New Tax Law Changes

Dear Clients and Friends of Cornerstone:

On July 30^th, President Bush approved the Housing and Economic Recovery Tax Act of 2008.  As some of these tax provisions impact both our individual and our business clients, we want to share them with each of you.  Here are highlights of its tax provisions:

·         A new refundable tax credit for first-time homebuyers.  First time homebuyers may want to take advantage of a new refundable credit equal to the lesser of $7,500 or 10% of the price of a first home purchased between April 8, 2008 and July 1, 2009.  The credit phases out at AGI (Adjusted Gross Income) levels over $150,000 for married filing joint and $75,000 for singles.  The credit must be repaid over 15 years in equal installments (or entirely repaid if sold earlier), but in the meantime, it’s like an interest-free loan.  This credit acts as tax paid, and does not increase alternative minimum tax when used.

·         Additional standard deduction for state and local real property taxes paid in 2008.  Home owners who claim the standard deduction would get an additional deduction for state and local real property taxes for 2008.  The maximum amount that may be taken for this additional standard deduction is the lesser of the real estate taxes paid or $500 for single taxpayers and $1,000 for joint filers.  As the standard deduction increases, more and more of our clients do not have enough of the combined mortgage interest, charitable donations, income and real estate taxes to receive a tax benefit.  For 2008, the standard deduction for married filing joint is $10,900.  If that is your circumstance, then your deduction could be increased to as much as $11,900.

·         Limitations on the exclusion of gain from the sale of a principal residence.  Beginning in 2009, the taxpayer exclusion from gain on the sale of a principal residence would not apply to any gain allocated to periods of “nonqualified use”.  Such use is defined as when the taxpayer is not the principal resident of the dwelling (i.e. when the taxpayer used the home as a vacation home or rental).  However, “nonqualified use” does not include periods when the homeowner vacated their property for military or other official service, change of employment, health conditions, or other unforeseen circumstances.  So let’s say you bought a vacation house in 2001 for $325,000.  In January 2009 you sell your current principal residence and move into the former vacation home.  At that time, the vacation home is worth $425,000.  In September 2011, after using the vacation home as your principal residence for two out of the last five years, you sell the home for $500,000.  When sold, $75,000 of the gain is not taxed, and $100,000 is taxed as capital gains.

·         Eliminating costs on housing programs by the AMT. As mentioned before, the low-income housing tax credit and the rehabilitation tax credit will also offset the AMT (Alternative Minimum Tax).  In addition, interest on tax-exempt housing bonds would no longer be applicable to AMT for housing bonds issued after July 30^th.  Older Private Activity bonds will continue to be subject to AMT.

·         Increasing the applicability of the low-income housing credit.   Several changes in this law will increase the availability of this credit.  One of those changes in the new definition of a first time homebuyer.  If you have not owned a home for the last three years, you are a first time homebuyer under these rules.

·         Electing to accelerate AMT credits and research credits instead of bonus depreciation. C Corporations eligible to claim the 50% bonus depreciation can choose to accelerate recognition of part of their AMT (Alternative Minimum Tax) or R&D tax credits.  If so elected, these credits are refundable, subject to limitation, even if there is a tax loss.  Credits generated through December 31, 2005 are eligible for the refundability treatment.  As a result, there may be amended returns necessary for some 2005 returns.  Watch for amended K-1’s from partnership interests which may begin to arrive this fall.

·         Protecting identities in real estate transactions.  Rather than requiring the seller of real estate to provide their social security number to the purchaser, sellers may now give their personal information to an independent third party for verification to prevent identity theft.

·         Enhancing the rehabilitation of government leased buildings.  Rather than restricting a property owner from full use of the rehab tax credit if more than 35 percent of a property is currently leased by the government, the act would give access to the full rehab credit so long as a state or local government tax-exempt entity does not lease more than 50 percent of the property.

·         Delaying the effective date of the worldwide interest allocation for two years (until tax years beginning after December 31, 2010).  If you are involved in foreign trade, an election may be necessary for the first taxable year beginning after December 31, 2010.  Please contact our office if you think this may apply to your business.

·         Information reporting on credit card transactions.  Beginning in 2011, financial institutions will have to annually report the gross amount of credit cards processed for businesses.  This report will include the name, address, and taxpayer ID of the payee, who will receive a copy of the report.  It will probably resemble the 1099-INT you currently receive from your bank.  This is expected to raise $7.6 billion over 10 years as part of the funding of the Housing Act.  Financial institutions will have to reprogram computers by 2011 to capture the information for the report, and those who have credit card revenue will also have to shape up their income reporting compliance.  This is a continuance of IRS’s highly successful matching program—an “audit without an audit.”

·         Lastly, the IRS increased the business mileage deduction to 58½ cents per mile beginning July 1, 2008.  If you normally deduct business miles on your return, we will need you to separate miles driven before July 1 and miles driven after June 30 this year.  If fuel costs keep going down, we could have a reduction in the cents per mile later in 2008 or 2009.

If after reading this you have any questions, please give Cornerstone a call.