Here is a case where, even though the IRS documentation did not state it directly, the real rule of the law makes an explicit statement, and therefore the Code is where the final rules are taken from. In this particular case, there is a situation where the home buyer credit is not available: if the home is purchased from a parent or another close relative (and vice versa). And the taxpayer who relied only on an IRS publication found out the hard way that the Internal Revenue Code is the final word on the subject.

There was a recent Tax Court case (Nievinski, TC Summary Opinion 2011-10) that challenged the limitation, and the Tax Court ruled in favor of the Service.  The argument was that, in a particular document, IRS Publication 4819 “Important Information About the First-Time Homebuyer Credit”, there was no express explanation of this limitation.

Unfortunately for the taxpayer in this case, the Code section 36(c)(3) does expressly prohibit the credit for such a transaction between related persons, and related persons definitely does include parents and other ancestors.

The same would be true in reverse, the parents could not have purchased the home from a child and claim the credit.

In addition, this ban on claiming the credit also applies to heirs buying a home from an estate, as well as to residences that were purchased after November 6, 2009 from an in-law.

The lesson here is that total reliance on IRS publications will not keep you out of dutch if the Code provides a counter or more complete explanation of the rules and regulations.  Make sure that you get the complete Code explanation – especially in the case of a move that is a little “on the edge” and seems like it may be too good to be true.

You can pick up my book, A Social Security Owner's Manual, at Amazon in either the print version or the Kindle version by clicking the links.
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Here are seven things that the IRS wants you to know about the Nonbusiness Energy Property Credit, as written about in the IRS Summertime Tax Tip 2010-16:

1. The new law increases the credit rate to 30% of the cost of all qualifying improvements and raises the maximum credit limit to $1,500 claimed for 2009 and 2010.
2. The credit applies to improvements such as adding insulation, energy-efficient exterior windows and energy-efficient heating and air conditioning systems.
3. To qualify as “energy efficient” for purposes of this tax credit, products generally must meet higher standards than the standards for the credit that was available in 2007.
4. Manufacturers must certify that their products meet new standards and they must provide a written statement to the taxpayer such as with the packaging of the product or in a printable format on the manufacturer’s website.
5. Qualifying improvement must be placed into service after December 31, 2008 and before January 1, 2011.
6. The improvements must be made to the taxpayer’s principal residence located in the United States.
7. To claim the credit, attach Form 5695, Residential Energy Credits to either the 2009 or 2010 tax return.  Taxpayers must claim the credit on the tax return for the year that the improvements were made.

Homeowners who have been considering some energy efficient home improvements may find these tax credits will get them bigger tax savings next year.

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12/19/2010 – with the passage of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, the provision for an IRA owner who is at least age 70½ to make a direct charitable contribution of up to $100,000 from his or her IRA has been extended through the end of 2011.  Such a direct contribution can be used to satisfy the IRA owner’s Required Minimum Distribution.

See the article Charitable Contributions from Your IRA in 2010 and 2011 for more details.

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Like all tax provisions, this is one that you have to pay particular attention to the details, otherwise you could miss out on the credit.  Following are seven facts that the IRS wants you to know about claiming the credit (IRS Tax Tip 2010-27).

Seven Important Facts About Claiming the First-Time Homebuyer Credit

1. You must buy – or enter into a binding contract to buy – a principal residence located in the United States on or before April 30, 2010.  If you have entered into a binding contract before April 30, 2010, you must close on the home purchase before October 1, 2010.
2. To be considered a first-time homebuyer, you and your spouse – if you are married – must not have jointly or separately owned another principal residence during the three years prior to the date of purchase.
3. To be considered a long-time resident homebuyer you and your spouse – if you are married – must have lived in the same principal residence for any consecutive five-year period during the eight-year period that ended on the date the new home is purchased.  Additionally, your settlement date must be after November 6, 2009.
4. The maximum credit for a first-time homebuyer is $8,000.  The maximum credit for a long-time resident homebuyer is $6,500.
5. You must file a paper return and attach Form 5405, “First-Time Homebuyer Credit and Repayment of the Credit” with additional documents (detailed below) to verify the purchase.  Therefore, if you claim the credit you will not be able to file electronically.
6. New homebuyers must attach a copy of a properly executed settlement statement used to complete such a purchase.   Buyers of a newly constructed home, where a settlement statement is not commonly available, must attach a copy of the dated certificate of occupancy.  Mobile home purchasers who are unable to get a settlement statement must attach a copy of the retail sales contract.
7. If you are a long-time resident claiming the credit, the IRS recommends that you also attach any documentation covering the five-consecutive-year period, including Form 1098, “Mortgage Interest Statement” or a substitute mortgage interest statement, property tax records or homeowner’s insurance records.

