Banner
March 29, 2010
C&L Value  Advisors LLC Newsletter 
Greetings!
 
The "Worker, Homeownership, and Business Assistance Act of 2009," this new law extends and generally liberalizes the tax credit for first-time homebuyers, making it a more flexible tax-saving tool. It also includes some crackdowns designed to prevent abuse of the credit. 
Also, to pay for the hiring incentives in the recently enacted "Hiring Incentives to Restore Employment Act" (the 2010 HIRE Act), Congress passed several offsetting revenue raisers, including a comprehensive set of measures to reduce offshore noncompliance by giving IRS new administrative tools to detect, deter and discourage offshore tax abuses. Here is a brief overview of the new offshore anti-abuse provisions.
Extended and liberalized homebuyer tax credit rules under the Worker, Homeownership, and Business Assistance Act of 2009
New Building Homebuyer credit basics. Before the new law was enacted, the homebuyer credit was only available for qualifying first-time home purchases after April 8, 2008, and before December 1, 2009. The top credit for homes bought in 2009 is $8,000 ($4,000 for a married individual filing separately) or 10% of the residence's purchase price, whichever is less.
 
Only the purchase of a principal residence (i.e., a main home) located in the U.S. qualifies for the credit. Vacation homes and rental properties are not eligible.
 
The homebuyer credit reduces your tax liability on a dollar-for-dollar basis. If the credit is more than the tax you owe, the difference is paid to you as a tax refund.
 
For homes bought after December 31, 2008, you must pay back the homebuyer credit if you dispose of the home or stop using it as your principal residence within 36 months of purchase.
 
The credit is subject to a phase-out based on your modified adjusted gross income (AGI) for the year of purchase. Before the new law, the credit was phased out at modified AGI between $75,000 and $95,000 ($150,000 and $170,000 for joint filers).
 
Your guide to the revised homebuyer credit. The new law makes four important changes to the homebuyer credit, the first three of which make the credit easier to claim:
 
New lease on life for the homebuyer credit. The homebuyer credit is extended to apply to a principal residence bought before May 1, 2010. The homebuyer credit also applies to a principal residence bought before July 1, 2010 by a person who enters into a written binding contract before May 1, 2010, to close on the purchase of the principal residence before July 1, 2010.
 
In general, a home is considered bought for credit purposes when the closing takes place. So the extra two months (May and June of 2010) helps buyers who find a home they like but can't close on it before May 1, 2010. They can go to contract on the home before May 1, 2010, close on it before July 1, 2010, and get the homebuyer credit (if they otherwise qualify).
 
Certain service members on extended duty outside of the U.S. get an extra year to buy a qualifying home and get the credit; they also can avoid the recapture rules under certain circumstances.
 
Current homeowners who are "long-time residents" can claim credit of up to $6,500. For purchases after November 6, 2009, you can claim the homebuyer credit if you (and, if married, your spouse) maintained the same principal residence for any period of five consecutive years during the eight years ending on the date that you buy the subsequent principal residence. For example, if you and your spouse are empty nesters who have lived in your suburban home for the past ten years, you may be eligible for the credit if you buy a house in town.
 
You don't have to sell your current home in order to qualify for a homebuyer credit on the replacement home. You can buy the replacement home to beat the new deadlines (explained above) before you sell the old home. For that matter, you can hold on to your old home in the hope of achieving a better selling price later on. However, the replacement home must be your principal residence.
 
The maximum allowable homebuyer credit for qualifying existing homeowners is $6,500 ($3,250 for a married individual filing separately), or 10% of the purchase price of the subsequent principal residence, whichever is less.
 
The homebuyer credit is available to higher-income taxpayers. For purchases after November 6, 2009, the homebuyer credit phases out over higher levels of modified AGI, making the credit available to a bigger pool of buyers. For individuals, the phaseout range is between $125,000 and $145,000, and for those filing a joint return, it's between $225,000 and $245,000.
 
New home-price limit for the homebuyer credit. For purchases after November 6, 2009, the homebuyer credit can't be claimed for a home if its purchase price exceeds $800,000. It's important to note that there is no phaseout mechanism. A purchase price that exceeds the $800,000 threshold by even a single dollar will cause the loss of the entire credit.
 
The new purchase price limitation applies whether you are buying a first-time principal residence or are a long-time homeowner purchasing a replacement principal residence.
 
Other homebuyer credit changes. The new law includes a number of new anti-abuse rules that make it tougher to claim the homebuyer credit. The most important of these are as follows:
 
          Beginning with the 2009 tax return, the homebuyer credit can't be claimed unless the taxpayer attaches to the return a properly executed copy of the settlement statement used to complete the purchase of the qualifying residence.
 
