As noted above, the American Opportunity credit is based on the payment of qualified tuition and related expenses. These are the expenses for tuition and academic fees that are required for enrollment or attendance at an eligible educational institution. Qualified tuition and related expenses do not include student activity fees, athletic fees, insurance expenses, room and board, transportation costs and other personal living expenses. They also don’t include the cost of any course or education involving sports, games, or hobbies unless the course or education is part of the student’s degree program. Books are qualified expenses under the American Opportunity tax credit.

The amount of qualified tuition and related expenses taken into account in computing the American Opportunity credit must be reduced by tax-exempt scholarships and fellowships, certain military benefits, and any other tax-exempt payments of those expenses other than gifts or bequests.

The credit is phased out for higher income taxpayers. For 2009 and 2010, the American Opportunity tax credit is phased out for couples with income between $160,000 and $180,000, or singles with income between $80,000 and $90,000. These higher thresholds will allow more taxpayers to qualify for the credit.

If you have questions about this credit or any other tax issue, please feel free to contact our offices at 561-624-2118.
Glenn Schanel, CPA, CFP® is the President of Schanel & Associates, PA, Certified Public Accountants.  The firm provides tax, accounting, and consulting services to clients throughout South Florida and the United States.  We provides tax, accounting, and consulting services to clients throughout South Florida, North Palm Beach and Palm Beach County.

The maximum credit allowed is $2,500 per student (for both 2009 and 2010) for the first four years of undergraduate education at an eligible educational institution. Generally, eligible educational institutions are accredited schools offering credit toward a bachelor’s or associate’s degree or other recognized post-high school credential, and certain vocational schools.

The American Opportunity tax credit is available only for the qualified tuition and related expenses of an eligible student, i.e., a student who’s enrolled in a degree or certificate program at an eligible educational institution on at least a half-time basis, and who has never been convicted of a federal or state felony drug offense.

A taxpayer may claim an American Opportunity tax credit and exclude from gross income amounts distributed from a Coverdell education savings account (formerly called an education IRA) or 529 plan for the same student, as long as the distribution isn’t used for the same educational expenses for which a credit was claimed.

In order to be eligible for the American Opportunity tax credit for a tax year, qualified tuition and related expenses must be paid during that tax year for education furnished during an academic period (e.g., semester) that starts within that tax year or within the first three months of the following year. Under this rule, taxpayers have a timing option. For example, for a semester beginning in Jan. of Year 2, a taxpayer may pay the expenses in Year 1 or Year 2. The credit will be available in whichever year the payment is made.

If you have questions about this credit or any other tax issue, please feel free to contact our offices at 561-624-2118. We are located in Jupiter, Palm Beach County. Glenn Schanel, CPA, CFP® is the President of Schanel & Associates, PA, Certified Public Accountants. The firm provides tax, accounting, and consulting services to clients throughout South Florida and the United States. We provides tax, accounting, and consulting services to clients throughout South Florida, North Palm Beach and Palm Beach County.

As you may know, a tax credit is a dollar-for-dollar reduction in tax, and is therefore generally much more valuable than a deduction which only removes a percentage of the tax that is owed.   In this case, the government is offering a 30% tax credit, which means that Uncle Sam is in effect offering to pay for up to 30% of any qualified purchase.

The first tax credit is for expenditures made for qualifying energy-efficient home improvements in 2009 and 2010.

Qualifying energy-efficient home improvements include the following:

• Exterior windows (including skylights) and doors
• Insulation systems
• Certain metal and asphalt roofs
• High-efficiency central air conditioners
• Natural gas, propane and oil furnaces and water heaters
• Electric heat pumps and electric heat pump water heaters

Your tax credit will equal 30% of the cost of the improvement, subject to an overall $1,500 limit for 2009 and 2010.

A second credit is available for qualifying expenditures for more expensive “residential energy efficient property,” which includes the following:

• Solar water heating equipment
• Solar electricity generating equipment
• Wind energy equipment
• Geothermal heat pump equipment
• Fuel cell electricity generating equipment

You can qualify for this incentive credit by making any of these improvements to either your US principal residence or vacation home.  This credit also equals 30% of your cost, but, except for fuel cell equipment, there is no dollar limit.

To claim either of the credits, make certain that you obtain a manufacturer’s certification that the product purchased is eligible.  An Energy Star label in itself does not automatically qualify.  Be sure to keep the certification with your tax records.

2010 is the last year under current law where the government is offering this tax credit, so if you have been thinking of making some home improvements that might reduce your energy costs, 2010 may be the year to act.  And be sure not to overlook other potential benefits that are out there, including state tax incentives, utility company rebates and subsidized financing deals.

