25 May 2011

Benefits of Qualified Joint Ventures for Family Businesses

Uncategorized No Comments

An unincorporated business jointly owned by a

married couple is generally classified as a

partnership for Federal tax purposes. Previously,

married individuals in a business together were considered

partners and required to file an annual Form 1065

as well as a Form 1040 return.

For tax years beginning after December 31, 2006,

the Small Business and Work Opportunity Tax Act of

2007 (Public Law 110-28) provides that a “qualified joint

venture,” whose only members are a husband and a

wife filing a joint return, can elect not to be treated as

a partnership for Federal tax purposes.

A qualified joint venture conducts a trade or business

where:

n the only members of the joint venture are a husband

and wife who file a joint return;

n both spouses materially participate in the trade or

business, as mere joint ownership of property is not

enough;

n both spouses elect not to be treated as a partnership;

and

n the business is co-owned by both spouses and is not

held in the name of a state law entity such as a partnership

or LLC.

The QJV option simplifies the filing requirements by

allowing husband-and-wife businesses to be treated as

sole proprietorships and file a Form 1040 tax return rather

than partnerships for tax purposes. It eliminates filing

a Form 1065 tax return for qualified joint ventures. The

option also helps to ensure each spouse gets proper

Social Security credit.

Spouses electing qualified joint venture status are

treated as sole proprietors for Federal tax purposes.

Using the rules for sole proprietors, an EIN is not

required for a sole proprietorship unless the sole

proprietorship is required to file excise, employment,

alcohol, tobacco, or firearms returns. If the spouses

previously had an EIN for their partnership, that EIN

can only be used if the spouses do not elect qualified

joint venture status.

Making the Election to be Treated

as a Qualified Joint Venture

Spouses make the election on a jointly filed Form 1040

by dividing all items of income, gain, loss, deduction, and

credit between them in accordance with each spouse’s

respective interest in the joint venture, and each spouse

filing with the Form 1040 a separate Schedule C (Form

1040), Profit or Loss From Business (Sole Proprietorship)

or Schedule F (Form 1040), Profit of Loss From Farming,

and, if otherwise required, a separate Schedule SE (Form

1040), Self-Employment Tax.

To make the qualified joint venture election for

2009, jointly file the 2009 Form 1040, with the required

schedules. This generally does not increase the total tax

on the return, but it does give each spouse credit for

social security earnings on which retirement benefits

are based, provided neither spouse exceeds the social

security tax limitation.

Earning Social Security Benefits

For purposes of determining net earnings from selfemployment,

each spouse’s share of income or loss from

a qualified joint venture is taken into account just as it is

for Federal income tax purposes under the provision, in

accordance with their respective interests in the venture.

A spouse is considered an employee if there is an

employer/employee type of relationship, i.e., the first

spouse substantially controls the business in terms of

management decisions and the second spouse is under

the direction and control of the first spouse. If such a

relationship exists, then the second spouse is an employee

subject to income tax and FICA, Social Security and

Medicare withholding.

If your spouse is your employee, not your partner,

you must pay Social Security and Medicare taxes for

him or her. The wages for the services of an individual

who works for his or her spouse in a trade or business

are subject to income tax withholding and Social

Security and Medicare taxes, but not to FUTA tax. For

more information, refer to Publication 15, Circular E,

Employer Tax Guide.

Reporting Federal Income Tax

as a Qualified Joint Venture

Including Self-Employment Tax

Spouses electing qualified joint venture status are

treated as sole proprietors for Federal tax purposes. The

spouses must share the businesses’ items of income,

gain, loss, deduction, and credit.

If the business has employees, either of the sole

proprietor spouses may report and pay the employment

taxes due on wages paid to the employees, using the

EIN of that spouse’s sole proprietorship. If the business

already filed Forms 941 or deposited or paid taxes for part

of the year under the partnership’s EIN, the spouse may

be considered the “successor employer” of the employee

for purposes of determining whether the wages have

reached the social security and Federal unemployment

wage base limits. Refer to Publication 15, Circular E,

Employer Tax Guide for more information on the successor

employer rules.

For more information on qualified joint ventures, refer

to IRS.gov for Husband and Wife Business and Election

for Husband and Wife Unincorporated Businesses.

25 May 2011

Premium assistance tax credits for purchasing health insurance in the 2010 health reform legislation

Uncategorized No Comments

 

The centerpiece of the recently enacted health care overhaul legislation is its provision of tax credits to low and middle income individuals and families for the purchase of health insurance. I’m writing to give you an overview of how the new tax credits will work.

For tax years ending after 2013, the new law creates a refundable tax credit (the “premium assistance credit”) for eligible individuals and families who purchase health insurance through an exchange. The premium assistance credit, which is refundable and payable in advance directly to the insurer, subsidizes the purchase of certain health insurance plans through an exchange. Under the provision, an eligible individual enrolls in a plan offered through an exchange and reports his or her income to the exchange. Based on the information provided to the exchange, the individual receives a premium assistance credit based on income, and IRS pays the premium assistance credit amount directly to the insurance plan in which the individual is enrolled. The individual then pays to the plan in which he or she is enrolled the dollar difference between the premium assistance credit amount and the total premium charged for the plan. For employed individuals who purchase health insurance through an exchange, the premium payments are made through payroll deductions.

The premium assistance credit will be available for individuals and families with incomes up to 400% of the federal poverty level ($43,320 for an individual or $88,200 for a family of four, using 2009 poverty level figures) that are not eligible for Medicaid, employer sponsored insurance, or other acceptable coverage. The credits will be available on a sliding scale basis. The amount of the credit will be based on the percentage of income the cost of premiums represents, rising from 2% of income for those at 100% of the federal poverty level for the family size involved to 9.5% of income for those at 400% of the federal poverty level for the family size involved.

