The Potts Report

Let's Make a Deal

Beat into submission, President Obama reached an agreement with Republicans to extend the Bush tax cuts for two more years and also give workers a 2% reduction in Social Security tax for 2011. The agreement also allows a $5 million dollar exemption amount and a top estate tax rate of 35%; allows businesses to write off 100% of their equipment and machinery purchases in 2011; and provides a 2 year alternative minimum tax patch. Details of the agreement have not been released as of today, but stay tuned, the Potts Report will provide details as soon as the details are made known. If you would like to hear President Obama announce this agreement, click here.

Tax Foundation Ranked Arkansas 39th

The Tax Foundation, a non-profit research group focusing on tax policy, released its 2011 State Business Tax Climate Index (Eighth Edition) last week. In order to determine each state's rank, the Tax Foundation compared the tax systems of each state looking at the corporate income taxes, individual income taxes, sales taxes, unemployment insurance taxes, and property taxes. The Tax Foundation ranked Arkansas ranked 39th, up from 40th place in their 2010 State Business Tax Climate Index.

 

Is the Standard Deduction Standard Any More?

Let’s start with a short income tax review course. In calculating your taxable income you deduct the greater of the standard deduction or your itemized deductions from your adjusted gross income on the way to determining your taxable income. Taxable income is the income amount that is applied to the income tax tables or tax rates to determine your tax before applying tax credits or adding other taxes such as the self-employment tax or the alternative minimum tax.

Originally, the standard deduction was standard. It was an amount based on your filing status. Now it is a bit more complicated. In fact, for 2009, the IRS has designed a new form to help figure the standard deduction, Schedule L Standard Deduction for Certain Filers.

You still start with an amount based on your filing status. For 2009, these amounts are:

Single or married filing separately	$5,700
Married filing jointly or qualifying widow(er)	$11,400
Head of Household	$8,350

Next the standard deduction can be increased if you paid real estate taxes on property you own, sales tax on the purchase of a car, truck, or motor home, and/or a net disaster loss.

If you paid real estate taxes the amount paid can be added to the standard deduction up to $500; $1,000 if you file a joint return.

You can also increase the standard deduction for sales tax paid on the first $49,500 of cost for a new car, truck, or motor home. Details were previously discussed here Monday.

Finally, if you live in a Federally declared disaster area, you can add net disaster losses caused by these disasters to increase your standard deduction. In the past (and again in 2010) casualty losses were deductible as itemized deductions and the casualty loss amount was reduced by $100 then again by 10% of your adjusted gross income. The result? Very few people ever receive any tax benefit as the result of casualty losses. For 2009 and 2009 only, you will reduce the casualty loss by $500 and then add the remaining amount to your standard deduction. The result? More people will receive some tax benefit for their casualty loss caused by Federally declared disasters. Check out FEMA’s website. Did you have any damage from the ice storm of January 2009? Most of northern Arkansas was declared a disaster area. How about the tornadoes and severe storms that recently went through Scott and Logan counties?

2009 is the year of the standard deduction. Be sure you take advantage of it.

Should I Buy A Car Before December 31?

If you buy a NEW car or truck on or before December 31, 2009, you will qualify for an income tax deduction for the sales tax or excises tax paid on the portion of the cost that does not exceed $49,500 – even if you don’t itemize your deductions. Ignoring county and city taxes, Arkansas residents will be allowed an income tax deduction of up to $2,970 per car or truck purchased.Oklahoma residents will deduct the 3.25% excise tax paid on a new car or truck purchase for a deduction of up to $1,609.

The benefit works best for personal use cars and trucks. Owners that buy cars or trucks for business use already get to deduct sales tax although it is through the depreciation of the vehicle, used or new and not just for sales tax paid before December 31, 2009. A business that buys a car or truck normally adds the sales tax paid to the cost of the vehicle which is then depreciated over five years, unless it qualifies to be deducted in the year purchased under Section 179. But for business cars and trucks bought on or after February 17 and on or before December 31, 2009 sales taxes paid can be deducted rather than depreciated as part of the cost of the car or truck.

Now for the “except for’s”. With the Internal Revenue Code there is always an “except for” or two.

