President Trump signed into law the first two phases of the House’s coronavirus economic response package. Meanwhile, the Senate has been developing and negotiating "much bolder" phase three legislation.

President Trump signed into law the first two phases of the House’s coronavirus economic response package. Meanwhile, the Senate has been developing and negotiating "much bolder" phase three legislation.

Families First Coronavirus Response Act
The House had sent its Families First Coronavirus Response bill (HR 6201) and accompanying technical corrections resolution to the Senate on the evening of March 16. "I have decided we are going to vote…on the bill that came over from the House, and send it to the president for his signature," Senate Majority Leader Mitch McConnell, R-Ky., told reporters during a March 17 press briefing. "A number of my members think there are a number of shortcomings in the bill, and I counsel them to gag and vote for it anyway… and address those shortcomings in the next measure."

Senate Democrats were largely pleased with leadership’s decision to pass the House bill without amending it, while moving forward on additional legislation. "We will have other opportunities to legislate," Senate Minority Leader Chuck Schumer, R-N.Y., said from the Senate floor on the morning of March 17.

President Trump signed the Families First Coronavirus Response Act ( P.L. 116-127) into law on the evening of March 18.

Paid Leave Credits
The Families First Coronavirus Response Act increases funding for COVID-19 testing, and extends paid sick leave to employees all over the country affected by the pandemic. Under the new law, employers with fewer than 500 employees and government employers must provide paid sick leave to employees who are forced to stay home due to illness, quarantining, or caring for a family member because of COVID-19, or to care for a son or daughter if the school or place of care is closed due to COVID-19.

The new law compensates non-governmental employers for the required paid leave with refundable credits against the employer’s portion of the Old-Age, Survivors, and Disability Insurance (OASDI) payroll tax or the Railroad Retirement Tax Act (RRTA) Tier 1 payroll tax, as appropriate. It also provides similar credits for paid leave "equivalent amounts" to self-employed individuals affected by COVID-19.

Paid sick leave credit. For an employee who is unable to work because of a COVID-19 quarantine or self-quarantine, or who has COVID-19 symptoms and is seeking a medical diagnosis, eligible employers may receive a refundable sick leave credit for sick leave at the employee's regular rate of pay, up to $511 per day and $5,110 in total, for a total of 10 days. For an employee who is caring for someone with COVID-19, or is caring for a child because the child's school or child care facility is closed, or the child care provider is unavailable, due to the COVID-19, eligible employers may claim a credit for two-thirds of the employee's regular rate of pay, up to $200 per day and $2,000 in total, for up to 10 days.

Paid family care (child care) leave credit. For an employee who is unable to work because of a need to care for a child whose school or child care facility is closed, or whose child care provider is unavailable, due to the COVID-19, eligible employers may receive a refundable family care (child care) leave credit. This credit is equal to two-thirds of the employee's regular pay, up to $200 per day and $10,000 in total. Up to 10 weeks of qualifying leave can be counted towards the child care leave credit.

Phase Three
"That legislation [the Families First Coronavirus Response Act] was hardly perfect. It imposes new costs and uncertainty on small businesses at precisely the most challenging moment for small businesses in living memory," Senate Majority Leader McConnell said from the Senate floor on March 19. "So the Senate is even more determined that our legislation cannot leave small business behind."

The phase three measure under consideration includes several key components, such as:

• new federally-guaranteed loans for small businesses;
• direct financial help/emergency tax relief;
• targeted lending to industries of national importance; and
• health resources for those working on the front lines of combating COVID-19.

"The small business relief will help. And so will a number of additional tax relief measures, which will be designed to help employers maintain cash flow and keep making payroll," McConnell said. He also highlighted Republicans’ focus of putting "cash in the hands of the American people…from the middle class on down."

To that end, Treasury Secretary Steven Mnuchin reportedly said on March 19 that the forthcoming economic stimulus package would deliver $1,000 to every U.S. adult and $500 for every child. Further a second round of checks in the same amount would go out to individuals six weeks later, Mnuchin added.

"Americans need cash now and the president wants to get cash now. And I mean now, in the next two weeks," Mnuchin said at the White House.

Meanwhile, Senate Minority Leader Schumer has continued discussions with Senate Republicans and the Trump administration. As this Issue went to press, it still remained unclear how quickly Democrats and Republicans will reach consensus on the phase three measure.

