Independent Contractor vs Employee Trap

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A sneaky little provision in the recently passed Wisconsin Budget Bill (Wisconsin Act 28), assesses a $25,000 penalty for each “independent contractor” that should have been classified as an “employee” in the construction trades.   Check out the new State Statutes, Sec 71.63(3)(d) and 71.65(6), and “nonstatutory” provisions.   The trap is “willful misclassification”, a term which has yet to be defined. 

Apparently abuses in the classification of independent contractors in the construction trades has irked Governor Doyle and the State’s legislature.  A $25,000 penalty for each classification violation is a hefty price for noncompliance!

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Retroactive Tax Increases in Wisconsin

The new budget bill signed by Doyle before July 1st, adds some new taxes, retroactive to January 1, 2009.   

A whole new tax bracket at 7.75 %  was added for individuals with incomes over $200,000.

The tax on long term capital gains just doubled, from approximately 3% to 6% of the gain. 

The end result is calculated differently:  It used to be that only 40% of the capital gain was taxed at your individual Wisconsin tax rates.  Now 70% of the capital gain will be taxed.  Looked at another way, the previous exclusion from tax was on 60% of the gain.  Now only 30% of the gain is excluded from taxation.  Yes it is confusing, but essentially the tax on long term capital gains in Wisconsin just doubled.

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Most Overlooked Deduction 2008 AND 2009

As we’re preparing this year’s tax returns, we’re again finding we have to contact people for more information when there are students in the family. They’re forgetting that the Southern half of Wisconsin is located in a Federally Declared Disaster Area, and that we have this big education tax credit or deduction that applies only to 2008 AND 2009 for the Hope Credit. 

For the New American Opportunity Credit, more than just tuition costs qualify in calculating the credit. 

This year and last year’s biggest overlooked tax deduction: including ROOM and BOARD AND SUPPLIES (THAT LAPTOP COMPUTER!) with tuition for the education deduction or tax credit, for students attending schools full time in the Midwest Disaster Area in 29 Wisconsin Counties:

Adams, Calumet, Columbia, Crawford, Dane, Dodge, Fond du Lac, Grant, Green, Green Lake, Iowa, Jefferson, Juneau, Kenosha, Lafayette, Marquette, Milwaukee, Monroe, Ozaukee, Racine, Richland, Rock, Sauk, Sheboygan, Vernon, Walworth, Washington, Waukesha and Winnebago Counties.

If you attend school in a Federally Declared Disaster Area you get double the Federal Hope and Lifetime Education Credits. And, the definition of qualified tuition and fees has been changed to include room/board and supplies, just like is allowed under Section 529 Plans.

Qualified expenses include the following when required for enrollment or attendance at an eligible educational institution:

o Tuition

o Fees

o Supplies (books, computer software)

o Equipment (i.e., laptop computer)

o Room and board for students enrolled at least half-time in a degree or certificate program. Expenses are limited to the room and board allowable included in the cost of attendance set by the school for financial aid purposes or the actual cost of campus housing, if greater.

Students attending UW-Milwaukee, Madison, Whitewater, LaCrosse, Oshkosh, Platteville and the UW Extensions in the counties listed above, as well as the Technical Schools and any other schools with at least half-time attendance (8 credits) are eligible for this extra benefit to count supplies, equipment and room/board! Don’t forget to give us this information!

With the addition of the new American Opportunity Credit for 2009, with different rules, you also have the chance to use the cost of books, fees, equipment (computer) and other supplies necessary for post-high school attendance in the calculation of the credits. 

With 1099-Q distributions from a prepaid tuition plan or Educational Savings Account, we need to show how those dollars were spent for education.

So to make sure you’re taking advantage of the tax laws related to education, keep track of what monies are spent for every thing related to post-high school education and we’ll be able to calculate the optimal tax benefits from the multiple choices available.

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Summary of Tax Law Changes for Individuals in 2009

Tax changes affecting individuals and families in the American Recovery and Reinvestment Act of 2009

The recently enacted “American Recovery and Reinvestment Act of 2009” (the 2009 economic stimulus act) contains a wide-ranging tax package that includes tax relief for low and moderate-income wage earners, individuals and families with college expenses, and home and car purchasers.

“Making Work Pay” credit. The new law provides an individual tax credit in the amount of 6.2 percent of earned income not to exceed $400 for single returns and $800 for joint returns in 2009 and 2010. The credit is phased out at adjusted gross income (AGI) in excess of $75,000 ($150,000 for married couples filing jointly). The credit can be claimed as a reduction in the amount of income tax that is withheld from a paycheck, or through a credit on a tax return. Under the credit, workers can expect to see perhaps $13 a week less withheld from their paychecks starting around June. Next year, the extra take-home pay will go down to around $9 per week.

