CURRENT TAX NEWS SHOWN BELOW:
1. Planning For the Possilbe Return of Pre-2001 Tax Rates
2. Re: Summary of Small Business Health Care Tax Credit under the Patient Protection and Affordable Care Act.
3. September Tax Update Newsletter.
Planning For The Possible Return Of Pre-2001 Tax Rates
In under six months, absent Congressional action, the individual marginal income tax rate reductions that were implemented by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) (P.L. 107-16) will expire. President Obama’s proposals to resurrect the top two pre- EGTRRA individual rates of 36 percent and 39.6 percent after December 31, 2010, were recently reviewed by Congress’ Joint Committee on Taxation (JCT). It is therefore appropriate to examine the approaching sunset of the individual rate reductions, the possibility of their extension, and the closely related issue of the fate of the limitation on itemized deductions and the personal exemption phase-out. Other sunsets under EGTRRA will be discussed in future issues of the Tax Bulletin.
Comment
The timetable for addressing the EGTRRA tax cuts is uncertain. After Congress returns in September, there is just a short work period until the November elections. If Republicans should take control of the House and Senate in the November elections, Democrats would have only a lame duck session in which to address the rate reductions. As an alternative to making permanent the EGTRRA individual rate reductions, lawmakers may extend them for two or three years. An extension would be far less costly to federal revenues than making the rate reductions permanent. Most observers expect the middle-income tax cuts (rates from 10 percent to 28 percent) to be extended.
Comment
"The potential rate change makes tax planning more important. However, the rate is not high enough to move taxpayers into some of the tax shelters we have had in the past like oil and gas investing, real estate shelters, etc. that have limited potential economic return except for tax savings," Richard Beason, CPA, Education Foundation Board, Virginia Society of CPAs, told CCH. "In the 1970s and early 1980s when top tax rates where in the 70 to 90 percent brackets, it often made sense to invest in activities that had little hope of success just for the tax write-off. We are not close to those tax rates."
Individual income tax rates
EGTRRA set in motion a gradual reduction of the individual marginal income tax rates. EGTRRA also created a new and temporary 10-percent regular income tax bracket for a portion of taxable income that was previously taxed at 15 percent.
The federal individual income tax rates for 2010 are:
Single individuals:
· If taxable income is not over $8,375: 10% of the taxable income;
· Over $8,375 but not over $34,000: $837.50 plus 15% of the excess over $8,375;
· Over $34,000 but not over $82,400: $4,681.25 plus 25% of the excess over $34,000;
· Over $82,400 but not over $171,850: $16,781.25 plus 28% of the excess over $82,400;
· Over $171,850 but not over $373,650: $41,827.25 plus 33% of the excess over $171,850; and
· Over $373,650: $108,421.25 plus 35% of the excess over $373,650.
Married couples filing a joint return:
· If taxable income is not over $16,750: 10% of the taxable income;
· Over $16,750 but not over $68,000: $1,675 plus 15% of the excess over $16,750;
· Over $68,000 but not over $137,300: $9,362.50 plus 25% of the excess over $68,000;
· Over $137,300 but not over $209,250: $26,687.50 plus 28% of the excess over $137,300;
· Over $209,250 but not over $373,650: $46,833.50 plus 33% of the excess over $209,250; and
· Over $373,650: $101,085.50 plus 35% of the excess over $373,650.
Comment
The tax brackets have been adjusted for inflation since 2001.
Unless extended or made permanent, the individual marginal income tax rates will all rise after December 31, 2010, when EGTRRA sunsets. The 10-percent regular income tax bracket will also disappear after December 31, 2010, and the first portion of an individual’s taxable income will be taxed at 15 percent rather than at 10 percent.
According to the JCT, after EGTRRA sunsets, if there are no modifications by Congress, the federal individual income tax rates for 2011 will be:
Single individuals:
· If taxable income is not over $34,850: 15% of the taxable income;
· Over $34,850 but not over $84,350: $5,227.50 plus 28% of the excess over $34,850;
· Over $84,350 but not over $176,000: $19,087.50 plus 31% of the excess over $84,350;
· Over $176,000 but not over $382,650: $47,499 plus 36% of the excess over $176,000; and
· Over $382,650: $121,893 plus 39.6% of the excess over $382,650
Married couples filing a joint return:
· If taxable income is not over $58,200: 15% of the taxable income;
· Over $58,200 but not over $140,600: $8,730 plus 28% of the excess over $58,200;
· Over $140,600 but not over $214,250: $31,802 plus 31% of the excess over $140,600;
· Over $214,250 but not over $382,650: $54,633.50 plus 36% of the excess over $214,250; and
· Over $382,650: $115,257.50 plus 39.6% of the excess over $382,650.
President Obama has asked Congress to permanently extend the current 10, 15, 25, and 28 percent rates. Under the President’s proposal, these rates would continue for individuals without interruption after December 31, 2010. However, the 33 percent rate bracket and the 35 percent rate bracket increase to 36 percent and 39.6 percent, respectively, after December 31, 2010.
