Earned Income Credit – 2009 Changes

Posted by Emil Estafanous, CPA on December 30, 2009 · 50 Comments 

The following paragraphs explain the changes to the credit for 2009.

Amount of credit increased. The maximum amount of the credit has increased. The most you can get for 2009 is:

  • $3,043 if you have one qualifying child,
  • $5,028 if you have two qualifying children,
  • $5,657 if you have three or more qualifying children, or
  • $457 if you do not have a qualifying child.

Earned income amount increased. The maximum amount of income you can earn and still get the credit has increased for 2009. You may be able to take the credit if:

  • You have three or more qualifying children and you earn less than $43,279 ($48,279 if married filing jointly)
  • You have two qualifying children and you earn less than $40,295 ($45,295 if married filing jointly),
  • You have one qualifying child and you earn less than $35,463 ($40,463 if married filing jointly), or
  • You do not have a qualifying child and you earn less than $13,440 ($18,440 if married filing jointly).

The maximum amount of adjusted gross income (AGI) you can have and still get the credit also has increased. You may be able to take the credit if your AGI is less than the amount in the above list that applies to you.

Investment income amount increased.The maximum amount of investment income you can have and still get the credit has increased to $3,100 for 2009.

Advance payment of the credit. If you get advance payments of the credit from your employer with your pay, the total advance payments you get during 2009 can be as much as $1,826.

2010 Changes

The following paragraphs explain the changes to the credit for 2009:

Amount of credit increased. The maximum amount of the credit has increased. The most you can get for 2010 is:

  • $3,050 if you have one qualifying child,
  • $5,036 if you have two qualifying children,
  • $5,666 if you have three or more qualifying children, or
  • $457 if you do not have a qualifying child.

Earned income amount increased. The maximum amount of income you can earn and still get the credit has increased for 2010. You may be able to take the credit if:

  • You have three or more qualifying children and you earn less than $43,352 ($48,362 if married filing jointly),
  • You have two qualifying children and you earn less than $40,363 ($45,373 is married filing jointly),
  • You have one qualifying child and you earn less then $35,535 ($40,545 if married filing jointly), or
  • You do not have a qualifying child and you earn less then $13,460 ($18,470 if married filing jointly).

Investment income amount. The maximum amount of investment income you can have and still get the credit is still $3,100 for 2010.

Advance payment of the credit. If you get the advance payments of the credit from your employer with your pay, the total advance payments you get during 2010 can be as much as $1,830.

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Child-Related Tax Changes

Posted by Emil Estafanous, CPA on December 24, 2009 · 12 Comments 

Adoption Benefits Increased

For 2009, the maximum adoption credit has increased to $12,150. Also, the maximum exclusion from income for benefits under your employer’s adoption assistance program has increased to $12,150. These amounts are phased out if your modified AGI is between $182,180 and $222,180. You cannot claim the credit or exclusion if your modified AGI is $222,180 or more.

Child’s Investment Income

2008

Increase in age of children whose investment income is taxed at parent’s rate. The rules regarding the age of a child whose investment income may be taxed at the parent’s tax rate have changed for 2008. These rules continue to apply to a child under age 18 at the end of the year but, beginning in 2008, will also apply in certain cases to a child who either:

  • Was age 18 at the end of 2008 and did not have earned income that was more than half of the child’s support, or
  • Was a full-time student over age 18 and under age 24 at the end of 2008 and did not have earned income that was more than half of the child’s support.

A student is a child who during any part of 5 calendar months of the year was enrolled as a full-time student at a school, or took a full-time, on-farm training course given by a school or a state, county, or local government agency. A school includes a technical, trade, or mechanical school. It does not include an on-the-job training course, correspondence school, or school offering courses only through the Internet.

Form 8615 is used to figure the child’s tax. These rules also apply to parents who elect on Form 8814 to report their child’s income on the parents’ return.

Increase in investment income amount. The amount of taxable investment income these children can have without it being subject to tax at the parent’s rate has increased to $1,800 for 2008.