25 May 2011

Employer requirement to offer coverage in the 2010 health reform legislation

Uncategorized No Comments

 

The recently enacted health overhaul legislation requires certain employers to offer and contribute to their workers’ health insurance or pay a penalty. Under the new law, effective for months beginning after Dec. 31, 2013, a large employer that does not offer coverage for all its full-time employees, offers minimum essential coverage that is unaffordable, or offers minimum essential coverage that consists of a plan under which the plan’s share of the total allowed cost of benefits is less than 60%, is required to pay a penalty if any full-time employee is certified to the employer as having purchased health insurance through a state exchange with respect to which a tax credit or cost-sharing reduction is allowed or paid to the employee. Here are the details:

Who is subject to the employer mandate? Only an “applicable large employer,” defined as someone who employed an average of at least 50 full-time employees during the preceding calendar year, is subject to the requirement to offer coverage. Most small businesses, since they have fewer than 50 employees, are thus exempt from the employer requirement. In counting the number of employees for purposes of determining whether an employer is an applicable large employer, a full-time employee (meaning, for any month, an employee working an average of at least 30 hours or more each week) is counted as one employee and all other employees are counted on a pro-rated basis. However, even an employer with 50 or more employees isn’t subject to the penalty for not offering coverage if the employer doesn’t have any full-time employees who are certified to the employer as having purchased health insurance through a state exchange with respect to which a tax credit or cost-sharing reduction is allowed or paid to the employee. In other words, if an employer doesn’t have any full-time employees who have a lower income that might qualify him or her to receive a subsidy when purchasing a health plan in the proposed health insurance exchange, the employer will not pay a “pay or play” penalty.

Penalty for employers not offering coverage. An applicable large employer who fails to offer its full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an employer-sponsored plan for any month is subject to a penalty if at least one of its full-time employees is certified to the employer as having enrolled in health insurance coverage purchased through a state exchange with respect to which a premium tax credit or cost-sharing reduction is allowed or paid to the employee. The penalty for any month is an excise tax equal to the number of full-time employees over a 30-employee threshold during the applicable month (regardless of how many employees are receiving a premium tax credit or cost-sharing reduction) multiplied by one-twelfth of $2,000. For example, if an employer fails to offer minimum essential coverage and has 60 full-time employes, ten of whom receive a tax credit for the year for enrolling in a state exchange-offered plan, the employer will owe $2,000 for each employee over the 30-employee threshold, for a total penalty of $60,000 ($2,000 multiplied by 30 (60 minus 30)). This penalty is assessed on a monthly basis.

Penalty for employers that offer coverage but have at least one employee receiving a premium tax credit. An applicable large employer who offers coverage but has at least one full-time employee receiving a premium tax credit or cost-sharing reduction is subject to a penalty. The penalty is an excise tax that is imposed for each employee who receives a premium tax credit or cost-sharing reduction for health insurance purchased through a state exchange. For each full-time employee receiving a premium tax credit or cost-sharing subsidy through a state exchange for any month, the employer is required to pay an amount equal to one-twelfth of $3,000. The penalty for each employer for any month is capped at an amount equal to the number of full-time employees during the month (regardless of how many employees are receiving a premium tax credit or cost-sharing reduction) in excess of 30, multiplied by one-twelfth of $2,000. For example, if an employer offers health coverage and has 60 full-time employees, 15 of whom receive a tax credit for the year for enrolling in a state exchange-offered plan, the employer will owe a penalty of $3,000 for each employee receiving a tax credit, for a total penalty of $45,000. The maximum penalty for this employer is capped at the amount of the penalty that it would have been assessed for a failure to provide coverage, or $60,000 ($2,000 multiplied by 30 (60 minus 30)). Since the calculated penalty of $45,000 is less than the maximum amount, the employer pays the $45,000 calculated penalty. This penalty is assessed on a monthly basis.

Requirement to offer “free choice vouchers.” After 2013, employers offering minimum essential coverage through an eligible employer-sponsored plan and paying a portion of that coverage will have to provide qualified employees with a voucher whose value could be applied to purchase of a health plan through the Insurance Exchange. Qualified employees would be those employees: who do not participate in the employer’s health plan; whose required contribution for employer sponsored minimum essential coverage exceeds 8%, but does not exceed 9.8% of household income; and whose total household income does not exceed 400% of the poverty line for the family. The value of the voucher would be equal to the dollar value of the employer contribution to the employer offered health plan. Employers providing free choice vouchers will not be subject to penalties for employees that receive a voucher.

25 May 2011

Penalties on individuals for remaining uninsured in the 2010 health reform legislation

Uncategorized No Comments

 

The recently enacted health care overhaul legislation contains an “individual mandate”—a requirement that U.S. citizens and legal residents have qualifying health coverage or be subject to a tax penalty. I’m writing to give you an overview of the penalty provisions enforcing the individual mandate.

Under the new law, effective for tax years beginning after Dec. 31, 2013, non-exempt U.S. citizens and legal residents will be required to maintain minimum essential coverage or pay a penalty. Those failing to maintain minimum essential coverage in 2016 will be subject to a penalty equal to the greater of: (1) 2.5% of household income over the threshold amount of income required for income tax return filing (generally, in 2010, the filing threshold is $9,350 for a single person or a married person filing separately and $18,700 for married filing jointly); or (2) $695 per uninsured adult in the household. The fee for an uninsured individual under age 18 will be one-half of the adult fee for an adult. The total household penalty can’t exceed 300% of the per adult penalty ($2,085), nor exceed the national average annual premium for the “bronze level” health plan offered through the Insurance Exchange that year for the household size.

