taxation law services

Extension of the Homebuyer Tax Credit under the Worker, Homeownership, and Business Assistance Act of 2009

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New Deadlines

While the maximum tax credit amount remains at $8,000 for a first-time homebuyer, the Worker, Homeownership, and Business Assistance Act of 2009 (“WHBAA”)extends the deadline for qualifying home purchases from November 30, 2009, to April 30, 2010. Additionally, if a buyer enters into a binding contract by April 30, 2010, the buyer has until June 30, 2010, to settle on the purchase. The first-time homebuyer is defined as a taxpayer who has not owned a primary residence during the three years up to the date of purchase.

WHBAA also provides a “long-time resident” credit of up to $6,500 to others who do not qualify as “first-time homebuyers.” In order to qualify, a buyer must have owned and used the same home as a principal or primary residence for at least five consecutive years of the eight-year period ending on the date of purchase of a new home as a primary residence.

Members of the Armed Forces and certain federal employees serving outside the U.S. have an extra year to buy a principal residence in the U.S. and still qualify for the credit. An eligible taxpayer must buy or enter into a binding contract to buy a home by April 30, 2011, and settle on the purchase by June 30, 2011.

New Income Limits

WHBAA further raises the income limits for buyers who purchase homes after November 6. The full credit will be available to taxpayers with modified adjusted gross incomes (MAGI) up to $125,000, or $225,000 for joint filers. Those with MAGI between $125,000 and $145,000, or $225,000 and $245,000 for joint filers, are eligible for a reduced credit. Those with higher incomes do not qualify.

Remember, for homes purchased prior to Nov. 7, 2009, existing MAGI limits remain in place. The full credit is available to taxpayers with MAGI up to $75,000, or $150,000 for joint filers. Those with MAGI between $75,000 and $95,000, or $150,000 and $170,000 for joint filers, are eligible for a reduced credit. Taxpayers who enjoy higher incomes do not qualify for this tax credit.

Top New Restrictions

WHBAA imposes several new restrictions for homes purchased after November 6, 2009. Among the most important restrictions are inability by the dependants and minors (less than 18 years of age on the date of purchase) to claims the tax credit. Also, home purchased for the price exceeding $800,000 do not qualify for the tax credit.

How to Claim this Tax Credit

The qualifying homebuyers have the option of claiming the tax credit on either their 2009 or 2010 tax returns. In order to claim the tax credit, the eligible taxpayers must fill-out the new Form 5405 together with the following additional documentation:

a). Generally: a copy of the settlement statement showing all parties’ names and signatures, property address, sales price, and date of purchase. Normally, this is the properly executed Form HUD-1, Settlement Statement;

b). If the taxpayer purchased a mobile home and unable to get a settlement statement, then he should include a copy of the executed retail sales contract, showing all parties’ names and signatures, property address, purchase price and date of purchase;

c). If the taxpayer purchased a newly constructed home and a settlement statement is not available, then he should include a copy of the certificate of occupancy, showing the owner’s name, property address and date of the certificate.

If the taxpayer is claiming a “long-time resident” tax credit, it is advisable (to avoid refund delays) to attach the following documents covering the five-consecutive-year period:

I) Form 1098, Mortgage Interest Statement, or substitute mortgage interest statements, or
ii) Property tax records, or
iii) Homeowner’s insurance records.

Notice the word “or” – this means that either of the aforementioned three categories of records may suffice.

Remember, the taxpayers claiming the homebuyer credit must file a paper tax return because of the added documentation requirements.

Home-Buyer Credit: New Form 5405

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On January 15, 2010, the IRS released a new Form 5405 that eligible homebuyers need to claim the first-time homebuyer credit this tax season and announced new documentation requirements to deter fraud related to the first-time homebuyer credit. The new form and instructions follow the major changes to the homebuyer credit made by the Worker, Homeownership, and Business Assistance Act of 2009.

A taxpayer who purchases a home after Nov. 6 must use this new version of the form to claim the credit. Likewise, taxpayers claiming the credit on their 2009 returns, no matter when the house was purchased, must also use the new version of Form 5405. A taxpayer who purchased a home on or before Nov. 6 and chooses to claim the credit on an original or amended 2008 return may continue to use the previous version of Form 5405.

The processing of the tax returns containing Form 5405 will begin in mid-February, and, as long as all required documents are attached, it will take about four to eight weeks to get a refund claimed on a complete and accurate paper tax return.

Remember, the taxpayers claiming the homebuyer credit must file a paper tax return because of the added documentation requirements.

Fee Agreement Arrangements with Tax Lawyers in Minneapolis: 5 Most Important Issues

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In this article, I will discuss five most important issues that you need to know before you sign a fee agreement with tax lawyers in Minneapolis.

1. How is the lawyer’s fee paid? There are three main models of payment that lawyers use: hourly fee, contingency fee, and flat fee. The hourly fee is the most common form of tax lawyer compensation and it is fairly simple – the tax attorney is paid only based on the time he spends on the case. If you’re paying your tax lawyer by the hour, the agreement should set out the hourly rates of the tax attorney and anyone else in this attorney’s office who might work on the case. The contingency fee arrangement, where the tax attorney takes a percentage of the amount the client wins at the end of the case, is almost never used by tax attorneys in Minneapolis. In the unlikely case that this latter type of fee arrangement is used, the most important issue to understand is whether the tax lawyer deducts the costs and expenses from the amount won before or after you pay the lawyer’s percentage. Obviously, you will pay more in attorney fees if your tax lawyer deducts the litigation costs based on the latter scenario (i.e. after you pay the lawyer’s fee). Finally, in a flat fee arrangement, you pay an agreed-upon amount of money for a project. For example, you pay $3,000 to your tax attorney to file delinquent FBARs (Reports on Foreign Bank and Financial Accounts) for the past five years. While a flat fee arrangement is possible in a small project, it is generally disliked by tax lawyers in Minneapolis because it often lacks the necessary flexibility to account for the client’s individual legal situation. Usually, some sort of an additional payment arrangement is built into such fee agreements to make sure that the balance between the client’s legal needs and the tax attorney’s fees is maintained.

