Archive by Author

Feb 02

My favorite is “reform the U.S. international tax system.”

US multinationals operate on a worldwide tax regime. This is quite unusual; most countries do not tax their multinationals in this manner. In most countries, the corporation pays tax on income generated within the borders of that country. The US disregards borders – for the most part. 

Granted the US scheme is somewhat offset by the foreign tax credit, but in turn that is offset by the CFC scheme, on and on…

                 WSJ Chart

Feb 01

In his State of the Union speech, Obama outlined four proposals aimed at small businesses: eliminating the capital gains tax, encouraging lending, and developing tax credits for new hires and for investments in equipment and facilities.

On Friday, January 29, 2010, the President introduced plans to give employers a $5,000 tax credit for each net new worker hired this year. The purpose is to jumpstart hiring. The credit would be based on an unemployment wage base and would require approximately $7,000 of wages to obtain the full $5,000 credit.

Start-up companies would get a $2,500 tax credit for each worker hired.

In addition there would be another credit – a second credit – refunding a portion of the employer’s social security match. The idea is to refund the match paid on wage increases in excess of the rate of inflation. This credit will be based on the social security wage base, so it will automatically cutoff at $106,800 (which is the maximum subject to social security in 2010).

There are anti-abuse provisions. You cannot fire employees and hire them right back, for example. You cannot go “out of business” and pop up the following day or week.

The White House wants the credits to be retroactive to January 1. They would exist only for 2010.

Employers would be able to claim the credit on a quarterly basis, both as an incentive to hire and to get cash into the economy.

By the way, not-for-profits would qualify for the credit.

There is a credit maximum of $500,000 per business. There is a second limit – the credit would cap at 25% of the increase in a business’ social security wage base.

The cost? About $33 billion.

Feb 01

You may be entitled to a tax credit for 2009. This is an offbeat credit, so you may not have heard of it. The following is from the IRS:

Certain government retirees who receive a government pension or annuity payment in 2009 may be eligible for the Government Retiree Credit. The American Recovery and Reinvestment Act of 2009 provides this one-time credit of $250 for certain federal and state pensioners.

Here are seven things the IRS wants you to know about the Government Retiree Credit :

1. You can take this credit if you receive a pension or annuity payment in 2009 for service performed for the U.S. Government or any U.S. state or local government and the service was not covered by social security.

2. Recipients of the Making Work Pay Credit will have that credit reduced by any Government Retiree Credit they receive.

3. The credit is $250 for individuals and $500 if married filing jointly and both you and your spouse receive a qualifying pension or annuity.

4. You must have a valid social security number to claim the credit. If married filing jointly, both spouses must have a valid social security number to each claim the $250 credit.

5. You cannot take the credit if you received a $250 economic recovery payment in 2009.

6. This is a refundable credit, which means it may give you a refund even if you had no tax withheld from your pension.

7. To claim the credit, you must complete Schedule M, Making Work Pay and Government Retiree Credits, and attach it to your Form 1040A or 1040.

Jan 28

The following is a post by Sarah B. Lawsky at one of my favorite blogs – TaxProfBlog:

Throughout his first term, President Franklin Roosevelt paid taxes at the rates in effect when he took office, even as statutory tax rates increased. His position was that paying tax at a rate higher than that in effect at his inauguration reduced his salary, which violated the Constitutional provision that states that the president’s compensation “shall be neither increased nor diminished during the period for which he shall have been elected.”

At least one tax historian believes the approach is unique to Roosevelt. The memo on the cover of Roosevelt’s 1937 return thus seems to exemplify chutzpah: “I am wholly unable to figure out the amount of tax for the following reason,” he writes. “The first twenty days of January, 1937, were part of my first term of office and to these twenty days the income tax rates as of March 4, 1933 apply. To the other 345 days of the year 1937, the income tax rates as they existed on January 30, 1937. As this is a problem in higher mathematics, may I ask that the Bureau let me know the amount of the balance due?” Or in other words: I made a problem. Fix it, please!

Jan 25

Yes they can.

They can take up to 15% of your social security.

