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New law keeps payroll tax cut in place through February of 2012

Tuesday, December 27th, 2011 by Moore McLaughlin

On December 23, Congress passed H.R. 3765, the “Temporary Payroll Tax Cut Continuation Act of 2011” (the TTCA). The bill was signed into law by President Obama shortly thereafter. The tax provisions of the TTCA consist of a two-month temporary extension of the payroll tax cut that’s in place for 2011, plus a parallel extension of a lower Self Employment Contributions Act (SECA) tax rate on self-employment income.

Overview. The Federal Insurance Contributions Act (FICA) imposes two taxes on employers, employees, and self-employed workers—one for Old Age, Survivors and Disability Insurance (OASDI; commonly known as the Social Security tax), and the other for Hospital Insurance (HI; commonly known as the Medicare tax).

Before passage of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Tax Relief Act, P.L. 111-312), the FICA tax rate for employees and employers was 7.65% each—6.2% for OASDI and 1.45% for HI. Under the SECA tax, self-employment income of self-employed taxpayers was subject to a tax of 15.3%—12.4% for OASDI and 2.9% for HI. There is a maximum amount of compensation subject to the OASDI tax (the wage base), but no maximum for HI. (The wage base is $106,800 for 2011 and $110,100 for 2012.) Similar rules apply under the Railroad Retirement Tax Act (RRTA).

Under pre-2010 Tax Relief Act law, for computing the income tax of an individual, Code Sec. 164(f) allowed an above-the-line deduction equal to 50% of the amount of the SECA tax imposed on the individual’s self-employment income for the tax year.

Under Code Sec. 1402(a)(12), a taxpayer is allowed a deduction in computing net earnings from self-employment equal to: (1) net earnings from self-employment as determined before taking the Code Sec. 1402(a)(12) deduction into account, multiplied by (2) one-half the sum of the OASDI tax rate and the HI tax rate. This deduction is allowed in computing net earnings from self-employment in lieu of the Code Sec. 164(f) above-the-line deduction of one-half of the self-employment tax. Thus, the Code Sec. 164(f) deduction can’t be taken in computing self-employment tax liability. The Code Sec. 1402(a)(12) deduction is designed to put the self-employed in the same position as employees in that they don’t have to pay self-employment tax on about half of the amount of the tax itself.

Temporary tax cut for 2011. For remuneration received during 2011, the 2010 Tax Relief Act reduced the employee OASDI tax rate under the FICA tax by two percentage points to 4.2%. Similarly, for self-employment income for tax years beginning in 2011, the Act reduced the OASDI tax rate under the SECA tax by two percentage points to 10.4% percent. As a result, for 2011, employees pay only 4.2% Social Security tax on wages up to $106,800 and self-employed individuals pay only 10.4% Social Security self-employment taxes on self-employment income up to $106,800.

The 2010 Tax Relief Act provided rules for coordination with deductions for employment taxes, as follows.

The Code Sec. 164(f) income tax deduction allowed for tax years beginning in 2011 is computed at the rate of 59.6% of the OASDI tax paid, plus one half of the HI tax paid.

A new percentage (59.6%) replaces the rate of one half (50%) allowed under pre-2010 Tax Relief Act law for this portion of the deduction. The new percentage is necessary to continue to allow the self-employed taxpayer to deduct the full amount of the employer portion of SECA taxes. The employer OASDI tax rate remains at 6.2%, while the employee portion falls to 4.2%. Thus, the employer share of total OASDI taxes is 6.2 divided by 10.4, or 59.6% of the OASDI portion of SECA taxes.

However, the two-percentage-point reduction is not taken into account in determining the Code Sec. 1402 SECA tax deduction allowed for determining the amount of the net earnings from self-employment for the tax year.

New law. Under the TTCA, the reduced employee OASDI tax rate of 4.2% under the FICA tax, and the equivalent employee portion of the RRTA tax, is extended to apply to covered wages paid in the first two months of 2012. (Sec. 601(c) of the 2010 Tax Relief Act (P.L. 111-312), as amended by TTCA Sec. 101)

The TTCA also provides for a recapture of any benefit a taxpayer may have received from the reduction in the OASDI tax rate, and the equivalent employee portion of the RRTA tax, for remuneration received during the first two months of 2012 in excess of $18,350 (i.e., two-twelfths of the 2012 wage base of $110,100). (Sec. 601(g) of the 2010 Tax Relief Act (P.L. 111-312), as amended by TTCA Sec. 101) The recapture is accomplished by a tax equal to 2% of the amount of wages (and railroad compensation) received during the first two months of 2012 that exceed $18,350.

M&Q observation: A highlight of the TTCA issued by the House Ways & Means Committee on December 22, indicates that the recapture provision would apply only if the temporary payroll tax cut ends on Feb. 29, 2012. A House-Senate Conference will convene soon to consider extending the temporary payroll tax cut for the remainder of 2012.

