Articles

Individuals Tax Updates

INDIVIDUALS

Deferral of Required Minimum Distributions for 2009

Last January, we discussed new legislation enacted in late 2008 that provides relief with respect to the annual Required Minimum Distribution (RMD) that individual taxpayers over age 70? must withdraw from their IRAs and qualified retirement plans in 2009.  We noted that, as a result of this law change, the RMD for 2009 is waived, and the next RMD that must be withdrawn will be for calendar year 2010.  This relief applies to lifetime distributions to employees and IRA owners as well as to after-death minimum distributions to beneficiaries of a decedent’s retirement plan. 

Due to the late enactment, some plans experienced administrative difficulties in offering plan beneficiaries the option not to receive their 2009 RMD or the option to roll over any 2009 distributions into other qualified retirement plans.  As a result, some taxpayers have received unnecessary distributions this year and will be taxed on those distributions in 2009 unless corrective action is made available to them.  To provide relief to these taxpayers, the IRS recently issued Notice 2009-82.  This guidance allows individuals who received a 2009 RMD this year the option of either keeping the distribution or rolling it over into a qualified plan by the later of November 30, 2009, or 60 days after the date the distribution was received.  Note that taxpayers are permitted to rollover one distribution from an IRA per year.  However, the IRS applies this one-rollover-per-year rule on an IRA-by-IRA basis. 

As an example, a taxpayer who received a $10,000 RMD for 2009 on March 1, 2009, now has until November 30, 2009, to rollover this distribution to a qualified plan to avoid current taxation.  In the absence of this special relief provision, the taxpayer would have had to rollover that distribution by the end of April 2009 using the 60 day rule, or face current taxation.  Alternatively, if the taxpayer receives the distribution on October 30, 2009, the taxpayer will have until December 29, 2009, to rollover the distribution (60 days after the October 30th distribution).  If the taxpayer has other IRAs, (s)he may rollover one 2009 RMD from each of these IRAs as well by November 30, 2009, or the 60^th day following the distribution, if later.  These rules are complex.  Please call us if you have any questions regarding the amount or the timing for the rollover.  The IRS web site at http://www.irs.gov/ep also provides additional information on rollovers of 2009 RMDs.  

Tax Exempt Bonds as Tax Credit Bonds

Congress permits state and local governments to issue tax credit bonds as an alternative to traditional tax-exempt bonds.  Some versions of tax credit bonds do not pay interest.  Rather, a tax credit accrues quarterly on the bond and is includible in the taxpayer’s gross income as if it were an interest payment on the bond.  Then, the taxpayer holding the bond on the “credit allowance date” (i.e., March 15, June 15, September 15, and December 15) is permitted to claim a non-refundable tax credit against the taxpayer’s regular income tax and alternative minimum tax liability.  The effect is to provide the return to the bondholder in the form of a federal tax credit rather than a cash interest payment.

Recent tax bills have created several new types of tax credit bonds and extended the effective date of others.  These include bonds issued for forestry conservation, renewable energy, energy conservation, school construction, and recovery zone economic development purposes. 

Build America Bonds.  The new Build America Bond program is intended to assist state and local governments in financing capital projects by lower borrowing costs.  In general, these are interest-paying bonds that a state or local government issues between February 17, 2009, and January 1, 2011, and elects to treat as a tax credit bond.  Holders of Build America Bonds continue to receive interest payments and are also entitled to a tax credit of 35% of the interest payable on the bonds.  However, the interest income, plus the credit amount, must be included in income.  For these bonds, the tax credit offsets some or all of the tax arising from including the interest in taxable income.

For both types of bonds, credits may be distributed to owners of pass-through entities such as S corporations and partnerships.  Taxpayers will receive Form 1099-INT from the bond issuer reporting tax credits.  Taxpayers are to use Form 8912, Credit to Holders of Tax Credit Bonds, to claim the credit.  Any unused credit is not refundable, but can be carried forward to succeeding tax years.  If you would like additional information regarding tax credit bonds, please contact us.

IRS Liberalizes Home Mortgage Deduction Limit

There is good news from the IRS if the mortgage on your residence exceeds $1 million.  A new interpretation of the tax laws by the IRS could result in a greater mortgage interest deduction for you for this year and perhaps for prior years as well. 