The new car or truck must be a passenger automobile, light truck or motorcycle with a gross vehicle weight rating of 8,500 pounds or less, or a motor home. No weight restrictions on the motor home.

The sales tax deduction is phased out for taxpayers with modified adjusted gross income between $125,000 and $135,000 ($250,000 and $260,000 on a joint return). E.g., a single person with modified adjusted gross income of $130,000 could deduct 50% of the sales tax paid. The same person would not be allowed any deduction for sales tax paid if his modified adjusted gross income exceeded $135,000.

There is no limit to the number of vehicles you buy.If you buy two new cars, you get to deduct sales taxes paid on each vehicle on the portion of the cost that does not exceed $49,500.

How do you take this deduction if you don’t itemize? You simply add the sales tax or excise tax paid to your standard deduction.

Nonbusiness Energy Property Tax Credit

The American Recovery and Reinvestment Act of 2009 reinstated and amended the non-business energy property tax credit. The credit is for people who spend money on their principal residence for new improvements or certain new equipment that increase the energy efficiency of their home. The credit equals 30% of the amount spent on qualified improvements in 2009 and 2010, but the credit cannot exceed $1,500 over both years.

What type of expenditures qualify?  Expenditures for insulation materials, exterior windows, exterior doors, asphalt or metal roofs, natural gas furnaces, propane furnaces, oil furnaces, natural gas hot water boilers, propane hot water boilers, oil hot water boilers, advance main air circulating fans, central air conditioners, electric heat pumps, and stoves  that burn biomass fuels qualify IF they meet certain specifications. How do you know if they meet specifications? You can consult the Internal Revenue Code and the 2000 International Energy Conservation Code or you can ask the person selling you the equipment or materials. The manufacturers will have told the distributors whether or not their product qualifies for the credit. But therein lies a problem.

Your salesman can tell you whether the equipment or materials will qualify for the credit based on energy efficiency, but that doesn’t guarantee you can take the full amount of the credit on your tax return. Why? You may not have $1,500 worth of tax liability for the credit to offset. The non-business energy property tax credit is not a “refundable credit”. I.e., you must have a tax liability to benefit.

The bottom line: Many people will make a decision to buy a more energy efficient central air conditioning unit if they believe they will get $1,500 back on their income taxes at the end of the year. For money people, this $1,500 might not materialize. It depends on your particular tax situation. Ask your CPA.

Want to Know What’s In Your Future?

Higher taxes! Read the following paragraph, the last paragraph in the summary, from the publication titled The Long-term Budget Outlook – June 2009 published by the Congressional Budget Office.

CBO’s long-term budget projections raise fundamental
questions about economic sustainability. If outlays grew
as projected and revenues did not rise at a corresponding
rate, annual deficits would climb and federal debt would
grow significantly. Large budget deficits would reduce
national saving, leading to more borrowing from abroad
and less domestic investment, which in turn would
depress income growth in the United States. Over time,
the accumulation of debt would seriously harm the economy.
Alternatively, if spending grew as projected and
taxes were raised in tandem, tax rates would have to reach
levels never seen in the United States. High tax rates
would slow the growth of the economy, making the
spending burden harder to bear. Policymakers could mitigate
the economic damage from rapidly rising debt by
putting the nation on a sustainable fiscal course, which
would require some combination of lower spending and
higher revenues than the amounts now projected. Making
such changes sooner rather than later would lessen
the risks that current fiscal policy poses to the economy.

It is going to take the Republicans (lower spending) and the Democrats (higher taxes) to put the United States back on the path to fiscal health. How optimistic are you?

The American Recovery and Reinvestment Act of 2009

President Obama will sign into law Tuesday, February 16, 2009, The American Recovery and Reinvestment Act of 2009. Below I have outlined the tax provisions of the bill based on the Full Summary of Provisions from the Senate Finance, House Ways & Means Committees. I have listed all the topics so you can sample the flavor of the bill. I will be writing more about the law’s tax provisions in the following days.