          For purchases after November 6, 2009, the homebuyer credit can't be claimed unless the taxpayer is at least 18 years old as of the date of purchase. A married person is treated as meeting this requirement if he or his spouse is at least 18 years old.
          For purchases after November 6, 2009, the homebuyer credit can't be claimed by a taxpayer who can be claimed as a dependent by another taxpayer for the tax year of purchase. It also can't be claimed for a home bought from a person related to the buyer's spouse.
          The new law makes it easier for the IRS to go after questionable homebuyer credit claims without initiating a full-scale audit
 
What hasn't changed. The tax law still gives you the extraordinary opportunity to get your hands on homebuyer credit cash without waiting to file your tax return for the year in which you buy the qualifying principal residence. Thus, if you buy a qualifying principal residence in 2009 you can treat the purchase as having taken place on December 31, 2008, file an amended return for 2008 claiming the credit for that year, and get your homebuyer credit cash quickly via a tax refund. Similarly, you can treat a qualifying principal residence bought in 2010 (before the new deadlines) as having taken place on December 31, 2009, and file an original or amended return for 2009 claiming the credit for that year.
 
What also hasn't changed is the need for getting expert tax advice in negotiating through the twists and turns of the beefed-up homebuyer credit.
In This Issue
Extended & liberalized homebuyer tax credit rules...
Offshore anti-abuse provisions in the 2010 HIRE Act
Join Our Mailing List!
 Offshore anti-abuse provisions in the 2010 HIRE Act
Conservation

Increased disclosure of beneficial owners

Reporting on certain foreign bank accounts. The Act imposes a 30% withholding tax on certain income from U.S. financial assets held by a foreign institution unless the foreign financial institution agrees to disclose the identity of any U.S. individual with an account at the institution (or the institution's affiliates) and to annually report on the account balance, gross receipts and gross withdrawals/payments from such account. Foreign financial institutions would also be required to agree to disclose and report on foreign entities that have substantial U.S. owners. Congress expects that foreign financial institutions will comply with these disclosure and reporting requirements in order to avoid paying this withholding tax. These provisions are effective generally for payments made after 2012.

 

Reporting on owners of foreign corporations, foreign partnerships and foreign trusts. The Act requires foreign entities to provide withholding agents with the name, address and tax identification number of any U.S. individual that is a substantial owner of the foreign entity. Withholding agents are to report this information to the U.S. Treasury Department. The Act exempts publicly-held and certain other foreign corporations from these reporting requirements and provides the Treasury Department with the regulatory authority to exclude other recipients that pose a low risk of tax evasion. Any withholding agent making a withholdable payment to a foreign entity that does not comply with these disclosure and reporting requirements is required to withhold tax at a rate of 30%. These provisions are effective generally for payments made after 2012.

 

Extending bearer bond tax sanction to bearer bonds designed for foreign markets. Bearer bonds (i.e., bonds that do not have an official record of ownership) allow individuals seeking to evade taxes with the ability to invest anonymously. Recognizing the potential for U.S. individuals to take advantage of bearer bonds to avoid U.S. taxes, Congress took a number of steps in the 1980's to eliminate bearer bonds in the United States. First, they prevented the U.S. government from issuing bearer bonds that would be marketed to U.S. investors. Second, they imposed sanctions on issuers of bearer bonds that could be purchased by U.S. investors. The Act extends many of these sanctions to bearer bonds that are marketed to foreign investors and prevents the U.S. government from issuing any bearer bonds. These provisions apply to debt obligations issued after the date which is two years after the new law's enactment date.

 

Foreign financial asset reporting

Disclosure of information with respect to foreign financial assets. The new law requires individuals to report offshore accounts and other foreign financial assets with values of $50,000 or more on their tax returns. Individuals who fail to make the required disclosures are subject to a penalty of $10,000 for the tax year; an additional penalty can apply if Treasury notifies an individual by mail of the failure to disclose and the failure to disclose continues. These provisions apply for tax years beginning after the new law's enactment date.

 

Penalties for underpayments attributable to undisclosed foreign financial assets. For tax years beginning after the new law's enactment date, the Act imposes a penalty equal to 40% of the amount of any understatement that is attributable to an undisclosed foreign financial asset (i.e., any foreign financial asset that a taxpayer is required to disclose and fails to disclose on an information return).

 

New 6-year limitations period. For returns filed after the new law's enactment date as well as for any other return for which the assessment period has not yet expired as of the new law's enactment date, the Act imposes a new six-year limitations period for omissions of items from a tax return that exceed $5,000 and are attributable to one or more reportable foreign assets. The Act also clarifies that the statute of limitations does not begin to run until the taxpayer files the information return disclosing the taxpayer's reportable foreign assets.

