EZ E-File Tax Preparers, Inc

Tax Alerts

Tax Briefing(s)

2010 Health Care Reform Act

Congress returns to work in mid-September to a full agenda of tax legislation, dominated by the fast-approaching expiration of the 2001 individual marginal income tax rate reductions. Predicting when Congress will act on the rate cuts or any legislation is nearly impossible. House Democrats, who have already passed a number of tax bills, appear to be allowing the Senate to take the lead in the weeks preceding the November elections. The uncertainty over the fate of many tax provisions makes year-end tax planning more important than ever.

Individual tax rates

For many taxpayers, the greatest uncertainty is over the fate of the 2001 individual income tax rate reductions. After December 31, 2010, the individual marginal income tax rates for all taxpayers will rise when the reduced rates expire. President Obama has asked Congress to extend all of the 2001 individual marginal income tax reductions except for the top two rates.

Change is coming regardless of whether Congress approves the president’s proposal or allows the reduced rates to expire entirely. The likely prospect of higher income tax rates significantly impacts tax planning for individuals and business owners.

Individuals may benefit from many traditional planning techniques. Individuals expecting to be in a higher tax rate in a future year because of higher income levels may want take into account the timing of income or deductible expenses in one tax year or another. An individual may find that accelerating income into 2010, so it is taxed at a lower rate, may be advantageous. You may be able to accelerate payments due to you. Another strategy may be to take withdrawals from retirement savings, either as part of a Roth IRA conversion plan or otherwise, to accelerate income into 2010. Similarly, deferring deductions into 2011 may help offset income that is expected to be taxed at a higher rate. You may consider holding off on a charitable contribution until 2011. Our office can help you design a strategy that works best for you.

Individuals in the highest tax brackets also should consider the likely reinstatement of the limitation on itemized deductions. For 2010 – and 2010 only – the limitation on itemized deductions for higher income taxpayers is completely repealed. The provision limits the total amount of otherwise allowable itemized deductions for higher income taxpayers. President Obama has asked Congress to allow the limitation on itemized deductions to return but to modify it for 2011 and beyond.

Capital gains/dividends

Also expiring after December 31, 2010 are reduced capital gains and dividends tax rates. For 2010, the maximum capital gains and dividends tax rate is 15 percent (zero percent for taxpayers in the 10 and 15 percent brackets). President Obama has asked Congress to impose a 20 percent capital gains and dividends tax rate on higher-income individuals for 2011 and beyond. All other taxpayers would pay capital gains and dividends taxes of 15 percent unless they qualify for the zero percent tax rate. Generally, the 20 percent tax rate would apply to individuals with incomes over $200,000 and married couples filing a joint return with incomes over $250,000.

Small business

The House and Senate have tried several times this year to send a small business tax relief bill to the White House but have failed. House-passed bills stalled in the Senate. The stalemate in the Senate may break this fall because lawmakers are eager to show voters they support “jobs” bills.

Some of the small business tax relief measures that enjoy bipartisan support are:

--Expansion of the small business stock exclusion to 100 percent;
--Reform of the Code Sec. 6707A penalties for reportable transactions;
--An increase in the deduction for qualified start-up expenses;
--Enhanced Code Sec. 179 expensing; and
--Bonus depreciation.

Homebuyers

The popular first-time homebuyer tax credit (and the reduced credit for long-time residents) has expired. The credit was popular because Congress made it fully refundable and certain lenders allowed purchasers to monetize the credit toward a down payment. Recent reports about sales of new homes reaching record lows may encourage Congress to consider extending the incentive. However, Congress must find a way to pay for the credit if it decides to extend it.

Estate tax

Nine years ago, Congress repealed the federal estate tax. Because of budget concerns, Congress delayed full repeal until 2010. For individuals dying in 2010, the traditional stepped-up basis rules are replaced with a modified carryover basis regime. Again, because of budget concerns, full repeal expires after December 31, 2010. If Congress takes no action on the estate tax before year-end, the exemption level will be $1 million in 2011 and the maximum estate tax rate will be 55 percent.

