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The Tax Guy: Tax Season Delay for Certain Filers @PHXCPA

The Tax Guy

The IRS has announced a delay in the start of tax season for some individual taxpayers affected by the Tax Relief Act of 2010. This delay affects individual taxpayers who itemize deductions, claim tuition and fees deduction, or claim the educator expense deduction. The delay affects both paper-filed and e-file returns (For a complete list of forms, see Forms Affected By the Extender Provisions below).

The IRS is asking preparers to wait for the IRS prescribed start date – mid-to late February 2011 – before e-filing these returns; returns submitted on paper prior to the IRS prescribed start date will be ‘shelved’ and processed later than returns filed on or after the start date. IRS e-file is the fastest, best way for taxpayers affected by the delay to get their refunds.

For more details from the IRS, visit the following link: http://www.irs.gov/newsroom/article/0,,id=233449,00.html

Forms Affected By the Extender Provisions

Taxpayers must wait to file if they are affected by any of the tax credits or deductions that expired at the end of 2009 and were renewed by the 2010 Tax Relief Act, enacted Dec. 17.

The delays affect taxpayers claiming:

• Itemized deductions (claimed on Schedule A of Form 1040)
• Tuition and Fees Deduction (claimed on Form 8917)
• Educator Expense Deduction (claimed on Form 1040, line 23, or Form 1040A, line 16)
• Casualties and thefts (claimed on Form 4684)
• District of Columbia First-Time Homebuyer Credit (claimed on Form 8859)

A few other taxpayers must wait to file, due to recent changes included in the Small Business Jobs Act of 2010.

Affected forms include:

• Form 3800, General Business Credit
• Form 5405,  First-Time Homebuyer Credit and Repayment of the Credit
• Form 6478, Alcohol and Cellulosic Biofuel Fuels Credit
• Form 8834, Qualified Plug-In Electric and Electric Vehicle Credit
• Form 8910, Alternative Motor Vehicle Credit
• Form 8936, Qualified Plug-In Electric Drive Motor Vehicle Credit

Jermaine A. Southern a.k.a. "The Tax Guy" is a Certified Public Accountant (CPA) living in Phoenix, Arizona. He received his B.A. in Accounting from Morehouse College, and graduated from Arizona State University's W.P. Carey School of Business with a Masters of Taxation. He has been in public practice for more than nine years along the way working at both international (Deloitte & Touche LLP) and regional (Clifton Gunderson LLP) firms. He is now principal of his own private practice. The Tax Guy's articles do not necessarily reflect the views of PhxSoul.com. Please visit southerncpafirm.com to reach Jermaine for additional questions with regard to this article or other tax assistance.

The Tax Guy: New IRS Documentation Requirements for Homebuyer Credit

The Tax Guy

According to the IRS, thousands of individuals claiming the first-time homebuyer’s $8,000 tax credit may be trying to scam the system. Claims for the tax credit are being filed by those who were not first-time buyers, those who hadn’t yet bought houses, and those who were under age 18, according to an inspector general’s report. More than $500 million in claimed credits are currently being questioned by the Internal Revenue Service.

In addition the IRS has opened 115 criminal investigations, has frozen more than 110,000 refunds pending further examination and is stepping up audits of questionable claims. Recently, a tax preparer was sentenced to federal prison for filing fraudulent returns — the first in connection with housing tax credit fraud.

In light of these developments the IRS has come up with new documentation requirements for taxpayers who claim a homebuyer credit on their 2009 original or amended return. Taxpayers must now attach a copy of their settlement statements/agreements. Generally, this would be a properly executed Form HUD-1, or for newly constructed homes, with no executed settlement statement, a copy of their certificate of occupancy showing the taxpayers name, property address, and the date of the certificate.

Taxpayers looking to claim the Long-time resident’s credit must show proof that they had the same principle residence for at least 5 consecutive years during the 8 year period ending on the purchase date of the new home. Documentation showing you met this test would include Form 1098s, Property tax records, or Homeowner’s insurance records from prior years.