For tax years beginning in 2012, the TTCA provides that the OASDI rate for a self-employed individual remains at 10.4%, for self-employment income of up to $18,350 (reduced by wages subject to the lower OASDI rate for 2012). (Sec. 601(f) of the 2010 Tax Relief Act (P.L. 111-312), as amended by TTCA Sec. 101) Related rules for 2011 concerning coordination of a self-employed individual’s deductions in determining net earnings from self-employment and income tax also apply for 2012, except that the income tax deduction allowed for the OASDI portion of SECA tax paid for tax years beginning in 2012 is computed at the rate of 59.6% of the OASDI tax paid on self-employment income of up to $18,350. For self-employment income in excess of this amount, the deduction is equal to half of the OASDI portion of the SECA tax paid. The Joint Committee on Taxation explanation of the TTCA says that the 59.6% used for the first $18,350 of self-employment income is necessary to continue to allow the self-employed taxpayer to deduct the full amount of the employer portion of SECA taxes. The employer OASDI tax rate remains at 6.2%, while the employee portion falls to a 4.2% rate for the first $18,350 of self-employment income. Thus, the employer share of total OASDI taxes is 6.2% divided by 10.4, or 59.6% of the OASDI portion of SECA taxes, for the first $18,350 of self-employment income.

Effective date. The above TTCA changes are effective for remuneration received during the months of January and February in 2012 and for self-employment income for tax years beginning in 2012. (TTCA Sec. 101(c)).

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Posted in Current Events, IRS and state tax collections, Tax Current Events and News, Tax planning

Top 10 Tax Developments of 2011

Thursday, December 22nd, 2011 by Moore McLaughlin

As 2011 draws to a close, many tax developments will likely continue to make headlines and influence tax planning in 2012. In the usual tradition, we present a “Top 10 ” list of tax developments that may prove useful to practitioners as 2012 begins.

1. Fate of Bush-era tax cuts unresolved

2011 ended without any resolution of the fate of the Bush-era tax cuts. The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (2010 Tax Relief Act) extended the Bush-era tax cuts through 2012. President Obama and House Speaker John Boehner, R-Ohio, reportedly came close to an agreement in August 2011 to extend some of the Bush-era tax cuts as part of a comprehensive deficit reduction package. When their agreement fell apart, many Washington observers predicted the Joint Select Committee on Deficit Reduction would address the Bush-era tax cuts in a deficit reduction package. The Deficit Reduction Committee announced in November that it failed to reach an agreement and disbanded.

Comment

The fate of the Bush-era tax cuts may ultimately be decided by the lame-duck Congress, which will meet after the November 2012 elections. The outcome of the presidential election and which party controls the House and Senate will undoubtedly influence whatever decision lawmakers take over the Bush-era tax cuts.

2. Rollback of tax legislation

Congress repealed three tax laws in 2011: expanded business information reporting, real property expense reporting and three percent government withholding.

Business information reporting. The Patient Protection and Affordable Care Act (PPACA) required businesses, charities and government entities to file information returns (Forms 1099) for all payments of $600 or more in a calendar year to a single vendor, other than a tax-exempt vendor. The PPACA also repealed the long-standing reporting exception for payments made to corporations. The PPACA’s expansion of business information reporting proved universally unpopular. Congress passed the Comprehensive 1099 Taxpayer Protection Act in April 2011. The Comprehensive 1099 Taxpayer Protection Act repeals the expanded business information reporting provisions in the PPACA as if they have never been enacted.

Rental property expense reporting. The Small Business Jobs Act of 2010 required landlords to file a Form 1099 to report certain rental property expense payments of $600 or more. The Comprehensive 1099 Taxpayer Protection Act also repealed rental expense reporting as if it had never been enacted.

Government withholding. The Tax Increase Prevention and Reconciliation Act of 2007 imposed three percent withholding on payments for goods or services to contractors made by federal, state and local governments. In November 2011, President Obama signed the 3% Withholding Repeal and Job Creation Act, which repeals three percent government withholding as if it had never been enacted.

3. Foreign accounts

The Treasury Department and the IRS continued to focus on foreign account reporting in 2011. Three developments were interconnected: implementation of the Foreign Account Tax Compliance Act (FATCA), FBAR filings and the 2011 Offshore Voluntary Disclosure Initiative (OVDI).

FATCA. The IRS continued to implement the Foreign Account Tax Compliance Act (FATCA) in 2011. FATCA generally requires certain U.S. taxpayers holding specified foreign financial assets to report information about these assets on a new form to be attached to the taxpayer’s return. Additionally, foreign financial institutions must report certain information about accounts held by U.S. taxpayers. In July 2011, the IRS announced it intended to provide for a phased implementation of the FATCA requirements for foreign financial institutions. In December 2011, the IRS issued guidance about new Form 8938, Statement of Specified Foreign Financial Assets.

FBAR. The Treasury Department issued final rules on Form TD-F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR) in February 2011. The final rules retain and clarify the requirement to report signature or other authority over a foreign financial account. The final rules also reserved the treatment of investment companies other than mutual funds or similar pooled funds. In related news, the Treasury Department announced that taxpayers may electronically file the FBAR; previously, electronic filing was not an option for the FBAR.

OVDI. The IRS launched a campaign in 2011 to encourage taxpayers to voluntarily disclose unreported offshore accounts. The 2011 Offshore Voluntary Disclosure Initiative (OVDI) rewarded taxpayers who came forward voluntarily with a reduced penalty framework (although not as generous as a similar program in 2009). The 2011 OVDI closed on September 9, 2011. In December, IRS Commissioner Douglas Shulman reported that the agency has received more than 33,000 voluntary disclosures since 2009.

4. IRS help for distressed taxpayers

The IRS announced in February 2011 a series of measures intended to help good-faith taxpayers who cannot meet their tax obligations. The IRS “Fresh Start” initiative generally allows lien withdrawals for taxpayers entering into direct debit installment agreements (and for taxpayers who convert from a regular installment agreement to a direct debit agreement). The IRS also announced it would make streamlined installment agreements available to more small businesses. Qualified small businesses with $25,000 or less in unpaid taxes can participate in the streamlined installment agreement program.

