Federal Tax Provisions and the State of Iowa

One of the considerations of tax planning is the impact of state taxes.  Many states follow along with most federal provisions for calculating income, but almost every state varies from federal law on at least a few items.  This is often referred to as "de-coupling" from federal law. 

For example, Iowa in 2009 "de-coupled" from federal law on Section 179 expensing and bonus depreciation.  Section 179 expensing was limited to $133,000 (as opposed to $250,000 on federal returns), and bonus depreciation was not allowed at all on Iowa returns.  (Read more about this tax issue in this article.)

Iowa often "de-couples" from other "extender" items such as the front-side deduction for college expenses and the front-side deduction allowed to K-12 teachers for out-of-pocket classroom expenses.  These were a part of the federal tax bill signed into law last week.  The Iowa legislature will decide next month on whether to de-couple from these items and not allow them to be deductible on Iowa tax returns.  It is a safe bet that the legislature will vote to de-couple on these items, and also on the increase in Section 179 and bonus depreciation.

One federal provision that Iowa is coupling with is the provision in the "health care bill" passed earlier this year that allows people to keep children on their health insurance through age 26.  The value of this insurance coverage will be tax-free for federal purposes, and Iowa has announced that it will go along with federal law in this case.  Read more in this informational post from the Iowa Department of Revenue.

Adoption Credit Increases for 2010 and 2011

The "health care reform bill" passed by Congress earlier this year increased the credit available for expenses incurred in adopting a child.  For 2010 and 2011, taxpayers can claim a credit of up to $13,170 for adoption expenses.  Allowable expenses include adoption fees, court costs, attorney’s fees and travel expenses,

The bill also changed the credit to make it fully refundable.  In prior years, the adoption credit was non-refundable, meaning it could only reduce your tax liability to $0.  Any unused credit could be carried forward to the next year.  Now, you can claim the whole adoption credit no matter what your tax liability is.

One important note for people who qualify for this credit:  you will NOT be able to e-file your return.  You'll have to file a paper return and attach documentation relating to the adoption (such as the adoption decree). 

As always, I recommend seeking out a tax professional if you think you qualify for this credit.

Senate Votes Down 1099 Relief for Businesses

The Senate on Monday night failed to repeal the stricter 1099 reporting requirements that are looming for businesses.  Starting in 2012, businesses will have to issue 1099s to anyone and any company that they purchase more than $600 of ANYTHING from -- including purchases of goods, supplies, inventory, etc.  This is a major change from current law, which only requires 1099s to be issued to independent contractors and others who provide services to the business (such as accountants or lawyers).  This change was quietly tucked away in the "health care reform bill" passed earlier this year.

There has been a large amount of backlash from the business community (and rightfully so) about these new requirements. But on Monday night, the Senate twice voted down attempts to repeal the 1099 changes.  What's odd is, both Republicans and Democrats say they understand the burden this will place on businesses, and both Republicans and Democrats seem to want to do away with the changes.  But yet, they can't reach a compromise on the issue.  You can read more in this New York Times article.

You can read more about this issue in a prior Dinesen Tax Times article here.

Recycled and UPDATED - Will My Health Insurance Be Taxable?

I have published this article twice already, but the rumor is still out there, plus the IRS recently issued more information for employers.
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(Originally posted June 27, 2010, and re-posted on July 21, 2010)

I saw one of my clients yesterday, and he asked me whether the rumor is true that the government is going to start taxing people on health insurance provided by their employers. The answer to that question is, NO.

My client is right that there is a rumor going around about this, including one of those wonderful "chain" e-mails that breathlessly states that starting in 2011, you'll be taxed on employer-provided health insurance and that you need to forward the e-mail on to all your friends.

As with most rumors like this, there is a small grain of truth here. The health care bill passed in the spring does indeed impose an excise tax on employer-provided health insurance (this is the so-called "Cadillac Tax" that you may have heard of). Here are the facts about this excise tax:

•The tax starts in 2018, not 2011
•The tax applies only to employer-provided health insurance that exceeds $27,500/year, and the tax is imposed on the insurance company, not on you
•It is true that the value of your employer-provided health insurance will be reported on your W-2 starting in 2011, but that's all -- it will be reported on your W-2 but it's not a taxable item to you; it will be shown for reporting purposes only.

