BOND ANDERSON III, CPA, P.A. CERTIFIED PUBLIC ACCOUNTANT

Haiti Donations – Deductible on 2009 Tax Returns

A bill passed by Congress and signed into law on January 22, 2010 allows taxpayers to deduct qualified Haiti earthquake relief contributions on their 2009 tax returns. Taxpayers have the option to deduct qualified donations made to charities engaged in earthquake relief in Haiti on their 2009 tax return (filed in 2010) or their 2010 tax return (filed in 2011). To be deducted on the 2009 tax return, the contribution must have been made after January 11, 2010 and before March 1, 2010 and must be a cash contribution (cash, check, credit card, money order, debit card or text message). Non-cash (property such as food or clothing) donations do not qualify for this accelerated deduction.

Taxpayers claiming the deduction should maintain a record of the contribution such as bank statement, cancelled check, credit card statement, letter from the donee organization or if made by text message, a telephone bill. The record should substantiate the date, amount and the name of the charitable organization.

The State of North Carolina’s Department of Revenue has issued a bulletin that it will follow the federal provisions and allow the accelerated deduction. Thus North Carolina residents may take advantage of this provision without making any change to their 2009 North Carolina tax return.

Please contact us if there are questions regarding this charitable donation deduction.

Proper Documentation for Non-Cash Charitable Contributions

Non-cash charitable contribution deductions have recently come under increased scrutiny by the IRS. If you want to donate your used belongings to an organization like Goodwill or the Salvation Army, here are some rules you need to follow:

1. Determine the quality of your goods – the official wording from the IRS is that clothing and household goods must be in good used condition or better to qualify.

2. Next, determine the fair market value of each item. You can go to the Goodwill Industry or the Salvation Army websites and print a guideline to help you determine the fair market value of the items you are donating.

3. Along with a receipt from the organization, you must keep a list of each item donated and the fair market value of that item. This descriptive list should contain at least two columns: Column 1 – brief description of the item (i.e. 1 ladies blue shirt – excellent condition) and Column 2 – the fair market value. A description such as “1 bag of clothing” is not deemed sufficient documentation. We would even suggest that you take a picture of items donated.

We had been retained to assist a client in an IRS audit. The client provided the auditor with the receipts received from Goodwill and the Salvation Army stating that items had been donated. The IRS auditor only allowed a $1 deduction because the client did not have an itemized list of the items donated. So make sure you retain proper documentation of your non-cash charitable contributions.

If you have any questions or would like more information regarding non-cash charitable contributions, please contact us.

First-time Homebuyer Credit Extended and Revised

On November 6, 2009, the Worker, Homeownership and Business Assistance Act of 2009 was enacted extending the first time homebuyer credit, changing some of the criteria and limitations and adding a new credit for current homeowners who purchase a new home.  Following are criteria and limitations previously established which continue to apply and revisions provided in the new act:

• a)    The credit applies to qualifying principal residences purchased before May 1, 2010.  However the credit will extend to qualifying principal residences purchased prior to October 1, 2010 (as amended by the Homebuyer Assistance and Improvement Act of 2010) provided that a written, binding contract to purchase said residence was entered into before May 1, 2010. The term “purchase” generally is defined as closing and taking ownership of the residence (thus allowing the individual to occupy the home).
• b)    A first time buyer is defined as an individual and/or spouse who have had no home ownership interest 36 months prior to the first home purchase date.
• c)    The home purchased must be used by the taxpayer and/or spouse as their principal   residence.
• d)    The credit for a first time homebuyer remains at 10% of the purchase price of the primary residence not to exceed $8,000 ($4,000 if married and filing separately).
• e)    For residences purchased after November 6, 2009, the credits are phased out as a single taxpayer’s Adjusted Gross Income (AGI) increases from $125,000 to $175,000 ($225,000 to $245,000 for joint filing taxpayers).
• f)     For purchases after November 6, 2009, no credit is allowed unless the taxpayer or taxpayer’s spouse (if married) has attained age eighteen (18) as of the purchase date.
• g)    For residences purchased after November 6, 2009, no credit is allowed to an otherwise qualifying individual if a dependency exemption for said individual is allowable to another taxpayer.  For example:  Andy is 20 years old, his parents claim him as a dependent (in accordance with tax regulations), and Andy purchases his first primary residence in December, 2009; Andy can not claim the first time homebuyer credit.
• h)    Prior to this act a qualifying purchase did not include a principal residence purchased from parties related to the taxpayer; effective with this act for purchases after November 6, 2009, this disqualifier is extended to also include purchases of a primary residence from parties related to the taxpayer’s spouse.
• i)    After November 6, 2009, no credit is allowed for any residence if the purchase price of the residence exceeds $800,000.
• j)    Effective for tax returns ending after November 6, 2009, no credit is allowed unless a copy of the settlement statement is attached to the tax return.
• k)    Individuals who claim the credit on their 2009 tax return, regardless of when the home was purchased, may not file electronically; they must file a paper return.  Beginning with 2009 tax returns, individuals must use the newly revised Form 5405 (revised late December, 2009) to claim the credit.  Individuals who purchase a primary residence after November 6, 2009 must also use the revised Form 5405 to claim the credit.
• l)    Effective for residences purchased after November 6, 2009, a new tax credit of 10% of the cost of the principal residence not to exceed $6,500 ($3,250 if married filing separate) applies to an individual who (along with the individual’s spouse if married on the date of the purchase) has owned and used the same residence as the individual’s principal residence for any five consecutive years out of the eight years prior to purchase.  The purchased residence for which the individual claims the credit must be the individual’s primary residence.  To claim the credit the individual is not required to sell or dispose of the former primary residence and there is no requirement that the purchased primary residence be a “move-up” property; the new primary residence can be less expensive than the former residence. 
  For example:  Max and Rhonda lived in their principle residence since April, 2003.  In September, 2008 Rhonda’s employer transferred her to another state and the couple relocated to the new state.  Max and Rhonda rented an apartment at their new location while they tried to sell their old residence.  In March, 2010 they purchased a primary residence for $175,000 in the new state.  Max and Rhonda qualify for the $6,500 tax credit as they lived in their prior residence for 5 years and 5 months consecutively during the eight year period between March 2002 and March, 2010.
• m)    The tax credit does not have to repaid, unless the taxpayer(s) receiving the credit sell the residence or fail to use the home as a principal residence within 36 months from the purchase date.  A homeowner’s death does not trigger a recapture and transfer as part of a divorce proceeding may not trigger a recapture (subject to certain conditions).  Special credit recapture exemptions are now available for individuals or individuals’ spouses who receive government orders for “qualified official extended duty”.  This includes a member of the uniformed services, a member of the Foreign Services of the United States or an employee of the intelligence community.
• n)    A qualifying homebuyer may elect to treat a purchase after 2008 as a purchase on December 31st of the preceding calendar year.  For example:  June purchases and closes on her home in October, 2009.  She may elect to either: (1) amend her 2008 tax return to claim the tax credit; or (2) claim the tax credit on her 2009 tax return.   Caution:  If the residence was purchased after November 6, 2009 and the homebuyer elects to amend their 2008 tax return to claim the credit, the individual must use the revised Form 5405 as noted in Item (k) to claim the credit.
• o)    Under the first revision of the National First-Time Homebuyers Credit signed into law February 17, 2009 and affecting “first-time homebuyers” who purchased a home after December 31, 2008 but before December 1, 2009, the credit was available to unmarried individuals who purchased a home together and qualified for the credit.  This revision, effective for purchases after November 6, 2009, does not specifically address unmarried individuals and the Internal Revenue Service has not issued guidance at this time.
• p)    The credit is refundable which means the government will refund the portion of the credit exceeding the taxpayer’s tax liability.

