New Tax Law Means Some Will Have To Wait Until At Least February To File 2010 Tax Returns

The IRS released an announcement on their website http://www.irs.gov/ December 23 that states that while many taxpayers will be able to file when they normally do, others will have to wait while the IRS reprograms its computers to allow for some of the provisions in the tax law signed by President Obama December 17.

The affected tax filers include those who wish to claim any of the following deductions on their tax returns:

• The Higher Education Tuition and Fees Deduction covering up to $4,000 in tuition and fees paid to a post-secondary institution.  This is claimed using Form 8917 and can particularly help people who don't qualify for education credits or who live in a state where the deduction will reduce state tax as well as federal tax and may thus be worth more than the credit.  Those who claim the American Opportunity Tax Credit or the Lifetime Learning Credit are not impacted by the delay described here.
• The Educator Expense Deduction, which allows kindergarten through 12th grade educators to deduct up to $250 in out of pocket expenses directly on Form 1040 or 1040A without itemizing deductions.
• Everyone who files Form 1040 Schedule A to itemize deductions such as mortgage interest, state and local income, sales, and/or property taxes, charitable contributions, employee business expenses, and more.

More information is available in the IRS announcement available at http://www.irs.gov/newsroom/article/0,,id=233449,00.html?portlet=7

Sales Tax Deduction Reinstated in the Tax Law Passed Last Week

The big news of last week's tax law is that taxes are not going up January 1.  But there are other plot lines to the story, one of which is there are several tax deductions that previously expired at the end of 2009 that have now been extended for two years - 2010 and 2011.

This gives you some planning opportunities in the last few days of 2010 that weren't available a week ago.  One of these is the state and local sales tax deduction.  If you have been considering buying a "big ticket" item anyway, this might make it a little easier now.

Here are some of the choices you have with this deduction:

• You can itemize deductions and include the sales tax you paid, if that is higher than the state income tax you paid.
• If you live in a state that does not have sales tax, but charges fees based on the value of a vehicle purchased, you can claim those on the sales tax line as an itemized deduction.
• If you don't itemize deductions, you can file Schedule L to get a larger standard deduction based on your purchase of a vehicle.
• If you use the car for business you can include the sales tax and/or fees paid in the basis of the vehicle purchase price and depreciate it, including several possible provisions for accelerating much of the deductions into 2010.

There can be a big difference with each choice, especially if you factor in the possible effects on your state tax return and alternative minimum tax.  It is worth the time it takes to calculate it several ways to see which one is best for you.

Of Course, There Is Much More To Discuss

Come back often, I'll try to talk about it in plain English and give some planning ideas YOU can use!

Get Your Tax or Financial Questions Answered In A Future Blog Post 

I choose topics for my blog posts based on the questions I receive most frequently from you.  I appreciate your input!  Feel free to comment at http://www.dougbeecherstaxandmoneyblog.blogspot.com/

Important Note!   The information in this article is intended to inform you of some of the financial opportunities provided in the tax laws or elsewhere.  These laws are very complex and thus this article is not intended to give you specific advice for your personal situation.  If you need such advice, please contact a qualified professional.

© 2010, Doug Beecher, MBA, CPA all rights reserved. This article, either as a whole or in part, may not be reproduced or transmitted in any form without the prior written permission of the copyright holder. When such permission is granted, the user must state that the material was used by permission of the copyright holder.

The Long Awaited Tax Law Passed (14 Days Before Year-End!)

It's official.  Early this morning, the Congress approved the "Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010".  President Obama signed it into law later in the day.

It's been publicized as "extending the Bush tax cuts", like the Government is doing us some kind of huge favor.  Federal income taxes range from 10% to 35%.  Add in social security, medicare, and state taxes, and the range goes up to something more like 20% to 40%.  This law simply keeps those rates at those levels and didn't allow them to increase.  Thank goodness!  Most of us have a hard enough time making ends meet as it is without having even less left after taxes to do it with.

In Addition To Preserving Most 2010 Tax Rates There Is One Tax Reduction For 2011

For one year, 2011, it actually does cut taxes for most people -- those who are employed will see 2% less taken from whatever they earn (up to an income maximum of $106,800).  It will have the same effect as an immediate 2% raise beginning with your first paycheck in January, assuming the computers figuring your paychecks can be reprogrammed that quickly (Congress didn't leave much time for that, did they?).  I'm actually confident they'll still make it in time ...

2011 and 2012 Might Be A Good Time To Sell Assets To Generate Cash

For those in the 10 and 15% federal tax brackets (meaning less than $34,500 of taxable income (after deductions, so actual income can be somewhat higher) for single folks and $69,000 of taxable income for married couples filing a joint tax return), you could sell assets and get back your basis (generally what you paid for it) tax free plus any gain would also have zero federal income tax due, if you sold by December 31, 2010.  This deadline has been extended until December 31, 2012, and will be a real help to a lot of middle income people.

