Starting in 2010

Estate Tax Repealed

The federal estate tax will be eliminated for estates of individuals who die in 2010 unless Congrress acts by December 31, 2009 to retain it.

Roth IRA Conversions

Starting in 2010, individuals with any amount of modified Adjusted Gross Income are free to switch a traditional IRA to a Roth IRA. Conversions are fully taxable at your regular tax rate. For conversions in 2010, taxpayers can spread the tax due over two years. Half the tax will be due in 2011, and the remaining half will be payable in 2012. Removing the limit on conversions effectively eliminates the income limit on contributions to Roth IRAs. A taxpayer with income too high to use a Roth will be able to contribute to a traditional IRA (which does not have income limits for contributions) and immediately convert to a Roth.

Domestic Production Activities Deduction

In 2010, this deduction increases to nine percent of qualifying business net income. This deduction applies to businesses engaged in construction, engineering or architectural services, film production, or the lease, rental or sale of equipment you manufactured. However, the rate remains 6 percent for oil and gas companies.

State and Local Sales Tax Deduction

The opportunity for itemizers to choose to deduct their state sales tax payments instead of deducting their state and local income taxes ends after 2009, unless Congress extends it.

Educators' Deduction

This deduction for classroom supplies purchased by educators lapses after 2009, unless Congress extends it.

Nontaxable Combat Pay Allowed for Earned Income Tax Credit (EITC)

The election to include nontaxable combat pay in the calculation of earned income for the Earned Income Tax Credit is not available after 2009, unless Congress extends it.

Tuition and Fees Deduction

The deduction for up to $4,000 of college tuition and fees expires after 2009, unless Congress extends it.

Direct Donations of IRAs to Charity

Beginning in 2010, the opportunity for IRA owners age 70½ to directly donate part of their IRA balance to charity will disappear, unless Congress extends it.

Income Earned Abroad

The maximum foreign earned income exclusion is increased to $91,500. This is a $100 increase from 2009.

Additional Standard Deduction for Property Taxes

Starting in 2010, non-itemizers will no longer be allowed to increase their standard deduction by up to $1,000 of property taxes paid, unless Congress extends this break.

Section 179 Expense Deduction

The maximum amount of equipment placed in service that businesses can expense drops by nearly 50%, to $135,000 from $250,000 previously.

Limits on Deducting Farm Losses

Beginning in 2010, the amount of farm losses you can enter to offset nonfarm income is capped at the greater of $300,000 or your net farm income over the past five years. But this limit will apply only if you get federal farm payments or Commodity Credit Corporation (CCC) loans. You can take suspended losses in later years. The caps will also apply to partners and S corporation owners.

Capital Gains Tax Rates

The tax rate on capital gains from the sale of assets held longer than one year remains at 0% for people in the 10 percent or 15 percent tax brackets. The 15 percent maximum tax rate on long-term capital gains for taxpayers in higher brackets also remains the same. However, these rates are scheduled to increase in 2011.

Dividend Tax Rates

Similarly, the special 5 percent maximum rate on dividends of taxpayers in the 10 percent and 15 percent tax brackets remains at zero percent through 2010.

Exemptions for the Alternative Minimum Tax

For 2010, the exemption levels drop to $45,000 for married filing jointly, $33,750 for singles and heads of household, and $22,500 for married couples filing separately. Congress, can, however, act in 2010 to extend the relief that was available in 2009.

Partial Exclusion for Unemployment Benefits

For 2010, the first $2,400 of unemployment benefits you receive is no longer tax-free.

Sales Tax Deduction for New Vehicles

Beginning in 2010, buyers of new vehicles no longer get a tax benefit for sales tax paid on new vehicles, unless they itemize and elect to deduct sales taxes instead of state income taxes.

Credit for Energy-Saving Home Improvements

The 30 percent tax credit of the cost of energy-saving home improvements reverts to 10 percent after 2010, and is capped at $500.

Starting in 2011

Higher Tax Rates
Beginning in 2011, tax rates that were in effect prior to 2001 return. The top income tax rate goes back to 39.6 percent, and the special low 10 percent bracket is eliminated. Whether this will actually happen will be at the heart of a spirited battle in Congress during 2010.
Estate Tax Revived
For individuals dying after 2010, the federal estate tax returns with a $1,000,000 exemption and a 50 percent maximum rate. Congress is likely to take some action on these rules during 2010.
Increase in Capital Gains and Dividend Tax Rates
The tax rate reductions for long-term capital gains and dividends is scheduled to expire this year.

