Knight Accounting and Technology

Tax law is once again making news in Washington.  Congress is trying to finalize a few bills before the election season heats up, but what’s at stake and what should you know as a taxpayer?  I’ve alluded to a few of these issues in other articles, but let me try and give you an up to date summary.  I use the word “try” because by the time I put pen to paper (or fingers to keyboard, as is the case), much of the information could be out of date as it changes on a daily basis!

The biggest tax news right now is the potential expiration of the Bush tax cuts.  What are they, and why should you care?  Good question.  In 2001 and 2003, under then-President George W. Bush, tax brackets were lowered to a range from 10% to 35%, and capital gains (including sales of stock, land, rental properties, etc) and dividends were taxed at a maximum of 15%.  Among many other provisions, the child tax credit was increased to $1,000 per child.  These provisions were all set to expire in 2010, and politicians at the time were certain that Congress would act during those 9 years to find more permanent solutions.

Let’s fast forward to 2010.  We are quickly approaching 2011, and these provisions are still set to expire on December 31^st, 2010.  If this happens, tax brackets will jump back to the Clinton-era tax rates ranging from 15% to 39.6%, capital gains taxed at 20% and higher, and dividends taxed up to 39.6%.  This means a family with income less than $40,000 may pay about $400 in extra taxes, but someone making $80,000 might pay four times that in additional income taxes.  When you consider that the child tax credit will decrease to $500 per child, families could be hit the hardest.

Before we all panic, it’s important to remember that tax brackets are quite different from tax rates.  Many of us fall in the 25% tax bracket, but only pay an effective tax rate of 10 – 15%.  And, naturally, no one in Congress is campaigning on a ticket of raising taxes on lower income working families.  There is every expectation that Congress will intervene and not allow these rates to revert to the fullest increases possible.  However, as I’ve mentioned in the past, we all thought that Congress would fix the Alternative Minimum Tax and Estate Tax by now, so without a crystal ball, none of us know for sure.  (I published an article about these 2 changes back in April, and have reposted it at www.cpamichele.com if you are interested).

Two other issues being debated are the S Corporation requirement to pay payroll taxes on owner’s distributions in addition to their salary, therefore an extra 15.3% tax, and the new 1099 law that was passed as part of the healthcare reform.  As it is currently written, beginning in 2012 business owners will have to issue 1099 forms to all vendors they pay more than $600 for goods and services, rather than only unincorporated vendors that are paid for services.  Both of these new laws represent a significant burden to business owners and there is a good chance that new legislation will be passed to get rid of the requirements before they ever take hold.  Then again, there is a chance that disagreements in Washington will continue to overshadow any progress made on tax law, so all we can do for now is watch the news, keep our fingers crossed, and vote!

Now that April 15^th has come and gone, it’s time to start thinking about your 2010 taxes.  If you’re like most taxpayers, you want to put off thinking about taxes until next year, but I am a firm believer that the best way to save money on taxes is to make tax planning a year-round effort.  I would love to fill this column with tips for 2010, but unfortunately Congress has yet to finalize many important tax laws that are hanging in the balance and tax planning is more challenging than ever right now. 

Let’s back up a bit.  At the end of each year, Congress is expected to vote on several tax laws that expire from year to year, or require dollar amount adjustments.  Tax geeks like me wait anxiously for the news before Congress takes their holiday break, the figures are published, and we all move forward with advice for our clients.  But, with the push for health insurance passage this year Congress never got around to voting on the necessary issues before year end, and we’re now at the end of April and still anxiously awaiting decisions.  What hangs in the balance, and how does it affect you? 

For starters, over 50 tax provisions expired on 12/31/09.  The most commonly seen provisions from this package include the standard deduction for real estate taxes, the option to deduct sales tax instead of state and local taxes, tuition deductions, and the $250 deduction for educators.  These provisions were expected to be renewed at the end of 2009 for 2010, but that never happened.  

The Alternative Minimum Tax, a tricky tax penalty on high income earners with big deductions, is also set to strike if Congress doesn’t take action.  While I would need to write a book to fully explain the AMT, it was basically a tax penalty put into place decades ago to prevent uber-wealthy individuals from taking so many deductions that they didn’t have to pay a fair share of taxes.  When taxpayers with high incomes also had large itemized deductions, the AMT was an additional tax added to their bottom line to force them to pay the tax they would’ve paid without the benefit of the large deductions. 

The problem is, when the AMT was first put into place, uber-wealthy meant income above $150,000.  Each year, Congress passed patches to effectively increase the income level considered subject to AMT.  But, without a patch passed in December of 2009, the AMT is set to affect almost 40% of married couples in the US.  To put it in perspective, in 2009 several million taxpayers will be forced to pay higher taxes due to the AMT, but according to the Congressional Budget Office this figure jumps to over 30 million taxpayers in 2010 if a patch is not put into place.

