Last week, Congress made some significant changes to the first-time homebuyers tax credit. The changes will benefit many homebuyers but Congress did tighten up a few of the existing rules. Here are the key changes:

* Extended through April 30, 2010 – The Nov. 30 deadline has been extended through April 30, 2010. This means that you must have purchased a home by April 30, 2010 and must close on that purchase by June 30, 2010.

* Higher Income Limits – Prior to these changes the tax credit phase-out range was a Modified Adjusted Gross Income (MAGI) of $75,000 - $95,000 (for single taxpayers) and $150,000 - $170,000 (for married taxpayers). Under the new legislation, the MAGI ranges change to $125,000 - $145,000 (for single taxpayers) and $225,000 - $245,000 (for married taxpayers).

* Expansion of the tax credit – The credit is not limited to first-time homebuyers any more. Homebuyers who have owned a home for 5 of the last 8 years can qualify for a tax credit of as much $6,500. The 5 years of ownership must be consecutive years and the home must be the buyer’s principal residence. The credit is available for purchases made after Nov. 6, 2009 and before May 1, 2010.

* Home purchased for more than $800,000 after Nov. 6, 2009 do not qualify for either the $8,000 or the $6,500 tax credits. Also, homes purchased from in-laws after Nov. 6, 2009 do not qualify for either credit.

* Dependents of taxpayers under the age of 18 do not qualify for the tax credits.

* These credits are still refundable and can be claimed on your amended 2008 tax return (for 2009 purchases) or your 2009 tax return (for 2010 purchases). Buyers will also be required to submit a copy of their settlement statement to claim the tax credit.

I have an income property our daughter rents from us. I wanted to sell it to her last year but was told that she was excluded from the tax credit because she is immediate family. Is this still the case under the new housing tax credit law?

The first time home buyer credit was extended last week. Furthermore, as discussed in the Managing Your Money section of boston.com last week, the bill was expanded to include those people that already own a home. However, the new law does not adjust the rules relating to sales to related parties. Under both the original law and the extended law, sales of properties between related parties are not eligible for the housing tax credit. So, if you sell the property to your daughter, she will not be able to claim the $8,000 credit.

Flexible Spending Accounts (FSA) are a great way to reduce your taxes but you can lose money if you don’t spend it before the end of the year. FSAs allow you to set aside money on a pre-tax basis for deductible medical expenses that are not covered by your health insurance plan. However, any funds left in your FSA account are forfeited if not spent by the end of the coverage period which is typically Dec. 31. Some plans will allow you to get reimbursed for expenses incurred after Dec. 31 but it depends on your particular plan so be sure to check with your employer.

FSAs are employer-sponsored accounts that allow employees to make pre-tax contributions. The contributions can be used by the employee to pay for out-of-pocket medical expenses (i.e., deductible medical expenses that are not covered by the employee’s health insurance plan). Employee contributions in a FSA are “use-it-or-lose-it” meaning that the employee needs to spend the money in the account before the coverage period ends otherwise the unused funds will be forfeited. The coverage period depends on your employer’s specific plan however, many plans follow the calendar year.

If your coverage period ends on Dec 31 and you have not used all of the funds in your FSA here are some medical expenses that are typically covered.

* Deductibles and co-pays for medical and dental visits and treatments.
* Medical expenses for dental treatments including fees paid to dentists for X-rays, fillings, braces, extractions, dentures, etc. Generally, teeth whitening expenses are not deductible medical expenses.
* Fees for acupuncture or chiropractic treatments.
* Medical expenses for an inpatient's treatment at a therapeutic center for alcohol addiction. This includes meals and lodging provided by the center during treatment.
* Fees for ambulance services.
* Medical expenses for breast reconstruction surgery following a mastectomy for cancer.
* Medical expenses for special equipment installed in a home, or for improvements, if their main purpose is medical care for you, your spouse, or your dependent.
* Contact lenses needed for medical reasons and the cost of equipment and materials required for using contact lenses, such as saline solution and enzyme cleaner. You can also include expenses for eyeglasses and laser eye surgery or radial keratotomy.
* Medical expenses for in-patient care at a hospital or similar institution if a principal reason for being there is to receive medical care. This includes amounts paid for meals and lodging.
* Insurance premiums you pay for policies that cover medical care.
* Medical expenses for psychiatric care and psychoanalysis.
For more information about deductible medical expenses, visit the IRS’ web site and review Publication 502. http://www.irs.gov/publications/p502/ar02.html#en_US_publink100014786

With 2009 coming to a close, I am now meeting with clients, looking at their projected financial results for the year and considering some ideas to minimize their taxes. All businesses should do some tax planning right now and consider some tax avoidance (as opposed to tax evasion) strategies. Here are a couple of ideas:

Congress is currently working on legislation to extent the first-time homebuyer tax credit. In order to be eligible for the current credit, prospective buyers need to purchase and close on a home by Nov. 30. Under the proposed bill, the deadline is expected to be extended into 2010. The details of the extension are currently being worked on and a vote is expected as early as this week -- some say that a vote may occur today. Therefore, you may have some breathing room with your closing if you already purchased a home and are trying to beat the Nov 30 deadline. If you are a prospective first-time homebuyer who missed the opportunity to take advantage of the current credit, you may have a second chance.

In addition to the extension, Congress is said to be working on a bill to expand the current tax credit to prospective homebuyers who already own a home. Under this proposal, existing homeowners who purchase a home after this bill is enacted may receive a tax credit of as much as $6,500 dollars. This would apply to prospective purchasers who have owned a home for 5 of the last 8 years.

Although we will not know the exact details of these proposed bills until Congress completes their work, we do know that they need to act quickly if they expect to extend the current credit before it expires. Stay tuned...

My wife and I are in the process of starting our own consulting business. What is the appropriate tax treatment for the expenses that we incur to start the business?

Expenses that you incur from the genesis of your business until you begin operations are considered start-up costs. This is typically the planning stage of your business, prior to any revenue actually coming in the door. (A clear example might be a retail store. You are probably an active trade or business on the day customers can come through your store front.) These costs incurred to create a trade or business and might include the following:

At the end of last year, President Bush signed a law waiving the required minimum distributions (RMDs) for 2009 from IRAs and employer sponsored defined contribution plans such as 401(k) plans, 403(b) plans, 457(b) plans and profit sharing plans. Despite the passage of the law before the end of the year, many IRA owners and plan participants ended up receiving their 2009 RMD because IRA custodians and plan administrators did not have enough information on how to comply with the new law.

Although RMDs are not generally eligible to be rolled over, the new law provides individuals (who received their 2009 RMD) with the ability to roll their 2009 RMD over into an IRA or other eligible retirement plan. Rollovers usually need to be accomplished within 60 days. However, many individuals failed to meet this deadline because of the confusion and lack of information surrounding the new law.

Recently, the IRS has issued a notice (IRS Notice 2009-82) providing additional time for individuals who received their 2009 RMD and failed to complete the rollover within the 60-day period. Under the notice, IRA owners, plan participants, and spouse beneficiaries have until November 30, 2009 to complete the rollover.

Keep in mind that this waiver does not apply to RMDs received in 2009 for 2008. In addition, the waiver does not change the one-rollover-per-year rule which only allows an IRA account owner one (non-direct) rollover per year from each IRA account.

For more information about this IRS notice, visit the IRS web site at http://www.irs.gov/pub/irs-drop/n-09-82.pdf

Have you been thinking about starting your own business, but don't know where to start? Or have you already started your own business, but need some advice on how to take it to the next level?

Accountant and Managing Your Money blogger Jamie Downey, who specializes in the area of small businesses, will be here on Tuesday, Oct. 13, at 1 p.m. to take all of your questions about the world of small business.

Does the $8,000 first time tax credit have any income restrictions, and when does the offer end. I have heard two dates, Nov 30th and Dec 30th, what is the real deal. Under contract or closed?

In order to be eligible for the $8,000 First-Time Homebuyers Tax Credit for purchases made in 2009, your modified adjusted gross income (MAGI) cannot exceed $95,000 dollars if you are a single taxpayer and $170,000 if you are married filing jointly. If your MAGI is between $75,000 and $95,000 dollars for single taxpayers or between $150,000 dollars and $170,000 dollars for married taxpayers filing jointly, you would be eligible for a portion of the total credit based on the actual amount of your MAGI.

First-time homebuyers have until December 1, 2009 to purchase and close on a home to qualify for this credit. Therefore, if you signed a contract to purchase a home but do not close before Dec. 1, you would not qualify for the credit.

Visit the IRS’ web site at http://www.irs.gov/newsroom/article/0,,id=204671,00.html for more information about the First-Time Homebuyer Tax Credit.

With so much talk about taxes being raised at the federal level, it is refreshing to hear that there is proposed legislature to provide some tax relief to small business. Some of the key provisions in the Small Business Tax Relief Act of 2009 are the following:

Can a tax credit from the IRS result in a tax refund?

In short, it depends on the type of credit it is. If the tax credit is a refundable credit, you would receive a tax refund if the credit exceeds the amount of your tax liability. If the credit is not refundable, you would not be able to reduce their tax liability below zero (even if the amount of the credit exceeds your tax liability).

