Category: Federal Income Tax

House “Extenders” Package Unveiled

On December 7, House Ways and Means Committee Chair Charlie Rangel (D-NY) formally introduced H.R. 4213, the “Tax Extenders Act of 2009.” The 110-page measure, which would extend for one year 40-plus provisions that are set to expire at the end of this year, would be paid for by new foreign account tax compliance measures, and taxing “carried interest” as ordinary income. The bill is slated to be considered by the House Rules Committee on December 8, and then proceed directly to the House floor.
Individual provisions that would get a one-year lease on life are the election to claim an itemized deduction for state and local general sales taxes, the additional standard deduction for real property taxes, and the above-the-line deductions for qualified tuition costs and for schoolteachers.

On December 7, House Ways and Means Committee Chair Charlie Rangel (D-NY) formally introduced H.R. 4213, the “Tax Extenders Act of 2009.” The 110-page measure, which would extend for one year 40-plus provisions that are set to expire at the end of this year, would be paid for by new foreign account tax compliance measures, and taxing “carried interest” as ordinary income. The bill is slated to be considered by the House Rules Committee on December 8, and then proceed directly to the House floor.

Individual provisions that would get a one-year lease on life are the election to claim an itemized deduction for state and local general sales taxes, the additional standard deduction for real property taxes, and the above-the-line deductions for qualified tuition costs and for schoolteachers.

Estate Tax Relief and Extenders

On December 2, Democratic members of the House Ways & Means Committee predicted that the House would take up an estate tax relief bill this week. H.R. 4154, the “Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act of 2009, ” is slated to be considered by the House of Representatives on December 3. Ways & Means Select Revenue Subcommittee Chair Richard Neal (D-MA) said he expected that the House would actually pass the bill on December 3. An extenders bill may be taken up as early as next week.

(Checkpoint’s Newsstand)

Independent Contractor or Employee?

The IRS has compiled the following top ten list of things every business owner should know before classifying a worker as either an employee or independent contractor  (IRS Summertime Tax Tip 2009-20, 8/21/09) :

(1) Three characteristics are used by the IRS to determine the relationship between businesses and workers: behavioral control, financial control, and the type of relationship.
(2) Behavioral control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training, or other means.
(3) Financial control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job.
(4) The type of relationship factor relates to how the workers and the business owner perceive their relationship.
(5) If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees.
(6) If you can direct or control only the result of the work done — and not the means and methods of accomplishing the result — then your workers are probably independent contractors.
(7) Employers who misclassify workers as independent contractors can end up with substantial tax bills. Additionally, they can face penalties for failing to pay employment taxes and for failing to file required tax forms.
(8) Workers can avoid higher tax bills and lost benefits if they know their proper status.
(9) Both employers and workers can ask the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS.
(10) You can learn more about the critical determination of a worker’s status as an independent contractor or employee at the Small Business/Self Employed Tax Center on the IRS website at http://www.irs.gov/businesses/small/index.html. Additional resources include IRS Publication 15-A (http://www.irs.gov/pub/irs-pdf/p15a.pdf), IRS Publication 1779 (http://www.irs.gov/pub/irs-pdf/p1779.pdf), and IRS Publication 1976 (http://www.irs.gov/pub/irs-pdf/p1976.pdf).
  1. Three characteristics are used by the IRS to determine the relationship between businesses and workers: behavioral control, financial control, and the type of relationship.
  2. Behavioral control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training, or other means.
  3. Financial control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job.
  4. The type of relationship factor relates to how the workers and the business owner perceive their relationship.
  5. If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees.
  6. If you can direct or control only the result of the work done — and not the means and methods of accomplishing the result — then your workers are probably independent contractors.
  7. Employers who misclassify workers as independent contractors can end up with substantial tax bills. Additionally, they can face penalties for failing to pay employment taxes and for failing to file required tax forms.
  8. Workers can avoid higher tax bills and lost benefits if they know their proper status.
  9. Both employers and workers can ask the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS.
  10. You can learn more about the critical determination of a worker’s status as an independent contractor or employee at the Small Business/Self Employed Tax Center on the IRS website   Additional resources include IRS Publication 15-A , IRS Publication 1779 , and IRS Publication 1976 .

House health reform bill includes surtax on high-income-earners

On July 14, the House Democratic leadership released the text of the ”America’s Affordable Health Choices Act of 2009,” which is slated to be taken up by the House Ways & Means Committee on July 16. Title IV of the Act would make numerous tax changes to pay for the projected $1 trillion price tag of comprehensive national health care reform.

