Here We Go Again – More Changes Coming!

One thing is for sure in the past few years, our tax system has become quite fluid with numerous changes every year.  Included in President Obama’s budget proposal are a number of more proposed tax changes.  The following is an overview of the proposed changes:

Limiting Tax Cuts at $250,000 - Allowing the 2001 and 2003 tax cuts to expire for households making more than $250,000 per year, effective beginning in 2013.

Restore Estate Tax to 2008 Level - Restoring the estate tax to 2009 levels, effective beginning in 2013.

Itemized Deduction Tax Benefits - Limiting the tax subsidy for itemized deductions for high-income families to 28%.

American Opportunity Credit - Making the American Opportunity Tax Credit permanent (under current law, it won't apply after 2012). 

Student Loan Forgiveness - Permitting borrowers to exclude loan forgiveness on certain student debt, provided that they have met their repayment obligations for the 25-year period required by Federal repayment programs. (For many students on income-contingent or income-based repayment plans, at the end of their payment plans, any outstanding balance on their loans is forgiven. Under current law, those forgiven amounts are taxable.) 

Child Care Credit - Increasing tax credits for child care and dependent care expenses.

EITC - Permanently expanding the Earned Income Tax Credit for families with 3 or more children.

Automatic IRAs - Providing for “Automatic IRAs” in the workplace and giving employers tax credits of up to $250 a year for two years for automatically enrolling their employees in IRAs. 

Required Minimum Distributions - Eliminating required minimum distributions (RMDs) for taxpayers with aggregate IRA and tax-favored retirement plan account balances of $50,000 or less, effective for taxpayers attaining age 70-1/2 after Dec. 31, 2011.

Non-Spouse IRA Beneficiary - Allowing a surviving non-spouse beneficiary to make 60-day rollovers from a retirement plan or IRA to a non-spousal inherited IRA, effective for distributions after Dec. 31, 2011.

Business Issues:

Research Credit - Expanding the business research credit by nearly 20% and making it permanent. 

FUTA Tax Change - Revamping the Federal Unemployment Tax Act (FUTA) tax. Currently, the tax is 6.2% through June of 2011, and 6.0% for the remainder of calendar year 2011 and later years.  It is levied on the first $7,000 paid each employee as wages during the calendar year.  Under the budget proposal, the FUTA rate would remain at 6.2% after June of 2011, and, beginning in 2014, the FUTA wage base would be raised to $14,000. 

LIFO Inventory Repeal - Repealing the use of the LIFO inventory accounting method. Taxpayers currently using this method would be required to write-up their beginning LIFO inventory to its FIFO value in the first tax year beginning after Dec. 31, 2012, but this one-time increase in gross income would be taken into account ratably over ten years, beginning with the first tax year beginning after Dec. 31, 2012.

1099 to Corporations Repeal - Repeal the additional information reporting requirements imposed by the Affordable Care Act, but requiring businesses to file an information return for payments for services or for determinable gains aggregating to $600 or more in a calendar year to a corporation (except a tax-exempt corporation).  Regulatory authority would be provided to make appropriate exceptions where reporting would be especially burdensome.  Information returns would not be required for payments for property.  These changes would be effective for payments made after Dec. 31, 2011.

Schedule M-3 - Requiring all corporations and partnerships that must file Schedule M-3 to file returns electronically, effective for tax years beginning after Dec. 31, 2011. 

Reclassification of Workers - Permitting IRS to require prospective reclassification of workers who are currently misclassified and whose reclassification has been prohibited under current law.  This would apply upon enactment, with a transition rule. 

Oil Production Preferences Elimination - Eliminating tax preferences (e.g., expensing of intangible drilling costs, enhanced oil recovery credit, production tax credit for marginal wells, percentage depletion) for oil, gas and coal companies.

Dealers’ Income Would be Ordinary Not Capital - Effective for tax years beginning after the enactment date, requiring dealers in commodities, commodities derivatives dealers, dealers in securities, and dealers in options to treat the income from their day-to-day dealer activities in Code Sec. 1256 contracts as ordinary in character, not capital.

Electric Vehicle Credit - Reforming the current Code Sec. 30D credit for purchasers of electric vehicles by allowing dealers to claim it, with clear transparency requirements to ensure the benefit of the credit is passed on to consumers. 

Sec. 179 Made Permanent at $125K - Making permanent the Code Sec. 179 rule allowing up to $125,000 to be expensed. (Under current law, the maximum expensing amount is $500,000 for tax years beginning in 2010 or 2011, dropping down to $125,000 for tax years beginning in 2012, and then falling to $25,000 for tax years beginning after 2012.) 

QSBS - Making permanent the Code Sec. 1202 rule excluding all gain on qualified small business stock. (Under current law, the exclusion applies only for disposition of qualified stock acquired before 2012.)

Have additional questions?  Call one of our tax professionals.