TAXES

Gift tax crackdown, Part 2

2012-01-02T06:13:00.000-08:00

As we posted on 5/31/11, the IRS wants to crack down on people who transfer assets to family members with little or no consideration without filing a gift tax return. At that time a court had decided that the state of California was not required to give the IRS the names of such people, because the records existed at the county, not the state level. Now the court has changed its mind and told California to give the information to the IRS. The IRS is seeking such information from several other states as well.

IRA--Deceased Spouse

2011-11-12T14:06:00.000-08:00

If one member of a married couple dies and leaves an IRA to the other, there is a potential pitfall to avoid if the surviving spouse is under 59 1/2 years old. If the surviving spouse takes distributions from the IRA, there are no penalties for early distribution, because death is an exception. However, if the surviving spouse rolls it over into his or her own IRA or into a new IRA, then the death exception no longer applies, and penalties will be assessed on distributions. The only thing the surviving spouse can do in that situation to avoid penalties is to wait until he or she becomes 59 1/2, or until a situation arises in which some other exception applies.

Some of the other exceptions are:
Disability
Medical (subject to severe limits)
Distributions to unemployed individuals for health insurance premiums
Higher education expenses
First home buyer (up to $10,000)
Distributions to reservists while on active duty for at least 180 days.

Qualified Charitable Distribution

2011-11-11T12:51:00.000-08:00

Many people are familiar with or have used the Qualified Charitable Distribution (QCD). It enables a person over 70 1/2 years old to make a direct payment to a charity from his or her IRA with no tax consequences. Without the QCD feature, if you take money out of an IRA and donate it to a charity, you have to pay tax on the withdrawal, but you are not guaranteed to get a deduction for the full amount of the donation. This is especially true for someone who does not usually itemize deductions. Various other factors can enter in to raise your tax despite the fact that all the money went directly to a charity. With the QCD, if the money is paid directly out to the charity by the IRA and never touches the taxpayer's hands, there is no effect on income tax.

The QCD has been in effect for a few years, but it is scheduled to expire at the end of this year. It was supposed to expire last year, but Congress renewed it at the last minute, and gave people till the end of January, 2011, to do a QCD for 2010. No one knows (probably not even Congress at the moment) if it will be renewed again.

IRS Budget Cuts

2011-11-06T05:57:00.000-08:00

Kiplinger reports that the IRS's budget will be cut back for 2012. The only question is by how much. So far, Congress has deep cuts in mind, but that could change by the time the budget is finalized. It could mean even longer waits on hold when we try to call them. It could possibly mean that the IRS has less resources for collections. The last we heard about that, the plan had been to put more resources into collection, but apparently budget realities could interfere with that. From the government's point of view, putting more resources into collections would be cost-effective, as it would bring in more money than than was spent on it. But don't tell them that. (Sssshhhh!)

Social Security

2011-11-04T18:04:00.000-07:00

Social Security recipients will get a 3.6% raise in 2012. They went a couple of years without a raise, because there supposedly was no inflation during those years.

A frequent question is, what happens if I retire before the full retirement age? People can retire at age 62 if they want, but their monthly checks will be less, and they will have limits on the amount of income they can earn before their benefits are reduced. After full retirement age (which is 66 for people retiring in 2012), you can earn as much as you want without any limitations on your SS benefits.

The earnings limits for people under 66 apply only to "earned" income, not things like rents received, interest, dividends, etc.

In 2012, the amount a person under 66 can earn without benefit cuts will be $14,640.

IRS Computers

2011-09-12T13:33:00.001-07:00

Their computers are back up. Sorry to get your hopes up.

IRS computers crash

2011-09-11T06:16:00.000-07:00

We called the IRS for a routine representation matter on Friday, Sept 9, and were told that their nationwide computer network had crashed at about 8:00 that morning. They took our name and number and said that someone would call us back within 30 days. We assume that the network will be back up in less than 30 days. We will keep you posted.

Estate tax, more

2011-08-25T06:35:00.000-07:00

The Federal estate tax is still in danger of reverting after 2012 to a $1,000,000 exemption and a 55% tax rate. Congress has not made the current law permanent. The odds are they will do something before 2012 is over, but it would be nice is they would commit to something for the long term.

Foreign Accounts

2011-07-26T00:03:00.000-07:00

The IRS's amnesty program for people with undeclared foreign accounts ends Aug 31. It allows affected taxpayers to pay taxes owed plus a penalty and avoid criminal prosecution for tax evasion. Meanwhile their investigation of foreign banks continues with Credit Suisse, a large Swiss bank.

Gift tax basics

2011-07-06T08:28:00.000-07:00

The gift tax exemption for 2011 and 2012 is $5,000,000. This is a lifetime exclusion. That means that a person can give up to that amount in his/her lifetime and not owe any gift tax.

A person can also give up to $13,000 each per year to any number of persons without having to count it towards the $5,000,000 and without the need to report it in any way.

If a person gives over $13,000 in a year to any one person, the giver must file a gift tax return. Though no tax is due as long as the lifetime total is under $5M, it officially reduces that $5M, which runs like a declining balance during the person's lifetime of giving.