As if the 50 tax provisions and AMT aren’t enough, the elephant in the room is the Estate Tax.  To summarize a highly complex issue, as of January 1^st, the estate tax disappeared.  If your loved one died on December 31^st, 2009, their estate would owe 45% tax on any assets greater than $3.5 million.  If that same loved one passed away on January 1^st, 2010, their estate wouldn’t owe a penny of estate tax.  While the leading proposals in Washington range from a 35% to 45% tax on any assets great then $3.5 to $5 million, no legislation has been passed at this point.

It’s hard to believe the first quarter of the year has come and gone with no resolution on these issues.  For now, the best advice I can give is to make sure that your 2009 returns are filed correctly, and to hang on tight for 2010!  Will all 3 be passed and made retroactive to January 1^st?  Will these provisions be passed with a July 1 effective date, causing unimaginable complications for 2010 tax returns?  Or, will Congress avoid making any big tax cuts during an election year and allow these taxes to remain unchanged until 2011?  As tax laws are determined for the year, I will make every effort to publish them in this column, but until the new tax rates and tax laws are set, the best you can do is keep paying your taxes and keeping an eye on the news as it comes out of Washington.

There are some huge changes in the works.  I just wrote this article for the Summit Daily News and thought I’d repost it here for all to see.

If you own a small business, there are a number of drastic changes to your business operations included in the recently approved HIRE Act, and many more on the way as a result of the healthcare bill and a tax extenders package currently working its way out of committee.

The HIRE Act is a positive step for businesses.  While you should consult your own CPA, HR or payroll expert regarding the details, the Hiring Incentives to Restore Employment Act was passed on March 18^th, 2010 and provides tax breaks to companies who hire the unemployed.  Simply put, if you hire an employee between February 3^rd, 2010 and January 1, 2011 and that employee has not been employed for more than 40 hours during the previous 60 days, the employer does not have to pay the usual 6.2% of Social Security tax on that employee’s wages through the end of the year.  The employer can also receive a credit up to $1,000 if the individual remains employed for a full year. 

If you believe you have employees that meet this criteria (family members don’t count, nor can you terminate an existing employee without cause just to replace them with a formerly unemployed employee!), you should work with your payroll provider immediately.  Employees will need to sign an affidavit certifying their previous work status, and the credit can be claimed on the 2^nd Quarter Form 941 which is due July 31^st.

The healthcare bill also offers a few benefits for small businesses, but many of these are phased in over the next eight years.  The only change we’ve seen so far in 2010 is a credit available on the 2010 tax return for small businesses with fewer than 25 employees who offer health benefits to their works.  If your company fits this scenario, you and your tax advisor should work through the formulas available at www.irs.gov.  

Other small business changes lurking on the horizon are not nearly as favorable to businesses, and will cost businesses thousands of dollars in additional taxes and administrative work. Two changes on the horizon for 2011 are limits to FSA and HSA contributions, and a new employer requirement to report the aggregate value of benefits they provide for health coverage on their employees’ W-2’s.  The latter has sparked rumors across the internet that health benefits will become taxable and that’s not the case, they will just be reported as additional information.  Unfortunately, details aren’t available yet, so we’ll all have to stay tuned towards year end.

The most dramatic change to small businesses is buried deep in the healthcare bill.  Beginning in 2012, businesses will have to issue 1099-MISC forms to all vendors they pay more than $600 to for goods or services.  Under current law, you don’t have to issue 1099’s to corporations and you don’t have to issue 1099’s for the purchase of goods, only services.  Beginning 2012, if your business buys a $600 computer from Office Max, they will need to collect Office Max’s address and tax ID# at the time of purchase and send them a 1099 at year end.  I predict that even the smallest businesses will need to send dozens more 1099 forms a year, while larger businesses will be sending hundreds or thousands of additional forms.  This will increase costs for small businesses both on the front end to collect and track the information, and at year-end to issue the 1099’s.  In my opinion, this is the costliest nightmare to face small businesses in decades!

The last notable change applies only to S Corporations.  Currently, S Corp owners are allowed to pay themselves a reasonable salary and take the rest of the company profit as distributions, which are not subject to the 15.3% Social Security and Medicare tax paid on the owner’s salary.  This saves many S Corporations tens of thousands each year.  If the tax extenders package is passed, this benefit will no longer exists for those S Corporations in service fields such as accounting, law, health, engineering, architecture, consulting, and investment management.

