2013 Federal Budget: Tax Proposals

2013 Federal Budget: Tax Proposals

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Tax Proposals from the President’s 2013 Federal Budget

President Obama submitted a fiscal 2013 federal budget to Congress on February 13, 2012. On the revenue side, the President’s proposals blend several familiar ideas along with a number of new initiatives. The FY 2013 budget provides further detail regarding some of the President’s tax proposals unveiled in his January 24, 2012 State of the Union Address. If enacted by Congress, these proposals would impact individuals, businesses, exempt organizations, and taxpayers of all types.

 

Below are highlights from a dozen of the President’s more significant tax proposals:

Individual Income Tax Rates

The President has continuously expressed his opposition to the extension of the Bush-era tax cuts for higher income individuals. In the President’s proposal, he would reinstate the 36 percent and 39.6 percent tax brackets for high income taxpayers. At the same time, the President would extend the tax rate brackets of 10, 15, 25, and 28 percent, and eliminate the 33 and 35 percent tax rate brackets. The revised marginal tax rate brackets would be effective for taxable years beginning after December 31, 2012.

Capital Gains/Dividends

The President proposes to increase the tax rate on qualified capital gains from 15% to 20% for higher income taxpayers. The increased rate would apply to single individuals with incomes over $200,000 and married taxpayers filing a joint return with incomes over $250,000. Further, for taxpayers with incomes in excess of these thresholds, qualified dividends would be taxable at ordinary income rates. Both of these changes would be effective for taxable years beginning after December 31, 2012.

Limitation on Itemized Deductions/Personal Exemption Phaseout

The Administration proposes to reinstate the limitation on itemized deductions and the phase-out of personal exemptions for upper-income taxpayers.  Itemized deductions would be reduced by 3 percent of the amount by which adjusted gross income exceeds statutory thresholds, but not by more than 80 percent of the otherwise allowable deductions. The amount of each personal exemption would be reduced by 2 percent of the exemption amount for each $2,500 or fraction thereof by which adjusted gross income exceeds statutory thresholds. The thresholds for both provisions would be $200,000 for single individuals and $250,000 for married taxpayers filing joint returns. This change would be effective for taxable years beginning after 2012.

AMT/Buffett Rule

The President’s budget anticipates the future repeal of the Alternative Minimum Tax (“AMT”) for individual taxpayers. The AMT would be replaced by a so-called “Buffett Rule”. The Buffett Rule name is associated with legendary investor Warren Buffett and his public comments regarding his effective income tax rate in comparison to the rate paid by his secretary. Under the Buffett Rule, taxpayers making more than $1 million a year would be required to pay a minimum effective tax rate of at least 30 percent.

The President’s budget does not include a specific Buffett Rule provision with an effective date. Instead, the President has asked Congress to continue to extend the AMT “patch”, until Congress can pass measures consistent with the principles of the Buffett Rule. In this way the President hopes to keep the Buffett Rule alive as a future goal of comprehensive tax reform after 2012.

Estate Tax

President Obama has proposed to scale back some of the favorable estate tax provisions in the 2010 Tax Relief Act, which are scheduled to expire after 2012. In their place, the President proposes to reinstitute the federal estate tax parameters that were in effect as of calendar year 2009, including a top estate tax rate of 45 percent and an exemption amount of $3.5 million. The proposal would be effective for estates of decedents dying after December 31, 2012.

Manufacturing Communities Tax Credit

The purpose of this proposal by the President is to provide federal support for investment in communities that have experienced a major job loss, such as the closure of a military base or a mass lay-off. The credit would be structured similarly to the mechanism of the New Markets Tax Credits or as an allocated investment credit similar to the Qualifying Advanced Energy Project Credit.

LIFO/LCM Repeal

The last-in, first-out method (“LIFO”) is an inventory cost flow assumption that assumes the most recently items most recently purchased or produced by the taxpayer are the first items sold. As compared to other cost flow assumptions, LIFO generally results in lowest cumulative taxable income being reported over the operating life cycle of the taxpayer’s business, as long as the taxpayer continues to make investments in inventory. The President’s budget proposes repealing the LIFO method. The lower-of-cost-or market (“LCM”) inventory accounting method would be repealed as well.

