Wednesday, June 6, 2012
Mid-year brings no resolution to fate of Bush-era tax cuts, extenders and more
Doeren Mayhew
Mid-year brings no resolution to fate of Bush-era tax cuts, extenders and more
Hopes for a pre-election resolution to the fate of the Bush-era tax cuts, extenders and other tax incentives are quickly fading as summer approaches. This year is increasingly looking like a replay of 2010, the last time the Bush-era tax cuts were facing imminent expiration. The White House, the Democratic-controlled Senate and the GOP-controlled House all have different opinions on the fate of these tax incentives and negotiations, which have been few and far between, and have quickly bogged down. One solution, which is being talked about more and more, is a temporary extension of the tax cuts. While this would punt the issue to the next Congress, it does little to ease taxpayers' concerns about tax planning in a climate of constant uncertainty.
Bush-era tax cuts
Unless extended, the tax cuts in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) (as extended by the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010) will sunset after December 31, 2012. The list of expiring tax incentives is long and includes reduced individual income tax rates and capital gains/dividends tax rates; the $1,000 child tax credit; enhancements to the earned income tax credit (EIC); and much more.
On May 15, House Speaker John Boehner, R-Ohio, said that the House will vote before the November elections on legislation to extend the Bush-era tax cuts. Boehner gave no timetable for a vote. It is unclear at this time if the GOP plans to vote on making the Bush-era tax cuts permanent or merely to extend them one or two more years. Also unclear is whether or not any extension would be offset with revenue raisers elsewhere. Even if the House votes on the tax cuts, there is no guarantee the Senate will take them up.
Complicating matters is the federal budget deficit. After months of partisan wrangling last year, Congress passed the Budget Control Act of 2011 (BCA). The BCA imposes mandatory, across-the-board spending cuts through sequestration. The BCA's spending cuts are scheduled to take effect in 2013. The GOP wants to repeal the BCA and on May 10, the House approved legislation to effectively do that. The GOP bill has no chance of passage in the Democratic-controlled Senate. So the BCA remains, for now, law.
Few Capitol Hill observers expect Congress to take any meaningful action on the Bush-era tax cuts before the November elections. This leaves the fate of the Bush-era tax cuts to the lame duck Congress. Depending on the outcome of the November elections, the lame duck Congress could do nothing and allow the Bush-era tax cuts to expire, make the tax cuts permanent, or--and this appears to be the most likely scenario--extend the tax cuts for one year. Either way, the uncertainty complicates tax planning for 2012 and beyond.
Small businesses
Lawmakers are also dueling over competing small business tax bills. The House has approved the GOP-sponsored Small Business Tax Cut Act. The GOP bill would, among other provisions, provide a deduction for 20 percent of qualified domestic business income of the taxpayer for the tax year, subject to limitations. In the Senate, the Democrats' small business bill would give a 10 percent income tax credit to small employers that increase wages or create jobs in 2012 and extend 100 percent bonus depreciation through 2012 (which had expired at the end of 2011). If the Senate approves the Democratic bill, the two chambers could iron-out the differences in the bills in conference.
Tax extenders
Since January, supporters of the tax extenders have tried several times, all unsuccessfully, to attach the extenders to other bills. Some of the extenders were initially attached to the Middle Class Tax Relief and Job Creation Act of 2012, which extended the employee-side payroll tax cut for all of calendar year 2012, but were subsequently dropped. Supporters also tried to include many of the extenders, especially energy-related tax incentives, to the Senate's highway funding bill: the Moving Ahead for Progress in the 21st Century (MAP-21) Act. At the last minute, the extenders were removed from the Senate bill.
A drag on the extenders is their estimated cost to the federal budget. According to the Congressional Research Service, renewing all of the extenders for 2012 would cost $35 billion. This is one reason why supporters have tried to move only some of the extenders. There have also been calls in Congress to let some of the extenders expire permanently; but every extender has its supporter.
Federal estate tax
Another big question mark hovers over the federal estate tax. Unless Congress acts, the federal estate tax is schedule to revert to its pre-EGTRRA levels (a top tax rate of 55 percent with a $1 million exclusion). In 2010, the White House and the GOP agreed on a top tax rate of 35 percent with a $5 million exclusion (indexed for inflation) for decedents dying in 2011 and 2012 (special rules applied to decedents dying in 2010). The GOP has proposed to eliminate the estate tax entirely or, if not abolished, to retain the 35/$5 million amounts for decedents dying after 2012; the White House has proposed to reduce the exclusion amount to $3.5 million.
Our office will monitor developments and keep you posted of any changes. If you have any questions about legislative developments, please contact our office.
If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.
Contact Doeren Mayhew, a Michigan Finance firm, for more information.