Lower (Or Zero) Qualified Dividend Tax Rate Extended

In addition, with interest rates on bank accounts so low, some people have been putting their savings into select stocks that pay good dividends.  Of course, that's the stock market, and you have to be careful with that, but there is also a tax benefit that has been extended here.  The same zero federal income tax on capital gains I just mentioned has been extended two years until the end of 2012 for qualified dividend income, but only for people in the lowest two tax brackets.  (Everyone else will pay 15% federal tax, and regardless of income, most states will add their tax to that)

Of Course, There Is Much More To Discuss

Come back often, I'll try to talk about it in plain English and give some planning ideas YOU can use!

Get Your Tax or Financial Questions Answered In A Future Blog Post 

I choose topics for my blog posts based on the questions I receive most frequently from you.  I appreciate your input!  Feel free to comment at http://www.dougbeecherstaxandmoneyblog.blogspot.com/

Important Note!   The information in this article is intended to inform you of some of the financial opportunities provided in the tax laws or elsewhere.  These laws are very complex and thus this article is not intended to give you specific advice for your personal situation.  If you need such advice, please contact a qualified professional.

© 2010, Doug Beecher, MBA, CPA all rights reserved. This article, either as a whole or in part, may not be reproduced or transmitted in any form without the prior written permission of the copyright holder. When such permission is granted, the user must state that the material was used by permission of the copyright holder.

Still Waiting For An Answer on 2011 Tax Rates … The Political Process of Today

By Joshua K. Beecher, Guest Blogger

I wish I could be describing for you some highlights of tax law changes for 2011 to help with your year-end planning.   As you undoubtedly know, this subject is still being argued strenuously by all concerned, in spite of the “Tax Deal” that President Obama made with Republican leaders on Capitol Hill this week to address the expiring tax cuts put into place when Bush was in office.  It matters not which side of the aisle you find yourself, and what your personal thoughts are on the “Tax Deal” itself. 

Rather than debate the merits of whether or not those tax cuts should have been extended or not, I wish to focus on the process itself and how truly counterproductive Washington has become.

First we have the Republicans who started playing the “game” a few weeks ago when they stated that they would no longer listen to, vote on, or conduct any business (regardless of its merits or whether or not it was of benefit to the nation) at all until the issue of the tax cuts was addressed and settled.  Continue that same sentiment into last week, and the Senate Republicans shot down a bill that would maintain the tax cuts for anyone making under $250,000 a year; not only were they not going to conduct any business until the issue was addressed, but they weren’t going to view anything acceptable unless it was just an overall extension of the cuts as is.

Now enter the Democrats, many of whom are on their way out the door come January, and in no mood to play the Republicans’ game.  They choose to ignore the Republicans’ threats and hope to strike a deal on their terms. 

Not wanting to be left out of the fun, President Obama and the White House enter the scene over the weekend.  During his campaign, Obama swore off all errant moves made by Bush, and promised to correct our course; many Democrats of course believing this was the death sentence to Bush’s tax cuts.  However, coming off humiliating losses last month on Election Day, Obama eyes his future, and attempts to seize control once again.  He sees the opportunity to cut a deal (to bolster his long-term prospects), and does so; with the caveat of extending out unemployment payments to the millions receiving them across the country.

So, in summary, where does that leave us today?  Well, today Obama is attempting to sell the bill to his very own party members in Congress stating that it would be foolhardy and “borderline immoral” to allow benefits to run out for the long-term jobless.  This is supposed to be a deal in regards to the tax cuts, yet all the White House wants to discuss is the victory in protecting unemployment benefits for the “long-term” jobless.  In addition, he does toss in the fact that raising taxes on the middle class would be foolish at this time as well, but the Republicans are of course to blame for the fact that the “rich” are once again off the hook.  House Democrats are now saying they want to shoot the bill down for the fact that the President gave up too much; that while there should be compromise this is not a good representation of it.  And finally the trusty Republicans were so desirous to show their constituents that they protected these most cherished tax cuts that were set to expire that they agreed to some truly steep concessions on the side of unemployment benefits and social security cuts.  Everyone has their good news to spin in their favor, and everyone has their ability to demonize and place blame on the other. 

No longer do we discuss what’s truly good for the nation in Washington, we rather attempt to ensure political careers, and make sure the other guy looks bad (trying to make themselves look good by comparison.)

One side note to further illustrate the point.  Back in the stimulus package of 2009, the Federal Government changed a tax credit of up to 30% on the construction of commercial renewable energy projects to a grant which could be paid in cash 2 months after the completion of the project.  You have probably never heard of this seemingly meaningless piece of legislation, and you are further probably not aware that this grant program is set to expire at the end of the year along with the much touted Bush tax cuts.  Why does this have anything to do with our current discussion you might ask?  Well, everything really.  According to research and reports put out by the Solar Energy Industries Association (SEIA) that grant has been enormously successful in creating jobs, not to mention in furthering our independence in the energy sector. 

