Federal Tax Law Changes Effects on 2009 return filing and 2010 tax planning S. Kay Bell, tax journalist and author of“The Truth About Paying Fewer Taxes” Presented Jan. 12, 2010, to the Austin Chapter, Texas Society of Certified Public Accountants
Tax-writing History or Who’s to Blame? Article I, Section 7 of the Constitution of the United States provides: All Bills for raising Revenue shall originate in the House of Representatives; but the Senate may propose or concur with Amendments as on other Bills.
Continual Meddling • Congress, when it’s not fighting amongst itself, can never leave well enough alone. • From October 2008 to November 2009, one tax law – the first-time homebuyer credit – was changed three times. • The IRS lists more than two dozen individual tax return changes for this filing season. • An old Capitol Hill joke is that the official subtitle of every tax bill is The Accountants’ Full Employment Act. • Or maybe it’s not a joke. 80% of taxpayers last year hired a tax preparer or used tax software to complete their returns.
Astounding Tax Code Growth In 1913, CCH’s Standard Federal Tax Reporter needed 400 pages to discuss the Internal Revenue Code. Last year, it contained 70,320 pages. Any guesses as to the 2010 edition’s size?
Perpetual Procrastination • Compounding the problem of all the new laws we have to cope with each year is lawmakers’ tendency to wait until the last-minute … if they finally do get around to making changes. • Extenders are perennial problems. • Potential for disaster: In 2010, the estate tax died because of Congressional inaction.
First-time and move-up homebuyer credits Making Work Pay and government retiree credits Savings Bond purchases with refund money Tax-exempt unemployment compensation Roth rollover expansion Casualty loss limit increase American Opportunity Education Credit New auto sales tax deduction EITC tweaks for filers with three or more kids Energy-efficient home improvement credit No RMDs Second home sale exclusion limits New 1040 Forms L & M; Revisions to Schedules A & B Key New 2009 Tax LawsAffecting Individuals
Key New 2009 Tax LawsAffecting Businesses • Increased Section 179 expensing • Extension of bonus depreciation • Expanded net operating loss carryback • Exclusion of gain on the sale of some small-business stock • Reduced estimated tax safe harbor • COBRA continuation subsidy
Key New 2010 Laws … So Far • No more income limits for Roth IRA conversions • No more high-income taxpayer phase-outs • Homebuyer credit available for part of the year • Repayment of original first-time homebuyer $7,500 “credit” begins • Last chance for some energy-related breaks: hybrid vehicle and home energy-efficiency improvements • Domestic production activities deduction for certain businesses increased
Everlasting Extenders • Ostensibly temporary tax laws that are regularly extended, hence the name • Why not permanent? Short-term, relatively small budget costs are easier to offset, as the House is required to do. • And then we have the planning issues when they lapse or are passed late. Should I do this? Will that still be deductible when I file? Who knows?
Problems for AllWhen laws are extended at the very end of a tax year, or retroactively the next tax year, a vicious cycle is set in motion.
Laws that Lapsed in 2009:Popular Individual Extenders • IRC § 62(a)(2)(D) – Deduction for elementary and secondary school teachers and other educators • IRC § 63(c)(1) – Additional standard deduction for state and local real property taxes • IRC § 164 – State and local sales tax deduction • IRC § 165(h) – Deduction for personal casualty losses in federally declared disasters • IRC § 222 – Deduction for tuition and related expenses • IRC § 408(d)(8) – Allowance for tax-free distributions from individual retirement plans for charitable purposes
Laws That Lapsed in 2009:Estate Tax • “Throw Momma From the Train” • Planning issues • Retroactivity – Constitutional questions • Political battles – Committed anti-estate tax contingent not likely to make it easy for this law to be reinstated • Court battles probable
What’s on the Tax Horizon? • Health Care • Alternative Minimum Tax • “Creative” Revenue Options • Tax Day of Reckoning: 1.1.11 • Complete Tax Overhaul
Paying for Health Care • Various tax options • Businesses and individuals affected • Staggered effective dates
The AMT • 1969 loophole closer on wealthy (back then defined as $200,000 AGI) now affects more middle-class filers. • Complicated and costly to taxpayers who really aren’t its target. • Lip service to killing this parallel tax. • Raises too much money to eliminate; estimates range from $600 billion to $800 billion over 10 years.
