|
INDIVIDUAL TAX UPDATE
 Federal withholding changes due to the ”Making Work Pay Credit”
This is a new federal tax credit for 2009 and 2010. Eligible individuals are allowed a credit equal to the lesser of:
6.2% of the taxpayer’s earned income; or
$400 ($800 for married filing joint tax returns)
In order to be eligible, the taxpayer must not be a dependent of another taxpayer, cannot be a non-resident alien, and must have a valid social security number. Earned income includes wages, self-employment income and military combat pay excluded from gross income. The credit is phased out at 2% of the taxpayer’s modified adjusted gross income (AGI) in excess of $75,000 ($150,000 for married filing joint taxpayers.)
In order to expedite the delivery of the credit to taxpayers, the federal tax withholding tables on earnings were adjusted to allow for less tax withholding on wages throughout the 2009 tax year. However, there are reasons why many taxpayers will have insufficient federal tax withheld from their pay in 2009 because of the credit.
Taxpayers who have multiple employers and married employees filing jointly during 2009 may have insufficient federal withholding due to each employer reducing withholding as part of the credit implementation.
Taxpayers who qualify for the credit based on their wages, but have additional none-wage income on their 2009 tax return (capital gain or partnership income) may not be eligible for the credit, but will have lower federal tax withheld on their wages.
California tax rate and withholding changes
In 2009 and 2010, the California individual income tax rates have increased by .25%. The lowest tax bracket is now 1.25% (up from 1%) and the highest bracket is 9.55% (up from 9.3%). For taxpayers with California taxable income in excess of $1 million, the marginal tax rate is now 10.55% (up from 10.3% due to the 1% mental health tax surcharge).
Also, the California dependent credit is reduced from $309 to $99 (to be adjusted for 2009 inflation amounts) or a net reduction of $210 per dependent.
In late April of 2009 the Employment Development Department issued new California withholding tables to include the effects of the new tax laws. However, since implementation is dependent on the employers, it may be necessary to increase withholding to avoid owing California tax at the end of the year.
If you are concerned about your federal or California tax withholding for 2009, please call our office and we can prepare a personal tax projection to determine whether your tax withholding should be adjusted.
First time homebuyer federal tax credit available in 2009 and 2010
Two credits are now available to taxpayers who purchase a principal residence:
Taxpayers who haven’t owned a home in the past three years (as of the date of purchase) are eligible for a refundable federal tax credit of up to $8,000. The credit is calculated as 10% of the purchase price of the new home. The home must be used as the principal residence for the taxpayer and must be purchased by May 1, 2010, or the taxpayer must have entered into a binding purchase contract as of May 1, 2010 and the purchase must have closed by July 1, 2010. There is no requirement to repay the amount of the credit as long as the home remains the principal residence of the taxpayers for at least three years; however, eligibility does phase out as gross income increases.
Taxpayers who are considered “long-time residents” are eligible for a modified credit when purchasing a new principal residence. The modified credit is limited to $6,500 and is subject to all of the rules as the non-modified credit. A “long-time resident” is a taxpayer who owned and used a residence as a principal residence for any five-consecutive-year period in the eight-year period ending on the date of purchase of the new principal residence.
New deduction for sales taxes on new car purchases
For vehicles purchased on or after February 17, 2009 and before January 1, 2010, a taxpayer can deduct, as an itemized deduction or as an addition to the standard deduction, sales taxes on the purchase of a qualifying new vehicle. The original use of the vehicle must begin with the taxpayer and can include a passenger auto, light truck, or motorcycle (each of which must weigh less than 8,500 pounds) or a motor home with no weight restriction.
The deduction is allowed both for regular federal income tax as well as alternative minimum tax (AMT). The deduction begins to phase out when modified AGI exceeds $125,000 ($250,000 for married filing joint taxpayers). Only tax paid on the first $49,500 of the purchase price is eligible for the deduction. Also, if claiming the deduction as an itemized deduction, rather than as an addition to the standard deduction, the taxpayer is still allowed to deduct state income taxes paid.
Unemployment compensation exclusion
Up to $2,400 of unemployment compensation benefits received in 2009 ($2,400 per recipient if filing a joint return) will not be subject to federal income tax. There are no limitations or phase-out provisions related to the exclusion and the benefits are exempt from both regular and alternative minimum federal taxes.
American Opportunity Tax Credit replaces the Hope education credit
In 2009 the Hope education tax credit was renamed the American Opportunity Tax Credit and expanded for the following benefits related to higher education costs:
Qualifying period extended to four years from two years;
Maximum annual credit increased to $2,500 from $1,800;
Qualified expenses include tuition, fees, and course materials;
40% of the credit amount is refundable to eligible individuals;
Can be used to offset both regular federal income tax and AMT.
