Rules for claiming a dependent child

Final regs on dependent child of divorced or separated parents or parents who live apart T.D. 9408, 07/01/2008; Reg. § 1.152-4

Mike Habib, EA

IRS has issued final regs on the rules for claiming a child as a dependent by parents who are divorced, legally separated under a decree of separate maintenance or a written separation agreement, or who live apart at all times during the last 6 months of the calendar year. They are effective for tax years beginning after July 2, 2008, and reflect amendments under the Working Families Tax Relief Act of 2004 (WFTRA) and the Gulf Opportunity Zone Act of 2005 (GOZA).

Background. A taxpayer may deduct an exemption amount for a dependent, defined generally as a qualifying child or a qualifying relative. Code Sec. 152(e), as amended by § 404 of GOZA, carries rules for parents who (1) are divorced or legally separated under a decree of divorce or separate maintenance, (2) are separated under a written separation agreement, or (3) live apart at all times during the last 6 months of the calendar year. A child of parents described in (1), (2), or (3), is treated as the qualifying child or qualifying relative of the noncustodial parent if the child receives over one-half of his support during the calendar year from the child's parents, the child is in the custody of one or both of the child's parents for more than half of the calendar year, and:

• the custodial parent signs a written declaration that the custodial parent will not claim a child as a dependent for a tax year and the noncustodial parent attaches the declaration to the noncustodial parent's tax return (Code Sec. 152(e)(2); or
• a qualified pre-'85 instrument allocates the dependency exemption to the noncustodial parent and the noncustodial parent provides at least $600 for the support of the child during the calendar year. (Code Sec. 152(e)(3))

A custodial parent is the parent having custody for the greater portion of the calendar year and the noncustodial parent is the parent who is not the custodial parent. (Code Sec. 152(e)(4)) If a child is treated as the qualifying child or qualifying relative of the noncustodial parent under Code Sec. 152(e), then that parent may claim the child for purposes of the dependency deduction under Code Sec. 151 and the child tax credit under Code Sec. 24, if the other requirements of those provisions are met.

In May of 2007, IRS issued proposed regs on the rules for a dependent child of divorced or separated parents or parents who live apart. IRS has now adopted the proposed regs as final regs, with some modifications.

Final regs. The final regs update the prior final regs, deleting obsolete provisions, revising language to improve clarity, and incorporating provisions in Reg. § 1.152-4T, which is removed. They also provide guidance on issues that have arisen in the administration of Code Sec. 152(e).

Custodial parent. Like the proposed regs, the final regs define the custodial parent as the parent with whom the child resides for the greater number of nights during the calendar year (the counting nights rule). In response to commentators' concern that this rule doesn't address how the child's residence for a night is determined (e.g., by the child's physical location at a given time such as midnight, or by where the child sleeps) and for which year the night of Dec. 31 to Jan. 1 is counted, the final regs clarify that, for purposes of Code Sec. 152(e), a child resides for a night with a parent if the child sleeps (1) at the parent's residence (whether or not the parent is present); or (2) in the company of the parent when the child does not sleep at a parent's residence (for example, if the parent and child are on vacation). The time that a child goes to sleep is irrelevant. A night that extends over two tax years is allocated to the tax year when the night begins: for example, the night that begins on Dec. 31, 2008, is counted for tax year 2008. (Reg. § 1.152-4(d))

To remedy any ambiguity caused by the proposed regs' failure to define custody, the final regs provide that a child is in the custody of one or both parents for more than one-half of the calendar year if one or both parents have the right under state law to physical custody of the child for more than one-half of the calendar year. But, a child isn't in the custody of either parent for purposes of Code Sec. 152(e) when the child reaches the age of majority under state law. (Reg. § 1.152-4(c))

Release of the right to claim a child. Under Code Sec. 152(e)(2), a custodial parent may release a claim to an exemption for a child by signing a written declaration that he will not claim the child as a dependent. The final regs retain the rule in the proposed regs that a written declaration not on Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, (or successor form) must conform to the substance of Form 8332. The final regs further provide that a release not on a Form 8332 must be a document executed for the sole purpose of releasing the claim. A court order or decree or a separation agreement cannot serve as the written declaration. If a release of a claim to a child is for more than one year, the noncustodial parent must attach a copy of the written declaration (rather than the original, as required in the proposed regs) to the parent's return for the first tax year for which the release is effective. Copies must also be attached to returns for later years. (Reg. § 1.152-4(e))

Revocation of release of claim. Under both the final and proposed regs, a custodial parent who released the right to claim a child could revoke the release for future tax years by providing written notice of the revocation to the other parent. The final regs require that the parent revoking the release notify, or make reasonable attempts to notify, in writing, the other parent of the revocation. What is a reasonable attempt is determined under the facts and circumstances, but mailing a copy of the written revocation to the noncustodial parent at the last known address or at an address reasonably calculated to ensure receipt satisfies this requirement. A revocation can be made on Form 8332, or successor form designated by IRS. A revocation not on the designated form must conform to the substance of the form and be in a document executed for the sole purpose of revoking a release. A taxpayer revoking a release may attach a copy rather than an original to the taxpayer's return for the first tax year the revocation is effective, as well as for later years. (T.D. 9408, 07/01/2008, Reg. § 1.152-4(e)(3))

The final regs also clarify that a multiple year written declaration executed in a tax year beginning on or before July 2, 2008, that satisfies the requirements for the form of a written declaration in effect at the time the written declaration was executed is treated as satisfying the requirements for the form of a release under the final regs. However, the rules for revoking a release of a claim to an exemption apply without regard to whether a custodial parent executed the release in a tax year beginning on or before July 2, 2008; such a release executed may be revoked. (Reg. § 1.152-4(e)(5))

SFR - Substitute for return

IRS may prepare substitute returns in worker classification cases
Chief Counsel Advice 200822026

A Chief Counsel Advice (CCA) has concluded that, in employment tax cases where worker classification issues are present, revenue officers have authority under Code Sec. 6020(b) to prepare employment tax returns, but the requirements of Code Sec. 7436 must be met before assessment.

Background. Where there is an actual controversy involving a determination by IRS that one or more individuals performing services for the taxpayer are employees as part of an examination, Code Sec. 7436 gives the Tax Court jurisdiction to determine certain “worker classification issues” (i.e., the proper amount of the additions to tax, additional amounts, and penalties that relate to the employment tax with respect to determinations of worker classification and whether the taxpayer is entitled to relief under § 530 of the Revenue Act of 1978). To meet Code Sec. 7436 's requirements, certain procedures must be followed before assessment of employment taxes. They are spelled out in Notice 2002-5, 2002-1 CB 320. For example, Notice 2002-5 provides generally that a taxpayer will first receive a “30-day” letter listing the proposed employment tax adjustments to be made and describing the taxpayer's right either to agree to the proposed adjustments or to protest the proposed adjustments to the IRS's Appeals function (Appeals) within 30 days of the date of the letter.

If the taxpayer does not respond to the “30-day” letter by agreeing to the proposed adjustments or by filing a protest to Appeals, the taxpayer will receive a Notice of Determination of Worker Classification (NDWC). The taxpayer may also receive the NDWC if the taxpayer files a protest with Appeals and the worker classification issues are not settled in Appeals. As indicated in Notice 2002-5, under Code Sec. 7436(d)(1), the mailing of the NDWC suspends the period of limitations for assessment of taxes attributable to the worker classification issues for the 90-day period during which the taxpayer can bring suit and precludes IRS from assessing the taxes identified in the NDWC before the expiration of the 90-day period during which the taxpayer may file a timely Tax Court petition.

