Talking Shop Blog

The House and Senate have passed separate versions of the so-called “tax extenders” bill.

The legislation would reinstate a number of tax breaks that expired at the end of last year, including the R & D tax credit, certain energy credits, and various special income tax deductions.

House and Senate negotiators are now trying to find the revenue to fund the estimated $30 billion cost of extending the popular tax breaks.

Last week, acting House Ways and Means Chairman Sandy Levin (D-Mich.) said he may look at a conversional provision that would affect many companies that operate as an S Corporation.

The Hill’s Finance & Economy Blog notes that Levin “could close a loophole that allows S corporations to avoid paying employment taxes” ( http://thehill.com/blogs/on-the-money/domestic-taxes/93649-levin-looks-at-s-corps-to-help-pay-for-extender-bill ) .

There’s speculation that negotiators will revive a 2007 proposal that would have subjected all S corporation income in a service business to payroll taxes, not just the owners’ salary.

The provision would have applied to any owner active in the service business.

If enacted, this provision will increase taxes for many of the over 3 million small and mid sized companies that operate as a S Corporation. 

We’ll keep you posted as the House and Senate continue negotiations on the extenders bill.

Late on Tax Day April 15, President Obama signed into law the Continuing Extension Act of 2010 (the “Act”).

The Act extends the eligibility period for the COBRA continuation premium subsidy, including the 65% payroll tax credit for employers.

Under the Act, the eligibility period for the subsidy is retroactively extended for two months and now ends on May 31, 2010.

The Act also carries extended COBRA election procedures for certain involuntarily terminated workers and new notice requirements for plan administrators.

The Department of Labor (DOL) has just updated its Cobra website to reflect the new law.

The site includes updated Model Notices, Fact Sheet, Frequently Asked Questions (FAQs) and other relevant information.

You can access the DOL site at http://www.dol.gov/ebsa/cobra.html .

You can find additional updated information from the IRS at http://www.irs.gov/newsroom/article/0,,id=222173,00.html .

The Congressional Budget Office estimates that about 27 million taxpayers will be hit with the AMT this year under current law.

And nearly every married couple with income between $100,000 and $500,000 will owe some AMT this year.

On the one hand, the Administration and Congress would probably just like to see the AMT “go away”.

That’s because about one in six taxpayers will be hit with the tax, paying on average an additional $3,900 in tax. And that means many “middle income” families will see their taxes rise, even if they make less than $250,000 per year.

On the other hand, changing or eliminating the AMT would reduce federal tax revenues substantially. The AMT is expected to raise over $100 billion in 2011, 8% of total income tax revenues.

Any revenue loss from changing the AMT would need to be made up elsewhere.

Income tax rates are already scheduled to go up next year, so it’s unlikely Congress will raise the rates even further. But they could “broaden the tax base”, which means reducing or eliminating some current deductions. 

And they’ll probably look to other revenue sources, like a new value added tax, or VAT that we keep hearing about.

The CBO recently issued an Economic and Budget Issue Brief on the alternative minimum tax. It provides a good historical perspective, a non-technical overview of the tax, and the impact of various options on changing or eliminating the tax.

You can read the full Brief at

http://www.cbo.gov/ftpdocs/108xx/doc10800/01-15-AMT_Brief.pdf

This ever happen to you?

You’re minding your own business, tax time comes along, and then Whack!

You just got hit by the alternative minimum tax (AMT).

It happens to millions of taxpayers every year. But it wasn’t supposed to be this way.

The AMT was first enacted to make sure high income taxpayers didn’t avoid tax through generous tax breaks, tax shelters and loopholes in the law.

In fact, the original 1969 version was targeted towards just 155 high income taxpayers who were paying little to no federal income tax.

It’s estimated that about 27 million taxpayers will be hit with the AMT this year.

The AMT isn’t indexed for inflation like the regular tax. That’s why more and more taxpayers are being snagged by the tax.

But that’s not the only reason.

I have a client who was hit by the AMT every year back in the 80s. He had 9 kids, and that makes 11 personal exemptions on a joint return.

The personal exemption deduction is not allowed in computing the AMT. I know, I wouldn’t call it a “tax loophole” either. But it’s still not allowed.

So he paid the AMT every year while raising his large family.

Now the kids are grown and out of the house. He’s living off his pension and social security.

And he’s down from 11 personal exemptions to just 2. No more AMT.

The government estimates that nearly every married couple with income between $100,000 and $500,000 will owe some AMT this year.

More about that on Monday.

We’ve mentioned the Buy Gold Now! commercials before.

How about this one making the rounds.

“Gold in an IRA is the ultimate asset!”