The House has approved legislation to make permanent the estate tax rules as they were in 2009. The House bill has languished in the Senate over not only its cost but also concerns over whether to make it retroactive to January 1, 2010. Some states have already passed bills to protect older wills based on formula dispositions, which may not have anticipated repeal of the estate tax in 2010.

Extenders

A package of tax extenders has stalled in the Senate and is unlikely to pass as a single bill because of its price tag. Instead, Democratic leaders in the Senate have indicated that they may enact some of the extenders in other bills, especially the extenders that have support from both parties. House Democrats would prefer the Senate keep the extenders in one bill but will likely acquiesce in enacting some of the extenders rather than none.

Among the extenders that enjoy bipartisan support are:

--Research tax credit;
--State and local sales tax deduction;
--Teachers’ classroom expense deduction;
--Higher education tuition deduction; and
--Energy incentives for consumers.

Offsets

Congress must find offsets to pay for any tax cuts and its options are dwindling. Two House-approved revenue raisers, a change in the tax treatment of carried interest and the imposition of self-employment taxes on service S corps, died in the Senate and are unlikely to be revived. Less controversial are reforms to grantor retained annuity trusts (GRATs) and the cellulosic biofuel credit. Congress could also abolish the Code Sec. 199 production activities deduction and raise taxes on oil and gas producers.

Lawmakers have a short window in which to try to pass critical tax bills before year-end. Our office will keep you posted of developments. Please contact our office if you have any questions.

If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.

Businesses of all sizes are preparing for a possible avalanche of information reporting after 2011.

To help pay for health care reform, lawmakers tacked on expanded information reporting to the Patient Protection and Affordable Care Act (PPACA). The health care reform law generally requires all businesses, charities and state and local governments will file an information return for all payments aggregating $600 or more in a calendar year to a single provider of goods or services. The PPACA also repeals the longstanding reporting exception for payments to a corporation. The magnitude of the reporting requirement has opponents working feverishly to persuade Congress to either repeal it or scale it back.

Pre-PPACA law

Pre-PPACA law generally requires businesses to file an information return with the IRS reporting payments to non-corporate service providers that exceed $600 in a given year. Payments to providers of goods are excluded from reporting. Payments to a corporation for goods or services are excluded from reporting with some limited exceptions.

Sea change ahead

Effective for purchases made after December 31, 2011 the PPACA requires all businesses purchasing $600 or more in goods or services from another entity (including corporations but not tax-exempt corporations), to provide the vendor and the IRS with an information return. Presumably, Form 1099-MISC will be used for purposes of the new reporting rule, or the IRS will develop a new form. We will keep you posted on developments.

Example. In February 2012, your business buys computers, printers, and fax machines from an office supply company, doing business as a corporation, for $4,000. Your business also spends $1,000 at a local caterer, doing business as a partnership, for office breakfasts and lunches throughout the year. Additionally, the company spends $600 for business travel on Amtrak. Your business must provide each of these vendors with a Form 1099 for 2012, as well as the IRS.

Day-to-day transactions

Here are some more examples of purchases after 2011 that appear to fall under the PPACA’s reporting requirements:

-- You make small, incremental purchases from the same vendor; for example, your business purchases more than $600 of office supplies, such as staples, toner, pens, paper, and calendars from the same vendor.
-- You pay more than $600 throughout the year in mail and shipping costs to the same vendor; however each individual charge costs no more than $10 or $12.
-- You purchase floral arrangements for the office throughout the year, although each purchase may be no more than $40 to $70, your cumulative purchases are more than $600;
-- You purchase an $800 computer for your new employee;
-- You hold a summer picnic for your employees and purchase more than $600 in food from a local grocery store;
-- Every Friday you buy breakfast pastries from the local bakery for your employees, and even though each purchase is no more than $40, you spend more than $600 in the year.

