The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010

Posted December 17, 2010

Late last night, Congress completed work on long overdue tax legislation with bipartisan support in both the Senate and the House of Representatives. President Obama signed this legislation into law today.

 

For over a year, Congress had procrastinated in dealing with four major tax issues which have now been addressed in the last days of its lame‐duck session between last November's mid‐term elections and the seating of the newly elected Congress next January.

 

While this legislation provides some level of certainty to individual and business taxpayers in terms of planning their affairs, you will note below that all of the enacted provisions described below are temporary. Many of the various provisions expire in 2011 while others sunset in 2012. Thus, even though the bipartisan efforts to make this happen are laudable, the deep divide between Democrats and Republicans on tax policy will need to be addressed again most likely in 2012, a Presidential election year, and right before additional income taxes are scheduled to kick in to help pay for Health Care reform passed earlier this year.

 

The four major areas include:

• Extension of the Bush era tax cuts for all Americans for the tax years 2011 and 2012. Absent this extension, all Americans, both rich and poor, faced a relatively significant tax increase beginning January 1, 2011. In fact, it is estimated that up to 40 million lower income individuals would have been returned to the tax rolls for the first time since 2003.
• Extension of the AMT "patch" for the tax years 2010 and 2011. The Alternative Minimum Tax ("AMT") is an alternative tax computation on Form 1040 that was originally intended to keep the richest Americans from avoiding income tax in any tax year. However, since it was never indexed for inflation, it has now begun to impact middle class taxpayers by raising their Federal income tax. The "patch" is a two year extension of an AMT exemption amount which had expired on December 31, 2009. Without the extension of the AMT "patch", it is estimated that 21 million middle class taxpayers would have seen their Federal income tax increase on their soon‐to‐be‐filed 2010 Form 1040s.
• "Tax Extenders" reinstated for the tax years 2010 and 2011. Many individual and business tax provisions, which had expired at the end of 2009, have been retroactively reinstated for 2010 and in to 2011. Most prominent among a long list of provisions includes the Federal Research Credit for business innovation and the individual itemized deduction for state and local sales taxes.
• Reinstate the Estate tax in 2011 and 2012. After inexplicably allowing the Estate tax to lapse in 2010, it will now be reinstated, effective January 1, 2011. For the next two years, the Estate tax will apply to taxable estates exceeding $5,000,000 ($10,000,000 for married couples) at a maximum rate of 35%. Prior to its lapse in 2010, the Estate tax had applied in 2009 to taxable estates exceeding $3,500,000 ($7,000,000 for married couples) at a maximum rate of 45%. Had Congress taken no action on the Estate tax, it was scheduled to be reinstated on January 1, 2011 for taxable estates exceeding $1,000,000 ($2,000,000 for married couples) at a maximum rate of 55%. Of greater potential note, however, is the fact that the lifetime gift tax exemption will now increase from $1,000,000 to $5,000,000 per taxpayer for the two years 2011 and 2012.

The following is a summary of the new tax provisions most likely to impact our clients and friends in the three year period from 2010 through 2012. Many of these are tax provisions related to the four major areas above, some were compromises necessary to secure bipartisan support for the tax legislation, and others are intended to provide additional stimulus to the fragile Domestic economy and help reduce the current unemployment level.

 