If IRS erroneously makes an assessment of taxes attributable to the worker classification issues without first either issuing a NDWC or obtaining a waiver of restrictions on assessment from the taxpayer, the taxpayer is entitled to an automatic abatement of the assessment. However, under Notice 2002-5, once any procedural defects are corrected, IRS may reassess the employment taxes to the same extent as if the abated assessment had not occurred.

The amount of any tax imposed by the Code is to be assessed within 3 years after the return was filed, subject to certain specified exceptions. (Code Sec. 6501(a))

Under Code Sec. 6020(b), if a taxpayer fails to file a return when required, IRS may prepare a return based on its own knowledge and on information it obtains through testimony or other means. The failure-to-pay penalty under Code Sec. 6651(a)(2) applies to the amount of tax shown on the return, including, under Code Sec. 6651(g)(2) , any amount shown on a substitute return prepared by IRS. Absent the existence of a return under Code Sec. 6020(b), the Code Sec. 6651(a)(2) penalty doesn't apply to a nonfiler. [For discussion of recently issued regs on substitute returns, see Federal Taxes Weekly Alert 02/14/2008]

Facts. The Chief Counsel was asked to review a memorandum which addressed the issue of whether a revenue officer has authority under Code Sec. 6020(b) to prepare employment tax returns on behalf of taxpayers who fail to file such returns in a case in which worker classification issues are present and where the revenue officer did not refer the case to the Employment Tax Program as required under the Internal Revenue Manual (IRM).

For the years at issue, the taxpayer took the position that certain workers were independent contractors for federal tax purposes. However, for prior years, the taxpayer had treated the workers as employees. After reviewing the facts of the case, the revenue officer determined that the workers should have been treated as employees and prepared Substitute for Returns (SFRs) under Code Sec. 6020(b).

The taxpayer objected to the preparation of the SFRs and requested an appeal. The appeals officer concluded that the worker classification issue was undeveloped and that “the revenue officer did not have the authority to prepare Forms 941 under Code Sec. 6020(b) procedures because the IRM requires the issue to be referred to the Employment Tax Program,” and recommended the government concede the case.

Analysis. The CCA observed that the taxpayer failed to file an employment tax return and did not submit evidence to establish that no employment tax return was due. The revenue officer determined that some of the taxpayer's workers were employees and that an employment tax return should have been filed. The revenue officer prepared returns under Code Sec. 6020(b).

The CCA said that, because the revenue officer failed to meet Code Sec. 7436 's requirements, an assessment of employment taxes based on the Code Sec. 6020(b) return prepared by him is improper. However, the CCA said that the facts do not indicate that the government is required to concede the case. The CCA said that, under Notice 2002-5 , once the procedural defects are corrected and Code Sec. 7436 's requirements are met, employment taxes may be assessed.

Tax Problem Resolution Services

Tax Problem Resolution Services

I specialize in resolving tax problems for individuals, small-size companies, mid-size companies, and fortune 1,000 companies. I represent individuals and businesses before the IRS and any taxing authority, therefore the taxpayer does not have to deal with the IRS directly.

Mike Habib, EA

IRS strengthened enforcement policies, along with their new and complex tax regulations, makes it essential to properly plan for and manage IRS tax audits, examinations or collections efforts in a proactive manner. Applying new dispute resolution procedures and best practices is critical to managing IRS tax examinations or collections problems, resolving disputes at the earliest point, and containing administrative and tax costs. The tax problem resolution services services we offer are:

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As an IRS licensed Enrolled Agent (EA) providing IRS Tax Problem Resolution Services, I can represent individuals and businesses in all of the following states, counties, and metro cities, Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Puerto Rico Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington D.C.. West Virginia Wisconsin Wyoming. AL AK AZ AR CA CO CT DE DC FL GA HI ID IL IN IA KS KY LA ME MD MA MI MN MS MO MT NE NV NH NJ NM NY NC ND OH OK OR PA RI SC SD TN TX UT VT VA WA WV WI WY New York, Los Angeles, Orange County, Riverside, San Bernardino, San Francisco, Ventura, Lancaster, Palmdale, Santa Barbara, Chicago, Washington D. C., Silicon Valley, Philadelphia, Boston, Detroit, Dallas, Houston, Atlanta, Miami, Seattle, Phoenix, Minneapolis, Cleveland, San Diego, St Louis, Denver, San Juan, Tampa, Pittsburgh, Portland, Cincinnati, Sacramento, Kansas City, Milwaukee, Orlando, Indianapolis, San Antonio, Norfolk & VB, Las Vegas, Columbus, Charlotte, New Orleans, Salt Lake City, Greensboro, Austin, Nashville, Providence, Raleigh, Hartford, Buffalo, Memphis, West Palm Beach, Jacksonville, Rochester, Grand Rapids, Reno, Oklahoma City, Louisville, Richmond, Greenville, Dayton, Fresno, Birmingham, Honolulu, Albany, Tucson, Tulsa, Tempe, Syracuse, Omaha, Albuquerque, Knoxville, El Paso, Bakersfield, Allentown, Harrisburg, Scranton, Toledo, Baton Rouge, Youngstown, Springfield, Sarasota, Little Rock, Orlando, McAllen, Stockton, Charleston, Wichita, Mobile, Columbia, Colorado Springs, Fort Wayne, Daytona Beach, Lakeland, Johnson City, Lexington, Augusta, Melbourne, Lancaster, Chattanooga, Des Moines, Kalamazoo, Lansing, Modesto, Fort Myers, Jackson, Boise, Billings, Madison, Spokane, Montgomery, and Pensacola

Business auto tax write off opportunity

Enhanced tax breaks make it an especially good time to buy business autos

Mike Habib, EA
myIRSTaxRelief.com

Thanks to economic woes in general and financial trouble for auto manufacturers in particular, it's a good time to shop for a new vehicle, if you can afford to do so. Thanks to bonus first year depreciation deductions under the Economic Stimulus Act of 2008, it's an even better time to buy if the vehicle is going to be used for business. This Practice Alert takes a close look at the enhanced first year write-offs that are available to new business autos, light trucks or vans that are placed in service this year.

Bonus depreciation basics. In general, for property placed in service after Dec. 31, 2007, in tax years ending after that date, taxpayers get an additional depreciation deduction in the placed-in-service year equal to 50% of the adjusted basis of “qualified property.” (Code Sec. 168(k)(1)) This is property that meets all of these conditions:

• It is property falling within one of four statutory categories, the most important of which is property to which MACRS applies with a recovery period of 20 years or less. (Code Sec. 168(k)(2)(A))
• The original use of the property commences with the taxpayer after Dec. 31, 2007. Original use is the first use to which the property is put, whether or not that use corresponds to the taxpayer's use of the property. (Code Sec. 168(k)(2)(A))
• The property is acquired by the taxpayer (a) after Dec. 31, 2007, and before Jan. 1, 2009, but only if no binding written contract for the acquisition is in effect before Jan. 1, 2008, or (b) pursuant to a binding written contract which was entered into after Dec. 31, 2007, and before Jan. 1, 2009. (Code Sec. 168(k)(2)(A)(iii))
• The property is placed in service after Dec. 31, 2007, and before Jan. 1, 2009 (the placed-in-service date is extended for one year for certain property with a recovery period of ten years or longer and certain transportation property). (Code Sec. 168(k)(2)(B), Code Sec. 168(k)(2)(C))

If all of the Code Sec. 168(k) requirements are met, bonus first-year depreciation automatically applies to qualified property, unless the taxpayer “elects out” under Code Sec. 168(k)(2)(C)(iii).

