Pres. Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law on July 21, 2010. The Act is the most sweeping overhaul of the financial system since the Great Depression. At over 2,300 pages, many of the provisions won't be understood for years, as various commissioned studies and regulations are completed. We can be sure that the "law of unintended consequences" will apply to something so vast and unrefined. For example, the limits to be imposed upon debit card swipe fees charged by banks and other fee limitations could lead to the loss to consumers of no-fee checking accounts and the reduction of benefits associated with the use of credit cards, such as cash back and travel point programs.
The Act is proclaimed to be able to prevent future financial meltdowns for which the American taxpayer will be on the hook, and to protect consumers with the creation of a Bureau of Consumer Financial Protection to be housed in the Federal Reserve. Nevertheless, regulation of the Fannie Mae and Freddie Mac mortgage companies, which represent the largest exposure for taxpayer bailouts, was left out of this bill, as was the regulation of financing departments of auto dealers which touch the lives of most consumers.
The Act instructs the SEC to conduct a 6-month study of whether to apply a fiduciary standard of care to registered broker-dealers when providing investment advice to consumers. Presently the fiduciary standard applies to investment advisors but not to broker-dealers. Broker-dealers only have to recommend investments that are considered "suitable" for their customers. If the fiduciary standard is extended to brokers, then they will be required to recommend investments that are "in the best interest" of their customers.
The Act also permanently raises the FDIC deposit insurance limit to $250,000 retroactively to January 1, 2008. Previously the insurance limit was scheduled to drop to $100,000 after 2013.
Wednesday, July 21, 2010
Thursday, July 15, 2010
CBO Report on Social Security
The Congressional Budget Office just released the report, "Social Security Policy Options." Social Security outlays will exceed annual tax revenues in 2010, which is the first time since the 1983 reform. The CBO states that if the economy recovers soon, Social Security taxes will again be sufficient to pay current expenses, but only for a few years. By 2016, annual spending will regularly exceed tax revenues.
The CBO references the so-called Social Security "trust fund," where previous excess taxes were accumulated. The trust fund is projected to be exhausted in 2039. The problem, of course, is that there isn't really a trust fund. Prior excess Social Security taxes went to pay for other government spending by purchasing U.S. Treasury debt obligations. There is not a cash balance to draw upon as the trust fund misnomer would indicate. To pay for program benefits in excess of Social Security taxes, the government will need to issue more debt obligations, thus increasing the national debt, or raise taxes in order to fund the redemption of Treasury securities purchased with previous Social Security surpluses. That is one reason why this issue must be addressed now. The other major reason is the aging of the American population who will claim benefits. The options to address the funding shortfall can be basically categorized as lowering Social Security benefits or raising Social Security taxes, or some combination, because there isn't really 29 years worth of money on deposit in a "trust fund."
The CBO report analyzes 30 options. The CBO proceeds under the assumption that people currently older than 55 will not be affected by any changes. This cut-off makes it uncomfortable for people like me that are slightly younger than this age! While the CBO did not make recommendations, options analyzed include the following:
The CBO references the so-called Social Security "trust fund," where previous excess taxes were accumulated. The trust fund is projected to be exhausted in 2039. The problem, of course, is that there isn't really a trust fund. Prior excess Social Security taxes went to pay for other government spending by purchasing U.S. Treasury debt obligations. There is not a cash balance to draw upon as the trust fund misnomer would indicate. To pay for program benefits in excess of Social Security taxes, the government will need to issue more debt obligations, thus increasing the national debt, or raise taxes in order to fund the redemption of Treasury securities purchased with previous Social Security surpluses. That is one reason why this issue must be addressed now. The other major reason is the aging of the American population who will claim benefits. The options to address the funding shortfall can be basically categorized as lowering Social Security benefits or raising Social Security taxes, or some combination, because there isn't really 29 years worth of money on deposit in a "trust fund."
