Congratulations on your appointment Geoff!  We know you will be a huge asset to the BNI organization!  To read more about Geoff visit his page on our website under Our Team.

• HIRE Act of 2010 – Tax breaks for businesses
• New health care reform includes current and future tax changes
• Should you convert your regular IRA to a Roth?
• Two prior IRA rules are still in effect for 2010
• Working after retirement can change your benefits and your tax bill

Be sure to read Joe Laciak’s Tax Talk, as well as Geoff Laciak’s column, Because Your Money Matters.

Any tax projections can both require and challenge you to predict a series of unknown future events. You will need to make educated guesses and reasonable assumptions. Remember, tax planning is a dynamic process, and the earlier that it is started, the better.

Before going into the detailed planning tips which are set out below, here are some basic principles that can help guide your overall thinking:

• If you expect your tax rate will be higher next year, you may want to accelerate income into this year and defer deductions into next year.
• If you think your tax rate might be lower in 2011, consider deferring income to next year and accelerating deductions into this year.

Remember, the question is about your marginal tax rate. That is, the highest rate at which your last (marginal) dollar of income will be taxed. Even though overall tax rates will rise in 2011, if your income will be substantially lower in 2011 than in 2010, your marginal tax rate may actually decrease.

Here are a couple of additional guidelines:

• If you think your deductions might be restricted next year, accelerate some deductible expenses into this year.
• If you could qualify for the standard deduction in either year, consider shifting qualified expenditures into the year you expect to itemize your deductions.

It’s important for you to make an appointment to meet with us now, during the middle of the 2010 tax year while there is still plenty of time to consider and implement appropriate tax planning strategies.

Marginal tax rates to increase. The biggest factor is that the marginal tax rates are scheduled to increase in 2011 to a top rate of 39.6 percent over the current top rate of 35 percent.  But, that is misleading insomuch as the full benefit of both itemized deductions and personal/dependency exemptions will be capped at certain income levels in 2011. Taxpayers fully subject to this face an effective top marginal tax rate which could be three to four percentage points higher than the stated 39.6 percent rate.

Tax increase on dividends. If that were not enough, there is talk of allowing dividends to, once again, be taxed at the same rates as other ordinary income such as interest, rents and wages. Currently, qualified dividend income is taxed at a maximum rate of 15 percent. If dividends were to be subject to the top marginal rate of 39.6 percent, this would represent an increase of 164 percent!

Even if the 2011 tax rate on dividends were to remain at the same level as the tax rate on long-term capital gains, the tax rate increase on dividends would still be 33 percent, increasing from 15 percent to 20 percent for taxpayers finding themselves in the top two marginal tax brackets, namely, 36 percent and 39.6 percent.

Increase in long-term capital gains tax. The news gets worse, however. In 2013, the top marginal tax rate for long-term capital gains will climb to 23.8 percent for high income earners when a 3.8 percent Medicare tax will be added to the tax on capital gains.  With scheduled rate increases such as these, any business owners considering the possible liquidation of their companies should probably opt for sooner rather than later.

Increase in Medicare surtax. Another critical issue may involve whether or not to take that bonus in 2010 versus next year (assuming that your company is finally starting to swing back into making money), or defer that compensation to 2013 or later. W-2 and self-employment income only faces a top rate of 35 percent this year versus 39.6 percent in 2011. And, starting in 2013, any earned income above $200,000 for an unmarried taxpayer ($250,000 on a joint return) will also be subject to a new .9% Medicare surtax, increasing the Medicare tax from 1.45 percent to 2.35 percent.  Furthermore, the FICA cap is set at $108,600 for both 2010 and 2011, but with the shortfalls projected for the Social Security system, this cap is slated to rise to $154,000 by 2017!

The good news is, despite the fact that this Medicare surtax will be applied to most types of earned and unearned income starting in 2013, the tax will not be imposed upon retirement plan distributions, IRA payouts or Social Security benefits. Tax-exempt income, such as municipal bond interest, would also be spared. If you are otherwise required to take a minimum distribution out of a retirement plan or an IRA, you might want to consider taking some additional amounts in 2010 versus 2011 in light of these scheduled rate increases.

Timing on deductions is critical. The curious thing is that the value of deductions will correspondingly increase as these marginal tax rates go up over the next few years. Therefore, it might make a great deal of sense to pay any real estate taxes along with fourth-quarter estimated state income taxes just after the close of the 2010 tax year. However, if too many of these deduction dollars are paid in 2011 rather than 2010, the prospect of falling into an alternative minimum tax (AMT) trap can arise. The key is to find that balance between paying these expenses over the two-year period.

