AICPA's Hottest Tax Topics For 2009

• Chapter 1 -Individual Tax Corner
  • Learning Objectives
  • Introduction
  • Tax Issues Affecting Bankrupt and Insolvent Individuals
    • Basics on Excluded Debt Discharge Income
    • Relief for Bankrupt Individuals
    • Relief for Insolvent Individuals
    • Reduction of Debtor’s Tax Attributes Is Price for DDI Exclusion
    • How Individual Bankruptcy Estates and Bankrupt Individual Debtors Are Treated for Federal Income Tax Purposes
    • No Separate Bankruptcy Estate Tax Returns Required in Chapter 12 or Chapter 13 Cases
    • Exception for DDI from Principal Residence Mortgage Debt
    • Other DDI Relief Provisions May Apply in Specific Circumstances
  • Tax Implications of Personal Residence Short Sales and Foreclosures
    • Short Sales
    • What About the Excess Debt?
    • Tax Rules for Debt Discharge Income
    • Foreclosures
    • Exception for Debt Discharge Income from Principal Residence Mortgages Will Save the Day for Many
  • Paying Down Home Mortgage Balance Early Can Be Good
    Super-Conservative Investment Strategy
    • Sample Scenario: Accelerated Mortgage Pay-Down Strategy Avoids Inherently Ridiculous Outcomes and Delivers Guaranteed Return
    • Impact of Refinancing at Lower Interest Rate
    • Impact of Mortgage Interest Deductibility
    • Impact of Future Inflation or Deflation
    • Big Advantage to Continuing Program after Mortgage Is Paid Off
    • More Sample Scenarios
    • Conclusion
  • Reverse Mortgage Can Be Tax-Smart Strategy for Seniors
    Who Own Highly Appreciated Homes
    • Reverse Mortgage Can Provide Cash for Continued Home Ownership and Other Living Expenses
    • Reverse Mortgage Trends and Fees
    • Deducting Interest on a Reverse Mortgage
    • Other Reverse Mortgage Considerations
  • Unfavorable Rule Can Mean Higher Taxes on Properties Converted Into Principal Residences
    • Tax Planning Implications
  • How to Take Advantage of Rental Real Estate Exceptions to Dreaded Passive Loss Rules
    • Plan A: Take Advantage of “Small Landlord Exception”
    • Plan B: Take Advantage of “Real Estate Professional Exception”
  • Managing Capital Losses and Capital Loss Carryovers from Ill-Fated Investments
    • Triggering Capital Losses Now to Save Taxes in the Future
    • Sell Winners from Retirement Accounts; Sell Losers from Taxable Accounts
    • Effect of Capital Losses and Capital Loss Carryovers on College Savers
    • Strategies for Giving Stocks and Mutual Fund Shares to Relatives and Charities
    • Capital Gain/Loss Rules in a Nutshell for 2009 and 2010 (We Hope)
    • Capital Gain/Loss Netting Process in a Nutshell for 2009 and 2010 (We Hope)
    • Watch Out for the Dreaded Wash Sale Rule
  • Favorable Tax Rules (When Available) for Day Trader Losses and Expenses
    • Advantages of Mark-to-Market Election
    • How and When to Make the Election
    • Tax Reporting Issues for Traders
    • Traders Should Segregate Any Longer-Term Investments
    • Determining If Trader Status Is Available
  • Taxpayer Attempts to Treat Investment Losses as Ordinary Abandonment, Theft, or Casualty Losses Will Rarely Meet
    with IRS Approval
    • Attempts to Claim Ordinary Losses from Abandonment
    • Attempts to Claim Ordinary Losses from Theft or Casualty
    • Conclusion
  • Good News: IRS Grants Favorable Tax Treatment to Losses from Ponzi Investment Scams
    • Rev. Rul. 2009-9 Allows Taxpayer-Friendly Results
    • Rev. Proc. 2009-20 Allows Safe-Harbor Loss Deductions
  • Deducting IRA Losses