The CBO report analyzes 30 options. The CBO proceeds under the assumption that people currently older than 55 will not be affected by any changes. This cut-off makes it uncomfortable for people like me that are slightly younger than this age! While the CBO did not make recommendations, options analyzed include the following:
- Increase the payroll tax rate from one to three percentage points
- Remove the upper cap on compensation subject to the payroll tax but do not increase benefits
- Lower benefits for the top 50% or 70% of earners
- Raise the full retirement age to 70
- Reduce the cost-of-living adjustments for benefits
Friday, June 25, 2010
IRS to Require Small Businesses to Pay Taxes Electronically in 2011
Prior to 2011, businesses with less than $200,000 of aggregate federal income tax, employment tax, excise tax, and etc. could pay their taxes to the government by depositing a check with a commercial bank using the Federal Tax Deposit paper coupon, Form 8109. Beginning in 2011, all businesses (except those with less than $2,500 of quarterly tax deposits) must pay their taxes using the Electronic Federal Tax Payment System (EFTPS). Registration with the EFTPS is required, and can take several weeks to complete. Businesses that are currently using the paper deposit method should register at www.eftps.gov before the end of 2010 so that there is no delay in making tax deposits and incurring substantial penalties. Failure to use EFTPS when required results in a "failure-to-deposit" penalty of up to 15% of the amount required to be electronically deposited, even if the taxes are timely paid by paper. Payments made using the EFTPS must be scheduled by 8:00 p.m. ET at least one calendar day prior to the tax due date. The payment is made by debiting the business' bank account registered with EFTPS. I have found the EFTPS to be convenient and that its use helps reduce errors on the part of the government when processing tax payments. If you are not already using EFTPS, you should consider using it for the balance of 2010.
Monday, June 7, 2010
June 30, 2010 New Home Purchase Credit Deadline Extended to September 30, 2010
Original Post
The first-time homebuyer or long-term-owner tax credits of up to $8,000 or $6,500 respectively expired generally on April 30, 2010. The actual amount of the credit depends on several factors, including a phase-out based upon modified adjusted gross income. However, a transition rule allows the credit to those who had a written binding contract to purchase or construct a new principal residence by April 30, 2010, and who close on the purchase or receive their certificate of occupancy by June 30, 2010. Immediate steps should be taken to ensure that the closing or issuance of the certificate of occupancy happens on time. The credit is claimed on Form 5405 and certain documentation such as a copy of the binding contract, the settlement statement or certificate of occupancy, and other information must be attached to the form. The credit may be claimed on either your 2009 or 2010 tax return. Planning may be necessary to determine the best tax year in which to claim the credit.
July 1, 2010 Update
The ending date of the transition rule has been extended from June 30, 2010 to September 30, 2010. This will give an estimated 180,000 homebuyers who would miss the earlier date more time to complete their purchase or finish constructing their new principal residence. Congress enacted the extension on June 30th (H.R.5623) and Pres. Obama is expected to sign the legislation shortly.
The first-time homebuyer or long-term-owner tax credits of up to $8,000 or $6,500 respectively expired generally on April 30, 2010. The actual amount of the credit depends on several factors, including a phase-out based upon modified adjusted gross income. However, a transition rule allows the credit to those who had a written binding contract to purchase or construct a new principal residence by April 30, 2010, and who close on the purchase or receive their certificate of occupancy by June 30, 2010. Immediate steps should be taken to ensure that the closing or issuance of the certificate of occupancy happens on time. The credit is claimed on Form 5405 and certain documentation such as a copy of the binding contract, the settlement statement or certificate of occupancy, and other information must be attached to the form. The credit may be claimed on either your 2009 or 2010 tax return. Planning may be necessary to determine the best tax year in which to claim the credit.
July 1, 2010 Update
The ending date of the transition rule has been extended from June 30, 2010 to September 30, 2010. This will give an estimated 180,000 homebuyers who would miss the earlier date more time to complete their purchase or finish constructing their new principal residence. Congress enacted the extension on June 30th (H.R.5623) and Pres. Obama is expected to sign the legislation shortly.
Thursday, May 27, 2010
Foreign Bank Account Reports (FBAR) Due June 30th
The Treasury Department requires 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 to file a Foreign Bank Account Report (FBAR). The report is made for each calendar year using form TD F 90-22.1 and must be received by the government no later than 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. The report is required if the aggregate value of all foreign accounts exceed $10,000 at any time during the calendar year. Some foreign financial accounts may not be readily apparent. For example, one local bank offered local companies a sweep account that paid a higher rate of interest that was actually located in the Cayman Islands! Civil penalties for not filing on time can range from a minimum of $10,000 to the greater of $100,000 or 50% of the account value. Criminal penalties can range from a fine of up to $500,000 plus 10 years in jail. Clearly the US government is serious about forcing FBAR compliance. The government assumes noncompliance is indicative of tax fraud.
The 2010 HIRE Act added new disclosure requirements for those with more than $50,000 of "specified foreign financial assets" for tax years beginning on or after March 19, 2010. In this situation, disclosure in the income tax return is required, but this does not relieve the FBAR requirement. The penalty for failing to disclose this information in the income tax return is $10,000 and increases $10,000 every 30 days thereafter, not to exceed $50,000.
