New Car Tax Credit? (NOT)

(Thank you to Ruth for the question.)

There is a lot of confusion around the ‘New Car Tax Credit". The truth is, its not really a credit but an expanded deduction for the sales and excise taxes paid on a vehicle.
Here are the basics:

The vehicle must be a new.

It can be a car, light truck, motor home or motorcycle. There is a weight limit on the vehicle.

The vehicle must be purchased after Feb. 16, 2009, and before Jan. 1, 2010

You can deduct the sales and excise taxes paid on a new car for up to the first $49,500 of cost for the car.

You do not have to prepare a Schedule A Itemized Deductions to take advantage of this program. It is deductible on the first page of your 2009 tax return.

You lose the deduction if your income exceeds $135,000 if you are single and $260,000 if you file a joint tax return.

You can deduct it on your 2009 return and cannot take it on your 2008 tax return.

What is it worth? Not much. If you buy a $20,000 car and pay a 5% sales tax on it, you get to deduct $1000 from your income before you figure your taxes. For most people that translates into $250 cash in your pocket. Its better in your pocket than Uncle Sam’s but it does not seem like much of an incentive to go out and buy a new car.

There is not a lot of guidance from the IRS on this topic so things might change a little as the year passes. Here is a link to the IRS website where you will find essentially the same information as above.

http://www.irs.gov/newsroom/article/0,,id=205863,00.html?portlet=7

Do You Have any questions?

One of the good parts about a blog is the interaction with the readers. I enjoy reading the comments and then responding if appropriate. The comments are moderated but that is only to weed out the obscene or the obvious advertisements and spam. So far there has been no edited or deleted comments.

Now its your turn. Please send me questions or comments. If there is some part of the tax law that you want some information on, please let me know. I have a good source of subjects from my practice but could always use a fresh perspective. You can comment on this blog or you can send questions to thomstaxtalk@gmail.com

Ode To A New Economy

My apologies to Bare Naked Ladies. Connect to their web site here http://www.bnlmusic.com/

Once I had a million dollars. (Once I had a million dollars)
But I just lost my house (But I just lost my house)
Once I had a million dollars. (Once I had a million dollars)
Sold the furniture in my house.(Wanna buy a nice chesterfield or ottoman?)
Once I had a million dollars. (Once I had a million dollars)
Bought you a kiddie-car (a nice pedal automobile)
Once I had a million dollars

Once I had a million dollars. Now I live in a tree fort in your yard.
Once I had a million dollars. You could join me, it wouldn't be that hard.
Once I a million dollars. (We would put a little tiny fridge in there somewhere.)We could just go up and hang out. (Open the fridge there would becheap food laid out for us, little half subs and moldy bread and things.)

Once I had a million dollars (Once I had a million dollars)
I sold your fur coat (But not for much cause its not real)
Once I had a million dollars. (Once I had a million dollars)
We ate our exotic pets (both the llama and the emu)
Once I had a million dollars. (Once I had a million dollars)I sold everything that remains (ooh all them crazy elephant tusks and such)
Once I had a million dollars.

Once I had a million dollars (we couldn’t drive to the store.)
Once I had a million dollars (we'd take a bicycle to save some more.)
Once I had a million dollars (we’d have to eat Kraft dinner.)We’d get sick of eating Kraft dinner. Well of course we would and we'd still eat more. ANDSteal all the fanciest ketchup for it...Dijon ketchup! mmmm…

Once I had a million dollars. (Once I had a million dollars)
I'd buy you a Goodwill dress. (but not a real Goodwill dress that's cruel)
Once I had a million dollars. (Once I had a million dollars)
We’d sell all our art. (Poker playing dogs on velvet)
Once I had a million dollars. (Once I had a million dollars)
We ate our monkey. (He joined the llama and the emu)
Once I had a million dollars

Once I had a million dollars (Once I had a million dollars)
Once I had a million dollars (Once I had a million dollars)
Once I had a million dollars…
I was rich.

A Worthless Letter

Have you received a letter from Compliance Services that started out "Annual Minutes Requirement Statement"? It then quoted various laws and told you to complete the form and send it to them with a check for $125. It is an official looking form but does indicate that it is not a government form.

What is the purpose of this form? That is a good question. Based on the instructions, the company will prepare some document and send it back to you for filing with your other corporate records. They threaten you with dire results if you do not comply. Their main goal is to scare you into sending them $125. Don’t do it! Dealing with this company does not provide you with any additional protection.

My suggestion: THROW THE LETTER AWAY. The company is not providing any benefits for the fee.

If you are incorporated you must file an annual report with the Secretary of the State of Massachusetts. You can do this online or on paper. The cost is $125. (Guess how the company calculated their fee!) Here is a link to the Secretary of State’s web site where you can get much better information on your filing requirements. There also is a posting about the Compliance Services letter.

http://www.sec.state.ma.us/cor/coridx.htm

Please pass this blog on to your incorporated friends.

