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The IRS has provided details clarifying the federal tax status involving special payments made by 21 states in 2022. Taxpayers in many states will not need to report these payments on their 2022 tax returns.

The IRS has provided details clarifying the federal tax status involving special payments made by 21 states in 2022. Taxpayers in many states will not need to report these payments on their 2022 tax returns.

General welfare and disaster relief payments

If a payment is made for the promotion of the general welfare or as a disaster relief payment, for example related to the COVID 19 pandemic, it may be excludable from income for federal tax purposes under the General Welfare Doctrine or as a Qualified Disaster Relief Payment. Payments from the following states fall in this category and the IRS will not challenge the treatment of these payments as excludable for federal income tax purposes in 2022:

• California,

• Colorado,

• Connecticut,

• Delaware,

• Florida,

• Hawaii,

• Idaho,

• Illinois,

• Indiana,

• Maine,

• New Jersey,

• New Mexico,

• New York,

• Oregon,

• Pennsylvania, and

• Rhode Island.

Alaska is in this group only for the supplemental Energy Relief Payment received in addition to the annual Permanent Fund Dividend. Illinois and New York issued multiple payments and in each case one of the payments was a refund of taxes to which the above treatment applies, and one of the payments is in the category of disaster relief payment. A list of payments to which the above treatment applies is available on the IRS website.

Refund of state taxes paid

If the payment is a refund of state taxes paid and recipients either claimed the standard deduction or itemized their deductions but did not receive a tax benefit (for example, because the $10,000 tax deduction limit applied) the payment is not included in income for federal tax purposes. Payments from the following states in 2022 fall in this category and will be excluded from income for federal tax purposes unless the recipient received a tax benefit in the year the taxes were deducted.

• Georgia,

• Massachusetts,

• South Carolina, and

• Virginia

Other Payments

Other payments that may have been made by states are generally includable in income for federal income tax purposes. This includes the annual payment of Alaska’s Permanent Fund Dividend and any payments from states provided as compensation to workers.

The IRS intends to change how it defines vans, sports utility vehicles (SUVs), pickup trucks and “other vehicles” for purposes of the Code Sec. 30D new clean vehicle credit. These changes are reflected in updated IRS Frequently Asked Questions (FAQs) for the new, previously owned and commercial clean vehicle credits.

The IRS intends to change how it defines vans, sports utility vehicles (SUVs), pickup trucks and “other vehicles” for purposes of the Code Sec. 30D new clean vehicle credit. These changes are reflected in updated IRS Frequently Asked Questions (FAQs) for the new, previously owned and commercial clean vehicle credits.

Clean Vehicle Classification Changes

For a vehicle to qualify for the new clean vehicle credit, its manufacturer’s suggested retail price (MSRP) cannot exceed:

• $80,000 for a van, SUV or pickup truck; or

• $55,000 for any other vehicle.

In December, the IRS announced that proposed regulations would define these vehicle types by reference to the general definitions provided in Environmental Protection Agency (EPA) regulations in 40 CFR 600.002 (Notice 2023-1).

However, the IRS has now determined that these vehicles should be defined by reference to the fuel economy labeling rules in 40 CFR 600.315-08. This change means that some vehicles that were formerly classified as “other vehicles” subject to the $55,000 price cap are now classified as SUVs subject to the $80,000 price cap.

Until the IRS releases proposed regulations for the new clean vehicle credit, taxpayers may rely on the definitions provided in Notice 2023-1, as modified by today’s guidance. These modified definitions are reflected in the Clean Vehicle Qualified Manufacturer Requirements page on the IRS website, which lists makes and models that may be eligible for the clean vehicle credits.

Expected Definitions of Vans, SUVs, Pickup Trucks and Other Vehicles

The EPA fuel economy standards establish a large category of nonpassenger vehicles called “light trucks.” Within this category, vehicles are defined largely by their gross vehicle weight ratings (GVWR) as follows:

• Vans, including minivans

• Pickup trucks, including small pickups with a GVWR below 6,000 pounds, and standard pickups with a GVWR between 6,000 and 8,500 pounds

• SUVs, including small SUVs with a GVWR below 6.000 pounds, and standard SUVs with a GVWR between 6,000 and 10,000 pounds

• Other vehicles (passenger automobiles) that, based on seating capacity of interior volume, are classified as two-seaters; mini-compact, subcompact, compact, midsize, or large cars; and small, midsize, or large station wagons.

However, the EPA may determine that a particular vehicle is more appropriately placed in a different category. In particular, the EPA may determine that automobiles with GVWR of up to 8,500 pounds and medium-duty passenger vehicles that possess special features are more appropriately classified as “special purpose vehicles.” These special features may include advanced technologies, such as battery electric vehicles, fuel cell vehicles, plug-in hybrid electric vehicles and vehicles equipped with hydrogen internal combustion engines.

FAQ Updates

The IRS also updated its frequently asked questions (FAQs) page for the Code Sec. 30D new clean vehicle credit, the Code Sec. 25E previously owned vehicle credit and the Code Sec. 45W qualified commercial clean vehicles credit. In addition to incorporating the new definitions discussed above, these updates:

• Define “original use” and "MSRP;"

• Describe the information a seller must provide to the taxpayer and the IRS;

• Clarify that the MSRP caps apply to a vehicle placed in service (delivered to the taxpayer) in 2023, even if the taxpayer purchased it in 2022; and

• Explain what constitutes a lease.

Effect on Other Documents

Notice 2023-1 is modified. Taxpayers may rely on the definitions provided in Notice 2023-1, as modified by Notice 2023-16, until the IRS releases proposed regulations for the new clean vehicle credit.

The IRS established the program to allocate environmental justice solar and wind capacity limitation (Capacity Limitation) to qualified solar and wind facilities eligible for the Low-Income Communities Bonus Credit Program component of the energy investment credit.

