Congress turns focus to economy; Senate readies jobs bill
Fresh from its Presidents’ Day recess, Congress has shifted its priority from passing healthcare reform to the economy and readying a jobs bill to jumpstart hiring. The bill is expected to be in the neighborhood of $100 billion. On February 11, the Senate Finance Committee (SFC) released a draft version of an $85 billion jobs and tax incentives package. However, the SFC’s bill was subsequently scaled back by Senate Majority Leader Harry Reid, D-Nev., who has instead offered a pared-down version of the measure. Reid’s bill would include four initiatives originally proposed in the SFC’s jobs package. Reid’s bill would provide an employer payroll tax exemption for new hires, Code Sec. 179 expensing, extension of the Highway Trust Fund, and an expansion of the Build America Bond program.
Hiring incentives
The centerpiece of Reid’s proposed bill is a $13 billion incentive for businesses to hire unemployed individuals. Private sector businesses that hire qualified workers after the date of enactment and before January 1, 2011 would be exempt from the 6.2 percent Social Security payroll tax (up to the maximum Social Security wage of $106,800) for qualified new hires. A qualified new hire is an individual who has not been employed for more than 40 hours during the 60-day period prior to employment. The incentive would not apply to new hires related to the employer or public sector employees.
Code Sec. 179 expensing
The Reid bill would also extend enhanced Code Sec. 179 expensing for qualified property placed in service in tax years beginning in 2010. As in 2008 and 2009, taxpayers would be able to expense up to $250,000 of qualified Code Sec. 179 expense property. This amount would be reduced is the property placed in service during the tax year exceeds $800,000.
Bonus depreciation/Extenders up in the air
Noticeably absent from Reid’s proposed bill is an extension of bonus deprecation as well as the extension of a host of popular individual, business, charitable, and energy tax incentives that expired after December 31, 2009. These include the state and local sales tax deduction, additional standard deduction for real property taxes, New Markets Tax Credit, and the research tax credit. However, it is anticipated that Congress may deal with tax incentives in subsequent legislation.
Estate tax
In December, the House voted to extend the 2009 estate tax regime through December 31, 2010. However, the Senate has not acted on the House’s bill, nor unveiled a version of its own estate tax bill. Congress will likely deal with the estate tax after it passes jobs legislation.
COBRA
Eligibility for COBRA premium assistance will expire after February 28, 2010. Although the SFC’s jobs bill would extend eligibility for COBRA premium assistance through May 31, 2010, Reid’s bill would not.
Our office will keep you posted on these significant legislative developments.
IRS survey reveals increased tolerance of “a little” cheating
The IRS Oversight Board has released its annual Taxpayer Attitude Survey. According to the survey, the percent of taxpayers who find it acceptable to cheat on their income taxes increased from 9 percent in 2008 to 13 percent in 2009. The 2009 survey was based on interviews of 500 men and 500 women during August 2009.
Tolerance for cheating rises
Approximately 9 percent of survey respondents believe “a little” cheating on an income tax return is tolerable, and 4 percent endorse “as much cheating as possible.” The percentage of respondents who said that cheating was “not at all” acceptable decreased from a high of 89 percent to 84 percent in 2009.
At the same time, 95 percent of respondents completely or mostly agreed that “it is every American’s civic duty to pay their fair share of taxes.” Moreover, 92 percent agreed that cheaters should be held accountable. Fear of an audit has the greatest influence over individuals’ honest reporting of their taxes.
IRS services
The percent of taxpayers viewing various IRS services as very important generally declined across-the-board. For example, 70 percent of respondents (down from 78 percent in 2008) found it very important for the IRS to have a toll-free helpline. Additionally, there was a drop from 69 to 64 percent of respondents who viewed it very important for a website to provide information, and a drop from 55 percent to 46 percent of respondents who viewed it as very important to have community tax clinics.
