Donations for Haiti Earthquake Relief Eligible for Immediate Deduction

On January 12, a massive earthquake hit Haiti, causing monstrous damage.  Many large buildings were leveled, including the Presidential Palace, as well as shantytown homes and numerous national landmarks.  Since that time there has been an outpouring of sympathy worldwide for Haiti and its people.  People in the United States have been equally generous in their donations.  In fact, within the US the Haiti Relief fundraising effort has raised record donations through text messages, telethons and government sponsored initiatives.  In an effort to reward the generosity of its residents, the US government has announced that donations will qualify for immediate tax relief.

 

According to the IRS press release, people who give to charities providing earthquake relief in Haiti can claim donations on the tax return they are completing this season.  Taxpayers who itemize deductions on their 2009 return qualify for this special tax relief provision, enacted Jan. 22. Only cash contributions made to these charities after Jan. 11, 2010, and before March 1, 2010, are eligible. This includes contributions made by text message, check, credit card or debit card. The new law only applies to cash (as opposed to property) contributions. The contributions must be made specifically for the relief of victims in areas affected by the Jan. 12 earthquake in Haiti. Taxpayers have the option of deducting these contributions on either their 2009 or 2010 returns, but not both.

 

To learn more about how to claim donations made to Haitian relief effort visit www.irs.gov or call 800-829-1040 for individuals or 800-829-4933 for businesses. 

 

January 25, 2010

Marsha Henry

 

Tax Quarry ©


Are we over taxing our bank?

(Taken from Steptoe & Johnson LLP Daily Tax Update)

Last week, President Obama announced a proposal to levy a new fee on financial services institutions  (including insured depository institutionsbank holding companies, thrift holding companies, insurance or other companies that owned insured depository institutions, or securities broker-dealers) with over $50 billion in assets.   Both domestic firms and U.S. subsidiaries of foreign-based firms would be subject to the fee. The fee will be equal to approximately .15 percent of “covered  liabilities,"  which are determined by subtracting Tier 1 Capital and FDIC-assessed deposits and insurance reserves from assets.   

 

  • The fee is designed to recover, over a ten-year period, the current estimated Troubled Asset Relief Program (TARP) losses of $117 billion.  The White House statement said, “The fee will be in place at least 10 years, but even longer if needed to pay back every penny of TARP.  This will not be a cost borne by community banks or small firms; only the largest firms with more than $50 billion in assets will be affected. In fact, 60% of the revenue will come from the 10 largest financial firms.”  Covered liabilities would be reported by regulators.    
  • It is unclear whether the "fee" would be tax-deductible.  The "fee" might more accurately be described as a tax--the fee would be collected by the IRS and revenues would be contributed to the general fund to reduce the deficit.
  •  The President said, “My commitment is to recover every single dime the American people are owed.  And my determination to achieve this goal is only heightened when I see reports of massive profits and obscene bonuses at the very firms who owe their continued existence to the American people – who have not been made whole, and who continue to face real hardship in this recession.  That’s why I’m proposing a Financial Crisis Responsibility Fee to be imposed on major financial firms until the American people are fully compensated for the extraordinary assistance they provided to Wall Street.”  
  • Finance Committee Chairman Max Baucus issued the following statement, “We look forward to reviewing the details of this proposal and each of the President’s budget proposals.  Our focus in economic recovery must be three-fold: spur job growth at home, while maintaining and improving U.S. competitiveness world-wide; bring our deficits back to a sustainable level, including by passing meaningful health care reform; and recoup taxpayer dollars spent in support of the financial system.  The American taxpayer comes first, and they need to know where their tax dollars are going.  Excessive pay and excessive risk among the same firms that came to Congress a year ago simply will not stand.  I applaud the President for his initiative in working to ensure taxpayers see a return on their investment.  I remain committed to working with the President, and my colleagues across the aisle, to make sure this proposal is right for America and for American taxpayers.”  
  • House Financial Services Committee Chairman Barney Frank (D-MA) stated: “President Obama’s action today complies fully with the taxpayer protection language of the original TARP bill. His decision to do this before 2013 is a good one because there is no need to wait. In fact, the TARP program has been both more successful and less expensive than many critics feared and that allows us to move quickly now to repay the American taxpayer. I strongly support this proposal, and I am confident that the Committee on Ways and Means will be acting on it soon.” 