Comment

According to Commissioner Douglas Shulman and other top agency officials, IRS personnel have been instructed to be more flexible in helping distressed taxpayers.

5. Worker classification

The IRS launched a new program in September 2011 to enable employers to voluntarily reclassify their workers for federal employment tax purposes and take advantage of a reduced penalty framework. The Voluntary Classification System Program (VCSP) is open to employers currently treating their workers as independent contractors or other nonemployees and who want to prospectively treat the workers as employees. The employer must not be under audit and satisfy other requirements. The IRS has not announced an end-date to the VCSP.

6. Basis overstatement regs

The Supreme Court agreed in September 2011 to resolve a split among the federal courts of appeal over IRS regs (TD 9515) that impose a six-year limitations period on assessments due to overstated basis (Home Concrete & Supply, LLC, 2011-1 ustc ¶50,207). The government asked the Supreme Court to decide, among other questions, whether an understatement of gross income attributable to an overstatement of basis in sold property is an omission from income that can trigger the six-year assessment period.

Comment

In March 2011, the Court of Appeals for the Federal Circuit upheld the basis overstatement regs under Chevron-deference (Grapevine Imports, Ltd., 2011-1 ustc ¶50,264).

7. Mid-year mileage rate increase

For the third time in six years, the IRS announced a mid-year adjustment to the business standard mileage rate because of rising gasoline prices. The business standard mileage rate increased from 51 cents-per-mile to 55.5 cents-per-mile for the second half of 2011. The medical/moving standard mileage rate increased from 19 cents-per-mile to 23.5 cents-per-mile for the second half of 2011. Congress did not make a mid-year adjustment to the charitable standard mileage rate, which remained at 14 cents-per-mile for the second half of 2011.

Comment

For 2012, the business standard mileage rate is 55.5 cents-per-mile and the medical/moving standard mileage rate is 23 cents-per-mile. The statutorily-determined charitable standard mileage rate remains at 14 cents-per-mile for 2012.

8. Return preparer oversight

The IRS moved forward with its return preparer oversight initiative in 2011, defining the new designation “registered tax return preparer” and launching the registered tax return preparer competency examination. In June, the IRS issued final Circular 230 regulations, which clarified professional standards for certified public accountants (CPAs), enrolled agents (EAs) and registered tax return preparers. The IRS also fine-tuned its online preparer tax identification number (PTIN) registration system. Additionally, the IRS announced it would revisit its proposal to fingerprint certain PTIN applicants; a proposal which many tax professionals criticized as duplicative of their own employee background checks and too costly.

9. Mandatory e-file for preparers

Beginning January 1, 2011, specified tax return preparers who reasonably expected to file 100 or more covered returns in calendar year 2011 were required to file those returns electronically. The e-filing requirement was put in place by Congress in 2009. The IRS phased-in the requirement over two years (2011 and 2012). For calendar year 2012 (and subsequent years), the threshold for mandatory e-filing by specified tax return preparers is 11 or more covered returns. Firms must compute the number of covered returns in the aggregate that they reasonably expect to file as a firm. If the number is 11 or more in calendar year 2012 and subsequent years, all members of the firm must electronically file covered returns.

10. Updated PAL rules

The IRS issued proposed regs in November 2011 updating the definition of an interest in a limited partnership as a limited partner for purposes of the Code Sec. 469 passive activity loss (PAL) rules. Under the proposed regs, an interest in a limited liability company is treated as a limited partnership interest for the PAL rules.

Comment

The proposed regs reflect the evolution of the rules for limited partners since passage of the Uniform Limited Partnership Act of 1916.

Honorable mention

  • Congress bans tax strategy patents;
  • IRS helps organizations regain tax-exempt status after automatic revocation;
  • IRS responds to Hurricane Irene and many other natural disasters in 2011;
  • FUTA surtax expires mid-year;
  • Congress expands Work Opportunity Tax Credit (WOTC) for veterans;
  • Supreme Court agrees to hear arguments on PPACA;
  • IRS issues final regs on Code Sec. 6707A penalty.
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Posted in Asset Protection Planning, Current Events, Tax Current Events and News, Tax planning

Rhode Island—Personal Income Tax: Figures for Tax Year 2012 Provided

Tuesday, December 20th, 2011 by Moore McLaughlin

The Rhode Island Division of Taxation has provided personal income taxpayers with the standard deduction and personal and dependency exemption amounts as well as the tax rate schedule for tax year 2012. State law requires annual adjustments for inflation. The standard deduction amounts are as follows: $7,800 for single or married filing separate filing status, $15,600 for married filing joint, and $11,700 for head of household. The personal and dependency exemption amount is $3,650, and the phaseout range for exemptions is $181,900 to $202,700. The tax rate schedule is 3.75% for $0 to $57,150 in income; 4.75% for $57,150 to $129,900; and 5.99% for $129,900 and above.

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Posted in Asset Protection Planning, Current Events, IRS and state tax collections, Tax Current Events and News, Tax planning

Massachusetts—Personal Income Tax: Part B Income Tax Rate Reduced

Monday, December 19th, 2011 by Moore McLaughlin

The Massachusetts Department of Revenue has announced that for tax years after 2011 the Part B personal income tax rate will be reduced to 5.25% (previously 5.3%). The tax rate for Part B income is subject to reduction by 0.05% if the inflation-adjusted growth in baseline taxes in the fiscal year ending June 30 of the previous year exceeds 2.5% and the inflation-adjusted growth in baseline taxes for each consecutive three-month period reported by the Commissioner of Revenue between August and December of the previous year is greater than zero. There is a minimum rate of 5%.

