2010 Tax Law Changes Special Report


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2010 Tax Law Changes Special Report

  1. 1. BOSS Business Services presents<br /> 2010 Tax Law Changes<br />Special Report<br />As of June 15th, 2010<br />Understanding the 2010 tax law changes and what they mean for you and your small business<br />www.BossOffice.com<br />When it comes to tax law, most people glaze over at the mere thought of it. The language and legislation is technical. It can seem obscure to even the most astute CPAs and people who write tax software. But what about you? Joe or Jane consumer or small business owner.<br />If you are like most people, upon hearing of any new tax law changes, you are left with a nagging yet all important questions: So, what does all this mean for me and my small business?<br />This report explains just that: the nuts and bolts and hidden language of the recent tax law changes. We have laid out a series of real-life examples, in story form, to help you navigate the legal-speak and apply the 2010 changes to your life and your business. We have also included other pertinent information beyond 2010 and tables for your reference.<br />Of course, if you have any specific questions or require additional clarification, please don’t hesitate to ask. We always welcome the opportunity to speak with you. So, without further ado, here is your 2010 Special Report, a parable, courtesy of BOSS Business Services.<br />The Scenario<br />Sally and Ed are married. They are both 42 years old and have two kids together, ages 16 and 12. Sally is a real estate agent and a real estate investor. She has three rentals held inside her LLC, Crain Enterprises. She owns an S Corporation called The Terrace Group, from which she pays herself and two employees. Sally does not provide insurance benefits to her employees. She is on Ed’s policy through his employer.<br />Ed works full-time as an engineer and likes to trade the couple’s brokerage account in the stock market. Together, Sally and Ed make roughly $150,000/year in W-2 income and break even on everything else.<br />Oh, and one more thing, Sally works out a lot and is pretty hot. Everyone wonders why she is married to Ed. Sorry, Ed, but it’s true.<br />Ed and Sally, of course, are worried that somehow the new 2010 tax laws are going to impact them. Will they? Let’s take a look.<br />HIRE Act<br />FICA Tax (otherwise known as Social Security)<br />Sally’s businesses are both doing well. Craine Enterprises brings in steady cash flow through rental income. The Terrace Group has increased its customer base and the revenue is growing. As a result, the workload is becoming unsustainable given the current number of employees. Sally would like someone to help her with all the administrative tasks that she is now doing at night and on weekends instead of going to her kids’ recitals and baseball games.<br />Sally wants to hire Brooke, an administrative assistant who has been out of work for the past six months. The salary for the position is $20,000. With her current employees, Sally must match their 7.65% share of the Federal Insurance Contributions Act (FICA) tax. But as a result of the Hiring Incentives to Restore Employment (HIRE) Act that President Barack Obama signed into law on March, 18, 2010, the employer portion for Social Security (6.2%) of this obligation has been waived (there is also a Medicare portion of 1.45% that remains). This makes the option more enticing to Sally.<br />As a new hire, Brooke would still be obligated to pay the 6.2% Social Security tax on her income, but Sally, as the employer, is off the hook for the federal tax obligation for the look if Sally hired Brooke to start work on July, 1, 2010:<br />[$20,000 (annual salary × .062 (Social Security Portion of the FICA tax) × 182/365 (wages beginning on July 1, 2010, the 182nd day of the year)] = $618 (total payroll tax exemption for Sally through her company, The Terrace Group)<br />The above formula reflects any new employee hired after February 3, 2010 and earned wages after March 18, 2010, when Obama signed the bill into law.<br />(Note: As an employer, Sally still must keep Form W-11 in her files. A W-11 serves as the affidavit from Brooke stating that she hadn’t been employed for more than 40 hours during the 60 days prior to getting her new job).<br />Tax Credit<br />Additionally, if Brooke stays employed through The Terrace Group for at least 52 consecutive weeks, Sally, as the employer, will receive an income tax credit in 2011 of $1,000, or 6.2% of wages paid to Brooke over a 52-week period, whichever is less.