2009

The amount of taxable investment income a child can have without it being subject to tax at the parent’s rate has increased to $1,900 for 2009.

Earned Income for Additional Child Tax Credit

2009

For 2009, the amount your earned income must exceed to claim the additional child tax credit is reduced to $3,000.

2010

For 2010, the amount your earned income must exceed to claim the additional child tax credit is $3,000.

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Economic Recovery Payment

Posted by Emil Estafanous, CPA on December 22, 2009 · 8 Comments 

Any economic recovery payment you receive during 2009 is not taxable. These $250 payments are being made to most people who:

  • Receive social security benefits, supplemental security income (SSI), railroad retirement benefits, or veterans disability compensation or pension benefits, and
  • Live in a U.S. state, the District of Columbia, Puerto Rico, Guam, the U.S. Virgin Islands, American Samoa, or the Northern Mariana Islands.

If you are married and you and your spouse both meet these requirements, each of you may get a $250 payment.

If you are entitled to a payment, you will get it automatically. You do not need to apply for it.

Making Work Pay and Government Retiree Credits

Two new credits you may be able to take for 2009 are the:

  • Making work pay credit, and
  • Government retiree credit.

Making work pay credit. You may be able to take this credit if you have earned income from work. Even if your federal income tax withholding is reduced during 2009 because of the credit, you must claim the credit on your return to benefit from it.

You cannot take the credit if:

  • Your modified AGI is $95,000 ($190,000 if married filing jointly) or more,
  • You are a nonresident alien, or
  • You can be claimed as a dependent on someone else’s return.

The credit is 6.2% of your earned income but cannot be more than $400 ($800 if married filing jointly). The credit will be reduced if:

  • You receive a $250 economic recovery payment (described earlier) during 2009,
  • Your modified AGI is more than $75,000 ($150,000 if married filing jointly), or
  • You take the government retiree credit discussed next.

Government retiree credit. You can take this credit if you receive a pension or annuity payment in 2009 for service performed for the U.S. Government or any U.S. state or local government (or any instrumentality of one or more of these) and the service was not covered by social security. The credit is $250 ($500 if married filing jointly and both you and your spouse receive a qualifying pension or annuity). However, you cannot take the credit if you receive a $250 economic recovery payment during 2009. If you file a joint return, both you and your spouse receive a qualifying pension or annuity, and both of you receive an economic recovery payment, no government retiree credit is allowed; if only one of you receives an economic recovery payment, the credit is $250.

Social security number. To take either credit, you must include your social security number (if filing a joint return, the number of either you or your spouse) on your return. A social security number does not include an identification number issued by the IRS.

Schedule M. Generally, you will use new Schedule M (Form 1040A or 1040) to figure both the making work pay credit and the government retiree credit. Both credits are refundable, which means they are treated like payments you made and may give you a refund even if you had no tax withheld from your pay or your pension. If you are filing Form 1040EZ, you can take the making work pay credit on that form and do not have to file Schedule M.

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Alternative Minimum Tax (AMT) – 2009 Changes

Posted by Emil Estafanous, CPA on December 21, 2009 · 50 Comments 

The following changes to the AMT went into effect for 2009:

AMT exemption amount increased. The AMT exemption amount has increased to $46,700 ($70,950 if married filing jointly or qualifying widow(er); $35,475 if married filing separately).

AMT exemption amount for a child increased. The AMT exemption amount for a child whose unearned income is taxed at the parent’s tax rate has increased to $6,700.

Qualified motor vehicle tax allowed against AMT. If you claim a regular tax deduction for any state or local sales or excise tax on the purchase of a new motor vehicle, that tax is also allowed as a deduction for the AMT.

Tax-exempt interest on specified private activity bonds issued in 2009 or 2010 exempt from AMT. Tax-exempt interest on specified private activity bonds issued in 2009 or 2010 is not an item of tax preference and therefore is not subject to the AMT. A refunding bond is treated as issued on the date of the issuance of the refunded bond (or, in the case of a series of refundings, the original bond). However, tax-exempt interest on a specified private activity bond issued in 2009 or 2010 to currently refund a private activity bond issued after 2003 and before 2009 is not an item of tax preference.

