ENERGY TAX CREDIT (2009/2010)

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By JC Leahy, MA Accounting
Maximum Legal Refund (tm) Silver Spring, Maryland
Income Tax Preparation and Consulting
email jcleahy@jjaitoday.com

For assistance preparing your income tax returns, email: maxlegalrefund@yahoo.com

Congress allowed the Residential Energy Tax Credit to expire at the end of 2007. It was not available in 2008, then was reintroduced in 2009 with changes and complications.

Here's the current deal:

There are now actually TWO Residential Energy Tax Credits: (1) The Nonbusiness Energy Property Credit, and (2) The Residential Energy Efficient Property Credit.  Both are "nonrefundable credits" -- which means that to the extent the tax credit exceeds your tax liability you don't get the credit. .

NON BUSINESS ENERGY PROPERTY TAX CREDIT


This credit is limited to a total of $1,500 between the years 2009 and 2010. That means if you get a $1,500 credit in 2009 for installing energy efficient windows, don't expect another dime in 2010 for installing energy efficient doors. There is no carryforward or carryback provision for any unused portion of your Nonbusiness Energy Property Tax Credit.

The credit is equal to 30% of the cost of qualified improvements to your PRINCIPAL RESIDENCE located in the United States -- up to the $1,500 limit mentioned above. Qualified improvements include energy efficient insulation, exterior windows, doors, skylights, heat pumps, water heaters, furnaces, boilers, central air conditioners and certain metal and asphalt roofs. With the old, pre-2008 Residential Energy Tax Credit, you could rely on the Energy Star label to be sure your improvement qualified for the tax credit. This is no longer true.  With the exception of windows and skylights purchased before June 1, 2009, the IRS now publishes stricter, detailed guidelines that determine exactly which products qualify and which don't. Fortunately, the taxpayer can rely on the manufacturer's certification that any particular product meets the IRS guidelines. If you plan to claim this tax credit, be sure to get a copy of the manufacturer's certification. You don't need to attach it to your tax return, but you need to keep it on file.

Your Nonbusiness Energy Tax Credit may be reduced or disallowed if you claim certain other nonrefundable personal credits. There's a special tax form to accomplish this take-back: Form 5695. On Form 5695, you will subtract the amount of the following tax credits from what you thought would be your $1,500 : the credit for foreign taxes, the child and dependent care expenses credit, the credit for the elderly and disabled, and education tax credits.

Again, this is a "nonrefundable credit". This means that you can only get the credit up to the amount of  your income tax liability.  Unlike some nonrefundable credits, there is no carryback or carryforward of the limited portion; that amount is simply be lost.

So there are a lot of pitfalls and caveats, but the Nonbusiness Energy Property Tax Credit may help you improve the energy efficiency of your home.

RESIDENTIAL ENERGY EFFICIENT PROPERTY TAX CREDIT

This is an entirely different credit than the one outlined above, but it sounds similar in ways.. This one also goes on Form 5695 and is equal to 30% of the cost of qualified property. This one also is reduced or eliminated by those other personal nonrefundable credits I enumerated; viz., the foreign tax credit, the child and dependent care expenses credit, the credit for the elderly and disabled, and education tax credits This one also a nonrefundable credit. Products also have to comply with detailed standards published by the IRS, but the taxpayer may rely on certifications issued by manufacturers.

The Residential Energy Efficient Property Credit does not have a $1,500 cap. In fact, there is no cap at all, except for a $500 per half-kilowatt limit on fuel cells. Additionally, there ARE carryforward provisions from 2008 and to 2010, but only to the extent that the credit was limited by the tax-liability limit -- NOT for the other-personal-tax credit limit.

Qualified property for this credit is strictly defined as two groups:

• Group one: Qualified residential solar panels, solar water heating equipment, wind turbines, and geothermal heat pumps -- but not to the extent that any of these items is used to heat a swimming pool or hot tub. Products in this group DO NOT have to be installed on your principal residence.
• Group two: Qualified residential fuel cells. Fuel cells DO have to be installed on your principal residence located in the United States. They must have a capacity of at least half a kilowatt, and the credit cannot exceed $500 per kilowatt

Again, a good credit if you can negotiate the minefield of details.

Questions?  Feel free to contact me directly at jcleahy@jaitoday.com

JC Leahy
Maximum Legal Refund (tm)
Income Tax Preparation and Consulting

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.

HOW IS THE ALTERNATIVE MINIMUM TAX LIKE MAD COW DISEASE?

This question was asked by Dr. Reuben B, a practicing surgeon in Washington, DC. He phrased it a little differently: "What is the Alternative Minimum Tax and does it affect me?"

ANSWER:Dr. B, the Alternative Minimum Tax is like Mad Cow Disease because you can't tell for sure if you're affected without performing an autopsy. Believe it or not, the Alternative Minimum Tax (AMT) is a shadowy, alternative income tax system created by Congress to quietly take back a large slew of tax benefits to which people think they are entitled under the regular income tax system. This is very much like sneaking back at night to steal a gift that you gave during the day. In recent years, millions of mostly middle class taxpayers have been affected. The problem is so severe that the Emergency Economic Stabilization Act of 2008 included a provision to allow millions of middle-class taxpayers to escape from the Alternative Minimum Tax - for one year only.

Like Mad Cow Disease, Dr. B., there is no conclusive screening test to determine whether you are affected. You literally have to figure your income tax liability under BOTH income tax systems. Then, whichever comes out higher is what you, as a patriotic American, get to pay. The complexity introduced by the Alternative Minimum Tax goes a long way towards ensuring that the average American is unable to fill out his own tax return without resorting to a computer program and/or a tax consultant.

The list of tax write-offs disallowed under the Alternative Minimum Tax is really quite long. It includes even basic things like all of the personal exemptions for you and your entire family, the standard deductions of the taxpayers who don't itemize, the deduction for medical expenses of sick Americans, some charitable contributions, some home mortgage interest, the deduction for taxes paid to your State, and just about all of your miscellaneous itemized deductions such as investment expenses, tax preparation fees, and un-reimbursed employee expenses. The list of disallowed items really goes on and on.

If you don't like this, Email your congressman at https://writerep.house.gov/writerep/welcome.shtml and say that you want to either repeal the Alternative Minimum Tax or the regular income tax -- and keep the other. Or telephone them with area code 202 and the number listed at http://www.mass.gov/legis/memmenuh.htm. Consider calling whatever talk radio show you like. For example, Rush Limbaugh is at 1-800-282-2882.