A: On January 22, President Obama signed into law legislation encouraging relief donations to Haiti in wake of its devastation by multiple earthquakes. The legislation, HR 4462, was approved by unanimous consent on January 20 and January 21 by the House and the Senate respectively.

Reminiscent of the 2005 legislation to encourage aid to the Indian Ocean relief victims, the new law allows U.S taxpayers who make charitable contributions to Haiti relief programs after January 11, 2010 and before March 1, 2010 to elect to claim the resulting charitable deductions on their 2009 income tax return. If the taxpayer does not elect to take the deduction on the 2009 income tax return they can still take it as a charitable deduction on their 2010 income tax return. These charitable contributions must still be made to a qualified organization and meet all other requirements for charitable contribution deductions.

The same bill approves the use of phone bills to substantiate taxpayer donation claims where taxpayers have donated to Haiti relief programs via text messages.

Prior to this legislation, taxpayers who made donations would have to wait until 2011 to claim a tax deduction on their 2010 returns for their Haiti-related contributions. By accelerating the deductions that charitable taxpayers are entitled to receive and relaxing the standard of proof necessary claim such deductions, the United States Government is standing behind the U.S. charities and their donors who have raised a substantial $275 million in relief contributions within the first week of the disaster.

Q: I filed my tax return with the IRS. When can I expect my refund?

A: Whether you opted for direct deposit or asked the IRS to mail you a check, you can actually track your refund through the IRS' secure web site. Generally, you can access information about your refund about 72 hours after the IRS acknowledges receipt of your e-filed return, or three to four weeks after mailing a paper return. Make sure you have your tax return handy because you'll need to provide some information from your return, such as your social security or individual taxpayer identification number, your filing status, and the exact whole dollar amount of your refund. You can access the IRS site through the Israeloff, Trattner web site at http://www.israeloff.com/track_your_refund.cfm, or click the back button for the Tax Tips main menu and click on Track Your Refund.

Q: What type of tax breaks does the American Recovery and Reinvestment Act of 2009 provide businesses and individuals?

A: On Feb. 17, 2009 President Obama signed into law the American Recovery and Reinvestment Act of 2009 (ARRA). While approximately two-thirds of the nearly $800 billion stimulus act is focused on government spending initiatives intended to create jobs and jumpstart the economy, about one-third provides tax breaks for businesses and individuals.

Businesses will enjoy new tax breaks

The act provides some new breaks that will benefit many businesses:

Reduced estimated tax payment requirements. For 2009, ARRA reduces the estimated tax payment requirements for many small business owners. Owners generally will qualify for the reduced payments if their adjusted gross income (AGI) for 2008 was less than $500,000 and if more than 50% of their 2009 gross income is generated from a "small business," which is defined as a business that, on average, had fewer than 500 employees during 2008.

Deferral of income from cancellation of debt. Taxpayers generally must recognize cancellation-of-debt income (CODI) when they cancel --or repurchase -- debt for an amount less than its adjusted issue price. In certain situations, ARRA allows businesses to defer CODI generated from repurchasing business debt after Dec. 31, 2008, and before Jan. 1, 2011, until calendar year 2014 and then report the income ratably over the 2014 through 2018 tax years.

S corporation built-in gains tax relief. Although a C corporation conversion to an S corporation isn't a taxable event, the S corporation normally must hold on to its assets for 10 years to avoid tax on any built-in gains that existed at the time of the conversion. Under ARRA, for tax years beginning in 2009 and 2010, there generally will be no tax on an S corporation's net unrecognized built-in gain if the seventh tax year in the recognition period occurred before the 2009 and 2010 tax years.

Other business breaks expanded

The act expands some important tax breaks for businesses:
Net operating loss carryback. Generally, a net operating loss (NOL) may be carried back two years to generate a current tax refund, providing a cash infusion in times of loss. For 2008 (not 2009), ARRA extends the maximum NOL carryback to five years for small businesses with gross receipts of $15 million or less.

