Hot Tax Tips 2010

January 28, 2010

Christine Elsea Mandojana, CPA

Agenda

Major 2008 Tax Law Changes Major 2009 Tax Law Changes What’s Ending? What’s Beginning?

Major 2008 Tax Law Changes

Major 2008 Tax Law Changes

Renewed and Expanded national/refundable tax credit for first-time homebuyers and move-up buyers

Limitations on exclusion of gain (Sec 121) from sale of principal residence

Additional standard deduction for state and local real property taxes paid in 2009

Cancellation of Debt Income—Exclusion for Certain Home Mortgages

State & Local Sales Tax Deduction Tuition & Fees Deduction Educator’s Expense Deduction Temporary Itemized Deduction for PMI

Equivalent to an interest-free loan equal to 10% of home purchase price (up to $7,500)

Taxpayers must pay back loan beginning two years after home purchase tax year and over 15 year period/equal installments

MAGI Phase-outs: MFJ = $150k to $170k;Others = $75k to $95k

Restrictions: can’t buy from close relative, receive as gift or inherit the property; and can’t sell or cease to be primary residence before end of purchase tax year; recapture is accelerated if taxpayer disposed of the residence or it ceased to be the taxpayer’s (or spouse’s) principal residence during the 15-year period

First-time homebuyer definition: cannot have owned another main home during 3 years prior to date of purchase

Major 2008 Tax Law ChangesThe Evolution of the First-Time Homebuyers Credit

Applies to home purchased between:April 9, 2008 and December 31, 2008

Refundable credit for up to 10% of home purchase price (up to $8,000 or $4,000 for Single)

Taxpayer does not pay back the credit unless the taxpayer disposes of the residence, or the residence ceases to be the taxpayer’s (or spouse’s) principal residence, during the 36-month period beginning on the date of purchase

MAGI Phase-outs: MFJ = $150k to $170k; Others = $75k to $95k

Restrictions: can’t buy from close relative, receive as gift or inherit the property

First-time homebuyer definition: cannot have owned another main home during 3 years prior to date of purchase

Major 2008 Tax Law Changes

The Evolution of the First-Time Homebuyers Credit

Applies to home purchased between:January 1, 2009 and November 30, 2009

Major 2008 Tax Law Changes

The Evolution of the First-Time Homebuyers Credit

Applies to home purchases with closing date b/w:January 1, 2009 and June 30, 2010

Extended & E

xpanded!!

Refundable credit for up to 10% of home purchase price (up to $8,000 or $4,000 for Single)

First-Time Homebuyer cannot have owned another principal residence during the 3-year period ending on the date of the purchase of the principal residence

Long-Time Residents have owned the same home for any 5-consecutive-year period during the 8-year period ending on the date of the purchase of a subsequent principal residence

Refundable credit for up to 10% of home purchase price (up to $6,500 or $3,250 for Single)

Taxpayer must have a binding contract to purchase before May 1, 2010 and must close on sale before July 1, 2010

Taxpayer does not pay back the credit unless the taxpayer disposes of the residence, or the residence ceases to be the taxpayer’s (or spouse’s) principal residence, during the 36-month period beginning on the date of purchase

MAGI Phase-outs: MFJ = $225,000; Single = $125,000 Restrictions: can’t buy from close relative, receive as gift

or inherit the property; taxpayer > 18; purchase price < $800,000

Major 2008 Tax Law Changes

The Evolution of the First-Time Homebuyers Credit

Applies to home purchases with closing date b/w:January 1, 2009 and June 30, 2010Extended &

Expanded!!

Members of the Military and qualifying Foreign Service and Intelligence Community members serving outside the US now have an extra year to buy a principal residence in the US and qualify for the credit!!

