RJ Gold Client AlertsNovember, 2010
YEAR-END TAX SAVING STRATEGIES
NEW RULES EXTEND ROTH CONVERSIONS WITHIN 401(K) PLANS
Effective September 27, 2010, the Small Business Jobs Act of 2010 (SBJA) permits plan sponsors/employers to allow plan participants in 401(k) plans who are eligible to receive distributions to convert certain accounts to Roth accounts within the 401(k) plan. These rules are not as straight forward as they appear. We wanted you to have some summary information so you can speak with your employer/plan sponsor to see what may apply in your situation.
With the passing and subsequent signing of this Act by President Obama, participants may now convert non-Roth amounts within the plan so long as the plan is a Roth 401(k) plan. Consistent with previous rules and regulations governing conversions made during 2010, these conversions can also, to the extent taxable, be recognized as pro-ratable income in 2011 and 2012 rather than in 2010. Any amounts converted after 2010 are not eligible for this special two-year income recognition rule.
Please be aware that not all non-Roth amounts may be converted. Only non-Roth amounts that can be distributed from the plan pursuant to the provisions of the plan document at the time of conversion can be converted. Only distributions that are eligible for rollover may be converted. This still provides many conversion opportunities, as follows:
If you have any questions once you have spoken with your plan sponsor please feel free to contact us.
2010 HEALTH REFORM LEGISLATION - TAX PROVISIONS
2010 H.I.R.E. ACT
MASSACHUSETTS ABANDONED PROPERTY LAW
2010 HEALTH REFORM LEGISLATION - TAX PROVISIONS
Provisions Effective in 2010
Pre-Existing Conditions - Insurance companies can no longer exclude coverage for pre-existing conditions (effective this year for children and in 2014 for adults),
Small Employer Health Insurance Tax Credit.
Effective this year and going through 2013, To be a small employer qualifying for this new credit you must:
1. employ no more than 25
Full-time Equivalent (FTE) employees during the tax year,
The credit generally equals 35% of the amounts paid by the employer during the year for employee coverage.
The full amount of the credit is available only for employers that employee 10 or fewer FTE employees and have average annual FTE wages of less than $25,000 for the year.
No credit is allowed for premiums paid on behalf of partners, sole proprietors, 2% shareholders of an S corporation, 5% owners of the employer, and dependents of these individuals.
Dependent Coverage in Employer Health Plans. Effective 3/30/10, individuals can deduct (as a self-employed medical insurance deduction on page 1 of Form 1040) insurance coverage for their children who have not attained age 27 as of the end of the year.
Employees can exclude from their taxable income the amounts their employer pays for health care insurance for their children who have not attained age 27 as of the end of the year. The child does not have to be the individual’s dependent. This means no chargeback to income for premiums paid.
Although the exclusion for employer-provided health coverage for under-age-27 dependents is effective 3/30/10, employers don’t have to provide health coverage of these adult children if they don’t otherwise cover dependents.
Provisions Effective in 2011
Cost of Employer Sponsored Health Coverage Will Be Included on Form W-2.
Over-the-counter Medicine No Longer Reimbursable by Health Plans including health FSAs, Health Reimbursement Accounts (HRAs), Health Savings Accounts (HSAs), and Archer Medical Savings Accounts (MSAs)]
Increased tax from 10% to 20% on Nonqualifying HSA distributions; and on Archer MSA Distributions not used for qualified medical expenses, the tax increases from 15% to 20 .
Provisions Effective in 2013
Additional Hospital Insurance (HI) Tax for High Wage Workers. The employee portion of the HI tax rate will be increased by 0.9% for employees who earn wages over $200,000 ($250,000 for married couples filing jointly or $125,000 for married filing separate). An additional HI tax of 0.9% will be imposed on self-employment income in excess over $200,000 ($250,000 for married couples filing jointly or $125,000 for married filing separate) reduced (but not below zero) by wages taken into account in determining the FICA tax with respect to the taxpayer.
New 3.8% Surtax on Unearned Income. Taxpayers with modified adjusted gross income (MAGI) over $200,000 ($250,000 for a joint return or $125,000 for married filing separate) will be subject to a 3.8% surtax (called the Unearned Income Medicare Contribution) on net investment income.
Increased Medical Expense Deduction Threshold for the itemized deduction for medical expenses for regular income tax purposes will be increased from 7.5% of AGI to 10% of AGI.
Health FSA Contributions will be limited to $2,500 per year.
Deduction for Retiree Drug Coverage Eliminated.
Provisions Effective in 2014
Penalty for Not Having Health Insurance Coverage. The penalty per household will generally be capped at $285 for 2014, $975 for 2015, and $2,085 for 2016.
Health Care Cost-sharing Subsidies (or Tax Credits) Available to Low-income Individuals.
Penalty for Large Employers Not Offering Affordable or Adequate Health Insurance Coverage. A large employer is generally, an employer that employed an average of at least 50 full-time employees during the preceding calendar year. Any penalty paid under this provision is not deductible as a business expense.
Free Choice Vouchers. Employers that have a health plan under which they pay a portion of their employees’ health insurance coverage will have to provide certain low-income employees who don’t participate in the employer’s plan with a voucher that can be applied to purchase health insurance through a state run Insurance Exchange.
Provisions Effective in 2018
Excise Tax on High-cost Employer-sponsored Health Coverage (Cadillac Plans) A nondeductible excise tax will be levied on so-called Cadillac plans—basically health plans with annual premiums exceeding $10,200 for single coverage and $27,500 for family coverage.