"We don’t want bailouts unless they are used for workers, unless the industries keep all their employees, unless they don’t cut salaries of their employees, and unless they are not allowed to buy back their own stocks or raise corporate salaries," Schumer said in a March 19 tweet.

"At President Trump’s direction, we are moving Tax Day from April 15 to July 15," Treasury Secretary Steven Mnuchin said in a March 20 tweet. "All taxpayers and businesses will have this additional time to file and make payments without interest or penalties."

"At President Trump’s direction, we are moving Tax Day from April 15 to July 15," Treasury Secretary Steven Mnuchin said in a March 20 tweet. "All taxpayers and businesses will have this additional time to file and make payments without interest or penalties."

The Treasury and IRS officially announced the extension on March 21 (IR-2020-58; more details can be found in Notice 2020-18).

The move to extend this year’s tax filing deadline to July 15 follows the IRS’s formal announcement that certain 2019 tax year payments could be deferred without interest or penalties (see "Due Date for Federal Income Tax Payments Extended to July 15" in this Issue).

File as Usual if a Refund is Expected
"Working with our members, state societies, and tax professionals everywhere, AICPA scored a victory in the extension of the tax filing deadline to July 15, 2020," the American Institute of CPAs (AICPA) said in a March 20 tweet. However, the AICPA noted that it still encourages taxpayers to file their returns as soon as possible so that refunds can stimulate the economy.

"The AICPA understands the need for economic stimulus and, if possible, those who can file and get refunds should do so now," AICPA president and CEO Barry Melancon said in a statement.

Similarly, Mnuchin also encouraged taxpayers to file their returns, if possible. "While I still encourage taxpayers who expect to get a refund to file their taxes, this deadline extension will give everyone maximum flexibility to do what is best for them."

See Tax Filing and Tax Payment Relief for Coronavirus/COVID-19 Pandemic for a summary of filing and payment delays allowed by the federal and state governments.

The Treasury Department and IRS have extended the due date for the payment of federal income taxes otherwise due on April 15, 2020, until July 15, 2020, as a result of the ongoing coronavirus (COVID-19) emergency. The extension is available to all taxpayers, and is automatic. Taxpayers do not need to file any additional forms or contact the IRS to qualify for the extension. The relief only applies to the payment of federal income taxes. Penalties and interest on any remaining unpaid balance will begin to accrue on July 16, 2020.

The Treasury Department and IRS have extended the due date for the payment of federal income taxes otherwise due on April 15, 2020, until July 15, 2020, as a result of the ongoing coronavirus (COVID-19) emergency. The extension is available to all taxpayers, and is automatic. Taxpayers do not need to file any additional forms or contact the IRS to qualify for the extension. The relief only applies to the payment of federal income taxes. Penalties and interest on any remaining unpaid balance will begin to accrue on July 16, 2020.

Dollar Limits
The due date for making federal income tax payments otherwise due on April 15, 2020, for any taxpayer is automatically extended until July 15, 2020. The extension is limited to a maximum amount:

• up to $1 million for individuals, regardless of filing status, and other unincorporated entities such as trust and estates; and
• up to $10 million for each C corporation that does not join in filing a consolidated return or for each consolidated group.

Federal Income Tax Payments Only
The relief is available for federal income tax payments, including payments of tax on self-employment income, otherwise due on April 15, 2020. Thus, it applies to the payment of federal income taxes for the 2019 tax year, as well estimated income tax payments for the 2020 tax year that are due on April 15, 2020. The extension is not available for the payment or deposit of any other type of federal tax.

Taxpayers are urged to check with their state tax agencies for details on any delays in filing and payment state taxes.

Penalties and Interest
Any interest, penalty, or addition to tax for failure to pay federal income taxes postponed will not begin to accrue until July 16, 2020. The period from April 15, 2020, to July 15, 2020, will be disregarded but only for interest, penalties, or additions to tax up to maximum dollar amounts ($1 million or $10 million as applicable).

Interest, penalties, and additions to tax will continue to accrue from April 15, 2020, on the amount of any federal income tax in excess of the maximum dollar amounts. Taxpayers subject to penalties or additions to tax that are not suspended may seek reasonable cause under Code Sec. 6651 for failure to pay tax.

Individuals and certain trusts and estates may also seek a waiver to a penalty under Code Sec. 6654 for failure to pay estimated income taxes. Similar relief is not available for estimated tax payments by corporations or tax-exempt organizations for the penalty under Code Sec. 6655.