Under pre-Stimulus Act regs that taxpayers may rely on pending further guidance, the bonus depreciation allowance is found by multiplying the qualifying property's unadjusted depreciable basis by 50%. (Reg. § 1.168(k)-1(d)(1)(A)) The unadjusted depreciable basis is basis for gain or loss purposes, before depreciation, amortization, or depletion, less a number of adjustments, including a reduction in basis for personal use (i.e., use other than for trade or business or investment purposes), and a reduction for any portion of the property expensed under Code Sec. 179. (Reg. § 1.168(k)-1(a)(2)(iii))

To calculate regular depreciation allowances for qualifying property, the taxpayer first subtracts the bonus first year depreciation amount from the unadjusted depreciable basis of the asset. (Code Sec. 168(k)(1)(B), Reg. § 1.168(k)-1(d)(2))

Depreciating luxury autos. Purchased autos and other vehicles used in a trade or business normally are depreciated over five years using 200% declining balance depreciation, with a built-in switch to straight line. (Code Sec. 168(b)(1); Code Sec. 168(e)(3)(B)) Because the depreciation rules generally treat property as placed in service in the midpoint of the placed-in-service year (Code Sec. 168(d)(1)), yielding only half of the otherwise allowable depreciation for the placed-in-service year, the actual depreciation period is six years. The regular depreciation percentages (if the half-year convention applies) are:

• 20% for the first year;
• 32% for the second;
• 19.2% for the third year;
• 11.52% for each of the fourth and fifth years; and
• 5.76% for the sixth year.

However, the deduction normally obtained by applying the above depreciation rules (and the Code Sec. 179 expensing rules) to autos, light trucks and vans, is limited by the so-called “luxury auto dollar caps” of Code Sec. 280F. Thus, the maximum annual depreciation/expensing deduction for a business auto is the lesser of the otherwise allowable depreciation/expensing allowance or the applicable luxury-auto dollar cap.

For vehicles acquired and placed in service in 2008 that are not eligible for bonus depreciation (e.g., they are bought used, or the taxpayer elects out of bonus depreciation for five-year property), the dollar caps for: (1) autos (not trucks or vans) are $2,960 for the placed in service year, $4,800 for the second tax year, $2,850 for the third tax year; and $1,775 for each succeeding year; and (2) for light trucks or vans (passenger autos built on a truck chassis, including minivans and sport-utility vehicles (SUVs) built on a truck chassis) are: $3,160 for the placed in service year, $5,100 for the second tax year, $3,050 for the third tax year; and $1,875 for each succeeding year.

Boosted write-off for business autos, and light trucks or vans. Under the Stimulus Act, for vehicles that otherwise are qualified property under Code Sec. 168(k) (assuming the taxpayer doesn't elect out of bonus depreciation for 5-year property), the regular first-year luxury auto caps are boosted by $8,000 to $10,960 for autos, and to $11,160 for light trucks or vans.

Calculating first-year depreciation deduction. Where expensing isn't claimed, the first-year dollar-cap for a new passenger auto, truck or van that is qualified property under Code Sec. 168(k) and is acquired and placed in service in 2008, is determined as follows:

(1) Multiply the vehicle's depreciable basis by its business/investment use in the placed-in-service year.
(2) Multiply Line (1) result by 50%.
(3) Subtract Line (2) from Line (1).
(4) Multiply Line (3) result by 20% (assuming the half-year convention applies).
(5) Add Line (4) result to Line (2) result.
(6) Multiply the appropriate first-year dollar cap ($10,960 for autos, $11,160 for light trucks or vans) by the business/investment use percentage.

(7) The lesser of Line (5) or Line (6) is the total first-year depreciation allowance for the vehicle.
Illustration 1: On Jan. 10, 2008, a business bought and placed in service a new $35,000 auto and uses it 100% for business. It does not expense any part of the auto's cost, and the half-year depreciation convention applies. The 2008 depreciation deduction for the auto is computed as follows:

(1) $35,000 × 100% business use = $35,000.
(2) $35,000 × .50 = $17,500 bonus depreciation.
(3) $35,000 − $17,500 = $17,500 remaining basis.
(4) $17,500 × .20 first year depreciation allowance = $3,500.
(5) $17,500 + $3,500 = $21,000.
(6) $10,960 × 1.0 = $10,960.
(7) Lesser of $21,000 or $10,960 = $10,960 regular first year depreciation.

Caution: The combined special depreciation allowance and regular first-year depreciation deduction for lower-priced vehicles may be less than the maximum first-year depreciation allowance.

Illustration 2: The facts are the same as in the first illustration, except that the new auto costs $18,000. The 2008 depreciation deduction for the auto is computed as follows:

(1) $18,000 × 100% business use = $18,000.
(2) $18,000 × .50 = $9,000 bonus depreciation.
(3) $18,000 − $9,000 = $9,000 remaining basis.
(4) $9,000 × .20 first-year depreciation allowance = $1,800.
(5) $9,000 + $1,800 = $10,800.
(6) $10,960 × 1.0 = $10,960.
(7) Lesser of $10,800 or $10,960 = $10,800 regular first year depreciation.

Hidden danger for company owned vehicles. A vehicle is qualified property eligible for bonus first year depreciation only if it is used more than 50% in a qualified business use. (Reg. § 1.168(k)-1(b)(2)(ii)(A)(2)) In general, this isn't a problem for company owned autos so long as employee personal use is properly treated as compensation income under the fringe benefit rules. In this case, personal use is treated as qualified business use. ( Reg. § 1.280F-6(d)(2) ; Instructions for Form 4562 (2007), p. 9) However, a vehicle bought new in 2008 and provided to a 5% company owner (or a related person) will not be eligible for bonus first year depreciation unless it is actually used more than 50% for business driving. (Code Sec. 280F(d)(6)(C)) Thus, companies tempted by the prospect of larger first year writeoffs to buy new vehicles this year for their 5% owners should do so only if their business mileage on the car will exceed 50% of total mileage. Keep in mind, too, that depreciation recapture applies if qualified business use in the placed in service year exceeds 50% of total use but declines below that level in subsequent years. The 50% bonus first-year depreciation allowance for a passenger auto that qualifies under Code Sec. 168(k) is taken into account in computing recaptured depreciation. (Code Sec. 168(k)(2)(F)(ii))

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If You Missed the Tax Filing Deadline, There is Help Available

You missed the tax deadline April 15th, so now what?

Mike Habib, EA

myIRSTaxRelief.com

Although the IRS has received a record number of returns this year, there are still thousands of people who did not file tax returns on April 15^th. The reasons for this are numerous, but the IRS research shows that often people do not file in years that their status changes, for instance the death of a spouse or a divorce. Emotional or financial hardship reasons may also cause a person not to file. And then there are some folks who have simply procrastinated. Whatever your reason is, if you did not file your taxes by April 15th, you should stop putting it off and file your tax returns as soon as possible - even if you are late.

Sure, if you file late, you might be missing out on the economic stimulus tax refund check, but the reasons for filing are more compelling, and often less painful than ignoring your obligation.

Here are some things you should consider:

1. You could lose your refund. There is no penalty for failure to file if you are due a refund; however, you cannot obtain a refund without filing a tax return. If you wait too long to file, you may risk losing the refund altogether. In cases where a return is not filed, the law provides most taxpayers with a three-year window of opportunity for claiming a refund.
2. You won’t receive your Earned Income Tax Credit (EITC). Even if you are not otherwise required to file a tax return, you must file in order to receive this credit. The Earned Income Tax Credit (EITC) sometimes called the Earned Income Credit (EIC), is a refundable federal income tax credit for low-income working individuals and families. Congress originally approved the tax credit legislation in 1975 in part to offset the burden of social security taxes and to provide an incentive to work. When the EITC exceeds the amount of taxes owed, it results in a tax refund to those who claim and qualify for the credit. To qualify, taxpayers must meet certain requirements and file a tax return, even if they did not earn enough money to be obligated to file a tax return. The EITC has no effect on certain welfare benefits. In most cases, EITC payments will not be used to determine eligibility for Medicaid, Supplemental Security Income (SSI), food stamps, low-income housing or most Temporary Assistance for Needy Families (TANF) payments.
3. A statute of limitations applies to refunds and credits. After the expiration of the refund statute, not only does the law prevent the issuance of a refund check, it also prevents the application of any credits, including overpayment of estimated or withholding taxes, to other tax years that are underpaid. It is also worth noting that the statute of limitations for the IRS to assess and collect any outstanding balance does not begin until a return has been filed. Or put another way, there is no statute of limitations for assessing and collecting the tax if no return has been filed.
4. A “Failure to File” penalty may be assessed when you miss the tax filing deadline; the sooner you file, the more likely you are to be able to negotiate or decrease this penalty.

