Monday, November 16, 2009


President Obama signed the Worker, Homeownership, and Business Assistance Act of 2009 (H.R. 3548) into law on November 6, 2009. It had passed the Senate 98 to 0 and the House 403 to 12. So its passage was almost unanimous.

The Act extends unemployment benefits for 14 more weeks in all 50 states and up to 20 more weeks in states with a 3-month average unemployment rate of at least 8.5%. The temporary exclusion of the first $2,400 of unemployment benefits was not extended into 2010. The additional unemployment benefits is paid for by extending the 0.2 percent Federal Unemployment Tax Act (FUTA) surtax through June 30, 2011.

But since this is a blog about 1040 taxes I want to talk about the provisions that affect the 1040.

As we all know by now the centerpiece of this bill iss the extension and expansion of the First Time Homebuyer Credit, which was set to expire on November 30, 2009. The $8,000 refundable credit is extended for purchases made through April 30, 2010. It will also apply to purchases that close between May 1 and June 30, 2010, providing the taxpayer entered into a written binding contract to close before May 1, 2010.

The phase range out for purchases made after November 6, 2009 is now “modified” Adjusted Gross Income between $125,000 and $145,000 for single (and head of household and separate) filers and $225,000 and $245,000 for joint filers.

The Act also allows “existing homeowners” to claim a credit of up to $6,500 ($3,250 if married filing separate) on purchases made after November 6, 2009, if they owned and lived in, as a primary residence, the same home for any five (5) consecutive years during the eight (8) year period that ends on the date of purchase of the new home.

Qualified purchasers who close in 2009 can continue to elect to treat the purchase as being made in 2008 and file an amended 2008 return to claim the credit and a check. And qualified purchases made in calendar year 2010 can be treated as being made in 2009, with the credit claimed on the 2009 Form 1040.

So if you purchase a home, and qualify for the credit, in early 2010 be sure to give the Settlement/Closing Statement to your tax professional with your 2009 tax “stuff”. If you plan to purchase by the April 30 (or June 30) deadline but have not done so at the time you give your tax pro your “stuff” be sure to tell him/her of your intentions.

For purchases made after November 6, 2009, the purchase price cannot exceed $800,000. If you close on a home today, and you otherwise qualify for the credit, you will not be eligible for the credit if the purchase price of the home is more than $800,000. Previously there had been no limit.

I, and others, had criticized the previous credit for being too easy to get. All you had to do was ask for it. No documentation or declaration was required. As a result there were many fraudulent claims filed and tons of money was sent to individuals who did not qualify for the credit. To “fix” this Congress added additional requirements and conditions for the credit.

For purchases made after November 6, 2009, you must be at least age 18 in order to qualify for the credit, and you cannot be claimed as a dependent on another taxpayer’s return. And the definition of a “related party” now includes relatives of a taxpayer’s spouse. You cannot purchase the home from an “in-law” (parents, grandparents, children of a spouse) and qualify for the credit.

And, most important, you now must attach a “properly executed” copy of the Settlement or Closing Statement to your tax return. This applies to all qualified purchases made during calendar year 2009 through the 2010 expiration dates where the credit is requested on a 2009 (or 2010) tax return. The National Association of Tax Professionals’ analysis of the Act states that “it does not appear that closing statements need to be attached to amended 2008 returns”. Why Congress did not require this for all claims submitted after November 6, 2009, whether on a 2008 or 2009 return, is beyond me.

Unlike the initial $7,500 credit, none of the $8,000 or $6,500 credit needs to be repaid, unless the new home ceases to be the taxpayer’s principal residence within 36 months of the date of closing, except, or course, for death.

Special rules apply for members of the uniformed armed services, members of the Foreign Service, and employees of the “intelligence” community. The credit is available until April 30, 2011 (or June 30, 2011 if there is a written binding contract in place before 5/1/11) for those qualifying personnel stationed outside the United States for at least 90 days.