    • When Can Traditional IRA Losses Be Deducted?
    • When Can Roth IRA Losses Be Deducted?
    • Beware of 10% Penalty Tax When Liquidating Roth IRAs with Conversion Contributions
    • Here Are Some Examples
    • Conclusion
  • Deducting 529 Plan Losses
    • IRS Says Miscellaneous Itemized Deduction Treatment Applies
    • Mind These Other Considerations Too
    • Conclusion
  • Recovering Prior-Year Taxes under the Refundable AMT Credit Rules
    • Refundable AMT Credit Annual Limitation Rule for 2008-2012
    • Use FIFO to Determine Unused AMT Credits from Prior Tax Year
    • Coordination of Regular and Refundable AMT Credit Rules
    • AMT Credits Increased by Paid Interest and Penalties Attributable to Pre-2008 ISO Exercises
  • Perfect Storm for Roth IRA Conversions
    • Roth Conversion Basics
    • Scheduled Demise of $100,000 Restriction on Conversions for 2010 and Beyond
    • Direct Retirement Plan Rollovers (Conversions) into Roth IRAs Are Allowed
    • Assessing the Roth Conversion Variables
  • Reversing an Ill-Advised Roth IRA Conversion
    • Conversion and Reversal Basics
    • What If Roth IRA Has Other Contributions?
    • Reporting Reversals
    • Reconverting after Reversals
  • Tax Advantages of Trading in Broad-Based Equity
    Index Options
    • Special Rules Apply to Broad-Based Equity Index Options
    • Beware of Year-end Mark-to Market Rule
    • Finding Options That Qualify as Broad-Based
  • Treasury Inflation-Protected Securities (TIPS) Can Be Good Super-Conservative Investment for Retirement Accounts
    • TIPS to the Rescue
    • How TIPS Work
    • Clients Should Be Careful When Buying TIPS
    • Understand the Tax Implications
    • How to Buy TIPS
    • Conclusion
  • Taking Advantage of IRA Rollover Privilege for Non-Spousal Retirement Account Beneficiaries ..... 1-94 General Rollover Mechanics
    • Required Minimum Withdrawal Rules Apply to Receiving IRA
    • Special Considerations When Plan Participant Dies before RBD
    • Special Rollover Mechanics When Plan Participant Dies before RBD
    • Conclusions on Non-Spousal Rollover Privilege
  • Making Charitable Contributions from IRAs
    • Qualified Charitable Distribution (QCD) Definition
    • Sunset Date and Annual Limitation Rules
    • Senior IRA Beneficiaries Can Do QCDs Too
    • QCDs Offer Income and Estate Tax Advantages
    • Who Can Benefit?
    • Do QCDs from Roth IRAs Make Sense?
    • “Bad Old Rules” Will Return in 2010 Unless Congress Extends QCDs
  • Medical Expense Deductions for Costs to Enter and Stay in Continuing Care Retirement Communities
    • How CCRCs Work in a Nutshell
    • Fee Arrangements
    • Now for the Tax Angle
  • Structuring Tax-Smart Family Loans
    • Term Loan That Charges AFR Makes for Good and Simple Results
    • Loans Should Be in Writing
    • Interest-Free Loans: How to Beat the System
    • Remember: Charging Interest Rate Equal to AFR Allows Client to Completely Avoid Dreaded Below-Market Loan Rules
  • Divorce Planning: Dealing with Child-Related Tax Breaks
    • Noncustodial Parent Rule
    • Noncustodial Parent Rule Can Translate into Significant Tax Savings
    • Some Breaks May Be Available to Noncustodial Parent Even When Noncustodial Parent Rule Does Not Apply
    • Some Breaks Are Flatly Off-Limits for Noncustodial Parent
    • Custodial Parent Can Unilaterally Revoke Noncustodial Parent Rule
  • Update on the First-Time Homebuyer Credit and How to Claim Credit for Unmarried Co-Buyers
    • Eligibility Rules