The President has also asked Congress to expand the tax rate bracket for the 28 percent rate so that individuals with less than $195,550 of taxable income in 2011 ($200,000 of AGI, assuming one personal exemption and the basic standard deduction, indexed from 2009) will not be subject to the 36-percent rate that applies after December 31, 2010. For married individuals filing joint returns and surviving spouses, the dollar threshold for the 36-percent bracket would be set so that married couples and surviving spouses with AGI below $237,300 of taxable income in 2011 ($250,000 of AGI, assuming two personal exemptions and the basic standard deduction, indexed from 2009), subject to the 33-percent rate in 2010, will not become subject to the 36-percent rate after December 31, 2010.
Under the President’s proposal, the individual income tax rates for 2011 would be:
Single individuals:
· If taxable income is not over $8,575: 10% of the taxable income;
· Over $8,575 but not over $34,850: $858 plus 15% of the excess over $8,575;
· Over $34,850 but not over $84,350: $4,799 plus 25% of the excess over $34,850;
· Over $84,350 but not over $195,550: $17,174 plus 28% of the excess over $84,350;
· Over $195,550 but not over $382,650: $48,310 plus 36% of the excess over $195,550; and
· Over $382,650: $115,666 plus 39.6% of the excess over $382,650.
Married individuals filing a joint return:
· If taxable income is not over $17,150: 10% of the taxable income;
· Over $17,150 but not over $69,700: $1,715 plus 15% of the excess over $17,150;
· Over $69,700 but not over $140,600: $9,598 plus 25% of the excess over $58,200;
· Over $140,600 but not over $237,300: $28,472 plus 28% of the excess over $140,600;
· Over $237,300 but not over $382,650: $55,548 plus 36% of the excess over $237,300; and
· Over $382,650: $106,725 plus 39.6% of the excess over $382,650.
Planning Note
A variety of tax planning strategies should be considered before the end of 2010. Taxpayers may want to accelerate income, if possible, into 2010 to take advantage of the reduced rates. Taxpayers contemplating a conversion of a traditional IRA to a Roth IRA may want to pay all of the tax due in 2010, rather than recognizing half in 2011 and half in 2012, as permitted under current law.
According to the JCT, three percent of all taxpayers with net positive business income (approximately 750,000 taxpayers) will have marginal rates of 36 percent or 39.6 percent under the President’s proposal. Fifty percent of the approximately $1 trillion of aggregate net positive business income will be reported on returns that have a marginal rate of 36 or 39.6 percent, the JCT predicted.
Planning Note
The increase to 36 percent and 39.6 percent may encourage taxpayers currently doing business as an S corp to convert to C corp status. However, one disincentive to convert to a C corp is the expected rise in dividend taxes after 2010. The current 15-percent dividends tax rate will sunset after December 31, 2010.
Capital gains and dividends
At the same time taxpayers are looking at higher individual marginal income tax rates, the capital gains and dividend tax rates will increase after December 31, 2010. For 2010, the maximum capital gains and dividends tax rate is 15 percent (zero percent for taxpayers in the 10- and 15-percent brackets). Effective January 1, 2011, the tax rate on qualified long-term capital gains will be 20 percent and taxpayers will pay tax on dividends at the same rates that apply to ordinary income.
President Obama has asked Congress to impose a 20-percent capital gains and dividends tax rate on individuals with incomes above $200,000 (less the standard deduction and one personal exemption indexed from 2009). The 20-percent rate would also apply to married couples filing a joint return with income above $250,000 (less the standard deduction and two personal exemptions indexed from 2009). All other taxpayers would pay capital gains and dividends taxes of 15 percent unless they qualify for the zero-percent tax rate.
Comment
If Congress takes no action, the tax rate on dividends after December 31, 2010, will be the same as that currently for dividends failing to qualify for the current 15-percent rate; that is, the same as the rate applicable to a taxpayer’s personal income tax bracket.
Limitation on itemized deductions
Along with reducing the individual marginal income tax rates, EGTRRA repealed the limitation on itemized deductions, but only for 2010. President Obama has asked Congress to allow the limitation on itemized deductions to return but to modify it for 2011 and beyond. Under the President’s proposal, the limitation on itemized deductions would apply to an AGI threshold determined by taking a 2009 dollar amount and adjusting for subsequent inflation. The Obama administration has proposed a dollar amount of $200,000 for single individuals and $250,000 for married couples filing a joint return.
Comment
Also impacting higher-income taxpayers is repeal of the personal exemption phase-out. Under EGTRRA, the personal exemption phase-out is repealed, but only for 2010.
As an alternative to making permanent the EGTRRA individual rate reductions, lawmakers may extend them for two or three years.
