Stimulus package tax changes

From Ted Cohen, San Diego, CA

In the first half of 2008, Congress passed several tax changes that will impact individual and business taxpayers. These changes were primarily driven by the meltdown of the subprime mortgage market, high gasoline prices, and the push for alternative energy sources. Here’s a quick explanation of the tax changes so far this year.

Changes that affect homeowners
Four changes to the IRS code may affect homeowners this tax year:

First-time homebuyer credit: Depending on their circumstances, first-time homebuyers can get a temporary refundable tax credit equal to 10 percent of the purchase price of a home, up to $7,500 ($3,750 if married filing separately). This is a credit, not a deduction; the IRS will issue checks. The credit is effective for homes purchased on or after April 9, 2008, and before July 1, 2009. But there’s a catch . . . the amount must be repaid in equal installments back to IRS over 10 years (without interest). Homebuyers can choose to take the credit in 2008 or 2009 (if they buy the home after December 31, 2008 and before July 1, 2009).) The credit can be disallowed or may need to be repaid to IRS earlier if the residence is sold. Contact your tax advisor for further explanation.

Local real estate taxes: Anyone who purchased or refinanced a home with less than 20 percent down must now impound their real estate taxes into their monthly house payment. This rule also applies to anyone who purchased a home using a Federal Housing Administration (FHA) loan.
This change affects Alternative Minimum Tax (AMT) filers. AMT filers should find out now whether or not their 2008 real estate tax payments are fully deductible. Typically, taxpayers who are subject to AMT filing are upper-income earners with significant real estate taxes, state income taxes and/or high miscellaneous deductions such as employee business expenses.
Additional property tax deduction for non-itemizers: For 2008 only, there is a one-time, standard deduction increase for homeowners. The increase is $500 for individuals or $1,000 if married and filing jointly.
Vacation and rental properties: Some of the gains from vacation/rental property sales will be ineligible for the $250,000/$500,000 home-sale exclusion. Properties converted from a second residence or rental to a primary residence after 2008 and then sold may not be eligible for the exclusion. The portion of the profit that’s taxed is based on the ratio of the time after 2008 when the home was used as a second residence (or rented out) to the total time that the seller owned the house. The rest of the gain remains eligible for the home-sale exclusion of up to $250,000/$500,000.
Mortgage Relief
The IRS recently clarified the Mortgage Forgiveness Debt Relief Act of 2007 passed at the end of last year. The act made changes to the federal tax treatment of cancelled debts, foreclosures, repossessions, and abandonments on a principal residence.
The general rule regarding principal residences is as follows: If you have mortgage debt canceled on or after January 1, 2007, and before January 1, 2010, the IRS generally allows taxpayers to exclude up to $2 million of mortgage debt forgiveness on their principal residence. To claim the exclusion complete the IRS Form 982 and attach it to your tax return. However, this rule does not apply to rentals or investment properties that are “upside down” (debt owed is greater than current market value of property). There is an entirely different set of rules for tax treatment on those properties.
Check with your tax advisor as to the proper tax treatment in your specific situation.
Vehicles and mileage
The price of gasoline has forced two new vehicle-related tax changes:
The 6,000 lb. SUV deduction: Ironically one of the government’s responses to dependence on foreign oil and $5 per gallon gasoline has been to encourage people to buy gas guzzlers. High gas prices left automakers with massive inventories of SUVs and trucks. The automakers lobbied Congress and won a one-year tax break for vehicles over 6,000 pounds purchased business use. If you want that Hummer or Escalade, you can deduct up to the first $25,000 of the purchase price if you buy it new before the end of 2008. The deduction is based on the percentage of business use to which the vehicle is dedicated. On top of the deduction, a generous first-year depreciation deduction is available on these vehicles.
Mileage deduction: Because of rising fuel prices, the IRS has raised the business mileage deduction rate from 50.5¢ to 58.5¢ per mile, for business miles driven beginning July 1, 2008.
Economic stimulus checks
If you qualified for an economic stimulus check and haven’t yet get received a check (reaching as high as $600 for individuals and $1,200 for marrieds with no dependent children), the reason is most likely that you have not yet filed your 2007 tax return. No checks will be sent after December 31, 2008, so you are urged to file your 2007 return by the extended due date of October 15, 2008. (If you did not qualify in tax year 2007 to get a rebate check, the IRS gives a “second chance” in tax year 2008.) Consult your tax advisor if this situation applies to you.
Business deductions
Business Spending Incentives: For tax years beginning in 2008, the IRS has nearly doubled the amount of deductible Code Section 179 expensing. Businesses can deduct $250,000 for qualified depreciable tangible personal property used in the active conduct of a trade or business. (The threshold for reducing the deduction has been raised to $800,000.) If you are a fiscal year-end filer and your fiscal year ends in 2008, you must wait a year to have these new rules apply to your business. Contact your tax advisor as to how this might affect your corporate year-end tax planning.
The new law also raises the first-year limit on depreciation from $3,060 to $11,060 for new passenger autos and $11,260 for vans and trucks that weigh less than 6,000 pounds and are designated for business use. One problem is that the IRS excludes “luxury autos” from the depreciation rule. The IRS interprets a “luxury auto” as costing over $15,000 for an auto and $16,000 for a truck or van. If you can find a new car for under $15,000, you can get a good write off.
The year is not over yet, and the IRS has a history of making last-minute tax law changes. Stay tuned.
Posted by Vistage member Ted Cohen of TDC Consulting, Inc. a San Diego based business financial advisor. Ted can be reached at (858) 412-5596 or sdtaxes@gmail.com.