Work Opportunity credit. Employers can claim a credit equal to 40% of the first $6,000 of wages paid to employees in certain target groups, such as ex-felons, food stamp recipients and disabled veterans. ARRA expands the eligible target groups to include unemployed veterans and disconnected youth. This expanded benefit applies to such workers hired in 2009 and 2010.

Depreciation breaks extended

To spur additional investment, ARRA extends the increase in the Section 179 limit for initial year expensing to $250,000 (from $125,000 indexed for inflation). The expensing election begins to phase out dollar for dollar when total asset acquisitions for the tax year exceed $800,000 (up from $500,000 indexed for inflation). The new higher limit applies for calendar year 2009 or a business's fiscal year that begins in 2009.

Another depreciation-related provision extends the special allowance for certain property, generally if acquired in 2009. For eligible property, the special depreciation amount is equal to 50% of its adjusted basis. For passenger automobiles that are eligible property under the 50% bonus depreciation rules, the $8,000 increase for the first-year limit on depreciation also is extended to new vehicles placed in service in 2009.

Last year, corporate taxpayers were also allowed to accelerate their alternative minimum tax (AMT) and research and development (R&D) credits in lieu of taking the 50% bonus depreciation. That break has now been extended through 2009.

Energy-related breaks for businesses expanded ARRA creates or expands several energy-related breaks for businesses, such as the:

• Advanced energy investment credit,
  
• Renewable electricity production credit, and
  
• Alternative fuel pump tax credit.
  

Individuals also enjoy new tax breaks

ARRA also provides some new tax breaks for individuals:

New relief for most workers, retirees and other Social Security recipients. For 2009 and 2010, ARRA creates the Making Work Pay credit of up to $800 for joint filers and $400 for other filers. The credit generally is phased out for joint filers with AGIs exceeding $150,000 and for other filers with AGIs exceeding $75,000. Unlike last year's "recovery rebate," which was distributed via checks mailed to taxpayers, the new credit will generally be "paid" through a reduction in income tax withholding.

The act also provides a one-time payment of $250 to many people on fixed incomes, such as Social Security recipients and disabled veterans. Similarly, it provides a one-time refundable tax credit of $250 to certain government retirees who aren't eligible for Social Security benefits. Both the $250 payment and the $250 credit reduce any allowable Making Work Pay credit.

New sales tax deduction for vehicle purchases. ARRA creates a new above-the-line deduction for state and local sales and excise taxes paid on the purchase of new cars, light trucks, motorcycles and recreational vehicles. The deduction is available for vehicles purchased from Feb. 17, 2009, through Dec. 31, 2009.

The deduction is not, however, available for tax attributable to vehicle value in excess of $49,500. The deduction also phases out based on AGI, but the limits are higher than those for the Making Work Pay credit: The phaseout begins for joint filers with AGIs exceeding $250,000 and for other filers with AGIs exceeding $125,000.

Other individual breaks expanded

The bulk of the tax relief for individuals involves expanding existing breaks. Here are the key changes to be aware of:

Credit for first-time homebuyers. Last year, a refundable credit equal to 10% of the purchase price of a principal residence was made available to qualified first-time homebuyers. This credit was set to expire July 1, 2009, but ARRA extends its availability to purchases made before Dec. 1, 2009. For qualifying purchases made after Dec. 31, 2008, the act also increases the maximum credit from $7,500 to $8,000. Perhaps most significant, the act eliminates the repayment obligation for taxpayers whose qualifying purchase occurs after Dec. 31, 2008 -- except in situations where a home is sold within three years of purchase.

Child Tax Credit. The Act expands the Child Tax Credit ($1,000 for 2009 and 2010) for each qualifying child under age 17 by reducing the income "floor" that applies when determining the refundability of the credit from $8,500 in 2008 to $3,000 in 2009 and 2010.
American Opportunity education credit (previously called the Hope credit). For 2009 and 2010, ARRA expands this credit to cover 100% of the first $2,000 of tuition and related expenses (including books) and 25% of the next $2,000 of such expenses. The maximum credit is $2,500 per year for the first four years of postsecondary education. (The maximum Hope credit was $1,800 and applied to only the first two years of postsecondary education.) The credit phases out for joint filers with AGIs exceeding $160,000 and for other filers with AGIs exceeding $80,000.

