Tax Planning

The Worker, Homeownership and Business Assistance Act of 2009 (WHBAA)

The Worker, Homeownership and Business Assistance Act of 2009 (WHBAA) was signed into law Nov. 6. Not only does the act extend unemployment benefits for millions of Americans, but it also extends and enhances the homebuyers credit and the five-year net operating loss (NOL) carryback election for businesses.

The Homebuyers Credit

Last year, a refundable tax credit equal to 10% of the purchase price of a principal residence was made available to qualified first-time homebuyers. This credit was set to expire July 1, 2009, and generally required repayment. But in February the American Recovery and Reinvestment Act of 2009 (ARRA) extended its availability to purchases made before Dec. 1, 2009, and generally removed the repayment obligation for qualifying purchases after Dec. 31, 2008.

WHBAA has now extended the credit to purchases made before May 1, 2010 — or July 1 if a binding contract is in place before May 1 to close on the purchase before July 1.

The maximum credit remains at $8,000 ($4,000 for married filing separately) for first-time homebuyers. For purposes of the credit, a first-time homebuyer is someone who has had no ownership interest in a principal residence in the United States during the prior three-year period.

In addition, WHBAA expands the credit to many "long-time" homeowners purchasing a subsequent home. The maximum credit for these taxpayers is $6,500 ($3,250 for married filing separately). To qualify, the homeowner must have maintained the same principal residence for any five-consecutive-year period during the eight-year period ending on the purchase date of a subsequent principal residence.

WHBAA also significantly increases the modified adjusted gross income (MAGI) phaseout ranges for the credit. For qualifying purchases made after Nov. 6, 2009, the phaseout range is $225,000-$245,000 for joint filers, $125,000-$145,000 for single filers.
WHBAA does add a few new limits. Effective for purchases made after Nov. 6, 2009, no credit is allowed if:

• The home's purchase price exceeds $800,000 (regardless of regional market factors),
• The homebuyer (or his or her spouse) is related to the seller,
• The homebuyer is under age 18 on the date of purchase (unless his or her spouse meets the age requirement), or
• The homebuyer is the dependent of another taxpayer.

There are other expansions, enhancements and limitations as well, so it's important to consult your tax advisor to determine whether you're eligible for the credit.

The NOL Carryback

Generally, when business deductions exceed gross income, the difference is an NOL for tax purposes and may be carried back two years to offset income. This generates a tax refund, providing a cash infusion in times of loss. Any loss that's not absorbed is carried forward up to 20 years.

ARRA allowed taxpayers to elect to carry back 2008 NOLs from qualifying small businesses (businesses with average gross receipts of $15 million or less for the three years ending with the loss year) for three, four or five years instead of two. WHBAA expands the longer carryback option to businesses that don't qualify as "small" and extends it to 2009 NOLs.

Under WHBAA, generally taxpayers can apply the longer carryback to only one tax year's NOL and to offset only 50% of income in the fifth year back, 100% in the other four. For qualifying small businesses, taxpayers can apply the longer carryback to both 2008 and 2009 NOLs, and the 50% limit applies only to 2009 NOLs. Taxpayers also have the option to use the normal two-year carryback or to waive the carryback period entirely and carry the loss forward.

Are you eligible?

The extension and expansion of the homebuyers credit and the five-year NOL carryback option could provide you or your business with a valuable tax-saving opportunity. But the rules surrounding these breaks are complex. We'd be glad to help you determine whether you're eligible and, if so, how you can make the most of these breaks.

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A Guide to the Alternative Minimum Tax (AMT)

Thursday, 20 November 2008 08:24

The purpose of the alternative minimum tax is to ensure that everyone pays a fair share of tax. Essentially, a flat tax rate is applied on alternative minimum taxable income in excess of an exemption amount.

The alternative minimum tax (AMT), the government’s attempt to keep people from taking too many tax breaks, went into effect in 1983 and with TRA 1986 the rules were tightened. The alternative minimum tax concept was developed out of the favored or preferred status Congress gave to certain types of income, so-called preference items. To prevent some individuals with large incomes from paying little or no tax, the AMT was introduced. The Tax Reform Act of 1986 made the alternative minimum tax tougher and extended its provisions to thousands of additional taxpayers. Subsequently the Revenue Reconciliation Act of 1993 increased the rates still further.