Before they can do so, they have to notify you by mailing an Intent to Levy. You will also receive a CP 91, an IRS notice with the ominous title “Final Notice Before Levy on Social Security Benefits.” Take it seriously. You have only 30 days to respond before the IRS is able to levy you.

Once levied you will have to pay up in full, set up a payment plan, propose an offer or move the account to CNC (cannot collect) status.

Jan 20

If you do you will have to paper file your return. No e-filing for you.

The IRS released the following on January 15, 2010:

With the release of Form 5405, First-Time Homebuyer Credit and Repayment of the Credit, and the related instructions, eligible homebuyers can now start to file their 2009 tax returns. Taxpayers claiming the homebuyer credit must file a paper tax return because of the added documentation requirements.

The IRS expects to start processing 2009 tax returns claiming the homebuyer credit in mid-February after it completes the updating and testing of systems to meet the law’s new requirements. The updates allow the IRS to put in place critical systemic checks to deter fraud related to the homebuyer credit.

Some of these early taxpayers claiming the homebuyer credit may see tax refunds take an additional two to three weeks.

In addition to filling out a Form 5405, all eligible homebuyers must include with their 2009 tax returns one of the following documents in order to receive the credit:

  • A copy of the settlement statement showing all parties’ names and signatures, property address, sales price, and date of purchase. Normally, this is the properly executed Form HUD-1, Settlement Statement.
  • For mobile home purchasers who are unable to get a settlement statement, a copy of the executed retail sales contract showing all parties’ names and signatures, property address, purchase price and date of purchase.
  • For a newly constructed home where a settlement statement is not available, a copy of the certificate of occupancy showing the owner’s name, property address and date of the certificate.

In addition, the new law allows a long-time resident of the same main home to claim the homebuyer credit if they purchase a new principal residence. To qualify, eligible taxpayers must show that they lived in their old homes for a five-consecutive-year period during the eight-year period ending on the purchase date of the new home. The IRS has stepped up compliance checks involving the homebuyer credit, and it encouraged homebuyers claiming this part of the credit to avoid refund delays by attaching documentation covering the five-consecutive-year period:

  • Form 1098, Mortgage Interest Statement, or substitute mortgage interest statements,
  • Property tax records or
  • Homeowner’s insurance records.
Jan 18

Starting in 2010, there is a new type of retirement plan on the block. It is called the DB(k), and the law authorizing it passed Congress several years ago.

The 2006 Pension Protection Act allows for businesses with 500 employees or fewer to offer the DB(k). It is supposed to combine features of a pension with those of a 401(k):

  •  A defined benefit equal to 1% of final average pay for each year of employee service, up to 20 years
  • Automatic enrollment for the (k) portion. Unless an employee opts out or changes the contribution amount, 4% of pay is automatically contributed the (k) 
  • There is a 50% employer match to the (k), up to a maximum match of 2% of pay

Companies will establish a pension fund sufficient to pay a worker in retirement up to 20% of average annual pay during the last few years of work. An employee vests in the pension after three years. Their balance in this account would be paid monthly at retirement, just like a traditional pension plan. This is the “defined benefit” (DB) part of the plan.

Alongside the DB part, the company will automatically take 4% of an employee’s pay and put it in a 401(k) plan. The company must match 50% of that amount, up to 2% of pay. These amounts are immediately vested. A worker can set aside less than 4% or opt out altogether. At retirement, the worker can withdraw funds from the (k) side to supplement the pension (DB) payments.

Who pays for this? The employer must completely fund the pension part. The employee must fund the withholding part of the (k), and the employer must fund the match.

To induce employers to offer these plans Congress has exempted them from the “top heavy” rules. These rules are used to ensure that a company’s retirement plans are not unfairly skewed toward higher-paid workers.

What is the reason for this? Congress wanted to introduce a tax incentive for smaller companies to implement pension plans, which have become increasingly scarce outside of a union or government-as-employer situation. The DB part of the plan allows for a predictable monthly cash payment during retirement. The (k) side would fluctuate with the market.

Given the stock market’s roller coaster performance in recent years, the DB(k) could well be a desirable employee benefit.

