Article Source: http://www.energy.gov
What the American Recovery and Reinvestment Act Means to You
The American Recovery and Reinvestment Act of 2009 extended many consumer tax incentives originally introduced in the Energy Policy Act of 2005 (EPACT) and amended in the Emergency Economic Stabilization Act of 2008 (P.L. 110-343).
See the summary of the energy tax incentives included in the Emergency Economic Stabilization Act of 2008.
ABOUT TAX CREDITS
A tax credit is generally more valuable than an equivalent tax deduction because a tax credit reduces tax dollar-for-dollar, while a deduction only removes a percentage of the tax that is owed. Consumers can itemize purchases on their federal income tax form, which will lower the total amount of tax they owe the government.
Fuel-efficient vehicles and energy-efficient appliances and products provide many benefits such as better gas mileage –meaning lower gasoline costs, fewer emissions, lower energy bills, increased indoor comfort, and reduced air pollution.
In addition to federal tax incentives, some consumers will also be eligible for utility or state rebates, as well as state tax incentives for energy-efficient homes, vehicles and equipment. Each state’s energy office web site may have more information on specific state tax information.
Below is a summary of many of the tax credits available to consumers. Please see the ENERGY STAR® page on Federal Tax Credits for Energy Efficiency for more details on federal incentives and the Database of State Incentives for Renewables and Efficiency (DSIRE) for information on federal, state, local, and utility incentives.
HOME ENERGY EFFICIENCY IMPROVEMENT TAX CREDITS
Consumers who purchase and install specific products, such as energy-efficient windows, insulation, doors, roofs, and heating and cooling equipment in existing homes can receive a tax credit for 30% of the cost, up to $1,500, for improvements "placed in service" starting January 1, 2009, through December 31, 2010. See EnergyStar.gov's Federal Tax Credits for Energy Efficiency for a complete summary of energy efficiency tax credits available to consumers.
RESIDENTIAL RENEWABLE ENERGY TAX CREDITS
Consumers who install solar energy systems (including solar water heating and solar electric systems), small wind systems, geothermal heat pumps, and residential fuel cell and microturbine systems can receive a 30% tax credit for systems placed in service before December 31, 2016; the previous tax credit cap no longer applies.
AUTOMOBILE TAX CREDITS
Hybrid Gas-Electric and Alternative Fuel Vehicles
Individuals and businesses who buy or lease a new hybrid gas-electric car or truck are eligible for an income tax credit for vehicles “placed in service” starting January 1, 2006, and purchased on or before December 31, 2010. The amount of the credit depends on the fuel economy, the weight of the vehicle, and whether the tax credit has been or is being phased out. Hybrid vehicles that use less gasoline than the average vehicle of similar weight and that meet an emissions standard qualify for the credit.
This tax credit will be phased out for each manufacturer once that company has sold 60,000 eligible vehicles. At that point, the tax credit for each company’s vehicles will be gradually reduced over the course 15 months. See the IRS's Summary of the Credit for Qualified Hybrid Vehicles for information on the status of specific vehicle eligibility.
Alternative-fuel vehicles, diesel vehicles with advanced lean-burn technologies, and fuel-cell vehicles are also eligible for tax credits. See the IRS summary of credits available for Alternative Motor Vehicles.
Plug-In Electric Vehicles
The Recovery Act modifies the credit for qualified plug-in electric drive vehicles purchased after Dec. 31, 2009. The minimum amount of the credit for qualified plug-in electric drive vehicles is $2,500 and the credit tops out at $7,500, depending on the battery capacity. To qualify, vehicles must be newly purchased, have four or more wheels, have a gross vehicle weight rating of less than 14,000 lbs, and draw propulsion using a battery with at least four kilowatt hours that can be recharged from an external source of electricity. The full amount of the credit will be reduced with respect to a manufacturer's vehicles after the manufacturer has sold at least 200,000 vehicles. The credit will then phase out over a year.
Please see IRS Notices 2009-54: Qualified Plug-in Electric Vehicle Credit (PDF 29kb) and 2009-58: Qualified Plug-In Electric Vehicle Credit Under Section 30 (PDF 19kb) for more information (requires Adobe Acrobat Reader).
Plug-In Hybrid Conversion Kits
The Recovery Act also provided a tax credit for plug-in electric drive conversion kits. The credit is equal to 10% of the cost of converting a vehicle to a qualified plug-in electric drive motor vehicle and placed in service after Feb. 17, 2009. The maximum amount of the credit is $4,000. The credit does not apply to conversions made after Dec. 31, 2011. A taxpayer may claim this credit even if the taxpayer claimed a hybrid vehicle credit for the same vehicle in an earlier year.
Please see the IRS website for more information on Alternative Motor Vehicle Credits.
Low Speed & 2/3 Wheeled Vehicles
The Recovery Act law also creates a special tax credit for two types of plug-in vehicles - certain low-speed electric vehicles and 2- or 3-wheeled vehicles. The amount of the credit is 10% of the cost of the vehicle, up to a maximum credit of $2,500 for purchases made after Feb. 17, 2009, and before Jan. 1, 2012.
To qualify, a vehicle must be either a low speed vehicle propelled by an electric motor that draws electricity from a battery with a capacity of 4 kilowatt hours or more or be a 2- or 3-wheeled vehicle propelled by an electric motor that draws electricity from a battery with the capacity of 2.5 kilowatt hours. A taxpayer may not claim this credit if the plug-in electric drive vehicle credit is allowable. Please see IRS Notice 2009-58: Qualified Plug-In Electric Vehicle Credit Under Section 30 for more information (PDF 19kb, requires Adobe Acrobat Reader).
2/25/2010
2/18/2010
Weigh tax-favored health plans for clients
Article Source: AccountingWEB in Tax, Income Tax on 10/21/2009 - 18:27
As the debate over health care reform continues, there’s no reason why your clients can’t take matters into their own hands.
Strategy: Investigate the benefits of Health Savings Accounts (HSAs). Although these tax-favored accounts have been slow to catch on with the public, it might make sense for some clients. If it does, have them sign up for an HSA, whether or not health care reform is enacted.
Recent tax-law changes have improved HSAs, so they’ve become more attractive to a wider range of taxpayers.
Background information: The HSA is often called an “individual retirement account” (IRA) for medical expenses. Contributions can be deducted above the line or an employer can make tax deductible contributions on behalf of employees - or both.
As with a regular IRA, there’s no current income tax on the earnings within the account. Furthermore, distributions are completely tax-free if the funds are used to pay for qualified medical expenses. However, taxable distributions are hit with a 10 percent tax penalty if they are made before reaching age 59 1/2.
Who can qualify for an HSA? They are available to anyone who is not yet eligible for Medicare (i.e., someone under age 65), participates in a high-deductible plan, and does not receive coverage under another health insurance plan. For 2009, a “high deductible” plan is defined as a plan with a deductible of at least $1,150 and out-of-pocket maximum of no more than $5,800 for individual coverage; a deductible of at least $2,300 and out-of-pocket maximum of no more than $11,600 for family coverage. These limits are indexed for inflation.
Key point: For 2009, the maximum deductible HSA contributions are $3,000 for individuals; $5,950 for family coverage. (These figures are also adjusted for inflation.) In addition, a catch-up contribution of $1,000 is permitted for individuals age 55 or over .
Note that a 2006 law also authorizes certain tax-free rollovers to an HSA (see box, below).
HSA rollovers: A once-in-a-lifetime break
Normally, a taxpayer must pay tax at ordinary income rates when he or she takes a distribution from an IRA.
Strategy: Roll over funds from an IRA to an HSA. A one-time rollover is exempt from income tax as well as the 10% penalty tax that might otherwise apply to a taxpayer who is under age 59 1/2.
This method of funding an HAS - which was authorized by another 2006 tax-law change - is particularly beneficial for someone who is nearing retirement or has already retired. The maximum amount that may be rolled over is limited to the maximum HSA contribution allowed for the year.
Note that a taxpayer can roll over funds tax-free from an IRA into an HSA only once.
What happens to unused funds in an HSA? Any amount left over at the end of the year may be used to pay medical expenses in future years. Thanks to the higher annual contribution limits, employees can now accumulate even more in their accounts.
Advisory: This is a significant edge HSAs have over flexible spending accounts (FSAs) for health care expenses. Under the “use-it-or-lose-it” FSA feature, any amount remaining in your account at the end of the year is forfeited after a 2 1/2 - month grace period.
As the debate over health care reform continues, there’s no reason why your clients can’t take matters into their own hands.
Strategy: Investigate the benefits of Health Savings Accounts (HSAs). Although these tax-favored accounts have been slow to catch on with the public, it might make sense for some clients. If it does, have them sign up for an HSA, whether or not health care reform is enacted.
Recent tax-law changes have improved HSAs, so they’ve become more attractive to a wider range of taxpayers.
Background information: The HSA is often called an “individual retirement account” (IRA) for medical expenses. Contributions can be deducted above the line or an employer can make tax deductible contributions on behalf of employees - or both.
As with a regular IRA, there’s no current income tax on the earnings within the account. Furthermore, distributions are completely tax-free if the funds are used to pay for qualified medical expenses. However, taxable distributions are hit with a 10 percent tax penalty if they are made before reaching age 59 1/2.
Who can qualify for an HSA? They are available to anyone who is not yet eligible for Medicare (i.e., someone under age 65), participates in a high-deductible plan, and does not receive coverage under another health insurance plan. For 2009, a “high deductible” plan is defined as a plan with a deductible of at least $1,150 and out-of-pocket maximum of no more than $5,800 for individual coverage; a deductible of at least $2,300 and out-of-pocket maximum of no more than $11,600 for family coverage. These limits are indexed for inflation.
Key point: For 2009, the maximum deductible HSA contributions are $3,000 for individuals; $5,950 for family coverage. (These figures are also adjusted for inflation.) In addition, a catch-up contribution of $1,000 is permitted for individuals age 55 or over .
Note that a 2006 law also authorizes certain tax-free rollovers to an HSA (see box, below).
HSA rollovers: A once-in-a-lifetime break
Normally, a taxpayer must pay tax at ordinary income rates when he or she takes a distribution from an IRA.
Strategy: Roll over funds from an IRA to an HSA. A one-time rollover is exempt from income tax as well as the 10% penalty tax that might otherwise apply to a taxpayer who is under age 59 1/2.
This method of funding an HAS - which was authorized by another 2006 tax-law change - is particularly beneficial for someone who is nearing retirement or has already retired. The maximum amount that may be rolled over is limited to the maximum HSA contribution allowed for the year.
Note that a taxpayer can roll over funds tax-free from an IRA into an HSA only once.
What happens to unused funds in an HSA? Any amount left over at the end of the year may be used to pay medical expenses in future years. Thanks to the higher annual contribution limits, employees can now accumulate even more in their accounts.
Advisory: This is a significant edge HSAs have over flexible spending accounts (FSAs) for health care expenses. Under the “use-it-or-lose-it” FSA feature, any amount remaining in your account at the end of the year is forfeited after a 2 1/2 - month grace period.
New Method Starting from 2009 for Home Sale Exclusion
Modified Home Sale Exclusion for Non-Qualifying Use
Article Source: William Perez, About.com Guide
When homeowners sell their main home, they can exclude up to $500,000 in capital gains from income tax. The Housing Assistance Tax Act of 2008 changes the rules. The amount of profits from the sale of a house that can be excluded is now based on the percentage of time when the house was used as a primary residence.
Homeowners who sell their primary residence can exclude up to $250,000 (or up to $500,000 for married couples filing jointly) in capital gains from their taxes. The amount of gain that will qualify for the exclusion is limited based on the amount of time that the house is used as a primary residence. If the house is used other than as a primary residence, capital gains must be allocated between qualifying and non-qualifying use. Any non-qualifying use can potentially reduce the amount of capital gain that can be excluded. The allocation rules take effect beginning January 1, 2009.
Qualifying Use vs. Non-Qualifying Use
Taxpayers can qualify to exclude up to $250,000 in capital gains ($500,000 if married and filing jointly) when selling a house. To qualify, the person needs to own and live in the property has his or her primary residence for at least two years out of the five years ending on the date of sale.
Sometimes, however, the property isn't used as a primary residence during the entire five-year period. The house might be rented out, used as a vacation home, or used as a second home. Such uses of the home will be considered non-qualifying use and could subject gains from the sale of the house to tax.
Qualifying use means the property is being used by the homeowner or the homeowner's spouse as a primary residence. Non-qualifying use means the property is not being used as a primary residence by either the homeowner or the homeowner's spouse.
Homeowners who have used the property exclusively as their primary residence (that is, no second homes or rental use) will not need to allocate their gain.
Calculating Excluded and Non-Excluded Gain on the Sale of a Home
Gain from the sale of a home may need to be allocated between what gain be excluded and what gain is not excluded. The portion of capital gains that cannot be excluded is determined by the following ratio:
Period of non-qualifying use
--------------------------------------
Period of ownership
Time Period of Non-Qualifying Use
For the purpose of calculating capital gains, the period of non-qualifying use is any period of time the property is not being used as a main home that begins on or after January 1, 2009. Non-qualifying use prior to January 1, 2009, is disregarded for the the purpose of determining the capital gain allocation.
Temporary absences not exceeding a total of two years in aggregate will not jeopardize qualifying use. A property can maintain its status as a primary residence even if the homeowner is absence due to change in employment, health conditions, or other unforeseen circumstances.
Example of a Capital Gain Allocation
Tony & Melinda buy a condominium in 2009. They already own a house which they use as their primary residence. They let their daughter Rachel live there for the first two years while she attends graduate school. Melinda moves into the condo in 2011 and makes it her primary residence for three years. Tony and Melinda sell the condo in 2014 after owning the property for five years. (Although I'm working with whole years to illustrate the allocation, you could also measure the periods in days or months.) During the five years that Tony and Melinda owned the condo, there were two years of non-qualifying use when the property was not Tony and Melinda's primary residence. There were three years of qualifying use when Melinda lived there as her primary residence. The ratio of non-qualifying use is 2 / 5, or 40%. Forty percent of the gain will be taxable capital gains, and the remaining 60% can be excluded from capital gains, up to the exclusion limit of $250,000 (or $500,000 for married couples filing a joint return).
Planning Tips for Non-Qualifying Use
In the past, tax professionals advised clients to sell real estate after living in their house for at least two years out of five years ending on the date of sale. This helped clients qualify for the capital gains exclusion because the exclusion was based on the last five years of ownership.
Now, however, the exclusion is based on the period of time when the property is used as a primary residence. Any other use will not be excluded and could trigger capital gains tax.
