Tax Planning

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New rules for divorced parents & depedent deductions

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The IRS issued in 2007 regulations addressing various issues pertaining to divorced parents and who can claim the dependent exemptions. These new rules take affect for most divorced parents with the filing of your 2009 income tax return.

Beginning for years beginning after July 2, 2008 (so 2009 for calendar year individual taxpayers) the IRS will no longer accept a divorce decree in lieu of Form 8332, Release of Claim to Exemption fro Child of Divorced or Separated Parents, even if the decree contains all of the information otherwise found on the Form 8332 and is not conditional in any respect (for example, conditioned on child support payments being current, etc.).

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Watch out for taxes if you sell your life insurance contract

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The IRS has issued two new rulings addressing the sale and surrender of life insurance contracts from the point of view of policyholders and the investors. In this down economy, it can make good economic sense to sell an insurance policy that is no longer needed, or maybe can no longer be afforded.

The sale of an insurance policy is the sale of an asset; however, the gain could be either ordinary income (taxed like wages) or capital gain income (generally a lower tax rate). You will also need to take into account your investment in the policy (your tax basis).

Now, this discussion does not pertain to someone selling their insurance policy when they are either chronically ill or terminally ill. In those circumstances special exclusions generally will apply.

There are three situations under which you may be selling your policy.

  1. Surrender of the policy to the issuer for cash value.
  2. Sale of the policy with cash surrender value to an unrelated person.
  3. Sale of the policy with no cash surrender value to an unrelated person.

Here are the examples for each situation which demonstrate how the tax bite is determined.

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New deduction for sales taxes on a new car purchase

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The American Recovery and Reinvestment Act of 2009 provides that for vehicles purchased on or after February 17, 2009 and before January 1, 2010 you can deduct, as an itemized deduction or as an addition to the standard deduction, sales taxes on the purchase of a qualifying new vehicle -- on the first $49,500 of the purchase price. Qualifying vehicles include the following.

  • A passenger car, light truck, or motorcycle the gross vehicle weight rating of which is not more than 8,500 pounds.
  • A motorhome.

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The Stimulus Plan and New Car Sales

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Last month, President Obama signed the "American Recovery and Reinvestment Act of 2009" -- otherwise known as the economic stimulus act. We're like most tax professionals in that we're still sorting through the Act's nearly $300 billion in tax cuts to see which will be most valuable for you. But we can tell you that it will take careful planning to make the most of the new rules. For better or for worse, the new administration doesn't seem to be making "tax simplification" much of a priority.

Take the new deduction for sales tax on new cars. The concept is simple enough. The auto industry is a huge part of our economy. Car sales have slowed to the point where General Motors stock costs less than a gallon of gas and carmakers are flirting with bankruptcy. Why not give car buyers a tax incentive to stimulate manufacturers?

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Higher, More Complicated Taxes Ahead

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Last week, President Obama released his first budget proposal for Fiscal Year 2010. Most of the attention has focused on total spending ($3.55 trillion) and the total deficit ($1.75 trillion). However, the budget includes several tax provisions that are worth discussing now, especially for those of you who qualify as “wealthy."

Specifically, Obama proposes to let the Bush tax cuts expire for individuals making over $200,000 and households making over $250,000. This means that "marginal" rates (the rate you pay on your last dollar of income) would climb from their current 35% back up to 39.6%. Tax on long-term capital gains (gains from the sale of property you hold more than 12 months) would climb from their current 15% back up to 20%.