Tax Updates
The deepest recession in recent memory has led Congress and the New Administration to put in place a comprehensive economic stimulus plan. Part of that plan is the American Recovery and reinvestment Tax Act of 2009 (the "2009 Act"), which provides a measure of federal tax relief to most individuals and businesses. The new law will put dollars into the hands of taxpayers, dollars that our lawmakers hope will be spent in ways to stimulate the economy and create jobs.
"Making Work Pay" Tax Credit
One objective of the 2009 Act is to get money into the hands of individual taxpayers as quickly as possible. The new law creates a refundable income tax credit of up to $400 for eligible single filers and $800 for eligible couples filing a joint return. (A credit is a dollar-for-dollar offset against tax; a refundable credit is one for which the tax law allows a refund of the unused credit when tax liabilities are not high enough to take full advantage of the credit.)
The Making Work Pay credit may be claimed either as a reduction in the federal income tax that is withheld from a worker's paycheck or through a credit claimed on the taxpayer's income tax return. Most eligible individuals will be able to realize this tax benefit through a reduction in withheld income taxes and, thus, a higher take home pay. Individuals who may be claimed as dependents and nonresident aliens are not eligible.
The credit is calculated at a rate of 6.2% of earned income, up to the $400/$800 credit maximum. The credit begins to be phased out when annual modified adjusted gross income (AGI) exceeds $75,000 ($150,000 for married persons filing jointly) at a rate of 2% of the excess over $75,000/$150,000 amounts. The credit is fully phased out when modified AGI reaches $95,000 ($190,000 for joint filers).
The Making Work Pay tax credit is in effect for tax years beginning in 2009 and 2010.
Economic Recovery Payment
The 2009 Act provides a one time economic recovery payment of $250 to adults who are eligible for Social Security benefits, Railroad Retirement benefits, veterans' disability compensation or pension benefits, or qualifying individuals who are eligible for Supplementary Security Income (SSI) benefits. Only individuals who were eligible for one of the four programs for any of the three months prior to the month of the new law's enactment will receive an economic recovery payment.
An individual shall receive only one $250 economic recovery payment regardless of whether the individual is eligible for a benefit from more than one of the four federal programs. If the individual is also eligible for the Making Work Pay credit, that credit will be reduced by any economic recovery payment made.
The 2009 Act also provides for a one time refundable tax credit of $250 in 2009 to certain government retirees who are eligible for Social Security benefits. The credit is $500 on a joint return if both spouses are eligible. This credit also is a reduction to any allowance Making Work Pay credit.
First-time Homebuyer Credit
Pre-2009 Act tax law allows a first-time homebuyer a refundable tax credit equal to the lesser of $7,500 ($3,750 for married individual filing separately) or10% of the purchase price of a principal residence. A taxpayer is considered a first-time homebuyer if the taxpayer had no ownership interest in a principal residence in the U.S. during the three-year period prior to the purchase.
The credit is allowed for qualifying home purchases on or after April 9, 2008, and before July 1, 2009. The credit phases out for individual taxpayers with modified AGI between $75,000 and $95,000 ($150,000 and $170,000 for joint filers) for the year of purchase. The credit is generally allowed for the tax year in which the taxpayer purchases the home.
Under pre-2009 Act law, the new homebuyer credit generally was to be paid back to the government ratably over 15 years with no interest charge, beginning in the second tax year after the tax year in which the home is purchased. In effect, the credit was a no-interest loan.
Under the 2009 Act, the maximum credit amount is increased to $8,000 ($4,000 for married persons filing separately) and the credit is extended so that it applies to purchases made prior to December 31, 2008 and before December 1, 2009, the credit does not have to be repaid unless the home is resold or otherwise ceases to be the taxpayer's principal residence within 36 months of purchase.