Eligible taxpayer must enter into a binding contract to buy a principal resident on or before April 30, 2011 and must close on or before June 30, 2011

Eligible taxpayer must serve on qualified official extended duty service outside the US for at least 90 days during the period beginning after 12/31/2008 and ending before May 1, 2010

Credit repayment/recapture is waived for eligible taxpayers if the home is sold or stops being the taxpayer’s principal residence after 12/31/2008 due to government orders received by the taxpayer (or spouse) for qualified official extended duty service

Major 2008 Tax Law Changes

The Evolution of the First-Time Homebuyers Credit

Applies to home purchases with closing date b/w:January 1, 2009 and June 30, 2010

New Milit

ary, FSO &

Intel Benefit

s!!

Helps homeowners who claim the standard deduction

Homeowners can claim an additional standard deduction up to the lesser of the real estate taxes paid or $500 for single and $1,000 for MFJ filers

Real taxes paid must meet same requirements for itemized deduction (i.e., based on value of property)

If you own but rent your property, then you cannot take this additional deduction because you are already claiming the real property taxes on your Schedule E

Major 2008 Tax Law ChangesAdditional Standard Deduction for State and

Local Real Property Taxes Paid in 2009

Sec 121 gain exclusion amended to limit gain exclusion to period home used as principal residence

Gain related to period of time home rented or used as second home is no longer excluded (for periods starting in 2009)

Exceptions for Military, US Foreign Service, US Intelligence community, and Peace Corp

Major 2008 Tax Law ChangesLimitations on Exclusion of Gain from Sale

of Principal Residence

Sec 121 Gain Exclusion: You can exclude capital gain up to $250,000 for single and $500,000 for MFJ on sale of a principal residence you owned and lived in the last 2 out of 5 years. You cannot exclude gain up to depreciation required by law. Ten-Year suspension period in effect for military, US Foreign Service, Intelligence community, Peace Corps. Other exceptions may apply.

Major 2008 Tax Law Changes

Cancellation of Debt Income—Exclusion for Certain Home Mortgages

Tuition and Fees Deduction Above-the-line deduction for tuition and fees is extended

through 2009 Higher AGI limits than other education benefits ($4,000

deduction for AGI at or below $65,000 or $130,000 MFJ; $2,000 for AGI b/w $65,000/$80,000 or $130,000/$160,000 MFJ)

Lifetime Learning and American Opportunity Credit (modified HOPE) are still available at lower MAGI

Provision allowing individuals to exclude from income up to $2 million ($1 million Single) of qualified principal residence indebtedness cancelled b/c of their financial condition or decline in value of the residence—extended through 2012

Major 2008 Tax Law Changes

Educator’s Expense Deduction

Temporary Itemized Deduction for PMI

Above-the-line deduction for expenses paid by qualifying K – 12 grade teachers and other qualifying educators

Up to $250 Extended through 2009 Only US educators qualify

Qualified mortgage insurance premiums paid are deductible as mortgage interest expense

Deduction extended through 2010 (started in 2007) MFJ phase-out begins at $100,000 AGI and Single at

$50,000 AGI

Major 2009 Tax Law Changes

Major 2009 Tax Law Changes

Making Work Pay Credit Qualified Tuition Program Eligible Expense

Definition Expanded New American Opportunity Tax Credit (Modified

HOPE credit) New Vehicle Sales Tax Deduction Special (Bonus) Depreciation

Major 2009 Tax Law Changes Making Work Pay Credit

Expanded Eligible Expense Definition for 529s

Applies to tax years 2009 and 2010 Calculated as the lesser of 6.2% of an individual’s earned

income or $400 ($800 MFJ) Phase-out begins at MAGI of $75,000 ($150,000 MFJ) No credit for MAGI at or above $95,000 ($190,000 MFJ) Credit implemented during 2009 with reduced income tax

withholding schedules; some MFJ with two incomes may need to return some or all of the credit due to MAGI thresholds

Applies to tax years 2009 and 2010 Previously, eligible expenses paid out of QTPs were:

tuition, fees, books, supplies, equipment required for enrollment or attendance, expenses for special needs services, and room and board costs (subject to limit) for at least half-time students