Individual Provisions

• Federal income tax rate tables for 2010 remain in place in 2011 and 2012. Absent this legislation, millions of low income taxpayers would have returned to the tax rolls and the maximum tax rate was scheduled to increase from 35% to 39.6%. Middle class taxpayers would have seen their take‐home paycheck amounts reduced by increases in payroll withholding tables beginning January 1, 2011. For an individual making $50,000, this would have resulted in an $890 increase in Federal income taxes.
• Employee's share of Social Security taxes is reduced by 2% for 2011. For an individual making $50,000, this results in a cash savings of $1,000 in 2011. For individuals making up to the maximum withholding limit of $106,800, the savings will be $2,136. Note that the employers share of Social Security taxes is not reduced. The IRS also announced today that employers will have until January 31, 2011 to implement this payroll tax cut retroactively back to January 1, 2011.
• Phase‐outs of personal itemized deductions and personal exemptions are delayed until 2013. Absent this legislation, these "back door" tax increases for higher income individuals would have had the effect of raising the top tax rate of 39.6% to as high as an effective rate of 41%. These phase‐outs would have impacted many middle class taxpayers as well.
• Maximum tax rate on long term capital gains remains at 15%for 2011 and 2012. It had been scheduled to return to 20% effective January 1, 2011. Note that many taxpayers in lower income tax brackets will continue to be eligible for a zero rate tax on long term capital gains and qualified dividends.
• Maximum tax rate on dividend income remains at 15% for 2011 and 2012. Absent this legislation, the top rate on dividend income would have returned to as high as 39.6% in 2011. For businesses which export products overseas, this is good news for the lucrative benefit provided by Interest Charge ‐ Domestic International Sales Corporations ("IC‐DISC's").
• Student loan interest in 2011 and 2012 can continue to be deducted without regard to whether a taxpayer claims a standard deduction or itemizes deductions.
• Estate tax is reinstated for 2011 and 2012. It will apply to estates exceeding $5,000,000 at a maximum rate of 35%. For the first time, the total exemption of $10,000,000 available to spouses will be able to be moved to either spouse's estate, regardless of who owns the underlying assets comprising the taxable estates. This may require many current wills with various trust provisions to be redone to achieve desired results, at least for the next two years.
• Step up in tax basis of inherited assets to fair market value at death reinstated for 2011 and 2012. As noted above, the Estate tax had lapsed in 2010, but subject to certain limitations, so had the ability of an heir to receive a tax basis in assets received from an estate equal to their fair market value at the date of the decedent's death (or an alternate valuation date 6 months later). Rather, there was a carryover of the decedent's tax basis in such assets to the extent it was lower than their fair market value on the date of death. This subjected certain heirs to potentially significant capital gains taxes on the future disposition of any such testamentary assets received. This problem will be alleviated at least for the next two years.
• Estates of decedents dying in 2010 can elect to apply these 2011 provisions. For certain estates, it may be advantageous to pay some Estate tax in 2010 to avoid significant capital gains for heirs on their future sale of estate assets caused by the carryover tax basis issue discussed above.
• Lifetime Gift tax exclusion of $1,000,000 is increased to $5,000,000 per taxpayer for 2011 and 2012. This presents an unprecedented opportunity to gift assets to children, grandchildren and other heirs tax free (it also increases the generation skipping lifetime transfer exemption to $5,000,000). This is in addition to the annual gift tax exclusion which is currently $13,000 per donee (or $26,000 between spouses). Given the recent Domestic economic downturn, it also would appear to be an advantageous time to obtain fair market value asset appraisals which are as low as they may have been in years.
• Maximum rate on taxable gifts remains 35% for 2011 and 2012. Although the Estate tax had lapsed in 2010, a maximum Gift tax rate of 35% had still applied to taxable gifts in excess of annual gift tax exclusions and the lifetime gift tax exemption of $1,000,000 still available. Note that the maximum rate was 45% in 2009 and 55% back in 2001. Absent this legislation, the maximum rate would have returned to 55%.
• Unemployment benefits are extended for a maximum of 13 months from December 1, 2010 through December 31, 2011.

Individual tax extenders reinstated for 2010 and 2011.

• State and local sales tax deductions (of great benefit to Florida residents who pay no state income tax)
• Higher education tuition deduction
• Teacher's classroom expense deduction
• Charitable contribution of certain appreciated property
• Charitable contribution of IRA proceeds
• Credits relating to energy efficient home improvements and home appliances are extended one year into 2011 but are much less lucrative than in 2010