Backup withholding

The PPACA requires sellers to provide, and purchasers to collect, Taxpayer Identification Numbers (TINs). If a seller fails to furnish a correct TIN, you must impose backup withholding at the rate of 28 percent of the purchase price.

Moreover, if your business fails to issue an accurately completed Form 1099 to a vendor, the IRS can assess a penalty.

Preparing now

There are some proactive steps your business can take now to prepare for the new reporting requirement and its heavy administrative and paperwork burden. The way you collect and manage vendor information will be more important then ever. Basic information you will need to track includes every vendor’s name and TIN, the amounts spent at each vendor and the total annual amount spent at each vendor.

You should also begin requesting that each of your vendors, particularly your regular vendors, complete IRS Form W-9 for your records. Form W-9 will provide you with the vendor’s legal name, address, and TIN.

Pending legislation

Opponents of the expanded information requirement are hoping that Congress will repeal it before 2012. Outright repeal is a long-shot. As written now, the PPACA reporting requirement is estimated to raise $17 billion over 10 years. Congress will need to find another source of revenue if it repeals the reporting requirement. More likely, Congress will modify the requirement.

Senate Democrats have introduced legislation to raise the reporting threshold from $600 to $5,000 and exclude some routine payments, such as office supplies, from reporting. All purchases made with a credit card would also be exempt from the reporting requirement. Additionally, small businesses employing not more than 25 employees would be completely exempt from the reporting requirement.

Congress may scale back the PPACA’s reporting requirements in the autumn of 2010. Our office will keep you posted on developments.

Correctly calculating your estimated tax payments and/or withholding is even more important as the year end approaches. Accurate calculations are especially important as third and fourth quarter payments become due, and your income and expenses for the rest of the year can be more accurately projected.

Estimated tax payments

You are required to pay estimated tax if you receive income from which tax is not withheld, including income from self-employment, dividends and interest, capital gains and losses, rental income, and alimony, and your tax is expected to be $1,000 or more (after subtracting credits and withholding). Generally, individuals who do not pay at least 90 percent of their tax through withholding must estimate their income tax liability and make equal quarterly payments of the "required annual payment" liability throughout the year.

Higher-income taxpayers. For higher-income taxpayers whose adjusted gross income (AGI) shown on the preceding year's tax return exceeds $150,000 ($75,000 for married individuals filing separately), the required annual payment is the lesser of 90 percent of the tax for the current year, or 110 percent of the tax shown on the return for the preceding tax year.

Estimated tax payments are due quarterly. For most individuals, the due dates for the 2010 tax year are: April 15, June 15, and September 15 of 2010, and January 15, 2011. Failing to pay enough estimated tax on each installment date may result in a penalty for underpayment of estimated tax, even if you are due a refund. Therefore, properly calculating your payments is vital to avoid the penalties, including calculating adjustments needed in remaining quarters (including as soon as September 15, 2010 for the third quarter).

Third quarter payments are around the corner – September 15, 2010 – for the period June 1 through August 31. Fourth quarter payments will be due January 15, 2011 for the period September 1, 2010 through December 31, 2010. If your total estimated payments and withholding add up to less than 90 percent of what you owe, you may face an underpayment penalty.

Withholding

With the third and fourth quarter payments becoming due, ensure you are properly withholding and paying enough in estimated tax. Look at your projected year-end tax payments as compared with your expected tax liability to determine if your estimated tax payments need some tweaking. If your payments are expected to be less than 90 percent of current-year tax, you will generally need to increase your withholding or make estimated tax payments.

You may want to file a new W-4 with your employer adjusting your withholding to withhold more from your final paychecks for the year if you are currently underwithholding. This will help avoid being subject to a penalty when you file your return.

Adjusting estimated tax payments

A change in your business's income, deductions, credits, and exemptions may also make it necessary to refigure your estimated payments for the remainder of the year. To avoid either a penalty from the IRS or overpaying the IRS interest-free, consider increasing or decreasing the amount of your remaining estimated payments.