• In 2011, the maximum long-term capital gains tax rate goes back up to 20 percent from 15 percent. A lower 10 percent tax rate is used by individuals who are in the 15 percent tax bracket. Their long-term capital gains had been tax-free since 2008.
• In 2011, dividend income (other than capital gain distributions from mutual funds) is taxed as ordinary income at your highest marginal tax rate.

Child Tax Credit
The credit of $1,000 per eligible child reverts to $500 after 2010. After 2010, none of the child tax credit will be refundable to taxpayers unless their earned income is more than $12,550. This is one of the many Bush tax cuts currently scheduled to expire after 2010.
Payroll Tax Credit
Starting in 2011, the partial credit for payroll taxes paid is no longer available.
Section 179 Expense Deduction
The maximum amount of equipment placed in service that businesses can expense drops to $25,000, down from $135,000 in 2010.
College Savings Plans
Beginning in 2011, 529 Plans can no longer be tapped tax-free to pay for a computer or Internet access.
Tax Credit for College Tuition
The Hope credit is again limited to the first two years of college and is capped at $1,800. None of the credit is refundable if it is more than your regular income tax liability.
Earned Income Tax Credit (EITC)
Temporary increases in the Earned Income Tax Credit for filers with three or more children and the higher income levels for the phaseout of the credit are repealed.
Mortgage Insurance Premiums
The special itemized deduction for mortgage insurance premiums paid on mortgages taken out after 2006 expires on Dec. 31, 2010.

Starting in 2013

Tax Relief for Taxpayers Who Lose Their Homes Due to Foreclosure Expires
Beginning in 2013, debt forgiven in connection with the foreclosure of a principal residence will once again be considered taxable income (unless you are in bankruptcy or insolvent).

Starting in 2017

Credit for Residential Energy-Efficient Property
The credit for 30 percent of the cost of installing solar water heating equipment, photovoltaic or fuel cell equipment, geothermal heat pumps or wind turbines in your primary residence or a second home does not apply after 2016.

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GENERAL TAX TOPICS:

APPLYING FOR ITIN – FORM W7 PROCEDURE
If you or your spouse or dependent are on non immigrant dependent visa or some how not eligible to get social security number, may qualify for ITIN number. To apply for ITIN number for your spouse or dependent you must have to fill out W7, attach a notarized copy of their passport & visa (usually first, last and visa page), notary should be done from the U.S. notary public or if you are in the foreign country then must be from any of the local U.S. consulate office in your country.
You can apply the ITIN only at time of filling your tax return. You can not file form W7 alone without filling the tax return.

Foreign Earned Income Exclusion:
If you meet certain requirements, you may qualify for the foreign earned income and foreign housing exclusions and the foreign housing deduction.
If you are a U.S. citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income. However, you may qualify to exclude from income up to $87,600 of your foreign earnings. In addition, you can exclude or deduct certain foreign housing amounts.

You may also be entitled to exclude from income the value of meals and lodging provided to you by your employer. Refer to Exclusion of Meals and Lodging in Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, and Publication 15-B, Employer's Tax Guide to Fringe Benefits for more information.

• Requirements
  
• Can I Claim the Exclusion or Deduction?
• Tax Home In A Foreign Country
• Bona Fide Resident test
  
• Physical Presence Test
  
• Exceptions to Tests
• Figuring The Exclusion
  
• Choosing The Exclusion
  
• Revocation
  
• Which Form to File
• Foreign Housing Exclusion or Deduction
• Individual Retirement Arrangements
  
• Extension to Claim Foreign Earned Income Exclusion

References/Related Topics

• Form 2555, Foreign Earned Income (PDF)
• Form 2555-EZ, Foreign Earned Income Exclusion (PDF)
• Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return (PDF)
• Form 2350, Application for Extension of Time to File U.S. Income Tax Return (PDF)
• Internal Revenue Bulletins
• Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad
• U.S. Citizens and Resident Aliens Abroad

Requirement:

To claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, you must have foreign earned income, your tax home must be in a foreign country, and you must be one of the following:

• A U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year
• A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, or
• A U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months

For tax year 2008 the maximum amount of the Foreign Earned Income Exclusion under section 911 of the Internal Revenue Code has been increased to $87,600. (Refer to Revenue Procedure 2007-66.) In addition, Section 515 of the Tax Increase Prevention and Reconciliation Act of 2005 (P.L. 109-222) amends the computation of the Maximum Housing Amount Exclusion under Section 911 of the Code. (Refer to Notice 2006-87 and Notice 2007-25.)

Limits

For each tax year, you cannot exclude more than the smaller of:

1.      $87,600 (or other amount determined under Section 911 of the Internal Revenue Code), or
2.      Your foreign earned income for the tax year minus your foreign housing exclusion.

