Dugan & Lopatka Blog

We heard a lot about “double counting” and budget gimmicks during the health care reform debate.   Actually, we hear about budget gimmicks all the time in Washington. 

I remember one tax bill a few years back that had a section titled “Corporate Tax Relief”.  The bill delayed the September 15 corporate estimated tax payment to October 1.  Just 16 days.

Now what kind of tax “relief” is that?  16 days?

Then it clicked for me. The federal budget year ends on September 30, and the new fiscal year starts on October 1.

Congress just wanted to move some tax revenue from one fiscal year to the next. To make the numbers work.

The new health care bill puts a new twist on this old budget gimmick.

There’s a provision in the new law that increases the corporate estimated tax payment due in July, August or September of 2014 for some companies. But then their estimated tax payment for the next quarter is decreased by the same amount.

So there’s no net revenue gain to the government. It looks to me like Congress needed to increase revenue for the fiscal year ending September 30, 2014.

So they just “borrowed” it from the next fiscal year.

The good news is this new provision only applies to “large” corporations, companies with over $1 billion in assets. So no need to worry.

But it’s a good example of the budget gimmicks that our legislators use all the time.

Last week we covered the new 3.8% Medicare tax on unearned income and the increased 2.35% Medicare tax on wages, starting in 2013. Both apply to single filers earning more than $200,000 and joint filers earning more than $250,000.

Here are some more of the tax and penalty provisions under the new law.

Mandate for Employer Provided Coverage

Starting in 2014, employers with 50 or more employees generally are required to provide a level of “minimum essential coverage” health insurance for their employees or pay a penalty per employee.  

The Secretary of the Department of Health and Human Services will determine what qualifies as “minimum essential coverage”. This applies both for the employer mandate and the individual mandate mentioned below.

Employers who fail to provide the coverage will pay a penalty of up to $2,000 per year (adjusted for inflation) times the number of full-time employees.

Mandate for Individual Coverage

Beginning in 2014, individuals are required to obtain “minimum essential coverage” health insurance or pay an annual penalty of up to the greater of $695 (adjusted for inflation) or 2 percent of their income (once fully phased in after 2016).

Limit on Health FSAs

The maximum salary reduction contribution to a Health FSA is limited to $2,500 per year, for tax years beginning after December 31, 2012.

Limit on medical expense itemized deduction

The itemized medical expense deduction “floor” is increased from 7.5 percent to 10 percent, generally starting in 2013.

Small Employer Tax Credit

Employers with no more than 25 employees are entitled to up to a 35 percent tax credit on the cost of providing health insurance for employees, starting this year. We’ll have more on this credit once the IRS issues guidance.

The Cadillac Tax

A 40 percent excise tax is imposed on high-cost, “Cadillac” employer-sponsored health coverage. The Cadillac tax doesn’t start until 2018. That’s a long ways off for us. So we’ll have more on this one as we get closer to 2018. Stay tuned.

This week we talk taxes. 

Except on Thursday. That’s April Fool’s Day.

We start with the new jobs bill, the Hiring Incentives to Restore Employment (HIRE) Act of 2010.

Here are the key tax provisions. 

Section 179 Expense Deduction

The Act extends the higher $250,000 Section 179 expense deduction. The extension is retroactive to January 1, 2010, and applies to qualifying assets purchased and placed in service during 2010.

The $800,000 threshold for reducing the deduction remains the same.

The bill does not extend the 50% bonus depreciation provisions.

Social Security Tax Relief

The ACT exempts qualifying employers from the 6.2% Social Security payroll tax, for new employees hired after February 3, 2010 on wage paid after March 18, 2010 and on or before December 31, 2010.

The new hire must certify that he or she had been unemployed for at least 60 days prior to hiring. The IRS will issue guidance on the certification requirement.

For the first quarter, the social security exemption amount will be credited against the employer’s OASDI liability for the second quarter. For new-hire wages paid starting April 1, the employer will claim a direct OASDI credit in depositing payroll taxes under the regular deposit rules.

Retained worker business credit.

The Act also includes a tax credit for wages paid to new hires who qualify for the social security tax relief noted above, and who are retained for at least a year.

The credit is the lesser of $1,000 or 6.2 percent of the wages paid by the employer to each qualified retained worker during the 52 week period.

More tomorrow.