<br />Section 179<br />In addition to a new employee, Sally is contemplating revamping her entire computer network and communications system to help her business run more systematically and efficiently. Is there any room in the new tax laws that would help or hinder her efforts?<br />The HIRE Act extends Super Section 179 through the end of 2010. Prior to the HIRE act, the amount in qualified items Sally was able to expense was limited to $125,000 with a phaseout cap of $500,000. This means that if Sally bought $200,000 worth of equipment she could only expense $125,000 of it. If, however, she bought $900,000 worth of equipment, she could not expense any of it.<br />Now, as a result of the HIRE Act’s extension of Super Section 179, the expense limit is $250,000 with a phaseout cap of $800,000. So with a purchase of $200,000, Sally can expense all of it.<br />Foreign Account Tax Compliance<br />The HIRE ACT imposes additional reporting and disclosure requirements on foreign accounts with balances over $50,000. So if Ed, Sally’s undeserving husband, decides to shelter his earnings from the market in a Swiss Bank Account, if he has a balance over $50,000 it would be a good idea to talk to his CPA because the federal statutes are complex and may affect him.<br />Health Care Reform<br />Changes in 2010<br />Let’s get back to Sally for a moment. While she is currently covered under Ed’s policy through his employer, Bates Engineering, Sally is unable to afford to furnish health care benefits to her employees. She is still on the fence about hiring Brooke because Sally, as a small business owner, is unsure if she will have to provide health insurance for her existing employees as well as any potential new employees.<br />Small Business Healthcare Tax Credit<br />First, it’s important to point out that the definition of a small business varies depending on the clause. Sometimes it refers to a business with fewer than 25 full-time equivalent employees. Sometimes it’s 50. In this case it refers to businesses with less than 25 full-time employees. Under the new Health Care Reform Law, small businesses can receive a tax credit covering 35% of their health care premiums. In Sally’s case, she would qualify because she has less than 25 full-time equivalent employees whose annual average wages are under $50,000 per year. And the company has to contribute at least 50% of the premiums.<br />Tanning Excise Tax<br />Here’s an interesting one for you. As we pointed out, Sally like to keep up her figure and appearance. In addition to hitting the weight room and running trails, she occasionally visits a tanning salon. Starting on July 01, 2010, there will be a 10% tanning excise tax charged to customers who use these facilities, so Sally may have to reassess her budget as well as her bottom line.<br />Adoption Assistance Program Increase<br />On a more serious note, Ed and Sally are involved in many non-business-related activities. They like to travel and do charitable work. They have just returned from visiting earthquake victims in Haiti. While visiting, they were touched by Isa, an orphaned 18-month-old girl. They are contemplating the idea of adding Isa to their family.<br />The maximum exclusion for adoption assistance programs has increased to $13,170. This means that Ed and Sally can receive assistance up to $13,170 and not have to include it as taxable income. <br />Adoption Credit Increase<br />What’s more, when the adoption is final as determined by different types of visas, Ed and Sally are eligible for an adoption credit. Under the Health Care Reform Law, the one-time adoption credit for 2010 is now $13,170 per child and is refundable (refundable means it can reduce your tax owed to a negative amount which means the government will actually write you a check).<br />Non Tax-Related Issues<br />Pre-existing Conditions<br />On a personal note, Sally and Ed are especially excited about one provision. Their daughter has asthma and under the new health law, there are no more pre-existing condition exclusions for children and young adults are able to stay on their parents plan until they are 26.<br />What are some other non-tax-related changes in the year 2010? Here’s a quick-hitting guide:<br />Seniors get a $250 rebate on prescription drug coverage<br />Insurance companies are prohibited from dropping sick policy holders<br />There are no lifetime limits (dollar amount) on benefits or restrictive annual limits<br />New health plans must cover preventive services without copays<br />New health plans are required to implement an appeals process on disputed claims<br />Other 2010 Tax Changes<br />Changes for Businesses<br />Business Depreciation Changes<br />The 50% bonus depreciation deduction in the first year has expired. Keep an eye on this as Congress may re-instate this before the end of the year. <br />Cancellation of Debt<br />Qualifying businesses can elect to defer recognition of income from the cancellation of certain debt instruments. What does this mean? Normally, you have to pay tax if someone forgives your debt. With the new law, you can defer this amount for four years. It’s then recognized over the next five years.