This enactment increases this tax credit’s complexity due to timing and revised qualifiers.  Please contact our office to ensure conformance with the tax regulations and optimize tax savings.

IRA Conversion to Roth IRA

Beginning January 1, 2010, the long-time $100,000 income restriction imposed on converting IRA’s to Roth IRA’s is eliminated.  Individuals, regardless of income levels, are then permitted to convert IRA’s to Roth IRA’s and may elect to either report the entire income triggered by the 2010 conversion in tax year 2010 or report the conversion income 1/2 in tax year 2011 and 1/2 in tax year 2012.  While the elimination of the income limitation appears to have no expiration, the election to spread the conversion tax liability over the 2011-2012 timeframe is only available for IRA to Roth IRA conversions undertaken in tax year 2010.  Please be aware that the income limitations for making Roth IRA contributions remain unchanged and the fact that a taxpayer converts an IRA to a Roth IRA does not mean the individual is permitted to make annual contributions to a Roth IRA.

Conversions to Roth IRA’s are allowed for any IRA’s including SEP-IRA’s, Simple IRA’s and Traditional IRA’s.  The amount converted which may include income deferred contributions, tax-deductible contributions and all earnings, is deemed taxable income and is taxed at the taxpayer’s federal and state ordinary income tax rates.  If the IRA account being converted contains non-deductible or after-tax contributions, those contribution amounts are not subject to taxation arising from the conversion.

Example:  On January 10, 2010 Margo decides to convert her traditional IRA account to a Roth IRA. The account’s value is $35,000 of which $10,000 are non-deductible/after-tax contributions and the remaining $25,000 are earnings and tax-deductible contributions.  When Margo prepares her 2010 tax return she may elect to either declare the entire $25,000 as income from the conversion or declare $12,500 in 2011 and the remaining $12,500 on her 2012 tax return.

One additional factor to consider when converting to a Roth IRA is the requirement for a five year holding period.  To satisfy the five year holding period, a Roth IRA distribution may not be made prior to the end of the five year period beginning with the tax year the individual made the conversion and ending on the last day of the individual’s fifth consecutive tax year after the holding period started. Generally a Roth IRA owner has only one five year period for all the Roth IRA’s he/she owns.  However unlike contributions, each conversion has its own five year holding period; thus a Roth IRA owner may acquire several five year holding periods due to conversion(s).  Distributions from conversion Roth IRA’s made prior to the five year holding period being met may be subject to the 10% early withdrawal penalty.

Example:  Using the same numbers from the example above, let’s assume Margo reaches 59-1/2 years of age during 2010.  In March, 2011 Margo decides not to include the conversion income on her 2010 tax return; rather, she elects to split the $25,000 conversion income between her 2011 and 2012 tax returns.  When Margo prepares her 2011 tax return in March, 2012 she declares $12,500 as income from the conversion and since Margo is in a 25% income tax bracket, she calculates that she will owe $3,125 ($12,500 * 25%) in additional taxes.  Margo decides that since she is older than 59-1/2 years, she can withdraw $3,000 from her Roth IRA to pay the additional tax without incurring any further tax liability.  In this case however Margo’s assumption is incorrect.  The conversion was made on January 10, 2010, thus the start of her Roth IRA holding period is January 1, 2010 and holding period end date is December 31, 2014.  Her withdrawal of $3,000 in March, 2012 is within the holding period and therefore a non-qualified distribution.  A portion of the $3,000 withdrawal will be subject to a 10% early withdrawal penalty on her 2011 tax return.

There are numerous reasons to convert an IRA to Roth IRA, but there are also many differences between IRA’s and Roth IRA’s.  Thus before you make the final decision to convert an IRA to a Roth IRA, you should contact our office to determine the tax implications as well as whether the conversion will meet your financial goals and objectives.

North Carolina 2009 Corporate Income Tax Changes

Beginning with the 2009 tax year, corporations subject to corporate income tax will be required to pay a surtax of 3% on the amount of North Carolina income tax due, before applying any payments or tax credits.