The IRS established the program to allocate environmental justice solar and wind capacity limitation (Capacity Limitation) to qualified solar and wind facilities eligible for the Low-Income Communities Bonus Credit Program component of the energy investment credit. The IRS also provided:

• initial guidance regarding the overall program design ,

• the application process, and

• additional criteria that will be considered in making the allocations.

After the 2023 allocation process begins, the Treasury Department and IRS will monitor and assess whether to implement any modifications to the Low-Income Communities Bonus Credit Program for calendar year 2024 allocations of Capacity Limitation.

Facility Categories, Capacity Limits, and Application Dates

The program establishes four facilities categories and the capacity limitation for each:

The IRS anticipates applications will be accepted for Category 3 and Category 4 facilities in the third quarter of 2023. Applications for Category 1 and Category 2 facilities will be accepted thereafter. The IRS will issue additional guidance regarding the application process and facility eligibility.

The program will also incorporate additional criteria in determining how to allocate the Capacity Limitation reserved for each facility category among eligible applicants. These may include a focus on facilities that are owned or developed by community-based organizations and mission-driven entities, have an impact on encouraging new market participants, provide substantial benefits to low-income communities and individuals marginalized from economic opportunities, and have a higher degree of commercial readiness.

Finally, only the owner of a facility may apply for an allocation of Capacity Limitation. Facilities placed in service prior to being awarded an allocation of Capacity Limitation are not eligible to receive an allocation. The Department of Energy (DOE) will provide administration services for the Low-Income Communities Bonus Credit Program. An allocation of an amount of capacity limitation is not a determination that the facility will qualify for the energy investment credit or the increase in the credit under the Low-Income Communities Bonus Credit Program.

The IRS announced a program to allocate $10 billion of credits for qualified investments in eligible qualifying advanced energy projects (the Code Sec. 48C(e) program). At least $4 billion of these credits may be allocated only to projects located in certain energy communities.

The IRS announced a program to allocate $10 billion of credits for qualified investments in eligible qualifying advanced energy projects (the Code Sec. 48C(e) program). At least $4 billion of these credits may be allocated only to projects located in certain energy communities.

The guidance announcing the program also:

• defines key terms, including qualifying advanced energy project, specified advanced energy property, eligible property, the placed in service date, industrial facility, manufacturing facilities, and recycling facility;

• describes the prevailing wage and apprenticeship requirements, along with remediation options; and

• sets forth the program timeline and the steps the taxpayer must follow.

Application and Certification Process

For Round 1 of the Section 48C(e) program, the application period begins on May 31, 2023. The IRS expects to allocate $4 billion in credit in this round, including $1.6 billion to projects in energy communities.

The taxpayer must submit a concept paper detailing the project by July 31, 2023. The taxpayer must also certify under penalties of perjury that it did not claim a credit under several other Code Sections for the same investment.

Within two years after the IRS accepts an allocation application, the taxpayer must submit evidence to the DOE to establish that it has met all requirements necessary to commence construction of the project. DOE then notifies the IRS, and the IRS certifies the project.

Taxpayers generally submit their papers through the Department of Energy (DOE) eXHANGE portal at https://infrastructure-exchange.energy.gov/. The DOE must recommend and rank the project to the IRS, and have a reasonable expectation of its commercial viability.

Energy Communities and Progress Expenditures

The guidance also provides additional procedures for energy communities and the credit for progress expenditures.

For purposes of the minimum $4 billion allocation for projects in energy communities, the DOE will determine which projects are in energy community census tracts. Additional guidance is expected to provide a mapping tool that applicants for allocations may use to determine if their projects are in energy communities.

Finally, the guidance explains how taxpayers may elect to claim the credit for progress expenditures paid or incurred during the tax year for construction of a qualifying advanced energy project. The taxpayer cannot make the election before receiving its certification letter.

The IRS has released new rules and conditions for implementing the real estate developer alternative cost method. This is an optional safe harbor method of accounting for real estate developers to determine when common improvement costs may be included in the basis of individual units of real property in a real property development project held for sale to determine the gain or loss from sales of those units.

The IRS has released new rules and conditions for implementing the real estate developer alternative cost method. This is an optional safe harbor method of accounting for real estate developers to determine when common improvement costs may be included in the basis of individual units of real property in a real property development project held for sale to determine the gain or loss from sales of those units.

Background

Under Code Sec. 461, developers cannot add common improvement costs to the basis of benefitted units until the costs are incurred under the Code Sec. 461(h) economic performance requirements. Thus, common improvement costs that have not been incurred under Code Sec. 461(h) when the units are sold cannot be included in the units' basis in determining the gain or loss resulting from the sales. Rev. Proc. 92-29, provided procedures under which the IRS would consent to developers including the estimated cost of common improvements in the basis of units sold without meeting the economic performance requirements of Code Sec. 461(h). In order to use the alternative cost method, the taxpayer had to meet certain conditions, provide an estimated completion date, and file an annual statement.

Rev. Proc. 2023-9 Alterative Cost Method

In releasing Rev. Proc. 2023-9, the IRS and Treasury stated that they recognized certain aspects of Rev. Proc. 92-29 are outdated, place additional administrative burdens on developers and the IRS, and that application of the method to contracts accounted for under the long-term contract method of Code Sec. 460 may be unclear.

The alternative cost method must be applied to all projects in a trade or business that meet the definition of a qualifying project. However, the alternative cost limitation of this revenue procedure is calculated on a project-by-project basis. Thus, common improvement costs incurred for one qualifying project may not be included in the alternative cost method calculations of a separate qualifying project.

The revenue procedure provides definitions including definitions of "qualifying project,""reasonable method," and "CCM contract" (related to the completed contract method). It provides rules for application of the alternative cost method for developers using the accrual method of accounting and the completed contract method of accounting, rules for allocating estimated common improvement costs, and a method for determining the alternative costs limitation. The revenue procedure also provides examples of how its rules are applied.