Taxpayers owning second homes, vacation homes, and rental properties will need to revise their capital gains strategy accordingly. The use test is applied for the time period beginning January 1, 2009, until the property is sold. To get the most tax benefit, the property will need to be used entirely as a primary residence during this time period.
Taxpayers planning to sell a second home may want to move in and make that property their primary residence starting January 1, 2009, to gain as much qualifying use as possible before selling it.
Sources:
* Section 3092 of Housing Assistance Tax Act of 2008 (H.R. 3221)
* Summary of the tax provisions in H.R. 3221 from the Ways and Means Committee [pdf]
* CCH Tax Briefing on the Housing Assistance Tax Act [pdf]
Article Source: William Perez, About.com Guide
When homeowners sell their main home, they can exclude up to $500,000 in capital gains from income tax. The Housing Assistance Tax Act of 2008 changes the rules. The amount of profits from the sale of a house that can be excluded is now based on the percentage of time when the house was used as a primary residence.
Homeowners who sell their primary residence can exclude up to $250,000 (or up to $500,000 for married couples filing jointly) in capital gains from their taxes. The amount of gain that will qualify for the exclusion is limited based on the amount of time that the house is used as a primary residence. If the house is used other than as a primary residence, capital gains must be allocated between qualifying and non-qualifying use. Any non-qualifying use can potentially reduce the amount of capital gain that can be excluded. The allocation rules take effect beginning January 1, 2009.
Qualifying Use vs. Non-Qualifying Use
Taxpayers can qualify to exclude up to $250,000 in capital gains ($500,000 if married and filing jointly) when selling a house. To qualify, the person needs to own and live in the property has his or her primary residence for at least two years out of the five years ending on the date of sale.
Sometimes, however, the property isn't used as a primary residence during the entire five-year period. The house might be rented out, used as a vacation home, or used as a second home. Such uses of the home will be considered non-qualifying use and could subject gains from the sale of the house to tax.
Qualifying use means the property is being used by the homeowner or the homeowner's spouse as a primary residence. Non-qualifying use means the property is not being used as a primary residence by either the homeowner or the homeowner's spouse.
Homeowners who have used the property exclusively as their primary residence (that is, no second homes or rental use) will not need to allocate their gain.
Calculating Excluded and Non-Excluded Gain on the Sale of a Home
Gain from the sale of a home may need to be allocated between what gain be excluded and what gain is not excluded. The portion of capital gains that cannot be excluded is determined by the following ratio:
Period of non-qualifying use
--------------------------------------
Period of ownership
Time Period of Non-Qualifying Use
For the purpose of calculating capital gains, the period of non-qualifying use is any period of time the property is not being used as a main home that begins on or after January 1, 2009. Non-qualifying use prior to January 1, 2009, is disregarded for the the purpose of determining the capital gain allocation.
Temporary absences not exceeding a total of two years in aggregate will not jeopardize qualifying use. A property can maintain its status as a primary residence even if the homeowner is absence due to change in employment, health conditions, or other unforeseen circumstances.
Example of a Capital Gain Allocation
Tony & Melinda buy a condominium in 2009. They already own a house which they use as their primary residence. They let their daughter Rachel live there for the first two years while she attends graduate school. Melinda moves into the condo in 2011 and makes it her primary residence for three years. Tony and Melinda sell the condo in 2014 after owning the property for five years. (Although I'm working with whole years to illustrate the allocation, you could also measure the periods in days or months.) During the five years that Tony and Melinda owned the condo, there were two years of non-qualifying use when the property was not Tony and Melinda's primary residence. There were three years of qualifying use when Melinda lived there as her primary residence. The ratio of non-qualifying use is 2 / 5, or 40%. Forty percent of the gain will be taxable capital gains, and the remaining 60% can be excluded from capital gains, up to the exclusion limit of $250,000 (or $500,000 for married couples filing a joint return).
Planning Tips for Non-Qualifying Use
In the past, tax professionals advised clients to sell real estate after living in their house for at least two years out of five years ending on the date of sale. This helped clients qualify for the capital gains exclusion because the exclusion was based on the last five years of ownership.
Now, however, the exclusion is based on the period of time when the property is used as a primary residence. Any other use will not be excluded and could trigger capital gains tax.
Taxpayers owning second homes, vacation homes, and rental properties will need to revise their capital gains strategy accordingly. The use test is applied for the time period beginning January 1, 2009, until the property is sold. To get the most tax benefit, the property will need to be used entirely as a primary residence during this time period.
Taxpayers planning to sell a second home may want to move in and make that property their primary residence starting January 1, 2009, to gain as much qualifying use as possible before selling it.
Sources:
* Section 3092 of Housing Assistance Tax Act of 2008 (H.R. 3221)
* Summary of the tax provisions in H.R. 3221 from the Ways and Means Committee [pdf]
* CCH Tax Briefing on the Housing Assistance Tax Act [pdf]
2/16/2010
A New Credit in 2009 and 2010 and Related Topics
Article Source: www.irs.gov
What's New
American opportunity credit. This new education tax credit (a modification of the Hope credit) is available for 2009 and 2010. The maximum credit per student is $2,500 (100% of the first $2,000 and 25% of the next $2,000 of qualified education expenses). The credit is available for the first 4 years of postsecondary education, and 40% of the credit is refundable for most taxpayers. The threshold at which this credit is reduced is higher than that for the Hope and lifetime learning credits. For 2009, the amount of your credit is gradually reduced (phased out) if your modified adjusted gross income (MAGI) is between $80,000 and $90,000 ($160,000 and $180,000 if you file a joint return). You cannot claim a credit if your MAGI is $90,000 or more ($180,000 or more if you file a joint return).
Eligibility for the Hope credit. For 2009, you can claim a Hope credit only if at least one eligible student is attending an eligible educational institution in a Midwestern disaster area and you do not claim an American opportunity credit for any other student in the same year.
Increased income thresholds for 2009.
Hope and lifetime learning credits. For 2009, the amount of your Hope or lifetime learning credit is gradually reduced (phased out) if your modified adjusted gross income (MAGI) is between $50,000 and $60,000 ($100,000 and $120,000 if you file a joint return). You cannot claim a credit if your MAGI is $60,000 or more ($120,000 or more if you file a joint return). This is an increase from the 2008 limits of $48,000 and $58,000 ($96,000 and $116,000 if filing a joint return). For more information, see chapters 3 and 4.
Student loan interest deduction. The amount of your student loan interest deduction for 2009 is gradually reduced (phased out) if your modified adjusted gross income (MAGI) is between $60,000 and $75,000 ($120,000 and $150,000 if you file a joint return). You cannot take a deduction if your MAGI is $75,000 or more ($150,000 or more if you file a joint return). This is an increase from the 2008 limits of $55,000 and $70,000 ($115,000 and $145,000 if filing a joint return). See chapter 5 of Publication 970 for more information.
Qualified tuition program (529 plan). For 2009 and 2010, qualified education expenses include expenses paid or incurred for the purchase of computer technology, equipment, and Internet access to be used by the beneficiary and his or her family while enrolled at an eligible educational institution. For more information, see Qualified education expenses in chapter 9.
Education savings bond program. For 2009, the amount of your interest exclusion will be gradually reduced (phased out) if your filing status is married filing jointly or qualifying widow(er) and your modified adjusted gross income (MAGI) is between $104,900 and $134,900. You cannot take the deduction if your MAGI is $134,900 or more. For 2008, the limits that applied to you were $100,650 and $130,650. For all other filing statuses, your interest exclusion for 2009 is phased out if your MAGI is between $69,950 and $84,950. You cannot take the deduction if your MAGI is $84,950 or more. For 2008, the limits that applied to you were $67,100 and $82,100. For more information, see chapter 11.
Business deduction for work-related education. For 2009:
*
If you drive your car to and from school and qualify to deduct transportation expenses, the amount you can deduct for miles driven during 2009 is 55 cents per mile. This is down from 58½ cents per mile at the end of 2008. See chapter 13 for more information.
*
If your adjusted gross income for 2009 is more than $166,800 ($83,400 if you are married filing separately), your itemized deductions may be limited. See chapter 13 and the instructions for line 29 of Schedule A (Form 1040).
Reminders
Students in Midwestern disaster areas. The following rules apply only to students attending an eligible educational institution in the Midwestern disaster areas in the states of Arkansas, Illinois, Indiana, Iowa, Missouri, Nebraska, and Wisconsin. See Table 4-2 at the end of chapter 4 for a list of counties.
*
Hope credit increased. The Hope credit for students in Midwestern disaster areas is 100% of the first $2,400 of qualified education expenses and 50% of the next $2,400 of qualified education expenses for a maximum credit of $3,600 per student.
*
Lifetime learning credit increased. The lifetime learning credit rate for students in Midwestern disaster areas is 40% of qualified expenses paid, with a maximum credit of $4,000 allowed on your return.
*
Definition of qualified expenses expanded. The definition of qualified education expenses for the education credits and the tuition and fees deduction is expanded for students in Midwestern disaster areas.
See chapters 3, 4, and 7 for more information.
Contribution of military death gratuity to Coverdell ESA. Families of soldiers killed in the line of duty may contribute, subject to certain limitations, up to 100 percent of survivor benefits to education savings accounts. Under certain conditions this applies retroactively to deaths from injuries occurring on or after October 7, 2001. For more information, see chapter 8.
Estimated tax payments. If you have taxable income from any of your education benefits and the payer does not withhold enough income tax, you may need to make estimated tax payments. For more information, see Publication 505, Tax Withholding and Estimated Tax.
What's New
American opportunity credit. This new education tax credit (a modification of the Hope credit) is available for 2009 and 2010. The maximum credit per student is $2,500 (100% of the first $2,000 and 25% of the next $2,000 of qualified education expenses). The credit is available for the first 4 years of postsecondary education, and 40% of the credit is refundable for most taxpayers. The threshold at which this credit is reduced is higher than that for the Hope and lifetime learning credits. For 2009, the amount of your credit is gradually reduced (phased out) if your modified adjusted gross income (MAGI) is between $80,000 and $90,000 ($160,000 and $180,000 if you file a joint return). You cannot claim a credit if your MAGI is $90,000 or more ($180,000 or more if you file a joint return).
Eligibility for the Hope credit. For 2009, you can claim a Hope credit only if at least one eligible student is attending an eligible educational institution in a Midwestern disaster area and you do not claim an American opportunity credit for any other student in the same year.
Increased income thresholds for 2009.
Hope and lifetime learning credits. For 2009, the amount of your Hope or lifetime learning credit is gradually reduced (phased out) if your modified adjusted gross income (MAGI) is between $50,000 and $60,000 ($100,000 and $120,000 if you file a joint return). You cannot claim a credit if your MAGI is $60,000 or more ($120,000 or more if you file a joint return). This is an increase from the 2008 limits of $48,000 and $58,000 ($96,000 and $116,000 if filing a joint return). For more information, see chapters 3 and 4.
Student loan interest deduction. The amount of your student loan interest deduction for 2009 is gradually reduced (phased out) if your modified adjusted gross income (MAGI) is between $60,000 and $75,000 ($120,000 and $150,000 if you file a joint return). You cannot take a deduction if your MAGI is $75,000 or more ($150,000 or more if you file a joint return). This is an increase from the 2008 limits of $55,000 and $70,000 ($115,000 and $145,000 if filing a joint return). See chapter 5 of Publication 970 for more information.
Qualified tuition program (529 plan). For 2009 and 2010, qualified education expenses include expenses paid or incurred for the purchase of computer technology, equipment, and Internet access to be used by the beneficiary and his or her family while enrolled at an eligible educational institution. For more information, see Qualified education expenses in chapter 9.
Education savings bond program. For 2009, the amount of your interest exclusion will be gradually reduced (phased out) if your filing status is married filing jointly or qualifying widow(er) and your modified adjusted gross income (MAGI) is between $104,900 and $134,900. You cannot take the deduction if your MAGI is $134,900 or more. For 2008, the limits that applied to you were $100,650 and $130,650. For all other filing statuses, your interest exclusion for 2009 is phased out if your MAGI is between $69,950 and $84,950. You cannot take the deduction if your MAGI is $84,950 or more. For 2008, the limits that applied to you were $67,100 and $82,100. For more information, see chapter 11.
Business deduction for work-related education. For 2009:
*
If you drive your car to and from school and qualify to deduct transportation expenses, the amount you can deduct for miles driven during 2009 is 55 cents per mile. This is down from 58½ cents per mile at the end of 2008. See chapter 13 for more information.
*
If your adjusted gross income for 2009 is more than $166,800 ($83,400 if you are married filing separately), your itemized deductions may be limited. See chapter 13 and the instructions for line 29 of Schedule A (Form 1040).
Reminders
Students in Midwestern disaster areas. The following rules apply only to students attending an eligible educational institution in the Midwestern disaster areas in the states of Arkansas, Illinois, Indiana, Iowa, Missouri, Nebraska, and Wisconsin. See Table 4-2 at the end of chapter 4 for a list of counties.
*
Hope credit increased. The Hope credit for students in Midwestern disaster areas is 100% of the first $2,400 of qualified education expenses and 50% of the next $2,400 of qualified education expenses for a maximum credit of $3,600 per student.
*
Lifetime learning credit increased. The lifetime learning credit rate for students in Midwestern disaster areas is 40% of qualified expenses paid, with a maximum credit of $4,000 allowed on your return.
*
Definition of qualified expenses expanded. The definition of qualified education expenses for the education credits and the tuition and fees deduction is expanded for students in Midwestern disaster areas.
See chapters 3, 4, and 7 for more information.
Contribution of military death gratuity to Coverdell ESA. Families of soldiers killed in the line of duty may contribute, subject to certain limitations, up to 100 percent of survivor benefits to education savings accounts. Under certain conditions this applies retroactively to deaths from injuries occurring on or after October 7, 2001. For more information, see chapter 8.
Estimated tax payments. If you have taxable income from any of your education benefits and the payer does not withhold enough income tax, you may need to make estimated tax payments. For more information, see Publication 505, Tax Withholding and Estimated Tax.
Home Foreclosure and Debt Cancellation
Article Source: http://www.irs.gov/newsroom
Update Dec. 11, 2008 — The Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualify for this relief.
This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion doesn’t apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.
The amount excluded reduces the taxpayer’s cost basis in the home. More details. Further information, including detailed examples, can also be found in Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments.
The questions and answers, below, are based on the law prior to the passage of the Mortgage Forgiveness Debt Relief Act of 2007.
1. What is Cancellation of Debt?
If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.
