Congress Fails to Act, Allows 2010 Estate Tax Repeal

Contrary to most expectations, Congress failed to act by the end of 2009 to extend the estate tax at least to 2010, preventing the long-scheduled repeal of the estate tax.  The U.S. House of Representatives had passed an extension of the estate tax on December 3rd, but the U.S. Senate failed to consider a bill because of its pre-occupation on Health Insurance Reform.  Current expectations are that the Senate will consider an estate tax bill early in 2010 and extend the tax retroactively to the beginning of 2010.  However, there is no guarantee that this will happen as partisan politics could likely cause this issue to remain unresolved.  While the Congress has successfully hiked tax rates retroactively in the past, some advisors wonder if retroactively enacting a tax that no longer exists is constitutional.  Continued failure to act in 2010 will allow the "sunset" of the estate tax repeal in 2011 when the estate tax returns with a much lower exemption amount and a much higher tax rate.

Those who have estate tax planning documents in place face many problems and uncertainties.  What happens when assets are to be passed to trusts and others based upon formula clauses that reference tax provisions that no longer exist?  For example, many plans fund a credit shelter trust with an amount equal to the unused applicable exemption amount.  What does the trust receive if a person dies in 2010 when there is no estate tax?  In addition, the repeal of the estate tax brings along the dreaded carryover basis rules in which the income tax basis of inherited assets are no longer "stepped-up" (usually) to fair market value.  What if the estate tax is retroactively reinstated and it is challenged in court?  Many years of uncertainty could go by before we know whether the reinstatement was constitutional.  Congress's failure to resolve this important issue before the end of 2009 is irresponsible and shows a lack of true leadership.  The cost and pain of uncertainty inflicted upon families dealing with death and family inheritances is unconscionable.

Utah Governor's Fiscal 2011 Budget Recommendations

On December 11, 2009, Governor Gary R. Herbert released his recommendations for Utah's 2010-2011 fiscal year budget.  Although the Governor did not propose any new taxes, his recommendations include two proposals to modify current tax law in two respects.  First, he proposes that individual's begin making quarterly estimated income tax payments beginning in tax year 2011.  Utah is currently one of only three states having income tax that does not require quarterly estimated payments (the other two being Idaho and Tennessee).  This change would accelerate $125 million of tax collections into the fiscal 2011 budget year.

Second, the Governor proposes repealing the sales tax vendor discount beginning in July 2010.  Businesses having sales tax over $50,000 in the previous year must remit sales taxes on a monthly basis.  The state pays these vendors 1.31% of the combined collected sales tax as a means to offset the financial burden of monthly filing versus annual filing.  Technology has brought down the cost of monthly filings and so the vendor discount is no longer deemed necessary.  This change would result in annual savings to the State of $20 million, beginning with the fiscal 2011 budget year.

Homebuyer Credit Now Available to "Long-Time Residents"

The first-time homebuyer tax credit that was to expire on November 30, 2009, had been extended to April 30, 2010 (June 30, 2010 if a binding agreement to purchase was signed by April 30, 2010 and closing occurs by June 30, 2010).  The credit has been expanded to include long-time homeowners who purchase another home to use as their new principal residence after November 6, 2009 and by the dates indicated above.  An eligible long-time homeowner is any individual (or the individual's spouse if married) who has maintained the same principal residence for any 5 consecutive year period during the 8-year period ending on the date of the purchase of the new principal residence.  The maximum allowable credit for this purpose is the lesser of $6,500 or 10% of the purchase price.  Homes costing more than $800,000 are not eligible.  The credit is phased out for individual taxpayers with modified adjusted gross income between $125,000 and $145,000 ($225,000 and $245,000 for joint filers).  This new provision can help "empty nesters" downsize to another home.  There is no requirement that the previous home first be sold.

Reporting of ISO and ESPP Stock Issuance Required in 2010

New Treasury regulations were just issued requiring employers to file an information return with the IRS (in addition to providing information to the employee) regarding stock issued to the employee upon the exercise of an incentive stock option (ISO) or an employee stock purchase plan (ESPP).  While information to the employee has been required since 2007, the information to the IRS has been postponed until 2010.  The IRS will develop new Form 3921 for ISOs and new Form 3922 for ESPPs, effective for stock transfers after 2009.  The objective of the new form is to provide sufficient information to enable the employee to calculate their tax obligations.  The information to be reported includes the name and tax identification number of the employee and the corporation, the dates the option was granted and exercised, the exercise price per share, the fair market value per share on the date of exercise, and the number of shares transferred to the employee pursuant to the exercise of the option.  For an ESPP, additional information pertaining to the fair market value of the stock on the date of grant of the option is required.

Should You Convert to a Roth IRA in 2010?

A Roth IRA is a special type of an individual retirement account (IRA) that has many important differences from a traditional IRA.  Those differences may make the use of the Roth IRA superior to using a traditional IRA, depending upon your situation.  Contributions to a Roth IRA are not deductible, but qualifying distributions (including earnings) from the Roth IRA are not taxable.  Inherited Roth IRAs will also provide income tax-free distributions to your beneficiaries.  Furthermore, unlike a traditional IRA, contributions can still be made after age 70 1/2 and the lifetime minimum distribution rules do not apply.