Accounting Method Change Required

Under Rev. Proc. 2023-9, the alternative cost method is a method of accounting. A change to this alternative cost method is a change in method of accounting to which Code Secs. 446(e) and 481 apply. An eligible taxpayer that wants to change to the Rev. Proc. 2023-9 alternative cost method or that wants to change from the Rev. Proc. 92-29 alternative cost method, must use the automatic change procedures in Rev. Proc. 2015-13 or its successor. In certain cases, taxpayers may use short Form 3115 in lieu of the standard Form 3115 to make the change.

Effective Date

This revenue procedure is effective for tax years beginning after December 31, 2022.

The IRS announced that taxpayers electronically filing their Form 1040-X, Amended U.S Individual Income Tax Return, will for the first time be able to select direct deposit for any resulting refund. 

The IRS announced that taxpayers electronically filing their Form 1040-X, Amended U.S Individual Income Tax Return, will for the first time be able to select direct deposit for any resulting refund. Previously, taxpayers had to wait for a paper check for any refund, a step that added time onto the amended return process. Following IRS system updates, taxpayers filing amended returns can now enjoy the same speed and security of direct deposit as those filing an original Form 1040 tax return. Taxpayers filing an original tax return using tax preparation software can file an electronic Form 1040-X if the software manufacturer offers that service. This is the latest step the IRS is taking to improve service this tax filing season.

Further, as part of funding for the Inflation Reduction Act, the IRS has hired over 5,000 new telephone assistors and is adding staff to IRS Taxpayer Assistance Centers (TACs). The IRS also plans special service hours at dozens of TACs across the country on four Saturdays between February and May. No matter how a taxpayer files the amended return, they can still use the "Where's My Amended Return?" online tool to check the status. Taxpayers still have the option to submit a paper version of Form 1040-X and receive a paper check. Direct deposit is not available on amended returns submitted on paper. Current processing time is more than 20 weeks for both paper and electronically filed amended returns.

"This is a big win for taxpayers and another achievement as we transform the IRS to improve taxpayer experiences," said IRS Acting Commissioner Doug O’Donnell. "This important update will cut refund time and reduce inconvenience for people who file amended returns. We always encourage directdeposit whenever possible. Getting tax refunds into taxpayers’ hands quickly without worry of a lost or stolen paper check just makes sense."

The OECD/G20 Inclusive Framework released a package of technical and administrative guidance that achieves clarity on the global minimum tax on multinational corporations known as Pillar Two. Further, it provides critical protections for important tax incentives, including green tax credit incentives established in the Inflation Reduction Act. 

The OECD/G20 Inclusive Framework released a package of technical and administrative guidance that achieves clarity on the global minimum tax on multinational corporations known as Pillar Two. Further, it provides critical protections for important tax incentives, including green tax credit incentives established in the Inflation Reduction Act. Pillar Two provides for a global minimum tax on the earnings of large multinational businesses, leveling the playing field for U.S. businesses and ending the race to the bottom in corporate income tax rates. This package follows the release of the Model Rules in December 2021, Commentary in March 2022 and rules for a transitional safe harbor in December 2022. The guidance will be incorporated into a revised version of the Commentary that will replace the prior version.

Additionally, the package includes guidance on over two dozen topics, addressing those issues that Inclusive Framework members identified are most pressing. This includes topics relating to the scope of companies that will be subject to the Global Anti-Base Erosion (GloBE) Rules and transition rules that will apply in the initial years that the global minimum tax applies. Additionally, it includes guidance on Qualified Domestic Minimum Top-up Taxes (QDMTTs) that countries may choose to adopt.

"The continued progress in implementing the globalminimum tax represents another step in leveling the playing field for U.S. businesses, while also protecting U.S. workers and middle-class families by ending the race to the bottom in corporate tax rates," said Assistant Secretary of the Treasury for Tax Policy Lily Batchelder. "We welcome this agreed guidance on key technical questions, which will deliver certainty for green energy tax incentives, support coordinated outcomes and provide additional clarity that stakeholders have asked for."

As parents, we all know that preparing a reasonable budget and sticking to it is a basic principle of good financial planning. By assisting college-bound students in developing and maintaining their own budget, parents can help students make ends meet during their college years while helping them develop good money management skills they'll use for the rest of their lives.

As parents, we all know that preparing a reasonable budget and sticking to it is a basic principle of good financial planning. By assisting college-bound students in developing and maintaining their own budget, parents can help students make ends meet during their college years while helping them develop good money management skills they'll use for the rest of their lives.

Preparing a budget

Fixed expenses. Fixed expenses are those expenses that should not vary much throughout the year. Fixed expenses include tuition, college fees, books, supplies, rent, utilities, and insurance. Keep in mind how these expenses will need to be paid (monthly, quarterly, or annually) so a plan can be implemented to effectively manage cash flow. In addition, don't overlook large one-time expenses such as deposits and telephone installation fees.

Variable expenses. Unlike fixed expenses, variable expenses can fluctuate greatly from month to month, even from day to day. For budgeting purposes, variable expenses are harder to estimate than fixed expenses but since they are not fixed, your student usually has greater control over the amount and timing of these expenses. Examples of variable expenses are food, clothing, travel, entertainment, transportation, telephone and other miscellaneous items.

Making ends meet

Once the sources of funds and potential expenses have been identified and an initial budget has been developed, it may be obvious that making the budget work will take some effort and smart choices on your student's part. To make sure funds last through spring, here are a few money-saving tips to pass on to your college-bound student:

Housing

Live where you learn. Living on campus in a dormitory is usually cheaper then getting an apartment off-campus and will save on transportation expenses.

Roommates are key. If your heart is set on living off campus, you can really stretch your housing dollars by sharing an apartment with one or more other college students. If you and your roommates pool your funds to buy groceries, small kitchen appliances and furniture, the savings can be even greater.

Make Mom and Dad your roommates. Living at home while you are attending a local college can save your thousands of dollars in food and rent costs.

Food

Skip the crowded, expensive on-campus eateries. Packing a lunch or snacks from home can save you lots of time and money.

