How Do I? Make a catch-up contribution?

Employees can elect to make voluntary contributions from their salary to certain retirement plans. The type of plan may depend on your employer. Many employers maintain cash or deferred arrangements — 401(k) plans — as part of their defined contribution retirement plan. State and local governments can maintain “457″ eligible deferred compensation plans. Nonprofit organizations can provide a 403(b) tax-sheltered annuity. And, of course, taxpayers can contribute to an individual retirement account (IRA).

These plans all maintain separate accounts for their participants. All of these plans are subject to annual limits on voluntary employee contributions, which apply per participant, not per plan. The normal limit for both 2009 and 2010 is $16,500 or the employee’s compensation, if less. Employer limits may reduce the $16,500 amount.

Contributions to a 401(k), 403(b) or 457 plans must be made by the end of the calendar year to apply against that year’s limit. Generally, employees can change the amount or rate of salary reduction contributions by making an election at any time during the year.

Catch-up contributions

For most plans, the limit increases in the year that the employee will turn 50. The increased limit applies even if the employee terminates employment or dies before actually turning 50. The increased limits are known as “catch-up” contributions. Catch-up contributions are additional elective deferrals made by eligible participants above the normal applicable limit. However, a catch-up contribution does not mean that the employee can take an unused limit from an earlier year and catch-up; the catch-up contribution is based on the higher limits allowed to older individuals.

A plan does not have to allow catch-up contributions. There are statutory limits on catch-up contributions, adjusted for inflation each year. For 401(k), 403(b), and 457 plans, the maximum catch-up contribution for both 2009 and 2010 is $5,500. The employer cannot reduce the catch-up limit. Adding the catch-up limit produces a potential overall limit of $22,000 on voluntary contributions by a 50-year old employee. Excess contributions have to be included in income (if not withdrawn in time), plus they are subject to a 10 percent penalty.

IRAs

For an IRA, there is a separate regular limit of $5,000 for 2009, up to the amount of the individual’s compensation, and a separate catch-up limit of $1,000 for an individual who turns 50 by the end of the year. An IRA contribution can be made by the due date of the year’s tax return in the following year (not including extensions). So the deadline is April 15 of the following year. There also are penalties for an excess contribution to an IRA.

Lawmakers struggle to pay for health care reform

Health care reform continues to elude Congress as lawmakers struggle to find ways to pay for its estimated $1 trillion cost. The House is poised to pass a massive health reform bill, America’s Affordable Health Choices Act (H.R. 3200), which includes a surcharge on higher income individuals. The Senate, however, is unlikely to pass its version of health care reform before Congress’ August recess.  A final bill is not expected to pass Congress until the fall or maybe later.

Individual coverage

One of the most far-reaching changes would be the mandate that all individuals obtain health care coverage. Individuals would be insured whether through their employer or by participating in a new national exchange (also referred to as a “gateway”). In the exchange, individuals would shop among private insurers and a possible public health insurance plan. Congress is expected to impose a tax on individuals who do not obtain insurance. Lower-income individuals, however, would receive a credit or voucher to help pay for the cost of coverage.

Employers

Employers would be required to offer health care coverage or pay for coverage. Employers that opt out of providing coverage would pay an additional tax. Employer-provided coverage would also have to meet certain minimum standards. Small employers would be eligible for tax credits to help offset the cost of coverage.

Surtax

President Obama has promised that health care reform will not add to the federal deficit. Very few revenue raisers would generate the amount of money needed to fund health care reform. The House version of health care reform includes a surcharge on higher income individuals. The surcharge is estimated to raise more than $500 billion over 10 years.

For married couples filing jointly, a surtax of one percent would apply to the couple’s modified AGI that exceeds $350,000 but does not exceed $500,000; a 1.5 percent rate would apply to the couple’s modified AGI that exceeds $500,000 but does not exceed $1 million; and a 5.4 percent rate would apply to the couple’s modified AGI that exceeds $1 million.

For single individuals and heads of household, the dollar amounts would be 80 percent of the above-mentioned amounts. For married couples filing separately, the dollar amounts would be 50 percent of the above amounts. Moreover, the one and 1.5 percent rates would be increased to two and three percent if certain health care cost savings are not achieved by 2013.

