Taxpayers need to act fast to take advantage of temporary tax breaks

—Tax changes year-to-date; anticipated tax changes to come

If the first half of 2009 is any indication, taxpayers have their work cut out trying to keep up with available tax breaks and potential tax pitfalls of 2009. In February, Congress passed the
Economic Recovery and Reinvestment Act of 2009. The nearly $800 billion economic stimulus package offers significant tax incentives; however, many of the incentives, as well as other tax breaks, are temporary.

Business temporary tax changes set to expire during 2009 are:

Equipment purchases. The $250,000 limit for immediately expensing qualified equipment purchases was extended through 2009. The deduction is gradually reduced once annual equipment acquisitions exceed $800,000. Both new and used equipment qualify for this tax break. Sport utility vehicles are still subject to the $25,000 expensing limit.

In addition to the expensing option, purchases of new equipment, software, and qualified leasehold improvements can qualify for 50% first-year bonus depreciation through the end of 2009.

Expanded net operating loss carryback. The 2009 law extended the carryback period for 2008 net operating losses from two years to as many as five years. To be eligible for the extended period, a business’s average annual gross receipts for the last three years must be $15 million or less.

This option is available to eligible taxpayers for a limited time. A corporation that operates on a calendaryear basis, for example, must elect by September 15, 2009, while eligible individuals (sole proprietors, partners in a business partnership, and S corporation shareholders) have an October 15, 2009 deadline.

COBRA credit. Employers providing the 65% COBRA health insurance premium for former employees claim credit for this subsidy on their quarterly or annual employment tax returns. According to the IRS, businesses can ease cash flow problems by reducing their employment tax deposits by the amount of the credit. The IRS website at www.irs.gov provides details.

Individual temporary tax changes set to expire during 2009 are:

First-time homebuyer credit. This credit reaches $8,000 for purchases between January 1 and November 30, 2009. Taxpayers must be qualified buyers and satisfy income requirements. Eligible taxpayers also can file an amended 2008 tax return to receive the credit sooner.

Motor vehicle sales tax deduction. Taxpayers can take an extra standard deduction for state and local sales taxes paid on the purchase of a new vehicle and, in states without a sales tax, taxpayers can deduct other fees to take advantage of the temporary motor vehicle sales tax deduction enacted as part of the 2009 Recovery Act. The amount of the deduction is limited to the portion of the state sales or excise tax imposed on the first $49,500 of the purchase price of the vehicle and is effective for vehicles purchased between February 17 and December 31, 2009.

COBRA premium assistance. Individuals laid off from their jobs between September 1, 2008 and December 31, 2009 meeting income limits may qualify for nine months of COBRA premium assistance under the 2009 Recovery Act. Individuals pay 35 percent of the COBRA premium and employers must treat that as full payment. Employers claim a credit for the other 65 percent of the premium on their payroll tax returns.

Economic recovery payments. The 2009 Recovery Act authorized one-time payments of $250 to individuals receiving Social Security benefits, disabled veterans and others on fixed incomes. The Social Security Administration began sending the bulk one-time payments by mail and direct deposit in May 2009.

Exclusion of unemployment benefits. Individuals receiving unemployment benefits in 2009 can exclude the first $2,400 from their income. The exclusion is only available for 2009.

Tax evasion forgiveness. In an effort to shore up tax revenues, the IRS is encouraging taxpayers to disclose unreported foreign bank accounts and assets. In exchange for full disclosure and paying all back taxes plus interest and penalties, the IRS agrees not to criminally prosecute tax evaders and to waive the 75-percent fraud penalty. The settlement offer is only available up to September 23, 2009.

Looking Ahead at Tax Legislation

The rest of 2009 will likely bring additional tax law changes, although many will not take effect until 2010 or beyond.

In May, President Barack Obama released details of his tax proposals. These included extensive reform of the international tax rules, higher tax rates on upper income individuals, extended middle income tax breaks and deficit reduction. Individual tax cuts would total $736.5 billion over 10 years and business tax cuts would total $71 billion over 10 years.

In addition, in late July, the administration outlined tax proposals to help pay for health care reform, including a surtax on families earning more than $1 million a year. Congress has already noted its opposition to some of the President's proposals. However, there are several more months remaining in the year, a growing deficit, an economy that is still trying to find traction and an urgency to reform health care. As a result, it's a fluid time where policymakers can shift their priorities and make concessions in order to move forward the programs they think are important.

Since the information contained herein is of a general and summary nature, no final conclusion should be made without further review. For additional information, please contact us at 847-267-9600