FIRST TIME HOMEBUYER TAX CREDIT / REPEAT HOMEBUYER TAX CREDIT

By JC Leahy Maximum Legal Refund (TM)
Income Tax Preparation and Consulting
Silver Spring, Maryland

For help preparing your income tax returns, email: maxlegalrefund@yahoo.com or phone (301)537-5365 .

The First Time Homebuyer Tax Credit has come a long way since it was first created, and it is bigger and better for 2009 and 2010.  Also, it has a new cousin:  the Repeat Home Buyer's Tax Credit. The First Time Homebuyer Credit was created during the latter days of the Bush Administration by the Housing Recovery Act of 2008. Originally, it was not actually a tax credit, was not limited to first-time home buyers, and was not limited to buying a house. The maximum "credit" was $7,500. At that time, you would have been obligated to REPAY the $7,500 to the IRS over a 15-year period starting in tax-year 2010. So the original Home Buyer Tax Credit amounted to a 17-year interest-free loan for buying a principal residence, provided that you hadn't owned a principal residence during the prior 3 years. Nowadays, the maximum credit is $8,000, and you don't have to pay it back -- except as mentioned below.

To qualify for the credit you must have not owned a principal residence within the 3-year period ending on the date of purchase of your new principal residence. If you built your home, your date of purchase is counted as the date you moved in. If you owned a vacation home, or rental property, or a shopping center, or any other real estate that was NOT your principal residence, you still qualify.

The purchase date of your new home may be any time in 2009 and until June 30, 2010, provided that there is a binding sales contract in place no later than April 30, 2010, AND that you then close the purchase by June 30. The latest expiration date for this credit was November 30, 2009, but that was extended, with some changes. You must have purchased the home in an "arms length" transaction. This means that if you bought the home from relatives, such as your parents, it won't qualify for the credit.

If you make too much money, you can't get this credit. How much is too much? This depends on when you bought the home, First, the pre-November 6, 2009 rules: For single taxpayers, the credit starts to get reduced at a Modified Adjusted Gross Income of $75,000, and disappears entirely at $95,000. For married couples filing joiong returns, the credit starts to get reduced at MAGI of $150,000, and disappears completely at $170,000. This is called "MAGI phaseout." For post-November 6 buyers, the MAGI phaseout ranges are $125,000 to $145,000 for singles, and $225,000 to $245,000 for married filing joint.  So you can make more money and still claim the credit if you purchased your home after November 6. 

If two single people buy a home together, they must split the credit between them, and each one is subjet to MAGI phaseout separately.

You don't have to buy a house to qualify for this credit. A trailer will do. Or a mobile camper, or a yacht, for that matter. It must have full living facilities and you must use it as your principal residence.

There is one circumstance when you WILL have to pay back the $8,000 credit. If you If you sell the home or stop using it as a preincipal residence within 36 months of the purchase date, or convert it to a rental or business property, you'll be asked to repay the credit. This is also true if your home is destroyed or condemned and you do not replace it with a new principal residence withing 2 years.

One other little twist: When you eventually DO sell the home, the $8,000 credit reduces its tax basis. This increases any capital gain by $8,000.

Bottom Line: This is a great tax credit. Take it if you can -- just be aware of the details outlined above!


Questions? The author may be contacted at: jcleahy@jaitoday.com

PS: Upcoming Article: The Repeat Homebuyers Tax Credit -- Don't Miss It !!!

YEAR END TAX PLANNING: INVESTMENT EXPENSES

DON'T FORGET TO CLAIM YOUR INVESTMENT RELATED EXPENSES!!!
As you plan your income tax return, don't forget about money you have shelled out to buy, sell, and manage your investments. I categorize investment-related expenses into 4 categories, all of which are treated differently on your tax return:
• Category I: Those that you just can't claim
• Category II: Those that relate to buying and selling particular investments
• Category III: Those that relate to buying, selling, and managing your investments in general
• Category IV: Those that relate to royalty income and real estate rentals.


CATEGORY I: THOSE THAT YOU JUST CAN'T CLAIM
Costs specifically related to tax-exempt investments can't be claimed on your tax return at all. Congress' reason for making it this way is that if you're not going to have to include the income on your tax return, you shouldn't be able to include the deductions either. That makes sense.
However, here's one little point to remember: IRA's and 401k's and similar vehicles are NOT tax exempt!! They are tax DEFERRED. This means that outlays related to managing your IRA are, indeed, tax deductible if other requirements are met. On the other hand, outlays related to managing your tax-exempt municipal bonds are NOT.
Travel costs to attend an investment seminar, conventions, or stockholder meetings, or to investigate potential rental property are generally NOT tax deductible. Congress made it this way because they noticed that these activities so often occur in warm, sunny vacation locations. That makes a certain amount of sense.
Another investment related outlay that can't be deducted is one that you didn't pay. For example, if your brother Bob paid your annual IRA management fee, you can't deduct it. (Neither can your brother Bob, by the way.) That makes sense.
This leads to one important point of caution, however. If, Bob doesn't pay that IRA management fee, and the IRA management company simply takes it out of your IRA account, you can't deduct it. Why? Because technically, although you control your IRA, you don't own it; it is owned by a trustee. Therefore, if the fee is simply deducted from your IRA account, YOU didn't pay it! Always pay your IRA related expenses from a source outside the IRA; that way they will be deductible!!
Another expense that you just can't deduct is any part of the basic monthly fee for the first telephone line in your house.