When the person dies, the remaining balance is used to calculate the person's estate tax exemption.

Because Congress can't make up its mind about these things, the $5,000,000 exemption is scheduled to be reduced to $1,000,000 in 2013. (However, the estate tax exemption will still be $5M.) If that happens, anyone who has gone over $1,000,000 in reportable gifts by then, or who goes over it in 2013 or thereafter, will have to pay a gift tax on any subsequent gifts.

Congress may or may not act to preserve the $5,000,000 exemption. Everyone thought they would do something to avert the expiration of the estate tax for 2010, but the year was virtually over before they did anything.

You should also know that there are certain situations in which the gift tax exemption does not apply.

The top gift tax rate is currently the same as the top estate tax rate: 35%.

AMT Reform

2011-06-27T08:18:00.000-07:00

A group called ReformAMT is campaigning to eliminate the Alternative Minimum Tax on Incentive Stock Options. There is generally no regular tax when a person exercises ISO's, but the AMT on it can sometimes be substantial. People who are whacked with this tax don't like it, especially since it often comes as quite a surprise. Also, the transaction on which they are being taxed did not put any money in their pocket. (So how are they supposed to pay the tax??) Go to www.reformamt.org to find out what they are up to.

Mileage rates

2011-06-27T07:42:00.000-07:00

The standard mileage rate for business vehicle use is 55.5 cents for the July-Dec, 2011 period. For Jan-June, 2011, the rate was 51 cents per mile.

Other rate changes:
Medical miles: Jan-June = 19 cents; July-Dec = 23.5 cents
Moving expense miles: same as Medical miles

The rate for Charity miles remains 14 cent per mile.

Earned Income Credit

2011-06-19T11:42:00.000-07:00

The IRS has been concerned for some time with abuse of the Earned Income Credit. They have adopted a number of rules and requirements to combat that abuse. Tax preparers will probably have more hoops to jump through in coming years to substantiate the validity of the credit claimed. Some checklists exist which have been used voluntarily, but they may become required forms. No exact timetable has been given for such changes.

Gift tax crackdown

2011-05-31T04:37:00.000-07:00

As we reported in February, the IRS is trying to track down people who have failed to file gift tax returns. Recently they tried to get the state of California to give them records on people who transfer real estate to family members for no money or very little money. State attorneys argued in court that the records exist at the county level, not the state level, and that therefore the state could not do it. The court agreed. The IRS was directed to seek the records at the county level. There are 58 counties in California. The IRS has not said yet what it intends to do. A couple of possibilities are: (a) Proceed in contacting the counties, or (b) Move on to another state that might be easier to deal with. Massachusetts in recent years has moved many county functions to the state level, so we should not rule out the IRS snooping around here.

Buying business assets

2011-05-06T10:52:00.000-07:00

Machinery and equipment purchased in 2011 can be directly expensed (rather than depreciated) up to a value of $500,000. (Unless you buy more than $2,000,000 worth of such items.) In addition to machinery and equipment, this year you can also write off most types of leasehold improvements, restaurant property and retail improvements. These deductions come under the heading of what is known as "Section 179." The assets can be new or used.

These big breaks are not available for cars and light trucks under Section 179, but there is another depreciation provision known simply as bonus depreciation. This provision allows a 100% deduction for NEW assets purchased in 2011. (Remember, it has to be new, not used.) Also, it must have a recovery period of more than 20 years (so real estate is not allowed), and it must not be "listed property" (vehicles etc.) used less than 50% for business.

The 100% falls to 50% in 2012.

For Massachusetts taxes, the bonus depreciation deduction is not recognized, so you could end up with different depreciation calculations on the Federal and state returns. It could result in much higher taxable income for Massachusetts than for the federal return. Massachusetts does recognize the Section 179 deduction.

There, is that complicated enough? And that's only the simple part.

After tax season

2011-05-06T10:30:00.000-07:00

We didn't have much time for blogging during the tax season. We hope to catch up a little now.

What are the prospects for tax reform? If the tax system were overhauled, what might it look like?

One possible outline issued by a government commission envisions three tax rates: 12%, 22% and 28%. There would be no alternative minimum tax, but only two types of itemized deductions would be allowed: mortgage interest and donations. No mortgage interest deduction would be allowed on second homes. Capital gains and dividends would be taxed at the regular tax rate. Municipal bonds would no longer be exempt from tax. Many other tax breaks would be eliminated.

Of course, this is not likely to happen soon, and if and when anything does happen, it will certainly be quite different from the above outline. This just gives an idea of what some of the thinking is. There is a lot of other thinking going on, too, but nothing concrete yet.

One area of concern, however, is the capital gains tax. There is a strong possibility that it will go up. The debate is likely to on for at least a couple of more years. If it begins to look as though passage is immanent, people holding appreciated assets will probably start selling like mad to avoid the coming tax bite.

1099 Never-Mind

2011-04-06T17:08:00.000-07:00

The new requirements discussed in my 2/19/11 and 1/10/11 posts have now been repealed, pending the President's signature.