Many companies attempting to gain financing for these types of projects are non-profit entities, and as such must come to the table with what’s called “tax equity”.  Another major fallout in Wall Street’s collapse was financing for these projects due to the lack of a market for “tax equity”; however, these grants close that gap, and have been the main driver for the growth experienced in the sector since being put into place in February 2009.  Since their inception, the program has provided $1.3 billion to 1,170 solar projects across 42 states, as well as providing $15 billion to 211 wind-power developments in 38 states.  SEIA’s research shows that with solar jobs alone this growth as increased jobs (across the nation) by over 100% from 46,000 workers in 2009 to 93,000 in 2010.  (No data is provided on wind-power related jobs created over the same time period, but one can assume that the results would be similar.)

This is just one of many examples demonstrating how Washington continues to miss the mark on truly discussing and enacting real legislation to assist the American people.  Here is something that supports the private sector and private development, that doesn’t require a public subsidy once in place, is creating jobs at a huge growth rate and increasing our ability as a nation to cut ties to our dependence on foreign oil supplies for our energy needs; however, it’s something that no one wants to discuss in Washington (even though it’s supposed to be an important initiative of the President.)  Over this past weekend, Senate Finance Committee Chairman Max Baucus proposed a one-year extension to the program, and was shot down.

Again, I do not wish to say that the tax cuts were not something important to discuss and extend (I’m of the belief that they are a good thing and that ending them now would also end whatever fragile economic recovery is underway).   However, what cost did we pay to maintain those tax cuts, and was the cost truly worth it? 

·         Article in the Los Angeles Times on the renewal of the Federal Treasury Grant Program: http://latimesblogs.latimes.com/technology/2010/12/federal-treasury-grant-program-nearing-expiration-solar-and-wind-power-industry-urging-renewal.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+TheTechnologyBlog+%28Los+Angeles+Times+Technology+Blog%29

·         Report from SEIA on the job growth creating by the Fed’s Grant Program: http://www.seia.org/galleries/FactSheets/Factsheet_TGP.pdf

·         SEIA report showing the widespread benefits to many states of the Fed’s Grant Program: http://www.seia.org/galleries/pdf/TGP_Awards_12.7.10.pdf

·         Discussion of Obama’s uphill battle he faces in selling the Democrats on the “Tax Deal”: http://news.yahoo.com/s/ap/us_tax_cuts

·         Lastly, very interesting op-ed piece on the long-term (macro view if you will) effects that social networking is having, and will continue to have, on our society.  Would love your thoughts and feedback on what you think of what they label the “Zuckerberg Revolution”: http://www.latimes.com/news/opinion/commentary/la-oe-gabler-zuckerberg-20101128,0,7889675.story

Get Your Tax or Financial Questions Answered In A Future Blog Post 

I choose topics for my blog posts based on the questions I receive most frequently from you.  I appreciate your input!  Feel free to comment at http://www.dougbeecherstaxandmoneyblog.blogspot.com/

Important Note!   The information in this article is intended to inform you of some of the financial opportunities provided in the tax laws or elsewhere.  These laws are very complex and thus this article is not intended to give you specific advice for your personal situation.  If you need such advice, please contact a qualified professional.

© 2010, Joshua K. Beecher, all rights reserved. This article, either as a whole or in part, may not be reproduced or transmitted in any form without the prior written permission of the copyright holder. When such permission is granted, the user must state that the material was used by permission of the copyright holder.

The Cost and Benefits of Economic Rescue In This Week’s News

By Joshua K. Beecher, Guest Blogger

Editor's Note:  The first five posts in this blog focused on changes in the tax law that are currently scheduled to occur.  As this is a tax and money blog, we have invited Joshua K. Beecher to comment on money news of the past week, particularly as it relates to the current status of the cost and effectiveness of the economic stimulus and bailout activities.

This past week was an interesting one in terms of major figures in the financial world making very public statements.  Ben Bernanke, head of the Federal Reserve Bank, while in Germany this week, publicly defended the Fed’s decision to pump an additional $600 billion into the financial system by buying up U.S. Treasuries; claiming that the persistent high un-employment rate justified the action.  For those who follow finances at all know that this is a very unusual move for the Federal Reserve period, let alone its head.  Since when did it ever attempt to “publicly” explain their reasoning behind any decision?  And more importantly, since when did its head publicly call out China (and other emerging economies mind you) in regards to suppressing their currency value right in line with the White House’s administration?  Certainly another disturbing item that makes you wonder how politically neutral the Fed truly is.