Deductions for Taxes on Car Purchases
The 2009 Act allows an income tax deduction for state and local sales and excise taxes paid on the purchase of qualified motor vehicles on or after the 2009 Act's enactment date and before 2010. The deduction is allowable for AMT purposes as well. The new deduction is not allowed to taxpayers who elect to claim an itemized deduction for state and local taxes. For purposes of the new deduction, a "qualified motor vehicle" is generally defined as a new passenger automobile, light truck, motorcycle, or motorhome. The deduction is available only for taxes paid on up to $49,500 of the cost of a qualified vehicle. Further, the amount of taxes that can be deducted is phased out for taxpayers with modified adjusted gross income between $125,000 and $135,000 ($250,000 and $260,000 for married couples filing jointly).
Child Tax Credit
Eligible taxpayers may claim a tax credit of $1,000 ($500 after 2010) for each qualifying child under age 17. For taxpayers whose regular tax and AMT liabilities are not high enough to take full advantage of the credit, the tax law allows a refund of the unused credit to the extent of 15% of the taxpayer's earned income in excess of a certain "floor" amount ($8,500 in 2008). The child tax credit is phased out for taxpayers with income over specified levels.
The 2009 Act expands the child tax credit by reducing the income "floor" so that the credit is refundable to the extent of 15% of the taxpayer's earned income in excess of $3,000 for the years beginning in 2009 and 2010.
Social Security Tax and Medicare Tax
The taxable wage base for the social security portion of the tax has been increased to $106,800 for 2009. The withholding tax rate remains at 6.20%. There continues to be no wage limit for the Medicare component of the tax for 2008. The withholding tax rate for Medicare remains at 1.45%. The self employment tax rate continues at 15.30% on the first $106,800 of earnings for 2009 and 2.9% on earnings above this amount.
Federal Unemployment Tax
The taxable wage base for federal unemployment tax purposes (FUTA) remains at $7,000 for calendar year 2009. The tax, which is an employer's tax (not withheld), remains at 8 mills (.008) on the first $7,000 of gross wages per employee per year.
Federal Income Tax Changes
Several Federal tax acts were signed into law. The primary purpose of the new laws was to stimulate the economy and encourage energy conservation through the use of various tax deductions and credits. Potential tax saving opportunities, from these new laws, is discussed below .
Up to $250,000 of certain new business property may qualify for a direct write-off, instead of depreciation, for 2008. This tax break is set to drop back to $133,000 in 2009. The deduction is phased out once total asset purchases become greater than $800,000 for 2008. The phase-out threshold is set to decrease to $500,000 for 2009.
Taxpayers may immediately deduct 50% of the cost of qualified new business property placed in service between January 1, 2008 and December 31, 2008, when calculating their depreciation expense. Unfortunately, Pennsylvania and New Jersey do not recognize the additional deduction. Therefore, for state purposes, assets on which Federal bonus depreciation was taken must be depreciated using normal depreciation rates.
Individual filers who use the standard deduction will also be able to deduct a portion of their real estate taxes for the 2008 and 2009 tax years. The deduction is limited to the lower of the actual taxes paid or $500 ($1,000 for joint filers).
A tax credit for qualifying investments in energy conserving property which expired for year 2008 has been reinstated for property placed in service in 2009. The overall $500 credit consists of two parts, a $200 maximum for items such as exterior doors, windows, insulation, and certain roofs, and a $300 maximum for such items as qualifying heat pumps or furnaces. Purchases of energy efficient appliances (washers, refrigerators, dishwashers, etc) do not qualify for the credit.
Congress enacted an expanded "AMT patch" to insulate middle-income taxpayers from AMT. The Alternative Minimum Tax (AMT) was originally designed to insure that wealthy individuals could not completely avoid paying income tax; however, over the years, millions of taxpayers with moderate incomes have been forced to pay AMT. Nonrefundable personal credits, including the dependent care credit and education tax credit, may now be used to reduce the AMT liability. Also, the AMT exemption amounts were temporarily increased to $46,200 for single filers and $69,950 for joint filers.
Effective January 1, 2009, the standard mileage rate for the business use of a car is $.55 cents per mile. The standard mileage rate for 2008 had been $.505 cents for the months of January through June and $.585 cents for the months of July through December.
