The repeal essentially takes the Form 1099 reporting rules back to what they were before the changes were enacted.   Specifically, under IRC Section 6041(a), “All persons engaged in a trade or business and making payment in the course of such trade or business to another person” of more than $600 or more must report the amount and the name and the address of the recipient to the IRS and to the recipient.  This includes payments for items such as, but not limited to, rent, royalties, interest, compensation, remunerations, etc.  

Take note, however, that the increase in penalties for noncompliance with the Form 1099 reporting requirements which was included in last year’s small business and health care legislation were not repealed.  The increase in penalties remains in effect.  

Jeanette E. Anderson, CPA, CFE
Anderson Accountancy Corporation
762 Rio Del Mar Blvd.
Aptos, CA 95003
Ph 831-688-1977
Andersonaccountancycorp.com

These reductions are set to expire at the end of 2010.  If no action is taken by Congress,  in 2011, the tax rate on dividends and capital gains will increase to prior levels.  Adding to the prior rates is the new 3.8% Medicare tax on investment income (passed as part of the healthcare reform acts), which will result in a top tax rate on dividends of 43.4% and a top tax rate on capital gains of 23.8%.  Note that these figures are federal rates only, CA income taxes are also paid on dividends and capital gains. 

These increases are significant and may have far reaching effects in that it can discourage productive capital formation and ultimately reduce wages and living standards of U.S. citizens.  A website that I believe has some good information about income taxes and the economic effects various tax laws have is www.taxfoundation.org.

Jeanette Anderson, CPA, CFE
Anderson Accountancy Corporation
(831) 688-1977

You should also keep any receipts, canceled checks, and similar evidence for improvements or other additions to the basis. The following are some examples:

• Putting an addition on your home
• Replacing an entire roof
• Paving your driveway
• Installing central air conditioning or heating
• Rewiring your home
• Assessments for local improvements
• Remodel costs, including new flooring, appliances and the like
• Amounts spent to restore damaged property

In addition, you should keep track of any decreases to the basis. The following are some examples:

• Insurance or other reimbursement for casualty losses
• Deductible casualty loss not covered by insurance
• Payment received for easement or right-of-way granted
• Value of subsidy for energy conservation measure excluded from income
• Depreciation deduction if home is used for business or rental purposes

How you keep records is up to you, but they must be clear and accurate and must be available to the IRS if requested. And you must keep these records for as long as they are important for the federal tax law.

Keep records that support an item of income or a deduction appearing on a return until the period of limitations for the return expires. (A period of limitations is the limited period of time after which no legal action can be brought.)

For assessment of tax, this is generally three years from the date you filed the return. For filing a claim for credit or refund, this is generally three years from the date you filed the original return or two years from the date you paid the tax, whichever is later. Returns filed before the due date are treated as filed on the due date.

You may need to keep records relating to the basis of property (discussed earlier) longer than the period of limitations.

Note: Technically, basis is needed to determine gain on home sale (loss is not deductible). That need has diminished for most homeowners now that gain up to $250,000 ($500,000 in some sales by married couples) is tax-exempt.

Basis is still important, however, in figuring casualty loss, on conversion of the home to business use, or where there’s a gift of the home (in this case, important to the recipient).

Keep those records as long as they are important in figuring the basis of the property. Generally, this means for as long as you own the property and, after you dispose of it, for the period of limitations that applies to you.

Tax credits to certain small employers that provide insurance. The new law provides small employers with a tax credit (i.e., a dollar-for-dollar reduction in tax) for nonelective contributions to purchase health insurance for their employees. The credit can offset an employer’s regular tax or its alternative minimum tax (AMT) liability.

Small business employers eligible for the credit. To qualify, a business must offer health insurance to its employees as part of their compensation and contribute at least half the total premium cost. The business must have no more than 25 full-time equivalent employees (“FTEs”), and the employees must have annual full-time equivalent wages that average no more than $50,000. However, the full amount of the credit is available only to an employer with 10 or fewer FTEs and whose employees have average annual full-time equivalent wages from the employer of less than $25,000.

Years the credit is available. The credit is initially available for any tax year beginning in 2010, 2011, 2012, or 2013. Qualifying health insurance for claiming the credit for this first phase of the credit is health insurance coverage purchased from an insurance company licensed under state law. For tax years beginning after 2013, the credit is only available to an eligible small employer that purchases health insurance coverage for its employees through a state exchange and is only available for two years. The maximum two-year coverage period does not take into account any tax years beginning in years before 2014. Thus, an eligible small employer could potentially qualify for this credit for six tax years, four years under the first phase and two years under the second phase.