Forgo the morning java at the coffeehouse. A small regular coffee at a fancy coffeehouse costs about $1.35 while a home-brewed cup of coffee costs about 7 cents.

Plan your meals. If your fridge and freezer are stocked with delicious foods that you made ahead of time, you are less likely to grab pricey convenience foods on the run.

Grocery shop like a pro. Clipping coupons, buying store generic brands, avoiding convenience foods, and shopping from a list are ways that millions of smart shoppers take a big bite out of their grocery costs every month. Shopping at stores with double coupons and "buy one, get one free" deals can get you even more bang for your shopping buck.

Develop a food co-op. Pooling coupons, buying in bulk quantities and then splitting the costs among a group of friends or other students is a great way to end up with more disposable income.

Consider school-provided meal plans. Many schools have meal plans that allow you to pay for meals in advance. This can save money while converting a variable expense into a fixed expense, further simplifying the budgeting process.

Travel & transportation

Carpool with friends. Since you and your friends are all going to the same place anyway, why not have some fun driving to school while saving money in gas. Also, check to see if your school has a "ride board" or an organized carpool program.

Buy a bus pass. If you take the bus to school more than a couple of times each week, consider getting a monthly bus pass to save time and money.

Dust off your bike or skates. Considering riding a bike, using inline skates or walking to places instead of driving or using public transportation.

Plan air travel well in advance. If you're away at school and plan to visit home regularly, make any plane reservations months in advance to receive the best price on tickets. Make sure to take advantage of frequent flier miles and travel specials on the Internet.

Telephone

Make long-distance calls at night or on weekends. Rates can be as much as 65% less than peak period rates.

Use prepaid phone cards. Buy a month's worth of phone cards in advance and limit yourself each month to the amount on the phone cards.

Shop for a good long-distance plan. Deregulation of the phone companies has resulted in a lot of choices for phone plans. Since many of these plans can involve confusing restrictions and conditions, do your homework before committing to a plan.

Call your parents collect. This can obviously save you a bundle but remember to get the okay from Mom and Dad first.

Get on the Internet. If you have Internet access, you have access to email, either paid or free. Instead of picking up the phone, email your friends and family for a cheap and easy form of communication.

Maintaining the budget

Once you have a budget you and your student can live with, you're almost finished. As with any good financial plan, maintenance is critical. It's important that your student keep an accurate record of actual expenses to compare periodically with the budgeted amounts. Actual expenses can be recorded in a small notebook or on a computer spreadsheet using detailed categories for easy comparison. This process will help you and your student determine exactly where the money goes at all times.

For the college-bound student, developing and maintaining a budget may seem like just one more headache, but it will ultimately result in a greater sense of control over their money. If you need assistance in getting started with the budgeting process, please contact the office.

After your tax returns have been filed, several questions arise: What do you do with the stack of paperwork? What should you keep? What should you throw away? Will you ever need any of these documents again? Fortunately, recent tax provisions have made it easier for you to part with some of your tax-related clutter.

After your tax returns have been filed, several questions arise: What do you do with the stack of paperwork? What should you keep? What should you throw away? Will you ever need any of these documents again? Fortunately, recent tax provisions have made it easier for you to part with some of your tax-related clutter.

The IRS Restructuring and Reform Act of 1998 created quite a stir when it shifted the "burden of proof" from the taxpayer to the IRS. Although it would appear that this would translate into less of a headache for taxpayers (from a recordkeeping standpoint at least), it doesn't let us off of the hook entirely. Keeping good records is still the best defense against any future questions that the IRS may bring up. Here are some basic guidelines for you to follow as you sift through your tax and financial records:

Copies of returns. Your returns (and all supporting documentation) should be kept until the expiration of the statute of limitations for that tax year, which in most cases is three years after the date on which the return was filed. It's recommended that you keep your tax records for six years, since in some cases where a substantial understatement of income exists, the IRS may go back as far as six years to audit a tax return. In cases of suspected tax fraud or if you never file a return at all, the statute of limitations never expires.

Personal residence. With tax provisions allowing couples to generally take the first $500,000 of profits from the sale of their home tax-free, some people may think this is a good time to purge all of those escrow documents and improvement records. And for most people it is true that you only need to keep papers that document how much you paid for the house, the cost of any major improvements, and any depreciation taken over the years. But before you light a match to the rest of the heap, you need to consider the possibility of the following scenarios:

• • Your gain is more than $500,000 when you eventually sell your house. It could happen. If you couple past deferred gains from prior home sales with future appreciation and inflation, you could be looking at a substantial gain when you sell your house 15+ years from now. It's also possible that tax laws will change in that time, meaning you'll want every scrap of documentation that will support a larger cost basis in the home sold.
  • You did not use the home as a principal residence for a period. A relatively new income inclusion rule applies to home sales after December 31, 2008. Under the Housing and Economic Recovery Act of 2008, gain from the sale of a principal residence will no longer be excluded from gross income for periods that the home was not used as the principal residence. These periods of time are referred to as "non-qualifying use." The rule applies to sales occurring after December 31, 2008, but is based only on non-qualified use periods beginning on or after January 1, 2009. The amount of gain attributed to periods of non-qualified use is the amount of gain multiplied by a fraction, the numerator of which is the aggregate period of non-qualified use during which the property was owned by the taxpayer and the denominator of which is the period the taxpayer owned the property. Remember, however, that "non-qualified" use does not include any use prior to 2009.

• • You may divorce or become widowed. While realizing more than a $500,000 gain on the sale of a home seems unattainable for most people, the gain exclusion for single people is only $250,000, definitely a more realistic number. While a widow(er) will most likely get some relief due to a step-up in basis upon the death of a spouse, an individual may find themselves with a taxable gain if they receive the house in a property settlement pursuant to a divorce. Here again, sufficient documentation to prove a larger cost basis is desirable.

