Recap of 2009 Tax Law Changes


This post is in: Business
12 Comments

changeCongress was still mucking around with 2008 tax laws in February 2009, so we’ve got a precedent of late changes. Hopefully we won’t see that this year!

There are a lot of changes coming in 2010 and beyond. Here’s what we know about 2009 so far:

American Opportunity Tax Credit

The maximum credit has been increased to $2,500 (100% of first $2,000 expenses, 25% of next $2,000 expenses). This applies to the first four years of post-secondary education and is 40% refundable unless claimed by a child subject to kiddie tax. Phases out at $80,000-$90,000 modified adjusted gross income or $160,000-$180,000 for married filing jointly.

Alternative Minimum Tax

For 2009 only, the AMT exemption is increased to $46,700 ($70,950 MFJ). Note that it’s only for 2009. We’ve got another one-year only bandaid. I wish they would get this one fixed permanently one of these days.

Bicycle commuting fringe benefit

– 2009 forward –

Ride your bike to work? Your employer gets a deduction for up to $20/month that he gets to give you as a tax-free benefit.

I figure that’s got to work for a home office – right?

Casualty losses

– Change for 2009 only –

The $100 per casualty floor for individual casualty losses is temporarily raised to $500 per casualty. This isn’t a good thing. Guess the IRS figures we’ve all had too many casualty losses these days.

Child Tax Credit

– 2009 and 2010 –

The Additional Child Tax Credit (ACTC) earned income threshold decreased to $3,000 (was $8,500 in 2008). That means lower income is going to qualify to get this credit. Interesting. Wonder what special interest group that was written for….

COBRA subsidy

Beginning with COBRA premiums paid after 2/16/09
COBRA premiums are 65% subsidized for up to 15 months for jobless taxpayers who were involuntarily terminated 9/1/08 through 2/28/10.

Conversion kits

– Feb 18/09 through Dec 31/11 –

You can take a credit up to 10% of the cost of converting to a plug-in electric vehicle or $4,000, whichever is less.

Depreciation

Lots of options here.

You can take a Section 179 immediate expensing of up to $250,000. (Less if you have a heavy vehicle)

Or, if the new assets are new, you can take a 50% bonus depreciation in the first year.

Economic Recovery Payment (ERP)

– 2009 only –

One-time payment of $250 for recipients of SS, SSI, VA, or RRB benefits paid directly by the SSA, VA or RRB

Must have received a benefit 11/2008, 12/2008, or 1/2009

First-Time Homebuyer Credit (FTHC)

May not e-file 2009 return with FTHC, but may e-file without the credit and later amend!

The refundable credit equal to 10% of home purchase

$8,000 ($4,000 MFS) for taxpayers who did not own principal residence in previous 3 years

$6,500 ($3,250 MFS) for long-term homeowners who owned and lived in their principal residence 5 consecutive years out of 8 and who purchase a replacement home after 11/6/09

Must close on or before by 4/30/10

Government Retiree Credit (GRC)

– 2009 only –

This is a one-time refundable credit of $250 ($500 if both spouses are eligible).

Home sales

– 2009 and later years –

This isn’t a good one. For the first time, excluded gain on sale of principal residence must be prorated. Non-excludable gain equals the ratio of nonqualified use over total use multiplied by gain on the sale. In other words, it used to be that if you had 2 out of the previous 5 years for personal use, you got the exclusion. Now you have to pro-rate the exclusion.

Making Work Pay Credit (MWPC)

– 2009 and 2010 –

Refundable credit equal to 6.2% of earned income with a maximum credit or $400 or $800 for married filing jointly.

Net operating loss (NOL)

We got the NOL carryback change for 2008 early in 2009. With a little more notice, we’ve got another version of it for 2009.

You can take the NOL carryback for a year beginning or ending in 2009. It may be carried back 3, 4, or 5 years instead of the default 2 years. The 2009 election is not limited to small business.

If the 2009 NOL is carried back to 5th preceding year is limited to 50% of taxable income for that year.

Nonbusiness Energy Property Credit

– 2009 and 2010 –

The principal residence credit for energy efficient improvement is reinstated for 2009 and 2010. The credit is equal to 30% of cost of improvements, with a maximum credit of $1,500 for 2009 and 2010 combined.