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Posted in Asset Protection Planning, Current Events, IRS and state tax collections, Tax Current Events and News, Tax planning

IRS Letters and Visits to Return Preparers – FAQs Filing Season 2012

Monday, November 28th, 2011 by Moore McLaughlin

On its website, the IRS has issued answers to frequently asked questions (FAQs) concerning IRS’s return preparer compliance campaign for the 2012 filing season. The FAQs discuss the 21,000 “reminder” letters that the IRS has sent nationwide to return preparers and the 2,100 in-person follow-up visits that will be conducted starting in November of 2011 and running through April 15, 2012. The FAQs also provide tax return preparers with general pointers on their due diligence requirements.

Who has received the letters? The FAQs indicate that the IRS letters were sent to a pool of paid preparers who completed a large volume of tax returns with Form 1040 Schedules A (Itemized Deductions), C (Profit and Loss From Business (Sole Proprietorship)) or E (Supplemental Income and Loss) during the 2011 filing season. IRS says that the selection of return preparers who received the letters was based on the returns prepared for clients during the most recent filing season having a high percentage of attributes that typically indicate errors on these schedules (i.e., inaccuracies and misinterpretations of tax law).

The IRS letters include an enclosure that describes the current responsibilities of tax return preparers. The letters remind return preparers that taxpayers may not fully understand the tax laws and may incorrectly believe they are entitled to claim deductions for non-qualifying expenditures. The preparer may rely in good faith on information furnished by the client without verification, but can’t ignore the implications of information furnished to or actually known by him. He or she must make reasonable inquiries if the information, as furnished, appears to be incorrect, inconsistent with an important fact or another factual assumption, or incomplete. The preparer must make appropriate inquiries to determine the existence of facts and circumstances required as a condition for claiming a deduction or credit. The enclosure also outlines common issues that they should be aware of on Schedules A, C, and E.

Schedule A letter. The letter indicates that the most common issues for Schedule A deal with:

… Unreimbursed employee business expenses claimed on Form 2106 (Employee Business Expenses). It reminds prepares that taxpayers may only claim allowable unreimbursed expenses.

… Mileage claimed on Form 2106. IRS’s letter reminds preparers that taxpayers should have documentation to support business miles claimed;

… Travel, meals and entertainment expense. The letter reminds the preparer that taxpayers must have documentation of business purpose, as well as receipts to support expenses claimed; and

… Charitable contributions. The letter reminds the preparer that taxpayers must have receipts for all cash contributions and adequate documentation for all non-cash contributions

Schedule C letter. The letter indicates that the most common issues with Schedule C deal with:

… Gross receipts not being fully reported. IRS’s letter reminds preparers that books and records should be available for review to substantiate amounts reported;

… Expenses claimed must be ordinary and necessary for the type of business reported; and

… All expenses claimed are to be paid or incurred during the tax year and the allowable amount of the expense must be correctly computed.

Schedule E letter. The letter dealing with Schedule E indicates that the most common issues are:

… Rental income and expenses not being properly reported;

… Rental depreciation not being correctly calculated; and

… Limitations surrounding passive activities, basis, and at-risk rules not properly considered or calculated.

The FAQs contain the following general pointers on a return preparer’s due diligence requirements:

  • In general, return preparers should understand the underlying substantive law affecting an item of income or deduction. Return preparers must exercise due diligence in preparing or assisting in the preparation, approval, and filing of returns, documents, affidavits, or other papers relating to IRS matters.
  • Return preparers also must exercise due diligence in determining (1) the correctness of oral and written representations made by the return preparer to IRS; and (2) the correctness of representations made by the return preparer to the client with reference to any matter administered by IRS.
  • Return preparers who prepare returns for taxpayers who may be eligible for the earned income tax credit have additional due diligence requirements.
  • Return preparers aren’t required to audit, examine or review books and records, business operations, documents or other evidence to independently verify information provided by a taxpayer, advisor, other tax return preparer or other party. However, the preparer can’t ignore implications of information furnished to him or actually known by him and must make reasonable inquiries if the information as furnished appears to be incorrect or incomplete.
  • A return preparers must make inquiries of a taxpayer to prepare an accurate tax return. For example, he must make general inquiries or have existing knowledge of the taxpayer’s sources of income (e.g., whether the taxpayer received alimony, a refund of state taxes in the previous year, or received interest or dividends), and for Schedule C taxpayers, have a more in-depth discussion including what accounting method the taxpayer uses. A tax return preparer also should ask for taxpayer records where appropriate (e.g., previous year’s tax return or copies of depreciation schedules for Schedule C or E taxpayers or stock basis for filers of Schedule D (Capital Gains And Losses)).

Visits from IRS. The FAQs also discuss the 2,100 compliance visits IRS revenue agents will make nationally with members of the return preparer community. These visit will take place at the return preparer’s place of business. IRS requests that the return preparer have available the tax forms that he prepared in 2011 and all relevant documents, including worksheets, interview notes, correspondence, and a copy of the returns prepared for clients. If the return preparer is an Electronic Return Originator, e-file transmission documents should also be made available.