Calculating the amount of the credit. For tax years beginning in 2010, 2011, 2012, or 2013, the credit is generally 35% (50% for tax years beginning after 2013) of the employer’s nonelective contributions toward the employees’ health insurance premiums. The credit phases out as firm-size and average wages increase. Tax-exempt small businesses meeting these requirements are eligible for payroll tax credits of up to 25% for tax years beginning in 2010, 2011, 2012, or 2013 (35% in tax years beginning after 2013) of the employer’s nonelective contributions toward the employees’ health insurance premiums.

Special rules. The employer is entitled to an ordinary and necessary business expense deduction equal to the amount of the employer contribution minus the dollar amount of the credit. For example, if an eligible small employer pays 100% of the cost of its employees’ health insurance coverage and the amount of the tax credit is 50% of that cost (i.e., in tax years beginning after 2013), the employer can claim a deduction for the other 50% of the premium cost.

Self-employed individuals, including partners and sole proprietors, two percent shareholders of an S corporation, and five percent owners of the employer are not treated as employees for purposes of this credit. Any employee with respect to a self-employed individual is not an employee of the employer for purposes of this credit if the employee is not performing services in the trade or business of the employer. Thus, the credit is not available for a domestic employee of a sole proprietor of a business. There is also a special rule to prevent sole proprietorships from receiving the credit for the owner and their family members. Thus, no credit is available for any contribution to the purchase of health insurance for these individuals and the individual is not taken into account in determining the number of full-time equivalent employees or average full-time equivalent wages.

Most small businesses exempted from penalties for not offering coverage to their employees. Although the new law imposes penalties on certain businesses for not providing coverage to their employees (so-called “pay or play”), most small businesses won’t have to worry about this provision because employers with fewer than 50 employees aren’t subject to the “pay or play” penalty. For businesses with at least 50 employees, the possible penalties vary depending on whether or not the employer offers health insurance to its employees. If it does not offer coverage and it has at least one full-time employee who receives a premium tax credit, the business will be assessed a fee of $2,000 per full-time employee, excluding the first 30 employees from the assessment. So, for example, an employer with 51 employees who doesn’t offer health insurance to his employees will be subject to a penalty of $42,000 ($2,000 multiplied by 21). Employers with at least 50 employees that offer coverage but have at least one full-time employee receiving a premium tax credit will pay $3,000 for each employee receiving a premium credit (capped at the amount of the penalty that the employer would have been assessed for a failure to provide coverage, or $2,000 multiplied by the number of its full-time employees in excess of 30). These provisions take effect Jan. 1, 2014.

The “Cadillac tax” on high-cost health plans. The new law places an excise tax on high-cost employer-sponsored health coverage (often referred to as “Cadillac” health plans). This is a 40% excise tax on insurance companies, based on premiums that exceed certain amounts. The tax is not on employers themselves unless they are self-funded (this typically occurs at larger firms). However, it is expected that employers and workers will ultimately bear this tax in the form of higher premiums passed on by insurers.

Here are the specifics: The new tax, which applies for tax years beginning after Dec. 31, 2017, places a 40% nondeductible excise tax on insurance companies and plan administrators for any health coverage plan to the extent that the annual premium exceeds $10,200 for single coverage and $27,500 for family coverage. An additional threshold amount of $1,650 for single coverage and $3,450 for family coverage will apply for retired individuals age 55 and older and for plans that cover employees engaged in high risk professions. The tax will apply to self-insured plans and plans sold in the group market, but not to plans sold in the individual market (except for coverage eligible for the deduction for self-employed individuals). Stand-alone dental and vision plans will be disregarded in applying the tax. The dollar amount thresholds will be automatically increased if the inflation rate for group medical premiums between 2010 and 2018 is higher than the Congressional Budget Office (CBO) estimates in 2010. Employers with age and gender demographics that result in higher premiums could value the coverage provided to employees using the rates that would apply using a national risk pool. The excise tax will be levied at the insurer level. Employers will be required to aggregate the coverage subject to the limit and issue information returns for insurers indicating the amount subject to the excise tax.

Provided by Jeanette Anderson, CPA, CFE
Anderson Accountancy Corporation
(831) 688-1977
www.andersonaccountancycorp.com

The specific changes will impact each person in a different way and so it is important that when needed, people consult with a qualified tax professional.  As I’ve said before, proper planning can make all the difference when it comes to a person’s income taxes and personal financial future!