Alternative tax net operating loss deduction (ATNOLD). The 90% limit on the ATNOLD does not apply to the portion of an ATNOLD attributable to any 2008 or 2009 loss you elected to carry back more than 2 years under section 172(b)(1)(H) of the Internal Revenue Code

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Deduction for Credit or Debit Card Convenience Fees

Posted by Emil Estafanous, CPA on December 17, 2009 · 6 Comments 

If you pay your income tax (including estimated tax payments) by credit or debit card, you can deduct the convenience fee you are charged by the card processor to pay using your credit or debit card. The deduction is claimed for the year in which the fee was charged to your card as a miscellaneous itemized deduction on line 23 of Schedule A (Form 1040) (and is subject to the 2% of adjusted gross income floor).

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What is an Offer in Compromise?

Posted by Emil Estafanous, CPA on December 16, 2009 · 11 Comments 

An offer in compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service that settles the taxpayer’s tax liabilities for less than the full amount owed. Absent special circumstances, an offer will not be accepted if the IRS believes that the liability can be paid in full as a lump sum or through a payment agreement.

In most cases, the IRS will not accept an OIC unless the amount offered by the taxpayer is equal to or greater than the reasonable collection potential (RCP). The RCP is how the IRS measures the taxpayer’s ability to pay and includes the value that can be realized from the taxpayer’s assets, such as real property, automobiles, bank accounts, and other property. The RCP also includes anticipated future income, less certain amounts allowed for basic living expenses.

Three Types of OICs

The IRS may accept an offer in compromise based on three grounds:

1. Doubt as to Collectibility – Doubt exists that the taxpayer could ever pay the full amount of tax liability owed within the remainder of the statutory period for collection.

Example: A taxpayer owes $20,000 for unpaid tax liabilities and agrees that the tax she owes is correct. The taxpayer’s  monthly income does not meet her necessary living expenses. She does not own any real property and does not have the ability to fully pay the liability now or through monthly installment payments.

2. Doubt as to Liability – A legitimate doubt exists that the assessed tax liability is correct. Possible reasons to submit a doubt as to liability offer include: (1) the examiner made a mistake interpreting the law, (2) the examiner failed to consider the taxpayer’s evidence or (3) the taxpayer has new evidence.

Example: The taxpayer was vice president of a corporation from 2004-2005. In 2006, the corporation accrued unpaid payroll taxes and  the taxpayer was assessed a trust fund recovery penalty as a responsible party of the corporation. The taxpayer was no longer a corporate officer and had resigned from the corporation on 12/31/2005.  Since the taxpayer had resigned prior to the payroll taxes accruing and was not contacted prior to the assessment, there is legitimate doubt that the assessed tax liability is correct.

3. Effective Tax Administration – There is no doubt that the tax is correct and there is potential to collect the full amount of the tax owed, but an exceptional circumstance exists that would allow the IRS to consider an OIC. To be eligible for compromise on this basis, a taxpayer must demonstrate that the collection of the tax would create an economic hardship or would be unfair and inequitable.

Example: Mr. & Mrs. Taxpayer have assets sufficient to satisfy the tax liability and provide full time care and assistance to a dependent child, who has a serious long-term illness. It is expected that Mr. and Mrs. Taxpayer will need to use the equity in assets to provide for adequate basic living expenses and medical care for the child. There is no doubt that the tax is correct.

OIC Payment Options

In general, a taxpayer must submit a $150 application fee and initial payment along with the Form 656, Offer in Compromise.  Taxpayers may chose to pay their offer in compromise in one of three payment options:

1. Lump Sum Cash Offer – Payable in non-refundable installments, the offer amount must be paid in five or fewer installments upon written notice of acceptance.  A non-refundable payment of 20 percent of the offer amount along with the $150 application fee is due upon filing the Form 656.