The IRS has provided emergency relief for health savings accounts (HSAs) and COVID-19 health plans costs. Under this relief, health plans that otherwise qualify as high-deductible health plans (HDHPs) will not lose that status merely because they cover the cost of testing for or treatment of COVID-19 before plan deductibles have been met. In addition, any vaccination costs will count as preventive care and can be paid for by an HDHP.

The IRS has provided emergency relief for health savings accounts (HSAs) and COVID-19 health plans costs. Under this relief, health plans that otherwise qualify as high-deductible health plans (HDHPs) will not lose that status merely because they cover the cost of testing for or treatment of COVID-19 before plan deductibles have been met. In addition, any vaccination costs will count as preventive care and can be paid for by an HDHP.

HSAs and HDHPs
Eligible individuals can deduct contributions to HSAs. One requirement to qualify as an individual is to be covered under an HDHP and have no disqualifying health coverage. An HDHP is a health plan that satisfies certain requirements, including requirements with respect to minimum deductibles and maximum out-of-pocket expenses.

COVID-19 Relief
A health plan that otherwise satisfies the HDHP requirements will not fail to be an HDHP merely because it provides medical care services and items purchased related to testing for and treatment of COVID-19 prior to satisfaction of the applicable minimum deductible. As a result, the individuals covered by such a plan will not fail to be eligible individuals merely because of the provision of health benefits for testing and treatment of COVID-19.

This relief provides flexibility to HDHPs to provide health benefits for COVID-19 testing and treatment without application of a deductible or cost sharing. Individuals participating in HDHPs or any other type of health plan should consult their particular health plan regarding health benefits for COVID-19 testing and treatment provided by the plan, including the potential application of any deductible or cost sharing.

Caution. The IRS states that this relief applies only to HSA-eligible HDHPs. Employees and other taxpayers in any other type of health plan should contact their plan with specific questions about what their plan covers.

The American Institute of CPAs (AICPA) has requested additional guidance on tax reform’s Code Sec. 199A qualified business income (QBI) deduction.

The American Institute of CPAs (AICPA) has requested additional guidance on tax reform’s Code Sec. 199A qualified business income (QBI) deduction.

199A Deduction Guidance
The IRS issued final and proposed regulations in February 2019 on the Code Sec. 199A QBI deduction enacted in 2017 under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97). Additionally, the IRS later issued Frequently Asked Questions (FAQs) on the computation of QBI and instructions to Form 8995, Qualified Business Income Deduction Simplified Computation, and Form 8995-A, Qualified Business Income Deduction.

However, taxpayers and practitioners need additional related guidance, according to the AICPA. "We urge that you provide additional certainty regarding which deductions are not reductions for QBI," the AICPA wrote in a March 4 letter addressed to David Kautter, Treasury’s assistant secretary for tax policy, and Michael J. Desmond, IRS chief counsel. The letter was released by AICPA on March 6.

In brief, the AICPA recommends that Treasury and the IRS confirm that the deductible portion of self-employment tax under Code Sec. 164(f), the deduction for self-employed health insurance under Code Sec. 162(l), and the deduction for contributions to qualified retirement plans under Code Sec. 404 are not automatically reductions of QBI. Additionally, it recommends that the IRS update form instructions to reflect the same treatment for a charitable deduction under Code Sec. 170.

199A Rules Under Review
Meanwhile, the White House’s Office of Information and Regulatory Affairs (OIRA) is currently reviewing Code Sec. 199A rules as related to guidance on computations for shareholders of real estate investment trusts (REIT). OIRA received the rules from Treasury on March 5, according to its website.

The IRS has issued guidance that:

• exempts certain U.S. citizens and residents from Code Sec. 6048 information reporting requirements for their transactions with, and ownership of, certain tax-favored foreign retirement trusts and foreign nonretirement savings trusts; and
• establishes procedures for these individuals to request abatement or refund of penalties assessed or paid under Code Sec. 6677 for failing to comply with the information reporting requirements.

The IRS has issued guidance that:

• exempts certain U.S. citizens and residents from Code Sec. 6048 information reporting requirements for their transactions with, and ownership of, certain tax-favored foreign retirement trusts and foreign nonretirement savings trusts; and
• establishes procedures for these individuals to request abatement or refund of penalties assessed or paid under Code Sec. 6677 for failing to comply with the information reporting requirements.

