If possible, delay energy efficient home improvement projects into 2009 to receive a tax credit. In October 2008, President Bush signed the “Emergency Economic Stabilization Act of 2008”. This law extends the tax credit for energy-efficient existing home improvements for 2009. Home improvements, including energy efficient windows, doors, HVAC, insulation, roofs, and water heaters, installed between January 1, 2009 and December 31, 2009 are eligible for the tax credit.
Caution: Improvements made in 2008 are not eligible for tax credits. Under the energy efficient tax credit law of 2005, all tax credits expired at the end of 2007. New 2008 law applies only to improvements in 2009.
Tax Facts About Capital Gains and Losses
Almost everything you own and use for personal purposes, pleasure or investment is a capital asset. When you sell a capital asset, the difference between the amounts you sell it for and your basis, which is usually what you paid for it, is a capital gain or a capital loss.
While you must report all capital gains, you may deduct only capital losses on investment property, not personal property.
Here are a few tax facts about capital gains and losses:
• Capital gains and losses are reported on Schedule D, Capital Gains and Losses, and then transferred to line 13 of Form 1040.
• Capital gains and losses are classified as long-term or short-term, depending on how long you hold the property before you sell it. If you hold it more than one year, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term.
• Net capital gain is the amount by which your net long-term capital gain is more than your net short-term capital loss.
• The tax rates that apply to net capital gains are generally lower than the tax rates that apply to other income and are called the maximum capital gains rates. For 2008, the maximum capital gains rates are 5, 15, 25 or 28 percent.
• As noted earlier, the long term capital gains rate is expected to increase to 20% in 2011.
• If your capital losses exceed your capital gains, the excess is subtracted from other income on your tax return, up to an annual limit of $3,000 ($1,500 if you are married filing separately).
TIP: For more information about reporting capital gains and losses, or get IRS Publication 550, Investment Income and Expenses.
Income from Foreign Sources
Many immigrants who are American citizens with business interests in their country of birth earn money from foreign sources. These taxpayers must remember that they must report all such income on their tax return, unless it is exempt under federal law.
U.S. citizens are taxed on their worldwide income. This applies whether a person lives inside or outside the United States. The foreign income rule also applies regardless of whether or not the person receives a Form W-2, Wage and Tax Statement, or a Form 1099 (information return).
Foreign source income includes earned and unearned income, such as:
- Wages and tips
- Capital Gains
An important point to remember is that citizens living outside the U.S. may be able to exclude up to $87,600 of their 2008 foreign source income if they meet certain requirements. If married and both individuals work abroad and both meet either the bona fide residence test or the physical presence test, each one can choose the foreign earned income exclusion. Together, they can exclude as much as $175,200 for the 2008 tax year. However, the exclusion does not apply to payments made by the U.S. government to its civilian or military employees living outside the U.S.
TIP: For more information check out IRS Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.
Recent IRS Warning – Form 1099-OID Fraud
The IRS cautions taxpayers to avoid getting caught up in a new tax fraud disguised as a debt payment option for credit cards or mortgage debt. The fraud is also marketed as a way to reduce taxes or pay outstanding tax liabilities. It involves the filing of Form 1099-OID, Original Issue Discount, and/or bogus financial instruments such as bonded promissory notes or sight drafts.
This fraud has evolved from an earlier frivolous argument that a “strawman”(artificial person) bank account has been created at the Treasury Department for each U.S. citizen, and that individuals could use such “strawman” accounts to pay debts and claim withholding credits.
The IRS addresses the “strawman” argument in Revenue Ruling 2005-21 and Revenue Ruling 2004-31, and discredits the use of this position for income tax purposes. Moreover, the courts that have reviewed the “strawman” argument and other similar arguments have found them frivolous.
About Chuck Chuckuemeka
Chuck is managing partner of Chuckuemeka & Associates, a nationally focused CPA firm specializing in Accounting, Auditing, Consulting and Tax Advising.
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