IRS Help Announces Recent Tax Law Changes
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Re: Recent Tax Law Changes
Dear Clients and Friends:
Congress passed the landmark health care reform package earlier this year. In addition, there had been legislation to help small businesses weather this slow economy. We have prepared a brief summary of the legislation that we think will be relevant to your tax situation.
Healthcare Reform:
While the end result of the legislation related to healthcare, tax law plays a major role in its implementation.
There were two laws passed:
- The Patient Protection Act of 2010 which was crafted by the Senate. This act sets out the general framework for Health Care reform.
- The Health Care and Education Reconciliation Act of 2010 was crafted by the House. This act modifies the Patient Protection Act especially in areas of tax credits and cost sharing for individuals to help make coverage more affordable.
Both laws delay effective dates for many provisions, which make strategic planning that much more important. Many new taxes and penalties stand out immediately:
-Beginning in 2013, individuals earning more than $200,000 per year and married couples earning more than $250,000 per year will be paying an additional 0.9 percent in Medicare tax on their earnings.
-Also starting in 2013 for these same individuals earning more than $200,000 individually or $250,000 as a married couple there will be an additional 3.8 percent Medicare tax on net investment income including interest, dividends, and capital gains.
-Employers with 50 or more employees will generally be required to provide a minimum level of health insurance for their employees starting in 2014.
-Small Employers with no more than 25 employees are entitled to up to a 35 percent tax credit on the cost of providing health insurance for employees starting immediately in 2010.
-Most individuals will be required to obtain health insurance or be subject to a tax penalty starting in 2014.
-Tax credits to subsidize the cost of Health Insurance will be available to individuals earning up to 400 percent of the poverty level starting in 2014.
-Flexible Savings Arrangement dollars will be limited to prescription medications after 2010 along with placing a $2,500 annual cap on expenses covered under health FSAs starting in 2013.
-Limits on tax subsidized medical expenses will be imposed by raising the itemized medical deduction floor from 7.5 percent to 10 percent of AGI starting in 2013.
-Parents will now be able to cover adult children up to the age of 27 under their tax qualified employer provided health plans effective immediately.
-The government will introduce a new simplified cafeteria plan for small businesses which will be unveiled in 2011.
-Businesses, charities, and state and local governments will have to file 1099 forms for all payments over $600 or more in a calendar year to a single provider of goods or services for payments made after December 31, 2011. The Act repeals a long-standing reporting exception for payments to a corporation.
The Hire Act:
Two new benefits are currently available to employers who hire certain previously unemployed workers.
1. The payroll tax exemption which provides an exemption from the 6.2 percent employer portion of social security tax on wages paid to qualifying employees.
The credit is claimed on the quarterly Form 941.
2. In addition, for each qualified employee retained for at least 52 consecutive weeks, businesses will also be eligible for the New Hire Retention Credit which is also equal to 6.2 percent of wages paid to qualified employees over a 52 week period up to a maximum of $1,000. The credit is claimed on Form 3800 which is filed as part of your business income tax return at the end of the year.
Most businesses qualify for these credits. The credits do not apply to household employees and government employees.
Generally an employee who begins working for you after February 3, 2010 and before January 1, 2011 who was either unemployed or worked 40 hours or less for anyone during the previous 60 days can qualify. The employer must get the employee to sign for W-11 signed which certifies that they were not employed for more than 40 hours during the 60 days before beginning employment with you.
The Small Business Jobs Act of 2010.
The Act was signed into law September 27, 2010. Bonus depreciation, which allows a 50 percent first year depreciation deduction and which had expired December 31, 2009, was extended. The extension is retroactive to January 1, 2010 through 2011. The bonus depreciation is allowed for property with a recovery period of 10 years or longer, and for transportation property.
The limitation under code section 280f on the amount of depreciation deductions allowed with respect to passenger automobiles is increased in the first year by $8,000 to $11,060.
Eligible taxpayers may elect to claim a code section 179 expense deduction on the price of qualified Code section 179 property. Under the law that existed, the maximum deduction for tax years beginning in 2010 was $250,000. The dollar limit is reduced by the amount which the cost of qualifying property placed in service during the tax year exceeds $800,000. For 2011, the expensing limits had been scheduled to revert back to prior levels $25,000 and $200,000, respectively.
The Act increases the qualifying property cap from $800,000 to $2,000,000 effectively increasing the availability of the deduction to many more businesses. The Act increases the maximum section 179 deduction from $250,000 to $500,000 for both 2010 and 2011.
The Act included a temporary exclusion of 100 percent of gain on qualified small business stock with no minimum tax preference. The exclusion was previously 50 percent of the gain. The increased exclusion applies to sales of qualified stock issued after September 27, 2010 and before January 1, 2011. A five year holding period is required in order to claim this exemption in a future year.
The caveat is that you must acquire the stock either through purchase or creation of a new corporate entity by the end of 2010. In addition, the stock must be original issue; aggregate gross assets of the corporation must be less than $50,000,000 both before and after the issue date of the stock. The corporation must be engaged in an active trade or business excluding farming and certain service related businesses including financial services, performing arts, architecture, operating hotels, renting real property, law, or accounting. The corporation must be a domestic C Corporation.
If you are considering such an investment but have not identified the right opportunity, creating a new corporation before year end to hold future investments may also position investors to benefit from the act since start-up companies may be treated as an active trade or business for purposes of this code section.
Self-employment income. A Self employed individual can take a deduction for health insurance costs paid for the individual and for his or her immediate family for income tax purposes. However, in determining self-employment income subject to self-employment tax, the self employed individual cannot deduct any health insurance costs. Under the Act, the deduction for income tax purposes of health insurance is allowed in calculating net earnings from self-employment taxes. This provision of the Act only applies to Self-Employed individuals for years beginning after December 31, 2009.
The Act allows rollovers from 401(k) plans to Roth accounts. The rollover will be taxable except for any after-tax contributions. If an amount is rolled over in 2010, the amount is included ratably in income in equal amounts over 2011 and 2012, unless the taxpayer elects otherwise.
Expanded information return reporting on rental property expense payments (1099 forms).
The Act requires qualified individuals receiving rental income from real property to file informational returns with the IRS and to service providers reporting payments of $600 or more during the year for rental property expenses.
The Act extended a host of popular but temporary tax incentives including the state and local sales tax deductions, the teachers’ classroom expense deduction, through the end of 2010.
Pending Tax Legislation
After December 31, 2010, reduced individual income tax rates are scheduled to revert to their pre-2001 levels, with the top rate rising to 39.6 percent. President Obama wants to permanently extend all of the individual rate cuts except for the top two rates. The republicans are calling for all of the “Bush Tax Cuts” to be made permanent for everyone. Some democrats would like to let all of the cuts expire. The final outcome is not yet clear, but as we learn more we will let you know.
In addition to tax rates, some other issues are also on Congress’ agenda including:
-The federal estate tax
-Reduced capital gain/dividends tax.
-An AMT patch.
-Worker classification reform (i.e. independent contractor vs. employee rules).
-More international tax reforms.
-Energy tax incentives.
-National disaster relief.
Please contact us with any concerns or if there any questions.
Sincerely,
IRS Help, Inc.
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Michael Tamsett
- Title
- Enrolled Agent
- Services
- Income Tax Preparation for all types of businesses, and individuals IRS and State Audit Representation.
- Phone
- 212-941-0829
- mtamsett77@hotmail.com