2011-03-07T00:09:00.000-08:00

The Residential Energy Credit survived for 2010, and it has been extended in limited form into 2011. However, in 2010 it is limited to $1,500, and if you took the credit in 2009, the amount you took in that year reduces the amount you can take in 2010. For example, if you took a credit of $500 in 2009, your limit for 2010 is $1,000.

The limit in 2011 is only $500, and all the Residential Energy Credits you have taken since 2006 go towards reducing that limit. The credit has also been limited somewhat in the things that it covers, but it will still be good for windows, doors, insulation, certain kinds of roofs, qualified furnaces, etc.

The credit is good for your main home only. It is not for property you rent out to others. Also the home must be located in the United States.

Social Security wage base

2011-02-26T17:34:00.000-08:00

People who make more than $106,800 this year will not have to pay Social Security tax on earnings above that amount. 2011 is the third year this wage base has been pegged at $106,800.

The base has risen quite a bit over the years. In the year 2000, it was $76,200. From 1937 to 1950 it was $3,000.

From 1937 to 1949, the Social Security withholding rate on wages was 1%. When Medicare started in 1966, the withholding rate was 0.35%.

The base in 2012 is expected to be $110,100. (This is not official yet.) It is estimated to be $113,100 in 2013, $117,600 in 2014 and $122,700 in 2015.

The tax rate for Social Security withholding from pay checks has been 6.2% since 1990. For 2011 however, it has been lowered to 4.2%. It goes back to 6.2% in 2012.

The Medicare tax of 1.45% has no limit. If you make $1,000,000 this year, 1.45% of it will go to Medicare. That's $14,500. The Social Security tax, since it stops for wages above $106,800, will never go above $4,485.60 (4.2% of 106,800) for anyone in 2011.

And by the way, one of the provisions of the Health Care law that passed last year is that Medicare tax will be charged not only on earned income but also on investment income. However, that is not in effect for 2011.

For every employee who has Social Security and Medicare taxes withheld from his or her pay, the employer must also pay into those funds. For every year but 2011, the employer's share was equal to the employee's share. This year, though the Social Security rate for employees was reduced to 4.2%, the employer's rate remains 6.2%.

The total payroll tax "burden" (as it is called) for these two taxes, in 2010 was:
Employee's Social Security withholding 6.20%
Employer's Social Security share 6.20%
Employee's Medicare withholding 1.45%
Employer's Medicare share 1.45%
Total 15.30%

In 2011 the total is 13.3%, because of the 2% reduction in employee withholding. In 2012 it will return to 15.3%.

Self-employed people must pay the entire amount themselves: 13.3% of earnings this year, and 15.3% every other year. This can be a brutal blow to a self-employed person at tax time.

More on 1099s

2011-02-20T17:13:00.000-08:00

Congress is considering repealing the new requirement that 1099s be filed on payments to corporations. They may also repeal the requirement that landlords file 1099s on all their payments for services (as discussed in an earlier post).

Even More 1099's

2011-02-19T06:14:00.000-08:00

In 2012, additional 1099 reporting requirements are due to take effect, unless Congress repeals them. They would require that anyone with any business income issue 1099s to any vendor to whom they paid at least $600. Payments for both goods and services would require 1099s. (Under current law, payments for goods are not covered, and the focus is on payments to unincorporated individuals.)

Congress and the President have talked about repealing this new requirement, because nobody likes it. However, because it is projected to generate over $200 billion in tax revenues over the next 10 years, they have to figure out how to plug that budget gap if they repeal it. There is a lot of momentum on the side of repealing it, but it may not be easy.

Unreported gifts

2011-02-09T21:07:00.000-08:00

Many people transfer real estate titles to heirs or other family members without filing a gift tax return. The IRS has never checked on this to any great extent, but it is starting to do so now. If the transfer was done for anything less than fair market value, it could trigger the need for a gift tax return. Most people would not owe any actual gift tax, because their gifts are under the tax threshold. However, the law says a gift tax return must be filed. A gift tax return is supposed to be filed if you give any one person more than $13,000 during a calendar year. (The filing threshold was $10,000 several years ago; it has been gradually raised over the past few years to the present threshold of $13,000.)

Obamacare legal setback

2011-02-09T21:00:00.000-08:00

A Federal district court judge in Florida ruled that the healthcare reform law is unconstitutional. The Supreme Court will get the final word--in a year or two.

filing delay date

2011-01-30T20:15:00.000-08:00

The IRS has specified February 14, 2011, as the date on which it will begin accepting returns with certain characteristics. The most popular of these characteristics is itemized deductions. Most returns without itemized deductions are already being accepted.

Landlords must issue 1099s

2011-01-10T16:31:00.000-08:00

Beginning in 2011, landlords must issue 1099s if they pay someone (e.g., a self-employed carpenter or plumber) $600 or more during the year. Previously, landlords were not covered by the 1099 laws.

Some landlords will be exempt if their rental income is very small. The IRS will let us know at a later date (hopefully sometime this year) how much rental income will trigger the 1099 requirement.

