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Tax Newsletter
August, 2009

The economic turmoil of the last year at both the State and Federal levels has resulted in a host of tax law changes, and proposals for more. It should come as no surprise if there is additional tax legislation before year end. Most recently, the California budget crisis has prompted several temporary tax measures to shore up revenues. Following is a review of recent activity, as well as several provisions of the federal economic stimulus package, the American Recovery and Reinvestment Act of 2009 (2009 Act), that was signed into law by President Obama on February 17, 2009.


California Governor Arnold Schwarzenegger signed a number of bills into law related to the State’s budget on February 20 and July 28, 2009. Included in the bills were the following significant tax law changes:

Personal Income Tax Rate Increase – Effective with tax years beginning on January 1, 2009, the State temporarily increased its personal income tax rate for both regular tax and alternative minimum tax (AMT) purposes. The rate increase is equal to 0.25 percent, resulting in maximum tax rates of 9.55 percent (regular tax) and 7.25 percent (AMT).

Sales Tax Rate Increase – The State temporarily increased the sales and use tax rate from 5 percent to 6 percent, effective April 1, 2009 through June 30, 2011.

Estimated Tax Payments: Beginning in 2010, the quarterly required estimated tax payments for individuals and corporations will be as follows: 30% on April 15th, 40% on June 15th, 0% on September 15th and 30% due on January 15 (December 15th for Corporations).

Beginning in 2009, individuals who meet certain requirements are required to remit tax payments electronically. After the year started, it was determined that some taxpayers and practitioners may need additional time to implement practices and procedures to comply with the requirement, and it was decided that 2009 will be treated as a grace period, with no “e-pay penalties” assessed. The 1% penalty will be assessed beginning January 1, 2010.

Withholding: Beginning on November 1, 2009, the withholding on wages will increase by 10%. California Form DE-4 (California equivalent of Federal Form W-4) can be filed with your employer to adjust the number of allowances you claim.



Mandatory Retirement Distributions – Suspended for 2009 – Required Minimum Distributions (RMD) generally are minimum amounts that a retirement plan account owner must withdraw annually starting with the year that he or she reaches age 70-1/2 or, if later, the year in which he or she retires. For calendar year 2009, RMDs have been suspended.

AMT Patch - The 2009 Act slightly increases the amount of income that is exempt from alternative minimum tax (AMT). For 2009 the AMT exemption amounts are: $70,950 for joint filers and those filing as a surviving spouse (up from $69,950 in 2008); and $46,700 for those filing as single and head of household (up from $46,200). Unfortunately, although the patch continues to provide some AMT relief, many taxpayers in California will find they are still subject to the AMT tax.

First-Time Homebuyer Tax Credit – First-time homebuyers may be eligible for a refundable tax credit equal to the lesser of $8,000 or 10% of the purchase price of a principal residence, in the year of purchase. A taxpayer is considered a first-time homebuyer if the taxpayer had no ownership interest in a principal residence in the US during the 3 year period prior to the purchase. For homes bought after December 31, 2008 and prior to December 1, 2009, the credit is not required to be repaid unless the home is resold or otherwise ceases to be the taxpayer’s principal residence within 36 months of purchase. The credit phase-outs that start for taxpayers with AGI in excess of $75,000 ($150,000 for joint filers) continue to apply to both years.

New Car Deduction - A surprise provision arriving late in drafting the stimulus package allows purchasers of new vehicles for the rest of 2009 an above-the-line deduction for state and local sales taxes paid on the purchase. The new law places two limits on this new deduction:

  1. Deductible sales cannot exceed the portion of the tax attributable to the first $49,500 of the purchase price of any one vehicle; and
  2. Any deduction will be phased out to the extent the purchaser has adjusted gross income exceeding $125,000 ($250,000 for joint returns).

Note: This deduction is not allowed to taxpayers who elect to claim an itemized deduction for state and local sales taxes. Individuals who are likely to benefit from the new car tax deduction include middle-income and lower income taxpayers who would otherwise not itemize deductions.

Education Credits - The 2009 Act modifies and replaces the Hope Credit for tax years beginning in 2009 and 2010 and renames it the American Opportunity Tax Credit. The revised credit equals up to $2,500 per student per year for the cost of qualified tuition and related expenses. The credit is based on 100% of the first $2,000 of qualifying expenses and 25% of the next $2,000 of qualifying expenses. The new credit does have phase out levels and is completely phased out for taxpayers with AGI in excess of $90,000 ($180,000 for joint filers). Parents who forgo a dependency exemption create the opportunity for their child to qualify for the credit, which is 40% refundable.