S corporations filing composite income tax returns on behalf of shareholders living outside of North Carolina must calculate the amount of North Carolina income due separately for each nonresident shareholder. That calculation must include the amount of individual income surtax based on the Surtax Percentage Table for individuals with a filing status of single.

For example, Company YY, a C corporation, calculates its total North Carolina income tax liability to be $14,500 before deducting any applicable payments or tax credits. YY must then multiply $14,500 times 3% ($14,500 * .03 = $435) and add the resulting amount to the “regular” income tax liability ($14,500 + $435 = $14,935) to produce the total NC income tax liability of $14,935. YY may then subtract any applied payments, estimated payments and applicable tax credits to determine whether a refund is due or additional income tax is owed.

Please note that there is no penalty/interest for underpayment of estimated tax if the underpayment is because of the surtax.

North Carolina 2009 Personal Income Tax Changes

Beginning with the 2009 tax year, individuals within certain income thresholds will be required to pay a surtax on the amount of income tax owed on Line 14 of the D-400 Individual Income Tax return, before withholding, payments or credits are applied. The table below details the surtax percentage by filing status and income threshold.

NC Surtax Percentage Table

        Filing Status                                      NC Taxable Income                                       Surtax
                                                                     Shown on Line 13                                     Percentage

  Married Filing Jointly/                   Greater Than $100, 000 up to $250,000                           2%
  Surviving Spouse

  Married Filing Jointly/                   Greater Than  $250,000                                                    3%
  Surviving Spouse

  Single                                           Greater Than $60,000 up to $150,000                              2%

  Single                                           Greater Than $150,000                                                     3%

  Head of Household                       Greater Than $80,000 up to $200,000                              2%

  Head of Household                       Greater Than $200,000                                                     3%

  Married Filing Separately              Greater Than $50,000 up to $125,000                              2%

  Married Filing Separately              Greater Than $125,000                                                     3%

For example, taxpayers’, Mark and Meg Monroe, filing status is “Married Filing Jointly” and their NC taxable income shown on Line 13 of the 2009 Form D-400 is $180,000, then Meg would compute their “regular” NC income tax on Line 14 and multiply that amount by 2%. The resulting surtax would be added to their “regular” tax on Line 14 to produce the Monroe’s total NC income tax liability. Meg will then subtract withholding payments, other payments and any applicable credits to determine whether a refund is due or additional tax is owed.

Please note that there is no penalty/interest for underpayment of estimated tax if the underpayment is because of the surtax.

Changes To North Carolina Sales Tax Rate

Please be advised that effective Tuesday, September 1, 2009 the sales tax in North Carolina increases by 1%. In most counties the new rate will be 7.75% (with some counties increasing to 8 or 8.25%).

As you know, the combined rate is comprised of a state tax component and a county tax component. The 1% increase is all applied to the state rate making it 5.5%.

Special instructions for completing your September tax coupon: If you are a monthly sales tax filer you must use the following procedure for revising the amount of taxable sales to report on the form in order to arrive at the correct amount of tax to remit. This formula applies only to the state portion of the form, not the county portion.

Multiply the amount of taxable sales by 5.5% to arrive at the state portion of the tax.

Divide the result by .045 to arrive at a revised taxable sales amount.

Use this revised sales amount for the state tax line.

Use the actual sales amount for the county tax line.

Example:
Taxable sales in September = $ 10,000.00

Tax collected in September = $ 775.00

$ 10,000 times 5.5% = $ 550.00 divided by .045 = $ 12,222.22

State tax line on coupon $ 12,222.22 x 4.5% = $ 550.00

County tax line on coupon $ 10,000.00 x 2.25% = $ 225.00

If you are a quarterly tax filer follow the instructions provided by the state for separating the sales for July & August from the sales for September. The state will be mailing you a bulletin explaining the procedure but it may also be found online at:

http://www.dor.state.nc.us/taxes/sales/rate_increase2009.html

Once there, click on the first link titled “Important Notice: Sales and Use Tax Rate Change” and follow the instructions in Section II.

