2010 tax year review
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The document summarizes several tax acts passed in 2010 and 2011 that impacted individuals and businesses. Key provisions included a temporary reduction in the Social Security payroll tax, extension of bonus depreciation and increased Section 179 expensing, health insurance reform requirements, and changes to individual and corporate tax rates. The acts also covered homebuyer credits, tuition tax credits, and alternative minimum tax exemptions.
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2010 tax year review
- 1. What you need to know about the tax changes for 2010 and 2011
Editor's Notes
- I want to thank Ann Wise and the Baton Rouge Association of Women Attorneys for inviting me to speak today. I’m honored to be here. As Ann stated, my name is Martha Stuckey and I have the pleasure of speaking today on the tax changes of 2010. I know you’re all excited about the topic, so let’s jump right in.
- Let’s start by taking a quick look at some of the tax acts that were passed in 2010. HIRE (hiring incentives to restore employment)
- This act could affect employers who hired new employees in 2010. The employer’s 6.2% FICA is forgiven for wages paid on previously unemployed new hires after March 18, 2010 through December 31, 2010. A “qualified employee” must have started work after February 3, 2010 and before January 1, 2011 and generally must have been unemployed for at least 60 days before his or her start date. Employees who are related to the employer or who own more than 50% are not eligible. The act also increased Sec 179 expensing – The HIRE act extends enhanced sec 179 expensing at the $250,000/$800,000 threshold levels through December 31, 2010
- At least this is what most of us think. Anyway . . .
- This is not exactly a tax law but it will impact you or your clients and it is one I thought you should know about. The law includes numerous health-related provisions to take effect over a four-year period beginning in 2010 . In order of their assessed impact the primary provisions are as follows: insurers must offer the same premium to all applicants of the same age, sex and geographical location regardless of whether the applicant has a pre-existing condition ; Medicaid eligibility is expanded to include individuals and families up to 133% of poverty level; new health insurance exchanges in each state will enhance competition by offering a market where individuals and small businesses can compare policy premiums and buy insurance. Poverty level is $10,890 for 1 person or $22,350 for family of 4.
- Insurance companies will be prohibited from imposing lifetime dollar limits on essential benefits, like hospital stays in new policies issued. Dependents (children) will be permitted to remain on their parents' insurance plan until their 26th birthday, [24] and regulations implemented under the Act include dependents that no longer live with their parents, are not a dependent on a parent’s tax return, are no longer a student, or are married. [25] [26] Insurers are prohibited from excluding pre-existing medical conditions (except in grandfathered individual health insurance plans) for children under the age of 19. Insurers are prohibited from dropping policyholders when they get sick.
- The “Reconciliation” act amends the Patient Protection and Affordable Care Act of 2010 (signed March 23, 2010). Key provision is the small business tax credit Beginning in 2010, the health care reform package provides a temporary sliding-scale small employer tax credit to offset the cost of employer-provided coverage. Generally, a qualified small employer is one with no more than 25 employees and average annual wages of $50,000. The qualified small employer MUST contribute ate least one-half of the cost of health insurance premiums for coverage of its participating employees. In 2010 – 2013, qualified small employers may qualify for a tax credit up to 35% of their contribution toward the employee’s health insurance premium. The healthcare reform package does not require employers to provide health insurance coverage. However, “large” employers (generally employers with 50 or more full-time employees but with some exceptions) will be subject to “play or pay” rules after 2013. (Full time = 30 or more hours)
- This is a confusing credit, so let’s take a look at some of the calculations. For 2010, an employee pays 5 employees wages for 2080 hours each, 3 employees for 1040 hours each and one employee for 2,300 hours. The employer’s full time employee equivalent would be calculated as follows:
- No phase out in this example. Reminder that certain people are not counted in the FTE calculation Seasonal workers Self employed person/sole proprietor Any > 2% shareholder of S corp Any >5% owner of c corp/partnership/LLC Partner Related party
- For 2010, a qualified employer has 12 FTE with average annual wages of $30,000. The employer pays $96,000 in health care premiums (within average premium for state). Initial credit is .35 x $96,000 or $33,600 Reduction for annual wages of $25,000 is $33,600 x5x.04 = $6,720 Reduction for FTE in excess of 10 is $33,000 x 2 x .0667 = $4,482 6720 plus 4482 is 11,202 (TOTAL REDUCTION Credit is 33,600 less 11202 or 22398
- The health care reform package modifies the definitions of qualified medical expenses for FSAs (Flexible Spending Account), HSAs (Health Savings Account), and HRAs (Health Reimbursement Account) to conform them to the same definition as medical expense for itemized deductions beginning in 2011. Thus, over-the-counter medicines are excluded unless prescribed by a health care professional. The health care reform package makes the adoption credit refundable. It also raises the dollar limitation for the credit to $13,170 and extends the credit through 2011. Buried in the health care reform package, is the fact that the act imposes new information reporting requirements. Generally, businesses that pay any amount greater than $600 during the year to corporate and non-corporate service providers will be required to file an information report (1099-MISC) with each provider and with the IRS. This will start in 2012 unless the requirement is changed this year. One way to get around this requirement is to pay by Credit Card, Debit Card or pay pal – Companies pd by these methods will get a 1099 by the processing co. (1099K) So starting for 2012 you will have to report all payments over $600 to corporations, etc. This is something we as CPAs are watching carefully because of the burden to clients, paperwork involved, etc.