Those having a traditional IRA may convert or change to a Roth IRA.  However, the ability to convert is denied those having AGI in excess of $100,000.  In the year 2010, this AGI limitation is removed.  A conversion is treated as a taxable distribution not subject to the 10% premature penalty tax for those under age 59 1/2.  If income tax is due on the amount converted, why should you convert?

There are many factors to consider, and your specific situation must be analyzed before proceeding with a conversion.  However, timing for the conversion may be the very best in 2010 for the following reasons:

• The value of your IRA may be temporarily depressed because of market conditions, so the tax cost on conversion will also be less.
• Income tax rates are scheduled to increase in 2011.
• Taxable income from 2010 conversions may be recognized 50% each on your 2011 and 2012 tax returns instead of 100% on your 2010 return, possibly staying in lower tax brackets by splitting the income between tax years.  Conversions after 2010 must be 100% recognized in the year of conversion.

If you decide to convert and pay the conversion tax in 2010, you should consider certain additional tax planning steps such as shifting deductions to 2010 when your tax bracket may be higher than in 2009 or 2011 because of the additional conversion taxable income.

Consider Business Equipment Purchases Before the End of 2009

Businesses considering the purchase of equipment may be able to reduce their income taxes by making the purchase and placing the equipment in service before the end of 2009 rather than waiting until 2010.  Two significant provisions are currently set to expire at the end of 2009:  expanded first-year expensing and bonus depreciation.

The so-called "Section 179 Expensing" limit is $250,000 and will drop to $134,000 for tax years beginning in 2010.  The amount that may be expensed phases out dollar for dollar as the total year's purchases exceeds $800,000; dropping to $530,000 in 2010.  Unlike bonus depreciation, eligible equipment does not need to be brand new.  Furthermore, for fiscal year business whose tax year begins in 2009 and ends in 2010, the expensing provisions will include 2010 purchases made within the fiscal year, whereas for bonus depreciation, the purchase must actually be in 2009.

Bonus depreciation is 50% of the cost of brand new equipment (and certain other property) as first reduced by any Section 179 expensing.  Bonus depreciation expires at the end of 2009.  Regular depreciation applies to the balance of the cost of equipment that was not deducted under the Section 179 and bonus depreciation provisions.

Reduce Taxes with Health Savings Accounts

A Health Savings Account (HSA) is a tax-favored medical savings account established with a sponsoring financial institution.  Tax deductible contributions may be made and the account balance and earnings can be used to pay current and future qualified medical expenses tax-free.  The maximum deductible contribution is $3,000 in 2009 ($3,050 in 2010) for self coverage and $5,950 in 2009 ($6,150 in 2010) for a family health plan.  An additional $1,000 "catch-up" contribution may be made by those age 55 and older.  The contribution for a tax year may be made by the original (unextended) tax return due date of April 15th.  The deduction is "above-the-line" and reduces adjusted gross income (AGI).  Furthermore, the deduction is not "phased out" based upon levels of income.  Unlike flexible spending medical accounts under so-called cafeteria plans, the unused amounts in an HSA are not forfeited and ideally can be saved for retirement medical expenses.  Amounts withdrawn before age 65 to pay for non-medical expenses are subject to income tax plus a 10% penalty.  Under current health insurance reform proposals, this penalty would double to 20% after 2010.  To be eligible for an HSA, you must have a "high deductible health insurance plan," not be enrolled in Medicare, not be claimed as a dependent, and not be covered by a disqualifying health insurance plan.

Special Sales Tax Deduction for New Car Purchases Ends December 31, 2009

The American Recovery and Reinvestment Act of 2009 provides for a new deduction for the state and local sales and excise taxes paid on the purchase of a qualified new car, light truck, motor home, or motorcycle.  The vehicle must be purchased after February 16, 2009 and before January 1, 2010.  The amount of the deduction are the taxes paid on up to $49,500 of the purchase price.  The special deduction is available regardless of whether a taxpayer itemizes deductions on their tax return.  Even taxpayers living in states without sales taxes (e.g., Montana, Oregon, etc.) but that impose fees or non-sales taxes on the purchase of the vehicle would be entitled to a deduction of those fees or taxes.  The amount of the deduction is phased out for taxpayers whose modified adjusted gross income is between $125,000 and $135,000 for individual filers and between $250,000 and $260,000 for joint filers.  For more information, see http://www.irs.gov/newsroom/article/0,,id=211310,00.html.

November 30, 2009 Relief Regarding Waiver of 2009 RMDs

On December 23, 2008, Congress enacted the Worker, Retiree, and Employer Recovery Act that included a provision suspending the application of the required minimum distribution (RMD) rules for 2009.  These rules state that the normal 2009 RMD is not required for 2009 for defined contribution plans and IRAs.  This includes lifetime distributions for those age 70 1/2 or older and also distributions to heirs of inherited accounts.  The suspension did not apply to those who turned age 70 1/2 in 2008 and who chose to defer the first RMD to 2009 (not later than April 1).  Some taxpayers were unaware of this new law and received distributions in 2009 that were intended to comply with the RMD.  The IRS has just issued Notice 2009-82  granting an extension of time until November 30, 2009 to rollover the unnecessary 2009 distribution that was received to comply with the 2009 RMD.  Certain requirements of the notice must be met.