2010 H.I.R.E. ACT
The Hiring Incentives to Restore Employment Act (the HIRE Act) became law on March 18, 2010. The legislation includes three business tax breaks intended to boost hiring along with a package of changes intended to tighten the screws on offshore transactions and entities that Congress thinks can be used to hide income and assets from the IRS. This letter summarizes what we think are the key points.
Generous Section 179 Deduction Rules Extended through 2010. The HIRE Act extends the generous $250,000 Section 179 first-year depreciation write-off for one year, to cover tax years beginning in 2010. The new law also extends the $800,000 threshold for the Section 179 deduction phase-out rule to cover tax years beginning in 2010. Other favorable Section 179 deduction rules also apply in 2010. For example, Section 179 deductions can still be claimed for purchased software.
Note: For tax years beginning in 2011, the maximum Section 179 deduction will fall all the way back to $25,000 unless Congress takes further action. The phase-out threshold will fall all the way back to $200,000. Also, some of the other favorable Section 179 rules end after 2010.
Temporary Employer Social Security Tax Exemption for Wages Paid to New Hires. Wages paid by a qualified employer to a qualified new employee for employment between 3/19/10 and 12/31/10 are exempt from the 6.2% employer portion of the Social Security tax. However, there’s no exemption for the 6.2% employee portion of the tax, and there’s no break for individuals who pay self-employment tax.
The maximum amount of employer Social Security tax savings for a high-paid employee is $6,621.60 (6.2% × $106,800 Social Security tax ceiling for 2010). Savings will be less for lower-paid employees and for higher-paid workers who are paid less than $106,800 for employment between 3/19/10 and year-end.
Qualified employers include private-sector businesses, tax-exempt not-for-profits, and eligible public higher-education institutions.
Qualified new employees are full-time or part-time workers who start work between 2/4/10 and 12/31/10 and who were not employed more than 40 hours during the 60-day period ending on their start dates. However, the new worker cannot replace another worker unless that person quit voluntarily or was discharged for cause.
To give both employers and the IRS time to gear up for this new Social Security tax exemption deal, the benefit of the exemption for any eligible wages paid during March will be reflected as a credit on the employer’s federal employment tax return (Form 941) for the second quarter of 2010. The first quarter return is unaffected.
Temporary Tax Credit for Retaining Qualified New Employees. Above and beyond the temporary Social Security tax exemption explained above, employers can also claim a temporary new tax credit of up to $1,000 for wages paid to each qualified new employee, using the same definition as for the Social Security tax exemption.
There are some additional requirements for the credit. The worker must be kept on the payroll for at least 52 consecutive weeks, and wages during the second 26 weeks of the 52-week period must equal at least 80% of wages paid during the first 26 weeks of that period.
The credit amount equals the lesser of 6.2% of wages paid during the 52-consecutive-week period or $1,000. To claim the maximum $1,000 credit, the worker must be paid at least $16,130 during the 52-week period.
The credit can only be claimed for the tax year ending after 3/18/10 during which the 52-week requirement is first met for the applicable worker. So, the credit is a one-time deal for each eligible worker, based on wages paid during the 52-week period that starts with the worker’s employment date.
Because the 52-week requirement cannot be met until February of 2011 at the soonest, the credit can’t be claimed on a calendar-year 2010 return. Instead, you’ll have to wait until your calendar-year 2011 return is filed. If your business uses a fiscal tax year, you too will have to wait a while to collect your rightful credit. Even so, hiring a qualified new employee now and retaining that individual for at least 52 weeks can generate a credit that will eventually save taxes.
Strict New Rules to Clamp Down On Offshore Tax Evasion
Individuals Must Disclose Foreign Financial Assets. For tax years beginning after 3/18/10, the new law will require new tax return disclosures from individuals with interests in “specified foreign financial assets” if the aggregate value of such assets exceeds $50,000. Failure to make required disclosures can result in a $10,000 penalty.
New Six-year Statute of Limitations on Tax Understatements Attributable to Foreign Financial Assets.
The new law establishes a six-year statute of limitations period for tax understatements attributable to certain understated income from foreign financial assets. The understated income must exceed $5,000.
Statute of Limitations Suspended for Failures to Report Foreign Financial Assets. The HIRE Act suspends the statute of limitations period if the taxpayer fails to make required tax return disclosures for foreign financial assets.
Unfavorable New Rules for Foreign Trusts. Effective 3/18/10, the new law creates a more expansive definition of “beneficiary” for purposes of determining when a foreign trust is treated as a grantor trust owned by a U.S. beneficiary. This is important because taxpayers treated as grantors must report their shares of foreign trust income on their federal income tax returns.
In general, for transfers of property after 3/18/10 by a U.S. taxpayer to a foreign trust, the HIRE Act creates a rebuttable presumption that the trust is a grantor trust owned by a U.S. beneficiary.
For tax years beginning after 3/18/10, the new law requires U.S. taxpayers that are treated as grantors (owners) of foreign trusts to report whatever information about such trusts as the IRS may mandate.
For failures to file required returns and notices due after 12/31/09 for foreign trusts, the HIRE Act imposes a minimum $10,000 penalty.
MASSACHUSETTS ABANDONED PROPERTY LAW
Business entities are required to review their records annually to determine whether they are in possession of any unclaimed funds, securities or other property. An annual report is required to be filed by November 1, detailing and remitting unclaimed property of 3 years as of the previous June 30. Due diligence notification letters must be sent annually to any party alerting them of inactive account information so that amounts can be claimed and refunded. An annual report is required even if no abandoned property is being held. Click here for instructions and Form.
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