Don't overlook the value of depreciation deductions
Doeren Mayhew
Don't overlook the value of depreciation deductions
As businesses weather challenging economic times, one boost can come from depreciation. The term "depreciation" is often associated with complicated accounting and tax transactions but the fundamental concept is fairly simple. Depreciation should not be overlooked as a valuable tool.
Basics
Depreciation is essentially an income tax deduction. Depreciation allows you to recover the cost or other basis of qualified property. The rules for depreciation vary depending on the type of property. In recent years, these rules have been made more complex by tax legislation for bonus depreciation and special treatment of certain property. We'll discuss bonus depreciation later.
Generally, tangible property is depreciable. Tangible property is depreciable if it is subject to wear and tear. Tangible property includes machinery and equipment, motor vehicles, and furniture. Land, however, is not tangible property for depreciation purposes. Intangible property also may qualify for depreciation. One of the most widely used types of intangible property in every business activity is computer software. Copyrights and patents, which are intangible property, are also depreciable. Many types of property are not depreciable (although there are always exceptions). One type of business property that is not depreciable is inventory.
Use
To be depreciable, the property, whether tangible or intangible, must be used for business or in other income-producing activities. It is not the nature of the property itself which is determinative but rather the purpose for which the property is held. If you use property for business and for personal purposes, you can only deduct depreciation based only on the business use of that property.
Depreciation begins when a taxpayer places property in service for use in a trade or business or for the production of income. The property must have a determinable useful life of more than one year. Property that is placed in service and disposed of in the same year cannot be depreciated. Property ceases to be depreciable when you have fully recovered the property's cost or other basis or when you retire it from service, whichever happens first.
Let's look at an example: Olivia owns a small candy company. Olivia purchases a new candy-making machine. The machine is delivered in November 2012. However, the machine is not installed and operational until February 2013. If the machine had been ready and available for use when it was delivered, it would be considered placed in service in 2012 even if it was not actually used until 2013.
Methods
Generally, the method for calculating depreciation is determined by the type of property and when the property was placed in service. For tangible property, there are currently three systems of depreciation in effect, depending on when the property was placed in service. They are the modified accelerated cost recovery system (MACRS) for property placed in service after 1986, the accelerated cost recovery system (ACRS) for property placed in service after 1980 but before 1987, and the pre-1981 system (which included the straight-line method, declining-balance method, and certain other methods based on useful life and salvage value) for property placed in service before 1981.
Bonus depreciation
Bonus depreciation is intended to encourage businesses to make capital investments by enabling them to write these investments off more quickly. Under current law, 50 percent bonus depreciation is available for qualified property acquired after December 31, 2007 and placed in service before January 1, 2013 (before January 1, 2014 in the case of certain property with a long production period and certain noncommercial aircraft). A 100 percent bonus depreciation rate applies to property acquired after September 8, 2010 and placed in service before January 1, 2012 (before January 1, 2013 for certain property with a long production period and certain noncommercial aircraft). Several bills are pending in Congress to extend 100 percent depreciation through 2012.
Let's look at an example: ABC Co., a calendar-year taxpayer, acquires and places in service business equipment that costs $1 million on June 1, 2012. Under current law, ABC may claim an additional first-year depreciation deduction of 50 percent of the basis of the property, or $500,000. The remaining $500,000 of adjusted basis is recovered under the depreciation provisions other than the additional allowance.
Other considerations
While the basic concept of depreciation itself may be simple, strategies in its implementation to minimize tax liability sometimes may not be so straightforward. Decisions over whether to classify a particular asset within one or another depreciation "class," whether certain components of a building can be depreciated faster than the building itself, whether something is an improvement that requires depreciation or a repair that may be deducted immediately in full, and whether early disposition of a particular asset raised the pitfall of depreciation recapture are some of the many "fine points" surrounding depreciation that can make a significant difference in a business' taxable income.
If you have any questions about depreciation, please contact our office.
If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.
Contact Doeren Mayhew, a Michigan Finance firm, for more information.
Coordinating education tax incentives requires careful planning
Doeren Mayhew
Coordinating education tax incentives requires careful planning
Education tax incentives are often underutilized because the rules are so complex. Some of the incentives are tax credits; other deductions. There are also savings plans for education costs. Making things even more complicated is the on-again, off-again nature of the education tax incentives. Under current law (as of June 2012), several taxpayer-friendly features of the incentives are scheduled to expire.
American Opportunity Tax Credit
The American Opportunity Tax Credit (AOTC) is an enhanced version of the old Hope credit. The AOTC offers eligible taxpayers a credit of 100 percent of the first $2,000 of qualified tuition and related expenses and 25 percent of the next $2,000. That means the credit reaches a maximum of $2,500.
Four years. The AOTC can be claimed for the first four years of a student's post-secondary education (including college and university, vocational school and other qualified institutions of learning).