What constitutes “alternative minimum taxable income?” Generally, it is your adjusted gross income as determined for regular income tax purposes increased by certain tax preference items and decreased by certain itemized deductions.

After taking into account certain tax credits and adjustments, the alternative minimum tax is then computed.

However, the alternative minimum tax is payable only if it exceeds the taxpayers regular tax. Because regular taxes were generally lowered by TRA ‘86 and because the new laws tighten up the alternative minimum tax, many more taxpayers are now subject to the AMT’s bite.

AMT Formula

Basically, the tax is equal to the excess of a percentage of Alternative Minimum Income (less exemption) over the regular tax. The AMT exemption was increased by the Economic Growth and Tax Reconciliation Act. The Working Families Tax Relief Act of 2004 extended the relief and further fine-tuned the law. Most recently, the Tax Increase Prevention and Reconciliation Act of 2005, that became law in May 2006, extended the exemptions and raised the caps.

Exemption amounts of $45,000 (after 2007) on a joint return (or for a surviving spouse), $33,750 (after 2007) on a single return, $22,500 (after 2007) on a married filing separate return, and $22,500 on an estate or trust return, are available in calculating the taxable excess. These exemption amounts are reduced by 25% of the amount by which the AMTI exceeds $150,000 on a joint return, $112,500 on a single return and $75,000 on a separate return or in the case of an estate or trust.

For children subject to the “kiddie tax” the exemption is the lesser of the above amounts or the child’s earned income plus $6,400 (as indexed for 2008).

Alternative Minimum Income consists of one’s adjusted gross income; to which is added back many of the so-called tax preference items that were deducted in arriving at Adjusted Gross Income (AGI).

The Alternative Minimum Taxable Income definition is the AGI less alternative tax Net Operating Loss (NOL) less alternative tax itemized deductions less income from accumulated income distribution plus tax preferences.

To determine what, if any, one’s alternative minimum tax may be is an assignment for a tax professional, for there are many different additions, subtractions, deductions and adjustments to be made in computing the tax.

Triggering Events

Because of the effect on tax planning, you should be aware of what items might lead to the imposition of the alternative minimum tax. Understanding them might assist you in postponing or offsetting them whenever possible. These include:

1. Deducting net operating losses.
2. The excess of accelerated over straight-line depreciation of real estate or leased equipment.
3. Percentage depletion on oil and gas wells and similar projects.
4. Intangible drilling costs.
5. Exercising incentive stock options.
6. Deducting large amounts of non-refundable credits.
7. Deducting large amounts of state and local taxes.
8. Tax-exempt interest on nonessential function bonds.
9. Deductible passive losses.

You should get to know the alternative tax deductions. The 1986 changes were meant to tighten the deduction rules, not to simplify them.

Under these rules, you can deduct qualifying charitable contributions, casualty and theft losses and medical expenses that exceed 10 percent of your adjusted gross income and personal and estate taxes.

However, as mentioned above, you cannot deduct state and local taxes payable. However, Foreign Tax Credits are deductible against the alternative minimum tax after certain modifications. That is an important change to people in states with high taxes, such as California or New York. Until now, tax advisors have commonly told their clients to prepay state taxes to get a deduction.

Nor can you keep deducting certain kinds of interest. There are limits on the amount you can deduct for interest incurred in financing investments - stock purchases on margin, for instance, or limited partnership interests.

For more information on the alternative minimum tax and other year-end tax planning topics, download your free copy of the 2008-2009 Tax Planning Guide (a 36-page guide).

Brock and Associates, LLC is a fee-based financial planning firm specializing in asset protection and wealth preservation. Contact us for more information on how to avoid the alternative minimum tax and for other tax planning strategies.

 

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New Ideas for Philanthropy to Reduce Your Tax Bill

Last Updated (Friday, 01 August 2008 12:18)

When looking for ways in which to further reduce your income tax bill, the charitable deduction remains as one of the easiest ways to do so.  This assumes that you have sufficient itemized deductions (including year-end charitable gifts) to not take the standard deduction.

While there is no rule prohibiting charitable donations to be made 365 days a year, unfortunately the vast majority of us choose to do our giving at year's end.  We seem to get caught up by the holiday spirit and greatly increase our generosity in December.  Rather than wait until the holiday season to begin a charitable giving strategy, I've compiled a couple of ideas for philanthropy that you can begin immediately. 