The per adult annual penalty is phased in as follows: $95 for 2014; $325 for 2015; and $695 in 2016. For years after 2016, the $695 amount will be increased annually by the cost-of-living adjustment. The percentage of income will be phased in as follows: 1% for 2014; 2% in 2015; and 2.5% beginning after 2015. If a taxpayer files a joint return, the individual and spouse would be jointly liable for any penalty payment. The penalty, which will apply to any period the individual does not maintain minimum essential coverage (determined monthly), will be assessed through the Internal Revenue Code.

Exemptions will be granted for financial hardship, religious objections, American Indians, those without coverage for less than three months, aliens not lawfully present in the U.S., incarcerated individuals, those for whom the lowest cost “bronze plan” option exceeds 8% of household income, those with incomes below the tax filing threshold, and those residing outside of the U.S.

25 May 2011

Higher Medicare taxes on high-income taxpayers in the 2010 health reform legislation

Uncategorized No Comments

 

High-income taxpayers will be hit with two big tax hikes under the recently enacted health overhaul legislation: a tax increase on wages and a new levy on investments.

To help offset the cost of providing health insurance to millions of Americans, the new law imposes an additional 0.9% Medicare tax on wages above $200,000 for individuals and $250,000 for married couples filing jointly. In addition, for higher-income households, the new law adds a 3.8% tax on unearned income, including interest, dividends, capital gains and other investment income.

I’m writing to give you an overview of these two tax increases. Please call our offices for details of how the new changes may affect you or your business.

Higher Medicare tax on wages and self-employment income. The Medicare tax is the primary source of financing for Medicare’s hospital insurance trust fund, which pays hospital bills for beneficiaries who are 65 and older or disabled.

Under current law, wages are subject to a 2.9% Medicare tax. Workers and employers pay 1.45% each. Self-employed people pay both halves of the tax (but are allowed to deduct half of this amount for income tax purposes).

Unlike the payroll tax for Social Security, which applies to earnings up to an annual ceiling ($106,800 for 2010), the Medicare tax is levied on all of a worker’s wages without limit.

Under the provisions of the new law, which take effect in 2013, most taxpayers will continue to pay the 1.45% Medicare tax, but single people earning more than $200,000 and married couples earning more than $250,000 will be taxed at an additional 0.9% (2.35% in total) on the excess over those base amounts. Self-employed persons will pay 3.8% on earnings over those thresholds.

It should be noted that the $200,000/$250,000 thresholds aren’t indexed for inflation, so it is likely that more and more people will be subject to the higher tax in coming years.

Employers will collect the extra 0.9% on wages exceeding $200,000 just as they would withhold Medicare taxes and remit them to the IRS. However, companies won’t be responsible for determining whether a worker’s combined income with his or her spouse made them subject to the tax.

Instead, some employees will have to remit additional Medicare taxes when they file income tax returns, and some will get a tax credit for amounts overpaid. Married couples with combined incomes approaching $250,000 will have to keep tabs on both spouses’ pay to avoid an unexpected tax bill.

Medicare tax extended to investments. Under current law, the Medicare tax only applies to wages and self-employment income. Beginning in 2013, a Medicare tax will, for the first time, be applied to investment income. A new 3.8% tax will be imposed on net investment income of single taxpayers with AGI above $200,000 and joint filers over $250,000 (unindexed).

Net investment income is interest, dividends, royalties, rents, gross income from a trade or business involving passive activities, and net gain from disposition of property (other than property held in a trade or business). Net investment income is reduced by the deductions that are allocable to that income. However, the new tax won’t apply to income in tax-deferred retirement accounts such as 401(k) plans.

Because the new tax on investment income won’t take effect for three years, that leaves more time for Congress and the IRS to tinker with it. So we can expect lots of refinements and “clarifications” between now and when the tax actually takes hold in 2013.

25 May 2011

Tax changes affecting small business in the 2010 health reform legislation

Uncategorized No Comments

 

For owners of small businesses and their workers, the recently enacted health reform legislation has some key provisions to pay attention to. The major ones include: tax credits; excise taxes; and penalties. But whether a business will be affected by them depends on a variety of factors, such as the number of employees the business has. I’m writing to give you an overview of the provisions in the new law with the biggest impact on small business. Please call our offices for details of how the new changes may affect your specific business.

Tax credits to certain small employers that provide insurance. The new law provides small employers with a tax credit (i.e., a dollar-for-dollar reduction in tax) for nonelective contributions to purchase health insurance for their employees. The credit can offset an employer’s regular tax or its alternative minimum tax (AMT) liability.

Small business employers eligible for the credit. To qualify, a business must offer health insurance to its employees as part of their compensation and contribute at least half the total premium cost. The business must have no more than 25 full-time equivalent employees (“FTEs”), and the employees must have annual full-time equivalent wages that average no more than $50,000. However, the full amount of the credit is available only to an employer with 10 or fewer FTEs and whose employees have average annual full-time equivalent wages from the employer of less than $25,000.

Years the credit is available. The credit is initially available for any tax year beginning in 2010, 2011, 2012, or 2013. Qualifying health insurance for claiming the credit for this first phase of the credit is health insurance coverage purchased from an insurance company licensed under state law. For tax years beginning after 2013, the credit is only available to an eligible small employer that purchases health insurance coverage for its employees through a state exchange and is only available for two years. The maximum two-year coverage period does not take into account any tax years beginning in years before 2014. Thus, an eligible small employer could potentially qualify for this credit for six tax years, four years under the first phase and two years under the second phase.