Current tax law allows taxpayers to deduct interest paid on qualified residence acquisition debt up to $1 million and home equity debt up to $100,000.  Acquisition debt refers to debt incurred by taxpayers to purchase, construct, or substantially improve their home if the debt is secured by that home.  Home equity debt refers to debt secured by the taxpayer’s residence that may be used for other purposes (e.g., to pay for vacations, private school, a new car, etc.).  In calculating eligible residential interest, a taxpayer can use both the principal residence and one other vacation home, but both residences are subject to a single $1million acquisition debt limit or $100,000 home equity debt limit. 

In the past, there has been uncertainty as to whether the home mortgage acquisition debt limit could be extended to include the $100,000 home equity rule, so as to allow $1.1 million of purchase or construction debt.  Prior U.S. Tax Court cases have held that the $1 million home mortgage debt limit cannot be stretched to include the $100,000 home equity deduction if a taxpayer has a single acquisition debt in excess of $1 million.  But in a recent ruling, the IRS issued an opinion contrary to the Tax Court cases (CCA 200940030 on 10/2/09).  The IRS now states that individual homeowners may deduct residential interest expense generated by up to $1.1 million of direct acquisition debt.  In effect, the IRS has recharacterized any amount of debt over $1 million that does not qualify as acquisition debt as home equity debt, up to the additional $100,000 limit.

What this means is that you may have an additional mortgage interest deduction for 2009 if your acquisition debt exceeds $1 million.  In addition, you may be able to amend your income tax returns for 2008 and other open years to claim this increased mortgage interest deduction.  We can help you determine whether you qualify for this increased deduction.

New IRS Communication Tools

To increase taxpayer awareness and use of the recently enacted 2009 tax benefits available to American families, the IRS now provides explanations of these benefits through YouTube videos, radio public service announcements, and multi-lingual informational flyers.  This is in addition to a significant amount of information available on the IRS website at www.irs.gov/recovery.  Topics include the First-time Homebuyer Credit, education and energy tax credits, the deduction for sales or excise taxes paid on the purchase of a new vehicle, and the Making Work Pay Credit.  These products are in addition to earlier IRS efforts on YouTube (www.youtube.com/irsvideos) and iTunes to increase public awareness about the tax credits.

Savings Bond Opportunities

Under current law, individual taxpayers may check a box on Form 8888, which is filed with their tax return, and request that some or all of their tax refund be directly deposited into their checking and/or saving account.  Beginning in early 2010, taxpayers will be able to use this form to request that some or all of their 2009 tax refund be used to purchase up to $5,000 in Series I U.S. Savings Bonds.  Taxpayers will not have to open an account with the Treasury Department, have a bank account, or take any other action other than filing the tax return and checking the appropriate box.  The savings bonds will be mailed to the taxpayer within three weeks of processing the individual’s return.  Initially, in 2009, taxpayers can purchase the bonds in their own name (or joint names for married taxpayers who file jointly).  Beginning in 2011, taxpayers will be able to designate co-owners of the bonds such as their children or grandchildren.   For refunds up to $250, the bonds will be issued in $50 denominations.  Beyond that, bonds will be issued in increments of $50, $100, $200, $500, and $1,000.  For example, for a $1,000 refund, a taxpayer will receive six $50 bonds, one $200 bond, and one $500 bond.

Series I U.S. Savings Bonds are issued at face value (e.g., a $50 bond costs $50) and generally can be redeemed for principal and accrued interest at any time after 12 months.  The bonds accrue interest on the first day of each month, which is then compounded semi-annually.  They continue to earn interest until redeemed at a financial institution or when they reach maturity in 30 years, if earlier.  Savings bond interest income is exempt from state and local income tax.  The federal income tax is deferred until redemption.  However, taxpayers may elect to claim the interest annually.  Some taxpayers may be able to exclude all or part of the interest earned from eligible savings bonds if it is used to pay for qualified higher education expenses.  The bonds are subject to any applicable federal and state estate, inheritance, gift, and excise taxes.  For more information on this new savings initiative, go to:

http://www.irs.gov/retirement/article/0,,id=212061,00.html?portlet=6