Individual Retirement Accounts. Roth IRA and education IRAs require varying degrees of recordkeeping:

• • Traditional IRAs. Distributions from traditional IRAs are taxable to the extent that the distributions exceed the holder's cost basis in the IRA. If you have made any nondeductible IRA contributions, then you may have basis in your IRAs. Records of IRA contributions and distributions must be kept until all funds have been withdrawn. Form 8606, Nondeductible IRAs, is used to keep track of the cost basis of your IRAs on an ongoing basis.

• • Roth IRAs. Earnings from Roth IRAs are not taxable except in certain cases where there is a premature distribution prior to reaching age 59 1/2. Therefore, recordkeeping for this type of IRA is the fairly simple. Statements from your IRA trustee may be worth keeping in order to document contributions that were made should you ever need to take a withdrawal before age 59 1/2.
  • Education IRAs. Because the proceeds from this type of an IRA must be used for a particular purpose (qualified tuition expenses), you should keep records of all expenditures made until the account is depleted (prior to the holder's 30th birthday). Any expenditures not deemed by the IRS to be qualified expenses will be taxable to the holder.

Investments. Brokerage firm statements, stock purchase and sales confirmations, and dividend reinvestment statements are examples of documents you should keep to verify the cost basis in your securities. If you have securities that you acquired from an inheritance or a gift, it is important to keep documentation of your cost basis. For gifts, this would include any records that support the cost basis of the securities when they were held by the person who gave you the gift. For inherited securities, you will want a copy of any estate or trust returns that were filed.

Keep in mind that there are also many nontax reasons to keep tax and financial records, such as for insurance, home/personal loan, or financial planning purposes. The decision to keep financial records should be made after all factors, including nontax factors, have been considered.

With home values across the country at the highest levels seen in years, you may find that you could actually have a gain from the sale of your home in excess of the new IRS exclusion amount of $500,000 ($250,000 for single and married filing separately taxpayers). In order to determine your potential gain or loss from the sale, you will first need to know the basis of your personal residence.

With home values across the country dropping significantly from just a year ago, but still generally much higher then they had been even five years ago, you may find that you could actually have a gain from the sale of your home in excess of the new IRS exclusion amount of $500,000 ($250,000 for single and married filing separately taxpayers). In order to determine your potential gain or loss from the sale, you will first need to know the basis of your personal residence.

Note. The Housing and Economic Recovery Act of 2008 modified the home sale exclusion applicable to home sales after December 31, 2008. Under the new rule, gain from the sale of a principal residence that is attributable to periods that the home was not used as a principal residence (i.e. "non-qualifying use") will be no longer be excluded from income. A transition rule provided in the new law applies the new income inclusion rule to nonqualified use periods that begin on or after January 1, 2009. This is a generous transition rule in light of the new requirement.

The basis of your personal residence is generally made up of three basic components: original cost, improvements, and certain other basis adjustments.

Original cost

How your home was acquired will need to be considered when determining its original cost basis.

Purchase or Construction. If you bought your home, your original cost basis will generally include the purchase price of the property and most settlement or closing costs you paid. If you or someone else constructed your home, your basis in the home would be your basis in the land plus the amount you paid to have the home built, including any settlement and closing costs incurred to acquire the land or secure a loan.

Examples of some of the settlement fees and closing costs that will increase the original cost basis of your home are:

• Attorney's fees,
• Abstract fees,
• Charges for installing utility service,
• Transfer and stamp taxes,
• Title search fees,
• Surveys,
• Owner's title insurance, and
• Unreimbursed amounts the seller owes but you pay, such as back taxes or interest; recording or mortgage fees; charges for improvements or repairs, or selling commissions.

Gift. If you acquired your home as a gift, your basis will be the same as it would be in the hands of the donor at the time it was given to you. However, the basis for loss is the lesser of the donor's adjusted basis or the fair market value on the date you received the gift.

Inheritance. If you inherited your home, your basis is the fair market value on the date of the deceased's death or on the "alternate valuation" date, as indicated on the federal estate tax return filed for the deceased.

Divorce. If your home was transferred to you from your ex-spouse incident to your divorce, your basis is the same as the ex-spouse's adjusted basis just before the transfer took place.

Improvements

If you've been in your home any length of time, you most likely have made some home improvements. These improvements will generally increase your home's basis and therefore decrease any potential gain on the sale of your residence. Before you increase your basis for any home improvements, though, you will need to determine which expenditures can actually be considered improvements versus repairs.

An improvement materially adds to the value of your home, considerably prolongs its useful life, or adapts it to new uses. The cost of any improvements can not be deducted and must be added to the basis of your home. Examples of improvements include putting room additions, putting up a fence, putting in new plumbing or wiring, installing a new roof, and resurfacing your patio.

Repairs, on the other hand, are expenses that are incurred to keep the property in a generally efficient operating condition and do not add value or extend the life of the property. For a personal residence, these costs cannot be do not add to the basis of the home. Examples of repairs are painting, mending drywall, and fixing a minor plumbing problem.

Other basis adjustments

Additional items that will increase your basis include expenditures for restoring damaged property and assessing local improvements. Some common decreases to your home's basis are:

Recordkeeping

In order to document your home's basis, it is wise to keep the records that substantiate the basis of your residence such as settlement statements, receipts, canceled checks, and other records for all improvements you made. Good records can make your life a lot easier if the IRS ever questions your gain calculation. You should keep these records for as long as you own the home. Once you sell the home, keep the records until the statute of limitations expires (generally three years after the date on which the return was filed reporting the sale)

What do amounts paid for new swimming pools, Lamaze classes, lunches with friends, massages, and America Online fees have in common? All of these costs have been found to be legitimate tax deductions under certain circumstances. As you gather your information for the preparation of your tax return, it may pay to take a closer look at the items you spent money on during the year.

What do amounts paid for new swimming pools, Lamaze classes, lunches with friends, massages, and America Online fees have in common? All of these costs have been found to be legitimate tax deductions under certain circumstances. As you gather your information for the preparation of your tax return, it may pay to take a closer look at the items you spent money on during the year.