Plug-in Electric Drive Motor Vehicle Credit

– 2009 rules –

Credit maximum ranges from $7,500-$15,000 depending on details

Plug-in Electric Vehicle Credit

– Feb 18/09 through Dec 31/11 –

Nonrefundable credit equal to 10% of cost of a “neighborhood” vehicle manufactured for use on public streets with a maximum credit is $2,500.

Residential Energy Efficient Property Credit (REEP)

– Available through 2016 –

This is a nonrefundable credit for residential energy and hot water generated via alternative sources and includes certain solar, small wind, fuel cell, and geothermal energy property. The credit is equal to 30% of the cost of the equipment and is limited to $500 per 0.5/kW of capacity for fuel cells. There is no credit maximum.

Required Minimum Distribution waiver

– 2009 only –

The required minimum distributions from IRAs, 401(k)s, etc. are waived for 4/1/10 (but a taxpayer turning 70½ in 2008 must take the 2008 RMD by 4/1/09)

Section 529 plans

– 2009 and 2010 –

You are allowed to take computer technology and equipment as qualifying expense from a Section 529 plan (money put away for higher educatin).

Unemployment benefits

The first $2,400 of unemployment benefits paid in 2009 are tax-exempt.

Vehicle sales tax deduction

– Feb 17/09 through Dec 31/09 –

There is an additional deduction for state and local sales and excise tax on new vehicles purchased 2/17/09 through 12/31/09. This may be claimed as an itemized deduction or added to standard deduction. The maximum per vehicle deduction is the tax on a vehicle costing $49,500.

And that’s only the beginning. We can expect a lot more changes and tighter interpretations of current law in the months to come. Stay tuned at USTaxAid.com to get weekly alerts of tax changes you need to know!



12 Comments

  1. Ed Horan says:

    Our long comments are extracted from the Exchange News Fall 2008 Newsletter on our web site. “Before the President signed H.R. 3221, the Housing Assistance Tax Act of 2008, on July 30, 2008, a revenue-raising provision first promoted by Representative Charlie Rangel (D, N.Y.) was included by the conference committee as Section 3092 of the bill. This provision is an amendment to Section 121 and has a major impact on small landlords and taxpayers who were planning to convert their rental or second home to a principal residence and then exclude any gain from their income when they sell the property.
    The term Period of Non-Qualified Use is very important and means any period during which the property is not used as the principal residence of the taxpayer, the taxpayer’s spouse, or a former spouse. Importantly, the period before January 1, 2009, is excluded. In addition, subsection (4)(C)(ii) of the amendment provides additional exceptions to Period of Non-Qualified Use. These exceptions are (1) any portion of the five-year period (as defined in Section 121(a)) which is after the last date that such property is used as the principal residence of the taxpayer or spouse, (2) any period not exceeding 10 years during which the military or foreign service taxpayer, or spouse, is serving on qualified official extended duty as already defined, and (3) any other period of temporary absence (not to exceed a total of two years) due to change of employment, health conditions, or such other unforeseen circumstances as may be specified by the HUD Secretary.
    The amendment states “gain shall be allocated to periods of non-qualified use based on the ratio which (i) the aggregate periods of non-qualified use during the period such property was owned by the taxpayer, bears to (ii) the period such property was owned by the taxpayer.” How does this affect your second home planning? Suppose the taxpayer exchanged into a residence and rented it for four years, and then moved into it and lived in it for two years. The taxpayer then sold the residence and realized $300,000 of gain. Under prior law, the taxpayer would be eligible for the full $250,000 exclusion and would pay tax on $50,000.
    Under the new law, the exclusion would have to be prorated as follows:
    Four-sixths (4 out of 6 years) of the gain, or $200,000 would be taxable and thus would be ineligible for the $250,000 exclusion.

    Importantly, non-qualified use prior to January 1, 2009, is not taken into account in the allocation for the non-qualified use period, but is taken into account for the ownership period. Thus, suppose the taxpayer had exchanged into the property in 2007, and rented for 3 years till 2010 prior to the conversion to a primary residence. If the taxpayer sold the residence in 2013 after three years of primary residential use, only the 2009 rental period would be considered in the allocation for the non-qualified use. Thus, only one-sixth (1 out of 6 years) of the gain would be ineligible for the exclusion (1/6 * $300,000 = $50,000 ineligible).
    In general, the allocation rules only apply to time periods prior to the conversion into a principal residence and not to time periods after the conversion out of personal residence use. Thus, if a taxpayer converts a primary residence to a rental and never moves back in and otherwise meets the two-out-of-five year test under Section 121, the taxpayer is eligible for the full $250,000 exclusion when the rental is sold. This rule only applies to non-qualified use periods within the 5-year look-back period of Section 121(a) after the last date the property is used as a principal residence.”