Last week we reported that Illinois Governor Pat Quinn proposed “a 1 percent tax surcharge for education” as part of his new budget plan outlined on March 10, 2010. That would increase the tax rate from 3% to 4% on the individual side,  a 33% increase.

This replaces his proposed 50% increase in the Illinois income tax rate from a year ago.

The 33% increase would also apply to most small and mid-sized businesses, since these companies are generally organized as proprietorships, partnerships, LLCs or “S Corporations”. That means the business income is taxed on the owners’ personal returns at the individual tax rate.

There was some uncertainty as to how the 1 percent tax “surcharge” would apply to the current 4.8% corporate rate. We’ve now confirmed that under his proposal, the corporate rate would increase to 5.8%.

Last year’s proposals also included an increase in the personal exemption amount. We’ve also confirmed that the new proposals do not include any increase in the exemption amount.

We’ve updated our Tax Calculator so you can see how the proposed tax increase will affect you.

Here’s the link to our updated Tax Calculator:

http://www.duganlopatka.com/resources/governor-quinn-tax-proposal-calculator

We said yesterday we’re all for tax simplification.

But we don’t see it happening anytime soon.

That’s because Congress uses the tax code to help achieve its policy goals.

A broad array of deductions, credits and exemptions are in place to encourage (subsidize) certain types of personal, business and investment behavior.

We have the tax deduction for mortgage interest and property taxes to encourage home ownership. There’s no tax deduction for renting a home or apartment.

The various energy credits encourage consumers to purchase energy efficient products. 

Municipal bond interest is exempt from federal tax to encourage people to invest in their state and local governments.

The list goes on and on.

So the tax code gets more complicated every time a new tax incentive is enacted into law.

Then there’s the growing debate about replacing the income tax with a national sales tax or valued added tax (VAT).

In the end, I don’t think it’s an either/or issue. I think we’ll likely have both an income tax and some form of national sales tax.

But even if a national sales tax does replace the current income tax, it won’t be all that simple. We’ll still have deductions, credits and exemptions.    

Because Congress won’t give up the power it now has to use tax subsidies to achieve its policy goals.

Every few years there’s a new push for tax simplification.

We’re all for it.

The AICPA has lobbied for tax simplification for as long as I can remember.

“Simplifying tax rules is a high priority of the AICPA. Of the various strategies under discussion by Congress, we believe that tax simplification should be the first recommendation for reducing the tax gap.”

That’s from a 2007 AICPA report to the House Committee on Small Business on ways to reduce the so-called “tax gap”.

During the 2008 election campaign, then Senator Obama offered a plan to simplify tax filings for middle class people. The IRS would compute your taxes for you, if you wanted. They do the math, you just review, sign and mail in their pre-filled tax form.

That wouldn’t simplify the tax code, it would just simplify the process for those who opt in.

Then we have a January 7, 2009 report from the IRS National Taxpayer Advocate that urges tax simplification:

“U.S. taxpayers spend $193 billion a year complying with income tax requirements, an amount that equals 14 percent of the total amount of income taxes collected”.( http://www.irs.gov/newsroom/article/0,,id=202260,00.html )

Last month, Sen. Ron Wyden, D-Ore., and Judd Gregg, R-N.H., introduced a bipartisan tax simplification bill, the Tax Fairness and Simplification Act of 2010.

Among other things, the bill would eliminate the alternative minimum tax and reduce the number of individual tax brackets from the current total of six to three.

Yesterday, President Obama signed into law the new health care reform legislation.

And out the window goes tax simplification.

More tomorrow.

The Congressional Budget Office estimates the nearly $1 trillion health care reform legislation will cut the deficit by $138 billion over a 10 year period.

But former CBO director Douglas Holtz-Eakin says the legislation will raise the deficit by $562 billion.

Why the $700 billion swing?

Let’s cover just some of the ways.

First and foremost, the CBO is handicapped from the get go.

They are required by law to accept the legislation at face value. So if the House says reducing fraud, waste, and abuse will generate, say $100 billion in savings, the CBO has to accept the figure. No questions asked.

Then there are the assumptions the CBO uses.

The CBO Director’s Blog (http://cboblog.cbo.gov/?cat=5 ) notes that their 20 year rough estimate “reflects an assumption that the provisions of the legislation are enacted and remain unchanged throughout the next two decades, which is often not the case for major legislation”.

Has any major legislation remained unchanged for 20 years?