Medical Expenses

Medical expenses that you pay during the tax year for yourself, your spouse, and your dependents are deductible to the extent the total exceeds 7.5% of your adjusted gross income. This limitation can be hard to reach if you claim only medical insurance premiums and the co-pay on your kid's doctors' visits. Keep these potential deductions in mind as you tally up this year's medical expenses:

To maximize your deduction, try to bunch your medical expenses into one year to exceed the 7.5% limit. For example, schedule costly elective medical and dental treatments to be performed and billed in the same tax year.

Taxes Paid

Many of the taxes that you pay such as real estate taxes for your home, state and local taxes, and auto registration fees are deductible as itemized deductions on your return. Don't forget these:

Interest Expense

Although in recent years Congress has made the tax laws regarding interest deductions more strict, much of the interest that you pay during the year is still deductible. For interest paid to be deductible, you must be legally responsible for the underlying debt and the debt must result from a valid debtor-creditor relationship. While gathering your home mortgage interest numbers, dig a little deeper to get this inf

Since personal interest paid on credit cards and other unsecured loans is not deductible, it may be wise to make that interest deductible by paying off that debt with a home-equity loan. Interest on home-equity loans of up to $100,000 is generally deductible on your return.

Miscellaneous Expenses

Miscellaneous itemized deductions such as unreimbursed employee business expenses and tax preparation fees are deductible to the extent that the total of all of these expenses is more than 2% of your adjusted gross income. Here's a few more to add to the list:

Take the time this year to evaluate all of your expenditures made last year; you may be pleasantly surprised by what you find.

Biweekly mortgage prepayment plans are popular in the mortgage lending industry. These plans tout substantial interest savings and shortened loan terms by making two smaller mortgage payments each month instead of one large payment. Is this type of program right for you? Is a formal plan necessary?

How does it work? Once the plan has been established, a person makes biweekly payments (equal to half of their usual monthly mortgage payment) to the plan operator. This means that a person would make 26 payments instead of the usual 12, effectively making one additional mortgage payment for the year. At the end of the year, the plan operator sends the extra money paid in during the year to the borrower's lender to be applied towards principal.

How much does it cost? Formal prepayment plans typically charge a one-time membership fee of between $300-400. In addition, the plan operator will charge you a service fee of between $1-4 on each payment.

Will it really save me money? Definitely. For example, if you are currently making 12 monthly payments of $665, or $7,980 a year, on your 30-year mortgage, with a formal prepayment plan, you would make 26 biweekly payments of $332.50, or pay $8,645 annually. As a result, total interest paid over the life of the loan would shrink by $34,130 and the loan term would shorten to less than 24 years. But don't forget the annual membership fees and biweekly service charges: these could cost you up to $2,000 over the term of your loan (even after taking into consideration the shortened loan term).

Are there other options? Do it yourself. You can devise your own prepayment plan. This plan does not have to be complicated: take your current monthly payment, divide it by 12 and send the extra amount in with your regular monthly payment. Or just send in one extra payment at the end of the year. You will still reap the benefits without paying any extra administrative fees or getting stuck in a plan you can't commit to for the long term. For example, with a 30-year fixed mortgage for $100,000 at a 7 percent interest rate, a borrower would have monthly principal and interest payments of about $665, and pay $139,508 in interest over the life of the loan. By adding $25 a month, the same borrower could shorten the term by just over three years and save about $18,214 in interest. Sending in even more, say an extra $200 every month, would save $72,695 in interest, and the loan would be paid off in about 16 years. And you've avoided paying the extra fees of almost $2,000.

A couple things to consider before starting any prepayment plan:

We all know to include the amount shown on our Form W-2 as taxable income on our Form 1040, but how do you treat those other items of income, such as severance pay, lawsuit settlements, and disability payments, that occur less frequently?

Severance pay. Amounts you receive as severance pay are taxable. A lump-sum payment for cancellation of your employment contract is income in the tax year you receive it and must be reported with your other salaries and wages.

Allocated tips. Certain employers must allocate tips if the percentage of tips reported by employees falls below a required minimum percentage of gross sales. To "allocate tips" means to assign an additional amount as tips to each employee whose reported tips are below the required percentage. All tips you receive are taxable. If you do not have adequate records for your actual tips, you must include the allocated tips shown on your Form W-2 as additional tip income on your return.

Reinvested dividends. Dividend reinvestment plans let you choose to use your dividends to buy (through an agent) more shares of stock in the corporation instead of receiving the dividends in cash. If you are a member of this type of plan and use your dividends to buy more stock at a price equal to its fair market value, you must report the dividends as income. If you are a member of a dividend reinvestment plan that lets you buy more stock at a price less than its fair market value, you must report as income the fair market value of the additional stock on the dividend payment date.

State tax refund. If you itemized deductions on your federal tax return for a prior year, and received a refund of state or local taxes in the subsequent, you may have to include all or part of the refund as income on your tax return for the year of receipt. If you did not itemize your deductions on your federal tax return for the same year as the related refund year, do not report any of the refund as income.

Alimony payments. Alimony, separate maintenance, and similar payments from your spouse or former spouse are taxable to you in the year received, unless agreed upon by both of you in writing.

Retirement benefits. If you receive retirement benefits in the form of pension or annuity payments, the amounts you receive may be fully taxable, or partly taxable, depending on many factors including employee contributions. If you cannot use the Simplified General Rule, you can ask the IRS to figure the tax-free part of your pension under the General Rule. If your annuity starting date is after November 18, 1996, you generally cannot use the General Rule for annuity payments from a qualified plan.

Rent income from a vacation home. If you use a dwelling as a home and rent it for fewer than 15 days during the year, do not report any of the rental income and do not deduct any expenses as rental expenses. In this case, you may deduct some expenses on Schedule A (Form 1040), such as mortgage interest, property taxes, and any casualty losses.

Gambling winnings. Gambling winnings are fully taxable and must be reported on your tax return. As an offset, gambling losses may be claimed as a miscellaneous itemized deduction only to the extent of gambling winnings.

