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Individual Income Tax Update. for Heartland Regional Council of the IMA September 16, 2010 by Patricia S. Stoner, CPA The Whitlock Co., LLP. New Tax Laws Passed in 2010. Hiring Incentives to Restore Employment Act (P.L. 111-47) signed into law 3/18/10, known as the HIRE Act

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individual income tax update

Individual Income Tax Update

for

Heartland Regional Council of the IMA

September 16, 2010

by Patricia S. Stoner, CPA

The Whitlock Co., LLP

new tax laws passed in 2010
New Tax Laws Passed in 2010

Hiring Incentives to Restore Employment Act (P.L. 111-47) signed into law 3/18/10, known as the HIRE Act

Patient Protection and Affordable Care Act (P.L. 111-148) signed into law 3/23/10, known as PPACA or Health Care Act

Health Care and Education Reconciliation Act (P.L. 111-152) signed into law 3/30/10, known as the Reconciliation Act

hire act individual provisions effective 3 18 2010
HIRE Act - Individual ProvisionsEffective 3/18/2010

Individuals with foreign assets

  • New reporting, in ADDITION to Form TD F90-22.1 (reporting aggregate assets over $10k)
  • Must attach disclosure to their 1040 if aggregate value of all “specified foreign financial assets” exceeds $50k
  • Penalty for failure to disclose is $10k per year but can increase to $50k per year if IRS notifies you of failure to disclose
hire act individual provisions effective 3 18 20101
HIRE Act - Individual ProvisionsEffective 3/18/2010

“Specified foreign financial assets” are:

  • Depository or custodial accounts at foreign financial institutions
  • If not held in an account at a financial inst. :
    • Stocks or securities issued by foreign persons
    • Any other financial instrument/contract held for investment that is issued by or has a counterparty that is not a US person
    • Any interest in a foreign entity
hire act individual provisions effective 3 18 20102
HIRE Act - Individual ProvisionsEffective 3/18/2010

Individual Ownership in Foreign Trusts

  • Any US person treated as an owner of any portion of a foreign trust must provide info as IRS may require with respect to the trust

in addition to ensuring that the trust complies with “its” reporting obligations.

health care act of 2010 individual issues 2010
Health Care Act of 2010Individual Issues – 2010

Adoption Tax Credit

Extended through 2011

  • Increased by $1,000 to $13,170

per eligible child

  • AGI phase-out amounts have been extended
    • (credit is ratably reduced from $182,520-$222,520 rather than old limits of $75,000-$115,000)

Is now a refundable credit

expiring tax provisions after 12 31 10
Expiring Tax ProvisionsAfter 12/31/10

“Making Work Pay” credit

Lesser of

  • 6.2% of individual’s “earned” income
  • $400 ($800 for joint return)
      • Phased out at rate of 2% of the modified AGI above $75,000-$95,000 ($150,000-$190,000 joint)

NO $250 payment to SSA, RRB, VA recipients

in 2010 (was a “one-time” only payment in 2009)

expiring tax provisions after 12 31 101
Expiring Tax ProvisionsAfter 12/31/10

Earned Income Tax Credit (EITC):

ARRA of 2009 increased the percentage for families of 3 or more qualifying children to 45%

Increased threshold phase-out amounts for MFJ to $5,000 above the phase-out amounts for singles, surviving spouses & heads of h/h

expiring tax provisions after 12 31 102
Expiring Tax ProvisionsAfter 12/31/10

Refundable Child Tax:

Prior law – refundable portion

of child tax credit to 15% of the

earned income in excess of $12,500

New law ARRA - eased this earned income to $3,000 from $12,500 for 2009 and 2010 only

Credit is $1,000 per child, but reverts to $500 per child at end of 2010

expiring tax provisions after 12 31 103
Expiring Tax ProvisionsAfter 12/31/10

American Opportunity Tax Credit:

(Replaced Hope & Lifetime Learning credits)

  • Maximum credit increased from

$1,800 to $2,500 per student

per year

  • Credit computation:
    • 100% of first $2,000 of qualified tuition & related expenses AND
    • 25% of the next $2,000 of qualified expenses
  • 40% of credit is refundable
    • unless the child is subject to kiddie tax
expiring tax provisions after 12 31 104
Expiring Tax ProvisionsAfter 12/31/10

American Opportunity Tax Credit:

  • Expanded the credit to apply to “course materials” as well as tuition and fees
    • “Course materials” are: books, supplies & exp. needed for course of study whether or not purchased from educ. institution as condition of enrollment or attendance
  • Available for first four years of college
  • AGI phase-out increased from
    • $50k-$60k to $80k-$90k Single filers
    • $100k-$120k to $160k-$180k Joint filers
  • Credit may be claimed against AMT
expiring tax provisions after 12 31 105
Expiring Tax ProvisionsAfter 12/31/10