Here’s a very simplified example. You borrow $10,000 and default on the loan after paying back $2,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $8,000, which generally is taxable income to you.
2. Is Cancellation of Debt income always taxable?
Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve:
* Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.
* Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you.You are insolvent when your total debts are more than the fair market value of your total assets.Insolvency can be fairly complex to determine and the assistance of a tax professional is recommended if you believe you qualify for this exception.
* Certain farm debts:If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income.The rules applicable to farmers are complex and the assistance of a tax professional is recommended if you believe you qualify for this exception.
* Non-recourse loans:A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral.That is, the lender cannot pursue you personally in case of default.Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income.However, it may result in other tax consequences, as discussed in Question 3 below.
3. I lost my home through foreclosure. Are there tax consequences?
There are two possible consequences you must consider:
* Taxable cancellation of debt income.(Note: As stated above, cancellation of debt income is not taxable in the case of non-recourse loans.)
* A reportable gain from the disposition of the home (because foreclosures are treated like sales for tax purposes).(Note: Often some or all of the gain from the sale of a personal residence qualifies for exclusion from income.)
Use the following steps to compute the income to be reported from a foreclosure:
Step 1 - Figuring Cancellation of Debt Income (Note: For non-recourse loans, skip this section. You have no income from cancellation of debt.)
1. Enter the total amount of the debt immediately prior to the foreclosure.___________
2. Enter the fair market value of the property from Form 1099-C, box 7. ___________
3. Subtract line 2 from line 1.If less than zero, enter zero.___________
The amount on line 3 will generally equal the amount shown in box 2 of Form 1099-C. This amount is taxable unless you meet one of the exceptions in question 2. Enter it on line 21, Other Income, of your Form 1040.
Step 2 – Figuring Gain from Foreclosure
4. Enter the fair market value of the property foreclosed.For non-recourse loans, enter the amount of the debt immediately prior to the foreclosure ________
5. Enter your adjusted basis in the property.(Usually your purchase price plus the cost of any major improvements.) ____________
6. Subtract line 5 from line 4. If less than zero, enter zero.
The amount on line 6 is your gain from the foreclosure of your home. If you have owned and used the home as your principal residence for periods totaling at least two years during the five year period ending on the date of the foreclosure, you may exclude up to $250,000 (up to $500,000 for married couples filing a joint return) from income. If you do not qualify for this exclusion, or your gain exceeds $250,000 ($500,000 for married couples filing a joint return), report the taxable amount on Schedule D, Capital Gains and Losses.
4. I lost money on the foreclosure of my home. Can I claim a loss on my tax return?
No. Losses from the sale or foreclosure of personal property are not deductible.
5. Can you provide examples?
A borrower bought a home in August 2005 and lived in it until it was taken through foreclosure in September 2007. The original purchase price was $170,000, the home is worth $200,000 at foreclosure, and the mortgage debt canceled at foreclosure is $220,000. At the time of the foreclosure, the borrower is insolvent, with liabilities (mortgage, credit cards, car loans and other debts) totaling $250,000 and assets totaling $230,000.
The borrower figures income from the foreclosure as follows:
Use the following steps to compute the income to be reported from a foreclosure:
Step 1 - Figuring Cancellation of Debt Income (Note: For non-recourse loans, skip this section. You have no income from cancellation of debt.)
1. Enter the total amount of the debt immediately prior to the foreclosure.___$220,000__
2. Enter the fair market value of the property from Form 1099-C, box 7. ___$200,000__
3. Subtract line 2 from line 1.If less than zero, enter zero.___$20,000__
The amount on line 3 will generally equal the amount shown in box 2 of Form 1099-C. This amount is taxable unless you meet one of the exceptions in question 2. Enter it on line 21, Other Income, of your Form 1040.
Step 2 – Figuring Gain from Foreclosure
4. Enter the fair market value of the property foreclosed.For non-recourse loans, enter the amount of the debt immediately prior to the foreclosure. __$200,000__
5. Enter your adjusted basis in the property.(Usually your purchase price plus the cost of any major improvements.) ___$170,000__
6. Subtract line 5 from line 4.If less than zero, enter zero.___$30,000__
The amount on line 6 is your gain from the foreclosure of your home. If you have owned and used the home as your principal residence for periods totaling at least two years during the five year period ending on the date of the foreclosure, you may exclude up to $250,000 (up to $500,000 for married couples filing a joint return) from income. If you do not qualify for this exclusion, or your gain exceeds $250,000 ($500,000 for married couples filing a joint return), report the taxable amount on Schedule D, Capital Gains and Losses.
In this situation, the borrower has a tax-free home-sale gain of $30,000 ($200,000 minus $170,000), because they owned and lived in their home as a principal residence for at least two years. Ordinarily, the borrower would also have taxable debt-forgiveness income of $20,000 ($220,000 minus $200,000). But since the borrower’s liabilities exceed assets by $20,000 ($250,000 minus $230,000) there is no tax on the canceled debt.
Other examples can be found in IRS Publication 544, Sales and Other Dispositions of Assets, under the section “Foreclosures and Repossessions”.
6. I don’t agree with the information on the Form 1099-C. What should I do?
Contact the lender. The lender should issue a corrected form if the information is determined to be incorrect. Retain all records related to the purchase of your home and all related debt.
8. Where else can I go to get tax help?
If you are having difficulty resolving a tax problem (such as one involving an IRS bill, letter or notice) through normal IRS channels, the Taxpayer Advocate Service may be able to help. For more information, you can also call the TAS toll-free case intake line at 1-877-777-4778, TTY/TDD 1-800-829-4059.
In some cases, you may qualify for free or low-cost assistance from a Low Income Taxpayer Clinic (LITC). LITCs are independent organizations that represent low income taxpayers in tax disputes with the IRS. Find information on an LITCs in your area.
Related Items:
*
Publication 523, Selling Your Home
*
Publication 544, Sales and Other Dispositions of Assets
*
Publication 908, Bankruptcy Tax Guide
*
Form 1040, U.S. Individual Income Tax Return
*
Form 1040, Schedule D, Capital Gains and Losses
*
Form 1099-C, Cancellation of Debt
*
Form 9465, Installment Agreement Request
Update Dec. 11, 2008 — The Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualify for this relief.
This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion doesn’t apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.
The amount excluded reduces the taxpayer’s cost basis in the home. More details. Further information, including detailed examples, can also be found in Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments.
The questions and answers, below, are based on the law prior to the passage of the Mortgage Forgiveness Debt Relief Act of 2007.
1. What is Cancellation of Debt?
If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.
Here’s a very simplified example. You borrow $10,000 and default on the loan after paying back $2,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $8,000, which generally is taxable income to you.
2. Is Cancellation of Debt income always taxable?
Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve:
* Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.
* Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you.You are insolvent when your total debts are more than the fair market value of your total assets.Insolvency can be fairly complex to determine and the assistance of a tax professional is recommended if you believe you qualify for this exception.
* Certain farm debts:If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income.The rules applicable to farmers are complex and the assistance of a tax professional is recommended if you believe you qualify for this exception.
* Non-recourse loans:A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral.That is, the lender cannot pursue you personally in case of default.Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income.However, it may result in other tax consequences, as discussed in Question 3 below.
3. I lost my home through foreclosure. Are there tax consequences?
There are two possible consequences you must consider:
* Taxable cancellation of debt income.(Note: As stated above, cancellation of debt income is not taxable in the case of non-recourse loans.)
* A reportable gain from the disposition of the home (because foreclosures are treated like sales for tax purposes).(Note: Often some or all of the gain from the sale of a personal residence qualifies for exclusion from income.)
Use the following steps to compute the income to be reported from a foreclosure:
Step 1 - Figuring Cancellation of Debt Income (Note: For non-recourse loans, skip this section. You have no income from cancellation of debt.)
1. Enter the total amount of the debt immediately prior to the foreclosure.___________
2. Enter the fair market value of the property from Form 1099-C, box 7. ___________
3. Subtract line 2 from line 1.If less than zero, enter zero.___________
The amount on line 3 will generally equal the amount shown in box 2 of Form 1099-C. This amount is taxable unless you meet one of the exceptions in question 2. Enter it on line 21, Other Income, of your Form 1040.
Step 2 – Figuring Gain from Foreclosure
4. Enter the fair market value of the property foreclosed.For non-recourse loans, enter the amount of the debt immediately prior to the foreclosure ________
5. Enter your adjusted basis in the property.(Usually your purchase price plus the cost of any major improvements.) ____________
6. Subtract line 5 from line 4. If less than zero, enter zero.
The amount on line 6 is your gain from the foreclosure of your home. If you have owned and used the home as your principal residence for periods totaling at least two years during the five year period ending on the date of the foreclosure, you may exclude up to $250,000 (up to $500,000 for married couples filing a joint return) from income. If you do not qualify for this exclusion, or your gain exceeds $250,000 ($500,000 for married couples filing a joint return), report the taxable amount on Schedule D, Capital Gains and Losses.
4. I lost money on the foreclosure of my home. Can I claim a loss on my tax return?
No. Losses from the sale or foreclosure of personal property are not deductible.
5. Can you provide examples?
A borrower bought a home in August 2005 and lived in it until it was taken through foreclosure in September 2007. The original purchase price was $170,000, the home is worth $200,000 at foreclosure, and the mortgage debt canceled at foreclosure is $220,000. At the time of the foreclosure, the borrower is insolvent, with liabilities (mortgage, credit cards, car loans and other debts) totaling $250,000 and assets totaling $230,000.
The borrower figures income from the foreclosure as follows:
Use the following steps to compute the income to be reported from a foreclosure:
Step 1 - Figuring Cancellation of Debt Income (Note: For non-recourse loans, skip this section. You have no income from cancellation of debt.)
1. Enter the total amount of the debt immediately prior to the foreclosure.___$220,000__
2. Enter the fair market value of the property from Form 1099-C, box 7. ___$200,000__
3. Subtract line 2 from line 1.If less than zero, enter zero.___$20,000__
The amount on line 3 will generally equal the amount shown in box 2 of Form 1099-C. This amount is taxable unless you meet one of the exceptions in question 2. Enter it on line 21, Other Income, of your Form 1040.
Step 2 – Figuring Gain from Foreclosure
4. Enter the fair market value of the property foreclosed.For non-recourse loans, enter the amount of the debt immediately prior to the foreclosure. __$200,000__
5. Enter your adjusted basis in the property.(Usually your purchase price plus the cost of any major improvements.) ___$170,000__
6. Subtract line 5 from line 4.If less than zero, enter zero.___$30,000__
The amount on line 6 is your gain from the foreclosure of your home. If you have owned and used the home as your principal residence for periods totaling at least two years during the five year period ending on the date of the foreclosure, you may exclude up to $250,000 (up to $500,000 for married couples filing a joint return) from income. If you do not qualify for this exclusion, or your gain exceeds $250,000 ($500,000 for married couples filing a joint return), report the taxable amount on Schedule D, Capital Gains and Losses.
In this situation, the borrower has a tax-free home-sale gain of $30,000 ($200,000 minus $170,000), because they owned and lived in their home as a principal residence for at least two years. Ordinarily, the borrower would also have taxable debt-forgiveness income of $20,000 ($220,000 minus $200,000). But since the borrower’s liabilities exceed assets by $20,000 ($250,000 minus $230,000) there is no tax on the canceled debt.
Other examples can be found in IRS Publication 544, Sales and Other Dispositions of Assets, under the section “Foreclosures and Repossessions”.
6. I don’t agree with the information on the Form 1099-C. What should I do?
Contact the lender. The lender should issue a corrected form if the information is determined to be incorrect. Retain all records related to the purchase of your home and all related debt.
8. Where else can I go to get tax help?
If you are having difficulty resolving a tax problem (such as one involving an IRS bill, letter or notice) through normal IRS channels, the Taxpayer Advocate Service may be able to help. For more information, you can also call the TAS toll-free case intake line at 1-877-777-4778, TTY/TDD 1-800-829-4059.
In some cases, you may qualify for free or low-cost assistance from a Low Income Taxpayer Clinic (LITC). LITCs are independent organizations that represent low income taxpayers in tax disputes with the IRS. Find information on an LITCs in your area.
Related Items:
*
Publication 523, Selling Your Home
*
Publication 544, Sales and Other Dispositions of Assets
*
Publication 908, Bankruptcy Tax Guide
*
Form 1040, U.S. Individual Income Tax Return
*
Form 1040, Schedule D, Capital Gains and Losses
*
Form 1099-C, Cancellation of Debt
*
Form 9465, Installment Agreement Request
Frequently Asked Questions About the Move-Up/Repeat Home Buyer Tax Credit
Article Source: http://www.federalhousingtaxcredit.com
The Worker, Homeownership, and Business Assistance Act of 2009 has established a tax credit of up to $6,500 for qualified move-up/repeat home buyers (existing home owners) purchasing a principal residence after November 6, 2009 and on or before April 30, 2010 (or purchased by June 30, 2010 with a binding sales contract signed by April 30, 2010).
The following questions and answers provide basic information about the tax credit. If you have more specific questions, we strongly encourage you to consult a qualified tax advisor or legal professional about your unique situation.
# Who is eligible to claim the $6,500 tax credit?
Qualified move-up or repeat home buyers purchasing any kind of home are eligible to claim this credit.
# What is the definition of a move-up or repeat home buyer?
The law defines a tax credit qualified move-up home buyer (“long-time resident”) as a person who has 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, the law tests the homeownership history of both the home buyer and his/her spouse. That is, both spouses must qualify as long-time residents, with at least five years of principal residency for each. Repeat home buyers do not have to purchase a home that is more expensive than their previous home to qualify for the tax credit.
# How is the amount of the tax credit determined?
The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $6,500. Purchases of homes priced above $800,000 are not eligible for the tax credit.
# Are there any income limits for claiming the tax credit?
Yes. The income limit for single taxpayers is $125,000; the limit is $225,000 for married taxpayers filing a joint return. The tax credit amount is reduced for buyers with a modified adjusted gross income (MAGI) above those limits. The phaseout range for the tax credit program is equal to $20,000. That is, the tax credit amount is reduced to zero for taxpayers with MAGI of more than $145,000 (single) or $245,000 (married) and is reduced proportionally for taxpayers with MAGIs between these amounts.
# What is “modified adjusted gross income”?
Modified adjusted gross income or MAGI is defined by the IRS. To find it, a taxpayer must first determine "adjusted gross income" or AGI. AGI is total income for a year minus certain deductions (known as "adjustments" or "above-the-line deductions"), but before itemized deductions from Schedule A or personal exemptions are subtracted. On Forms 1040 and 1040A, AGI is the last number on page 1 and the first number on page 2 of the form. For Form 1040-EZ, AGI appears on line 4 (as of 2007). Note that AGI includes all forms of income including wages, salaries, interest income, dividends and capital gains.