TAX RELIEF FOR INDIVIDUALS AND FAMILIES

• “Making Work Pay” Tax Credit
• Economic Recovery Payment to Recipients of Social Security, SSI, Railroad Retirement and Veterans Disability Compensation Benefits
• Refundable Credit for Certain Federal and State Pensioners
• Increase in Earned Income Tax Credit
• Increase Eligibility for the Refundable Portion of Child Credit
• “American Opportunity” Education Tax Credit
• Computers as Qualified Education Expenses in 529 Education Plans
• Refundable First-time Home Buyer Credit
• Sales Tax Deduction for Vehicle Purchases
• Temporary Suspension of Taxation of Unemployment Benefits
• Extension of AMT Relief for 2009

TAX INCENTIVES FOR BUSINESSES

• Extension of Bonus Depreciation
• Election to Accelerate Recognition of Historic AMT/R&D Credits
• Extension of Enhanced Small Business Expensing
• 5-Year Carryback of Net Operating Losses for Small Businesses
• Delayed Recognition of Certain Cancellation of Debt Income
• Incentives to Hire Unemployed Veterans and Disconnected Youth
• Small Business Capital Gains
• Temporary Small Business Estimated Tax Payment Relief
• Temporary Reduction of S Corporation Built-In Gains Holding Period from 10 Years to 7 Years
• Repeal of Treasury Section 382 Notice
• Treatment of Certain Ownership Changes

MANUFACTURING RECOVERY PROVISIONS

• Industrial Development Bonds (IDB)
• Advanced Energy Investment Credit

ECONOMIC RECOVERY TOOLS

• New Markets Tax Credit
• Recovery Zone Bonds
• Tribal Economic Development Bonds
• Modify Speed Requirement for High-Speed Rail Exempt Facility Bonds

INFRASTRUCTURE FINANCING TOOLS

• De Minimis Safe Harbor Exception for Tax-Exempt Interest Expense for Financial Institutions
• Modification of Small Issuer Exception to Tax-Exempt Interest Expense Allocation Rules for Financial Institutions
• Eliminate Costs Imposed on State and Local Governments by the Alternative Minimum Tax
• Delay Application of Withholding Requirement on Certain Governmental Payments for Goods and Services
• Qualified School Construction Bonds
• Extension and Increase in Authorization for Qualified Zone Academy Bonds (QZABs)
• Tax Credit Bond Option for State and Local Governments (“Build America Bonds”)

REINVESTMENT IN RENEWABLE ENERGY

• Long-term Extension and Modification of Renewable Energy Production Tax Credit
• Temporary Election to Claim the Investment Tax Credit in Lieu of the Production Tax Credit
• Repeal Subsidized Energy Financing Limitation on the Investment Tax Credit
• Removal of Dollar Limitations on Certain Energy Credits
• Clean Renewable Energy Bonds (“CREBs”)
• Qualified Energy Conservation Bonds
• Tax Credits for Energy-Efficient Improvements to Existing Homes
• Tax Credits for Alternative Refueling Property
• Plug-in Electric Drive Vehicle Credit
• Addition of Permanent Sequestration Requirement to CO2 Capture Tax Credit
• Parity for Transit Benefits

OTHER PROVISIONS

• Treasury Department Energy Grants in Lieu of Tax Credits
• Treasury Department Low-Income Housing Grants in Lieu of Tax Credits

ASSISTANCE FOR FAMILIES & UNEMPLOYED WORKERS

• Extension of Emergency Unemployment Compensation
• Increase in Unemployment Compensation Benefits
• Unemployment Compensation Modernization
• Temporary Assistance to States with Advances to Unemployment Trust Funds
• Additional Unemployment Provisions
• Temporary Assistance for Needy Families Contingency Fund
• Extension of TANF Supplemental Grants
• Child Support Enforcement

HEALTH INSURANCE ASSISTANCE

• Premium Subsidies for COBRA Continuation Coverage for Unemployed Workers
• Medicare Payments for Teaching Hospitals
• Medicare Payments to Hospice
• Medicare Payments to Long Term Care Hospitals

STATE FISCAL RELIEF AND MEDICAID

• Temporary Federal Medical Assistance Percentage (FMAP) Increase
• Temporary Increase in Disproportionate Share Hospital (DSH) Payments
• Extension of Moratoria on Medicaid Regulations
• Extension of Transitional Medical Assistance (TMA)
• Extension of the Qualified Individual Program
• Provisions from the Indian Health Care Improvement Act
• Prompt Payment Requirements for Nursing Facilities and Hospitals