The CBO also has a poor track record in predicting changes in behavior when any significant legislation is passed.

To be fair to the CBO, who can forecast with any reasonable degree of accuracy how health care providers, employers, employees and consumers will react as the new law is phased in?

And what will state and local governments do in response to the massive changes that are coming?  For starters, many states will be filing lawsuits in federal court challenging various aspects of the legislation. I doubt the CBO included that in their forecasting.

How on earth can you translate the macro level change in behavior into millions, billions or trillions in revenues, costs or savings, etc.?

We all know the answer to that. You can’t.

In 1989 the CBO doubled its original 4 year cost estimate for Medicare catastrophic coverage from $5.7 billion to $11.8 billion. The CBO explained that it had received newer data showing it significantly underestimated certain costs.

Let’s hope they do a better job forecasting this time.

Mark your calendars for March 23, 2020 to find out.

“All this talk about rules, we make ‘em up as we go along”

 -Rep. Alcee Hastings (D-Fla.)  Member – House Rules Committee

  March 20, 2010

Last night the House passed the massive health care reform legislation, including the Senate Bill (HR 3590) and the House Reconciliation “Fix It” Bill (HR 4872).

The Reconciliation Bill includes a 3.8% Medicare tax on investment income, including interest, dividends, capital gains, rental income, annuities, royalties and so-called “passive income”.

The tax, starting in 2013, would apply to single filers earning more than $200,000 and joint filers earning more than $250,000.

Both the House and Senate bills also increase the Medicare tax on wages from 1.45% to 2.35% for the same “high income” households.

So how will overall tax rates look after health care reform?

Well, the top income tax rate is already scheduled to increase to 39.6% next year.

That means the top rate on investment income would increase from the current 35% to 43.4% once the Medicare tax increase takes effect. That’s a 24% increase over the current rate.

The capital gain tax rate is scheduled to increase to 20% next year. That means the top rate on capital gains would increase from the current 15% to 23.8% once the Medicare tax increase takes effect. That’s a 58 % increase over the current capital gain rate.

Top wage earners will see their combined income tax/Medicare tax increase to 41.95%, a 15% increase over current rates.

We’ll have much more in the coming days and weeks as details emerge.

We’ve all seen those Buy Gold Now! commercials.  

And what about all those free real estate seminars? Sign up now! Seating is limited!

It used to be “no money down real estate – and put cash in your pocket at closing”. These days, the pitch is short sales and foreclosure properties.

Many of the ads say “savvy investors know…”

I’m wondering who are all those savvy investors? And how can I become a savvy investor?

I decided to ask my partner, John Kozuch, who runs our financial services company.

John gave me the usual advice: Determine your goals and objectives. Assess your risk tolerance. Diversify your portfolio holdings.  Focus on the long term.

But I wanted to hear more. I want to be a savvy investor.

So John offered up this simple tip.

If it shows up on TV at 2:00 a.m., change the channel.

I’m never up at 2:00 a.m.

And I guess I’ll never be a savvy investor.

The Bureau of Labor Statistics reported that the unemployment rate held steady in February at 9.7%. But a disturbing trend continues: Employment fell in areas like construction, while temporary help services added jobs.

And the long term loss of manufacturing jobs continues. We continue to move from a manufacturing based economy to a service based economy.

The BLS report also shows that over the last two years, the largest gains were in health care, social services and education. I’m not so sure about education jobs right now with the outlook for budget cuts and teacher layoffs here in Illinois.

Where are the skilled jobs today if you don’t have a college degree?

By and large, they’re trade or technology based.

Jobs in the construction trades are down, but they’ll rebound. We’ll always need good carpenters, electricians, plumbers, roofers, iron workers and so on.

Most of the new jobs will be I T and technology based. We hear a lot about Green jobs and we’re seeing them. With medical advances, there’s a growing need for medical technicians. 

Name the industry and there’s a technology component. And many of the technical jobs don’t require a 4 year college degree.

The jobs do require training, whether at a community college or at technical and vocational schools, like DeVry and IIT, as examples.

So what about those who don’t have college degrees or are not college bound?

They’re good candidates for good paying jobs in a broad range of trade and technical fields.

You can learn more about the current jobs outlook at the BLS Occupational Outlook Handbook website -  http://www.bls.gov/oco/

And you can check out specific job categories at their A-Z jobs index –http://www.bls.gov/oco/ooh_index.htm