The expanded "kiddie tax" will take full effect. The "kiddie tax" taxes the unearned income of dependent children at the parent's tax rate. The tax applies to dependent children who are under age 19 and to full-time students under age 24 who have earned income that does not exceed one-half of the child's support.
ALERT - New IRS 1099 Information Reporting Rules Required
Most companies are familiar with the IRS rules that require reporting certain payments on annual IRS Form 1099 information returns. A little-noticed provision of the recent Health Care Reform Law is substantially changing the IRS information reporting regime and will cause businesses new administrative burdens and produce a flood of new tax paperwork. While the new rules do not apply to payments made before 2012, it is not too early to start focusing on how to deal with them.
For many businesses, the new rules will require issuing Form 1099s for all sorts of business payments that they never had to worry about before. In addition, the IRS will receive Form 1099s detailing how companies spend money on a whole new range of business expenses. However, the Health Care Legislation did not require IRS Form 1099 reporting of payments that are made for non-business reasons.
Three principal changes are made in the IRS information reporting program:
- Payments to corporations are now required to be reported.
- Payments for purchases of property are now required to be reported.
- Payments of "gross proceeds" will now be required to be reported.
Present IRS Information Reporting Rules: Background: For many years, businesses have been required to report various payments on different versions of Form 1099. For instance, when a business pays $600 or more during a calendar year to an independent contractor for services, the business must issue the contractor a Form 1099-MISC that reports the amount paid that year. The business must also furnish a copy of the Form 1099-MISC to the IRS. This reporting procedure helps independent contractors remember to include the payments on their tax returns, and it helps the IRS ensure that income is reported.
Other types of payments that businesses must report on IRS Forms 1099 include:
1. Commissions, fees or other compensation paid to a single recipient when the total amount paid in a calendar year is $600 or more.
2. Interest, rents, royalties, annuities and income items paid to a single recipient when the total amount paid in a calendar year is $600 or more.
When an IRS Form 1099 is required, it must contain:
- The total amount for the calendar year;
- The name and address of the payee;
- The tax ID number ("TIN") of the payee;
- Contact information for the payor; and
- The payor's TIN.
If the particular company does not have a payee's TIN, the business may be required to institute back-up federal income tax withholding at a 28% rate on payments under the Internal Revenue Code.
Since they are generally considered to be businesses for IRS Form 1099 reporting purposes, the rules summarized also apply to payments made by non-profit entities.
If a business–payor fails to issue a proper IRS Form 1099, the IRS will assess a $50 penalty. The penalty for any intentional failure can be $100 or more.
Reporting Payments to Corporations
Under the rules that currently apply, most payments to corporations are exempt from Form 1099 reporting requirements. However, there are a few exceptions. For instance, payments of $600 or more in a calendar year to an incorporated law firm must be reported on
Form 1099-MISC.
Reporting Payments for Property
Under current rules, there also is generally no requirement to issue 1099s to report payments for purchases of property (such as merchandise, raw materials and equipment).
2012 Changes on IRS Information Reporting
The Health Care Law made two big changes to the existing Form 1099 reporting rules and a third change that is hard to evaluate until the IRS provides further guidance.
First Change: Payments to Corporations Must Be Reported. Starting in 2012, if your business pays a corporation $600 or more for tangible property or services in a calendar year, you must report the total amount on an information return. Presumably, Form 1099-MISC will be used for this purpose, or the IRS will develop a new form. (Payments to corporations that are tax-exempt organizations will be exempt from this new requirement.)
Second Change: Payments for Property Must Be Reported. Starting in 2012, if your business pays $600 or more in a calendar year to any party (including an individual) as "amounts in consideration for property," you must report the total payments on an information return for that year. The term "property" means computer equipment, office supplies, raw materials and just about anything else you can put your hands on. Again, Form 1099-MISC might be used to report the payments, or a new IRS form might be created.
