Payroll Tax Cut in 2010 Tax Relief Act

 

The biggest new tax break for individuals in the recently enacted “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” is the one-year payroll tax reduction. Under this new provision, which is intended to supplement income and boost economic growth, the payroll tax-which funds Social Security-will be cut by two percentage points during 2011. Here are the details:

 

  • The Social Security payroll tax on individual wages will be lowered to 4.2% in 2011, from the usual 6.2% rate. For an individual with wages of $60,000, that amounts to a $1,200 savings for individuals with an income of $60,000. If the individual gets paid twice a month, it will mean an extra $50 in his or her paycheck starting in January.
  • Self-employed workers will also get the tax break. Their self-employment taxes will be cut from 12.4% to 10.4%.
  • There is no phase-out (i.e., gradual reduction) of the payroll tax reduction for higher income workers. It goes to everyone who works, regardless of income. However, since Social Security taxes apply only to the first $106,800 in earnings in 2011, the benefit for high earners tops out at $2,136.
  • The payroll tax reduction in effect replaces the $400-per-worker tax break included in the 2009 stimulus bill. That break, called the Making Work Pay tax credit, provided a tax credit of 6.2% on the first $6,450 of a worker’s wages but was phased out for workers making more than $75,000 ($150,000 for couples). The Making Work Pay credit, which was billed as a way to stimulate the stalled economy, is widely thought to have had little if any success in that regard, in part because of the small amounts involved-$400 for individuals, $800 for couples. The new law’s payroll tax reduction, by contrast, provides a potentially much bigger tax break for taxpayers (up to $2,136 for individuals, $4,272 for couples). In addition, the benefits of the payroll tax reduction are distributed far differently than they were under the Making Work Pay credit, which was aimed primarily at low and moderate-income workers. For example, an individual making $100,000 in 2011 will be able to keep an extra $2,000 under the payroll tax reduction, but under the Making Work Pay credit (which was phased out for earnings over $75,000), the individuals’s tax break would have been zero.
  • The employer’s share of Social Security tax is not affected; it stays at 6.2%. Thus, the cost of hiring new workers isn’t directly affected by the payroll tax reduction.
  • The tax break only applies for one year, 2011-for now anyway. There will almost certainly be efforts to extend it beyond 2011, and I will keep you apprised of any developments in that regard.
  • The payroll tax reduction will cost the government an estimated $120 billion.
  • The payroll tax reduction will not affect the worker’s future Social Security benefit, because benefits are based on lifetime earnings, not the amount of tax paid by the worker into the Social Security system.

 

I hope this information is helpful. If you would like more details about the payroll tax reduction or any other aspect of the new law, please do not hesitate to call

 Ben R. Loggins
Certified Public Accountant
ben@logginscpa.com

 

 

President Signs Tax Relief Act

 

In addition to extending the Bush tax cuts, providing relief from the AMT, and cutting the payroll tax by two percentage points, the recently enacted “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” (Tax Relief Act) extends a host of other important tax breaks for businesses and individuals. I’m writing to give you an overview of these key tax breaks that were extended by the new law. Please call our office for detailsof how the new changes may affect you or your business.

 

Individual tax relief

 

The following tax breaks for individuals that expired at the end of 2009 have been retroactively reinstated by the Tax Relief Act and extended through 2011:

 

  • The election to take an itemized deduction for State and local general sales taxes instead of the itemized deduction permitted for State and local income taxes.
  • The above-the-line deduction for qualified higher education expenses.
  • The $250 above-the-line tax deduction for teachers and other school professionals for expenses paid or incurred for books, certain supplies, equipment, and supplementary materials used by the educator in the classroom.
  • The increased contribution limits and carryforward period for contributions of appreciated real property (including partial interests in real property) for conservation purposes.
  • The provision that permits tax-free distributions to charity from an Individual Retirement Account (IRA) of up to $100,000 per taxpayer, per tax year. Individuals also will be allowed to make charitable transfers during January of 2011 and treat them as if made during 2010.
  • The look-thru rule for certain regulated investment company (RIC) stock in determining the gross estate of nonresidents.
  • The increase in the monthly exclusion for employer-provided transit and vanpool benefits to equal that of the exclusion for employer-provided parking benefits.

 

In addition, the new law extends for an additional year (i.e., through 2011) the rule allowing premiums for mortgage insurance to be deductible as qualified residence interest.

 

Business tax relief

 

On the business side, the following business tax breaks that expired at the end of 2009 have been retroactively reinstated and extended through 2011 by the Tax Relief Act:

 