<br />Maximum Auto Value for Using the Cents Per Mile Valuation Rule<br />If an employer provides an automobile for an employee, the personal use value may be determined by using the cents per mile valuation rule if the vehicle’s value is less than $13,300 ($16,000 for a truck or van).<br />Work Opportunity Credit<br />Two new groups have been added to the credit: unemployed veterans and disconnected youth. Employers receive a credit of up to 50% of wages if they hire these folks.<br />R & D Tax Credit Expires<br />The R & D Tax credit has expired but is expected to be renewed retroactively in 2010. The credit was 6.5% of qualified expenditures.<br />Limits on Deducting Farm Losses<br />The amount of farm losses that you can enter to offset non-farm income is capped at the greater of $300,000 or your net farm income over the past five years.<br />Deducting Losses<br />Losses in 2010 can only be carried back two years whereas in 2008 and 2009, you were able to take them back three to five years.<br />Changes for Individuals<br />Earned Income Credit<br />The maximum AGI you can have and still get the credit has increased. If you work and you don’t make much money, you can apply for this credit.<br />$43,352 — 3 kids ($48,362 Married filing jointly (MFJ)) — max credit $5,666<br />$40,363 — 2 kids ($45,373 MFJ) — max credit $5,036<br />$35,535 — 1 kid ($40,545 MFJ) — max credit $3,050<br />$13,460 — 0 kids ($18,470 MFJ) — max credit $457<br />Health Savings Accounts<br />The contribution limits for 2010 are $3,050 for self-only coverage or $6,150 for family coverage. This can be $1,000 more if you are over 55. Penalties doubled from 10% to 20% for non-qualified withdrawals. <br />IRA Deduction Expanded<br />If you are covered by a retirement plan, you can take an IRA deduction of $5,000 per person (unless you are 50 or over — in this case, it’s $6,000 per person) if your modified AGI is less than $66,000 ($109,000 MFJ).<br />First-time Homebuyer Credit<br />The first-time homebuyer credit was extended until April 30, 2010. It was available to previous homeowners replacing their principal residence. The income limit was also increased. For a married couple filing a joint return, the phaseout range is $225,000 to $245,000. For other taxpayers, the phaseout range is $125,000 to $145,000.<br />What is a phaseout range? This means that you can get the whole credit if you are under the minimum. If you are in the range then you only get a partial credit. If you are over the maximum range then you receive no benefit.<br />Roth IRAs<br />If you have a rollover or conversion to a Roth IRA in 2010, half of any resulting income is reportable in 2011 and half in 2012, unless you elect to include it all in 2010.<br />AMT Exemption<br />The alternative minimum tax can be viewed as a second tax system. In other words, if you have found ways to not pay tax using “normal income tax” then you might have to pay this tax. The exemption amounts are scheduled to decrease to<br />$33,750 Singles<br />$45,000 MFJ<br />$22,500 Married Filing Separately (MFS)<br />Personal Casualty and Theft Loss Limit Reduced <br />Each loss is limited to the excess of the loss over $100, instead of $500. This means that your theft loss is deductible with the exception of the first $100. If someone steals $1,000 worth of your stuff, you can now deduct $900 rather than $500.<br />Expiring Tax Benefits<br />Unless Congress changes their minds, there are a slew of tax benefits that have expired in 2010. Keep in mind that these may change, depending on what Congress does, before the end of the year. Here’s the list of the most relevant:<br />Deduction for educator expenses (out of pocket expenses)<br />Tuition and fees deduction<br />Increased standard deduction for real estate taxes or net disaster loss<br />Itemized deduction or increased standard deduction for state or local sales or excise taxes on the purchase of a new motor vehicle<br />Deduction for state and local sales taxes<br />Exclusion from income of up to $2,400 in unemployment compensation<br />Exclusion from income of qualified charitable distributions<br />Government retiree credit<br />Extra $3,000 IRA deduction for employees of bankrupt companies<br />Personal Exemption and Itemized Deduction Phaseouts Ended<br />In 2010, taxpayers with AGI above a certain amount will no longer lose part of their deduction for itemized deductions and personal exemptions. If your AGI was under $125,000 before 2010, there were no limits. But if your AGI was over $125,000 then there were limits. There are now no limits on what you can deduct.