Possible revenue raisers

The $1 trillion price tag of health care reform has lawmakers looking at every option to generate revenue. Some of the proposals being debated are:

• Delaying the effective date of worldwide allocation of interest rules;
• Codifying the economic substance doctrine;
• Limiting treaty benefits involving foreign multinational corporations;
• Modifying or repealing the itemized deduction for medical expenses;
• Limiting the student FICA exception;
• Extending Medicare payroll tax to all states and local government employees;
• Modifying or repealing the exclusion for employer-provided reimbursement of expenses under FSAs and similar arrangements;
• Imposing an excise tax on sugar-sweetened beverages;
• Heightening requirements for a hospital to keep its tax-exempt status; and
• Reducing the special deduction for non-profit “Blues.”

The health care reform debate is likely to continue into the autumn and possibly longer. If you have any questions about the pending legislation, please contact our office.

Congress ramps-up tax legislation at mid-year mark

A new administration brings a flurry of activity to Washington, D.C., and the Obama administration is no exception. Almost immediately after taking office, President Barack Obama and Congress passed a massive stimulus bill, the American Recovery and Reinvestment Act of 2009 (2009 Recovery Act). Since passage of the 2009 Recovery Act, Congress has been busy debating a host of other tax bills, such as health care reform, an overhaul of the individual income tax rates, the future of the federal estate tax, business tax reform, and more. Lawmakers have reached mid-year 2009 with a full plate of tax bills to enact.

2009 Recovery Act

You’re probably familiar with many of the tax breaks in the 2009 Recovery Act. Among the highlights are:

• New Making Work Pay credit;
• Extended and expanded first-time homebuyer credit;
• New deduction for state and local sales taxes for purchases of motor vehicles;
• Enhanced child tax credit;
• COBRA premium assistance;
• Enhanced transportation fringe benefits;
• Increased energy tax breaks; and
• Extended net operating loss carryback for small businesses.

As is always the case after Congress passes new tax laws, the IRS must interpret them. Many of the IRS’s interpretations of the new incentives are very taxpayer-friendly. For example, the IRS recently determined that taxpayers in states without a sales tax can take advantage of the deduction for motor vehicle purchases.

Many members of Congress would like to extend or make some of the tax incentives permanent. One probable candidate for extension is the first-time homebuyer credit. Under current law, the credit will expire after 2009. There is even talk of raising the credit from $8,000 to $15,000. There is also support in Congress to make permanent the enhanced child tax credit. The White House would like to make permanent the Making Work Pay credit but many members of Congress balk at its $500 billion price tag.

Health care reform

How to pay for health care reform is the billion-dollar question on Capitol Hill. Under current law, employer-provided health insurance is not counted as income for tax purposes and the amount of health care benefits that are counted as tax-free is unlimited.

Several lawmakers have floated the idea of eliminating or reducing the exclusion. One proposal would cap the exclusion based on the value of the health insurance policy or income level of the employee eligible for the exclusion. Another proposal would be to convert the exclusion to a tax credit or deduction. Coupled with a possible exclusion would be expanded tax breaks for small businesses.

The Obama administration has proposed other ways to raise the money needed for health care reform. The president would overhaul the international tax rules to generate more revenue. Revenue from proposed climate change legislation would also help to pay for health care reform under the administration’s plans.

The White House is urging Congress to pass health care reform this year. Several House committees have already unveiled blueprints of health care reform. Our office will keep you posted of developments.

Tax rates

After 2010, tax rates for all individuals are scheduled to increase. The Obama administration has asked Congress to make permanent all of the current lower rates except for the top two rates. They would rise to 36 and 39.6 percent.

Congress is expected to go along with the president’s proposals to raise the tax rates for higher-income individuals. The White House defines higher-income individuals as single taxpayers with incomes over $200,000 and married couples with incomes over $250,000. It is unclear if Congress will pass legislation this year or wait until 2010.

Business taxes

The news for businesses is mixed. Congress is expected to approve some enhancement of the current extended net operating loss (NOL) carryback. Lawmakers could make more businesses eligible for the special treatment but they are unlikely to extend the relief to all businesses, regardless of size. Under current law, this tax break is limited to small businesses.

Large businesses, especially multi-nationals, will likely pay higher taxes. The White House has proposed overhauling the international tax rules, with special emphasis on the rules that allow certain corporations to defer paying U.S. taxes on foreign-source income. The president unveiled these proposals in May and the response on Capitol Hill was lukewarm. But the government’s need for revenue could convince some lawmakers to embrace them.

Estate tax

After 2009, the federal estate tax is abolished. However, it reappears in 2011. To complicate matters even more, the 2011 estate tax will mirror the 2001 estate tax. The lower rates and higher exclusions available between 2001 and 2009 will disappear after 2011.

Several bills have been introduced in Congress to extend or make permanent the estate tax as it applies this year. Lawmakers could vote this fall.