Strategy for expensing depreciable assets. The same will hold true for deductions stemming from depreciable asset acquisitions. However, the exact analysis will depend on your particular cash flow needs. The following three criteria might be used in doing this analysis:

1. If your business was experiencing cash flow problems (probably due to losses over the last several years) and your purchased assets during 2009, your would have up until October 15, 2010, the extended due date of the return, to claim 50 percent bonus depreciation. Only tangible real or personal property with a useful life of 20 years or less is eligible. This write-off could serve to create or increase a net operating loss which could then be carried back three, four or five years (to a profitable tax year) to garner a refund and help your cash flow needs. Conversely, deducting and expensing the asset’s cost in this manner would not generate any immediate tax benefit to the extent that the business, or the K-1 business owner, did not have current business taxable income (profits) to cover the deduction amount.
2. If the business, especially a flow-through entity such as a partnership/LLC or an S corporation, was finally starting to make money and anticipated these profits to grow dramatically over the next several years, this could mean that future deductions would be even more valuable as individual tax rates increase. If that were the case, immediately expensing an asset’s cost might make sense, even if there were not at least $250,000 of current profits to cover the expensed amount. For example, suppose 2010 was still a loss year, but the company was finally able to start reinvesting in plant and equipment. Also suppose that 2011 and 2012 were projected to be significantly more profitable. In such a scenario, it might make a lot of sense to elect to expense and deduct the asset’s cost in 2010 and then carry it over to the next year or two when the owners were facing a 39.6 percent marginal tax rate on their company’s profits.
3. If the deductions would be most valuable in later years, such as 2013 or later when the top marginal rate can be as much as 43. 4 percent, then opting to take normal depreciation over a four, six or eight-year period might be the best bet.

Personal losses continue to be nondeductible. The sad thing about personal losses for individual taxpayers is that they continue to be nondeductible. This includes any loss incurred on the sale of one’s personal residence or vacation home. Both short-term and long-term capital losses remain capped at $3,000 per year to the extent that they exceed the total of any capital gains.

One bit of good news continues to be that individuals experiencing any forgiveness of debt in relation to their mortgage on a principal residence need not pick this up in income to the extent that it does not exceed $2 million. Yet, any other “cancellation of debt” income, such as mortgages on second homes, rental properties or credit card debt, generally remains fully taxable unless the taxpayer is otherwise insolvent or has filed for bankruptcy protection.

Strategies for owning real estate used in a business. With regard to our business investments, most of these are done through ownership of either a partnership/LLC or an S corporation. If we are merely an investor in this business enterprise, the “passive loss” rules are normally going to come into play. We are not allowed to take such passive losses (which have flowed through to us on a Schedule K-1) to the extent that they exceed any net profits received from such investments, or net rental income. The only other exception is when we finally dispose of our entire investment in a particular passive activity in a fully taxable transaction. Therefore, if we do hold investments in these so-called passive investments, it behooves us to consider disposing them in 2011 or 2013, when the value of such losses might be much more valuable.

While speaking of passive activities, it is very common for the owners of a business conducted as either a partnership/LLC or an S corporation to also own the real estate.  The real estate is typically held in a separate LLC in the same percentages and is rented to these businesses. Furthermore, given the state of the economy over the last several years, rent being paid to the owners of these “real estate” LLCs was probably the last use to which the company’s limited cash flow was put. As a result, it has not been unusual to see a net rental loss flowing out of the LLC to the owners on their K-1s. In such a situation, consideration should be given to elect to treat the ownership of the business as one activity with the LLC holding the real estate. The end result is that the passive loss rules do not apply to these particular rental losses, meaning that the owners can freely take them as a write-off against their W-2 and self-employment income, as well as their dividend, interest and capital gains income.

Taxpayers owning real estate used in or rented to a trade or business should consider having a “cost segregation” study done. This type of study will assess whether a much faster write-off can be done instead of the normal 27.5 or 39-year periods normally reserved for depreciable real estate. Not only will a shorter timeframe be required in taking any depreciation deductions, assets might be identified where you could elect to immediately expense a portion of their cost, or claim a 50% bonus depreciation deduction – at least for those assets placed into service before 2010.

Tax credits on energy saving investments. As far as any tax credits, taxpayers should be reminded that 30% of the cost of any insulation or other energy saving investments, such as new windows or doors, can be taken on their 2010 return, but limited to an overall cap of $1,500 for 2009 and 2010 combined.

