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.

No 1099 Relief in Tax Deal

A website visitor asks if the tax deal contained any relief from 1099 reporting for small businesses.  The answer is NO, it didn't.  But there is still hope that Congress will provide relief before the stricter reporting requirements take affect in 2012.  Both Republicans and Democrats seem to agree that the stricter requirements will be a burden on small businesses, but for some reason, they can't reach an agreement to actually provide relief.

Oh, and rental property owners:  you are subject to stricter 1099 rules starting January 1, 2011.  Rental owners have not had to issue 1099s in the past, but now they will, if they pay $600 or more to service providers (accountants, lawyers, plumbers, electricians, etc.).

Read prior Dinesen Tax Times coverage here and here.

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.

Back to the Drawing Board on Taxes

The Senate today voted down two measures to extend the Bush Tax Cuts.  CNN article.

Debt Commission Report Fails to Get Necessary Votes

President Obama's "Debt Commission" voted today on their plan to reduce the federal deficit by $4 trillion over the next 10 years.  The plan was approved by a vote of 11-7, but 14 "yes" votes were needed in order for the proposal to be put before Congress.  Despite that, many analysts think that parts of the proposal will be brought before Congress as part of other budget proposals.

You can read more about today's vote here, and previous Dinesen Tax Times coverage here.

House Passes Extension of Bush Tax Cuts

The U.S. House of Representatives today passed an extension of the Bush Tax Cuts for the lower and middle classes.  The measure passed 234-188 in the House and now goes to the Senate.  Pundits say the Senate will likely vote the measure down.

Link to a Reuters news article about the House vote.

Major Tax Changes Proposed in Debt Commission Report

President Obama's "Debt Commission" released a report today (Wednesday) with recommendations on how to cut the federal deficit.  The Commission says its recomendations would reduce the federal debt by $4 trillion over the next 10 years. The Commission is made up of 6 Republicans, 6 Democrats and 6 others appointed by the President. In order for any of these recommendations to be put before Congress, at least 14 members of the Commission need to approve the plan. The Commission is set to conduct a vote on Friday.

Major changes to the tax code are a part of the plan.  The Commission proposes repealing the alternative minimum tax, creating three tax brackets for individuals (12%, 22% and 28%), and eliminating all itemized deductions (everyone would take a standard deduction, but certain tax credits would be allowed for mortgage interest and charitable contributions).

Corporate taxes would have one flat rate of 28%.

The proposal includes much more than just tax reform.  You can read the entire proposal here, and a CNN article about the proposal here.

U.S. House Will Vote Thursday on Tax Cuts

Democrats in the U.S. House of Representatives say they will try to push through a vote tomorrow (Thursday) on extending the "Bush Tax Cuts" for people who earn $250,000 a year or less.  Republicans seem lukewarm to the idea, though, because they say the tax cuts should be made permanent for all taxpayers.

The Bush Tax Cuts are just one of a number of items lawmakers need to deal with.  We still don't know whether a number of provisions that expired at the end of 2009 will be extended to 2010.

And perhaps most importantly, we don't know whether lawmakers will provide relief to the "alternative minimum tax" (AMT).  Under current provisions, the AMT exemption amounts are reduced dramatically in 2010, and an estimated 1-in-5 Americans will be hit with this tax unless Congress passes legislation to -- at the very least -- retain the 2009 exemption levels.

This article from CNN provides more information about the wrangling going on in the House.

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.

Homebuyer Credit Closing Deadline Extended

The Senate on Wednesday approved an extension of the closing deadline for people who qualify for one of the homebuyer tax credits. Yesterday (June 30) had been the original closing deadline, but the deadline has now been extended through September 30.

The homebuyer credits provide a tax credit of up to $8,000 for first-time homebuyers, and $6,500 for "long-time homeowners" who buy a new house.