More legislation

Along with health care, individual, business, and estate tax reform, lawmakers are considering hundreds of other tax-related bills. Among them are:

• A temporary alternative minimum tax (AMT) patch for 2009;
• Help for cash-strapped pension plans;
• Higher capital gains and dividends taxes for wealthy individuals;
• Automatic enrollment in IRAs;
• Enhanced Earned Income Tax Credit;
• Repeal/reduction of the Code Sec. 199 domestic production tax credit;
• Limiting itemized deductions for higher-income individuals;
• Imposition of more information reporting to close the “tax gap;” and
• Repeal of the last-in, first-out (LIFO) accounting method.

The second half of 2009 is certain to be busy in Congress. If you have any questions about these or any other tax bills in Congress, please contact our office.

President Obama calls for sweeping international tax reforms

During the presidential campaign, then candidate Barack Obama promised to close international tax loopholes and crack down on offshore tax evasion. In May, President Obama unveiled sweeping measures to reform the nation’s international tax rules. The president also proposed to overhaul the rules for holding funds in offshore accounts, repeal the last-in, first-out (LIFO) accounting rules, tax carried interest as ordinary income, and provide limited business tax relief. Details of the president’s proposals were released by the Treasury Department in the “Green Book” (named for the color of its cover).

International taxation

A U.S. based company is generally allowed to defer U.S. taxation on its foreign source income until the earnings are repatriated. President Obama has proposed various measures to limit the ability of U.S. companies to take deductions for offshore expenses against U.S. income. According to the president, some companies abuse the deferral rules and his proposals will close loopholes.  Opponents counter that the deferral rules are necessary to ensure American competitiveness in the global economy.

The president also proposed to:

• Require corporation status under check-the-box election for certain overseas “disregarded entities” established by U.S. businesses;
• Curb income shifting through intangible property transfers;
• Curb earnings-stripping by expatriated entities through interest deductions;
• Repeal the 80/20 company rules that shelter dividends as foreign-source income;
• Prevent withholding avoidance by foreign portfolio investors through equity swaps; and
• Modify the foreign tax credit rules for dual capacity taxpayers.

Many of the details of these international proposals, especially about how to calculate the amount of deferred deductions to match foreign expenses with deferred income, need to be fleshed out. The president’s proposals serve as a blueprint for Congress to use when drafting legislation. Congress may approve all or some of the proposals or make significant changes to them.

Offshore accounts

The IRS is aware that some Americans fail to report all or part of their assets in foreign bank accounts. Estimates of unreported income reach as high as $100 billion. President Obama would strengthen the rules for reporting by Americans and disclosure by foreign banks. Individuals and banks that fail to follow the heightened rules would be subject to enhanced sanctions.

LIFO

Many businesses use LIFO to account for inventory. The last units of inventory purchased are generally treated as the first units sold. The president has proposed to repeal LIFO, which would raise more than $65 billion in revenue.

Carried interest

Under current law, carried interest (partnership profits interests allocable to the performance of services) is taxed as capital gains. President Obama is asking Congress to tax carried interest as ordinary income subject to self-employment tax. Similar measures have failed in Congress before but the need to raise revenue may convince lawmakers to change the tax treatment of carried interest this time.

Business incentives

President Obama has proposed about $70 billion in tax cuts for businesses. One of the most significant incentives would be a permanent research tax credit. A temporary tax break for qualified small business stock would also be extended and expanded.

The president also called on Congress to extend the carryback period for net operating losses (NOLs). Current law allows an extended period for NOLs but is limited to small businesses. President Obama did not specify to what extent he would extend the NOL carryback but is recommending that Congress set aside significant budget resources of over $60 billion between 2009 and 2010 to carry this off.

Additionally, the president has proposed extending a number of temporary business tax incentives. These include tax breaks for restaurants, incentives to produce biodiesel and renewable diesel fuels, and tax credits for investing in economically-challenged neighborhoods. Congress could tack-on more temporary incentives.

All of the president’s proposals will be debated at length in Congress over the next several months. The White House is asking Congress to move quickly on international reform and other measures to boost federal revenues. Our office will keep you posted of developments. Please contact us if you have any questions.

How Do I? Determine if someone has been ‘involuntarily terminated’ for purposes of the new COBRA subsidy?

Individuals who have been “involuntarily terminated” from employment may be eligible for a temporary subsidy to help pay for COBRA continuation coverage. The temporary assistance is part of the American Recovery and Reinvestment Act of 2009 (2009 Recovery Act), and is aimed at helping individuals who have lost their jobs in our troubled economy. However, not every individual who has lost his or her job qualifies for the COBRA subsidy. This article discusses what qualifies as “involuntary termination” for purposes of the temporary COBRA subsidy.