Individual mandate. The new law contains an “individual mandate”—a requirement that U.S. citizens and legal residents have qualifying health coverage or be subject to a tax penalty. Under the new law, those without qualifying health coverage will pay a tax penalty of the greater of: (a) $695 per year, up to a maximum of three times that amount ($2,085) per family, or (b) 2.5% of household income over the threshold amount of income required for income tax return filing. The penalty will be phased in according to the following schedule: $95 in 2014, $325 in 2015, and $695 in 2016 for the flat fee or 1.0% of taxable income in 2014, 2.0% of taxable income in 2015, and 2.5% of taxable income in 2016. Beginning after 2016, the penalty will be increased annually by a cost-of-living adjustment. Exemptions will be granted for financial hardship, religious objections, American Indians, those without coverage for less than three months, aliens not lawfully present in the U.S., incarcerated individuals, those for whom the lowest cost plan option exceeds 8% of household income, those with incomes below the tax filing threshold (in 2010 the threshold for taxpayers under age 65 is $9,350 for singles and $18,700 for couples), and those residing outside of the U.S.

Premium assistance tax credits for purchasing health insurance. The centerpiece of the health care legislation is its provision of tax credits to low and middle income individuals and families for the purchase of health insurance. For tax years ending after 2013, the new law creates a refundable tax credit (the “premium assistance credit”) for eligible individuals and families who purchase health insurance through an Exchange. The premium assistance credit, which is refundable and payable in advance directly to the insurer, subsidizes the purchase of certain health insurance plans through an Exchange. Under the provision, an eligible individual enrolls in a plan offered through an Exchange and reports his or her income to the Exchange. Based on the information provided to the Exchange, the individual receives a premium assistance credit based on income and IRS pays the premium assistance credit amount directly to the insurance plan in which the individual is enrolled. The individual then pays to the plan in which he or she is enrolled the dollar difference between the premium assistance credit amount and the total premium charged for the plan. For employed individuals who purchase health insurance through an Exchange, the premium payments are made through payroll deductions.

The premium assistance credit will be available for individuals and families with incomes up to 400% of the federal poverty level ($43,320 for an individual or $88,200 for a family of four, using 2009 poverty level figures) that are not eligible for Medicaid, employer sponsored insurance, or other acceptable coverage. The credits will be available on a sliding scale basis. The amount of the credit will be based on the percentage of income the cost of premiums represents, rising from 2% of income for those at 100% of the federal poverty level for the family size involved to 9.5% of income for those at 400% of the federal poverty level for the family size involved.

Higher Medicare taxes on high-income taxpayers. High-income taxpayers will be hit with a double whammy: a tax increase on wages and a new levy on investments.

Higher Medicare payroll tax on wages. The Medicare payroll tax is the primary source of financing for Medicare’s hospital insurance trust fund, which pays hospital bills for beneficiaries, who are 65 and older or disabled. Under current law, wages are subject to a 2.9% Medicare payroll tax. Workers and employers pay 1.45% each. Self-employed people pay both halves of the tax (but are allowed to deduct half of this amount for income tax purposes). Unlike the payroll tax for Social Security, which applies to earnings up to an annual ceiling ($106,800 for 2010), the Medicare tax is levied on all of a worker’s wages without limit.

Under the provisions of the new law, which take in 2013, most taxpayers will continue to pay the 1.45% Medicare hospital insurance tax, but single people earning more than $200,0000 and married couples earning more than $250,000 will be taxed at an additional 0.9% (2.35% in total) on the excess over those base amounts. Employers will collect the extra 0.9% on wages exceeding $200,000 just as they would withhold Medicare taxes and remit them to the IRS. Companies wouldn’t be responsible for determining whether a worker’s combined income with his or her spouse made them subject to the tax. Instead, some employees will have to remit additional Medicare taxes when they file income tax returns, and some will get a tax credit for amounts overpaid. Self-employed persons will pay 3.8% on earnings over the threshold. Married couples with combined incomes approaching $250,000 will have to keep tabs on their spouses’ pay to avoid an unexpected tax bill. It should also be noted that the $200,000/$250,000 thresholds are not indexed for inflation, so it is likely that more and more people will be subject to the higher taxes in coming years.