Glenn Schanel, CPA, CFP® is the President of Schanel & Associates, PA, Certified Public Accountants.  The firm provides tax, accounting, and consulting services to clients throughout South Florida and the United States.

In an effort to revive the real estate market, in 2008 Congress created a tax credit for “first time home buyers.”  In its original form, this “credit” of $7,500 was in reality an interest free loan that the taxpayer had to repay over a 15 year period.  It soon became evident that this credit/loan was not very “stimulative”, so in 2009 Congress created a new plan that included a true credit.

The new law created a refundable federal tax credit of up to $8,000 ($4,000 for a married taxpayer filing separately) for qualifying first- time homebuyers who purchased a home between April 8, 2008, and December 1, 2009. In order to qualify for the credit, the taxpayer must have not owned a qualifying principal residence in the U.S. during the three-year period before the purchase of the new home.  This credit was phased out for individual taxpayers whose modified adjusted gross income was between $75,000 and $95,000 (between $150,000 and $170,000 for married taxpayers filing jointly).

As a result of the continuing weakness in the real estate market, last month Congress enacted the Worker, Homeownership, and Business Assistance Act of 2009.  This Act extends the $8,000 first-time homebuyer credit for contracts to purchase entered before May 1, 2010, and closed before July 1, 2010. The new law also liberalizes the credit by making it available to higher income taxpayers, as well as to those individuals who are not first-time homebuyers.

Generally, existing homeowners who are qualifying “long-time residents” may qualify for the tax credit if they contract to purchase another principal residence before May 1, 2010, and close before July 1, 2010. The Act provides that any individual who has maintained the same principal residence for any five-consecutive-year period during the eight-year period ending on the date of the purchase of a subsequent residence be treated as a “first-time homebuyer”.

However, the maximum credit for long-time residents who qualify under the Act is the lesser of $6,500 ($3,250 for married individuals who file separate returns) or 10% of the purchase price of the principal residence.

The credit now phases out for individual taxpayers whose modified adjusted gross income is between $125,000 and $145,000 ($225,000 and $245,000 for married taxpayers filing joint returns).  In addition, for purchases after November 6, 2009, the first-time homebuyer tax credit cannot be claimed for the purchase of a principal residence if its purchase price exceeds $800,000.

If you qualify, you can claim your credit by attaching a Form 5405 to your income tax return in the year of the home purchase and a copy of your settlement statement.  You can also elect to treat any home purchased in 2009 as if it occurred on December 31, 2008 and a purchase in 2010 as if it occurred on December 31, 2009.  If you choose to do this and have already submitted your prior year’s tax return, you can claim your credit by filing an amended tax return.

So if you believe that you would qualify for either the first time home buyer or long-time resident tax credits, this could be the right time to buy a home.

Glenn Schanel, CPA, CFP® is the President of Schanel & Associates, PA, Certified Public Accountants.  The firm provides tax, CPA, accounting, and consulting services to clients throughout South Florida and the United States. Our clients are located in North Palm Beach, Port St. Lucie County, Palm Beach County, West Palm Beach.

The information contained in this communication is intended as general guidance on matters of interest only.  The application and impact of laws can vary widely based on specific facts involved.  Given the changing nature of laws, rules and regulations, and the inherent hazards of electronic communication, there may be delays, omissions, or inaccuracies in information contained in this transmission.  The information contained herein should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisors.  Pursuant to Regulations Governing Practice Before the Internal Revenue Service, any tax advice contained in this communication, unless explicitly provided otherwise, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

(This article is the third in a three part series on the tax consequences of short sales and foreclosures. This installment will cover properties that qualify as vacation residences or second homes.)

A vacation or second home is a residence that is used for personal purposes but which does not qualify as a principal residence. Unfortunately, when it comes to a foreclosure or short sale, a transaction involving a vacation home is the situation most likely to result in an unfavorable tax situation.

Tax on Gains

The gain/loss on a short-sale or foreclosure transaction is calculated as the market price or sale price minus the cost basis. The cost basis on a vacation home is the sum of the purchase price, the purchase costs, and capital improvements. Any gains that result from the transaction must be reported as a taxable capital gain. Losses, however, are not deductible, because a vacation home is considered personal-use property.

Debt Forgiveness Income

Even if a vacation home is sold at a loss through a short sale or foreclosure, the taxpayer may still be subject to debt forgiveness income.