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In a move to reduce fraudulent claims, the IRS recently decided that in order to claim this credit, proof of the purchase of the new home must be attached to the return with form 5405 and the entire return must be paper-filed.

This will likely add at least a week to the processing time, and likely much more as the filing season progresses.  So if you’re claiming this credit, keep in mind that your turnaround for your refund will be extended specifically because of this credit.  I’m sure it will be worth the wait!

You can pick up my book, A Social Security Owner's Manual, at Amazon in either the print version or the Kindle version by clicking the links.
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Over the past year, this blog has undergone a few major changes… I upgraded the format to WordPress; then added the IRA Owner’s Manual, reorganizing all those IRA posts into a coherent manual; a summary, chapter by chapter, of the seminal book “The Richest Man In Babylon”; plus I started writing more – generally adding a new post every other day.

Planned for 2010:  more of all the yummy income tax, IRA, and other retirement-related and investment/financial planning articles that you’ve come to expect; likely a Social Security Owner’s Manual and a 401(k) Owner’s Manual (along the same lines as the IRA Owner’s Manual); guest experts will from time to time contribute posts on areas complimentary to my expertise; and continuing the pace of approximately 175 to 200 posts throughout the year.  Please pass along any suggestions for new topics and series that you’d like to see written up and discussed.

Listed below are the Getting Your Financial Ducks in a Row end of year statistics and Top Ten lists for 2009.  Thanks to all who have supported this blog in 2009 by reading, subscribing, commenting, linking, and not coming right out and booing!

General Statistics for 2009

• 198 total posts
• 228 comments & trackbacks
• 9,386 page views (averaging 26 per day)
• 105 RSS subscribers

Top 10 Most-Viewed Posts for 2009

1. The IRA Owner’s Manual
2. 401(k) & Qualified Domestic Relations Orders (QDRO)
3. Payroll Tax Reduction (ARRA 2009)
4. Auto Purchase Incentive (from ARRA 2009)
5. Separation From Service On or After Age 55
6. 19 Ways to Withdraw IRA Funds Without Penalty
7. Determining Your MAGI
8. Traditional IRA v. Roth IRA – Compare & Contrast
9. American Recovery and Reinvestment Act of 2009
10. 401(k) Fair Disclosure for Retirement Security Act of 2009

Top 10 Referrers for 2009

1. leimbergservices.com/blogwatch.cfm
2. obliviousinvestor.com
3. moneysmartlife.com/financial-advisor-…
4. blogher.com/those-pesky-401-k-fees-yo…
5. blogcatalog.com/blog/getting-your-fin…
6. twitter.com/
7. wohlnerfinancial.blogspot.com
8. keyfeeonly.com/web-resources
9. monevator.com/2009/12/12/weekend-read…
10. dividendsvalue.com/5086/weekly-links-…

Top 10 Search Engine Terms for 2009

1. qualified domestic relations order 401k
2. irs life expectancy tables 2009
3. payroll tax reduction 2009
4. net unrealized appreciation
5. payroll tax reduction
6. 2010 estate tax changes
7. arra car sales tax
8. 401k separation from service
9. 401(k) fair disclosure for retirement
10. 2010 gift tax exclusion

Top 10 Most Popular Links Clicked in 2009

1. bfponline.com
2. badmoneyadvice.com
3. iraownersmanual.com
4. irs.gov/publications/p590/index.html
5. irs.gov/pub/irs-drop/rr-02-62.pdf
6. blankenshipfinancial.com
7. carnivalofpersonalfinance.com
8. money.cnn.com/2009/01/06/pf/funds/etf…
9. affinefinancial.com/2009/07/09/can-an…
10. moneyning.com

That’s it for 2009 – Happy New Year to all, and thanks again for all your support! – jb

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In today’s tax law and until you’ve paid your taxes for 2009, this is how it works:  If you use the Standard Deduction – that is, if the total of your itemized deductions doesn’t exceed the Standard Deduction amounts – you are allowed to take an additional increase in your standard deduction for real estate taxes paid during the tax year.  This amount is the lesser of the actual amount that you paid in real estate taxes or $1,000 for a married couple filing jointly (MFJ).  The amount is $500 for single filers.

