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Tax Deal - All posts in category Tax Deal

  • Feb 15, 2011
    10:07 AM ET

    Homebuyer Credit Tax Fraud for Fun and Profit

    This week, IRS released tax tips about the homebuyers credit, which also happens to be the subject of this week’s TaxWatch column. Just in time, the Justice Department also released their news about the homebuyers credit – a list of indictments issued and lawsuits filed against tax preparers who filed false or fraudulent claims for the homebuyers credits.

    Associated Press

    Considering the millions of dollars stolen by these people, at a time when the U.S. Treasury is already seriously depleted, it’s a relief to know that criminals are being caught (as detailed in the Tax Blog post about easy money in refundable tax-credit fraud).

    Of course, I simply can’t see why these tax professionals engaged in this fraud. There simply isn’t enough profit in it for them to run the risk to their future livelihood.

    In a way, I have to envy those preparers who took a short-cut in filing their homebuyers credit claims. Simply by knocking out tax returns and phony documents, you can complete those tax returns in no time at all.

    My office filed over 1,000 claims for a national home community developer. We sweated over each and every tax return, meticulously gathering documents from the buyers and the seller, trying to ensure that IRS had enough proof of the purchase and residency. Sometimes, getting proof of prior home ownership, or lack of it, took creativity. Everyone has special or unusual issues.

    Friends who were buying homes together are allowed to split the credit any way they choose. So we developed forms to help protect us, the developer and the buyers, in case anyone later changed their mind about the credit split. We dealt with divorce issues, family issues, bankruptcy and even someone who was absent from home– in prison– after buying the house. Each tax return took hours, instead of the hour or so we had anticipated. Reality is complicated.

  • Feb 9, 2011
    11:53 AM ET

    Last-Minute Tax Advice Will Cost You

    The complex tax code and eleventh-hour changes don’t mean it’s too late to get good advice – but you might have to pay up.

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    In some ways, filing taxes has gotten a lot easier in recent years: free electronic filing, Turbo Tax, and now, even an iPhone app from the IRS. But here’s a warning before you start that download: Washington is mucking things up.

    The eleventh-hour tax bill negotiated by Congress and President Obama includes some 500 changes—no fewer than 160 pages are now devoted to the estate and gift tax. Those last-minute adjustments mean anyone planning to itemize deductions, be it mortgage interest or charitable donations, must wait until mid- to late February to file this year. And these changes come on the heels of the IRS pushing back companies’ deadline for sending out so-called 1099 forms to Feb. 15 a few years ago. That means taxpayers have already had to wait a full two weeks longer to get the details they need for income like dividends, interest and sales of real estate.

    The result is as predictable as, well, death and you know what: Everybody, it seems, is running late this year. Taxpayers and preparers are trying to decide whether to complete a return early and risk having to refile, or wait even longer to make sure they have all they need.“Everything is being shoved closer and closer to April 15,” says John Ams, executive vice president of the National Society of Accountants. (Even the IRS was tripped up—the agency won’t be able to start processing returns until mid-February, delaying refunds for those lucky enough to get them.)

    For all but the simplest 1040-filers, the new wrinkles could lead to fee increases, particularly for those with preparers who charge by the hour.

  • Jan 18, 2011
    7:00 AM ET

    The Dead Have Choices: 2010 Estate Tax Options

    The 2010 Tax Relief Act establishes an exclusion from estate taxes for $5 million dollars per person, effective all of 2010 through December 31, 2012. But wait, 2010 was practically over by the time this legislation passed. Under the old rules, the estates of those who died were off the hook for estate taxes in 2010. Did that change?

    Not exactly. Now there’s a choice. The Tax Relief Act gave estate executors a choice between no estate taxes – and the right to use the new estate tax law. Why would anyone want to subject an estate to taxes if they can opt out? There are actually some pretty sound reasons to consider this. Let me explain.

    In 2010 with no estate taxes, larger estates also lost the right to a step-up in basis. ‘Step-up’ means the tax basis of the estate’s assets rise to whichever is lower: either cost or their fair market value (FMV) at the date of death–or optionally, 6 months after death  (if the overall estate value is lower). The ‘step-up’ concept is important for two types of assets – highly-appreciated assets and assets whose cost is difficult to prove due to the passage of time, modifications of assets, and lost records.