Medicare payroll tax extended to investments. Under current law, the Medicare payroll tax only applies to wages. Beginning in 2013, a Medicare tax will, for the first time, be applied to investment income. A new 3.8% tax will be imposed on net investment income of single taxpayers with AGI above $200,000 and joint filers over $250,000 (unindexed). Net investment income is interest, dividends, royalties, rents, gross income from a trade or business involving passive activities, and net gain from disposition of property (other than property held in a trade or business). Net investment income is reduced by properly allocable deductions to such income. However, the new tax won’t apply to income in tax-deferred retirement accounts such as 401(k) plans. Also, the new tax will apply only to income in excess of the $200,000/$250,000 thresholds. So if a couple earns $200,000 in wages and $100,000 in capital gains, $50,000 will be subject to the new tax. Because the new tax on investment income won’t take effect for three years, that leaves more time for Congress and the IRS to tinker with it. So we can expect lots of refinements and “clarifications” between now and when the tax is actually rolled out in 2013.

Floor on medical expenses deduction raised from 7.5% of adjusted gross income (AGI) to 10%. Under current law, taxpayers can take an itemized deduction for unreimbursed medical expenses for regular income tax purposes only to the extent that those expenses exceed 7.5% of the taxpayer’s AGI. The new law raises the floor beneath itemized medical expense deductions from 7.5% of AGI to 10%, effective for tax years beginning after Dec. 31, 2012. The AGI floor for individuals age 65 and older (and their spouses) will remain unchanged at 7.5% through 2016.

Limit reimbursement of over-the-counter medications from HSAs, FSAs, and MSAs. The new law excludes the costs for over-the-counter drugs not prescribed by a doctor from being reimbursed through a health reimbursement account (HRA) or health flexible savings accounts (FSAs) and from being reimbursed on a tax-free basis through a health savings account (HSA) or Archer Medical Savings Account (MSA), effective for tax years beginning after Dec. 31, 2010.

Increased penalties on nonqualified distributions from HSAs and Archer MSAs. The new law increases the tax on distributions from a health savings account or an Archer MSA that are not used for qualified medical expenses to 20% (from 10% for HSAs and from 15% for Archer MSAs) of the disbursed amount, effective for distributions made after Dec. 31, 2010.

Limit health flexible spending arrangements (FSAs) to $2,500. An FSA is one of a number of tax-advantaged financial accounts that can be set up through a cafeteria plan of an employer. An FSA allows an employee to set aside a portion of his or her earnings to pay for qualified expenses as established in the cafeteria plan, most commonly for medical expenses but often for dependent care or other expenses. Under current law, there is no limit on the amount of contributions to an FSA. Under the new law, however, allowable contributions to health FSAs will capped at $2,500 per year, effective for tax years beginning after Dec. 31, 2012. The dollar amount will be indexed for inflation after 2013.

Dependent coverage in employer health plans. Effective on the enactment date, the new law extends the general exclusion for reimbursements for medical care expenses under an employer-provided accident or health plan to any child of an employee who has not attained age 27 as of the end of the tax year. This change is also intended to apply to the exclusion for employer-provided coverage under an accident or health plan for injuries or sickness for such a child. A parallel change is made for VEBAs and 401(h) accounts. Also, self-employed individuals are permitted to take a deduction for the health insurance costs of any child of the taxpayer who has not attained age 27 as of the end of the tax year.

Excise tax on indoor tanning services. The new law imposes a 10% excise tax on indoor tanning services. The tax, which will be paid by the individual on whom the tanning services are performed but collected and remitted by the person receiving payment for the tanning services, will take effect July 1, 2010.

Liberalized adoption credit and adoption assistance rules. For tax years beginning after Dec. 31, 2009, the adoption tax credit is increased by $1,000, made refundable, and extended through 2011 The adoption assistance exclusion is also increased by $1,000.

Provided by Jeanette Anderson, CPA, CFE
Anderson Accountancy Corporation
(831) 688-1977
www.andersonaccountancycorp.com

Taxpayers who purchase a “qualified principal residence” on or after May 1, 2010 and before January 1, 2011, will be allowed a credit equal to the lesser of 5% of the purchase price of the home or $10,000.  The credit is also available to taxpayers who enter into an enforceable contract during the applicable time period, as long as the purchase is completed before August 1, 2011. 