Third Change: Payments of "Gross Proceeds" Must Be Reported. Under a third new rule that will also take effect in 2012, payments of $600 or more in "gross proceeds" to a payee in a calendar year must be reported on an information return. At this point, it is unclear what this new reporting requirement is meant to cover. The definition of gross proceeds should not include any costs that would not be included as income to the recipient of the proceeds. An example would be state and local taxes, which would be in the purchase transaction, but the recipient of the payment is merely a collector and remitter of such taxes. Like non-income payments also should be excluded as “gross payments” in the new IRS information reporting. More IRS clarification on the "gross proceeds" question needs to be forthcoming.
Key Points
The Health Care Bill made key changes in how IRS 1099s are used. First, it expanded the scope by using them to track payments not only for services but also for tangible goods. Second, it requires that IRS Form 1099s be issued not just to individuals but also to corporations.
These seemingly small changes will generate millions of additional IRS information forms to be received and sent out. It creates a heavy administrative burden.
Companies need to do four things:
1. The final impact of the law will be "flushed out" by IRS rulings and regulations on the new law. Businesses should carefully track IRS developments such as the recently issued IRS Notice 2010-51, requesting comments on open issues for the new IRS information reporting rules. Some of these unanswered questions include:
- The appropriate scope of the statutory terms "gross proceeds" and "amounts in consideration for property," and how to interpret these terms to minimize duplicate reporting;
- Whether or how the expanded IRS reporting requirements should apply to payments between related corporations, such as payments related to intercompany transactions within the same consolidated group;
- The appropriate time and manner of reporting to the IRS (cash or accrual accounting and fiscal or calendar year), and what, if any, changes are needed to existing practices for the new IRS Form 1099 information reporting;
- Changes that might be needed to Form W-9, Request for Taxpayer Identification Number and Certification, and the existing rules for soliciting TINs to minimize the burden for business-payors to get TINs from payees, as well as privacy concerns with TINs; and
- How the back-up withholding requirements for missing TINs under the expanded new IRS reporting requirements should be administered in order to minimize the burden on payors.
2. Companies need to be evaluating how their existing computer software will accommodate the new IRS reporting regime.
3. Review your business's procedures for obtaining a TIN from each payee to avoid the requirement for back-up withholding of federal income tax.
4. Since this is a new federal information program, most, if not all, states have not enacted similar programs. However, with the economic downturn and shrinking budgets, many states will enact similar or “piggyback” proposals and these must be monitored to ensure compliance.
Employee vs. Independent Contractors
As a small business owner you may hire people as independent contractors or as employees. There are rules that will help you determine how to classify the people you hire. This will affect how much you pay in taxes, whether you need to withhold from your workers paychecks and what tax documents you need to file.
Here are seven things every business owner should know about hiring people as independent contractors versus hiring them as employees.
1. The IRS uses three characteristics to determine the relationship between businesses and workers:
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.
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.
Type of Relationship factor relates to how the workers and the business owner perceive their relationship.
2. 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.
3. 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.
4. 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.
5. Workers can avoid higher tax bills and lost benefits if they know their proper status.
6. 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.
2011 Depreciation Dollar Limits For Business Autos, Light Trucks And Vans?
Rev Proc 2011-21, 2011-12 IRB
IRS has released the inflation-adjusted Code Sec. 280F depreciation limits for business autos, light trucks and vans (including minivans) placed in service in 2011, and the annual income inclusion amounts for such vehicles first leased in 2011. The maximum annual depreciation deduction limits for autos are the same as for vehicles placed in service last year, but the dollar limits for light trucks and vans for years one through three are $100 higher than those that applied for 2010. IRS also made changes to the luxury auto figures for 2010 to reflect the bonus depreciation allowance in the Small Business Jobs Act.