To determine modified adjusted gross income (MAGI), add to AGI certain amounts of foreign-earned income. See IRS Form 5405 for more details.
# If my modified adjusted gross income (MAGI) is above the limit, do I qualify for any tax credit?
Possibly. It depends on your income. Partial credits of less than $6,500 are available for some taxpayers whose MAGI exceeds the phaseout limits.
# Can you give me an example of how the partial tax credit is determined?
Just as an example, assume that a married couple has a modified adjusted gross income of $235,000. The applicable phaseout to qualify for the tax credit is $225,000, and the couple is $10,000 over this amount. Dividing $10,000 by the phaseout range of $20,000 yields 0.5. When you subtract 0.5 from 1.0, the result is 0.5. To determine the amount of the partial first-time home buyer tax credit that is available to this couple, multiply $6,500 by 0.5. The result is $3,250.
Here’s another example: assume that an individual home buyer has a modified adjusted gross income of $138,000. The buyer’s income exceeds $125,000 by $13,000. Dividing $13,000 by the phaseout range of $20,000 yields 0.65. When you subtract 0.65 from 1.0, the result is 0.35. Multiplying $6,500 by 0.35 shows that the buyer is eligible for a partial tax credit of $2,275.
Please remember that these examples are intended to provide a general idea of how the tax credit might be applied in different circumstances. You should always consult your tax advisor for information relating to your specific circumstances.
# How is this home buyer tax credit different from the tax credit that Congress enacted in July of 2008? How is this different than the rules established in early 2009?
The previous tax credits applied only to first-time home buyers and were for different amounts of money.
# How do I claim the tax credit? Do I need to complete a form or application? Are there documentation requirements?
You claim the tax credit on your federal income tax return. Specifically, home buyers should complete IRS Form 5405 to determine their tax credit amount, and then claim this amount on line 67 of the 1040 income tax form for 2009 returns (line 69 of the 1040 income tax form for 2008 returns). Please note that although the Form is titled “First-Time Homebuyer Credit,” this is the correct form for claiming both the $8,000 first-time homebuyer tax credit and $6,500 repeat buyer tax credit.
No other applications are required, and no pre-approval is necessary. However, you will want to be sure that you qualify for the credit under the income limits and repeat home buyer tests. Note that you cannot claim the credit on Form 5405 for an intended purchase for some future date; it must be a completed purchase. Home buyers must attach a copy of their HUD-1 settlement form (closing statement) to Form 5405 as proof of the completed home purchase. In cases where a HUD-1 form is not used, such as for construction of some new homes, you should attach a copy of the certificate of occupancy in lieu of the HUD-1.
Homebuyers should be sure to read the instructions for the revised IRS Form 5405 to be sure they meet the new program requirements.
# What types of homes will qualify for the tax credit?
Any home that will be used as a principal residence will qualify for the credit, provided the home is purchased for a price less than or equal to $800,000. This includes single-family detached homes, attached homes like townhouses and condominiums, manufactured homes (also known as mobile homes) and houseboats. The definition of principal residence is identical to the one used to determine whether you may qualify for the $250,000 / $500,000 capital gain tax exclusion for principal residences.
It is important to note that you cannot purchase a home from, among other family members, your ancestors (parents, grandparents, etc.), your lineal descendants (children, grandchildren, etc.) or your spouse or your spouse’s family members. Please consult with your tax advisor for more information. Also see IRS Form 5405.
# I read that the tax credit is “refundable.” What does that mean?
The fact that the credit is refundable means that the home buyer credit can be claimed even if the taxpayer has little or no federal income tax liability to offset. Typically this involves the government sending the taxpayer a check for a portion or even all of the amount of the refundable tax credit.
For example, if a qualified home buyer expected, notwithstanding the tax credit, federal income tax liability of $5,000 and had tax withholding of $4,000 for the year, then without the tax credit the taxpayer would owe the IRS $1,000 on April 15th. Suppose now that the taxpayer qualified for the $6,500 home buyer tax credit. As a result, the taxpayer would receive a check for $5,500 ($6,500 minus the $1,000 owed).
# Instead of buying a new home from a home builder, I hired a contractor to construct a home on a lot that I already own. Do I still qualify for the tax credit?
Yes. For the purposes of the home buyer tax credit, a principal residence that is constructed by the home owner is treated by the tax code as having been “purchased” on the date the owner first occupies the house. In this situation, the date of first occupancy must be after November 6, 2009 and on or before April 30, 2010 (or by June 30, 2010, provided a binding sales contract was in force by April 30, 2010).
In contrast, for newly-constructed homes bought from a home builder, eligibility for the tax credit is determined by the settlement date. To provide proof of purchase, homebuyers must attach a copy of the HUD-1 Form or certificate of occupancy to IRS Form 5405.
# Can I claim the tax credit if I finance the purchase of my home under a mortgage revenue bond (MRB) program?
Yes. The tax credit can be combined with an MRB home buyer program.
# I am not a U.S. citizen. Can I claim the tax credit?
Perhaps. Anyone who is not a nonresident alien (as defined by the IRS) and who has owned and resided in a principal residence in the United States for at least five consecutive years of the eight years prior to the purchase date can claim the tax credit if they meet the income limits. For married taxpayers, the law tests the homeownership history of both the home buyer and his/her spouse. The IRS provides a definition of “nonresident alien” in IRS Publication 519.
# Is a tax credit the same as a tax deduction?
No. A tax credit is a dollar-for-dollar reduction in what the taxpayer owes. That means that a taxpayer who owes $6,500 in income taxes and who receives an $6,500 tax credit would owe nothing to the IRS.
A tax deduction is subtracted from the amount of income that is taxed. Using the same example, assume the taxpayer is in the 15 percent tax bracket and owes $6,500 in income taxes. If the taxpayer receives a $6,500 deduction, the taxpayer’s tax liability would be reduced by $975 (15 percent of $6,500), or lowered from $6,500 to $5,525.
# Is there a way for a home buyer to access the money allocable to the credit sooner than waiting to file their 2009 or 2010 tax return?
Yes. Prospective home buyers who believe they qualify for the tax credit are permitted to reduce their income tax withholding. Reducing tax withholding (up to the amount of the credit) will enable the buyer to accumulate cash by raising his/her take home pay. This money can then be applied to the downpayment.
Buyers should adjust the withholding amount on their W-4 via their employer or through their quarterly estimated tax payment. IRS Publication 919 contains rules and guidelines for income tax withholding. Prospective home buyers should note that if income tax withholding is reduced and the tax credit qualified purchase does not occur, then the individual would be liable for repayment to the IRS of income tax and possible interest charges and penalties.
In addition, rule changes made as part of the economic stimulus legislation allow home buyers to claim the tax credit and participate in a program financed by tax-exempt bonds. As a result, some state housing finance agencies have introduced programs that provide short-term second mortgage loans that may be used to fund a downpayment. Prospective home buyers should check with their state housing finance agency to see if such a program is available in their community. To date, 18 state agencies have announced tax credit assistance programs, and more are expected to follow suit. The National Council of State Housing Agencies (NCSHA) has compiled a list of such programs, which can be found here.
# HUD allows “monetization” of the tax credit. What does that mean?
It means that HUD will allow buyers using FHA-insured mortgages to apply their anticipated tax credit toward their home purchase immediately rather than waiting until they file their 2009 or 2010 income taxes to receive a refund. These funds may be used for certain downpayment and closing cost expenses.
Under the guidelines announced by HUD, non-profits and FHA-approved lenders are allowed to give home buyers short-term loans. The guidelines also allow government agencies, such as state housing finance agencies, to facilitate home sales by providing longer term loans secured by second mortgages.
Housing finance agencies and other government entities may also issue tax credit loans, which home buyers may use to satisfy the FHA 3.5 percent downpayment requirement.
In addition, approved FHA lenders can purchase a home buyer’s anticipated tax credit to pay closing costs and downpayment costs above the 3.5 percent downpayment that is required for FHA-insured homes.
More information about the guidelines is available on the NAHB web site. Read the HUD mortgagee letter (pdf) and an explanation of the FHA Mortgagee Letter on Tax Credit Monetization (pdf). An FAQ about monetization (pdf) is available at the NAHB web site.
# If I’m qualified for the tax credit and buy a home in 2009 (or 2010), can I apply the tax credit against my 2008 (or 2009) tax return?
Yes. The law allows taxpayers to choose (“elect”) to treat qualified home purchases in 2009 (or 2010) as if the purchase occurred on December 31, 2008 (or if in 2010, December 31, 2009). This means that the previous year’s income limit (MAGI) applies and the election accelerates when the credit can be claimed. A benefit of this election is that a home buyer in 2009 or 2010 will know their prior year MAGI with certainty, thereby helping the buyer know whether the income limit will reduce their credit amount.
Taxpayers buying a home who wish to claim it on their prior year tax return, but who have already submitted their tax return to the IRS, may file an amended return claiming the tax credit using Form 1040X. You should consult with a tax professional to determine how to arrange this.
# For a home purchase in 2009 or 2010, can I choose whether to treat the purchase as occurring in the prior or present year, depending on in which year my credit amount is the largest?
Yes. If the applicable income phaseout would reduce your home buyer tax credit amount in the present year and a larger credit would be available using the prior year MAGI amounts, then you can choose the year that yields the largest credit amount.
# How can two unmarried buyers allocate the tax credit if one qualifies for the $8,000 first-time home buyer tax credit and the other qualifies for the $6,500 repeat home buyer credit?
The buyers can allocate the tax credit in any reasonable manner, provided neither claims a tax credit higher than the one they qualify for and the home purchase does not yield a total of more than $8,000 in tax credits. For example, the repeat home buyer could claim $6,500 and the first-time home buyer could claim $1,500. Alternatively, both buyers could claim a $4,000 tax credit.
# Does a married couple qualify for any home buyer tax credit in the following situation? Spouse A has lived in and owned the same principal residence for at least five years. Spouse B has lived in and owned the same principal residence for less than five years.
In this situation, the couple does not qualify for any home buyer tax credit. Because the couple is married, the law tests the ownership history of both spouses. Spouse A clearly does not qualify for the $8,000 first-time home buyer tax credit, so neither does Spouse B.
Spouse A does appear to qualify for the $6,500 repeat buyer credit, but because Spouse B has not owned and lived in the same principal residence for at least five years, neither of them can claim the repeat home buyer tax credit.
The Worker, Homeownership, and Business Assistance Act of 2009 has established a tax credit of up to $6,500 for qualified move-up/repeat home buyers (existing home owners) purchasing a principal residence after November 6, 2009 and on or before April 30, 2010 (or purchased by June 30, 2010 with a binding sales contract signed by April 30, 2010).
The following questions and answers provide basic information about the tax credit. If you have more specific questions, we strongly encourage you to consult a qualified tax advisor or legal professional about your unique situation.
# Who is eligible to claim the $6,500 tax credit?
Qualified move-up or repeat home buyers purchasing any kind of home are eligible to claim this credit.
# What is the definition of a move-up or repeat home buyer?
The law defines a tax credit qualified move-up home buyer (“long-time resident”) as a person who has 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, the law tests the homeownership history of both the home buyer and his/her spouse. That is, both spouses must qualify as long-time residents, with at least five years of principal residency for each. Repeat home buyers do not have to purchase a home that is more expensive than their previous home to qualify for the tax credit.
# How is the amount of the tax credit determined?
The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $6,500. Purchases of homes priced above $800,000 are not eligible for the tax credit.
# Are there any income limits for claiming the tax credit?
Yes. The income limit for single taxpayers is $125,000; the limit is $225,000 for married taxpayers filing a joint return. The tax credit amount is reduced for buyers with a modified adjusted gross income (MAGI) above those limits. The phaseout range for the tax credit program is equal to $20,000. That is, the tax credit amount is reduced to zero for taxpayers with MAGI of more than $145,000 (single) or $245,000 (married) and is reduced proportionally for taxpayers with MAGIs between these amounts.
# What is “modified adjusted gross income”?
Modified adjusted gross income or MAGI is defined by the IRS. To find it, a taxpayer must first determine "adjusted gross income" or AGI. AGI is total income for a year minus certain deductions (known as "adjustments" or "above-the-line deductions"), but before itemized deductions from Schedule A or personal exemptions are subtracted. On Forms 1040 and 1040A, AGI is the last number on page 1 and the first number on page 2 of the form. For Form 1040-EZ, AGI appears on line 4 (as of 2007). Note that AGI includes all forms of income including wages, salaries, interest income, dividends and capital gains.
To determine modified adjusted gross income (MAGI), add to AGI certain amounts of foreign-earned income. See IRS Form 5405 for more details.
# If my modified adjusted gross income (MAGI) is above the limit, do I qualify for any tax credit?
Possibly. It depends on your income. Partial credits of less than $6,500 are available for some taxpayers whose MAGI exceeds the phaseout limits.
# Can you give me an example of how the partial tax credit is determined?
Just as an example, assume that a married couple has a modified adjusted gross income of $235,000. The applicable phaseout to qualify for the tax credit is $225,000, and the couple is $10,000 over this amount. Dividing $10,000 by the phaseout range of $20,000 yields 0.5. When you subtract 0.5 from 1.0, the result is 0.5. To determine the amount of the partial first-time home buyer tax credit that is available to this couple, multiply $6,500 by 0.5. The result is $3,250.
Here’s another example: assume that an individual home buyer has a modified adjusted gross income of $138,000. The buyer’s income exceeds $125,000 by $13,000. Dividing $13,000 by the phaseout range of $20,000 yields 0.65. When you subtract 0.65 from 1.0, the result is 0.35. Multiplying $6,500 by 0.35 shows that the buyer is eligible for a partial tax credit of $2,275.
Please remember that these examples are intended to provide a general idea of how the tax credit might be applied in different circumstances. You should always consult your tax advisor for information relating to your specific circumstances.
# How is this home buyer tax credit different from the tax credit that Congress enacted in July of 2008? How is this different than the rules established in early 2009?
The previous tax credits applied only to first-time home buyers and were for different amounts of money.
# How do I claim the tax credit? Do I need to complete a form or application? Are there documentation requirements?
You claim the tax credit on your federal income tax return. Specifically, home buyers should complete IRS Form 5405 to determine their tax credit amount, and then claim this amount on line 67 of the 1040 income tax form for 2009 returns (line 69 of the 1040 income tax form for 2008 returns). Please note that although the Form is titled “First-Time Homebuyer Credit,” this is the correct form for claiming both the $8,000 first-time homebuyer tax credit and $6,500 repeat buyer tax credit.