Regardless of your reason for not filing, file your tax return as soon as possible. You can contact a tax professional or the IRS for help with filing delinquent returns.

I personally specialize in helping individuals and businesses who are unable to fully pay their taxes, either back taxes, or due to current or late filing. If you can not pay your taxes, do not let this prevent you from filing as tax settlement options may be available. For more details contact us as quick as possible.

For more information on how to file a tax return for a prior year, visit our website at http://www.myirstaxrelief.com/irs-tax-help-services.html

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State Property Tax Credits - Tax Problem Resolution

Memo explains how state property tax credits are taxed and reported - Chief Counsel Advice 200814022

Mike Habib, EA

myIRSTaxRelief.com

In Chief Counsel Advice, IRS has explained the proper federal income tax treatment of certain state property tax credits and the extent to which the state must provide information reports about the credits to IRS under Code Sec. 6041 or Code Sec. 6050E.

Background on tax benefit rule. In general, a taxpayer who receives a refund of state taxes previously deducted on a prior year's federal income tax return must include the refund in gross income in the year received to the extent of any federal income tax benefit, unless all or part of the income is excluded under Code Sec. 111. A taxpayer who receives a refund of state taxes that were not previously deducted on a prior year's federal income tax return is not required to include the refund in gross income in the year received. (Rev Rul 93-75, 1993-2 CB 63)

Facts. State X real property taxes are imposed on a calendar year period and become due Date 1 of the following year. Taxpayers receive a discount if they pay their real property taxes by Date 3.

State X mobile home taxes are imposed on a calendar year period and become due Date 2 of the same year. Taxpayers receive a discount if they pay their mobile home taxes by Date 3.

State Statute A provides for a homestead income tax credit for individuals during Year 1 and Year 2. The credit is equal to 10% of the real property taxes or mobile home taxes that were levied against an individual's homestead, became due during the tax year, and were paid anytime before filing the income tax return claiming the credit (including a timely filed amended return). If the credit exceeds an individual's state income tax liability, the taxpayer can carry forward the unused credit for up to five years. Alternatively, he can request that the state tax commissioner issue a certificate for the unused portion of the credit. The certificate can be used against any of the taxpayer's real property tax or mobile home tax liabilities that become due during the tax year following the year for which the taxpayer claimed the credit. The counties in State X will treat the receipt of a certificate as a payment when it is transferred to them. The counties will have the authority to implement a system that applies the certificate to the following year's liability or (at the county's option) also permits a cash refund if a taxpayer has already paid the real property tax or mobile home tax liability that becomes due during the income tax taxable year following the year for which the taxpayer claimed the credit. This election to carry forward or receive a certificate is irrevocable.

State Statute B provides for a commercial property income tax credit for individuals and corporations during tax years Year 1 and Year 2. The amount of the credit is equal to 10% of the real property taxes or mobile home taxes that were levied against a taxpayer's commercial property, became due during the tax year, and were paid anytime before filing the income tax return claiming the credit (including a timely filed amended return). If the credit exceeds a taxpayer's income tax liability, the taxpayer can carry forward the unused credit for up to five years but there is no option to receive a certificate for the unused portion of the State Statute B credit.

Federal taxable income is used as a starting point in calculating State X income tax for corporations as well as individuals, and there is no add back if a taxpayer claims the Statute A or B credit and takes a deduction on the federal return for real property taxes or mobile home taxes paid or accrued. Consequently, the State Statute B credit is in addition to a deduction for state income tax purposes.

Proper tax treatment of State Statute A credit. The CCA concluded that the following general tax treatment applies when the State Statute A credit exceeds an individual's state income tax liability:

• the credit carryforward should be treated as a reduction in the taxpayer's state income tax liability in the carryforward years and
• the use of a certificate to timely satisfy a real property tax or mobile home tax liability should be treated as a reduction in the taxpayer's real property tax or mobile home tax liability.

Each of these reductions affects the amount deductible under Code Sec. 164(a). Additionally, in a county that permits a refund if a taxpayer has already paid the real property tax or mobile home tax liability that becomes due during the tax year following the year for which the taxpayer claimed the credit, such a refund would be subject to the general rules concerning the tax benefit rule, as discussed above, for taxpayers using the cash method who receive the refund in a year after the real property tax or mobile home tax liability was paid. If the real property tax or mobile home tax refund occurs during the same tax year those taxes were paid, the refund reduces the amount otherwise deductible under Code Sec. 164 by a taxpayer using the cash method.

Proper tax treatment of State Statute B credit. The CCA observed that the State Statute B credit can affect only a taxpayer's state income tax liability for the year the credit is claimed or for a carryforward year. Accordingly, this credit should be treated as a reduction in a taxpayer's state income tax liability. This affects the amount deductible under Code Sec. 164(a)(3).

Information reporting. Code Sec. 6050E requires information reporting for state and local income tax refunds. Form 1099-G is used for this purpose. The CCA said that, in the case of State Statute A, if a taxpayer uses the credit against his state income tax liability for the year the credit is claimed, and receives a refund of state income tax for that year, the amount of the refund must be reported by the state refund officer on Form 1099-G. A copy of the Form 1099-G must be sent to the taxpayer. (Code Sec. 6050E(b)) However, the refund officer need not furnish this statement to the taxpayer if the refund officer verifies that the taxpayer did not claim itemized deductions for federal income tax purposes. (Reg. § 1.6050E-1(k))

If the credit is carried forward and applied to reduce state income tax liability in subsequent years, any state income tax refunds in those subsequent years will be subject to Code Sec. 6050E reporting.

The use of a certificate to pay, reduce or obtain a refund of real property or mobile home tax is outside of Code Sec. 6050E, as it is not a state income tax refund. Instead, any information reporting for a certificate would be based on Code Sec. 6041, which requires information reporting for payments of $600 or more made in the course of a trade or business for rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable gains, profits, and income. If the refund is reportable under Code Sec. 6041, the amount reported would be shown on a Form 1099-MISC, in box 3 “Other income.”

Reg. § 1.6041-1(b)(1) and Reg. § 1.6041-1(i) provide that payments made by a state or a political subdivision are subject to this reporting requirement. Payments are only reportable under Code Sec. 6041 to the extent they constitute fixed or determinable income. Under Reg. § 1.6041-1(c), income is fixed when it is to be paid in amounts definitely predetermined. Income is determinable whenever there is a basis of calculation by which the amount to be paid may be ascertained. A taxpayer's use of a certificate to timely satisfy real property or mobile home tax is treated as a reduction in the tax liability and not as income. Therefore, there is no required reporting under Code Sec. 6041 as there is no fixed or determinable income. If, however, the county permits a refund based on the application of the certificate, there may be income if the taxpayer previously deducted these taxes, based on the tax benefit rule. In that case, the refund must be reported on Form 1099-MISC to the extent it is income. The county does not have a reporting obligation if it cannot determine the amount that is fixed or determinable income.