To accomplish LIFO repeal, taxpayers would be required to write up their beginning LIFO value in the first taxable year beginning after December 31, 2013. However, this one-time increase in gross income would be taken into account ratably over ten years, beginning with the first taxable year after December 31, 2013. The repeal of the LCM method would be effective for taxable years beginning after December 31, 2013.

Carried Interest

The Administration’s proposal would tax as ordinary income a partner’s share of income from “investment services partnership interest” (“ISPI”), regardless of the character of the income at the partnership level. Accordingly, such income would not be eligible for the reduced rates that apply to long-term capital gains. An ISPI would include a carried interest in an investment partnership that is held by a person who provides services to the partnership. To the extent the partner’s share of income from an ISPI is attributed to “invested capital”, the partner’s income would not be recharacterized from capital gain to ordinary income.

The President’s carried interest proposal would be effective for taxable years ending after December 31, 2012.

Repeal of Oil/Gas and Coal Tax Incentives

The President has proposed to repeal credits and deductions available to oil, gas and coal producers for tax years beginning after December 31, 2012, including the enhanced oil recovery credit, the expensing of intangible drilling costs, the exception to passive loss limitations for working interests in oil and natural gas properties, along with numerous other incentives. The President has proposed to increase the amortization period from two to seven years for geological and geophysical expenditures incurred independent producers in oil and gas exploration paid or incurred after December 31, 2012. Additionally, the Section 199 “Manufacturing” deduction would be eliminated for oil, gas and coal producers.

Bonus Depreciation

Past legislation provided for 100 percent bonus depreciation through the end of 2011. The President’s budget proposal extends 100 percent bonus depreciation through the end of 2012.

Tax Credit for New Jobs/Wage Increases

Qualified employers would be eligible for a new, temporary credit. The credit would be equal to 10% of the increase in the employer’s eligible 2012 wages over the prior year (2011). The maximum amount of the increase in eligible wages would be $5 million with a maximum credit of $500,000. The proposal would be effective for wages paid during the one year period beginning on January 1, 2012.

Incentives for Insourcing/Disincentives for Outsourcing

The President’s budget proposes to create a new general business credit against income tax equal to 20% of the eligible expenses paid or incurred in connection with “insourcing” a U.S. trade or business. Insourcing is described by the President’s budget as reducing or eliminating a trade or business or line of business currently conducted outside the U.S., and starting up or expanding the same trade or business within the U.S., to the extent that this action results in an increase in U.S. jobs.

Meanwhile, the President’s budget would disallow deductions for expenses paid in connection with outsourcing a U.S. trade or business. Both proposals would be anticipated to be effective for expenses paid or incurred after the date of enactment.

Notably absent from the Administration’s budget proposal was details about corporate tax reform, which has been a recurring theme in Presidential addresses over the past year. President Obama has said he would support reducing the corporate tax rate in exchange for the closing of unspecified tax loopholes.

Given the current landscape of a divided Congress and the politically charged atmosphere in this Presidential election year, most commentators do not expect many of the President’s proposals to result in actual 2012 tax legislation. Regardless of what happens in November, the lame duck Congress that returns to work after the November elections will take up the fate of the Bush-era tax cuts. The outcome of the November election will most likely determine whether many of the other items in President Obama’s 2013 budget either fade into history or become strong contenders for tax legislation at the end of 2012 and into 2013.

Richard Woods, CPA, Senior Manager


Payroll Reporting Issues & Taxation

Payroll Reporting Issues & Taxation

New for 2012 and reminders for 2011

Employee social security tax withholding – The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 temporarily reduced the rate of social security tax withholding (for employees only) from 6.2% to 4.2% for wage payments made in 2011. On December 23, 2011, President Obama signed into law the Temporary Payroll Tax Cut Continuation Act of 2011 extending the current 4.2% Social Security Old-Age Survivors, and Disability Insurance (OASDI) tax rate for employees to wages paid after 12/31/11 and before March 1, 2012. Employers should implement the new payroll tax rate as soon as possible in 2012, but not later than January 31, 2012, as the IRS has advised. For any Social Security tax over-withheld during January, employers should make an offsetting adjustment in workers’ pay as soon as possible but not later than March 31, 2012.

The current law includes a new “recapture” provision for higher income employees, which is currently being negotiated by a conference committee.  However, if a full-year extension of the payroll tax cut is negotiated for 2012 then the recapture rule will not apply.

