Analyzing the Tax Cut Deal

President Obama signed a tax bill into law yesterday (Friday) that gives us some clarity on what the tax situation will be for 2011 and 2012.  Here are the highlights of the bill:

• Tax brackets to remain the same, with a 10% bottom rate and a 35% top rate.  Without this legislation, the bottom rate would have increased to 15% and the top rate to 39.6%.
• A "payroll tax holiday" that reduces the amount of FICA withholding by 2% (self-employed taxpayers will see their self-employment tax decrease by 2%).  For a person making $40,000/year, this would equal an $800 savings.  (But the Making Work Pay Credit is expiring, which negates some of the savings.)
• Another "patch" to the Alternative Minimum Tax that will help millions of taxpayers avoid this tax.
• The capital gains and qualified dividends rates remain at 0% for taxpayers in the 10% and 15% tax brackets, and at 15% for taxpayers in the higher tax brackets. 
• The Child Tax Credit will remain at $1,000 (it had been set to decrease to $500 in 2011).
• You can claim dependent care expenses of $3,000 for one child or $6,000 for two or more children.  These amounts had been set to decrease to $2,400 and $4,800.
• The expanded Earned Income Credit remains in place through 2012.
• The credit available for energy efficient upgrades to your home remains in place through 2012 (it had been set to expire at the end of this year).
• Extension of the American Opportunity Credit for college expenses, and an extension of the "above-the-line" deduction for college expenses.
• Special 100% "bonus depreciation" for purchases of brand-new assets from September 9, 2010, through the end of 2011.
• The estate tax returns with a $5 million exemption per person, and a 35% top rate, retroactive to January 1, 2010.  Estates arising in 2010 will have the option of of using these rules, or using the "old rules" of no estate tax and a reduction in the amount of increase in carryover basis.

Deal Reached on Taxes (Maybe)

President Obama and Republicans in Congress have reached an agreement on taxes.  The agreement calls for the following:

• Extension of the Bush Tax Cuts through the end of 2012.  For more on what this means, see this article posted a few days ago on the Dinesen Tax Times.
• A two-year "AMT patch."  This will prevent an estimated 22 million taxpayers from falling victim to this tax.  For more on what would happen without this patch, see this Dinesen Tax Times article.
• Extension of the expanded Earned Income Tax Credit, extension of the expanded child tax credit, and extension of the American Opportunity Credit for college expenses.
• Extension of miscellaneous tax provisions such as the additional standard deduction for real estate taxes paid by non-itemizers.  The $250 "above-the-line" deduction for classroom expenses of K-12 teachers is also extended.
• Unlimited expensing of new assets in 2011.
• A reduction in the employee portion of FICA withholding, from the current 6.2% to 4.2%.  For a person making 40,000 per year, this would equate to a savings of $800 over one year.  This provision may have been put in the agreement to make up for the expiration of the Making Work Pay Credit.
• The estate tax will return with a $5 million exemption and a top rate of 35%

Democrats are not happy with this proposal, so it remains to be seen if it will actually be passed into law.

Tax News Roundup, 7/22/10

SHORT NEWS WEEK


This is a short week for the Dinesen Tax Times Tax News Roundup. Your correspondent is leaving on Friday for a week-long vacation to Montana, South Dakota and Wyoming. The Tax News Roundup will return at some point in August!

PROPOSAL TO ELIMINATE ESTATE TAX VOTED DOWN

Here's the latest in the saga of the estate tax: the U.S. Senate this week voted down a proposal to eliminate the estate tax altogether. Senator Jim DeMint, a Republican from South Carolina, made the proposal. It was defeated by a vote of 39-59. Read more about it in the Wall Street Journal.

THE TAX COURT, GAMBLING AND FENG SHUI

The U.S. Tax Court this week ruled in favor of a couple who used Feng Shui and other traditional Vietnamese methods to determine their “lucky days” for gambling. The couple had claimed that they were professional gamblers but the IRS disagreed. The Tax Court sided with the couple. Read more in the Dinesen Tax Times blog posting.