    • Phaseout Rule
    • Under New Liberalized Rules, Credits Must Still Be Repaid in Certain Cases
    • Election to Claim Credit for 2009 Purchase on 2008 Return
    • Unmarried Co-Buyers Can Share Credit for Best Tax Results
  • Temporary Sales Tax Deduction for Buyers of New Vehicles
    • Non-Itemizers
    • Itemizers
    • Deduction Can Be Significant
    • Deduction Can Be Claimed for More Than One Purchase
    • Interaction with General State and Local Sales Tax Itemized Deduction
    • Eligibility Rules
    • Phaseout Rule
  • Update on Hybrid and Diesel Vehicle Credits
    • Hybrid Vehicle Credit
    • Lean-Burn Diesel Vehicle Credit
    • Interaction of Hybrid and Lean-Burn Credits with Temporary Sales Tax Deduction
  • Scoop on the Cash-for-Clunkers Program
    • Dealers Receive Government Money for Collecting Traded-In Clunkers
    • Specifics for New Passenger Autos
    • Specifics for New Trucks and Vans
    • Traded-In Clunkers Must Meet Strict Guidelines
    • Traded-In Clunkers Must Be Destroyed
    • Regulations
    • Consumer Information
    • Tax Angles
    • Conclusion
  • Liberalized Higher Education Credit for 2009 And 2010
    • Qualified Expenses and Eligibility Rules
    • Phaseout Rule
    • Partial Refundability Rule
    • No Changes for Lifetime Learning Credit
• Chapter 2 - Small Business Tax Corner
  • Learning Objectives
  • Introduction
  • Managing Section 1231 Losses for Optimal Tax Savings
    • Business Asset Gain and Loss Basics
    • Favorable Treatment for Section 1231 Losses (and Gains)
    • Beware of Dreaded Nonrecaptured Section 1231 Loss Rule
    • Tax-Smart Timing Considerations for Section 1231 Transactions
    • Net Section 1231 Losses Are Extra-Beneficial Because They Can Create or Increase NOLs
    • Triggering Tax-Saving Net Section 1231 Losses
  • Small and Medium-Sized Businesses Can Carry Back
    2008 NOLs for Up to Five Years
    • Eligible Taxpayers
    • Losses from S Corps, Partnerships, and Sole Proprietorships
    • Extended Carryback Election Procedures
    • NOL Calculations for Individuals
    • NOL Calculations for C Corporations
    • Remember: First-Year Bonus Depreciation Can Create or Increase NOLs
  • Updated Guide to Entity Choices for the Very Small Business
    • Liability Limiting Entities for the One-Owner Business
  • Liability Limiting Entities for Husband-Wife Businesses
    • Husband-Wife LLC Offers Maximum Tax Flexibility
    • Husband-Wife S Corp Can Reduce Social Security and Medicare Taxes
    • Husband-Wife C Corp: Last but Not Necessarily Least
    • Conclusions on Husband-Wife Liability Limiting Entities
  • Update on Filing Returns for Unincorporated Husband-Wife Businesses
    • How to Elect Out of Partnership Status
    • Definition of Qualified Joint Venture
    • IRS Admits Husband-Wife Rental Real Estate Business Can Be Qualified Joint Venture, but Watch Out for Tricky Tax Reporting Procedure
    • Unofficial IRS Guidance Says Husband-Wife LLC Cannot Be Qualified Joint Venture
    • Determining When Unincorporated Husband-Wife Businesses Must Be Treated as Partnerships for Tax Purposes
  • Long-Term Care Insurance Tax Benefits for Small Business Owners
    • Tax Treatment of Benefit Payments
    • Deductions for Long-Term Care Insurance Premiums
    • Bigger Breaks for Small Business Owners
  • Tax Benefits of Combining HSA with Section 105 Medical Expense Reimbursement Plan
    • Section 105 Plan Basics
    • Mind Section 105 Plan Details because IRS Is Watching
