Health care reform legislation passes

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The recently signed health care legislation has an

official name, but you probably think of it simply as

health care reform. And now that it’s law, you may be

wondering what tax changes are in store.

Here’s a recap of some rules included in the two health

care bills that will affect your individual and business

tax returns.

* BUSINESS TAX CREDIT. Starting this year, a new federal

  tax credit is available when you provide health care

  insurance for qualified workers. In general, the

  credit applies when you have no more than 25 employees

  earning average wages of $50,000 or less. The maximum

  credit is 35% of the premiums you pay.

* ADOPTION CREDIT. For 2010, you’ll be able to claim an

  increased adoption credit on your personal return.

  The credit is increased by $1,000 (to $13,170) and is

  refundable. Also, the credit is extended through 2011.

* CHANGES TO HEALTH SAVINGS PLANS. In 2011,

  over-the-counter medications will no longer be

  considered qualified medical expenses for health

  savings plans such as HSAs, FSAs, and HRAs. Also,

  penalties for nonqualified withdrawals will increase.

  The maximum contribution you can make to FSAs will be

  limited to $2,500 starting in 2013.

* INCREASED MEDICARE TAX. A two-part change affects

  individual tax returns in 2013.

  If you’re married, filing jointly, and have income of

  more than $250,000 ($200,000 when you’re single), a

  3.8% Medicare tax may be assessed on your unearned

  income. Unearned income includes dividends, interest,

  royalties, and rents.

  In addition, when your earned income is greater than

  $250,000 (for married filing jointly) a .9% increase

  in Medicare tax will apply. The income threshold is

  $200,000 when you’re single.

* MODIFICATION OF MEDICAL EXPENSE ITEMIZED DEDUCTION.

  Starting in 2013, in order to claim an itemized

  deduction on your personal return when you’re under

  age 65, your unreimbursed medical expenses will need

  to exceed 10% of your adjusted gross income. The

  current threshold is 7.5%.

* PENALTIES FOR NOT PROVIDING HEALTH CARE TO EMPLOYEES.

  A penalty for failure to provide minimum essential

  health coverage to your employees takes effect in

  2014. The penalty applies when you have 50 or more

  full-time employees.

We’ll be providing more information on these and other

tax provisions in the health care reform legislation.

In the meantime, if you have any questions about how

the bill applies to you or your business, please call.

Tips to get the most from an IRA

=======================

* There is still time for a 2009 IRA. If you didn’t

  make contributions to an IRA in 2009, you can still

  set up and contribute to an IRA for 2009. The deadline

  for doing so is April 15, 2010. An IRA is a great way

  to save for your retirement, and with a deductible

  IRA, you also cut your current tax bill.

* If your 2009 deductible IRA wasn’t fully funded by

  December 31, 2009, and you make any IRA contributions

  prior to April 15, 2010, designate to the bank or

  trustee that these 2010 contributions are for 2009

  (up to the maximum allowed). You can then deduct

  these amounts on your 2009 income tax return for a

  quicker tax benefit.

* Make your 2010 IRA contributions as early this year

  as possible to maximize the time you have for

  tax-deferred growth in the fund.

* Consider converting a traditional IRA to a Roth IRA

  this year. The previous rule that excluded taxpayers

  with incomes over $100,000 from doing a conversion to

  a Roth is eliminated as of January 1, 2010. You’ll

  have to pay tax on the amount converted, but

  qualifying distributions from the Roth IRA are

  tax-free thereafter. Furthermore, you won’t have to

  take annual distributions from your Roth IRA when you

  reach age 70½ if you don’t want to.

* Note that while converting a traditional IRA to a Roth

  IRA is now open to everyone, regardless of income,

  contributing to a Roth IRA is still not allowed for

  higher-income taxpayers. For 2010, Roth IRA

  eligibility phases out for singles once income reaches

  $105,000 and for joint filers once income reaches

  $167,000.

* For 2010, annual minimum distributions from most

  retirement plans are once again required for those

  aged 70½ and older. In 2009, these required minimum

  distributions (RMDs) were suspended. 2010 required

  distributions must be taken by December 31, 2010.