Keep in mind that a tax credit is different from a tax deduction. A tax credit reduces your tax liability dollar for dollar whereas a tax deduction reduces the amount of your taxable income which is used to calculate your tax liability.

Here are some common refundable and non-refundable tax credits:

Refundable Tax Credits
Earned Income Tax Credit
Credit for Estimate Tax Payments
Credit for Excess Social Security Taxes Withheld
Credit for Taxes Withheld from Salaries and Wages
First-Time Homebuyer Credit
Making Work Pay Tax Credit
Health Coverage Tax Credit
Additional Child Tax Credit (partially refundable)
Alternative Minimum Tax (AMT) Credit (partially refundable)

Non-Refundable Tax Credits
Adoption Expense Tax Credit
Child and Dependent Care Tax Credit
Credit for the Elderly and Disabled
Credit for Qualified Alternative Fuel Vehicles
Hybrid Vehicle Credit
Tax credits for energy-saving home improvements
Hope Scholarship Tax Credit (American Opportunity Credit)
Lifetime Learning Tax Credit
Retirement Saver’s Tax Credit
Foreign Tax Credit
Child Tax Credit (generally not refundable)

I recently determined that I have underreported income on my tax returns going back to 2004. The amounts are not that significant, about $4,500 per year. I would like to correct this problem. Do I need to amend all my tax returns going back to 2004? Can you help me determine what to do?

Your honesty should be commended. My anecdotal evidence indicates that people only want to amend their tax returns when their error has resulted in them paying too much tax on their return, not paying too little.

For most instances, the statute of limitations on a federal tax filing is three years. As such, the Internal Revenue Service can assess additional tax on a taxpayer for a period of three years after the tax return has been filed. This would mean that you would file an amended tax return for the tax years 2008, 2007 and 2006. Assuming that you filed your tax return for 2005 by the filing deadline of April 15, 2006, the statute of limitations has already expired on this tax year and you would not amend this tax return. (However, if you extended the tax return that year and did not file the return until the deadline of October 15, 2006, you may still consider amending your 2005 tax year as the statute of limitations is open for another two months.)

As is always the case there are some exceptions to this rule. If the amount of gross income you failed to report to the IRS is in excess of 25% of the amount of gross income stated in the tax return filed with the IRS, then the statute of limitations is extended to six years. For your case, if your gross income was approximately $18,000, there is a possibility that you would also need to amend your 2005 and 2004 tax returns.

Also, the statute of limitation does not apply in the case of a fraudulent tax return filed with the IRS with the intent to evade any tax. The IRS would have to prove that this was the intent. Since you are trying to rectify this problem, it is pretty clear that your intent was not to evade taxes.

It is important to understand the starting date for running the statute of limitations is the day you file the tax return. For those who fail to file a tax return, the clock on the statute does not begin and thus the IRS can open tax years much further back in time.

I have a savings account to house tax money. I claim exempt on a lot of paychecks. Is it okay to owe money come tax time if you pay it in full? Is there a cap on how much you can owe on tax returns before you get any fees?

In theory, this sounds like a good idea for taxpayers because it allows them to hold onto the income taxes they owe until April 15th, when they file their return. This, in turn, would allow them to earn interest on those dollars before paying the IRS. Unfortunately, our income tax system is designed as a pay-as-you-go system. This means that taxpayers are required to pay tax on their income as it is earned. Most people who have taxes automatically withheld from their paychecks accomplish this requirement without having to make additional tax payments. However, if you do not have enough withheld or you earn a significant amount of income where taxes are not automatically withheld (e.g., income from investments, alimony, self employment income) you may need to make additional estimated tax payments to meet the requirements.

Estimated tax payments need to be made at least quarterly. There are specific due dates each quarter (April 15, June 15, September 15, and Jan 15). If you do not have enough withheld or paid in through estimated payments each quarter, you may still be assessed an underpayment penalty.

To avoid an underpayment penalty, the IRS requires that you pay 90 percent of your tax liability for the current year or 100 percent of your tax liability from the previous year through your withholdings or estimated tax payments. If your adjusted gross income is above $150,000 dollars, the IRS requires that you pay 90 percent of your tax liability for the current year or 110 percent of your tax liability from the previous year.

The two exceptions to this rule are (1) if your tax liability for the current year is less than $1,000 dollars (after credit for withheld taxes); or (2) if you are a US citizen or US resident who did not have a tax liability for the tax previous year (assuming the previous tax year comprised of 12 months).

While there isn’t a specific dollar amount on how much you can owe before an underpayment penalty applies, I would recommend that you calculate your estimated tax liability for the current year. This will serve you well in two ways. First, it will provide you with an estimate of how much you will owe versus how much you have already saved. Second, it will help you determine if you have underpaid your taxes to date and allow you to make adjustments to reduce or eliminate the penalty before the end of the tax year. The IRS provides a worksheet with instructions on how to calculate your estimated taxes (http://www.irs.gov/pub/irs-pdf/f1040es.pdf). If you need assistance with this calculation or with the settlement of any penalties, I would recommend speaking with a CPA or qualified tax professional.The IRS also provides various form of free taxpayer assistance. For more information visit the IRS' web site at http://www.irs.gov/newsroom/article/0,,id=165646,00.html

In 2008, Governor Patrick signed into law a bill that drastically changes the way many corporations will file their 2009 Massachusetts tax returns. In the past, Massachusetts viewed subsidiaries or affiliated corporations as separate entities for tax purposes. Those that did business in the state were required to file a Massachusetts tax return. However, starting in 2009, this practice has been eliminated and the state now requires “combined reporting”.

Under this new method, affiliated corporations with 50 percent or greater common ownership will be required to file a unitary combined tax return. In this system, the income of all corporations in the group (including those not doing business in the state) is aggregated. Transactions between these entities, or intercompany transactions, are eliminated. The total income of the group (or unit) is then allocated to the state based apportionment factors.

A unitary group will include all corporations under common ownership that are engaged in a “unitary” business. Corporations are considered under common ownership if more than 50% of their voting stock is controlled by the same beneficial owners. A unitary business is defined broadly to include two or more corporations whose business activities are interrelated and result in mutual benefit or a sharing of value between the corporations. As you would expect, the law specifies the Legislature’s intent that the term “unitary” be construed to the broadest extent permissible under the U.S. Constitution.

The bill was entitled “An Act Relative to Tax Fairness and Business Competitiveness”. This may be a misnomer since the reason for this change was to extract more taxes from businesses. Not many people would consider increasing corporate taxes something that will make Massachusetts more business competitive. However, under the new reporting structure, it is estimated that Massachusetts will extract some $400 million in additional corporate taxes annually.

In addition to increasing the tax burden, implementation and compliance of combined reporting will be a challenge. The Department of Revenue is in charge of issuing the regulations needed to implement combined reporting. More regulations will be issued in coming months to help companies implement these rules.

When it comes to state taxes, I often feel like Moby Dick's Captain Ahab and the state of Massachusetts is my white whale. So when the Governor and Legislature recently increased taxes that will soak the average Massachusetts household by some $384 dollars, I became disheartened. The list of tax increases is quite extensive, including the sales tax (25%), alcohol, meals, satellite television, as well as potential increases in local meals and hotel taxes. (BTW – Have you ever noticed that politicians in favor of tax increases now refer to them as “diversifying the revenue base”? In the old days they would refer to them as “closing loopholes”.)

Obviously, $384 dollars is a significant amount of money for any family. In difficult economic times, it can be disastrous. To combat these increases, I am looking for ways to offset my expenditures to the state. The easy solution of buying things online or in New Hampshire to avoid sales tax is not necessarily legal, nor is it supportive of other Massachusetts residents and businesses. While I do not condone this activity, there are certainly many that will pursue this course of action. However, I came up with a few areas that I could at least cut back some of my costs paid to Massachusetts without directly hurting the businesses here in the state. Here they are:

What should you do if you discover an error in your 2008 tax return?

According to the IRS, you do not need to file an amended return if you discover a math error or if you fail to include a form or schedule – such as a W-2. The IRS usually corrects math errors and requests missing forms in the normal course of reviewing your return. However, you should file an amended return if any of the following items are reported incorrectly on your original return:

* Your filing status
* Your dependents
* Your total income
* Your deductions or credits

In certain situations, you may have the opportunity to amend your return to claim a tax credit sooner than you may have otherwise. For example, you may also elect to amend your 2008 return if you are eligible to claim the new first-time homebuyer credit for a qualified 2009 home purchase. The amended return will allow you to claim the homebuyer credit on your 2008 return without waiting until next year to claim it on your 2009 return.

In June I attended a college graduation party. I was chatting with the graduate and he told me that only 18 percent of his graduating class had full time jobs. An ABC News survey, pretty much confirmed this statistic. Although we are in the middle of a recession, one has to wonder if the college system in the US is still based on a 20th century model. I would think that after investing upwards of $200,000, college graduates would have been taught some skills that are more valued by employers. Success in the 21st century will still go to knowledge workers, but what skills are the colleges teaching if 80 percent of the students can not find jobs? This statistic will obviously change as the economy improves, but it just seems that alternatives to quality education can come at a much better value, i.e. internet, books, lectures on DVD, audio programs etc.