Beginning with tax year 2010, this increase goes away completely.  For many folks this can represent a direct increase in taxes – if you’re MFJ and in the 25% bracket, for example, this means you will pay an additional $250 in taxes.

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If you are in the market for a new home, you may still be able to claim the First-Time Homebuyer Credit. Congress recently passed The Worker, Homeownership and Business Assistance Act Of 2009, extending the First-Time Homebuyer Credit and expanding who qualifies.

Here are the top 10 things the IRS wants you to know about the expanded credit and the qualifications you must meet in order to qualify for it.

1. You must buy – or enter into a binding contract to buy a principal residence – on or before April 30, 2010.
2. If you enter into a binding contract by April 30, 2010 you must close on the home on or before June 30, 2010. Note: the closing date was updated to on or before September 30, 2010.
3. For qualifying purchases in 2010, you will have the option of claiming the credit on either your 2009 or 2010 return.
4. A long-time resident of the same home can now qualify for a reduced credit. You can qualify for the credit if you’ve lived in the same principal residence for any five-consecutive year period during the eight-year period that ended on the date the new home is purchased and the settlement date is after November 6, 2009.
5. The maximum credit for long-time residents is $6,500. However, married individuals filing separately are limited to $3,250.
6. People with higher incomes can now qualify for the credit. The new law raises the income limits for homes purchased after November 6, 2009. The full credit is available to taxpayers with modified adjusted gross incomes up to $125,000, or $225,000 for joint filers.
7. The IRS will issue a December 2009 revision of Form 5405 to claim this credit. The December 2009 form must be used for homes purchased after November 6, 2009 – whether the credit is claimed for 2008 or for 2009 – and for all home purchases that are claimed on 2009 returns.
8. No credit is available if the purchase price of the home exceeds $800,000.
9. The purchaser must be at least 18 years old on the date of purchase. For a married couple, only one spouse must meet this age requirement.
10. A dependent is not eligible to claim the credit.

For more information about the expanded First-Time Home Buyer Credit, visit IRS.gov/recovery.

You can pick up my book, A Social Security Owner's Manual, at Amazon in either the print version or the Kindle version by clicking the links.
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There is a provision expiring at the end of 2009 for folks over age 70½ who wish to make contributions to their favorite charities from their IRAs.  This provision allows you to make the contribution directly from your IRA, so that the income never shows up on your tax return at all.

Why does this matter?  Aren’t you able to make a contribution and follow that up with a deduction on Schedule A of your tax return?  Well, the difference is that if you make the contribution directly to the charitable organization, the income never shows up on your tax return.

This income, if it is included in your AGI (and MAGI), will impact many of your other deductions – for example, medical expenses are deductible only to the extent that they exceed 7.5% of your AGI.  If your AGI is inflated by a distribution from an IRA that is then contributed to a charity, of course the 7.5% will be much higher, thus eliminating some of your expenses from being deductible.

Eligibility

As mentioned before, to take advantage of this, you must be over over age 70½ and subject to Required Minimum Distributions (RMD) from your IRA.  There is also a limit of $100,000 that can be contributed directly to the charity and excluded from your gross income.

So through the end of 2009, you are still able to make this direct contribution from your IRA.  These contributions can also be used to satisfy your RMD for the year… just make sure that the distribution is made payable to the charitable organization.

Beginning in 2010, you’ll have to claim the distribution as income, and then make the contribution after that, so this will in effect be a tax increase for the folks that are taking advantage of this provision.

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12/17/2010 – with the passage of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, the rate changes formerly discussed in this article have been superseded.

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You can pick up my book, A Social Security Owner's Manual, at Amazon in either the print version or the Kindle version by clicking the links.
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