Gas prices through the roof but IRS not planning to increase standard mileage rates

During its May 12 payroll industry conference call, an IRS spokesperson said that IRS has no current plans to increase the standard mileage rate of 51¢ per mile for business miles driven, despite the big boost in gasoline prices.
 
Simplified deduction method. The optional mileage allowance for owned or leased autos (including vans, pickups or panel trucks) is 51¢ per mile for business travel after 2010. (The 2011 rate for using a car to get medical care or in connection with a move that qualifies for the moving expense deduction is 19¢ per mile, 2.5¢ more per mile than the 16.5¢ for 2010.) ( Rev Proc 2010-51, 2010-51 IRB 883 )
 
The mileage allowance deduction replaces separate deductions for lease payments (or depreciation if the car is purchased), maintenance, repairs, tires, gas, oil, insurance, and license and registration fees. The taxpayer may, however, still claim separate deductions for parking fees and tolls connected to business driving. ( Rev Proc 2010-51 )
 
The standard mileage rate may not be used for a purchased auto if: it was previously depreciated using a method other than straight-line for its estimated useful life; a Code Sec. 179 expensing deduction was claimed for the auto; the taxpayer has claimed the additional first-year depreciation allowance; or the taxpayer depreciated it using MACRS under Code Sec. 168 . Also, under current rules, the standard mileage rate can't be used to compute the deductible expenses of five or more autos owned or leased by a taxpayer and used simultaneously (such as in fleet operations). Rural mail carriers who receive qualified reimbursements also can't use the standard mileage rate. ( Rev Proc 2010-51 )
 
A taxpayer who uses the mileage allowance method for an auto he owns may switch in a later year to deducting the business connected portion of actual expenses, so long as he depreciates it from that point on using straight-line depreciation over the auto's remaining life. The depreciation deductions would still be subject to the Code Sec. 280F dollar caps. ( Rev Proc 2010-51 )
 
Additionally, employers may reimburse employees who are required to provide their own cars for business use at a rate that doesn't exceed the standard mileage rate. A mileage rate that doesn't exceed the standard mileage rate is treated as made under an accountable plan if the mileage is properly substantiated (time, place, mileage, and business purpose).
 
IRS generally announces the new mileage rate for the upcoming calendar year at the end of the current year (e.g., in late December or early January). However, in the past, IRS has occasionally made mid-year adjustments in the mileage rates. In June of 2008, IRS announced that the optional mileage allowance for autos would increase from 50.5¢ to 58.5¢ per mile for business travel in the last six months of the year (from July 1, 2008 to Dec. 31, 2008) to better reflect the real cost of operating an auto in a period of skyrocketing gas prices. And, back in September of 2005, IRS increased the then-applicable 40.5¢ per mile optional standard mileage rates for the last four months of 2005 (from Sept. 1, 2005 to Dec. 31, 2005) by 8¢ to 48.5¢ due to unusually high gasoline prices.
 
No current plans for change. During the May 12 payroll industry conference, Ligeia Donis, Assistant Branch Chief, IRS Office of Chief Counsel, said IRS has no current plans to increase the standard mileage rate of 51¢ per mile for business miles driven during 2011, despite the current high gasoline prices. She gave two reasons for this. First of all, there is always the possibility that gas prices could decline. Second, IRS had received some feedback from employers that the change was difficult to implement when it adjusted the standard mileage rate in the middle of 2008.

Although IRS presently has no plans to adjust the mileage rate, that doesn't necessarily mean it won't decide to make such an adjustment later this year.   We'll keep our eyes & ears open and we'll keep you informed.

Tax Reform Part II - Roth IRA's and Tax Exempt Municipal Bonds

This is our second message discussing the concept of tax reform.  There is a lot of talk about a fairer, flatter tax system which we understand to mean lower tax rates, coupled with a broader tax base (meaning fewer deductions and credits) similar to the tax revisions passed in 1986.  However, passage isn’t likely until 2013 or later, since neither party has a specific plan yet. I want to reiterate that this discussion does NOT relate to any changes proposed for 2011 or 2012.

In our last message, we discussed capital gains & qualified dividend tax rates.  Today, we are going to review Roth IRA conversions and tax free municipal bonds (along with a few other items). 

