While the core of the “Bush Era” tax cuts was extended for two more years, it’s just one of this year’s features on the tax-planning landscape.
The string of tax-related legislation that cleared Congress in 2010 included, among other things, the Hiring Incentives to Restore Employment (HIRE) Act, the Health Care Act as Amended by the 2010 Health Care Reconciliation Act, the Small Business Jobs Act, and the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act. Consequently, we have a matrix of new and old opportunities to weave together for the 2010 tax filing season.
To simplify the details of tax laws that currently apply, we’ll discuss the areas of highest interest for 2010-11:
The highest profile business change is the reduction of the FICA tax for employees down 4.2% from 6.2% during 2011 only. Effective on 1/1/11, the change was implemented among businesses by 1/31/11. Any excess tax withheld due to delayed implementation must be refunded by 3/31/11.
Those needing to purchase new equipment ordinarily limited by a cap under Section 179, can take advantage of the option to expense new depreciable property under an uncapped bonus depreciation from September 8, 2010 through 2011. The 50% bonus will be extended into 2012, and, for some assets, through 2013. Leasehold improvements can also qualify but have a limit of $250,000 for qualified restaurants and retail properties in 2010-11
Startup expenses for new businesses must be over $10,000 (up from $5,000) before you have to capitalize them over 15 years. The previously mentioned HIRE Act provided a credit of the employer payroll tax for most of 2010 for hiring the long-term unemployed. It has since expired, but there’s still time to apply for the credit by amending your Form 941/944.
More than 10 other credits were extended right before the end of the year, but the newest is the Small Business Health Care Insurance Credit. This credit can be a big boon for those businesses paying more than half of employee premiums; companies must have fewer than 25 employees with an average payroll under $50,000 after 2009. So, in fact, only a few small businesses will get much benefit from it. This credit applies to non-profit groups as well.
Much more is coming on the health insurance front, so pay attention as the calendar moves toward 2014. Finally, cell phones are no longer listed property after 2009, meaning they will no longer require a usage log for business use.
W-2 & 1099 reporting has some new rules beginning in 2011. All brokers must provide the cost basis of securities purchased after 2010 (making the tax preparers very happy.) Credit card processors must report the amount of all payments made to merchants, beginning this year. The health care legislation requires businesses to report the employer-paid health insurance premiums on each W-2, but the IRS will waive penalties for non-compliance for one year. However, 1099 forms must be issued by all landlords, incorporated or not, for all payments to subcontractors, incorporated or not, with accumulated payments of $600 or more.
In addition, beginning in 2012, all businesses must report payments for goods or services to any individual or entity (other than tax exempt corporations) totaling more than $600, regardless of how paid. There’s been considerable debate about limiting or repealing this onerous requirement, but no relief yet. Meanwhile, the forms industry is preparing for a banner sales year ahead.
Penalties for noncompliance have risen to $30 for each form filed up to a month late, $60 for being up to five months late, and $100 after that. Accumulated penalties will have an annual cap of up to $1.5 million. The IRS is getting serious about income reporting.
Estate Tax Renewal and Relief
While virtually the entire profession of tax advisors expected the 2009 estate rules to have been extended into 2010, our Congress allowed the estate tax to expire. Along with it, the comfortable stepped-up-basis rules were replaced with the much less favorable carryover-basis rules. Just as surprising, the Tax Relief Act of 2010 included even more favorable rules than before 2010. The new maximum tax rate is now 35% beginning after 2009, and the unified credit becomes the equivalent of $5,000,000. Further, the exemption is portable, meaning that if one spouse does not need the full exemption upon death, the other spouse may add it to his/her own $5,000,000 exemption.
The gift tax and generation-skipping rules are set to match these rates. The new provisions, and the restoration of the stepped-up-basis rules, are effective through 2012, and estates for 2010 have the choice of the old or the new law. This window of opportunity may not last, so those with estates who can benefit from this liberalization should begin planning their estate documents accordingly.
Alternative minimum tax victims are given some relief with a higher 2010 exemption of $47,450 for singles and $72,450 for joint filers (half of that for married filing separately.) For 2011, we can look forward to exemptions of $48,450 and $74,450. The maximum tax rate for long-term capital gains and qualified dividends is extended at 15% and for ordinary rates at 35% for two more years. Of course, there are no guarantees for 2012 and beyond. Other extensions through 2012 include marriage penalty relief, the $1,000 child credit, the sales tax deduction option and the elimination of the itemized deduction phase-outs.
The Residential Energy Tax expired in 2010, as did the $400 Making Work Pay Credit (which was replaced with the FICA tax rate reduction from 6.2% to 4.2% for 2011 only.) The opportunity for an additional itemized deduction of up to $1,000 of real estate tax payments also expired. For 2010 only, the self-employed with health insurance may deduct those premiums from self-employment taxes. Finally, Health Savings Accounts and the equivalents lost the privilege to pay for non-prescribed medications and supplies after 2010.
Those with higher incomes should prepare for the Medicare surtax of 0.9% on earned income and 3.8% on unearned income, beginning in 2013. We can hope it’ll get rolled back, but since these two increases are earmarked for about half the funding support for the healthcare reform costs, it isn’t likely to happen without a comprehensive change in direction on that issue.
If all of this seems confusing and irrational, such is the result of compromise among politicians. Don’t develop confidence that all things in the tax world are settled, either. We’ve learned, from the barrage of new laws over the last decade, that we must constantly stay informed and have a multi-year vision in tax and financial planning as we meander through the next decade.
Mark Patrick is a partner at Patrick & Robinson CPAs in Jacksonville. He can be reached at (904) 396-5400 or Mark@CPAsite.com.