Hybrid Vehicle Credit Update

If you are considering a hybrid vehicle purchase in 2009, a tax credit of up to $3,400 may be enough to help make that decision. In addition, thanks to the American Recovery and Reinvestment Act of 2009 (Stimulus Act), the really good news for 2009 purchases is that the credit is now allowed against alternative minimum tax (AMT). Top this with the fact that the credit has no AGI phase-out limit, and you've got a whole new ballgame. But, you need to be careful—the amount of credit available depends on which hybrid you buy, and some of the most popular models are no longer eligible. Also, only purchases of new (not used) vehicles qualify.

The actual credit allowed varies by vehicle. Furthermore, the credit is phased out once a manufacturer sells 60,000 hybrid vehicles. Lexus, Toyota, and Honda all hit this mark in previous years, so no 2009 purchase of their hybrids qualifies for a credit.

Ford and Mercury hit the 60,000 sales mark during the last quarter of 2008, which means the full credit for these vehicles is no longer available. However, 50% of the credit for Ford and Mercury vehicles will be allowed for purchases made from April 1, 2009, through September 30, 2009, and 25% of the credit will be available for purchases made from October 1, 2009, through March 31, 2010. So, if you're interested in a Ford or Mercury hybrid, you'll want to make the purchase before October 1, 2009, to get 50% (rather than 25%) of the credit.

The full credit is still available on hybrids manufactured by Mazda, Mercedes-Benz, Nissan, and Volkswagen and on certain General Motors vehicles.

There is also a credit for advanced lean burn technology vehicles, but no one had produced vehicles to which this credit applied until the last half of 2008 when Mercedes-Benz and Volkswagen released their versions. Since then, BMW and Audi have added vehicles to this list.

Tracey S. Peters, CPA, LLC
http://www.fagantax.com
tpeters@fagantax.com
410.418.9111

Emergency Economic Stabilization Act of 2008: Tax Changes Affecting Businesses

On October 3 2008, President Bush signed into law a $850 billion financial markets rescue package. The rescue plan --called the Emergency Economic Stabilization Act of 2008 -- is designed to restore liquidity to the financial markets. At the same time, it includes some valuable individual and business tax incentives that also will serve to help revive our economy.

The business tax incentives in the Emergency Economic Stabilization Act of 2008 cover a wide range of activities and industries. As with most tax incentives, however, they can be realized only if you take the time and effort to plan for them. In this letter, we highlight some of the key incentives and invite you to discuss them with us in more detail.

Research Tax Credit: The rescue package extends the research tax credit to amounts paid or incurred in 2008 and 2009. It also increases the alternative simplified research credit to 14 percent starting next year, a tremendous incentive now for smaller firms to finally use the research credit to grow their businesses.

Leasehold improvements: Many businesses remodel or otherwise make improvements to their facilities on a regular schedule. Under the new law, qualifying restaurant improvements and leasehold improvements will be eligible for 15-year cost recovery rather than a 39-year period for two more years, through December 31, 2009. Similarly, Congress authorized a 15-year recovery period for depreciation of certain improvements to retail space. This treatment is extended through December 31, 2009. It applies to both owner-occupied businesses and restaurants, as well as leased establishments.

Energy conservation: The new law extends a host of energy tax incentives, some targeted to consumers (including businesses) and others to producers and manufacturers. Many of the extensions go beyond the one or two year periods that Congress authorized for non-energy extenders. Most notable are the extension of the special deduction for energy efficient commercial buildings, through December 31, 2013; and the substantial, long-term tax breaks given to businesses that develop or use solar energy. For businesses in urban areas, a $20/month transportation fringe benefit may be set up for employees who bicycle to work.

Charitable contributions: The Tax Code gives businesses enhanced deductions for contributions of food to charitable organizations, as well as contributions of books and computer equipment to qualifying schools. The new law extends these tax breaks through December 31, 2009. Additionally, Congress extended the temporary suspension of limitations on charitable contributions in the case of a qualified farmer or rancher contributing food before January 1, 2009.

S corporation shareholders are also eligible for special tax treatment when making charitable contributions of qualifying property. The new law extends, through December 31, 2009, the special rule allowing S corp shareholders to take into account their pro-rata share of charitable deductions even if such deductions would exceed such shareholder's adjusted basis in his or her S corporation.