    In plain English, here’s an example. Mildred, a little old lady built up her stock portfolio over 30 or 40 years, a little bit at a time. The original records for those accounts are nowhere to be found. She was one of my clients, early in my tax practice. She was in the later stages of Alzheimer’s disease, so there was no way to ask her about the purchases. The stocks had split an unknown number of times – or perhaps experienced reverse splits. Companies had been split off, issuing new stocks. The family couldn’t possibly figure out where to start. Due to the step-up in basis, when Mildred died, we didn’t have to play detective and research all her purchase prices and trace the splits. We simply recorded the FMV on the date of death – and the heirs could sell the stocks without paying any capital gains taxes on a generation of appreciation.

    Let’s go back to the original rules for 2010.

  • Jan 11, 2011
    10:24 AM ET

    Planning For Your Estate, Tax Deal or Not

    A lot of people who would have owed the federal tax under past rules are off the hook after Congress passed the tax deal. But that could also mean less work for tax attorneys and other advisers. They can expect fewer calls for help in finding ways around the estate tax. That might not be a good thing.

    What’s good for the taxpayer can be tough for the tax-planning profession, which for years has “conjured up ways of beating the tax code, or minimizing its pernicious effect,” says Ned Watts, an estate planning attorney in Dedham, Mass. “This would mean most people don’t have to worry” about estate taxes, adds Watts.

    Still, the temporary change hardly spells the end of estate tax advice. The package is a two-year fix, and political battles are certain to ensue over changes after that.

    What’s more, the fix is not a carte blanche to ignore planning ahead. Anyone with between $1 million and $10 million in assets still ought to take traditional estate-planning measures, according to Watts and others. This could include naming which family member gets a summer home, deciding how to bequeath a piece of artwork, or whether to set up a trust for a grandchild. Even if not estate-tax driven, these tasks all require attention.

    Elizabeth Schlueter, head of wealth advisory for J.P. Morgan Private Wealth Management, says many people ought to take another look at their wills, because “they either don’t have one, or the one they have has been sitting in a drawer.”

  • Jan 6, 2011
    2:58 PM ET

    Bad News for Would-Be 2010 IRA Donors

    t’s official: Many taxpayers who were hoping to make charitable IRA donations for 2010 will not be able to do so.

    The Internal Revenue Service has issued a statement saying that the law doesn’t allow taxpayers to return payouts taken last year in order to make direct charitable Individual Retirement Account donations for 2010.

    The questions arose after lawmakers tucked a provision into the giant December tax package that retroactively extended the IRA charitable donation. This highly popular rule, which had expired at the beginning of 2010, allows taxpayers who are 70 l/2 or older to donate up to $100,000 per year of IRA assets directly to a charity. There’s no deduction for the gift, but it doesn’t count as income and it can satisfy the Required Minimum Distribution, or RMD, as I reported last month.

    Lawmakers, recognizing that their own delays had caused problems, gave taxpayers until Jan. 31 of this year to make 2010 donations.

    But the law did not address the predicament of those who wanted to make IRA donations last year but took required payouts instead, often at the last minute, because they were afraid Congress wouldn’t extend the law.

  • Jan 6, 2011
    10:55 AM ET

    Explaining the (Stingier) Energy Tax Credit

    Homeowners who make energy-efficient improvements to their houses can still get a break from Uncle Sam next year, but the payback will be smaller and there are several catches that could shut out some taxpayers altogether.

    The tax law passed in December extends a federal tax credit through 2011 for people who make their homes more energy efficient.  The catch: The government reduced the credit to pre-2009 levels. This means that taxpayers will be able to get a maximum $500 lifetime credit for up to 10% of costs of making their home more efficient. That’s down drastically from the maximum $1,500 credit that covered up to 30% of expenses which taxpayers could claim in tax years 2009 and 2010. (Now and then, you’d have to spend at least $5,000 to get the maximum credit.)

    The new rules also limit how much of the federal tax credit can be awarded for various types of equipment. Windows get the most stringent rules. If you spend up to $2,000 this year to install new windows you can get a maximum $200 credit—but after getting that credit, you can’t claim any tax credits for windows in future years, not even if you get even more efficient windows later or move to a new home and install such windows there.

    The caps on other types of equipments reset annually. So you can get a $150 credit for a furnace or hot water boiler in 2011, and again in 2012 if you upgrade. The credit is capped at $50 a year for smaller equipment like an advanced main circulating fan (they make furnaces more efficient), but can be as high as $300 for most other types of qualified property.

  • Jan 3, 2011
    11:10 AM ET

    The Three Most Important Tax Stories of 2010

    On the tax-development Richter scale, 2010 was an 8.0. Here’s my list of the three most important tax stories of the year:

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    Bush-era tax cuts extended through 2012: If you had told me right after the 2008 presidential election that the Bush-era tax cuts would survive through 2010, I would have called you uninformed. If you had told me they would be extended through 2012, I would have called you delusional. If you had told me that President Obama himself would urgently lobby a Democrat-controlled lame duck Congress for that extension because it was necessary to save the economy, I would have suggested electroshock therapy. All these things happened. Who woulda thunk it? Not me, that’s for sure.