Business Provisions

• 100% bonus depreciation deduction for assets placed in service between September 9, 2010 and December 31, 2011 (reverting to 50% for assets placed in service in 2012). The surprise here was the inclusion of assets placed in service in the last part of 2010. Bonus depreciation typically applies to only the acquisition of new property with an assigned useful life of 20 years or under. It also applies to computer software and qualified leasehold improvements. Note that this enhanced write‐off will apply to assets purchased before September 9, 2010 but not placed in service until after September 8, 2010. Otherwise, assets placed in service before September 9, 2010 are still eligible for a 50% bonus depreciation deduction. Bonus depreciation is not limited by the amount of a taxpayer's annual fixed asset investments and can be used to generate net operating losses which may be able to be carried back to recapture taxes paid in the prior two years.
• Sec. 179 Small Business Expensing enhanced for 2012. Absent this legislation, the maximum Sec. 179 deduction for 2012 would have been $25,000 with a phase‐out when total fixed asset additions exceed $200,000. The new 2012 provision provides for a $125,000 Sec. 179 deduction with a phase‐out when total fixed asset additions exceed $500,000. Under previously enacted legislation for both 2010 and 2011, the maximum Sec 179 deduction is $500,000 and gets reduced when total fixed asset additions for a tax year exceed $2,000,000. In addition to the above investment limitations, Sec. 179 deductions can only be used in a current tax year to the extent the taxpayer has taxable income; they cannot be used to create a net operating loss. Unused Sec. 179 deductions can be carried forward to future years where there is taxable income.
• Federal Research credit for innovation reinstated for 2010 and 2011. Applies to all businesses which create innovation in the form of new or enhanced products, new or enhanced production processes or internally developed software applications. It is estimated than less than 40% of eligible Federal research credits are claimed by U.S. businesses even though it is a benefit Congress clearly wants them to get in return for competing in a global economy.
• Extension until December 31, 2011 to purchase certain small business stock which can avoid all capital gains taxes if held at least 5 years. Under previous legislation, this had applied to certain small business stock purchased between September 28, 2010 and December 31, 2010. Note that similar qualified small business stock purchased in earlier years and held at least 5 years may qualify for either 50% or 75% capital gains exclusions.

Business tax extenders reinstated for 2010 and 2011.

• 15‐year depreciation life for leasehold improvements, restaurant building and improvements and retail improvements
• Empowerment zone credits of potentially $3,000 per employee, per year for businesses located within a Federally designated area, several of which exist here in Duval County
• 5‐year depreciation life for farm machinery and equipment
• Enhanced deductions for charitable contributions of food inventories

 

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Small Business Jobs Act Benefits
More Than Just Small Businesses

Posted October 1, 2010

The Small Business Jobs Act of 2010 (The Act) has just been passed by Congress, and it benefits more than just small businesses. It also provides tax-saving opportunities for larger businesses and individuals — including small-business investors, the self-employed and employees saving for retirement.

 

Changes affecting businesses

 

Section 179 expensing. The Act helps small-business owners invest in their own businesses by increasing the Internal Revenue Code Sec. 179 expensing election limit. For tax years beginning in 2010 and 2011, the limit will now be $500,000, with a dollar-for-dollar phaseout starting when purchases for the year exceed $2 million. The Act also temporarily expands the definition of eligible property to include qualified leasehold-improvement, restaurant and retail-improvement property. The maximum amount of such property that can be expensed is $250,000.

 

Bonus depreciation. Another depreciation-related provision extends the special allowance for certain property, generally if acquired in calendar year 2010. Businesses can recover the costs of qualifying depreciable property more quickly by immediately deducting 50% of the cost. Bonus depreciation isn’t subject to any asset purchase limits, so businesses ineligible for Sec. 179 expensing can take advantage of it.

 

Property that qualifies for bonus depreciation includes tangible property with a recovery period of 20 years or less, computer software purchased by the business, water utility property, and qualified leasehold improvement property.

 

Other key changes. Here are some additional changes businesses should be aware of:

• New five-year carryback of the general business credit,
• Increase in the start-up expenditures deduction,
• Shortening of the S corporation built-in gains period, and
• Removal of cell phones from the definition of "listed property that’s subject to tighter substantiation requirements and special depreciation rules."