The purpose of these visits is to confirm that return preparers are complying with current return preparer requirements, including the maintenance of records and signing and furnishing of preparer tax identification numbers (PTINs) on the tax returns that they prepare, and to provide information on new return preparer requirements effective for the 2012 filing season. If violations are found, the revenue agent may, with managerial approval, determine it is appropriate to propose penalties

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Posted in IRS and state tax collections, Tax Current Events and News, Tax planning

Advisory: Rhode Island Estate tax threshold for 2012

Friday, October 28th, 2011 by Moore McLaughlin

The Rhode Island Division of Taxation has announced the estate tax threshold for the estates of decedents dying in 2012. The threshold for 2012 will be $892,865, compared with $859,350 for 2011, a 3.9 percent increase. A state law enacted in 2009 raised the threshold to $850,000, from $675,000, effective for decedents dying in 2010. That law also required that the threshold amount be adjusted each January thereafter, based on annual inflation, compounded annually, and rounded to the nearest $5 increment.

In general, for a decedent dying in 2012, a net taxable estate valued at $892,865 or less will not be subject to Rhode Island’s estate tax. (In certain circumstances, the Rhode Island estate tax will not apply no matter the estate’s size: Rhode Island General Laws Chapter 44-22 provides full details on the computation of the tax, including such factors as the marital and charitable deductions.)

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Posted in Asset Protection Planning, Elderlaw/Law For Life, Estate Planning, Tax Current Events and News, Tax planning

ADVANCED TRAINING IN SELF-DIRECTED RETIREMENT ACCOUNTS™

Wednesday, September 28th, 2011 by Moore McLaughlin

Save this date:  Wednesday, October 26, 2011

Self-Directed IRAs, Roth IRAs, SEP IRAs, Solo(k) Plans and the like are a huge untapped capital market for alternative asset investments.  Are you up to speed?  If you’re not, or you’re not sure, or you just want to brush up, you should attend: 

ADVANCED TRAINING IN SELF-DIRECTED RETIREMENT ACCOUNTS™

October 26, 2011, 8:30 AM to 4:00 PM

Presented by:

Frank L. Bridges, J.D.

Sponsored by:

HeritageDesign™ Law Group LLC

Special Luncheon Provided by:

PENSCO Trust Company

At The Learning Center, 199 Wells Avenue, Suite 302, Newton, Massachusetts.

This seminar is a must for:

  • Registered Investment Advisors who want to help their clients invest retirement funds in alternative assets and learn how this untapped private capital market fits into their practice (even if they have a broker-dealer);
  • Accountants who want to gain confident expertise to advise their clients in this developing area (Continuing education credits available);
  • Real estate professionals who want to use this untapped capital source to facilitate real estate deals;
  • Entrepreneurs and private offering organizers who want to learn how to attract and work with self-directed retirement account investors;
  • Bankers who want to attract more business accounts;
  • Investors who want to diversify their retirement savings with alternative assets.

 

Content Summary:

  1. Part 1 – The basics – What you can do with a self-directed retirement account (e. g., types of accounts, investment policy and diversification, mechanics of setup…)
  2. Part 2 – Rules of the Road (e.g., prohibited transactions, disqualified persons, plan asset rules, operating companies, co-investing and enabling, fiduciary duties…)
  3. Part 3 – Successful Venture Design and Implementation (e.g., investment return and UBIT, management and governance issues, private offerings to SDRA™ investors, valuation and the “Supercharged” Roth conversion, practical considerations…).
  4. Part 4 – Planning for SDRA™ Investors (e.g., special retirement and estate planning issues, business succession issues, buy-outs and business exit strategies)

Case studies will be used to illustrate key issues and solutions.

About Mr. Bridges:  Mr. Bridges, a nationally recognized expert on self-directed retirement accounts, offers years of case experience and, as an estate planner, a unique perspective on the topic.  You will especially enjoy his entertaining lecture style and his passion for the subject.

PENSCO Trust Company, one of the leading specialized custodians for self-directed retirement accounts, will provide lunch and information about their institutional platform for advisors.

SEATING IS LIMITED.  This seminar is limited to 20 participants, so reserve your seat now!

To reserve your seat send an email to asweeney@hdlawgroup.com with the subject “SDRA Seminar Reservation” and your contact information.  We will send you information on how to register.

                                                Registration Fee:         $95

For more information, contact:

Alicia Sweeney, Program Coordinator

HeritageDesign™ Law Group LLC
199 Wells Avenue

Suite 302
Newton, MA 02459
617-630-5700
617-630-0003 (Fax)
www.heritagedesignlaw.com

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Posted in Asset Protection Planning, Elderlaw/Law For Life, Estate Planning, Self-directed IRAs, Seminars, Tax Current Events and News, Tax planning

Massachusetts Enacts 2011 Sales Tax Holiday and Provides Guidelines

Monday, August 8th, 2011 by Moore McLaughlin

On August 1, 2011, Massachusetts Governor Deval Patrick signed legislation, establishing a sales tax holiday on August 13 and 14, 2011. The bill provides that the state sales tax will not be imposed on nonbusiness sales at retail of tangible personal property with a purchase price of $2,500 or less. Telecommunications, tobacco products subject to the cigarette excise tax, gas, steam electricity, motor vehicles, motorboats, and meals will be excluded. Transfer of possession of or payment in full for the property shall occur on one of those days, and prior sales or layaway sales are ineligible. The Department of Revenue has issued guidelines implementing the 2011 sales tax holiday. (applicable to sales on 08/13/2011 and 08/14/2011)

Qualifying purchases. The sales tax exemption applies to sales of tangible personal property for personal use only. Purchases exempt from sales tax are also exempt from use tax. Therefore, eligible items of tangible personal property purchased on the Massachusetts sales tax holiday from out-of-state retailers for use in Massachusetts are exempt from Massachusetts use tax.