529 savings plans. 529 plan distributions used to pay qualified education expenses -- tuition, room, board, mandatory fees and books -- are generally tax free. For expenses paid in 2009 and 2010, ARRA expands the definition of qualified education expenses to include computers and computer technology.

Qualified small business stock gain exclusion. Generally, taxpayers selling qualified small business (QSB) stock are allowed to exclude 50% of their gain as long as they've held the stock for at least five years. ARRA increases the exclusion to 75% if the stock is issued after Feb. 17, 2009, and before Jan. 1, 2011.

AMT relief granted early this year

One tax provision affecting individuals that many thought wouldn't be enacted until later in the year is the extension of alternative minimum tax (AMT) relief. ARRA provides a one-year "patch" that increases the AMT exemption. For married couples filing jointly, the 2009 exemption is $70,950. For singles and heads of households, it's $46,700, and for married filing separately, it's $35,475.

The patch also expands the AMT income ranges over which the exemptions phase out and only partial exemptions are available. The 2009 phaseout ranges are now $150,000 to $433,800 for married filing jointly, $112,500 to $299,300 for singles and heads of households, and $75,000 to $216,900 for married filing separately. The exemption is completely phased out if AMT income exceeds the top of the applicable range.

Additionally, ARRA extends a provision through 2009 that allows certain nonrefundable personal tax credits to provide a benefit against the AMT. These include the dependent care credit, the American Opportunity credit and the Lifetime Learning credit. The act also excludes from the AMT any income from tax-exempt bonds issued in 2009 and 2010, along with 2009 and 2010 refundings of bonds issued after Dec. 31, 2002, and before Jan. 1, 2009.

Energy-related breaks expanded for individuals ARRA creates or expands several energy-related breaks for individuals, such as:

• Transit benefits,
  
• Residential energy property credit,
  
• Residential energy-efficient property credit, and
  
• Plug-in electric vehicles credit.

Although much of ARRA focuses on working Americans, it also provides some tax relief for laid-off workers. For 2009, the act suspends federal income tax on the first $2,400 of unemployment benefits per recipient.

COBRA Insurance Continuation. Under the Act, an individual who has been involuntarily terminated on or after September 1, 2008, through the end of 2009 is required to pay only 35% of the group health insurance premium to secure COBRA continuation coverage (for up to nine months).
Take full advantage

ARRA may significantly affect your tax liability in a variety of ways. If you would like more detailed information about this new tax law, please give us a call. We would be glad to help you determine exactly how ARRA will affect your tax liability -- and what you should do to take full advantage of the act.

Q: What is the 2008 Economic Stimulus Act?

A: In an effort to head off a major economic slowdown, the Administration and Congress agreed on a package of tax provisions intended to stimulate the economy. The Economic Stimulus Act of 2008 ("Act") provides benefits to both individuals and businesses.

Below, we highlight the Act's provisions and illustrate how they might apply to your personal and business situations. Of course, before acting on anything you read here, you should consult with us.

Rebate for Individuals Each qualifying individual will receive a tax credit in the form of a "recovery rebate" check to be received generally in 2008. Some taxpayers will receive a credit for some of or the entire rebate amount on their 2008 tax returns (filed in 2009).

The rebate has two components: (1) a base amount generally dependent on filing status and income-tax liability and (2) an increase in the child tax credit.

Base Amount.-- The minimum base rebate amount is $300 ($600 for married couples filing jointly). Very generally, a person will be entitled to this amount if he/she has at least $1 of federal income-tax liability or $3,000 in qualifying income. "Qualifying income" means the sum of earned income, veterans' disability payments (including payments to survivors of disabled veterans), and Social Security benefits. So, those who do not pay taxes but have these other sources of income could be eligible for a rebate check.

The maximum base rebate amount is $600 ($1,200 for joint filers). The amount of the rebate will be equal to the lesser of the individual's tax liability or 10% of the first $6,000 of taxable income ($12,000 for joint filers).