The guidance is effective as of the date the revenue procedure is published in the Internal Revenue Bulletin, and applies to all prior open tax years, subject to the limitations under Code Sec. 6511.

Reporting on Foreign Trusts
Code Sec. 6048 generally requires annual information reporting of a U.S. person’s transfers of money or other property to, ownership of, and distributions from, foreign trusts. Reporting is not required, however, for transactions with foreign compensatory trusts described in Code Secs. 402(b), 404(a)(4), or 404A. Further, the IRS is authorized to suspend or modify any Code Sec. 6048 reporting requirement if the United States has no significant tax interest in obtaining the required information.

Reporting Relief
The Treasury and IRS have determined that U.S. individuals should be exempt from the Code Sec. 6048 reporting requirement for certain tax-favored foreign trusts because:

• the trusts are generally subject to written restrictions (e.g., contribution limitations, conditions for withdrawal, and information reporting) by the laws of the country where the trust is established; and
• U.S. individuals with an interest in these trusts may be required by Code Sec. 6038D to separately report information about their interests in accounts held by or through the trusts.

A foreign trust covered by this guidance is a trust established under a foreign jurisdiction’s law to operate exclusively or almost exclusively to provide, or earn income for the provision of, either pension or retirement benefits and ancillary or incidental benefits, or medical, disability, or educational benefits. To be eligible for coverage, the foreign trust must meet other requirements listed in the guidance that have been established by the laws of the trust’s jurisdiction.

An eligible individual:

• must be compliant with all requirements for filing a U.S. federal income tax return for the period he or she was a U.S. citizen or resident; and
• to the extent required by U.S. tax law, must have reported as income any contributions to, earnings of, or distributions from, an applicable tax-favored foreign trust on the return or an amended return.

Penalty Relief
Eligible individuals who have been assessed a penalty for failing to comply with Code Sec. 6048 for an applicable tax-favored foreign trust and want relief must complete Form 843, Claim for Refund and Request for Abatement. The individual must write "Relief pursuant to Revenue Procedure 2020-17" on Line 7 of the form, and explain how the individual and the foreign trust meet the requirements in the guidance. The form should be mailed to Internal Revenue Service, Ogden, UT 84201-0027.

Scope
This guidance does not affect:

• any reporting obligations under Code Sec. 6038D or any other provision of U.S. law, including the requirement to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR);
• the exception from reporting for distributions from certain foreign compensatory trusts (Section V of Notice 97-34, 1997-1 C.B. 422); or
• the exception from information reporting requirements for certain Canadian retirement plans ( Rev. Proc. 2014-55, I.R.B. 2014-44, 753).

Proposed Regs
The Treasury and IRS intend to issue proposed regulations that would modify the information reporting requirements to exclude eligible individuals’ transactions with, or ownership of, applicable tax-favored foreign trusts. The Treasury and IRS request comments about these and other similar types of foreign trusts that should be considered for an exemption from Code Sec. 6048 reporting.

The Treasury and IRS have adopted as final the 2016 proposed regulations on covered assets acquisitions (CAAs) under Code Sec. 901(m) and Code Sec. 704. Proposed regulations issued under Code Sec. 901(m) are adopted with revisions, and the Code Sec. 704 proposed regulations are adopted without revisions. The Code Sec. 901(m) rules were also issued as temporary regulations. The CAA rules impact taxpayers claiming either direct or deemed-paid foreign tax credits.

The Treasury and IRS have adopted as final the 2016 proposed regulations on covered assets acquisitions (CAAs) under Code Sec. 901(m) and Code Sec. 704. Proposed regulations issued under Code Sec. 901(m) are adopted with revisions, and the Code Sec. 704 proposed regulations are adopted without revisions. The Code Sec. 901(m) rules were also issued as temporary regulations. The CAA rules impact taxpayers claiming either direct or deemed-paid foreign tax credits.

Covered Asset Acquisitions
The CAA rules are designed to address transactions that result in a basis difference for U.S. and foreign income tax purposes. In a CAA, the disqualified portion of any foreign income tax determined with respect to income or gain attributable to relevant foreign assets (RFAs) is not taken into account in determining direct or indirect foreign tax credits. Foreign taxes that are disqualified for foreign tax credit purposes remain eligible to be deducted.