As interesting as Mr. Bernanke’s speech was, even more interesting is the Op Ed piece that Mr. Warren Buffett wrote into the New York Times, and which they published this past Wednesday.  He goes on to praise the efforts of a litany of department heads: Fed Chairman Bernanke, Treasury Secretaries Henry Paulson and Tim Geithner, etc. stating that they acted with “courage and dispatch.”  No details were provided in his article on the costs and/or benefits of the government’s various rescue efforts, but it does make you wonder.  Is the true cost to U.S. taxpayers for the bailout the pittance they would have us believe?

One of the more interesting websites to check out on the topic is one entitled ProPublica (bailout.propublica.org).  On their site, you can track everything that has been paid out from the government to the various entities that have received assistance.  You can also track how much of that money has been paid back.  As of this very moment, a total of $546 billion has been spent, loaned or invested by the Government, and a total of $264 billion of that has been returned and paid to the Treasury as interest, dividends, fees or to repurchase their stock warrants.  This leaves $282 billion outstanding which is far less than the publicly touted cost of the Troubled Asset Relief Program (TARP) for banks which alone was supposed to cost $700 billion.  In addition, this figure is likely to come down even further as more banks continue to make repayments.

Earlier this spring, Mr. Geithner predicted that TARP (along with assistance for GM, Chrysler and homeowner’s facing foreclosure) would cost roughly $119 billion, once everything was paid back that would be repaid.  Fannie Mae and Freddie Mac would add an additional $85 billion, and with the government actually standing to make money on the Fed’s finance programs for the banks, to the tune of $115 billion, that left the government’s total rescue tab at a mere $89 billion.  Most would agree that this is a very small price to pay to avoid the financial Armageddon and collapse to which we were headed, but is this truly the end of the story?  It is incredibly difficult to have a full and exact accounting of the entire rescue effort given how wide spread the government’s efforts were, but I’d like to take a look at just a few of the intangibles that certainly paint the picture a little differently than what our Washington leaders (and those like Mr. Buffett) would have us believe.

First up is an interesting take from a New York Times financial columnist, Gretchen Morgenson, who back in April of this year began to question the numbers being touted by Treasury Secretary Tim Geithner and Co.  She points out that the Treasury’s numbers leave out the effects of the Fed’s near-zero interest rate policy, which of course was put into place originally to increase lending.  However, the fact of the matter is that it punishes investors and heaps mountainous profits and benefits on the banks.  Through this policy, the banks have been able to pay depositors next-to-nothing while taking that money and loaning it out.  Considering the fact that the average credit card rate in the nation is 14% you can see how the profits add up quickly.  There is no simple way to calculate a figure for this transfer of wealth to banks, but Morgenson calls it “enormous.”

Next let’s take a look at the overlooked losses the Federal Deposit Insurance Corp (FDIC) has accrued by taking on 43 failing banks this year alone.; total cost to the Insurance fund stands at $6.65 billion.  While that fund is financed by bank fees, what of the loss-sharing arrangements the FDIC was forced to make to convince healthy banks to buy up troubled assets from failing ones?  Christopher Whalen, the editor of the Institutional Risk Analyst (a weekly newsletter produced by Institutional Risk Analytics), expects to see that figure top $400 billion when all the dust settles and all is said and done.

And while we’re at it, let’s not stop there.  TARP was also designed to give the banks a reprieve and instant cash injection by changing long-standing accounting rules to allow them to maintain bad assets on their books at unrealistic levels (Mr. Whalen has labeled this provision as “extend and pretend.”)  This portion of TARP is still ongoing as of yet those toxic assets’ true value (and losses) have not been absorbed on the banks’ balance sheets.  This of course helps explain why many banks have been so hesitant to loan out any money, which in turn has prolonged the economic downturn.  As with all these “intangibles” there’s really no real way to calculate the total cost, but Mr. Whalen has said, “The refusal of the Washington political class to address the issue of bank insolvency quickly via restructuring and recapitalization has extended the economic recovery process by years.  Lending will continue to shrink and real economic activity is suffering. The cost of ‘extend and pretend’ goes into the trillions of dollars in lost economic activity.”

As stated earlier, there is no real way to put a dollar figure on the cost of the government’s actions to “rescue” our troubled and failing financial system; however, if for nothing else it is worth taking a second look at assessments provided by our government (and then intentionally praised by those in high esteem like Mr. Buffett) with the heavy dose of salt that they deserve.