No other applications are required, and no pre-approval is necessary. However, you will want to be sure that you qualify for the credit under the income limits and repeat home buyer tests. Note that you cannot claim the credit on Form 5405 for an intended purchase for some future date; it must be a completed purchase. Home buyers must attach a copy of their HUD-1 settlement form (closing statement) to Form 5405 as proof of the completed home purchase. In cases where a HUD-1 form is not used, such as for construction of some new homes, you should attach a copy of the certificate of occupancy in lieu of the HUD-1.
Homebuyers should be sure to read the instructions for the revised IRS Form 5405 to be sure they meet the new program requirements.
# What types of homes will qualify for the tax credit?
Any home that will be used as a principal residence will qualify for the credit, provided the home is purchased for a price less than or equal to $800,000. This includes single-family detached homes, attached homes like townhouses and condominiums, manufactured homes (also known as mobile homes) and houseboats. The definition of principal residence is identical to the one used to determine whether you may qualify for the $250,000 / $500,000 capital gain tax exclusion for principal residences.
It is important to note that you cannot purchase a home from, among other family members, your ancestors (parents, grandparents, etc.), your lineal descendants (children, grandchildren, etc.) or your spouse or your spouse’s family members. Please consult with your tax advisor for more information. Also see IRS Form 5405.
# I read that the tax credit is “refundable.” What does that mean?
The fact that the credit is refundable means that the home buyer credit can be claimed even if the taxpayer has little or no federal income tax liability to offset. Typically this involves the government sending the taxpayer a check for a portion or even all of the amount of the refundable tax credit.
For example, if a qualified home buyer expected, notwithstanding the tax credit, federal income tax liability of $5,000 and had tax withholding of $4,000 for the year, then without the tax credit the taxpayer would owe the IRS $1,000 on April 15th. Suppose now that the taxpayer qualified for the $6,500 home buyer tax credit. As a result, the taxpayer would receive a check for $5,500 ($6,500 minus the $1,000 owed).
# Instead of buying a new home from a home builder, I hired a contractor to construct a home on a lot that I already own. Do I still qualify for the tax credit?
Yes. For the purposes of the home buyer tax credit, a principal residence that is constructed by the home owner is treated by the tax code as having been “purchased” on the date the owner first occupies the house. In this situation, the date of first occupancy must be after November 6, 2009 and on or before April 30, 2010 (or by June 30, 2010, provided a binding sales contract was in force by April 30, 2010).
In contrast, for newly-constructed homes bought from a home builder, eligibility for the tax credit is determined by the settlement date. To provide proof of purchase, homebuyers must attach a copy of the HUD-1 Form or certificate of occupancy to IRS Form 5405.
# Can I claim the tax credit if I finance the purchase of my home under a mortgage revenue bond (MRB) program?
Yes. The tax credit can be combined with an MRB home buyer program.
# I am not a U.S. citizen. Can I claim the tax credit?
Perhaps. Anyone who is not a nonresident alien (as defined by the IRS) and who has owned and resided in a principal residence in the United States for at least five consecutive years of the eight years prior to the purchase date can claim the tax credit if they meet the income limits. For married taxpayers, the law tests the homeownership history of both the home buyer and his/her spouse. The IRS provides a definition of “nonresident alien” in IRS Publication 519.
# Is a tax credit the same as a tax deduction?
No. A tax credit is a dollar-for-dollar reduction in what the taxpayer owes. That means that a taxpayer who owes $6,500 in income taxes and who receives an $6,500 tax credit would owe nothing to the IRS.
A tax deduction is subtracted from the amount of income that is taxed. Using the same example, assume the taxpayer is in the 15 percent tax bracket and owes $6,500 in income taxes. If the taxpayer receives a $6,500 deduction, the taxpayer’s tax liability would be reduced by $975 (15 percent of $6,500), or lowered from $6,500 to $5,525.
# Is there a way for a home buyer to access the money allocable to the credit sooner than waiting to file their 2009 or 2010 tax return?
Yes. Prospective home buyers who believe they qualify for the tax credit are permitted to reduce their income tax withholding. Reducing tax withholding (up to the amount of the credit) will enable the buyer to accumulate cash by raising his/her take home pay. This money can then be applied to the downpayment.
Buyers should adjust the withholding amount on their W-4 via their employer or through their quarterly estimated tax payment. IRS Publication 919 contains rules and guidelines for income tax withholding. Prospective home buyers should note that if income tax withholding is reduced and the tax credit qualified purchase does not occur, then the individual would be liable for repayment to the IRS of income tax and possible interest charges and penalties.
In addition, rule changes made as part of the economic stimulus legislation allow home buyers to claim the tax credit and participate in a program financed by tax-exempt bonds. As a result, some state housing finance agencies have introduced programs that provide short-term second mortgage loans that may be used to fund a downpayment. Prospective home buyers should check with their state housing finance agency to see if such a program is available in their community. To date, 18 state agencies have announced tax credit assistance programs, and more are expected to follow suit. The National Council of State Housing Agencies (NCSHA) has compiled a list of such programs, which can be found here.
# HUD allows “monetization” of the tax credit. What does that mean?
It means that HUD will allow buyers using FHA-insured mortgages to apply their anticipated tax credit toward their home purchase immediately rather than waiting until they file their 2009 or 2010 income taxes to receive a refund. These funds may be used for certain downpayment and closing cost expenses.
Under the guidelines announced by HUD, non-profits and FHA-approved lenders are allowed to give home buyers short-term loans. The guidelines also allow government agencies, such as state housing finance agencies, to facilitate home sales by providing longer term loans secured by second mortgages.
Housing finance agencies and other government entities may also issue tax credit loans, which home buyers may use to satisfy the FHA 3.5 percent downpayment requirement.
In addition, approved FHA lenders can purchase a home buyer’s anticipated tax credit to pay closing costs and downpayment costs above the 3.5 percent downpayment that is required for FHA-insured homes.
More information about the guidelines is available on the NAHB web site. Read the HUD mortgagee letter (pdf) and an explanation of the FHA Mortgagee Letter on Tax Credit Monetization (pdf). An FAQ about monetization (pdf) is available at the NAHB web site.
# If I’m qualified for the tax credit and buy a home in 2009 (or 2010), can I apply the tax credit against my 2008 (or 2009) tax return?
Yes. The law allows taxpayers to choose (“elect”) to treat qualified home purchases in 2009 (or 2010) as if the purchase occurred on December 31, 2008 (or if in 2010, December 31, 2009). This means that the previous year’s income limit (MAGI) applies and the election accelerates when the credit can be claimed. A benefit of this election is that a home buyer in 2009 or 2010 will know their prior year MAGI with certainty, thereby helping the buyer know whether the income limit will reduce their credit amount.
Taxpayers buying a home who wish to claim it on their prior year tax return, but who have already submitted their tax return to the IRS, may file an amended return claiming the tax credit using Form 1040X. You should consult with a tax professional to determine how to arrange this.
# For a home purchase in 2009 or 2010, can I choose whether to treat the purchase as occurring in the prior or present year, depending on in which year my credit amount is the largest?
Yes. If the applicable income phaseout would reduce your home buyer tax credit amount in the present year and a larger credit would be available using the prior year MAGI amounts, then you can choose the year that yields the largest credit amount.
# How can two unmarried buyers allocate the tax credit if one qualifies for the $8,000 first-time home buyer tax credit and the other qualifies for the $6,500 repeat home buyer credit?
The buyers can allocate the tax credit in any reasonable manner, provided neither claims a tax credit higher than the one they qualify for and the home purchase does not yield a total of more than $8,000 in tax credits. For example, the repeat home buyer could claim $6,500 and the first-time home buyer could claim $1,500. Alternatively, both buyers could claim a $4,000 tax credit.
# Does a married couple qualify for any home buyer tax credit in the following situation? Spouse A has lived in and owned the same principal residence for at least five years. Spouse B has lived in and owned the same principal residence for less than five years.
In this situation, the couple does not qualify for any home buyer tax credit. Because the couple is married, the law tests the ownership history of both spouses. Spouse A clearly does not qualify for the $8,000 first-time home buyer tax credit, so neither does Spouse B.
Spouse A does appear to qualify for the $6,500 repeat buyer credit, but because Spouse B has not owned and lived in the same principal residence for at least five years, neither of them can claim the repeat home buyer tax credit.
Frequently Asked Questions About the First-Time Home Buyer Tax Credit
Article Source: http://www.federalhousingtaxcredit.com
The Worker, Homeownership, and Business Assistance Act of 2009 has extended the tax credit of up to $8,000 for qualified first-time home buyers purchasing a principal residence. The tax credit now applies to sales occurring on or after January 1, 2009 and on or before April 30, 2010. However, in cases where a binding sales contract is signed by April 30, 2010, a home purchase completed by June 30, 2010 will qualify.
For sales occurring after November 6, 2009, the Act establishes income limits of $125,000 for single taxpayers and $225,000 for married couples filing joint returns.
The income limits for sales occurring on or after January 1, 2009 and on or before November 6, 2009, are $75,000 for single taxpayers and $150,000 for married taxpayers filing joint returns.
The following questions and answers provide basic information about the tax credit. If you have more specific questions, we strongly encourage you to consult a qualified tax advisor or legal professional about your unique situation.
# Who is eligible to claim the $8,000 tax credit?
First-time home buyers purchasing any kind of home—new or resale—are eligible for the tax credit. To qualify for the tax credit, a home purchase must occur on or after January 1, 2009 and on or before April 30, 2010. For the purposes of the tax credit, the purchase date is the date when closing occurs and the title to the property transfers to the home owner. A limited exception exists for certain contract for deed purchases and installment sale purchases. See the IRS website for more detail.
However, the law also allows home sales occurring by June 30, 2010 to qualify, provided they are due to a binding sales contract in force on or before April 30, 2010.
Persons who are claimed as dependents by other taxpayers or who are under age 18 are not qualified for the tax credit program.
# What is the definition of a first-time home buyer?
The law defines “first-time home buyer” as a buyer who has not owned a principal residence during the three-year period prior to the purchase. For married taxpayers, the law tests the homeownership history of both the home buyer and his/her spouse.
For example, if you have not owned a home in the past three years but your spouse has owned a principal residence, neither you nor your spouse qualifies for the first-time home buyer tax credit. However, IRS Notice 2009-12 allows unmarried joint purchasers to allocate the credit amount to any buyer who qualifies as a first-time buyer, such as may occur if a parent jointly purchases a home with a son or daughter. Ownership of a vacation home or rental property not used as a principal residence does not disqualify a buyer as a first-time home buyer.
# How is the amount of the tax credit determined?
The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $8,000.
# Are there any income limits for claiming the tax credit?
Yes. For sales occuring after November 6, 2009, the income limit for single taxpayers is $125,000; the limit is $225,000 for married taxpayers filing a joint return. The tax credit amount is reduced for buyers with a modified adjusted gross income (MAGI) of more than $125,000 for single taxpayers and $225,000 for married taxpayers filing a joint return. The phaseout range for the tax credit program is equal to $20,000. That is, the tax credit amount is reduced to zero for taxpayers with MAGI of more than $145,000 (single) or $245,000 (married) and is reduced proportionally for taxpayers with MAGIs between these amounts.
# The income limits for claiming the tax credit were raised when the tax credit was extended. Are the higher limits retroactive?
No. The new income limits are only applicable to purchases occurring after November 6, 2009.
The income limits for sales occuring on or after January 1, 2009 and on or before November 6, 2009 are $75,000 for single taxpayers and $150,000 for married couples filing jointly.
# What is “modified adjusted gross income”?
Modified adjusted gross income or MAGI is defined by the IRS. To find it, a taxpayer must first determine “adjusted gross income” or AGI. AGI is total income for a year minus certain deductions (known as “adjustments” or “above-the-line deductions”), but before itemized deductions from Schedule A or personal exemptions are subtracted. On Forms 1040 and 1040A, AGI is the last number on page 1 and first number on page 2 of the form. For Form 1040-EZ, AGI appears on line 4 (as of 2007). Note that AGI includes all forms of income including wages, salaries, interest income, dividends and capital gains.
To determine modified adjusted gross income (MAGI), add to AGI certain amounts of foreign-earned income. See IRS Form 5405 for more details.
# If my modified adjusted gross income (MAGI) is above the limit, do I qualify for any tax credit?
Possibly. It depends on your income. Partial credits of less than $8,000 are available for some taxpayers whose MAGI exceeds the phaseout limits.
# Can you give me an example of how the partial tax credit is determined?
Just as an example, assume that a married couple has a modified adjusted gross income of $235,000. The applicable phaseout to qualify for the tax credit is $225,000, and the couple is $10,000 over this amount. Dividing $10,000 by the phaseout range of $20,000 yields 0.5. When you subtract 0.5 from 1.0, the result is 0.5. To determine the amount of the partial first-time home buyer tax credit that is available to this couple, multiply $8,000 by 0.5. The result is $4,000.
Here’s another example: assume that an individual home buyer has a modified adjusted gross income of $138,000. The buyer’s income exceeds $125,000 by $13,000. Dividing $13,000 by the phaseout range of $20,000 yields 0.65. When you subtract 0.65 from 1.0, the result is 0.35. Multiplying $8,000 by 0.35 shows that the buyer is eligible for a partial tax credit of $2,800.
Please remember that these examples are intended to provide a general idea of how the tax credit might be applied in different circumstances. You should always consult your tax advisor for information relating to your specific circumstances.
# How is this home buyer tax credit different from the tax credit that Congress enacted in early 2009?
The tax credit’s income limits were increased, the documentation requirements were tightened, and the program's deadlines were extended.
# How do I claim the tax credit? Do I need to complete a form or application? Are there documentation requirements?
You claim the tax credit on your federal income tax return. Specifically, home buyers should complete IRS Form 5405 to determine their tax credit amount, and then claim this amount on line 67 of the 1040 income tax form for 2009 returns (line 69 of the 1040 income tax form for 2008 returns). Please note that although the Form is titled “First-Time Homebuyer Credit,” this is the correct form for claiming both the $8,000 first-time homebuyer tax credit and $6,500 repeat buyer tax credit.