Example: A married couple is retired and living on Social Security benefits only. They pay no income tax on their joint return. The couple would be entitled to a $600 rebate check.

Example: A single individual has a taxable income of $25,000 and pays income tax of $500. The rebate amount is $500 -- the lesser of her tax ($500) or 10% of $6,000 ($600).

Example: A married couple files a joint return showing $50,000 in taxable income and a tax of $10,000. The couple would receive a base rebate of $1,200 (10% of the first $12,000 of taxable income).

In determining taxable income for eligibility and rebate purposes, taxpayers generally must use 2007 income as reported on their 2007 tax return, filed in 2008. If a person isn't eligible for a rebate check based on 2007 income (for example, where the individual was someone else's dependent for 2007), but becomes eligible during 2008, then the IRS wont send that person a rebate check. However, the individual will be able to claim a credit when he files his 2008 return.

Child Credit Amount.-- If an individual receives at least $1 of the base rebate and has qualifying children under age 17, that individual will receive an additional child tax credit of $300 per child, which will be included in the rebate check. This amount is a refundable credit, so the recipient receives this extra amount even if the amount of the recipient's 2007 income tax is less than the total child tax credit.

Example: A married couple files jointly with three qualifying children. Their taxable income is $45,000 and their income tax is $5,000. The amount of the total rebate check for the couple would be $1,200 (base amount) plus $900 (three times $300 as additional child tax credit), for a total of $2,100.

Recovery Rebate Phase Out.-- The rebate amount (including both the base credit and the additional child tax credit) is phased out at a rate of 5% of adjusted gross income (AGI) over $75,000 ($150,000 for joint filers).

Example: A married couple filing a joint return has two qualifying children and $160,000 of AGI. The maximum rebate of $1,800 (i.e., $1,200 base credit plus $600 additional child tax credit) is reduced by $500 (5% of the $10,000 AGI in excess of $150,000), so the couple's rebate is $1,300.

Therefore, most higher-income individuals' rebate amounts will be reduced or eliminated. There is no specific amount of AGI at which the credit is fully phased out, since that amount will depend on the specific family situation of the taxpayer.

Valid ID Requirement.-- No rebate amount is allowed to an individual if he/she doesnt include on the tax return a valid identification number (that is, a Social Security number). Both joint return filers must provide their own numbers. If a child tax credit amount is claimed for a qualifying child, the child's Social Security number must be included on the return.

Increase in Section 179 Expensing One provision intended to stimulate business spending is an increase in the limits applicable to the so-called "Section 179 expensing election" for the 2008 tax year.

Under Section 179 of the tax law, a taxpayer may elect to deduct, up to a dollar limit, the cost of qualifying property placed in service during the tax year. So, a taxpayer could elect to write off the cost of a purchase all at once instead of depreciating it over time. Generally, qualifying property includes tangible personal property, like equipment, vehicles, machinery, etc. Certain off-the-shelf computer software can qualify as well.

The dollar amount of purchases that qualify for the expensing election is phased out dollar-for-dollar as the value of the taxpayer's investment in qualified property exceeds a certain amount. In addition, the amount that can be expensed cannot exceed the taxpayer's taxable income from the business for the year.

The new law raises both the expensing limit and the investment limit. For property placed in service in tax years beginning in 2008, the Act increases the pre-law $128,000 expensing limit to $250,000. The overall investment limit increases from $510,000 to $800,000. Neither new amount is to be indexed for inflation.

Example: ABC Company, having taxable income of $300,000 in 2008, purchases and places in service new equipment worth $220,000 during the year. Under the Act, the full $220,000 purchase price of the equipment can be deducted for 2008 tax purposes.
Example: XYZ Corporation places in service new equipment worth $850,000 in 2008. The business' taxable income is $1 million. The maximum Section 179 expensing election that XYZ can make is $200,000 (i.e., $250,000 maximum expensing election less $50,000 phase-out ($850,000 purchases less $800,000 investment limitation)). Note the remainder of the purchased equipment may be eligible for deduction under the regular depreciation rules (as amended by the Act  see below).

Due to these increases, most small businesses and some medium-sized businesses may be able to claim a full deduction for the cost of business equipment and machinery placed in service this year.

