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First-Time Homebuyer Credit

A new first-time homebuyer credit of up to $7,500 has been designed by Congress to entice middle-class taxpayers to get off the sidelines and buy their first home. This temporary tax credit applies for homes purchased after April 8, 2008 and before July 1, 2009. As with most tax law provisions, in trying to make the first-time homebuyer credit fair, Congress introduced some complicated rules. The basics, however, are fairly straightforward:

  • The credit is equal to $7,500 unless the purchase price is less than $75,000, in which case the credit is 10 percent of the purchase price ($3,750 for married individuals filing separately).
  • Those with higher income are excluded from taking the credit. The new credit phases out for married couples filing jointly with modified adjusted gross income (AGI) between $150,000 and $170,000 ($75,000 and $95,000 for single taxpayers).

A first-time homebuyer is someone who has not owned a principal residence in over three years. Renters, even if they own a second home, can therefore qualify, as can someone who stopped owning a home three years ago.
Qualifying homeowners who purchase within the allowed time period in 2009 need not wait to file their 2009 returns to claim the credit; they may do so on a 2008 return. The credit amount ($7,500 or less) must be paid back to the government over 15 years starting with the second year after purchase. It is therefore more an interest-free loan than a permanent tax credit. There are exceptions in cases of death, and an accelerated recapture provision that may require an immediate payback of any balance due when the house is sold or no longer used as a principal residence.

Guidelines for Deducting Charitable Contributions

Americans as a whole are very generous. Each year Americans donate billions to charities in the form of cash and non-cash contributions. Charitable contributions of non-cash property pose special problems for the IRS, primarily because the amount of the deduction is generally the fair market value of the contributed property on the date of contribution. In recent years Congress has taken steps in an attempt to close perceived abuses.

Clothing and household items. Effective for donations made after August 17, 2006, anyone making donations of clothing and household items can only take a deduction for items that are in good used or better condition. This includes furniture, furnishings, electronics, appliances, linens and similar items. You should be aware that food, paintings, antiques, objects of art, jewelry, gems and collectibles are not household items. The IRS may deny a deduction for any item that has minimal value, like used socks or undergarments. However, there is an exception for the donation of single items that might not be in at least good condition if the item is worth more than $500 and you include a qualified appraisal with the donation. So what constitutes good used or better condition? That has not yet been defined. You should maintain as much evidence as possible to substantiate your position if challenged.

Motor Vehicles. Generally, charitable deductions exceeding $500 for donated vehicles are limited to the actual sales price of the vehicle when sold by the charity, and donors must obtain a contemporaneous acknowledgement from the charity in order to claim the deduction. There are some limited exceptions under which a donor may claim a fair market value deduction. If the charity makes a significant intervening use of or a material improvement to a vehicle, or give or sells the vehicle to a needy person at a price significantly below fair market value, the donor may be able to deduct the full fair market value. To meet the contemporaneous requirement, the acknowledgment must be obtained by the donor on or before the earlier of the date on which the donor files a return for the taxable year in which the contribution was made, or the due date (including extensions) of that return.

Cash. In another big change, that is effective starting in 2007, the IRS will no longer permit a deduction for the contributions of cash, check or other monetary gift unless you, as the donor, can show a bank record or a written communication from the charity indicating the amount of the donation, the date the donation was made and the name of the charity. The new recordkeeping requirements give taxpayers no leeway. You must have a bank record or a receipt to substantiate your deduction.

Telework Tax Credit for Georgia

With talk of gas prices climbing, the idea of telecommuting is becoming more and more appealing to many employees. However, it can be hard for employees to convince their employer that this is an effective alternative to working at an office. Thanks to the Georgia Telework Tax Credit, employers now have added incentives to set up telework programs. Telework is defined as performance of normal and regular work functions on a workday that ordinarily would be performed at the employer’s principal place of business at a different location, thereby eliminating or substantially reducing the physical commute to and from that employer’s principal place of business.

In Georgia, this credit is available for tax years 2008 and 2009 as a nonrefundable credit available against the Georgia corporation income tax for a percentage of eligible “telework” expenses: up to $1,200 per employee and for 100% of the costs of an assessment of the employer’s telework program, up to a maximum credit of $20,000 per employer. The exact amount of the credit calculation will be determined based on factors including number of days per month the employee is working and whether or not the principal place of business is a nonattainment area (where air quality is poor or air pollution is high) as defined by the Environmental Protection Agency. Here is a general breakdown of the credit:

  • 100% of eligible expenses if the employee works at least 12 days per month and the primary place of business is a nonattainment area;
  • 75% of eligible expenses if the employee works at least 12 days per month, or;
  • 25% of eligible expenses if the employee works at least 5 days per month.

