Business Provisions of The American Recovery and Reinvestment Act of 2009

First, a little backwards thinking. I know you’ve heard a lot about how tax cuts stimulate spending. I suspect you’ve heard little or nothing about how taxes, in and of themselves, encourage businesses to spend money. For example, a sole proprietor in the 25% tax bracket, in a high income state like California can expect an approximate 50% discount, via the tax deduction, for anything they spend on qualified business expenses. Yes, the expenses have to be reasonable or necessary, but knowing that you will get almost half of it back at tax time (or sooner, if you adjust your estimated tax payments), can make a new computer (or a new employee) much more appealing (and doable).

Speaking of estimated taxes:
Individuals with an adjusted gross income under $500,000, who can certify that at least 50% of their income reported the previous year was from a small business are now required to pay estimated tax payments based on 90% of the previous years taxes (rather than 100%). As always, if your 2009 taxable income is looking lower than 2008, you can still base your estimated taxes on your projected 2009 taxes instead of your 2008 actual taxes.

Speaking of new employees:
Disabled veterans and “disconnected youth” have been added to the classes of employees that may qualify their employers for the Work Opportunity Tax Credit.

Speaking of new computers (or other tangible assets):
Generally, the expense of fixed assets (assets expected to have a life of one year or more), is claimed over the lifetime of the asset via depreciation, rather than in the year they are purchased and/or put into service. The 2008 Economic Stimulus Act brought back bonus depreciation, allowing businesses to deduct 50% of the cost of new assets in the year of purchase, and then deduct the balance via depreciation over the first and remaining years of the assets expected life.

The 2009 Act extends bonus depreciation through 2010. The act also increased the amount that can be expensed (claimed) in the year of purchase under section 179, and the amount of depreciation that can be claimed for vehicles was also increased. The act also extended the opportunity for qualifying businesses can also take accumulated AMT and business credits in lieu of bonus depreciation through 2010.

And yes, there’s more. The 2009 act also has provisions that allow qualifying business to:
Recognizing cancellation of debt over 5 years
Carry net operating losses back 5 years
Shorten the S-corp built-in gain period

And more – as always, contact us if you have questions about how any provision of this act will affect your tax situation.

Other Tax Provisions - American Recovery and Reinvestment Act of 2009

I’ve talked about folks who buy a car or get (or have) a job seeing tax advantages from this act. What else can you do to take advantage of the new tax laws?

Get a job (and have kids):
Two earned income based credits for taxpayers with qualifying children – the additional child tax credit and the earned income credit, were both expanded. The wage base to qualify for the additional child tax credit was decreased from $8,500 to $3,000, and additional earned income credit is available to taxpayers with three or more qualifying children.

Lose a job :-(
The first $2,400 of unemployment benefits are now excluding from federal income tax. Also, individuals who are involuntarily separated between September 1, 2008 and January 1 2010 can maintain their insurance while paying only 35% of the COBRA coverage (the employer is required to pay the balance, but can take it as a credit against federal payroll taxes and withholding).

Buy a house:
The 2008 stimulus package included a “credit” of up to $7,500 for first time howebuyers (it’s actually a loan). The ARRA increases that to $8,000 and eliminates repayment (after living in the home for 36 months) for homes purchased from January 1, 2009-November 30, 2009 by qualifying taxpayers.

If you bought a house on or after April 9, 2008 and before January 1, 2009 you may still qualify for the 2008 credit.

Go to college (or send your kids):
The HOPE credit got a new name (the “American Opportunity Tax Credit”) and some nice enhancements. The maximum credit was increased from $1,800 to $2,500 for 2009 and 2010. Also students in all four years of college (instead of only those with freshman or sophomore standing) now qualify, and course materials are now qualifying expenses. It’s not all easy street, however, the Treasury Department has been charged with exploring the feasibility of requiring community service to qualify for the education credits.

Withdrawals from Qualified Tuition Plans are now excludable from income if used to pay for computers and computer technology (including internet access) as well as previously qualified educational expenses. The computers have to be used by the student (but not exclusively).