The costs of college education are compounded, as much of the cost must be paid in after tax dollars. (You will probably need to earn in the neighborhood of $325,000 in wages to pay $200,000 in college costs.) The federal government has provided some relief in recent years and new rules in 2009 are the most generous yet. There are now three different options, one of which is brand new for this year. The following gives a brief outline of each:

In June I attended a college graduation party. I was chatting with the graduate and he told me that only 18 percent of his graduating class had full time jobs. An ABC News survey, pretty much confirmed this statistic. Although we are in the middle of a recession, one has to wonder if the college system in the US is still based on a 20th century model. I would think that after investing upwards of $200,000, college graduates would have been taught some skills that are more valued by employers. Success in the 21st century will still go to knowledge workers, but what skills are the colleges teaching if 80 percent of the students can not find jobs? This statistic will obviously change as the economy improves, but it just seems that alternatives to quality education can come at a much better value, i.e. internet, books, lectures on DVD, audio programs etc.

The costs of college education are compounded, as much of the cost must be paid in after tax dollars. (You will probably need to earn in the neighborhood of $325,000 in wages to pay $200,000 in college costs.) The federal government has provided some relief in recent years and new rules in 2009 are the most generous yet. There are now three different options, one of which is brand new for this year. The following gives a brief outline of each:

I've heard about the tax credit for child care expenses but can the cost of summer camps be included towards that credit?

The Child and Dependent Care tax credit is available to those who are working or looking for work and must pay for the care of their children, spouse, or dependents (i.e., a qualifying person). The qualifying person can be a child under age 13 or a spouse or dependent who cannot care for himself or herself. The credit can be up to 35 percent of your qualifying expenses depending on your income. The qualifying expenses can be incurred at any point during the year including during the summer months when children are out of school. Here are a few other types of expenses and how the IRS views them for purposes of this credit:

I bought my home in January 2009 but do not have taxable income. How can I claim my credit?

The first-time homebuyer credit that was enacted as part of the Housing and Economic Recovery Act of 2008 does not have a minimum income limit. Therefore, those who qualify for the tax credit may file for it even if they do not have any taxable income. This tax credit is a refundable credit which means that the credit can lower your tax liability below zero and result in a refund if the credit exceeds your tax liability.

For example, if your tax liability before the credit is $5,000 dollars and the refundable tax credit is $8,000 dollars, your tax liability will be a negative $3,000 dollars ($5,000 - $8,000 = -$3,000). In your case, if you do not have any taxable income and your tax liability is zero, you should be eligible for a refund of the entire credit.

In order to claim the credit you will need to file a tax return and IRS Form 5405. Form 5405 (First Time Homebuyer Credit) should be filed with your 2008 or 2009 tax return depending on when you purchased the home. If you purchased your home in 2008, you should file for the credit on your 2008 tax return. If you purchased you home in 2009, you can file for the credit on your 2008 or 2009 tax return. If necessary, you can file an amended 2008 tax return to claim this credit.

For more information about this credit, visit the IRS’ web site at: http://www.irs.gov/newsroom/article/0,,id=204671,00.html

Yesterday, with significant fanfare and reporters present, Governor Patrick signed into law a stimulus bill for the New Hampshire Retailers Association and e-commerce websites. By increasing the Massachusetts sales tax by 25 percent, both Mr. Patrick and the legislature have enacted the equivalent of the Northern Massachusetts Uncompetitive Act. This ensures that those retail vacancies, that are already abundant, will continue to rise (consequently local real estate rolls and real estate tax revenues will decline).

Fortunately New Hampshire retailers and Amazon.com will continue to thrive under this legislation. Unfortunate as it is for Massachusetts retailers, consumers will search out these lower taxed havens. No need to send jobs to China when we can send them right over the border to New Hampshire.

Let’s look at some of the tax increases and other highlights of the bill enacted yesterday by the Governor Patrick:

As I noted in a previous post, the American Recovery and Reinvestment Act (the stimulus bill) provided little relief or stimuli to small businesses. This is a source of frustration to me since I work with small businesses and can see their positive impact on the economy and their employees. These entrepreneurial types can actually grow the economy and the job base.

At least Congress and the Administration tipped their hat in the direction of small businesses when it comes to capital purchases. Under the tax rules, businesses that acquire fixed assets take depreciation expense for the value of that asset over a period of several years. (Fixed assets include things such as office equipment, machinery, vehicles etc.) Consequently, businesses can experience significant cash drain in the year of purchase. They incur the cash outlay for the fixed asset and are also burdened with increased income taxes (since the corresponding depreciation expense must be taken over several years as opposed to in the current year). The stimulus bill has extended some laws that were set to expire that try to avert this kind of cash drain on small businesses and encourage them to invest in fixed assets. Here are the details of these provisions:

As discussed in this blog a few times before, the American Recovery and Reinvestment Act (ARRA) passed earlier this year, provides a tax deduction for the purchase of a new qualified vehicle. The Treasury announced last week that this incentive now applies to all states – including those that do not impose a sales or excise tax. This includes Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon.

Purchasers of a new qualified vehicle in the states mentioned above can now take an above-the-line tax deduction for fees and other taxes that are imposed by the state or local government. These fees and other taxes must be based on the vehicle's sales price or as a per unit fee in order to qualify for the deduction.

All of the other provisions of this incentive are the same for all states including:
* New vehicles include cars, light trucks, motor homes, or motorcycles.
* The deduction is only available for purchases made on or after February 17, 2009 and before January 1, 2010.
* The deduction is limited to the sales tax, excise taxes, or fees paid on vehicles with a maximum purchase price of $49,500 dollars.
* If you are married and you file a joint tax return have, the deduction gets phased-out once your modified adjusted gross income (MAGI) reaches $250,000 dollars and is completely gone if your MAGI is more than $260,000 dollars. For all other taxpayers, the phase-out range is a MAGI of $125,000 dollars to $135,000 dollars.
* The deduction is available whether or not you itemize your deduction on your tax return.
* The deduction must be taken on your 2009 tax return (which is filed in 2010).

On June 9, 2010, the US House of Representatives passed the Sutton Fleet Modernization bill, a.k.a the “cash for clunkers” act. The idea behind the legislation is to get older and less efficient vehicles off the road as well as stimulate automobile sales. This is done in the form of a significant US Government subsidy to the purchaser of a new car or truck. The bill is being endorsed by the automobile manufacturers, the United Auto Workers and the National Automobile Dealers Association. Here is how the legislation would work:

On May 11, the Obama administration outlined its budget and tax proposals for the coming fiscal year. The federal deficit is currently estimated at over $1.8 trillion for fiscal year 2010. Obviously the federal government can not sustain these kinds of deficits. As such, tax increases are on the horizon.

The tax proposals look to increase taxes by approximately $1.1 trillion over the next ten years. The following is a list of some of the more significant tax increases that will hit individuals and businesses if these proposals are enacted:

I own GM stock. If the company goes bankrupt can I claim a loss on my income taxes or do I have to sell it now for pennies to claim that loss?

In order to take a tax deduction for a worthless security without having to sell first, the security must be considered entirely worthless. A company's stock does not necessarily become entirely worthless if they file for bankruptcy. Under Federal bankruptcy laws a company can file for Chapter 7 or Chapter 11 bankruptcy. If a company files under Chapter 7, it means that the company ceases to operate and goes out of business. The company's assets will be sold and the proceeds generated from that liquidation will be used to pay back the company's creditors and investors. If the company files under Chapter 11, which is what GM is expected to do today, it means that the company continues to operate on a daily basis and tries to reorganize its business with the goal of eventually emerging from bankruptcy as a profitable company.

A company's stock may continue to have value and trade on a public stock exchange even though it is in bankruptcy. Stocks that do not meet the requirements to be listed (and thus traded) on one of the major exchanges like the NYSE or the NASDAQ, may trade on other public exchanges like the OTC or the Pink Sheets. Generally, if the company's stock retains some value the only way to capture the loss and receive a tax deduction is to sell the stock and record the capital loss based on the cost basis of the shares you sold.

The ability for individuals to generate wealth hinges on their ability to save money as well as earn a decent return on that investment. Most financial advisors believe that saving ten percent per year should be adequate to create long term wealth and a comfortable retirement. The Massachusetts Senate last week passed a bill which will make it more difficult for individuals to execute that plan. The bill will increase taxes by $1.003 billion on residents of the state, which in turn will drain the financial coffers a little more from all of us residents.

A $1 billion dollar tax increase will increase taxes on the average Massachusetts household by $384 (approximately 2.6 million households). If you did not think the average $9,023 that your household was already paying in taxes to the state of Massachusetts was significant (source: Taxpayer Foundation), it will be increasing by 4.3 percent. These numbers do not include local real estate taxes.

Every tax credit that is introduced is either refundable, partially refundable or non-refundable. What does "refundable" mean?

A refundable credit is a tax credit that can reduce the amount of tax you owe to less than zero. In other words, it can result in a refund where there was not one to begin with. As an example, the newly created $8000 first-time homebuyers tax credit is refundable. If your federal income tax bill without this credit is $6,000, and you qualify for the credit, $8,000 would be deducted from the amount you owe. You would end up with a $2,000 refund.

