If you throw all the products we buy and the services we use in one basket, then add up the price tag, that's the Gross Domestic Product, which is the primary metric economists use to assess the economic health of a country or region.

The easy part of calculating GDP is the calculation itself: C+I+G+(X-M)=GDP. Got it? No? Well, add Consumption, Investment by companies, Government purchases, and then take the product of eXports (calling it 'E' would lack sexiness) minus iMports ('I' was taken). Viola! GDP.

Still don't get it? Well, knowing the components helps. Consumption is the biggest component, and it's a tally of the cost of all the goods and services we buy. Investment is what companies spend on the real assets they own, plus the value of the inventory that we haven't gobbled up through consumption. Government purchases are what the Feds pay money for (whether it be highways or fighter jets, though big social programs, like welfare, aren't counted). And then we calculate the difference between the goods and services we¿re sending to other countries and the stuff we're bringing in.

Good. That explains it, except there's a catch. Inflation has a habit of distorting the numbers, so economists talk about either Nominal GDP or Real GDP. In fact, Real GDP isn't necessarily "real" for most folks, since it takes any inflation out. Nominal GDP includes the effects of inflation. (There's something called the implicit price deflator which is a calculation using the two, but we'll spare you the details.)

So, now that we know GDP, why do we want to? Well, it's good to compare different markets. And watching the trend shows whether a given economy is growing (good), stagnating (not so good), or shrinking (very not so good). When GDP goes down two quarters in a row, we're officially in a recession.

For the record, GDP is released at the end of each month, with most reporting ¿preliminary¿ data for the previous month. But you won't get final GDP numbers for the fourth quarter of a year until the very end of the first quarter of the next year. After all, it's not an easy number to calculate.

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Tuesday, July 29, 2008

The Hidden Tax Traps In The Housing-rescue Bill

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Eva Rosenberg

MarketWatch

LOS ANGELES -- The eagerly anticipated housing-rescue bill, also know as the Housing Assistance Act of 2008, is intended to calm the mortgage market, the real estate market, homeowners on the verge of bankruptcy and foreclosure, victims of bank failures and others whose lives are topsy-turvy this year.

But from a tax perspective, the bill is likely to cause more upset than calm. Here is a look at five areas where tax law was changed along with housing law, and the good news and bad news that goes along with each:

1. Tax credit for new homeowners

First, we have a $7,500 credit for new homeowners that's not really a credit. It's a loan. Those who qualify to receive this credit will receive 10% of the purchase price of their home -- up to $7,500, in the first year. Then they will repay the loan over a 15-year period, starting in the second year after the taxable year in which the house is purchased.

In other words, if you bought a home in August 2008, you start paying back 6.667% of the original credit on your 2010 tax return. This credit applies to purchases of new homes on or before April 9, 2008 and before July 1, 2009.

The good news:

This is a refundable credit. That means, even if your total tax liability is zero, you can file to get this money directly from IRS. Although this is a loan, it's a zero-percent loan. Bonus: If you buy the home in 2009, before July 1, 2009, you can make an election to report the purchase on your 2008 tax return and get the refund a year early.

The bad news:

Mark Luscombe, principal tax analyst for CCH, a Wolters Kluwer business, points out that people who normally don't have to file tax returns will need to start filing tax returns just to pay the credit back. That will affect seniors living on modest fixed incomes and Social Security. If you forget to pay it back? Well, the bill doesn't include any specific penalties. But all of IRS's usual non-filing and non-payment penalties will apply. Expect IRS computers to track this and to issue notices for unfilled returns. If you sell the house in less than 15 years, you will have to repay the rest of the credit immediately. This requirement is waived if the owner dies. There are special provisions when the house is sold due to divorces or other emergencies. This is a temporary credit and may not be renewed once it expires on June 30, 2009. The credit phases out for married folks, filing jointly, with modified adjusted gross income (MAGI) between $150,000- $170,000. For singles, the phase-out is at MAGI between $75,000-$95,000.

Who qualifies? Folks who haven't owned a principal residence for three years before buying the new home. If you've owned a vacation home or timeshare, you will still qualify.

