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The New Year brings five significant changes to consider as you prepare your 2009 federal income tax return.  These changes generally provide opportunities to decrease overall tax liability through increased deductions, taxpayer credits and more. 

When preparing your 2009 return consider these five changes:

1. The American Recovery and Reinvestment Act (ARRA) provides significant incentives for taxpayers. These include: 

- Those purchasing a home or improving energy efficiency.

- Those purchasing a car.

- Parents and students paying for college.

2. Expansion of IRA deduction to those covered by a retirement plan with adjusted gross income of less than $65,000 (single) or $109,000 (married filing jointly).

3. Increase in the Standard Deduction to $11,400 for those married and filing jointly, and $5,700 for singles and those who are married and filing separately.

4. Change to the standard mileage rate to $.55 per business mile.

5. Increase of investment income a child may receive ($1,900) without being taxed on their parents’ return.

Have you noticed the D.C. bag tax every time you purchase a drink or grab a bite to eat?

As of January 1, 2010, consumers at grocery stores and other food and alcohol retailers in Washington, D.C. must pay a new five cent tax on the use of plastic and paper bags.  The tax, mandated by D.C. Council legislation, is the only active bag tax that exists in the United States today.

The primary purpose of the tax is environmental, with 80% of the tax going to a fund dedicated to cleaning up the Anacostia River.  In addition, lawmakers hope that the tax will reduce paper and plastic litter, which accounts for 21% of the trash in the Anacostia River and is often the cause of blocked street drains.  Store owners, who are responsible for collecting the tax, may keep one cent for every bag distributed. Retailers that provide incentives to their customers to bring reusable bags can retain an extra cent.

Lawmakers estimate that the tax will generate $3.6 million in revenue this year, an amount that will likely decline in future years as a growing number of consumers will begin using reusable bags.  Nonetheless, some taxpayers remain displeased and skeptical, pointing to the failure of a similar tax program in San Francisco where the government  proposed 17 cent tax for plastic bags. Critics argue now is a bad time to impose a bag fee when every penny counts.

The Small Business and Entrepreneurship Council (SBE Council) released the 14^th annual Small Business Survival Index 2009: Ranking the Policy Environment for Entrepreneurship Across the Nation. The index ranks states based on their public policy conditions for small businesses and entrepreneurship. Hometown Washington, D.C. was ranked dead last this year and Maryland, not much better, was ranked 37^th. However, Virginia was ranked 10^th.

The rankings are based on taxes, regulatory costs, government spending, property rights, and health care and energy costs to determine which states are the friendliest to small businesses. Virginia’s success is easy to explain – low tax rates. D.C. and Maryland refuse to address their job killing corporate tax rates. Around this time last year, I made a case for the elimination of the D.C. corporate income tax.

When pigs fly…

Click here to view the complete report.

Low inflation contributed to a five cent drop in standard business mileage reimbursement rate for 2010. Effective January 1, 2010, the mileage reimbursement rate for business and medical and moving expenses have changed, but the mileage rate for charitable organizations has remained the same.

The IRS announced the 2010 optional standard mileage rates beginning January 1, 2010:

-          50 cents per mile for business miles driven

-          16.5 cents per mile for medical or moving purposes

-          14 cents per mile driven in service of charitable organizations

Limitations

The business standard mileage rate cannot be used to compute the deductible expenses of automobiles used for hire, or five or more automobiles owned or leased by a taxpayer and used simultaneously. In addition, a taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle.

On December 3, the House of Representatives voted 225-200 on a bill to address issues with the estate tax or “death tax”, as it’s been nicknamed. The estate tax will disappear completely in 2010 under rules put in place under the Bush administration. These rules lapse 2011, returning the laws to those in force in 2001. The higher 2001 rates would affect estates worth $1 million and up, which include many small farms and businesses. The bill to repeal the tax must now pass the Senate and be signed by President Obama in order to become law.  The bill includes a permanent $3.5 million federal estate tax exemption (up from $1 million) and sets the gift tax and estate tax rates at 45%.  This is a reduction from the 55% rate if the current law lapses without new legislation in place.

Currently, there are approximately 200,000 riders and 4,000 employers participating in Metro’s SmartBenefits program. The program allows employees to set aside of a portion of their salary, before taxes, for transit expenses. Metrorail, Metrobus and regional bus fares, parking at Metro lots and registered van pool expenses are loaded onto a SmartTrip card each month at vending machines located in Metro stations.

Metro has proposed the following program changes:

- Workers would be required to set an amount for transit rides and transit parking, a new requirement.

- Unused transit and parking benefits for the month would be returned to the employer, instead of rolling over. This change upset many employees, since some employers had decided to keep the funds and not credit employees.

- Riders will not need to visit vending machines each month to download their benefits. Instead, the transaction will occur at the fare gate, bus box, or parking exit. The program will use the new cards like debit cards, deducting used amounts from the benefit amount set aside for the month.

These changes were going to be effective Jan. 1st, but due to the volume of complaints from employers and employers, Metro has decided to postpone the transition another year to give employers and employees more time to review the proposed changes to the program.

IRS has agreed to the extension although a formal request is pending. Metro says the changes are needed to protect the benefit system from misuse and that the additional time will allow them to make other planned improvements to the program as well.

Congress Extends First-time Homebuyer Credit

Congress has extended the first-time homebuyer tax credit into the first half of 2010. The credit was scheduled to expire after November 30, 2009. The extension increases the income phase out amounts and includes current homeowners in some benefits.

According to trade reports, the first-time homebuyer credit has generated more than 300,000 home sales above otherwise expected sales, helping to reduce excess new construction inventory.