New Markets Tax Credit: The new law extends the New Markets Tax Credit through December 31, 2009. The New Markets Tax Credit is one of the few incentives in the Tax Code to encourage taxpayers to invest in or make loans to small businesses in economically distressed areas. In today's credit crunch, extension of the New Markets Tax Credit may help small businesses secure financing that otherwise would not be available.

Disaster relief: The new law provides temporary, but significant, tax relief to victims of the recent severe storms, tornadoes, and flooding that hit the Midwest and, to a somewhat lesser extent, victims of Hurricane Ike in Texas. Additionally, Congress authorized national relief for locations declared disaster areas by the president in tax years beginning after December 31, 2007. Exceptions do apply, so we are advising affected clients to contact our offices for further assistance.

Other business extenders: The rescue package also targets a whole host of extended, enhanced and expanded tax breaks to certain specific businesses. If your operations touch upon one of these areas, please contact our offices for further details. These targeted tax breaks includes:
· Farming business machinery and equipment treated as five-year property;
· Brownfield remediation;
· The Code Sec. 199 domestic production activities deduction for qualifying activities in Puerto Rico;
· Qualified Zone Academy Bonds;
· The Subpart F active financing exception;
· Look-through treatment of payments between related controlled foreign corporations (CFCs);
· Enhanced expensing for U.S. film and television production;
· District of Columbia first-time homebuyer tax credit;

. . . and over ten other targeted measures ranging from tax breaks for mine safety, to special deductions for NASCAR racetracks, to an excise tax exemption for manufacturers of wooden arrows.

In addition to tax breaks only available to businesses, the Emergency Economic Stabilization Act of 2008 also provides tax relief to individuals in their capacities as business owners or shareholders. All told, the Emergency Economic Stabilization Act of 2008 is one of the largest tax laws in recent years, containing something for almost everyone. Some of these breaks, however, require quick action before the 2008 tax year ends; others call for careful coordination with standard year-end tax strategies; and still others require planning now to maximize the benefits available in 2009 and beyond.

Tracey S. Peters, CPA, LLC
http://www.fagantax.com/
tpeters@fagantax.com
410.418.9111

Emergency Economic Stabilization Act of 2008: Tax Changes Affecting Individuals

On October 3 2008, President Bush signed into law a $ 850 billion financial markets rescue package. The rescue plan is designed to restore liquidity to the financial markets. At the same time, it includes some valuable individual tax incentives we want you to know about. The tax incentives cover a wide spectrum of activities. They are designed to put money back into the pockets of individual taxpayers during these difficult days. In this letter, we highlight some of the key incentives and invite you to discuss them with us in more detail.

AMT: The rescue package has some good news for individuals who are liable for alternative minimum tax (AMT) The AMT was created nearly 40 years ago as an alternative tax to the regular income tax to ensure that very wealthy individuals pay their fair share of taxes. However, the AMT was not indexed for inflation and it is ensnaring middle-income taxpayers. To prevent this, Congress created an AMT "patch." The 2008 patch is similar to past patches but with some important differences.

The 2008 patch raises the AMT exemption amounts to $69,950 for married couples filing jointly and surviving spouses, $46,200 for single taxpayers and heads of household and $34,975 for married couples filing separately. The rescue package also allows taxpayers to take nonrefundable personal credits to reduce their AMT liability. Additionally, and this is a new feature to the patch, the rescue plan abates AMT liability stemming from the exercise of incentive stock options along with interest and penalties on the unpaid amounts. The rescue package also allows individuals, including those who paid their ISO AMT liabilities, to accelerate the refund of the minimum tax credit that has not been used.

Homeowners: When a lender forecloses on property, sells the home for less than the borrower's outstanding mortgage and forgives all or part of the excess mortgage debt, the Tax Code treats the cancelled debt as taxable income to the homeowner. The Mortgage Forgiveness Debt Relief Act, enacted in late 2007, excludes from federal tax discharges involving up to $2 million of indebtedness ($1 million for a married taxpayer filing a separate return) secured by a principal residence and incurred in the acquisition, construction or substantial improvement of the residence. The new law extends this treatment from the end of 2009 through 2012.

The rescue package also extends the additional standard deduction for real property taxes. Individuals who do not itemize their deductions may take this deduction in 2008 and 2009. This deduction is not an above the line deduction that lowers your adjusted gross income. It is an addition to the standard deduction, and can reduce your taxable income by as much as $500 ($1,000 for those filing joint returns).