The US Stimulus Package and its Affect on Families

During the last week of August, I attended the 84th National Bar Association Convention and Exhibit in San Diego California and made a presentation as part of a panel at a session entitled, "Understanding the Federal Tax Aspects of the American Recovery and Reinvestment Act of 2009 (the Stimulus Bill)".  My presentation focused on how the tax provisions of the stimulus package would affect families. 

To review the paper on this issue, please feel free to download it at the link below. 

Download 2009 NBA Paper on Tax breaks for individuals v2

Copyright (c) 2009

Marsha Henry, Esq.


4 of 4: Tax Tips for Making It through the Recession with a Financial Advantage - Go Green

 

Preview_treehugger

In year’s past the idea of “going green” or becoming more environmentally friendly would probably conjure up an image of a tree hugging fanatic.  Someone who was pro-environment was considered to have a preference for spending their Saturday nights hanging out with trees, small shrubbery and wild plants (instead of wild intoxicated human house guests).  They typically ate tofu and wore Birkenstocks with socks.  The men rarely shaved, if ever, and the women refused to cut their hair and seldom washed it in order to conserve water.  Purchasing new clothes was forbidden.  The family shopped at second hand stores and often wore the same clothing from their teenage years into retirement.  Well, that may be a little exaggerated.  But, the reality is that being environmentally conscious was not mainstream and certainly not an attractive option.      

 

Now, there is a different image associated with being “green”.  In 2009, when we think of being green we think of our neighbors with their 2.5 kids within walking distance from school and a hybrid car in the driveway hidden behind the white picket fence.  Mom and Dad take public transit to work.  They work in corporate America and have been educated in the best schools.  Their house lighting is solar or wind powered and the thermostat is on a timer to shut off during their absence in the day and while sleeping at night.  They are conscious of their carbon footprint and are eager to reduce the amount of trash they leave in their garbage cans opting to compost organic material or dispose of plastics and cardboard in a blue recycling bin. 

 

It’s at the point now that even the government is getting in on the craze.  According to the Energystar.gov website the Energy Policy Act of 2005 first established the energy efficiency tax credits that became effective in 2006 and 2007.  The majority of these tax credits were for 10% of the cost, up to $500.  On October 3, 2008 former President Bush signed the Emergency Economic Stabilization Act of 2008 (also known as the "Bailout Bill") to put many of the tax credits back in place for 2009, and increased the credit to 30%, up to $1,500.  On February 17, 2009 President Obama signed into law the American Recovery and Reinvestment Act of 2009 (also known as the "Stimulus Bill") which among other changes extended the tax credits to 2010.  All these credits are intended to assist homeowners in their move to becoming greener citizens. 

 

A few of the available credits are as follows: 

 

§ Tax credits are available at 30% of the cost, up to $1,500, in 2009 & 2010 (for existing homes only) for windows and doors, insulation, roofs, HVAC and non-solar water heaters.   

 

§ Tax credits are also available at 30% of the cost, with no upper limit through 2016 (for existing homes & new construction) for geothermal heat pumps, solar panels, solar water heaters, small wind energy systems and fuel cells.[1]     

 

For more information on eligibility and how these credits work you should consult a tax professional or review the IRS guidance on this topic. 

 

IRS Guidance:

IRS Notice 2009-53 (6/22/2009) Interim guidance for Section 25C 

IRS Notice 2009-41 (5/11/2009) Interim guidance for Section 25D

 

 

2009 Copyright ©

Marsha Henry


[1] List taken from www.energystar.gov .