The 2010 HIRE Act added new disclosure requirements for those with more than $50,000 of "specified foreign financial assets" for tax years beginning on or after March 19, 2010. In this situation, disclosure in the income tax return is required, but this does not relieve the FBAR requirement. The penalty for failing to disclose this information in the income tax return is $10,000 and increases $10,000 every 30 days thereafter, not to exceed $50,000.
Wednesday, May 19, 2010
Health Care Reform, Part 4: Mandated Health Insurance Begins in 2014
Starting in 2014 individuals will be required to purchase "minimum essential" health insurance coverage for each month or else pay a penalty. Individuals covered by Medicare or Medicaid (and certain other exceptions) are exempt from the mandate. The amount of the penalty is computed using a formula that takes into account the person's household income and a flat dollar amount. In 2014 the monthly penalty is 1/12 of the greater of $95 or 1% of income for the year. In 2015 the penalty increases to the greater of $325 or 2% of income. In 2016 the penalty increases to the greater of $695 or 2.5% of income. The penalty is computed upon each household member age 18 or older. The penalty for those under age 18 is one-half the adult amount. An upper cap on the penalty limits the total amount of penalty assessed upon a household to a flat dollar cap of $285 in 2014, $975 in 2015, and $2,085 in 2016. In addition, the household penalty may not exceed the national average annual premium for the "bronze" level of coverage through the coming insurance exchange. The calculation of the penalty is so complex that it is to be administered by the IRS and collected on the individual's income tax return! Even though assessment and collection of the penalty is through the income tax system, non-payment of the penalty does not result in additional interest or penalty. The IRS is also prohibited from filing liens and levies against property, and may not criminally prosecute those who do not pay the penalty.
Also starting in 2014, employers with an average of 50 full-time employees (FTEs) not offering "minimum essential" health insurance coverage to its FTEs must pay a penalty. The penalty is an "excise tax" equal to the number of FTEs over a 30-FTE threshold during any month, times 1/12 of $2,000 (adjusted for inflation). In addition, if the employer offers health insurance and an employee whose household income falls below certain thresholds instead enrolls in a health insurance exchange for which the employee receives a premium tax credit or cost-sharing reduction, then the employer must pay a penalty equal to $3,000 times 1/12 for each month the employee is so enrolled. An upper-cap to the penalty applies. This second penalty does not apply if the employer provides such employee a "free choice voucher." The voucher obligates the employer to pay to the insurance exchange an amount that the employer would have paid in providing coverage to the employee under the plan offered by the employer.
These are complicated provisions for which the IRS will need to issue guidance as to implementation. Individuals and employers are in this together. Indeed, the health care law calls these penalties "shared responsibility" penalties.
Also starting in 2014, employers with an average of 50 full-time employees (FTEs) not offering "minimum essential" health insurance coverage to its FTEs must pay a penalty. The penalty is an "excise tax" equal to the number of FTEs over a 30-FTE threshold during any month, times 1/12 of $2,000 (adjusted for inflation). In addition, if the employer offers health insurance and an employee whose household income falls below certain thresholds instead enrolls in a health insurance exchange for which the employee receives a premium tax credit or cost-sharing reduction, then the employer must pay a penalty equal to $3,000 times 1/12 for each month the employee is so enrolled. An upper-cap to the penalty applies. This second penalty does not apply if the employer provides such employee a "free choice voucher." The voucher obligates the employer to pay to the insurance exchange an amount that the employer would have paid in providing coverage to the employee under the plan offered by the employer.
These are complicated provisions for which the IRS will need to issue guidance as to implementation. Individuals and employers are in this together. Indeed, the health care law calls these penalties "shared responsibility" penalties.
Friday, May 7, 2010
Health Care Reform, Part 3: 2013 Tax Changes
The largest tax impact from health care reform for individuals occurs in 2013. Four significant changes are as follows:
Increased Medicare Tax on Employees and the Self-Employed. The Medicare tax is currently 2.90% of wages. The employee and the employer each pay one-half, or 1.45%. Self-employed individuals pay both halves, or 2.90%, and may deduct one-half of that amount from income taxes for the deemed employer's share. For earnings after 2012, the Medicare tax rate on the employee one-half rises to 2.35% on wages exceeding $250,000; $200,000; or $125,000 for joint, single, or separate return filers respectively. The employer's tax rate remains at 1.45%. Although the employer isn't subject to the tax rate increase, the employer must withhold the additional 0.90% tax once wages exceed $200,000 regardless of the employee's marital status. Any shortfall or overage in this additional Medicare withholding tax is the responsibility of the employee and is reported on the income tax return. The Medicare tax rate for the self-employed rises to 3.80% at the $250,000/$200,000/$125,000 income levels, but there is no increase to the income tax deduction because the rate increase is for the deemed employee's share. This increased tax on wages has the effect of increasing the cost of the so-called "marriage penalty" where two-earner spouses do not receive the same tax treatment as two-earner, non-married couples.