A non-refundable credit cannot reduce your tax bill to less than zero. The Hope and Lifetime Learning credits are good examples of this. For instance if your tax bill is $1,000 and you qualify for a $1,800 Hope Credit, your tax bill would be reduced to $0 and you would not owe any taxes, but you would not get a refund.

Some tax credits are partially refundable, such as the child tax credit. Taxpayers with income below a threshhold receive a larger credit than those above the threshold.

I thought you were also excluded from the first-time homebuyer credit if you bought your house from a family member, is this the case? My wife and I are about to purchase a house from her parents, is there a way for us to get the credit?

Unfortunately, you are correct. The first-time buyer credit enacted in 2008 and expanded in 2009 does not apply if you purchase your home from a related party. According the IRS, a related party includes spouses, family members (e.g., siblings, half-siblings, etc.), ancestors (e.g., parents, grandparents, etc.) and lineal descendants (e.g., children, grandchildren, etc). For purposes of this credit, step-relatives are not considered a related party since they are not ancestors or lineal descendants.

Based on the information in your question, you and your wife would not be eligible for this tax credit.

For more information about the first-time homebuyers tax credit and how the IRS defines a related party visit the following links:

http://www.irs.gov/newsroom/article/0,,id=206291,00.html
http://www.irs.gov/publications/p544/ch02.html#en_US_publink100072497

Homeowners can now get large tax credits for energy efficiency improvements made to their home. On February 17, 2009, President Obama enacted “The American Recovery and Reinvestment Act”. This legislation made significant changes and increases to the residential energy tax credit programs available from the federal government.

The tax credits are available for improvements performed from January 1, 2009 through December 31, 2010. The taxpayer receives a credit for 30% of the cost, with a maximum combined credit in 2009 and 2010 of $1,500, on the following items:

The Roth IRA has many benefits, especially for families with larger estates. However, due to income limitations, many are disqualified from accessing a Roth IRA. Back in 2006, President Bush signed into law a new set of rules for Roth IRA conversions that occur in 2010. For many people, this may be the tax planning event of a lifetime. All taxpayers can take advantage of the Roth IRA of these new rules. Here is how:

I am a 76 year old retired widow. I have both a traditional IRA and a Roth IRA. Can I convert some funds from the traditional IRA to the Roth IRA, pay income tax now (if any), and then have the presently devalued stocks perhaps grow tax-free in the Roth as well as receive the other benefits of the Roth IRA?

There are a couple of requirements for you to be eligible to convert amounts from your traditional IRA to your Roth IRA. They are as follows:

Can I use a long-term capital loss carryover to offset a short-term capital gain?

In short, yes, you can offset a short-term term capital gain with a long-term capital loss carryover. However, you do need to offset the long-term loss carryover against any long-term gains before you can offset any short-term capital gains. The process of offsetting gains and losses can be confusing. Here is a step-by-step guide on grouping and offsetting different types of capital gains and losses.

Step 1: Determine which gains and losses are considered short-term vs. long-term. Short-terms gains and losses are those where your holding period (i.e., the amount of time you held the asset before selling or exchanging it) is equal to 1 year or less. Long-term gains and losses are those where your holding period is more than 1 year.

Step 2: Offset your short-term gains against your short-term losses. Be sure to include any short-term losses carried over from prior tax years. This will result in your “net short-term gain or loss”.

Step 3: Long-term capital gains tax rates vary based on the asset sold and your marginal income tax rate. For example, the long-term capital gains rate for stocks is different than for collectibles. Generally, the rate for stocks and other securities will either be zero or 15 percent (depending on your income tax bracket) whereas the rate for collectibles is 28 percent. You need to group your long-term capital gains and losses according to the capital gains rate that applies to that asset.

Once you have classified your long-term gains and losses by the appropriate long-term capital gains rate, you should offset the gains and losses within those groups. In other words, offset your long-term gains and losses within the 15 percent tax bracket, then the long-term gains and losses within the 25 percent bracket, etc. Do this for each group but don’t forget to include any long-term loss carryovers from prior tax years. This will result in a “net long-term gain or loss” for each capital gains tax rate.

The final step in calculating your overall net long-term gain or loss is to offset the “net long-term gain or loss” for each capital gains tax rate against each other. Use the losses in the lower tax bracket to offset the gains in the higher tax brackets first.

Step 4: Once you have calculated a net short-term gain or loss and a net long-term gain or loss, you can offset these against each other using the following rules:

Rule 1: If you have, both, a net short-term loss and a net long-term loss, you can take $3,000 dollars of the loss on your tax return and carryover additional losses to the next tax year.

Rule 2: If you have, both, a net short-term gain and a net long-term gain, the short-gains will be taxed at ordinary income tax rate and the long-term gains will be taxed at their appropriate long-term capital gains rate.

Rule 3: Any other combination of short and long-term gains and losses (not mentioned in Rules 1 and 2) should be offset against each other using your short-term loss to offset the higher long-term gains first. If this results in a gain, you will pay taxes at the appropriate short-term or long-term capital gains rates. If the result is a loss, you can take up to $3,000 dollars of the loss on your tax return and carry the remaining amount to the following year.

For more information about capital gains tax rates, visit the IRS’ web site at http://www.irs.gov/newsroom/article/0,,id=106799,00.html

I purchased $6,400 in Fannie Mae stock that is now worth about $100. I thought Fannie Mae was financially sound based on comments by my Congressman Barney Frank who said right before its collapse “These two entities—Fannie Mae and Freddie Mac—are not facing any kind of financial crisis." This was my mistake and one I have to deal with. What, if any deduction can I take on my tax return for this loss?

Investment property that you own is considered a capital asset. When you sell a capital asset, you incur a capital gain or loss based on the difference between the amount you received when you sold the asset and your cost basis (typically the amount you paid for the asset). In your case, once you actually sell the stock, you will have incurred a capital loss of approximately $6,300.

As many of you know, the estate tax is supposed to be eliminated beginning January 1, 2010. This elimination is in effect for only one year, however, and in 2011, the estate tax is scheduled to return -- and return in a big way. In 2011, estates greater than $1M could be subject to taxation. (As a point of reference, in 2009, estates greater than $3.5M are potentially subject to taxation.)

Nobody really expects that the one year suspension of estate taxes will actually happen. Most people expect that at some point this year Congress will set a relatively high estate tax limit and then increase that limit in subsequent years to account for inflation. The big question is --what might that limit be? Numbers between $3.5M and $5M have been in the press for months.

It's beginning to look like the limit might be the $3.5M that is in effect this year, but with one really important change. The change would be that if one spouse doesn't use his or her $3.5M exemption, the surviving spouse could "carry over" the unused amount. That means that a married couple could avoid taxation on up to $7M without having to have expensive and complicated trusts drafted. In addition, couples wouldn't have to go through the arduous process of re-titling their assets to be sure that each spouse held assets worth $3.5M.

When will the new exemption amount be announced or voted on? That is still unclear but keep an eye on a bill introduced by Senator Max Baucas, the top tax writer in the Senate. Something will have to be decided by the end of this year and hopefully it will be this summer or early fall so people can begin to plan accordingly.

My accountant e-filed my daughter's return at the end of March and mine on the same day. I got my refund about a week later. To this day we have not seen hers. She filed a short form. How can I find out if it has been sent out or if the check has been cashed?

Filing electronically has many benefits, not the least of which is the promise of a quick turnaround by the IRS - normally within 3 weeks of the acknowledgement date vs. 6 weeks for paper returns. Regardless of whether you file on line or by mail, the IRS website can help you track your refund. Information about your return is available 72 hours after you receive an electronic acknowledgement of receipt of your return (if you filed on line) or about 3-4 weeks after mailing your paper return.

Start by going to the official IRS website, www.irs.gov. Click on "Where's my refund?" on the lefthand side of the homepage. This will take you to an area where you will put in your personal information, including the amount of refund you are expecting. Once entered, you will be given the status of your return. You can also check the status by calling the IRS Refund Hotline at 800-829-1954.

Even though you got your refund already, you'll need to give your daughter's return more time before assuming it's been lost or otherwise delayed. The IRS recommends waiting 28 days, and if you haven't received it by then you can start a refund trace online (through the "Where's my refund?" page.)

Can you tell me at what point does a teenager and high school/college student who earns income working part-time file income tax return even if he or she is listed as a dependent on parent's return? Is there a income threshold or "dependency" issue as to when to file? Thanks!

Children who are claimed as a dependent on their parent’s tax return are required to file a federal tax return for 2008 if the child:

1) has over $900 dollars of unearned income (includes items such as taxable interest, dividends, investment income, etc.),
2) has over $5,450 dollars of earned income (includes items such as wages, tips, self-employment income, taxable scholarships, fellowship grants, etc.), or
3) has a combined unearned and earned income that exceeds the larger of $900 dollars or their earned income (up to $5,150 dollars) plus $300 dollars.

The limits above increase by $1,350 dollars if the dependent child is blind. The above dollar limits also assume that the dependent is not married. There are different requirements for dependents that are married or over the age of 65.