Nonexempt sales. The sales tax holiday does not apply to sales of motor vehicles, motorboats, meals, telecommunications services, gas, steam, electricity, tobacco products, and any single item costing in excess of $2,500.

“Motor vehicle” means a motorized, self-propelled vehicle which is constructed and designed for transportation or travel over a land surface, including low-speed vehicles and limited use vehicles, but not including motorized bicycles. It also means snow vehicle and recreation vehicle. Rentals of motor vehicles are also not eligible for the holiday.

Motorboats, including jet skis, are not exempt under the sales tax holiday. Generally, the sales tax holiday will apply to purchases of canoes, kayaks, rowboats, and other types of watercraft with no mechanical propulsion, provided that the sales price is $2,500 or less.

“Meals” are any food or beverage, or both, prepared for human consumption and provided by a restaurant, where the food or beverages is intended for consumption on or off the restaurant premises, and includes food or beverages sold on a “take out” or “to go” basis, whether or not they are packaged or wrapped and whether or not they are taken from the premises of the restaurant.

Gas for purposes of the holiday refers to natural gas. Sales of gasoline are not subject to the sales tax.

“Telecommunications services” are any transmission of messages or information by electronic or similar means, between or among points by wire, cable, fiber optics, laser, microwave, radio, satellite or similar facilities but not including cable television. Sales of prepaid calling arrangements and cards are not eligible for the sales tax holiday. Telecommunications equipment, such as a telephone or cell phone purchased for nonbusiness use, is eligible for the sales tax holiday

Tobacco products include cigarettes, cigars and smoking and smokeless tobacco. Layaway sales do not qualify for the exemption even if the last required payment or payments necessary to complete the transaction are made on August 13 or 14, 2011. Sales of the excluded items remain taxable.

Specific rules. The Department provided specific rules to be applied by retailers in administering the Massachusetts sales tax holiday exemption.

Threshold: Generally, sales or use tax is due on the entire sales price of a single item worth more than $2,500. The sales price is not reduced by the threshold amount. However, since there is no sales tax on any article of clothing worth less than $175, only the increment of the sales price of the article of clothing over $175 is subject to tax.

Multiple items on one invoice: Separate invoices do not have to be prepared when a customer purchases multiple items during the sales tax holiday. As long as each item is priced $2,500 or less, there is no upper limit on the tax-free amount each customer may purchase.

Bundled transactions: When several items are offered for sale at a single price, the entire package is exempt if the sales price of the package is $2,500 or less. Items that are priced separately and are to be sold separately qualify for the sales tax holiday exemption if the price of each item is $2,500 or less.

Coupons and discounts: If a store coupon or discount reduces the sales price of an article, the discounted sales price determines whether the sales price is within the sales tax holiday threshold. If the purchaser bought both an eligible property and a taxable property and the coupon or discount applies to the total amount paid by the purchaser, the seller allocates the discount on a pro rata basis to each article sold.

Exchanges: In case of an even exchange of an eligible item purchased during the sales tax holiday no tax is due even if the exchange is made after the sales tax holiday.

Special orders: Special order items are eligible for the sales tax holiday exemption provided they are ordered and paid in full on the sales tax holiday weekend and the cost of each item is $2,500 or less even if the items are delivered at a later date. A prior special order purchase with a deposit made before August 13, 2011 will not qualify for the sales tax holiday exemption even if the customer pays the entire remaining balance due on August 13 or 14, 2011.

Rain checks: Eligible property bought with the use of a rain check during the sales tax holiday weekend qualifies for the exemption regardless of when the rain check was issued. Issuance of a rain check during the sales tax holiday weekend will not qualify otherwise eligible property for the sales tax holiday exemption if the property is actually purchased after the sales tax holiday.

Rentals: Generally, rentals for 30 days or less of eligible tangible personal property are eligible for the sales tax holiday even if the rental period covers days before or after the holiday provided payment in full is made during the sales tax holiday weekend.

Rebates: A rebate is generally treated as a cash discount and is excluded from the sales price. So, the discounted sales price determines whether the sales price is within the sales tax holiday threshold. If the customer receives a rebate after the sale by mailing a coupon to the manufacturer, the full purchase price of the property determines whether the sales price is within the sales tax holiday price threshold and tax must be charged on the full purchase price if it is over $2,500. If the customer receives a cash discount from the vendor upon the purchase of tangible property and a manufacturer’s rebate after the sale, only the cash discount given by the vendor is excluded from the sales price for purposes of the sales tax holiday exemption.

Internet sales: An eligible property ordered over the Internet is exempt if it is ordered and paid for on August 13 or 14, 2011, Eastern Daylight Time, even if the property is delivered after the sales tax holiday period.

Splitting items normally sold together: Articles normally sold as a single unit cannot be priced separately and sold as individual items in order to qualify for the sales tax holiday exemption.

Returns: Under the law, sales tax may only be refunded if returns are made within 90 days of the sale. During the 90-day period after August 13 or 14, 2011, a retailer may not credit a retail customer who returns an item that could have qualified for the sales tax holiday exemption, unless the customer provides a receipt or invoice showing the tax was paid or the seller’s records show that tax was paid.

