Tax Time: What Did This Economy Do to Your Taxes?

Bill Smith
Director of the National Tax Office, CBIZ MHM
Tuesday, February 17, 2009; 11:30 AM

Bill Smith, director of the national tax office at CBIZ MHM, was online Tuesday, Feb. 17 at Noon ET to discuss how the choices you made during the financial crisis may be impacting your 2008 taxes.

A transcript follows.

For more information on this subject, read: After Tough Year, Taxes Can Bring Pain and Relief (By Michael Rosenwald, Feb. 15).


Bill Smith: Good morning everyone. My name is Bill Smith, and I am a director in the National Tax Office of CBIZ MHM, a national tax and financial advisory services firm. I will be happy to answer as many questions as I can during the time we have. Regarding the new law, many people want to know if it will affect the filing of their 2008 tax returns, and the answer is generally "No," with some minor exceptions. With that, I will post some of the answers to questions I have already answered, and move on to your new questions. Welcome!


Aurora, Ill.: Hi,

I closed on my first house 1/30/09! When I filed my taxes, I claimed my purchase as 12/31/08 as allowed by the First-Time Homebuyer Credit that was enacted in September '08.

Last week, the limit of the credit was increased $500 to $8000, and the repayment clause was struck. Obviously, I would like to take advantage of the new law, which applies to homes purchased after 1/1/09, which mine was. However, since I claimed the credit on my 2008 return, I am unsure how to go about getting the "improved" credit on the improved terms. Will I have to file an amended 2008 return, or is the new credit claimable in 2008 as well?

I hope I didn't penalize myself for filing early! Thanks, Derek

Bill Smith: Derek,

The Conference Agreement to the new law states that the waiver of credit recapture for homes purchased between December 31, 2008 and December 1, 2009 "applies without regard to whether the taxpayer elects to treat the purchase in 2008 as occurring on December 31, 2008." So you should be eligible for the waiver. And it looks like you can take the $8,000, although it's not crystal clear from the statute. May need to wait for the IRS interpretation.


Delray Beach, Fla.: MY wife just bought a new car, and from reading the details from the new Stimulus bill, there is a deduction, right?

I believe it allows a refund on fed and state taxes...

Can this deduction be taken for '08 (this tax return) or do we have to wait until next year?

Thanks, Robert

Bill Smith: Robert,

It is a deduction for the sales and excises taxes paid on a new car purchased in 2009, up to the first $49,500 of purchase price. So it is a 2009 item, not 2008. You can add it to your state income tax deduction if you itemize, or it can be added to the standard deduction if you do not. If you elect to deduct state sales taxes instead of state income taxes (an option), it should be included, or if not, added.


Bowie, Md: I'm wondering if anything in the new "Stimulus" bill will effect our 2008 taxes. Should we wait for a few more weeks to submit them, to see how things pan out?

Bill Smith: Most of the provisions are prospective, meaning they affect 2009 and beyond. As long as you have all of your statements (some senders of 1099s were given an extenstion to mail them for 2008), you are probably safe. If you bought a new house and are a first time homebuyer in 2009, you might have an option to take a credit in 2008.


Silver Spring, Md.: My son, a freshman in college, won a scholarship last year. The Association that awarded him the scholarship sent a 1099-MISC with the amount in box 7. We thought the scholarship was tax free as it was used for tuition and books. What am I supposed to do?

Bill Smith: Scholarships are not taxable as long as the money is not being paid for work by the student. The institution (or in your case Association) is still required to report the amount to you.


Minneapolis, Minn.: First, a statement: I converted $20,000 from an IRA to a ROTH IRA. My expected tax liability is $3,000. (The bond fund that I converted had falen 40 percent and now pays about 10 percent! So, my tax liability will be made back in 18 mos. with earnings. After that, tax free. Also, any cap. gains, recovery gains, are tax free.)

Question, should I do this again for 2009's tax year? Assuming that I have the same tax liability? I am 56 years old & plan on hitting the ROTH last for funds.

Bill Smith: Check with your financial advisor, but generally given the low valuations of investment portfolios, it is a great time to consider switching from a tradtional IRA to a Roth IRA (or to do other sophisticated estate planning strategies).


Portland, Ore.: I'm not certain if I can join the chat tomorrow so I'm submitting this early. I read that the new stimulus package has a $250 payment for disabled veterans. Is there an income cap for individuals to be paid this? My husband is a disabled veteran (40 percent disability as classified by the VA) but last year our gross income was $215,000 (double income, no children).

I hope you can shed some light for me!

Bill Smith: The $250 is a credit against 2009 taxes, and you must be someone "who receives during the first taxable year beginning in 2009 any amount as a pension or annuity for service performed in the employ of the United States." This includes adults who are eligible for benefits under certain social security, Railroad Retirement and veterans compensation programs, or for supplemental security income (SSI) cash benefits."

There is no income phase-out of the credit.


Charleston, South Carolina: I have put $7,000.00 in to my house, in construction, meaning new carpet,painting,new wooden floors,new bathrooms floors..... Can I add this too my house reconstruction or what can I do. Help please?

