IRS getting bigger on health care reform responsibilities

Hi Folks,

Hope you had a memorable Memorial Day weekend.  I was in NYC and got to personally say "thank you for your service" to several sailors & marines that were on leave & taking in the scene at Time Square!

As the health care reform law enacted in March 2010 is being implemented, the Internal Revenue Service’s role is only going to get bigger

• the tax credit for small firms that provide employee health coverage,
• having employers list the value of medical insurance on W-2 forms for employees,
• the 10% excise tax on indoor tanning salons (the "Snooki" tax) and
• nondiscrimination rules for health plans.

Congress did remove one unpopular item – forcing businesses to prepare & file 1099 forms for any individual or business to whom they had paid $600 or more for goods or services.  The expansion of 1099 reporting was very unpopular and the repeal was only signed into law a few short months back.  Even though that was a potential bonanza of new revenue for our firm, we were pretty happy about that one being repealed!

Congressional opponents of the 2010 health care law won’t be able to repeal or “defund” it before 2013.  There aren’t enough votes in the Senate to repeal and the president has indicated that he would veto any such legislation. The opposition’s best hope for repealing “Obamacare” rests in the Supreme Court, which will determine the law’s constitutionality. Because a final decision isn’t likely until mid-2012, IRS will keep working on the rules so taxpayers will have guidance if the law is upheld.  Which ever way the Supreme Court goes will make for interesting politics as we head into next year’s presidential election.

One of the provisions IRS has to prepare for includes the refundable income tax credit to help low-income earners afford health coverage. The credit will be available for households with income up to 400% of federal poverty levels (currently, about $43,300 for an individual and about $88,200 for a family of four). IRS will have a lot of work to do to define exactly how household income is determined (total income, taxable income, AGI, etc.), so stay tuned for that.

Beginning in 2013 (after the next election -- what an unbelievable coincidence), IRS will begin collecting a special 3.8% Medicare surtax on unearned income of high-earners (defined as single taxpayers with adjusted gross incomes (“AGI”) over $200,000 and married taxpayers with AGI over $250,000).  The surtax is levied on the lesser of the taxpayer’s net investment income or the excess of AGI over the thresholds. Unearned income includes interest, royalties, dividends, capital gains, annuities and passive rental income, but not tax-free interest and retirement plan payouts. IRS is charged with making rules to clarify in which cases rents are treated as unearned income.

There has been some mis-information circulating about the 3.8% Medicare surtax on gains attributable to the sale of a principal residence.  The surtax would only apply if your GAIN (not proceeds, but gain) exceeded $500,000 (married taxpayers) or $250,000 (single taxpayers).  Note that there would be a 3.8% surtax liability on any gain from the sale of a second home, vacation home, rental property or other investment if the taxpayer’s income exceeded the applicable AGI limits.

IRS has also been charged with determining how to collect penalty taxes on individuals who remain uninsured after 2013. In 2014, the tax will be the greater of $95 or 1% of income above the filing threshold (the income amount below which an individual is not required to file a tax return) but not more than $285. Special rules will be required to apportion the penalty among uninsured people in a household. While $285 doesn’t sound too onerous, note that the fines increase sharply after 2014.  Reporting of insurance coverage to the IRS also will be required so they can determine which individuals owe the penalty tax for not having coverage (Big Brother really is watching).

An excise tax will be assessed on businesses with 50 or more full-time employees and no health plan. As of 2014, the tax is due if one or more employees get the insurance tax credit.  IRS regulations will have to spell out how to compute the number of full-time workers, since the excise tax is based on that figure.  The number of part-time workers will complicate the calculation.  We don’t see this a being a huge deal to our client base as most firms that large are providing health benefits to their employees.

And further down the road we’ll see an excise tax on high-value (“Cadillac”) health plans.  Starting in 2018, insurance companies and self-insurers owe a 40% excise tax on the value of plans in excess of $10,200 for individual coverage and $27,500 for family coverage. Higher thresholds apply to policies for retirees over age 55 and folks in high risk jobs, such as first responders. IRS is busily preparing for the enforcement of this now.

That’s it for now!  Carpe Diem~!.  So far, the IRS has issued rules on:

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.

 

 

This is it, Folks! The last day of our tax season.

I hearken you back to your elementary school days; do you remember how you felt on the last day of school, when that final bell rang signifying the start of your summer? Well, that's how it feels to be a tax practitioner today (or the spouse of a tax practitioner).  Our offices will remain open this week, but all of our staff members will be taking some much needed and well-deserved time off in the coming weeks.

To add a little mass to this message and in support of our goal to help you become more aware of the impact of taxes on your financial situation, I'd like to share with you the story of Douglass Stives, CPA.  Doug Stives earns less than 75 percent of his former salary but takes home almost 90 percent as much. How? He claims every tax deduction he can. Kelsey Hubbard talks with the CPA-turned-professor about using the tax code to get more with less in this light and fun article from the "Wall Street Journal".  

http://online.wsj.com/article/SB10001424052748703696704576222590253291266.html?mod=dist_smartbrief

Carpe Diem!

IRS Updates it's version of "the Dirty Dozen"

One week to go!!  We're working hard to get everything done and realize that there are still some of you that we haven't heard from yet.  Get in here soon, OK!

 

The IRS released its 2011 iteration of the Dirty Dozen. There's no reference to the classic WWII themed movie or its great cast of characters, which included Lee Marvin, Jim Brown, Charles Bronson, George Kennedy, Telly Savalas, Donald Sutherland, Clint Walker and John Cassavetes (who was nominated for an Oscar and a Golden Globe as best supporting actor).  I vividly remember watching the Dirty Dozen with my dad and it is one of my all time favorite movies.  I don't know how I feel about the IRS stealing the tag line! 

 

The 2011 version of this IRS list of evil-doers "represents the worst of the worst tax scams," said IRS Commissioner Doug Shulman. "They may look tempting, but these fraudulent deals end up hurting people who participate in them." Hiding income in offshore accounts, identity theft, return preparer fraud and filing false or misleading tax forms top this year's list.  The rest of the story can be found in the following link.

 

http://www.irs.gov/newsroom/article/0,,id=238262,00.html

 

Note: According to Wikipedia, John Wayne was the original choice for Colonel Reisman (Lee Marvin's character), but he turned down the role.

Repeal of Expanded Form 1099 Reporting!

We've been harping about the disastrous consequences of the 1099 reporting requirements included in the 2010 health care law and it looks like the collective criticism of this overreaching policy hasn't fallen on deaf ears.  The U.S. House of Representatives bill H.R. 4 repeals those requirements and it has passed in the U.S. Senate and now awaits the President's signature.

H.R. 4 repeals the information reporting requirements under IRC Sec. 6041 for payments to recipients of rental income made after 12/31/10, as well as the provisions for payments made to corporations and payments for goods and other property made after 12/31/11. Under H.R. 4, the 1099 reporting rules return to the way they read before enactment of the Affordable Care Act and Small Business Jobs Act and generally require reporting by payors considered to be engaged in a trade or business for payments totaling at least $600 in a year.

This is a win for all business owners, regardless of the size of the business.  Check that! -- the folks that print blank 1099 forms can't be happy because this was going to be a windfall for them!

ELEVEN DAYS LEFT TO FILE YOUR 2010 TAX RETURNS!  Have a great day.