Qualified Charitable Distribution

2011-01-05T11:17:00.000-08:00

One of the last-minute changes in the new tax law had to do with the option for people over 70 and a half years old to make a charitable donation directly from their IRA without declaring it as income. That provision was supposed to expire as of 12/31/09, but there was some confusion over it during the year, probably because it was almost, but not quite, renewed during the year. Now it has indeed been renewed. And because of the last-minute nature of the renewal, eligible taxpayers have been given the option to make such a distribution in January of 2011 that can be counted as happening in 2010. Contact your IRA administrator.

Tax filing delay

2011-01-05T11:07:00.000-08:00

The IRS has announced that it will need some extra time to reprogram their computers in regard to some of the provisions of the new tax law. Therefore returns with certain tax features will not be accepted until mid- to late February. Those situations are:

1. Anyone who files a Schedule A
2. State and local sales tax deduction
3. Tuition and fees deduction for higher education
4. Educator expenses.

The IRS will announce specific dates later.

Estate tax law at last

2011-01-05T10:50:00.000-08:00

The new estate tax top rate is 35% on anything above $5 million. Also, a person who dies and leaves everything to his or her spouse, and does not use up the $5M exemption, can also pass on the unused portion of the exemption to the spouse. Formerly this was done by setting up trusts, but the new law may make such trusts less necessary.

For executors and family of a person who died in 2010, the option exists to apply the new law as outlined above, or the law that existed during most of 2010, which was quite different. Under that law there was no estate tax, and the basis of inherited assets was treated differently.

Under the new law, the gift tax also has a $5M exclusion, as opposed to $1 million before.

Unfortunately the new estate tax law expires in 2013, unless Congress acts.

New law same as old

2011-01-05T10:45:00.000-08:00

Many of the tax provisions that were scheduled to expire in 2010 or 2011 were revived by Congress in the recently passed tax bill. The specifics of the bill are still hard to come by. If you are viewing this from my web site, you can e-mail me with a question that applies to your tax situation.

Estate Tax, part 8

2010-11-06T00:41:00.000-07:00

Now that 2010 is almost over, it seems that there is virtually no chance that the Estate Tax will be changed for this year. (Nothing is impossible, but it does not seem likely.)

There is no estate tax for 2010, but if heirs sell assets they inherit, they could incur a capital gains tax. This is because inherited assets will be valued at their original cost (or other basis) value rather than at the fair market value as of the date of death. However, for most people this will be offset by a $1.3 million step-up in value (up to fair market value) available per estate. Assets inherited by a spouse get an additional $3 million step-up in valuation.

The estate tax for 2011 is yet to be determined. It is scheduled to revert back to 2001 law, but Congress will most likely change that, as no one wants 2001 to come back.

Year-end Planning

2010-11-05T00:05:00.000-07:00

Tax planning for the end of 2010 is a bit more difficult this year, because Congress has still not decided what the tax rates will be for 2011. This could be important for some people who can choose to accelerate income or deductions into 2010, or defer them until 2011. Kiplinger is still predicting that the 2010 tax rates will be carried over to 2011. That may be a workable assupmtion for many people, but nothing is certain until it actually happens.

Some of the current tax provisions may be worth reminders. One particularly nice one for those who can benefit from it is that long term capital gains for people in the 10% and 15% brackets are not taxed at all. That's right, 0% tax. The 0% rate applies up to $34,000 of taxable income for single people and $68,000 for married filing jointly.

Just to recap the Standard Deductions for 2010, they are:
$5,700 for Single
$8,400 for Head of Household
$11,400 for Married Filing Jointly
For people 65 and over:
$7,100 for Single
$9,800 for Head of Household
$12,500 for Mariied Filing Jointly

For year-end planning for your individaul situation, contact your tax professional!

Whack your self-employment tax

2010-10-05T18:11:00.000-07:00

For businesses in Hyannis, Centerville, Provincetown or anywhere on Cape Cod, one of the most deadly killers of small sole-proprietorships that I have seen is the Self-Employment tax. It is the equivalent of the FICA (AKA Social Security) tax that is deducted on an employee’s paycheck. But the rate for the Self-Employment tax is twice that of FICA. And since a sole proprietor does not receive a regular paycheck, the pain is not spread out in easy to digest small time periods. Sole Proprietors must send quarterly checks directly to the IRS, often in very large amounts. If they get behind—something that often happens—they can find themselves facing crippling tax bills at tax preparation time in April.

There are some strategies available to (a) provide for paying the tax by carefully setting aside funds, or (b) reduce the tax through the use of special tax breaks.

One tax provision that often works well for the reduction of Self-Employment tax (depending on the type of business and its own particular circumstances) is known as the Section 179 expense option. This allows a business that purchases a large item of machinery or equipment to write off, in many cases, the entire purchase price of the equipment in the year of purchase. This can be done even if the equipment is financed with a multi-year loan. The result can be that the business’s profit is partly or completely eliminated for tax purposes, the sole proprietor pays little or no tax, and he still has cash he needs to operate and to live.

