Thursday, October 30, 2008

AICPA Offers Americans Financial Advice On Job Loss

New York (October 27, 2008) – CPAs serving on the National CPA Financial Literacy Commission of the American Institute of Certified Public Accountants (AICPA) are offering tips on managing personal finances in the event of a job loss. The United States lost more than 159,000 jobs in September, a five-year high, according to the Department of Labor. The total number to date for 2008 is 760,000. U.S. unemployment held steady at 6.1 percent in September, according to the Bureau of Labor Statistics.........


Fidelity Investments Reports Nearly Half Of 61 Year-Olds Plan To Start Taking S.S. As Soon As Possible

Financial Needs and Health Concerns Cited As Top Factors in Decision to Begin Receiving Benefits at Age 62

BOSTON, Oct 27, 2008 (BUSINESS WIRE) -- In a new survey(1) released today, Fidelity Investments reports that nearly half (45%) of Americans age 61 today are planning to begin taking Social Security at the age of 62, the first year that eligible recipients can apply. The top reasons driving their decision to collect early are immediate financial needs and health and longevity concerns............

MarketWatch (Wall Street Journal)

CPAs Provide Tips On Calming Client Fears

The Texas Society of CPAs has provided five tips that CPAs can pass along to their clients to calm their financial worries............


Tuesday, October 28, 2008

Michigan Tax Values Go Down, But Property Taxes Go Up

These are very different times we live in. Last week at the Broadway Theatre Guild office, I ran into Ken Parrish, a CPA, long time friend and the Kent County Treasurer. I asked him his opinion on the current state of property taxes in Michigan. What's going to happen with declining property values and the resulting loss of property taxes. He said for most homeowners, property taxes in 2009 will probably go up. How can that happen?

This is how the property tax system works based on current law. This past year residential property values declined by 20% to 30% in some areas. Tax day in Michigan is December 31st. All property is to valued on December 31, 2008 for purposes of the 2009 property taxes. A logical person may conclude that all residential property taxes will go down in 2009. Not so.

The 1994 ballot proposal, known as Proposal A, specifies that property taxes cannot increase by more that the rate of inflation or 5%. Since 1994, because of low rates of inflation, property values for purposes of the property tax, known as Taxable Value, have increased at very low rates (the inflation rate) even at a time when property values were increasing at double digit rates. Now its payback time.

Property owners who have owned their homes for a large number of years have seen their state equalized value (SEV) go up while increases in Taxable Value have been held back by the Proposal A limitation. Now the reverse is happening. Property values are declining while inflation is up. The social security inflation adjustment will be 5.8%. We can expect the rate of inflation in Michigan to be up. For a long term property owner, this means their Taxable Value will increase even though their SEV will decrease. As long as the Taxable Value does not exceed the SEV, they will experience an increase in tax in 2009. New home owners may not experience a property tax increase.

In the 1990s, no one ever thought property values would decline while inflation is increasing. But, we are now living in a very different time. A ballot proposal which would have frozen the taxable value when the SEV goes down failed to make the ballot.

Ed Kisscorni Blog

Saturday, October 25, 2008

New Tax Law Offers Opportunities

Is it time for the kids to get their own home?

Practitioners have a new tax benefit to consider, but, as has become an increasing Congressional practice, one that has a very short time line. The Housing and Economic Recovery Act of 2008 provides a credit of 10 percent of the purchase price (but not to exceed $7,500 ($3,750 for married filing separately)) for a principal residence by a first-time homebuyer (defined as one who has not owned a residence for the three years preceding the purchase). This is phased out for MAGIs in excess of $75,000 ($150,000 for married filing jointly). The credit is recaptured proportionately for each of the first 15 years the taxpayers own the property with any unrecaptured amount accelerated to the year of disposition. The recapture cannot exceed the amount of the gain on a sale to an unrelated party. This applies only to purchases made on or after April 9, 2008 and before July 1, 2009.

Note: This has the effect of an interest-free loan from the government repaid through the tax system, but its benefits may be attractive for extended year-end planning to buy a principal residence.

The credit is reduced by phasing out over a range of $20,000 of MAGI in excess of $75,000 ($150,000 in the case of a joint return).

An important and unusual feature of this credit is that it is refundable, meaning that even though the purchaser may have a small or no tax liability, the purchaser may receive the full amount of the credit in cash (or in part as an offset against nominal tax liability). Although in most cases this means that the purchaser will receive $7,500 in the year of purchase and then increase tax liability by $500 in each of the following 15 years, this benefit can be fairly substantial. If one assumes a rate of return on the $7,500 subsidy equal to the mortgage rate (assumed 6 percent), since the purchaser can “invest” in the mortgage itself by paying down the mortgage by that amount, then one calculates the approximate net present value of an undiscounted credit amount (generally $7,500) inflow followed by 15 successive outflows, each discounted by 4.5 percent (the after-tax rate of return assuming the purchaser is in the 25-percent rate in each future year) for the number of years from the date of purchase. This amounts to $2,131. If the taxpayer is in the 15-percent tax rate, the after-tax rate of return on the mortgage increases to 5.1 percent, and the net present value to $2,345. By contrast, if the purchaser is in a low tax bracket in the year of purchase but will be in the 35-percent rate in years thereafter, the after-tax rate of return declines to 3.9 percent and the net present value to $1,902. There are of course many possible combinations of tax rates in future years, and the problem can become much more difficult with variable mortgages.

Now might be the time for clients to facilitate the purchase of a starter home for certain children by funding the down payment by a $12,000 gift shielded by the annual exclusion ($24,000 if gift-splitting is applicable). Alternatively, the client can make a low-interest rate loan of the down payment or the full mortgage amount. Such loans are generally subject to §7872 rules that require a minimum (or will be deemed to have) interest rate at the AFR. This produces taxable interest income to the parent’s tax rate, thereby reducing the amount of the subsidy as calculated above. The child, even if the loan from the parent is collateralized by the residence, may not be able to deduct the interest if the child cannot itemize deductions. Currently – September 2008 – the applicable long-term annual AFR is 4.58 percent (compared to a conventional 6-percent mortgage rate), so the benefit of the credit will be reduced by the additional taxes paid by the parent. However, no interest rate need be (and none will be deemed to be) applicable if the gift loan does not exceed $10,000, and applies to loans in excess of $10,000 but not in excess of $100,000 only to the extent of the child’s net investment income for the year

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