First-time Homebuyer Credit

The original first-time homebuyer credit rewarded eligible individuals with a tax credit worth 10% of a home’s value up to a maximum credit of $8,000 after the purchase of a qualified residence. The credit phased out for single individuals with modified adjusted gross incomes (MAGI) in excess of $75,000 and for married couples filing jointly with MAGI above $150,000. Qualifying buyers could purchase a property with a maximum price of $800,000.

Extension Terms

The new legislation extends the beginning November 7, 2009 through June 30, 2010. To qualify, sale contracts must be issued by April 30, 2010 and the sale must close by June 30, 2010.

Increased Income Limits

Single individuals may earn up to $125,000 to be eligible for the total credit amount. Joint filers may earn up to $225,000 to be eligible for the total credit amount.

Current Homeowners

Current homeowners can benefit from a maximum $6,500 tax credit, if they have occupied their primary residence for a period of five consecutive years during the last eight years.

Tax Credit Abuses

The news is not all good. The IRS is reportedly investigating more than 100 civil fraud cases related to the first-time homebuyer credit. In some cases, the IRS is pursuing criminal charges.

A government watchdog told Congress in October that the IRS has paid more than $400 million in bogus claims for the first-time homebuyer credit. Congress has instructed the IRS to crackdown on abuses. The IRS is expected to heighten the substantiation requirements for the credit.

Escaping Commercial Real Estate Foreclosure

In our August 4, 2009 e-Newsletter, we alerted our clients of the pending “Next Mortgage Crisis”. To address the pending issue of the coming commercial real estate “crisis”, on October 30, 2009, the Federal Deposit Insurance Corporation (FDIC) implemented new policy guidelines to its examiners and financial institutions for commercial loan workouts on those Commercial Real Estate (CRE) loans made to credit worthy borrowers. The new guidelines allow the value of commercial properties, which may have fallen below the loan amount, to continue as “performing” properties, under certain conditions. Link to FDIC policy guidance.

In the current economic downturn when cash flows are diminishing and with delays in selling or renting, the FDIC’s new policy guidance is routine. The new FDIC policy for its’ examiners and financial institutions provides guidance on developing processes for restructuring loans and on determining the correct structure for each property for credit worthy borrowers.

As noted in the Wall Street Journal, this situation reminds me of the real estate crash in the early 1990’s when the Resolution Trust Corp (RTC) destroyed numerous viable financial institutions. It was a mindless government “check the box” war on banks, and savings and loans. If this current approach was in effect back then, a lot of pain could have been avoided.

So, if possible, keep your loan current. Under the new guidelines your lending institution won’t be as anxious.

I encourage you to evaluate your IRA before the new year, as the tax laws regarding Roth IRA conversions are changing effective January 2010.  If your adjusted gross income is above $100,000, you will have the option of converting an existing traditional pretax IRA to a Roth IRA.  In previous years, this option was only available to those making less than $100,000.

When you’re evaluating your IRA and making a decision to invest in a Roth IRA, consider the following:

-         Direct contributions can be withdrawn tax free any time.

-         Earnings may be withdrawn penalty free after five years. 

-         Assets in your Roth can be passed to your heir’s tax free. 

-         No withdrawal requirements when you reach a certain age (70 ½), so your money can continue to accumulate tax free.

Key attributes of a Roth Conversion include: 

- Any investor with a Traditional IRA, Rollover, SEP or 401(k) plan is eligible.

- For the 2009 tax year, your adjusted gross income must be $100,000 or less.

- For 2010 and beyond, the income restriction will be lifted and anyone will be eligible to convert.

- Conversions are a distribution from the Traditional IRA and therefore a taxable event.

- A conversion may cause you to increase your tax bracket.

- For the 2010 tax year, you have the option of applying 50% of the conversion amount to the 2011 tax year and 50% to 2012, or pay 100% in 2010.

- If you convert to a Roth and discover that you were ineligible or that the conversion is not tax advantageous to you, you can reverse the conversion.  This is called a “recharacterization”.

A Roth conversion is best suited for you if you meet all three of the following criteria:

- You will be in the same or higher tax bracket by the time you retire.

- You won’t need to withdraw the money for at least 10 years.

- You have cash on hand to pay the income taxes for the conversion.

Investors need to be aware of all of the tax implications and rules of the conversion to make the right decision for their investments. 

 We recently did some research on the top foundations which support local nonprofit organizations. A few you may find of particular interest are the Bill and Melinda Gates Foundation and The Ford Foundation.

The Bill and Melinda Gates Foundation have three areas of funding research, the Global Development Program, the Global Health Program, and more notably, the United States Program. The United States Program focuses on improving public education, as well as programs for housing/homelessness. However, the foundation accepts a minimal amount of applications from unsolicited organizations. If your program or project does meet the foundation’s criteria, you may begin the grant application process. First, submit an online letter of inquiry (LOI), which should include the project description, financial information, and organization information. If the LOI is accepted, you will be invited to submit a full proposal. After you have submitted a proposal for your project or program, the proposal will be reviewed, and the amount of funding will be determined.

The Ford Foundation is more diverse than the Bill and Melinda Gates Foundation. The foundation’s areas of funding are selected based on their goals that are organized into eight key issues: Democratic and Accountable Government, Human Rights, Social Justice Philanthropy, Economic Fairness and Opportunity, Natural Resources and Sustainable Development, Access to Education, Freedom of Expression, and Sexuality and Reproductive Health Rights. If you wish to apply for a grant from The Ford Foundation, first visit the foundation’s website and determine if your organization meets their requirements. Next, submit an online grant inquiry. Within six weeks your organization should be notified if it is of The Ford Foundation’s interest. The final step is the approval process, which includes meetings, site visits, grant negotiations, administrative and legal review, and a final presentation for the grant approval. The approval process takes about three months.