    • Use Employee-Spouse/Section 105 Plan Checklist
    • Section 105 Plan Can Pay First-Dollar Reimbursements for Certain Health Expenditures without Jeopardizing Employee-Spouse’s HSA Contribution Privilege
    • Putting the Tax-Saving Pieces Together
    • Do Not Forget to Account for Client’s Age
  • Depreciation Rules for Business Vehicles
    • “Heavy” SUVs, Pickups, and Vans Used for Business Still Rule
    • Reduced $25,000 Section 179 Deduction for Heavy SUVs
    • Despite $25,000 Limitation, Depreciation Rules for Heavy SUVs Are Still Quite Favorable
    • Mind These Caveats
  • The Current State of Leasing Versus Buying for
    Business Autos
    • The Analytical Framework
    • Using the After-Tax Present Value Framework: Comprehensive Example
    • Financial and Tax Implications of Car Leasing Terminology
  • Update on Health Insurance Premiums Paid for More-Than-
    2% S Corporation Shareholder- Employees
    • More-Than-2% S Corporation Shareholder-Employees Treated Same as Partners for Fringe Benefit Purposes
    • Specifics for More-Than-2% S Corporation Shareholder-Employees
    • IRS Website Article Created Controversy Out of Thin Air
    • IRS Adopts More Reasonable Stance in Notice 2008-1
    • What to Tell Affected Clients
  • Clients Can Subdivide and Prosper with Tax-Saving Section 1237 Exception
    • Qualifying for Low-Taxed Capital Gains Treatment
    • Definition of Tract of Real Property
    • Definition of Substantial Improvements
    • Election to Disregard Substantial Improvements
    • Unfavorable Rule Can Dilute Tax Savings
    • Conclusions
  • Developer Entity Strategy Can Slash Taxes on Appreciated Land
    • Step 1: Establish S Corp to Be the Developer
    • Step 2: Sell the Land to the S Corp
    • Step 3: Develop the Property and Sell It Off
    • Make Sure the Developer Entity Is an S Corp!
    • Anticipate IRS Challenges and Take Steps to Avoid Them
  • Self-Employed Clients Should Not Overlook Roth IRA Contribution Opportunities
    • Objection No. 1: Client’s Income Is Too High for Roth Contributions (Oops, That May Be Wrong!)
    • Objection No. 2: Roth Contributions Are Less Attractive Than Deductible Retirement Plan Contributions (Oops, That May Be Wrong Too!)
• Chapter 3 - Corporate Tax Corner
  • Learning Objectives
  • Introduction
  • Setting Reasonable Compensation Levels for Shareholder-Employees of Closely Held C Corps
    • What Is Reasonable?
    • Reasonable Compensation Checklist
    • Selected Reasonable Compensation Court Decisions
    • Tax Planning Impact of Reduced Tax Rates on Dividends
  • Is S Corp Shareholder-Employee Compensation Now a Hot Button for the IRS?
    • Times Are Changing
    • Tax Planning Implications
  • Benefits of Including Debt in C Corporation Capital Structure
    • Using Third-Party Debt
    • Using Owner Debt
    • How to Ensure Owner Debt Will Be Respected as Such
  • How C Corporation Shareholders Can Borrow from Their Corporations at Historically Low Interest Rates
    • Relatively Low AFRs Create Taxpayer-Friendly Results
    • Timely Corporation-to-Shareholder Loan Strategies
    • Avoiding Below-Market Loan Rules Is Good Idea
    • Seven Commandments for Corporation-to-Shareholder Loans
  • Planning for Zero-Basis Client Receivables and Professional Goodwill When Professional Corporation Converts to
    LLC or LLP Status
    • Damage Control Tax Planning Strategies
  • Arrange for Dividends, Stock Redemptions, and Stock Sales Now to Avoid Possible Future Tax Hikes
    • Strategy No. 1: Take Dividends Right Now