Take the A Train (or Van Pool):
The amount of transportation fringe benefits excludable from income was increased from $120 to $230 per month.

AMT Patch:
Check out our 2007 newsletter (click on AMT Relief) for a more complete explanation of how the alternative minimum tax works, and why it gets “patched” every year. This year, the exemption amount will increase to $46,700 for most taxpayers ($70,950 for married taxpayers filing jointly)

Making Work Pay "Stimulus Payments" American Recovery and Reinvestment Act of 2009

I’ve been getting calls and emails from clients who want to know when their stimulus check will arrive (and if they will ever get their California Refund).

Here’s how the 2009 “Making Work Pay” provision works:

It’s only available to U.S. Citizens or Resident Aliens. Those who are claimed as a dependent on another’s tax return do not qualify.

In 2009 and 2010, there will be a credit for 6.2% of earned income for up to $400 per taxpayer. 6.2% just happens to be the amount of social security withheld from most wages. Like the 2008 stimulus payment, this credit will phase out at $75,000 in modified adjusted gross income* ($150,000 for taxpayers filing jointly). Unlike the 2008 stimulus payment, checks will not be issued to pay the credit in advance.

Instead, qualified employees should see their federal income tax withholding reduced based on the new credit, increasing their net paycheck. I believe the thinking is that taxpayers are less likely to save an extra $13 a week (or so), than a lump sum check for $400. The IRS released new withholding tables yesterday that they would like employers to start using as soon as possible, but no later than April 1st.

When you file your 2009 return next year, the credit should offset the decrease in your withholding, and barring any other changes, your refund or balance due should be about the same as this year.

The Economic Recovery Payment or “making having worked pay”:

There will also be a $250 payment for many retired (and disabled) taxpayers. This payment will be made, not by the IRS, but by the Social Security Administration (to social security, including SSI recipients), Department of Veterans Affairs (for disabled veterans), and Railroad Retirement Board (for railroad retirement beneficiaries). Social Security has a special section on their website. Unlike the 2008 stimulus payment, no action is required to receive these payments if you qualify.

Retirees from the Civil Service or state governments who worked at a time when their wages were not subject to social security will qualify for a refundable $250 credit, but you will have to file a return to qualify.

* Total income subject to tax, less certain adjustments like IRA contributions, but not decreased by foreign earned income exclusions.

Sources:
CCH “Tax Legislation Update”
DHHCS ‘How the Economic StimulusPlan Affects Individuals with Disabilities”
FedSmith.com “$250 Tax Credit of Payment for Federal Retirees”
IRS “Tax Provisions in the American Recovery and Reinvestment Act of 2009

Sales Tax Deduction for Vehicle Purchases - American Recovery and Reinvestment Act of 2009

While other provisions of this legislation will affect significantly more people, the new vehicle sales tax credit is of particular interest to me - my **** recently experienced a sudden and unexpected transmission failure – guess what I’ve been shopping for?

From THE AMERICAN RECOVERY AND REINVESTMENT ACT OF 2009 – FEBRUARY 12, 2009 - FULL SUMMARY OF PROVISIONS FROM SENATE FINANCE, HOUSE WAYS & MEANS COMMITTEES”

"Sales Tax Deduction for Vehicle Purchases. The bill provides all taxpayers with a deduction for State and local sales and excise taxes paid on the purchase of new cars, light truck, recreational vehicles, and motorcycles through 2009. This deduction is subject to a phase-out for taxpayers with adjusted gross income in excess of $125,000 ($250,000 in the case of a joint return). This proposal is estimated to cost $1.684 billion over 10 years."