If, during the quarter, you learn that a change in your business's anticipated income, deductions, credits, exemptions, or other adjustments will either increase or decrease your business's tax liability, and therefore affecting your required annual payment for the remainder of the year, you should adjust your remaining quarterly payments accordingly.

Refiguring tax payments due

To change your estimated tax payments, refigure your total estimated payments due. Next, determine the payment due for each remaining payment period. Be careful when refiguring your remaining payments. The IRS may assess a penalty against you when filing your return at the end of the year if an estimated tax payment for a previous period is less than one-fourth of your amended estimated tax. So be cautious when refiguring any tax payments.

If one of your children received a full scholarship for all expenses to attend college this year, you may be wondering if this amount must be reported on his or her income tax return. If certain conditions are met, and the funds are used specifically for certain types of expenses, your child does not have to report the scholarship as income.

Qualified educational institution

Any amount received as a “qualified scholarship” or fellowship is not required to be reported as income if your child is a candidate for a degree at an educational institution. For the college that your child attends to be treated as an educational organization, it must (1) be an institution that has as its primary function the presentation of formal instruction, (2) normally maintain a regular faculty and curriculum, and (3) have a regularly enrolled body of students in attendance at the place where the educational activities are regularly carried on. Your child has received a qualified scholarship if he or she can establish, that in accordance with the conditions of the scholarship, the funds received were used for qualified tuition and related expenses. Therefore, the entire amount is generally taxable if your child is not a candidate for a degree. Athletic scholarships are also tax-free if they meet the above-mentioned requirements.

Qualified tuition and expenses

Qualified tuition and related expenses include tuition and fees required for enrollment or attendance at the educational institution, as well as any fees, books, supplies, and equipment required for courses of instruction at the educational institution. To be treated as related expenses, the fees, books supplies, and equipment must be required of all students in the particular course of instruction. Incidental expenses, such as expenses for room and board, travel, research, equipment, and other expenses that are not required for either enrollment or attendance at the educational institution are not treated as related expenses. Any amounts that are used for room, board and other incidental expenses are not excluded from income.

Example. Assume this year your son received a scholarship in the amount of $20,000 to pay for expenses at a qualified educational institution. His expenses included $12,000 for tuition; $1,100 for books; $900 for lab supplies and fees; and $6,000 for food, housing, clothing, laundry, and other living expenses.

The $14,000 that your son paid for tuition, books and lab supplies and fees is considered to be qualified educational expenses and therefore would not have to be reported as income. The $6,000 that he spent on housing and the other living expenses is considered to be incidental expenses and would have to be reported in his income.

A note on student loans. “Financial aid” in the form of student loans is not counted as a scholarship. However, student loans are not included in income, generally, and student loan interest can be deducted up to $2,500 a year. If a student loan is partly or wholly forgiven, however, the amount forgiven by the lender is included in income unless specific exceptions apply.

Reduced tuition

If you or your spouse is or was an employee of the school, your child may be entitled to reduced tuition. If so, the amount of the reduction is not taxable as long as the tuition is not for education at the graduate level.

There can be all sorts of complicating factors in assessing whether a particular scholarship will be taxed, such as the treatment of work-study scholarships, educational sabbaticals, scholarships paid by an employer, and stipends to cover the tax on the non-tuition portion of attending a university. If you need additional assistance in determining the taxability of scholarships funds, please contact our office.

Over the next few years, employers will face a number of new compliance and reporting obligations, among others, as a result of the new health care reform package (the Patient Protection and Affordable Care Act). On the horizon for employers is the requirement to report the value of health insurance coverage they provide to each employee on the employee’s annual Form W-2, Wage and Tax Statement. This new reporting requirement starts with the 2011 tax year and, according to the IRS, is for information purposes only. Employees will not have to pay tax on the amount reported on the W-2 for health care coverage; thus the new reporting requirement does not affect an employee’s tax liability.

Employers should plan now in order to implement and navigate the new W-2 health coverage reporting requirement, and understanding the basics of this new obligation is an important first step.