Ultimate?  I don’t know about that.

I’m not a savvy investor so I’m not so sure there really is “an ultimate asset”.

No, change that, I am pretty sure. There is no “ultimate asset”.

Actually the commercials have me thinking about something else – the Roth conversion.

We’ve got new tax rules this year on Roth conversions. And we’ve all seen the Roth conversion ads and commercials.

 I just did a Google search on “Roth conversion” and came up with “ About 2,590,000 results (0.33 seconds). Yikes.

Some of the sites make it sound like the Roth conversion is the ultimate financial planning strategy.

There’s that word again. Ultimate.

Roth conversions will make sense for some but not for others.

And to make some sense of all of this, our financial services company, Dugan & Lopatka Financial Services LLC, will be hosting a Roth IRA seminar on Tuesday, May 4.

To find out more or to make a reservation, call our office at 630-665-4440.

The IRS has just released guidance on the “small employer” health insurance credit under the new health care reform bill.

Starting this year, qualifying employers with no more than 25 employees are entitled to up to a 35% tax credit on the cost of providing health insurance for employees.

The credit is available to qualifying small employers that pay at least half the cost of single coverage for their employees in 2010.

The credit is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have.

The IRS also began mailing postcards this week to more than four million small businesses and tax-exempt organizations to make them aware of the benefits of the recently enacted credit.

You can find out more about the credit at http://www.irs.gov/newsroom/article/0,,id=220809,00.html?portlet=6

Last week the IRS reported that personal tax refunds are up nearly 10% over last year.

IRS Commissioner Doug Shulman attributes the increase to the new tax credits in last year’s economic stimulus bill.

High on the list are the Make Work Tax Credit, the increased Child Credit, and the various energy and education credits.

Refunds are also higher because personal income was lower for most. Reduced wages, unemployment and smaller investment returns will all lower your tax bill.

I look at a tax refund three ways.

If you over-withheld, you’re just getting back your own money that you put in.

If I get a tax credit, I’m getting someone else’ s money.

But that only happens with a balanced budget. If the government pays out only what it takes in, then my tax credit was “paid” by someone else.

As we’ve said before, government spending is a zero sum game.

Of course with our current budget deficit, the tax credits we get come from borrowed money. The federal government can’t afford to dole out the credits with current tax revenue, so they just borrow and print more money.

Yes, tax refunds are nice.

But remember, it’s your own money, someone else’s money or borrowed money.

If you have a refund coming, you can track it at https://sa2.www4.irs.gov/irfof/lang/en/irfofgetstatus.jsp .

The IRS has released additional guidance on the new payroll tax exemption for qualifying new hires under the HIRE Act.

A couple of items caught my attention.

The IRS says that an employer can claim the exemption for rehires, provided that the employee is otherwise a “qualifying employee” under the Form W-11 certification.

Many private sector employers had to lay off valuable employees during this recession.

And some companies are now starting to rehire to meet customer demands as orders pick up. So it’s good news that rehires can qualify for the payroll tax exemption.

The exemption also applies to the hiring of a recent graduate, again, if he or she is an otherwise “qualifying employee”.

That’s good news for many employers, including those about to hire graduates who interned for your company last year.

You can find the new guidance in FAQ format at http://www.irs.gov/businesses/small/article/0,,id=220749,00.html

And you can get Form W-11 on the IRS website at http://www.irs.gov/pub/irs-pdf/fw11.pdf .

The form is not required to be filed with the IRS.

Illinois Governor Pat Quinn signed into law a pension reform bill yesterday.

It’s a step in the right direction in addressing the state’s massive budget crisis. But we’ve got quite a ways to go to dig out of an estimated $12 billion deficit.

Something else the governor did yesterday really caught my attention.

He dumped a plan to hire longtime aide, Claude Walker, as the state’s first Canoe Czar.

His hiring, at a starting salary of $85,000 per year, was first reported yesterday morning by the Quad-City Times’ Springfield Bureau.

Work spread quickly around the state capital and by the early afternoon he was fired.

See it doesn’t look good to hire a Canoe Czar when you’re faced with a $12.8 billion budget deficit.

I’m not sure what a Canoe Czar does.

The hiring announcement said he would “coordinate kayaking and canoeing” for the Department of Natural Resources.

Walker is a self described “kayaking enthusiast.”

I’m a self described kayaking enthusiast too. I like to kayak down the West Branch of the DuPage River.

Maybe I’ll see Claude rolling down the river this weekend.

No word on whether he received severance pay.  

You can read the about the new pension reform bill at http://www.illinois.gov/PressReleases/ShowPressRelease.cfm?SubjectID=3&RecNum=8368