Title IV of the bill includes the following changes to the Code:

  • High income individuals married filing a joint return or surviving spouses would face a surtax equal to: 1% of modified adjusted gross income (AGI) over $350,000 but not over $500,000; 1.5% of modified AGI over $500,000 but not over $1 million; and 5.4% of modified AGI over $1 million. The dollar amounts for separate filers would be half of the joint filer amounts; for other filers the amounts would be 80% of the joint filer amounts. The surtax for modified AGI over $350,000 but not over $1 million would rise for post-2012 tax years unless federal health reform savings hit a predetermined target level.
  • A tax on individuals who don’t have acceptable health benefit plan coverage (as defined by the bill). In general, the tax would equal 2.5% of modified AGI in excess of the taxpayer’s exemption amount, but not more than the “national average premium” for that year. A number of exceptions would apply (e.g., for dependents, objectors on religious grounds).
  • Health insurers would be required to file information returns for the individuals they cover.
  • Employers that fail to satisfy the bill’s health coverage participation requirements would face a tax of $100 per day per each non-covered employee.
  • Employers electing not to provide health benefits for employees would pay an excise tax equal to 8% of wages (the excise tax would be less for small employers).
  • Small businesses would get an employee health coverage tax credit.
  • The application of the worldwide allocation of interest would be delayed (until the first tax year beginning after 2019) and as a anti-tax-avoidance measure, there would be new limitations on treaty benefits for certain deductible payments.
  • The economic substance doctrine would be codified. An accuracy related penalty would apply for underpayments due to transactions lacking economic substance, and a stiff penalty would apply for nondisclosure of “noneconomic substance transactions.”

Vehicle Sales Tax Deduction

The American Recovery and Reinvestment Act of 2009 included a new income tax deduction for state or local sales or excise taxes paid on qualifying 2009 motor vehicle purchases.  This deduction is limited to taxes on the first $49,500 of the cost of the vehicle.  Conversations with the IRS National Media Relations office verified that the deduction is limited to the first $49,500 of cost but is available for two or more vehicles.

Vehicles included are passenger autos, light trucks and motorcycles and motor homes.  However, these vehicles must be new and their original use must begin with the taxpayer.

The deduction is available to itemizers and in addition to the standard deduction for those that do not itemize.  This is the second itemized deduction that is allowed to non-itemizers for 2009.  The other is a real property tax deduction that is treated as an increase in the standard deduction of $500 ($1000 for married filing joint status).

IRS reminds taxpayers about special tax break available for new car purchases this year [IR 2009-30]:

The Internal Revenue Service has announced that taxpayers who buy a new passenger vehicle this year may be entitled to deduct state and local sales and excise taxes paid on the purchase on their 2009 tax returns next year. “For those thinking about buying a new car this year, this deduction may give them a little more drive to make their purchase this year,” said IRS Commissioner Doug Shulman. “This deduction enables taxpayers to buy now and get cash back later on their tax returns.” The deduction is limited to the state and local sales and excise taxes paid on up to $49,500 of the purchase price of a qualified new car, light truck, motor home or motorcycle. 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. IRS also alerted taxpayers that the vehicle must be purchased after Feb. 16, 2009, and before Jan. 1, 2010, to qualify for the deduction. The special deduction is available regardless of whether a taxpayer itemizes deductions on their return. The IRS reminded taxpayers the deduction may not be taken on 2008 tax returns. 

The American Recovery and Reinvestment Act of 2009

Dear CPA:  Does this legislation affect 2008 returns?

Dear Taxpayer:  Generally, no.  The new legislation does not have any major impact for the vast majority of individuals preparing their 2008 tax returns due April 15. Instead, these changes will largely impact 2009 tax returns filed next year, in 2010. Taxpayers should continue to prepare their 2008 tax returns as they normally would.  And remember, the sooner you provide complete and  adequate information to your CPA,  the sooner your return will be prepared!

Advance Earned Income Credit (EIC) Payment

An employee who expects to be eligible for the earned income credit (EIC) and expects to have a qualifying child is entitled to receive EIC payments with their pay during the year.  To get these payments, the employee must provide the employer a properly completed Form W-5, Earned Income Credit Advance Payment Certificate. Employers are required to make advance EIC payments to employees who give them a completed and signed Form W-5.

Certain employees who do not have a qualifying child may be eligible to claim the EIC on their tax return.  However, they cannot get advance EIC payments. 

For 2009, the maximum amount of advance payments an employee can receive is a total of $1,826.