No other applications are required, and no pre-approval is necessary. However, you will want to be sure that you qualify for the credit under the income limits and first-time home buyer tests. Note that you cannot claim the credit on Form 5405 for an intended purchase for some future date; it must be a completed purchase. Home buyers must attach a copy of their HUD-1 settlement form (closing statement) to Form 5405 as proof of the completed home purchase. In cases where a HUD-1 form is not used, such as for construction of some new homes, you should attach a copy of the certificate of occupancy in lieu of the HUD-1. Homebuyers should be sure to read the instructions for the revised IRS Form 5405 to be sure they meet the new program requirements.
# What types of homes will qualify for the tax credit?
Any home that will be used as a principal residence will qualify for the credit, provided the home is purchased for a price less than or equal to $800,000. This includes single-family detached homes, attached homes like townhouses and condominiums, manufactured homes (also known as mobile homes) and houseboats. The definition of principal residence is identical to the one used to determine whether you may qualify for the $250,000 / $500,000 capital gain tax exclusion for principal residences.
It is important to note that you cannot purchase a home from, among other family members, your ancestors (parents, grandparents, etc.), your lineal descendants (children, grandchildren, etc.) or your spouse or your spouse’s family members. Please consult with your tax advisor for more information. Also see IRS Form 5405.
# I read that the tax credit is “refundable.” What does that mean?
The fact that the credit is refundable means that the home buyer credit can be claimed even if the taxpayer has little or no federal income tax liability to offset. Typically this involves the government sending the taxpayer a check for a portion or even all of the amount of the refundable tax credit.
For example, if a qualified home buyer expected, notwithstanding the tax credit, federal income tax liability of $5,000 and had tax withholding of $4,000 for the year, then without the tax credit the taxpayer would owe the IRS $1,000 on April 15th. Suppose now that the taxpayer qualified for the $8,000 home buyer tax credit. As a result, the taxpayer would receive a check for $7,000 ($8,000 minus the $1,000 owed).
# Instead of buying a new home from a home builder, I hired a contractor to construct a home on a lot that I already own. Do I still qualify for the tax credit?
Yes. For the purposes of the home buyer tax credit, a principal residence that is constructed by the home owner is treated by the tax code as having been “purchased” on the date the owner first occupies the house. In this situation, the date of first occupancy must be on or after January 1, 2009 and on or before April 30, 2010 (or by June 30, 2010, provided a binding sales contract was in force by April, 30, 2010).
In contrast, for newly-constructed homes bought from a home builder, eligibility for the tax credit is determined by the settlement date. To provide proof of purchase, homebuyers must attach a copy of the HUD-1 Form or certificate of occupancy to IRS Form 5405.
# Can I claim the tax credit if I finance the purchase of my home under a mortgage revenue bond (MRB) program?
Yes. The tax credit can be combined with an MRB home buyer program. Note that first-time home buyers who purchased a home in 2008 may not claim the tax credit if they are participating in an MRB program.
# I live in the District of Columbia. Can I claim both the Washington, D.C. first-time home buyer credit and this new credit?
No. You can claim only one.
# I am not a U.S. citizen. Can I claim the tax credit?
Maybe. Anyone who is not a nonresident alien (as defined by the IRS), who has not owned a principal residence in the previous three years and who meets the income limits test may claim the tax credit for a qualified home purchase. The IRS provides a definition of “nonresident alien” in IRS Publication 519.
# Is a tax credit the same as a tax deduction?
No. A tax credit is a dollar-for-dollar reduction in what the taxpayer owes. That means that a taxpayer who owes $8,000 in income taxes and who receives an $8,000 tax credit would owe nothing to the IRS.
A tax deduction is subtracted from the amount of income that is taxed. Using the same example, assume the taxpayer is in the 15 percent tax bracket and owes $8,000 in income taxes. If the taxpayer receives an $8,000 deduction, the taxpayer’s tax liability would be reduced by $1,200 (15 percent of $8,000), or lowered from $8,000 to $6,800.
# I bought a home in 2008. Do I qualify for this credit?
No, but if you purchased your first home between April 9, 2008 and January 1, 2009, you may qualify for a different tax credit. Please consult with your tax advisor for more information.
# Is there a way for a home buyer to access the money allocable to the credit sooner than waiting to file their 2009 or 2010 tax return?
Yes. Prospective home buyers who believe they qualify for the tax credit are permitted to reduce their income tax withholding. Reducing tax withholding (up to the amount of the credit) will enable the buyer to accumulate cash by raising his/her take home pay. This money can then be applied to the downpayment.
Buyers should adjust their withholding amount on their W-4 via their employer or through their quarterly estimated tax payment. IRS Publication 919 contains rules and guidelines for income tax withholding. Prospective home buyers should note that if income tax withholding is reduced and the tax credit qualified purchase does not occur, then the individual would be liable for repayment to the IRS of income tax and possible interest charges and penalties.
In addition, rule changes made as part of the economic stimulus legislation allow home buyers to claim the tax credit and participate in a program financed by tax-exempt bonds. As a result, some state housing finance agencies have introduced programs that provide short-term second mortgage loans that may be used to fund a downpayment. Prospective home buyers should check with their state housing finance agency to see if such a program is available in their community. To date, 18 state agencies have announced tax credit assistance programs, and more are expected to follow suit. The National Council of State Housing Agencies (NCSHA) has compiled a list of such programs, which can be found here.
# HUD is now allowing "monetization" of the tax credit. What does that mean?
It means that HUD allows buyers using FHA-insured mortgages to apply their anticipated tax credit toward their home purchase immediately rather than waiting until they file their 2009 or 2010 income taxes to receive a refund. These funds may be used for certain downpayment and closing cost expenses.
Under HUD’s guidelines, non-profits and FHA-approved lenders are allowed to give home buyers short-term loans of up to $8,000. The guidelines also allow government agencies, such as state housing finance agencies, to facilitate home sales by providing longer term loans secured by second mortgages.
Housing finance agencies and other government entities may also issue tax credit loans, which home buyers may use to satisfy the FHA 3.5 percent downpayment requirement. In addition, approved FHA lenders can purchase a home buyer’s anticipated tax credit to pay closing costs and downpayment costs above the 3.5 percent downpayment that is required for FHA-insured homes.
More information about the guidelines is available on the NAHB web site. Read the HUD mortgagee letter (pdf) and an explanation of the FHA Mortgagee Letter on Tax Credit Monetization (pdf). An FAQ about monetization (pdf) is available at the NAHB web site.
# If I’m qualified for the tax credit and buy a home in 2009 (or 2010), can I apply the tax credit against my 2008 (or 2009) tax return?
Yes. The law allows taxpayers to choose (“elect”) to treat qualified home purchases in 2009 (or 2010) as if the purchase occurred on December 31, 2008 (or if in 2010, December 31, 2009). This means that the previous year’s income limit (MAGI) applies and the election accelerates when the credit can be claimed. A benefit of this election is that a home buyer in 2009 or 2010 will know their prior year MAGI with certainty, thereby helping the buyer know whether the income limit will reduce their credit amount.
Taxpayers buying a home who wish to claim it on their prior year tax return, but who have already submitted their tax return to the IRS, may file an amended return claiming the tax credit using Form 1040X. You should consult with a tax professional to determine how to arrange this.
# For a home purchase in 2009 or 2010, can I choose whether to treat the purchase as occurring in the prior or present year, depending on in which year my credit amount is the largest?
Yes. If the applicable income phaseout would reduce your home buyer tax credit amount in the present year and a larger credit would be available using the prior year MAGI amounts, then you can choose the year that yields the largest credit amount.
# How can two unmarried buyers allocate the tax credit if one qualifies for the $8,000 first-time home buyer tax credit and the other qualifies for the $6,500 repeat home buyer credit?
The buyers can allocate the tax credit in any reasonable manner, provided neither claims a tax credit higher than the one they qualify for and the home purchase does not yield a total of more than $8,000 in tax credits. For example, the repeat home buyer could claim $6,500 and the first-time home buyer could claim $1,500. Alternatively, both buyers could claim a $4,000 tax credit.
# Does a married couple qualify for any home buyer tax credit in the following situation? Spouse A has lived in and owned the same principal residence for at least five years. Spouse B has lived in and owned the same principal residence for less than five years.
In this situation, the couple does not qualify for any home buyer tax credit. Because the couple is married, the law tests the ownership history of both spouses. Spouse A clearly does not qualify for the $8,000 first-time home buyer tax credit, so neither does Spouse B.
Spouse A does appear to qualify for the $6,500 repeat buyer credit, but because Spouse B has not owned and lived in the same principal residence for at least five years, neither of them can claim the repeat home buyer tax credit.
The Worker, Homeownership, and Business Assistance Act of 2009 has extended the tax credit of up to $8,000 for qualified first-time home buyers purchasing a principal residence. The tax credit now applies to sales occurring on or after January 1, 2009 and on or before April 30, 2010. However, in cases where a binding sales contract is signed by April 30, 2010, a home purchase completed by June 30, 2010 will qualify.
For sales occurring after November 6, 2009, the Act establishes income limits of $125,000 for single taxpayers and $225,000 for married couples filing joint returns.
The income limits for sales occurring on or after January 1, 2009 and on or before November 6, 2009, are $75,000 for single taxpayers and $150,000 for married taxpayers filing joint returns.
The following questions and answers provide basic information about the tax credit. If you have more specific questions, we strongly encourage you to consult a qualified tax advisor or legal professional about your unique situation.
# Who is eligible to claim the $8,000 tax credit?
First-time home buyers purchasing any kind of home—new or resale—are eligible for the tax credit. To qualify for the tax credit, a home purchase must occur on or after January 1, 2009 and on or before April 30, 2010. For the purposes of the tax credit, the purchase date is the date when closing occurs and the title to the property transfers to the home owner. A limited exception exists for certain contract for deed purchases and installment sale purchases. See the IRS website for more detail.
However, the law also allows home sales occurring by June 30, 2010 to qualify, provided they are due to a binding sales contract in force on or before April 30, 2010.
Persons who are claimed as dependents by other taxpayers or who are under age 18 are not qualified for the tax credit program.
# What is the definition of a first-time home buyer?
The law defines “first-time home buyer” as a buyer who has not owned a principal residence during the three-year period prior to the purchase. For married taxpayers, the law tests the homeownership history of both the home buyer and his/her spouse.
For example, if you have not owned a home in the past three years but your spouse has owned a principal residence, neither you nor your spouse qualifies for the first-time home buyer tax credit. However, IRS Notice 2009-12 allows unmarried joint purchasers to allocate the credit amount to any buyer who qualifies as a first-time buyer, such as may occur if a parent jointly purchases a home with a son or daughter. Ownership of a vacation home or rental property not used as a principal residence does not disqualify a buyer as a first-time home buyer.
# How is the amount of the tax credit determined?
The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $8,000.
# Are there any income limits for claiming the tax credit?
Yes. For sales occuring after November 6, 2009, the income limit for single taxpayers is $125,000; the limit is $225,000 for married taxpayers filing a joint return. The tax credit amount is reduced for buyers with a modified adjusted gross income (MAGI) of more than $125,000 for single taxpayers and $225,000 for married taxpayers filing a joint return. The phaseout range for the tax credit program is equal to $20,000. That is, the tax credit amount is reduced to zero for taxpayers with MAGI of more than $145,000 (single) or $245,000 (married) and is reduced proportionally for taxpayers with MAGIs between these amounts.
# The income limits for claiming the tax credit were raised when the tax credit was extended. Are the higher limits retroactive?
No. The new income limits are only applicable to purchases occurring after November 6, 2009.
The income limits for sales occuring on or after January 1, 2009 and on or before November 6, 2009 are $75,000 for single taxpayers and $150,000 for married couples filing jointly.
# What is “modified adjusted gross income”?
Modified adjusted gross income or MAGI is defined by the IRS. To find it, a taxpayer must first determine “adjusted gross income” or AGI. AGI is total income for a year minus certain deductions (known as “adjustments” or “above-the-line deductions”), but before itemized deductions from Schedule A or personal exemptions are subtracted. On Forms 1040 and 1040A, AGI is the last number on page 1 and first number on page 2 of the form. For Form 1040-EZ, AGI appears on line 4 (as of 2007). Note that AGI includes all forms of income including wages, salaries, interest income, dividends and capital gains.
To determine modified adjusted gross income (MAGI), add to AGI certain amounts of foreign-earned income. See IRS Form 5405 for more details.
# If my modified adjusted gross income (MAGI) is above the limit, do I qualify for any tax credit?
Possibly. It depends on your income. Partial credits of less than $8,000 are available for some taxpayers whose MAGI exceeds the phaseout limits.
# Can you give me an example of how the partial tax credit is determined?
Just as an example, assume that a married couple has a modified adjusted gross income of $235,000. The applicable phaseout to qualify for the tax credit is $225,000, and the couple is $10,000 over this amount. Dividing $10,000 by the phaseout range of $20,000 yields 0.5. When you subtract 0.5 from 1.0, the result is 0.5. To determine the amount of the partial first-time home buyer tax credit that is available to this couple, multiply $8,000 by 0.5. The result is $4,000.
Here’s another example: assume that an individual home buyer has a modified adjusted gross income of $138,000. The buyer’s income exceeds $125,000 by $13,000. Dividing $13,000 by the phaseout range of $20,000 yields 0.65. When you subtract 0.65 from 1.0, the result is 0.35. Multiplying $8,000 by 0.35 shows that the buyer is eligible for a partial tax credit of $2,800.
Please remember that these examples are intended to provide a general idea of how the tax credit might be applied in different circumstances. You should always consult your tax advisor for information relating to your specific circumstances.
# How is this home buyer tax credit different from the tax credit that Congress enacted in early 2009?
The tax credit’s income limits were increased, the documentation requirements were tightened, and the program's deadlines were extended.
# How do I claim the tax credit? Do I need to complete a form or application? Are there documentation requirements?
You claim the tax credit on your federal income tax return. Specifically, home buyers should complete IRS Form 5405 to determine their tax credit amount, and then claim this amount on line 67 of the 1040 income tax form for 2009 returns (line 69 of the 1040 income tax form for 2008 returns). Please note that although the Form is titled “First-Time Homebuyer Credit,” this is the correct form for claiming both the $8,000 first-time homebuyer tax credit and $6,500 repeat buyer tax credit.
No other applications are required, and no pre-approval is necessary. However, you will want to be sure that you qualify for the credit under the income limits and first-time home buyer tests. Note that you cannot claim the credit on Form 5405 for an intended purchase for some future date; it must be a completed purchase. Home buyers must attach a copy of their HUD-1 settlement form (closing statement) to Form 5405 as proof of the completed home purchase. In cases where a HUD-1 form is not used, such as for construction of some new homes, you should attach a copy of the certificate of occupancy in lieu of the HUD-1. Homebuyers should be sure to read the instructions for the revised IRS Form 5405 to be sure they meet the new program requirements.