Is Getting Married A Good Tax Move

I went to a friend’s wedding last week and was thinking about the tax consequences of marriage. Only a CPA would think about taxes on a sunny Sunday while going to a wedding. But getting married changes your tax situation, sometimes drastically.

Many years ago two friends of mine decided to get married. They decided on a New Year’s Eve wedding and planned on getting married at 11:45 PM. They were both clients so I pulled out their tax returns and did a little math. I suggested that they postpone their wedding for a half-hour and save $4000 in taxes, enough to pay for their wedding. They decided to get married the next year, at 12:01.

Why did this happen? They both had about the same substantial income. They had both gotten a package to leave their jobs and would be earning a lot less the next year. They would have jumped into a higher tax bracket that year filing as a married couple rather than as two singles.

This is called the marriage penalty. Congress keeps vacillating between a marriage penalty and a singles penalty. Currently there is a marriage penalty and every year congress talks about changing it. Who knows what they will do next?

The rule of thumb is that if two people’s incomes are about equal, they will probably pay a higher tax as a married couple. If their incomes are significantly different, they pay more in taxes as singles. Other things, like kids, medical expenses and home ownership can effect this calculation.

I’m wondering if a few people will plan their wedding based on this blog.

Why Did I Get a Retirement Tax Form if I’m Not Retired?

Why did that get that 1099-R form from my 401(k)? The 1099-R form reports distributions made from your 401(k), IRA, or other pension plan. This form is issued when money is withdrawn from your tax-deferred retirement account. Luckily, losing money in the stock market does not generate this form.

Hopefully, if you have withdrawn money from your retirement account, it is because you have retired. This is a taxable transaction. If you’ve lost your job and needed the money to pay day-to-day bills, you have to report the distribution as income and pay taxes on it. You also may pay a 10% penalty for withdrawing the money.

Switching trustees or investments are also reasons for receiving a 1099-R. Transferring money from one IRA to another or from your 401(k) to an IRA is not a taxable event. You do not have to pay tax when you transfer money in this fashion. This is when "Why did I get that retirement form?" becomes a very good question. IF I don’t have to pay tax, why is the IRS being told I took the money?

The reason they are being told is simple: the law requires that all distributions be reported to the IRS. If you take a good look at the 1099-R you should see that the IRS is also being told that it is not a taxable event. Box 7, Distribution Codes is the spot to look for on the form. A "G" in that box tells the IRS that you transferred money directly from your 401(k) to your IRA (or wherever you transferred money from and to). It also tells the IRS that you do not have to pay tax on the distribution

If you get one of these forms with a G in box 7, you report the gross distribution in box 15a or 16a on your 1040 form. You do not put anything is box 15b or 16b. By doing this you are telling the IRS that you know you got the form and that it is not taxable. This should eliminate any nasty letters from the IRS I mentioned in a previous posting

New Homeowners Tax Credit – Revisited

This is an update to my blog of January 13th on the 2008 New Homeowners Tax Credit.

There have been changes made in the Economic Stimulus Plan concerning the new homeowner credit. Here are the highlights of the new law:

The credit is now available if you close on your home between January 1 and November 30, 2009.

You cannot have owned a home for three years prior to closing on your new home.

The credit amount is 10% of the purchase price of the home to a maximum of $8000. So if you buy a house for $50,000, you only get a credit of $5,000. Previously, the maximum was $7,500.

You do not have to pay the credit back if you buy a house in 2009. If you qualified for the $7,500 credit by purchasing a home in 2008, you still have to pay the credit back over 15 years.
You must pay the credit back if you sell the home within 3 years.

The tax credit is refundable. This means that if your total taxes are $3000, the IRS will send you a check for $5000 ($8,000 credit less the $3,000 you owe in taxes).

The credit may not exceed a total of $8000. If two individuals buy a house together, the $8,000 is divided between them rather than each getting a credit.

You cannot buy the house from a related party, like your parents or grandparents.

You can claim the credit on your 2008 tax return even if you bought the house in 2009.

You start losing the credit when your income exceeds $75,000 if you are single or $150,000 if you are married.

How do you claim the credit? File Form 5405 with your 2008 tax return. You can still claim the credit If you are buying a home after your filed your 2008 tax return. Just file an amended return to claim the credit.

Here is where some planning comes in handy. If you owe the IRS, file an extension. After you buy the home, file the return with the credit, and avoid having to write the IRS a check. Suppose you owe the IRS $2,000 and close on your house in May of 2009. File an extension (Form 4868) for your tax return. Then, after you have closed on the house, file the return with the $8,000 credit. You get a check for $6,000, the $8,000 credit less the $2,000 you owed in taxes. This is a great deal and you should take advantage of it. Call it your own personal bailout.

The law was recently signed. The details are still being worked on and the IRS has not issued any guidance. So keep an eye on the news and this blog as things develop.

Comments anyone?