No penalty for failure to pay estimated tax will apply to an individual whose tax due is less than $1,000 for the year. Also, a U.S. citizen or resident need not pay estimated tax if he or she had no tax liability for the preceding 12-month tax year. Individuals who do not qualify for these two exceptions may generally avoid the penalty for failure to pay estimated tax by paying at least 90% of the current year's tax liability or paying 100% of the prior year's tax liability. A special rule applies to individuals with adjusted gross income for the previous tax year in excess of $150,000 ($75,000 for married individuals filing separately). For these individuals the prior safe harbor percentage if 110% of the prior year’s tax liability for both the Internal Revenue Service and State of Michigan. The required payments may be made either through withholding or generally payment of equal quarterly installments. In the event that your income has increased from the prior year, it is generally best to use the prior year safe harbor rule to keep you "safe" from penalty. You may have a balance due with your income tax return, but you have kept your money working for you rather than the IRS.
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Every state with a sales tax has a companion tax for purchases outside the state. In Michigan, that tax is called the "use tax". While many Michigan residents are not aware of the use tax, it has been on the books since the 1930's. The law says that you owe tax on purchases from companies that do not collect Michigan sales or use tax. This includes mail order and Internet purchases as well as purchases while traveling in foreign countries and other states. You do not have to pay Michigan use tax if (1) Michigan sales or use tax was paid to the seller, (2)The seller charged another state's sales tax of at least 6% on purchases made while traveling in that state, or (3) Purchases made outside Michigan in a calendar month did not exceed $10. Examples of purchases subject to use tax include (1) Out-of-state catalog, Internet or mail order purchases ( L.L. Bean, Amazon.com), and (2) Purchases made outside of Michigan (furniture, computers, appliances). An out-of-state business that does not have a store, warehouse, or employees in Michigan does not have to register and collect Michigan use tax. However, many may voluntarily collect use tax for their customers.

Beginning with tax year 1999, the use tax could be paid on MI-1040 Michigan Income Tax Return. The use tax due can be calculated by multiplying purchases under $1,000, if you know the actual amount, by 6% (.06) or for purchases under $1,000, if you have incomplete or inaccurate receipts, you may use the Use Tax Table that is provided in the Michigan Tax Instruction Booklet. In all cases, if a single purchase exceeds $1,000, you must pay 6% on those purchases. Maintaining these records throughout the year will make this calculation easier.
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The Michigan Department of Treasury is holding millions of dollars in abandoned and unclaimed property belonging to Michigan residents. To check if the Treasury Department is holding funds for you or your family, visit their web site by clicking Here.

A Little Short on April 15th?

For those taxpayers who find themselves short of funds to pay that tax bill on April 15th here are some options that may help you

Take out a loan. At first this may not sound like an appealing option but consider this: The IRS late-filing penalty is 5% per month on the tax you owe in addition to the late-payment penalty of ½ % per month. That's 5 ½ % per month up to a maximum of 5 months. After that, the late-payment penalty continues on your outstanding balance. In addition, interest is charged on the outstanding balance at the federal short-term rate plus 3%. Depending on your circumstances, you can see how a loan might not be such a bad idea.

Of course, the best loan is an interest-free or low-interest loan from family or friends. Just keep in mind that if the loan is over $10,000 there are imputed interest issues to consider.

A personal loan from a financial institution might be another option for you, although the interest is considered personal and therefore not deductible.

Perhaps the best option for homeowners is to take out a home equity loan or a draw from a home equity line of credit. Unlike the other two choices, the interest paid on this loan would be deductible on your individual tax return.

Use your credit card. You could also charge your tax liability for a non-deductible fee of 2 ½ % to 4%. This fee combined with your credit card interest rate is an expensive choice unless you pay your balance within a month.

If none of these options suit you the important thing to remember is that if you are able to file your return on April 15th do so. If not, file an extension and avoid the 5% late-filing penalty and work out an installment agreement with Uncle Sam.
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Taxpayers are no longer be able use their discretion to determine the charitable deduction for a donated vehicle. Lawmakers have long believed that taxpayers have been claiming inflated deductions for their donated vehicles and Congress has recently cracked down on this abuse in the 2004 Jobs Act. Under the new tax law, the deduction will be limited to the actual sales price of the vehicle when sold by the charity, with some exceptions.