HEALTH INFORMATION TECHNOLOGY

• Funding for Health Information Technology (IT) through Medicare and Medicaid Incentives

TRADE PROVISIONS

• Expansion of Trade Adjustment Assistance (TAA) Programs
• Duty Refund Recollection

DEBT LIMIT

• Debt Limit Increase

Tax Season Officially Begins

Today is the day in which all W2s and 1099s are to be completed and mailed to their intended recipient…except for 1099-Bs, the statements you receive from your broker or mutual fund company reporting your interest, dividends, and stock sales. Last year the law was changed to allow brokers until February 15th to mail 1099-Bs. Hopefully this will prove to be a good change. In the past 1099-Bs were mailed by January 31st but then around the end of February or the first of March many of you would receive an amended form. The intent of the law is to reduce the frequency of amended 1099-Bs.

Now it’s off to the races. Ready, set, prepare them tax returns.

Economic Stimulus Act of 2008 - Part 2

In addition to cash rebates (previously discussed), the Economic Stimulus Act of 2008 included a couple of business incentives - a more generous Section 179 deduction and bonus depreciation.

Most business owners are familiar with Section 179. Section 179 is an election in the Internal Revenue Code that allows you to elect to expense certain assets in the year purchased rather than to depreciate these assets over several years. In 2008, you can expense up to $250,000 under Section 179 as long as your total asset purchases don't exceed $800,000.  When asset purchases exceed $800,000, the $250,000 election amount begins to phase out on a dollar for dollar basis.  Previously the Section 179 deduction topped out at $128,000 of qualified assets if your total asset purchases for the year were less than $510,000. [We've come a long way, baby. During my first tax season out of school, you could only expense $5,000 of assets under Section 179.]

Caution: If you have a fiscal year, the increased Section 179 amounts due not become effective until your year begins in 2008.  If you have a June 30 fiscal year, the increased limits do not begin until July 1, 2008.

Also, bonus depreciation is back.  50% bonus depreciation is allowed on assets purchased in 2008. For example, if you purchased $10,000 of assets that don't qualify under Section 179, you can still deduct 50% of the assets cost plus normal depreciation on the other 50%.  Restated, If you purchased computers that are to be depreciated over 5 years and these computers cost $10,000, you can take first year depreciation of $7,000 ($5,000 bonus depreciation and $2,000 depreciation on the remaining cost).

As always, there are exceptions to the general rule and the tax laws may not work as you first expect.  If you are a client of Potts & Company and have questions, give us a call.

The IRS has posted detailed information concerning the cash rebates on its website. Click here.

The Economic Stimulus Act of 2008

FREE MONEY- LET'S PARTY!!!

President Bush signed the Economic Stimulus Act of 2008 this past Wednesday.  It has been all over the news for the last month.  Our government is giving us free money and they want us to spend it!

Most of us are getting a credit on our 2008 income taxes when we file our 2007 income tax returns! (Huh?) It's simple. File your 2007 income tax return and the IRS will do the rest.

Here's the particulars. If your adjusted gross income is less than $75,000 for individuals and $150,000 for married couples filing jointly, you will qualify for a rebate up to $600 each (i.e., $1,200 for married couples) plus $300 for each qualifying child.  You have a qualifying child if that child qualifies for the child tax credit. You may qualify for a partial credit if your income exceeds $75,000 or $150,000 (if married) as long as your adjusted gross income does not exceed $87,000 or $174,000, respectively.  To calculate your rebate, Kiplinger has a calculator on their website to help you determine the rebate amount. Click here. If you are a client of Potts & Company, we will calculate it for you when we prepare your return.

If your 2007 tax liability is less than $600, or $1,200 for joint filers, your rebate will equal the greater of your tax liability or $300 (plus $300 per qualifying child.) Aren't income tax calculations simple?

If you have no tax liability in 2007, you can try again when you file your 2008 income tax return. Remember, it is a rebate based on your 2008 income tax liability.  Sending checks in 2007 is just an advance credit payment of a 2008 credit.

Rebate checks will be mailed beginning in May 2008 and continue through the summer.

The Economic Stimulus Act of 2008 is even more exciting if you own a business!  It includes a more generous Section 179 deduction and 50% bonus depreciation.  Stay tuned. Details next blog post- in a day or two.