- This act may or may not affect you depending on if you have a pension plan or not. The funding relief provisions DO NOT waive or alter an employer’s obligation to fully fund its pension plan. Provides single employer plans with an extended period to amortize certain funding shortfalls. Generally, the plan sponsors may elect between two different schedules: a “2 plus 7” schedule or a 15 year schedule. The “2 plus 7” schedule provides for interest-only payments for 2 years after which 7 year amortization would apply. The 15 year schedule provides for amortizing a funding shortfall base in level installments over 15 years subject to various conditions. The bill also allows multiemployer plans to elect a 30-year period for certain losses incurred in either of the first two plan years ending on or after August 31, 2008. The bill also extends the maximum smoothing period for determining plan asset values from 5 years to 10 years for the first 2 plan years ending on or after August 31, 2008. The “doc fix” reverses a 21% cut in Medicare physician reimbursements that took effect June 1, 2010. It also provides a 2.2% update to physician payment rates through November 30, 2010.
- This act only affects those who purchased a new home before May 1, 2010. Under the new law, qualified taxpayers with binding sales contracts executed before May 1, 2010 now have until September 30, 2010 ( addl 3 months) to close title on their residence and qualify for the homebuyer credit. The initial closing deadline had been June 30, 2010.
- The new law adopts a matching rule proposed by the Obama administration to prevent the separation of creditable foreign taxes from the associated foreign income. The new law suspends the recognition of foreign tax credits until the related foreign income is taken into account for US tax purposes. The rules will apply to foreign income taxes paid or accrued in tax years beginning after December 31, 2010. Dividends and interest paid by a US corporation to a foreign person are generally considered US source income to the recipient, subject to withholding of up to 30%. The dividends and interest may be excluded from US withholding if at least 80% of the US corporation’s gross income is foreign source during a 3 year test period and is attributable to the active conduct of a foreign trade or business (a so-called 80/20 company). The new law repeals the 80/20 company rules for interest and dividends paid by a domestic corporation that meets the 80/20 test, and for interest paid by resident alien individuals who meet the 80/20 test. By the way – the US is one of the only countries that does NOT exclude foreign income from taxation. The new law eliminates the advance EIC effective for tax years beginning after December 31, 2010. So advanced EIC history.
- In an interview with the committee, they were all asked to add 2+2. The mathematician answered immediately, “Four.” The economist thought for several minutes and finally answered, “Four, plus or minus one.” Finally the tax lawyer stood up, peered around the room and motioned silently for the committee members to gather close to him. In a hushed, conspiratorial tone, he replied, “How much do you want it to be?”
