The Kiplinger Tax Letter
Circulated Biweekly to Business Clients Since 1925
1729 H. St. NW, Washington, DC 20006-3938 •
Washington, September 2008
Many new tax breaks for real estate
were slipped into recently enacted legislation providing relief from the current
mortgage crisis. Lawmakers approved tax cuts worth 12.4 billion over 10 years,
as well as tax increases to offset them.
Nonitemizers can deduct property taxes
in 2008 in addition to taking the standard deduction. The extra write-off is
capped at $1,000 for marrieds and $500 for singles. This break lapses after
Fist-time home buyers get a tax credit
of up to $7,500 for buying a main home after April 8, 2008 and before July 1,
2009. To be eligible, purchasers must not have owned a principal residence in
the U.S. in the precious three years. The credit phases out between $150,000
and $170,000 of AGI for married couple and $75,000 to $95,000 for single
filers. It is refundable to the extent that it exceeds regular tax liability,
but it doesn’t offset the AMT. Home buyers in 2009 can elect to take the credit
on their 2008 income tax returns.
But the tax credit is recaptured over 15
years, without any interest, starting two years after the year the credit is
claimed. Thus a first-time home buyer who claims a $7,500 tax credit for a
purchase in 2008 must pay an extra $500 of income tax in 2010 and later years.
If the homeowner sells the residence before the credit is fully repaid, the
seller is taxed that year on the lesser of the gain from the sale (if sold to an
unrelated party) or the unrecaptured balance of the credit.
The credits for low-income housing and
fixing up old buildings are juicier:
They now can offset the AMT. This rule
applies to low-income projects that are put in service after 2007 and to
rehabilitation expenses incurred after 2007.
Exempted from the minimum tax: Interest on more
tax free bonds… those used for low-income housing and mortgages for veterans and
low-incomers. This easing applies only to new nods issued after Bush signed the
Victims of the 2005 hurricanes also get
relief. Those whose casualty losses were later reimbursed can report the
funds as if received in 2005. That helps folks whose income tax rate in 2005
was lower than in the year that they were reimbursed. IRS will charge only one
year’s interest. 1040-Ss for 2005 are due by April 15, 2009.
Businesses that can’t benefit from 50% bonus
depreciation get a break: They can elect to accelerate the use of their AMY
and R&D credit carryovers instead.
Congress curbed a break for folks turning a
second home into a main home:
Some of the gain will be ineligible for the
home-sale exclusion if the house is converted to personal use after 2008 and
is later sold. The portion of the profit is converted to personal use after
2008 and is later sold. The portion of the profit that’s taxed is based on the
ration of the time after 2008 when the home was used as a second residence or
rented out to the total time that the seller owned the house.
And credit card issuers will have to file
1099s on payments to merchants, starting with payments for 2011. That gives
issuers time to gear up their computers.
Buyers of new heavy SUVs get showered with
tax breaks this year.
Special 50% bonus depreciation is the reason.
Here’s an example:
Your firm buys a new $50,000 SUV with a loaded weight over
6,000 pounds and placed it into service in 2008. The business can expense
$25,000 of the cost. One-half of the remaining $25,000 cost, $12,500, is
claimed as bonus depreciation. And 20% of the $12,500 balance of the cost can
be deducted as regular depreciation. Assuming the SUV is used 100% for
business, a total of $40,000 can be written off in year one…80% of the total
cost. You can’t take this break on used heavy SUVs.
There’s a move in Congress to rein in the
largesse. The House OK’d a bill that would restrict the total write-off in
the first year for heavy SUVs to $11,260 for vehicles that are placed into
service after the measure is signed into law.
But passage isn’t guaranteed. The
Senate is still balking at the provision.
Watch out for excess personal use of your
SUV in the first five years.
The IRS can recapture your tax break.
It business use falls below 50% within that five-year period, starting with the
year that the vehicle is put in use, any write-offs that are claimed over
straight-line depreciation are taxed as income, according to the Tax Court (Birdsill,
TC Summ. Op. 2008-55). Recapture applies both to special expensing for heavy
SUVs and to bonus depreciation allowed in 2008.
A big win for IRS on payroll tax exemptions
for severance pay:
Nearly all such payments are hit with FICA
and Medicare taxes, an Appeals Court says. It reverses a lower court case
that allowed a company to avoid payroll taxes on buyouts of employees who were
let go involuntarily. For payroll tax purposes, payments to those workers are
treated the same way as buyouts of employees who voluntarily lefty… taxes are
due (CSX, Fed. Cir.).
There is an exception for supplemental
unemployment benefit plans. Plan payments made to furloughed workers remain
exempt from payroll taxes if they are tied to state unemployment benefits that
are paid to laid-off employees.
Be careful if you use a payroll service firm
to pay your employees:
You are on the hook if the company defaults,
a district court says. One day after a business wired payroll funds to its
agent, the IRS imposed a levy on the agent’s bank for unpaid taxes. The
business paid it s employees directly and sued the Service to get its money
back, claiming that the seizure was invalid. The court disagreed, saying the
bank didn’t hold the funds in trust for the business, so the IRS levy was proper
(DT Floormasters, D.C., Ind.). The payer’s only recourse is to sue the payroll
firm, which, given the firm’s financial woes, probably won’t help.
Special withholding rules apply to severance
pay, the Service says. Such compensation is treated as supplemental wages,
so employers get a choice: They can withhold a flat 25% of each payment or they
can aggregate the severance pay with any regular wages and compute withholding
on the total (Rev. Rul. 2008-29).