# What types of homes will qualify for the tax credit?
Any home that will be used as a principal residence will qualify for the credit, provided the home is purchased for a price less than or equal to $800,000. This includes single-family detached homes, attached homes like townhouses and condominiums, manufactured homes (also known as mobile homes) and houseboats. The definition of principal residence is identical to the one used to determine whether you may qualify for the $250,000 / $500,000 capital gain tax exclusion for principal residences.
It is important to note that you cannot purchase a home from, among other family members, your ancestors (parents, grandparents, etc.), your lineal descendants (children, grandchildren, etc.) or your spouse or your spouse’s family members. Please consult with your tax advisor for more information. Also see IRS Form 5405.
# I read that the tax credit is “refundable.” What does that mean?
The fact that the credit is refundable means that the home buyer credit can be claimed even if the taxpayer has little or no federal income tax liability to offset. Typically this involves the government sending the taxpayer a check for a portion or even all of the amount of the refundable tax credit.
For example, if a qualified home buyer expected, notwithstanding the tax credit, federal income tax liability of $5,000 and had tax withholding of $4,000 for the year, then without the tax credit the taxpayer would owe the IRS $1,000 on April 15th. Suppose now that the taxpayer qualified for the $8,000 home buyer tax credit. As a result, the taxpayer would receive a check for $7,000 ($8,000 minus the $1,000 owed).
# Instead of buying a new home from a home builder, I hired a contractor to construct a home on a lot that I already own. Do I still qualify for the tax credit?
Yes. For the purposes of the home buyer tax credit, a principal residence that is constructed by the home owner is treated by the tax code as having been “purchased” on the date the owner first occupies the house. In this situation, the date of first occupancy must be on or after January 1, 2009 and on or before April 30, 2010 (or by June 30, 2010, provided a binding sales contract was in force by April, 30, 2010).
In contrast, for newly-constructed homes bought from a home builder, eligibility for the tax credit is determined by the settlement date. To provide proof of purchase, homebuyers must attach a copy of the HUD-1 Form or certificate of occupancy to IRS Form 5405.
# Can I claim the tax credit if I finance the purchase of my home under a mortgage revenue bond (MRB) program?
Yes. The tax credit can be combined with an MRB home buyer program. Note that first-time home buyers who purchased a home in 2008 may not claim the tax credit if they are participating in an MRB program.
# I live in the District of Columbia. Can I claim both the Washington, D.C. first-time home buyer credit and this new credit?
No. You can claim only one.
# I am not a U.S. citizen. Can I claim the tax credit?
Maybe. Anyone who is not a nonresident alien (as defined by the IRS), who has not owned a principal residence in the previous three years and who meets the income limits test may claim the tax credit for a qualified home purchase. The IRS provides a definition of “nonresident alien” in IRS Publication 519.
# Is a tax credit the same as a tax deduction?
No. A tax credit is a dollar-for-dollar reduction in what the taxpayer owes. That means that a taxpayer who owes $8,000 in income taxes and who receives an $8,000 tax credit would owe nothing to the IRS.
A tax deduction is subtracted from the amount of income that is taxed. Using the same example, assume the taxpayer is in the 15 percent tax bracket and owes $8,000 in income taxes. If the taxpayer receives an $8,000 deduction, the taxpayer’s tax liability would be reduced by $1,200 (15 percent of $8,000), or lowered from $8,000 to $6,800.
# I bought a home in 2008. Do I qualify for this credit?
No, but if you purchased your first home between April 9, 2008 and January 1, 2009, you may qualify for a different tax credit. Please consult with your tax advisor for more information.
# Is there a way for a home buyer to access the money allocable to the credit sooner than waiting to file their 2009 or 2010 tax return?
Yes. Prospective home buyers who believe they qualify for the tax credit are permitted to reduce their income tax withholding. Reducing tax withholding (up to the amount of the credit) will enable the buyer to accumulate cash by raising his/her take home pay. This money can then be applied to the downpayment.
Buyers should adjust their withholding amount on their W-4 via their employer or through their quarterly estimated tax payment. IRS Publication 919 contains rules and guidelines for income tax withholding. Prospective home buyers should note that if income tax withholding is reduced and the tax credit qualified purchase does not occur, then the individual would be liable for repayment to the IRS of income tax and possible interest charges and penalties.
In addition, rule changes made as part of the economic stimulus legislation allow home buyers to claim the tax credit and participate in a program financed by tax-exempt bonds. As a result, some state housing finance agencies have introduced programs that provide short-term second mortgage loans that may be used to fund a downpayment. Prospective home buyers should check with their state housing finance agency to see if such a program is available in their community. To date, 18 state agencies have announced tax credit assistance programs, and more are expected to follow suit. The National Council of State Housing Agencies (NCSHA) has compiled a list of such programs, which can be found here.
# HUD is now allowing "monetization" of the tax credit. What does that mean?
It means that HUD allows buyers using FHA-insured mortgages to apply their anticipated tax credit toward their home purchase immediately rather than waiting until they file their 2009 or 2010 income taxes to receive a refund. These funds may be used for certain downpayment and closing cost expenses.
Under HUD’s guidelines, non-profits and FHA-approved lenders are allowed to give home buyers short-term loans of up to $8,000. The guidelines also allow government agencies, such as state housing finance agencies, to facilitate home sales by providing longer term loans secured by second mortgages.
Housing finance agencies and other government entities may also issue tax credit loans, which home buyers may use to satisfy the FHA 3.5 percent downpayment requirement. In addition, approved FHA lenders can purchase a home buyer’s anticipated tax credit to pay closing costs and downpayment costs above the 3.5 percent downpayment that is required for FHA-insured homes.
More information about the guidelines is available on the NAHB web site. Read the HUD mortgagee letter (pdf) and an explanation of the FHA Mortgagee Letter on Tax Credit Monetization (pdf). An FAQ about monetization (pdf) is available at the NAHB web site.
# If I’m qualified for the tax credit and buy a home in 2009 (or 2010), can I apply the tax credit against my 2008 (or 2009) tax return?
Yes. The law allows taxpayers to choose (“elect”) to treat qualified home purchases in 2009 (or 2010) as if the purchase occurred on December 31, 2008 (or if in 2010, December 31, 2009). This means that the previous year’s income limit (MAGI) applies and the election accelerates when the credit can be claimed. A benefit of this election is that a home buyer in 2009 or 2010 will know their prior year MAGI with certainty, thereby helping the buyer know whether the income limit will reduce their credit amount.
Taxpayers buying a home who wish to claim it on their prior year tax return, but who have already submitted their tax return to the IRS, may file an amended return claiming the tax credit using Form 1040X. You should consult with a tax professional to determine how to arrange this.
# For a home purchase in 2009 or 2010, can I choose whether to treat the purchase as occurring in the prior or present year, depending on in which year my credit amount is the largest?
Yes. If the applicable income phaseout would reduce your home buyer tax credit amount in the present year and a larger credit would be available using the prior year MAGI amounts, then you can choose the year that yields the largest credit amount.
# How can two unmarried buyers allocate the tax credit if one qualifies for the $8,000 first-time home buyer tax credit and the other qualifies for the $6,500 repeat home buyer credit?
The buyers can allocate the tax credit in any reasonable manner, provided neither claims a tax credit higher than the one they qualify for and the home purchase does not yield a total of more than $8,000 in tax credits. For example, the repeat home buyer could claim $6,500 and the first-time home buyer could claim $1,500. Alternatively, both buyers could claim a $4,000 tax credit.
# Does a married couple qualify for any home buyer tax credit in the following situation? Spouse A has lived in and owned the same principal residence for at least five years. Spouse B has lived in and owned the same principal residence for less than five years.
In this situation, the couple does not qualify for any home buyer tax credit. Because the couple is married, the law tests the ownership history of both spouses. Spouse A clearly does not qualify for the $8,000 first-time home buyer tax credit, so neither does Spouse B.
Spouse A does appear to qualify for the $6,500 repeat buyer credit, but because Spouse B has not owned and lived in the same principal residence for at least five years, neither of them can claim the repeat home buyer tax credit.
2/15/2010
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The Importance of Cash Management
Source:from Findlaw
Steven E. Springer
The Importance of Cash Management
Cash Management
Business analysts report that poor management is the main reason for business failure. Poor cash management is probably the most frequent stumbling block for entrepreneurs. Understanding the basic concepts of cash flow will help you plan for the unforeseen eventualities that nearly every business faces.
Cash vs. Cash Flow
Cash is ready money in the bank or in the business. It is not inventory, it is not accounts receivable (what you are owed), and it is not property. These can potentially be converted to cash, but can't be used to pay suppliers, rent, or employees.
Profit growth does not necessarily mean more cash on hand. Profit is the amount of money you expect to make over a given period of time, while cash is what you must have on hand to keep your business running. Over time, a company's profits are of little value if they are not accompanied by positive net cash flow. You can't spend profit; you can only spend cash.
Cash flow refers to the movement of cash into and out of a business. Watching the cash inflows and outflows is one of the most pressing management tasks for any business. The outflow of cash includes those checks you write each month to pay salaries, suppliers, and creditors. The inflow includes the cash you receive from customers, lenders, and investors.
Positive Cash Flow
If its cash inflow exceeds the outflow, a company has a positive cash flow. A positive cash flow is a good sign of financial health, but is by no means the only one.
Negative Cash Flow
If its cash outflow exceeds the inflow, a company has a negative cash flow. Reasons for negative cash flow include too much or obsolete inventory and poor collections on accounts receivable (what your customers owe you). If the company can't borrow additional cash at this point, it may be in serious trouble.
What Are the Components of Cash Flow?
A "Cash Flow Statement" shows the sources and uses of cash and is typically divided into three components:
Operating Cash Flow. Operating cash flow, often referred to as working capital, is the cash flow generated from internal operations. It comes from sales of the product or service of your business, and because it is generated internally, it is under your control.
Investing Cash Flow. Investing cash flow is generated internally from non-operating activities. This includes investments in plant and equipment or other fixed assets, nonrecurring gains or losses, or other sources and uses of cash outside of normal operations.
Financing Cash Flow. Financing cash flow is the cash to and from external sources, such as lenders, investors and shareholders. A new loan, the repayment of a loan, the issuance of stock, and the payment of dividend are some of the activities that would be included in this section of the cash flow statement.
How Do I Practice Good Cash Flow Management?
Good cash management is simple. It involves:
1. Knowing when, where, and how your cash needs will occur
2. Knowing the best sources for meeting additional cash needs
3. Being prepared to meet these needs when they occur, by keeping good relationships with bankers and other creditors
The starting point for good cash flow management is developing a cash flow projection. Smart business owners know how to develop both short-term (weekly, monthly) cash flow projections to help them manage daily cash, and long-term (annual, 3-5 year) cash flow projections to help them develop the necessary capital strategy to meet their business needs. They also prepare and use historical cash flow statements to understand how they used money in the past.
Original Source: U.S. Small Business Administration
Steven E. Springer
The Importance of Cash Management
Cash Management
Business analysts report that poor management is the main reason for business failure. Poor cash management is probably the most frequent stumbling block for entrepreneurs. Understanding the basic concepts of cash flow will help you plan for the unforeseen eventualities that nearly every business faces.
Cash vs. Cash Flow
Cash is ready money in the bank or in the business. It is not inventory, it is not accounts receivable (what you are owed), and it is not property. These can potentially be converted to cash, but can't be used to pay suppliers, rent, or employees.
Profit growth does not necessarily mean more cash on hand. Profit is the amount of money you expect to make over a given period of time, while cash is what you must have on hand to keep your business running. Over time, a company's profits are of little value if they are not accompanied by positive net cash flow. You can't spend profit; you can only spend cash.
Cash flow refers to the movement of cash into and out of a business. Watching the cash inflows and outflows is one of the most pressing management tasks for any business. The outflow of cash includes those checks you write each month to pay salaries, suppliers, and creditors. The inflow includes the cash you receive from customers, lenders, and investors.
Positive Cash Flow
If its cash inflow exceeds the outflow, a company has a positive cash flow. A positive cash flow is a good sign of financial health, but is by no means the only one.
Negative Cash Flow
If its cash outflow exceeds the inflow, a company has a negative cash flow. Reasons for negative cash flow include too much or obsolete inventory and poor collections on accounts receivable (what your customers owe you). If the company can't borrow additional cash at this point, it may be in serious trouble.
What Are the Components of Cash Flow?
A "Cash Flow Statement" shows the sources and uses of cash and is typically divided into three components:
Operating Cash Flow. Operating cash flow, often referred to as working capital, is the cash flow generated from internal operations. It comes from sales of the product or service of your business, and because it is generated internally, it is under your control.
Investing Cash Flow. Investing cash flow is generated internally from non-operating activities. This includes investments in plant and equipment or other fixed assets, nonrecurring gains or losses, or other sources and uses of cash outside of normal operations.
Financing Cash Flow. Financing cash flow is the cash to and from external sources, such as lenders, investors and shareholders. A new loan, the repayment of a loan, the issuance of stock, and the payment of dividend are some of the activities that would be included in this section of the cash flow statement.
How Do I Practice Good Cash Flow Management?
Good cash management is simple. It involves:
1. Knowing when, where, and how your cash needs will occur
2. Knowing the best sources for meeting additional cash needs
3. Being prepared to meet these needs when they occur, by keeping good relationships with bankers and other creditors
The starting point for good cash flow management is developing a cash flow projection. Smart business owners know how to develop both short-term (weekly, monthly) cash flow projections to help them manage daily cash, and long-term (annual, 3-5 year) cash flow projections to help them develop the necessary capital strategy to meet their business needs. They also prepare and use historical cash flow statements to understand how they used money in the past.
Original Source: U.S. Small Business Administration
Bookkeeping and Accounting Basics
By Timothy J. Morgan Selected from FindLaw
While keeping track of your business's finances may seem overwhelming, it's not that hard when you know the basics of accounting and bookkeeping.
Bookkeeping and accounting share two basic goals:
* To keep track of your income and expenses, which improves your chances of making a profit.
* To collect the financial information necessary for filing your various tax returns.
Sounds pretty simple, doesn't it? It can be, especially if you remind yourself of these two goals whenever you feel overwhelmed by the details of keeping your financial records.
There is no requirement that your records be kept in any particular way. As long as your records accurately reflect your business's income and expenses, the IRS will find them acceptable. (There is a requirement, however, that some businesses use a certain method of crediting their accounts: the cash method or accrual method. )
Three Steps to Keeping Your Books
The actual process of keeping your books is easy to understand when broken down into three steps.