Because of these new documentation rules, Form 5405 Homebuyer Credit, must be filed by paper and can not be e-filed. Also processing for amended returns will take longer (approx. 12-16 weeks) longer than normal.

Jermaine A. Southern a.k.a. "The Tax Guy" is a Certified Public Accountant (CPA) living in Phoenix, Arizona. He received his B.A. in Accounting from Morehouse College, and graduated from Arizona State University's W.P. Carey School of Business with a Masters of Taxation. He has been in public practice for more than nine years along the way working at both international (Deloitte & Touche LLP) and regional (Clifton Gunderson LLP) firms. He is now principal of his own private practice. The Tax Guy's articles do not necessarily reflect the views of PhxSoul.com. Please visit southerncpafirm.com to reach Jermaine for additional questions with regard to this article or other tax assistance.

The Tax Guy: Haitian Donations Given Early Eligibility

The Tax Guy

If you are donating to charities to help with the earthquake relief in Haiti, you may be able to claim those donations on your current 2009 tax return. Listed below are the IRS guidelines for this special provision.

1. The contributions must be made specifically for the relief of victims in areas affected by the Jan. 12 earthquake in Haiti.
2. To be eligible for a deduction on the 2009 tax return, donations must be made after Jan. 11, 2010 and before March 1, 2010.
3. In order to be deductible, contributions must be made to qualified charities and cannot be designated for the benefit of specific individuals or families.
4. The new law applies only to cash contributions. Cash contributions can be made by text message, check, credit card or debit card.
5. You must itemize your deductions in order to claim these donations on your tax return.
6. You have the option of deducting these contributions on either your 2009 or 2010 tax return, but not both.
7. Contributions made to foreign organizations generally are not deductible. You can find out more about organizations helping Haitian earthquake victims from agencies such as the U.S. Agency for International Development (usaid.gov).
8.  Federal law requires that you keep a record of any deductible donations you make. For donations by text message, a telephone bill will meet the record-keeping requirement if it shows the name of the organization receiving your donation, the date of the contribution, and the amount given. For cash contributions made by other means, be sure to keep a bank record, such as a cancelled check or a receipt from the charity. Receipts should show the name of the charity, the date and amount of the contribution.

Also See
• IR-2010-12, Haiti Relief Donations Qualify For Immediate Tax Relief
• IRS Publication 526

Jermaine A. Southern a.k.a. "The Tax Guy" is a Certified Public Accountant (CPA) living in Phoenix, Arizona. He received his B.A. in Accounting from Morehouse College, and graduated from Arizona State University's W.P. Carey School of Business with a Masters of Taxation. He has been in public practice for more than 10 years along the way working at both international (Deloitte & Touche LLP) and regional (Clifton Gunderson LLP) firms. He is now principal of his own private practice. The Tax Guy's articles do not necessarily reflect the views of PhxSoul.com. Please visit southerncpafirm.com to reach Jermaine for additional questions with regard to this article or other tax assistance.

The Tax Guy: Laid Off Last Year and Had to Tap into Your IRA or Old 401(k)? There May Be a Silver Lining

The Tax Guy

Withdrawals from Traditional IRAs are taxable, and carry a 10% early withdrawal penalty for individuals, who are under the age of 59.5 years old. The IRS has recently created another withdrawal exception that allows avoidance of the early withdrawal penalty. If you have received unemployment compensation payments for 12 consecutive weeks during the year of withdrawal or the preceding year, then to the extent you utilized the withdrawal funds to pay for health insurance premiums those amounts are penalty free. The funds don’t have to be directly paid from the withdrawal.

For example, a withdrawal of $10K in March from a Traditional IRA would allow for health insurance premiums to be paid out at $600/mo for duration of the year even if they came from other sources. If 9 payments were made @ $600 each; $5,400 of the $10,000 would not be subject to the 10% penalty.

Along with other withdrawal exceptions for first-time home purchases and qualified higher education expenses this can greatly reduce your tax bill this year.