  Taxpayers who turn 70½ in 2010 may choose to delay

  taking their first distribution until April 1, 2011.

For additional information or assistance with IRA

decisions, give us a call.

In these troubled economic times, many financially distressed borrowers may have had some or all of their debt cancelled or forgiven by their lender last year. While such relief was no doubt welcome to people who received it, what they may not have realized is that debt forgiveness may have tax consequences. Specifically, debt forgiven in 2009 may have to be included as income on your 2009 return. However, not all canceled debts trigger taxable income. And, even if there is no exception or exclusion in a particular case, that may not be the last word. The tax bite may be reduced or eliminated if you can show that the amount reported by the lender is incorrect.

General rule. The tax laws specifically include income from the discharge of indebtedness in gross income. However, there are several exceptions to this rule. In addition, there are numerous exclusions from gross income for certain types of forgiven debts.

Exceptions. If the cancellation of debt by a private lender, such as a relative or friend, is intended as a gift, there is no income. Likewise, a debt cancelled by a private lender’s Last Will and Testament triggers no income to the borrower.

There is also an exception for certain student loans. For example, doctors, nurses, and teachers agreeing to serve in rural or low income areas in exchange for cancellation of their student loans won’t have income from the cancellation if they meet certain conditions.

Also keep in mind that there is no income from cancellation of deductible debt. For example, if a lender cancels home mortgage interest that could have been claimed as an itemized deduction on Schedule A of Form 1040, there is no tax problem to contend with.

Price adjustment. There is no income if an individual purchases property and the seller later reduces the price. The purchaser’s basis (yardstick for measuring gain or loss on a later sale) in the property, however, is reduced by the amount of the purchase price adjustment.

Exclusions. In addition to the above exceptions, there are exclusions from the general rule for reporting canceled debt as income for:

·       discharge of debt through bankruptcy,

·       discharge of debt of an insolvent taxpayer,

·       discharge of qualified farm debt,

·       discharge of qualified real property business debt, and

·       discharge of qualified principal residence debt.

These exclusions are quite complicated and a detailed discussion of them is beyond the scope of this letter. However, it is worth pointing out that the qualified principal residence debt exclusion applies where individuals restructure their acquisition debt on a principal residence, lose their principal residence in a foreclosure, or sell a principal residence in a short sale (where the sales proceeds are insufficient to pay off the mortgage and the lender cancels the balance). Also, the exclusions require certain tax attributes to be reduced and must be reported to the IRS on its Form 982.

Repurchased business debt. Income from certain repurchased business debt can be stretched out over several years. Although all of the deferred debt discharge income will eventually be recognized, you benefit from the deferral of tax to later years.

Form 1099-C, Cancellation of Debt. A taxpayer should receive a Form 1099-C from a federal government agency, financial institution, or credit union that forgives a debt of $600 or more. The amount of the canceled debt is shown in box 2. Any forgiven interest included in the amount of canceled debt in box 2 will also be shown in box 3. As noted above, if the interest would otherwise be deductible, it does not have to be included in income.

An individual who doesn’t agree with the amount shown on Form 1099-C should contact the lender in writing and request it to issue a corrected Form 1099-C showing the proper amount of canceled debt. Even if the lender refuses to issue a corrected report, there still may be recourse if you have adequate documentation to show that the lender incorrectly reported the amount canceled.

If you had a debt forgiven last year, we can determine how it may affect your 2009 taxes, make sure you gain maximum advantage from any exception or exclusion that may apply, and guide you through various choices that may be available to you, depending on the specific circumstances of your situation. We also may be able to help you to resolve any discrepancy concerning the amount reported by the lender.

Client Alert

We’re well into February, and there still has been no further action on the part of Congress to undo the estate tax repeal that applies for individuals dying in 2010. Repeal doesn’t necessarily mean that taxes will be lowered for heirs of a decedent dying in 2010. That’s because, estate tax repeal includes changes to the income tax basis rules for property acquired from a decedent. As a result of these income tax changes, some heirs could face higher combined estate and income tax costs if their loved one dies in 2010 than would have been the case if death had occurred in 2009.