Here’s a quick history:

The American Jobs Creation Act of 2004 allowed taxpayers to elect to claim either sales taxes or income taxes paid as an itemized deduction (but not both). Since most taxpayers would find keeping receipts and adding up the total sales tax paid for the entire year slightly burdensome, the IRS created pub 600, which calculated a sales tax deduction based on income, state sales tax rates, and exemptions claimed (an additional deduction could be claimed based on local sales tax). Taxpayers who purchased certain “big ticket items” like cars could add the sales tax on that purchase to the amounts from the tables.

Who does this benefit?

Taxpayers who itemize: The largest itemized deduction I generally see are property taxes and interest paid on a primary residence – most of my clients who own a home itemize while most of those who don’t own a home see a greater tax advantage from taking the standard deduction. If you aready have enough expenses to benefit from itemizing, any additional itemized deductions are gravy.

Taxpayers who pay little or no state income tax: taxpayers in states with a relatively high state income tax generally see more tax advantage from claiming the state income tax than the sales tax deduction (of course, taxpayers who live in states with no state income tax will get a larger deduction from the sales tax).

Taxpayers who purchased a qualifying “big ticket” item like a car: The additional sales tax deduction plus the amount from pub 600 may exceed their deductible income tax that year, even when the income tax is generally higher.

Taxpayers who shop a lot and keep all their receipts :-): I had a few clients who actually did so although they tended to get a larger deduction with the pub 600 amounts.

So what’s changed?

The new legislation allows taxpayers to claim qualifying sales tax on a new vehicle purchase without itemizing. For example Roger A. Vehicle is single, has no dependents, rents his home, and generally doesn’t have enough expenses to itemize. Of his $50,000 a year income, at 2009 rates and brackets, he would usually pay taxes of approximately $6,350. However, on February 18th, 2009 he purchases a new truck for $30,000 paying $2,325 in sales tax. On his 2009 return, he deducts $2,325 from his adjusted gross income, and without any other changes, lowers his taxes to approximately $5,769 – a savings of $581. Under the old rules, even with the purchase of a new vehicle, Roger wouldn’t have had enough expenses to itemize and wouldn’t have seen any tax benefit from his purchase.

Who does this benefit?

Taxpayers who don’t itemize: If Roger itemized, he could have taken the sales tax as an itemized deduction. However, if his income taxes paid were more than the pub 600 amount for the general sales tax deduction, he would effectively lose the difference (e.g. if he could deduct approximately $2,967 in sales tax with the new car ($642 from pub 600 plus $2,325 from the car), and $2,410 in income tax without it, the sales tax on the new car would only be reducing his tax by approximately $140, instead of $580)

Taxpayers who are in a higher tax bracket: Roger is in the 25% tax bracket, which means his taxes are reduced about 25% of the sales tax paid. If Roger were making $43,000, he would be in the 15% tax bracket and his tax savings would be approximately $349.

Taxpayers who purchase new cars: the legislation provides for a deduction on sales tax paid on new vehicles. Also, don’t run out and buy a Hummer yet - the deduction is limited to vehicle purchases of up to $49,500

How Fast Can You Get Your Income Tax Refund?

As refund loans are more heavily marketed, I’m waiting for an ad that shows someone walking into a tax office on December 31st with their dog and walking out with a check in their hand and another in the dog’s mouth. If you have a refund coming, who wouldn’t want it as soon as possible? BTW, the absolute fastest way to get your refund appears at the end.

Let’s start with the free ways to accelerate your refund (some tax preparers still charge for efiling and direct deposit - my company doesn’t) – starting the clock ticking from the time you have everything you need to file:

1) Efile, if possible*: The IRS will acknowledge electronically filed returns within 48 hours (I generally get acknowledgements the next day). With snail mail, your return probably hasn’t even arrived at the IRS by then (let alone been open and processed).
2) Direct Deposit: The IRS efile refund Cycle Chart show direct deposits sent between 8 and 14 days after the return is efiled (it can take a day or two to move through the ACH system). Paper Checks are scheduled to be mailed between 15 and 21 days after the return is efiled, and it will take at least a day or two for it to move through the U.S. Postal System. Of course, the IRS cannot guarantee a specific date – it’s not all bad, though, some of my clients tell me their deposit came in ahead of schedule!