Calculating the amount of the credit. For tax years beginning in 2010, 2011, 2012, or 2013, the credit is generally 35% (50% for tax years beginning after 2013) of the employer’s nonelective contributions toward the employees’ health insurance premiums. The credit phases out as firm-size and average wages increase. Tax-exempt small businesses meeting these requirements are eligible for payroll tax credits of up to 25% for tax years beginning in 2010, 2011, 2012, or 2013 (35% in tax years beginning after 2013) of the employer’s nonelective contributions toward the employees’ health insurance premiums.

Special rules. The employer is entitled to an ordinary and necessary business expense deduction equal to the amount of the employer contribution minus the dollar amount of the credit. For example, if an eligible small employer pays 100% of the cost of its employees’ health insurance coverage and the amount of the tax credit is 50% of that cost (i.e., in tax years beginning after 2013), the employer can claim a deduction for the other 50% of the premium cost.

Self-employed individuals, including partners and sole proprietors, two percent shareholders of an S corporation, and five percent owners of the employer are not treated as employees for purposes of this credit. Any employee with respect to a self-employed individual is not an employee of the employer for purposes of this credit if the employee is not performing services in the trade or business of the employer. Thus, the credit is not available for a domestic employee of a sole proprietor of a business. There is also a special rule to prevent sole proprietorships from receiving the credit for the owner and their family members. Thus, no credit is available for any contribution to the purchase of health insurance for these individuals and the individual is not taken into account in determining the number of full-time equivalent employees or average full-time equivalent wages.

Most small businesses exempted from penalties for not offering coverage to their employees. Although the new law imposes penalties on certain businesses for not providing coverage to their employees (so-called “pay or play”), most small businesses won’t have to worry about this provision because employers with fewer than 50 employees aren’t subject to the “pay or play” penalty. For businesses with at least 50 employees, the possible penalties vary depending on whether or not the employer offers health insurance to its employees. If it does not offer coverage and it has at least one full-time employee who receives a premium tax credit, the business will be assessed a fee of $2,000 per full-time employee, excluding the first 30 employees from the assessment. So, for example, an employer with 51 employees who doesn’t offer health insurance to his employees will be subject to a penalty of $42,000 ($2,000 multiplied by 21). Employers with at least 50 employees that offer coverage but have at least one full-time employee receiving a premium tax credit will pay $3,000 for each employee receiving a premium credit (capped at the amount of the penalty that the employer would have been assessed for a failure to provide coverage, or $2,000 multiplied by the number of its full-time employees in excess of 30). These provisions take effect Jan. 1, 2014.

The “Cadillac tax” on high-cost health plans. The new law places an excise tax on high-cost employer-sponsored health coverage (often referred to as “Cadillac” health plans). This is a 40% excise tax on insurance companies, based on premiums that exceed certain amounts. The tax is not on employers themselves unless they are self-funded (this typically occurs at larger firms). However, it is expected that employers and workers will ultimately bear this tax in the form of higher premiums passed on by insurers.

Here are the specifics: The new tax, which applies for tax years beginning after Dec. 31, 2017, places a 40% nondeductible excise tax on insurance companies and plan administrators for any health coverage plan to the extent that the annual premium exceeds $10,200 for single coverage and $27,500 for family coverage. An additional threshold amount of $1,650 for single coverage and $3,450 for family coverage will apply for retired individuals age 55 and older and for plans that cover employees engaged in high risk professions. The tax will apply to self-insured plans and plans sold in the group market, but not to plans sold in the individual market (except for coverage eligible for the deduction for self-employed individuals). Stand-alone dental and vision plans will be disregarded in applying the tax. The dollar amount thresholds will be automatically increased if the inflation rate for group medical premiums between 2010 and 2018 is higher than the Congressional Budget Office (CBO) estimates in 2010. Employers with age and gender demographics that result in higher premiums could value the coverage provided to employees using the rates that would apply using a national risk pool. The excise tax will be levied at the insurer level. Employers will be required to aggregate the coverage subject to the limit and issue information returns for insurers indicating the amount subject to the excise tax.

25 May 2011

Tax changes affecting individuals in the 2010 health reform legislation

Uncategorized No Comments

 

I’m writing to give you a brief overview of the key tax changes affecting individuals in the recently enacted health reform legislation. Please call our offices for details of how the new changes may affect your specific situation.

Individual mandate. The new law contains an “individual mandate”—a requirement that U.S. citizens and legal residents have qualifying health coverage or be subject to a tax penalty. Under the new law, those without qualifying health coverage will pay a tax penalty of the greater of: (a) $695 per year, up to a maximum of three times that amount ($2,085) per family, or (b) 2.5% of household income over the threshold amount of income required for income tax return filing. The penalty will be phased in according to the following schedule: $95 in 2014, $325 in 2015, and $695 in 2016 for the flat fee or 1.0% of taxable income in 2014, 2.0% of taxable income in 2015, and 2.5% of taxable income in 2016. Beginning after 2016, the penalty will be increased annually by a cost-of-living adjustment. Exemptions will be granted for financial hardship, religious objections, American Indians, those without coverage for less than three months, aliens not lawfully present in the U.S., incarcerated individuals, those for whom the lowest cost plan option exceeds 8% of household income, those with incomes below the tax filing threshold (in 2010 the threshold for taxpayers under age 65 is $9,350 for singles and $18,700 for couples), and those residing outside of the U.S.