The credit is still subject to a phase out once adjusted gross income exceeds $80,000 ($160,000 for married filing joint returns).
Non-business Energy Efficient Property Credit
Property generally eligible for the credit includes certain insulating materials, exterior doors and windows, and metal roofs that meet specified usage energy requirements. The credit is equal to 30% of the cost of the property up to a maximum aggregate credit amount of $1,500 for the period from January 1, 2009 through December 31, 2010.
Residential Energy Efficient Property Credit
Effective for the 2009 and later tax years, taxpayers who install energy efficient property in their residence (either principal or otherwise) are eligible for a federal tax credit equal to 30% of the amount paid to install the property. The qualified property includes solar energy, solar water heating, fuel cell, small wind energy and geothermal heat pump property. Costs allocable to swimming pools and hot tubs are specifically excluded from the credit. There is no gross income limitation for the credit and it can be used to offset both regular and alternative minimum federal tax.
Converting a traditional IRA to a Roth IRA
Taxpayers are allowed to convert a traditional IRA to a Roth IRA in 2009 as long as adjusted gross income (excluding income from the conversion) does not exceed $100,000. The amount converted will be taxed as ordinary income on the taxpayer’s 2009 individual income tax returns, but will not be subject to early withdrawal penalties. Both contributions and earnings in a Roth IRA grow tax-free, and unlike a traditional IRA, can be distributed tax-free at retirement.
In 2010 the $100,000 income limit required for conversion is eliminated and the resulting income tax related to conversion is deferred and paid equally over the 2011 and 2012 tax years. Converting from a traditional IRA to a Roth IRA account is not a decision to be taken lightly; however, there are definite tax advantages in the right situations. Please call our office if you would like to discuss your situation in more detail. |
BUSINESS TAX UPDATE
Accelerated depreciation provisions extended to 2009
The 50% bonus depreciation is available for qualified business property placed in service during the 2009 tax year. The original use for the property must begin with the taxpayer, and the deduction is allowed for both regular and AMT purposes. There is no limit to the amount of purchased equipment that will qualify for bonus depreciation. Qualified property includes most tangible personal property, certain interior improvements to nonresidential buildings, and most computer software.
Section 179 depreciation is also available for most tangible business property and non-customized software used in the active conduct of a trade or business. The maximum amount of property that can be expensed using section 179 is $250,000, and the eligible amount begins to phase out once total assets purchased by the business exceed $800,000. For the purposes of section 179, the provision is available when used property is purchased (i.e. the original use of the property doesn’t have to begin with the taxpayer). Additionally, the amount eligible for deduction in the current year is limited to the amount of income generated by the trade or business. Excess expense will carry forward to future tax years. The deduction is allowed for both regular and AMT purposes.
Net operating loss eligible for up to five year carryback
Stimulus legislation allows any business, regardless of income, to carry back net operating losses (NOLs) generated in tax years beginning or ending in 2008 or 2009 for up to five years (versus the standard two year carryback period). Therefore, if your business uses a fiscal year end other than December 31, you may still have time to take actions that will create or increase an NOL for the current tax year. That NOL can then be carried back for up to five years to recover federal taxes paid in those years.
COBRA premiums are subsidized through December 31, 2009
Generally, employees who were covered under their employer’s health plans are given the right to temporarily continue their health coverage for 18 months under the Consolidated Omnibus Budget Reconciliation Act (COBRA). Under the new law, workers who are involuntarily terminated between September 1, 2008 through December 31, 2009 qualify for a 65% subsidy of their COBRA premiums for premiums paid on or after February 17, 2009. The employee is required to pay 35% of their premium to their employer. The employer remits the full premium payment to the health care provider and then is allowed to claim a credit for 65% of the premium paid on their payroll tax return. The subsidy received by the employee is excluded from gross income; however, the subsidy will begin to be recaptured on the 2009 individual income tax return for taxpayers whose modified adjusted gross income exceeds $125,000 ($250,000 on a married filing joint return).
California small-business hiring tax credit
For taxable years beginning on or after January 1, 2009, a small business is allowed a credit of up to $3,000 against California income taxes paid for each net increase in qualified full-time employees hired during the taxable year. For purposes of the credit, a small business is one that had fewer than 20 employees on the last day of the previous year. Unlike many other credits, the employer is not required to reduce the wage expense deduction by the amount of the tax credit claimed. The credits are not refundable, not eligible to reduce California AMT, and are claimed on a timely filed original tax return. Any unused credits can be carried forward for eight years. There is a statewide aggregate limit of $400 million in total credits available for all businesses. Once this limit is reached, the credit will no longer be available.
|