Educational expenses under Sec 529 plans:

Qualified higher education expenses:

-Tuition - Fees

- Books - Supplies

- Exp. req’d for enrollment - Spec needs expenses

- Room & board

New law for 2009 & 2010 only:

  • Allows purchase of any:
    • Computer technology (educ. software only)
    • Computer equipment
    • Internet access or related services
expiring tax provisions after 9 30 10
Expiring Tax ProvisionsAfter 9/30/10

First-time homebuyer

credit eased

(Under ARRA and Worker Acts in 2009)

  • Must have been under contract by 4/30/10
  • May have claimed on 2009 return if purchased in 2010, otherwise, amend or claim on 2010 return
  • Due date for closing extended from 6/30/10 to 9/30/10 (2010 Homebuyer Assistance Act)
expiring tax provisions after 4 30 2011
Expiring Tax ProvisionsAfter 4/30/2011

First-Time Homebuyer

Tax Credit – Armed Services

  • If any armed services taxpayers are overseas, they have an extension of one year on these rules
    • Signed contract for purchase by 4/30/2011
    • Closed on purchase & occupy by 6/30/2011
going going gone in 2009
Going, Going, Gone In 2009

Exclusion of first $2,400 of unemployment benefits received

Non-itemizers sales tax deduction for car purchase

Most individual Midwest Disaster relief items unless Congress includes in extenders

gone in 2009 or are they really
~Gone~ In 2009 or Are They Really?

Unless Congress passes a bill that extends these for 2010, they are gone

Follow American Jobs and Closing Tax Loopholes Act of 2010 (H.R.4213) or others for passage

Itemizers sales tax deduction vs. state income tax deduction

Above-the-line deduction for higher education expenses (instead of Hope/Lifetime Learning credits)

gone in 2009 or are they really1
~Gone~ In 2009 or Are They Really?

More to watch for extender legislation ….

Above-the-line deduction for educator expenses up to $250

For non-itemizers, additional standard deduction for state & local real estate taxes

Certain farm equipment can no longer be depreciated over 5 years

gone in 2009 or are they really2
~Gone~ In 2009 or Are They Really?

More to watch for extender legislation ….

Tax-free IRA distributions up to $100,000 to eligible charities

Contributions of capital gain real property for conservation purposes

expiring tax provisions after 12 31 106
Expiring Tax ProvisionsAfter 12/31/10

Non-Business Energy Tax Credits

  • Homeowners who install:
    • Insulation
    • Exterior doors and windows
    • Exterior skylights
    • Electric heat pumps
    • Central air conditioner
    • Water heaters
    • Oil furnaces
    • Hot water boilers
expiring tax provisions after 12 31 107
Expiring Tax ProvisionsAfter 12/31/10

Non-Business Energy Tax Credits

Confirm they meet the revised required standards for energy efficiency for credit

Credit is 30% of expenditures

Aggregate cap of $1,500 credit for energy property placed in service 1/1/2009 and before 1/1/2011

expiring tax provisions after 12 31 108
Expiring Tax ProvisionsAfter 12/31/10

Qualified mortgage insurance premiums deductible as qualified residence interest expense (contracts issued after 12/31/06)

Core Midwest Disaster area still has until 12/31/10 to use the special five-year carryback period (instead of 2 yrs) for a “Qualified Disaster Recovery Assistance loss”

expiring tax provisions after 12 31 109
Expiring Tax ProvisionsAfter 12/31/10

Section 179 Provisions

Expensing elections extended through 2010

  • $250,000 expense maximum
    • Phase-out maximum of $800,000 in

purchases during year

  • Election can be revoked by taxpayer for any tax year 1/1/2003 through 12/31/2010
    • After that, can only be revoked with IRS’ consent
  • Off-the-shelf computer software is included
expiring tax provisions after 12 31 1010
Expiring Tax ProvisionsAfter 12/31/10

Capital Gains:

Lower CG tax rates of 0% and 15% set to expire

Those rates will return to 10% and 20%

Qualified Dividend Income:

These dividends have been taxed at “capital gain” tax rates of 0% and 15%

Beginning 1/1/2011, will be taxed at higher “ordinary income” tax rates again

roth iras for 2010
Roth IRAs for 2010

For 2010, the $100,000 AGI limit for making Roth IRA conversions from traditional IRAs removed

Unless elected otherwise:

The tax on this conversion will be paid:

50% on your 2011 return

50% on your 2012 return

(But at 2010 ordinary income tax rates)

health care act of 2010
Health Care Act of 2010

“Health Care Act”

includes

Patient Protection and Affordable Care Act (PPACA)

Health Care and Education Reconciliation Act

(which amends sections of PPACA)

health care act of 2010 individual issues 2011
Health Care Act of 2010 –Individual Issues - 2011

W2 Forms For Calendar Yr 2011

(issued in Jan 2012)

Updated: Per IRS notice 2010-69, this will NOT be mandatory for 2011!