Sources

•Warren Buffet’s Op Ed Piece in the New York Times: http://www.nytimes.com/2010/11/17/opinion/17buffett.html

•ProPublica’s tally on Government Bailout/Rescue Spending: http://bailout.propublica.org/main/summary

•Gretchen Morgenson’s article in the New York Times, 04/17/2010, questioning the Bailout was/is a bargain: http://www.nytimes.com/2010/04/18/business/economy/18gret.html

•Ben Bernanke’s defense of the Fed’s recent announcements and actions; including issuing a warning to China on its currency policies: http://money.cnn.com/2010/11/18/news/economy/Bernanke_Frankfurt_defense/index.htm?source=cnn_bin

•Christopher Whalen’s Institutional Risk Analytics: http://us1.institutionalriskanalytics.com/www/index.asp

Get Your Tax or Financial Questions Answered In A Future Blog Post

I choose topics for my blog posts based on the questions I receive most frequently from you.  I appreciate your input!  Feel free to comment at http://www.dougbeecherstaxandmoneyblog.blogspot.com/

Important Note!   The information in this article is intended to inform you of some of the financial opportunities provided in the tax laws or elsewhere.  These laws are very complex and thus this article is not intended to give you specific advice for your personal situation.  If you need such advice, please contact a qualified professional.

Technorati code:  TVBHRR4KV452

© 2010, Joshua K. Beecher, all rights reserved. This article, either as a whole or in part, may not be reproduced or transmitted in any form without the prior written permission of the copyright holder. When such permission is granted, the user must state that the material was used by permission of the copyright holder.

The Small Business Jobs Act of 2010 Lets Me Expense More Equipment. Should I Do It?

President Obama signed the “Small Business Jobs Act of 2010” on September 27.  I mentioned this previously in my October 9 blog post.  One of the things this act does is to extend and increase the amount of equipment that you can write-off in the year of purchase, instead of depreciating it over several years.  It is good for the economy and it is good for jobs to encourage these kinds of purchases.  We can expect increases in equipment orders, which will help hiring.  The businesses buying the equipment will also need to hire people to operate the equipment, or at least increase the hours of existing employees in many cases.

The question I would like to explore today is, once you decide buying new equipment makes economic sense for your business, are you better off taking the tax deduction in the current year or by claiming it as depreciation over several years.  The quick answer is:  It depends.  Let’s look it further by considering a sample case.

Suppose a manufacturing company can get new orders if it buys a new $400,000 machine that is more effective at making custom designed metal parts.  The factory wants to make the sale, so it offers low interest terms of 4% -- with 10% ($40,000) down and $4,920 monthly payments that pay off the machine over 7 years.  Let’s suppose you know that worst case you could get enough orders to pay not only labor, materials, and other expenses but to have more than enough left over to make the monthly payments.  But you don’t have enough for the down payment after you pay your taxes.  This is the situation the tax law writers were hoping to help.  You save enough in taxes by buying the machine that you can reduce your quarterly estimated tax payments and use that to have the down payment.  Then you hire new workers and you pay more taxes on your higher income in the future.  You, your workers, the government, and the economy all benefit.

The timing of when you claim the deduction for the machine can make a difference.  Let’s look at a simplified example that illustrates the point:

Assume the business is organized as a pass-through entity (such as an LLC or an S corporation), so the business owner pays the taxes for the business as part of his or her personal tax return.  Let’s suppose the owner is married filing a joint return and that the owner and spouse together have $200,000 in taxable income per year (but they live on $80,000 after paying taxes and setting aside money needed for working capital to keep the business operating).  Lets also assume there are no changes in tax rates for the next 7 years (I know, a big assumption, but we’re trying to keep things simple here) and that there won’t be any long term difference in state taxes either way – so we’ll look at federal income taxes only.

One option is to claim the whole $400,000 in the year of purchase.  We can’t use expensing rather than depreciation to create a tax loss, so we will take $200,000 in year 1 and the other $200,000 will carry forward to year 2, completely eliminating federal income tax in both years.  In the following 6 years, the business owner will be in the 28% bracket on all taxable income above $137,300, and federal income tax will be $44,243 per year for a total of $265,458 for 8 years. 

Another option is to claim standard (called MACRS in tax language) depreciation, which would provide a deduction of $57,160 in year 1, $97,960 in year 2, $69.960 in year 3, $49,960 in year 4, $35,720 each in years 5, 6, and 7, and $17,800 in year 8.  These deductions add to the same $400,000, but over 8 years.  Applying these deductions to $200,000 in taxable income each year results in federal income tax of $28,238 in year 1, $17,872 in year 2, $24,872 in year 3, $30,254 in year 4, $34,241 in years 5, 6, and 7, and $39.259 in year 8, for a total of $243,218 for 8 years.

The second option results in total federal income tax savings of $22,240 over an 8 year period.  Your actual economic benefit would be different for several reasons.  Depending on the interest rate you pay to borrow working capital, or the interest rate you receive on reserves you keep for working capital, there is a benefit to paying more tax later in order to pay nothing in the first two years. 

