Archive for 'Taxes'

Apr 27

May 15 is an important date for small charities.

You may remember that charities have to file an information return (Form 990) with the IRS annually. You may also remember that small charities (defined as less than $25,000 in annual revenues) do not have to file.

If you do, you are out-of-date.

The Pension Protection Act of 2006 changed this law. Now all charities are required to file. Furthermore, if you go three years without filing the IRS will revoke your exemption. There is no $25,000 exemption anymore. In tax land, three years after the PPA of 1996 is May 15, 2010.

The IRS has created a form – the 990-N – for these small charities to file. You may have heard of it referred to as the “postcard.”

So, file the postcard.

If you don’t, tax practitioners expect the IRS to wait until 2011 before issuing revocations. This would allow affected organizations additional time to catch-up on their filings.

Apr 22

Today I was reviewing information on the new health care act. I am stunned by the marriage penalties that are built into this law.

Let’s go over a couple of things. The premium tax credits in the new law are linked to the federal poverty line (FPL). These credits can be used for one thing only: to buy health insurance through the new health insurance exchanges. Individuals will be eligible for these credits if their annual household income is less than 400% of the FPL.  Now, the FPL for an individual is $10,830. Get married and that number goes to … $14,570.

How does the credit move in relation to household income?  Here is a table:

                                Household Income as a                                 Premium Payment as a

                                Percentage of FPL                                           Percentage of Income

                                Up to 133%                                                         2%

                                133% to 150%                                                    3% to 4%

                                150% to 200%                                                    4% to 6.3%

                                200% to 250%                                                    6.3% to 8.05%

                                250% to 300%                                                    8.05% to 9.5%

                                300% to 400%                                                    9.5%

 Take two individuals at the poverty line – $10,830. They get married. You now have a married couple with household income of $21,660, which is 149% of the FPL. You have just doubled their premiums as a percentage of income.

 By the way, 63% of American households were below 400% of the FPL in 2008.

Say that your sister is single and earns $44,000. Say she meets and falls in love with Steve (a good-looking brute), who is divorced, has custody of a child and also earns $44,000. As a single man, Steve was at 300% of the FPL and qualified for the premium credit. As a married man, Steve and your sister would exceed 400% of the FPL and not qualify for any credit.

 Go to the other end: the high incomers. Say that your sister earns $190,000 and Steve earns $180,000. Separately, they are not subject to the new Medicare tax on either earned or unearned income. Married, well, there’s a different answer. At a minimum, $120,000 of their combined income would be subject to the new 0.9% Medicare tax. If they are unwise enough to have saved and accumulated a portfolio, they could also be subject to the new 3.8% Medicare tax on unearned income.

 Let’s agree on one thing, irrespective of political bent: this is not healthy legislation.

Apr 22

Beginning in 2014, if you are uninsured you will pay a penalty of $95 or 1% above the minimum income required to file a tax return, whichever is larger. The penalty cannot be more than $285.

The insurance company will send you a form. You will have to attach it to your tax return like a W-2.

Fortunately, the IRS cannot charge interest on the penalties or file a lien or levy to secure it – at least for now.

Apr 22

Don’t forget the counterpart to the FICA break on new hires: an income tax credit if you retain the new employee for a required period of time.

A qualifying employee must remain employed for at least 52 weeks, and the employee’s taxable wages for the last 26 weeks must equal or exceed at least 80% of the wages for the first 26 weeks.  There is no limit to the number of qualifying employees for whom the credit may be claimed, but the credit itself is limited to the lesser of $1,000 or 6.2% of the employee’s wages for the 52-week period.

The HIRE credit can be claimed in the employer’s taxable year that includes the end of the first year of employment. The credit may not be carried back to any tax year beginning before March 18,2010. This means that a calendar-year employer will first qualify for the credit in 2011, and the credit cannot be carried back to 2010.

Apr 21

This is the key fundraiser under the new health law. It doesn’t apply until 2013, which will coincide with a new president and Congress.

There are two pieces to this:

(1) The first is the 0.9% surtax on earned income. If you are single, the surtax will apply at $200,00. If you are married, the surtax will apply at $250,000. Yes, you do spot a severe marriage penalty.

What this means is that the Medicare rate will be 3.80% rather than 2.90% for those exceeding the above earned income limits.

(2) The second is a 3.80% surtax on investment (that is, unearned income). The limits are the same as above but the math is a bit more complicated.

(a) You add up your investment income, which includes interest, dividends, capital gains, annuities, royalties and passive rental income. Thankfully this will not include payouts from IRAs, Roths, profit sharing and pension plans. It will also exclude tax-free municipal interest.

(b) You subtract the threshold amount ($200,000 single, $250,000 married) from your “modified AGI.”

(c) You pay the 3.8% on the smaller of (a) or (b).

Accumulating trusts are hit especially hard, as the surtax will start at approximately $12,000 of taxable income.

Note the effect on dividends. If the Bush tax cuts expire, then the tax rates on qualified dividends could be as high as 39.6%. Combine it with the surtax, and the marginal tax rate could be 43.4% - before state taxes.

Apr 20

Let’s touch base on the Foreign Account Tax Compliance Act (FATCA) which is incorporated into the HIRE Act.

First, these provisions apply to tax years beginning after March 18, 2010. For most individuals, this means their 2011 tax return to be filed in 2012.

Second, you must have $50,000 or more overseas in a financial institution. If you do, you must disclose the name of the institution, the account number and the maximum value of the account during the year. The reporting applies to “specified foreign financial assets.” Right now, that term includes checking and savings accounts, securities accounts, private equity and hedge funds.

