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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Form 1040 instructions for 2008 detail several new items

Form 1040 instructions for 2008 detail several new items
IRS has released the general instructions for Form 1040 for 2008 on its web site. They detail the many new rules that apply for 2008 and 2009 as a result of the flood of recent tax legislation.

What’s new for 2008. The 2008 Form 1040 instructions detail these new items for 2008.

    • Economic stimulus payment. Any economic stimulus payment the taxpayer received in 2008 is not taxable for federal income tax purposes but reduces his recovery rebate credit.
    • Recovery rebate credit. This credit is figured like last year’s economic stimulus payment, except that the amounts are based on tax year 2008 instead of tax year 2007. The maximum credit is $600 ($1,200 if married filing jointly) plus $300 for each qualifying child. A taxpayer may be able to take this credit only if he did not get an economic stimulus payment, or his economic stimulus payment was less than $600 ($1,200 if married filing jointly for 2007) plus $300 for each qualifying child he had for 2008. The credit is entered on line 70 and there is a worksheet (at page 61 of the instructions) for figuring the credit.

RIA observation: Many individuals may have received a zero or reduced economic stimulus payment because of the phaseout rules. Under those rules, the amount of an economic stimulus payment (both the basic and the child’s amount) was reduced by 5% of a taxpayer’s adjusted gross income (AGI) above $75,000 ($150,000 for joint returns). Since the time when IRS first started sending out economic stimulus payments, economic conditions have worsened. As a result, many individuals who lost all or a portion of their economic stimulus payment because of the phaseout rules may be in a position due, for example, to a layoff or cutback in hours or salary, to claim a recovery rebate credit on the 2008 return they file in 2009. Like the stimulus payment, the recovery rebate credit is subject to the same phaseout rules.

    • Withdrawal of economic stimulus payment from certain accounts. If a taxpayer’s economic stimulus payment was directly deposited to a tax-favored account and he withdraws the payment by the due date of his return (including extensions), the amount withdrawn will not be taxed and no additional tax or penalty will apply. For stimulus payments deposited into a Coverdell education savings account (CESA), the withdrawal can be made by the later of the above date or June 1, 2009. Additional information may be found at the instructions for lines 15a and 15b, 21, and 59.
    • Alternative minimum tax (AMT) exemption amount increased. The AMT exemption amount is increased to $46,200 ($69,950 if married filing jointly or a qualifying widow(er); $34,975 if married filing separately).
    • IRA deduction expanded. An individual and his spouse, if filing jointly, each may be able to deduct up to $5,000 ($6,000 if age 50 or older at the end of the year). The individual may be able to take an IRA deduction if he was covered by a retirement plan and his 2008 modified adjusted gross income (AGI) is less than $63,000 ($105,000 if married filing jointly or qualifying widow(er)). If his spouse was covered by a retirement plan, but the individual was not, he may be able to take an IRA deduction if his 2008 modified AGI is less than $169,000. Details and exceptions may be found at the instructions for line 32 that begin on page 30.
    • Standard deduction increased by real estate taxes and net disaster losses. A taxpayer’s standard deduction is increased by certain state or local real estate taxes he paid, and a net disaster loss attributable to a federally declared disaster, as explained in the instructions for line 39c on page 34.
    • First-time homebuyer credit. If a taxpayer buys a main home after April 8, 2008, and before July 1, 2009, and did not own a main home during the prior 3 years, he may be able to take this credit, as detailed in the instructions for line 69 on page 61.
    • Rollovers to Roth IRAs. A taxpayer can roll over distributions from an eligible retirement plan to a Roth IRA. The rollover is not tax-free, as detailed in the instructions for lines 16a and 16b.
    • Standard mileage rates. The 2008 rate for business use of one’s vehicle is 50 1/2 cents a mile (58 1/2 cents a mile after June 30, 2008). The 2008 rate for use of one’s vehicle to get medical care or to move is 19 cents a mile (27 cents a mile after June 30, 2008).
    • Earned income credit (EIC). A taxpayer may be able to take the EIC if (1) a child lived with the taxpayer and the taxpayer earned less than $38,646 ($41,646 if married filing jointly), or (2) a child did not live with the taxpayer and the taxpayer earned less than $12,880 ($15,880 if married filing jointly). The maximum AGI one can have and still get the credit also has increased. A taxpayer may be able to take the credit if his AGI is less than the amount in the above discussion that applies to the taxpayer. The maximum investment income he can have and still get the credit has increased to $2,950. More information can be found in the instructions for lines 64a and 64b that begin on page 46.
    • Mailing the return. A taxpayer may be mailing his return to a different address this year because IRS has changed the filing location for several areas. Taxpayers who received an envelope with their tax package should use it. Otherwise, they should obtain the filing location from the back cover.
    • Personal exemption and itemized deduction phaseouts reduced. Taxpayers with adjusted gross income above a certain amount may lose part of their deduction for personal exemptions and itemized deductions. The amount by which these deductions are reduced in 2008 is only 1/2 of the amount of the reduction that otherwise would have applied in 2007.
    • Tax rate on qualified dividends and net capital gain reduced. The 5% tax rate on qualified dividends and net capital gain that applied for 2007 is reduced to zero for 2008.
    • Tax on child’s investment income. Form 8615 is required to figure the tax for a child with investment income of more than $1,800 if the child:

(1) was under age 18 at the end of 2008;
(2) was age 18 at the end of 2008 and did not have earned income that was more than half of the child’s support; or
(3) was a full-time student over age 18 and under age 24 at the end of 2008 and did not have earned income that was more than half of the child’s support.