 

Changes affecting individuals

 

Exclusion on small business stock gains. To make investing in certain small businesses more attractive, The Act temporarily increases the qualified small business (QSB) stock gain exclusion. The exclusion will be 100% for stock acquired after The Act’s enactment date (that is, the date the president signs it into law) and before Jan. 1, 2011, that’s held for at least five years. Additionally, the act eliminates the alternative minimum tax (AMT) preference item on such gain, making it tax free for AMT purposes as well.

 

Self-employment tax. If you’re self-employed, The Act permits you to deduct for 2010 self-employment tax purposes any costs incurred in 2010 for health insurance for you and your spouse, dependents and children age 26 or under.

 

Information reporting required for rental property expense payments. For payments made after Dec. 31, 2010, the new law requires persons receiving rental income from real property to file information returns with the IRS and service providers reporting payments of $600 or more during the tax year for rental property expenses. Exceptions are provided for individuals renting their principal residences on a temporary basis (including active members of the military), taxpayers whose rental income doesn't exceed an IRS-determined minimal amount, and those for whom the reporting requirement would create a hardship (under IRS regulations).

 

Roth 457(b) plans. If you’re a government employee who participates in a 457(b) plan, be aware that The Act may allow your employer to start providing you the option to designate some or all of your contributions as Roth contributions. The contributions won’t reduce your taxable income, but you won’t have to pay any tax on qualified distributions.

 

401(k), 403(b) or 457(b) rollovers to Roth accounts. Under The Act, your 401(k), 403(b) or 457(b) plan may allow (but isn’t required to allow) you to roll any portion of your pretax account balance into a Roth account. The amount of the rollover would be includible in your taxable gross income — except to the extent it’s the return of any after-tax contributions. If the rollover is made in 2010, you can elect to pay the tax over a two-year period in 2011 and 2012.

 

How you can benefit

 

Whether or not you’re a small-business owner, you may be able to reap significant tax savings by taking advantage of the opportunities The Act offers. We’d be pleased to help you determine exactly how you can benefit. For further clarification, or if you need assistance, please do not hesitate to call your LBA professional at 904.396.4015.

 

 

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IRS Mails 401(k) Compliance Questionnaire to Employers Sponsoring 401(k) Plans

Posted June 10, 2010

IRS warns employers that failure to respond or provide complete information will result in further action.

On May 18, 2010 the IRS' Employee Plans Compliance Unit (EPCU) began sending out a compliance questionnaire to 1,200 randomly selected 401(k) plan sponsors. The EPCU launched this initiative in an effort to ensure that these popular retirement plans are being operated properly. The agency will use the information gathered to gauge plan compliance and to gain insight into how to address non-compliance trends.

Plan sponsors will have 90 days to complete and return the "voluntary" questionnaire.

According to the IRS, the 401(k) Compliance Check Questionnaire Project is neither an audit nor an investigation — but it is an "enforcement action." While participation is not mandatory, failure to accurately complete and return the questionnaire within the three-month window could trigger a plan audit. The questionnaire is quite detailed and technical. Responding with wrong answers also could result in a plan audit.

Click here to download this important LBA Alert to learn more.

 

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January 2010

Will you have 27 pay periods in 2010?

Posted Jan. 1, 2010

Companies whose first payday of 2010 falls on January 1st, and whose pay periods are every other week, are directly affected

It is a simple matter of math that is affecting standard pay periods in 2010. If your company is on a bi-weekly pay schedule, and the first scheduled payday for 2010 falls on January 1st, you will need to adjust your employees' gross wages per pay period for salaried employees.

The adjustment is minor and easy to compute. Salaried employees' annual
compensation will need to be divided by 27 - not 26. Only if your first payday in 2010 is January 1st, will this directly affect you. If you are on this pay schedule, there will be three months with three pay periods in them - January, July and December. Without making the adjustment, salaried employees would be paid more than their annual compensation.

Click here to download this important LBA Alert to learn more.

 

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Significant Increases to Florida Unemployment Tax Rate
and Base

Posted Jan. 1, 2010

Facing the highest unemployment rate since 1975, the State of Florida is borrowing approximately $300 million per month to pay unemployment compensation benefits. Due to this deficit, effective January 1, 2010, an employee’s taxable wages for unemployment will increase from $7,000 to $8,500.

