Monthly Archives: June 2011

It’s Not as Easy Being Green

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The past few years, Congress has allowed tax credits for energy efficient home improvements.  In 2009 and 2010, the tax credit for building envelope and qualified energy property (discussed below) was equal to 30% of qualifying expenses up to a $1,500 credit.  Tax credits for alternative energy products (solar, wind, geothermal) were equal to 30% of such expenditures without limit.

Beginning January 1, 2011, Congress substantially reduced the amounts of such credits.  This post will discuss two home energy efficiency tax credits:

  • Credit for Nonbusiness Energy Property
  • Credit for Residential Energy Efficient Property

Credit for Nonbusiness Energy Property

This credit equals the sum of:

  • 10% of certain costs for property installed to improve the energy efficiency of existing homes (these costs are referred to as building envelope components)
  • 100% of costs for residential energy property expenses (subject to dollar limitations for each specific type of property)

Building envelope components (10% credit) include:

  • insulation
  • exterior windows (including skylights)
  • exterior doors
  • certain metal and asphalt roofs designed to reduce heat gain

It is important to note that these credits only apply when such property is installed in your principal residence.

For building envelope components, the credit is allowed only for amounts paid to purchase the components (i.e., the credit is NOT allowed for onsite preparation, assembly, or original installation).

Residential energy property (100% credit) includes:

  • electric heat pump water heaters (up to $300)
  • electric heat pumps (up to $300)
  • biomass fuel stoves (up to $300)
  • high-efficiency central air conditioners (up to $300)
  • natural gas, propane, or oil water heaters (up to $300)
  • natural gas, propane, or oil furnaces or hot water boilers (up to $150)
  • advanced main air circulating fans (used in natural gas, propane, or oil furnace) (up to $50)

The credit for qualified energy property is allowed for amounts paid to purchase the property as well as for onsite preparation, assembly, or original installation.

In prior years, the credit was not subject to the $50 to $300 limits.  The credit was equal to 30% of the expenses up to a $1,500 credit.

In 2011, there is a lifetime maximum nonbusiness energy property credit of $500 ($200 for exterior windows and skylights), taking into account all such credits allowed to the taxpayer for years ending after December 31, 2005.  This limit includes credits for building envelope components and for residential energy property.

Credit for Residential Energy Efficient Property

Clear your mind of the above rules.  This is a completely separate credit.

This credit is equal to 30% (without limit) of the cost of qualified:

  • solar electric property
  • solar water heating property
  • fuel cell property
  • small wind energy property
  • geothermal heat pump property

The rule for this credit has not changed from prior years—the credit is still equal to 30% of the costs of such property without limit.  This credit is allowed for amounts paid to purchase the property as well as for onsite preparation, assembly, or original installation.

This credit applies when the property is installed in your residence (the statute does not require it to be your principal residence).  It is therefore possible that you can claim a credit for this credit on a vacation home (although it would be best to wait for IRS guidance on the issue).

Both the credit for nonbusiness energy property and credit for residential energy efficient property are nonrefundable credits that can be used to offset both regular tax and alternative minimum tax.

One final note—taxpayers may rely on written manufacturer certifications that the property is qualified for these credits.

Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230.

Changes (some scary) to Michigan’s Personal Income Tax

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Our previous posts have described changes in Michigan tax law regarding pension income and business taxation.  This post will highlight changes to Michigan’s personal income tax.  These changes are generally effective January 1, 2012.

A list of the most relevant changes:

  • Political contributions will no longer be deductible.  Previously, Michigan allowed up to a $50 deduction for political contributions ($100 on a joint return)
  • Senior citizens will no longer be able to exclude a portion of interest, dividends, and capital gains received.
  • Taxpayers will no longer receive an additional $600 exemption per dependent child under age 19
  • Charitable contributions from retirement accounts will no longer be deductible for Michigan tax purposes
  • The additional exemption allowed for each taxpayer age 65 and older will be eliminated

There will also be substantial changes to the Homestead Property Tax Credit.  This credit is based on the property taxes assessed against your principal residence and its maximum amount is $1,200.  It is calculated as:

(Property Taxes Assessed – 3.5% of Household Income) * 60%

For senior citizens, the 60% at the end of the formula is increased to 100%.

The credit begins to phase out when Household Income exceeds about $73,000.

Changes to the Homestead Property Tax Credit:

  • a taxpayer will no longer be eligible for the credit if the taxable value of her homestead exceeds $135,000 (for a new home, this limit equates to a sale value of $270,000)
  • the credit will be phased out starting at $41,000 of household resources and will be completely phased out at household resources of $50,000
  • the 60% and 100% applicable percentages for non-seniors and seniors will be eliminated.  In its place will be an applicable percentage phase out based on household resources:
    • Those with $21,000 of household resources and lower will have an applicable percentage of 100%
    • The applicable percentage will phase out four percentage points for every $1,000 of household resources above $21,000.
    • The minimum applicable percentage will be 60%.

Under prior law, the Homestead Property Tax Credit was based on household income.  Under the new law, the credit will be based on household resources.  The primary difference between the two concepts is that household resources would exclude any subtractions due to net business, rental, or royalty losses.

Example:  John has W-2 income of $70,000 and a business loss of $30,000.  His household income is $40,000.  John pays property taxes of $2,000.  Under old law, his property tax credit would be based on the amount of his property taxes exceeding 3.5% of household income.  Subject to the applicable percentage, John property taxes eligible for the credit are $600 ($2,000 property taxes less $1,400 (which is 3.5% of household income of $40,000).

Under the new law, John’s household resources are $70,000 (household resources do not take into account business losses).  3.5% of his household resources is $2,450.  Since John’s property taxes of $2,000 don’t exceed 3.5% of household resources, John cannot take the property tax credit.

Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230.

Business Credit Card Sales Will Now Be Reported to the IRS by Credit Card Processors.

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The IRS is looking for ways to close the tax gap (the amount of tax that should be paid compared to the amount of tax that is actually paid).  The annual tax gap is roughly $340 billion per year.

To help the IRS locate more unreported income, Congress passed a law requiring credit card processing companies to report to the IRS the amount of credit card sales its customers receive.  The law takes effect this year.  In other words, if your business accepts credit cards, your credit card processor will report your credit card sales to the IRS (in early 2012 you will receive a Form 1099-K showing 2011 credit card sales).

The Form 1099-K will report your total credit card sales for the year, as well as monthly credit card sales.  A draft copy of the form can be viewed here.

The State of Michigan may also have some interest in viewing the monthly and total sales on these forms to make sure that all sales are being reported for sales tax purposes.

Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230.

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