• Example: Ann decides to donate her old car to a local charitable organization. Based on the condition of the vehicle, she looks up the vehicle’s “Blue Book” value and determines that the car is worth $1,500. On August 1, 2005, she donates the car. On September 30, 2005, the charity sells the vehicle for $800. Under the old rules, Ann would have claimed a $1,500 deduction. Under the current rules, the deduction will be limited to $800, the gross proceeds received by the charitable organization from the sale of Ann’s vehicle.

An important exception to this rule exists if the charitable organization intends to “significantly” use the vehicle in its charitable activities or make “major” improvements before selling it. In either of these cases, the taxpayer’s donation is the vehicle’s FMV before any improvements.

The charitable organization must provide a written acknowledgement to the donor on a timely basis. The acknowledgement must include the following:

• Donor’s name and TIN;
• Vehicle identification number; and
• Date of contribution.

If the vehicle is sold, the acknowledgement must include the date of the sale and the gross proceeds from the sale. Similarly, the organization must identify if it intends to use or improve the vehicle. The charitable organization must also report the donation to the IRS on Form 1098-C. The taxpayer must include a copy of the acknowledgement with their tax return or the deduction will be disallowed.
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Kiddie Tax Alert!

There were significant changes to the “Kiddie Tax” in 2008 and it is still in effect in 2009. Your dependent child age 18 or under or under 24 if the child is a fill time student at year-end, who has unearned income (typically from investments) over $1,900 may be taxed at the parent’s higher tax rate.

If the following four requirements are met, the excess unearned income (over $1,900) will be taxed at the parent’s higher tax rate.

1. One or both of the child’s parents are alive at the year-end and are in a higher income tax bracket.
2. The child doesn’t file a joint income tax return.
3. The child’s unearned income exceeds $1,900 for 2009.
4. Your child is-
   
   • Age 18 or under at the end of the year and doesn’t have earned income that exceeds 50% of his or her support.
   • Age 19-23 at the end of the year, is a full time student and doesn’t have earned income that exceeds 50% of his or her support.

Tax Planning Advice

There are ways to plan ahead that may reduce this “Kiddie Tax”. Invest in a 529 College Savings Plan. This investment income is not subject to the additional tax; however, these funds must be used for higher education to receive the desirable tax free status. Another option for investing for your child is to invest in tax-exempt municipal bonds or growth oriented stocks.

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New for 2009

New for 2009 - Invdividuals

Refundable Making Work Pay Credit. The Stimulus Act establishes the new Making Work Pay credit for 2009 and 2010. The credit amount equals the lesser of 6.2% of earned income or $400 ($800 for a married joint-filing couple). Since the credit is refundable, it can offset your entire federal income tax liability.

The credit is phased out (reduced or eliminated) by 2% of your Modified Adjusted Gross Income (MAGI) in excess of the applicable thresholdÑ$75,000 for an individual taxpayer or $150,000 for a married joint-filing couple. The $400 individual credit is fully phased out when MAGI reaches $95,000 and the $800 married joint-filing credit is fully phased out when joint MAGI reaches $190,000.

To get credit dollars into the economy quickly, the IRS has already released new federal employment tax withholding tables. The new tables will allow employees to collect credits in advance in the form of lower payroll tax withholdings for the rest of 2009. Self-employed individuals can collect credits in advance by reducing their quarterly estimated tax payments.

One-time $250 Economic Recovery Payment for Eligible Federal Program Recipients. The new law provides a one-time $250 Economic Recovery Payment to the following government program recipients.

• Adults eligible for Social Security benefits.
• Individuals of any age who are eligible for Supplemental Social Security Income (SSI) benefits (other than those who receive them while in a Medicaid institution).
• Individuals of any age who are eligible for Supplemental Social Security Income (SSI) benefits (other than those who receive them while in a Medicaid institution).
• Adults eligible for veteranÕs compensation or pension benefits.

To receive the $250 payment, you must have been eligible for at least one of these programs for at least one month during the three-month period that includes November and December of 2008 and January of 2009. Congress has ordered these government agencies to get these payments underway as soon as possible, but they must begin no later than the middle of June.

One-time $250 Refundable Credit for Eligible Government Retirees. The Stimulus Act also provides a one-time $250 credit to certain government retirees who wonÕt qualify for the Economic Recovery Payment benefit. The money is delivered in the form of a refundable tax credit for 2009 of $250 for each eligible individual or $500 for a married joint-filing couple when both spouses are eligible individuals. To be eligible, you must pass all of the following three tests.