Recent legislation's effect on luxury auto limits. First-year luxury auto dollar limits are enhanced for new vehicles bought and placed in service in 2010 or 2011, and otherwise eligible for bonus depreciation. If bought and placed in service after Dec. 31, 2009 and before Sept. 9, 2010, 50% bonus first-year depreciation applies under the Small Business Jobs Act (P.L. 111-240). If bought and placed in service after Sept. 8, 2010, and before Jan. 1, 2012, then 100% bonus first-year depreciation applies under the 2010 Tax Relief Act (P.L. 111-312). Unless a taxpayer elects out, for autos, light duty trucks or vans that are subject to the Code Sec. 280F luxury-auto limits, and are qualified property under the bonus depreciation rules of Code Sec. 168(k), the regular first-year dollar limit for 2010 as well as 2011 is increased by $8,000. (Code Sec. 168(k)(2)(F)(i))
Year-by-year limits for 2011. There are four sets of dollar limits for vehicles placed in service in 2011. Two are for passenger autos that are not trucks or vans and are subject to the luxury-auto limits of Code Sec. 280F (they are rated at 6,000 pounds unloaded gross vehicle weight or less). One set of limits applies to autos for which the bonus depreciation rules don't apply under Code Sec. 168(k) (the auto is pre-owned or not used more than 50% for business, the taxpayer elects out of Code Sec. 168(k) or elects to increase its Code Sec. 53 AMT credit limit instead of claiming bonus depreciation); the other set of auto limits applies to autos for which the bonus depreciation rules do apply.
There also are two sets of limits for light trucks or vans (passenger autos built on a truck chassis, including minivans and sport-utility vehicles (SUVs) built on a truck chassis) that are subject to the luxury-auto limits (they are rated at 6,000 pounds gross (loaded) vehicle weight or less). (Code Sec. 280F(d)(5)(A)) One set of limits applies to light trucks and vans for which the bonus depreciation rules don't apply under Code Sec. 168(k); the other set of auto limits applies to light trucks and vans for which the bonus depreciation rules do apply. Certain non-personal-use vehicles are exempt from the luxury auto limits regardless of their weight.
The following are the annual depreciation dollar caps for vehicles that are subject to the luxury-auto limits of Code Sec. 280F and placed in service in calendar year 2011.
If the bonus depreciation rules don't apply to an auto (not a truck or van):
... $3,060 for the placed in service year;
... $4,900 for the second tax year;
... $2,950 for the third tax year; and
... $1,775 for each succeeding year.
If the bonus depreciation rules do apply to an auto (not a truck or van):
... $11,060 for the placed in service year;
... $4,900 for the second tax year;
... $2,950 for the third tax year; and
... $1,775 for each succeeding year.
Observation: The dollar figures for autos placed in service in 2011 are the same as those that applied for autos placed in service in 2010.
If the bonus depreciation rules don't apply to a light truck or van (passenger auto built on a truck chassis, including minivan and sport-utility vehicle (SUV) built on a truck chassis):
... $3,260 for the placed in service year;
... $5,200 for the second tax year;
... $3,150 for the third tax year; and
... $1,875 for each succeeding year.
If the bonus depreciation rules do apply to a light truck or van:
... $11,260 for the placed in service year;
... $5,200 for the second tax year;
... $3,150 for the third tax year; and
... $1,875 for each succeeding year.
Observation: The 2011 dollar figures for a light truck or van are $100 higher in years one through three than those that applied for 2010. The succeeding year figure stays the same.
Caution: The dollar limits must be reduced proportionately if business/investment use of a vehicle is less than 100%.
Observation: IRS left open the possibility that there may be more changes coming for 2011. Rev Proc 2011-21 says that IRS intends to issue additional guidance addressing the interaction between the 100% additional first-year depreciation deduction and Code Sec. 280F(a) for the tax years subsequent to the first taxable year.
Observation: Heavy SUVs—those that are built on a truck chassis and are rated at more than 6,000 pounds gross (loaded) vehicle weight—are exempt from the luxury-auto dollar caps because they fall outside of the Code Sec. 280F(d)(5) definition of a passenger auto. For how to get big writeoffs for such vehicles under recent legislation.