This strategy can be a trap in itself if it is not done carefully. You can’t buy a big piece of equipment with a big loan attached unless you actually need it and it will actually enable you to make more profits in the future. Over-use of this strategy can get you into a situation in which you are over-expanded, have equipment you can’t use and you can’t make the loan payments.

However, there are many cases in which this strategy makes sense, and for 2010 and 2011, this tax break has been expanded to help stimulate the economy.

For the many construction and landscaping contractors on the Cape, medium-duty or heavy vehicles are often much needed, and they can often qualify for some of these tax write-offs. Be sure to consult your tax professional before acting!

Small Business Tax Breaks

2010-09-20T18:06:00.000-07:00

Almost all of the biggest businesses on Cape Cod are small enough to fit into the "small business" category for tax purposes.

The limit on expensing machinery and equipment (instead of depreciating it) will be raised to $500,000 for 2010 and 2011. (The limit for vehicles over 6,000 pounds Gross Vehicle Weight is a $25,000 expense write-off, plus additional "bonus" and regular depreciation.) Any business that buys $2 million or less in such assets will be able to get the full benefit of this break. It will be phased out for businesses that buy more than $2 million worth of equipment.

Similarly, $250,000 in renovations for restaurants and retail stores can be written off, including improvements landlords make for retail tenants.

A welcome tax break for self-employed people: This year they will be able to deduct health insurance premiums on schedule C. Thus they will reduce self-employment tax (the deadliest killer of sole proprietorships).

Sales Tax Holiday

2010-08-04T08:29:00.000-07:00

Massachusetts sales tax holiday weekend: Aug 14-15, 2010.

Nothing new + my manifesto

2010-07-29T22:55:00.001-07:00

Congress is not getting anything done on tax legislation, despite the pressing need to come up with something for 2011. Most politicians want the Bush tax cuts to stay in place for everybody except the "wealthy," but even some Democrats are now saying that raising taxes for anybody, including the "wealthy," in the midst of a recession, would be bad for the economy. If Congress does nothing, everyone's taxes will rise because of the automatic expiration date of 12/31/10 written into the bush tax cut law.

Philosophically speaking, the President and many Democrats seem to believe that "rich" people are not playing "by the rules." Their evidence for this seems to be simply that some people have more money than others. This seems to be held as an offense against social justice.

The President has never specified exactly to what extent he believes wealth should be redistributed, but there seems to be little doubt that he believes this is an important goal. This is not something new and subversive in America, since the fact is that our entire income tax structure has some grounding in the idea that some people just have too much, and some of it should be taken away.

Is this the best approach to the goal "to promote the general welfare," set forth in the preamble to the Constitution? In my opinion, it is not.

1. The fact that some people have more money than others is just a natural fact that flows from the natural differences amongst individuals. The statement in the Declaration of Independence that "all men are created equal" is just a statement of what happened at the beginning, not a statement of how everything should turn out in the end. We should all start out the same at the starting line, and in America we have tried hard to create that condition. What happens after that is up to the individual.

2. The fact that some people have more money than others does not make those who have money automatically bad. Similarly, the fact that there have been some bad people who acquired wealth illegally does not mean that ALL people who acquire wealth are not playing "by the rules." Furthermore, there are plenty of laws that can be enforced against those who do obtain wealth illegally or actually unfairly.

3. Americans, statistically, give more money to charity than any other people in the world. They want to help. Many of the richest give huge sums.

4. The economy is not a zero sum-game. If some people get more, it DOES NOT FOLLOW that necessarily others get less. On the contrary, the EXACT OPPOSITE can happen. Because of the GROWTH factor, EVERYONE GETS MORE!!!!!!!! If a business grows, provides needed goods or services and creates jobs, everyone benefits. If "everyone" includes the owner of the business, well, that is the fulfillment of the American Dream for him.

5. To expect everyone to end up with the same amount or even remotely similar amounts is unnatural and artificial. It is a nice thought, but to try to force that outcome gums up the whole works.

6. To take money away from key people in the economy (those in positions to enhance economic growth) and from productive businesses is DESTRUCTIVE to the economy.

7. To take money away from people who make a lot because they are highly skilled and do work that is of major benefit to the society as a whole (e.g., doctors, engineers and such) is DESTRUCTIVE to the society at large.

8. Rich people are as imperfect as everyone else. They can be obnoxious or caught up in the trappings of their wealth. This is not nice, but it is not a crime. They should get religion or something, but taking money away from them is not the answer.

9. If we stop punishing productive people and businesses by taking resources away from them, the scariest thing about it would be how fast we will grow. (And of course sometimes we would go too fast and have a crash. Then we would start this debate all over again.)

10. There would be plenty of money to care for those unable to care for themselves. The flow of money to charity would be immense.

11. The government is NOT the best entity to help those who need help. It just creates jobs for politicians and bureaucrats.

More 1099's

2010-07-14T07:53:00.000-07:00

Congress is considering legislation that would require landlords to issue 1099's beginning in 2011. The 1099 rules as they currently exist do not apply to landlords.

