Insights from the Virginia Tax Conference

Posted on by

I attended the Virginia Tax Conference and it was loaded with items of interest and concern in the years to come.

For example the HIRE Act gives some very nice refundable tax credits to employers who hire the unemployed. The Employer has a new form for employees to fill out a W-11 form.

The House of Representatives passed an extenders bill but there are some extenders which were left out. For example Alternative Minimum Tax relief. This means that in 2011, more taxpayers will be subject to AMT. 5 year NOL on carry-backs is going away. Waiver of the minimum distribution rules for 2010. Homebuyer’s credit will not be renewed. Also the capital gain and dividend rates will increase in 2011 if nothing is done. Therefore, expect dividend rates to go up to ordinary income rates and capital gain rates to go up to 20%. If you are a corporation sitting on earnings a profits, it might be a good time to declare a dividend. Tax rates will rise in the top brackets from 35% to 39.5%. So again, for high income taxpayers this is a real problem. Also, your price for indoor tanning just went up. There is a 10% surtax on indoor tanning services. There are 2010 benefits for health insurance for employees that meet certain criteria under the statute. In 2012, new 1099 requirements have been added. In 2013 some whopper tax increases. .9% Medicare surtax on “earned income”. I point this out because there will also be a 3.8% surtax on unearned income. So, there will be a choice for upper income folks as to whether they should shut down those S Corps and convert them to LLC’s since the dividends will have this new 3.8% surtax, but then again, if you have a long way to go to get to the limit on Social Security, it might not be worth it. 2010 might also be the year to convert a traditional IRA to a Roth IRA since (1) rates will increase in 2011, and (2) further increase in 2013.
So, lots of things coming down the pike in the income tax area. But the 2000 pound gorilla in the room is the Estate Tax and capital gains step up in basis for 2010 and years going forward. In 2010, as anyone who has read this blog knows, there is no estate tax this year. What some are now whispering is that Congress may take no action in 2010 on the Estate Tax. That means two things: (1) The exemption in 2011 will be $1 Million. (2) No basis step-up except for the $1.3 Million in 2010. That means for people dying in 2010, they will pay no estate taxes, but their families will for the most part be stuck with their basis. We’ll have some tales about this scenario in days to come. This means in essence that the families will be paying the capital gains on the property even if the person was of modest means. This is a horrible result. As for the 2011 Exemption of $1 Million, this is clearly something that could impact almost anyone who owns a business, or real estate of substantial value. We’ll have some tales about that in the future as well. Clearly, this means that it may be a good year to make taxable gifts late in the year (if Mom or Dad is expected to live past 2010). That would generate a gift tax in 2011 (which could be a deduction for deaths in 2011). This when coupled with low real estate values and stock values comparatively right now, may signal a time to make large gifts. And we’ll discuss all the various gifting techniques out there for implement estate freezes and the like. Some of these will likely be legislatively stopped starting in 2011.

Gift or not

Posted on by

Joe who is not real thorough in life, fails to file his 2005 tax return until 2010. Had he filed on time he would have received a refund. In the back of his mind, he knew that by not filing, he would lose his refund, but he was busy at work, the dog kept eating his W-2 form and he was depressed. When he finally got around to doing his taxes, he discovered that the refund he lost would have been $10,000. The question for today is this? Can he deduct the $10,000 when he prepares his 2007 return as a charitable gift, since he gave the money to the U.S. Government.

Update on Section 1022

Posted on by

At this point the IRS has not issued any guidance that we’ve seen concerning Section 1022 of the Code for allocating basis for decedent’s dying in calender year 2010, as we discussed in February. As you recall, survivors other than a spouse can elect to step-up basis on $1.3 Million of assets and a surviving spouse can elect to step-up basis on up to $3 Million of assets. So at this point, since it appears that Congress is not going to make any changes to the Estate Tax in 2010 or Section 1022. Thus, for families of persons dying in 2010, it would be advisable to talk to your attorney about filing a protective form 706 to elect the basis allocation.

The Explanation

Posted on by

“The rental of personal property is deemed to be a business under the Internal Revenue Code. Section 1402(a) of the Code which defines income from Self Employment defines any earned income as income from self-employment except income from rentals of REAL PROPERTY, not income from the leasing of tangible personal property unless leased with real property. Since your LLC is a disregarded entity, this is self-employment income. You’ll have to pay self-employment tax on the income. Now we can argue that its a passive activity and thus not subject to these rules. The one factor that you have in your favor of all things is that the lease is a triple net lease. In other words, the lessee pays all taxes and insurance on the property. Generally, a triple net lease is presumed to be a passive investment instead of an active business under Section 469. The problem for you is that those losses should then have been suspended and not deducted on your Schedule E as an active business. So by making this argument you may be worse off than by paying the small amount you would owe under the self-employment rules”, the lawyer concluded. “What should I do then?”. Send me to the audit said the lawyer.

The bad news

Posted on by

Mr. Beaumont looked at the good doctor and said, you took salary of $50,000 which while a little low is not going to be a problem, but the leasing income should have been reported on Schedule C of his 1040. “What difference does that make?” asked the Doctor. “Let’s see in 2008 you had leasing income of $50,000. In 2009 you had leasing income of $60,000. You’ll owe self employment taxes on a portion of that”, said Beaumont. “What does that mean?” asked the doctor. “About 15% of $40,000 and 3% of the rest” replied the lawyer. “Wait a minute, could you explain that to me”, asked the Doctor.