Debt forgiveness income is the difference between the loan amount at the time of the foreclosure or short-sale and the market price or sale price. As a general rule, debt forgiveness income is taxable as ordinary income, but there are several exceptions. Debt forgiveness income does not need to be included as income if:

(1) the debt discharge occurs as a result of a Title 11 bankruptcy case.
(2) the taxpayer is insolvent at the time of discharge (your liabilities exceed your assets).
(3) the loan is non-recourse (the lender cannot pursue you personally).

There is a catch, however. If a taxpayer elects to avoid taxes on debt cancellation income, other tax benefits (called attributes) must be reduced to the extent that the income is not recognized. In other words, the relief is temporary because it only defers the tax consequences into the future. The taxpayer can choose to reduce the basis of the depreciable property or to follow a prescribed ordering of tax attribute reductions. These include net operating losses, capital loss carryovers and passive loss carryovers.

In summary, the foreclosure or sale of a second/vacation home is likely to result in a very unfavorable tax situation. Capital losses are not deductible, but gains are taxable, and any related cancellation of debt can result in higher taxes now or in the future.

Consult with a Tax Professional

This can be a complicated issue, so we recommend that anyone involved in one of these transactions consult with a tax professional to review their particular situation. If you or someone you know is involved in a foreclosure or a short sale and is concerned about the possible tax consequences, please feel free to contact our offices at (561) 624-2118 to schedule a consultation.

Glenn Schanel, CPA, CFP® is the President of Schanel & Associates, PA, Certified Public Accountants. The firm provides tax, accounting, and consulting services to clients throughout South Florida and the United States.

The information contained in this communication is intended as general guidance on matters of interest only. The application and impact of laws can vary widely based on specific facts involved. Given the changing nature of laws, rules and regulations, and the inherent hazards of electronic communication, there may be delays, omissions, or inaccuracies in information contained in this transmission. The information contained herein should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisors. Pursuant to Regulations Governing Practice Before the Internal Revenue Service, any tax advice contained in this communication, unless explicitly provided otherwise, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

(This article is the second in a three part series on the tax consequences of a short sale or foreclosure. This installment covers properties that qualify as rentals.)

You may be one of the many South Floridians who purchased one or more investment properties at or near the height of the real estate boom and now are left holding a property that has significantly depreciated in value. Meanwhile, the mortgage, along with insurance, taxes and other costs of ownership are putting a severe strain on your monthly cash flow. Renting the property can help alleviate some of this pressure, but with so many rental properties on the market, the rent can be considerably less than the monthly carrying costs. As a result, you may be considering a short sale arrangement or even a foreclosure.

However, before going forward with a short sale or foreclosure on a rental property, it is not only important to understand the legal implications, but it is also critical to understand all of the potential tax consequences, because they can be significant.

Tax on Capital Gains

The tax law treats both a short sale and a foreclosure of your rental property as a sale. The gain or loss is calculated as the market price or sale price minus your cost basis. In most cases, there will be a loss, and unlike with a personal residence, the loss on a sale of rental property is immediately deductible. This is generally referred to as a Section 1231 loss. This means that the loss is likely to qualify as an ordinary, as opposed to a capital loss. As a result, the tax benefit of the loss is at higher, ordinary tax rates. This is the one primary advantage over properties held for personal use.

Debt Forgiveness Income

Debt forgiveness income is the difference between the loan amount at the time of the foreclosure or short-sale and the market price or sale price. While Congress did provide tax relief for debt forgiveness income related to a principal residence, debt forgiveness income continues to be taxable for rental properties. However, there are two basic exceptions to this general rule:

(1) When the amount forgiven/deficiency is included in a bankruptcy filing.

(2) When you are insolvent at the time the debt is forgiven.

One more exception applies if your rental qualifies as Section 1231 property. In this case, you may be able to reduce the cost basis of the rental property without being insolvent. The result is that you don’t report the income from the debt forgiveness but you have a lower loss on the “sale’ of your property. To use this strategy, you must make an election and the debt forgiven must be “qualified acquisition indebtedness,” (i.e. debt incurred to acquire, construct or improve a property.)

Consult with a Tax Professional

This can be a complicated issue, so we recommend that anyone involved in one of these transactions consult with a tax professional to review their particular situation. If you or someone you know is involved in a foreclosure or a short sale and is concerned about the possible tax consequences, please feel free to contact our offices at (561) 624-2118 to schedule a consultation.

Glenn Schanel, CPA, CFP® is the President of Schanel & Associates, PA, Certified Public Accountants. The firm provides tax, accounting, and consulting services to clients throughout South Florida and the United States.

