McLaughlin & Quinn, LLC - Providence | Boston

• Beginning in 2011, the highest income tax rate would be 39.6%. The second highest tax rate would be 36% and would apply to taxable income above the following amounts but less than the income levels at which the 39.6% rate would apply: $250,000 less the standard deduction and two personal exemptions, indexed from 2009, for married taxpayers filing jointly; $200,000 less the standard deduction and one personal exemption, indexed from 2009, for single filers. The 28% rate bracket would be expanded so that taxpayers earning less than these amounts would not see their taxes rise because of the increased tax rate brackets.

• After 2010, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) elimination of the limit on itemized deductions would sunset. As a result, itemized deductions (other than medical expenses, investment interest, theft and casualty losses, and gambling losses) would be reduced by 3% of the amount by which AGI exceeds statutory floors (which would be higher than under current law), but not by more than 80% of the otherwise allowable deductions. The floors would be indexed annually for inflation. For 2011, the AGI floors would be adjusted for inflation starting with a value of $250,000 in 2009 for married taxpayers filing jointly and $200,000 in 2009 for single taxpayers.

• The EGTRRA elimination of the personal exemption phase-out would sunset after 2010 and the AGI levels at which the phase-out begins would be adjusted. For 2011, the AGI floors would be adjusted for inflation starting with a value of $250,000 in 2009 for married taxpayers filing jointly ($125,000 if filing separately) and $200,000 in 2009 for single taxpayers.

• For tax years beginning after 2010, a 20% tax rate on long-term capital gains and qualified dividends would apply for married taxpayers filing jointly with income over $250,000 less the standard deduction and two personal exemptions (indexed from 2009) and for single taxpayers with income over $200,000 less the standard deduction and one personal exemption (indexed from 2009). The reduced rates on gains on assets held over 5 years would be repealed.

• The tax value of all itemized deductions would be limited to 28% whenever they would otherwise reduce taxable income in the 36% or 39.6% tax brackets. A similar limitation also would apply under the AMT. This would apply to itemized deductions after they have been reduced under the separate proposal (see above) that would reinstate the pre-EGTRRA limit on certain itemized deductions, but with adjusted AGI thresholds in 2011 of $250,000 (indexed from 2009) for married taxpayers filing jointly and $200,000 (indexed from 2009) for other taxpayers. After 2011, these thresholds would be indexed.

• The making work pay credit would be made permanent and the phaseout of the credit would be liberalized.

• The following earned income tax credit (EITC) rules would be made permanent: the $5,000 (indexed) increase in the beginning of the phase-out range for joint filers relative to other individuals; and the expansion of the EITC for workers with three or more qualifying children.

• The liberalized $3,000 earnings threshold for refundability of the child credit would be made permanent and the earnings threshold would no longer be indexed for inflation.

• The American Opportunity Tax Credit (AOTC) enacted by ARRA to temporarily replace the Hope credit for 2009 and 2010 would permanently replace the Hope credit. Additionally, the AOTC's $2,000 tuition and expense amounts, as well as the phase-out thresholds, would be indexed for inflation.

• Disallowance of the LIFO inventory accounting method. Taxpayers that currently use the LIFO method would be required to write up their beginning LIFO inventory to its FIFO value in the first tax year beginning after December 31, 2011. This one-time increase in gross income would be taken into account ratably over the first tax year and the following seven tax years.

• Currently, taxpayers not using a LIFO method may write down the carrying values of their inventories by applying the lower-of-cost-or-market (LCM) method and may write down the cost of “subnormal” goods. Taxpayers using the retail method for tax currently are not required to use that method for financial statement reporting purposes. Effective for tax years beginning after 12 months from the enactment date, taxpayers would not be able to use the LCM and subnormal goods methods. Appropriate wash-sale rules also would be included to prevent taxpayers from circumventing the prohibition. The retail method would be allowed only if the taxpayer uses that method for financial accounting purposes as well. The new rules would be treated as a change in the method of accounting for inventories, and any resulting Code Sec. 481(a) adjustment generally would be included in income ratably over a four-year period beginning with the change year.

• For tax years ending after December 31, 2009, all corporations and partnerships required to file Schedule M-3 would be required to file their tax returns electronically. In the case of certain other large taxpayers not required to file Schedule M-3 (such as exempt organizations), the regulatory authority to require electronic filing would be expanded to allow reduction of the current threshold of filing 250 or more returns during a calendar year. Any new regs would balance the benefits of electronic filing against any burden that might be imposed on taxpayers, and implementation would take place incrementally to afford adequate time for transition to electronic filing. Taxpayers would be able to request waivers of this requirement if they cannot meet the requirement due to technological constraints, if compliance with the requirement would result in undue financial burden, or if other criteria specified in regulations are met.

• Effective for employment tax returns required to be filed with respect to wages paid after December 31, 2009, new rules would set forth standards for holding employee leasing companies jointly and severally liable with their clients for Federal employment taxes, and would also provide standards for holding employee leasing companies solely liable for such taxes if they meet specified requirements.

• For damages paid or incurred after 2010, no deduction would be allowed for punitive damages paid or incurred by the taxpayer, whether upon a judgment or in settlement of a claim. Where the liability for punitive damages is covered by insurance, such damages paid or incurred by the insurer would be included in the gross income of the insured person. The insurer would be required to report such payments to the insured person and to IRS.

• The three Superfund excise taxes would be reinstated for periods after December 31, 2010, and the corporate environmental income tax would be reinstated for tax years beginning after December 31, 2010.

• Oil and gas companies would face repeal of all of the following tax breaks: the credit for enhanced oil recovery projects, the credit for marginal well production, expensing for intangible drilling costs, the deduction for tertiary injectants, the passive loss exception for working interests in oil and gas properties, the percentage depletion deduction, and the domestic manufacturing deduction. The amortization period for geological and geophysical costs would be increased to seven years, and there would be a tax on certain offshore oil and gas production.

• A business would have to file an information return for post-2009 payments to corporations aggregating $600 or more in a calendar year (except payments to tax exempt corporations).

• For payments made to contractors after 2009, a contractor receiving payments of $600 or more in a calendar year from a particular business would be required to furnish to the business (on Form W-9) the contractor's certified TIN. A business would be required to verify the contractor's TIN with IRS, which would be authorized to disclose, solely for this purpose, whether the certified TIN-name combination matches IRS records. If a contractor failed to furnish an accurate certified TIN, the business would be required to withhold a flat-rate percentage of gross payments.

• A host of changes would crack down on underreporting of income through the use of accounts and entities in offshore jurisdictions.

• For tax years beginning after 2010, carried interests would be taxed as ordinary income.

• For transactions entered into after the enactment date, new rules would clarify that a transaction satisfies the economic substance doctrine only if (i) it changes in a meaningful way (apart from federal tax effects) the taxpayer's economic position, and (ii) the taxpayer has a substantial purpose (other than a federal tax purpose) for entering into the transaction. The proposal would also clarify that a transaction will not be treated as having economic substance solely by reason of a profit potential unless the present value (PV) of the reasonably expected pre-tax profit is “substantial” in relation to the PV of the net federal tax benefits arising from the transaction. IRS would be directed to publish regulations to carry out the purposes of the proposal. Additionally, a 30% penalty would apply to an understatement of tax attributable to a transaction that lacks economic substance, reduced to 20% if there were adequate disclosure of the relevant facts in the taxpayer's return. Effective for tax years ending after the enactment date with respect to transactions entered into after that date, there would be no deduction for interest attributable to an understatement of tax arising from the application of the economic substance doctrine.

There are certain Federal and State taxes that can be discharged in bankruptcy.

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