Lease income inclusion tables. A taxpayer that leases a business auto may deduct the part of the lease payment representing business/investment use. If business/investment use is 100%, the full lease cost is deductible. So that auto lessees can't avoid the effect of the luxury auto limits, however, they must include a certain amount in income during each year of the lease to partially offset the lease deduction. (Code Sec. 280F(c)) The income inclusion amount varies with the initial fair market value of the leased auto and the year of the lease, and is adjusted for inflation each year.
Tables 5 and 6 of Rev Proc 2011-21, carry the income inclusion tables for passenger autos, and light trucks and vans with a lease term beginning in 2011.
Observation: The income inclusion amounts for vehicles first leased this year are lower than they were for vehicles first leased last year. For example, for an auto with a fair market value over $37,000 but not over $38,000, and first leased in 2010, the income inclusion amounts were $44 for the first tax year during the lease, $96 for the second tax year, $143 for the third, $170 for the fourth, and $198 for the fifth and later lease years. If an auto in the same fair market value range is first leased in 2011, the income inclusion amounts are $22 for the first tax year during the lease, $49 for the second tax year, $73 for the third, $87 for the fourth, and $100 for the fifth and later lease years.
Some luxury auto figures revised for 2010. Rev Proc 2010-18, 2010-9 IRB 427, carrying the luxury auto dollar limits placed in service in 2010, was issued before the Small Business Jobs Act was enacted and thus did not reflect a boosted first-year dollar limit for 2010 qualifying vehicles. Rev Proc 2011-21 revises the 2010 luxury auto figures in Rev Proc 2010-18, by providing that if the bonus depreciation rules apply to an auto (not a truck or van), then the first-year dollar cap is increased from $3,060 to $11,060; for a light truck or van, the first-year dollar cap is increased from $3,160 to $11,160. All other luxury auto figures for vehicles placed in service in 2010 remain the same.
Rev Proc 2011-21, also revises the income inclusion amounts in Rev Proc 2010-18, for vehicles first leased in 2010. For such vehicles, the income inclusion rules don't apply unless the fair market value of an auto is $18,500 or more (had been $16,700 or more in Rev Proc 2010-18); it's $19,000 or more for trucks and vans (had been $17,000 or more in Rev Proc 2010-18).
Changes Affecting Self-Employed's Health Insurance Deduction For 2010?
Self-employed taxpayers and their advisers should be aware that on the 2010 return there are a number of key changes, almost all positive, that affect the Code Sec. 162(l) self-employed's health insurance deduction. This article surveys what's new for this key deduction on the 2010 return.
Background. A self-employed individual (or a partner or a more-than-2%-shareholder of an S corporation) can deduct as a business expense 100% of the amount paid during the tax year for medical insurance. (Code Sec. 162(l)(1)(B)) No deduction is allowed to the extent the deduction exceeds the individual's earned income as defined in Code Sec. 401(c) (net earnings from self-employment) derived from the trade or business for which the plan providing the coverage is established. (Code Sec. 162(l)(2)(A)) For purposes of applying the earned income limit to the deduction of a more-than-2% S corporation shareholder, that shareholder's wages from the S corporation are treated as his earned income. (Code Sec. 162(l)(5)(A))
Changes to keep in mind. The following changes affect the self-employed's health insurance deduction for the 2010 year.
The self-employed individual's health insurance deduction is also allowed in calculating net earnings from self-employment for purposes of the self-employment tax for tax years beginning in 2010. (Code Sec. 162(l)(4), as amended by the 2010 Small Business Act, P.L. 111-240, 9/27/2010) Net earnings from self-employment are generally an individual's trade or business income, less the deductions permitted by the Code that are attributable to that trade or business, plus the individual's distributive share of partnership income or loss. For tax years beginning before 2010, a self-employed individual's health insurance costs, although deductible for income tax purposes, weren't deductible in determining net earnings from self-employment. Thus, business owners couldn't deduct the cost of health insurance for themselves and their family members for purposes of calculating their self-employment tax. This new deduction under the 2010 Small Business Act only applies for one year: it doesn't apply for tax years beginning before Jan. 1, 2010, or after Dec. 31, 2010.