Interim relief for Form W-2 reporting of the cost of coverage of group health insurance – Code DD is added to box 12 of the 2011 Form W-2 to report the cost of employer-sponsored health coverage. However, to give employers more time to update their payroll systems, the IRS made this requirement optional for all employers for 2011. During 2011, IRS Notice 2011-28 provided further relief for smaller employers filing fewer than 250 W-2 forms by making the reporting requirement optional for them at least for 2012 and continuing this optional treatment for smaller employers until further guidance is issued. This reporting is for informational purposes only, to show employees the value of their health care benefits so they can be more informed consumers. The amount reported does not affect tax liability, as the value of the employer contribution to health coverage continues to be excludible from an employee’s income.

Form W-3, Kind of Employer – To improve document matching compliance, box b of the 2011 Form W-3 (Transmittal of Wage and Tax Statements) has been expanded to include a new section, Kind of Employer, which contains five new checkboxes. Filers are required to check one of these new checkboxes. Be sure to check the “None apply” checkbox if none of the other checkboxes apply.

FUTA tax rate for 2011 – As a reminder the Federal Unemployment Tax Act (FUTA) temporary surcharge of 0.2% expired on June 30, 2011. This means that there are two different FUTA rates in effect for 2011. The IRS will update Form 940, Employer’s Annual Federal Unemployment Tax Return, to accommodate the two different rates for tax year 2011.

Kentucky Unemployment changes effective January 1, 2012 –The Kentucky taxable wage base (the amount on which quarterly unemployment taxes are calculated) will increase from $8,000 to $9,000 for 2012. This means employers will pay taxes on the first $9,000 of wages an employee earns during 2012.

Other Important Reminders

Compensation Guidelines:

All compensation to employees for services performed, whether paid in cash or other forms must be included in gross income when paid. Wages, salaries, commissions, vacation allowances, bonuses, fringe benefits that do not qualify for statutory exclusions, tips, payments based on a percentage of profits, personal club dues and other forms of compensation are included in gross income.

If a household worker is your employee, payments are also treated as compensation subject to employment taxes.  Social Security and Medicare taxes apply to the wages of household workers to whom you pay $1,700 or more in a calendar year. All wages paid to household workers performing their work in Louisville Metro are subject to Louisville Metro local occupational taxes.

Listed below are items you should consider before processing your final payroll of the year and issuing year-end informational reports to employees. These items are general guidelines and are not intended to be a comprehensive list of all specific rules that might apply to your payroll tax situation.

For specific questions, please consult with your payroll tax professional or your Mountjoy Chilton Medley advisor.

 

Holiday Gifts – Holiday gifts to employees are generally presumed to be compensation and as such should be subject to all payroll taxes and included on Form W-2. This includes payments in cash, gift certificates or any other form easily turned into cash. A noncashholiday gift will not be considered wages subject to employment taxes if the gift is of nominal value.

Qualified Retirement Plan Participants – Special considerations related to qualified retirement plan participants include the following:

  • 401(k) and 403(b) Plans – maximum employee deferral for 2011 is $16,500; age 50 or older is $22,000. The maximum employee deferral for 2012 is $17,000; age 50 or older is $22,500.
  • Simple IRA Plan – maximum employee deferral for both 2011 and 2012 is $11,500; age 50 or older is $14,000.
  • Employee deferrals are not subject to federal and state income tax, but are subject to Social Security, Medicare, FUTA, SUTA and occupational tax withholding.
  • If an employee is an active participant in your company’s qualified retirement plan, you must remember to mark the retirement plan Box 13 on the W-2 and if deferrals are present, include the amount with the proper code in Box 12. Please refer to the form’s instructions for further guidance.

Fringe Benefits

  • Include in W-2 wages the health insurance premiums and company provided Health Savings Plan Contributions for S-corporation shareholders that own 2% or more of the company.
  • Cafeteria plan benefits are taxable for Kentucky Unemployment, and Louisville Metro  Occupational Tax purposes, but are not taxable for FICA, Medicare, FUTA tax, Federal, Kentucky and Indiana income tax withholding purposes.  These plans may be taxable for other states and localities.
  • Group-term life insurance is generally tax-exempt up to the cost of $50,000 of coverage. For specific calculations, use MCM’sGroup Term Life Premiums – 2011 Income Inclusion Worksheet.
  • Health Savings Account (HSA) limits for 2011: self only coverage – $3,050; family coverage -$6,150; ages 55 or older catch-up contribution – $1,000. Limits for 2012:  self only coverage – $3,100; family coverage – $6,250; ages 55 or older catch-up contribution – $1,000.