Under Code Sec. 901(m), a CAA includes the following categories of transactions:

• a qualified stock purchase (defined in Code Sec. 338(d)(3) to which Code Sec. 338(a) applies (Code Sec. 338 CAA);
• a transaction treated as the acquisition of assets for U.S. income tax purposes and as an acquisition of stock for foreign income tax purposes;
• any acquisition of an interest in a partnership that has an election in effect under Code Sec. 754 ( Code Sec. 743(b) CAA); and
• any similar transaction determined by the Secretary of the Treasury.

An RFA is any asset, if income, deduction, gain or loss, attributable to the asset is taken into account in determining the foreign income tax.

The disqualified portion of the foreign income tax for the tax year is the ratio of:

• the aggregate base differences (i.e., excess of U.S. basis of RFA after CAA over U.S. basis before CAA) allocable to the tax year with respect to all RFAS, and
• the income on which the foreign income tax is determined.

Exemptions, Other Changes
The proposed regulations added the following three CAA transaction categories which are retained in the final regulations:

• transactions treated as an acquisition of assets for U.S. tax purposes, and as an interest in a fiscally transparent entity for purposes of foreign income tax purposes;
• transactions treated as a partnership distribution of one or more assets, the U.S. basis of which is determined under Code Sec. 732(b), Code Sec. 732(d), or which causes the U.S. basis of the partnership’s remaining assets to be adjusted under Code Sec. 734(b), provided the transaction results in an increase in the U.S. basis of one or more of the assets distributed by the partnership or retained by the partnership without a corresponding increase in the foreign basis of such assets; and
• transactions treated as an acquisition of assets for purposes of both U.S. income tax and a foreign income tax, provided the transaction results in an increase in the U.S. basis without a corresponding increase in the foreign basis of one or more assets.

The final regulations provide an exemption for CAAs if a domestic Code Sec. 901 payor or members of its consolidated group recognized the gains or losses or took into account its distributive share of the gains and losses recognized by a partnership for U.S. tax purposes as part of the original CAA. The term "aggregate base difference" is modified to take into account adjustments based on gain or loss recognized with respect to an RFA as a result of a CAA.

Under the foreign basis election in the proposed regulations, a taxpayer can elect to determine base difference as the U.S. basis in the RFA immediately after the CAA less the foreign basis in the RFA immediately after the CAA. Taxpayers may apply the election retroactively to CAAs that occurred on or after January 1, 2011, provided the remaining rules in the proposed regulations were applied retroactively. The final regulations modify the consistency requirement so that it applies only for tax years that remain open. Under a new requirement, deficiencies must be taken into account that would have resulted from the consistent application of the final regulations for a closed tax year.

The final regulations also extend the scope of the de minimis rule, under which a basis difference is not taken into account if:

• the sum of the basis differences for all RFAs is less than the greater of $10 million or 10 percent of the total U.S. basis or all RFAs after the CAA; or
• the RFA is part of a class of RFAs for which the sum of the basis differences of all RFAs in the class is less than the greater of $2 million or 10 percent of the total U.S. basis of all RFAs in the class immediately after the CAA.

An additional exclusion is added for an individual RFA with a base difference of less than $20,000.

The final regulations add a priority rule to address transactions to which both Code Sec. 901(m) and Code Sec. 909 apply. Under the rule, Code Sec. 901(m) calculations are taken into account before applying Code Sec. 909.

Tax Cut and Jobs Act changes, including the repeal of Code Sec. 902, are also reflected.

Applicability Date
The final regulations apply to CAAs occurring on or after the date the final regulations are published in the Federal Register. A taxpayer may choose to apply the regulations before they would otherwise apply, provided consistency requirements are met, for tax years open for assessment. Returns for tax years ending before the date the final regulations are published must be filed no later than one year after the publication date. For tax years not open for assessment, appropriate adjustments must be made to account for deficiencies that would have resulted from a consistent application of the rules.

People are buzzing about Roth Individual Retirement Accounts (IRAs). Unlike traditional IRAs, "qualified" distributions from a Roth IRA are tax-free, provided they are held for five years and are made after age 59 1/2, death or disability. You can establish a Roth IRA just as you would a traditional IRA. You can also convert assets in a traditional IRA to a Roth IRA.

Before 2010, only taxpayers with adjusted gross income of $100,000 or less were eligible to convert their traditional IRA (provided they were not married taxpayers filing separate returns). Beginning in 2010, anyone can convert a traditional IRA to a Roth IRA, regardless of income level or filing status.