There are many technicalities associated with the new law and the purpose of this TAX NEWS is to call your attention to your own estate plan as it currently exists and recommend that you contact your estate attorney to ask if your estate documents will achieve your wishes under the new law.

In addition to the concern that some heirs will face increased tax costs if Congress does not take action, another concern is gaining stature as more time elapses—wills and trusts using formula clauses that work well when the estate tax is in force may produce unintended tax consequences when there is no estate tax—such clauses could be construed to leave spouses with far less than the testator intended, and in some cases, even nothing, as shown in the simplified example that follows.

An illustration: An individual has a $6.5 million estate. His will leaves the “exempt amount” (stated as a formula) to his children from his first marriage and the balance to his current spouse. Had he died in 2009, the children would have received $3.5 and his spouse would have gotten $3 million. The marital deduction coupled with unified credit, which sheltered $3.5 million for 2009 transfers, would have prevented any estate tax from being owed. Now assume he dies in 2010. The formula clause could be interpreted as giving everything to the children and nothing to his spouse.

There is also concern that these formula clauses could operate to increase state death taxes depending on the state you live in and what that state may or may not have done in response to the new law.

Fortunately, some states already have begun to tackle this issue. They have started the process of enacting laws that would provide that a formula for calculating transfers or devises based on federal estate or generation-skipping transfer tax law contained in a will or trust of a decedent who dies after Dec. 31, 2009, and before Jan. 1, 2011, will be construed to refer to the tax law applicable on Dec. 31, 2009. California has not yet done this and currently has no estate tax.

The bottom line is that the current law and the inaction of Congress on this issue has created a situation with much uncertainty.  You need to understand from your estate attorney exactly what the implications of your current estate plan are and if you need or want to modify those documents.  Your current documents may produce unintended results under the new law.

Please keep us informed about any developments you are undertaking with your attorney and, as always, provide us a complete copy of any revised estate documents so we may be of greatest assistance to you and your family.

A law signed by President Obama on January 22 lets you take an early tax deduction for contributions you make for earthquake relief to Haiti. And if you use your cell phone to donate via a text message, the new law gives you an easier method for substantiating your contribution.

If you itemize deductions on your tax return, you may elect to take a charitable deduction on your 2009 return for Haiti contributions made after January 11, 2010, and before March 1, 2010. Claiming a 2010 contribution on your 2009 return will give you an earlier tax benefit, though you may also wait until you file your 2010 return to take the deduction.

Here are other important details.

* The contributions must be made specifically for relief related to the January 12, 2010, earthquake in Haiti.

* The contributions must be made to qualified charities, rather than to specific individuals.

* Only cash contributions qualify for the earlier 2009 deduction option; contributions of property or goods do not qualify.

* Contributions made to foreign charities generally don’t qualify.

* You’ll need records to substantiate any deductible donations you make. But a special easing of the rules will allow you to use your telephone bill as substantiation for donations made by text message. The phone bill must show the name of the organization receiving your donation, the date of the contribution, and the amount you gave. For other donation methods, you’ll need a bank record or written communication from the charity.

* If you claim a Haiti relief deduction on your 2009 return, you may not also claim the same donation on your 2010 return (which you’ll be filing in 2011). To decide whether to take the deduction on your 2009 or 2010 return, run the numbers to see which year will give you the bigger tax savings. For 2009, higher-income taxpayers have a limit on their total itemized deductions. This limit is eliminated for 2010, so the deduction could actually provide a bigger tax break if taken on your 2010 tax return.

For additional information or filing assistance, please contact our office.

Is the estate tax really dead?

==============================

Officially, the estate tax has been repealed, but only

for 2010. That’s due to a provision in a 2001 law that

gradually reduced the estate tax rates and increased

the exemption amount, setting the tax to expire

completely in 2010. According to that law, the estate

tax is scheduled to be reinstated in 2011 at its

pre-2001 levels.

Congress expected to deal with the estate tax by the

end of 2009, and the House did in fact pass a permanent

extension of the tax at 2009 levels (with a 45% top rate

and a $3.5 million exemption). The Senate, however, was

focused on health care reform and ran out of time,

leaving the estate tax issue for 2010.