2 of 4: 4 Tax Tips for Making it Through the Recession with a Financial Advantage. Number Two Go Back To School

Generally speaking, during any downturn in the market most career counselors would advise the unemployed job seeker to consider going back to school.  In actuality, this advice can also benefit the employed job seeker as well.

 

Registering in a degree or certificate program has a number of advantages.  The most obvious advantage is increased knowledge and skill in the particular area of study.  This can help a job seeker who is interested in changing career paths, looking to get a promotion or just remaining employed.  Also, an advanced degree can provide opportunities for transitioning into a higher paying job.  Most importantly, however, it can also leave a little bit of extra money in your pocket in the short term if you take advantage of the government’s education tax incentive programs.  Below is a summary of a tax incentive program you may be eligible to take advantage of if you decide to take the plunge and go back to school.   

   

The Lifetime Learning Credit is a credit for those pursing higher education beyond the first two years of an undergraduate program.[1]  Since it is a credit rather than a deduction, you may be able to subtract the full amount of the cost from your federal income tax.  To qualify for the credit, you must pay post-secondary tuition and certain related expenses.[2]

 

The credit applies to undergraduate, graduate and professional degree courses, including instruction to acquire or improve job skills, regardless of the number of years in the program.  If you qualify, your credit equals 20% of the first $10,000 of post-secondary tuition and fees you pay during the year, for a maximum credit of $2,000 per tax return

 

This credit is phased out for Modified Adjusted Gross Income over $48,000 ($96,000 for married filing jointly) and eliminated completely for Modified Adjusted Gross Income of $58,000 or more ($116,000 for married filing jointly).  As a result, it is ideal for someone who may have lost their job part way through the year or has had their income reduced by an employer during the recession. 

Taking advantage of this credit does mean have a little bit of disposable income.  Not everyone will be able to benefit from this.  However, if you have the opportunity it is worth considering as part of your planning. 

 

For more information on available educational tax credits, see Publication 970, Tax Benefits for Education, which can be obtained online at IRS.gov or by calling the IRS at 800-TAX-FORM (800-829-3676).

 



[1]The Hope Tax Credit is available for students in their first and second year of college or a vocational program.  The Obama administration budget has proposed that the credit should be made available for four years.   Our discussion assumes that those going back to school have already completed one degree so we will not be reviewing this credit in any detail.  For more information on how this credit works, please visit the IRS website.

[2]You may also be eligible to claim this expense for your spouse or any of your dependents.


4 Tax Tips for Making It Through the Recession. Number One: Start Your Own Business

 

So, you lost your job and you’re not sure what to do next.  You have been posting your resume on-line and networking profusely.  But, nothing!  Well, all is not lost.  You may want to consider starting your own business.  There is no better time to start a business than when you have all the time in the world to start your own business. 

 

There are a number of advantages to starting your business.  First, when you go to an interview six months after being let go from your last job and you are asked to explain the “gap period” in your employment, you can respond enthusiastically with, “I started a successful (blank) business during that time and developed the following skills”.  Second, in the event the business does take off before the standard three year break even target date, you will have income to supplement your cost of living until you get back in the workforce.  In fact, you may actually develop a profitable concept and not need to go back to work.  Third, you will develop a sense of self confidence and keep the creative energy juices flowing.  Finally, and very importantly you will be able to deduct your business expense, including things such as rent for the space you conduct your business in and supplies which will allow you to extend your dollars while you are still unemployed.    

     

Well, what are business expenses?  The IRS defines business expenses as the cost of carrying on a trade or business. These expenses are usually deductible if the business is operated to make a profit.  According to the IRS website, to be deductible, a business expense must be both “ordinary” and “necessary”. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business.

 

Keep in mind, though, that you may not be able to deduct some costs. Costs which are considered to be your investment in your business are called capital expenses. Capital expenses are considered assets in your business, such as business assets and business start up costs. 

 

The IRS also notes that, generally, you cannot deduct personal, living, or family expenses. However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. You can deduct the business part.  For example, if you borrow money and use 70% of it for business and the other 30% for a family vacation, you can deduct 70% of the interest as a business expense. The remaining 30% is personal interest and is not deductible.