Bill Smith: Yes. If you add something to your house that is expected to last for a year or more ("permanent improvement"), you can add the amount to your basis for calculating your gain when you sell the house. I assume this is your principal residence, in which case, right now you can exclude up to $250,000 of gain (single) or $500,000 of gain (married filing joint).


Dupont Circle, D.C.: Hi. I lost my job in January 2008 and collected unemployment, which I had taxes deducted. I found a good job in September, but in all I only worked 5 months last year. Since I paid taxes at a higher rate than I actually earned, I am hoping I will get a generous tax fund. True? And don't you think its a bit heartless to tax unemployment benefits? I was making about $42 an hour; on unemployment it was $8.

Bill Smith: Generally, taxes are withheld on each paycheck based on the idea that you will be employed the entire year at that salary. When that is not the case, typically your withholding is going to exceed you tax when you prepare your return, and you will be eligible for a refund.

The (slightly) good news is that the first $2,400 of unemployment benefits in 2009 will be tax free.


Alexandria, Va.: I received 1099-INT statements for my children, both of whom are minors. Do I include those on my tax return?

Bill Smith: Generally, yes, if the children are under 18 and the income is more than $900.


Arlington, Va.: I just did my taxes over the weekend. I am due a big refund, primarily because I had much lower investment dividend income this year. I consider myself to be a fairly smart person but I have to say this tax is system has gotten way too complicated. Trying to figure out how to file a schedule D gave me the biggest headache I have had in years. If a relatively sophisticated person has this much trouble it is clearly time to reform the system. Do you think we'll ever get a simplified system? I don't mind paying my taxes, but trying to navigate this overly-complex system is a nightmare.

Bill Smith: In defense of the system, it has become fairly simple for the vast majority of individual filers. Generally, it involves a W-2, maybe some interest or dividends, state income tax, mortagage interest and real property taxes, and charitable contributions.

After that, it can become mind-numbingly complex. But the Internal Revenue Code has become the vehicle of choice for enacting social policy, so I am not overly optimistic about a simplified Tax Code. Throw into the mix the information reporting requirements that allow the authorities to monitor all sorts of monetary transactions, and there is even less motivation to simplify.


Castle Rock, Colo.: I already filed my 2008 Tax forms. Is there anything I need to do to get the pending $800 tax credit?

Bill Smith: The Making Work Pay credit is a 2009 and 2010 credit. If you qualify, you can get the credit through a reduction in your withholding taxes from your employer, or claim it at year end in a lump sum. So your 2008 tax return in unaffected.


Oakton, VA: I read in the Sunday WP under "11 Most Overlooked Deductions," that I can deduct the state tax I paid on my new auto I bought 1/08. If so where do I enter this? Thanks 11 Most Overlooked Deductions (The Post, Feb. 16)

Bill Smith: Payments for car registration and licensing or a motor vehicle tax may be deductible as a personal property tax if imposed annually and assessed in proportion to the value of the car. This is entered as part of the tax section on Schedule A.

The new law provides increased deductibility for sales and excise taxes on new car purchases in 2009. See answer to other related question.


Jim, Washington, D.C: I am a small business owner. Anything in the new tax bill that could help with my current cash flow?

Bill Smith: The biggest item for many small businesses is the ability to carry 2008 losses back up to five years, allowing for the filing of quick refund claims in the years when the business was making money. If you were still profitable in 2008, and hopefully you were, the new law extended the increased expensing limits on depreciable property and the 50% additional first year bonus depreciation. Combined, those two provisions can let you write-off up to 80% of the cost of new equipment in the first year in certain circumstances.


Herndon, Va.: Hello, I am not sure if this is a question of tax or social security. I hired my mom to teach my daughter a foreign language since she was a teacher to teach that language. She also lives with us. I paid for her teaching so do i (and she) need to pay social security and medicare tax for her teaching income? Is her teaching work covered by social security? thanks.

Bill Smith: Are you considering running for public office, or accepting a political appointment? This is a "nanny tax" type of question. Generally, any employer and employee must pay FICA and FUTA taxes on the wages of the employee. In your mother's case, remember that you can give her a gift of up to $12,000 per year ($24,000 if you are married), and the gift is tax free and there are no filing requirements. Those amounts increase to $13,000/$26,000 in 2009. As long as she is there anyway, why spend the time bonding with your daughter by teaching her a foreign language?


Pellet stove bought in 2008: Hoping to get in before my meeting with my tax guy in an hour! Is the $300 tax credit for purchase of energy-efficient appliances, like a pellet stove, applicable to stoves bought in 2008? Thank you!

Bill Smith: Generally, yes. Different types of property are subject to different caps (removed for 2009 in the new law, and total increased). Not sure where pellet stoves fit in, but probably the $300 cap.


Herndon, Va.: So, let me see if I understand this. My girlfriend closed on her first house 11/15/08. Therefore, she would not qualify for the $8,000 credit in the stimulus bill. Is that correct?

Bill Smith: I believe she qualifies for the $8,000 credit (assuming she meets all of the other qualifications). Unfortunately, she does not qualify (by about 46 days) for the waiver of the repayment of the credit. The waiver only applies to homes purchased after December 31, 2008.