Good news if you plan to convert a 401 (k)
account directly to a Roth IRA:
New rules from the IRS offer a sweet deal
for any after-tax contributions. The total amount of your after-tax
contributions can be converted free of tax. This is a much more liberal rule
than when converting a regular IRA to a Roth. In that situation, the portion of
the rollover that is deemed to be tax free is based on the ration of your
nondeductible payins to the total in your IRA accounts. If you have $60,000 in
your IRA with $600 of it would escape income tax. The remaining $5,400 would be
taxed. But in the same situation with a 401 (k), the full $6,000 would avoid
tax. The same goes for 403(b) plans and 457 plans.
With airlines reinstating the Saturday night
stayover rule for cheap fares…
Remember that an extra day tacked onto a
business trop can be deductible if the total cost of the trip is lower as a
result. This is so even if the additional day is used for sightseeing, shopping
and the like. The extra meal and lodging expenses for the nonbusiness day must
be less than the cost of flying without a Saturday stay. Reimbursement of the
extra day’s food and lodging is also tax free to employees.
The IRS is ramping up its examination of
tool reimbursement plans.
Firms involved in aviation, agriculture and
construction will be audited, expanding a probe that began with auto
dealers, car repair firms and body shops. IRS believes that many tool
reimbursement plans are just shams that are designed to make a portion of the
workers’ pay tax free and save payroll taxes for employers. Unless employees
are required to substantiate tool expenses and return any excess to their
employers, payments made under the plan are taxed and hit with payroll tax.
Claiming cell phones as a tax free fringe
benefit will get easier soon. Congress is prodding IRS to loosed rules
requiring taxation of personal use of employer-provided cell phones and
requiring detailed records to be maintained on business usage. Workers now have
to document the business purpose, time and place of calls they make. Lawmakers
say cell phone usage should be on a par with employee use of company desk phones
or e-mail, which needn’t be tracked. If the Service doesn’t act soon,
taxwriters will take the initiative to change the law.
Note this break if you use a flexible
spending plan for dependent care costs:
You can claim the depended care credit
to the extent that your expenses are more than the amount that you fund through
your flexible spending account. Although only $5,000 of dependent care expenses
can be run through a flex plan, the credit is available for as much as $6,000 of
eligible expenses for taxpayers with two or more children under the age of 13.
In that case, $1,000 of expenses would be eligible for the dependent care credit
on Form 2441. For most filers, the credit on that amount would generate an
additional $200 in tax savings. Of course, no credit can be claimed for any
dependent care costs that are paid out of the flexible spending account. That
would be prohibited double-dipping.
The Service is easing the rules on some
reimbursements by flex plans.
Prepaid orthodontist charges can be
reimbursed up front, the IRS says in proposed regulations, even if the
treatment lasts into the following tax year.
Newly employed workers are permitted to make
retroactive elections for their flex accounts, as long as they do so within
30 days of their hiring date.
Workers who quit can tap unused funds to pay
dependent care expenses that are incurred after they leave their jobs. This
helps them avoid any forfeitures.
And individuals in flex plans who don’t have
health insurance can buy it with their set-asides, effectively using pretax
dollars to obtain medical coverage.
IRS is easing up on earnings on escrows in
tax deferred exchanges.
Sellers will not woe tax if the exchange
proceeds are $2 million or less, the IRS says in final regulations. Those
swaps are exempt from the general rule, which makes sellers liable for taxes on
all earnings on the sales proceeds, even if they pay part of all of the earnings
to the exchange intermediary as a fee.
The change benefits small nonblank exchange
facilitators by helping them to stay competitive with banks that perform the
same service. Unlike the banks, the small nonblank businesses typically keep
some earnings to augment the fee. Since most of the swaps they broker are $2
million or less, the ruling will let them avoid paying earnings to clients and
raising their basic fee to make up the difference.
The IRS is on the warpath against firms that
It has weapons for tracking down firms that
violate the rules used to determine whether workers really are employees or
independent contractors. The result: an increase in audits in a few months
after IRS generates more leads.
Take a look at what the Revenue Service now
has in its arsenal:
More help from the states. The IRS has
signed up most of the states to share payroll tax exam data. Thousands more
audit referrals will result.
Revved up document matching programs to
pinpoint audit leads and lessen chances for no-change examinations. An
electronic matching system, for example, enables the IRS to spot businesses
issuing 10999 forms with payments of $25,000 or more to at least fie workers who
have no other sources of income.
And audit leads from workers. Taxpayers
can now file Form 8919 along with their tax returns to tell the Service that
they believe their employer incorrectly pegged them as contractors. A flood of
these forms is likely to come because filing the 8919 allows an individual to
avoid paying self-employment tax.
Home builders will get special audit
attention from the Service. Agents will be on the lookout for inappropriate
income deferrals by builders that use the completed contract method of
accounting. Among their targets: Developers who sell lots but don’t report
income until the common improvements are finished. And those who use a
subsidiary to build all the houses in a project so the company can say that the
contract isn’t complete until all homes are built. Otherwise, the home builder
would owe taxes after each house was completed.
IRS will clamp down on 529 plans this year
and issue regulations that will target abuses. Under the microscope: Putting as
much as $120,000 (the maximum 529 payin that’s free of gift tax) into accounts
for different people, then quickly changing the beneficiary on all of the
accounts to one individual. And another ploy…stuffing a lot of money into a 529
plan and later using the funds to pay for retirement. That allows contributors
to circumvent the payin ceilings and distribution requirements that apply to
qualified retirement plans.
Yours very truly,
Kiplinger Washington Editors