Bartering income. Bartering occurs when you exchange goods or services without money exchanging. The goods or services exchanged have a dollar or fair market value, and this value must be included in the income of both parties.

Academic scholarships. Qualified scholarships and fellowships are treated as tax- free amounts if all of the following conditions are met: you are a candidate for a degree at an educational institution; amounts you receive as a scholarship or fellowship are used for tuition and fees required for enrollment or attendance at the educational institution, or for books, supplies, and equipment required for courses of instruction; and the amounts received are not a payment for your services.

Child support payments. Some types of income taxpayers receive are not taxable and child support is one of them. When you total your gross income to see if you are required to file a tax return, do not include your nontaxable income.

Social Security benefits. If your "provisional income" is above a certain base amount, a portion of your Social Security benefits (up to 85%) may be taxable. "Provisional income" is your modified adjusted gross income plus one-half of the Social Security benefits.

Gifts, bequests, and inheritances. Generally, property you receive as a gift, bequest, or inheritance is not included in your income. However, if property you receive this way later produces income such as interest, dividends, or rentals, that income is taxable to you. If you inherited an Individual Retirement Arrangement (IRA), though, special rules apply.

Stock options. If you are granted a non-statutory stock option, the amount of income to include and the time to include it depend on whether the fair market value (FMV) of the option can be readily determined. If your stock option is granted under an employee stock purchase plan, you do not include any amount in your gross income as a result of the grant or exercise of your option. You report income or loss when you sell the stock that you purchased by exercising the option.

Lawsuit settlements, For court awards and damages, to determine if settlement amounts you receive by compromise or judgement must be included in your income, you must consider the item that the settlement replaces. Include the following as ordinary income: interest on any award; compensation for lost wages or lost profits in most cases; punitive damages; amounts received in settlement of pension rights (if you did not contribute to the plan); damages for certain patent/copyright infringement and breach of contract; any recovery under the Age Discrimination in Employment Act. Do not include in your income compensatory damages for the following: personal physical injury or physical sickness (whether received in a lump sum or installments); damages to your character; alienation of affection; surrender of custody of a minor child.

Prizes and awards. If you win a prize in a lucky number drawing, television or radio quiz program, beauty contest, or other event, you must include it in your income. For example, if you win a $100 prize in a photography contest, you must report this income on your tax return in the year received.

Long-term disability. Generally, you must report as income any amount you receive for your disability through an accident or health insurance plan if paid for by your employer. If both you and your employer pay for the plan, only the amount you receive for your disability that is due to your employer's payments is reported as income. If you pay the entire cost of a health or accident insurance plan, do not include any amounts you receive for your disability as income on your tax return. If you pay the premiums of a health or accident insurance plan through a cafeteria plan, and the amount of the premium was not included as taxable income to you, the premiums are considered paid by your employer.

Sick pay and short-term disability. Amounts you receive from your employer while you are sick or injured are part of your salary or wages. You must include in your income sick pay from any of the following: a welfare fund; a state sickness or disability fund; an association of employers or employees; an insurance company, if your employer paid for the plan.

Long-term care insurance contracts. Payments you receive from qualified long-term care insurance contracts are generally excluded from income as amounts received for personal injury or sickness. Additionally, certain payments received under a life insurance contract on the life of a terminally or chronically ill individual (accelerated death benefits) can be excluded from income.

Q. What is Generally Accepted Accounting Principles (GAAP)? A. It's the difference between accounting theory and practice.

This sign was seen on a tobacco store: "We collect taxes -- federal, state, and local. We also sell cigarettes as a sideline."

A fine is a tax for doing wrong. A tax is a fine for doing well!

Client: What's the difference between the short form and the long form?

Accountant: If you use the short form, the IRS gets all your money. If you use the long form, I get all your money!

"A taxpayer is someone who works for the federal government but who doesn't have to take a civil service examination." Ronald Reagan

An accountant who is traveling through Europe is asked, "What do the colors of your flag stand for?"

The accountant replies: "Taxes. We get red when we think about 'em, white when we find out how much we owe, and blue when we pay up."

Question: How many tax advisors does it take to change a light bulb?

Answer: There's a tax-deductible convention in Honolulu that answers this very question!

What did the psychiatrist say to the IRS agent?

"Stop pitying yourself. Everyone on earth does NOT hate you. Maybe everyone in the US does, but there's no way that everyone on earth feels that way!"

What's the difference between an optimist, a pessimist, and an accountant?

To the optimist, the glass of water is half full. To the pessimist, the glass of water is half empty. To the accountant, the glass of water is twice as big as it needs to be.

'Every tax question has an answer that is straightforward, simple and WRONG!'

Two accountants are heard passionately arguing about "Capital Punishment." Both agree: the income tax is murder!"

A professor of taxation delivers a highly detailed, brilliant lecture drawing the distinction between tax avoidance and tax evasion. He then asks his brightest student, "Tell us succinctly what the difference is between tax avoidance and tax evasion." The student replies: "Jail."

How many accountants does it take to change a light bulb? Two, one to change the light bulb and one to check that it was done within the given budget.

"Like mothers, taxes are often misunderstood, but seldom forgotten." (Lord Bramwell)

'Trial Balance' really means 'TRY to balance'

'Return on Investments is optimistic. Return of investments is realistic.'

The tax accountant just finished reading the tale of Cinderella to his daughter. The little girl loved the story and asked, "Daddy, when the pumpkin becomes a golden coach, would that be income or a capital gain?"

What's the difference between a taxidermist and a tax collector? The taxidermist takes the skin, but the tax collector takes it all!

What does CPA stands for?

"Computerized Personal Assistant!" "Cleaning, Pressing, and Alterations" "Cut, Paste, and Assemble" "Can't Pass Again"

"Can't Promise Anything"

"Can't Please Anyone"

"Couldn't Pass Accounting"

"Constantly Protecting ASSets"

"Car Parking Attendant"

I(nternal) R(evenue) S(ervice): We've got what it takes to take what you've got.