 

Further, if you use part of your home for business, you may be able to deduct expenses for the business use of your home. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation.  Also, if you use your car in your business, you can deduct car expenses. If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage.

 

Rental expenses are also deductible as are interest expenses, taxes and insurance.  The IRS defines rent as any amount you pay for the use of property you do not own.  In general, you can deduct rent as an expense only if the rent is for property you use in your trade or business.  You can deduct interest expenses if the amount charged is for the use of money you borrowed for business activities.  Also, you can deduct various federal, state, local, and foreign taxes directly attributable to your trade or business as business expenses.  Finally, you can deduct the ordinary and necessary cost of insurance as a business expense, if it is for your trade, business, or profession.

This list is not all inclusive of the types of business expenses that you can deduct.  For more information, talk to a tax professional or visit the IRS website:  http://www.irs.gov/businesses/small/article/0,,id=109807,00.html


Taxing Our Way to Better Health

 

The Obama Administration has been exploring a number of possibilities for funding health care reform in the US.   Much of the uncertainty should dissipate soon now that the Ways and Means Committee has commenced work on the Bill. 

Supporters champion the bill as logical alternative to the private insurance companies.  Ways and Means Chairman Charles Rangel, a big supporter of the bill writes on his website, “Historic legislation will reduce out-of-control costs, improve choices for patients, and expand access to quality, affordable health care.”  He goes on to say that “[r]eforming America’s health care system to control costs and improve access to quality affordable care is not only the moral thing to do, it is also critical to our economic recovery and the long-term fiscal health of our nation,”   On the other hand, some argue that the government’s health reform bill will not provide the needed change that the current Administration is expecting.  The New York Times reported that, “Senate Republicans so far have been unanimously opposed to the health committee measure. All 10 Republicans on the health panel voted against it, warning that it would not reduce the cost of medical care and would not expand coverage to all Americans as Mr. Obama hopes.”  Nonetheless, if the Administration can find a plausible way to fund the bill, there is a high probability that some form of the bill will be passed, despite resistance.   

 

One proposal for funding the bill is to levy an income surtax.  This has not received a lot of support.  Some expect that a change in tax rules governing non-resident investments in the US and US persons investing in foreign countries will help to provide some of the much needed cash.  What seems to be certain, though, is that lawmakers are focused on exploring money raising initiatives that will not add to the US debt level.  The goal is to fund the cost of the bill with additional tax revenue. 

Below is a summary of some of the key benefits you can expect from the bill: 

 

  • No more co-pays or deductibles for preventive care

  • An annual cap on out-of-pocket expenses—keeping Americans from financial ruin
     
  • An end to rate increases for pre-existing conditions, gender or occupation.
     
  • Group rates of a national pool if you buy your own plan
     
  • Guaranteed affordable oral health, hearing and vision care for kids

  • End to denials for pre-existing conditions like heart disease, cancer or diabetes

  • Get needed care, no lifetime limits

  • Job and life choices no longer based on health care coverage

Marsha Henry

Copyright©


US Considering Funding Health Care Through Additional Taxes

Alot of controversy is developing around President Obama's proposal for health care reform.  Apparently, there is now some talk about imposing a new tax to cover the increased cost to provide health care to every American.   According to Steptoe & Johnson Daily News Update, the Senate Finance Committee Chairman Max Baucus said that he is considering a proposal to pay for some of his health care reform legislation with tax increases outside the health care system.   The article stated that Baucus explained that offsets would “essentially” come from the health arena, but other options could be considered.  Baucus said, “The good news is we have options.”  They also reported that the Congressional Budget Office has provided new cost estimates for health care reform policy options that would allow Baucus to offer a fully offset bill, around $1 trillion.  Baucus said, “We’re getting closer.  I expect to be ready sooner now that we have CBO numbers to enable us to have options that will fully pay for the bill.”