Background

The 2009 Recovery Act temporarily allows individuals involuntarily terminated from their employment between September 1, 2008 and December 31, 2009 to elect to pay 35 percent of their COBRA coverage and be treated as having paid the full amount. In most cases, the former employer pays the remaining 65 percent of the premium and is reimbursed by claiming a payroll tax credit.

Some individuals who are “qualified beneficiaries” may also be eligible for the COBRA subsidy. They include spouses and dependent children. However, domestic partners generally do not qualify for the COBRA subsidy.

Income limits

The COBRA subsidy is excludable from gross income. However, individuals with modified adjusted gross incomes (MAGI) between $125,000 and $145,000 ($250,000 and $290,000 for married couples filing jointly) must repay part of the subsidy. For individuals with MAGI exceeding $145,000 and married couples with MAGI exceeding $290,000, the full amount of the subsidy must be repaid as additional tax.

Coverage period

The COBRA subsidy applies as of the first period of coverage starting on or after February 17, 2009 (the effective date of the 2009 Recovery Act). For most plans this was March 1, 2009. The subsidy is available for nine months. However, the nine-month subsidy period may end earlier if the individual becomes eligible for Medicare or another group health plan (such as one sponsored by a new employer).

Involuntary termination

One of the most important questions for purposes of the COBRA subsidy is what is involuntary termination? The IRS has explained that involuntary termination is severance from employment due to an employer’s unilateral authority to terminate the employment. However, the IRS stresses that whether an involuntary termination has occurred depends on all the facts and circumstances.

Involuntary termination can also occur when an employer:

• Declines to renew an employee’s contract;
• Furloughs an employee;
• Reduces an employee’s time to zero hours;
• Tells an employee to “resign or be fired;”
• Relocates its office or plant and an employee declines to relocate; or
• Locks out its employees.

Extended election

Moreover, individuals involuntarily terminated between September 1, 2008 and February 18, 2009, but who declined COBRA coverage, have a second chance under the 2009 Recovery Act. They may be eligible to re-elect COBRA coverage and receive the subsidy.

Small businesses

COBRA continuation coverage and the subsidy are generally unavailable to employees of small businesses (businesses with 20 or fewer employees). However, some states have mini-COBRA laws that extend COBRA continuation coverage and the subsidy to workers at small businesses. COBRA continuation coverage and the subsidy are also unavailable if the employer terminates its health plan.

If you would like to know more about the COBRA premium subsidy, please contact out offices. We can help determine your eligibility for this assistance.

IRS guidance fine tunes tax breaks in 2009 Recovery Act

The IRS is moving quickly to issue guidance on the many tax incentives for individuals and businesses in the American Recovery and Reinvestment Act of 2009 (2009 Recovery Act). Since Congress passed the multi-billion dollar stimulus package in February, the IRS has released guidance on the extended net operating loss (NOL) carryback for small businesses, the new Making Work Pay credit, the enhanced first-time homebuyer tax credit, the new COBRA subsidy, and the new sales tax deduction for motor vehicles.

Net operating losses

One of the most valuable tax breaks in the 2009 Recovery Act is the extended NOL carryback. Small businesses with an NOL in 2008 can offset this loss against income earned in up to five prior years. This special treatment will accelerate refunds and generate an immediate infusion of cash into a struggling business. The IRS expects record numbers of small businesses to be eligible for the carryback and has promised to expedite refunds.

To qualify for the new five-year carryback provision, a small business must have no greater than an average of $15 million in gross receipts over a three-year period ending with the tax year of the NOL. Businesses with more than $15 million in gross receipts can carry back their 2008 NOL for two years.

Generally small businesses that are not corporations (including sole proprietorships filing schedule C with their Form 1040) may accelerate a refund by using Form 1045, Application for Tentative Refund. Corporations with NOLs may accelerate a refund by using Form 1139, Corporation Application for Tentative Refund.

If your small business is in a loss position this year, the extended NOL carryback should not be overlooked. The requirements for the extended carryback are complex. Our office can help you elect this special treatment and maximize your refund.

Making Work Pay credit

Many employers have already implemented the new Making Work Pay credit. The credit reaches $400 for single individuals and $800 for married couples filing jointly. Like other incentives, the Making Work Pay credit phases out for higher income taxpayers (single individuals with modified AGI above $75,000 and married couples filing jointly with modified AGI above $150,000).