Ideas for Philanthropy: Property Owner

Real estate, whether agricultural, commercial or rental residential, may sometimes be a problem for the owner.  It may be low earning, time consuming or facing a declining market value.  An outright charitable gift of the property may be very helpful, assuming it is readily marketable.  If used to fund a “net income plus make-up” charitable remainder unitrust, what was a problem becomes a source of improved income.  When long-term appreciated real estate is used, either for an outright gift or for funding an income-producing gift, there will be avoidance of capital gains tax as well as income tax savings from the charitable deduction.

Ideas for Philanthropy: Crowded Collector

Individuals that have downsized their living circumstances often find themselves with an assortment of valuable works of art, historical documents, antique furniture and scientific collections that they no longer have room to display.  Rather than storing these items in a storage unit or basement, a donation to charity can be a very satisfying alternative for the donor.  The collector is able to share beauty or knowledge with others, reduce impediments, and realize income tax savings.  One of the caveats of this approach is that to be tax deductible at present fair market value, tangible personal property gifts must be something that can be used in ways related to the purpose or the function of the charity. 

Ideas for Philanthropy: Business Owners

Closely held non-marketable stock in a profitable corporation may be used to make cost effective charitable gifts.  The firm may have profits it needs to distribute, and the sole stockholder does not need additional taxable income.  A gift of a minority block of stock is deductible at its independently appraised fair market value, subject to a minority position value.

Most charitable organizations do not normally want funds invested in non-marketable securities.  If the corporation, or its employee stock ownership plan, later wants to redeem the stock at its appraised value, it naturally prefers to have cash.  If the stock is then placed in the corporation treasury, the sole stockholder still has 100% of the equity.  Should younger executives or family members purchase it, a capital gains tax is likely avoided.  Neither subsequent event, however, can be a prearranged condition of the gift.

Charities may also want to avoid "S Corporation" stock, which can lead to either "phantom income" or unrelated business income to the charity.

Ideas for Philanthropy: Investors

Because unrealized capital gains are subject to one's top combined federal and state income tax rates, using a charitable gift in kind instead of a sale avoids the tax. This will also increase the tax savings compared to a cash gift of the same value.  Stock gifts to charities can be considered when:

• A take-over bid has raised the value of holding stock

If it succeeds, the stockholder faces a forced sale with heavy capital gains tax.  If the take-over is unsuccessful, the stock is likely to fall back in value.  Making an outright gift of the stock, or using it to fund a life income charitable remainder trust, can be advantageous alternatives.

• A part of the portfolio needs to be shifted from equities to fixed

An older donor wants to shift a portion of a portfolio from equities to fixed income, without erosion of principal by taxation of long-term gains.  A charitable remainder annuity trust can make the shift with no erosion and with an improved effective rate of return after considering the combined tax savings.

• Continuing equities investing with tax-free changes

A middle-aged donor may like to continue investing in equities for retirement years, with the ability of the trustee to make changes in the portfolio free of taxes on realized gains.  A charitable remainder unitrust of the “net income only, plus make-up” type provides tax sheltered growth and complete flexibility in shifting investment objectives to produce retirement income.

• Cash is available to make a significant gift

However, the gift can be made with highly appreciated stock, using the cash to purchase replacement shares of the same stock with a new and much higher basis.  There is the same charitable deduction for the current year, and the prior appreciation will no longer be subject to capital gains tax when the stock eventually is sold.

• Gifting the difference of market value and sale price

If stock to be used in a charitable gift plan is in the form of a single certificate worth more than the intended gift, there may not be time to have two replacement certificates issued by the company’s transfer agent this year.  A “bargain sale” may be feasible, with the deductible difference between the fair market value and sale price as the charitable gift.  Any gain of the stock is prorated between the gift and sale portions of the transaction, with no tax on the gift portion.

Just a quick note before you jump out and start implementing any of these ideas for philanthropy.  It is always a good idea to meet with your financial advisor before taking on a new tax strategy.  A qualified financial professional will be up-to-date on current tax laws and will know of subtle nuances that may affect the effectiveness of your strategy. 

Brock and Associates, LLC is a Utah based financial planning firm.  We specialize in retirement, estate, legacy, and tax planning.

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