<br />Estimated Taxes for Self Employed<br />You must pay at least 100% of the prior year’s tax to avoid a penalty.<br />Changes for Estates<br />No Federal Estate Tax in 2010<br />The Death Tax. When you die, if you have millions of dollars in your estate then in most years it is taxed. If you die this year then your descendants get your stuff tax-free. But only this year. There is a good chance that congress will reinstate the “death tax” later this year. Next year, the exemption is $1M and the tax is 55%.<br />No Generation-skipping Transfer Tax<br />In 2010, you can transfer your money to your grandkids tax-free. After this year, you will be taxed if you give your money to your grandkids. So you may want to watch your back this year if you have grandkids.<br />Gift Tax<br />The 2010 gift tax rate is 35%. This goes up to 55% in 2011. The exemption is $1M which means this is the amount you are able to give your kids or grandkids without you having to pay tax on it.<br />Changes Beyond 2010<br />Now that we have covered the changes observed in 2010, let’s cast our gaze out into the future. Here is a breakdown, year-by-year, of some of the changes that take effect down the road. <br />2011<br />1. Employers will have to make an information disclosure on W-2s reporting the amount of employer provided health coverage.<br />2. Flex plan and HAS withdrawals will no longer be able to be used for over the counter medicines without a prescription. This is related to item number 3 because the penalty goes up.<br />3. The penalty on non-qualified medical expenses withdrawn from health savings accounts will increase from 10 to 20%. The penalty increase on non-qualified medical expenses withdrawn from Archer Medical Savings Accounts will increase from 15 to 20%.<br />2012<br />1099-MISC<br />There is an important change related to spending and 1099s that will apply in 2012. Currently, businesses must only issue a 1099-MISC to non-corporate entities (with certain exceptions) for services. The 1099-MISC is the form issued to a party (with a copy to the IRS) used to declare that you paid money for services to an entity other than a corporation, i.e., LLCs, partnerships, individuals. Beginning in 2012, businesses must issue a 1099-MISC to any entity to which it pays $600 or more over the course of a year for services or goods. So if a business buys $600 worth of computer equipment from Best Buy prior to 2012, it is not required to issue a 1099. If it buys the same equipment starting in 2012, it has to issue Best Buy a 1099-MISC. The same goes with any other purchase that meets or exceeds $600, no matter where you buy it.<br />2013<br />1. The employee portion of Medicare tax will increase from 1.45% to 2.35% for individuals earning more than $200,000/year (married filing jointly above $250,000/year).<br />2. Flexible savings account contributions will be limited to $2,500/year.<br />3. Single people with adjusted gross income over $200,000/year (married filing jointly over $250,000/year) will be subject to a 3.8% surcharge tax on unearned income (interest, dividends, annuities, passive rental income, royalties and capital gains).<br />4. The income threshold for medical expense deductions for people under 65 will increase from 7.5% to 10% of AGI (Adjusted Gross Income).<br />2014<br />1. A tax of $95 is assessed on all people without health insurance. This amount goes up each year after that: $325 in 2015. $695 in 2016. The tax can only go up to 2.5% of your AGI. There is a family cap of $2,250/family. Fines (excise tax) for kids 26 and under are half those amounts.<br />2. Companies: If a company has 50 or more employees and they don’t offer health coverage, they are going to be subject to a penalty of $2,000/employee up to $60,000 for the first 30 employees.<br />2017<br />The income threshold for medical expense deductions for people over 65 will increase from 7.5% to 10% of AGI.<br />2018<br />Cadillac Plans, or high dollar employer-provided health plans, will have an excise tax if their value is $27,500 and up for families and $10,200 and up for single coverage.