IRS has changed its position and concluded that Medicare B premiums are deductible as a Code Sec. 162(l) self-employed health insurance expense, as indicated by the Instructions to Form 1040 (2010) (Line 29, Self-Insured Health Insurance Deduction). Medicare B is supplemental medical insurance. Premiums that a taxpayer pays for Medicare B are a deductible medical expense under Code Sec. 213; thus, a taxpayer who applies for it at age 65 or after he becomes disabled can include the monthly premiums he pays in his medical expenses. In the past, IRS had argued that Medicare Part B premiums didn't qualify for a deduction because they weren't paid under a health insurance plan established by the taxpayer under a trade or business; rather Medicare Part B was a federal program available only to those who qualify under the statute. (Field Service Advice 3042) There was limited case law supporting this position. (Reynolds, (2000) TC Memo 2000-20, affirmed on another issue (2002, CA7) 90 AFTR 2d 2002-5294))
The self-employed health insurance deduction, effective Mar. 30, 2010, is available for any child of the taxpayer who has not attained age 27 as of the end of the year. (Code Sec. 162(l)(1)(D), as amended by the Health Care and Education Reconciliation Act (Reconciliation Act, P.L. 111-152, 3/30/2010)) The expanded definition of children for whom the self-employed deduction for health insurance premiums may be claimed also applies to more-than-2% S corporation shareholders entitled to claim the deduction.
Observation: A taxpayer could claim a deduction for the cost of health insurance for a child before Mar. 30, 2010, but only if that child was the taxpayer's dependent (and the other requirements for the Code Sec. 162(l) deduction were satisfied). Under the Reconciliation Act, a self-employed taxpayer may claim a deduction for health insurance premiums paid for a child who is under age 27 as of the end of the tax year, whether or not the child is the taxpayer's dependent for tax purposes. For example, an adult child who has not turned 27 years of age need not meet the dependency tests for a qualifying child under Code Sec. 152(c)(1) —and thus the deduction is available—regardless of (a) child support thresholds, (b) the child's place of abode, or (c) the child's tax filing status.
The limitation on a self-employed individual's deduction for health insurance premiums where there's an employer-subsidized health plan has been changed. (Code Sec. 162(l)(2)(B), as amended by the Reconciliation Act) Before Mar. 30, 2010, no individual who was eligible to participate in any subsidized health plan maintained by any employer of the individual or of the individual's spouse was entitled to the deduction. Under the Reconciliation Act, the deduction is also not available for any month in which the self-employed individual is eligible to participate in a subsidized health plan maintained by any employer of any dependent, or any child of the taxpayer who hasn't attained age 27 as of the end of the tax year.
Because this rule applies on a calendar-month basis, if a self-employed individual is eligible to participate in a subsidized plan that's maintained by an employer of the individual, his spouse, his dependent, or his under-age-27 child for, say, only one calendar month (e.g., December), the deduction is still available for premiums paid during the other months of the year. The eligibility test is applied separately to (1) plans that provide coverage for qualified long-term care services, or are qualified long-term care insurance contracts and (2) plans which don't include such coverage and aren't such contracts. (Code Sec. 162(l)(2)(B)) Thus, an individual eligible for employer-subsidized health insurance may still be able to deduct long-term care insurance premiums, so long as he isn't eligible for employer-subsidized long-term care insurance.
Congress Repeals Expanded 1099 Reporting Requirements?
Concerned about the tax compliance burden imposed on taxpayers, particularly small businesses, Congress passed legislation repealing the expanded 1099 reporting requirements enacted last year. Ending months of negotiations and debate, the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011, repeals information reporting rules that would have required the filing of Form 1099 for (1) Payments of $600 or more by businesses; and (2) Expense payments of $600 or more with respect to rental property. To pay for the cost of repeal, the legislation increases the amount of overpayment of health care credit that is subject to recapture.
The House passed the measure on March 3, 2011, by a vote of 314 to 112. The Senate followed with passage on April 5, 2011, by a vote of 87-12. The bill now goes to President Obama for his signature.
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