There are also a number of variables in the tax law we ignored to keep this example simple that you would have to consider in your own situation.  For example, at $200,000 of taxable income you would be subject to partial phase-out of your itemized deductions, if you have children you probably lost the child tax credit, if you have education expenses those were probably eliminated at your income level, etc.  You would need to evaluate all of these for your own situation.  There might be a benefit in taking more depreciation in one year and less in another to best deal with the timing of how these other tax law provisions interact with the depreciation deduction.

Chances are this exact set of facts don’t look anything like your own.  You may be a contractor for whom one crew cab truck would better carry 4 workers and equipment to a job site, with less use of fuel, than multiple trucks would.  You may be a service company with a network of computers that would work better if they were replaced.  You might be a child care provider that could attract new children with new playground equipment.

Obviously, each situation is unique and individual.  My point here is to simply illustrate that it is worth the effort to make the calculation several ways – the decisions you make, along with changes in the law, can make a big difference in the tax you pay over a period of years.  And when you are doing the math, also remember there are a lot of moving parts in the tax laws.  No matter how hard you try, you are likely to overlook something.  Professional help can often save enough in taxes to pay for itself – several times over.  We’d love to hear from you!

Get Your Tax or Financial Questions Answered In A Future Blog Post

I choose topics for my blog posts based on the questions I receive most frequently from you.  I appreciate your input!  Feel free to comment at http://www.dougbeecherstaxandmoneyblog.blogspot.com/

Important Note!   The information in this article is intended to inform you of some of the financial opportunities provided in the tax laws or elsewhere.  These laws are very complex and thus this article is not intended to give you specific advice for your personal situation.  If you need such advice, please contact a qualified professional.

© 2010, Doug Beecher, MBA, CPA, all rights reserved. This article, either as a whole or in part, may not be reproduced or transmitted in any form without the prior written permission of the copyright holder. When such permission is granted, the user must state that the material was used by permission of the copyright holder.

Health Care Reform Changes Taking Effect By January 2011

It has been widely publicized that The Patient Protection and Affordable Care Act of 2010 and the Health Care and Education Reconciliation Act of 2010 were both passed by Congress and signed into law by President Obama in March of this year.  You know that these laws will make major changes in how you receive health care services and how you pay for them, and that they will gradually take effect year by year over the next decade.

Let’s look specifically at the changes that will take effect between now and January 1, 2011 that will impact you directly, and also tell you some useful places to go to get more detail if you would like it.

• Adoptions.  The adoption credit has been increased to a maximum of $13,170, it has been extended through 2011, and most significantly, it has been made refundable.  Even if you don’t owe or pay income tax, you can still get a tax refund for the amount you paid for an adoption.  In the past, this was limited to the amount of tax you paid, with the possibility of getting the rest in a future year.

• Adult Children Under Age 27.  Employer-provided health coverage plans are now required to offer coverage to adult children of employees who have not reached their 27^th birthday, regardless of their marital status or whether they are dependents of their parents for tax purposes.  It is up to each employee to decide whether to accept that offer.  If this situation applies to you, you should have received a letter from your insurance company in the past few weeks notifying you that you can include these children in your insurance coverage if you want to.

• Small Employer Tax Credit.  Small employers with 10 or fewer employees and average annual wages of less than $25,000 are eligible for a tax credit of 35 percent of their contribution towards their employee’s health insurance premiums, through 2013.  Smaller tax credits are also available now for employers with 11-25 employees and for those with average yearly wages of $25,000-$50,000.

• Cafeteria Plans.  There is a new potential exemption from nondiscrimination requirements for cafeteria plans for qualified small employers to encourage more of them to offer tax-free health insurance benefits to employees.

• New Tax On Indoor Tanning Services.   A new 10% tax on indoor tanning services began July 1, 2010.

• Medicines Bought Using A Health Savings Account Must Be Prescribed by a Health Care Professional Beginning January 1.  The whole point of over-the counter medicines is that you don’t have to see a doctor in order to buy and use them.  Beginning January 1, 2011, a prescription from a health care professional will also be required in order to have your health savings account pay for medicines, including the over-the-counter varieties.  I know it seems unusual to be talking about getting a prescription for over-the-counter medicine, but if you want to use your health savings account to buy them that is what you will have to do.  As a side note, this same prescription requirement already became law a few years ago, to claim an itemized deduction on your personal tax return for medicine.

• Increased Tax on Nonqualified Health Savings Account Distributions.  Beginning January 1, this tax increases to 20% for both health savings accounts and Archer medical savings accounts.

This is just a summary of what is happening immediately.  There is much more that is coming, and lots of detail you can read on what is here now.  If you would like more information, there is a website I like that has a timeline that you can easily use to focus on a specific year or a specific type of change, such as affordability/subsidies, employers, financing and taxes, fraud/abuse, insurance, long-term care, Medicaid/CHIP, Medical Malpractice, Medicare, and more.  This website is http://healthreform.kff.org/timeline.aspx.