Child tax credit: The rescue package also enhances the child tax credit. Before the new law, the child tax credit was refundable to the extent of 15 percent of the taxpayer's earned income in excess of approximately $12,050 (reflecting inflation adjustments from the original floor of $10,000). Under the new law, the floor falls to $8,500. This treatment will result in an increase in the amount of the refundable credit for more taxpayers. Additionally, the rescue plan changes the definition of a "qualifying child" with respect to age and joint returns, clarifies the tiebreaker rules and ties the child tax credit to the child dependency exemption.

Charity: In 2008 and 2009, an individual age 70 1/2 or older can distribute up to $100,000 of his or her IRA balance to charitable organizations, including churches, without recognizing income and without taking a charitable deduction. This special tax break had expired at the end of 2007. The rescue package also includes some provisions related to donations to charities helping victims in disaster areas.

Energy: Rising fuel costs are pinching many people's wallets. If you install qualifying energy conservation property, such as exterior windows and doors, in your home you may be eligible to a tax break. The new law extends a number of energy conservation tax incentives and creates a new tax credit for individuals who purchase a plug-in electrical vehicle. Significant take breaks for "going solar" are also available in connection with home improvements.

State and local taxes: The rescue package gives individuals who itemize their deductions the option of deducting state and local income taxes or deducting state and local general sales taxes. This election was available in past years but expired at the end of 2007. The new law makes it retroactive to January 1, 2008, and extends it for 2009.

Education: The Tax Code provides many incentives to help individuals with educational expenses. The higher education tuition deduction is one of the most popular. The rescue package extends it but does not make it permanent. Nonetheless, it can be a valuable incentive. As previously, however, the amount of the deduction depends on your adjusted gross income.

Teachers: The Tax Code also gives teachers and other education workers a special deduction. Teachers may deduct up to $250 of qualified classroom expenses above-the-line. This special treatment expired at the end of 2007. The rescue package makes it retroactive to January 1, 2008, and extends it through 2009.

Disasters: Many individuals across the country are recovering from tornadoes, hurricanes and other natural disasters in 2008. The rescue package targets tax relief for individuals affected by flooding and tornadoes in 10 states and also helps victims of Hurricane Ike in Louisiana and Texas. For the first time, Congress authorized temporary national disaster relief.

Broker basis reporting: Starting in 2011, brokers will be required to report to the IRS not only their customers' gross proceeds from the sale of most corporate stocks but also the investor's cost basis in those shares. This will encourage the more accurate computation of capital gains each year. Broker basis reporting is expected to raise $6 billion over 10 years to partially offset the cost of the tax incentives in the rescue package. The reporting requirement takes effect for stocks acquired in 2011, mutual funds acquired in 2012, and other securities acquired in 2013.

Tracey S. Peters, CPA, LLC
http://www.fagantax.com/
tpeters@fagantax.com
410.418.9111

Take Advantage of 22 Last-Chance Opportunities for Tax Savings in 2009

taken from an Intuit posting ...

1. Income. Up to $2,400 of unemployment compensation benefits are excluded from gross income by the recipient. However, the exclusion is not available for benefits received in tax years beginning after 2009 [IRC Sec. 85(c)].

2. Personal deductions. Clients can claim a deduction (whether they itemize or claim the standard deduction) for sales or excises taxes paid on the purchase of a new vehicle. The deduction (phased out at higher income levels) does not apply to purchases after December 31, 2009 [IRC Sec. 164(b)(6)(G)].

3. Personal deductions. Clients who claim the standard deduction can take an additional deduction for state and local property taxes, up to a maximum of $500 ($1,000 for joint return filers). The deduction is not available for tax years beginning after 2009 [IRC Sec. 63(c)(7)].

4. Personal deductions. A client can elect to take an itemized deduction for state and local general sales taxes instead of an itemized deduction for state and local income taxes, but the election is available only for tax years beginning before Jan. 1, 2010 [IRC Sec. 164(b)(5)(I)].

5. Personal deductions. A client may claim an above-the-line deduction for “qualified tuition and related expenses” paid for the enrollment or attendance of the client, the client’s spouse, or a dependent at an eligible institution of higher education. The deduction cannot exceed $4,000 (phased out at higher income levels) and applies only to tax years beginning before January 1, 2010 [IRC Sec. 222(e)].

6. Personal deductions. The maximum deduction allowed annually for charitable donations is increased in the case of “qualified conservation contributions.” The increased deduction is not available for donations after December 31, 2009 [IRC Sec. 170(b)(1)(E)].