    • Strategy No. 2: Do Low-Taxed Stock Redemption Deal Right Now
    • Strategy No. 3: Sell Stock Right Now
    • The Bottom Line
  • Estate Tax Value of Closely Held Stock Can Be Reduced by Hypothetical Tax on Corporation's Appreciated Assets
    • How Should Hypothetical Tax Liability Be Calculated?
    • Now Eleventh and Fifth Circuits Both Like Taxpayer-Friendly Dollar-for-Dollar Method
  • Understanding When Expenditures Related to Intangibles Must Be Capitalized (or Not)
    • Amounts That Generally Must Be Capitalized
    • Acquired Intangibles for Which Capitalization Is Required
    • Created Intangibles for Which Capitalization Is Required
    • Other Intangibles Generally Must Be Separate and Distinct Assets for Capitalization to Be Required
    • Certain Transaction Costs Must Also Be Capitalized
    • Taxpayer-Friendly 12-Month Rule for Created Short-Term Intangibles (Including Prepaid Expenses)
    • Coordination of Section 263(a) Regulations with Rules for Accrual-Method Taxpayers
    • Separate Capitalization Rules for Amounts Paid to Facilitate Acquisitions, Restructurings, Contributions to Capital, Formations of Disregarded Entities, Etc.
    • Remember Taxpayer-Friendly Loopholes to Avoid Capitalization
    • Treatment of Capitalized Amounts
    • Impact of Section 263(a) Regulations on Pre-Opening Expenditures to Internally Start Up Brand New Business
    • Tax Compliance Drill for Pre-Opening Expenditures Incurred to Internally Start Up a Brand New Business
    • Impact of Section 263(a) Regulations on Pre-Opening Expenditures to Internally Expand Existing Business
    • Impact of Section 263(a) Regulations on Pre-Opening Expenditures Incurred in Connection with Same-Line-Of-Business Acquisition
    • Tax Compliance Drill for Pre-Opening Expenditures Incurred to Expand Existing Business (Internally or Via Acquisition)
    • Impact of Section 263(a) Regulations on Pre-Opening Expenditures Incurred in Connection with Acquisition of Dissimilar Business
    • Tax Compliance Drill for Pre-Opening Expenditures Incurred in Connection with Acquisition of Dissimilar Business
• Chapter 4 - New Tax Law Corner
  • Learning Objectives
  • Introduction
  • Individual Tax Changes in the American Recovery and Reinvestment Act of 2009
  • Health-Related Changes in the American Recovery and Reinvestment Act of 2009
    • Subsidized COBRA Coverage for Terminated Workers
    • Liberalized Health Coverage Tax Credit Rules
  • Business Tax Changes in the American Recovery and Reinvestment Act of 2009
  • Energy-Related and Miscellaneous Tax Changes in the American Recovery and Reinvestment Act of 2009
  • Summary of Key Tax Changes in the Worker, Retiree, and Employer Recovery Act of 2008
  • Individual Tax Changes in the Emergency Economic Stabilization Act of 2008
  • Preparer Penalty Changes in the Emergency Economic Stabilization Act of 2008
  • Business Tax Changes in the Emergency Economic Stabilization Act of 2008
  • Business Tax Changes in the Emergency Economic Stabilization Act of 2008
  • Energy-Related Tax Changes in the Emergency Economic Stabilization Act of 2008
  • Disaster-Relief Tax Changes in the Emergency Economic Stabilization Act of 2008
  • Executive Compensation Tax Changes in the Emergency Economic Stabilization Act of 2008
  • Investor and Broker Tax Changes in the Emergency Economic Stabilization Act of 2008
  • Miscellaneous Tax Changes in the Emergency Economic Stabilization Act of 2008
• Chapter 5 - Latest Developments