RECYCLED: WILL MY HEALTH INSURANCE BE TAXABLE?

This question keeps popping up: will my health insurance be taxable? The short answer to the question is NO. The Dinesen Tax Times has covered this story, once on June 27th and again on July 21st. Read the July 21st article here.

UNEMPLOYMENT BENEFITS EXTENDED

Congress extended unemployment benefits for 2.9 million unemployed Americans this week. Read more here.

As a friendly reminder, unemployment benefits are taxable, so if you receive unemployment in 2010, you'll have to report it as income on your 2010 tax return. For 2009, you were exempt from taxes on the first $2,400 of unemployment benefits, but Congress has not extended that exemption for 2010 (at least not yet).

Tax News Roundup 7/17/2010

Here's a roundup of some of the tax news from this week....

SNIPES SENTENCED
Actor Wesley Snipes has lost his appeal of his 2008 conviction for willfully failing to file tax returns. Snipes had said he failed to receive a fair trial and that the three-year prison sentence he received was not fair, but an appeals court in Florida this week disagreed. Snipes was convicted of failing to file tax returns and pay income tax on more than $37 million of income between 1999-2004. You can read more about his case in a variety of locations, including here and here.

Jason’s comments: Snipes aligned himself with dubious tax advisors who led him into frivolous tax positions. What is a frivolous tax position? Here’s a good example, from the Orlando Sentinel:

“(Snipes) claimed that as a "fiduciary of God who is a 'non-taxpayer,' he was a foreign diplomat and not obligated to pay U.S. taxes….”

Those kinds of arguments never work. Bottom line? File your tax returns!

RETURNED MAIL COSTS THE IRS $57.9 MILLIONThe Treasury Inspector General for Tax Administration (TIGTA) this week released a report showing that, of the 200 million pieces of mail the IRS sends out to taxpayers, more than 19 million of those pieces of mail were returned as undeliverable in 2009. The report says the returned mail costs the IRS $57.9 million, and can cause harm to taxpayers because penalties and interest can rack up when notices are not received.

The report recommends that the IRS provide more ways for taxpayers to update addresses. Currently, the IRS accepts changes over the phone or the internet only in limited circumstances. For most people, your address gets updated at the IRS when you file a tax return with a new address on it, or when you submit Form 8822. Form 8822 should be submitted if you move after you have filed your tax return for the year.

Brave souls can read the entire TIGTA report here.

Jason’s comment: If you move and are concerned about the IRS not having your current address, contact your tax advisor. You may want to file Form 8822.

ESTATE TAX RUMBLINGS
Another estate tax proposal was made this week, this time a bipartisan proposal from Democrat Senator Blanche Lincoln of Arkansas and Republican Senator John Kyl of Arizona. Their proposal calls for an exemption of $5 million (phased in over 10 years and indexed for inflation), and a flat rate of 35%. It appears their proposal would allow taxpayers to either use this year’s estate tax rate (0%) but not get a basis step up, or use the 35% rate with a basis step up.

There have been a number of estate tax proposals out there. Iowa Senator Tom Harkin recently co-sponsored legislation that would provide an exemption amount of $3.5 million. Estates valued between $3.5 million and $10 million would be taxed at 45%, estates between $10 million and 50 million would be taxed at 50%, and estates worth more than $50 million would be taxed at 55%. The proposal also calls for an additional “billionaire’s surtax” of 10%.

In 2009, the top rate was 45% with an exemption amount of $3.5 million. If Congress does nothing, the estate tax will return in 2011 with a flat rate of 55% and an exemption amount of $1 million.

Jason’s comments: It will be interesting to see what happens. I wonder if the death this week of billionaire New York Yankees owner George Steinbrenner will spur action on the estate tax. Speaking of Steinbrenner, here’s an article that talks about the estate tax implications of Steinbrenner’s death.

YOURS TRULY FEATURED IN ONE IOWA ARTICLEI recently had an article featured at One Iowa, talking about gift tax issues facing same-sex couples. You can read the article here.