Tax Law Blog | IRS Tax Attorneys

We do our best to stay up to date on reverse mortgage legislation but every once and a while something slips by and the Reverse Mortgage Fairness Act of 2009 is a perfect example.  New York’s Govenor signed A08305 in July and the bill became effective Oct. 26, 2009.

The bill amended Banking Law and Real Property Tax Law to prohibit proceeds received from reverse mortgage from being considered as income for the purpose of senior citizens’ partial property tax exemption authorized by section 467 of the Real Property Tax Law.

The bill also states that monies used to repay a reverse mortgage may not be deducted from income, and further that any interest or dividends realized from the investment of reverse mortgage proceeds shall be considered income.

“We wanted to create a system where seniors could better utilize the equity in their homes and remain eligible for vital tax exemptions,” said New York State Senator Hiram Monserrate.

“As we try to recover from this national economic slowdown, we need to better protect homeownership and reward property owners who have planned for the golden years the right way,” added Monserrate.

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It takes Sgt. Charles Denault barely two minutes to spot a dozen cars with out-of-state license plates parked in driveways and outside houses and apartments.

Driving his cruiser along this streets of coastal Kittery, Denault is on the lookout for vehicles registered in other states — especially New Hampshire — but owned by people who live in Maine.

“They’re everywhere,” Denault said as he points out car after car with New Hampshire plates. “It’s like dandelions that keep popping up.”

By professing to live in New Hampshire, Mainers can avoid paying a 5 percent sales tax when they buy a vehicle. They also don’t have to buy car insurance, which is required in Maine but not in New Hampshire. And people who work in New Hampshire can also avoid paying Maine’s income taxes if they claim a New Hampshire residence.

A side effect is that they may end up paying slightly more to register their car in New Hampshire — a negligible worry for Mainers already skipping out on paying other taxes but potentially devastating to towns like Kittery, which hurt as tax collections and state aid to the town go down.

Police say some people simply aren’t aware that they’re required by law to have Maine plates after 30 days of becoming a resident. But all too often, said Kittery Police Chief Ed Strong, money is the motivator.

Strong said offenders use all sorts of tricks to get around the law: Some claim to live at a relative’s New Hampshire home or use the address of a rental or seasonal property.

“We have found people that have dummy addresses in New Hampshire to register their vehicles,” Strong said.

Nobody knows for sure how many excise tax evaders there are in Maine or how much money the state and local towns are losing because of them.

In Maine, it would cost $305 in excise taxes and fees to register a 3-year-old midsize car with a retail price of $20,000; the same vehicle would cost $313.20 to register in New Hampshire.

Kittery police typically write 150 to 200 summonses a year for excise tax evasion, although the pace has accelerated over the past year.

But other towns aren’t so vigilant.

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As many Americans gird themselves for the Black Friday shopping crush, we can think of a lot of reasons to stay home and do holiday shopping online. Not having to pay sales taxes should not be one of them.

Online retailers who do not collect sales tax enjoy a significant and unfair advantage over rivals who must add the tax to their prices. They also cost the states billions of dollars a year in lost sales tax revenue — money that cash-starved states cannot afford to forgo.

New York’s Legislature made the right decision in 2008 when it passed a law requiring Amazon.com and other Internet retailers to collect taxes on sales to New York customers. Amazon challenged the law in a lower court, and lost in January. A New York appeals court is expected to rule soon. New Yorkers will be well served if it upholds the lower court’s ruling. And other states would be wise to look to New York as a model.

Sales taxes for any state are legally due on online purchases that would be taxable if the items were bought in a local store. If the retailer does not collect the taxes, the buyer is supposed to remit them to the state.

As a practical matter, unless the taxes are collected by retailers, they are virtually never paid. As online shoppers well know, some Internet retailers collect sales tax and some do not. The deciding factor is whether the retailer has a physical presence in the state where the customer is located. If so, the retailer is obligated to collect the tax. If not, not.

Those rules are based on a 1992 Supreme Court ruling that it would be unduly burdensome for retailers to collect other states’ sales taxes. Of course, that was before online shopping was so widespread and before software and other support services made collecting easy.

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California resident J.D. won over $50,000 playing video poker online this year. Wow! She couldn’t do that well in Las Vegas, and at home she can play anytime without having to drive for hours. Plus, she can play any number of different “machines” without waiting for one of them to be free. But J.D. spent over $40,000 before cashing out $50,000. Are her losses deductible?

First, a brief overview.

Online gambling offers advantages to both casual hobbyists and serious gamblers. After all, you never have to sit next to a smoker, you aren’t subject to the casino cacophony, and you can take a break without worrying about someone stealing your machine.