Stipulations of first-time home buyer’s credit. The use of the first-time home buyer’s credit grew dramatically in 2010, but the key deadline, which has expired, is that the contract for purchase must have been signed by April 30^th with the taxpayer taking occupancy by June 30^th. The same occupancy cut-off of June 30^th applies for new construction, as well as for those individuals claiming a credit for a new home purchase after owning another principal residence for at least five consecutive years out of the prior eight years. 

Extension of provisions in 2010. Finally, there are a number of tax provisions that expired at the end of 2009 that will most certainly be extended for the 2010 tax year. Examples of these tax provisions include the sales tax deduction, $250 educator’s deduction, as well as charitable IRA transfers to a charity of up to $100,000. The trouble Congress is having is how to pay for their continuation in light of the current and projected future deficits. Nevertheless, they will be passed in time for filing our 2010 returns.

Gifts exceeding $13,000 annually to any third party remain taxable, but a credit against such transfer tax remains available for up to $1 million of gifts over one’s lifetime. The news isn’t so good for estate tax, which remains in limbo at this time. The consensus is that it will be retroactively reinstated with a top rate of 45% and an exemption of $3.5 million per decedent. Talks of lowering the rate or increasing the exemption remain just that – mere discussion points. The trick is how to pay for any tax cuts while simultaneously addressing the deficit and paying for the Health Care Act provisions. These provisions include a tax credit for small business owners helping to fund employee health insurance, as well as being able to cover children under age 27 through company medical reimbursement or employee cafeteria plans.

Hopefully, this letter outlined numerous tax alerts, which I would be happy to discuss further with you. But, I highly recommend that you schedule an appointment with me as soon as possible, while there is still time to implement recommended strategies. The 2010 tax year truly represents one of the most critical times in recent memory to identify any tax traps and maximize opportunities for dramatic tax savings. Next year may truly be too late….

To schedule your midyear tax planning appointment with Joe Laciak, please call Lori Beier, Executive Assistant, at 219-864-7000, or email lbeier@laciak.com.

Click here for a pdf version of the above letter.

We would like to take a moment to thank the Chesterton/Duneland Chamber of Commerce, as well as, our co-hosts Sound Construction Co, LLC, Remax Affiliates; Timothy Vojslavek, Attorney; Hamstra Mortgage Professionals, Inc.; and the Center for Workforce Innovations for their help and support.  Thank you to James Tudor of Tudor Cleaning & Restoration and his team of chefs for truly putting the sizzle in our Summer Sizzler! 

Congratulations to all our guests who won door prizes compliments of The Brassie Golf Course, Butler Winery, Bee’s Purse Parties, El Salto Restaurant, European Market, Lucrezia Café, NCM Media Networks, Regal Rabbit, Serenity Salon and Spa and Thrift and Chic!

The Laciak team had a great time visiting with new friends and old! 

www.laciak.com/events/events-pictures/

• Expansion of the first-time homebuyers tax credit
• Expansion of the business net operating loss carryback period
• COBRA subsidy extension
• The value to your company of well-documented corporate minutes
• How to improve your chances of getting a business loan
• Tax rule changes for 2010

Be sure to check out Joe Laciak’s Tax Talk, as well as Geoff Laciak’s column, Because Your Money Matters.

 With tax season now behind us, the professionals at Laciak>cpa  encourage you to think about the following aspects of your financial well being:

• Are you planning a major transaction this year without knowing how it will affect your taxes?
• Would you or your business benefit from other financial services besides tax preparation?
• Has your company outgrown its current accounting methods and procedures?
• Could you use the financial expertise of a CFO without adding to your payroll?
• Should you consider estate planning as a means to secure your financial future?

 Now think about your most recent experience with your accountant:

• Do you wonder if you might be paying too much in taxes?
• Do you wish your accountant would speak in terms you could understand?
• Do you need your accountant to turn around information faster?
• Do you wish your accountant would give you more personalized attention?

If you feel you aren’t getting the attention you need from your accountant, or if you are looking for comprehensive financial services beyond what he or she currently offers, let Laciak>cpa help you.  Our team will review your tax returns, discuss opportunities to grow your bottom line, as well as verify your wealth and help plan your estate. 

To schedule your appointment, please call Jane Szymczak, Director of Client Services, at 219-864-7000, or email jszymczak@laciak.com.

