Tax Law Blog | IRS Tax Attorneys

A tax break meant to spur donations to Haitian earthquake relief has received unanimous approval from the Minnesota House.

It should reach Gov. Tim Pawlenty’s desk sometime this week. The Senate needs to take one more vote to line up two slightly different versions.

The bill would allow donors to deduct charitable contributions from their 2009 state income taxes. It would apply to donations made specifically for Haiti relief efforts.

Corporations could also deduct Haiti donations from corporate franchise taxes.

The legislation would match up state and federal tax law.

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Taxpayers wishing to claim their Haiti relief donations on the tax return they are filling out this season must make those donations by the end of this month, according to the Internal Revenue Service.

Individuals and corporations have until midnight on Sunday, Feb. 28, to make cash contributions to charities providing earthquake relief in Haiti. These contributions can be claimed on either a 2009 or 2010 return, but not both. Contributions made after that date but before the end of the year can only be claimed on a 2010 return.

Contributions made by text message, check, credit card or debit card qualify for this special option. Donations charged to a credit card before the end of February count for 2009. This is true even if the credit card bill isn’t paid until after Feb. 28. Also, checks count for 2009 as long as they are mailed by the end of this month and clear your financial institution shortly thereafter.

Taxpayers can benefit from their donations most quickly by filing their 2009 returns early, filing electronically and choosing direct deposit. Refunds take as few as ten days and can be directly deposited into a savings, checking or brokerage account, or used to purchase Series I U.S. savings bonds.

This special provision, enacted Jan. 22, does not apply to contributions of property. Eligible contributions must be made specifically for the relief of victims in areas affected by the Jan. 12 earthquake in Haiti. Gifts made directly to individual victims are not deductible. Notice 1396 a one-page notice describing this provision, is available on IRS.gov and is printed in English, Spanish, French and Haitian Creole.

To get a tax benefit, individuals must itemize their deductions on Schedule A. Those who claim the standard deduction, including all short-form filers, are not eligible.

Taxpayers should be sure their contributions go to qualified charities. Most organizations eligible to receive tax-deductible donations are listed in a searchable online database available on this Web site under Search for Charities. Some organizations, such as churches or governments, may be qualified even though they are not listed on IRS.gov. Donors can find out more about organizations helping Haitian earthquake victims from agencies such as USAID.

The IRS reminds donors that contributions to foreign organizations generally are not deductible. IRS Publication 526, Charitable Contributions, provides information on making contributions to charities.

Federal law requires that taxpayers keep a record of any deductible donations they make. For donations by text message, a telephone bill will meet the recordkeeping requirement if it shows the name of the donee organization, the date of the contribution and the amount of the contribution. In addition, for text message donations of $250 or more, taxpayers must obtain a written acknowledgement from the charity. For cash contributions made by other means, be sure to keep a bank record, such as a cancelled check, or a receipt from the charity showing the name of the charity and the date and amount of the contribution. Publication 526 has further details on the recordkeeping rules for cash contributions.

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Managing household paperwork, finances and taxes for military families just got easier thanks to the new Military Spouses Residency Relief Act, according to H&R Block (NYSE: HRB).

The act affects the tax status of families when they move on military orders by allowing more flexibility when it comes to state taxes. Servicemembers often retain their permanent residency throughout their military service. Prior to MSRRA, servicemembers could maintain their home state as their permanent residence for the duration of their military career, despite frequent moves during active duty.

Military spouses can now seek the same permanent residency status as servicemembers and have their income taxed only by their state of permanent residence. State taxes only would be due to the state of their permanent residence, provided the servicemember does not seek additional employment.

“In the past, spouses would have to establish new residency in the duty station state and be subject to that state’s income taxes. The Act lets spouses maintain permanent residency in the same state as the servicemembers they are married to and only pay state taxes for the state they call home,” said Zach Goff, manager of tax research of The Tax Institute at H&R Block.

Prior to MSRRA, upon arrival at the new duty location spouses would have to make address changes to titles, re-register their vehicles and obtain new driver’s licenses. Many times, this would lead to servicemembers and their spouses filing state income tax returns for different states.

To determine whether spouses qualify for relief under MSRRA, they must meet three requirements:

– The servicemember must be present at the duty state in compliance with
military orders
– The spouse is stationed with the servicemember
– The spouse is living in the same state as the servicemember

When spouses are applying for the same domicile as servicemembers, they must prove residency, which can be accomplished by activities such as registering to vote, voting via absentee ballot, owning land and maintaining a valid driver’s license.

Because MSRRA was passed to help military families, there are still other requirements for legally changing residency. In addition, a non-military spouse will not simply inherit the permanent residency of their spouse by marriage; they must declare it.

