federal tax law update for 2010. tax rates 20102011 ordinary income35%39.6% capital gain15%20%...
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Healthcare Legislation – How Will We Pay for It?
H.R. 3902 5.4% surtax on AGI > $500,000
(1 MM for joint filers)
Senate 40% excise tax on insurers of “cadillac plans”
additional 0.9% payroll tax on wages over 200k
Business Tax Breaks
50% bonus depreciation ended 12/31/09
Section 179 – Cap EX may be expensed up to $134k (down from $250k in 2009)
5-year carryback for 2008 and 2009 for business tax losses
Deferral of Business COD
Applies only to debt forgiven during 2009 or 2010
Deferral until 2014 with 5 year spread
Election required by borrower
Insolvency exception still applies
Employer Owned Life Insurance
Life insurance proceeds in excess of basis are taxable
Exceptions Insured is employee within 12 months of death Insured is HC or director at time policy issued Payable to insured’s family / beneficiary Used to purchase equity of insured
Notice and Consent Must be writing Prior to issuance of policy
COBRA Subsidy
65% subsidy for COBRA coverage for involuntary terminated employees between September 1, 2008 and February 28, 2010
Employer claims credit against payroll taxes
Home buyer $8,000 Tax Credit
Extended to purchases of principal residence closing before May 1, 2010
Also applies to purchases that close prior to July 1, 2010 if purchase agreement is signed prior to May 1, 2010
Phases out starting with AGI of $125,000 for individual filers (AGI of 225,000 for joint)
IRA Distributions to Charity
$100,000 exclusion expired 12/31/09
House has passed extension through 2010
Nonspouse Beneficiary Rollovers
Starting 2010 plans required to permit nonspouse beneficiaries to elect transfer to IRA
60 day roll over rule does not apply
Family Limited Partnership
Device to gift assets to next generation at substantial valuation discount
Independent Business Purpose required
Best if used to gift interests in family business
Foreign Financial Account Reporting
Signature authority / beneficial interest in foreign financial accounts
Aggregate value in excess of $10,000
FBAR due June 30 of succeeding year
October 15, 2009 was due date under IRS Voluntary Disclosure Program
IRS Audit Rates
1% of individuals
3% of individuals with income of $200,000
6.5% of individuals with income of $1 million
Schedule C (sole proprietorship) attract IRS audits
Conventional and Roth IRAs
TAX TREATMENTConventional IRA – Deduction upon contribution and taxed as ordinary income when funds
withdrawnRoth IRA – No deduction on contribution and no tax upon withdrawal
INCOME RESTRICTIONSConventional IRA – None, if not in an employer sponsored plan. If in employer sponsored
plan, $65,000 (ind.), $109,000 (Married Filing Jointly)Roth IRA – $120,000 (ind.), $176,000 (Married Filing Jointly)
CONTRIBUTION RESTRICTIONS - $5,000/yr. ($6,000/yr. if over 50)Conventional IRA – cannot contribute if over the age of 70 1/2Roth IRA – can contribute until death
MINIMUM REQUIRED DISTRIBUTIONS (MRD)Conventional IRA – starting April 1, in the year after turning 70 1/2Roth IRA – no MRD
Conversions of Conventional IRA to Roth IRA
No income restrictions (previously $100,000)
Conversion triggers income tax
Conversions in 2010 can have income recognized 50% in 2011 and 50% in 2012, or all in 2010
Highest marginal income tax rate is currently 35%
Highest marginal income tax rate is scheduled to be 39.6% in 2011
Factors to Consider in Conversions
Rising tax rates
Lower income levels now
Higher rates of return
Longer time frame before withdrawals
Need to withdraw during lifetime
Exposure to State and Federal estate tax
Purpose of conversion (personal or for children)
Ability to pay tax outside of retirement assets
Use of loss carryovers or charitable deduction carry forwards
Recharacterization
Can be completed up until the date the tax return is
due (including all extensions) if reported on the return
Suggestion: Create multiple Roth IRAs broken up by asset classes to retain the “winners” and recharacterize the “losers.”
Recharacterization will be eligible for conversion in year following the first conversion and not until 30 days after the recharacterization
Tax upon the Disposition of Life Insurance
Revenue Ruling 2009-13 and 2009-14
Rev Rul. 2009-13
Situation #1 – A is the insured, the beneficiary is member of A’s family, A had incidents of ownership (right to change beneficiary, take loan, surrender policy). Surrendered for $78,000 which included $10,000 of “cost of insurance” deductions taken by insurer through the date of surrender. Premiums of $64,000 had been paid.