Taxpayers do not have to submit a new Form W-4 to their employers; the credit is automatic. However, an employee with multiple jobs or married couples whose combined incomes place them in a higher tax bracket may want to submit a revised W-4 to ensure sufficient withholding. Our office can determine if you need to adjust your withholding.

First-time homebuyer credit

The 2009 Recovery Act raised the maximum first-time homebuyer credit from $7,500 to $8,000 ($4,000 for married couples filing separately) for qualified homes purchased before December 1, 2009. Congress also removed the repayment requirement for homes purchased in 2009. Like other tax incentives, the first-time homebuyer credit has income restrictions. The credit begins to phase out for single individuals with modified AGI above $75,000 ($150,000 for married couples filing jointly).

The IRS recently announced that taxpayers can claim the $8,000 credit on their 2008 tax returns due April 15, 2009 or on their 2009 tax returns next year. Consequently, taxpayers have several filing options.

Taxpayers purchasing a home in the near future and who have already filed their 2008 returns may want to file an amended return. This will allow them to claim the credit almost immediately. However, some individuals may want to wait and take the credit in 2009.

Taxpayers purchasing a home who have not yet filed their 2008 returns may want to request a six-month extension (until October 15, 2009). Alternatively, they can file as planned and then file an amended return to take the credit.

If you are a first-time homebuyer in 2009, don’t miss out on this valuable credit. Our office can recommend the best time to take the credit.

Economic recovery payment

Social Security recipients, disabled veterans and retired government employees may be eligible for one-time economic recovery payments of $250. These payments are in lieu of the Making Work Pay credit. However, the economic recovery payment will be a reduction to any Making Work Pay credit for which the recipient qualifies.

The IRS will not be distributing the economic recovery payments. Individuals will receive them from the Social Security Administration, Department of Veterans Affairs, or other agency. The SSA expects to start making the payments in May.

COBRA subsidy

Individuals who are involuntarily terminated from employment between September 1, 2008 and December 31, 2009 may qualify for a 65 percent COBRA premium subsidy for up to nine months. Family members may also be eligible for the subsidy. Eligible individuals will pay 35 percent of the COBRA premium and employers will pay the remaining 65 percent. The COBRA subsidy, however, phases out for individuals whose modified AGI exceeds $125,000 ($250,000 for married couples filing jointly). Individuals with modified AGI exceeding $145,000 ($290,000 for married couples filing jointly) do not qualify for the subsidy.

Employers will recover their share through a payroll tax credit. The IRS has instructed employers to use Form 941, Employer’s Quarterly Federal Tax Return, to report their COBRA premium assistance payments. In some cases, such as multi-employer plans, the plan provides the subsidy and will be reimbursed by taking a credit on Form 941.

Sales tax deduction for vehicle purchases

Congress created a temporary deduction in the 2009 Recovery Act for state and local sales and excise taxes paid on the purchase of new motor vehicles. Cars, light trucks, motor homes, and motorcycles are eligible for the deduction. The deduction is limited to the tax on up to $49,500 of the purchase price of an eligible motor vehicle. Because this is an above-the-line deduction, taxpayers who do not itemize their deductions can also take advantage of it.

Similar to other incentives, there are income limitations. The deduction phase out for single individuals with modified AGI between $125,000 and $135,000 and married couples with modified AGI between $250,000 and $260,000.

We’ve covered a lot of material in a short time. As always, please contact our office if you have any questions about these valuable tax incentives.

Individual tax incentives abound in American Recovery and Reinvestment Tax Act of 2009

The American Recovery and Reinvestment Tax Act of 2009 (ARRTA) is loaded with various tax incentives for individuals for 2009 and 2010. Among the individual tax breaks in the new law are incentives for homeownership, help for the unemployed and employed, as well as education assistance and tax breaks for taxpayers with children. This article provides an overview of the major individual tax incentives provided by the ARRTA.

Making Work Pay Credit. The Making Work Pay credit is a new but temporary refundable credit. Qualified taxpayers will either take the credit through a reduction in the amount of income tax withheld from their paycheck by allowing a credit against income tax in an amount equal to the lesser of 6.2 percent of the individual’s earned income or $400 ($800 for married couples filing jointly), or in a lump sum when filing their income tax return for the tax year.

Note. Individuals who are self-employed may qualify for the credit as well, to the extent earnings from self-employment are taken into account in computing taxable income.

The credit applies retroactively to the start of 2009 and extends through 2010. Up to the maximum $400/$800 credit amount is allowed for each year.  The credit begins to phase out for individuals with modified adjusted gross income (MAGI) exceeding $75,000 ($150,000 in the case of married couples filing jointly). The credit will be phased out at a rate of 2 percent above the MAGI limits.