First Time Homebuyer Tax Credit Ends November 30, 2009

The First Time Homebuyer Tax Credit was substantially revised in 2009.  Unlike the 2008 credit which must be repaid over 15 years, the 2009 credit does not have to be repaid.  Further, the maximum credit was increased from $7,500 to $8,000.  However, the credit expires on November 30, 2009.  Time is therefore of the essence as the purchase closing must be on or before that date.  For a newly constructed home, the purchase date is considered to be the move-in date.  A first-time homebuyer is defined to be someone who has not owned a principal residence in the USA during the three-year period ending on the date of purchase of the home qualifying for the credit.  If you are married, both spouses must pass the three-year test.  The amount of the credit is phased out for modified adjusted gross income of unmarried individuals between $75,000 and $95,000; and of married joint tax return filers between $150,000 and $170,000.  An election is available to claim the 2009 credit on the 2008 tax return.  Therefore, you have the option of choosing between 2008 or 2009 which can provide important flexibility as to the timing of receipt of the credit and as to qualifying for the credit if modified adjusted gross income is too high in one year or the other.  The credit must be repaid if the residence is sold or is no longer used as the principal residence during the 36-month period from the date of purchase (or the 15-year period for the 2008 credit).

UPDATE:  The Worker, Homeownership, and Business Assistance Act of 2009, signed into law on November 6, 2009, generally extends the credit until April 30, 2010.  The credit has also been made available to more people and certain anti-fraud provisions have been implemented.

Residential Energy Credits

The nonbusiness or residential energy property credit that expired in 2007 has been reinstated for 2009 and 2010. You may be able to claim an income tax credit of 30% of the cost of certain energy-efficient property or improvements you place in service in 2009 or 2010. The total cumulative amount of credit you can claim over the two years is limited to $1,500. Qualifying property that meet certain prescribed energy standards can include high-efficiency heat pumps, air conditioners, water heaters, energy-efficient windows, doors, insulation materials, and certain roofs. Under current law, this credit is allowed against the alternative minimum tax (AMT) for 2009 but not for 2010. Congress may later enact a “patch” that could permit the credit to reduce AMT in 2010, but this is uncertain. In addition to the Federal tax credit, many states and electric and natural gas utilities grant credits for energy efficiency improvements.  Now would be a good time to make these kinds of improvements in order to save tax and to reduce looming energy costs for winter.

Delinquent Foreign Bank Account Reporting (FBAR) Special Deadline Fast Approaching

Every U.S. citizen or resident, including all forms of organizations, having a financial interest in, or signature or other authority over a financial account in a foreign country must make an annual report to the U.S. Treasury Department.  The report is made for each calendar year using form TD F 90-22.1.  The report must be received (not postmarked) by June 30th of the next year.  No extension of time to file the report is permitted.  The report is a separate filing and is not included with your income tax return, although certain questions in your income tax return about foreign bank accounts must be answered.  No report is required if the aggregate value of all foreign accounts do not exceed $10,000 at any time during the calendar year.  The requirements regarding the need to file this report are complex and extensive, including for example, persons and organizations that own more than 50% of an entity (domestic or foreign) having foreign accounts.  Very significant financial penalties exist for late or non-filing.

The Treasury Department and the IRS have made a big push to improve taxpayer compliance.  A new "Voluntary Compliance Program" gives certain qualifying taxpayers until September 23, 2009 to file the FBAR for 2008 (which normally would have been due June 30, 2009) and avoid penalty.  See the IRS website for more details:  http://www.irs.gov/newsroom/article/0,,id=210174,00.html

UPDATE:  The IRS announced on September 21, 2009 a one-time extension of the September 23, 2009 due date until October 15, 2009.

Tax Benefits of Grantor Retained Annuity Trusts May Be Reduced Soon

A grantor retained annuity trust (GRAT) is an effective estate tax reduction strategy specifically permitted in the Internal Revenue Code.  Assets that can generate income and/or appreciation in excess of the IRS valuation interest rate can transfer significant value to your heirs with minimal gift tax consequences, thereby reducing future estate tax.  Pres. Obama's budget proposal will eliminate the ability to set up so-called short-term GRATs, those having a term of less than 10 years.  This change in law is proposed to be effective when next year's budget is enacted, expected Fall of 2009.  Given the historically low interest rates, depressed asset values, and the proposed loss of using short-term GRATs, now is the time for those who could benefit from the GRAT strategy to take swift action.

Extended Tax Returns, Deadline Fast Approaching

New for certain 2008 tax returns: the IRS reduced the automatic 6-month extension to only 5 months for partnerships, limited liability companies (taxed as partnerships), and trusts. The extended due date is September 15, 2009, which is the same as for corporations which previously where the only entities with a due date one-month earlier than for individual tax returns. Individuals still have a 6-month extension, meaning that the extended due date is October 15, 2009.