Bonus First-year Depreciation In addition to the limit increases in the Section 179 expensing election, the Act provides a second incentive for the purchase of business-related assets.

For property placed in service after December 31, 2007, and acquired after that date and before January 1, 2009, the taxpayer will be entitled to an additional depreciation deduction equal to 50% of the adjusted basis of the qualifying property (generally, new business property other than real estate). The adjusted basis of the property is then reduced by this bonus depreciation when computing regular depreciation on the property.

Example: M Corp., a calendar-year company, bought and placed in service $1 million of depreciable machinery with a five-year life under the tax laws depreciation rules. Under the pre-2008 Act law, the first-year depreciation on the machinery would have been $200,000 (20%). Under the Act, M Corp. may deduct first-year depreciation of $600,000 (i.e., 50% of $1 million bonus depreciation ($500,000) plus 20% of the remaining $500,000 adjusted basis ($100,000)).

A taxpayer may "elect out" of the bonus first-year depreciation allowance for one or more classes of property for the tax year.

Several other requirements pertain to this provision and applying it to a specific situation can be tricky. See us for additional details.

Q: What is the Small Business and Work Opportunity Tax Act of 2007 (SBWOTA)

A: On May 25, the President signed the Small Business and Work Opportunity Tax Act of 2007 (SBWOTA). Passed in conjunction with legislation to continue funding the war in Iraq and to raise the minimum hourly wage, the tax-related provisions are designed in part to provide benefits to small businesses likely to be hit hard by the minimum wage increase.

Following are highlights of key provisions affecting businesses and individuals, as well as GO Zone incentives and other areas of tax law.

Businesses

The Section 179 election to expense property in its initial year (rather than depreciate it) is extended through 2010 and increased from $100,000 to $125,000, effective for years beginning after 2006. The expense deduction begins to phase out if more than $500,000 of eligible property is placed in service during the year (up from $400,000). These amounts will be adjusted for inflation annually.

The Work Opportunity tax credit, which had been set to expire Dec. 31, 2007, is extended until September 30, 2011. This credit is available to businesses that hire employees from targeted groups of individuals, such as veterans, ex-felons, high-risk youth, and food stamp and supplemental security income recipients. The new law expands this list to include disabled veterans and individuals in counties that have suffered significant population losses. If you hire a target employee, your business can receive a 40% tax credit for the first $6,000 paid to that worker.

The individual and corporate alternative minimum tax (AMT) limits on the use of certain credits are waived, effective for years after 2006 as well as for carryback of these credits. This applies to the Work Opportunity credit and the credit for taxes paid on employee tips. Employers are also now eligible for the full tip credit despite the increase in the minimum wage.

SBWOTA includes certain S corporation and pension provisions, but they are generally too obscure and technical to cover here. Contact your tax advisor to ascertain whether any of these changes affect your tax planning strategies.

Individuals

The new law also affects some individual taxpayers. The "kiddie tax," which subjects children (and now young adults) to tax on most unearned income at their parents' marginal tax bracket, had recently been expanded to include those under age 18 (up from age 14). Now, SBWOTA broadens that rule to include those who qualify as dependents because they are either under age 19, or under age 24 and a full-time student, if their earned income doesnt exceed one half of the amount needed for their support.

GO Zone incentives

In addition, SBWOTA extends several tax incentives designated for the Gulf Opportunity Zone (GO Zone):

• The increased Sec. 179 expense election, which is generally doubled for qualifying property, is extended through 2008.

• The low-income housing tax credit for GO Zone housing is extended through 2010.

• Tax-exempt bond financing for GO Zone property is expanded to include expenses for all repairs and reconstruction. The provision applies to owner financing provided after May 25, 2007, and before 2011.

Other Changes

Finally, the act subjects tax return preparers to increased levels of penalty for the redefined category of "unreasonable positions" taken on a tax return, as well as for the category of "willful and reckless" tax positions. The legislation also makes changes in the pension area, as well as numerous other minor changes and technical corrections. Please consult your tax advisor for details that may affect you.

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