Withdrawals from retirement savings: Tough rules may change
| In response to the economic downturn that has affected the retirement portfolios of millions of individuals across the country, Congress has been considering a variety of alternatives to offer relief to those who face financial emergencies and need immediate access to their funds. Two of the most significant proposals that have been recommended include: (1) significant broadening of the suspension of the 10 percent penalty tax on early withdrawals from IRAs and defined contribution plans, and (2) extending the temporary suspension of the penalty tax imposed on individuals age 70 1/2 or older who do not take required minimum distributions (RMDs) from certain retirement plans.
Early withdrawal penalty To discourage individuals from using money set aside in retirement accounts for expenses incurred outside of retirement, a 10 percent tax is imposed on the amount that is withdrawn, in addition to this amount being included in the individual’s gross income and subject to federal (and often, state) income tax. The 10 percent penalty will not apply to distributions made in the following circumstances:
Caution: The extent to which withdrawal may be made from an employer-sponsored qualified retirement plan, even with respect to amounts that you contributed, depends upon what is allowed under the written plan itself. Some plans don’t allow you to withdraw only after retire. Others allow withdrawals for “hardships,” which may include medical expenses or other financial crisis. Still other withdrawals, however, such as withdrawals for higher education or a first home purchase, are never allowed under IRS rules from an employer-run. The 10 percent penalty and, for that matter, the underlying taxable income generated from a withdrawal, do not apply if the funds are properly rolled over within a 60-day period from an employer-sponsored plan to an IRA or from one qualified plan or IRA to another. Hardship withdrawals. Individuals who take hardship withdrawal from their defined contribution plan must also pay the 10 percent penalty tax. A hardship is defined as an immediate and heavy financial need. Certain expenses are deemed to meet this definition, but even so, the penalty still applies. Proposals to suspend the 10 percent penalty Several proposals have been advanced by policymakers to eliminate or suspend the 10 percent early withdrawal penalty in certain situations. The proposals would generally add a paragraph to Internal Revenue Code Sec. 72(t) to eliminate the penalty in specific circumstances. Proposals include eliminating or suspending the 10 percent early withdrawal penalty for:
RMDs Individuals with certain qualified retirement plans, as well as traditional IRAs and 403(b) plans, are required to withdraw a certain amount ( a “required minimum distribution” or RMD) from the account each year after reaching age 70 1/2 (Roth IRAs are not subject to the RMD rules). The annual RMD is based on the account balance as of December 31 of the prior year and the account holder’s life expectancy. Generally, RMDs must begin no later than April 1 of the year after you reach age 70 1/2. Proposals to suspend RMDs RMDs were suspended for 2009 only. RMDs must be taken for 2010 and beyond, unless Congress acts to suspend the RMD rules again. However policymakers have put forth various proposals to eliminate or suspend altogether the RMD requirements. The proposals include:
When contemplating whether to implement any of these proposals, Congress and Treasury officials must balance a number of considerations, including the immediate financial needs of individuals with the policies behind the penalty taxes; namely, providing funds for retirement and not allowing the money to be used for pre-retirement expenses. Our office will keep you posted on any legislative proposals that may affect your retirement planning. We also can help you navigate the current rules that would apply should you need to make a withdrawal soon from your retirement savings. |
March 2010 tax compliance calendar
| As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of March 2010.March 3
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 24-26. March 5 Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 27-March 2. March 10 Employees who work for tips. Employees who received $20 or more in tips during February must report them to their employer using Form 4070. Employers. Semi-weekly depositors must deposit employment taxes for payroll dates March 3-5. March 12 Employers. Semi-weekly depositors must deposit employment taxes for payroll dates March 6-9. March 15 Monthly depositors. Monthly depositors must deposit employment taxes for payments in February. March 17 Employers. Semi-weekly depositors must deposit employment taxes for payroll dates March 10-12. March 19 Employers. Semi-weekly depositors must deposit employment taxes for payroll dates March 13-16. March 24 Employers. Semi-weekly depositors must deposit employment taxes for payroll dates March 17-19. March 26 Employers. Semi-weekly depositors must deposit employment taxes for payroll dates March 20-23. March 31 Employers. Semi-weekly depositors must deposit employment taxes for payroll dates March 24-30.