Erroneously collected taxes: Customers who were erroneously charged sales tax for an exempt purchase may obtain a tax refund from the vendor. The vendor that has remitted erroneously collected tax to the Department may file an abatement application within three years with satisfactory evidence that the vendor credited or refunded the tax to the purchaser.

Retailers’ responsibilities. All Massachusetts businesses normally making taxable sales of tangible personal property on August 13 and 14, 2011 and out-of-state retailers registered to collect Massachusetts sales and use taxes must participate in the sales tax holiday. Any sales or use tax erroneously collected by a retailer during the sales tax holiday must be remitted to the Department. Retailers must keep normal business records showing the date of sale, items purchased and selling price. Purchasers paying for tangible personal property with business credit cards or checks must be charged tax on the items purchased. Normal business records showing the date of sale, items purchased, and selling price must be kept by the retailer/vendor. However, a separate certification from the purchaser on transactions of $1,000 or more will not be required for the 2011 sales tax holiday.

Penalties. Retailers that back-date sales occurring after August 14, 2011 or that forward-date sales that occurred before August 13, 2011 in order to make them appear to qualify for the sales tax holiday may be subject to the tax evasion penalties of Mass. Gen. L. § 73 , including a felony conviction, a fine of not more than $100,000 or $500,000 in the case of a corporation, or by imprisonment for not more than five years, or both, and may also be required to pay the costs of prosecution.

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Two Tax Court Decisions Clarify When Long-Term Care Expenses Are Deductible

Thursday, July 28th, 2011 by Moore McLaughlin

Long-term care can be very expensive, but many long-term care expenses can be deducted from your taxes. Two important recent decisions by the U.S. Tax Court provide guidance on when caregiving services are deductible. In one decision, the court ruled that payments to non-medical caregivers are still deductible as medical expenses; in the other, the court held that a written agreement is required in order for a deceased woman’s estate to deduct more than $1 million in care that her son allegedly provided her.

In the first case, Estate of Lillian Baral v. Commissioner, Lillian Baral suffered from dementia and her doctor recommended that she get 24-hour-a-day care. Her brother hired caregivers to assist Ms. Baral with daily activities. On her tax return, Ms. Baral included a deduction for medical expenses for the payments to the caregivers. The IRS said the expenses were not deductible and asked for more money. Following Ms. Baral’s death, her estate appealed the matter to the U.S. Tax Court.

Under tax law, expenses for medical care may be claimed as an itemized deduction if they exceed 7.5 percent of adjusted gross income. (Note that this threshold will rise to 10 percent of adjusted gross income in 2012.) The definition of medical expenses includes the cost of long-term care if a doctor has determined you are chronically ill. “Chronically ill” means you need help with activities like eating, going to the bathroom, bathing, and dressing, or you require substantial supervision due to a severe cognitive impairment.

The Tax Court agreed with Ms. Baral that the payments to the caregivers for assisting and supervising Ms. Baral are deductible medical expenses. The expenses qualified as long-term care services even though the caregivers were not medical personnel because a doctor had found that the services provided to Ms. Baral were necessary due to her dementia.

In the second case, Estate of Olivio v. Commissioner, New Jersey resident Anthony Olivo provided nearly full-time care to his mother from 1994 to 2003, during which time he largely abandoned his practice as an attorney. After his mother died, Mr. Olivo became administrator of her estate.

Mr. Olivo filed a tax return for the estate and claimed a deduction of $1.24 million as a debt he said the estate owed him for the care he had provided his mother over the years. He claimed he had an oral agreement with his mother that after she died she would compensate him for his services. The IRS disallowed the deduction and Mr. Olivo filed a petition with the Tax Court.

The U.S. Tax Court agreed with the IRS that the estate is not entitled to the deduction. Applying the law in New Jersey, which presumes that services to a family member living in the same household are given for free (many states have similar laws), the court ruled that without a written agreement between Ms. Olivo and her son, it must assume that Mr. Olivo provided the services without any expectation he would be repaid.

Check with your CPA to determine if your long-term care expenses are deductible.

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Posted in Asset Protection Planning, Elderlaw/Law For Life, Estate Planning, IRS and state tax collections, Tax Current Events and News, Tax planning

Proposals to reform or eliminate the mortgage interest deduction

Thursday, July 21st, 2011 by Moore McLaughlin

As lawmakers continue to debate how to handle the nation’s debt and do “something big” rather than simply patch the problem, it seems probable that many broader tax reform issues may resurface during the course of the negotiations. One such issue, which was addressed by President Obama in his 2012 and 2011 budget proposals, is the mortgage interest deduction—one of the largest tax expenditures. According to various estimates, the deduction cost the Treasury Department somewhere between $80 and $103 billion in 2010, and its value over the 10-year budget window is expected to exceed $1 trillion. This post examines the mechanics of the deduction, arguments for and against reforming it, reform proposals, and the projected effect of any changes on both taxpayers and the budget.

Background. Interest paid with respect to a mortgage on real estate is deductible interest on indebtedness. Itemizing taxpayers can deduct their mortgage interest on up to $1 million of qualifying acquisition debt on a qualified principal and, if applicable, secondary residence. A residence includes a house, condominium, cooperative, mobile home, house trailer, or boat. In effect, this deduction reduces the after-tax cost of financing a home. In contrast, taxpayers are not permitted to deduct the costs of renting a home.