Pending legislation

2010-07-14T07:42:00.000-07:00

The US Senate is close to passing a bill that contains a number of tax breaks for small businesses.
1. Self-employed people would be able to deduct medical insurance for themselves and their family on Schedule C for 2010.
2. Businesses could write off (instead of depreciating) up to $500,000 in machinery, equipment and similar fixed assets placed in service in 2010 and/or 2011.
3. The 50% depreciation bonus that was in effect for 2009 would be extended through 2010.
4. Expanded tax breaks on sale of small business stock.
5. And a few other provisions.

Estate tax stuck in Congress

2010-07-01T10:39:00.000-07:00

There is still no guarantee that Congress won't reinstate the estate tax retroactive to January 1, 2010. As discussed in previous posts of this blog, the estate tax (AKA death tax) was completely phased out this year, due to a law passed in 2001. The House has passed a bill that re-instates it with a 45% tax rate on everything above $3.5 million. But it is stuck in the Senate. Most senators want a higher exemption level and a lower tax rate. (Maybe that's because most of them will have estates worth more than $3.5 million?) This matter has also been pushed back by a number of other things on the Senate's agenda. If nothing is done, the estate tax will revert back to its 2001 level: a top tax rate of 55% and an exemption of only $1 million. Probably the vast majority of Senators and Congressmen have potential estate worth more than $1 million (just guessing here), so the odds are good that something will be in place for 2011. At least that's the conventional wisdom.

Homebuyer credit extension passed

2010-07-01T10:25:00.000-07:00

The House approved the extension mentioned in the previous post (June 22), and the President is expected to sign it in a few days. The deadline is extended to September 30.

Homebuyer credit extension

2010-06-22T11:14:00.000-07:00

For those who met the deadline of April 30, 2010, to enter into a contract a buy a new home, the deadline to close the deal is almost here: June 30, 2010. There have been some instances of paperwork delays that could cause some people to miss the deadline. As a remedy, there is a bill going through Congress now to extend the deadline by another three months. The Senate approved it, and the House of Representatives is expected to act on it soon.

Tanning Tax

2010-06-22T11:12:00.000-07:00

A 10% tax on indoor tanning services goes into effect on July 1, 2010. So, hurry up and get your pre-summer tanning done!

Small Non-Profits

2010-06-20T06:39:00.000-07:00

The IRS now has a filing requirement for small non-profit organizations which previously were not required to file returns. It is called form 990-N. It is simple and can even be filed by e-mail. Organizations that are required to file and do not do so for three consecutive years will have their exempt status revoked. The IRS web site has more information at www.irs.gov/eo.

Health insurance credit for employers

2010-05-08T11:46:00.001-07:00

The IRS recently sent out postcards to employers who might qualify for a new credit established by the new health care law. It is a credit worth up to 35% of health insurance premiums paid by employers who have less than 25 “full time equivalent” employees and pay an average of less than $50,000 per year to each employee.

The full 35% credit will be realized only by employers with less than 10 “full time equivalent” employees who are paid an average of less than $25,000 per year. The credit is gradually reduced above that level.

“Full time equivalent” means that you have to divide the total hours worked during the year by part-timers by the number of hours they would have worked if they were full time. (The simplest example is that is you have two employees who each work 20 hours per week all year, you have one full time equivalent employee.)

The average wages are determined by dividing the total wages by the number of full time equivalent employees.

To qualify, the employer must pay at least 50% of covered employees’ health insurance premiums, if they have coverage as a single individual. If they are on a family plan, the employer only has to pay the amount equal to 50% of the single plan.

The credit has a number of other complicated rules, as you may have guessed.

The credit is taken on the employer’s annual income tax return. For example, a sole proprietor will take the credit on form 1040. For a corporation that files form 1120, the credit will be taken on that form.

Tax-exempt organizations can also claim the credit. For them, it is a refundable credit (subject to certain limitations).

For employers other than non-profits, the credit is not refundable; it can only reduce the income tax down to zero.

Estate Tax, part 6

2010-03-24T17:24:00.000-07:00

There is some concern that changing the estate tax rules in the middle of the year might be unconstitutional. One proposal that tries to deal with this problem is to give estates a choice of using either the 2009 rules or the 2010 rules.
The 2010 rules, headlined by an absence of any estate tax, are not as simple as they sound. Assets inherited under the rules in place until the end of 2009 become valued at fair market value as of the date of death (or an optional alternative date). Assets inherited under the 2010 rules would keep the same value they had when the decedent owned them. Thus there could be huge capital gains if the heir sells the assets. There is an exemption of $1.3 million in gains for such cases, plus an additional $3 million exemption for surviving spouses.
The Senate may be tied up for a while longer in fighting over changes to the health care bill that just passed. That could further delay action on the estate tax.

Estate Tax, part 5

2010-02-22T16:46:00.000-08:00

Basically, there is nothing new yet on this. Republicans in the Senate want to raise the exemption to $5 million and lower the tax rate to 35%. Maybe they will get to work on this after they finish the work they are doing now on other taxes (see previous post).

