2008 TAX LAW CHANGES
We have had a few tax law changes so far in 2008 and a couple in late December of 2007. Following is a brief overview of several of them.
First-Time Homebuyer Credit
This title might be better termed a "Loan" instead of a "Credit" since it is a refund that a taxpayer can receive but has to repay. Here are the details:
This refundable credit is equal to ten percent of the purchase price of a qualifying taxpayer's principal residence, with a maximum credit not to exceed $7,500 ($3,750 for MFS). The amount of the credit is reduced for a taxpayer modified AGI of over $75,000 ($150,000 for MFJ).
The credit is only available to properties purchased on or after April 9, 2008 and before July 1, 2009. Only for purposes of this credit, a taxpayer can elect to treat the purchase of a qualifying residence after December 31, 2008 and before July 1, 2009 as if the residence was purchased on December 31 , 2008.
A "first-time homebuyer" is a taxpayer (and spouse if the taxpayer is married) who has had no present ownership interest in a principal residence during the three-year period ending on the date of the purchase of this principal residence.
A "purchase" is defined as the acquisition of a principal residence, but does not include property acquired from a related party. A "purchase" includes the construction of a residence.
Recapture of the Credit
As stated earlier, this credit is really more like a loan. The taxpayer who claims this credit faces a recapture tax of the entire credit amount spread over the recapture period of fifteen years. This recapture tax increases the taxpayer's income tax each year by an amount equal to 1/151h (6.67%) of the credit amount. The recapture continues for fifteen years until the entire credit is recaptured unless certain events accelerate the recapture. The recapture begins with the second year following the year of the purchase of the principal residence.
If the taxpayer ceases to use the property as a principal residence (such as by establishing a new principal residence), the balance of the credit that has not been recaptured is recaptured on the return for the year of the cessation.
If a taxpayer disposes of the property before the end of the recapture period, the taxpayer is required to recapture any credit not already recaptured. The recapture due to a disposition is limited to the taxpayer's gain on the disposition of the property. When the gain is calculated, the taxpayer is required to reduce the basis in the property by the credit that has not already been recaptured.
The recapture rules do not apply in the following situations:
- The taxpayer's death.
- Involuntary conversion.
- Transfers to spouse or incident to divorce.
Increase in Standard Deduction for Real Property Taxes
Only for the tax year beginning in 2008, the standard deduction for individuals is increased by the amount of real property taxes paid by the taxpayer, but not more than $500 ($1,000 for MFJ returns). This is a one-year deduction only, but these short term provisions often get extended to one or more future years.
Gain from Sale of Principal Residence Allocated to Nonqualifying Use Not Excluded from Income
This provision is applicable to sales after December 31, 2008. It basically denies a taxpayer the right to use the Sec. 121 exclusion for the gain from the sale of the taxpayer's principal residence to the extent the gain is used for a nonqualifying purpose (rental, business, etc.) after December 31, 2008.
The new provisions state the exclusion does not apply to "so much of the gain from the sale or exchange of property as is allocated to periods of nonqualified use."
The Mortgage Forgiveness Debt Relief Act of 2007
The Act was enacted in late December 2007 and applies to qualified debt forgiven in 2007, 2008, or 2009. Usually, debt that is forgiven or cancelled by a lender must be treated as taxable income, but the recent legislation allows taxpayers to exclude from income certain cancelled mortgage debt secured by a principal residence.
Mortgage Insurance Premiums
Mortgage insurance premiums with respect to mortgage insurance contracts issued after 2006 remain deductible through 2010 as the result of extending legislation enacted by Congress in late December 2007.
Energy efficiency improvements to existing home.
Extended through 2009 is the residential energy credit for making qualifying energy saving improvements to your home. The lifetime non-refundable credit is $500.00 (but only $200.00 of this credit amount may be for qualifying window expenditures) and add energy efficient biomass fuel stoves as a new class of energy efficient property eligible for a credit of $300.00.
Penalties for late-filed partnership returns
Penalties have increased to $85/month/partner, with a maximum of twelve months (up form the former $50 month/partner, with a maximum of five months).
Penalties for late-filed 5 Corporation returns
Penalties are imposed at $85/month/shareholder, up to a maximum of twelve months. This change was effective with the 2007 S corporation tax returns.
Regulation Changes
Change in Length of Filing Extensions for some Entity Returns
IRS regulations have changed the filing extensions period for partnerships (Form 1065 series) and trusts and estates (Form 1041 series). The new extension period is only five rnonths (previously six months) starting with returns which have unextended due dates on or after January 1, 2009
This brings the extended due date for calendar year Forms 1065 and 1041 to September 15, the same date as corporations.
The extension time limit for corporation returns did not change.
Change in Procedure to Elect to Deduct Startup and Organization Costs
Now IRS has released new regulations regarding this election. The new regulations state the taxpayer makes the election by merely deducting the expenses (subject to the limitations mentioned above) on the tax return for the first year the business starts. There is no longer a requirement for a written statement.
In the event of an audit, taxpayers still need to be able to show the items that make up the startup costs and organizational expenses as well as the amount deducted on the return to verify the proper limits have been applied.
Due Date Extended for Some 2008 Returns
Since February 28 is a Saturday, the deadline for filing 2008 returns normally due that day is extended to March 2. This includes:
- Form W-2, Wage and Tax Statement
- Form 1099-Misc, Miscellaneous Income
- Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips
Electronic filers have until March 31 to file these returns
SUVs and Depreciation Limits
In revenue Procedure 2003-75, the IRS announces a separate set of luxury car depreciation limitations for trucks or vans that do not have a gross vehicle weight in excess of 6,000 pounds. In that revenue procedure, the IRS stated that the term "trucks and vans" referred to passenger automobiles that are built on a truck chassis, inclUding minivans and sport utility vehicles (SUVs). The same definition sUbsequently appeared in the instructions for Form 4562, Depreciation and Amortization. Based on the definition, the IRS seemed to imply that SUVs and vans built on a car chassis were not eligible for the exemption for the annual depreciation caps under the luxury car rules.
When the IRS issued Revenue Procedure 2008-22 with the 2008 depreciation limits for vehicles, the language indicating that an SUV should be considered to be a truck if it was built on a truck chassis was omitted. This change poses some uncertainty as to whether an SUV is or is not subject to the depreciation limits.
At this time, the IRS has no plans to provide a specific definition of a truck for purposes of the exemption from the depreciation limits for trucks and vans with a gross vehicle weight in excess of 6,000 pounds. The IRS did suggest basing the definition of a truck on Department of Transportation (DOT) guidelines.
Agencies of the DOT define a light truck that is designed for off-road operation, (I.e., has four-wheel drive, or is more than 6,000 pounds of gross vehicle weight and has physical features consistent with those of a truck); or that is designed to perform at least one of the following functions:
- Transport more than 10 people
- Provide temporary living quarters
- Transport property in an open bed
- Permit greater cargo-carrying capacity than passenger-carrying volume
- Can be converted to an open bed vehicle by removal of rear seats to form a flat, continuous floor with the use of simple tools.
Applying this definition, virtually every, if not all, heavy SUV qualifies as a light truck.
Given the absence of any specific IRS definition of truck for purposes of Sec. 280, it appears reasonable to claim exemption from the depreciation limits if the manufacturer has or is entitled to categorize an SUV in excess of 6,000 gross vehicle weight as a light truck.
MORE UPDATES COMING SOON.