Itemizing taxpayers can also deduct interest on up to $100,000 ($50,000 for married individuals filing separately) of home equity debt—i.e., debt secured by a taxpayer’s qualified residence up to the fair market value of the residence, as reduced by the amount of acquisition indebtedness on it.

Arguments for and against reforming the deduction. The mortgage interest deduction is often criticized as being an “upside-down” subsidy, in that it tends to provide greater benefit to taxpayers with higher incomes. The amount of interest paid by lower- and moderate-income taxpayers is less likely to be sufficiently high to make it worthwhile to forego the standard deduction, so they are less likely to claim any benefit from it.

Proponents of the deduction argue that it encourages home ownership and makes it affordable to taxpayers who would otherwise not be able to own a home. Critics claim in response that, rather than encouraging home ownership, the deduction actually encourages middle-class and wealthy taxpayers to take on more debt and buy larger homes than they otherwise would. Further, critics argue that the deduction tends to benefit taxpayers with larger incomes who likely would have purchased a home regardless of the deduction.

M&Q illustration : A married couple who takes out a $150,000 mortgage on January 1, 2011, payable over 30 years with 7% interest, pays $9,584.85 in interest in the first year. Unless the couple has other itemized deductions, they may simply opt for the $11,400 standard deduction.

If the same couple were to double their mortgage to $300,000, same interest and term, their interest payment in the first year is $19,169.71.

If the couple were to again double their mortgage to $600,000, the interest payment would be $38,339.42.

Critics of the deduction also claim that the deduction artificially drives up home prices. However, this same argument is cited by its proponents, who observe that eliminating the deduction could further impact home prices in an already depressed market.

M&Q observation: The effect of driving up prices may have contributed to the problem of “underwater” mortgages, where taxpayers owe more on their homes than the home is actually worth.

Proposals. A number of different proposals have been advanced regarding the mortgage interest deduction. In light of the popularity of the provision, and the strength of the real estate lobby, it appears unlikely that it would be repealed outright. In general, the proposals tend to focus on converting the deduction to a credit, capping the maximum mortgage amount, and limiting the credit to a primary residence.

The President’s Fiscal Commission proposed a 12% nonrefundable credit on up to a $500,000 mortgage, with no credit for a second residence or for home equity. The Debt Reduction Task Force would have a 15% refundable tax credit capped at $25,000. Other proposals suggest a 20% credit, whereas another proposal is to simply have a fixed credit for owning a home as opposed to having a mortgage.

President Obama’s 2012 budget proposal, as well as his 2011 proposal, suggested capping itemized deductions, including mortgage interest, for taxpayers in the top two tax brackets (33% and 35%). Under the proposal, these taxpayers would only be able to reduce their tax liability by a maximum of 28%.

M&Q illustration : The current structure of the mortgage interest deduction reduces the after-tax cost for each $100 borrowed by a taxpayer in the 35% bracket to $65. However, the after-tax cost for each $100 borrowed by a taxpayer in the 10% bracket is $90. In other words, the higher a taxpayer’s tax bracket, the greater relative benefit he will receive from the deduction. The Administration’s proposal would limit the benefit to higher-income taxpayers by five or seven percentage points, such that the after-tax cost for each $100 borrowed would rise to $72.

M&Q observation: The effect of this proposal on taxpayers who are subject to the alternative minimum tax (AMT) would depend on a number of factors, including the taxpayer’s particular mix of income and deductions and the taxpayer’s marginal statutory rate. Although AMT taxpayers are already effectively subject to a 28% limit on deductions, the President’s proposal has an AMT element that would nonetheless result in an increase in the tentative minimum tax liability of certain AMT taxpayers.

Economic effect. Given the amount of foregone revenue from the deduction, the effects of reforming or repealing the provision could be significant.

If the deduction was repealed flat out, the Urban-Brookings Tax Policy Center (TPC) estimates that the average tax bill of those who claim the mortgage interest deduction would increase by $710. However, this increase would vary widely among taxpayers—those with $30,000 to $40,000 incomes would face an average increase of $70, whereas taxpayers making over $1 million would face an average increase of $4,000. However, given the popularity of the deduction, its outright repeal seems unlikely.

According to the TPC, replacing the current mortgage interest deduction with a 20% nonrefundable credit, limiting mortgages eligible for the credit to $500,000, and limiting the credit to primary residences would only have a nominal or positive effect on the majority of the tax bills of those who claim the deduction. Again, those who would face the largest increase are taxpayers in the top tax brackets with the largest mortgages.

The economic effect of replacing the deduction with a flat credit for home owners, regardless of whether their home debt-financed, would obviously depend on the amount of the credit. In general, credits are considered more progressive than deductions, and the benefit of a flat credit to higher-income taxpayers would presumably be less than that under the current regime. However, the incentive towards home ownership would remain intact.

The Joint Committee on Taxation estimates that President Obama’s proposal to limit upper-income taxpayers’ itemized deductions to 28% would yield $293,261 million over the 2011 through 2021 period.  This increased revenue would be largely attributable to the limits on mortgage interest and charitable contribution deductions.

Conclusion. While it seems unlikely that the deduction will be repealed outright, it is nonetheless possible that this popular tax expenditure could be somehow reformed or curtailed. The context of the looming debt crisis may well provide the necessary push for lawmakers to take action on this issue. What choices will be made and when remains to be seen—stay tuned.

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