Premium assistance tax credits for purchasing health insurance. The centerpiece of the health care legislation is its provision of tax credits to low and middle income individuals and families for the purchase of health insurance. For tax years ending after 2013, the new law creates a refundable tax credit (the “premium assistance credit”) for eligible individuals and families who purchase health insurance through an exchange. The premium assistance credit, which is refundable and payable in advance directly to the insurer, subsidizes the purchase of certain health insurance plans through an exchange. Under the provision, an eligible individual enrolls in a plan offered through an exchange and reports his or her income to the exchange. Based on the information provided to the exchange, the individual receives a premium assistance credit based on income and IRS pays the premium assistance credit amount directly to the insurance plan in which the individual is enrolled. The individual then pays to the plan in which he or she is enrolled the dollar difference between the premium assistance credit amount and the total premium charged for the plan. For employed individuals who purchase health insurance through an exchange, the premium payments are made through payroll deductions.

The premium assistance credit will be available for individuals and families with incomes up to 400% of the federal poverty level ($43,320 for an individual or $88,200 for a family of four, using 2009 poverty level figures) that are not eligible for Medicaid, employer sponsored insurance, or other acceptable coverage. The credits will be available on a sliding scale basis. The amount of the credit will be based on the percentage of income the cost of premiums represents, rising from 2% of income for those at 100% of the federal poverty level for the family size involved to 9.5% of income for those at 400% of the federal poverty level for the family size involved.

Higher Medicare taxes on high-income taxpayers. High-income taxpayers will be hit with a double whammy: a tax increase on wages and a new levy on investments.

Higher Medicare payroll tax on wages. The Medicare payroll tax is the primary source of financing for Medicare’s hospital insurance trust fund, which pays hospital bills for beneficiaries, who are 65 and older or disabled. Under current law, wages are subject to a 2.9% Medicare payroll tax. Workers and employers pay 1.45% each. Self-employed people pay both halves of the tax (but are allowed to deduct half of this amount for income tax purposes). Unlike the payroll tax for Social Security, which applies to earnings up to an annual ceiling ($106,800 for 2010), the Medicare tax is levied on all of a worker’s wages without limit.

Under the provisions of the new law, which take in 2013, most taxpayers will continue to pay the 1.45% Medicare hospital insurance tax, but single people earning more than $200,0000 and married couples earning more than $250,000 will be taxed at an additional 0.9% (2.35% in total) on the excess over those base amounts. Employers will collect the extra 0.9% on wages exceeding $200,000 just as they would withhold Medicare taxes and remit them to the IRS. Companies wouldn’t be responsible for determining whether a worker’s combined income with his or her spouse made them subject to the tax. Instead, some employees will have to remit additional Medicare taxes when they file income tax returns, and some will get a tax credit for amounts overpaid. Self-employed persons will pay 3.8% on earnings over the threshold. Married couples with combined incomes approaching $250,000 will have to keep tabs on their spouses’ pay to avoid an unexpected tax bill. It should also be noted that the $200,000/$250,000 thresholds are not indexed for inflation, so it is likely that more and more people will be subject to the higher taxes in coming years.

Medicare payroll tax extended to investments. Under current law, the Medicare payroll tax only applies to wages. Beginning in 2013, a Medicare tax will, for the first time, be applied to investment income. A new 3.8% tax will be imposed on net investment income of single taxpayers with AGI above $200,000 and joint filers over $250,000 (unindexed). Net investment income is interest, dividends, royalties, rents, gross income from a trade or business involving passive activities, and net gain from disposition of property (other than property held in a trade or business). Net investment income is reduced by properly allocable deductions to such income. However, the new tax won’t apply to income in tax-deferred retirement accounts such as 401(k) plans. Also, the new tax will apply only to income in excess of the $200,000/$250,000 thresholds. So if a couple earns $200,000 in wages and $100,000 in capital gains, $50,000 will be subject to the new tax. Because the new tax on investment income won’t take effect for three years, that leaves more time for Congress and the IRS to tinker with it. So we can expect lots of refinements and “clarifications” between now and when the tax is actually rolled out in 2013.

Floor on medical expenses deduction raised from 7.5% of adjusted gross income (AGI) to 10%. Under current law, taxpayers can take an itemized deduction for unreimbursed medical expenses for regular income tax purposes only to the extent that those expenses exceed 7.5% of the taxpayer’s AGI. The new law raises the floor beneath itemized medical expense deductions from 7.5% of AGI to 10%, effective for tax years beginning after Dec. 31, 2012. The AGI floor for individuals age 65 and older (and their spouses) will remain unchanged at 7.5% through 2016.

Limit reimbursement of over-the-counter medications from HSAs, FSAs, and MSAs. The new law excludes the costs for over-the-counter drugs not prescribed by a doctor from being reimbursed through a health reimbursement account (HRA) or health flexible savings accounts (FSAs) and from being reimbursed on a tax-free basis through a health savings account (HSA) or Archer Medical Savings Account (MSA), effective for tax years beginning after Dec. 31, 2010.

Increased penalties on nonqualified distributions from HSAs and Archer MSAs. The new law increases the tax on distributions from a health savings account or an Archer MSA that are not used for qualified medical expenses to 20% (from 10% for HSAs and from 15% for Archer MSAs) of the disbursed amount, effective for distributions made after Dec. 31, 2010.

Limit health flexible spending arrangements (FSAs) to $2,500. An FSA is one of a number of tax-advantaged financial accounts that can be set up through a cafeteria plan of an employer. An FSA allows an employee to set aside a portion of his or her earnings to pay for qualified expenses as established in the cafeteria plan, most commonly for medical expenses but often for dependent care or other expenses. Under current law, there is no limit on the amount of contributions to an FSA. Under the new law, however, allowable contributions to health FSAs will capped at $2,500 per year, effective for tax years beginning after Dec. 31, 2012. The dollar amount will be indexed for inflation after 2013.