In long-distance marriages each spouse may buy his/her own home (principal residence). They will have to split the credit between them.

2. New standard deduction rules

We have a new standard deduction -- in addition to the old standard deduction -- for real property taxes paid. This is designed for folks whose overall itemized deductions fall below the standard deduction. Married couples, filing jointly, may now deduct qualified real property taxes paid up to $1,000 ($500 for singles and married filing separately).

"Qualified" refers to real property taxes you could have deducted on Schedule A if you had been able to itemize. Naturally, property taxes used on other parts of your tax return, like Schedule E, Schedule C, Schedule F, or office in home can't be used again here.

Luscombe points out that generally when Congress gives us these extra deductions, they are "above the line" deductions, like education expenses, student-loan interest and teacher expenses.

This is effective in 2008. And there are no AGI limits to this benefit.

3. Vacation-home hit

We've been taking for granted that lovely $250,000 ($500,000 for couples filing jointly) personal residence capital-gains-tax exclusion for about a decade. Savvy taxpayers have played hopscotch, moving from home to vacation home to the next home, etc. and avoiding income taxes on the sale of each one. That free ride is at an end.

The personal resident exclusion is still good on your personal home. However, you'll be paying taxes on the sale of your vacation home, or rental property converted to a home. The tax will be based on the amount of days the house was not a qualified personal residence divided by the total number of days you owned it. This ratio is multiplied by the amount of gain realized on the sale of the property.

Gain resulting from depreciation taken on the property after May 6, 1997 won't be included in this computation. That gain will still be taxed separately as ordinary income.

The good news:

This won't affect any sales you make this year since the law becomes effective on Jan. 1, 2009 The ownership period to take into account as the numerator for nonqualified use also starts on Jan. 1, 2009.

Snowbirds, folks who typically summer in their principal residences up north and spend winter in their vacation homes in the south will have to wait until IRS writes up regulations interpreting the new law. It's not clear if their temporary absences will be considered a period of nonqualified use.

The new law defines unqualified use as:

any period after the last date the property is used as the principal residence of the taxpayer or spouse (regardless of use during that period), and any period (not to exceed two years) that the taxpayer is temporarily absent by reason of a change in place of employment, health, or, to the extent provided in regulations, unforeseen circumstances, are not taken into account.

4. Tighter tracking of payments

In a blow to eBay merchants and others accepting credit cards, debit cards, or third-party payments, your merchant bank will now be required to send a report to IRS and to you with your total annual gross payment card receipts. In other words, IRS will get your total merchant credit card gross receipts for the year.

The good news:

For merchants who had always meant to catch up on bookkeeping, you will now get a report summarizing all the money you received. This won't be effective until Jan. 1, 2011. There will be an exemption for business with 200 or fewer transactions generating sales of $20,000 or less.

The bad news:

Like most bank reports that add up total deposits, it will be wrong. After all, there were credits you issued, and refunds that won't be reflected in the total gross receipts. Be sure to reduce the total income on that report by all the costs and fees you had too. In the past, when IRS wanted to get information from banks and merchant accounts, it required going to a judge and getting a subpoena. With this new law in place, IRS can now step in and audit at any time -- with a little or no notice, depending on the urgency of the circumstances, explains Luscombe.

5. Miscellaneous provisions

Some other juicy tidbits tossed our way include:

Tax exempt interest on certain mortgage bonds will no longer be an alternative minimum tax preference. Low-income-housing credits and rehabilitation credits may now reduce AMT. Bonds backed by FHA are eligible for treatment as tax-exempt bonds.

Many of the provisions of this law won't become effective until next year. Some won't be effective for several years.

But the provisions for converting your vacation home to a personal residence are becoming effective soon. So, if you've got a second house you want to sell tax-free in the next year or two -- move into it before the end of this year.

Eva Rosenberg is the founder of TaxMama.com and an enrolled agent licensed to represent taxpayers before the IRS. She is the author of the new e-book, "The 100% Home-Based Business Tax Solution." Reach her at taxwatch@gmail.com