  • Your employer will report the value of health insurance premiums

paidforyou during

the year

  • Does NOT make this

benefit taxable!

health care act of 2010 individual issues 20111
Health Care Act of 2010 –Individual Issues - 2011

Effective beginning 1/1/2011

  • Ban on OTC medication

reimbursed from:

    • Flexible spending accounts (FSAs)

through a cafeteria plans

    • Health savings accounts (HSAs)
    • Medical savings accounts (MSAs)
    • Health reimbursement arrangements (HRAs)

Unless the physician formally prescribes the OTC medications

health care act of 2010 individual issues 20112
Health Care Act of 2010 –Individual Issues - 2011

Health Savings Accounts

Effective beginning 1/1/2011

  • Penalties increase to 20%
    • for non- medical distributions
      • From HSAs (health savings accounts)
      • From Archer MSAs (medical savings accounts)
health care act of 2010 individual issues 2013
Health Care Act of 2010 –Individual Issues - 2013

Medicare Payroll Tax

Effective in 2013

  • New tax 0.9% on employee wages
    • In additionto 1.45% Medicare tax withholding
    • Not matched by employer
    • 401K (deferred comp) are EXEMPT*
  • Employer must:
    • Withhold on wages over $200,000 for an employee
health care act of 2010 individual issues 20131
Health Care Act of 2010 –Individual Issues - 2013

Medicare Payroll Tax

  • Wage threshold amounts :
    • $200K for single
    • $250K for married filing jointly
    • $125K for married filing separately
  • Individuals must:
    • Compute 0.9% tax on aggregate wages on Form 1040
    • Any balance due, pay with 1040
    • Consider higher estimated tax payments
health care act of 2010 individual issues 20132
Health Care Act of 2010 –Individual Issues - 2013

Medicare Payroll Tax

EXAMPLE:

Jack has $200k W-2 from XYZ Corporation

Sally, his wife, has $210k W-2 from ABC Corporation

XYZ withholds no 0.9% tax:

$200,000 – 200,000 = no excess, no tax

ABC withholds 0.9% tax:

($210,000 – 200,000) = $10,000 excess x 0.9%

= $90 Medicare tax withheld

health care act of 2010 individual issues 20133
Health Care Act of 2010 –Individual Issues - 2013

So -- Married filing jointly on 1040

Compute their additional tax:

Jack’s W-2 $200,000

Sally’s W-2 210,000

Total wages 410,000

Threshold for MFJ 250,000

Taxable portion 160,000

x _ 0.9%

Total tax 1,440

Less (Sally’s withholding) - 90

Balance due 04/15 $ 1,350

health care act of 2010 individual issues 20134
Health Care Act of 2010 –Individual Issues - 2013

Medicare Tax on “Net Investment Income”

Effective in 2013

3.8% Medicare tax in ADDITION to all other Medicare taxes

Tax is based on “net investment income” for

- individuals

- estates

- trusts

health care act of 2010 individual issues 20135
Health Care Act of 2010 –Individual Issues - 2013

Medicare Tax on Net Investment Income

Effective in 2013

What is “Net Investment Income”?

  • Interest income
  • Dividend income
  • Annuity income (taxable portion)
  • Rent income
  • Royalty income
  • Net gains (ordinary and capital) sale of property
  • Passive investment income
  • Commodity trading
health care act of 2010 individual issues 20136
Health Care Act of 2010 –Individual Issues - 2013

Medicare Tax on Net Investment Income

Exemptions:

  • Sale of a personal residence
  • Gains on sale of business if “active participation”
  • Interest income on municipal bonds
  • IRA, qualified retirement plan distributions
  • Income subject to self-employment tax
  • Nonresident aliens
health care act of 2010 individual issues 20137
Health Care Act of 2010 –Individual Issues - 2013

Medicare Tax on Net Investment Income

Tax computed on the lesser of:

An individual’s “net investment income”

OR

the excess of the individual’s modified adjusted gross income (AGI) over threshold amounts

health care act of 2010 individual issues 20138
Health Care Act of 2010 –Individual Issues - 2013