AMT Geography 10 states, plus D.C., with highest percentage of total filers subject to alternative minimum tax: New Jersey, New York, Connecticut, California, District of Columbia,Maryland, Massachusetts, Rhode Island, Oregon, Minnesota and Virginia.
“Creative” Revenue Raisers or What Else Can We Tax? • Health care set the stage • Specific, dedicated taxes • Transaction tax, aka The Tobin Tax • Raking in Roth dough?
Health Care Proposals Opened the “Other” Tax Door • Surtax on the wealthy • Bo-Tax goes, Tanning Tax takes its place • “Sin” taxes – Sugared beverages are the latest fat tax target
Specific, Dedicated Taxes • Isolates the debate • Budgetary/tax response to line-item veto • Afghan War Surtax • Political posturing meets specific revenue stream • Mileage taxes • London has had a congestion zone vehicle tax since 2003 • The Netherlands’ per-kilometer tax takes effect in 2012 • Possibility of a U.S. federal per-mile tax floated earlier this year • Texas is contemplating a per-mile tax on drivers to replace the state’s current per-gallon fuel excise tax
The Tobin Tax • Named after James Tobin, the late American economist and Nobel laureate who in 1972 was the first to suggest a securities transfer tax to discourage currency speculation and penalize short-term trading. • Latest iteration – 0.25% tax on the sale and purchase of stocks, options, derivatives and futures. • Retirement accounts would be exempted. • Concern – The tax, especially in a struggling economy, would stifle growth. • Appeal – $150 to $300 billion/year.
Will the Roth IRA Survive? • Expanded traditional-to-Roth conversion eligibility will give the Treasury a short-term influx of tax revenue. • Uncle Sam is hoping most who do convert in 2010 choose to defer taxes into 2011 and 2012 since tax rates will likely be higher then. • Given the deficit situation, there’s speculation that Congress eventually will renege on Roth’s tax-free status, at least partially. • Most common prediction: A tax on Roth IRA distributions analogous to the tax on some Social Security benefits. • Precedent: Until 1983, Social Security benefits were tax-free.
Mark Your Tax Calendars:Big changes coming Jan. 1, 2011 Unless Congress acts: • Individual income tax rates will go from 10%, 15%, 25%, 28%, 33% and 35% to 15%, 28%, 31%, 36% and 39.6% • Capital gains tax rates that currently are 0% and 15% depending on AGI revert back to 10% and 20%. • Qualified dividends now taxed at lower capital gain rates will again be taxed at higher ordinary income rates. • Child credit falls from $1,000 per child to $500 per child. • The estate tax will be fully reinstated at pre-phaseout levels: a 55% rate and a $1 million exemption.
A Simplified Tax Code? • Last major change: “historic” 1986 Act • Bush 43’s Blue Ribbon Tax Reform Panel • DOA because of powerful real estate industry • Obama’s Economic Recovery Advisory Board • Missed December deadline; still “gathering information” • Flat Tax/National Sales Tax • Political divide, complicated by lobbyists for tax breaks • Practical difficulty: Income tax so woven into entire economy
Is there a solution? • Demand Congress do its job in a timely manner. • If lawmakers at least maketax law changes well in advance of expiration deadlines, everyone will be better equipped to deal with and plan for them. • Bottom line • Political expediency and revenue needs vs. sound tax policy
Internal Revenue Service http://waysandmeans.house.gov Ways and Means Committee http://waysandmeans.house.gov Senate Finance Committee http://finance.senate.gov Joint Committee on Taxation www.jct.gov Thomas/Library of Congress http://thomas.loc.gov CCH www.cch.com Tax Analysts http://www.taxanalysts.com/ Tax Foundation www.taxfoundation.org Treasury Department http://www.ustreas.gov Congressional Budget Office http://www.cbo.gov/ TIGTA http://www.treas.gov/tigta/ National Taxpayer Advocate http://www.irs.gov/advocate/ National Taxpayer Advocacy Panel http://www.improveirs.org WebCPA http://www.webcpa.com/ Accounting Web http://www.accountingweb.com/ Don’t Mess With Taxes http://dontmesswithtaxes.typepad.com/ Resources