“Each state has different tax regulations and different filing requirements,” Goff said. “Before spouses attempt to change their state of residency, they should first contact the state taxation board to determine whether they meet the MSRRA requirements.”

Taxpayers should check their state’s department of revenue Web site for more information about MSRRA and other state tax changes.

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College students strapped for cash are in for a treat this tax season. Under a change in the tax code, the cost of textbooks and course materials are eligible for a tax credit for the first time for students and their families.

The American Opportunity Tax Credit makes textbooks and other course material expenses—including tuition and fees incurred in 2009-2010 not covered by scholarships or grants—eligible to be claimed as a tax credit of up to $2,500 on that year’s tax return.

The new credit is a modification of the existing Hope Credit for tax years 2009 and 2010. The IRS says it makes the Hope Credit available to a broader range of taxpayers, including many who have higher incomes, or who owe no tax.

A major addition to the list of qualifying expenses is required course materials (including textbooks) which allows credit to be claimed for four post-secondary education years instead of two. The maximum annual credit is $2,500 per student.

The full credit is available to people with a modified adjusted gross income of $80,000 or less. For married couples filing a joint return the amount is $160,000 or less.

According to the IRS, under the American Recovery and Reinvestment Act (ARRA), more parents and students will qualify over the next two years for the credit. The purpose of the American Opportunity Credit is to pay for college expenses.

To help students understand the tax credit, the National Association of College Stores (NACS) has launched a Web site developed in cooperation with the Internal Revenue Service, (www.textbookaid.org).

For more detailed information about the American Opportunity Tax Credit visit www.irs.gov/recovery.

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A legislative tax panel approved a bill Monday that would let state taxpayers deduct donations to Haiti earthquake relief efforts when they file their 2009 taxes this spring.

It would make state tax law match up with a federal law allowing taxpayers to deduct donations made by the end of February from their 2009 tax returns instead of waiting until next year.

The House Taxes Committee passed the bill from Rep. Ann Lenczewski (len-CHEHS’-kee) on a voice vote.

Lenczewski says the bill has received bipartisan support. She expects it to pass through the Legislature quickly.

The Haiti proposal is similar to a state law passed in 2005 to encourage donations to help victims of the 2004 Indian Ocean tsunami.

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The Paterson administration wants to change the way New York businesses get tax breaks for job creation, proposing credits for research and development, capital investment and payroll costs for new jobs in high technology, biotechnology, clean energy, finance and manufacturing.

The proposed Excelsior Jobs Program would replace the Empire Zones Program, which provides tax incentives for 8,116 businesses in exchange for promises to retain or create jobs, which didn’t always materialize. That program is set to expire this summer.

The administration also proposed a $25 million seed fund to help university research on new technology bridge the gap to actual business applications.

The Empire Zones Program, with credits for businesses located in 85 zones statewide, is set to end June 30, a date the administration said it accelerated by a year.

“Unfortunately, our enterprise zone program is no longer working,” Paterson said in a speech to lawmakers Wednesday. “It’s their last year, so we’re going to put it where it belongs, in the past. We are no longer going to provide tax credits for businesses that do not provide the jobs we were promised.”

However, its cost is projected to rise from $538 million this year to $551 million in the next fiscal year starting April 1, according to the Budget Division. “There are legacy costs associated with past commitments,” division spokesman Matt Anderson said.

Empire State Development, due to statutory changes this year, required businesses to get recertified, reporting in December that it issued retention certificates to more than 6,600 businesses while sending notices to decertify 544. The agency said the 30-year-old program then had more than 8,700 businesses employing more than 344,000.

Basic benefits can include tax credits per employee ranging from $1,500 to $3,000 annually for up to five years, investment tax credits of 10 percent, a 25 percent tax credit for certain investments up to $100,000 and a state sales tax refund on building materials for construction or expansion.

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Cash-strapped communities have a message for corporations that promised jobs in return for tax breaks: A deal’s a deal.

As the economy sputters along, municipalities struggling to fix roads, fund schools and pay bills increasingly are rescinding tax abatements to companies that don’t hire enough workers, that lay them off or that close up shop. At the same time, they’re sharpening new incentive deals, leaving no doubt what is expected of companies and what will happen if they don’t deliver.

“We will roll out the red carpet as much as we can (but) they are going to honor the contract,” said Brendon Gallagher, an alderman in DeKalb, Ill., where Target Corp. got abatements from the city, county, school district and other taxing bodies after promising at least 500 jobs at a local distribution center.

So when the company came up 66 workers short in 2009, Target got word its next tax bill would be jumping almost $600,000 — more than half of which goes to the local school district, where teachers and programs have been cut as coffers dried up.

The newfound boldness comes from communities and states that have long bent over backward to lure companies and jobs by offering abatements and other incentives — to the tune of an estimated $60 billion a year in the United States, according to the Washington-based economic development watchdog group Good Jobs First.