7. Business deductions. For tax years beginning before 2010, teachers in grades K-12 and other eligible educators can claim an above-the-line deduction for up to $250 of their out-of-pocket expenses for books and supplies used in the classroom [IRC Sec. 62(d)(1)].

8. Business deductions. A client can claim an additional 50% depreciation allowance for qualifying business machinery and equipment placed in service before January 1, 2010 [IRC Sec. 168(k)(2)(A)].

9. Business deductions. A client can claim a Section 179 expensing deduction for the first $250,000 of qualifying equipment and machinery placed in service during the year, subject to a phase out if more than $800,000 of eligible property is placed in service during the year. For tax years beginning after December 31, 2009, the maximum Section 179 deduction drops to $125,000 (adjusted for inflation) with the phase-out starting at the $500,000 level [IRC Sec. 179(b)(7)].

10. Business deductions. The cost of qualified leasehold improvement property, restaurant property, and retail space improvement property can be written off over 15 years. The 15-year write-off period is not available for property placed in service after December 31, 2009 [IRC Sec. 168(e)(3)(E)].

11. Business deductions. Business clients may claim enhanced deductions for donations of food inventory to a charitable organization if the organization uses the property solely for the care of the ill, the needy, or infants. The enhanced deduction does not apply to donations after December 31, 2009 [IRC Sec. 170(e)(3)(C)].

12. Business deductions. The maximum first-year depreciation deduction for passenger automobiles used for business purposes is increased by $8,000 for automobiles placed in service before 2010 [IRC Sec. 68(e)(3)(B)].

13. Business deductions. Certain qualifying machinery and equipment used in a farming business may be written off over a five-year cost recovery period. The original use of the property must begin with the taxpayer and the property must be placed in service before January 1, 2010 [IRC Sec. 168(e)(3)(B)].

14. Personal tax credits. A client who hasn’t owned a home during the previous three years can claim a first-time homebuyer credit of up to $8,000 (phased out at higher income levels) for the purchase of a principal residence. The credit can be claimed only for homes purchased before December 1, 2009 [IRC Sec. 36].

15. Business credits. Employers may claim a 20% income tax credit for qualifying differential pay paid to employees on active military duty. The credit expires for payments made after December 31, 2009 [IRC Sec. 45P].

16. Business credits. An eligible contractor may claim a credit of up to $2,000 for each qualified new energy efficient home that the contractor constructs and that is acquired from the contractor for use as a residence. The credit does not apply to homes acquired after December 31, 2009 [IRC Sec. 45L].

17. Alternative minimum tax. Clients can offset nonrefundable personal tax credits, such as the child and dependent care credit and the Lifetime Learning credit, against their alternative minimum liability. The offset will not be available for tax years beginning after 2009 [IRC Sec. 26(a)(2)].

18. Alternative minimum tax. For tax years beginning in 2009, the exemption amounts used in calculating a client’s alternative minimum taxable income of $70,950 for married couples filing a joint return and $46,700 for singles and heads of households. For tax years beginning after 2009, these amounts are scheduled to drop to $45,000 and $33,750, respectively [IRC Sec. 55(d)(1)].

19. Estimated taxes. For small business owners with adjusted gross income of $500,000 or less, the “required annual payment” of 2009 estimated taxes is the lesser of (1) 90% of the current year’s tax or (2) 90% of the prior year’s tax. For 2010, the prior-year’s-tax threshold rises to 100% (or 110% for clients with adjusted gross income of $150,000 or more) [IRC Sec. 6654(d)(1)].

20. Retirement plans. The requirement that an IRA owner age 70 ½ or over must receive a minimum distribution annually is suspended for 2009, but is reinstated in 2010 [IRC Sec. 401(a)(9)(H)].

21. Retirement plans. An IRA may exclude from income distributions of up to $100,000 annually if paid directly by the IRA trustee to charitable organization. The exclusion expires in tax years beginning after 2009 [IRC Sec. 408(d)(8)].

22. Employee benefits. Clients who are covered by employer-sponsored health plans and are laid off before January 1, 2010 can qualify for subsidized plan continuation (COBRA) coverage for up to nine months. Employers can claim a credit against employment taxes for the subsidies provided to employees [IRC Sec. 6432].

Feel free to give us a call to discuss in more detail.

Tracey S. Peters, CPA, LLC
http://www.fagantax.com/
cpeters@fagantax.com
410.418.9111