The first quarter of 2010 brought many tax developments from Congress, the IRS and the courts. We have highlighted some of these important federal tax developments below.
Health care reform. In March, President Obama signed comprehensive health care reform legislation (the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act). The health care reform package does not mandate employer-provided coverage but beginning in 2014 large employers that do not offer coverage will pay a penalty. Large employers that offer coverage but the coverage fails to meet minimum essential standards will also pay a penalty. Tax credits for small employers are available immediately for 2010 tax years. Individuals must obtain minimum essential coverage after 2013 unless they are treated as exempt; otherwise they will pay a penalty. Starting in 2013, the new law broadens the Medicare tax base for higher income taxpayers, including amounts paid on investment income, and, after 2017, imposes an excise tax on high-dollar health insurance plans.
HIRE Act. President Obama signed the Hiring Incentives to Restore Employment (HIRE) Act in March, providing businesses with payroll tax relief, a worker retention tax credit and enhanced Code Sec. 179 expensing. Payroll tax forgiveness applies to wages paid to covered workers who are on the employer’s payroll after March 18, 2010 and before January 1, 2011. The covered employee must begin employment after February 3, 2010 and before January 1, 2011. The HIRE Act also allows employers to claim a worker retention credit for qualified employees.
Estate tax. The federal estate tax does not apply to decedents dying after December 31, 2009 and before January 1, 2011. Also, beginning in 2010, the stepped up basis at death rules are replaced with modified carryover basis at death rules applicable to estates holding assets with unrealized capital gains of more than $1.3 million. In December 2009, the House passed the Permanent Estate Tax Relief Act, which would permanently extend the top federal estate tax rate of 45 percent with a $3.5 million exclusion ($7 million for married couples). The Senate, however, has failed to take up the House bill. Some action this year is expected.
Individual tax rates. President Obama urged Congress in his Fiscal Year (FY) 2011 federal budget proposals to extend the individual marginal rate cuts enacted in 2001 but allow the top two individual marginal income tax rates to revert to 36 percent and 39.6 percent respectively after 2010. Higher income individuals also would pay 20 percent tax on qualified dividends and capital gains after 2010 under the president’s proposal. Congress is expected to take up the individual marginal rate cuts and the dividend/capital gains tax rates over the summer of 2010.
Homebuyer credit. In January, the IRS issued an updated version of Form 5405, First-Time Homebuyer Credit and Repayment of the Credit. Because of documentation requirements for claiming the credit, taxpayers who claim the credit on their 2009 return must file a paper return and attach Form 5405 and a properly executed copy of a settlement statement used to complete the purchase. The IRS noted that settlement documents can vary from one location to another. For a newly constructed home where a settlement statement is unavailable, a copy of the certificate of occupancy generally will be accepted, the IRS advised.
Audit rates. IRS statistics released in March indicate that the examination rate for individual taxpayers between FY 2008 and FY 2009 remained generally static at an overall audit rate of one percent for individuals. The audit rate was 1.86 percent for taxpayers with adjusted gross incomes (AGIs) between $200,000 and $500,000 and 5.35 percent for taxpayers with AGI between $1 million and $5 million.
Maximum fair market values. The IRS released in January the maximum fair market values (FMVs) for business automobiles, trucks and vans first placed into service in 2010 and for which the vehicle cents-per-mile rule and the fleet-average valuation rule may apply. The maximum FMVs for use of the vehicle cents-per-mile valuation rule in 2010 are $15,300 for a passenger automobile and $16,000 for a truck or van, which includes automobiles built on a truck chassis, such as minivans and sport-utility vehicles (SUVs) built on a truck chassis.
Vehicle depreciation. Depreciation limits for business automobiles, trucks and vans first placed in service in 2010 as well as the annual income inclusion amounts for vehicles first leased in 2010 were released by the IRS in February. The maximum depreciation limits for passenger automobiles first placed in service during the 2010 calendar year are $3,060 for the first tax year; $4,900 for the second tax year; $2,950 for the third tax year; and $1,775 for each tax year thereafter. The amounts for trucks and vans first placed in service during the 2010 calendar year are $3,160 for the first tax year; $5,100 for the second tax year; $3,050 for the third tax year; and $1,875 for each tax year thereafter. If Congress decides to extend bonus depreciation for another year into 2010, first year amount will increase by $8,000, as was the case in 2009.
Like-kind exchanges. In March, the IRS unveiled a much-anticipated safe harbor for participants in multiple-party like-kind exchanges under Code Sec. 1031 that have experienced hardship because of the default of qualified intermediaries (QIs) during the economic downturn. The safe harbor for reporting gain or loss is available to taxpayers that initiated deferred like-kind exchanges but failed to complete the exchange due to a QI’s default on its obligation to timely acquire and transfer replacement property when its assets are frozen in bankruptcy or receivership.
Student FICA exception. In a major concession, the IRS agreed in March to accept claims that medical residents qualify under the student FICA exception and are entitled to refunds for FICA (Social Security) taxes. The new IRS policy, however, does not apply to current payments but only to tax periods ending before April 1, 2005. Generally, courts have held that medical residents were not subject to FICA taxes because their services were incident to and for the purpose of pursuing an educational course of study.
These are just some of the many federal tax developments during the first quarter of 2010. Please contact our office if you have any questions about these or any tax developments.
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