The penalties begin at $10,000. The penalties ramp, and quickly, if you receive but do not respond to an IRS request for information.

The IRS is to couple this by strong-arming foreign financial institutions to agree to a “qualified intermediary” program. The institution would be required to obtain, verify and provide to the IRS information about U.S. account holders, including the account number, account balance or value and gross deposits and withdrawals for the account.

If foreign law prevents the reporting of this information, then the foreign institution must obtain a waiver from the account holder or close the account.

Oh, Congress also expects the foreign institution to withhold 30% on monies arriving from U.S, sources. This does not start until after 2012, and the foreign institution can avoid this unpleasantry by meeting the reporting requirements above.

Apr 19

The IRS has issued a draft version of Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit. This form can be used by covered employees to certify that they meet the criteria of the HIRE Act, thus allowing qualified employers to claim tax breaks.

  • The HIRE Act is a tax break to the employer, not the employee.
  • If the employer hires someone who has been unemployed for the last 60 days, or who worked no more than 40 hours during the same 60 day period, then the employer does not have to  pay the matching FICA (6.2%) tax. 
  • The employer does have to match the Medicare tax (1.45%)
  • The employee is still responsible for his FICA, Medicare and federal withholding taxes.

Let’s go over the ground rules of the HIRE Act again:

(1)    Applies to payroll after February 3, 2010 and before January 1, 2011

(2)    You can’t fire someone to hire someone. The qualified employee must not replace another employee, unless the other employee left voluntarily or was terminated for cause.

(3)    The employee cannot be related to the employer.

(4)    The employer claims the credit on its Form 941, beginning in the second quarter of 2010.

The HIRE Act requires the employer to obtain a statement from each qualifying employee stating that he or she was unemployed (or underemployed) for the required number of days before beginning work. This form serves as that statement. The employer does not have to file this form with the IRS, but it must keep the forms available should the IRS request.

Mar 19

The president signed the bill March 18, 2010. The centerpiece is a FICA exemption to encourage employers to hire and retain new employees.

A “qualified employee” must start work anytime after February 3, 2010 and before January 1, 2011, and generally must have been unemployed at least 60 days before the start date. The employer FICA is forgiven for wages paid after March 18, 2010 and before January 1, 2011. Note the difference between the hire date and the first date for qualifying wages.

A qualified employee may be hired for any number of hours, full-time or part-time. Since the benefits to the employer are tied to wages paid, no minimum or maximum number of hours is required. The maximum value of this tax break incentive is $6,621 per new hire, which equals the employer’s FICA match of 6.2% up to the FICA wage cap of $106,800.

The reduced tax withholding will have no effect on the employee’s future Social Security benefits, and employers would still need to withhold the employee’s 6.2% share of FICA taxes, as well as income taxes. The employer and employee’s shares of Medicare taxes still apply to these wages.

To qualify for the hiring tax credit, the Act requires the employer to get a statement from each new hire certifying that he or she was unemployed during the 60 days before beginning work or, alternatively, worked less than a total of 40 hours for someone else during the 60-day period. The IRS is currently developing a form employees can use to make the required statement.

To allow payroll departments and the IRS a few weeks to adjust for the new Act, Congress provided that the payroll tax holiday will not apply to wages paid during the first calendar quarter of 2010. Instead, whatever tax break would have been allowed for the first quarter of 2010 will be allowed against the employer’s FICA liability for the second quarter of 2010. Beginning for any new-hire wages paid on or after April 1, the employer will take the tax break immediately into account when making payroll deposits.

There is also an additional $1,000 income tax credit for every new hire retained for 52 weeks. Actually, the credit is the lesser of $1,000 or 6.2 percent of wages paid to the new hire during a 52-consecutive week period.

The new hire must stay on the job for at least the 52 consecutive-week period to entitle the employer to the retained worker tax credit. For example, if the new hire voluntarily leaves after 50 consecutive weeks, the employer is not entitled to any portion of the credit for that employee.

Mar 17

The Housing Assistance Tax Act of 2008 included a provision requiring banks and credit card merchants to report payments to the IRS.

Under the proposed Regs, the new 1099-K would be required for “reportable payment transactions.” A reportable payment transaction is when a card (such as a credit card) is accepted as payment or for any transaction settled through a third-party network (such as PayPal).

Small merchants will be exempt. “Small” means no more than 200 transactions for the year or no more than $20,000 in annual sales.

Fortunately the new 1099 won’t be required until 2012 and will report on 2011 transactions.

What this means is that taxpayers who have a merchant, Paypal or similar account and otherwise meet the threshhold will receive  form 1099-K from their service provider early in 2012. The 1099-K will report the gross amount paid out with no adjustments for fees or chargebacks.

Taxpayers will have to provide their federal tax identification numbers to the processing companies. Failure to do so may lead to backup tax withholding similar rto that in palce for interest or dividend income.

Mar 11

You finally  buy your new Kentucky home. There may be a tax credit up to $5,000 IF:

(1) You do not qualify for the federal first-time homebuyer credit,

(2) It is a new home,

(3) You buy it after July 25,  2009 and before July 26, 2010,

(4) It is your principal residence, and

(5) You live there for a minimum of two years

There is a yet another big hoop to go through. You have to fax Form 40A103 “Application for New Home Tax Credit” within seven (7) days of the closing for approval by the state.  You can’t mail this form in. And no approval = no credit.

The credit is nonrefundable.

Who gets this credit?  A “qualified buyer” is a resident of Kentucky who purchases a qualified residence AND is not eligible to receive the federal first-time homebuyer credit. That leaves the move-up buyer, I suppose.