Dependent coverage in employer health plans. Effective on the enactment date, the new law extends the general exclusion for reimbursements for medical care expenses under an employer-provided accident or health plan to any child of an employee who has not attained age 27 as of the end of the tax year. This change is also intended to apply to the exclusion for employer-provided coverage under an accident or health plan for injuries or sickness for such a child. A parallel change is made for VEBAs and 401(h) accounts. Also, self-employed individuals are permitted to take a deduction for the health insurance costs of any child of the taxpayer who has not attained age 27 as of the end of the tax year.

Excise tax on indoor tanning services. The new law imposes a 10% excise tax on indoor tanning services. The tax, which will be paid by the individual on whom the tanning services are performed but collected and remitted by the person receiving payment for the tanning services, will take effect July 1, 2010.

Liberalized adoption credit and adoption assistance rules. For tax years beginning after Dec. 31, 2009, the adoption tax credit is increased by $1,000, made refundable, and extended through 2011 The adoption assistance exclusion is also increased by $1,000.

25 May 2011

IRS agents to begin accepting taxpayer records in electronic format

Uncategorized No Comments

IRS Headliner Volume 303, Oct. 15, 2010

IRS has announced that it will begin accepting taxpayer records in electronic format instead of continuing to use traditional paper books and records for tax audits.

For some time, business owners and tax professionals have been encouraging IRS to accept taxpayer records in electronic format. These wishes were specifically expressed in tax practitioner focus groups held at 2008 National Tax Forums, and from other stakeholders. After considering the issue, IRS recently decided to train approximately 1,100 revenue agents on QuickBooks Premier Accountant Edition 2010 software. The agents who have completed the training are being encouraged to accept taxpayers’ QuickBooks files, as well as electronic records from Peachtree accounting software. The ability to conduct audits using these software options will be available on an increasing basis as revenue agents begin to work with the new software.

IRS is advising taxpayers providing electronic records to use a CD, DVD, or flash/jump drive to ensure the security of the files. Taxpayers should not use e-mail to transmit the electronic records.

IRS believes that obtaining taxpayer accounting records in electronic format provides the following significant advantages: (1) It will reduce taxpayer burden because taxpayers won’t have to print records stored electronically. (2) It will provide a complete set of the taxpayer’s accounting records, which will decrease the number of items included in the initial document request and follow-up requests. (3) It will increase the efficiency of the revenue agent’s analysis and testing of the books and records, which will speed up the entire audit process.

The authority for requesting QuickBooks backup files and accounting records in electronic format is in Code Sec. 6001 , Reg. § 1.6001-1(a) , Reg. § 1.6001-1(e) , and Rev Proc 98-25, 1998-1 CB 689 . The aforementioned revenue procedure does not prevent or exempt a taxpayer from providing electronic records, if such records exist.

25 May 2011

2010 & 2011 Tax Planning

Uncategorized No Comments

August 1, 2010

By JOSEPH W. WALLOCH

Uncertainty abounds! “This is the most uncertainty in taxation I have experienced in my lifetime,” says Sidney Kess, a national tax expert, CPA and Harvard Law School graduate who has been in tax practice in New York City for more than a half century.

Congress is uncertain what to do about the expiring Bush tax cuts, the Federal Estate Tax, the Alternative Minimum Tax and the extension of expiring tax provisions, to name a few of the tax uncertainties. Congressional inaction that some label “congressional malpractice” on these taxing issues has created monumental confusion and uncertainty.

The president’s “Debt Commission” is uncertain how to address the over $100 trillion projected funding deficit – yes, trillion with a T – in Social Security and Medicare in the coming decades. Preliminary discussions indicate that a tax increase of over 26.7 trillion in the coming decades is being considered.

Tax planning in uncertain times calls for assessing the worst case, best case and “most likely” scenarios.

The “most likely” scenario is that taxes will increase in the future. It is not a question of “if” but “when.”

Many major taxpayers are accelerating long-term capital gain income into 2010 in order to lock in the current maximum tax rate of 15 percent. If the Bush tax cuts are allowed to expire, the top long-term capital gains tax rate will increase to 20 percent in 2011. The Health Care Act increase of 3.8 percent on investment income scheduled to kick in 2013 will increase the maximum long-term capital gains tax rate to 23.8 percent in 2013, or a 59 percent increase in tax! Major taxpayers planning 2010 acceleration transactions including hedge fund managers with carried interest, and Ralph Lauren, who is planning to sell 25 percent of his business in 2010 to take advantage of the 15 percent long-term capital gains tax rate.

Many taxpayers are converting traditional Individual Retirement Accounts or IRAs and other retirement plans to Roth IRAs in 2010 because of perceived future increased tax rates. The conversion privilege was expanded to all taxpayers in 2010 because of the elimination of any income limitation. The good news is that future income and appreciation in the Roth IRA is not subject to income taxation. The bad news is that the conversion is subject to current income tax hopefully at lower tax rates. However, there is an election to have the income either taxed in 2010 or taxed 50 percent in each of 2011 and 2012.

On the deduction side of the tax equation, many taxpayers are planning to defer deductions into the future where potentially increased tax rates will generate a greater tax benefit. The current top individual income tax rate in 2010 is 35 percent. If the Bush tax cuts are not extended, the top tax rates will increase to 39.6 percent in 2011. In 2013, with the Health Care Act increase of 3.8 percent, the maximum tax rate would increase to 43.4 percent. The current top California tax rate is 10.55 percent. Thus, in 2011 and beyond, the combined federal and California tax would take more than 50 percent of your ordinary income.