    Favorable estate tax surprises: Since way back in 2001, we’ve known that the federal estate tax was scheduled for a one-year repeal, in 2010 only. But nobody in their right mind actually expected Congress to let it happen. It happened! Heirs of billionaires who died this year got a huge tax-saving windfall (good for them, in my opinion). Plus we now have a very favorable set of estate tax rules for the next two years. Estates of individuals who die in 2011 and 2012 will be sheltered by a $5 million exemption.

  • Dec 23, 2010
    7:30 AM ET

    How the Tax-Free IRA Distribution Donation Works

    For the last few years, you’ve been allowed to make donations to IRS-approved charities directly out of your IRA if you were age 70½ or older at yearend. The annual limitation on these qualified charitable distributions, or QCDs, is a whopping $100,000. If your spouse has IRAs in his or her own name and is 70½ or older, he or she can also arrange for QCDs up to the $100,000 annual limit. Of course, smaller donations are allowed too (as small as you like).

    The tax advantage is this: QCDs are federal-income-tax-free and they count as IRA required minimum distributions (RMDs). Since RMDs are taxable except when taken in the form of QCDs, you can substitute tax-free QCDs for taxable required distributions and thereby reduce your tax bill. In effect, this strategy allows you to deduct QCDs without any of the tax-law restrictions that apply to garden-variety charitable donations. (You don’t get to claim an actual charitable deduction, of course, because that would result in a double tax benefit.)

    The QCD break expired at the end of 2009, but the new tax cut extension legislation retroactively restored it for 2010 and extended it through 2011, something discussed in today’s Tax Guy column.

  • Dec 22, 2010
    9:36 AM ET

    Big-Impact Small Business Tax Breaks

    Many of the business-related tax breaks were in the Small Business Jobs Act passed this fall but small — and mid-size — businesses also retained some benefits in the tax deal signed last week.

    But some of these breaks will benefit truly small businesses more than others — and some will extend to what most of us consider mid-size or even larger companies. That’s because there are really two definitions of small business — the government’s more generous definition and the tighter definition most small business owners and watchers adopt.

    First, there’s the government’s definition: A business with sales of $7 – $25 million, with up to 500 or 1,000 employees.

    Second, there’s the more common definition that fits the average small firm: A business with sales of well under $2 million with up to 10 employees or freelancers.

    Thinking in terms of average small business owner (definition #2), here are some tax breaks that have impact.

    For starters, Section 179 depreciation is now so high ($500,000) that the average small business can write off all their asset and equipment purchases the year they buy them. That’s a plus because you can get an instant tax benefit from all your purchases (made after Sept. 8 of this year and before Jan. 1, 2012), instead of spreading the depreciation over three, five or seven years.

  • Dec 20, 2010
    10:22 AM ET

    All Tax Breaks Are Not Created Equal

    The sweeping tax bill President Obama just signed into law impacts just about everyone. But not all tax breaks were created equal.

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    In many cases, higher earners may be keeping more cash in their pockets. Households with income of $500,000 to $1 million will gain $3,859 compared to current tax rules.

    Wealthier Americans will benefit greatly from a two-year extension of current rates on long-term capital gains and dividends, keeping both at a top rate of 15%. Without the extension, the rate on long-term gains would have risen to 20%, and the top dividend rate could have risen to as high as 39.6% for the wealthiest taxpayers in the highest tax bracket.

    Wealthy Americans hoping to pass on estates to their heirs get a break through the deal, which lowers the top estate-tax rate to 35% and increases the exemption to $5 million per individual.

About Tax

  • The Tax Blog brings together a team of award-winning tax journalists from the Dow Jones network and around the web to examine the tax issues, changes and legislation that affect families, investors and small business owners. Our contributors include Tax Report columnist Laura Saunders (WSJ), Tax Guy columnist Bill Bischoff and senior reporter Jilian Mincer (, retirement-focused reporter Anne Tergesen (WSJ), wealth management writer Arden Dale (Dow Jones Newswires), TaxWatch columnist Eva Rosenberg and personal finance reporter Andrea Coombes (MarketWatch), and reporter Alyssa Abkowitz (SmartMoney). They’ll provide the latest news and insight, mine the tax code for tips and loopholes, and answer your questions about tricky tax situations. Contact the The Tax Blog with ideas, suggestions or tax questions at