UPDATE ON OCTOBER 25, 2010: The IRS says that employer reporting of health insurance on the W-2 will be optional for 2011. So, your 2011 W-2 may or may not show the value of employer provided health insurance. At any rate: you will not be taxed on this! It will be shown on the W-2 for informational and reporting purposes only.

Snopes.com provides more information about the original rumor:
http://www.snopes.com/politics/taxes/hr3590.asp

Changes Coming to Flex Accounts

Those of you who take part in a flex plan or an HSA for reimbursement of medical expenses will want to take note: starting in 2011, you will no longer be able to claim reimbursements for purchases of non-prescription, over-the-counter medicines. You'll only be able to claim reimbursements for medicines purchased with a prescription. The only exception to this will be purchases of insulin.

This does not apply to "non-medicine" purchases relating to your health, such as crutches or bandages. You can still be reimbursed for those purchases.

This change affects flex plans, HSAs and Archer MSAs and goes into effect January 1, 2011. The change comes as part of the health-care reform bill passed earlier this year.

Will My Health Insurance Be Taxable?????

I saw one of my clients yesterday, and he asked me whether the rumor is true that the government is going to start taxing people on health insurance provided by their employers. The answer to that question is, NO.

My client is right that there is a rumor going around about this, including one of those wonderful "chain" e-mails that breathlessly states that starting in 2011, you'll be taxed on employer-provided health insurance and that you need to forward the e-mail on to all your friends.

As with most rumors like this, there is a small grain of truth here. The health care bill passed in the spring does indeed impose an excise tax on employer-provided health insurance (this is the so-called "Cadillac Tax" that you may have heard of). Here are the facts about this excise tax:

1. The tax starts in 2018, not 2011
2. The tax applies only to employer-provided health insurance that exceeds $27,500/year and is imposed on the insurance company, not on you
3. It is true that the value of your emloyer-provided health insurance will be reported on your W-2, but that's all -- it's reported on your W-2 but it's not a taxable item to you; it will be shown for reporting purposes only

Snopes.com provides more information:
http://www.snopes.com/politics/taxes/hr3590.asp

Excise Tax on Tanning Services Starts July 1

A 10% excise tax on tanning services starts July 1. The IRS today released regulations about the tax, which will be assessed in a similar fashion to a sales tax. The provider of the tanning service will have to submit the excise tax to the IRS quarterly, which means an increased cost to the consumer.

The tax only applies to ultraviolet tanning services; "spray-on" tanning and tanning lotions are not subject to the excise tax. The regulations provide exceptions for licensed medical professionals who use ultraviolet lights as part of medical treatment, and for fitness centers that provide tanning as an incidental cost of membership.

The affect on your pocketbook will be to add 10% to your current tanning cost. So if a tanning fee is $20, you'll be paying an additional $2 in excise tax starting July 1.

This excise tax is part of the health care reform bill that Congress passed in the spring. Officials estimate that the tax could raise $2.7 billion of revenue over the next 10 years.

Health Care Bill May Change 1099 Reporting Requirements

Small business owners take note: one of the provisions in the health care reform bill recently signed into law impacts the way businesses issue 1099s. Currently, a business is only required to issue 1099s to individuals who perform services for the company (independent contractors, accountants, lawyers, etc.). But a provision in the health care bill would require 1099s to also be issued to any corporation from which you purchase more than $600 worth of goods in a year.

For example, let's say you spend $1,000 at Best Buy to buy a new computer for your business. Under current law, you don't have to issue a 1099 to Best Buy, because Best Buy is a corporation, and the purchase is for goods instead of services. But the new law will require you to issue a 1099 to Best Buy, and to any other supplier or vendor you do more than $600 worth of business with. So, if you have dozens of suppliers and you buy more than $600 worth of goods from each of those suppliers, you'll be issuing dozens of 1099s.

This change is set to take affect January 1, 2012. You can read more about it here.