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February 2010 tax compliance calendar
As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of February 2010.
February 3
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 27-29.
February 5
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 30-February 2.
February 10
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 3-5.
February 10
Employees who work for tips. Employees who received $20 or more in tips during January must report them to their employer using Form 4070.
February 12
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 6-9.
February 16
Monthly depositors. Monthly depositors must deposit employment taxes for payments in January.
February 18
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 10-12.
February 19
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 13-16.
February 24
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 17-19.
February 26
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 20-23.
Congress approves 2009 deductions for 2010 Haiti earthquake donations
Congress has passed, and the president has signed, legislation allowing taxpayers to claim a deduction on their 2009 federal tax return for qualified Haiti disaster relief contributions made after January 11, 2010 and before March 1, 2010.
The bill gives taxpayers the option of claiming a deduction on their 2009 or 2010 tax returns for 2010 donations to a domestic U.S. charitable organization assisting Haiti. Taxpayers entitled to the deduction include both individuals and corporations.
However, taxpayers must itemize their deductions in order to take advantage of the early deduction. Additionally, the donation must be monetary. Taxpayers may not claim a 2009 tax deduction for 2010 contributions of marketable securities or other property that is easily convertible into cash. While donations by check or credit qualify, donations of food are not currently eligible. However, at least one Congressional proposal has promised to change this. We will keep you posted.
We encourage you to explore this option and look forward to helping you plan your tax position for a truly worthy donation.
IRS provides new first-time homebuyer credit form
A new Form 5405, First-time Homebuyer Credit and Repayment of the Credit, is now available for taxpayers claiming the credit on their 2009 income tax return. Because taxpayers are required to file a paper version of this form and new documentation requirements must accompany the form, the IRS reported that delivery of refunds may be slower than normal.
Taxpayers purchasing a home for the first time during 2009 may claim a credit equal to 10 percent of the purchase price of the principal residence with a maximum of $8,000 (or $4,000 for married couples filing separate returns). The Worker, Homeownership, and Business Assistance Act of 2009 also created a reduced tax credit (up to $6,500) for taxpayers who are qualified long-time residents of a home, but purchase a new principal residence during 2009.
To claim the credit for the 2009 tax year, taxpayers are now required to include documentation to substantiate their claim, in addition to their paper return. Required documentation includes a settlement statement in the form of a properly executed HUD-1 or a copy of the certificate of occupancy where a settlement statement is unavailable for a newly constructed home. Taxpayers claiming the reduced credit because they are qualified long-term residents should attach Form 1098, Mortgage Interest Statement, property tax records, or homeowner’s insurance records with their return.
Please let us know if you purchased a new home during 2009, and we will be sure to inform you of what documents you will need to gather to file your return and claim the credit.
How Do I … Convert a Traditional IRA to a Roth IRA?
People are buzzing about Roth Individual Retirement Accounts (IRAs). Unlike traditional IRAs, “qualified” distributions from a Roth IRA are tax-free, provided they are held for five years and are made after age 59 1/2, death or disability. You can establish a Roth IRA just as you would a traditional IRA. You can also convert assets in a traditional IRA to a Roth IRA.
Before 2010, only taxpayers with adjusted gross income of $100,000 or less were eligible to convert their traditional IRA (provided they were not married taxpayers filing separate returns). Beginning in 2010, anyone can convert a traditional IRA to a Roth IRA, regardless of income level or filing status.
Comment: While you can only contribute a maximum of $5,000 to a Roth IRA for 2010 (plus a $1,000 catch-up contribution if you are over age 50), you can convert an unlimited amount from a traditional IRA.
Conversion is treated as a taxable distribution of assets from the traditional IRA to the IRA holder, although it is not subject to the 10 percent tax on early distributions. While paying taxes on conversion is undesirable, the advantages of holding assets in a Roth IRA usually outweigh this disadvantage, especially if you will not be retiring soon. Furthermore, if you convert assets in 2010, you have the option of including them in income in 2011 and 2012 (50 percent each year) instead of 2010.