The willingness to write — and enforce — the “clawback” provisions comes even as companies across the country struggle and against a broader backdrop of governments getting tough on business practices.

What’s more, the poor economy has communities thinking about how the tax breaks they dole out will play with residents who have grown increasingly angry at the thought of anything that hints of corporate welfare.

“The public is a lot more aware of tax abatements and there’s a climate of skepticism about what can be perceived as corporate handouts,” said Geoff McKimm, a member of the Monroe County Council in Indiana.

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WASHINGTON — The Internal Revenue Service today reminds individual taxpayers who are considering buying a new car that they have until Dec. 31 to take advantage of a tax break that may not be around in 2010.

Taxpayers who buy a qualifying new motor vehicle this year after Feb. 16 can deduct the state or local sales or excise taxes they paid on the first $49,500 of the purchase price. Qualifying motor vehicles include new passenger automobiles, light trucks, motorcycles, and motor homes.

Individuals who itemize and those who take the standard deduction can benefit from this tax break. In states without a sales tax, other taxes or fees can qualify if they are assessed on the purchase of the vehicle and are based on the vehicle’s sales price or as a per unit fee.

The deduction is reduced for joint filers with modified adjusted gross incomes (MAGI) between $250,000 and $260,000 and other taxpayers with MAGI between $125,000 and $135,000. Taxpayers with higher incomes do not qualify.

Taxpayers who take the standard deduction need to complete Schedule L and attach it to Form 1040 or Form 1040A to increase the standard deduction by the allowable amount of state or local sales or excise taxes paid on the purchase of the new vehicle. Also, check the box on line 40b on Form 1040 or line 24b on Form 1040A. Individuals who itemize should include the allowable amount of state or local sales or excise taxes from the purchase of the vehicle on Form 1040, Schedule A.

With a quiet change to the law on Friday, the federal government allowed Citigroup to avoid paying billions of dollars in taxes.

Pressed about the move Wednesday, the White House danced around the question of whether the government was giving a “tax break” to the bank, which already benefited from a government bailout.

White House Press Secretary Robert Gibbs also would not answer whether President Obama was comfortable with the move.

“The IRS made that decision, and it allows Citigroup to pay back the United States the money that it was owed,” Gibbs said.

As the Washington Post reported, the IRS tweaked a tax rule on Friday which prevented private, profitable companies from buying money-losing companies to avoid paying taxes.

The rule change enabled Citigroup to repay the government, officials said, arguing that the ruling benefited taxpayers since it would make Citigroup shares more valuable.

“Is the president comfortable with Citigroup and perhaps others getting massive tax breaks, as they pay back their bailout fund?” CBS News White House Correspondent Chip Reid asked.

Gibbs said the change in the law was appropriate because the law was never intended to apply to transfers of ownership between the government and a private company.

“This was a law that wasn’t written as the United States being a member of the private sector,” Gibbs said.

Reid pressed back, “But there are lots of ordinary Americans who would say, ‘Hey, this tax law isn’t fair, that’s not the way it was intended,’ and they don’t get the IRS go in there and say, ‘Oh, well, we’ll change it for you.’”

Gibbs simply restated the argument that the government allowed Citigroup to keep billions of dollars “because it doesn’t fit what the law says.”

“So you disagree with all the reports that this is a tax break for Citigroup?” Reid asked.

“I disagree with the fact that this was somehow changed in a way — in the way in which you’re characterizing it, yes,” Gibbs responded.

When pressed further, however, the press secretary said, “Citigroup’s losing money. They can use that against their taxes. That is — that’s always been the case.”

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Those who have used offshore bank accounts in order to evade taxes are receiving more time to do so under a one-time extension of an IRS leniency program. The official announcement is set for today.

The program was initially expiring on Wednesday will allegedly continue until Oct. 15 according to USA today.

The IRS approved the continuation in response to requests from lawyers and tax preparers who told the agency they have been overwhelmed with late-filing applicants, the officials said. The IRS has had to reassign employees to handle an application surge since the program began in March.

Offshore account owners approved for the program by the IRS generally avoid criminal prosecution and pay:

• Back taxes and interest for a minimum of six years.

• A 25% delinquency penalty for each year in which tax returns weren’t filed, or a 20% accuracy penalty for years in which returns were filed but offshore income was omitted.

• A penalty equal to 20% of the highest aggregate value at any point during the last six years for all previously secret accounts.

Ordinarily, the IRS could impose penalties of at least 50% for all years in which an account wasn’t disclosed. In some cases, that could exceed the value of the offshore holdings.

If you are thinking of applying yourself, I urge you to contact a Tax lawyer to talk about your specific circumstances. Try browsing the tax lawyer directory.