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MONTHLY TAX NEWSLETTERSeptember 2008
by Richard Conboy, CPA
Housing foreclosures are still rocking the economy and probably will for some time. No one seems to be immune.
Just as an example, the Associated Press recently reported that one of the initial ABC network’s ‘Extreme Makeover’ house projects is now a foreclosure casualty - even though the family not only got the home for free but also received $250k to pay any taxes due at that time. Evidently, the family from Lake City, Georgia used the two-story home as collateral for a $450,000 loan. When they couldn’t make the payments, the lender was forced to foreclose.
To help buoy the real estate market, the Housing and Economic Recovery Act of 2008 was signed into law by the President last month. At more than 600 pages, it will take a little bit more time to really digest all the new rules, but here are some of its highlights:
First-time Homebuyer Credit -
This new provision provides for a 10% refundable credit on the purchase price of a first time home. Please keep in mind that a tax credit is a dollar for dollar reduction in your income tax liability. And a "refundable" tax credit is even better, since you get to keep 100% of the amount of the credit even if the credit exceeds your tax liability for that year.
The idea behind this new credit is to help jump start the stagnant housing market by encouraging first time buyers to jump into the market now. In reality, this credit isn’t a true tax credit because it has to be paid back. Instead, it’s more of an interest-free loan administered by the IRS. But that shouldn’t subtract from it’s value to a new homebuyer. Here are the basics about the credit:
Temporary Increase to the Standard Deduction for Homeowners -
There is more good news to homeowners in the form of an increased standard deduction – for 2008 only. Under the newly enacted rules, homeowners who don't itemize can increase their standard deduction for their state and local property taxes paid during the year, up to a maximum of $500 for single individuals and $1,000 for married couples.
New Rules to Pro-Rate Gain on Exclusion of Principal Residence -
Here is the revenue raiser included as part of the Housing and Economic Recovery Act of 2008 . The new rules include a provision that caps the exclusion one can claim on the sale of a home that wasn't always used as one's principal residence.
Under the pre-2009 rules, you don't pay taxes on the first $500,000 ($250,000 if single) of gain realized on the sale of a home that you owned for at least two years and used as a principal residence for at least two years as well. So many people who owned multiple residences would simply move into each home for at least two years before selling it, thus avoiding paying taxes on the first $500,000 of gain.
Well, the amended provision requires you to pay taxes on the portion of the gain attributable to the following ratio - the time the home was not used as your primary residence after 2008 divided by the total time that you owned the home. The amendment is effective for tax years after 12/31/08 and closes a loophole available to people who own multiple residences.
Let's Hope Groucho Is Wrong This Time –
Grouch Marx once said, “Politics is the art of looking for trouble, finding it, misdiagnosing it and then misapplying the wrong remedies.” Hopefully, Groucho's words won't ring true this time, and the Housing Assistance Tax Act of 2008 will help turn the tide of the current housing and banking crisis.
Richard Conboy CPA has his own CPA firm outside of Boston, MA. Richard can be reached for questions or comments at (978) 774-0167.
Who knows how bad the current banking crisis might become? To help you determine how much of your bank deposits are at risk if your bank were to fail, the FDIC has developed an online Electronic Deposit Insurance Estimator named EDIE and available at http://www.fdic.gov/edie . Here is how the FDIC explains their tool EDIE.
EDIE is an interactive application that can help you learn about deposit insurance. It allows you to calculate the insurance coverage of your accounts at each FDIC-insured institution.
The FDIC protects you against the loss of your insured deposits in the unlikely event that an FDIC-Insured Institution fails. If you or your family's deposit accounts at one FDIC-Insured Institution total $100,000 or less, your deposits are fully insured. If you or your family has more than $100,000 at one insured institution, you can still be fully insured if your accounts meet certain requirements. You can use EDIE to determine your insurance coverage beyond the basic $100,000 amount. Note: Federal law provides up to $250,000 in insurance coverage for deposits held in Individual Retirement Accounts (IRAs).
Getting Started with EDIE: Before you begin, be sure that you have assembled the following current information about all of your deposit accounts at an FDIC-Insured Institution: Account Balance, Name of Owner(s), and Name of Beneficiary(ies) for Personal Accounts and Account Balance, Business Name and Employer Identification Number (EIN#) for Business Accounts.
Bank failures are on the rise. Following a quiet period between June 2004 and February 2007, three banks failed during 2007 and eight more banks have failed so far in 2008, according to the Failed Bank List published by the FDIC.
There are certainly steps you should take to minimize the risk of losing your money if one of your banks is to fail. But how can you recoup some of your losses if you have deposits exceeding FDIC limits in a bank that has already failed? A good place to start is by figuring out how to maximize the tax breaks you can claim due to your losses.
According to the instructions of IRS Form 4684, Casualties and Thefts, there is special treatment available to losses on deposits in insolvent or bankrupt financial institutions. Depositors can claim their losses as either a casualty loss of personal property on Form 4684 or, if their losses don’t exceed $20,000, as a miscellaneous itemized deduction on their Schedule A.
Both of these options come with pitfalls, however. Casualty losses of personal property are only allowable to the extent that the loss exceeds 10% of Adjusted Gross Income (AGI) plus $100. Miscellaneous itemized deductions are only allowable to the extent they exceed 2% of AGI, and are then further limited if a taxpayer is subject to the Alternative Minimum Tax. Plus, individuals can’t claim their losses as a Miscellaneous Itemized Deduction if any part of the deposits related to the loss is federally insured.
There is a third option. Taxpayers can claim any losses not previously deducted as a nonbusiness bad debt for the year in which the final determination of the loss occurs, which means they will report those lost deposits as a short-term capital loss. An individual can use his or her capital losses to first offset any other capital gains realized during the year, and then will utilize up to $3,000 of any remaining losses to offset wages and other ordinary income earned that year. Additional unused losses are then carried forward to subsequent years.
IRS Publication 547 goes on to explain, “The choice generally is made on the return you file for the year the bank fails and applies to all your losses on deposits for the year in that particular financial institution. If you treat the loss as a casualty or ordinary loss, you cannot treat the same amount of the loss as a nonbusiness bad debt when it actually becomes worthless. However, you can take a nonbusiness bad debt deduction for any amount of loss that is more than the estimated amount you deducted as a casualty or ordinary loss. Once you make the choice, you cannot change it without permission from the Internal Revenue Service.”
So what’s the best route to take if you have money in a bank that fails? Remember, the rules aren't completely straightforward, and you do need to make a decision with the first tax return that you file for the year of the loss. If you suffer any lost deposits in connection with a bank that fails, the best route is to meet with a tax professional to discuss how to best maximize the various tax breaks available to you.
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