The full AOTC is available to individuals whose modified adjusted gross income is $80,000 or less ($160,000 or less for married couples filing a joint return). If your modified adjusted gross income is above that amount, the credit begins to phase out. Eligible individuals may receive a refund of 40 percent of the AOTC.
Sunset. The AOTC is scheduled to expire after 2012. At that time, the old Hope credit will return.
Lifetime Learning Credit
The Lifetime Learning Credit is often in the shadow of the AOTC. One reason may be that the Lifetime Learning Credit and the AOTC cannot be claimed in the same year. The Lifetime Learning Credit reaches $2,000 for qualified educational expenses.
Key difference. There is one very valuable difference between the Lifetime Learning Credit and the AOTC. There is no limit on the number of years the Lifetime Learning Credit can be claimed. This requires careful planning. Individuals who are considering graduate school may want to use the AOTC for undergraduate expenses and the Lifetime Learning credit for graduate school expenses.
No sunset. The Lifetime Learning Credit is not scheduled to expire after 2012. It is one of the few tax incentives that have essentially remained unchanged in recent years.
Student Loan Interest Deduction
Individuals who took out loans to finance their post-secondary education may qualify for a deduction. Student loan interest is interest you paid during the year on a qualified student loan. The loan proceeds must have been used for qualified higher education expenses, including tuition and room and board.
Above-the-line. The student loan interest deduction (and the expired higher education deduction discussed below) is an above-the-line deduction. This means you can claim the deduction even if you do not itemize deductions.
Sunsetting features. Under current law, there is no limitation as to the number of months during which interest paid on a student loan is deductible. After December 31, 2012, a 60-month limitation is scheduled to return. The student loan interest deduction is subject to income limits. Under current law, the deduction is reduced when modified adjusted gross income exceeds $60,000 for single individuals ($125,000 for married couples filing a joint return) and is completely eliminated when modified adjusted gross income is $75,000 or more for single individuals ($155,000 for married couples filing a joint return). After December 31, 2012, these income limitations are scheduled to be significantly lower.
Coverdell Education Savings Accounts
Coverdell Education Savings Accounts (ESAs) are similar to IRAs. Contributions are not tax-deductible but the funds grow tax-free until distributed. Distributions are tax-free if they are used for qualified education expenses of the beneficiary.
Not just post-secondary. Under current law, funds in a Coverdell ESA can be used for elementary and secondary school expenses as well as post-secondary education costs. Coverdell ESAs are the only education tax incentive to offer this feature. The AOTC, Lifetime Learning Credits and 529 plans (discussed below) are limited to post-secondary education. However, this special feature of Coverdell ESAs is scheduled to expire after 2012. At that time, Coverdell ESA dollars will only be available for post-secondary expenses.
Contribution limitation. Total contributions to a Coverdell ESA cannot be more than $2,000 in any year for the beneficiary. This rule applies no matter how many Coverdell ESAs are established. However, the $2,000 amount is scheduled to fall to $500 after 2012. Income limitations also apply. If you use the funds in a Coverdell ESA for a non-qualified purpose, there is a 10 percent additional tax.
529 Plans
States and institutions of higher learning can create so-called "529 plans." Funds in a 529 plan can be used for qualified post-secondary expenses, such as tuition and room and board, of the designated beneficiary. Contributions are not tax-deductible but distributions are tax-free, so long as they pay qualified expenses. There are many 529 plans. Before selecting one, please contact our office. We can help you select the 529 plan that meets your expectations.
No income limitations. 529 plans are similar to Coverdell ESAs with one very important difference. There are no income limitations for contributors.
Higher education deduction
Finally, there is the higher education deduction. This popular deduction allows eligible individuals to claim a deduction for certain higher education costs. The higher education tuition deduction reaches $4,000. That's the good news....the bad news is that the deduction expired after 2011.
May be renewed. There have been several attempts in Congress to renew the deduction for 2012 but they have failed to pass. Congress could renew the deduction late in 2012 or early in 2013 and make the deduction retroactive to January 1, 2012.
Like other education incentives, the higher education deduction had some restrictions. One of the most important is income. An individual's modified adjusted gross income could not exceed $80,000 ($160,000 if married filing a joint return).
We have covered a lot of ground discussing these education tax incentives. Please contact our office for more details and to discuss how we can create a plan using some or all of these incentives that delivers the most value.
If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.
Contact Doeren Mayhew, a Michigan Finance firm, for more information.
FAQ: What is IRS's new "real-time" tax system?