Jan 05

The estate tax has been enacted four times in American history. It has been repealed three times.

The first estate tax was repealed by Thomas Jefferson, who forcefully defended a person’s right to leave one’s property at death to “whom he pleases.”

In 1862 the estate tax was imposed a second time to collect funds for the Civil War. It was repealed in 1870.

In 1898 the estate tax was imposed again to collect funds for the Spanish-American war, and it was repealed in 1902.

The estate tax was enacted a fourth time in 1916 to help pay for WWI. World War I ended over ninety years ago, but Congress forgot.

The estate tax has been “repealed” again in 2010, but not really.

What are we talking about? The estate tax is the tax on the net worth of a decedent. The government spots a certain amount (the “unified credit”). If your net worth is less than this amount, then you can stop worrying about the estate tax. If you are worth more, well, then you might want to worry – at least a little bit.

 Look at the following:


    Year                Exemption                    Tax Rate

 2009                 $3.5 million                   45%                 

2010                 Tax Repeal                    0%

2011                 $1 million                      55%

What’s the problem? Well, if Congress does nothing, the estate tax goes away in 2010 and then returns in 2011. That’s not all, though. The amount the IRS spots you – the unified credit – goes down, which is bad, and the maximum tax rate goes up, which is also bad.

What if you die in 2010? First, bad for you. Second, there is a dirty tax secret buried here. Congress has substituted a capital gains tax for the estate tax.  Congress says that you have to carryover the decedent’s basis to the beneficiary. Say that dad bought those shares of P&G at an average of $4.12 per share. The good news is that you have received shares in P&G. The bad news is that your basis in the shares in $4.12 per share rather than market value when dad passed away. You have capital gain taxes to pay when you sell those shares!

Congress realized this is unfair, so they allowed the estate to use market value rather than dad’s cost – up to a limit.  The estate can mark-up enough assets to eliminate $1,300,000 of capital gains. Note that this is not the same as saying that $1,300,000 of assets are marked-up to market value.

There is another mark-up – this one for $3,500,000 – for assets transferred to the surviving spouse.

Hold on though. Congress is intent on revising this law in 2010 – and making the change retroactive to January 1, 2010. What will happen? Will it happen? I don’t know, but we are expecting something to happen.

Dec 16

If you’ve been unemployed in 2009, the first $2,400 of unemployment benefits you received in 2009 is tax free. This provision applies only to benefits received in 2009, unless Congress extends the law. 

Normally, unemployment benefits are taxable.

Dec 16

You may have heard that 2010 is the year to convert to a Roth IRA. The $100,000 AGI limit is coming off, and you will have the option to pay the tax over a two-year period. So, if you convert $50,000 in 2010, you can pay the tax in 2010 or spread it over the next two years – 2011 and 2012.

We practitioners knew that this moment was coming. The tax law changed back in 2005 (Tax Increase Prevention and Reconciliation Act of 2005). Many of us thought that we saw a way to fund a Roth, even if the taxpayer was over the annual Roth income limits for contributions. How? Well, by funding a nondeductible IRA for 2006, 2007… well, you get the idea. We would convert it over to a Roth in 2010. The only part that would be taxed was the appreciation, and that wasn’t so bad.

This idea won’t work. In fact, there is a nasty trap.

Let’s walk through an example.

Charlie has contributed $12,000 to a nondeductible IRA over the years. It is now worth $19,000. He has left previous employers and rolled his 401(k) into an IRA. That IRA is worth $82,000. In 2010 he converts the $19,000 IRA to a Roth.

One would think that his income would be $19,000 – $12,000 = $7,000.

One would be wrong.

The IRS says that you have to figure out his nondeductible as a percentage, not as a dollar amount. The denominator is the sum of all his IRAs, not just his nondeductible IRA. For Charlie, this math would be $12,000 divided by ($19,000 + 82,000) which equals 11.9%. When he converts $19,000, the IRS says his basis is $19,000 times 11.9% which equals $2,257. Charlie’s income upon the Roth conversion will be $19,000 minus 2,257 which equals $16,743. There’s a surprise.

Sorry Charlie.