Anything faster is some form of a loan – a rather expensive one (see How Much Does an Refund Anticipation Loan Cost).

Cost of a Refund Anticipation Loan (generally received within 1-2 days): $62-102 (2007 figures) – remember this is a 1-2 week loan..

Cost of an Instant Refund Anticipation Loan (received when you’re filing your return): fees above plus $25-55 (2007 figures) for a 1-2 day loan.

Cost of a “paystub” loan based on your anticipated refund (can be received prior to receiving you W-2s, etc, and filing your return): The cost depends on how long the loan is open – for a 1 month loan (between receiving proceeds and filing and paying back the balance), the annual percentage rate can be as high as 177%. Some loans require that your refund be paid directly to the line of credit (which the tax preparer will do, for a fee). According to 2006 data, the due date for the loans (Mid February) may force taxpayers to apply for a traditional Refund Anticipation Loan to pay back the paystub loan on time (one lender appears to require a bank product, with additional fees, in all cases).

Like any financial product, the various bank products based on your refund have both costs and benefits. Not only are the costs of these products extremely high, but in many cases, the extent of them is not readily apparent. They are also extremely complex, and your tax preparer, even with the best of intentions, may not themselves be aware of the full implication of some of these products, let alone able to advise you of them.

The Fastest Way to Get Your Refund

Your refund (or balance due) is the difference between what you paid in throughout the year, and what you actually owe for the year. Which means that if you are receiving a refund, you have given the IRS more money than you were required to throughout the year.

The fastest way to get your “refund” is to carefully plan your withholding and estimated payments so that you have the use of that money through out the year, rather than loaning it to the government, interest free, and then waiting for them to send it back. And I know an excellent tax preparer who can help you do just that :-).

* Many, but not all taxpayers will be able to e-file

Choosing a Tax Preparer?

Writing the post about whether you need a W-2 to file, I remembered a tax preparer who insisted that it was OK to e-file without W-2's because that‘s what the client wanted (to my knowledge, he is no longer preparing taxes). One of the reasons I spend literally hundreds of hours studying tax law is so that I am as well-equipped as possible to do the best for my clients while keeping them from running afoul of the IRS (or other taxing authorities). I believe that the vast majority of other professional tax prepares share this objective, but there‘s always a few . . .

The IRS offers some good information about choosing a tax preparer, including a list of warning signs – here‘s some highlights:

• “Be cautious of tax preparers who claim they can obtain larger refunds than other preparers”


• Every case I personally have seen of a preparer who claims to have a special advantage for reducing tax liability has been committing some form of tax fraud. No exceptions. And you are liable for your taxes – even if it‘s your preparer who understated them. The schemes vary – some claim credits that their clients are not actually entitled to, some inflate deductions (As I recall, one preparer put $20,000 in work related expenses and $10,000 in charitable contributions on every single client's return), some sell social security numbers to their clients so they can claim fictitious dependents, etc. And a year or two later, when the IRS comes knocking at
  your door, the preparers are nowhere to be found.


• “Avoid preparers who base their fee on their refund”


• Even if it weren't generally prohibited for those enrolled to practice before the IRS (there are very few exceptions), clearly this is a bad idea. Not only does it give preparers a huge incentive to prepare fraudulent returns, but even if they‘re preparing accurate returns, it gives them an incentive to encourage you to have too much withheld from your pay. Your refund, barring certain refundable credits, is the money you've paid that you didn‘t actually owe, coming back to you. It‘s bad enough that they might encourage you to give the government an interest free loan – but now they're taking a percentage.


• “Use a reputable professional who signs the tax return and provides a copy”


• How can someone stand behind their work if they won't even admit they did it? I‘ve seen clients come in with extensive returns (and extensive bills) in fancy folders with company logos, etc, and then turn to page two of the 1040, and the preparer block is printed “self-prepared.” There are several reasons why a preparer may choose to do this (none of them good).