The information contained in this communication is intended as general guidance on matters of interest only. The application and impact of laws can vary widely based on specific facts involved. Given the changing nature of laws, rules and regulations, and the inherent hazards of electronic communication, there may be delays, omissions, or inaccuracies in information contained in this transmission. The information contained herein should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisors. Pursuant to Regulations Governing Practice Before the Internal Revenue Service, any tax advice contained in this communication, unless explicitly provided otherwise, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

(This article is the first in a three part series on the tax consequences of a short sale or foreclosure. This installment will cover properties that qualify as a principal residence.)

The last thing a person involved in a foreclosure or short sale needs is a crushing tax bill, so it is important to understand and be aware of potential tax consequences. When it comes to a qualified principal residence, taxes can be avoided in most, but not all, circumstances.

A principal residence for tax purposes is a home that a taxpayer has owned and lived in for at least two of the past five years. Keeping that definition in mind, we will consider both the capital gains tax and the tax on debt forgiveness income that could result from a short sale or foreclosure.

Tax on Capital Gains

The gain/loss on a short-sale or foreclosure transaction is calculated as the market price or sale price minus the taxpayer’s cost basis. In the event there is a loss, there is nothing to report for tax purposes, because a loss on a principal residence or any personal property is not deductible. If there is a gain on the residence, then the taxpayer is eligible to exclude up to $250K (or up to $500K for a married couple that files married filing jointly) of this gain.

Therefore, when it comes to a foreclosure or short sale on a principal residence, unless the capital gain exceeds the exclusion maximums, there will be no capital gains tax.

Debt Forgiveness Income

Debt forgiveness income is the difference between the loan amount at the time of the foreclosure or short-sale and the market price or sale price. As a general rule, debt forgiveness income is taxable, but there are some exceptions.

The Mortgage Forgiveness Relief Act of 2008 says that debt forgiveness income can be excluded if the debt can be considered “Qualified Principal Residence Indebtedness” (QPRI). QPRI is any debt that is secured by a principal residence and was incurred to acquire, construct or improve a principal residence.

Therefore, a potential income recognition problem does exist if a taxpayer had refinanced and used any “cash-out” proceeds for some purpose other than home improvement. In that case, the income would be taxable unless the taxpayer qualifies for an exclusion under the bankruptcy or insolvency exceptions.

Consult with a Tax Professional

This can be a complicated issue, so we recommend that anyone involved in one of these transactions consult with a tax professional to review their particular situation. If you or someone you know is involved in a foreclosure or a short sale and is concerned about the possible tax consequences, please feel free to contact our offices at (561) 624-2118 to schedule a consultation.

Glenn Schanel, CPA, CFP® is the President of Schanel & Associates, PA, Certified Public Accountants. The firm provides tax, accounting, and consulting services to clients throughout South Florida and the United States.

The information contained in this communication is intended as general guidance on matters of interest only. The application and impact of laws can vary widely based on specific facts involved. Given the changing nature of laws, rules and regulations, and the inherent hazards of electronic communication, there may be delays, omissions, or inaccuracies in information contained in this transmission. The information contained herein should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisors. Pursuant to Regulations Governing Practice Before the Internal Revenue Service, any tax advice contained in this communication, unless explicitly provided otherwise, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

All your working life you have strived to develop a successful business. The investment you make in your business is much more than just money or capital. It includes a substan tial amount of your time and hard work.

Over the years, the small business you started will grow based on your hard work. As a reward of this growth, a business’s income will increase and be available to you. In addition, the value of the business will also increase over time.

However, following your death, the business will have to be valued and that value will be added to your estate to compute the estate taxes due. The real question at this point is how to convert this illiquid business interest into cash to pay the estate taxes and other estate administration costs.

The general solution appears to be to simply sell the business or liquidate. Liquidation is not an attractive alternative because it is unlikely the liquidation value is equivalent to the business’s full fair market value. The better alternative is for the estate is to sell the business. But who will buy a closely held business interest? What is a fair price? When will the sale be made? Where will the funds come from?

This “dispositio n dilemma” is easily resolved when a buy-sell agreement is established. This agreement provides that:

• someone (e.g., the business entity, the surviving owners, or a key employee) will purchase a deceased owner’s interest, minimizing the possibility that the business might fall into the hands of outsiders
• at an agreed -upon price, minimizing the possibil ity that the parties involved will not be able to agree on a proper value for the business, and
• the deceased owner’s estate is obligated to sell the interest at that price, minimizing the chances that the parties may not live up to their agreement.