The first tax benefit comes in the form of payroll tax relief, in which employers may qualify for a 6.2 percent payroll tax incentive, the maximum savings being $6,621 per qualified employee.  The second tax benefit gives qualifying businesses a new hire retention credit of up to $1,000 per worker when they file their 2011 income tax returns.

Let’s look at each of these provisions separately and how employers may benefit.

Payroll Tax Relief for Hiring Unemployed Workers

Employers know that payroll taxes under the Federal Insurance Contributions Act (FICA) are composed of two types of taxes: The first component is for Social Security taxes, which is 6.2% of maximum wages of $106,800 in 2010. The second component of the FICA tax is for Medicare taxes, which is 1.45% of covered wages. Furthermore, an employee is liable for an amount equal to these taxes paid by the employer.

The new HIRE act relieves qualified employers from paying their share of Social Security taxes for the remainder of the year on wages paid to qualifying new hires after March 18, 2010 through December 31, 2010.  However, employers must continue to withhold and pay the employee’s share of Social Security taxes, as well as the employer’s and employee’s share of Medicare taxes.  This temporary relief granted to qualifying employers will not affect the employee’s future Social Security benefits.

A qualified employer is a non-household employer or non-governmental employer, other than public colleges and universities.

 A “qualified employee” is one who meets the following requirements:

• Begins work with a qualified employer after February 3, 2010 and before January 1, 2011.
• Certifies by signed affidavit that he or she has not been employed for more than 40 hours during the 60 days prior to being hired.
• Is not being employed to replace another employee unless that employee left voluntarily or for cause, including downsizing.
• Is not related to the business owner, or doesn’t directly or indirectly own more that 50 percent of the company stock.

New IRS Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit, is used by the employer to confirm that the new employee is a qualified employee under the HIRE Act. Employers retain the Form W-11 along with other payroll and income tax records. If both employer and employee do not complete the sections applicable to them on this form, the employer can not claim HIRE Act benefits.

Eligible employers will use Form 941, Employer’s Quarterly Federal Tax Return, to account for the payroll tax exemption for eligible new hirers. The form has been revised for use beginning with the second calendar quarter of 2010.  Qualifying employers should report applicable first quarter wages and credits on the second quarter form and factor in any social security tax forgiveness when making payroll tax deposits.

Business Tax Credit for Retaining Newly Hired Workers

Businesses will also be eligible for an additional one-time business tax credit for retaining qualified workers, referred to as the new hire retention credit. The credit is 6.2 percent of wages paid to each new worker who qualifies, up to a maximum credit of $1,000, subject to these conditions:

• The retained worker was hired after February 3, 2010 and before January 1, 2011 under the payroll tax relief provision.
• Continued working for at least 52 consecutive weeks.
• Earned wages in the last 26 weeks that were at least 80% of wages earned in the first 26 weeks.

Business cannot carry back the credit to a taxable year that began prior to March 18, 2010. 

Enhanced Expensing for Small Businesses

The HIRE Act also increases enhanced expensing rules another year, which allow qualifying businesses the option to deduct the cost of business machinery and equipment, instead of recovering it via depreciation over a number of years. For tax years beginning in 2010, the maximum amount that a business may expense is increased from $125,000 to $250,000.  This election begins to phase out when a business buys more than $800,000 of expensing-eligible assets.

Feel free to call the Laciak>cpa team at 219-864-7000 or email us at info@laciak.com to discuss how these tax law changes affect your particular business. 

Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit

Frequently Asked Questions about the HIRE Act

The following summary contains key provisions of the legislation, which are very complex and amendments by Congress are likely. Although many changes will not take effect for several years, some tax planning opportunities and requirements become effective in 2010 and 2011.   

Provisions in 2010:

Tax credit for small business employers that provide insurance. To qualify in 2010, a business must offer health insurance to its employees as part of their compensation and contribute at least half the total premium cost.  The business must have no more than 25 full-time employees with annual wages that average no more than $50,000. The tax credit is up to 35 percent of the employer’s contribution, increasing up to 50 percent in 2014. 

New tax on tanning services. Beginning July 1, 2010, an excise tax of 10 percent will be imposed on the cost of indoor tanning services.

Adoption credit increased. Also effective in 2010, the maximum adoption credit is increased by $1,000 to $13,170 per eligible child, and has been extended through 2011.  It has also been made refundable.