And the 36-month recapture provision is waived for qualified personnel who claimed the credit and either sold the home or stopped using it as a principal residence after December 31, 2008, due to government orders received for qualified official extended duty service.

FYI, while I will be thrilled if some of my clients can get a piece of this “pie”, I share the opinions of many of my fellow tax bloggers concerning this credit. If I were a Senator the vote would not have been unanimous.

The other provision of the Act that could affect 1040s is allowing taxpayers to elect to “carry back” a 2009 “net operating loss” (NOL) for five (5) instead of two (2) years. Certain small businesses were previously permitted to carry back a 2008 NOL for five (5) years. For 2009 NOLs the 5-year carryback period is eligible for almost all business operations, not just “small” businesses.

The amount that is carried back to the 5th preceding year may be limited to 50% of the taxpayer’s taxable income, without regard to the NOL, for that 5th year.

The NOL carryback issue is truly a complicated one, whether 2 or 5 years, as I recently discovered. Anyone who may be involved in a NOL situation should most definitely consult a tax professional who is experienced in NOL filings.

Of special interest to me, as a tax professional, is the provision of the Act that requires any tax return preparer who prepares more than 10 individual income tax returns during a calendar year (this includes returns for estates and trusts) to electronically file the returns.

This requirement is effective for tax returns filed after December 31, 2010. So it does not apply to the upcoming tax filing season, but will take effect in 2011 for the filing of 2010 returns.

While it was a common belief among tax professionals that such a requirement was coming, it was not expected to come so soon. We all thought that this mandate would be included in the eventual legislation that would require the IRS regulation of all paid tax preparers.

NATP recently told its members in its weekly email newsletter -

As it is stated, this is all the new law provides {i.e. e-filing required – rdf}. At this time, there is no guidance on how clients can "opt out" or otherwise file their returns on paper. It appears that a return that is "filed" by the taxpayer does not have to be electronically filed. The way in which the law is written is unclear on this point.”

Many states already have such e-file mandates. NJ requires paid tax preparers, who prepared 50 or more returns in the prior year, to file state income tax returns electronically – but this can be done free of charge, and without using tax preparation software, via the internet and clients can elect to “opt out” and elect to have their state return filed “the old fashioned way”.



Mary said...

I don't understand why anyone would call this an "opt-out" system.

I presume that no preparer is ever allowed to e-file a return on behalf of any taxpayer unless that taxpayer agrees to sign a form such as the 8879 authorizing him to do so.

Tax preparers can't force a taxpayer to sign an 8879 unless the taxpayer wants to do so. It's always the taxpayer's prerogative to refuse to allow a preparer to efile a return for any reason. So it's an "opt-in" system.

A taxpayer always ought to have the right to take the prepared tax forms home to review at his leisure and consider them carefully before signing that 8879. The taxpayer might want to take the prepared tax forms to another tax pro for a second opinion, for example. Or he might want to use the paid preparer's work as the basis for self-preparing his own return, perhaps taking into account information that arrived after he picked up the papers from the preparer, e.g., a corrected 1099, or making any other changes he deems appropriate. That's certainly his prerogative. If he uses his paid preparer's work to create his own return, it's still his option whether to file that return electronically or via paper.

Robert D Flach said...


What you say is true and logical - but we are dealing with the government here.

NJ requires me to file all my returns electronically, unless the client actually signs a state "Opt Out" form that tells me he/she/they do not want the return filed electronically.

The form is to "cover my arse" to show the state, if questioned, why I did not comply with the requirement of the law.

The "Opt Out" form is not filed with the state tax return, but kept in my files with the copy of the paper return, to be shown to the state in case I, the preparer, am "audited" regarding electronic filing.

I can see the logic - I must have some hard copy documentation to explain why I did not comply with the law.


Owen S. Arnoff, EA said...

So, if e-filing is mandatory, how can you attach your HUD-1 to the return to claim the homebuyer credit?

Robert D Flach said...


Good question!

But don't ask me. I have never e-filed a federal income tax return.