Beginning in 2011, estates worth more than $1 million are going to be slammed with a 55 percent tax rate, unless Congress does something to stop it. Roth lRAs provide tax-free treatment for qualified distributions. Beginning in 2011, participants in State and local government-operated 457 plans (other than employees of nonprofits) can contribute deferred amounts to designated Roth accounts. Participants in 401(k) and 403(b) plans already have this ability. Also, participants in 401(k), 403(b) and 457 plans can roll over account balances to a Roth, subject to tax on pre-tax contributions and earnings. This provision takes effect on the date of enactment. For rollovers in 2010, you can opt to have the taxable income split between 2011 and 2012.
SUCCESSION PLANNING One of the most prominent unresolved tax issues, Estes said, is the estate tax for 2010. It’s relevant to owners of small businesses who want to do succession planning. “It’s a big issue, especially for people who want to pass their business on to their kids,” Estes said. “There was no estate tax in 2010.” Beginning in 2011, estates worth more than $1 million are going to be slammed with a 55 percent tax rate, unless Congress does something to stop it. In 2004-2005, the exclusion was $1.5 million; from 2006-2008, the exclusion was $2 million; in 2009, the exclusion was $3.5 million. The value of an estate includes all assets, including a house and proceeds from insurance policies on the taxpayer’s life, unless the person has set up things so he or she is not considered to own the policies. “There’s talk it’s going to be changed, moved up to $3.5 million,” Estes said. “If nothing is done, people are going to get hit hard. 2010 was the year to die if you had money.”
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Estes advises clients to start now on setting up succession planning, to minimize the impact of estate tax, whatever it turns out to be. “If you end up on your deathbed and plan at the last minute, things can be pulled back into your estate,” he said. Without Congressional action and Presidential approval, current tax rate brackets of 10, 15, 25, 28, 33 and 35 percent will be replaced in 2011 by pre-Bush brackets of 15, 28, 31, 36 and 39.6 percent, translating into acrossthe-board tax rate hikes for taxpayers. The current 0 and 15 percent rates on most long-term gains are scheduled to rise to 5 and 20 percent in 2011. The current 0 and 15 percent rates on dividends will be replaced by ordinary income rates scheduled to be as high as 39.6 percent.
HEALTH INSURANCE PROVISIONS The Patient Protection and Affordable Care Act, enacted last March, enabled qualifying small businesses with fewer than 25 full-time employees to claim up to 35 percent of employee health-care costs. Qualifying nonprofits could claim up to 25 percent. “There’s a new reporting requirement for employer-provided health insurance,” Estes said. “They’ll be reporting it in 2012 for the 2011 tax year.” Estes said he expects that the new Congress “is going to tear some of (PPAC) apart.” And that effective dates for some provisions in PPAC extend out to 2018. “What we’ve been telling clients is that there are major things in PPAC. They need to be aware they’re there and follow them closely going forward to see if they come to fruition,” Estes said. One thing Estes believes will “go away” are Form 1099 reporting requirements set to take effect in 2012, mandating that companies report each expenditure that is greater than $600. “We would have to track all the purchases made from Costco, Target, Office Depot, and report that to the IRS at the end of the year,” Estes said. “There’s a lot of talk about that provision being done away with completely. It would be a nightmare for small businesses to add that level of reporting requirement. That’s going to be a pain.”
Other PPAC-related tax issues include: ● Additional 0.9 percent Medicare tax for high-earners (2013); ● Additional 3.8 percent Medicare tax on net investment income for high-earners (2013); ● $2,500 limit on health care FSA contributions (2013); ● Higher floor (10 percent of AGI) for itemized medical expense deductions (2013); ● Disallowance of deductions for retiree drug plan subsidies (2013); ● Excise tax on medical devices (2013); ● Deductable compensation limit for health insurers (2013); ● Increase in minimum estimated tax payments for corporations (2014); ● New insurance reporting requirements for all providers of insurance (2014); ● Penalties for individuals without “adequate” coverage (2014); ● Penalties for large employers that do not provide “qualified” coverage (2014); ● Health insurance cost-sharing subsidies for qualified low-income individuals (2014); ● Increase in health insurance tax credit for small employers (2014); ● Requires employers to provide “free choice vouchers” to eligible employees (2014); ● Excise tax on health insurance providers (2014); ● Additional increase in health insurance tax credits for small employers (2015); ● Increase in penalties for individuals without “adequate” coverage (2015); ● Increase in penalties for large employers that do not provide “qualified” coverage (2014); ● Additional increase in penalties for individuals without “adequate” coverage (2016); ● Excise tax on “Cadillac” health ❑ plans (2018). Mikunda Cottrell is a locally owned accounting firm that serves approximately 1,500 individual clients and 1,500 business clients, as well as nonprofits. It launched its office in Anchorage in 1977.
www.akbizmag.com • Alaska Business Monthly • January 2011