In the case of State Statute B, a taxpayer can only use the credit to reduce its state income tax liability for the year the credit is claimed or a carryforward year. Any state income tax refund received by individual taxpayers must be reported on Form 1099-G, under Code Sec. 6050E, regardless of whether all or part of the refund does not constitute income. Code Sec. 6050E does not apply to state income tax refunds issued to corporations.

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Tax Development Q1 2008 - Economic Stimulus - Chances of being audited

The most important IRS Tax Development in Q1 2008

Mike Habib, EA

myIRSTaxRelief.com

While the Economic Stimulus Act of 2008 was the most significant development in the first quarter of 2008, many other tax developments may affect you, your family, and your livelihood. The new law changes and other key developments are summarized below. Please contact us for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.

Economic Stimulus Act. On Feb. 13, President Bush signed the “Economic Stimulus Act of 2008” (Stimulus Act) into law. The centerpiece of the Stimulus Act, which was designed to bolster the sagging economy, was a provision that puts extra cash into the hands of most Americans. Most will receive a rebate check in 2008 from the IRS based on the filing status and income stated on their 2007 return (which is filed in 2008). Some will get a tax credit in 2009 when they file their returns for tax year 2008, and still others (depending largely on income in tax years 2007 and 2008) may receive a combination of a rebate check in 2008 and an income tax credit in 2009. To receive the cash rebate, taxpayers, including many who wouldn't ordinarily have to file a return, must file a return for tax year 2007. Key provisions in the Stimulus Act include:

• Most taxpayers are to receive cash rebate payments, which typically will equal the amount of tax liability on the 2007 return, up to a maximum amount of $600 for individuals ($1,200 for taxpayers who file a joint return) and a minimum of $300 for individuals ($600 for taxpayers who file a joint return). There is also an additional $300 for each qualifying child. The rebates are reduced by 5% of adjusted gross income (AGI) in excess of $75,000 for individuals and $150,000 for those who are married and file jointly. Those individuals who have little or no tax liability may also qualify for a minimum payment of $300 ($600 if filing a joint return) if they file a tax return that reflects $3,000 or more in qualifying income (which includes Social Security benefits, railroad retirement benefits, and certain disability or survivors' benefits from the Veterans Administration).
• Expensing—the option to currently deduct the cost of business machinery and equipment—is made much more attractive. The amount that a taxpayer could otherwise expense, $128,000, has been increased to $250,000 for tax years that begin in 2008. And, the $510,000 overall investment limit (beyond which there's a phaseout of current expensing) has been increased to $800,000.
• In addition to the usual depreciation allowed for business property, taxpayers may take an extra “bonus” depreciation deduction for the first year certain property is placed in service. A bonus first-year depreciation deduction of 50% of adjusted basis is allowed for qualified property (most new personal property and software) acquired and placed in service after Dec. 31, 2007, and before Jan. 1, 2009. (The liberalized rules for writing off business autos are covered below.)
  

Zero tax on long-term capital gain and dividend income. Beginning this year and continuing through 2010, a zero tax rate applies to most long-term capital gain and dividend income that would otherwise be taxed at the regular 15% rate and/or the regular 10% rate (last year, a 5% rate applied to such income). This low rate has an impact not only on lower-bracket individuals but also, surprisingly, on some whose top dollars are taxed well in excess of 15%. The amount of income taxed at 0% depends on the interplay between an individual's filing status, his taxable income, and how much of that taxable income consists of long-term capital gain and qualifying dividend income.

$1 million deduction limit. Generally, a publicly held corporation's deduction for compensation paid during a tax year to its chief executive officer or any of its four highest paid officers is limited to $1 million. The IRS has formally ruled that compensation paid to an executive is not excepted from this limit as qualified performance-based compensation if the plan or contract under which it's paid also provides for payment to the executive on: (1) termination without cause or for the executive's resignation for good reason or (2) voluntary retirement. In a concession to taxpayers, the IRS will only apply this new interpretation of the rules prospectively.

Quicker deduction for payroll tax on bonuses and vacation pay. The IRS has allowed employers who use the accrual method of accounting and incur payroll taxes (Federal Insurance Contributions Act (FICA) tax and Federal Unemployment Tax Act (FUTA) tax) to take a deduction for bonuses and vacation pay in an earlier year than the year in which the amounts are paid in many cases. The IRS now allows these employers to use the recurring item accounting exception. In general, under this exception taxpayers may be able to currently deduct certain recurring liabilities that they pay on or before the earlier of when they must file their returns (including extensions), or the 15th day of the ninth calendar month after the close of the tax year.

Lifetime payouts to nonspouse IRA beneficiary. In a private letter ruling, the IRS has allowed a nonspouse beneficiary of an individual retirement account (IRA) to salvage lifetime payouts even though she failed an essential rule requiring distributions to begin by the end of the year following that of the IRA owner's death. Generally, where an IRA owner dies before he must start taking annual required minimum distributions, the IRA must be distributed to a nonspouse beneficiary either within five years of his death, or over the life or life expectancy of the designated beneficiary. To qualify for the latter alternative, the distributions must begin no later than one year after the deceased owner's death. However, the IRS allowed the beneficiary, who made up her missed annual required minimum distributions and paid a penalty excise tax, to avoid the tough five-year payout rule. This was an extremely favorable result for the taxpayer, allowing her to avoid quickly depleting the IRA (and by so doing, having to likely pay more taxes, sooner). The ruling illustrates the hazards of not receiving expert tax advice when dealing with post-death IRA distributions.

Trust's investment advice fees. The Supreme Court has held that investment advisory fees paid by a trust were deductible only to the extent that they exceeded 2% of the trust's adjusted gross income (AGI). Thus, such expenses didn't qualify for the exception to the 2% of AGI limit in the tax law for costs paid or incurred in connection with the administration of a trust or estate that wouldn't have been incurred if the property weren't held in the trust or estate. However, for the sake of administrative convenience, the IRS has provided that, for tax years beginning before Jan. 1, 2008, nongrantor trusts and estates will not have to “unbundle” a fiduciary fee (i.e., separate the fee into components that are subject to the deduction limit and those that aren't). As a result, for 2007 tax years, affected taxpayers can deduct the full amount of a bundled fiduciary fee without regard to the 2% floor.

Luxury auto depreciation limits for 2008. Under special “luxury automobile” rules, a taxpayer's otherwise available depreciation deduction for business autos, light trucks, and minivans is subject to additional limits, which operate to extend depreciation beyond its regular period. The IRS has released the inflation-adjusted depreciation limits for business autos, light trucks and vans (including minivans) placed in service in 2008—e.g., $2,960 for autos first place in service in 2008; $3,160 for light trucks or vans first place in service in 2008. The “luxury passenger auto limits” cap the otherwise allowable depreciation that can be claimed in a year. Generally, the maximum annual depreciation deduction limits for these vehicles are close to what they were for vehicles that were placed in service last year: the dollar limits for the first and second years for business autos, light trucks and vans are $100 lower than last year's figures. However, for vehicles that qualify, the Economic Stimulus Act of 2008 increases the otherwise applicable first-year limit by $8,000—e.g., $10,960 for autos first place in service in 2008; $11,160 for light trucks or vans first place in service in 2008.

Chances of being audited. The IRS has issued its annual data book, which provides statistical data on its fiscal year 2007 activities, including how many tax returns it examines (audits), and what categories of returns it focuses its resources on. Out of a total of 135 million individual returns filed in calendar year 2006, about 1,384,563 individual income tax returns (1.0%) were audited during fiscal year 2007, slightly more than those examined in the prior year. Of the 1.5 million individual farm returns that showed gross receipts from farming (Schedule F), only 5,705 (0.4%) were audited in 2007. For returns with total positive income of at least $200,000 and under $1 million, the audit rate was 2% for nonbusiness returns and 2.9% for business returns; for returns of $1 million or more, the audit rate was 9.3%. The audit rate for corporations with less than $10 million of assets was 0.9% (up from 0.8% in the prior year); and for corporations with $10 million or more of assets, it was 16.8% (down from 18.6%). The audit rate for S corporations was 0.5% (up from 0.38% for the prior year); and for partnerships it was 0.4% (up from 0.36%).