  • The research and development credit.
  • 15-year writeoffs for qualified leasehold improvements, and restaurant buildings (and certain improvements to such restaurant buildings).
  • 7-year writeoffs for certain motorsports racetrack property.
  • The employer wage credit for activated military reservists.
  • The active financing exception from the Code’s Subpart F rules for a controlled foreign corporation predominantly engaged in the conduct of a banking, financing, or similar business.
  • Look-through treatment of payments between related controlled foreign corporations.
  • The Indian employment credit.
  • The new markets tax credit.
  • Accelerated depreciation for business property on an Indian reservation.
  • The railroad track maintenance credit.
  • The special expensing rules for certain film and television productions.
  • The mine rescue team training credit.
  • The election to expense advanced mine safety equipment.
  • Expensing of environmental remediation costs.
  • The deduction allowable for domestic production activities in Puerto Rico.
  • The American Samoa economic development credit.
  • The rules exempting from gross basis tax and from withholding tax the interest-related dividends and short-term capital gain dividends received from a RIC by certain foreign persons (extended to apply to tax years of a RIC beginning before 2012).
  • The inclusion of a RIC within the definition of a “qualified investment entity” under the provisions of the Foreign Investment in Real Property Tax Act as codified in. Code Sec. 897.
  • The enhanced deduction for contributions of food and book inventories, and computer equipment for educational purposes.
  • A liberal rule for S corporations making charitable donations.
  • The special rules for interest, rents, royalties and annuities received by a tax-exempt entity from a controlled entity.
  • Empowerment zone tax incentives.
  • Renewal community tax incentives.
  • Tax incentives for investments in the District of Columbia.
  • The work opportunity credit (extended for four months (through the end of 2011)).
  • Qualified zone academy bonds.

In addition, the new law extends for an additional year (i.e., through 2011) the temporary exclusion of 100% of gain on the sale of certain small business stock.

 

 

Energy provisions

 

The following energy provisions were extended by the Act (through 2011):

 

  • The credit for manufacturers of energy-efficient new homes.
  • Incentives for biodiesel and renewable diesel.
  • The credit for refined coal facilities.
  • Excise tax credits and outlay payments for alternative fuel and alternative fuel mixtures.
  • The special rule to implement FERCs and State electric restructuring policy.
  • Suspension of the limitation on percentage depletion for oil and gas from marginal wells.
  • Grants for specified energy property in lieu of tax credits.
  • Provisions related to alcohol used as fuel.
  • The energy efficient appliance credit.
  • The credit for energy-efficient improvements to existing homes.
  • The 30% investment tax credit for alternative vehicle refueling property.

 

 

Disaster relief provisions

 

The following disaster relief provisions are extended through 2011:

 

  • New York Liberty Zone tax-exempt bond financing.
  • Increased rehabilitation credit for structures in the Gulf Opportunity Zone.
  • Low-income housing credit rules for buildings in Gulf Opportunity Zones.
  • Tax-exempt bond financing for the Gulf Opportunity Zones.
  • Bonus depreciation deduction applicable to specified Gulf Opportunity Zone extension property.

 

I hope this information is helpful. If you would like more details about these changes or any other aspect of the new law, please do not hesitate to call. 

Ben R. Loggins
Certified Public Accountant
ben@logginscpa.com

 

Health Reform — Hidden Tax Change

Health care??

On March 23rd, President Obama signed into law health care changes that will impact how you issue 1099s for your business.   There are only a few lines buried in the new law in Section 9006 that will impact businesses in the U.S. drastically.  Planning for that change now can turn a year-end tax nightmare into a January dream come true. 

 
Those few lines mandate that beginning in 2012, all businesses must issue 1099s to everyone they pay more than $600 to during the year.  This changes the 1099 reporting requirement in two ways.  You will need to report payments for services as well as well as tangible goods (materials).  Currently you are only required to report payments for services and legal fees.  You will also be required to report payments to corporations as well as individuals.  These two small changes could impact the number of 1099s you are required to file exponentially. 
 
But still, what does the Health Care reform bill have to do with 1099s?  To help offset the cost of the health care bill, the 1099 provision would help uncover fraudulent deductions and unreported income.  The IRS estimates that more than $300 billion in tax revenue goes unreported each year.   By enforcing tax compliance, they are able to reduce the cost of the health care bill while offering millions in tax credits.   
 
So the question is, “what can I do now to make this change transparent for my company?”  The answer – 1) Start collecting W-9 forms for anyone you pay regardless if it is for services or goods, regardless of whether they are incorporated or not; regardless of the amount, and  2) make sure these tax ID numbers are entered into your accounting program.  When it is time to print out 1099s in January of 2012, you and/or your accountant will no longer need to go through each payee to determine if it they are a service provider, if the company is incorporated or not, then track down the taxpayer ID number.  Now there’s only one criteria – is it over $600?
 
Give us a call for more information on this and many other tax changes resulting from the new health reform legislation. 

 

New Tax Break — Haiti Contributions

A new tax law allows people who contributed in 2010 to charities providing earthquake relief in Haiti to take a tax deduction for the contribution on their 2009 tax return instead of their 2010 return.  You do not have to wait; you can receive an immediate tax benefit. 
 
Certain requirements apply.  Call our office or visit www.irs.gov for more information.

First Time Homebuyer Credit Extended — Income Limits Decreased

Home CredtiA new law that went into effect November 6 extends the first-time homebuyer credit five months and expands the eligibility requirements for purchasers. The Worker, Homeownership, and Business Assistance Act of 2009 extends the deadline for qualifying home purchases from Nov. 30, 2009, to April 30, 2010. Additionally, if a buyer enters into a binding contract by April 30, 2010, the buyer has until June 30, 2010, to settle on the purchase.