Your state’s filing requirements may be different. Here in Massachusetts, the filing requirements are determined based on a person’s residency and gross income. In general, residents and part-year residents who have earned or accrued more than $8,000 dollars of gross income from Massachusetts sources need to file a return. Nonresidents need to file if their Massachusetts gross income exceeds either the $8,000 dollar threshold or their prorated personal exemption, whichever is less.

Massachusetts taxpayers with low income may qualify for No Tax Status (NTS) or a Limited Income Credit (LIC) which will reduce or eliminate any tax liability. However, you will still need to file a Massachusetts tax return to qualify for the NTS or LIC.

In general, even if your child’s income limits do not meet the requirements noted above, it may be a good idea to file a return for your child to get a refund of any federal or state income tax withheld.

For more information about federal filing requirements, visit the IRS’ web site at http://www.irs.gov/individuals/

For Massachusetts filing requirements, visit the MA Department of Revenue’s web site at http://www.mass.gov

I am considering the purchase of a two family home and renting both units. I am pretty handy and believe I can improve the property and increase its value. With interests rates this low, the monthly rent will almost cover the mortgage payment and all the expenses, although it will probably incur a cash flow loss in the first year or two. Can I deduct these losses on my tax return?

It seems to be a good time to invest in rental real estate. Home values are depressed and interest rates are at 50 year lows. These definitely seem to be the proper ingredients for a successful venture.

Yesterday, my wife and I were performing a spring cleaning of our closet. The closet was overflowing with clothes and it was time to purge some of the items that were no longer being worn. For items in decent condition, we set them aside to be dropped in a charity bin for used clothes. The remainder went in the trash.

After about an hour of purging, I became reunited with an old friend from my youth; my Van Halen concert t-shirt from 1984. My wife immediately told me to trash it. I refused, but after some severe arm twisting, I relented. My only condition was that it had to go to the charity bin. To trash it would be comparable to throwing away a Picasso. Plus, I argued to her, the t-shirt was worth at least $25 as a collector’s item, and we may be able to get a tax deduction for it. She laughed and kept on working. Subsequently, she uncovered one of her old Bon Jovi concert t-shirts. We had the same conversation in reverse order.

After years of abuse by tax payers, the IRS is getting serious about charitable deductions. Generally, you are allowed to deduct from your income contributions of cash or property to a qualifying charity. If you donate property, you generally can deduct the fair market value of the property at the time you donate it. However, determining the fair market value is not always easy. My wife and I clearly had a difference of opinion on the value of my Van Halen shirt. So here are some of the rules for how much you can deduct for your charitable contribution(s):

My husband passed away in July 2008. I would now like to sell the home that we lived in and move into a small apartment or condominium. I expect the gain on the sale of the home to be approximately $400,000. How much of this gain will be taxable?

The sale of one’s primary residence gets beneficial treatment under the current tax law. Single filers can exclude from taxable income up to $250,000 of capital gain and married filers can exclude up to $500,000 of capital gain. This is clearly one of the most significant tax breaks afforded by the IRS. A surviving spouse such as you can receive the full $500,000 exclusion. However, there are a few requirements that you must meet.

In these difficult economic times, the Internal Revenue Service and hundreds of its community partners want to go the extra mile to assist taxpayers. On Saturday, March 21, 2009, approximately 250 IRS Taxpayer Assistance Centers and hundreds of community free tax help sites nationwide will open their doors to assist people. People who earn $42,000 or less are eligible for free tax return preparation at either the IRS TACs or the community partner sites.

Super Saturday also is an opportunity for people, regardless of income, who may have a tax issue or who may be unable to pay their tax bill to visit an IRS TAC. The IRS can work with people to set up payment option plans that will prevent even greater penalties and interest. The IRS is committed to doing what it can to help financially distressed taxpayers who have played by the rules.

To find the location closest to you, visit http://www.irs.gov/individuals/article/0,,id=204165,00.html?portlet=7 and click on the state in which you live to see a list of locations in various cities. Below the chart are the items you need to bring if you are having your tax return prepared.

NOTE: The VITA Program offers free tax help to low- to moderate-income (generally $42,000 and below) people who cannot prepare their own tax returns.

People who want their tax returns prepared should bring the following information:
* Valid driver’s license or photo identification (self and spouse, if applicable)
* Social Security cards for all persons listed on the return
* Dates of birth for all persons listed on the return
* All income statements: Forms W-2, 1099, Social Security, unemployment, or other benefits statements, self-employment records and any documents showing taxes withheld
* Dependent child care information: payee’s name, address and Social Security Number or Taxpayer Identification Number.
* Proof of account at financial institution for direct debit or deposit (i.e. cancelled/voided check or bank statement)
* Prior year tax return (if available)
* Any other pertinent documents or papers

Source: Internal Revenue Service

The recently passed Emergency Economic Stabilization Act extended more than 30 tax provisions that were set to expire and also created a series of new tax breaks with expiration dates. Additionally, many of the tax laws signed by ex-President Bush also included expiration dates. While an ever evolving tax code does not create simplicity, it does create the opportunity to reduce your tax burden.

In order to minimize your taxes in future years, you should be aware of the various provisions that are set to expire and take advantage as best you can. In 2009 and 2010 there are at least 113 tax provisions that are set to expire. While many of these provisions get extended by Congress year after year, next year may be different. There is no doubt the US Treasury needs additional revenue and Congress may let many of these provisions expire. Here is a list of some of the more significant provisions for businesses and individuals that are set to expire over the next two years:

My daughter is a full time student in Boston. We claim her as a dependent in California. She made a little over $11,000 (all in Boston) in 2008. What tax form should she be using and what residency status does she claim?

Based on the information in your question, I'm assuming your daughter's domicile or legal residence is California. If so, she will likely need to file a federal tax return, a Massachusetts tax return, and a California tax return. For federal purposes, she will need to file Form 1040 because her earned income (i.e., income from working such as salaries and wages) in 2008 was over $5,450 dollars. [As a side note, I made the assumption that the $11,000 dollars was earned income. If the $11,000 is from unearned income (i.e., interest, dividends, etc.), your daughter would still need to file a return for federal tax purposes because her unearned income exceeded the $900 threshold for federal purposes.]

For state tax purposes, your daughter will need to file a Massachusetts income tax return because her income from Massachusetts sources exceeded the $8,000 threshold. The form that she will need to file will depend on her residency status. If your daughter’s domicile (i.e., legal residence) is not Massachusetts, she may still be considered a full-time resident for MA income tax purposes depending on her “permanent place of abode” and whether or not she spent more then 183 days in Massachusetts during 2008. The MA Department of Revenue defines a “permanent place of abode” as a dwelling place continually maintained by a person, whether or not owned by such person, and will include a dwelling place owned or leased by a person's spouse. Generally, college dormitories or other similar temporary institutional settings are not considered a permanent place of abode in Massachusetts. However, off-campus apartments may be considered a permanent place of abode.

With April 15th only about a month away, many Americans are now starting to contemplate the preparation of their tax returns. There are two alternatives for preparing your individual tax return; you can either do it yourself or you can have someone else do it for you. However, there are several options within each of these alternatives. Here is a look at your different options and some thoughts on each.

Here are answers to some of the questions we've received about the First-Time Homebuyer's Tax Credit. Many questions can be answered by going to the IRS home page (www.irs.gov) and clicking on the link for the "Update on Recovery Tax Provisions for Individuals and Businesses." In addition you can download Form 5405 (First-Time Homebuyer Credit Form) and find details within the instructions for filing this form.

"If you own a mobile home and are purchasing a home are you eligible for the 8,000 credit.? I have heard that a mobile home is not considered a home per say." We've received many questions about mobile, or manufactured, homes. These homes qualify as a personal residence, as do houseboats, housetrailers, coops and condominiums. Therefore you will not qualify for the credit since you already own a home.

"I am divorced and live in the home my ex husband and I purchased in 97. In December 08 I refinanced this home and it is now solely in my name. I am planning to sell this home and purchase a new home this summer. Will I be considered a first time homeowner? " Unfortunately you will not be considered a first-time homebuyer, as you will have owned a home within the 36 months prior to the purchase of your new home this summer.

"On the "tax credit available for 1st time buyers" how would that work with a same-sex couple that is not legally married? can both claim the deduction on their 2009 taxes since they are co-signers or just 1 party?" You are eligible to share the credit and can allocate it using any reasonable manner. That means one of you can take the entire deduction if you so decide, or you can allocate it according to such methods as percentage of downpayment or percentage of ownership.

"Does the tax credit appy if the client is doing a construction loan?" Yes, construction loans qualify for the credit. You are treated as having purchased the home on the the date you first occupy it.

"Is the $8000.00 a credit over an above a refund. For example if someone were to get a $1500.00 refund from federal, would their total refund be $9500.00 with this new tax credit.?" You are correct. The credit is payable even if you do not owe tax.

My wife and I just prepared our 2008 tax return. To our dismay, we owe over $6,000 to the Internal Revenue Service and we do not have the money to pay this in full. I want to wait to file the tax return until we have the money to pay the full amount. My wife thinks we should file the tax return now and pay the balance due with our credit cards. What should we do?