Dear IRS: Enclosed is my 1999 tax return and payment. Please take note of the attached newspaper article and you will see that the Pentagon is paying $171.50 for hammers and NASA has paid $600 for a toilet seat. Please find enclosed four toilet seats (value $2,400) and six hammers (value $1,029). This brings my total payment to $3,429. Please note the overpayment of $22 and apply it to the Presidential Election Fund, as noted on my return. Might I suggest you send the above-mentioned fund a 1.5-inch screw. (See attached article: HUD paid $22 for a 1.5-inch Phillips head screw.) It has been a pleasure to pay my tax bill this year, and I look forward to paying it again next year.

Did you ever notice that an expression that starts with "only" and ends with "million" most often involves government spending?

A visitor from Holland was chatting with his American friend and was jokingly explaining about the red, white and blue in the Netherlands flag. "Our flag symbolizes our taxes," he said. "We get red when we talk about them, white when we get our tax bill, and blue after we pay them." "The same with us," the American said, "only we see stars, too!

A man walked into the tax collector's office and sat down and smiled at everyone. "May I help you?" said the clerk in charge. "No," said the man. "I just wanted to meet the people I have been working for all these years."

Pastor Thurman answers his phone. "Hello, is this Pastor Thurman?" "It is" "This is the IRS. Can you help us?" "I can." "Do you know a Pete Kloppers?" "I do." "Is he a member of your congregation?" "He is." "Did he donate $10,000?" "He will."

A stockbroker received notice from the IRS that he was being audited. He showed up at the appointed time and place with all his financial records, then sat for what seemed like hours as the accountant pored over them. Finally the IRS agent looked up and commented, "You must have been a tremendous fan of Sir Arthur Conan Doyle." "Why would you say that?" asked the broker. "Because you've made more brilliant deductions on your last three returns than Sherlock Holmes made in his entire career."

The owner of a small deli was being questioned by an IRS agent about his tax return. He had reported a net profit of $80,000 for the year. "Why don't you people leave me alone?" the deli owner said. "I work like a dog, everyone in my family helps out, the place is only closed three days a year. And you want to know how I made $80,000?" "It's not your income that bothers us," the agent said. "It's these deductions. You listed six trips to Bermuda for you and your wife." "Oh, that," the owner said smiling. "I forgot to tell you -- we also deliver."

What's an extroverted accountant? One who looks at your shoes while he's talking to you instead of his own.

What's an insolvency practitioner? Someone who arrives after the battle and bayonets all the wounded.

Why did the auditor cross the road? Because he looked in the file and that's what they did last year.

What does an accountant do for birth control? He talks about his business.

There are three kinds of accountants in the world. Those who can count and those who can't.

How do you drive an accountant completely insane? Tie him to a chair, stand in front of him and fold up a road map the wrong way.

What do accountants suffer from that ordinary people don't? Depreciation.

An accountant is someone who knows the cost of everything and the value of nothing.

What's the definition of an accountant? Someone who solves a problem you didn't know you had in a way you don't understand.

How do you know you've met a good tax accountant? He has a loophole named after him.

Why did the accountant fall asleep before he died? His life flashed before his eyes.

RE: WARNING--Circulation of Fictitious IRS Forms and Bank Letters

Attached are samples of a fictitious document that is not a genuine IRS Form and a fraudulent letter addressed to a bank customer purporting to be from the customer's bank.

Some of you may be the unwitting subjects of a new fraud scheme that uses fictitious IRS Forms and fraudulent bank correspondence. These incidents are not limited to the customers of small community banks. Documents like those attached are being circulated nationwide in an attempt to steal your identity and money by having you disclose personal and banking information.

Accordingly, when the perpetrator of the fraud contacts your bank in person, telephonically or through electronic means, they have all the necessary customer information to appear credible.

You should be advised if you have filled in and returned the fictitious form via the fax number, mail service, or any other means to promptly notify all financial institutions with whom you do business. I also suggest that you advise your customers to immediately do the following:

1. Contact the fraud department of each of the three major credit bureaus and report that his/her identity has been stolen. Also, consider placing a "fraud alert" on your file and request that no new credit be granted without prior approval.

Addresses:

Equifax
PO Box 740241
Atlanta, GA 30374-0241

Order Credit Report 1-800-685-1111
Report Fraud 1-800-525-6285

Experian
P.O. Box 2104
Allen, TX 75013

Order Credit Report 1-800-397-3742
Report Fraud 1-800-397-3742

Trans Union
760 Sproul Road
PO Box 390
Springfield, PA 19064-0390

Order Credir Report 1-800-916-8800
Report Fraud 1-800-680-7289

2. For any accounts that have been fraudulently accessed or opened, contact the security department of each affected creditor or financial institution. Consider closing these accounts. Also, on any new accounts you open, consider using a password, but do not use your mother's maiden name.

3. File a report with your local police department or the police where the identity theft took place. Retain a copy of the police report in case your bank, credit card company, or others need proof of the crime at a later date.

4. Contact the Internal Revenue Service to report the incident using the following toll-free hotline number:
1-800-829-0433.

If you have received this fictitious form but did not complete and return it, any information which you have concerning this matter should be brought to the attention of the Internal Revenue Service at the same toll-free number listed above.

Additional sources of information for you on what to do if you are a victim of identity theft, and the precautions to take to prevent becoming a victim, can be found at the Federal Trade Commission's Web site:

http://www.consumer.gov/idtheft/victim.htm

and the OCC's Web site:

http://www.occ.treas.gov/idtheft.pdf

If you have additional questions, please contact
the supervisory office responsible for your bank or:

Mail: Office of the Comptroller of the Currency
Enforcement & Compliance Division
250 E Street, SW, Washington, DC 20219
Fax: (202) 874-5301
Internet: http://www.occ.treas.gov
E-mail: alertresponses@occ.treas.gov

The fictitious letter and form may be viewed and downloaded from the following site:

Letter:

Sample Letter

Form:

Sample Form