Medicare Surtax on Unearned Income. Beginning in 2013, individuals, trusts, and estates are subject to a new, additional Medicare tax of 3.80% on the lesser of: 1) net investment income, or 2) the excess of (modified) adjusted gross income over certain thresholds. The thresholds are $250,000; $200,000; or $125,000 for joint, single, or separate return filers respectively. The threshold for trusts and estates is the top income tax bracket amount which is currently only $11,200. Net investment income includes interest, dividends, capital gains, annuities, rents, royalties, and passive activity income less related investment expenses. Investment income does not include active trade or business income and gains from disposing of interests in active businesses in which the taxpayer materially participates, distributions from IRAs and qualified retirement plans, tax-exempt interest, gain excluded under from the sale of a principal residence, and any self-employment income. This is a significant tax increase. Coupled with the sunset of the Bush tax cuts in 2011, the top federal tax rate in 2013 on ordinary investment income would be 43.4% and on long-term capital gains 23.8%. A future article will review planning ideas to reduce the impact of this new tax.
Reduction in Itemized Medical Deductions. Currently unreimbursed medical expenses must exceed 7.5% of AGI to net an itemized tax deduction. Beginning in 2013 the threshold increases to 10.0% for taxpayers under age 65. For those age 65 and older, the 10.0% threshold starts in 2017.
Reduction in Health FSA Contributions. Beginning in 2013, the maximum contribution amount permitted to a flexible spending account for medical expenses is $2,500. There is no upper limit under current law, except for that imposed under the employer's cafeteria plan.
Increased Medicare Tax on Employees and the Self-Employed. The Medicare tax is currently 2.90% of wages. The employee and the employer each pay one-half, or 1.45%. Self-employed individuals pay both halves, or 2.90%, and may deduct one-half of that amount from income taxes for the deemed employer's share. For earnings after 2012, the Medicare tax rate on the employee one-half rises to 2.35% on wages exceeding $250,000; $200,000; or $125,000 for joint, single, or separate return filers respectively. The employer's tax rate remains at 1.45%. Although the employer isn't subject to the tax rate increase, the employer must withhold the additional 0.90% tax once wages exceed $200,000 regardless of the employee's marital status. Any shortfall or overage in this additional Medicare withholding tax is the responsibility of the employee and is reported on the income tax return. The Medicare tax rate for the self-employed rises to 3.80% at the $250,000/$200,000/$125,000 income levels, but there is no increase to the income tax deduction because the rate increase is for the deemed employee's share. This increased tax on wages has the effect of increasing the cost of the so-called "marriage penalty" where two-earner spouses do not receive the same tax treatment as two-earner, non-married couples.
Medicare Surtax on Unearned Income. Beginning in 2013, individuals, trusts, and estates are subject to a new, additional Medicare tax of 3.80% on the lesser of: 1) net investment income, or 2) the excess of (modified) adjusted gross income over certain thresholds. The thresholds are $250,000; $200,000; or $125,000 for joint, single, or separate return filers respectively. The threshold for trusts and estates is the top income tax bracket amount which is currently only $11,200. Net investment income includes interest, dividends, capital gains, annuities, rents, royalties, and passive activity income less related investment expenses. Investment income does not include active trade or business income and gains from disposing of interests in active businesses in which the taxpayer materially participates, distributions from IRAs and qualified retirement plans, tax-exempt interest, gain excluded under from the sale of a principal residence, and any self-employment income. This is a significant tax increase. Coupled with the sunset of the Bush tax cuts in 2011, the top federal tax rate in 2013 on ordinary investment income would be 43.4% and on long-term capital gains 23.8%. A future article will review planning ideas to reduce the impact of this new tax.
Reduction in Itemized Medical Deductions. Currently unreimbursed medical expenses must exceed 7.5% of AGI to net an itemized tax deduction. Beginning in 2013 the threshold increases to 10.0% for taxpayers under age 65. For those age 65 and older, the 10.0% threshold starts in 2017.
Reduction in Health FSA Contributions. Beginning in 2013, the maximum contribution amount permitted to a flexible spending account for medical expenses is $2,500. There is no upper limit under current law, except for that imposed under the employer's cafeteria plan.
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