Now, the expectation is that the Senate will deal with

the estate tax in January, reinstating it retroactive

to the first of the year. However, there is still no

consensus on what the law should be and no certainty

that a bill will pass quickly.

Stay tuned. Though Congress may not find it easy to

reach an agreement on the estate tax, you can be sure

they are not likely to have it disappear even for one

year.

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Rules changed for business losses

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Normally, a business can carry back a net operating

loss (NOL) for only two years before carrying it

forward for up to 20 years. The “American Recovery and

Reinvestment Act of 2009,” signed earlier this year,

allowed a carryback for three, four, or five years to

qualified small businesses for NOLs in tax years

beginning or ending in 2008. To qualify for the longer

carryback period, the business had to have average

gross receipts of $15 million or less.

NEW LAW. A new law signed November 6, 2009, expands the

longer carryback period to include businesses of any

size. The longer carryback is generally available for

NOLs incurred in either 2008 or 2009.

One important restriction: An NOL carried back to the

fifth year is limited to 50% of the taxable income for

the year. Any remaining NOL may offset income in the

remaining four years.

These rule changes are important if your business

suffered a loss in 2008 or 2009. For a complete

discussion of how the changes affect your company’s tax

situation, give us a call.

***************************************
christopher w. keys, cpa
keys & mcbride, cpas & consultants
714-544-0766 ring
714-544-2595 fax
949-338-2205 mobile
***************************************
14451 chambers road, suite 200
tustin, ca 92780
***************************************
1400 nw irving street, suite 509
portland, or 97209
***************************************
email: chris@keysmcbride.com
web: www.keysmcbride.com

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Two IRA tax breaks will end soon

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Two tax provisions that could affect you are scheduled

to expire after December 31, 2009. Here’s a quick review.

* For 2009 only, you have the option of skipping your

required minimum distribution (RMD) from traditional

IRAs and certain other qualified pension plans. This

suspension of the RMD rules applies to distributions

you would have had to take because you’re over age

70½ or are the beneficiary of an inherited traditional

or Roth IRA.

If you took a distribution earlier this year and

would like now to reverse it, you have the later of

60 days from the distribution date or November 30, 2009,

to roll the money back into a retirement plan.

* If you’re 70½ or older, you can make a 2009 donation

of up to $100,000 directly from your IRA to a

qualified charity without treating the donation as a

taxable IRA distribution. Distributions from

employer-sponsored retirement plans – including SIMPLE

IRAs – are not eligible.

No charitable deduction is allowed for the donation

unless nondeductible contributions are transferred.

In that case, a charitable contribution deduction may

be allowed if you itemize deductions on your tax return.

Please contact us if you would like to discuss these and

other IRA actions to consider at year-end.

There still exists some confusion about the rules regarding the amount of gain that is taxed when you sell your home.  The old rules that allowed a one-time exclusion for those over the age of 55 no longer apply.  The old rules allowing you to “roll” the gain into a replacement property no longer apply.  Here are the new rules that allow a single filer to exclude up to $250,000 of gain and married/joint filers to exclude up to $500,000 of gain.  Any gains above those amounts are taxed as capital gains.

There are three tests that must be met to exclude gain on the sale of a  residence:

1. Ownership. The taxpayer must have owned the residence for periods aggregating at least two years during the five years ending on the date of the sale or exchange [IRC Sec. 121(a)].

2. Use. The taxpayer must have occupied the residence as a principal residence for periods adding up to at least two years within the five-year period ending on the date of the sale or exchange [IRC Sec. 121(a)]. Short, temporary absences are generally counted as periods of use [Reg. 1.121-1(c)]. However, a one-year sabbatical leave is not considered a short, temporary absence [Reg. 1.121-1(c)(4), Example 4].

3. One Sale in Two Years. The taxpayer must not have used the $250,000 (or $500,000) exclusion for any residence sold or exchanged during the two-year period ending on the date of the current sale or exchange [IRC Sec. 121(b)(3)]. The date of sale is generally the earlier of the date the deed passes (is conveyed) or the time possession and the burdens and benefits of ownership are (from a practical standpoint) transferred to the buyer (Rev. Rul. 69-93). This will usually be the date of the closing statement.

You can find more helpful information at our web page www.keysmcbride.com