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Estimated tax payments - IRS Problem Resolution

New, changed and expired provisions affect 2008 individual estimated tax

Mike Habib, EA
MyIRSTaxRelief.com

Apr. 15, 2008 is the due date for affected calendar year taxpayers to make their first installment of 2008 estimated tax. There aren't any drastic changes in the estimated tax rules themselves for 2008. However, there are a number of new, changed and expiring provisions that will affect some individuals' estimated tax computations for 2008. This article provides a brief overview of the estimated tax rules for individuals and looks at the changes that may impact 2008 estimated taxes.

Who needs to pay estimated tax. Individuals who have income that is not subject to withholding (for example, earnings from self-employment, interest, dividends, rents, alimony, etc.) must pay estimated tax or face a penalty. In addition, taxpayers who do not elect voluntary withholding on unemployment compensation and the taxable part of social security payments also may have to pay estimated tax on those items or face a penalty. (Code Sec. 6654)

When and how much to pay. For 2008 estimated tax, in general, a taxpayer must pay 25% of a “required annual payment” by Apr. 15, 2008, June 16, 2008, Sept. 15, 2008 and Jan. 15, 2009 to avoid an underpayment penalty. (Code Sec. 6654(c))

The required annual payment for most taxpayers is the lower of 90% of the tax shown on the 2008 return or 100% of the tax shown on the 2007 return even if filed late (“prior year exception”). However, a taxpayer (other than a farmer or fisherman) whose adjusted gross income on his 2007 return is over $150,000 (over $75,000 if married filing separately) must pay the lower of 90% of his 2008 tax or 110% of his 2007 tax. The prior year exception does not apply for a taxpayer who did not file a 2007 return or filed a 2007 return that did not cover 12 months. (Code Sec. 6654(d))

Other exceptions to penalty. There's no underpayment penalty if the tax shown on the return (after withholding) is less than $1,000. Estimated tax does not have to be paid for 2008 if the taxpayer was a U.S. citizen or resident alien for all of 2007 and had no tax liability for the full 12-month 2007 tax year. (Code Sec. 6654(e))

Annualized method. A taxpayer who, after Mar. 31, 2008, has a large change in income, deductions, additional taxes, or credits that requires him to start making estimated tax payments should use the annualized income installment method. While the due dates will not change, the payment amounts will vary based on the taxpayer's income, deductions, additional taxes, and credits for the months ending before each payment due date. As a result, this method may allow the taxpayer to skip or lower the amount due for one or more payments. A taxpayer who uses the annualized method should be sure to file Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, with his 2008 tax return, to indicate to IRS how he has computed his payments, even if no penalty is owed. (Code Sec. 6654(d)(2))

Farmers and fishermen. Special estimated tax rules apply to farmers and fishermen.
New items for 2008. A taxpayer should use his 2007 return as a starting point for figuring his 2008 estimated tax. He should determine whether he will benefit by any of the following new provisions:

• Forgiveness of mortgage debt. For debt discharged on or after Jan. 1, 2007 and before Jan. 1, 2010, taxpayers generally may exclude up to $2 million of mortgage debt forgiveness on their principal residence.
  

Observation: This technically is not new for 2008 as it also applied for 2007. Presumably, IRS included it as a new item on Form 1040–ES for 2008 because is was enacted in late 2007 and not reflected on the original version of the Form 1040–ES for 2007.

• Tax relief for volunteer responders. An income tax exclusion applies for qualified state or local tax benefits (such as reduction or rebate of state or local income or property tax) and qualified reimbursement payments (up to $360 a year) granted to members of qualified volunteer emergency response organizations (e.g., state or local organizations whose members provide volunteer firefighting or emergency medical services). The exclusion applies for the 2008 through 2010 tax years.
  
• Homesale exclusion liberalized for surviving spouse. Before a late 2007 law change, the up-to-$500,000 exclusion was available only if a husband and wife filed a joint return for the year of sale. Thus, if the home was sold in a year after the year of a spouse's death—when a joint return would no longer be filed—the surviving spouse could only get a maximum homesale exclusion of $250,000. A new law provides relief for sales and exchanges after Dec. 31, 2007—it allows a surviving spouse to qualify for the up-to-$500,000 exclusion if the sale occurs not later than 2 years after the spouse's death, provided the requirements for the $500,000 exclusion were met immediately before the spouse's death and the survivor has not remarried as of the date of the sale.
  
• Capital gain tax rate reduced. As discussed in greater detail in Federal Taxes Weekly Alert 1/17/2008, beginning this year and continuing through at least 2010, a zero tax rate applies to most long-term capital gain and dividend income that would otherwise be taxed at the regular 15% rate and/or the regular 10% rate (last year, a 5% rate applied to such income).
• Kiddie tax broadened. For 2008 (technically for tax years beginning after May 17, 2007), a 2006 tax law expanded the kiddie tax to apply to children age 18, and children over age 18 but under age 24 who are full-time students—if their earned income doesn't exceed one-half of the amount of their support.

Observation: The 2006 tax law did not change the kiddie tax rules for children who are under age 18. Rather, it expanded the kiddie tax to apply where:

... the child turns age 18, or turns age 19-23 if a full-time student, before the close of the tax year;
... the child's earned income for the tax year doesn't exceed one-half of his or her support;
... the child has more than the inflation-adjusted prescribed amount of unearned income (i.e., $1,800 for 2008);
... the child has at least one living parent at the close of the tax year; and
... the child doesn't file a joint return for the tax year. [See Federal Taxes Weekly Alert 6/7/2007 for details]

• Itemized deduction phaseout reduced. A higher-income taxpayer's itemized deductions (other than those for medical expenses, investment interest, nonbusiness casualty and theft losses, and gambling losses) are reduced if his adjusted gross income (AGI) exceeds an inflation-adjusted amount. His itemized deductions generally are reduced by the lesser of (1) 3% of the excess of adjusted gross income over the applicable amount, or (2) 80% of the itemized deductions otherwise allowable for the tax year. For 2008, the phaseout begins at $159,950 of AGI ($79,975 for marrieds filing separately). However, under a 2001 tax law change that applies for the first time in 2008, a taxpayer will lose only 1/3 of the amount he would otherwise lose under the regular reduction computation. [See Federal Taxes Weekly Alert 1/14/2008 for details]
• Personal exemption phaseout reduced. The personal exemption amount of a taxpayer whose AGI exceeds an inflation-indexed threshold amount is reduced by an applicable percentage. This applicable percentage is 2% for each $2,500 (or fraction thereof) by which the AGI of a taxpayer (other than a married taxpayer filing separately) exceeds the appropriate threshold amount. For married persons filing separately, the applicable percentage is 2% for each $1,250 (or fraction of that amount) by which his AGI exceeds the threshold amount. The applicable percentage can't exceed 100%. The inflation-adjusted threshold amounts for 2008 are $239,950 (joint returns and surviving spouses), $199,950 (head of household), $159,950 (unmarried individuals), and $119,975 (married persons filing separately). However, under a 2001 law change that applies for the first time in 2008, a taxpayer will lose only 1/3 of the amount he would otherwise lose under the regular phase-out computation.
  
• Mortgage insurance deduction extended. Mortgage insurance premiums continue to be deductible after 2007. Originally, this deduction was available only for 2007. It now applies through 2010.
  