Comment: Generally, this income-splitting would be advantageous to any taxpayer who does not expect a sharp increase in income in 2011 or 2012. A wildcard factor is that the lower income tax rates that have been in effect since 2001 will expire after 2010 and could increase in 2011.
There are four ways to convert a traditional IRA to a Roth IRA:
- A rollover - you receive a distribution from a traditional IRA and roll it over to a Roth IRA within 60 days;
- Trustee-to-trustee transfer - you direct the trustee of the traditional IRA to transfer an amount to the trustee of a Roth IRA;
- Same-trustee transfer - the trustee of the traditional IRA transfers assets to a Roth IRA maintained by the same trustee; or
- Redesignation - you designate a traditional IRA as a Roth IRA, instead of opening a new Roth account.
Comment: The account holder does not have to convert all of the assets in the traditional IRA.
Another advantage of converting assets from a traditional IRA to a Roth IRA is that you can change your mind and put the assets back into the traditional IRA. This is known as a recharacterization. You have until the due date, with extensions, for the return filed for the year of conversion. Thus, if you convert assets in 2010, you have until mid-October in 2011 to undo the conversion.
This ability to recharacterize the conversion allows you to use hindsight to check whether your assets declined in value after the conversion. Since you are paying taxes on the amount converted, a decline in asset value means that you paid taxes on phantom income that no longer exists. However, if you convert assets into multiple Roth IRAs, you can choose to recharacterize the assets in a Roth IRA that decreased in value, while maintaining the conversion for a Roth IRA’s assets that appreciated in value.
The use of a Roth IRA can be a savvy investment, but whether to convert assets is not an easy decision. If you would like to explore your options, please contact this office.
2010 filing season gets underway; IRS expects many early filers
| The IRS opened the 2010 federal income tax filing season on January 15 when it announced it would start accepting electronically filed 2009 individual income tax returns. The IRS anticipates that more than 60 percent of individual taxpayers will file their 2009 returns electronically and it is preparing for a large number of individuals to file early. Triggering early filing is the expected interest in refunds because of the economic slowdown.E-fileElectronic filing has exploded since the IRS first accepted e-filed returns. More than 95 million returns were filed electronically with the IRS in 2009 compared to just 4.2 million in 1990.
Paper returns take four to six weeks for the IRS to process before refunds are issued. According to the IRS, taxpayers who e-file their returns and use direct deposit should receive their refunds in as few as 10 days. However, more complex returns generally take longer for the IRS to process and issue a refund if one is due. Some taxpayers may not be able to e-file their 2009 returns. The IRS cannot electronically process 2009 returns that include Form 5405, First-Time Homebuyer Credit and Repayment of the Credit. Taxpayers claiming the first-time homebuyer credit on a 2009 return must file a paper return. Taxpayers submitting Form 5405 must attach documentation substantiating their homebuyer credit. The IRS can only process these documents manually. Refunds Thanks to recent legislation, taxpayers have one more option to save their refunds. You can use all or part of your refund to purchase up to $5,000 in U.S. Series I Savings Bonds. The total amount of your purchase must be a multiple of $50. The bonds will be issued in the taxpayer’s name or, if married filing jointly, the bonds will be issued in the names of both spouses. Bonds will be delivered to taxpayers by mail. You may also be able to split your refunds among different accounts if you choose direct deposit. The IRS allows taxpayers to select up to three different accounts. This is a great option to deposit part of your refund into a retirement savings account. Preparers Your federal income tax return is one of the most important and sensitive documents you sign. Trust its preparation to a professional. Our office adheres to a high professional standard and code of ethics. Unfortunately, not all preparers do and some taxpayers have been harmed by the actions of unscrupulous preparers. The consequences can be severe. Although the preparer signs the return, you are responsible for the accuracy of every item on your return. Avoid preparers who claim they can obtain larger refunds than other preparers. If a preparer asks you to sign a blank return that should also raise a red flag. The filing season can be stressful. It doesn’t have to be. Our office is ready to help you. Please contact us today if you have any questions.
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