But the legality of online gambling in the U.S. is not really clear. There is no overall federal law that defines illegal gambling. So whether your playing is legal is defined at the state level. Some states — including Illinois, Indiana, Louisiana, South Dakota and Washington — have explicitly outlawed online gambling or some form of it. Other states have no specific law addressing Internet gambling.

You’ve probably heard of the Unlawful Internet Gambling Enforcement Act and Regulation GG which became law in 2006 and become effective on Dec. 1. That certainly sounds like a federal law that makes Internet gambling illegal, doesn’t it?

Ironically, this law turns bankers into policemen and forces them to enforce a non-law. Banks are required to return or block illegal-gambling deposits into their clients’ accounts, or even to close accounts.

However, the UIGEA doesn’t define unlawful Internet gambling. In fact, there is so much dispute over the definition that the House financial services committee wrote to Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke asking them to delay enforcement of the UIGEA for one year, until Dec. 1, 2010. See the letter.

Congress is battling over outlawing online gambling altogether, or limiting it to certain games. At present, the only thing that’s clear is that online sports betting is illegal.

Article in its entirety: Online Gambling Poses Tax Conundrum

From the IRS Website:

Most businesses may use losses incurred during the economic downturn to reduce income from prior tax years, under a revenue procedure issued today by the Internal Revenue Service.

The relief provided under the Worker, Homeownership, and Business Assistance Act of 2009 differs from similar relief issued earlier this year in that the previous relief was limited to small businesses.

The current relief is applicable to any taxpayer with business losses, except those that received payments under the Troubled Asset Relief Program. The relief also applies to a loss from operations of a life insurance company.

Taxpayers under the procedure may elect to carry back a net operating loss (NOL) for a period of three, four or five years, or a loss from operations for four or five years, to offset taxable income in those preceding taxable years. An NOL or loss from operations carried back five years may offset no more than 50 percent of a taxpayer’s taxable income in that fifth preceding year.  This limitation does not apply to the fourth or third preceding year.

The procedure applies to taxpayers that incurred an NOL or a loss from operations for a taxable year ending after Dec. 31, 2007, and beginning before Jan. 1, 2010.

The state tax department is cracking down on dishonest tax preparers and refund-anticipation lenders with a new law.

The measure requires individuals and businesses who meet certain criteria with regard to tax preparation and refund loans to register annually.

Some commercial preparers will also be required to pay an annual $100 fee. Fines for violating these new amendments to the state Tax Law could reach $5,000.

The tax department says nearly 60 percent of New York personal income tax returns are prepared with the assistance of someone who’s paid to do it.

Anyone, regardless of education, training, or criminal background, can call themselves a tax preparer and charge for their services.

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According to current federal guidelines, Roth IRA conversions are only available to taxpayers with adjusted gross incomes of less than $100,000. That limit is being repealed in January, for most Americans, but Wisconsin residents will miss out on the opportunity for now, according to Tim Steffen, CFP and CFA at Robert W. Baird & Co.

Wisconsin residents who have already done a Roth conversion and exceed the income requirements could face several penalties, Steffen said. They include:

* A 3.3 percent early distribution penalty for the amount converted for taxpayers younger than 59.5 years old.
* Any amount that is rolled into a Roth IRA may be treated as a contribution and subjected to a $5,000 annual maximum. If the amount exceeds that limit, it may be subject to a 2 percent penalty.
* For 2010 conversions, the amount withdrawn from a traditional IRA will be taxable in Wisconsin for the year, even though federal law allows income to be spread over 2011 and 2012.

The state Department of Revenue has said previously that it will propose updating state tax code to adopt the federal changes. Those proposals have not yet been made, and would require legislative action, which will not occur until January, at the earliest.

“This means that a Wisconsin resident doing a conversion in early 2010 would face uncertainty as to the state tax treatment of the transaction,” Steffen said.

Those who wish to convert a portion of their holdings to a Roth account in anticipation of a law change can do so with little fear of negative consequences, Steffen said, because tax law allows accounts to be “re-characterized.”

“A re-characterization is essentially a way to undo the conversion transaction,” he said. “The converted amount would be rolled back into the traditional IRA and there would be no tax consequences for that year.”

Re-characterizations must be finalized by Oct. 15 of the year after the conversions, allowing Wisconsin residents until Oct. 15, 2011 if the state takes no action.

Baird’s contacts in Madison have told the company there are politicians who want to see state law changed, Steffen said.

“By all means, this is not a sure thing,” he said. “This would require bipartisan support. It’s not a done deal at all.”

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Looking for a Wisconsin tax attorney?