Click here to download this important LBA Alert to learn more.

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December 2009

IRS Announces 2010 Standard Mileage Rates

Posted Dec. 7, 2009

December 7, 2009 – The Internal Revenue Service has issued the 2010 optional
standard mileage rates used to calculate the deductible costs of operating an
automobile for business, charitable, medical or moving purposes.

Click here to download this important LBA Alert to learn more.

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October 2009

IRS Announces Retirement Plan Limitations

Posted Oct. 15, 2009

DOLLAR LIMITATIONS ON BENEFITS AND CONTRIBUTIONS FOR RETIREMENT PLANS UNCHANGED

On October 15, 2009, the IRS announced the 2010 cost-of-living adjustments applicable to dollar limitations for retirement plans and other items. The limits remain the same as they were in 2009.

Retirement plans are subject to annually adjusted dollar limitations by the IRS for cost-of-living increases, and are normally determined based on inflation data provided by the Bureau of Labor Statistics' release of the Consumer Price Index.

Click here to download this important LBA Alert to learn more.

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May 2009

IRS Relaxes Safe Harbor Rules

Posted May 28th, 2009

The Internal Revenue Service issued regulations on May 18, 2009, relaxing the 401(k) and 403(b) safe harbor rules.

Background

A safe harbor plan is exempt from the typical discrimination testing related to 401(k) salary deferrals and employer matching contributions (ADP/ACP) provided the employer commits to making either a matching contribution for those employees contributing to the plan or, a 3% contribution to all eligible employees whether or not they defer. Until yesterday, if an employer elected to make the 3% contribution prior to the start of the plan year the employer could not reduce or eliminate the 3% contribution during the year. The commitment could only be eliminated by termination of the plan.

Click here to download this important LBA Alert to learn more.

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February 2009

Stimulus act provides businesses taxsaving
opportunities and other benefits

Posted February 17th, 2009

On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (“the Act”). Although there was much debate in Congress over this stimulus legislation, there’s no doubt that the nearly $800 billion act’s government spending initiatives and tax incentives for private spending will benefit many companies. Additionally, the Act provides businesses a multitude of tax-saving opportunities.

 

Click here to download this important LBA Alert to learn more.

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February 2009

Will the Stimulus Act Benefit You and Your Family?

Posted February 17th, 2009

On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (the Act). In addition to government spending initiatives intended to revive the economy, the nearly $800 billion act provides hundreds of millions of dollars of tax cuts expected to benefit 95% of taxpayers.

Because of adjusted gross income (AGI) phaseouts and other limitations, you may not qualify for many of the new or expanded tax breaks the Act provides. But even if you don’t, your children, parents or other loved ones might, so you’ll want to be familiar with the Act’s tax provisions. The Act also provides help to laid-off workers that may benefit your family.

Click here to download this important LBA Alert to learn more.

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November 2008

How will President-Elect Obama's Tax Plan Affect
MY Taxes?

Posted November 10th, 2008

With the current turbulent financial situation and a new chief executive preparing to take the oath of office in just over two months, many of us are wondering what impact our new President will have on our taxes. Click here to download this important LBA Alert to learn more.

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March 2008

Tax Law Enacted to Spur U.S. Economy

Posted March 7th, 2008

The Economic Stimulus Package Act of 2008 is designed to boost the U.S. economy by providing tax rebates to individuals and tax incentives for businesses. Click here to download the LBA Alert on this important piece of legislation to learn how it could affect you.

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March 2008

LBA Releases Top Ten Planning Tips for 2008

Posted March 7th, 2008

LBA has released its 7th annual list of Top Ten Planning Tips. These helpful hints have helped hundreds of LBA’s clients properly plan to proactively maximize their income and minimize their tax liability. Click here for this year’s list.

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November 2007

IRS Announces 2008 Standard Mileage Rates

Posted November 28th, 2007

The Internal Revenue Service has issued the 2008 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes. Download the Alert for a list of the new rates.