Business readers should also be aware that when your current health plan comes up for renewal between now and the first several months of 2011, there are likely to be sizeable premium increases.  If you do an Internet search for this, you will find a wide array of amounts and reasons for these coming increases, but no agreement on the subject.  But even U.S. Health & Human Services Secretary Kathleen Sebelius said on September 20, 2010, “I think the rate increases are likely to be somewhat substantial”. My research on what “somewhat substantial” is indicates average 30-40% increases, depending greatly by how many children employees have (remember adult children up to age 26 are likely to be included now), the average employee ages, as well as other factors. 

For example, if a plan currently allows employees to cover one child but not another, expect it to now require all children to be covered.  And instead of one flat premium regardless of the number of children in a family, expect to pay individually for each child. 

As was noted above, small businesses with an employee health plan, may qualify for a tax credit to help pay for these increases.  My purpose in writing about possible premium increases was to let business readers know what may be coming and encourage them to start preparing now before their insurance company gives 30 days notice of large rate increases. 

Get Your Tax or Financial Questions Answered In A Future Blog Post

I choose topics for my blog posts based on the questions I receive most frequently from you.  I appreciate your input!  Feel free to comment here at this blog.

Important Note!   The information in this article is intended to inform you of some of the financial opportunities provided in the tax laws or elsewhere.  These laws are very complex and thus this article is not intended to give you specific advice for your personal situation.  If you need such advice, please contact a qualified professional.

© 2010, Doug Beecher, MBA, CPA, all rights reserved. This article, either as a whole or in part, may not be reproduced or transmitted in any form without the prior written permission of the copyright holder. When such permission is granted, the user must state that the material was used by permission of the copyright holder.

How The End of The 2001/2003 Tax Cuts After 2010 Will Affect Two Single People Considering Marriage

Today we’ll continue our look at 2011 scheduled income tax changes by considering further Quincy from the last post.  Before we do, let me briefly review tax law changes in the last two weeks that you may have heard about in the news. 

President Obama signed the “Small Business Jobs Act of 2010” on September 27.  It’s beyond the scope of this post to comment on this act beyond saying that it is primarily about extending depreciation rules and allowing some 401(k) retirement plan participants to convert to Roth tax treatments.  It also levels the playing field on two specific issues – (1) Self-employed people will now get to reduce their social security/medicare taxes as well as their income taxes if they pay for a health insurance plan (this was already the case for W-2 employees).  (2) Cell phones are no longer considered “listed” property.  If you have a business, the IRS no longer will make you keep track of how much you used your phone for business and personal purposes so that they could make sure you didn’t deduct the personal part.

It’s safe to say, that while these may be fair and welcome changes, Congress is now apparently leaving any other tax law changes until after the November 2 elections -- at the earliest.  Which means that nothing has yet been done about the tax increases scheduled for January 1, 2011.  With that in mind, we will continue exploring how much these tax increases are going to be – by discussing our friend Quincy a little more.  To review,

·        Quincy is single and works full-time for about $9 per hour, earning $18,000 per year.  He lives with a couple roommates and shares living expenses with them.  For taxes he files single with no dependents.  His average weekly paycheck is $287.67. (Gross pay $346.15 less $20 federal withholding and $38.48 in other withholding taxes)  He files a 1040-EZ tax return each year because  his only source of income is the wages from his job and he does not have enough deductions to itemize.

·    In the last post, we saw that Quincy’s taxes will increase by $832 in 2011 compared with 2010.

So what happens if Quincy decides to marry anytime in 2011 (even December 31) and his new spouse, Matilda, has the identical work and tax facts that he does?   Our starting point is to realize that if he and Matilda don’t marry, their taxes will increase by $1,664 ($832 times two).  A key part of this is the standard deduction of $5,700 for each of them, totaling $11,400 for both of them.  Under current law, it wouldn’t matter if they married or not, this would be their standard deduction.  Under the old law that is about to return, the standard deduction for a married couple is 1.67 times that for a single person, not 2 times.  This works out to $9,519.  They will be taxed at 15% either way, so the difference in the standard deduction adds $282 to their taxes.

Let me say that one more time for clarity.  The return of the old tax law on January 1, 2011, will cost this couple that works for $9 per hour each, $1,664 in additional taxes each year if they don’t marry, and $1,946 in additional taxes if they do.

Let me take the story of Quincy and Matilda one step further.  If each earn a yearly salary of $43,350, (comfortable but certainly not $200,000+), their standard deduction and 15% tax bracket both shrink to 1.67 times the amounts for singles.  As two singles, they are at the top of the 15% bracket in 2010 and 2011.  Anything higher will be taxed at 25% in 2010 and 28% in 2011.  If they marry, the tax bracket change causes more than $13,000 to be taxed at 28% rather than 15% in 2011.