Jermaine A. Southern a.k.a. "The Tax Guy" is a Certified Public Accountant (CPA) living in Phoenix, Arizona. He received his B.A. in Accounting from Morehouse College, and graduated from Arizona State University's W.P. Carey School of Business with a Masters of Taxation. He has been in public practice for more than 10 years along the way working at both international (Deloitte & Touche LLP) and regional (Clifton Gunderson LLP) firms. He is now principal of his own private practice. The Tax Guy's articles do not necessarily reflect the views of PhxSoul.com. Please visit southerncpafirm.com to reach Jermaine for additional questions with regard to this article or other tax assistance.

The Tax Guy: Getting Married Can Be Very Taxing!

The Tax Guy

Something must definitely be in the water. Wow, in the last year, more friends and clients have gotten married than I have ever witnessed. What probably didn’t come up with any of these couples before their big day was how would the marriage change their respective tax situations.

For years, many provisions in the tax code treated married couples more punitive than single taxpayers especially with regards to tax brackets and standard deductions. The amounts for these items were larger for married couples than for singles, but were not equal to what two singles would have gotten under the same circumstances. The old tax code was written with the 1950s attitude that wives didn’t work. But today, as we know, most wives are working, and when the second person was working this created the “marriage penalty.”

The “marriage penalty” has largely been alleviated thanks to the 2001 Tax Act, which doubled the amount of the standard deduction for married couples filing jointly, and doubled the tax brackets for the two lowest tax rates for them as well. 

There are, however, many other sections of the tax code that still penalizes double income married couples. And it’s especially noticeable if one or both of the newlyweds were formerly filing as head of household. 

For example, a woman making $60K per year with two children marrying a man making $85K per year with no kids would see her child tax credit reduced from $2,000 to about $250 per year.

Two single newlyweds who each make $50K per year will find that their contributions to their respective Traditional IRAs, which had been deductible as single taxpayers become nondeductible once they are married. There are other credits and deductions which similarly are affected by marriage status.

One of the most often asked questions from newlyweds regarding taxes relates to changing their tax withholdings by increasing the exemptions claimed. I generally discourage increasing the exemptions claimed to lower monthly tax withholdings until after the first year in order to make sure there are no adverse tax consequences which may not be readily apparent.

Another big question I get involves the decision to file separate vs. joint returns. The quick and dirty answer is unless (1) your spouse is running for public office and you want to hide your information (ala John McCain) or (2) your spouse has extremely high medical bills, joint filing is best.

Obviously, love triumphs over taxes in all of these situations (well maybe not for me, I’m all about the benjamins), however, your new potential tax situation should be considered along with your fiancé’s credit history, debt situation, etc. You should also make yourself aware of the rules for injured spouse and innocent spouse relief.

Jermaine A. Southern a.k.a. "The Tax Guy" is a Certified Public Accountant (CPA) living in Phoenix, Arizona. He received his B.A. in Accounting from Morehouse College, and graduated from Arizona State University's W.P. Carey School of Business with a Masters of Taxation. He has been in public practice for more than nine years along the way working at both international (Deloitte & Touche LLP) and regional (Clifton Gunderson LLP) firms. He is now principal of his own private practice. The Tax Guy's articles do not necessarily reflect the views of PhxSoul.com. Please visit southerncpafirm.com to reach Jermaine for additional questions with regard to this article or other tax assistance.

The Tax Guy: Tax Consequences of Home Mortgage Foreclosure

The Tax Guy

Many homeowners around the Valley are falling behind in their mortgage payments, in large part due to adjustable rate mortgages (ARMs) that have reset to higher rates. The delinquency rate for mortgage borrowers continues to increase, and a record number of homes are entering the foreclosure process.

The tax consequences that accompany a home mortgage foreclosure can further weaken an already tenuous financial condition. When a lender forgives any portion of a mortgage loan, taxable "cancellation of debt" income generally results. The lender will then issue the borrower a 1099-C for the loan amount forgiven. Clients are generally shocked and upset that they now must pay income taxes on this same amount that couldn’t pay for in the first place.