CATEGORY II: COSTS OF BUYING AND SELLING SPECIFIC INVESTMENTS
Outlays related to buying any investment are capitalized as part of the investment, increasing its cost, or "basis". This reduces the amount of any gain when you ultimately sell the asset.
Outlays related to selling any investment are subtracted from the selling price, reducing it to the "net amount realized." Again, this lowers the amount of any taxable gain when you sell the asset.

CATEGORY III: OUTLAYS RELATED TO GENERAL MANAGEMENT OF YOUR INVESTMENTS
Unless you're a "real estate professional" or professional securities trader, which is pretty narrowly defined, all these expenses of owning and managing your investments go on Schedule A (Itemized Deductions) of your Form 1040 as "Miscellaneous Itemized Deductions" -- all except expenses related to royalties and real estate rentals, which go on Schedule E. We'll talk about Schedule E expenses later; let's focus on Miscellaneous Itemized Deductions for now. Almost anything you can think of could be included here as long as these conditions are met:
• You must itemize your deductions using Schedule A of Form 1040.
• You must literally "pay or incur" the expense yourself.
• The expense must be "ordinary and necessary."
• The relationship between the investments and the expense must be "reasonable and proximate."
Here's a partial list of deductions to think about:

• Fees for investment advice
• Subscriptions to investment or financial publications
• IRA setup and custodial fees
• Software or online services to manage your investments
• Safe deposit box fees if used to store investment related documents
• Transportation costs to and from your broker or advisor's office – including mileage
• Attorney, accounting, or clerical costs
• Charges for automatic investment services or dividend reinvestment plans
• Costs to replace lost security certificates
• Straight-line depreciation on your computer and peripherals to the extent they were used to manage investments
• Bank deposit losses if not FDIC insured
• Casualty or theft of non-rental, non-royalty investment property
• Investment fees for non-publicly offered mutual funds shown in Box 5 of Form 1099-DIV
• Proxy fight expenses related to non-frivolous policy disputes
• Salary of a bookkeeper, secretary, or other employee to keep track of investments
• Investment property management expenses
• (Investment interest is also deductible but is reported differently that other "investment expenses."  It is NOT included under "miscellaneous itemized deductions;" instead, it has a separate line on Schedule A and potentially requires a Form 4952 to compute its limitations.)

Once you have compiled your list of Miscellaneous Itemized Deductions and investment interest, the amount you can actually deduct is subject to a series of different limitations:
FIRST of all, the amount of any investment interest you are claiming cannot exceed the following amount: investment income minus the deductible portion (after 2% AGI floor) of other related investment expenses.. . This excess investment interest, if any, can be carried over and deducted on your tax return in some future year. There is no limit to the number of years you can carry it forward until you get a chance to use the deduction.  You may be required to submit a Form 4952, "Investment Interest Expense Deduction" do compute and document all of this.
SECOND, most Miscellaneous Itemized Deductions, including investment expenses, are subject to a "2% of AGI Floor." This means that you multiply your adjusted gross income by .02 and subtract that figure from your investment expenses and other Miscellaneous Itemized Deductions.
The only people who don't have to worry about the 2% of AGI reduction are professional securities traders, who can put all their expenses on a Schedule C. These insiders have no reduction or limit on their investment expenses writeo-off at all. (Go figure!!!)
THIRD: If there is anything left after applying the first two limitations, it is subject to being reduced by a "phase out" of your total itemized deductions. Phase-out of miscellaneous itemized deductions occurs if your Adjusted Gross Income exceeds certain thresholds. These thresholds are:
If your filing status is "married filing separately" $79,975
Single $159,950
Head of Household $159.950
Married Filing Jointly $159,950
(2 Singles living together out of wedlock = $159,950 x 2 $319,900)
(Do you see the big marriage penalty in those numbers?)
Generally, for your 2008 return, 27% of itemized deductions above these thresholds evaporate in this sneaky Congressional take-back called the "phase-out" of itemized deductions. Gambling losses, medical expenses (minus 7.5% of AGI "floor"), and casualty/theft losses (minus a series of limitations that apply only to casualties and thefts) are not subject to "phase-out."
And again, there is no phase-out for the insiders who are able to list their investment expenses on Schedule C.
FOURTH: If there is anything left of your Miscellaneous Itemized Deductions at this point, it is now subject to the Alternative Minimum Tax -- which completely disallows all of your investment expense deductions.
Have you heard the term "shell game"???!!!!. Thank Congress! LOL!