As always, I will do my best to keep small businesses in the loop on these upcoming changes through my blog at www.cpamichele.com.  In my 10 years as a CPA, I’ve never seen so many changes in such a short amount of time, and who knows what surprises lie ahead!

This myth is circulating the internet and email, and I just want to clarify the truth.  The myth is that the value of your health insurance will be added to your W-2 starting in 2011 and therefore your taxable income will increase by the same amount.  The truth is that the value of your health insurance will need to be printed for informational purposes on your W-2 starting in 2011, but will NOT be added to your taxable income and you will NOT owe taxes on the value of your health insurance as long as your company maintains a pre-tax health plan (which most do!)

It’s only February 10th, and I’ve already come across this problem dozens of times.  If you worked multiple jobs during the year or if you are a student who worked during school, but are still claimed as a dependent on your parents return, you are facing a big surprise at year-end…you owe taxes or have a smaller refund than ever before.  Why?  It’s all due to the Making Work Pay Credit.  This credit, which was established by President Obama back in April, required payroll departments to withhold $6 – $13 less per pay period from each person’s check.  At year end, each worker would have $400 less in withholdings and on the tax return, a similar $400 credit would be applied to even it out.  No harm, no foul, right?  Well, for many working individuals, it’s not that simple.

Here’s where it’s causing a fiasco.  If you worked 2 jobs, you had a total of $800 less withheld, but you still only get a $400 credit on your return, so you owe back that $400.  If you were a student and worked, your employer would have $400 less withheld, but since your parents most likely still claim you as a dependent on their return, you don’t qualify for the Making Work Pay Credit, so you owe $400.

Unfortuantely, there’s no way around this for 2009, but you can make changes for 2010.  Ask your employer for a new W-4 (or, if you are starting a new job, you will get a form when you start), and while you can keep the same Single/O or Married/2 or whatever you normally file as, but you can add an additional amount to withhold on line 6 you should enter an additional amount of $18 for a bi-weekly payroll or $40 for a monthly payroll.

I was just made aware of a few typos on my 2009 Individual Tax Organizer.  Please accept my apologies!  I have re-posted an update organizer on the Downloads page on my website.  I will not be mailing out new organizers, but the changes are easy to make.  In the Retirement Plan Contributions section of the organizer, I ask for your 2008 contributions, but this should read 2009 contributions.  Also, that section is repeated both on page 1 and page 3.  You only need to fill it out once.  Again, my apologies!

OK, so it’s still a few days from being signed into law, but there are no indications that it won’t be.  Both the Senate and House voted yesterday to make all charitable donations for Haiti relief deductible on 2009 tax returns, if made to qualified charities (visit http://www.irs.gov/app/pub-78/ to see if your favorite charity is properly registered with the IRS) by March 30, 2010.

Thank you for any and all that you are doing for the relief efforts.  I spent time in Haiti in college and it’s a wonderful place filled with extrememly generous people.  If you are looking for donation ideas, please visit my favorite charity, www.shelterbox.org.

I suppose now’s a good a time as any to announce that we’re pregnant and due July 21st! I’m having a rough first trimester again this time around, but can’t wait to meet the little angel growing in my belly!

Anyways, why is this post under my shopping & savings category? Because I found a great offer on a website today for a FREE nursing cover. They make great gifts for any pregnant woman in your life, or if you’re expecting yourself. All you need to do is go to www.uddercovers.com for a free nursing cover ($32 value), and enter CHRISTMAS in all caps in the promotion section. There is an $8.95 shipping charge, but it’s still a great deal if you’re in the market or looking for a special gift.

Beginning on Jan. 1, 2010, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

• 50 cents per mile for business miles driven
• 16.5 cents per mile driven for medical or moving purposes
• 14 cents per mile driven in service of charitable organizations

The new rates for business, medical and moving purposes are slightly lower than last year’s. The mileage rates for 2010 reflect generally lower transportation costs compared to a year ago.

We’ve all heard “no new taxes” in campaign speeches throughout the years, but how is the governemnt planning to pay for some of the breaks being offered to individuals?  By increasing fees and penalties paid by small businesses!  The latest example of this trend is the late filing penalties for S Corporations and Partnerships.  S Corps are due 3/15 each year, and 9/15 if a proper 6-month extension is filed.  Partnerships are due 4/15 each year, and 9/15 if a proper 5-month extension is filed.  If you file after that, the penalty is increasing to $195 per shareholder per month, which is quite an increase over the $50 per shareholder fee that existed only 2 years ago.  Of course, you can avoid thees penalties by filing on time, but I don’t think this is the end of fees being assessed and increased in the near future.