However, there are several instances where cancellation of debt income is not taxable, the most common involving bankruptcy, insolvency, qualifying farm debts and non-recourse loans. It should be noted that most homeowners whose homes are foreclosed do not also file for bankruptcy (this decision should be discussed individually with a financial advisor to determine its appropriateness). 

A taxpayer that owes additional tax due to a home mortgage foreclosure can request a payment agreement with the IRS, or may qualify to enter into an offer-in-compromise (OIC) that will provide a partial abatement of the tax. This process can be lengthy but may be well worth the effort (Note: During the past 2 years, the IRS has substantially tightened the qualifying conditions for OICs). 

Another component of the home foreclosure scenario is capital gain income. Because a home foreclosure is treated like a sale, capital gain is recognized if the property's fair market value exceeds its basis. However, a taxpayer may exclude up to $250,000 ($500,000 for joint filers) of this gain if the property was owned and used as a principal residence for two of the previous five years.

If the home was held as a rental property the gain will be taxed at rates determined by the holding period of the seller. As a rental property, the seller will also be entitled to take any capital losses from the sale to offset other capital gains or offset ordinary and wage income up to $3,000 a year carried forward until the capital loss is spent.   

Jermaine A. Southern a.k.a. "The Tax Guy" is a Certified Public Accountant (CPA) living in Phoenix, Arizona. He received his B.A. in Accounting from Morehouse College, and graduated from Arizona State University's W.P. Carey School of Business with a Masters of Taxation. He has been in public practice for more than nine years along the way working at both international (Deloitte & Touche LLP) and regional (Clifton Gunderson LLP) firms. He is now principal of his own private practice. The Tax Guy's articles do not necessarily reflect the views of PhxSoul.com. Please visit southerncpafirm.com to reach Jermaine for additional questions with regard to this article or other tax assistance.

The Tax Guy: Renting to Family Members Can Be Taxing

The Tax Guy

One way to weather a soft residential selling market is to rent out your present home until the market improves.

Renting out a home that you own may result in a tax loss for you, even if the rental income is more than your operating costs. This is because you will be entitled to a depreciation deduction for your cost of the house (except for the portion allocated to the land). And many people turn to family members first, however, if your tenant is related to you special rules and limitations may apply. (For these purposes, "related" means spouse, child or grandchild, parent or grandparent, and siblings.)

Here's the tax picture:

If you rent a home to a relative who (1) uses it as his or her principal residence (that is, not just as a second or vacation home) for the year, and (2) it's rented at a fair rental (not at a discount), then no limitations apply. You can deduct all the normal rental expenses, even if they result in a rental loss for the year.

The problem arises if you set the rent below the fair rental value. Since this then becomes a rental property which you are treated as using personally, you would have to allocate the expenses between the personal and rental portions of the year. Even more seriously, however, since all of the rental days (at a bargain rate to a relative) are treated as personal days, the rental portion is zero. Thus, you would have to report all of the rent you receive in income, but none of your expenses for the home would be deductible (Actually, you would still be able to deduct the mortgage interest, and property taxes. These items are deductible even for non-rental homes on your Schedule A.).

Given the above, it is important to set the rent at a fair rate. Factors to look at include comparable rentals in the area, and making sure rent payments at least are covering monthly mortgage for property. Rent payments which do not cover the landlord’s basic expenses may be assumed to be under fair market value.

"The Tax Guy" is a new column on PhxSoul.com that will provide useful, professional tax tips and accounting advice.

Jermaine A. Southern a.k.a. "The Tax Guy" is a Certified Public Accountant (CPA) living in Phoenix, Arizona. He received his B.A. in Accounting from Morehouse College, and graduated from Arizona State University's W.P. Carey School of Business with a Masters of Taxation. He has been in public practice for more than nine years along the way working at both international (Deloitte & Touche LLP) and regional (Clifton Gunderson LLP) firms. He is now principal of his own private practice. The Tax Guy's articles do not necessarily reflect the views of PhxSoul.com. Please visit southerncpafirm.com to reach Jermaine for additional questions with regard to this article or other tax assistance.