Remember, usually, you will have to pay out-of-pocket expenses (e.g. long-distance calls, mailing costs, photocopying fees, lodging, etc.) and litigation costs (such as court filing fees) in addition to your tax lawyer’s fees.

2. Does the agreement include the amount of the retainer? Most tax lawyers in Minneapolis require their client to pay a retainer. Retainer can mean two different fee arrangements. First, retainer may be the amount of money a client pays to guarantee a tax attorney’s commitment to the case. Under this arrangement, the retainer is not a form of an advance payment for future work, but a non-refundable deposit to secure the lawyer’s availability. Second, a retainer is simply the amount of money a tax attorney asks his client to pay in advance. In this scenario, the lawyer usually deposits the retainer in a client trust account and withdraws money from it for the work completed according to the fee agreement. The fee agreement should specify the amount of the retainer and when the lawyer can withdraw money form the client trust account (usually, on a monthly basis).

3. How often will you be billed? Most tax attorneys in Minneapolis bill their clients on a monthly basis. Sometimes, however, when the project is not large, the fee agreement will specify that you will be billed upon completion of the case. In a flat-fee scenario, it is likely that the client will be obligated to pay either a half or even the whole amount immediately as a retainer. It is wise for a client to insist in paying some part of the fee upon completion of the case to retain a degree of control over the case completion.

4. What is the scope of the tax attorney’s representation? Most tax lawyers in Minneapolis will insist on defining their obligations in the fee agreement. The most important issue here is to state what the tax attorney is hired for without defining it either too narrowly or too broadly. Usually, a fee agreement should specify that a new contract should be signed if you decide to hire this tax lawyer to handle other legal matters.

If you are hiring a large or a mid-size law firm, beware that the partners in a law firm often delegate some or all of their obligations to their associates or even their staff. While the partners retain full responsibility for the case, there is a danger that important parts of it may be delegated to far less experienced associates. Besides the potential quality issues, there is also a concern that you would be paying a large hourly fee for a first-year associate’s work. It is important to insist that the fee agreement specifies what, if any, type of work is being delegated to the associates, the corresponding billing rate of each associate involved, and who carries the responsibility for the whole case.

5. Who controls what decisions? Whether this information should be included in the fee agreement really depends on a case and on an attorney. Generally, tax attorneys in Minneapolis let their clients make the important decisions that affect the outcome of the case (such as: acceptance or rejection of the IRS settlement offer, commencement of a lawsuit, business decisions, et cetera). All of the decisions with respect to the legal issues (such as: where to file a lawsuit, what motions should be filed, what negotiation tactics should be employed, how to structure a business transaction from a tax perspective, etc.) are usually taken by the tax lawyers. If there are any changes to this arrangement (for example, you want your lawyer to make certain decisions with the respect to the outcome of the case), you should insist that these modifications be reflected in the fee agreement.

Generally, before you sign the fee agreement, tax lawyers in Minneapolis will discuss with you many more topics than what is covered in this article. The five issues explained here, however, are crucial to your understanding of how the tax relationship with your tax attorney will work. Before you sign the fee agreement with your tax lawyer, you should ask at least these five questions and make sure that the answers are complete and to your satisfaction.

Reporting Payments to Independent Contractors: Form 1099-MISC

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Reporting Payments to Independent Contractors: Form 1099-MISC

If you hire an independent contractor to do work for your business, you may have to report to the IRS your payments to him by filing Form 1099-MISC (Miscellaneous Income) if the following four conditions are met:
1. The payee is not your employee;
2. The payment was for services in the course of your trade or business (including nonprofit organizations);
3. The payment is made to an individual, partnership, estate, or in some cases, a corporation; and
4. You made payments to the payee of at least $600 during the calendar year.

In order to comply with the first requirement, it is advisable (and in many industries – required) to ask your contract attorney to draft the Independent Contractor Agreement, the Independent Contractor Certification, and the appropriate Independent Contractor Statement. The Independent Contractor should read and sign all three of these documents before he commences his services to your business.

Non-employee compensation paid to nonresident aliens should be reported on Form 1042-S, (Foreign Persons’ U.S. Source Income Subject to Withholding) where some withholding may be required., Form 1042 (Annual Withholding Tax Return for U.S. Source Income of Foreign Persons) must be filed if Form 1042-S is required.

Filing This Year’s Tax Return: Name Change as a Result of Divorce or Marriage

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If you changed your last name last year as a result of getting married or divorced, you need to make sure that the name on your tax return matches the name registered with the Social Security Administration (the “SSA”). This is because the new name which you adopted as a result of marriage (or an old name to which you reverted after your divorce) is usually not reflected on your social security card. Therefore, your new name is not likely to match your old social security number (the “SSN”).

Informing the SSA about the name change is relatively easy. All you have to do is file Form SS-5, Application for a Social Security Card, at your local SSA office. The form can be found on the SSA’s website. You can also obtain the form by calling 800-772-1213 or at the local SSA offices.

It usually takes about two weeks to have the change verified.