Federal tax law requires all of us to file our tax return and settle our tax liability in full by April 15th. Failure to file your return or pay on time will trigger various interest and penalties. Although owing interest and penalties to the IRS sounds distressing, you can save significant amounts of money if you handle this properly. There are three assessments that the IRS can levy on you. They are summarized as follows:

Passage of The American Recovery and Reinvestment Act of 2009 (“ARRA”) has left many with questions about the various tax deductions provided under that new law. A few days ago we provided some clarification about the first-time homebuyer’s credit. Today, I’ll provide some details about the Making Work Pay tax credit.

The Making Work Pay tax credit is a refundable tax credit for working taxpayers for 2009 and 2010. The credit will provide a tax credit of as much as $400 dollars for individuals and $800 dollars for married taxpayers who file joint returns. The credit will equal 6.2 percent of the taxpayer’s earned income and will be refunded throughout the rest of the year. The refund will not be paid out as a single lump-sum amount. For those who qualify for the credit, you should start to see an increase in your after-tax pay checks within the next couple of months as employers update the tax tables they use to calculate your income tax withholdings. The credit will need to be reported on taxpayer’s 2009 tax return (filed in 2010).

This credit begins to phase out if your modified adjusted gross income (MAGI) exceeds $75,000 dollars ($150,000 dollars if you are married and file a joint return). If your MAGI exceeds $95,000 dollars ($190,000 for married filing jointly) you will not qualify for this credit.

If you receive the $250 dollar payment under the provisions of the Economic Recovery Payment (for Social Security Recipients, Veterans and Railroad Retirees) your Making Work Pay tax credit may be reduced.

Taxpayers who are self-employed or who do not have taxes withheld by their employer can also claim the credit by adjusting their estimated tax payments and claiming the credit on their 2009 tax return.

The IRS is still in the process of working out the details of this tax credit and expects to publish them for employers in Publication 15 (Employer’s Tax Guide).

Regardless of your income, obtaining a significant amount of personal wealth is much easier than most people think. Although winning this week’s Mega Millions jackpot sounds enticing, it is not going to happen. The way to become wealthy is to continually set aside a small amount of money and let it grow. With the help of compounding interest, one is almost guaranteed to become a millionaire using this method. The reason most of us do not succeed using this method of generating wealth is that it takes years and persistent sacrifice. Instead we want instant wealth, something which is very difficult to obtain.

In the past week this blog has been inundated with questions about the revised First-Time Homebuyer Credit. Although the explanation of the credit seems simple enough, as always the devil is in the details. There are many individuals whose situations don’t fit neatly with the government’s description of the credit, and more clarification is needed.

The most frequently asked questions pertain to the definition of a first-time homebuyer. Examples of this type of question include:

* If one partner of a recently married couple has owned a condo within the past 3 yrs, and the other has not, are they able to take half the first-time home owner credit from the 2009 stimulus bill?

*If 2 single people buy a house together and one is a first-time home buyer can that person get the 1st time homebuyer credit?

*How about a couple, one of whom is a first-time home buyer, the other who purchased and owns a condo, purchased prior to marriage?

*If the son is a first time home buyer and purchased a house together with the father who owned property. Does the son still qualify for the $8,000 credit?

The definition of a first-time homebuyer, found through the National Association of Home Builders website, states:

"The law defines "first-time home buyer" as a buyer who has not owned a principal residence during the three-year period prior to the purchase. For married taxpayers, the law tests the homeownership history of both the home buyer and his/her spouse.

For example, if you have not owned a home in the past three years but your spouse has owned a principal residence, neither you nor your spouse qualifies for the first-time home buyer tax credit. However, unmarried joint purchasers may allocate the credit amount to any buyer who qualifies as a first-time buyer, such as may occur if a parent jointly purchases a home with a son or daughter. Ownership of a vacation home or rental property not used as a principal residence does not disqualify a buyer as a first-time home buyer."

You may find answers to more of your questions on a page dedicated to the First-Time Homebuyers Tax Credit at the NAHB website. We’ll continue to watch for more detail on the credit.

I'd like to know if the homeowner's energy credit still exists. I thought for 2008 the credit had ended but had heard for 2009 it was to be reinstated. I had energy-star-rated storm windows installed in my home in 2008. Can I take a credit for that year or might it be better to take it in 2009?

The Energy Tax Incentives Act of 2005 (“the Energy Act of 2005”) provided tax credits, deductions and incentives for individuals and businesses to encourage energy efficiency and conservation. While many of the provisions of the Energy Act of 2005 were effective in August of that year, the tax credits for consumers who make certain energy efficient home improvements were not effective until 2006 and 2007. These credits expired at the end of 2007 but were extended and modified under The Emergency Economic Stabilization Act of 2008 and the American Recovery and Reinvestment Act of 2009. The extensions and modifications, however, do not apply to 2008. Therefore, the tax credits are not available for consumers who installed high-efficiency heating and cooling systems, water heaters, windows, doors, and insulation in 2008.

Unfortunately, it seems that you do not qualify for the tax credit. Based on the information in your question, you installed your windows in the year that the credit expired. In order to qualify for the tax credit in 2009, the IRS requires the improvement to have been placed in service in 2009. The IRS defines “placed in service” as the date in which the property is ready and available for use.

The Department of Energy and the Environmental Protection Agency provide a good summary of the energy efficiency tax credits on their Energy Star web site (http://www.energystar.gov/index.cfm?c=products.pr_tax_credits#c1).

For more information on how to apply for the Energy Star rebates or tax credit, visit the following Energy Star and IRS web sites.
- Energy Star rebates & credits: http://www.energystar.gov/index.cfm?c=windows_doors.pr_taxcredits

- IRS Form 5695 (Residential Energy Efficient Property Credit): http://www.irs.gov/pub/irs-pdf/f5695.pdf

How can I take advantage of the $8,000 tax credit Congress has made available to first time home buyers? Also, how and when will I receive this credit?

As part of the American Recovery and Reinvestment Act of 2009, a.k.a. the Stimulus Bill, first time home owners are now eligible for a tax credit of $8,000. The following summarizes the eligibility requirements of this credit:

My husband received 100 shares of stock from his grandmother back in the 90s. The stock split, and a company spun off, and that company was acquired by a private Japanese company in 2007. The Japanese company paid cash for the stock, and we received this cash payment in December 2008. Now we have to declare capital gains on this cash. How on earth do we figure out those capital gains? I understand we're supposed to figure the difference between the sale price and the purchase price all the way back when the stock was purchased by his grandmother, but we have no way to get the initial purchase price. Can you help us figure this out?

The capital gain or loss on the sale of a stock is computed by taking the difference between the proceeds received from the sale and the tax basis of the stock. The tax basis of the stock is the original purchase price plus any associated costs to purchase the stock such as brokerage fees or transaction fees. The difficulty in your situation (as you have alluded to) is determining the tax basis for stock that may have been purchased years or decades ago before your husband received it. The tax basis for your husband’s stock will be determined based on how he received it from his grandmother. In general, if his grandmother gifted the stock to him, the tax basis will be the tax basis that she had before she gifted it or the fair market value of the stock on the date of the gift. If your husband inherited the stock from his grandmother, the tax basis will generally be the fair market value of the stock on the date of her death.

Let’s take a look at each of these situations in more detail starting with the easier of the two. If your husband inherited the stock from his grandmother, you can look up the historical stock price on his grandmother’s date of death and use that as the starting point for your tax basis. In general, inherited securities receive a “step-up” or “step-down” in basis to the value on the date of death so you won’t need to go all the way back to his grandmother’s original purchase date(s) to determine the tax basis. Once you’ve determined the date of death value you can make adjustments to the tax basis from that date forward to account for any capital changes that may have occurred since you inherited the stock. If there were no capital changes, the date-of-death value becomes your tax basis.

For tax purposes, capital changes are changes that the company goes through that effect the value of their stock price and your tax basis in that stock. Examples of capital changes include stock splits, stock redemptions, mergers and acquisitions, etc. There are several ways to find out what capital changes have occurred for a company and how they affected your stock. Some publicly traded companies provide details on their corporate web site. If the company is no longer publicly traded or the information is not available through their web site, the task becomes more difficult and will require more work to find the information you need. There are reference materials that track the capital changes of companies. These materials can be expensive and difficult to find but some libraries may have them. If you use a tax preparer to do your return, see if they have access to this information. I believe many of the larger CPA firms and tax law firms have them. Another source may be your or your grandmother’s broker. Brokers may have access to this type of information through their research departments but I don’t know how easy it is for their clients to access this information.

On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009. It is one of the largest pieces of legislation in U.S. history with a total price tag of $787 billion. That is an additional $2,600 of per capita national debt for every man, women and child in the country. The Downey family’s share of this debt burden is $7,800 (there are three of us).

While the bill’s spending programs may bankrupt the U.S. Treasury and the U.S. taxpayer, there are some positives in the way of tax reductions. The following highlight some of the major tax deductions for individuals and businesses:

I live in Massachusetts and worked in Rhode Island for 4 months. How does this impact my tax situation?

Wages are always treated as taxable income in the state where they are earned. So the income you earned in Rhode Island will be taxable wages to that state. Since you are not a resident of Rhode Island, they can not tax you on other income, such as interest, dividends and capital gains.

What is the mileage rate for autos beginning Jan 1, 2009 ?