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Learning Objectives

1. Understand the basic federal income tax considerations that apply to bankrupt and insolvent individuals.
2. Understand how personal residence short sales and foreclosures are treated for federal income tax purposes.
3. Understand why accelerating the payment of home mortgage principal balances can be an attractive, albeit super-conservative, investment strategy.
4. Understand how a little-known provision can limit the tax advantage of converting a vacation home or rental property into a principal residence.
5. Understand how rental property owners can take advantage of exceptions to the passive activity loss (PAL) limitation rules.
6. Understand how capital losses and capital loss carryovers can be managed for the best tax results.
7. Understand favorable tax rules that may be available for day trader losses and expenses.
8. Understand the IRS view of taxpayer attempts to treat investment securities losses as ordinary losses from abandonment, theft, or casualty.
9. Understand favorable IRS rules for losses from Ponzi investment schemes.
10. Understand when clients can deduct IRA losses.
11. Understand when clients can deduct Section 529 plan account losses.
12. Understand when clients can take advantage of the refundable AMT credit rules.
13. Understand why now might be the perfect storm for Roth IRA conversions.
14. Understand how to reverse ill-advised Roth IRA conversions.
15. Understand the tax advantage of investing in broad-based equity index options.
16. Understand why Treasury Inflation-Protected Securities (TIPS) can be a sensible superconservative investment for retirement accounts, whether we have inflation or deflation.
17. Understand how non-spousal qualified retirement account beneficiaries can roll over inherited account balances into their own IRAs.
18. Understand the tax advantages of making qualified charitable contributions out of IRAs.
19. Understand how medical expense deductions can be claimed for seniors who enter continuing care retirement communities.
20. Understand how to arrange tax-smart loans between family members.
21. Understand how to handle child-related tax breaks for divorcing clients.
22. Understand how the temporary first-time homebuyer credit rules work, including when unmarried individuals team up to buy a home.
23. Understand the temporary deduction for state and local sales taxes paid on new vehicle purchases.
24. Understand the tax credits for purchasing new qualified hybrid vehicles and new leanburn diesel vehicles.
25. Understand the liberalized higher education tax credit for 2009 and 2010.

Introduction

This chapter covers the preceding “hot topics” that affect many individual tax clients. Some of the topics are “hot” due to recent tax law changes or developments. Others are “hot” because of economic or societal trends. Both compliance and planning tips are presented.

Tax Issues Affecting Bankrupt and Insolvent Individuals

This section gets you up to speed on the basic federal income tax rules that apply to bankrupt and insolvent individuals. Sadly, there are more and more of them everyday, and some of them may be your clients. Here is what you need to know to help them.

Basics on Excluded Debt Discharge Income

In some cases, financially distressed individuals are able to get their lenders to agree to reduce balances owed. This may occur outside of bankruptcy, in a so-called voluntary loan workout, or within bankruptcy, when the bankruptcy court mandates that certain debts must be reduced or eliminated whether lenders are amenable or not. In either case, the debtor will have some debt discharge income (DDI). The general rule is that DDI must be included in gross income for federal income tax purposes.

However, special relief provisions apply when DDI is recognized by a bankrupt or insolvent individual. These relief measures are found in Section 108 of the Internal Revenue Code. In fact, most of the relief measures are mandatory rather than elective. That means tax professionals (like you) better not miss them when they would help financially distressed clients.

Naturally, the government generally extracts a price for excluding DDI from taxation. Here is the price: certain tax attributes belonging to the bankrupt or insolvent taxpayer (NOLs, capital loss carryovers, passive loss carryovers, and so forth) must be reduced by the amount of DDI that is excluded from gross income (i.e., by the amount of DDI that is treated as federal-income-taxfree).

Relief for Bankrupt Individuals

Any DDI that occurs pursuant to a Title 11 of the U.S. Code bankruptcy proceeding is automatically excluded from federal income taxation. This is thanks to IRC Sec. 108(a)(1)(A).

Title 11 of the U.S. Code is not part of the Internal Revenue Code. Title 11 encompasses bankruptcy filings under Chapter 7 (so-called liquidations), Chapter 11 (so-called reorganizations), Chapter 12 (for farmers and fishermen), and Chapter 13 (so-called wage earner filings).

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (which we will call the 2005 Bankruptcy Act) made it considerably more difficult for individuals to file under Chapter 7 and thereby be completely exonerated from unsecured debts such as credit card balances. However, DDI still occurs in Chapter 7 cases (just not as often as before), and DDI still occurs in some Chapter 11, 12, and 13 cases.

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