Baucus added that no details about the financing options for the health care bill have been finalized.  Baucus said, "We're ready when we're ready.  I'm not going to schedule a markup until senators have all the information they need."  Baucus added, "CBO has given us a lot of leeway, a lot of cushion here.  We have a lot of options that will enable us to write a $1 trillion bill fully paid-for.  But as I've said before, we're not going to put out a mark until we're sure we have it right.”


Bill won't pass on proposed "Bailout"

[Taken from Steptoe & Johnson LLP Daily Tax Update]

Today, the House failed to pass the Emergency Economic Stabilization Act of 2008” (H.R. 3997) by a vote of 228 nays to 205 yeas. The measure needed 218 votes for passage. House Republicans rejected it by a 2-1 margin, and more than 90 Democrats voted no.  Opponents said that part of the reason for the opposition from Republicans was what they called a partisan floor speech before the vote by House Speaker Nancy Pelosi.  After the vote, House Minority Leader John Boehner said, “I think we need to renew our efforts. . . . I think we need to calm down, relax and go back to work.” 

  • The voting time was held open for an extended period in order to try to persuade opponents to change their vote in support of the bill.  It is unclear when Congressional leaders will try to bring up the bill again. Supporters vowed to try to bring the rescue bill up for consideration again as soon as possible.  However, Congress is not in session tomorrow. 
  • According to the Senate Finance Committee, the tax provisions in the financial rescue plan are as follows:

    “Help for Homeowners Sinking Under Mortgage Debt: Usually, when homeowners have parts of their mortgages forgiven, they immediately owe income taxes on the amount of indebtedness forgiven.   To keep struggling homeowners from facing higher tax bills, the housing relief bill passed by Congress this year allowed homeowners caught up in the mortgage crisis to avoid paying tax on forgiven mortgage debts through 2009.  To help more homeowners stay on their financial feet in the ongoing economic crisis, the rescue plan will extend through 2012 the housing bill provision that forgives income from the cancellation of indebtedness.  It does not extend the relief to home equity loans.   

    “Fairness for Banks Hit by the Failures of Fannie Mae and Freddie Mac: Federal law limits the allowable investments for banks, and so many community banks invested in Fannie Mae and Freddie Mac preferred stock – which became worthless when the government bailed those companies out.  This proposal ensures fairness for the approximately 800 banks that held Fannie and Freddie preferred stock, by allowing financial institutions or financial institution holding companies to treat their Fannie and Freddie losses as ordinary losses.  Applying to any preferred stock that was owned on September 6, 2008 or sold between January 1 and September 6, 2008, this provision will allow banks to claim the book benefit of the loss on their tax returns, therefore reducing the need to obtain additional capital from the FDIC or investors.  This should also prevent some community banks from becoming insolvent. 

    “Stronger Taxation of Compensation and Severance Pay for Financial Executives: The financial rescue plan contains non-tax measures aimed at limiting executive compensation and ‘golden parachute’ severance packages overall for companies and executives participating in the buyout – a key element in gaining approval of the package among negotiators.  When the Treasury directly buys assets from a company, not through an auction or bidding process, the financial institution will be required to meet certain standards for executive compensation, including a total prohibition on ‘golden parachute’ severance payments to senior executive officers. 

    “When more than $300 million of a company’s assets are purchased by the Treasury through an auction, ‘golden parachute’ payments will be banned for top executives hired while the Treasury rescue is in effect.  Additionally, tax provisions will kick in to strengthen the tax treatment of remaining executive compensation and severance packages.  The deductibility of executive compensation for companies will be cut in half from the level in current law, and companies will also lose deductions currently available for excessively large severance packages.  Executives receiving severance packages will continue to face a 20 percent excise tax on payments once they reach an excessive threshold, and that tax will now be due if the executive leaves for reasons other than a standard retirement for which they are eligible – not just if the company changes hands, as in current law.”