If both you and your spouse work abroad and you and your spouse meet either the bona fide residence test or the physical presence test, you can each choose the foreign earned income exclusion. You do not both need to meet the same test. Together, you and your spouse can exclude as much as $175,200 for the tax year.

Part Year Exclusion

Part-year exclusion. If you qualify under either the bona fide residence test or the physical presence test for only part of the year, you must adjust the maximum limit based on the number of qualifying days in the year. The number of qualifying days is the number of days in the year within the period on which you both:

1.        Have your tax home in a foreign country, and
2.        Meet either the bona fide residence test or the physical presence test.

For this purpose, you can count as qualifying days all days within a period of 12 consecutive months once you are physically present and have your tax home in a foreign country for 330 full days. To figure your maximum exclusion, multiply the maximum excludable amount for the year by the number of your qualifying days in the year, and then divide the result by the number of days in the year.

Physical presence test

Under the physical presence test, a 12-month period can be any period of 12 consecutive months that includes 330 full days. If you qualify under the physical presence test for part of a year, it is important to carefully choose the 12-month period that will allow the maximum exclusion for that year.

For sales after 2007, the maximum exclusion on the sale of a main home by an unmarried surviving spouse is $500,000 if the sale occurs no later than 2 years after the date of the other spouse's death. However, this rule applies only if the requirements for joint filers relating to ownership and use were met immediately before the date of such death, and during the 2-year period ending on the date of such death, there was no sale or exchange of a main home by either spouse which qualified for the exclusion.

Like-Kind Exchanges Under IRC Code Section 1031

 Whenever you sell business or investment property and you have a gain, you generally have to pay tax on the gain at the time of sale. IRC Section 1031 provides an exception and allows you to postpone paying tax on the gain if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange. Gain deferred in a like-kind exchange under IRC Section 1031 is tax-deferred, but it is not tax-free.

The exchange can include like-kind property exclusively or it can include like-kind property along with cash, liabilities and property that are not like-kind. If you receive cash, relief from debt, or property that is not like-kind, however, you may trigger some taxable gain in the year of the exchange. There can be both deferred and recognized gain in the same transaction when a taxpayer exchanges for like-kind property of lesser value.

This fact sheet, the 21st in the Tax Gap series, provides additional guidance to taxpayers regarding the rules and regulations governing deferred like-kind exchanges.

Who qualifies for the Section 1031 exchange?

Owners of investment and business property may qualify for a Section 1031 deferral. Individuals, C corporations, S corporations, partnerships (general or limited), limited liability companies, trusts and any other taxpaying entity may set up an exchange of business or investment properties for business or investment properties under Section 1031.

What are the different structures of a Section 1031 Exchange?

To accomplish a Section 1031 exchange, there must be an exchange of properties.  The simplest type of Section 1031 exchange is a simultaneous swap of one property for another. 

Deferred exchanges are more complex but allow flexibility.  They allow you to dispose of property and subsequently acquire one or more other like-kind replacement properties. 

To qualify as a Section 1031 exchange, a deferred exchange must be distinguished from the case of a taxpayer simply selling one property and using the proceeds to purchase another property (which is a taxable transaction).  Rather, in a deferred exchange, the disposition of the relinquished property and acquisition of the replacement property must be mutually dependent parts of an integrated transaction constituting an exchange of property.  Taxpayers engaging in deferred exchanges generally use exchange facilitators under exchange agreements pursuant to rules provided in the Income Tax Regulations. .

A reverse exchange is somewhat more complex than a deferred exchange.  It involves the acquisition of replacement property through an exchange accommodation titleholder, with whom it is parked for no more than 180 days.  During this parking period the taxpayer disposes of its relinquished property to close the exchange.

What property qualifies for a Like-Kind Exchange?

Both the relinquished property you sell and the replacement property you buy must meet certain requirements. 

Both properties must be held for use in a trade or business or for investment.   Property used primarily for personal use, like a primary residence or a second home or vacation home, does not qualify for like-kind exchange treatment.

Both properties must be similar enough to qualify as "like-kind."  Like-kind property is property of the same nature, character or class.  Quality or grade does not matter. Most real estate will be like-kind to other real estate.  For example, real property that is improved with a residential rental house is like-kind to vacant land.  One exception for real estate is that property within the United States is not like-kind to property outside of the United States.  Also, improvements that are conveyed without land are not of like kind to land.

Real property and personal property can both qualify as exchange properties under Section 1031; but real property can never be like-kind to personal property. In personal property exchanges, the rules pertaining to what qualifies as like-kind are more restrictive than the rules pertaining to real property.  As an example,  cars are not like-kind to trucks. 