Tax changes

2010-02-22T16:30:00.000-08:00

The Senate just passed a bill that contains some tax reductions. The headline items are mainly for small businesses. One provision calls for a tax break for businesses that hire new people during 2010. Restoring the expanded write-offs for purchases of new equipment is also part of the bill.
There were a number of tax breaks that expired at the end of 2009. Most of these are being restored in this new tax bill. For example, the option to distribute money from an IRA directly to a charity without paying tax on the distribution--an option that expired this year--is to be restored. Credits for college tuition--valid in 2009 but dead so far in 2010--are also targeted for revival. The House will still have to act on the bill to make it law.

First-Time Homebuyer Credit

2010-01-30T06:55:00.000-08:00

Taxpayers claiming this credit will not be able to e-file this year.
Legislative changes in November 2009 expanded and extended the credit and also added documentation requirements for claiming the credit. For homes purchased after November 6, 2009 a copy of a properly executed settlement statement is required to be attached to the return. Due to increased compliance checks by the IRS, it is highly recommended that a copy of a properly executed settlement statement be attached to all returns claiming the credit, regardless of the date of purchase. Proper documentation will help to expedite the processing of the return when attached on any claim for the credit.

Form 5405 (to claim the credit) is not eligible for e-file. The IRS will not begin processing paper filed Forms 5405 until mid-February.

Learn more about the First-Time Homebuyer Credit by going to: https://www.irs.gov/newsroom/article/0,,id=204671,00.html

Municipal Bonds rates up

2010-01-19T18:57:00.000-08:00

An interesting side-effect of the financial crisis is that interest rates on municipal bonds are now about the same as the rates for US Treasury bonds. Usually muni rates are lower than Treasury rates. High-income investors accept the lower rates because muni interest is exempt from Federal income tax. Currently, however, many investors are concerned about the safety of municipal bonds, because many of the state and local governments that issue them are having serious budget problems. Also, bond-insurance companies have been hit hard by the crisis, adding further stress to the market. Higher demand for Treasuries and lower demand for munis has lowered the market rates on the former and raised them on the latter.
One would think this situation would eventually return to normal, but there is a new development in this mix. There is a Federal subsidy available to state and local governments that issue taxable bonds. The feds will pay 35% of the interest that the states and locals are on the hook for. This subsidy is scheduled to expire at the end of this year, but it could be extended, because it appears by some calculations to be more efficient than having a tax exemption for muni bonds. If it became permanent, it could change the market for municipal bonds permanently, according to The Economist, an international weekly news and economics magazine.
Does this mean that muni rates will stay high? It could mean that, but theories to project investment values don't always work out. Investors will need to watch carefully and be mindful of the elevated risk.

Estate Tax, part 4

2010-01-12T09:13:00.000-08:00

The Estate Tax was allowed to expire, an outcome that was set in motion by a law passed in 2001. So, at the moment there is no “death tax.” However, Congress plans to resurrect it, probably retroactive to January 1, 2010. The only reason they let it expire was that they were too busy arguing about health care.
In 2009 the estate tax exemption was $3.5 million, with a 45% tax on everything above that amount. Guesstimates are that the new law will have an exemption of between $3.5 million and $5 million.
Stay tuned for further developments.

Section 179 and Bonus Depreciation

2010-01-12T09:01:00.000-08:00

A tax provision that many small businesses take advantage of every year is the ability to write off in full the purchase of machinery and equipment (including heavy vehicles) instead of depreciating it. This is known to accountants as the Section 179 deduction.
The limit for this write-off had been temporarily increased to $250,000 for 2008 and 2009, but because Congress was preoccupied with health care at the end of last year, the limit automatically reverted back to $134,000 for 2010.
Congress can still take action to restore the higher limit, and many analysts predict that they will do so. And there is a good chance that they will make the remedy retroactive to January 1.
Another depreciation break that expired at the end of 2009 was a 50% bonus—an option to write off half of certain new machinery and equipment in the year of purchase. That too has a strong chance of being revived. If it is restored, it can be used on top of the expense deduction described above, such as for purchases over the $134,000 (or $250,000) limit.

Sale of your home

2009-12-30T06:07:00.000-08:00

As many people know, if you sell your home you may be able to exclude from taxable income up to $250,000 in gains for an individual or up to $500,000 for a married couple.
There has been a change in the rules about the usage of the home that could affect some taxpayers who have used the home at some point as a rental property or vacation property, second home, etc. This change does not apply to anything that happened before January 1, 2009. However, starting with that date, if the property is not used as your main home for some period of time, then the gain is allocated between what they call qualified and non-qualified use. The gain for the qualified-use period can be excluded from taxable income, but the gain from the non-qualified-use period cannot. You would have to pay tax on that part of the gain. Again, this only applies to you if the home was used as other than your main home during any time starting with January 1, 2009.

Not taxable in 2009

2009-12-28T23:20:00.000-08:00

1. "Cash for Clunkers" payments are not taxable on your Federal income tax
2. Unemployment compensation up to $2,400 is not taxable, but anything over $2,400 is still taxable.
3. Economic recovery payments. In 2009, there were payments of $250 to Social Security recipients and certain others. These are not taxable.