$250 Economic Recovery Payment. The ARRTA also provides a one-time payment of $250 to individuals on a fixed income, including railroad retirement beneficiaries, Social Security recipients, disabled veterans, as well as retired government workers who are not eligible for Social Security benefits. The $250 payment will reduce the individual’s otherwise allowable Making Work Pay credit to which they may be entitled. This payment will only be made in 2009, likely around mid-year.

New Car Deduction. Both itemizers and non-itemizers can take advantage of a new but temporary above-the-line deduction for state and local sales taxes or excise taxes paid on the purchase of a new (qualifying) motor vehicle. Both domestic and foreign vehicles qualify as well as motor homes, SUVs, light trucks and motorcycles weighing no more than 8,500 gross pounds.

The deduction is allowed in computing AMT, but is not available to taxpayers who elect to deduct state and local sales and use taxes in lieu of income taxes as an itemized deduction. The deduction begins to phase-out for taxpayers with adjusted gross income (AGI) exceeding $125,000 ($250,000 for joint filers). Additionally, deductible sales/excise taxes cannot exceed the portion of tax attributable to the first $49,500 of the purchase price.

Enhanced First-Time Homebuyer Tax Credit. The ARRTA raises the maximum amount of the first-time homebuyer tax credit to $8,000 (up from $7,500) and extends the credit through December 1, 2009. The ARRTA also completely eliminates any repayment requirement for purchases made after January 1, 2009 if the taxpayer does not sell or otherwise dispose of the property within 36 months from the date of purchase. However, if the taxpayer does dispose of the residence within this time, pre-ARRTA rules for recapture apply, requiring the homebuyer to repay any credit amount received to the government over 15 years in equal installments. Purchases on or after April 9, 2008 and before January 1, 2009 are still governed by the original first-time homebuyer tax credit rules enacted last year in the Housing and Economic Recovery Act of 2008.

Education Credit. The ARRTA temporarily enhances and expands the Hope education tax credit (renaming it the American Opportunity education tax credit) for 2009 and 2010. The credit is increased in amount, to a maximum of $2,500 per year and extended to all four years of college education. Additionally, the credit is subject to more generous phase-out levels of $80,000 of AGI for individuals and $160,000 for joint filers. For 2009 and 2010, up to 40 percent of the American Opportunity credit is refundable.

Qualified Tuition Programs (”529 plans”). Distributions from qualified tuition programs (also known as “529 plans”) used to pay a beneficiary’s qualified higher education expenses are tax-free. For 2009 and 2010, ARRTA allows beneficiaries to use distributions from QTPs to pay for computers, laptops and computer technology, including internet access.

Child Tax Credit. The ARRTA increases the refundable portion of the child tax credit for both 2009 and 2010. For 2009 and 2010, the child tax credit is refundable to the extent of 15 percent of the taxpayer’s earned income in excess of $3,000.

Enhanced Earned Income Tax Credit. For 2009 and 2010, the ARRTA temporarily increases the Earned Income Tax Credit (EITC) for working families with three or more children. The new law (1) increases the credit to 45 percent of a family’s first $12,570 of earned income for families with three or more children and (2) adjusts the start of the EITC phase-out range upwards by $1,880 for joint filers, regardless of the number of children.

AMT Patch. The ARRTA boosts alternative minimum tax (AMT) exemption amounts for 2009. The new amounts are slightly higher than last year’s exemptions but much higher than the amounts they had been set to revert to had this remedial provision not been passed.

The 2009 exemption amounts are:

• $46,700 for individuals and heads of household; and
• $70,950 for joint filers and surviving spouses.

The new law also provides that for 2009 nonrefundable personal credits may offset both regular tax and the AMT.

Partial Exclusion of Unemployment Benefits. The ARRTA temporarily excludes up to $2,400 of unemployment compensation from a recipient’s gross income for 2009. Unemployment benefits are otherwise includible in a recipient’s gross income for tax purposes. As such, any unemployment benefits over $2,400 in 2009 will be subject to federal income tax.

Increased Transit Benefits For Workers. Beginning in March 2009, and effective for 2009 and 2010, the ARRTA increases the income exclusion for transit passes and van pooling to $230 per month.

Energy Incentives. Code Sec. 25C provides a tax credit for energy efficient improvements made to a taxpayer’s home. The ARRTA increases the Code Sec. 25C residential energy property credit to 30 percent (up from 10 percent), raises the maximum cap to a $1,500 aggregate amount for 2009 and 2010 installations, eliminates the pre-2008 $500 lifetime cap, and makes other modifications to the credit. Taxpayers can use the credit for insulation materials, exterior windows and doors, skylights, central air conditioning, and hot water boilers, among many other energy efficient improvements.