Like the prior New Home Credit, there are some requirements:
1)      The home must be a “qualified principal residence”
2)      The taxpayer must apply the credit in equal amounts over 3 successive tax years
3)      The credits are non-refundable, will not reduce AMT & cannot be carried over 

Another important point – the state has established a $100 million dollar limit for this credit, which  will be used on a first-come, first-serve basis.  In order to ensure you are able to utilize this credit, make those purchases soon!  Once the total of $100 million in credits have been used by taxpayers, no more will be allowed, even if all other criteria are met.

Contact: Jeanette Anderson, CPA, CFE
Anderson Accountancy Corporation, (831) 688-1977
www.andersonaccountancycorp.com

By law, each year, the dollar amounts for a variety of tax provisions must be revised to match inflation.  As we all know that inflation was minimal in 2009 as compared to prior years, there are no significant changes in the specific provisions for 2010 as compared to 2009.  Following are some of the key items affecting 2010 tax returns (and which are due to be filed by April 15, 2011 for most people):

• The personal and dependency exemption will remain the same as 2009 levels, at $3,650 per individual or dependent.
• The standard deduction for married couples filing jointly, married individuals filing separately and singles remain the same as 2009 levels.  Specifically, the standard deduction for each is listed below:
  Married couples filing jointly – $11,400
  Married individual filing separately – $5,700
  Singles – $5,700
• The federal tax rate thresholds for 2010 are increased slightly from 2009 levels.  That means that individuals will need to earn slightly more money before their tax rate increases from 15% to 25%.
• The maximum earned income credit for working families with 2 or more children for 2010 is $5,028, up from $4,824 for 2009.  Further, the upper income limit to qualify for the credit for joint filers with 2 or more children is $43,415 for 2010, up from $41,646 for 2009.
• The annual gift exclusion will remain consistent with 2009 at $13,000 per individual.

The above information is a summary of some of the key items that will affect taxpayers in 2010, and are subject to changes by the IRS.  As such, it is important to consult with a qualified tax professional when dealing with tax issues as the rules are complex and include numerous qualifiers and phase outs.

Following are some of the key items that individuals should know with respect to the credit:

1. To qualify, you must buy, or enter into a binding contract to buy, a principal residence on or before April 30, 2010.  This means that second homes and vacation homes do NOT qualify.
2. If you enter into a binding contract by April 30, 2010, you must close escrow on the purchase of the home before June 30, 2010 (this may prove difficult for short-sale and bank-owned properties).
3. For purchases (see above) made in 2010, you have the option of claiming the credit on your either your 2009 or 2010 tax return.  This is great as it allows you to receive the benefit of the credit almost concurrent with the purchase.
4. A reduced credit is now available for residents who have lived in the same principal residence for any five consecutive year period during the preceding eight year period that ended on the date the new home is purchased.  Additionally, to qualify under this provision, the settlement date for the new purchase must be after November 6, 2009.
5. The maximum credit for long-time residents (see #4 above) is $6,500 for married couples filing jointly. For married couples filing separately, the maximum credit for long-time residents is $3,250 each.
6. People with higher incomes can now qualify for the credit.  The new law raises the upper income limits for homes purchased after Nov. 6, 2009.  In order to receive the full credit, taxpayers must have adjusted gross incomes of $125,000, or $225,000 for joint filers.
7. To claim the credit on homes purchased after Nov. 6, 2009, and all home purchases claimed on 2009 tax returns, the newly revised IRS Form 5405 must be used.  This form was revised in December 2009.  Failure to use the proper form may cause the credit to be denied.
8. No credit is available if the purchase price of the home exceeds $800,000.
9. The purchaser must be at least 18 years of age on the date of the purchase. 
10. A dependent of another taxpayer is not eligible to claim the credit, even if over 18 years of age.

As a caution, the IRS has stated that there was much abuse of this credit during 2009 and as a result it plans to be critical of credits claimed on future tax returns.  To protect yourself and obtain the maximum credit for which you may qualify, it is important to consult with a qualified tax professional regarding the credit.

The following questions and answers provide basic information about the tax credit. If you have more specific questions, we strongly encourage you to consult a qualified tax advisor or legal professional about your unique situation.

1. Who is eligible to claim the tax credit?

2. What is the definition of a first-time home buyer? How is the amount of the tax credit determined?

3. Are there any income limits for claiming the tax credit? What is “modified adjusted gross income”?

4. If my modified adjusted gross income (MAGI) is above the limit, do I qualify for any tax credit?

5. Can you give me an example of how the partial tax credit is determined?

Read the rest of the article at this link and get answers to your questions.