The IRS announced new standard mileage rates for 2009 in November 2008. The new rates are down from those in 2008 to reflect the general decline in gas prices. While the rates mentioned below are effective from January 1 through December 31, 2009, the IRS may change them for the second half of the year if gas prices increase as they did last year.

Keep in mind that these rates are optional standard mileage rates used to compute the deductible costs of operating a passenger automobile for business, charitable, medical, or moving expense purposes.

The rates are as follows:

Business use of auto: 55 cents per mile
Charitable use of auto: 14 cents per mile
Medical use of auto: 24 cents per mile
Moving expense deduction (for work-related moves into a new home): 24 cents per mile

For more information visit the IRS web site at http://www.irs.gov/newsroom/article/0,,id=200505,00.html

My wife and I moved from Rhode Island to Massachusetts in August of 2008. I worked in Massachusetts throughout the year while my wife changed jobs in August. The question I have is about doing our state taxes for Rhode Island and Massachusetts. What state tax forms / returns do I need to file and where will I receive a credit for state taxes paid?

Moving from one state to another during the year always adds a little complexity to your tax situation. To further complicate the matter, you worked in one state and lived in another state.

I own a small business that I started in October 2008. Can I file my personal income tax separate from my business? My wife and I are the only owners and we have no employees.

Congratulations on starting your own business! The income tax form that you will need to file for your business depends on the business entity that you established when you started your business. You will need to review your business records to see what entity you formed and follow the IRS’ guidelines on how to report your business income.

As you can imagine, the tax filing requirements differ for each type of entity. The business entities available to those starting a business are sole proprietorship, general or limited partnership, C corporation, S corporation, limited liability company (LLC), and limited liability partnership (LLP). While there are many tax and non-tax issues to consider when choosing a business entity, here is a general summary of the income tax filing requirements for each entity.

I started a small business in 2008 performing weight loss seminars and personal training for individuals. I earned about $18,000 in 2008 and have received various “1099 Miscellaneous” statements. How do I account for this income? Additionally, I incurred about $7,000 in expenses related to the business. Can I claim these as deductions?

Being self employed is very gratifying as you have a sense of controlling your own future. However, it does complicate your tax situation just a bit. Self employed individuals still need to complete their Form 1040. In addition to the 1040, they also need to file a Schedule C “Profit or Loss from Business”. The Schedule C is basically an income statement, where you report your revenues as well as your expenses of your business. The difference between these two is the profit earned by your business. The $11,000 in net profit earned last year by your business will carry from your Schedule C over to your 1040 as taxable income.

"My mother bought a mutual fund in Jan. 2000 for $10,000. When she gifted it to me in Jan. 2003 it had a value of $7,000. I sold it in Feb. 2008 for $6,000. Is my cost basis $10,000 or $7,000?"

Your cost basis will depend on whether the gift was made while your mother was alive or at her death. A gift made during the donor's lifetime carries with it the date and purchase price of the donor. So in this case if your mother made a lifetime gift the date of purchase would be in Jan 2000 and the cost basis would be $10,000. However if the gift was made as an inheritance when your mother died, then the mutual fund receives a "step up in basis." This means that the purchase date becomes the date of Mom's death, and the cost would be the value of the mutual fund on that date.

To complicate things a little bit more, don't forget that any dividends, interest or capital gains that were distributed by the mutual fund and reinvested in more shares of the fund are added to the cost basis. Many investors forget to keep track of these reinvestments and therefore underestimate the true cost basis. If you haven't kept records yourself you can request a history of the activity in the fund through the fund company. That will show any additional purchases made through reinvested dividends and interest.

Who among us does not have questions about their federal or state income taxes? Fortunately there are several state services and not for profit agencies providing assistance to taxpayers. The Massachusetts Society of Certified Public Accounts (MSCPA) and State Treasurer Tim Cahill have teamed up to answer taxpayers’ questions and help educate them in these matters.

It's a buyer's market for homebuyers, and first-time homebuyers have an even greater incentive to make a purchase. The IRS is offering a credit for homes purchased after April 8, 2008 and before July 1 2009. While called a "credit", it's really more like a long-term loan at zero percent interest.

President-elect Obama has been meeting with Congress to put together a stimulus package. It appears that President-elect Obama is prepared to sign one of the largest pieces of legislation in his first days as President. The size of the stimulus would be enormous, probably between $775 billion and $1 trillion over two years. Furthermore, it would include a combination of governmental spending and tax cuts. Tax cuts would likely comprise some 40 percent of the total cost of the package, and benefit both individuals and businesses alike. Here are some of the tax breaks being proposed:

In the December 12, 2008 Boston Globe business section there was a report on a bill in Congress amending the Pension Plan Act of 2006, which included an amendment to change the minimum required distribution (MRD) laws for individuals over the age of 70 1/2. Was this bill passed and the MRD altered?

On December 23, 2008 President Bush signed into law the "Worker, Retiree, and Employer Recovery Act of 2008". This bill waives the minimum required distribution from an Individual Retirement Account (IRA) or defined contribution plan. This waiver is temporary and is only effective for calendar year 2009.

W.F. writes… My husband and I are very confused about AMT, what can we "make" and still avoid paying extra? I heard the cap was 100K for married couples, if you made over that then you would pay AMT which is higher tax?

Don’t feel bad, you are in good company. Many well educated people are also confused by the AMT. Estimating whether or not you will be subject to the AMT is not as straight forward as you may have hoped. The alternative minimum tax or AMT is an additional federal tax system that taxpayers are subject to. Taxpayers must calculate their federal tax under the regular income tax system (using the regular tax rates) as well as under the AMT system (using the higher AMT tax rates). The amount that they must pay is the higher of the two.

The AMT was originally setup in 1969 to ensure that high income earners did not avoid paying federal taxes because of loopholes in the tax system. The target that year was 155 people. Today, many people with incomes well below the original targets are being caught by the AMT mainly because the AMT was never adjusted for inflation. Some government estimates suggest that close to 30 million people could be subject to the AMT within the next 10 years if there aren’t any changes to the current laws.

I’ve heard that it is better to donate property that has gone up in value rather than to sell it and donate the money received from the sale of that property. Why?

Donating property that has appreciated in value can provide you with a larger tax savings than selling the property first and then donating the proceeds from the sale. This is generally true because you will pay tax on the capital gain if you sell the property before donating it. The capital gains tax would reduce the tax benefit that you receive from the donation. If you donate the property directly you will receive the full tax benefit for the donation without the offsetting capital gains tax.

In 1974, Congress enacted and President Ford signed into law the Employee Retirement Security Act (ERISA). Part of this legislation created the Individual Retirement Account, or the IRA. Currently, over 45 million Americans have IRA accounts with an estimated value of $3.1 trillion. While the IRA has helped millions of Americans in their retirement years, many do not appreciate the tax nightmare that can await the beneficiaries of these accounts. For those with significant estates, approximately 70 percent of the value of the IRA can be consumed by federal estate and income taxes. Additional state and local taxes may also be due. Adequate estate planning is required to ensure that this does not happen to you. Your IRA is useless to your family if the real beneficiary is Uncle Sam.

Federal and state governments are pretty good at extracting revenues from their “customers” (in the form of taxation). Governments are expensive to run and tax laws have been designed to minimize individual tax avoidance strategies. However, with the calendar ready to close out 2008, there are still a few things you can do to cut your 2008 tax burden. Here are a few actionable items you may want to consider for the next month:

I will probably make $200,000 dollars plus this year. I am 51 yrs old and I would like to convert my 401K which totals $80,000 to a Roth. How would that affect me tax wise?

The good news is that beginning in 2008, direct conversions from your 401(k) plan to a Roth IRA are permitted. Prior to 2008, individuals who wanted to convert their 401(k) or parts of their 401(k) accounts to a Roth IRA were required to follow a two step process. They would need to convert their 401(k) to a traditional IRA and then convert the traditional IRA to a Roth IRA. While the Pension Protection Act of 2006 eliminated this two step process, you will still need to meet certain criteria to qualify for a Roth IRA conversion. In addition, you will need to be sure that your employer’s 401(k) plan allows in-service distributions to withdraw funds to convert. Although the law allows the direct conversion, your 401(k) may not allow the withdrawal/distribution of your 401(k) assets (without a penalty) until you reach a certain age or until you discontinue working for that employer.

For those of you in Massachusetts unfamiliar with the trappings of the Alternative Minimum Tax, or AMT, you better educate yourself. The number of taxpayers subject to the AMT is growing faster than the federal budget deficit. The Congressional Budget Office estimates that over 30 million taxpayers will be subject to the AMT in 2010. Furthermore, Massachusetts residents are much more likely than residents in other states to have to pay the AMT.

In 1969, the US Treasury became aware of approximately 155 high wealth families whose tax avoidance strategies were so effective that they were paying little or no federal income taxes. Their strategies were completely legal and in compliance with the then existing federal tax code. To target these families, Congress passed the AMT, and President Nixon signed it into law. The AMT is basically a parallel tax code with its own set of tax rates, deductions, exemptions and credits. You as a taxpayer are required to calculate your federal income taxes under the “regular” rules as well as under the AMT rules. The IRS requests that you pay the greater of the two.