You may want to rethink the wisdom of doing a Roth conversion. The general rule is that it pays to convert to a Roth and pay the tax bill on the conversion up front if you expect your tax rate when you pull out the funds will be the same or higher than the tax rate on the conversion. Since major tax overhaul will reduce tax rates, your future tax rate may end up being lower than they are now.

Roth's have other advantages, such as tax-free payouts for heirs, that still may favor making a switch. One thing that Congress won’t do in tax reform is to renege and subject Roth payouts to tax.

Lower federal tax rates affect the decision whether to buy tax-free bonds. The after-tax yield on taxable bonds rises as tax rates decline, so investing in them may provide more bang for the buck than exempts.

Another aspect of tax overhaul is that municipalities may have to pay higher rates on their bonds to get investors to bite. That hikes their borrowing costs...bad news for state and local governments with tight budgets. The good news is that tax reform won’t nix tax-exempt bonds.

Businesses must factor in tax reform as they plan equipment purchases now. Tax overhaul is likely to stretch out depreciation periods compared to current law, as a way to pay for reducing the top corporate tax rate from its current 35% level.  Businesses may end up better off if they place assets in use before reform takes effect.

Remember, that many assets put in service in 2011 receive 100% bonus depreciation. It falls to 50% for those placed in service in 2012. It is unlikely that these incentives will be extended beyond 2012.

Finally, there was a Senate hearing yesterday in which executives from 5 of the largest oil companies were asked to defend their industry's $2 Billion federal subsidy.  In no way am I defending big oil and while we think that it makes sense for ALL federal spending to be scrutinized, we don't believe that singling out one business or industry is the way to address our fiscal problems.

$2 Billion is A LOT of money, but let's put this into perspective: Federal spending is expected to reach $3.6 trillion in the current year, tax revenues are projected to be $2.1 trillion and the budget deficit is $1.5 trillion.  After this subsidy is eliminated from the budget the DEFICIT would still be $1,498,000,000,000.  To put it another way, it would take 750 similar spending cuts to eliminate the deficit.  And to put it another way, under the current spending plan it takes the federal government less than 5 hours to spend $2 Billion.  Our political leaders need to put the gamesmanship aside (on both sides of the aisle) and get serious about controlling federal spending.

Tax Reform thoughts on capital gains & qualified dividends

It's good to be back among the normal folks now that tax day has passed.  This is our first email message since the end of tax season so I hope you had a good end to your April.

 

The budget battles have begun in Washington and there is a lot of talk about a fairer, flatter tax system.  While tax overhaul may not be imminent, we will pay close attention to the debate and prepare a series of email messages discussing the possible changes.

 

Our expectation is that tax reform will produce lower rates, coupled with a broader tax base (meaning fewer deductions and credits) similar to the tax revisions passed in 1986.  However, passage isn’t likely until 2013 or later, since neither party has a specific plan yet.  Tax overhaul is only in the discussion stages now but we should begin planning & preparing for what’s to come because many investment decisions will be affected.

Let's start with capital gains and qualified dividends. Reform probably ends their special low tax rates.  Congress did that in 1986, taxing all capital gains and dividends as ordinary income, subject to the taxpayer's marginal tax rate.  Similar tax treatment is likely in a future overhaul and the 15% maximum rate on long-term gains and dividends provides a tempting target for the political class.

 

After the 1986 law, the maximum rate on gains was 33%.  Thus, selling appreciated assets prior to reform will be a huge tax saver. 

 

There is a double-edged sword to this approach, as history reminds us.  The 1986 changes sparked a HUGE wave of selling before they took effect (along with depressed asset valuations and the S&L crisis -- basic law of supply & demand stuff here folks).  So keep in mind that tax consequences aren’t the only factor to take into account when deciding to sell an asset.

 

If you’re thinking of doing an installment sale with payouts spread over several years, don't count on Congress grandfathering the 15% top rate on your gains.  Lawmakers didn’t do that in 1986...the profit portion of installments received after 1986 was taxed as ordinary income.

 

The next round of reform may repeat the sell-off scenario (but hopefully not another financial crisis).

 

More to follow...enjoy your week.