Comment: While you can only contribute a maximum of $5,000 to a Roth IRA for 2010 (plus a $1,000 catch-up contribution if you are over age 50), you can convert an unlimited amount from a traditional IRA.

Conversion is treated as a taxable distribution of assets from the traditional IRA to the IRA holder, although it is not subject to the 10 percent tax on early distributions. While paying taxes on conversion is undesirable, the advantages of holding assets in a Roth IRA usually outweigh this disadvantage, especially if you will not be retiring soon. Furthermore, if you convert assets in 2010, you have the option of including them in income in 2011 and 2012 (50 percent each year) instead of 2010.

Comment: Generally, this income-splitting would be advantageous to any taxpayer who does not expect a sharp increase in income in 2011 or 2012. A wildcard factor is that the lower income tax rates that have been in effect since 2001 will expire after 2010 and could increase in 2011.

There are four ways to convert a traditional IRA to a Roth IRA:

• A rollover - you receive a distribution from a traditional IRA and roll it over to a Roth IRA within 60 days;
• Trustee-to-trustee transfer - you direct the trustee of the traditional IRA to transfer an amount to the trustee of a Roth IRA;
• Same-trustee transfer - the trustee of the traditional IRA transfers assets to a Roth IRA maintained by the same trustee; or
• Redesignation - you designate a traditional IRA as a Roth IRA, instead of opening a new Roth account.

Comment: The account holder does not have to convert all of the assets in the traditional IRA.

Another advantage of converting assets from a traditional IRA to a Roth IRA is that you can change your mind and put the assets back into the traditional IRA. This is known as a recharacterization. You have until the due date, with extensions, for the return filed for the year of conversion. Thus, if you convert assets in 2010, you have until mid-October in 2011 to undo the conversion.

This ability to recharacterize the conversion allows you to use hindsight to check whether your assets declined in value after the conversion. Since you are paying taxes on the amount converted, a decline in asset value means that you paid taxes on phantom income that no longer exists. However, if you convert assets into multiple Roth IRAs, you can choose to recharacterize the assets in a Roth IRA that decreased in value, while maintaining the conversion for a Roth IRA's assets that appreciated in value.

The use of a Roth IRA can be a savvy investment, but whether to convert assets is not an easy decision. If you would like to explore your options, please contact this office.

Yes, but only for a limited time. In late December 2009, Congress passed the 2010 Defense Appropriations Act (2010 Defense Act). The new law temporarily extends the eligibility period for COBRA premium assistance through February 28, 2010 and the duration of the subsidy for an additional six months (up to 15 months).

Reduced premiums

Individuals who are involuntarily separated from employment between September 1, 2008 and February 28, 2010 may be able to make reduced premium payments for COBRA continuation coverage. Instead of paying the full monthly premium, assistance eligible individuals pay 35 percent of the premium and their former employers pay the remaining 65 percent of the premium. The former employer is reimbursed by a payroll tax credit.

Extension

Originally, Congress set a December 31, 2009 deadline for eligibility for COBRA premium assistance. The 2010 Defense Act extended the deadline for eligibility to February 28, 2010. The 2010 Defense Act also extended the maximum period for receiving the subsidy an additional six months (from nine to 15 months).

In some cases, an individual may have exhausted his or her nine months of COBRA premium assistance before Congress approved the extension. The 2010 Defense Act provides an extended period for the retroactive payment of the individual's 35 percent payment. To continue coverage, the assistance eligible individual must pay the 35 percent of premium costs by February 17, 2010 or, if later, 30 days after notice of the extension is provided by their plan administrator.

In other cases, an individual may have exhausted his or her nine months of COBRA premium assistance and paid 100 percent of the COBRA premium for December. Individuals who paid the full COBRA premium in December are entitled to a refund under the 2010 Defense Act.

Automatic

Individuals who qualify for COBRA premium assistance are automatically eligible to pay reduced premiums for up to six more months for a total of 15 months. The individual must continue to be eligible for the subsidy. If he or she becomes eligible for other group health coverage (such as a spouse's plan) or Medicare the individual is no longer eligible for COBRA premium assistance.

