2009-2010 Changes to Tax Laws
Estimated Tax Payment Requirements Temporarily Eased For Some
Who's affected: Many small-business owners
Key changes: Under the American Recovery and Reinvestment Act of 2009, qualified taxpayers must pay only 90% of their 2008 tax liablity through estimated payments or withholding to avoid underpayment penalties. Taxpayers generally will qualify if their AGI for 2008 was less than $500,000 and if more than 50% of their 2008 gross income was generated from a "small business" (defined as a business, that on average, had fewer than 500 employees during 2008).
Planning tips: Take advantage of the lower payment requirements to help maintain your busienss's cash flow. You may end up oweing more on April 15, 2010, because you won't have prepaid as much tax. But until then, you'll have more cash in your pocket to use needed.
AMT Risk Lifted For Some Private Activity Bonds
Who's affected: Bond investors vulnerable to the AMT.
Key changes: The American Recovery and Reinvestment Act of 2009 excludes from the AMT any income from tax-exempt bonds issued in 2009 and 2010, along with 2009 and 2010 re-fundings of bonds issued after Dec. 31, 2002, and before Jan. 1, 2009. Previously, tax-exempt interest from private activity municipal bonds could trigger AMT liability.
Planning tips: Those who've hestitated to invest in private activity bonds because of the potential negative AMT consequences may want to reconsider them. Those holding private activity bonds that don't fall under the new provision, however, still need to be wary of the AMT.
Expanded Break For First-Time Homebuyers
Who's affected: First-time homebuyers (defined as taxpayers who've had no ownership interest in a principal residence in the United States during the prior three-year period).
Key changes: Last year, a credit of up to $7,500 on the purchase price of a principal residence was made available to qualified first-time homebuyers. The American Recovery and Reinvestment Act of 2009 extends its availability to qualifying prhycase made before Dec. 1, 2009, and for those made after Dec. 31, 2008, increases the maximum credit to $8,000. Perhaps most significant, the act generally eliminates the repayment obligation for qualifying purchases after Dec. 31, 2008. The credit starts to phase out for joint filers with modified AGIs exceeding $150,000 ($75,000 for single filers), and there other limitations.
Planning tips: Even though you likely won't qualify, your adult children or grandchildren might. So if you've been thinking about mkaing a gift to help them fund a down payment, now may be a great time to do it. In addition to benefiting from the credit, they also can take advantage of low housing prices and low interest rates. But be sure to first consider the gift tax consequences.
Estate and GST Tax Exemptions Increase in 2009
Who's affected: Anyone concerned about estate and generation-skipping transfer (GST) taxes.
Key changes: Under 2001 tax legislation, the estate and GST tax exemptions have both gone up to $3.5 million for 2009 from $2 million in 2008. As of this writing, after the estate and GST tax repeal scheduled for 2010, the exemptions are set to drop significantly for 2011, though legislation this year might extend (and perhaps increase) the $3.5 million exemptions.
Planning tips: Don't take a wait-and-see attitude about reviewing your estate plan; review it now. Depending on how your plan is set up, it may require updates to avoid unexpected and undesirable results. Plus, with proper planning, you can make the most of the increased exemptions.
Education Tax Credit Sports New Name, More Benefits
Who's affected: Taxpayers paying for college expenses in 2009 or 2010.
Key changes: The American Recovery and Reinvestment Act of 2009 introduced the American Opportunity education credit (an expanded version of what was previously known as the Hope Credit). For 2009 and 2010, the credit covers 100% of the first $2,000 of tuition and related expenses (including books) and 25% of the next $2,000 of expenses. The maximum credit is $2,500 per year for the first four years of postsecondary education. (The maximum Hope credit was $1,800 and applied to only the first two years of postsecondary education.) The credit starts to phase out for joint filers with adjusted gross incomes (AGIs) over $160,000 and for other filers with AGIs over $80,000. And it's completely phased out at AGIs of $180,000 for married couples and $90,000 for single filers.
Planning tips: If you don't qualify for this credit because your AGI is too high, your child might. Keep in mind that both the credit and a tax-free 529 plan or ESA distribution can be taken as long as expenses paid with the nontaxable distribution aren't also used to claim the credit.
NOL Carryback Period Temporarily Expanded
Who's affected: Small businesses with gross receipts of $15 million or less.
Key changes: Generally, a net operating loss (NOL) may be carried back two years to generate a current tax refund. For 2008 (not 2009), the American Recovery and Reinvestment Act of 2009 (ARRA) extends the maximum NOL carryback to five years for qualifying small businesses. Any loss not absorbed in the carryback period is then carried forward for up to 20 years.
Planning tips: Carrying back an NOL and receiving a current tax refund may provide a needed influx of cash in tough times. But waiving the carryback period and carrying the entire loss forward may be benefical if your marginal tax rate in the carrybac years is unusually low, or if the alternative minimum tax (AMT) in prior years makes the carryback less beneficial. The election to waive the carryback period must be made by the due date of the tax return (plus extensions) for the eyar in which the NOL arose.
Stimulus Act Provides A Variety Of New Breaks
Who's affected: Many businesses and their owners
Key changes: The American Recovery and Reinvestment Act of 2009 (ARRA) expands and extends many tax breaks for businesses. But it also provides businesses with some news breaks.
The act reduces the estimated tax payment requirements for many small-business owners for 2009. To avoid penalties, taxpayers generally need to make sure their estimated payments or withholding equals at least 90% of their tax liability for the current year or 110% of the prior year's tax - 100% if their adjusted gross income (AGI) for the prior year was $150,000 or less. Under ARRA, the 110% - or 100% - becomes 90% for qualifying business owners. Owners generally will qualify for the reduced payments if their AGI for 2008 was less than $500,000 and ifmore than 50% of their 2008 gross income was generated froma a "small business," which is defined as a business that, on average, had fewer than 500 employees during 2008.
In certain situations, ARRA also allows businesses to defer cancellation-of-debt income (CODI) generated from repurchasing business debt until calendar year 2014. They must then report the income rateably over the 2014 through 2018 tax years. Taxpayers generally must recognize CODI when they cancel - or repurchase - debt for an amount less than its adjusted issue price. CODI is the excess of the old debt's adjusted issue price over the repurchase price.
Finally, ARRA shortens the S corporation built-in gains period. Although a C Corporation conversion to an S corporation isn't a taxable event, the S corporation normally must avoid recognizing built-in gains for 10 years to avoid tax on any built-in gains that existed at the time of the conversion. Under ARRA, for tax years beginning in 2009 and 2010, there generally will be no tax on S corporation's net unrecognized built-in gains if the seventh tax year in the recogniton period occurred before the 2009 and 2010 tax years.
Planning tips: Work with your tax advisor to ensure you take advantage of every ARRA benefit you're entitled to.
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