The ARRTA also removes the individual dollar caps under the Code Sec. 25D residential energy efficient property credit for solar hot water property, wind energy property and geothermal heat pumps. Moreover, if you are interested in an environmentally-friendly car, the ARRTA modifies the credit for plug-in electric vehicles, although they are not yet on the market.

If you have any questions about the individual tax incentives in the ARRTA, please contact our office.

American Recovery and Reinvestment Tax Act of 2009 extends/creates business tax breaks

The American Recovery and Reinvestment Tax Act of 2009 (ARRTA) provides more than $75 billion worth of tax benefits for business for 2009 and 2010, in addition to numerous individual tax breaks. This article highlights some of the valuable tax breaks for businesses in the new law.

Bonus Depreciation. The ARRTA extends bonus depreciation under the 2008 Economic Stimulus Act, allowing businesses to immediately write-off an additional 50-percent of the cost of qualifying depreciable property placed in service before 2010. The additional 50-percent first-year bonus depreciation applies retroactively to capital expenses incurred on or after January 1, 2009. Qualified property includes most types of new property, including equipment, computers, tractors, wind turbines and solar panels.

The ARRTA also extends through 2010 additional first-year bonus depreciation for property with a recovery period of 10 years or longer, for transportation property (for example, tangible personal property used to transport people or property, and for certain aircraft).

Note. Effective January 1, 2009, the ARRTA law also increases the regular dollar caps for new passenger vehicles placed in service after 2008 and before 2010 by $8,000 when bonus depreciation is claimed.

Code Sec. 179 Expensing. For 2009, the ARRTA extends the Code Sec. 179 expensing amounts, which had been increased by the 2008 Economic Stimulus Act. For 2009, the Code Sec. 179 expensing amount is $250,000 and the investment ceiling is $800,000.

Five-Year NOL Carryback. The ARRTA allows certain small businesses to elect a five-year carryback of net operating losses (NOLs) arising in 2008. Only qualified small businesses with average gross receipts of $15 million or less qualify for the longer carryback. Eligible businesses can elect to carryback 2008 NOLs three, four or five years. The new carryback treatment applies only to NOLs arising in tax years beginning or ending in 2008. Quick refunds apply if your business qualifies.

AMT/R&D Credits Election. Through 2009, the ARRTA temporarily extends the ability of businesses to accelerate the recognition of a portion of their accumulated AMT and research and development (R&D) credits instead of taking bonus depreciation. In effect, this allows an immediate cash refund for these credits.

Work Opportunity Tax Credit. Businesses can claim a Work Opportunity Tax Credit (WOTC) generally equal to 40 percent of the first $6,000 of wages paid to employees who are in one of nine targeted groups. The ARRTA adds (1) unemployed veterans and (2) disconnected youth to the list of targeted groups. The new categories apply to individuals who are hired and begin work in 2009 or 2010.

Cancellation of Debt Income. Under the ARRTA, eligible businesses can make an (irrevocable) election to recognize certain cancellation of debt income (CODI) ratably over a five-year period, beginning in 2014. The election applies to certain types of business debt repurchased by the business during 2009 and 2010.

S Corp Built-In Gain Period. Current law provides that if a C corporation converts to an S corporation the conversion is not a taxable event. However, the S corporation usually must hold its assets for 10 years after the conversion in order to avoid being taxed on any built-in gains that existed at the time of the conversion. For S corp sales of their C corp assets  in 2009 and 2010, however, the ARRTA temporarily shortens the holding period, from 10 to seven years, for sales of assets subject to the built-in gains tax imposed after such a conversion.

Qualified Small Business Stock. Pre-ARRTA law allowed noncorporate investors to exclude 50 percent of the gain from the sale of certain qualified small business stock (QSBS) held for more than five years. The ARRTA increases the exclusion to 75 percent for QSBS acquired after February 17, 2009 and before 2011. A “qualified small business” is one that does not have more than $50 million in assets and conducts an active trade or business.

Estimated Tax Payments. For individual taxpayers with income from small businesses, the ARRTA temporarily reduces 2009 required estimated tax payments for certain small businesses. Under the new law, 2009 quarterly estimated tax payments may now be based on 90 percent - instead of 100 percent - of the taxpayer’s 2008 returns. For purposes of the new provision, a “small business” is one that does not employ more than an average of 500 people, and the individual’s adjusted gross income is less than $500,000. The individual also must certify that at least 50 percent of the gross income shown on his or her return for the preceding tax year was income from a “small trade or business.”