Changed provisions. In calculating 2008 estimated tax, individuals also should consider the following changed provisions:

• Increased standard deductions. The basic and additional standard amounts have increased for most categories of taxpayers for 2008.
  
• IRA deduction. An taxpayer may be able to take an IRA deduction if covered by a retirement plan and the taxpayer's 2007 modified AGI is less than $63,000 ($105,00 if married filing jointly or qualifying widow(er)).
  
• IRA contribution limit increased. In general, an individual who isn't an active participant in certain employer-sponsored retirement plans, and whose spouse isn't an active participant, may make an annual deductible cash contribution to an IRA up to the lesser of: (1) $5,000 (increased from $4,000 for 2007), plus an additional $1,000 for those age 50 or older, or (2) 100% of the compensation that's includible in his gross income for that year. If the individual (or his spouse) is an active plan participant, the deduction phases out over a specified dollar range of MAGI.
• Standard mileage rates. The 2008 mileage rates for a taxpayer's use of his vehicle are 50 1/2¢ per business mile, 19¢ per mile to get medical care or make a job related move, and 14¢ per mile for charitable use (the latter figure is unchanged).
  
• Tax breaks for adoption. The maximum adoption credit has increased to $11,650, as has the maximum adoption exclusion.
  
• Earned income credit. The maximum credit is higher, and the AGI-based phaseout figures are revised.
  
• Savers credit. The income limits have increased for the retirement savers credit.
  

Expired tax benefits. The following tax changes for 2008 involve tax provisions that expired at the end of 2007 but may be reinstated by Congress.

• Credits reduced by AMT calculation. Personal tax credits (other than the adoption credit, the child tax credit and the credit for elective deferrals and IRA contributions) can't exceed the excess of regular tax liability over tentative minimum tax.

Observation: This credit limit may reduce a taxpayer's personal credits even if he has no AMT liability.

• Decreased AMT exemption amount. In 2008, the AMT exemption amount will decrease to $33,750 for unmarried individuals, $45,000 for marrieds filing jointly or qualifying surviving spouses, and $22,500 for marrieds filing separately. For 2007, the AMT exemption amounts were $44,350, $66,250, and $33,125, respectively.

Observation: Although there's a high probability that Congress will once again “patch” the AMT problem, taxpayers must nonetheless make their estimated tax payments as if this relief will not materialize.

• Educator expenses. The above-the-line deduction for educator expenses doesn't apply for post-2007 tax years.
• Tuition and fees deduction. The above-the-line deduction for higher-education expenses isn't available for tax years beginning after 2007.
• D.C. first-time homebuyer credit. This credit does not apply to homes purchased after 2007.
• Option to claim state & local sales tax as itemized deduction instead of deducting state & local income tax. This option is no longer available for tax years beginning after 2007.
• Tax-free distributions from IRAs for charitable purposes. The special rule for IRA distributions to charities has expired. Under this rule, which applied for distributions in tax years beginning in 2006 and 2007, an exclusion from gross income, not to exceed $100,000, is allowed for otherwise taxable IRA distributions by taxpayers age 70 1/2 and older from a traditional or Roth IRA that are qualified charitable distributions.
• Election to include nontaxable combat pay as earned income for purposes of the earned income tax credit. For tax years beginning after 2007, taxpayers no longer may elect to treat combat pay as earned income for purposes of the earned income credit.
• Penalty-free withdrawals for individuals called to active duty. A provision giving early withdrawal penalty relief for active duty reservists has expired. Under this rule, the Code Sec. 72(t) 10% early withdrawal penalty tax does not apply to a distribution from an IRA (or attributable to elective deferrals under a Code Sec. 401(k) plan, Code Sec. 403(b) annuity, or certain similar arrangements) that's (1) made to reservists ordered or called to active duty after Sept. 11, 2001, and before Dec. 31, 2007, for a period of more than 179 days or for an indefinite period, and (2) made during the period beginning on the date of the order or call to duty and ending at the close of the active duty period.
• Credit for nonbusiness energy property. For property placed in service after 2007, a taxpayer can no longer claim a lifetime nonrefundable credit of up to $500 for making qualifying energy saving improvements to his home (only $200 for qualifying window expenditures).
• Research credit. The research credit does not apply for amounts paid or incurred after 2007.
• Indian employment credit. The Indian employment credit does not apply for tax years beginning after 2007.

Observation: The changed and expired items described above are those that IRS mentions in the instructions to Form 1040–ES for 2008. There are many other items that have changed for 2008 as a result of inflation adjustments.


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Trucker Tax Relief - Trucker Tax Resolution Service

Truckers Tax Relief - Are you a truck driver with tax problems?

If you're a truck driver and owe the IRS, you're better off resolving your tax debt now. As you know, tax problems do not go away by themselves! Stop your IRS wage garnishment today, stop your IRS bank levy today, and release your IRS tax lien today.

As you can see from the statement below by Mr. Douglas H. Shulman, the new IRS Commissioner, he will first concentrate on Enforcement, then secondly its Service! Are you saying where is the kinder and gentler IRS?

Contact us today to resolve your tax problems.

Statement of Commissioner Douglas H. Shulman

I want to extend my thanks to the members of the Senate and the Senate Finance Committee, especially Chairman Baucus and Senator Grassley. I also want to thank President Bush for nominating me and Treasury Secretary Paulson for his support.

The Internal Revenue Service touches virtually every adult, every business and every non-profit organization in America. It is an honor to assume the leadership of this critical agency. I recognize the great responsibility I have been given and will work to ensure that the IRS is fair, impartial and respects the rights of all taxpayers.

As Commissioner, I will concentrate on both enforcement and service. For the majority of Americans who pay their taxes willingly and on time, there must be clear guidance, accessible education and outstanding service. Our aim should be to make it as easy as possible for citizens to pay the correct amount of taxes in the most efficient and least burdensome manner possible.

For taxpayers who intentionally evade paying taxes, there must be rigorous enforcement programs.

I am looking forward to working with the dedicated and talented IRS workforce, along with the broader tax community and important stakeholders to continue to build an efficient, effective and respected IRS.

Contact us today to resolve your tax problems.

Don't compromise on your representation! We represent truckers and truck drivers before the IRS and any taxing authority.

Mike Habib, EA

As an IRS licensed Enrolled Agent (EA) specializing in IRS Tax Problem Resolution, I can represent truckers and truck drivers in all of the following states, counties, and metro cities, Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Puerto Rico Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington D.C.. West Virginia Wisconsin Wyoming. AL AK AZ AR CA CO CT DE DC FL GA HI ID IL IN IA KS KY LA ME MD MA MI MN MS MO MT NE NV NH NJ NM NY NC ND OH OK OR PA RI SC SD TN TX UT VT VA WA WV WI WY New York, Los Angeles, Orange County, Riverside, San Bernardino, San Francisco, Ventura, Lancaster, Palmdale, Santa Barbara, Chicago, Washington D. C., Silicon Valley, Philadelphia, Boston, Detroit, Dallas, Houston, Atlanta, Miami, Seattle, Phoenix, Minneapolis, Cleveland, San Diego, St Louis, Denver, San Juan, Tampa, Pittsburgh, Portland, Cincinnati, Sacramento, Kansas City, Milwaukee, Orlando, Indianapolis, San Antonio, Norfolk & VB, Las Vegas, Columbus, Charlotte, New Orleans, Salt Lake City, Greensboro, Austin, Nashville, Providence, Raleigh, Hartford, Buffalo, Memphis, West Palm Beach, Jacksonville, Rochester, Grand Rapids, Reno, Oklahoma City, Louisville, Richmond, Greenville, Dayton, Fresno, Birmingham, Honolulu, Albany, Tucson, Tulsa, Tempe, Syracuse, Omaha, Albuquerque, Knoxville, El Paso, Bakersfield, Allentown, Harrisburg, Scranton, Toledo, Baton Rouge, Youngstown, Springfield, Sarasota, Little Rock, Orlando, McAllen, Stockton, Charleston, Wichita, Mobile, Columbia, Colorado Springs, Fort Wayne, Daytona Beach, Lakeland, Johnson City, Lexington, Augusta, Melbourne, Lancaster, Chattanooga, Des Moines, Kalamazoo, Lansing, Modesto, Fort Myers, Jackson, Boise, Billings, Madison, Spokane, Montgomery, and Pensacola