<br />Quick Summary<br />So there you have it, your 2010 Tax Law Change Special report. As we mentioned earlier, these changes can be difficult to digest even for those of us who do this for a living. You may understandably have questions. Do not hesitate to contact us if you require further clarity on any of the points covered in this report. That’s what we’re here for. We will leave you with a series of tables and tax rates to help you find ways in which the laws specifically apply to you. We wish you and your business success in 2010 and beyond.<br />Sincerely,<br />BOSS Business Services<br />www.BossOffice.com <br />See tax tables on following pages<br />2010 Tax Information for IndividualsMarried Individuals Filing Separate - Tax RatesStandard DeductionAmount    Taxable incomeTaxMarried filing jointly  $ 11,400 OverBut not overTax+%On $ overSingle (and married  $ - $ 8,375 $ - 10% $ - filing separately)  $   5,700 $ 8,375 $ 34,000 $ 838 15% $ 8,375 Heads of Household  $   8,400 $ 34,000 $ 68,650 $ 4,681 25% $ 34,000 $ 68,650 $ 104,625 $ 13,344 28% $ 68,650 Personal  $ 104,625 $ 186,825 $ 23,417 33% $ 104,625 Exemption2010 $ 186,825 .......... $ 50,543 35% $ 186,825 Amount  $ 3,650 Heads Of Households - Tax RatesKiddie Tax2010  Net unearned income not Taxable incomeTaxsubject to the " Kiddie Tax"  $  1,900 OverBut not overTax+%On $ over $ - $ 11,950 $ - 10% $ - Individual Retirement Account  $ 11,950 $ 45,550 $ 1,195 15% $ 11,950 Contribution Limits2010 $ 45,550 $ 117,650 $ 6,235 25% $ 45,550 Roth  $  5,000 $ 117,650 $ 190,550 $ 24,260 28% $ 117,650 Trational IRA  $  5,000 $ 190,550 $ 373,650 $ 44,672 33% $ 190,550 Annual " catch-up" contributions  $ 373,650 .......... $ 105,095 35% $ 373,650 (account owners age 50+)  $  1,000 Single Taxpayers - Tax Rates2010 Health Savings Accounts    Taxable incomeTaxMaximum annual H.S.A. OverBut not overTax+%On $ overcontribution:  $ - $ 8,375 $ - 10% $ - Individuals $ 3,050 $ 8,375 $ 34,000 $ 838 15% $ 8,375 Family coverage $ 6,150 $ 34,000 $ 82,400 $ 4,681 25% $ 34,000 Catch-up contributions  $ 82,400 $ 171,850 $ 16,781 28% $ 82,400 (ages 55 to 64) $ 1,000 $ 171,850 $ 373,650 $ 41,827 33% $ 171,850 $ 373,650 .......... $ 108,421 35% $ 373,650 2010 Long-Term Capital Gains Rates   Married Individuals Filing Joint andTaxpayers in the Surviving Spouses - Tax Rates10% or 15% bracket:0%Taxable incomeTaxTaxpayers in OverBut not overTax+%On $ overhigher brackets:15% $ - $ 16,750 $ - 10% $ - Tax on unrecaptured  $ 16,750 $ 68,000 $ 1,675 15% $ 16,750 Sec. 1250 gain25% $ 68,000 $ 137,300 $ 9,363 25% $ 68,000 Capital gain rate  $ 137,300 $ 209,250 $ 26,688 28% $ 137,300 on collectibles28% $ 209,250 $ 373,650 $ 46,834 33% $ 209,250 $ 373,650 .......... $ 101,086 35% $ 373,650 Domestic Employees2010Threshold when a domestic employer  $  1,700 must withhold and pay FICA for house cleaners, babysitters, etc. <br />2010 Tax Information for BusinessesQualified Plan Limits2010Corporate Income Tax RatesDefined Contribution Plan Dollar limit Taxable Income on additions on Sections 415(c)(1)(A) $ 49,000 OverBut not overTax RateDefined Benefit Plan limit on benefits   (Section 415(b)(1)(A)) $ 195,000 $ - $ 50,000 15%Maximum compensation used to  $ 50,000 $ 75,000 25%determine contributions $ 245,000 $ 75,000 $ 100,000 34%401(k), SARSEP, 403(b) Deferrals  $ 100,000 $ 335,000 39%(Section 402(g)), & 457 deferrals  $ 335,000 $ 10,000,000 34%(Section 457(b)(2)) $ 16,500 $ 10,000,000 $ 15,000,000 35%401(k), 403(b), 457 & SARSEP  $ 15,000,000 $ 18,333,333 38%additional " catch-up" contributions  $ 18,333,333 .......... 35%for employees age 50 and older $ 5,500 SIMPLE deferrals Business Equipment2010(Section 408(p)(2)(A)) $ 11,500 Maximum Section SIMPLE additional " catch-up" contributions for employees age 50 and older $ 2,500 179 deduction $ 134,000 Compensation defining highly Phaseout for Section 179 $ 530,000 compensated employee (Section) 414(q)(1)(B)) $ 110,000 Domestic Production Compensation defining key Activities Deduction2010employee (officer) $ 160,000 Percent of qualifying Compensation triggering Simplified business net income9%Employee Pension contribution Oil and gas companies6%requirement (Section 408(k)(2)(c)) $ 550 Transportation Fringe Social Security/ Medicare 2010Benefit Exclusion2010Social Security Tax Wage Base $ 106,800 Monthly commuter highway Medicare Tax Wage Base No limitvehicle and transit pass $ 230 Monthly qualified parking $ 230 Driving Deductions2010Business mileage, per mile50 centsCharitable mileage, per mile14 centsMedical and moving, per mile16.5 cents2010 Tax Information for Estates and GiftsEstate Tax2010Gift Tax 20102010 Rate0%Annual Gift Exclusion $ 13,000 2011 Top Rate55%2010 Top Rate 35%2010 Unified CreditN/A2011 Unified Credit $ 1,000,000 <br />