CATEGORY IV: RENTAL AND ROYALTY EXPENSES
Royalty and real estate rental expenses, which appear on Schedule E, must meet the same requirements as the Schedule A expenses, namely:
• You must literally "pay or incur" the expense yourself.
• The expense must be "ordinary and necessary."
• The relationship between the investments and the expense must be "reasonable and proximate."
In order to limit the amount of royalty and rental expenses you can deduct, Congress came up with a scheme that classifies all income into 3 categories: "Earned Income," "Portfolio Income" and "Passive Income." . Earned Income includes wages and the net income (or loss) from conducting a business or a farm and certain other things like unemployment compensation. Any other income, in Congress' view, is "Unearned." Unearned income is divided into Portfolio Income and Passive Income. Portfolio Income is interest and dividends stocks, bonds, and bank accounts. Passive Income relates to things such as real estate rental and royalties. The tricky part about Passive Income is that if your expenses exceed your revenues, the resultant loss CANNOT be deducted unless you have another passive activity that is producing an equal profit – which is referred to as a "passive income generator," or PIG. In most cases, because of depreciation of high-cost assets such as buildings, rental activities generate only a small profit, or, more often, a nondeductible loss. This is to say that the deduction for passive investment expenses is limited to the amount of passive revenue. The excess can be carried over to future years until either the asset is sold, in which case the accumulated carried forward losses become part of a capital transaction, or a PIG comes along.
There is one important exception to the limitation of deducting real estate rental losses. If you have more than 10% of a real estate rental and you help manage it in a "active" way, and if your "Modified Adjusted Gross Income" is less than certain thresholds, you may use up to $25,000 of rental loss to offset other non-passive income, such as a salary. The thresholds are:
Married filing separately Zero
Married filing separately as abandonded spouses $50,000
(But the exception amount is $12,500 each, not $25,000)
Single $100,000
Head of Household $100,000
Married Filing Jointly $100,000
(2 Singles living together out of wedlock = $100,000 x 2 $200,000)
(Anybody see a marriage penalty in these numbers?)
Between $100,000 and $150,000, the $25,000 exception is phased down to zero.
Another exception relates to "qualified real estate professionals." These insiders can deduct their real estate losses fully every time without limit.

THE BOTTOM LINE
The bottom line to all of these complexities, is to keep careful track of all those investment related expenses and consult your tax advisor about how to best use them. For assistance with your income tax filings, you may wish to contact Maximum Legal Refund ™ at maxlegalrefund@yahoo.com or telephone (301)537-5365.

INCOME TAX PLANNING FOR MEDICAL EXPENSES

by JC Leahy
What a good deal!!! Pay your medical expenses AND save Federal income tax, AND save payroll taxes, AND save State income tax all at the same time!!! Just be careful not to bite the razor blade in that apple!!

As writer Dachary Carey observed, "When you're thinking about ways to manage your medical expenses, one option that many people fail to consider is the flexible spending account." Flexible spending accounts were created by Congress eons ago. They help people pay their families' unreimbursed medical expenses such as co-pays, orthodontics, chronic diabetes or asthma medications, eyeglasses, any sort of surgery, hospitalization, or other medical and drug expenses. A flexible spending account (FSA) is sort of like a 401(k). A certain amount of money is withheld from your paycheck each month, free of income taxes or payroll taxes. Usually you can set aside, by installments each paycheck, $4,000-$5,000 per year. The beauty is that for every $1,000 you put into your FSA, you save 28% or 15% (depending on your tax bracket) of income tax. PLUS Social Security tax of 6.2%, PLUS Medicare tax of 1.45%, PLUS your State income tax. This means in the 28% bracket you save $356.50 in taxes for every $1,000 of medical expenses you channel through your FSA!!! In the 15% bracket it's $226.50. If you sock away $5,000 to FSA, you save $1782.50 or $1,132.50!! Plus State income tax!! What a great tool to ease the burden of medical expenses!!! What a rosy apple Congress had dropped into your bag!!!

There is one problem. In true Lex Luthor fashion, Congress has inserted a razor blade into your apple!! The razor blade is this: When you set aside money for your family's medical expenses in an FSA, and you don't spend it ALL by 12/31 (or whatever your annual deadline is) the institution holding your money gets to confiscate the whole balance. Thousands upon thousands of people lose their entire FSA balances to managing institutions every year!! Do you find that harsh? Hard to believe? Unjust? Do you think it would make more sense to just let folks keep their own money in their FSA for rainy-day medical expenses?
Well, with that caveat, the FSA is a really smart way to help pay family medical expenses. You can use it for medical expenses of you, your spouse, and your dependents. Check with your human resources department about how to begin, because there is usually an annual election made sometime before January 1 -- or sooner. And don't bite into that razor blade!!

PS -- Congress is about to take away, or cap, and/or tax FSA's. As one arrogant SOB, Ron Lieber, wrote in the New York Times, "Use the tax break before you lose it, because many of you probably don't deserve to have it in the first place." Is that arrogant or WHAT??

You might want to e-mail and/or telephone your senators and congressional representative about this. Tell them to leave your FSA alone and get the razor blade out of the damn apple!!! Here's the link for that:

REMOVE THE RAZOR BLADE FROM THE APPLE!!!
CLICK HERE:
CONTACT YOUR CONGRESSMAN AND SENATORS HERE



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