Dependent deductions tax problem

Tax breaks for qualifying relatives are limited - what you should know
Internal Legal Memorandum 200812024

Mike Habib, EA
myIRSTaxRelief.com

An Internal Legal Memorandum (ILM) explains that various tax breaks are not allowed for qualifying relatives. Specifically, the ILM concludes that, apart from a dependency exemption, a taxpayer's qualifying relative may not qualify him for the earned income credit, head of household filing status, or the child tax credit, but in limited circumstances may qualify the taxpayer for the child and dependent care credit.

Background. A taxpayer is entitled to a deduction equal to the exemption amount for each person who qualifies as his “dependent.” (Code Sec. 151(c))

A person qualifies as the taxpayer's dependent if the person is the taxpayer's qualifying child or qualifying relative. (Code Sec. 152(a)) The terms “qualifying child” and “qualifying relative” were added to Code Sec. 152 by the Working Families Tax Relief Act of 2004 (WFTRA), effective for tax years beginning after 2004. WFTRA established a uniform definition of a “qualifying child” for determining whether a taxpayer may claim certain child-related tax benefits. It established the term “qualifying relative” to identify individuals (other than a qualifying child) for whom a dependency exemption deduction may be allowed.

A “qualifying child” of a taxpayer is an individual who: (A) bears a certain relationship to the taxpayer, (B) has the same principal place of abode as the taxpayer for more than one-half of the tax year, (C) meets certain age requirements, and (D) has not provided over one-half of his or her own support for the calendar year. (Code Sec. 152(c)(1))

A “qualifying relative” is an individual: (A) who bears a specified relationship to the taxpayer (Code Sec. 152(d)(1)(A)); (B) whose gross income for the calendar year in which that tax year begins is less than the exemption amount (Code Sec. 152(d)(1)(B)); (C) with respect to whom the taxpayer provides over one-half of his or her support for the calendar year in which that tax year begins (Code Sec. 152(d)(1)(C)); and (D) who isn't a qualifying child of that taxpayer or of any other taxpayer for any tax year that begins in the calendar year in which that tax year begins. (Code Sec. 152(d)(1)(D))

Observation: An individual need not be technically related to a person to qualify as the person's qualifying relative. That's because, the specified relationships include in-laws and an individual who, for the tax year of the taxpayer, has as such individual's principal place of abode the home of the taxpayer and is a member of the taxpayer's household. (Code Sec. 152(d)(2))

Notice 2008-5, 2008-2 IRB, provides guidance on individuals who may be qualifying relatives of a taxpayer under Code Sec. 152(d). Specifically, it clarifies that, solely for purposes of Code Sec. 152(d)(1)(D), an individual is not a qualifying child of “any other taxpayer” if the individual's parent (or other person with respect to whom the individual is defined as a qualifying child) is not required by Code Sec. 6012 to file an income tax return and (i) does not file an income tax return, or (ii) files an income tax return solely to obtain a refund of withheld income taxes. Notice 2008-5 clarifies that a taxpayer may claim a dependency exemption deduction for an unrelated child of an unrelated individual who lived with the taxpayer as a member of the taxpayer's household for the entire year.

Illustration: Andrew supports as members of his household for the tax year an unrelated friend, Betty, and her 3-year-old child, Carole. Betty has no gross income, is not required by Code Sec. 6012 to file an income tax return, and does not file an income tax return for the tax year. Accordingly, because Betty does not have a filing requirement and did not file an income tax return, Carole is not treated as a qualifying child of Betty or any other taxpayer, and Andrew may claim both Betty and Carole as his qualifying relatives, provided all other requirements of Code Sec. 151 and Code Sec. 152 are met. (Notice 2008-5)

Earned income credit. An eligible individual may be allowed an earned income credit under Code Sec. 32 . In general, an eligible individual is (i) any individual who has a qualifying child for the tax year, or (ii) any other individual who does not have a qualifying child for the tax year, if certain requirements are met, such as age and residency, and that the individual is not a dependent of someone else. The ILM says that a taxpayer who may claim an individual as his or her qualifying relative under Notice 2008-5 , may not use that individual for purposes of claiming the earned income credit because the credit requires that the dependent be a qualifying child, not a qualifying relative, of the taxpayer.

Head of household filing status. Under Code Sec. 2(b)(1), an individual is a head of a household if, and only if, he is not married at the close of his tax year, is not a surviving spouse, and either (1) maintains as his home a household which constitutes for more than one-half of the tax year the principal place of abode, as a member of such household, (i) a qualifying child of the individual, or (ii) any other person who is a dependent of the taxpayer, if the taxpayer is entitled to a deduction under Code Sec. 151 for the tax year, or (2) maintains a household which constitutes for such tax year the principal place of abode of the father or mother of the taxpayer, if the taxpayer is entitled to a deduction for the tax year for such father or mother under Code Sec. 151. A taxpayer cannot be considered a head of a household by reason of an individual who would not be a dependent for the tax year but for (i) Code Sec. 152(d)(2)(H) or (ii) Code Sec. 152(d)(3), relating to multiple support agreements. Thus, the ILM concludes that a taxpayer who may claim an individual as his or her qualifying relative under Notice 2008-5 because that individual was a member of the taxpayer's household, but who does not have a specified familial relationship to the individual, may not claim head of household filing status.

Child tax credit. Under Code Sec. 24(a), a taxpayer may be allowed a credit of $1,000 for each qualifying child of the taxpayer. The ILM concludes that a taxpayer who may claim an individual as his or her qualifying relative under Notice 2008-5 may not use that individual for purposes of claiming the child tax credit because the credit requires that the dependent be a qualifying child, not a qualifying relative, of the taxpayer.

Observation: The ILM does not point out that an individual can be a taxpayer's qualifying child for child tax credit purposes without necessarily being the taxpayer's actual child. That's because, for this purpose, a qualifying child is defined to include a brother, sister, stepbrother, or stepsister of the taxpayer or a descendant of these relatives. (Code Sec. 26(c)(1), Code Sec. 152(c)(2))

Dependent care credit. A taxpayer with one or more qualifying individuals may be allowed a dependent care credit under Code Sec. 21. A “qualifying individual” is (1) a dependent of the taxpayer (as defined in Code Sec. 152(a)(1) who has not attained age 13, (2) a dependent of the taxpayer (as defined in Code Sec. 152 determined without regard to Code Sec. 152(b)(1), Code Sec. 152(b)(2), and Code Sec. 152(d)(1)(B)) who is physically or mentally incapable of caring for himself or herself and who has the same principal place of abode as the taxpayer for more than half of the year, or (3) the spouse of the taxpayer, if the spouse is physically or mentally incapable of caring for himself or herself and who has the same principal place of abode as the taxpayer for more than half of the tax year. The ILM states that Code Sec. 152(a)(1) provides that a dependent is a qualifying child, and as a result, the dependent care credit is limited to taxpayers with one or more qualifying children under the age of 13. A taxpayer who may claim an individual as his or her qualifying relative may not claim the dependent care credit, unless that qualifying relative is physically or mentally disabled.

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