December 2009

There are three great tax credits available to people who purchase new principal residences. Two are for first-time home buyers and the third is for "existing" home owners. The original First-time Home Buyer Credit allows qualifying buyers to claim a credit of the lesser of $7,500 or 10% of the home’s purchase price. A first-time home buyer is someone who has not owned a home for three years prior to the purchase of the current home. This credit is actually a "tax-free loan" that must be paid back in 15 equal annual payments. Home purchases finalized between April 9, 2008 and June 30, 2009 may be eligible for this credit.

The successor First-time Home Buyer Credit is the lesser of $8,000 or 10% of the purchase price, and does not have to be paid back. The definition of first-time home buyer stays the same. If one spouse owned a home in the three-year period, then the other spouse cannot take the credit. If the home is purchased from a close relative (parent, grandparent, child, etc.), the purchase is ineligible for the credit. Home purchases finalized between January 1, 2009 and April 30, 2010 may qualify for the credit. When a binding sales contract is signed by April 30, 2010, a home purchase completed by June 30, 2010 will qualify.

Existing home owners who are purchasing a "new" home may qualify for a new credit that is the lesser of $6,500 or 10% of the purchase price. Eligible taxpayers must have owned and resided in the same home for at least five consecutive years of the eight years prior to the purchase date. For married taxpayers, both spouses must meet this qualification. Home purchases finalized after November 6, 2009 and by April 30, 2010 may qualify for the credit. A binding sales contract signed by April 30, 2010 will extend the eligibility period to June 30, 2010. Homes priced above $800,000 are ineligible for the credit.

All three credits are subject to taxpayer income limits that may reduce or eliminate the credit. A copy of the final HUD-1 Closing Statement must be sent to the IRS when claiming one of the credits; sales closing after November 6 require additional paperwork be attached to the return. As of this writing, 2009 returns claiming one of the credits cannot be electronically-filed.

After the waiver of RMDs from IRAs and certain other retirement accounts in 2009, eligible taxpayers must take their required minimum distribution in 2010. No penalty will be assessed for skipping the 2009 distribution. Be sure to arrange with your broker or banker to take your 2010 RMD. If you turned 70 or 70 ½ in 2008 or 2009, you may have an RMD to take in 2010.

There is no doubt 2009 was a tough year for many individuals and families. Taxpayers who had debt forgiven – either mortgage, credit card or other loans – may receive a 1099-C when they receive other tax reporting statements. If you get a 1099-C, you must report this on your 2009 taxes. Unfortunately, you may have income to recognize. Similarly, a taxpayer who abandons his/her home may receive a 1099-A which also has to be reported on the tax return. If you receive an envelope that says "Important Tax Document Enclosed", be sure to save it and bring it to us.

Taxpayers who buy a new car, light truck, motor home and/or motorcycle between February 17 and December 31, 2009 may be eligible to deduct sales, local and/or excise taxes assessed on the first $49,500 of the purchase price. Taxpayers do not have to itemize in order to take this deduction. There are income limits which will reduce or eliminate the deduction. We must see your purchase contract in order to calculate the correct deduction. Vehicle buyers in states with no sales tax may be able to deduct certain government-imposed fees.

The American Opportunity Credit modifies the Hope Credit for 2009 and 2010 only, making it available for the first four years of college. The maximum credit for each of the next two years is $2,500 per student. In addition to tuition, related fees, books and other required course materials will be included as qualifying expenses. Qualifying students must be enrolled at least half-time and attend an accredited institution. Finally, the credit will be refundable. Income phase-out limits will reduce or eliminate the credit for some taxpayers.

The Lifetime Learning Credit applies to undergraduate, graduate and professional degree courses including instruction to acquire or improve job skills. The credit equals 20% of the first $10,000 of tuition and fees paid during the tax year. Income limits apply.

If the student is claimed as a dependent, he/she cannot claim either education credit, but the parents can. To take the credit, we must see a record of tuition and qualifying expenses paid.

Starting in 2010, people with income over $100,000 will be able to convert a traditional IRA to a Roth and spread the tax over 2011 and 2012. Roth IRAs have many tax advantages. To learn more about how this could impact you, contact Bill for an appointment. High-income taxpayers will still not be able to contribute directly to a Roth IRA.

Certain energy-efficient improvements made to your primary residence in 2009 and 2010 may qualify for a tax credit of the lessor of$1,500 or 30% of the cost of the improvement, exclusive of labor and installation costs. The maximum credit for both years combined is $1,500. Qualifying improvements include new windows and doors, insulation, certain roofs, heating and air conditioning systems, certain water heaters and biomass stoves. Improvements must meet specific efficiency standards. To take the credit, we must see the detailed invoice specifying brand name, model and efficiency rating. Some improvements may also qualify for a separate Oregon credit. Go to our website for important links.

Over the past five years, we have represented several sole proprietors at IRS audits of their business records. Each audit reinforces our position on keeping squeaky clean and detailed business records. It is imperative to have a separate bank account and credit card for your entrepreneurial concern. Create a paper trail for all deposits and purchases. Demand a receipt or paid invoice for every purchase. Minimize use of cash for purchases because it is harder to track.

Deposit all revenue in full. You can "buy" cash by writing a personal check, or a business check if you need petty cash. Deposit non-revenue money (loans, rebates, refunds) in transactions separate from deposits of revenue. If a customer makes good on a bad check, deposit it separately and note the details on your copy of the deposit slip.

Don’t pay your personal bills or expenses from your business account. Write yourself a draw check, then make your payments from your personal account. Are all your purchases "regular and customary" for your business? If not, IRS could disallow the expense. If you have inventory you must count inventory-on-hand at the end of every year. Our staff can help businesses organize their records, do monthly bookkeeping and provide other consulting services.