John M. Hoffman & Associates CPAs

Tax News

Update - January 4, 2016 - I apologize for not keeping this page as up to date as I should. However, not much has really happened. The annual last minute renewal of expiring tax provisions that keep a few on edge waiting to see if the special needs provision is kept in place...the changes to social security benefits quietly signed into law in November of 2015, the implementation and at the same time delays of implementation of the Affordable Care Act provisions. Otherwise, what is below is really sort of "it". Estate taxes thresholds are nicely in excess of $5M per person but watch out for certain states (like Massachusetts).

 

Prior Latest news - Post 2012 election. At the 13th hour, our politicians put together tax legislation to help reduce our deficit. They made promises to make spending cuts soon. The bulk of this tax bill appears rather fair and not too complicated. Some of what has happened is not really part of the new tax bill but allowing what prior law has scheduled to happen occur. Let me offer what I think are some of the key highlights:

Expiration of the 2% reduction in employee social security tax contributions.  This one never really made sense to me because while it saved a worker earning $40,000 per year $800, it also saved the person making $100,000 per year $2,000. As such, the contribution goes back to the rate it had been for years - 7.65% combined social security Medicare for both employee and employer.

"Bush" tax cuts made permanent - at least as permanent as anything in our tax code can be. This means that the average American taxpayer will see his or her primary tax rates and structure not change from where it has been for years - and hopefully for years to come. This includes the 0% rate of tax on long term capital gains and qualified dividends for taxpayers in a 15% or lower bracket and 15% for that income for people in higher brackets (except the following people):

High income taxpayers will see a new top rate of 39.6%. This rate will apply to taxable income above $450,000 for married couples, $400,000 for single taxpayers. These folks will also see their rate of tax on long term capital gains and qualified dividends rise to 20%.

Another tax hit for higher income taxpayers is the phase-out of personal exemptions and itemized deductions. We had this for years and the joke was that the phase out was phased out (literally). It now is back. It means that when your income hits certain levels you start to reduce your itemized deductions (in one calculation) and your personal exemptions (in another calculation). This aspect ends up adding complexities without need (in my mind). I would have rather seen higher rates which is simpler to understand. With this concept, a single person with taxable income over $250,000 might thing their marginal tax bracket is 33% (as that is what the table says). However, at that level, itemized deductions are reduced by 3% of every additional dollar of income and for every $2,500 of income in excess of the $250,000 threshold they lose 2% of their personal exemption. The bottom line is that each of these provisions increase tax by about 1%. As such, that person is effectively in a 35% bracket when they think they are in a 33% bracket but this only happens until their personal exemptions are totally phased out or their reduction of itemized deductions puts them at the standard deduction or 20% of the deductions they started with - SEE WHAT I MEAN - complexity for small dollars - a simple higher rate would have been easier. The threshold for married folks is $300,000 of income and the hit for families is greater because when you have a spouse and 4 children your exemptions at $3,900 each totals $23,400. An extra $10,000 of income takes away 8% of that or $1,872. In a 33% bracket that costs $618 which on $10,000 of income is over 6%.

The rest of the tax bill essentially restores provisions that were scheduled to expire - things like the $250 above the line deduction for educators, above the line deduction for education, child credit, child care credits, etc. There is also the AMT "patch: which  for years would be an 11th hour extension of a larger AMT exemption which would keep more people out of this tax. The patch makes the larger exemption permanent and indexes it for inflation.

Estate and gift taxes are set at a rate of 40% with an exemption of $5,250,000. This means that if you die with less than $5,250,000 your federal estate tax will likely be zero. Don't get complacent because many states still impose quite an estate tax - and Massachusetts is one of them.

Then there is the additional Medicare tax that is part of "Obamacare". This is not something to fear because there is not much one can do about it other than be prepared to pay more if it applies to you. The Medicare tax, to fund Medicare, is imposed on wages and self employment earnings at a rate of 2.9% (half from the employer and half from the employee. Taxpayers with gross income above $250,000 (married) and $200,000 (single) will now have that rate increased to 3.8% and this tax will now apply to investment income (this all being stated in simple terms).

Examples:

Johnny and Mrs. Appleseed's only income is $1,000,000 of dividends from Apple stock. In 2013, Johnny and Mrs. will pay the additional 3.8% tax on $750,000 of income.

Billy and Mrs. Paycheck's only income is Billy's wages of $1,000,000 from Walmart (he must work a lot of hours). Billy and Mrs. will pay an additional .9% tax on $750,000. The reason the rate is only .9% while the Appleseed's pay 3.8% is that the Paychecks have already paid 2.9% towards Medicare on their income.

Other:

The 3.8% tax on investment income (for those fortunate enough to have income at those levels) applies to interest, dividends, capital gains, rental income, and income from "S" corporations. It does not apply to pension or IRA income.

The additional tax applies only to income that exceeds the threshold ($250,000 for married couples).

Observation - When you combine the 3.8% Medicare tax, the 20% rate of higher income folks on dividends and the possible impact of "phase out"of personal exemptions and deductions, upper income folks will be paying roughly 25% tax on income that a married couple with up to $72,500 of taxable income would pay zero tax on.  My point is that despite the spin that certain politicians wish to make, our tax code does result in higher rates of tax for folks with higher income; effectively paying a bigger percentage of a bigger amount.

 

 End of 2010 (becoming outdated)- Since then there has not been much to report (a good thing). As I update this the debate over extending the 2% reduction in social security contributions (the payroll tax cut) continues. While I think the lower income workers do need a break we also need to keep funding social security if it is going to be there for all.