Many taxpayers are planning to defer charitable contributions into 2011 in order to maximize their tax benefit. Other taxpayers are strongly considering moving out of a high-tax state like California to lower or “zero income tax” states including Nevada, Washington, Texas and Florida. For example, LeBron James’ move to Florida rather than New York is estimated to have saved him more than $12 million in state income tax.

There is currently no federal estate tax in 2010. Thus, very large estates are going untaxed. George Steinbrenner, owner of the New York Yankees, recently passed away. His death in 2010 is estimated to have saved his heirs over $600 million in federal estate taxes.

Congress is now on their August recess. On return, they will continue to ponder postponing the expiration of the Bush tax cuts, fixing the federal estate tax, “patching” the Alternative Minimum Tax, extending certain tax deductions and credits, extending 50 percent bonus depreciation on new property acquisitions, as well as deciding whether or not the maximum tax rate on dividend income will be increased from 15 percent to 39.6 percent.

25 May 2011

Client letter provides guidance to clients who can’t pay their tax liabilities

Uncategorized No Comments

 

Dear Client:

You recently asked what will happen and what you should do in the event that you cannot pay your taxes on time. First and most importantly, don’t let your inability to pay your tax liability in full keep you from filing your tax return properly and on time. It is also important to remember that an extension of time to file your tax return doesn’t also extend the time to pay your tax bill.

Even if you can’t make full payment of your liabilities, timely filing your return and making the largest partial payment you can will save you substantial amounts in interest and penalties. Additionally, there are procedures for requesting payment extensions and installment payment arrangements which will keep the IRS from instituting its collection process (liens, property seizures, etc.) against you.

Overview of the most common penalties. The “failure to file” penalty accrues at the rate of 5% per month or part of a month (to a maximum of 25%, reached after five months) on the amount of tax your return should show you owe. The “failure to pay” penalty is gentler, accruing at the rate of only 0.5% per month or part of a month (to a maximum of 25% reached after fifty months) on the amount actually shown as due on the return. If both apply, the failure to file penalty drops to 4.5% per month, so the total combined penalty remains at 5%—thus, the maximum combined penalty for the first five months is 25%. Thereafter, the failure to pay penalty can continue at 0.5% per month for 45 more months, yielding an additional 22.5%. In total, these combined penalties can reach 47.5% of your unpaid liability in less than five years.

Both of these penalties are in addition to interest you will be charged for your late payment. If you also missed estimated tax payments, an additional penalty is tacked on for the period running from each payment’s due date until the tax return due date, normally April 15th. This penalty is computed at 3% above the fluctuating federal short-term interest rate for the period.

Borrowing money to pay taxes. Given the rate at which the above-mentioned penalties and interest accrues, it might be a good idea to borrow money to pay the taxes. In many situations, the rate of interest that you would pay to a family member, or even to a bank, is less overall than that which you would have to pay the IRS.

Loans from relatives or friends are often the simplest method to pay the bill. One advantage of such loans is that the interest rate will probably be low, but you must also consider that loans over $10,000 at below-market interest rates may trigger tax consequences. When loans from individuals are not available, a loan from a bank or other commercial source could be sought, but such loans are not likely to be made on favorable terms to a hard-pressed taxpayer. Moreover, interest on a loan to pay taxes is nondeductible personal interest. In contrast, if you can take out a home equity loan and use the proceeds to pay off your tax debts, you will probably be paying at a lower rate than with other types of loans, and the interest payments will be deductible even if the loan proceeds aren’t used in connection with the house.

Credit cards. It is relatively quick and easy to use credit cards to pay the income tax bill, whether you file your income tax return by mailing a paper copy or by computer. In addition, three companies (Official Payments Corporation at 888-872-9829, Link2Gov Corporation at 888-729-1040, and RBS WorldPay, Inc. at 888-972-9829) are authorized service providers for purposes of accepting credit card charges from both electronic and paper filers. However, credit card loans are likely to be at relatively high interest rates and the interest is not deductible. Moreover, the service providers typically charge an additional fee based on the amount you are paying.

Installment agreement request. If you cannot or prefer not to take out a loan, you might be able to defer your tax payments by requesting that the IRS enter into an installment payment agreement with you. This request is made on Form 9465 or by applying for a payment agreement online. There are various options for making your monthly installment agreement payments, including the direct debit and payroll deduction methods, both of which are made automatically and thus reduce the risk of default.

If you file and request a payment agreement online, there are three available payment options: (1) payment in full within 10 days (which saves on interest and penalties); (2) short-term extension of up to 120 days (for which no fee is charged, but additional penalties and interest accrue); or (3) monthly payment plan (which carries an additional user fee, and interest and penalties continue to accrue on the unpaid balance).

You can also request an installment agreement on Form 9465, which can be filed along with either an e-filed or paper return. Form 9465 requires less information than the hardship extension application (described below). If the liability is under $25,000, you will not be required to submit financial statements. Even if your request to pay in installments is granted, you will be charged interest on any tax not paid by its due date. However, the late payment penalty will be half the usual rate (0.25% instead of 0.5%) if you file your return by the due date (including extensions).

The IRS charges a fee for installment agreements, which will be deducted from your first payment after your request is approved. The fee for entering into an installment agreement is regularly $105, but it is reduced to $52 when the taxpayer pays by way of a direct debit from the taxpayer’s bank account. Notwithstanding the method of payment, the fee is $43 if the taxpayer is a low-income taxpayer—i.e., an individual who falls at or below 250% of the dollar criteria established by the poverty guidelines updated annually in the Federal Register by the U.S. Department of Health and Human Services. There is a $45 fee to restructure or reinstate an established installment agreement that applies regardless of income levels or method of payment.