Capital Gains: Hi Bill, On my 1099-DIV it says we made $3K on our mutual funds. I'm guessing that was before we lost almost $10K in them in the fall. So why do I have to report these "gains" when I lost a boatload of money?

Bill Smith: I presume that the loss you are referring to is the loss in value, not a loss from the disposition of the mutual fund. The $3,000 on the 1099 is your share of the gains from activity within the mutual that was distributed out to you as dividends during the year. The $10,000 loss can only be deducted for tax purposes when you actually dispose of your holdings in the mutual fund.

For this reason, many people will sell investments at year end, such as the mutual fund you are referring to, in order to be able to realize such losses on their tax return. Always be careful of the wash sale rule, however, which prohibits the purchase of the same security within 30 days before or after selling a security at a loss.


Rockville, Md.: "Bill Smith: Are you considering running for public office, or accepting a political appointment? This is a "nanny tax" type of question"

I know this was supposed to be glib but I take offense to this comment.

I have no plans to run for public office or accept a political appointment. However, I obtained an EIN, I've been filling out the proper forms, and I've been paying the taxes on my housekeeper since 1) it's the right thing to do and 2) it's the law.

Bill Smith: Absolutely true. My point was that many people fall into the trap of thinking household employees are not subject to the general rules involving employees. Your situation is very different, because it involves your mother and she is living with you. It does not necessarily fall within the traditional definition of employment to teach your daughter a language while they are living together in the same home, in the same sense that you could tutor your daughter.

I meant no offense, nor was I suggesting that you play "fast and loose" with the tax law. It merely illustrates that in the tax law, not every issue issue is black and white. If you want to treat her as an employee, then you need to follow the FICA and FUTA rules.


Springfield, Mo.: Tax-time is going to sting this year. In early 2008 I started getting uncomfortable with our heavy investments in the questionable economy, so, we unloaded almost half of our stock portfolio. All long term holds, and we were early enough that it was almost all gains. But then we got lazy about supplemental payments, so we are in-for a bad hit, and probably some late payment penalties.

Bill Smith: You are in the enviable position of having to worry about the tax on gains from your investments in 2008. The rates are still favorable and you avoided the worst of the downturn, apparently. You are correct that you will probably have penalties for failure to pay enough estimated taxes.


Washington, D.C.: Regarding the first-time homebuyer tax credit, my husband and I just bought a new house. He had sold his home in 2008, and I have never purchased a home before. Is there any chance that we would be eligible since I am a first timer?


Bill Smith: Unfortunately the term "first-time homebuyer" is defined in the statute as follows: "The term "first-time homebuyer" means any individual if such individual (and if married, such individual's spouse) had no present ownership interest in a principal residence during the 3-year period ending on the date of the purchase of the principal residence to which this section applies." So spouses are treated as one person, in effect, when determining whether a home was owned within the relevant period.


Long Island, N.Y.: What's the status of AMT in 2009?

I saw something in a preliminary portion of the bill that raised both the AMT exemption (from 69K for joint filers) & start the phase out of the exemption (currently at $150K for joint filers).

Did those survive the final bill that the President will sign today?

Bill Smith: The AMT patch set the exemptions at $70,950 for joint returns and $46,700 for separate filers. The phase-out amounts did not change: $150,000 for joint returns and $112,500 for separate filers.


Oviedo, Fla.: By accident, my ex husband and I each took a 12-year-old daughter as a deduction on the 2007 tax returns. I got a stimulus check based on her residence with me - his income was too high.Will I get audited? And, if I restate that return will I have to give back the money? BTW, I am a full time student who owed no tax that year.

Bill Smith: Only one of you was the proper person to claim your daughter as a dependent. If it was you, you do not need to do anything. It is unlikely that you will get audited simply for the "double reporting." If your ex husband was the proper person, then you should file an amended return removing your daughter as a dependent. If the check was based on your daughter being your dependent, you will have to return the money.


Rockville, Md.: I bought a 2009 American model in November of 2008, will that qualify me for a tax credit/deduction?

Bill Smith: Not the new deduction in the new law, but there is still some deduction available. See the answer to the other car question for the rules.


foster child in dispute: I have a relative that moved in with us. he is eligible to be claimed on his parent's tax return. he has lived with us for most of the past year, and we have incurred significant expense. In ways he is like a foster. For instance to add him to our health insurance we had to classify him as such. Can we partially claim him for half the year? Can we claim portions of his college expenses as we are sponsoring him through school though we are not custodial parents? What options are there? I fear despite any agreement to claim for tax purposes, my in-law would still claim him and get us both in trouble with IRS.

Bill Smith: The qualifying child and qualifying relative rules are complicated and too lengthy to go into here. Check the website and try to walk through where you fit vis-a-vis the in-laws.


Burke, Va.: I sent my son in 6th grade to Sylvan Learning center in 2008 to help him improve his writing skills. I paid $2900.00. Is this amount tax deductible?


Bill Smith: It may qualify as a medical expense under certain circumstances, and that would be deductible on Schedule A to the extent it exceeds 7.5% of AGI


Bill Smith: Thanks everyone. I hope I answered most of your questions, and good luck during "filing season."



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