If the offer will be paid in 5 or fewer installments in 5 months or less, the offer amount must include the realizable value of assets plus the amount that could be collected over 48 months of payments or the time remaining on the statute, whichever is less.

If the offer will be paid in 5 or fewer installments in more than 5 months and within 24 months, the offer amount must include the realizable value of assets plus the amount that could be collected over 60 months of payments, or the time remaining on the statute, whichever is less.

If the offer will be paid in 5 or fewer installments in more than 24 months, the offer amount must include the realizable value of assets plus the amount that could be collected over the time remaining on the statute.

2. Short Term Periodic Payment Offer – Payable in non-refundable installments; the offer amount must be paid within 24 months of the date the IRS received the offer. The first payment and the $150 application fee are due upon filing the Form 656. Regular payments must be made during the offer investigation.

The offer amount must include the realizable value of assets plus the total amount the IRS could collect over 60 months of payments or the remainder of the statutory period for collection, whichever is less.

3. Deferred Periodic Payment Offer – Payable in non-refundable installments; the offer amount must be paid over the remaining statutory period for collecting the tax. The first payment and the $150 application fee are due upon filing the Form 656. Regular payments must be made during the investigation.

The offer amount must include the realizable value of assets plus the total amount the IRS could collect through monthly payments during the remaining life of the statutory period for collection.

The IRS is not bound by either the offer amount or the terms proposed by the taxpayer.  The OIC investigator may negotiate a different offer amount and terms, when appropriate.  The investigator may determine that the proposed offer amount is too low or the payment terms are too protracted to recommend acceptance. In this situation, the OIC investigator may advise the taxpayer as to what larger amount or different terms would likely be recommended for acceptance.

Payments and Application Fees

When filing an offer in compromise, two separate remittance documents should be sent, one for the application fee and the other for the required offer payment.  All payments should be made by check or money order made payable to the United States Treasury.  Practitioners who file multiple OICs at the same time should not combine application fees for multiple clients.

The Form 656-PPV, Offer in Compromise Payment Voucher, included in the Form 656, should be completed and attached to any periodic payment(s) that becomes due. Failure to submit any required periodic payments, after the initial payment has been submitted, will result in the offer being declared withdrawn.  For offers originally sent to Holtsville, NY, send payments to:  P.O. Box 9011, Holtsville, NY 11742. For offers originally sent to Memphis, TN, send payments to: AMC Stop 880, P.O. Box 30834, Memphis, TN 38130-0634.

The OIC application fee reduces the assessed tax or other amounts due.  The application fee will be returned if the OIC is deemed not to be processable. Unless the offer in compromise has been submitted under doubt as to liability or a completed Form 656-A and Offer in Compromise Application Fee and Payment Worksheet is included with the Form 656, the $150 application fee must be included with the offer or the IRS will return the offer.

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Deduction for Sales and Excise Taxes Imposed on Purchase of New Motor Vehicles

Posted by Emil Estafanous, CPA on December 9, 2009 · Leave a Comment 

In 2009, you can deduct the state or local sales and excise taxes imposed on the purchase of a qualified motor vehicle after February 16, 2009, and before January 1, 2010. A qualified motor vehicle includes a passenger automobile, light truck, or motorcycle, the original use of which begins with that purchaser and that has a gross vehicle weight rating of 8,500 pounds or less.  A qualified motor vehicle also includes a motor home, the original use of which begins with that purchaser.  The amount of tax you are able to deduct is limited to the tax that is imposed on the first $49,500 of the purchase price of the vehicle.  The deduction is phased out over a $10,000 range that begins when modified adjusted gross income is more than $125,000 ($250,000 if married filing a joint return). No deduction is allowed when modified adjusted gross income is equal to or more than $135,000 ($260,000 if married filing a joint return). The new deduction can be used to increase the amount of your standard deduction or you can take it as an itemized deduction (if you are not electing to take the state and local general sales tax deduction).

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