Note that an installment agreement request can be made after the expiration of a hardship extension period (described below). Additionally, the IRS has the authority to enter into an installment agreement calling for less than full payment of the tax liability over the term of the agreement. It may do so if it determines such an agreement will facilitate partial collection of the liability.

The installment agreement may terminate, and all your taxes become due immediately, under certain circumstances (for example, if you stop making payments).

The IRS is required to enter into an installment agreement at your request (a “guaranteed installment agreement”) if the following apply:

·       the tax liability is $10,000 or less (not counting interest and penalties);

·       within the prior 5 years you have not (i) failed to file returns or pay taxes, or (ii) entered into a previous installment agreement;

·       the IRS determines the tax liability cannot be paid in full;

·       the installment agreement provides for full payment within 3 years; and

·       you agree to comply with the tax laws during the agreement period.

As a matter of policy, the IRS often grants guaranteed installment agreements even if taxpayers are able to fully pay their accounts.

Undue hardship extensions. You may also qualify for an extension of time to pay if you can show that payment would cause “undue hardship.” Form 1127 is used to apply for an undue hardship extension, and you must attach a statement of assets and liabilities as well as an itemized list of receipts and disbursements for the 3 months preceding the tax due date.

If you qualify for an undue hardship extension, you will be given an extra six months to pay the tax shown as due on your tax return. You will avoid the failure to pay penalty, but you will still be charged interest. If the IRS determines a “deficiency,” i.e., that you owe taxes in excess of the amount shown on your return, the undue hardship extension can be as long as 18 months and, in exceptional cases, another 12 months can be tacked on. However, no extension will be granted if the deficiency was the result of negligence, intentional disregard of the tax rules, or fraud.

To establish undue hardship, it is not enough to show that it would just be inconvenient to pay your tax when due. For example, if you would have to sell property at a “sacrifice” price, you may qualify for an undue hardship extension. However, if a market exists, having to sell property at the current market price is not viewed as resulting in an undue hardship.

To qualify for an extension, you would have to: (i) show that you do not have enough cash and assets convertible into cash in excess of current working capital to meet your tax obligations; (ii) show you cannot borrow the amount needed except on terms that would inflict serious loss and hardship; and (iii) provide security for the tax debt. The determination of the kind of security—such as a bond, filing a notice of lien, mortgage, pledge, deed of trust, personal surety, or other form of security—will depend on the particular circumstances involved. However, no collateral is required if you have no assets.

Offer-in-compromise. Another potential way to deal with unpaid taxes is by using an offer-in-compromise, which is a technique that may allow you to settle your tax debt for a fraction of its face value. This option is available only if you have already filed your return but are unable to pay your taxes—in other words, it can’t be requested prospectively.

Like any creditor, the IRS prefers a partial payment to no payment at all. Thus, the IRS might be willing to settle your liability for less than the full amount if: (a) you aren’t able to pay the full amount, (b) there is doubt as to how much the tax liability is, (c) collection of the liability would create economic hardship for you (for instance, if you are out of work due to health problems, or if sale of your assets to pay the tax would leave you without enough money to meet basic living expenses), or (d) compelling public policy or equity considerations exist, and due to the exceptional circumstances (such as a medical condition that prevents proper management of financial affairs, or reliance on erroneous advice from the IRS), the IRS’s collection of the full liability would undermine public confidence in the fair and equitable administration of tax laws.

The process is started by actually making an offer-in-compromise. If the offer is based on any reason other than doubt as to how much the tax liability is, you must submit your financial information along with the offer. If it is grounded on doubt as to the liability, the IRS is not permitted to request a financial statement. Partial payments must be made to the IRS while a periodic payment offer is being considered. For lump-sum offers, or offers involving five or fewer installments, a 20% down payment (of the total offer amount) must be made with the application.

In order to obtain an offer-in-compromise based on any of the above-mentioned grounds except doubt as to liability, you must agree to comply with all tax law rules on filing returns and paying taxes for the longer of five years or until the offered amount is paid. If you don’t comply with these rules, the compromise will terminate and the IRS can seek collection of the original liability amount.

Innocent spouse relief. If you are unable to pay liabilities that are attributable to your spouse, it might be worth exploring whether you are eligible for relief under the “innocent spouse” provisions. Under limited circumstances, a taxpayer can be relieved from liabilities shown on a joint return filed with a spouse. In general, relief is potentially available for: erroneous items attributable to the other spouse of which you had no knowledge or reason to know; the separate liabilities of a spouse to whom you are no longer married or with whom you no longer reside (including deceased spouses); and liabilities for which it would otherwise be inequitable to hold you liable. This is a very specialized type of relief that carries many procedural and substantive requirements that are beyond the scope of this letter, but it’s important that you’re aware of it because there are strict time restrictions associated with claiming innocent spouse relief.

Avoiding more serious consequences. Many taxpayers ignore their tax liabilities when they run into financial difficulties—for example, by failing to file their tax returns. However, tax liabilities do not go away if left unaddressed, and failing to deal with the problem often exacerbates it. It is very important that you timely file a properly prepared return, even if full payment cannot be made. Include as large a partial payment as you can with the return, and start working with the IRS on one (or more) of the options discussed above as soon as possible. Otherwise, you may face escalating penalties, the risk of having liens assessed against your assets and income, or even seizure and sale of your property. In many cases, these tax nightmares can be avoided by taking advantage of the arrangements offered by the IRS.