Medicare Tax on Net Investment Income

  • Threshold amounts are the same as the 0.9% Medicare payroll tax:
    • $200K for single
    • $250K for married filing jointly
    • $125K for married filing separately
health care act of 2010 individual issues 20139
Health Care Act of 2010 –Individual Issues – 2013

Medicare Tax on Net Investment Income

EXAMPLE:

Sally is single:

ABC Corp W-2 $ 180,000

XYZ Corp W-2 50,000

Total wages 230,000

Interest and dividend income 250,000

Modified AGI $ 480,000

health care act of 2010 individual issues 201310
Health Care Act of 2010 –Individual Issues - 2013

Medicare Tax on Net Investment Income

She will owe the lesser of:

Net investment income $250,000

x 3.8%

$ 9,500

OR

Modified AGI $480,000

x__ 3.8%

$ 18,240

health care act of 2010 individual issues 201311
Health Care Act of 2010 –Individual Issues - 2013

Medicare Net Investment Income Tax COMBINED with New Payroll Tax

Sally owes $9,500 for NII Medicare Tax, plus the 0.9% Medicare payroll tax calculated below:

Total wages (180k + 50k) $ 230,000

Less threshold for single - 200,000

30,000

x 0.9%

Medicare payroll tax due $ 270

So, Sally owes $9,770 for both taxes

health care act of 2010 individual issues 201312
Health Care Act of 2010 –Individual Issues - 2013

New: Limits on Cafeteria Plans

Effective 1/1/2013

  • OLD LAW:
    • No limit on election amount of FSA (cafeteria plans)
  • NEW LAW:
    • $2,500 limit per year
    • Amount indexed for inflation after 2013
health care act of 2010 individual issues 2014
Health Care Act of 2010 –Individual Issues - 2014

The “Mandate” is to get health insurance for everyone in the U.S.

  • Beginning 2014, individuals without any health insurance must pay a penalty to IRS
      • Applicable dollar amount(s) of penalty is:
        • 2014 is $ 95 per person
        • 2015 is $ 325 pp
        • 2016 is $ 695 pp
health care act of 2010 individual issues 20141
Health Care Act of 2010 –Individual Issues - 2014

Individual Health Insurance Mandate:

Penalty amount is lesser of:

  • Flat dollar amount (such as $95 pp)

OR

  • Percentage of income (excess over filing requirement threshold)
    • 1.0% for 2014
    • 2.0% for 2015
    • 2.5% for 2016
health care act of 2010 individual issues 20142
Health Care Act of 2010 –Individual Issues - 2014

Individual Health Insurance Mandate:

  • Per person claimed on that return
    • 50% the rate if under age 18
  • Flat dollar amount is limited to 300% of the applicable dollar amount for the calendar year
    • (= 3 adults or 2 adults & 2 kids)
health care act of 2010 individual issues 20143
Health Care Act of 2010 –Individual Issues - 2014

Individual Health Insurance Mandate:

  • Doesn’t apply if without health insurance 3 months or less during tax year

Computed pro-rata for # of months you did

NOT have coverage

    • ($95 x 1/12 x # of mos. without coverage x # of persons)

IRS has limited collection methods for this penalty

  • IRS can offset refunds or credits

Criminal penalties for non-compliance are waived

things to think about
Things to Think About

Remember to watch current legislation which may effect 2010 taxes (the “extenders” bills for items that expired in 2009)

Get your physician’s written prescription for any OTC medications before you make your FSA election or before you purchase any in January 2011

more things to think about
More Things to Think About
  • Remember the pre-EGTRRA higher ordinary income tax rates (and CG rates) will become effective after 12/31/10 unless Congress acts, so consider potentially accelerating income from 2011 to 2010
    • Top four brackets for 2011:
      • 39.6%, 36%, 31% and 28% instead of
      • 35.0%, 33%, 28% and 25%
more things to think about1
More Things to Think About
  • Good to know - when planning any Roth IRA conversions in 2010, the tax will be computed at 2010 rates and just paid in 2011 & 2012
  • If have FSAs, consider doing elective surgeries like Lasik eye surgery, orthodontics, etc. prior to 1/1/2013
things to think about1
Things to Think About

OMG! These tax laws!

Is that all?

Probably not, but that’s all we have time for….

any questions
Any Questions?

Thanks for your time today -

Enjoy the rest of your conference!

My contact information is:

Patricia Stoner, CPA

The Whitlock Co., LLP

3271 E. Battlefield Suite 300

Springfield, MO 65804

417-881-0145 phone; 417-881-1016 fax

pstoner@whitlockco.com