1. During the 2009 tax year, you receive any pension or annuity benefits for service as any employee of the U.S. or any state that is based on wages that were not subject to FICA tax withholding at the time they were paid.
2. You are ineligible for the aforementioned Economic Recovery Payment benefit.
3. You report a Social Security Number (SSN) on your 2009 Form 1040. (If married, either you or your spouse must report an SSN on the return.)

Temporary Sales Tax Deduction for Buyers of New Vehicles and Motor Homes. The new law adds a new deduction for state and local sales and excise taxes paid on new (not used) (1) passenger autos and light trucks with gross vehicle weight ratings of 8,500 pounds or less, (2) motorcycles, and (3) motor homes purchased between 2/17/09 and 12/31/09. However, the deduction is limited to taxes allocable to the first $49,500 of the purchase price. The amount will be claimed as an additional itemized deduction if you itemize. If you donÕt itemize, it will be added to your standard deduction.

The new standard deduction add-on or additional itemized deduction (whichever applies to you) is subject to phase-out provisions. The phase-out range is between MAGI of $125,000 and $135,000 for unmarried individuals and between MAGI of $250,000 and $260,000 for married individuals who file separately.

Liberalized Higher Education Credit. For 2009 and 2010, the Stimulus Act includes taxpayer-friendly modifications to the Hope Scholarship higher education tax credit. (The Hope credit is also temporarily renamed the American Opportunity credit, but we will stick to calling it the modified Hope credit for the sake of continuity.) Under the revamped rules, the modified Hope credit equals 100% of the first $2,000 of qualified post-secondary education expenses paid during the year plus 25% of the next $2,000. So the maximum annual credit is now $2,500. Under prior law, the maximum Hope credit for 2009 was only $1,800, and it probably would have been about the same for 2010.

The modified Hope credit covers the cost of tuition, fees, and course materials (but not room and board) for the first four years of post-secondary education in a degree or certificate program. It is unavailable for a year if the student has already logged in four years worth of academic hours as of the beginning of that year. Under prior law, the Hope credit was only allowed for the first two years of post-secondary study, and the cost of course materials did not count as a qualified expense.

The modified Hope credit is subject to phase-out rules, but they are considerably more lenient than the prior-law Hope credit rules. The modified Hope credit phase-out range is between MAGI of $80,000 and $90,000 for unmarried individuals and between MAGI of $160,000 and $180,000 for married joint-filers.

The modified Hope credit can offset your entire federal income tax liability, including any AMT. In addition, up to 40% of the modified Hope credit can be a refundable credit, which means you can get some cash back after reducing your federal income tax bill to zero.

Temporary Homebuyer Credit Extended and Liberalized. Legislation passed last year established a temporary refundable tax credit for first-time homebuyers. The Stimulus Act extends the credit for five more months, to cover qualified home purchases between 1/1/09 and 11/30/09. In addition, the maximum credit amounts are slightly increased for 2009 purchases. More importantly, the requirement to repay the credit over 15 years is deleted for 2009 purchases (but not for 2008 purchases).

For a qualified home purchase between 1/1/09 and 11/30/09, the maximum credit equals the lesser of: (1) 10% of the purchase price or (2) $8,000 ($4,000 if you use married filing separate status).

Eligibility is restricted to individuals who have not owned a principal residence in the U.S. during the three-year period that ends on the home purchase date. If you are married, both you and your spouse must pass the three-year test.

Tax-free Treatment for First $2,400 of 2009 Unemployment Benefits. In general, unemployment compensation benefits count as income for federal income tax purposes. However, the Stimulus Act grants a one-year exemption for the first $2,400 of unemployment compensation received in 2009. Unemployment benefits above the $2,400 limit will still count as taxable income.

Residential Energy Credits Liberalized. The Stimulus Act liberalizes the nonrefundable personal credit for up to 30% of expenditures to install: solar water heating equipment, wind energy equipment, geothermal heat pumps, solar electricity generation equipment, or fuel cell equipment in your home. The new law also extends (through 2010) and liberalizes the separate nonrefundable personal credit for expenditures to install energy-efficient insulation, windows, doors, roofs, and heating and cooling equipment in your residence. Most importantly, the previous lifetime limit of $500 was replaced with an aggregate $1,500 cap for 2009 and 2010.

New for 2009-Businesses

Generous Section 179 Deduction Rules Extended. The Stimulus Act extends the $250,000 Section 179 first-year depreciation deduction allowance by one year, through tax years beginning in 2009. Without this change, the maximum Section 179 deduction would have been only $133,000. The new law also extends the $800,000 phase-out threshold for reduced Section 179 deductions. Without this change, the threshold would have been only $530,000.

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