Applicable coverage

Generally, employers must calculate and report the aggregate cost of all "applicable employer-sponsored coverage" provided to each employee annually on the employee’s Form W-2, starting with the 2011 tax year. "Applicable employer-sponsored coverage" is coverage under any group health plan made available to any employee by the employer which is excluded from the employee’s gross income under Internal Revenue Code Sec. 106, or would be excludable. Applicable employer-sponsored coverage also includes coverage under a federal, state or local government group health plan. Coverage is treated as applicable employer-sponsored coverage regardless of whether the employer or employee pays for the coverage.

Applicable employer-sponsored coverage that must be reported includes the following:

- Medical plans;
- Prescription drug plans;
- Executive physicals;
- On-site clinics, if they provide more than de minimus care;
- Medicare supplemental policies;
- Employee assistance programs; and
- Coverage under dental and vision plans, unless they are "stand-alone" plans.

Excludable coverage. Employers do not need to report the following types of health care coverage on an employee’s W-2: the cost of contributions made by employees (or their spouses) to Archer medical savings accounts (MSAs) or health flexible spending accounts (HSAs); salary reduction contributions to flexible spending arrangements (FSAs); long-term care, disability, or accident income insurance; or specific disease or hospital/fixed indemnity plans. These are all excluded from the new W-2 reporting requirement.

Aggregate cost

Employers must report the aggregate or total cost of employer-sponsored health insurance coverage. This includes coverage paid for by both the employee and employer. The IRS has advised that employers do not need to provide a specific breakdown of the different types of medical coverage, they must just report the total cost of all applicable coverage.

According to the IRS, the aggregate cost of coverage should be computed under rules similar to COBRA cost of coverage rules. For fully insured plans, the COBRA cost of coverage is generally the amount of premiums paid to the insurer. For self-insured plans, the COBRA cost of coverage is based upon an actuarial estimate of future costs.

Valuing coverage may pose a challenge to employers with respect to plans that are subject to the new W-2 reporting requirement but that have not yet been valued for COBRA purposes, such as on-site medical clinics. Employers will need to determine reportable values for coverage under such programs. The IRS is still hammering out applicable guidance for such situations, and our office will keep you posted.

Updating payroll systems

However, because an employee whose employment is terminated before the close of a calendar year may request an early W-2 form from his or her former employer, employers must be prepared for and implement the new reporting requirements at the start of 2011. Employers will also need to ensure that their payroll systems are updated to reflect these changes so that they will be able to provide W-2 forms that comply with the new requirements.

Although the new W-2 reporting rule does not kick in until the 2011 tax year, employers may want to start updating their payroll systems now, and do so by the end of January 2011. Employers are not required to file Forms W-2 until January 31, 2012. However, having payroll systems updated in order to comply with the new W-2 requirement by the start of 2011 is important particularly if an employee requests their W-2 prior to this date (such as an employee who has been terminated and requests an early W-2 form). Employers must provide a W-2 upon an employee’s request within 30 days.

Former employees

The new W-2 reporting requirement applies to all employees. However, it may apply to former employees as well. If a former employee (such as a retiree, terminated employee on COBRA, or a surviving spouse) is provided with health insurance, you may be required to file a W-2 for the individual reporting their health coverage. However, the IRS has not yet issued guidance on reporting requirements for former employees. Our office will keep you updated on developments.

The new W-2 reporting requirement for health care coverage can be complicated, and the rules are still developing. If you have questions regarding your new reporting obligations, please contact our office.

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of September 2010.

September 1

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 25-27.

September 3

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 28-31.

September 9

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates September 1-3.

September 10

Employees who work for tips. Employees who received $20 or more in tips during August must report them to their employer using Form 4070.

September 15

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates September 8-10.

Monthly depositors. Monthly depositors must deposit employment taxes for payments in August.

September 17

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates September 11-14.

September 22

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates September 15-17.

September 24

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates September 18-21.

September 29

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates September 22-24.