• They don‘t want the IRS to be able to find patterns in the returns they do (what are they hiding?).


• They don‘t want the IRS to know that they are making money preparing taxes (can you trust someone committing tax fraud not to prepare a fraudulent return in your name?)
• In states that require preparers to be licensed, they‘re not licensed.
  
• They are using software intended to help individuals prepare their own returns, rather than investing in a package designed for professional
  preparers.
  
• [Check credentials, professional affiliations, etc.]


• Obviously you don‘t want to work with someone who deceives you about their background. While it‘s not a definite indicator, I believe the most common reason for joining a professional society is to have better access to continuing education and advice from peers – both things I would want any professional I‘m working with to have.


• “Ask friends and family whether they know anyone who has used the tax professional and whether they were satisfied”


• One caveat – most people who are receiving large refunds like their tax preparer, but a large refund doesn‘t necessarily imply exceptional tax preparation.


• Some factors contributing to large refunds (like high withholding relative to income) are completely out of the preparer‘s control – for example, if your daughter earns $4,000, has no other income, and has $1,000 withheld, barring extremely unusual circumstances, any competent tax preparer should be able to get her a $1,000 refund. If your neighbor makes $300,000 in taxable income, has no dependents, deductible expenses, or withholding, it's going to be pretty hard for any honest preparer to get them a refund.
  
• Large refunds year after year generally mean that you are giving the government more money than you have to. For some of my clients, this works as a way to save up for big purchases, but for the rest, I believe that skilled tax planning includes bringing your withholding in line with your income.
  
• Consider broadening your search to include the internet – not all tax preparers will be out there (some smaller firms still don't have websites), also, if you belong to a social networking sites see if they have a forum for recommendations.

How much does a Refund Anticipation Loan Cost?

Disclaimer: I last handled refund anticipation loans in 2005, which is my most current anecdotal evidence (I found some more recent stats on the web – hyperlinks are to citation, and although I believe them to be accurate, I have not verified the accuracy of the referenced sites, and make no claim about their accuracy). Things may have improved since then (but I doubt it). There are cases where the benefits to an individual taxpayer outweigh the costs, but their widespread popularity suggest to me that the full cost of these products isn’t being effectively communicated to most buyers.

Keep in mind that traditional refund anticipation loans aren’t even issued until the return is accepted and the IRS has sent back a debt indicator that there are no liens against the refund. While it’s not 0%, there’s not a whole lot of risk once these criteria are met that the refund won’t be forthcoming. My understanding is that one function of interest is to offset potential losses from default. Refund Anticipation loans are not particularly risky, yet annualized of the 1-2 weeks of the loan, interest rates can range from 40% to 235% (based on 2006 figures) – that’s not including tax preparation fees that the client may not have incurred if they didn’t have to go to a preparer to get the loan.

But wait, there’s more. One year while I was still handling these products, the IRS was pulling a significant number of earned income credit returns for further examination. Which is how we discovered that if the IRS didn’t send the refund within 3 weeks, the lender would begin charging additional interest, and, as my clients at the time reported, start calling them daily demanding that they repay the loan with their personal funds (remember, these are people who needed their refunds badly enough to purchase a very expensive loan, and they haven’t received anything from the IRS yet – the odds of them having any money were extremely slim, and there wasn’t a whole lot they could do to speed the IRS up – the daily phone calls were likely to accomplish nothing more than pile more pressure on an already burdened client – and they would not stop).

How much do these loans cost? Don’t answer yet. Unless you elect to have the proceeds direct deposited or credited on some chains “card,” you will receive a bank check, not an IRS check. Don’t plan on cashing the check at the bank that issued it – again, my experience was that they didn’t have any consumer branches in the area. And a check cashing place that has a special on refund checks may not offer that rate for the bank check from the refund loan. Also, California law sets a 3% maximum (3.5% without ID) fee for government and payroll checks (many banks will cash them for free) – other checks can legally be as high as 12%. (more info here)