Energy Incentives. A number of the energy tax incentives in the ARRTA are targeted to businesses. The ARRTA:

• Extends and modifies the Code Sec. 45 renewable production tax credit.
• Expands the Code Sec. 48 energy investment credit to include qualified small wind energy property.
• Allows the Code Sec. 48 investment tax credit to be claimed in lieu of the Code Sec. 45 production tax credit.
• Removes the individual dollar limits on certain energy tax credits for qualified small wind energy property, qualified solar water heating property, and qualified geothermal heat pumps.

If you have any questions about the business incentives in the ARRTA, please contact our office.

White House/Congress start work on economic stimulus package

Congress and the new Obama Administration are working to quickly enact a massive economic stimulus package to jump start the U.S. economy. Democrats in the House and Senate have unveiled an $816 billion stimulus package including roughly $275 billion in tax incentives. The fact that Democrats control both the House and the Senate should speed delivery of a final stimulus bill to the White House before the end of February.

Economic recovery

Coming into office, President Obama pledged to make an economic recovery his number one priority. The federal government will spend billions of dollars on infrastructure projects, in aid to state and local governments and in job creation programs, especially in alternative energy.

Second in size to the spending component of the stimulus bill is the tax cut package. Although Congress is still debating the number and scope of tax incentives, lawmakers are likely to settle on a mix of individual and business tax breaks.

Individual tax incentive

Individuals will likely benefit from a temporary payroll tax cut along with enhancements of existing tax breaks. Democrats have proposed a new Making Work Pay tax credit, which would reduce payroll withholding for lower and middle income wage earners. The credit would reach $500 for eligible single taxpayers and $1,000 for married couples. Democrats would also create a new partially refundable $2,500 tax credit for each year of post-secondary education, lower the floor for the child tax credit and enhance the earned income tax credit.

Similarly, Republicans in Congress have also proposed some individual tax cuts. Their proposals include repealing the alternative minimum tax (AMT) and increasing the child tax credit to $1,000.

Marginal tax rates

Seven years ago, Congress lowered the individual marginal tax rates and created the new 10 percent rate. The highest rate, at 39.6 percent gradually fell to 35 percent, where it is at today. The lower rates, however, are temporary and will expire after 2010.

Obama has promised to renew the lower rates for all but high income individuals. The top two old rates (39.6 and 36 percent) would return after 2010 if not sooner.

At this time, it is unclear if the economic stimulus bill will restore the top two old rates. Some senior Democrats in the House want the bill to immediately raise the top individual marginal tax rate to 39.6 percent. However, Republican opposition could postpone the increase until after 2010.

Business tax breaks

Unlike past tax cuts, this one is not expected to be heavy on business tax incentives. Congress will likely extend bonus depreciation and increased Code Sec. 179 expensing as well as provide for a five-year, rather than two-year, carryback of net operating losses. The latter provision would generate refunds for cash-strapped businesses.

Before taking office, Obama proposed a tax break for employers that create or retain jobs in the U.S. Obama appears to have backed away from this proposal after many lawmakers said it would be very difficult for the IRS to determine which employers would qualify for the tax credit.

Republicans are expected to push for a reduction in the corporate tax rate. During the campaign, President Obama supported lowering the top corporate tax rate in exchange for closing unspecified corporate tax “loopholes.”

Capital gains

Congress lowered taxes on capital gains and dividends in 2003 and renewed those cuts in 2006. The top rate on capital gains and dividends is 15 percent. A zero percent rate is available for individuals in the 10 and 15 percent income tax brackets. These lower rates are temporary and will expire after 2010. Although many Democrats in Congress are not keen on the lower capital gains and dividends tax rates, they are unlikely to push for an accelerated sunset date.

Energy

Consumers and businesses can look forward to enhanced and extended energy tax breaks. Congress is expected to significantly expand the current tax incentives that encourage the development and production of alternative energy, such as solar, biomass and wind energy. These tax breaks are connected to Obama’s plan to create new “green collar” jobs in alternative energy.

Retirement savings

Many individuals have seen the value of their retirement savings plummet in recent months. There is little Congress can do, if anything, to restore value to these accounts. However, it has already suspended required minimum distributions from IRAs, 401(k)s and similar arrangements for 2009 and could extend that treatment to 2010. Some lawmakers have also proposed relaxing the rules for early distributions from IRAs and similar plans so cash-strapped individuals can access these funds for non-retirement purposes.

If you have any questions about these or any economic stimulus proposals, please contact our office. We’ll keep you posted of developments.