Taxes and Timing

June 2009 Top 100 Community Security National Corporation is one of the BA NK S US BANKER 2009* in the U.S. Taxes and Timing For comedians, and perhaps for life in general, timing is everything. Our tax code includes innumerable examples of that, which is what contributes to its extraordinary complexity. Congress affixes special dates to some tax breaks to lower their “revenue costs.” Here are three new examples, taken from the “stimulus bill” enacted in February. time buyers, but it had to be paid back over time, beginning after three years of living in the home. So last year’s tax break was really a loan, not a credit at all, and the record shows that it did not have much impact on the housing market. The stimulus bill ups the ante to $8,000 and eliminates the payback requirement. Again, dates are critical. The key here is when title passes, not when the contract is signed. Home purchases that closed after December 31, 2008, are eligible for the enhanced tax treatment, while taxpayers who bought earlier in 2008 still will have to pay their credit back. But home-buyers shouldn’t wait until the last minute, because the new credit expires on November 30, 2009 (not December 31, 2009, as one might expect). Why the 11month window, instead of the full tax year? Presumably, to reduce revenue cost. For both the 2008 and 2009 tax years, the home-buyer tax credit begins phasing out at $75,000 of AGI for singles, $150,000 for joint filers. Only time will tell whether the new credit works better than the one that it replaced. New car deduction The purchaser of a new vehicle today, and for the rest of the year, may be entitled to a new “abovethe-line” deduction for state and local sales taxes or excise taxes associated with the purchase. Taxes on leases are not eligible, however. Each taxpayer may claim the tax break on the first $49,500 in value for any one purchase. Cars, SUVs, light trucks and motorcycles, whether foreign or domestic, generally are all eligible, provided they weigh no more than 8,500 pounds. The tax break phases out at higher income levels. Singles with adjusted gross income up to $125,000 and married couples with up to $250,000 may take full advantage of this 2009 opportunity. However, only purchases on or after the date of enactment of the stimulus bill are eligible for this tax treatment. President Obama signed the legislation on February 17, 2009, so that is the key date. Anyone who bought a new car in January is out of luck. Why would Congress use that arbitrary date, instead of simply granting the deduction for all 2009 purchases? Because the point of the deduction is to cause new sales to happen, and the earlier sales already occurred. Those purchasers would get a slight windfall, and IRS would get less money, if the easier-to-understand approach had been used. Education credit For the 2009 and 2010 tax years only, the HOPE education credit has been rechristened the “American Opportunity Tax Credit,” and the maximum credit goes from $1,800 for 2008 to $2,500 for each of the next two years. The beginning of the phaseout was lifted to $80,000 singles/$160,000 joint filers. The scope of the credit is larger now as well. It’s available for all four years of college and may be applied to course materials. To get the maximum credit, one must have $4,000 of qualifying education expenses. The first $2,000 of expenses creates a dollar-for-dollar credit, and the next $2,000 generates a 25% credit, so the total is $2,500. The changes to the education credit were made retroactive to January 1, 2009, in the stimulus bill, and they apply to the full calendar year. But it’s still not simple. Tuition that was paid for the spring semester of 2009 is not eligible for the higher credit if the payment was actually made in 2008. No wonder so many people rely on computers to do their taxes. continued on the next page First-time home-buyer tax credit A far more costly example of this phenomenon is the first-time homebuyer credit. Last year Congress created a $7,500 “credit” for first- Wealth Management & Trust Division Top 100 Community Security National Corporation is one of the Build America Bonds There are new players on the municipal bond stage, Build America Bonds (BABs). The new instruments, introduced by the American Recovery and Reinvestment Act (also known as the “stimulus bill”), are a new type of taxable municipal bond. BABs will have one of two types of subsidies from the federal government. Either the federal government will pay the issuer 35% of the interest costs of the bond, or the issuer may pass along a 35% tax credit to the bond buyers. BABs can be issued only in 2009 (after February 17, 2009) and throughout 2010, under current law. They generally are intended to finance new capital projects of state and local governments. BABs could be free of state income tax in the state of issuance, depending upon how the state wants to handle it. Why is a new kind of municipal bond helpful to the economic recovery? Because it has the potential to pull many more buyers into the market. Pension funds, endowments and other tax-free investment funds will give consideration to BABs, although they would not ordinarily consider tax-free municipal bonds. Foreign investors not subject to U.S. tax laws also may find BABs attractive. The bonds are expected to have risk and yield characteristics that fall between U.S. Treasury issues and corporate bonds. The market for tax-free municipals has been hard hit by the current economic turmoil, making it difficult for state and local governments to raise new money. The availability of this alternative instrument may help the tax-free muni market to stabilize. Early market reaction has been positive. BABs were first offered in April. California, for example, with the worst credit rating of any state, successfully sold $6.9 billion in bonds, of which $1.62 billion was in traditional taxfree format. The balance was subsidized by the federal government picking up 35% of the interest cost. Market observers expect that $150 billion worth of BABs may be issued, though there is no cap on issuance in the law. * Security National Bank of Sioux City and Security National Bank of South Dakota are 100% owned by Security National Corporation. Ranked by three-year average ROE. Banks and thrifts with less than $2 billion of assets at Dec. 31, 2008. Market value is calculated using the most recently publicly available information regarding share count and the most recent closing price. Represents the average return on equity for the three years ending Dec. 31, 2006, 2007 and 2008. List includes public banks and thrifts traded on major exchanges, pink sheets and bulletin boards. Private companies that file with the SEC are also included. Source: SNL Financial LC Our team BA NK S US BANKER 2009* has an average of over 12 years with Security National Bank and over 800 years of combined banking and finance experience. in the U.S. Our team is comprised of: • • • • • • Attorneys Certified Trust and Financial Advisors (CTFA) Certified Financial Planners (CFP®) Chartered Financial Analyst (CFA) Qualified Retirement Advisors (QKA) Masters in Business Administration (MBA) | | | | | Login to your accounts Read topical articles Check the markets Listen to educational podcasts Stay on track with your financial goals Security National Bank 601 Pierce St., Sioux City, IA 51101 (712) 277-6586 • www.snbwealth.com Security National Bank of South Dakota 325 Dakota Dunes Blvd. Dakota Dunes, SD 57049 (605) 232-6065 • www.snbwealth.com Security National Bank of South Dakota 6601 So. Louise Ave., Sioux Falls, SD 57108 (605) 977-9007 • www.snbwealth.com 6-2-09