    Important now is the fact that the period before January 1, 2009 is excluded.

  2. The code uses the term “period”. RIA says “Presumably, the fraction will be expressed in either days or months”.

  3. Thanks Dave. I’ve got to go back and read this. That wasn’t what I read the first time through.

    BTW, did you see anything that dealt with months? Or does one part of a year count as a year? I was looking for that part and couldn’t find anything. I hate it when we get new law and no regs.

  4. Diane, regarding Mr. Tam’s situation, from what I’ve read a period of nonqualified use will not include any period before January 1, 2009. Therefore, if Mr. Tam had moved into the house on January 1, 2010 and sold the house after two years, the taxable gain would only be 1/29 of the total gain. Let me know if I’m mistaken.

  5. Thanks for the question Darlene, and it’s a good one. I had to go back and research it.

    I didn’t see any exception to HOW the sale on the 1st principal residence occurred, so I’d say as long as the homeowner meets all over requirements (go to irs.gov and search for Form 5405 Instructions – revised 12/09), yes, they get the move up credit.

    Just a quick review on the requirements: Have to have house 5 years, have to make new house their principal residence, can’t buy from certain family members of self or spouse.

  6. Darlene says:

    Can a howmeownner who sells their home with an agreed short payoff to the lender take advantage of the $6,500.00 Move up/repeat home purchase tax credit if they purchase another home?

  7. The specific bill that authorized the extension of the tax credit is “The Worker, Homeownership and Business Assistance Act of 2009”. Here’s a link to that bill with more details (who voted for, against and related bills) http://www.opencongress.org/bill/111-h3548/show

    Also, here’s a very helpful FAQ done by the National Association of Home Builders: http://www.federalhousingtaxcredit.com/faq1.php

    I agree, this is a win for home builders, as long as the properties can be completed in time.

    I do wonder what will happen to real estate during the rest of 2010, though.

  8. Laurie Murray says:

    So – Realtor.org is the last work on the tax credit? Can we see that on IRS.gov? If that is true, it would be great for the builders who cannot get a new home built by April 30th due to weather conditions. Can this be verified??

  9. John, I wish I had better news for you. It used to be that you could move into a property, live there 2 years and then get the full exclusion.

    The rules have gotten a lot more complicated for Code Sec 121. In your case, you will have to pro-rate the gain for the period of qualified use (when you lived there) and non-qualified use (when you didn’t). So if you had the property for a total of 29 years, 2 of which you lived there and there was gain of $275K, your exclusion would be:

    $275,000 * (2/29) = $18,965

    The rest would be taxable.

    There is a lot more to this change, I’ll post another blog entry later this week. Thanks for the question!

  10. Thanks for the clarification Melanie. Are you seeing a lot of clients taking advantage of this tax break?

  11. John Tam says:

    Ms. Kennedy, pls explain how it would apply to us. We would have a rental house for 29 years, the last two we plan to occupy before selling. Assuming our base price is #125K, sales price $400K, fully depreciated, what would be our capital gain tax liability when sold? As we are just now preparing to move into the rental house, I would like to know if it’s advisable when we would have to first rent out our primary house. Your response is sorely and desparately needed.

    Thanks.
    John

    ***************************************
    Home sales
    – 2009 and later years –

    This isn’t a good one. For the first time, excluded gain on sale of principal residence must be prorated. Non-excludable gain equals the ratio of nonqualified use over total use multiplied by gain on the sale. In other words, it used to be that if you had 2 out of the previous 5 years for personal use, you got the exclusion. Now you have to pro-rate the exclusion.

  12. Melanie Thurman says:

    As a Realtor®, I can tell you that the First-Time Homebuyer’s Tax Credit (or move-up Credit) does not expire on April 30, 2010, but the buyer must be “under contract”by that date…this quote is taken from Realtor.org–

    Can a Buyer Still Qualify If He/She Closes After April 30, 2010?
    Under the Extended Home Buyer Tax Credit, as long as a written binding contract to purchase is in effect on April 30, 2010, the purchaser will have until July 1, 2010 to close.

Leave a Comment