Certain other payments continue to be non-taxable, as usual:
1. Expense sharing in a car pool.
2. A rebate from a car manufacturer when you buy a car.
3. Casualty insurance reimbursements (with some exceptions).
4. Court awards for personal injury.
5. Assistance from a non-profit organization to make a down payment on a home.
6. Subsidies and rebates from public utilities for purchasing energy conservation measures for a dwelling unit.
7. Child support payments.
8. Disaster relief payments.
9. A few other special circumstances.

If you have questions on other particular types of income, please contact our office.

Home-Buyer Credits

2009-12-20T09:36:00.000-08:00

There have been three different (yet similar) home-buyer credits since 2008. The first two were exclusively for first-time home-buyers, but the latest one, in effect for homes purchased after November 6, 2009, expands it to some people who already owned a home.
The first credit, in effect for 2008, was for a maximum of $7,500. It was not a no-strings-attached credit, because those who claimed it have to pay it back at $500 per year additional tax on their tax returns for fifteen years.
The credit that was in effect for most of 2009 was a maximum $8,000 refundable credit for first-time home-buyers only. It does not have to be repaid.
For homes purchased after 11/6/09, the same basic credit is in effect, but if the home is not the buyer's first home purchase, he/she/they may qualify for a $6,500 refundable credit.
(We always throw in the adjective "refundable," because some credits are not refundable, meaning that if you do not have enough tax to use them up, you lose them. In this case, even if you had no tax and bought a home that was your first home, the government would send you a refund check for $8,000.)
The credit is now good until May 1, 2010. For homes purchased in 2010, the credit can be claimed on either the 2010 or the 2009 tax return. So, for people still hoping to get a big refund on their 2009 tax return, if they enter into a binding contract before 5/1/2010, and close by 7/1/2010, they qualify.
The $6,500 credit for non-first-time home-buyers is limited to buyers who lived for a minimum of five of the last eight years in a home they owned.
In any case, the buyers must keep the home, and keep using it for their main home, for at least 36 months to avoid paying back the credit. Also if your income is too high (depending on the purchase date) the credit is reduced or eliminated.
As with any tax matter, there is plenty of complexity. If you have questions you can go to Publication 17 at www.irs.gov, or call me.

Estate Tax, Part 3

2009-12-19T08:08:00.000-08:00

The Senate is considering bills to change the estate tax. One bill would keep the 45% rate and the $3.5 million exemption, but would index the exemption to inflation each year.

Another bill being considered would raise the exemption to $5 million and lower the maximum tax rate to 35%.

Another thing they might do is just extend the 2009 provisions for one year, 2010, and then address the issue anew after the healthcare debate is over.

Estate tax, part 2

2009-12-11T15:57:00.000-08:00

The Wall Street Journal reports that the House of Representatives voted recently to repeal the expiration of the Estate tax, which is scheduled for 2010, and keep the 2009 rates permanently. That means 45% of everything over $3.5 million. The Senate still has to vote on the matter, but they are pretty tied up with the health care debate at the moment. Again, it will be interesting to see what happens. Most of the prognosticators say that the likely outcome is the one the House just voted for.

Tax Planning and Estate Tax

2009-12-07T17:57:00.000-08:00

Here are some things you might like to be aware of (or not care about) as you contemplate your tax situation for the end of 2009.

1. The first-time home-buyer tax credit has been extended and expanded.

2. Sales tax on a new vehicle is deductible even if you don't itemize. You can deduct the sales tax on the first $49,500 of your purchase. If you buy more than one car, you can deduct the sales tax on the second or third car, too.

3. As in 2008, non-itemizers can deduct some of their real estate taxes ($500 for single people and $1,000 for married filing jointly).

4. In fact, for 2009, there are so many things to account for for non-itemizers that they have to file a form as big as Schedule A to keep track of them.

4. Minimum Required Distributions from IRAs are NOT required for 2009 for those over 70 & 1/2.

5. New energy credits now at a rate of 30% and a maximum of $1,500, except on solar and wind, on which there is NO limit.

Looking forward into 2010, income tax rates are expected to stay the same as in 2009. However, in the area of the Estate Tax (also know as the Death Tax), there is no real certainty about what will happen for 2010. The best guesses throughout the year up to now have been that the 2009 estate tax rates and structure would be extended into 2010. However, Congress has been so tied up with health care that they have not gotten around to doing anything about the estate tax. Under existing law, there will be no estate tax at all in 2010. It has been phased down for the last few years, and next year it is scheduled to disappear. Unfortunately, if nothing is done before 2011, that year's estate tax will revert back to the old law, which taxed everything over $1,000,000 at 55%. Congress still has some time to change the 2010 law, since the estate tax returns are not due till nine months after the person dies. Therefore Congress could theoretically wait until September to change the law. At any rate it will be interesting to watch what happens.

Also in 2010, the restriction against converting a regular IRA to a Roth for people with income over $100,000 has been eliminated, and taxpayers are given two years to pay the resulting tax. However, because of the amount of taxes that will be generated by such a conversion, taxpayers are urged to exercise caution and consult carefully with their tax advisers before they make such a move.