More American homebuyers will get tax relief thanks to changes made to the First-Time Homebuyer Credit. H&R Block (NYSE: HRB) advises the popular credit is now more accessible to existing homeowners and first-time homebuyers in three ways:

1. Through a tax credit worth up to $6,500 for existing homeowners in the
market for a new home.
2. Through a new closing deadline of April 30, 2010 — extended from Nov.
30, 2009 — for the $8,000 First-Time Homebuyer Credit. Also, a special
provision gives taxpayers two extra months to close if they’ve entered
into a contract by April 30, 2010.
3. By increased phase-out limits that start at $125,000 for singles and
$225,000 for married filing jointly — up from $75,000 and $125,000
respectively. The new limits apply to homes purchased after Nov. 6,
2009.

Under the new requirements, an estimated 2 million Americans are expected to claim the tax benefit.* The IRS estimates 1.4 million people have already claimed earlier versions of the First-Time Homebuyer Credit.

“From seniors looking to downsize, to families wanting to move, to those shopping for their first home, this credit paves the way for more people to positively impact their taxes through the benefits of homeownership,” said Amy McAnarney, executive director of The Tax Institute at H&R Block.

Existing homeowners must have owned and lived in their current home continuously for five of the last eight years to claim the credit of up to $6,500. Taxpayers must close on the replacement home between Nov. 7, 2009 and April 30, 2010. If taxpayers have entered into a contract on a home by April 30, 2010, they have until June 30, 2010 to close.

“The tax credit of up to $6,500 for current homeowners could ease the sting of those wanting to move but worried they’ll take a loss in the down market,” McAnarney said. “More first-time and existing homeowners can take advantage of this valuable tax credit under the new law.”

A house must be valued at less than $800,000 to be eligible for the new $6,500 or the $8,000 credit for first-time homebuyers. Taxpayers can claim the credit on their 2009 or 2010 tax returns. A completed settlement statement must be attached to the return in order to claim the credit.

Owning a home can trigger many other tax benefits. Taxpayers should consult their tax professional to ensure they receive all the credits and deductions a new house affords them.

The Tax Institute at H&R Block is a leading source of tax expertise focused on individual taxpayers and the tax preparation industry. Through its staff of enrolled agents, CPAs and attorneys, The Tax Institute provides unbiased research, analysis and interpretation of federal and state tax laws. For more information, visit: www.thetaxinstitute.com.

*National Association of Realtors, Nov. 5, 2009.

Former hostage Terry Anderson, who was held captive in the Middle East for 6 1/2 years, has filed for bankruptcy.

In the chapter 7 bankruptcy filed Nov. 3, which was first reported by The Columbus Dispatch in Ohio, Anderson claimed $1.8 million in liabilities and $60,000 in assets.

Anderson was chief Middle East correspondent for The Associated Press when he was kidnapped in Lebanon by Iranian-sponsored terrorists. He was freed in 1991. He is now a lecturer at the University of Kentucky.

After being released, Anderson received a $26 million judgment in a lawsuit against Iran. In 2004, he lost an Ohio Senate race.

The bankruptcy filing lists 17 credit cards, some with debt related to a restaurant in the Virgin Islands.

Anderson did not immediately return phone messages.

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The dead line for The First Time Homebuyer Credit is November 30, 2009, which is just around the corner.  As we know, the Housing and Economic Act of 2008 allows a tax credit of $ 8,000 for qualified first time home buyers. This credit is available for the homes purchased from April 8, 2008 to December 1, 2009. Which means to take the advantage from this credit, taxpayer must close the purchase by November 30, 2009.  The adoption of this plan was a part of economic- stimulus effort to encourage homebuyers and boost the sales of housing market to stimulate the economy.

Some things that taxpayers should also know about this credit are that, According to IRS since the time this measure was adopted, more than a million claims have been received by the IRS.  Due to the increased number of credits applied so far, the IRS’s focus on these claims has also increased.  IRS is concerned that there is a potential for fraud and the misuse of this new refundable tax credit.  Now, the IRS is greatly focused on fraudulent claims and has also increased its investigation to prevent the misuse of this tax break.  The Internal Revenue Service is examining more than 100,000 suspicious claims filed for the first-time home-buyer tax benefit.Some lawmakers, tax experts and even the IRS believe that there is evidence that a significant number of the claims might prove to be unjustified, or even fraudulent.

An IRS spokesman said the agency “will vigorously pursue those who filed fraudulent claims” for this credit.

As this program is coming to an end, more and more people would want to take an advantage of this credit and might not make an effort to find out about the other eligibility requirements that would qualify the taxpayer to claim this credit and could cause a potential trouble.

Please seek the help of a tax expert and a good realtor who could help you benefit from this tax break without causing any big trouble.

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