In December of 2010 a last minute compromise in Washington extended the 2010 individual tax rate structure for two more years (through 2012). Many tax credits and breaks were extended while some were not. Items of note that were not extended:

Real estate deduction for non-itemizers (expired 12/31/2009).

Energy efficiency credits (for insulation / storm windows etc) (expired 12/31/2010) but was then brought back with a $500 limit. If you took as much as $500 in previous years you are done. If you took $400, you have $100 left to claim.

There was also a temporary resolution to estate taxes. In simple terms, through 2012, a person can die with up to $5,000,000 and have no federal estate tax. If a married person dies and uses up less than that $5,000,000 tax free transfer, their spouse can use what was left behind (nice). It is expected that this will become permanent.

Please note - Massachusetts still has a very high estate tax rate.

Update from November 24, 2009

The first time home buyers credit has been extended through April 30, 2010 and a new credit for existing home owners who buy a new home has been added.

A real opportunity for 2009 is in the area of energy credits. Be ready with your information as up to $1,500 in your pocket for things like insulation, storm windows, new heating systems, etc is there. Even more for solar hot water or photovoltaic (electricity generated by solar panels).

Update July 4 2009

Shortly after his inauguration, President Obama signed the

“American Recovery and Reinvestment Act of 2009".

Noteworthy items include:

Making work pay credit – this credit of up to $400 ($800 for married couples) is essentially a rebate of the social security tax on the 1st $6,450 of earnings. This credit applies for tax years 2009 and 2010. Like most tax reductions, this credit is phased out for taxpayers above a certain earning threshold.

Enhancement of First-Time Homebuyer Tax Credit – the new $8,000 credit does not have to be repaid and may be available for qualified taxpayers making a first time home purchase between January 1, 2009 and November 30, 2009.

Energy credits are brought back for 2009 through 2010. The credit is larger (up to $1,500) for energy efficiency expenditures for your existing principal residence.

Enhanced education credits, continuation of bonus depreciation and expensing of asset purchases, exclusion of the 1st $2,400 of unemployment benefit from taxation, and many more things.

http://tax.cchgroup.com/Legislation/House-Senate-Recovery-Act-2009.pdf Links you to CCH’s “Special Report” on this tax act.

Previous buy recent tax legislation:

"Housing Assistance Tax Act of 2008"

Not too well publicized mid summer tax package with not too much substance.

Noteworthy items include:

First time homebuyer credit (not too exciting as the homebuyer has to pay the money back and the adjusted gross income limit is $150,000 to $170,000 for a married couple. We don't get too excited about additional loans (even interest free from the government) for first time home owners. Most of them have well enough debt.

Property tax deduction for non-itemizes. This is sort of neat for someone like a senior citizen who owns their home but does not itemize (perhaps they don't have a mortgage). This provision allows a larger standard deduction if the non-itemizer has real property tax payments.

Reduced home sale exclusion will prevent (prospectively) a taxpayer from moving into their highly appreciated rental or vacation property for two years, selling the property at a sizeable gain and then excluding that gain under the principal residence exclusion. The new rule will force taxpayers (prospectively) to prorate gain on sale between periods of nonqualified (rental or vacation) use and periods of qualified principal residence use.

http://tax.cchgroup.com/legislation/2008-Housing-Assistance-Act.pdf?cm_sp_o=1wTblkzfbBE%20VzTwCjCZBAlw%20Vzllwl%20ftw%20ZBAlbET%20-llblfzEgw%20az0%20-gf%20Bu%20niioCjCaw0f%20kbE Links you to CCH's "Special Report" on this tax act.

 

"Economic Stimulus Package" also known as "Where's My Rebate"?

Please note that there have been some processing errors of the economic stimulus checks, particularly the IRS failure to include amounts for dependent children in the rebate checks. The IRS is aware of this and hopes to have this problem remedied in July of 2008. This requires no further action on the taxpayer part.

Economic Stimulus Package

This legislation is intended to "jumpstart" the economy with the advance tax credits and billions of dollars sent out to taxpayers. Many view this as George Bush's gift to Walmart where much of it will undoubtedly end up. This package also increases depreciation for small businesses.

http://tax.cchgroup.com/legislation/2008-stimulus-package.pdf Links you to CCH's "Special Report" on this tax act.

2007 Year End Tax Legislation "The AMT Patch"

Tax Increase Prevention Act of 2007

This legislation addressed a "rollback of AMT exemption amounts and instead gave AMT exemption amounts that are slightly larger than 2006 amounts. The AMT is still alive and well but at with this legistlation fewer people will be subject to this tax and many subject to this tax will pay less.

http://tax.cchgroup.com/legislation/2007-year-end.pdf Links you to CCH's "Special Report" on this tax act.

Small Business and Work Opportunity Act of 2007

The item within this legislation that impacts more of our clients than any other is the change to the "Kiddie Tax" rules. Effective for years beginning after May 25, 2007 the age limit for kiddie tax is raised to all children under age 19 and students under are 24. The impact of this legislation is to negate much of the tax planning opportunity of gifting appreciated securities to children who could turn around and sell these appreciated securities (perhaps to use for college tuition) and pay very little capital gains tax in their own bracket.

This change in legislation makes the use of section 529 college savings plans even more of an excellent choice.

Most of the other provisions (in our opinion) effect only a small number of taxpayers.

http://tax.cchgroup.com/legislation/2007-small-business-work.pdf Links you to CCH's "Special Report" on this tax act.

Keep posted for future changes as we want to keep everybody up to date. If you see something you think merits consideration on this page, please email it to jhoffman@hoff-man.com. 

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