- Section 179 expensing and bonus depreciation. The act increases the maximum amount a taxpayer may expense under IRC § 179 to $500,000 and increases the phaseout threshold amount to $2 million for tax years beginning in 2010 and 2011. The first-year 50% bonus depreciation available under IRC § 168(k) is extended for one year to apply to property acquired and placed in service in 2010 (or 2011 for certain long-lived and transportation property). Qualified small business stock. The act amends IRC § 1202 to increase the exclusion from gross income of gain from the sale or exchange of qualified small business stock from 50% to 100%, and the minimum tax preference does not apply. This provision applies to eligible stock acquired after Sept. 27, 2010, and before Jan. 1, 2011 Self-employed individuals’ health insurance. The act allows self-employed individuals who deduct the cost of health insurance for themselves and their spouses, dependents, and children who have not attained age 27 as of the end of the tax year to take the deduction into account in calculating net earnings from self-employment for purposes of SECA taxes. This provision applies to the taxpayer’s first tax year beginning after 2009
- Reporting rental income. The act makes recipients of rental income from real estate generally subject to the same information reporting requirements as taxpayers engaged in a trade or business. In particular, rental income recipients making payments of $600 or more to a service provider in the course of earning rental income are required to provide an information return (typically Form 1099-MISC) to the IRS and to the service provider. This provision will apply to payments made after Dec. 31, 2010. Information returns. The act also increases the penalties for failure to file a correct information return. The first-tier penalty increases from $15 to $30, and the calendar-year maximum increases from$75,000 to $250,000. The second-tier penalty increases from $30 to $60, and the calendar-year maximum increases from $150,000 to $500,000. The third-tier penalty increases from $50 to $100, and the calendar-year maximum increases from $250,000 to $1,500,000. For small business filers, the calendar-year maximum increases from $25,000 to $75,000 for the first-tier penalty; from $50,000 to $200,000 for the second-tier penalty; and from $100,000 to $500,000 for the third-tier penalty.
- The bill has provisions covering the estate tax, expiring tax cuts, expired tax provisions and an alternative minimum tax (AMT) patch. Extension of EGTRRA Tax Cuts The EGTRRA introduced a new 10% tax bracket for individuals and reduced the tax brackets above the 15% bracket to 25%, 28%, 33% and 35%. Those changes were scheduled to sunset after 2010, so that in 2011 the 10% rate would disappear (with income in that bracket reverting to the 15% bracket) and the other rates would revert to 28%, 31%, 36% and 39.6%, respectively. With the bill’s postponement of the EGTRRA sunset, those rates would continue through 2012. The EGTRRA also lowered the capital gains tax rate to 15% (0% for taxpayers in the 10% and 15% tax brackets), which is also scheduled to expire after 2010. The bill’s postponement of the EGTRRA sunset would continue the lowered capital gains tax rate through 2012. AMT Patch The bill includes an AMT patch for 2010 and 2011. For 2010, the AMT exemption amounts would be $47,450 for unmarried individuals and $72,450 for married individuals filing jointly. For 2011, the amounts would be $48,450 and $74,450, respectively.
- Bonus Depreciation and Section 179 Expensing The bill allows taxpayers to deduct 100% of the cost of business property acquired after Sept. 8, 2010, and before Jan. 1, 2012, and placed in service before Jan. 1, 2012 (or before Jan. 1, 2013, in the case of certain property). The bill would also set the expensing limitation under IRC § 179 at $125,000 and the phaseout threshold amount at $500,000 for 2012. The bill would then reduce these amounts to $25,000 and $200,000 for tax years beginning after 2012. Estate Tax The EGTRRA (Economic Growth & Tax Relief Reconciliation Act of 2001) enacted a slow repeal of the estate and generation-skipping transfer (GST) taxes. Under the EGTRRA provisions, the estate and GST tax rates gradually declined until the estate and GST taxes were eliminated in 2010. Under the EGTRRA sunset provision, the estate tax repeal was to be in effect for 2010 only. After that, the estate and GST regime in place before the passage of the EGTRRA would spring back to life, as if the EGTRRA had never been enacted. This means that starting Jan. 1, 2011, the estate tax exemption would be $1 million (adjusted for inflation), the tax rate would be 55%, and the state death tax credit would be revived. The EGTRRA also repealed the step-up in basis for assets passing at death. Instead, inherited assets are subject to a modified carryover basis rule in 2010. Under this rule, a recipient’s basis in property acquired from a decedent will be the lesser of the adjusted basis of the property at death or the fair market value (FMV) on the date of death. The carryover basis provision also sunset after Dec. 31, 2010. The act reinstates the estate tax, with an estate tax rate of 35% and an estate tax exemption of $5 million (adjusted for inflation after 2011). For estates of decedents dying in 2010, an election will be available either to be subject to the reinstated estate tax or to be subject to the modified carryover basis rule. Estates of decedents dying in 2010 would be given an extension to file an estate tax return until nine months after the date of enactment of HR 4853.