The Mortgage Mess and Unexpected Tax Consequences for Homeowners

Homeowners who over-extended themselves with creative financing arrangements and exotic loan terms are now facing some unpleasant and unanticipated provisions of the Tax Code. Not only are homeowners with the overwhelming possibility of losing their homes either voluntarily through selling at a loss or involuntarily through foreclosure, but many also must accept certain tax consequences for which they are totally unprepared.

No Deduction or carryover basis. There are no deductions available for taking a loss on the sale of one’s primary residence. When the net sale price of the homeowner’s home is less than his or her tax basis, the loss incurred on the sale is considered a nondeductible personal expense for federal income tax purposes. What’s more, if a homeowner eventually purchases a second home and sells that property down the road at a taxable profit, previous losses cannot be used to offset that gain since basis is no longer carried over.

Conversion. One possibility for homeowners faced with taking a loss on the sale of their home: convert the home into an income-producing property, such as a rental, before an eventual sale. Losses incurred after the property is converted may be deductible as an ordinary loss. However, only the amount of loss incurred after the home becomes a business or investment property is deductible.

Cancelled debt. When a lender forecloses on property, sells the home for less than the borrower’s outstanding mortgage and forgives part or all of the unpaid mortgage debt, the Tax Code considers the cancelled debt to be taxable income.
If a lender refuses to discharge the remaining debt, the homeowner is obligated to pay off the loan and there is no tax break or write-off for doing so. A borrower’s “cancelled debt income” is taxable at ordinary rates. Few exceptions apply. For example, when borrowers are insolvent or involved in bankruptcy proceedings, discharged debt is not taxable.

Foreclosure and gain. Moreover, if property is foreclosed and sold at auction for more than the home’s tax basis, the sale produces taxable capital gain. In this case, however, the gain from a foreclosure sale of an individual’s principal residence may be excluded to the extent of up to $250,000 ($500,000 for married homeowners filing jointly), depending on the length of homeownership. No exclusion, however, is given on vacation property that is not a principal residence.

Short sales. Lenders that allow homeowners to sell their property when the outstanding mortgage debt exceeds the net sale price of the home also create taxable ordinary income for the homeowner on the difference if the lender accepts proceeds from the sale as payment in full.

Reporting obligations. When a bank or other creditor forgives part or all of a borrower’s unpaid mortgage balance, the lender is required to report the cancelled debt amount to the IRS on Form 1099-C (Cancellation of Debt), if the amount forgiven is $600 or more. Since cancelled debt is income to the borrower, the amount must also be reported by the homeowner on his or her federal income tax return.

The President has proposed and Congress is considering legislation that would ensure that cancelled debt on a primary residence is not counted as income.

No Relief at the Pump? Evaluate Your Options

Effective July 1, 2008, the IRS raised the standard business mileage rate to 58.5 cents. With gas prices hitting all-time highs, businesses should evaluate whether this sufficiently reimburses travelers, or whether a switch to the actual expense method of computing vehicle expense deductions makes more sense.

Two methods available:

There are two basic methods that business taxpayers may choose to compute their deduction for the business use of automobiles: the IRS’s standard mileage rate (SMR) and the actual expense method.

Standard mileage rate. The fixed and operating costs of the vehicle are generally calculated by multiplying the number of business miles traveled by the business standard mileage rate. Although a business using the SMR method cannot deduct any of the actual expenses incurred for operating or maintaining the car, the IRS does allow additional deductions for business-related parking costs and tolls, as well as interest paid on vehicle loans and any state or local personal property tax paid on the vehicle.
Actual expense method. Under the actual expense method, taxpayers can deduct the operating and maintenance costs incurred for the car during the current year, which include:
• Gas and oil (whether premium or regular grade);
• License and registration fees;
• Insurance;
• Garage rent;
• Tires;
• Minor and major repairs;
• Maintenance items such as oil changes and tire rotations;
• Interest paid on a car or truck loan; and
• Car washes and detailing
If the business use of the vehicle is less than 100 percent, expenses need to be allocated between business and personal use.

Contact HLBGC for further details, limitations and an evaluation of the most cost effective method for your business.

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