RIA observation: The election to report a child’s investment income on a parent’s return and the special rules
for when a child must file Form 6251 also now apply to the children listed above.

    • Tax relief for Kansas disaster area. Temporary tax relief was enacted as a result of May 4, 2007, storms and tornadoes affecting the Kansas disaster area. The tax benefits provided by this relief include suspended limits for certain personal casualty losses and special rules for withdrawals and loans from IRAs and other qualified retirement plans. For more details on these and other tax benefits related to the Kansas disaster area, see Pub. 4492-A.
    • Tax relief for Midwestern disaster areas. Temporary tax relief was enacted as a result of severe storms, tornadoes, or flooding affecting Midwestern disaster areas after May 19, 2008, and before Aug. 1, 2008. The tax benefits provided by this relief include:
        • … Suspended limits for certain personal casualty losses and cash contributions.
        • … An additional exemption amount if the taxpayer provided housing for a person displaced by the Midwestern storms, tornadoes, or flooding.
        • … An election to use the taxpayer’s 2007 earned income to figure his 2008 EIC and additional child tax credit.
        • … An increased charitable standard mileage rate for using the taxpayers’ vehicle for volunteer work related to the Midwestern storms, tornadoes, or flooding.
        • … Special rules for time and support tests for people who were temporarily relocated because of the Midwestern storms, tornadoes, or flooding.
        • … Special rules for withdrawals and loans from IRAs and other qualified retirement plans. Details on these and other tax benefits related to the Midwestern disaster areas will be explained in IRS Publication 4492-B .
    • Credit for nonbusiness energy property expired. The credit for nonbusiness energy property has expired and does not apply for 2008. Form 5695 is now used only to claim the residential energy efficient property credit.

What’s New for 2009. The 2008 Form 1040 instructions detail these new items for 2009.

    • Earned income credit (EIC). A taxpayer may be able to take the EIC if: (1) a child lived with the taxpayer and the taxpayer earned less than $40,295 ($43,415 if married filing jointly), or (2) a child did not live with the taxpayer and the taxpayer earned less than $13,440 ($16,560 if married filing jointly). The maximum AGI one can have and still get the credit also has increased. One may be able to take the credit if his AGI is less than the above amount that applies to him. The maximum investment income the taxpayer can have and still get the credit has increased to $3,100.
    • IRA deduction expanded. A taxpayer may be able to take an IRA deduction if he was covered by a retirement plan and his 2009 modified AGI is less than $65,000 ($109,000 if married filing jointly or qualifying widow(er)). If the taxpayer’s spouse was covered by a retirement plan, but the taxpayer was not, he may be able to take an IRA deduction if his 2009 modified AGI is less than $176,000.
    • Elective salary deferrals. The maximum amount the taxpayer can defer under all plans is generally limited to $16,500 ($11,500 if the taxpayer only has SIMPLE plans; $19,500 for Code Sec. 403(b) plans if the taxpayer qualifies for the 15-year rule). The catch-up contribution limit for individuals age 50 or older at the end of the year is increased to $5,500 (except for Code Sec. 401(k)(11) plans and SIMPLE plans, for which this limit remains unchanged).
    • Divorced or separated parents. A noncustodial parent claiming an exemption for a child can no longer attach certain pages from a divorce decree or separation agreement instead of Form 8332 if the decree or agreement was executed after 2008. The noncustodial parent will have to attach Form 8332 or a similar statement signed by the custodial parent and whose only purpose is to release a claim to exemption.
    • Limit on exclusion of gain on sale of main home. Generally, gain from the sale of the taxpayer’s main home is no longer excludable from income if it is allocable to periods after 2008 where neither the taxpayer nor his spouse (or former spouse) used the property as a main home. See IRS Publication 553 for more details.
    • Credit for plug-in electric drive motor vehicles. A taxpayer may be able to take a credit if he places a plug-in electric drive motor vehicle in service in 2009.
    • Qualifying child definition revised. The following changes to the definition of a qualifying child apply to years after 2008.
        • … The taxpayer’s qualifying child must be younger than the taxpayer.
        • … A child cannot be the taxpayer’s qualifying child if he or she files a joint return, unless the return was filed only as a claim for refund.
        • … If the parents of a child can claim the child as a qualifying child but no parent so claims the child, no one else can claim the child as a qualifying child unless that person’s AGI is higher than the highest AGI of any parent of the child.
        • … The taxpayer’s child is a qualifying child for purposes of the child tax credit only if he can and does claim an exemption for him or her.
    • Credit for nonbusiness energy property. A taxpayer may be able to take this credit for qualifying energy savings items for his home placed in service in 2009.
    • Personal casualty and theft loss limit. Generally, a personal casualty or theft loss must exceed $500 to be allowed for 2009. This is in addition to the 10% of AGI limit that generally applies to the net loss.
    • Alternative minimum tax (AMT) exemption amount decreased. Absent a law change, the AMT exemption amount will drop to $33,750 ($45,000 if married filing jointly or a qualifying widow(er); $22,500 if married filing separately).
    • Allowance of certain personal credits against the AMT. Absent a law change, the following personal credits will no longer offset the AMT: credit for child and dependent care expenses; credit for the elderly or the disabled; education credits; mortgage interest credit; residential energy credits; and District of Columbia first-time homebuyer credit.

Source: Federal Taxes Weekly Alert (preview) 11/20/2008, Volume 54, No. 47

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