A properly drafted buy-sell agreement also minimizes the possibility that funds will be unavailable to make the purchase, and provides a deceased owner’s estate with needed liquidity by converting an illiquid asset into cash. It’s easy to see why a buy-sell agreement is so valuable. It helps assure business continuity for the surviving owners and fair treatment of the deceased owner’s heir(s).

The advantages of implementing a Buy-Sell plan are somewhat obvious: continuity of management; to create a ready market for the business interest; to provide a fair and reasonable price; and to peg the value of the business interest for federal estate tax purposes.
There are several types of Buy-Sell Agreements. Which one to use depends on several factors,including the number of business owners, the relative ages and health status of the owners,concern about the Alternative Minimum Tax, and whether a step-up in cost basis is desired by the surviving owners. Some of the most common types of Buy-Sell Agreements are the Entity or
Stock Redemption, Cross Purchase, Wait-and-See, Mixmaster, and the One Way Buyout.

Once the type of plan is chosen, it is very important to decide how the liability for the purchase price will be funded. Several possibilities exist:

• Surplus, which consists of an existing fund of the purchaser
• Sinking Fund, also known as a savings account or savings plan
• Borrowing, obtaining financing from a third party, such as a bank
• Installment Sale, financing from the seller
• Life Insurance, which may provide a death benefit and a sinking fund

Each of these funding options has advantages and disadvantages. However, the disadvantages generally outweigh the advantages in all of them except for the use of life insurance, which by its nature provides the cash, in the amount needed, at exactly the time it’s needed, usually without taxation. For this reason, life insurance is most often the preferred funding vehicle in buy-sell planning. The annual premium provides an ascertainable cost and the policy provides a benefit no other plan accomplishes — guaranteed funds in the event of a premature death. The policy, if a whole life policy, may also act as a savings or sinking fun since the cash value in the policy is accumulated on a tax deferred basis. And the death benefit is income tax free!

In sum, life insurance meets the client’s objectives. First, it not only has an ascertainable cost, but it also is the least expensive. Second, the availability of the funds is certain in the case of a premature death. It may also act as a sinking fund.

Lastly, the use of the insurance allows the surviving owner to continue the business free and clear. It also allows the deceased owner’s family to receive the cash for the decedent’s interest, since they are paid in full and there is no installment sale, borrowing, or a shortfall of funds.

Glenn G Schanel, CPA and Associates, PA

Glenn G. Schanel of Glenn G Schanel, CPA and Associates, PA represents American General Life Insurance Company (AGL), with securities offered through American General Securitie s Incorporated (AGSI), 2727 Allen Parkway, Houston, Texas, 77019. Member NASD and SIPC. AGL and AGSI are member companies of American International Group, Inc. (AIG). Glenn G Schanel, CPA and Associates, PA is a separate entity from any member of AIG. Mr. Schanel can be reached by calling (561) 624-2118.

The U.S. Chamber of Commerce has endorsed for its members the products and services of member companies of American International Group, Inc. (AIG), the leading U.S.-based international insurance and financial services organization. American General Life Insurance Company, a member company of AIG, provides a broad portfolio of top-tier financial products for businesses, families and individuals.

The comments in this article are those of the presenter and not necessarily those of AIG American General. Neither AIG American General nor its agents provide legal or tax advice. You should always consult with your tax and legal advisors about the appropriateness of this concept to your business, and ask your life insurance representative for the best product with which to fund this plan.

AIG American General is the marketing name for the life insurance companies and affiliates of American International Group, Inc. (AIG), that comprise AIG’s Domestic Life Operations, including American General Life Insurance Company.

What Are They?

A health savings account (HSA) is a means of saving for medical expenses on a taxfavored basis. It is not health insurance, but rather is a custodial account that is set up with a financial institution and created exclusively for the benefit of the account holder to
save for medical expenses.

How Are Contributions Taxes?

Contributions to an HSA are deductible for federal income tax purposes. The maximum annual contribution to an HSA for 2005 is the lesser of the annual deductible under a high deductible health insurance plan or $2,650 for individual coverage or $5,250 for family coverage.

Who Is Eligible For An HSA?

Any individual under age 65 who is covered by a “high deductible” health plan and cannot be claimed as a dependent on someone else’s tax return. A high deductible health plan in 2005 has an annual deductible of at least $1,000 for individual coverage, or
$2,000 for family coverage.

How Are Distributions Taxed?

Distributions from an HSA to pay the medical expenses of the individual and family are excludible from income. Distributions not used to pay medical expenses are subject to tax and penalties.

The following is a summary of the annual contribution limits for retirement savings plans for 2006:

Please contact our office at (561) 624-2118 if you have any questions.