Mandates for health care plans effective September 23, 2010:  

• All health insurance plans are prohibited from denying coverage due to pre-existing conditions, which is effective this year for children under age 19 and in 2014 for adults.
• Plans that extend coverage to dependent children must continue to offer that coverage up to age 26.
• Insurance companies are prohibited from rescinding coverage, except in cases of fraud or intentional misrepresentation of material fact.
• No discrimination based on the wages of employees.
• Small and large group market plans are prohibited from imposing lifetime limits on coverage.
• Plans must provide coverage, without cost-sharing, for preventive services and immunizations. 

Provisions in 2011:

Restrictions placed on reimbursement for OTC medications. Starting in 2011, the cost of over-the-counter drugs or medical-related supplies will no longer be reimbursable through flexible spending accounts, health reimbursement accounts, health savings accounts or Archer MSAs, unless prescribed by a doctor.

Penalty tax raised on HSA distributions. Starting in 2011, distributions from health savings accounts and Archer MSAs that are not used for qualified medical expenses will be taxed at 20 percent, instead of 10 percent. This does not apply to individuals age 65 and older.

Annual fees for pharmaceutical companies.  Starting in 2011, non-deductible annual fees will be imposed on branded prescription pharmaceutical manufacturers based on market share, which will raise between $2.5 billion and $4.1 billion in revenue for the federal government.  

Employer-sponsored health coverage included on W-2. Beginning with tax year 2011, every employer must report the cost of employer-provided health care coverage on an employee’s Form W-2.

Provisions in future years:

Employee contributions to FSAs capped. Starting in 2013, annual employee contributions by salary reduction to a health flexible spending account will be capped at $2,500 (indexed annually for inflation).  The current threshold is $5,000.

Floor on medical expense deduction raised. Starting in 2013, the threshold for deducting medical expenses will increase from 7.5 percent of adjusted gross income to 10 percent, a 33 percent increase. It is unchanged through 2016 for individuals aged 65 and older.

Deduction eliminated for subsidized retiree drug cost. Beginning in 2013, the new law reduces an employer deduction for retiree prescription drug expenses.

Additional Medicare tax for high-wage earners. Beginning in 2013, the employee portion of the Medicare tax will increase by .9 percent from 1.45 percent to 2.35 percent for individuals earning more than $200,000 annually ($250,000 if married and filing jointly). 

New unearned income Medicare tax. Also beginning in 2013, high income individuals earning $200,000, ($250,000 for joint filers), along with high income estates and trusts, will incur an additional 3.8 percent tax on net investment income. Investment income generally refers to interest, dividends, capital gains, rental income, annuities and royalties.

Excise tax on sales of medical devices. Starting in 2013, a 2.3 percent excise tax will be imposed on the sale of taxable medical devices other than eyeglasses, contact lenses and hearing aids.

Tax credits for low and middle income families.  Starting in 2014, the law requires states to act as coverage coordinators and establish health care insurance exchanges. Federal subsidies in the form of refundable premium tax credits will be available to individuals and families with incomes up to 400 percent of the federal poverty level, if they purchase coverage through a state exchange.

Penalty for employers not offering coverage. Starting in 2014, if an employer has at least 50 full-time employees and at least one employee receives a premium tax credit, the employer must offer them a minimum level of health insurance benefits or pay a penalty. The total penalty per year is $2,000 for each employee, excluding the first 30 employees. Employers incur this tax on a monthly basis.  

Penalty to citizens not having essential coverage.  Also starting in 2014, non-exempt U.S. citizens and legal residents will be required to have “minimum essential coverage” or pay a penalty. The penalty is $95 per person per year, or 1 percent of taxable household income, whichever is greater. This will rise in 2016 to $695 per person per year, or 2.5 percent of taxable income. Individuals must file a return to substantiate that they are covered.

Annual fees for health insurance providers. Starting in 2014, non-deductible annual fees, totaling billions, will be imposed on health insurance providers based on market share. These fees, increasing annually from $8 billion in 2014 to $14.3 billion in 2018, are intended to help the federal government recapture some of the benefits health insurers get as more Americans purchase health insurance.

Tax on high-cost insurance.  Beginning in 2018, insurers offering high-cost employer-sponsored health care plans (“Cadillac plans”) with annual premiums costing more than $10,200 for individuals, or $27,500 for families, will incur a 40 percent excise tax. . The tax excludes stand-alone coverage for vision and dental. It is expected that employers and workers will ultimately bear this tax in the form of higher premiums passed on by insurers.

Feel free to call the Laciak>cpa team at 219-864-700, or email us at info@laciak.com to discuss how these provisions may affect you or your business.