 

Other disclosure provisions

New reporting rule for PFICs. Effective on the new law's enactment date, activities with respect to passive foreign investment companies (PFICs) are subject to a new reporting rule. Unless otherwise provided by IRS, each U.S. person who is a shareholder of a PFIC must file an annual information return containing such information as IRS may require. A person that meets this new reporting requirement could, however, also have to meet the new reporting rule requiring disclosure of information with respect to foreign financial assets (see above). It is anticipated that IRS will exercise its regulatory authority to avoid duplicative reporting.

 

Electronic filing. For returns the due date for which (determined without regard to extensions) is after the new law's enactment date, the Act creates an exception to the general annual 250 returns threshold for electronic filing: IRS will be permitted to issue regs requiring filing on magnetic media for any return filed by a financial institution with respect to any taxes withheld by it for which it is personally liable. Thus, IRS will be authorized to require a financial institution to electronically file returns with respect to any taxes withheld by the financial institution even though the financial institution files less than 250 returns during the year.

 

Provisions related to foreign trusts

Clarifications with respect to foreign trusts. Under present law, a U.S. person is treated as the owner of the property transferred to a foreign trust if the trust has a U.S. beneficiary. Under current Treasury regulations, a foreign trust is treated as having a U.S. beneficiary if any current, future or contingent beneficiary of the trust is a U.S. person. Notwithstanding this requirement, some taxpayers have taken positions that are contrary to this regulation. In order to enhance compliance with this regulation, the Act codifies this regulation into the statute. This provision is effective on the new law's enactment date. The Act also clarifies that a foreign trust will be treated as having a U.S. beneficiary if (1) any person has discretion to determine the beneficiaries of the trust unless the terms of the trust specifically identify the class of beneficiaries and none of those beneficiaries are U.S. persons or (2) any written oral or other agreement could result in a beneficiary of the trust being a U.S. person. As a final clarification, the Act clarifies that the use of any trust property will be treated as a payment from the trust in the amount of the fair market value of such use.

 

Presumption with respect to transfers to foreign trusts. For transfers of property after the new law's enactment date, the Act provides that if a U.S. person directly or indirectly transfers property to a foreign trust (other than a trust established for deferred compensation or a charitable trust) IRS may treat the trust as having a U.S. beneficiary unless such person can demonstrate to the satisfaction of IRS that under the terms of the trust, (1) no part of the trust may be paid or accumulated during the year for the benefit of a U.S. person, (2) that if the trust were terminated during the year, no part of the trust could be paid to a U.S. person (3) and that such person provides any additional information as IRS may require with respect to such transfer.

 

Minimum penalty with respect to failure to report on certain foreign trusts. Under pre-Act law, a taxpayer that fails to file an information return with respect to certain transactions involving foreign trusts (e.g., the creation of a foreign trust, the transfer of money or property to a foreign trust, or the death of a U.S. owner of a foreign trust) is subject to a penalty of 35% of the amount required to be disclosed on such return. If IRS uncovers the existence of an undisclosed foreign trust but is unable to determine the amount required to be disclose on such return, it is unable to impose a penalty. The Act strengthens this penalty by imposing a minimum penalty of $10,000 on any such failure to file. This provision applies to notices and returns required to be filed after Dec. 31, 2009. Notwithstanding this minimum penalty, in no event may the penalties imposed on taxpayers for failing to file an information return with respect to a foreign trust exceed the amount required to be disclosed on the return.

 

Dividend equivalent payments

Dividend equivalents treated as dividends. For payments made on or after the date that is 180 days after the new law's enactment date, the Act treats a dividend equivalent as a dividend from U.S. sources for certain purposes, including the U.S. withholding tax rules applicable to foreign persons. A dividend equivalent is any substitute dividend made pursuant to a securities lending or a sale-repurchase transaction that (directly or indirectly) is contingent upon, or determined by reference to, the payment of a dividend from sources within the U.S. or any payment made under a specified notional principal contract that directly or indirectly is contingent upon, or determined by reference to, the payment of a dividend from sources within the U.S. A dividend equivalent also includes any other payment that IRS determines is substantially similar to a payment described in the preceding sentence. Under this rule, for example, IRS may conclude that payments under certain forward contracts or other financial contracts that reference stock of U.S. corporations are dividend equivalents.
Please give us a call today for details on how the homebuyer credit can help you or your family members.  Or if you would like more details about the Offshore provisions or other aspects of the law.
 
Sincerely,
Kevin Cameron & Jolene Loos
C&L Value Advisors LLC