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.