The Economic Stabilization Act of 2008, a.k.a. “the bailout bill”, was not just a bonanza for Wall Street firms. It also contained several provisions to benefit individual taxpayers. The following nine items are either new tax benefits for 2008 or extensions of previous benefits that were set to expire:

1. Alternative Minimum Tax - Each year, Congress and President Bush continue to "patch" the Alternative Minimum Tax (AMT), which typically affects wealthier taxpayers but increasingly affects the middle-class, and with good reason. The Internal Revenue Service estimates that without the current legislation, over 26 million Americans would be subject to the AMT. The new legislation increases the exemption for married couples to $69,950. For single taxpayers, the exemption is increased to $46,200.

The recently passed Emergency Economic Stabilization Act of 2008 (or, as it is more commonly known,"The Bailout Bill") is a law authorizing the Secretary of the Treasury to spend $700B to purchase distressed assets from the nation's banks. The Act certainly has its supporters and opponents. Supporters believe the bill was necessary to save the US economy from another Depression. Opponents believe it only benefits Wall Street financial instutions that acted irresponsibly and out of greed.

However, the Act does contain a number of features that directly benefit the average American taxpayer. Here are some of the highlights:

The extension of a one year patch for the alternative minimum tax: the 2008 exemption is $46,200 for singles, $69,950 for married couples who file jointly and $34,975 for married couples who file separately.

A credit for energy saving home improvements: you can claim a 10% tax credit for installing skylights, new windows and doors, and new high efficiency furnaces, air conditioners and water heaters but you need to wait until 2009 to do this work in order to claim the credit.

An extension on the forgiveness of mortgage debt: through 2012, you can exclude from gross income the forgiveness/discharge of any mortgage debt. The limit is $2M or $1M if married and filing separately.

Teachers, counselors and other educators in K-12 schools can deduct up to $250 of personal expenses made for classroom supplies and materials. This deduction is an "above the line" deduction so you don't have to itemize to claim the deduction.

IRA owners can contribute up to $100,000 directly to a qualified charity without having to count the contribution as income. This benefit is available in both 2008 and 2009 but you must be age 70 1/2 or older to claim it.

Owners of plug-in electric vehicles are entitled to tax credits of $2,500 to $7,500. This credit will phase out once each manufacturer has sold 250,000 vehicles.

Many about-to-be retired people are surprised to learn that the benefits they receive from Social Security can be subject to taxes. Years ago, very few people saw their Social Security benefits taxed. However, today, a full third of all Social Security recipients are taxed and that number will grow to 43 percent in just 10 years.

The reason is that the income limits for taxation of benefits were established years ago and, like the alternative minimum tax (AMT) that so many of us get hit with, the limits were not indexed for inflation.

These days, if you are single and half of your Social Security benefit plus all the other income you have exceeds $25,000, up to half of the benefits are taxable. If half your Social Security benefit plus all other income exceeds $34,000, 85 percent of your benefits are taxable.

If you are married and half your Social Security benefit plus all other income is between $32,000 and $44,000, up to 50 percent of the benefits is taxable. If your income exceeds $44,000, 85 percent of your benefits are taxable.

The markets are down and new retirees are looking for the most tax efficient places to live because, all else being equal, living in a lower tax state can make your retirement assets last longer. According to the retirementliving.com website, the nation as a whole will pay 9.7 percent of its income in state and local taxes in 2008. However, in some states, you can expect to pay significantly more and in others, significantly less.

What are the most expensive states? New Jersey tops the list with its residents paying 11.8 percent of their income in state and local taxes. New York is right behind New Jersey at 11.7 percent and Connecticut wraps up the top 3 most expensive states at 11.1 percent.

If you really want to stretch your retirement dollar, you might want to consider a move to Alaska, where residents pay just 6.4 percent of their income in state and local taxes. Nevada is in second place at 6.6 percent. Wyoming residents pay 7.0 percent, Florida residents pay 7.4 percent, New Hampshire residents pay 7.6 percent and the other top ten states include South Dakota at 7.9 percent, Tennessee at 8.3 percent, Texas at 8.4 percent, Louisiana at 8.4 percent and Arizona at 8.5 percent.

The retirementliving.com website is a source of a lot of great information. Their state by state guide tells you the specifics of nearly every tax imaginable including: sales tax, gasoline tax, cigarette taxes, and personal income taxes. The site also includes information about the Homestead Exemptions available in each state. For paid subscribers, you can get reports on the top retirement cities and the newest and best active adult communities and senior living facilities.

At least once a month a client or friend will mention that they are thinking of donating their car to a favorite charity. Most think they can get a tax deduction equal to the book value of the car they are donating. They are wrong.

Three years ago, the rules pertaining to donations for cars changed dramatically. Before 2005, you could donate your car and take a tax deduction for it. The amount of the deduction was equal to the fair market value of the car at the time it was donated.

In 2005, the rules changed and now when you donate your car, you still get a tax deduction, but the amount of the deduction is equal to what the charity sells the car for. That can be significantly less than the fair market value. As with all tax rules, there are exceptions. One is that if the charity keeps your car and uses it, you are still able to deduct the car's fair market value. Also, you can deduct the car's fair market value instead of its ultimate sales price if the value is $500 or less. Before you donate your car, you might want to ask the organization if they will be keeping or selling your car. It could make a big difference to you at tax time.

Thanks to recent uptick in inflation (to 5.4 percent over the previous 12 months), several tax breaks will be even bigger in 2009. According to The Kiplinger Tax Letter, the annual gift tax exemption will rise to $13,000 per recipient in 2009. That is a $1,000 increase over the $12,000 exemption currently in place.

Also in 2009, the personal exemption also rises significantly to $3,650. That is up from $3,500 in 2008.

Finally, the standard deduction amount will also increase. For married filers, the 2009 amount will be $11,400. That amount is $500 higher than it was in 2008. For single filers, the new amount is $5,700 and for head of household filers, the standard deduction will be $8,350. If you are age 65 or older and married, you will get an additional $1,100.

Making full use of the annual gift tax exclusion is a great way to reduce a taxable estate. Here's an example: in 2009, a husband and wife can give each of their three children and their children's spouses $26,000. That totals $156,000 in tax free gifts. If the same couple also had three grandchildren, they could give each grandchild $26,000 or $78,000 in total. Between the couple's children, their spouses and the grandchildren, this couple could reduce their taxable estate by $234,000 per year. It is important to note that you are not limited to family members when making gifts. In theory, you could give $13,000 to as many people as you wanted.

What are the rules for converting a traditional IRA to a Roth IRA? Are there any strategies to avoid paying or reducing the immediate tax bite?

In order to convert a traditional IRA to a Roth IRA in 2008 or 2009, your modified adjusted gross income (MAGI) must not exceed $100,000.

These rules change in 2010 when the $100,000 limit is lifted and you will be able to do a conversion regardless of your income. Of course, any amount that you convert will be subject to income taxes. However, there is another "bonus" arriving in 2010 -- if you do a conversion in that year, it is assumed that you are not paying the taxes until you file your 2011 and 2012 returns. That means that actual payment will not occur until 2012 and 2013.

The surprising thing is that the government actually wants you to do it that way. If you want to pay the taxes due in the year of conversion, you need to specifically elect that treatment on your tax return. While it might seem that the government is being especially nice, many suspect an ulterior motive -- higher tax rates are expected to be in effect in those years. So, it just might make sense to do the conversion in 2010 and pay the taxes right away. If you think you might do a conversion in 2010, it might be a good idea to start saving money to cover the tax bill.

The market has been very volatile lately and most long term investors are experiencing a "negative" 2008. The Standard & Poor's 500 Index is down approximately 15 percent year-to-date and the financial news seems pretty dismal at times. However, there is one bright spot -- tax loss harvesting opportunities are plentiful.

Basically, if you sell individual stocks or mutual funds for less than you paid for them, you will recognize a loss and you can subtract the loss from gains you might have somewhere else in your portfolio. If you don't have any other gains, the losses are still valuable because they can be used to offset up to $3,000 in ordinary income and the balance can be carried over to future years. (It might seem obvious, but we are talking about gains and losses in your taxable accounts, not your IRAs.)

As with most things in life, there is one "catch" and that catch is known as the wash sale rule. Under the wash sale rule, the IRS will deny your tax break if you have purchased the same (or a substantially identical) security in the 30 calendar days before or after the sale. The rules on what constitutes a substantially identical security are not always very clear, so if you want to make a "replacement" purchase within 30 days, it is probably best to consult your tax advisor or financial advisor. Also, it is important to note that if you do have a wash sale, the disallowed loss is not lost forever. Instead, your disallowed loss is added to the basis of the replacement security.

Tax loss harvesting really can be well worth your effort. If you are in the 33 percent tax bracket and you have a $3,000 loss that you can use to reduce your ordinary income, you will save almost $1,000 in taxes. However, there is a popular saying in our field: "don't let the tax tail wag the dog." In simple terms, this means that you shouldn't go crazy selling investments simply to capture a loss. A buy and hold strategy is still the best for most investors. You should simply be aware that if you find yourself holding an investment that no longer has a place in your portfolio, there may be some tax advantages to selling it.