Military Spouses Residency Relief Act

Under the new Military Spouses Residency Relief Act, signed into law on November 11, 2009, spouses of military service members who relocate from one state to another on military orders do not become residents of the new state for income tax purposes. This means that the military spouse’s wage/salary and self-employment income is not taxable by the new state. This new law will result in big California tax savings for some military families. This makes the income tax treatment of the military spouse similar to that of the service member, who does not acquire residency in the new state because of the Servicemembers Civil Relief Act. This new law is effective January 1, 2009.

Previously, a military spouse would acquire California tax residency when moving to California under the service member’s Permanent Change of Station (PCS) orders. The military service member would not, so the spouses had different state tax residency and the spouse’s wage/salary and self-employment income was taxed by California.

Real Estate Tax Assessment Appeals in San Diego, California

The California State Board of Equalization Letter to Assessors 2009/021, 04/29/2009, confirmed that San Diego County has certified the last day of the real estate tax assessment filing period. The regular appeals filing period for San Diego real estate tax assessments will begin on July 2, 2009 and will end on November 30, 2009.

Unmarried Co-Owners of Residence with > $1 Million Mortgage

Home mortgage interest is only deductible on up to $1 million of debt used to buy or improve a taxpayer’s primary residence. If two unmarried persons are co-owners of a home they both use as their primary residence, the question arises as to whether each owner has a separate $1 million limit. The IRS recently took the position (no surprise) that the $1 million limit applies per property, not per taxpayer. Therefore, the $1 million has to be split among the owners based on their percentages of ownership. IRS office of Chief Counsel Internal Legal Memorandum 200911007.

S-Corporation Built-In Gains Period Now 7 Years

The new stimulus law, the American Recovery and Reinvestment Act of 2009, signed into law by President Obama on Feb. 17, temporarily reduced the S-Corporation built-in gains period from 10 to 7 years. For tax years 2009 and 2010, S-corporations can avoid C-corporation maximum-rate income tax on built-in gains. Built-in gains are generally gains that were unrealized at time of conversion from C-corporation to S-corporation. Generally these gains are subject to the maximum C-corporation tax rate if realized (the property is sold) by the S-corporation within 10 years of S-election.

Who Really Pays Income Tax

According to the IRS Winter 2009 Statistics of Income Bulletin, taxpayers in the top 1% of Adjusted Gross Income (AGI) reported AGI of at least $388,806. This group accounted for 40% of the total income tax reported, compared to 39% in 2005. Taxpayers in the top 5% of AGI reported AGI of at least $153,542 and this group accounted for 60% of total income tax.

Energy Efficient Home Improvements Tax Credit

The new stimulus law, the American Recovery and Reinvestment Act of 2009, signed into law by President Obama on Feb. 17, provides homeowners more tax credits for energy efficient home improvements. Previously, the credit was 10% with a lifetime maximum of $500 and ended after 2009. Now a credit can be claimed on 2009 and 2010 purchases and the maximum is $1,500 for 2009 and 2010 combined.

California Homebuyer’s Credit

California taxpayers who purchase a new home (new construction) March 1, 2009 through February 28, 2010 and use it as their primary residence for the following two years can get a tax credit of 5% of the purchase price (maximum $10,000). 1/3 of the credit is claimed in the year of purchase and each of the two succeeding years. To apply for the credit, the escrow person, on behalf of the seller and buyer, must fax the completed Form 3528-A, Application for New Home Credit, to the FTB , within seven calendar days after the close of escrow. Only the first $100 million of valid credit applications will be approved. (FTB—Tax Credit for New Home Purchase, 02/27/200).

California Budget Tax Changes

HIGHER PERSONAL INCOME TAX RATES: personal income tax rates increased by 0.125% to 0.25% for tax years 2009 through 2012. HIGHER SALES TAX RATES: sales tax rates go up by 1%. San Diego’s 7.75% rate becomes 8.75%. AUTOMOBILE REGISTRATION / VEHICLE LICENSE FEE INCREASE: the vehicle license fee portion of automobile registration, which is a “property tax” on the value of the vehicle, increased from 0.65% to 1.15% for registrations beginning May 19, 2009. NEW HOME BUYER TAX CREDIT: purchase of a new home (new construction) March 1, 2009 through February 28, 2010 used as personal residence for two years results in a tax credit of 5% of the purchase price (maximum $10,000); once $100 million of credits have been claimed, no more credits will be issued.

New Motor Vehicle Tax Deduction

The stimulus act signed into law by President Obama, on Feb. 17, called the American Recovery and Reinvestment Act of 2009, allows an itemized deduction for state or local sales or excise taxes on the purchase of a new motor vehicle between 2/17/2009 and 12/31/2009. The deduction is the amount of taxes on up to $49,500 of the purchase price of a passenger automobile, light truck or motorcycle (gross vehicle rating not more than 8,500 pounds), or a motor home. Even taxpayers who claim the standard deduction can use this deduction in addition to the standard deduction. Taxpayers with Modified Adjusted Gross Income (MAGI) over $125,000 ($250,000 married filing jointly) get reduced or no benefit. Unlike other state/local tax deductions, this one is allowed for AMT. However, the deduction is not available to a taxpayer who elects to deduct state and local sales and use taxes in lieu of income taxes as an itemized deduction.

First-Time Homebuyer Tax Credit

The new stimulus law, the American Recovery and Reinvestment Act of 2009, changed the first-time homebuyer tax credit. Gone is the 15-year recapture, which rendered the old credit somewhat useless. Now there is no recapture unless the home ceases to be the taxpayer’s or spouse’s principal residence within 3 years. The credit of 10% of the purchase price (maximum of $8,000) is a dollar-for dollar reduction in federal income taxes. If the credit is larger than the tax liability, the rest simply paid to the first-time homebuyer as a “tax refund”. Either way, the government is essentially giving the first-time homebuyer cash of 10% of the purchase price of the new home. This is a huge benefit, and I highly recommend claiming the credit. The home purchase must close before December 1, 2009. Even better, if you buy the home in 2009, you can claim the tax credit on your 2008 tax return. This way you get the money much sooner

Computer Programmer was Independent Contractor

Court of appeals determined that a computer programmer was an independent contractor and not an employee. Decision based upon control over the details of work, duration of projects only six to twelve months each, accounting and tax reporting by both parties (1099-MISC form and Form 1040 Schedule C / Sole Proprietorship), beliefs of the parties regarding the relationship, “distinct occupation or business” factor, the “kind of occupation” factor, and the “skill required” factor. Suskovich v. Anthem Health Plans of Virginia, Inc., (CA 7 1/22/2009).

E-File Season Opens Tomorrow

IRS announced that 2009 e-filing season will open on 1/16.

Standard mileage rates down for 2009

The optional mileage allowance for owned or leased autos (including vans, pickups or panel trucks) is 55¢ per mile for business travel after 2008. That's 3.5¢ less than the 58.5¢ allowance for business mileage that applied in the last six months of 2008. Further, the rate for using a car to get medical care or in connection with a move that qualifies for the moving expense deduction is 24¢ per mile, down 3¢ from the 27¢ per mile allowance for the last half of 2008.

Real Estate Section 1031 Exchange Escrow Earnings

IRS has ruled that earnings on section 1031 exchange escrow funds are not taxable if used for exchange fees on small exchanges (exchange proceeds are $2 million or less).