Now, includes expenses paid or incurred for the purchase of any computer technology or equipment or Internet access or related services (computer software for sports, games or hobbies doesn’t count)

New American Opportunity Tax Credit

Major 2009 Tax Law Changes

Modifies the HOPE tax credit for 2009 and 2010 Up to $2,500 (100% of 1st $2,000 expenses and 25% of

next $2,000) per eligible student per year for qualified tuition and related expenses paid for each of the first 4 years of the student’s post-secondary education in a degree or certificate program

Tuition and related expenses definition expanded to include course materials (previously tuition and academic fees only)

MAGI phase-out b/w $80,000 and $90,000 ($160,000 and $180,000 MFJ)

40% refundable for non-child taxpayers (0% refundable to child taxpayers subject to kiddie tax)

New Vehicle Sales Tax Deduction

Major 2009 Tax Law Changes

Applies to qualified new motor vehicle purchases b/w Feb 17, 2009 and Jan 1, 2010

Allowed for taxpayers using either the itemized or standard deduction

Taxpayers using the itemized deduction can add qualified sales tax to state and local taxes OR include in other general sales tax claimed

Taxpayers using the standard deduction add the qualifying sales tax to their 2009 standard deduction

Qualified motor vehicle sales taxes are State or local sales or excise taxes imposed on the purchase of a qualified motor vehicle cost not exceeding $49,500

A qualified motor vehicle is either a passenger auto, light truck or motorcycle less than 8,500 lbs or a motor home. The original use of the vehicle must commence with the taxpayer

MAGI phase-out: $125,000 to $135,000 ($250,000 to $260,000 MFJ)

Bonus Depreciation

Major 2009 Tax Law Changes

Applies to qualifying MACRS property acquired after Dec 31, 2007 and placed in service b/f Jan 1, 2010

Qualifying MACRS property is generally new property depreciable under MACRS and has a recovery period of 20 years or less

Bonus Depreciation equals 50% of the adjusted basis and taken in the placed-in-service year

Opt-out available

What’s Ending?

What’s Ending?

After 2009

Above-the-Line Tuition and Fees Deduction Educator’s Expense Deduction New Vehicles Sales Tax Deduction Additional Standard Deduction for Real

Estate Taxes

2003 Investment Tax Cuts Child Tax Credit of $1,000/qualifying child

reverts to $500 New American Opportunity Tax Credit Making Work Pay Credit Expanded Eligible Expense Definition for

QTP Bonus Depreciation Temporary Itemized Deduction for PMI First-Time and Long-Time Resident

Homebuyer’s Credit (unless qualifying Military, FS or Intel Community)

After 2010

What’s Ending?

What’s Ending?

Investment tax cuts extended until December 31, 2010 (previously 12/31/2008)

2003 Investment Tax Cuts

Applies to long term (>1 year) capital gains and qualified dividends

Capital gains for taxpayers in 10% to 15% bracket dropped to 0% in 2008 to 2010

Max LT capital gain rate will return to 20% and max qualified dividend rate will return to 39.6% in 2011

Unrecaptured Section 1250 gains taxed at max 25% $3000 loss write-off against ordinary income still in effect

10% - 15% 25% +General capital assets (stock, land, etc.) 0% 15%

Section 1250 property1 10% - 15% 25%Collectibles 10% - 15% 28%

1 Gain attributab le to building depreciation

Taxpayer's Ordinary Rate

Capital Gain Tax Rates

What’s Beginning?

Income limit eliminated for Roth IRA Conversions in 2010

ROTH IRA Conversions

Taxpayers with modified AGI > $100,000 will be able to convert Traditional IRA funds to a Roth IRA in 2010

If convert in 2010, you can spread the federal income tax over 2 years (2011 & 2012)

What’s Beginning?

Questions?

Christine Elsea Mandojana, CPAFinancial Planning & Tax Services

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