Finally, certain types of property are specifically excluded from Section 1031 treatment. Section 1031 does not apply to exchanges of:

• Inventory or stock in trade
• Stocks, bonds, or notes
• Other securities or debt
• Partnership interests
• Certificates of trust

What are the time limits to complete a Section 1031 Deferred Like-Kind Exchange?

While a like-kind exchange does not have to be a simultaneous swap of properties, you must meet two time limits or the entire gain will be taxable.  These limits cannot be extended for any circumstance or hardship except in the case of presidentially  declared disasters. 

The first limit is that you have 45 days from the date you sell the relinquished property to identify potential replacement properties.  The identification must be in writing, signed by you and delivered to a person involved in the exchange like the seller of the replacement property or the qualified intermediary.  However, notice to your attorney, real estate agent, accountant or similar persons acting as your agent is not sufficient. 

Replacement properties must be clearly described in the written identification.  In the case of real estate, this means a legal description, street address or distinguishable name. Follow the IRS guidelines for the maximum number and value of properties that can be identified. 

The second limit is that the replacement property must be received and the exchange completed no later than 180 days after the sale of the exchanged property or the due date (with extensions) of the income tax return for the tax year in which the relinquished property was sold, whichever is earlier. The replacement property received must be substantially the same as property identified within the 45-day limit described above.

Are there restrictions for deferred and reverse exchanges?

It is important to know that taking control of cash or other proceeds before the exchange is complete may disqualify the entire transaction from like-kind exchange treatment and make ALL gain immediately taxable.

If cash or other proceeds that are not like-kind property are received at the conclusion of the exchange, the transaction will still qualify as a like-kind exchange.  Gain may be taxable, but only to the extent of the proceeds that are not like-kind property.

One way to avoid premature receipt of cash or other proceeds is to use a qualified intermediary or other exchange facilitator to hold those proceeds until the exchange is complete.

You can not act as your own facilitator. In addition, your agent (including your real estate agent or broker, investment banker or broker, accountant, attorney, employee or anyone who has worked for you in those capacities within the previous two years) can not act as your facilitator.

Be careful in your selection of a qualified intermediary as there have been recent incidents of intermediaries declaring bankruptcy or otherwise being unable to meet their contractual obligations to the taxpayer.  These situations have resulted in taxpayers not meeting the strict timelines set for a deferred or reverse exchange, thereby disqualifying the transaction from Section 1031 deferral of gain.  The gain may be taxable in the current year while any losses the taxpayer suffered would be considered under separate code sections.

How do you compute the basis in the new property?

It is critical that you and your tax representative adjust and track basis correctly to comply with Section 1031 regulations.

Gain is deferred, but not forgiven, in a like-kind exchange. You must calculate and keep track of your basis in the new property you acquired in the exchange. 

The basis of property acquired in a Section 1031 exchange is the basis of the property given up with some adjustments.  This transfer of basis from the relinquished to the replacement property preserves the deferred gain for later recognition.  A collateral affect is that the resulting depreciable basis is generally lower than what would otherwise be available if the replacement property were acquired in a taxable transaction. 

When the replacement property is ultimately sold (not as part of another exchange), the original deferred gain, plus any additional gain realized since the purchase of the replacement property, is subject to tax.

How do you report Section 1031 Like-Kind Exchanges to the IRS?

You must report an exchange to the IRS on  Form 8824, Like-Kind Exchanges and  file it with your tax return for the year in which the exchange occurred. 

Form 8824 asks for:

• Descriptions of the properties exchanged
• Dates that properties were identified and transferred
• Any relationship between the parties to the exchange
• Value of the like-kind and other property received
• Gain or loss on sale of other (non-like-kind) property given up
• Cash received or paid; liabilities relieved or assumed
• Adjusted basis of like-kind property given up; realized gain

If you do not specifically follow the rules for like-kind exchanges, you may be held liable for taxes, penalties, and interest on your transactions. 

Beware of schemes

Taxpayers should be wary of individuals promoting improper use of like-kind exchanges.  Typically they are not tax professionals.   Sales pitches may encourage taxpayers to exchange non-qualifying vacation or second homes.  Many promoters of like-kind exchanges refer to them as “tax-free” exchanges not “tax-deferred” exchanges. Taxpayers may also be advised to claim an exchange despite the fact that they have taken possession of cash proceeds from the sale. 

Consult a tax professional or refer to IRS publications listed below for additional assistance with IRC Section 1031 Like-Kind Exchanges. 

References/Related Topics

• Publication 544, Sales and Other Dispositions of Assets
• Form 8824, Like-Kind Exchanges (PDF)

Form 4797, Sales of Business Property

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