How do I: Comply with the upcoming
| Doeren Mayhew | |
How do I: Comply with the upcoming
A U.S. person with financial interests in or signature authority over foreign financial accounts generally must file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR) if, at any point during the calendar year, the aggregate value of the accounts exceeds $10,000. The FBAR form is due by June 30 of the calendar year following the calendar year being reported. Thus, FBARs for 2011 are due by June 30, 2012. An FBAR is not considered filed until it is received by the Treasury Department in Detroit, MI.Aggregate value. To determine whether a U.S. person has interests in or authority over foreign accounts with an aggregate value of at least $10,000 during the year, the maximum values of all of the accounts are added together. An account's maximum value is a reasonable approximation of the greatest value of currency or nonmonetary assets in the account during the year. Account value is determined in the currency of the account. Signatures. An FBAR filed by an individual must be signed by the filer identified in Part I. The filer's title should be provided only if the FBAR reports signature authority over a foreign account. In that case, the title should be the one on which the individual's signature authority is based. An FBAR filed by an entity must be signed by an authorized individual, whose title must also be provided. If spouses file only one FBAR to report their jointly owned accounts, they must both sign the FBAR. Jointly owned accounts. Generally, when one account has more than one owner, each owner that is required to file an FBAR must report the entire maximum value of the account. Each owner must also provide the number of other owners of each account. The FBAR should use the identifying information for the principal owner. Simpler rules apply when joint owners are also spouses. If one spouse files an FBAR the other spouse is not required to file a separate FBAR if: (1) all of the nonfiling spouse's foreign financial accounts are jointly owned with the filing spouse; (2) the filing spouse reports all of those jointly-owned accounts on a timely filed FBAR; and (3) both spouses sign the FBAR. Where to file. The FBAR is not filed with the taxpayer's federal income tax return. Instead, it is filed with the Treasury Department (although the IRS accepts hand deliveries for forwarding). There are four methods for filing an FBAR. (1) Mail the FBAR to: Department of the Treasury, PO Box 32621, Detroit MI 48232-0621; (2) Send the FBAR via an express delivery service to: IRS Enterprise Computing Center, ATTN: CTR Operations Mailroom, 4th Floor 985 Michigan Ave., Detroit MI 48226; (3) Hand deliver the FBAR to any local IRS office (including IRS attaches located in U.S. embassies and consulates) for forwarding to the Treasury, Detroit MI; or (4) File the FBAR electronically. E-filers must first apply to become a BSA (Bank Secrecy Act) e-filer. Record-keeping. Persons who must file FBARs must also retain records that show: the name in which each account in maintained, the account number or other designation, the name and address of the foreign financial institution that maintains the account, the type of account, and each account's maximum account value during the reporting period. These records must be kept for five years following the FBAR's due date. The records must also be available for inspection by the Treasury Department. FATCA. Keep in mind that you may also be required to file new IRS Form 8938, Statement of Specified Foreign Financial Accounts. The Foreign Account Tax Compliance Act (FATCA) of 2010 created separate and distinct reporting requirements for certain taxpayers holding specified foreign financial assets. New Form 8938, Statement of Specified Foreign Financial Assets, is similar to the FBAR but has some important differences. The threshold for filing Form 8938 is higher than the FBAR (and the threshold varies depending on the taxpayer's status and location). Form 8938 also applies--at this time--to only specified individuals and covers only specified foreign financial assets. Unlike the FBAR form, Form 8938 is filed together with your Form 1040 tax return if required. Please call this office if you are not sure whether you must file an FBAR Form or you are unsure about what information to report. While the Treasury has waived some penalties in the past when FBAR reporting was new, it has indicated that it will be less forgiving, if at all, for FBAR Forms required by the June 30, 2012 deadline. Contact Doeren Mayhew, a Michigan Finance firm, for more information.
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June 2012 tax compliance calendar
| Doeren Mayhew | |
June 2012 tax compliance calendar
June 1 Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 26-29. June 6 Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 30-June 1. June 8 Employers. Semi-weekly depositors must deposit employment taxes for payroll dates June 2-5. June 11 Employees who work for tips. Employees who received $20 or more in tips during May must report them to their employer using Form 4070. June 13 Employers. Semi-weekly depositors must deposit employment taxes for payroll dates June 6-8. June 15 Employers. Semi-weekly depositors must deposit employment taxes for payroll dates June 9-12. June 20 Employers. Semi-weekly depositors must deposit employment taxes for payroll dates June 13-15. June 22 Employers. Semi-weekly depositors must deposit employment taxes for payroll dates June 16-19. June 27 Employers. Semi-weekly depositors must deposit employment taxes for payroll dates June 20-22. June 29 Employers. Semi-weekly depositors must deposit employment taxes for payroll dates June 23-26. July 5 Employers. Semi-weekly depositors must deposit employment taxes for payroll dates June 27-29. July9 Employers. Semi-weekly depositors must deposit employment taxes for payroll dates June 30-July 3. Contact Doeren Mayhew, a Michigan Tax firm, for more information.
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