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Tax Newsletter
July, 2010

The first half of 2010 saw three major bills enacted into law, including The Hiring Incentives to Restore Employment (HIRE) Act of 2010, The Health Care and Education Reconciliation Act of 2010 and the Patient Protection and Affordable Care Act of 2010. While much of this legislative process was health care related, the tax laws play a major role in implementation. Each piece of legislation includes provisions that are effective immediately and others that are effective in the next few years, making planning much more challenging.

Provisions with Immediate Impact

  • Beginning in 2010, eligible small employers are entitled to a maximum 35% tax credit on the cost of providing health insurance for employees. The credit is targeted to small businesses that primarily employ low and moderate income workers and pay at least 50% of the insurance premiums for their employees. The credit is available to employers with no more than 25 full time equivalent employees and whose employees have annual wages that average no more than $50,000. The deduction for health insurance expense is reduced by the allowable credit.

  • The HIRE Act temporarily suspends the employer’s 6.2% share of the Social Security payroll tax for covered employees. The provision applies to wages paid to qualified individuals from March 19, 2010 through December 31, 2010. A qualified individual is any individual who:

    • Begins employment after February 3, 2010 and before January 1, 2011;
    • Does not replace another employee, unless the other employee left employment voluntarily or was terminated for cause;
    • Certifies by a signed affidavit that he or she has not been employed for more than 40 hours in the continuous 60-day period (including 2009) ending on the first day of work; and
    • Is not related to the employer.

  • Parents now have the ability to cover their adult children up to age 27 under their tax-qualified employer provided health plans.

Provisions with Delayed Impact

  • Starting in 2013, individuals who earn more than $200,000 for the year ($250,000 for married couples) will be paying an additional .9% (from 1.45% to 2.35%) in Medicare tax.

  • Also in 2013, individuals with adjusted gross income greater than $200,000 ($250,000 for joint filers), will pay an additional 3.8% in Medicare tax on net investment income. Net investment income includes interest, dividends, royalties, rents, gain from disposing of property from a passive activity, and income earned from passive activities. Social Security benefits and retirement plans are exempt from this additional tax.

  • The itemized medical expense deduction floor for regular tax purposes will increase from 7.5% to 10% of adjusted gross income, starting in 2013.

These provisions should be considered along with already-enacted legislation with January 1, 2011 effective dates, such as--

  • A top rate for ordinary income, including dividend income, ranging from 35% to 39.6%,
  • The rate for long term capital gains increasing from 15% to 20%

Planning in this shifting tax environment is extremely difficult. Projections of future tax liability are only as good as the underlying assumptions. Taxpayers may have to build some flexibility into their planning to account for the possibility of new legislation, or changes to existing legislation.

Other Provisions

  • Businesses will be required to file information returns for all business payments, including amounts paid in consideration for property, aggregating $600 or more in a calendar year, to a single payee. The information returns will also be required to be sent to corporations, which were previously excluded from this type of filing. This provision is effective for payments beginning in 2012.

  • The increased section 179 expense allowance has been extended one additional year, 2010. The section 179 dollar limitation is $250,000 and the investment limitation is $800,000.

Estate and Gift Tax

The Economic Growth and Tax Relief Reconciliation Act of 2001 repealed the estate and generation-skipping transfer taxes for deaths that occur in 2010. Gift taxes are still imposed where cumulative transfers during life exceed $1 million. The gift tax rate has been reduced for 2010 from 45% to 35%. The combination of the reduction in gift tax and the repeal of the GST tax means that a fully taxed transfer to a grandchild made under the current law for 2010 will be taxed at the 35% rate, not the previous combined gift/GST rate of 69.75%.

However, as of the date of this newsletter, there is great uncertainty regarding the transfer tax rules that will apply to deaths that occur in 2010 or to taxable gifts. It’s been widely reported that Congress is expected to set aside the repeal for 2010, and to extend the 2009 maximum rates and estate tax exclusion and generation skipping tax exemption amounts to 2010.