US Presidential Candidates Tax Positions

Presidential Candidates' Tax Policies in a Nutshell

Whichever candidate is elected in November, there are likely to be big changes proposed to the tax code. The presidential candidates' proposed tax policies include changes to individual and business income taxes, the estate tax and Social Security. For individuals, Sen. Obama would provide expanded credits for families, savers, homebuyers and clean vehicles; Sen. McCain would double the personal exemption to $7,000 and extend and index the increased alternative minimum tax (AMT) exemption amounts.


On the business side, both Obama and McCain seem to support reducing the corporate tax rate; McCain proposes a corporate tax rate of 25 percent. However, the candidates differ on the estate tax with Obama favoring the status quo, a top rate of 45 percent and a $3.5 million exemption, while McCain proposes a top rate of 15 percent with a $5 million exemption. The candidates also differ greatly on the issue of Social Security: Obama favors the current structure, with an increase in the payroll tax to pay for it, and McCain favors personal accounts for younger workers.

Individual Income Taxes

Obama proposes a $1,000 tax credit for families with incomes between $8,000 and $75,000 ($500 for individuals). He would extend the current marginal rates for the lower tax brackets and proposes to eliminate the federal income tax on seniors with incomes below $50,000. He suggests a universal mortgage credit of 10 percent, up to $800, a $4,000 refundable education credit, and expanding the existing Savers Credit to more taxpayers and making it refundable. He also proposes an expanded earned income tax credit (EITC), an expanded Child and Dependent Care Credit by making it refundable, and an expanded tax credit for clean vehicles. To pay for these tax breaks, he proposes restoring the 36- and 39.6-percent tax brackets, raising the capital gains and dividend tax rate to 20 percent for families with incomes over $250,000 ($200,000 for individuals) and restoring the phase-out for itemized deductions and exemptions. He also supports simplified tax returns for many filers and would also extend and index the increase in AMT exemption amounts.


McCain wants to make the Bush tax cuts permanent, including the lower marginal rates and capital gains and dividend rates. He also proposes gradually doubling the personal exemption amount to $7,000. He would pay for these proposals by eliminating congressional earmarks and with unidentified cuts in government spending. He has proposed simplified tax returns for many filers. He would also extend and index the increased AMT exemption amounts and has proposed an election for a separate and simplified alternative tax system.

Business Income Taxes

Obama generally supports corporate tax reform and hints of corporate tax rate reductions for domestic business activity tied to repealing other business tax breaks and closing loopholes to pay for the rate reductions. He also proposes to eliminate capital gains taxes on small businesses. Loopholes Obama has identified include clarifying the economic substance doctrine, increasing capital gains reporting, eliminating special tax breaks for oil and gas companies while expanding the renewable production tax credit, taxing carried interests as ordinary income, and what is described as the CEO pay loophole. He would also reform international tax loopholes and crack down on international tax havens. Further, he proposes making the research and development credit permanent.


McCain has proposed reducing the corporate tax rate from 35 percent to 25 percent, banning taxes on internet sales and cell phones, and permitting full first-year expensing for capital acquisitions. These tax breaks would be paid for with spending cuts or corporate loophole closers, identifying some of the tax breaks for oil and gas companies and repealing the domestic production activities deduction. McCain has also proposed expanding the research and development credit and making it permanent.

Estate Tax

Obama would preserve the estate tax as in effect in 2009: a 45-percent top tax rate and a $3.5 million exemption.


McCain wants to preserve the estate tax with a 15-percent top tax rate and a $5 million exemption.

Social Security

Obama would preserve the existing Social Security structure but help cover the growing deficit by imposing a payroll tax of four percent (two percent each from employer and employee) on incomes over $250,000.


McCain has proposed adopting personal accounts for younger employees, similar to proposals by the Bush administration.

Health Care

Obama proposes targeted health care tax credits including a health care credit for small business. He proposes a new health insurance exchange to provide health insurance, paid for by employers who do not provide employee health insurance.


McCain wants a refundable tax credit of up to $5,000 for families to be paid for by treating employer-provided health benefits as taxable compensation to the employee.


By Jeff Carlson and Stephen K. Cooper, CCH News Staff