Additional changes to NC Sales Tax law are scheduled to take place in October of this year but they have not yet been finalized. Among the changes are a minor increase to the state rate and an identical decrease to the county rate (the same thing they did last year). The state is also defining additional items and services which will now be subject to sales tax.

If you have questions about the new sales tax rules, or any other tax matters, please send us an email or call us at 919-383-5826.

401(K) & Job Termination

Early distribution of one’s 401(k) account (provided that certain exceptions are not met – leaving one’s job is not one of the exceptions) can be subject to not only income tax but also a 10% penalty on the full distribution. If you are younger than 59½ years old, leave your job for any reason and your employer informs you that you must withdraw and clear your 401(k) account within a specified time frame, then the following do’s and don’ts will help guide you through the process and avoid incurring penalties and additional income tax liability.

DO:
     <>  Open a Traditional IRA account with the financial institution of your choice and instruct the institution with your 401(k) account to directly rollover the entire 401(k) account balance to the Traditional IRA account.
     <>  Heed the correspondence from your former employer and accomplish the account transfer within the specified timeframe.
     <>  Deposit into a Traditional IRA account, the entire amount of any 401(k) account funds distributed directly to you. Taxpayers have 60 days (not necessarily 2 calendar months) from the distribution date to complete and have the transfer considered as a qualified rollover. Remember that any difference between the total 401(k) distribution and the received distribution (sometimes income taxes are withheld) may incur a 10% penalty and additional income tax liability.

DON’T
     <>  Do not have your 401(k) account balance distributed directly to you. Unless certain exceptions are met or you comply with qualified rollover limitations as stated above, the distribution may be subject not only to income tax but also an added 10% penalty.
     <>  Do not rollover 401(k) funds into a ROTH IRA account. 401(k) accounts are deferred tax accounts, ROTH IRA’s are not, so the two are not interchangeable. 401(k) accounts can not be directly converted to ROTH IRA accounts. There is a method for accomplishing a conversion indirectly but certain limitations and criteria must be met.

This article contains basic information for dealing with one’s 401(k) account after terminating job employment. Tax law on this subject is complex and each company 401(k) plan will vary, thus each individual’s position needs to be assessed based on their specific situation. Please call or email us with particular circumstances so that we may provide a tax friendly solution.

Residential Energy Tax Credits

Energy Efficient Products (doors, windows, etc.)
In tax years 2006 and 2007 there were several tax credits available to individual taxpayers for investing in energy efficient products for their home. While no such credits were available in 2008, a recent tax law provides for tax credits on qualified items placed in service in existing homes in 2009 and 2010. Examples of items which may qualify are exterior doors, windows, central air & heat units, hot water heaters, heat pumps, skylights, insulation, main air circulating fans and certain types of roofs. In most cases there are energy efficiency ratings on the items which must meet or exceed certain levels to qualify for the tax credit. A complete list of items and their rating thresholds can be viewed at www.EnergyStar.gov. Installation costs may be included when computing the credit for some items (a/c & heat units, hot water heaters, etc.) but not others (doors, windows, insulation and roofs).

The maximum credit previously allowed (2006/2007) was $ 500 but that amount has been raised to as high as $ 1,500 (2009 & 2010 combined) under the new rules. These tax credits are non-refundable, meaning they can be used to reduce your federal income tax but not below zero. For example, if your unadjusted income tax is $ 800 and your tax credits amount to $ 1,000 the tax is reduced to zero and you ‘lose’ the $ 200 difference.

Note that these credits apply only to improvements to an individual taxpayer’s primary residence and not to rental property.

Renewable Energy Systems
Tax credits are also available for larger, more complex renewable energy systems (i.e. solar or wind) placed in service through December 31, 2016. The rules for these credits are complicated and we encourage you to contact our office for additional information.

If you are planning to install energy efficient products or systems please give us a call or email us so we can help you maximize your tax savings.