Jon Kyl, a Senate Finance Committee member, announced on May 17th that he and Finance Committee Chair Max Baucus had reached an understanding on the shape of future federal estate tax. They had agreed on a 35% top rate and a $5 million exemption level, indexed for inflation. A day later, there was an announcement that there’s no agreement on the estate tax on either substance or process. “None whatsoever”.

It’s apparent that estate tax reform is currently gridlocked. Although a bill was passed in Congress at the end of 2009 to apply the 2009 rules to 2010, any effort in the Senate has stalled. Apparently, it could take 70 Senate votes to move on estate taxes this year, not just a majority or even the 60 needed to stop a filibuster. It appears the Senate leadership won’t bring an estate tax bill to the floor unless it has the backing of a majority of Democrats. This is regardless of the level of Republican support.

As a result of the above, it’s possible that action on estate tax reform may not take place before the November elections. The idea of retroactive estate tax reform in 2010 has drastically declined, and the possibility of reverting to a $1 million exemption in 2011 looks closer to reality the closer we get to year-end.

In summary, the estate and gift tax rules that apply for 2010 are uncertain. There may be reform by year-end. The reform may, or may not, be retroactive to January 1, 2010. If reform bills are not passed the rules for 2009, 2010 and 2011 may be summarized as follows:

2009 (EGTRRA rules)
  • $3.5 million estate and generation skipping tax (GST) exemption
  • 45% maximum estate tax rate
  • $1 million lifetime gift tax exemption
  • No state death tax credit
2010 (EGTRRA rules)
  • Estate and GST tax repealed
  • $1 million lifetime gift tax exemption remains
  • Estate tax replaced with carryover basis for income tax purposes (Under current law, heirs receive property from a decedent with a basis stepped up to date of death values.)
2011 (“Sunset” year, returning to pre-EGTRRA rules)
  • $1 million exemption (indexed for inflation)
  • 55% maximum estate tax rate
  • State death tax credit reinstated

Foreign Accounts

US persons must generally disclose any account in which they have a financial interest or has signature or other authority over on Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (the FBAR). The FBAR must be filed by June 30 of the year following the year in which a $10,000 filing threshold is met. The $10,000 threshold is the aggregate value of all foreign financial accounts in which a US person has a financial interest or has signature or other authority.

Individuals holding interests in specified foreign financial assets must attach to their income tax returns certain information with respect to each asset if the aggregate value of all the assets exceeds $50,000. A specified foreign financial asset includes:

  • Any depository, custodial or other financial account maintained by a financial institution;
  • Any of the following assets that are not held in an account maintained by a financial institution;
    • Any stock/security issued by a person other than a US person;
    • Any financial instrument or contract held for investment that has an issuer or counterparty other than a US person, and
    • Any interest in a foreign entity

California

  • Effective with tax years beginning on January 1, 2009, the State temporarily increased its personal income tax rate for both regular tax and alternative minimum tax (AMT) purposes. The rate increase is equal to 0.25 percent, resulting in maximum tax rates of 9.55 percent (regular tax) and 7.25 percent (AMT).

  • Beginning in 2010, the quarterly required estimated tax payments for individuals and corporations will be as follows: 30% on April 15th, 40% on June 15th, 0% on September 15th and 30% due on January 15 (December 15th for Corporations).

Running the numbers. We recommend running tax projections for 2010 and future years before implementing year-end tax strategies. Please let us know if you would like our assistance in preparing a projection.

We often remind our clients that tax considerations should generally not drive financial decisions. However, once financial objectives are defined and understood, it becomes easier to determine the tax planning strategies that are consistent with overall objectives. Unfortunately, frequent changes in the income tax rules, coupled with the changes and uncertainty in the estate tax area, make both short and long-term planning more complex. With the year-end approaching, it may be a good time to review your financial objectives with a view toward assessing whether any of the recent tax incentives can be incorporated into the financial plan.


The information contained in this newsletter is general in nature and does not constitute tax advice or opinion. Applicability to specific situations should be determined through consultation with your tax advisor.

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