- The HIRE act, Small Business Jobs Act and 2010 Tax Relief act were all tax stimulus acts They Provided incentives for employment Encouraged enhanced spending with increased depreciation deductions Lowered individual tax rates as well as capital gain rates, etc.
- Employee FICA is at 4.2% for 2011 ONLY. Employer FICA remains at 6.2% Election for 100% depreciation Section 179 Limit is raised to $500,000/$2,000,000 Potential Healthcare credit for small business employers Self employed individuals will be allowed to use self employed health insurance to reduce self employment income 1099s required for all payments over $600 for services to real estate rental companies for 2011 Note – suggest getting form W-9 filled out and signed before issuing first payment 1099s required for all payments for services over $600 for 2012 Original health care legislation required reporting of medical benefits. Starting in 2011 employers were to report value of the health insurance coverage on the W-2s. This has been suspended by the IRS though, so it will not apply for 2011.
- Tax rates for individuals were reduced to the same rates for 2009 (10-35%) Capital gain rates max out at 15% Alt Min Tax (exemption amount increased and changed the tax liability limitation) Employee Fica at 4.2%, employer fica at 6.2% (FICA wage base limit for 2011 is 106,800) Incentives such as $250 deduction for teacher classroom expenses and the state and local sales tax deduction in lieu of state income tax as well as the deduction for tuition and related expenses
- Those who bought a home for the first time in 2010 may be eligible to claim a first time homebuyer credit This year marks the first year that e-filing is mandatory for individual returns. (again for preparers who do more than 100 returns) The itemized deduction limitation is repealed for 2010 (and through 2012). Personal exemption phaseouts also do NOT apply. The $1000 child tax credit continues instead of reverting to $500 The $3000 amount for the child and dependent care credit, which was scheduled to revert to $2,400 after 2010 continues for 2 years.
- This year all preparers were required to pay a fee and register with the IRS for a PTIN. (preparer tax id) So you will no longer see the SSN of the preparer Who cannot e-file? If you claim the homebuyer credit you may not be able to efile your return. EFTPS- effective 1/1/11 employers who make payroll tax deposits will be required to do it using EFPTS and will no longer be able to fill out the coupon and take a check to the bank to make a payroll tax payment. The requirement for 990s and 990 Ezs (which affect nonprofit entities) has been raised. Nonprofits may only have to file a 990N if they fall under the raised revenue amounts. Now if your revenue is under the $50,000 threshold you will be eligible to file the 990N.
- Don’t forget to send your preparer the cost of tuition, uniforms, supplies, etc. for your children in school K-12 th . Don’t forget to send your preparer your 2010 homeowners declaration pages. This year LA is allowing no capital gains on the sale of a closely held LA business
- These are extensions to file – not extensions to pay. You will incur penalties and interest if you pay late. Thank you Emancipation Day! Because the holiday is in DC it is treated like a federal holiday for deadlines.
- The IRS is warning taxpayers that it will not accept certain 2010 individual tax returns until mid- or late February due to tax law changes recently enacted by Congress (IR-2010-126). Taxpayers affected include all those who itemize deductions on Schedule A, as well as those who take certain recently extended deductions. The delays will affect taxpayers whether they e-file or file on paper. The IRS is emphasizing that for most taxpayers, filing season will start in January, as usual. But because of changes recently made by Congress on Dec. 17, the IRS will need time to update forms and to reprogram its computer systems to handle certain items. The change affecting the most taxpayers will be the fact that Form 1040, Schedule A, will have to be updated to reflect the extension of the state and local general sales tax deduction under IRC § 164. The IRS anticipates that it will be the middle of or late in February before it can accept Forms 1040 with itemized deductions on updated Schedule A. The IRS also has to update the state and local sales tax tables for use in calculating the state and local general sales tax deduction. Other individual taxpayers affected by the delay include: · Taxpayers claiming the IRC § 222 higher education tuition and fees deduction on Form 8917; · Taxpayers claiming the $250 deduction for elementary and secondary school teachers under IRC § 62(a)(2)(D); · Taxpayers filing Form 4686 to claim casualty or theft losses
- Both the IRS and LDOR have email notifications that you can subscribe to. Kiplinger and CCH are sites that require annual subscription fees.