1. Keep receipts or other acceptable records of every payment to and every expenditure by your business.
2. Summarize your income and expenditure records on some periodic basis (daily, weekly, or monthly).
3. Use your summaries to create financial reports that will tell you specific information about your business, such as how much monthly profit you're making or how much your business is worth at a specific point in time.
Whether you do your accounting by hand on ledger sheets or use accounting software, these principles are exactly the same.
Step One: Keeping Your Receipts
Each of your business's sales and purchases must be backed by some type of record containing the amount, the date, and other relevant information about that sale. You'll use these to create summaries of your transactions.
From a legal point of view, your method of keeping receipts can range from slips kept in a cigar box to a sophisticated cash register hooked into a computer system. Practically, you'll want to choose a system that fits your business needs. For example, a small service business that handles only relatively few jobs may get by with a bare-bones approach. But the more sales and expenditures your business makes, the better your receipt filing system needs to be.
Step Two: Setting Up and Posting to Ledgers
A completed ledger is really nothing more than a summary of revenues, expenditures, and whatever else you're keeping track of (entered from your receipts according to category and date). Later, you'll use these summaries to answer specific financial questions about your business, such as whether you're making a profit and, if so, how much.
On some regular basis -- like every day, once a week, or at least once a month -- you should transfer the amounts from your receipts for sales and purchases into your ledger. This is called "posting;" how often you do this depends on how many sales and expenditures your business makes, and how detailed you want your books to be.
Generally speaking, the more sales you do, the more often you should post to your ledger. A retail store, for instance, that does hundreds of sales amounting to thousands or tens of thousands of dollars every day should post daily. With that volume of sales, it's important to see what's happening every day and not to fall behind with the paperwork. To do this, the busy retailer should use a cash register that totals and posts the day's sales to a computerized bookkeeping system at the push of a button. A slower business, however, or one with just a few large transactions per month, such as a small website design shop, dog-sitting service, or swimming-pool repair company, would probably be fine if it posted weekly or even monthly.
...
While keeping track of your business's finances may seem overwhelming, it's not that hard when you know the basics of accounting and bookkeeping.
Bookkeeping and accounting share two basic goals:
* To keep track of your income and expenses, which improves your chances of making a profit.
* To collect the financial information necessary for filing your various tax returns.
Sounds pretty simple, doesn't it? It can be, especially if you remind yourself of these two goals whenever you feel overwhelmed by the details of keeping your financial records.
There is no requirement that your records be kept in any particular way. As long as your records accurately reflect your business's income and expenses, the IRS will find them acceptable. (There is a requirement, however, that some businesses use a certain method of crediting their accounts: the cash method or accrual method. )
Three Steps to Keeping Your Books
The actual process of keeping your books is easy to understand when broken down into three steps.
1. Keep receipts or other acceptable records of every payment to and every expenditure by your business.
2. Summarize your income and expenditure records on some periodic basis (daily, weekly, or monthly).
3. Use your summaries to create financial reports that will tell you specific information about your business, such as how much monthly profit you're making or how much your business is worth at a specific point in time.
Whether you do your accounting by hand on ledger sheets or use accounting software, these principles are exactly the same.
Step One: Keeping Your Receipts
Each of your business's sales and purchases must be backed by some type of record containing the amount, the date, and other relevant information about that sale. You'll use these to create summaries of your transactions.
From a legal point of view, your method of keeping receipts can range from slips kept in a cigar box to a sophisticated cash register hooked into a computer system. Practically, you'll want to choose a system that fits your business needs. For example, a small service business that handles only relatively few jobs may get by with a bare-bones approach. But the more sales and expenditures your business makes, the better your receipt filing system needs to be.
Step Two: Setting Up and Posting to Ledgers
A completed ledger is really nothing more than a summary of revenues, expenditures, and whatever else you're keeping track of (entered from your receipts according to category and date). Later, you'll use these summaries to answer specific financial questions about your business, such as whether you're making a profit and, if so, how much.
On some regular basis -- like every day, once a week, or at least once a month -- you should transfer the amounts from your receipts for sales and purchases into your ledger. This is called "posting;" how often you do this depends on how many sales and expenditures your business makes, and how detailed you want your books to be.
Generally speaking, the more sales you do, the more often you should post to your ledger. A retail store, for instance, that does hundreds of sales amounting to thousands or tens of thousands of dollars every day should post daily. With that volume of sales, it's important to see what's happening every day and not to fall behind with the paperwork. To do this, the busy retailer should use a cash register that totals and posts the day's sales to a computerized bookkeeping system at the push of a button. A slower business, however, or one with just a few large transactions per month, such as a small website design shop, dog-sitting service, or swimming-pool repair company, would probably be fine if it posted weekly or even monthly.
...
2/10/2010
Avoid an Audit: 6 'Red Flags' You Should Know
Source: Glen Curtis
Wednesday, February 10, 2010 from www. Finance.yahoo.com
Provided by Investopedia
If history is any indicator, less than 1% of Americans will be audited by the Internal Revenue Service in the coming year. And while some of these audits are totally random, and there's nothing that the individual taxpayer can do about them, many audits are actually instigated by the taxpayers themselves.
1. Overestimating Donated Amounts
The IRS encourages individuals to donate things like clothes, food and even old automobiles to charities. It does this by offering a deduction in return for a donation. However, the problem with this system is that it is up to the taxpayer to determine the value of goods that are donated.
As a general rule, the IRS likes to see individuals value the items they donate at anywhere between 1% and 30% of the original purchase price (unless special circumstances exist). Unfortunately many, if not most, taxpayers either aren't aware of this, or simply choose to ignore this fact.
There are several other tips that the taxpayer can use to ensure that he or she is valuing donated goods at a "fair" price. Aside from the 30% and under rule mentioned above, consider having an appraiser write a letter. (In fact, for individual items valued at $5,000 or more, an appraisal is required.). Another benchmark the IRS uses that could come in handy is the willing-buyer-willing-seller test.
This means that taxpayers should value their goods at a point or price where a willing seller (who is under no duress) would be able to sell his property to a willing buyer (who also is under no duress to purchase the item). Using such a benchmark will keep you out of trouble and prevent you from placing an excessive value on your dad's old Frank Sinatra albums.
2. Math Errors
While this may sound simple, many returns are selected for audit due to basic math errors. So when filling out your tax return (or checking it after your accountant has completed the form) make sure that the columns add up. Also make sure that the total dollar value of capital gains and/or losses are properly calculated. Even a small error can raise eyebrows.
3. Failure to Sign the Return
A large percentage of folks simply forget to sign their tax returns. Don't be a part of that number! Failure to sign the return will almost guarantee that it will receive additional scrutiny. The IRS will wonder what else you might have forgotten to include in the return.
4. Under-Reporting Income
Tempting as it might be to exclude income from your tax return, it is vital that you report all money that you received throughout the year from work and/or from the sale of an asset (such as a home) to the IRS. If you fail to report income and you are caught, you will be forced to pay back-taxes plus penalties and interest.
How can the IRS tell if you've reported everything? In some situations it can't. After all, the system isn't perfect. However, a common way some individuals get caught is that they accept cash for a service they've performed. If the customer or individual who paid that individual the cash gets audited, the IRS will see a large cash disbursement from his or her bank account. The IRS agent will then follow that lead and ask the individual what that cash layout was for. Inevitably, the trail leads right back to the individual who failed to report that money as income.
In short, it's better to be safe than sorry. Make sure you report all of your income.
5. Home Office Deductions
Be careful with home office deductions. Excessive or unwarranted deductions can raise red flags. In addition, large deductions in proportion to your income can raise the ire of the IRS as well.
For example, if you earned $50,000 as an accountant (operating from home), home-office related deductions totaling $30,000 will raise more than a few eyebrows. Trying to write off the value of a new bedroom set as office equipment could also draw unwanted attention.
Deduct only items that were used in the course of your business.
6. Income Thresholds
There is nothing the individual taxpayer can do about this one, but if you earn more than $100,000 each year, your odds of being audited increase exponentially. In fact, some accountants put the odds of being audited at one in 72, compared to the one in 154 odds for people with lower incomes.
Other Sensitive Tax Areas
Partnership/Trust/Tax Shelter Risk
If you own shares in a limited partnership, control a trust or partake in any other tax shelter investments, you are more apt to be audited. While there may be no way to avoid such an audit, individuals that have a stake in such an entity should be aware that they have a target on their backs. They should also take even greater care to document deductions, donations and income.
Small Business Ownership
Small business owners are an easy target - particularly those with cash businesses. Bars, restaurants, car washes and hair salons are exceptionally big targets, not only because they deal in so much cash, but also because there is so much temptation to under-report income and tips earned.
Incidentally, other actions that go part and parcel with business ownership may draw unwanted IRS interest too, including putting family members on the payroll and over-estimating expenses.
In short, business owners must know that they can't "push the envelope". If they want to stay in business and avoid the scrutiny of an audit, it's best to remain on the straight and narrow.
So why does the IRS seem to be cracking down more and more on individuals and small business owners these days? It's simple. According to the IRS there is roughly an annual $300 billion gap between what Americans pay in taxes versus what they owe. That equates to about $2,680 per household. The Congress knows this too, and given the deficits the United States government has run up over the past 20 years, there is enormous pressure on legislators and the IRS to collect all tax funds.
Being Audited
What should you do if you are audited? Be honest with the auditor and respond to all inquiries as quickly as possible. Don't be afraid to show all of your documentation. If possible, have a qualified accountant and/or tax attorney represent you.
Bottom Line
Audits have and will remain a part of the tax collection process for a long time to come, but that doesn't mean that you have to be among the "lucky" few to be chosen. The key to avoiding an audit is to be honest, document your deductions, donations and income.
Wednesday, February 10, 2010 from www. Finance.yahoo.com
Provided by Investopedia
If history is any indicator, less than 1% of Americans will be audited by the Internal Revenue Service in the coming year. And while some of these audits are totally random, and there's nothing that the individual taxpayer can do about them, many audits are actually instigated by the taxpayers themselves.
1. Overestimating Donated Amounts
The IRS encourages individuals to donate things like clothes, food and even old automobiles to charities. It does this by offering a deduction in return for a donation. However, the problem with this system is that it is up to the taxpayer to determine the value of goods that are donated.
As a general rule, the IRS likes to see individuals value the items they donate at anywhere between 1% and 30% of the original purchase price (unless special circumstances exist). Unfortunately many, if not most, taxpayers either aren't aware of this, or simply choose to ignore this fact.
There are several other tips that the taxpayer can use to ensure that he or she is valuing donated goods at a "fair" price. Aside from the 30% and under rule mentioned above, consider having an appraiser write a letter. (In fact, for individual items valued at $5,000 or more, an appraisal is required.). Another benchmark the IRS uses that could come in handy is the willing-buyer-willing-seller test.
This means that taxpayers should value their goods at a point or price where a willing seller (who is under no duress) would be able to sell his property to a willing buyer (who also is under no duress to purchase the item). Using such a benchmark will keep you out of trouble and prevent you from placing an excessive value on your dad's old Frank Sinatra albums.
2. Math Errors
While this may sound simple, many returns are selected for audit due to basic math errors. So when filling out your tax return (or checking it after your accountant has completed the form) make sure that the columns add up. Also make sure that the total dollar value of capital gains and/or losses are properly calculated. Even a small error can raise eyebrows.
3. Failure to Sign the Return
A large percentage of folks simply forget to sign their tax returns. Don't be a part of that number! Failure to sign the return will almost guarantee that it will receive additional scrutiny. The IRS will wonder what else you might have forgotten to include in the return.
4. Under-Reporting Income
Tempting as it might be to exclude income from your tax return, it is vital that you report all money that you received throughout the year from work and/or from the sale of an asset (such as a home) to the IRS. If you fail to report income and you are caught, you will be forced to pay back-taxes plus penalties and interest.
How can the IRS tell if you've reported everything? In some situations it can't. After all, the system isn't perfect. However, a common way some individuals get caught is that they accept cash for a service they've performed. If the customer or individual who paid that individual the cash gets audited, the IRS will see a large cash disbursement from his or her bank account. The IRS agent will then follow that lead and ask the individual what that cash layout was for. Inevitably, the trail leads right back to the individual who failed to report that money as income.
In short, it's better to be safe than sorry. Make sure you report all of your income.
5. Home Office Deductions
Be careful with home office deductions. Excessive or unwarranted deductions can raise red flags. In addition, large deductions in proportion to your income can raise the ire of the IRS as well.
For example, if you earned $50,000 as an accountant (operating from home), home-office related deductions totaling $30,000 will raise more than a few eyebrows. Trying to write off the value of a new bedroom set as office equipment could also draw unwanted attention.
Deduct only items that were used in the course of your business.
6. Income Thresholds
There is nothing the individual taxpayer can do about this one, but if you earn more than $100,000 each year, your odds of being audited increase exponentially. In fact, some accountants put the odds of being audited at one in 72, compared to the one in 154 odds for people with lower incomes.
Other Sensitive Tax Areas
Partnership/Trust/Tax Shelter Risk
If you own shares in a limited partnership, control a trust or partake in any other tax shelter investments, you are more apt to be audited. While there may be no way to avoid such an audit, individuals that have a stake in such an entity should be aware that they have a target on their backs. They should also take even greater care to document deductions, donations and income.
Small Business Ownership
Small business owners are an easy target - particularly those with cash businesses. Bars, restaurants, car washes and hair salons are exceptionally big targets, not only because they deal in so much cash, but also because there is so much temptation to under-report income and tips earned.
Incidentally, other actions that go part and parcel with business ownership may draw unwanted IRS interest too, including putting family members on the payroll and over-estimating expenses.
In short, business owners must know that they can't "push the envelope". If they want to stay in business and avoid the scrutiny of an audit, it's best to remain on the straight and narrow.
So why does the IRS seem to be cracking down more and more on individuals and small business owners these days? It's simple. According to the IRS there is roughly an annual $300 billion gap between what Americans pay in taxes versus what they owe. That equates to about $2,680 per household. The Congress knows this too, and given the deficits the United States government has run up over the past 20 years, there is enormous pressure on legislators and the IRS to collect all tax funds.
Being Audited
What should you do if you are audited? Be honest with the auditor and respond to all inquiries as quickly as possible. Don't be afraid to show all of your documentation. If possible, have a qualified accountant and/or tax attorney represent you.
Bottom Line
Audits have and will remain a part of the tax collection process for a long time to come, but that doesn't mean that you have to be among the "lucky" few to be chosen. The key to avoiding an audit is to be honest, document your deductions, donations and income.
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