Unemployment assistance - Certain eligible individuals who were laid off between September 1, 2008 and December 31, 2009 may qualify for COBRA premium assistance. Individuals may pay 35% of the COBRA premium with the employer claiming a credit for the other 65%.

Under another provision, individuals receiving unemployment benefits in 2009 may exclude the first $2,400 from income.


Bonus Depreciation – The 2009 Act extends the 50-percent first-year bonus depreciation allowed under the 2008 Economic Stimulus Act through December 31, 2009. The extension is retroactive to January 1, 2009. The new law also extends, through 2010, the additional year of bonus depreciation allowed under the 2008 Economic Stimulus Act for property with a recovery period of 10 years or longer, for transportation property (tangible personal property used to transport people or property), and for certain aircraft.

Also extended for bonus depreciation purposes, the regular dollar cap for new vehicles placed in service in 2009. The regular first-year depreciation dollar cap remains at $10,960 if bonus depreciation is elected ($11,160 for light trucks and vans).

Code Sec. 179 Expensing - The 2008 Economic Stimulus Act increased the amount of Code Sec. 179 expensing for 2008 to $250,000 and increased the threshold for reducing the deduction to $800,000; these levels have been extended to calendar year 2009.

Net Operating Loss (NOL) Carryback - The new law provides a five-year carryback of 2008 NOLs but only for qualified small businesses with average gross receipts of $15 million or less. The new law gives these businesses the choice to carry back NOLs three, four or five years. The new treatment will apply only to NOLs for any tax year beginning or ending in 2008. The normal NOL carryback period, which is two years for all businesses, returns for NOLs incurred in 2009.

Energy Incentives:

The energy incentives in the new law are targeted to both individuals and businesses. President Obama has pledged to significantly expand the development and production of alternative sources of energy, such as biomass, solar and wind energy, in part to create new “green collar” jobs. The more significant incentives provided under the new law include:

Plug-in Electric Vehicles - Although plug-in electric vehicles are not yet on the market, the new law modifies the existing credit for these environmentally- friendly vehicles. Separate treatment has also been carved out for low-speed vehicles. The base amount of the credit for qualified plug-in electric vehicles is $2,500. The full amount of the credit will be reduced once the manufacturer records its 200,000th sale.

Note, if a vehicle is eligible for the plug-in electric vehicle credit, it is not eligible for the Code Sec. 30B qualified hybrid vehicle credit. The new law allows the Code Sec. 30B credit as a personal credit against the alternative minimum tax (AMT) for tax years beginning after 2009.

Residential Energy Property Credit - The new law increases the Code Sec. 25C residential energy property tax credit from 10 percent to 30 percent, raises the maximum cap to a $1,500 aggregate amount for 2009 and 2010 installations, eliminates the $500 lifetime cap, and makes several other modifications. The changes are effective for eligible property placed in service after December 31, 2008, and before January 1, 2011.

Improvements eligible for the Code Sec. 25C credit include insulation materials, exterior windows including skylights, exterior doors, central air conditioners, natural gas, propane or oil water heaters or furnaces, hot water boilers, electric heat pump water heaters, certain metal roofs and stoves, and advanced main air circulating fans.

Estate Tax Reform

The estate tax is currently set to expire in 2010 and then, in 2011, return to 2002 levels, unless Congress takes action this year. The budget resolution adopted by Congress, and favored by President Obama, for fiscal year 2010 calls for extending the estate tax permanently at 2009 levels: an individual exemption of $3.5 million/$7 million per couple, and a tax rate of 45 percent.

Running the numbers. We recommend running tax projections for 2009 and 2010 before implementing year-end tax strategies. Please let us know if you would like our assistance in preparing a projection.

We often remind our clients that tax considerations should generally not drive financial decisions. However, once financial objectives are defined and understood, it becomes easier to determine the tax planning strategies that are consistent with overall objectives. Unfortunately, frequent changes in the income tax rules, coupled with the changes and uncertainty in the estate tax area, make both short and long-term planning more complex. With the year-end approaching, it may be a good time to review your financial objectives with a view toward assessing whether any of the recent tax incentives can be incorporated into the financial plan.

The information contained in this newsletter is general in nature and does not constitute tax advice or opinion. Applicability to specific situations should be determined through consultation with your tax advisor.

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