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MONTHLY NEWSLETTER - SEPTEMBER 2010
MONTHLY NEWSLETTER - SEPTEMBER 2010
Tax filing reminders
* September 15 - Third quarter installment of 2010 individual estimated income tax is due.
* September 15 - Filing deadline for 2009 tax returns for calendar-year corporations that received an automatic extension of the March 15 filing deadline.
* September 15 - Filing deadline for 2009 partnership tax returns that received an extension of the April 15 filing deadline.
* October 1 - Generally, the deadline for businesses to adopt a SIMPLE retirement plan for 2010.
* October 15 - Deadline for filing 2009 individual tax returns on extension.
Put year-end tax planning on your schedule
At the end of 2010, most of the provisions in the Economic Growth and Tax Relief Reconciliation Act of 2001 will “sunset” or expire. Only those provisions extended or made permanent by later tax legislation will remain effective in 2011. That fact makes year-end tax planning crucial for 2010. At the point of major tax change, there are always opportunities and pitfalls that should be analyzed if you want to keep your taxes as low as possible. With all the tax changes that have already occurred and the many more sure to come this year and next, you must review your tax situation now.
An important part of our service to you is helping to identify actions you can take before year-end to minimize your income tax bill. If you’d like to discuss tax-cutting options that fit your particular situation, please contact us soon for a year-end tax planning review.
Gambling winnings and losses can affect your tax bill
From time to time, some of you are lucky enough to win a shilling or two at your local casino, the track, or your state lottery. How will that gambling income impact your taxes?
All gambling winnings are taxable. This is true for cash winnings and for the fair market value of any non-cash prizes you might win (e.g., a car, vacation, etc.). Depending on your other income and the amount of your winnings, your federal tax on such winnings can go as high as 35%. You don’t receive any capital gains rate break for gambling winnings, nor is there any income averaging to help lower your tax bill.
However, you are entitled to a tax deduction for gambling losses. These are taken as an itemized deduction and your losses can’t exceed your winnings. In other words, if you report no gambling income, you can’t report gambling losses. When you gamble and lose, you must keep documentary evidence of your losses (canceled checks, credit card charges, losing tickets, ATM receipts, etc.). Many casinos keep track of your wins and losses for electronic games if you belong to their player clubs.
But gambling deductions might not be all that beneficial. You can’t simply “net out” your winnings and losses. Instead you must report your entire winnings as income, and use your losses as itemized deductions. In many cases (especially for older taxpayers with little income other than social security benefits, and with very few itemized deductions), the losses might not be tax beneficial. If you take the standard deduction rather than itemizing deductions, you will receive no tax benefit whatsoever. However, the winnings could have a significant impact on your income and may cause you to pay additional taxes (such as making some of your social security benefits taxable when they otherwise wouldn’t be).
Evaluate investment risk in your profile
If nothing else, the recent financial meltdown provided an important learning experience and reinforced time-tested concepts about risk in investing. None of these lessons will comfort investors. However, we can still evaluate investment risks, at least on a relative scale.
Conservative investors fear loss of principal above all. They flock to lower-risk vehicles, such as Treasury bonds, CDs, and money market funds, which are comparatively well known and easy to understand. They’re willing to accept a lower ceiling on their potential earnings in exchange for a lower risk of losing principal. However, this reasoning ignores or underrates a different but no less serious risk: that inflation will outstrip the earning power of the investor’s savings, causing the principal to lose value even when achieving its maximum rate of return. In the worst case, conservative investors can outlive their investments.
Aggressive investors have no problem with risky investments if the investments carry a high profit potential. The more rational risk-takers recognize a corresponding loss potential and accordingly risk no more principal than they can afford to lose. Their less rational fellows may continue to risk everything until little or nothing remains.
The wisest investors take a balanced approach. Since most have neither the time nor the resources to analyze individual investments in depth, they generally refer to advice and analysis provided by outside sources. They also diversify their holdings so that if one investment fails, their portfolios are not irreparably damaged.
The mix of assets in your own portfolio should reflect your risk tolerance, but it also should be tempered by an awareness that both extreme caution and excessive risk-taking can be pathways to ruin. In general, no one stock or other single investment (excluding mutual funds, which are bundles of investments) should comprise a major part of your portfolio. Varying the types of assets in your portfolio (foreign vs. domestic stocks, bonds, mutual funds, Treasury bills) can provide an additional margin of safety.
You can’t escape risk in the world of investments, but you should try to choose the investments that fit both your risk comfort level and your personal financial situation.
This newsletter provides business, financial, and tax information to clients and friends of our firm. This general information should not be acted upon without first determining its application to your specific situation. For further details on any article, please contact us.
I am required by IRS Circular 230 to inform you that, unless otherwise expressly indicated, any federal tax advice contained in this communication, including attachments and enclosures, is not intended or written to be used, and may not be used, for the purpose of (i) avoiding tax-related penalties under the Internal revenue Code or (ii) promoting, marketing, or recommending to another party any tax-related matters addressed herein.
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