Income limits

Higher-income individuals may qualify for COBRA premium assistance but find they have to repay it. If an individual's modified adjusted gross income for the tax year in which the premium assistance is received exceeds $145,000 (or $290,000 for married couples filing a joint return), the amount of the subsidy during the tax year must be repaid. For taxpayers with adjusted gross income between $125,000 and $145,000 (or $250,000 and $290,000 for married couples filing a joint return), the amount of the premium reduction that must be repaid is reduced proportionately.

Higher-income individuals may permanently waive the right to COBRA premium assistance. However, they may not later obtain the subsidy if their adjusted gross incomes end up below the limits. Our office can help you decide which option is best.

Possible extension

Many lawmakers in Congress support extending eligibility for COBRA premium assistance beyond February 28, 2010. In fact, the House of Representatives approved a bill in December extending eligibility through June 30, 2010. However, the Senate has yet to vote on the bill. Our office will keep you posted of developments.

The new "new homebuyer" tax credit

The homebuyer tax credit would have expired on November 30, 2009 had Congress not extended the credit. The new credit is extended to homes purchased before (1) May 1, 2010, or (2) July 1, 2010 if the taxpayer enters into a written binding contract before May 1, 2010 to close on the home before July 1, 2010. The credit amount remains at a maximum of $8,000, or 10 percent of the home's purchase price (whichever is less). However, the new law places a cap on the home's purchase price, which cannot exceed $800,000 in order to claim the credit. In addition, a modified credit is available for "repeat" homebuyers, discussed below.

Comment. The "first-time homebuyer credit" is somewhat of a misnomer. Under the original - and now extended - credit, you did not (and still do not) technically have to be purchasing your very first home to qualify for and take the credit. A first-time homebuyer for purposes of the $8,000 credit is a taxpayer who an individual (and spouse, if married) who had no present ownership interest in a principal residence during the three-year period ending on the date the home is purchased. This means that you could have previously owned a home as long as you have not had any ownership interest in a personal residence for at least the three years prior to purchasing the home for which you are claiming the credit.

Congress raises income limits

The homebuyer tax credit is also now available to a greater segment of the home-buying population. The new law has increased the income limits that phase out the credit, allowing higher income individuals and families to qualify.Phase-out of the credit begins under the new law at $125,000 modified adjusted gross income (AGI) for single taxpayers (up from $75,000) and at $225,000 for married taxpayers filing joint returns (up from $150,000). The phaseout range itself is $20,000, thereby reducing the credit to zero for individual taxpayers with modified AGI of more than $145,000 ($245,000 for married joint filers). The credit is reduced proportionately for taxpayers with modified AGIs between these amounts.

"Long-time" homeowners qualify for reduced $6,500 credit

A reduced homebuyer tax credit may be claimed by existing homeowners who have owned and lived in their home for a long period of time. The reduced tax credit, of up to $6,500, may benefit long-time homeowners who are ready to move up or simply move on from their current home. The tax credit is equal to 10 percent of the home's purchase price up to a maximum of $6,500. Purchases of homes priced above $800,000 are not eligible for the tax credit.

To qualify for the reduced $6,500 credit, you must be a "long-time resident" as defined by the law. For purposes of the credit, a "long-time resident" is defined as a person who has owned and resided in the same home for at least five consecutive years of the eight years prior to the purchase of the new residence. Importantly, for married taxpayers, the law tests the homeownership history of both the spouses.

If you are an existing, repeat homebuyer who qualifies for the reduced credit, you do not have to purchase a home that is more expensive than your previous home to qualify for the tax credit. There is no requirement that the new principal residence be a "move up" property; it can be less expense than your former home. However it must be your new "principal residence" in order to claim the credit. Moreover, a repeat homebuyer does not need to sell or otherwise dispose of his or her current residence to qualify for the $6,500, either, as long as your new home becomes your principal residence.

Example. Bob and Edith are married and are both eligible to claim the reduced $6,500 credit for existing "long-time residents." Their modified AGI is $240,000, which results in being $15,000 over the beginning of the phaseout for married taxpayers filing jointly. They will be able to claim a partial reduced homebuyer credit in the amount of $1,650 (15,000/$20,000 = 0.75; 1.0-0.75 = 0.25. $6,500 x 0.25 = $1,625).

While the homebuyer credit can be very valuable, it is also very complex. In addition to the provisions we have described, there are special rules for repayment, new documentation requirements, a purchase price cap, and more. Please contact our office for more details about the first-time homebuyer credit.