                                                                                                          2010                                                                                                               2011    

            ·          Adjusted Gross Income:                            $ 86,700                                                                                                     $  86,700

·          Standard Deduction                                     $ 11,400                                                                                                     $      9,519

·          Personal Exemptions (1 @ $3,650)    $    7,300                                                                                                     $      7,300

·          Taxable Income                                               $  68,000 (15% bracket becomes 25% here today)        $  69,881

·          Tax before credits                                          $    9,362 ($16,750 taxable@10%, $51,250@15%)       $  12,185 ($56,780@15%, $13,101@28%)

·          Making Work Pay Credit                             $       800 (Passed in 2009 for 2009 and 2010)                   $      -  0 -

·          Federal Tax After Credits                          $    8,562                                                                                                     $   12,185  ($3,623 higher in '11 vs. '10)

Letting the 2001-2003 tax cuts expire is going to affect everyone. 

.

Get Your Tax or Financial Questions Answered In A Future Blog Post

I choose topics for my blog posts based on the questions I receive most frequently from you.  I appreciate your input!  Feel free to comment here.

Important Note!   The information in this article is intended to inform you of some of the financial opportunities provided in the tax laws or elsewhere.  These laws are very complex and thus this article is not intended to give you specific advice for your personal situation.  If you need such advice, please contact a qualified professional.

© 2010, Doug Beecher, MBA, CPA, all rights reserved. This article, either as a whole or in part, may not be reproduced or transmitted in any form without the prior written permission of the copyright holder. When such permission is granted, the user must state that the material was used by permission of the copyright holder.

$832 Tax Increase Coming in 2011 For A Single Person Earning $9 Per Hour

Let’s continue our look at 2011 scheduled income tax changes by considering this single person:

·         Quincy works full-time at a job at about $9 per hour, earning a $18,000 per year.  He lives with a couple roommates and shares living expenses with them.  For taxes he files single with no dependents.

·         His average weekly paycheck is $287.67. (Gross pay $346.15 less $20 federal withholding and $38.48 in other withholding taxes)

·         He files a 1040-EZ  tax return each year because his only source of income is the wages from his job and he does not have enough deductions to itemize.

In 2010, Quincy’s tax return could be summarized as follows:

·         Adjusted Gross Income:                                $18,000

·         Standard Deduction                                       $  5,700

·         Personal Exemptions (1 @ $3,650)              $  3,650

·         Taxable Income                                               $  8,650

·         Tax before credits                                          $      865 (all taxable at 10%)

·         Making Work Pay Credit                             $     400 (Passed in 2009 for 2009 and 2010)

·         Federal Tax After Credits                            $     465 (assuming no federal income tax withholding)

·         Federal Tax Withheld From Pay             $ 1,040 ($20 per week times 52 weeks)

·         Federal Tax Refund                                        $     575

Here’s what will change for Quincy in 2011, unless Congress makes a last-minute modification (very possible, be sure to check back here to see):

·         The 10% bracket is disappearing.  All of Quincy’s taxable income will be taxed at 15%.

·         There is a current proposal in Congress to extend the Making Work Pay Credit to 2011, but as of now it has not yet been voted on.

With these changes, here is what this Quincy’s tax return summary will look like in 2011:

·         Adjusted Gross Income:                               $18,000

·         Standard Deduction:                                     $  5,700

·         Personal Exemptions (1 @ $3,650)            $   3,650

·         Taxable Income                                               $   8,650

·         Tax before credits                                          $   1,297 (all taxable at 15%)

·         Making Work Pay Credit                             $  -  0  -

·         Federal Tax After Credits                            $  1,297

·         Federal Tax Withheld From Pay             $ 1,040 ($20 per week times 52 weeks)

·         Federal Tax Owed With Return                $     257

Quincy, who is used to having to receiving a $575 refund when he files his tax return, will find out he owes $257 instead – a net $832 increase in his tax liability (over 4½ percent of his income).

Letting the 2001-2003 tax cuts expire is going to affect everyone. 

Even someone earning only $9 per hour, like Quincy.

Get Your Tax or Financial Questions Answered In A Future Blog Post

I choose topics for my blog posts based on the questions I receive most frequently from you.  I appreciate your input!  Feel free to comment here at this blog.

Important Note!   The information in this article is intended to inform you of some of the financial opportunities provided in the tax laws or elsewhere.  These laws are very complex and thus this article is not intended to give you specific advice for your personal situation.  If you need such advice, please contact a qualified professional.

© 2010, Doug Beecher, MBA, CPA, all rights reserved. This article, either as a whole or in part, may not be reproduced or transmitted in any form without the prior written permission of the copyright holder. When such permission is granted, the user must state that the material was used by permission of the copyright holder.