Economic recovery payment. The new law provides for a one-time payment of $250 to retirees, disabled individuals and Social Security beneficiaries and SSI recipients receiving benefits from the Social Security Administration and Railroad Retirement beneficiaries, and to veterans receiving disability compensation and pension benefits from the U.S. Department of Veterans’ Affairs. The one-time payment is a reduction to any allowable Making Work Pay credit.

Refundable credit for certain federal and state pensioners. The new law provides a one-time refundable tax credit of $250 in 2009 to certain government retirees who are not eligible for Social Security benefits. This one-time credit is a reduction to any allowable Making Work Pay credit.

Unemployment compensation exclusion. A provision temporarily suspends federal income tax on the first $2,400 of unemployment benefits received by a recipient in 2009.

Expanded earned income tax credit. The new law provides tax relief to families with three or more children and increases marriage penalty relief. The changes apply for 2009 and 2010.

Expanded child tax credit. A measure increases the eligibility for the refundable child tax credit in 2009 and 2010 by lowering the threshold to $3,000 (from $8,500 in 2008).

Expanded and revised higher education tax credit. The new law creates a $2,500 higher education tax credit that is available for the first four years of college. The credit is based on 100% of the first $2,000 of tuition and related expenses (including books) paid during the tax year and 25% of the next $2,000 of tuition and related expenses paid during the tax year, subject to a phase-out for AGI in excess of $80,000 ($160,000 for married couples filing jointly). Forty percent of the credit is refundable. The new credit temporarily replaces the Hope credit.

Computers as an education expense. A provision permits computers and computer technology to qualify as qualified education expenses in 529 education plans for tax years beginning in 2009 and 2010.

Expanded first-time credit for first-time home buyers. Last year, Congress provided taxpayers with a refundable tax credit that was equivalent to an interest-free loan equal to 10% of the purchase of a home (up to $75,000) by first-time home buyers. The provision applied to homes purchased on or after April 9, 2008 and before July 1, 2009. Taxpayers receiving this tax credit were required to repay any amount received under this provision back to the government over 15 years in equal installments (or earlier if the home was sold). The credit phases out for taxpayers with adjusted gross income in excess of $75,000 ($150,000 in the case of a joint return). The new law enhances the credit by eliminating the repayment obligation for taxpayers that purchase homes on or after January 1, 2009. It also extends the credit through the end of November 2009, and bumps up the maximum value of the credit from $7,500 to $8,000.

Tax break for new car purchasers. The new law allows taxpayers to deduct State and local sales taxes paid on the purchase of a new automobile, including light trucks, SUVs, motorcycles, and motor homes. The tax break phases out starting with taxpayers earning $125,000 per year ($250,000 for joint returns). The deduction is allowed to both those who itemize their deductions as well as to nonitemizers. However, the deduction cannot be taken by a taxpayer who elects to deduct State and local sales taxes in lieu of State and local income taxes.

Alternative minimum tax (AMT) patch. To hold the number of taxpayers subject to the AMT at bay, the new law increases the AMT exemption amounts for 2009 to $46,700 for individuals and $70,950 for joint returns, and allows the personal credits against the AMT.

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2009 Standard Mileage Rates

IRS Announces 2009 Standard Mileage Rates
 
IR-2008-131, Nov. 24, 2008

WASHINGTON — The Internal Revenue Service today issued the 2009 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on Jan. 1, 2009, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

  • 55 cents per mile for business miles driven
  • 24 cents per mile driven for medical or moving purposes
  • 14 cents per mile driven in service of charitable organizations

The new rates for business, medical and moving purposes are slightly lower than rates for the second half of 2008 that were raised by a special adjustment mid-year in response to a spike in gasoline prices. The rate for charitable purposes is set by law and is unchanged from 2008.

The business mileage rate was 50.5 cents in the first half of 2008 and 58.5 cents in the second half. The medical and moving rate was 19 cents in the first half and 27 cents in the second half.

The mileage rates for 2009 reflect generally higher transportation costs compared to a year ago, but the rates also factor in the recent reversal of rising gasoline prices. While gasoline is a significant factor in the mileage rate, other fixed and variable costs, such as depreciation, enter the calculation.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study. Independent contractor Runzheimer International conducted the study.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for any vehicle used for hire or for more than four vehicles used simultaneously.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

Revenue Procedure 2008-72 contains additional information on these standard mileage rates.

 
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