Income is $14,000 ($78,000 - $64,000).
It is ordinary income.
Tax upon the Disposition of Life Insurance
Rev Rul. 2009-13 (cont.)
Situation #2 – A is the insured, the beneficiary is member of A’s family, A had incidents of ownership. $78,000 cash surrender value, $64,000 in premiums paid and a $10,000 cost of insurance. The policy is sold to B (unrelated to A) for $80,000
Insurance with cash value consists of investment and insurance components. Cash value is value of the investment characteristic, and the cost of insurance is the value of the insurance portion. Basis for taxpayer is the premium paid ($64,000) minus the cost of insurance ($10,000). Result is a gain of $26,000 ($80,000-$54,000).
Of that $26,000, $14,000 is ordinary income ($78,000-$64,000), the balance is capital gain.
Tax upon the Disposition of Life Insurance
Rev Rul. 2009-13 (cont.)
Situation #3 – A is the insured, the beneficiary is member of A’s family, A had incidents of ownership. Policy was 15 year term no cash surrender value. Premiums were $45,000 ($500/monthly). Policy was sold to B (unrelated to A) for $20,000.
Basis is the amount paid minus the cost of insurance. Cost of insurance is presumed to be the premium for term policies. In this case the sale occurred half way through the month, so the “basis” was $250. Income is amount paid minus unused premium so there is a $19,750 of income.
There was no inside build-up of value, so no ordinary income. All of the income is capital gain.
Tax upon the Disposition of Life Insurance
Rev. Rul. 2009-14
Situation #1 - A is the insured of a 15 year level term policy ($500/mo. premium). B purchased the policy from A for $20,000 with 7+ years remaining on term. B has no risk of economic loss at A’s death, no insurable interest in A’s life and the policy was purchased by B as an investment. B pays $9,000 in premiums before A dies and B is paid the death benefit of $100,000.
The sale from A to B is a transfer for a valuable consideration. The exclusion from income is limited to actual consideration paid ($20,000) and any amounts paid thereafter ($9,000). Therefore B’s exclusion is $29,000 out of $100,000 and he has $71,000 of income.
The $71,000 is ordinary income, not capital gain.
Tax upon the Disposition of Life Insurance
Rev. Rul. 2009-14 (cont.)
Situation #2 – A is the insured of a 15 year level term policy ($500/mo. premium). B purchased the policy from A for $20,000 with 7+ years remaining on term. B has no risk of economic loss at A’s death, no insurable interest in A’s life and the policy was purchased by B as an investment. B pays $9,000 in premiums. A does not die, instead, B sells to C (unrelated to A) for $30,000.
B paid $20,000 for the policy and $9,000 in additional premiums, so his basis is $29,000. The income therefore is $1,000 ($30,000-$29,000).
Because B has purchased the insurance as an investment, it is a capital investment and therefore the income is capital gain.
Situation #3 – Same as #1 except B is foreign corporation.
The results are the same as Scenario #1, there is $71,000 worth of ordinary income to the corporation.
New Estate Tax Law
HR 436 – 1/9/2009, $3.5million unified credit, 45% tax rate, eliminate FLLP discounts
HR 498 – 1/14/2009, 15% capital gains permanent, $5 million unified credit by 2015 plus inflation, portability
HR 2023 – 4/22/09, $2 million unified credit, restore state tax credit, raise rates on large estate, portability
Taxpayer Certainty and Relief Act of 2009 – 3/26/2009 - $3.5 million unified credit plus inflation, 45% tax rate, make numerous EGTRRA tax cuts permanent, portability
Lincoln-Kyl Amendment to the Senate budget bill – 4/1/09 - $5 million unified credit, 35% tax rate, portability
Pay-As-You-Go Bill – 6/17/09, $3.5 million unified credit, 45% tax rate
HR 4363, HR 533, HR 205, HR 99 all call for repeal of estate tax effective 1/1/10.
2010 Budget
Disclaimer
IRS CIRCULAR 230 DISCLAIMER: To the extent that this written communication may address certain tax issues, this written communication is not intended or written to be used, and cannot be used by any persons to avoid any potential tax penalties that may be asserted by the Internal Revenue Service. In addition, this communication may not be used by anyone in promoting, marketing or recommending the transaction or matter addressed herein.