Recently, the IRS released Rev. Rul. 2010-25 to address whether acquisition indebtedness incurred by a taxpayer to acquire, construct, or substantially improve a qualified residence can constitute home-equity indebtedness to the extent it exceeds $1 million.  In Rev. Rul. 2010-25, the IRS ruled that a taxpayer can deduct as qualified residence interest up to $1.1 million of the debt securing the purchase of a taxpayer’s principal residence.

Rev. Rul. 2010-25 gives an example in which an unmarried individual purchases a principal residence for $1,500,000 with a cash down payment of $300,000 and a bank loan of $1,200,000 secured by the residence.  In the example, the taxpayer pays interest that accrues on the indebtedness during that year, and there is no other debt outstanding that is secured by the principal residence.  Per Rev. Rul. 2010-25, the taxpayer may deduct the interest paid on the first $1 million of the original loan balance because it is considered acquisition indebtedness under Sec. 163(h)(3)(B). Under the ruling, pursuant to Sec. 163(h)(3)(C), the taxpayer may also deduct the interest paid on $100,000 of the remaining debt of $200,000 because the first $100,000 loan amount in excess of home acquisition indebtedness is considered home-equity indebtedness. Any interest on the remaining indebtedness of $100,000 is considered nondeductible personal interest under Sec. 163(h)(1) because it cannot be traced to any source other than the personal residence, which has already reached its limits.

Rev. Rul. 2010-25 clarifies a gray area that has for years plagued many CPAs.  This ruling may allow CPAs and Taxpayers that have taken this position in the past the opportunity to sleep a little easier at night!!

 The IRS estimates that more than $1.1 billion in refunds await over 1 million taxpayers who failed to file returns for 2007.  In order to collect these refunds, taxpayers must file their late tax returns no later than 4/18/2011.  

If taxpayers file their late 2007 tax returns, their refund checks will be held if either 2008 or 2009 returns haven’t been filed.  In addition, refund checks will be applied to any other tax debts still owed to the IRS or on unpaid child support or past due federal debt such as student loans.

Feel free to contact me at Wallace Neumann & Verville, LLP if you would like to discuss filing your late tax returns.  Failure to file your returns timely may result in lost refunds.

IRS Service Center Employee’s Medical and Charitable Expense Deductions Disallowed: 

Taxpayer/IRS service center employee’s claim for medical expense deductions was denied due to lack of substantiation.  Although Taxpayer submitted a statement from his health insurance company, the statement did not show he actually made payments.  At trial, he did not offer testimony to clarify the health insurance deduction, and ultimately conceded that the IRS’s disallowance of his health insurance deduction was correct.

In addition, the same Taxpayer’s claim for charitable contribution deductions was denied due to lack of substantiation.  At trial, taxpayer submitted a list of purported donations, he was unable to verify contemporaneous nature of same or offer any other evidence regarding his record-keeping.  Ultimately, he agreed that the IRS’s determination was correct. Also, with the exception of certain items the IRS allowed, taxpayer wasn’t entitled to deductions for some of his miscellaneous expenses. (Arnold Freedman v. Commissioner, (2010) TC Memo 2010-155, 2010 RIA TC Memo ¶2010-155)

When claiming deductions, it is important to keep good records in the event you are selected for audit.  You may be required to substantiate the deductions at some point in the future.

Since there is a good possibility of the Bush tax cuts expiring, do you know how much your income tax will be in 2011? The Tax Foundation has created a useful tool called the 2011 Income Tax Calculator which estimates your income tax based on tax laws under three scenarios: (1) Bush tax cuts expire, (2) Bush tax cuts extended, and (3) Obama’s budget proposal.

While this calculator may not have all of the tools to take into account all of your unique circumstances (as a business owner, for example), give it a try to see the possible impact on your personal financial plan and budget for 2011. I put a few numbers into their calculator – a married couple with two children and a mortgage earning $280,000 of wages, $5,000 of long-term capital gains, and $4,000 of qualified dividend income should be prepared to pay about $11,000 more tax in 2011 “if Congress fails to act to extend the Bush tax cuts.”

How much extra tax does a married couple pay with no dependents and no mortgage earning $500,000 of wages and/or retirement income, $20,000 of long-term capital gains, and $40,000 of qualified dividend income? Almost $32,000 if Congress allows the Bush tax cuts to expire!

The Las Vegas CPA firm, Wallace Neumann & Verville, welcomes the opportunity to review your personal circumstances, while there is still time, and create a plan to reduce your 2011 income tax burden.

The Obama administration has promised that taxes will increase only on people making more than $250,000 for married taxpayers and $200,000 for single taxpayers (read more on this issue by clicking on Tax Increases for the Wealthy).  However, one tax cut that is being overlooked is the “Making Work Pay” credit.  This credit was exclusively designed as a middle-class benefit (taxpayers who make $75,000 or less).  If this credit is not extended, the middle class will experience a decline in their paychecks. CNN has an interesting article on the tax hike nobody seems to be talking about.

The Wall Street Journal has an interesting and well written article by Arthur Laffer: Tax Hikes and the 2011 Economic Collapse.  Mr. Laffer makes some Economic Predictions based on the 2011 increasing tax rates and history lessons from earlier period tax rate increases.  Predicting the future is never easy or perfect, but we know tax rates are increasing in 2011, and you may want to consider taking advantage of the lower 2010 tax rates.

Due to the increasing tax rates, 2010 tax planning is going to be more important than ever.  We should discuss tailoring a specific 2010 tax plan.  Generally, the following should be considered:

1-      Income acceleration (when possible)

2-      Capital gain acceleration

3-      Harvesting and preserving capital loss carryforwards

4-      Expense postponement (when possible)

5-      Roth Conversions

Wallace Neumann & Verville does not provide investment advice.  However, we should work with your investment and legal advisors to help minimize your tax liability.