Matching Employee’s Name and Social Security Number – The IRS has stepped up their review and matching of employee’s name and Social Security number. The employee’s name and Social Security number reported on W-2′s must match the exact legal name and number printed on the employee’s Social Security card. Any inconsistencies could result in penalties if reported incorrectly. To verify Social Security numbers, register to use the Social Security Number Verification System (SSNVS) throughwww.ssa.gov/bso/bsowelcome.htm. The Social Security Number Verification Service Handbook is available online at www.ssa.gov.

Business Expense Reimbursements – Reimbursements of employee business expenses made under accountable plans can be excluded from gross wages. For a plan to be accountable it must have a business connection, must require proper substantiation by the employee including the time, place and business purpose of the expenses, and finally, the plan must require employees to return reimbursements in excess of substantiated expenses.

Reimbursements of employee business expenses made by employers with no accountable plan are to be reported as taxable wages subject to all employment taxes.

Employer-Provided Automobiles – The value of an employee’s personal use of an employer provided auto is considered wages, unless the use can be excluded from income as a de minimis fringe benefit, working condition fringe benefit, or qualified nonpersonal vehicle. Employers providing a company car to an employee, that the employee can use for personal use, must include in the employee’s wages and report on Form W-2 an amount that represents the value the employee received for personal use of the car. Personal use includes commuting to and from work. For more information related to valuing the personal use of employer-provided automobiles, use our complimentary 2011 Auto Usage Worksheet or contact your MCM advisor.

Standard Mileage Rates – For 2011, the IRS standard mileage rates for the use of a car (also vans, pickups or panel trucks) are as follows:

Mileage Type Jan. 1–June 30 July 1–Dec. 31
Business $0.51 $0.555
Medical/Moving $0.19 $0.235
Charitable $0.14 $0.14

Note: The standard rate for deducting the cost of miles driven for work will be 55.5 cents a mile in 2012, the same as it’s been for the last six months of 2011. But the rate for deducting miles related to driving for medical or moving purposes dropped by 5 cents, to 23 cents per mile for 2012, from 23.5 for the second half of 2011.  

Other Payroll

2011 and 2012 FICA Tax Rates and Limits – For 2011, the employee’s FICA rate is 5.65%, which is comprised of two components: Social Security and Medicare tax. The Social Security rate of 4.2% applies to wages paid up to the wage limit of $106,800 for 2011. For 2012 the Social Security taxable wage limit is increased to $110,100 and calculated at the rate of 6.2% unless changes are enacted. There is no cap on wages subject to the Medicare tax of 1.45%.

The American Jobs Act includes several provisions which, if ultimately passed, will impact employers including payroll tax related cuts.  Watch for further updates in this area.

COBRA Premium Assistance Credit Extended – Although the COBRA premium assistance subsidy program ended August 31, 2011, you may have a small group of employees who will still qualify. This is because those who qualified by the May 31, 2010 end date could have potentially delayed the start of coverage (e.g. the result of a severance package, paid-time off hours, etc.). This program provides a subsidy for former employees involuntarily terminated for a period of up to 15 months. To assist in figuring out who still qualifies, the Dept. of Labor has posted a Q&A at www.dol.gov/ebsa/faqs/faq-cobra-premiumreduction.htm.

Electronic Deposit Requirements – With only a few exceptions, you must use electronic funds transfer to make all your federal tax deposits (such as employment tax, excise tax, and corporate income tax). Electronic fund transfers are made using the Electronic Federal Tax Payment System (EFTPS) which is a free service. Forms 8109 and 8109-B, Federal Tax Deposit Coupons, are no longer acceptable forms of payment. For more information about EFTPS or to enroll in EFTPS, visit their website at www.eftps.gov or call 1-800-555-4477.

Federal Unemployment Insurance Tax (FUTA) – The gross FUTA tax rate is a flat 6.2% on the first $7,000 of each employee’s wages from January 1, through June 30, 2011 and 6.0% from July 1, through December 31, 2011. The Federal Government provides a maximum 5.4% FUTA tax credit adjustment (that reduces the above rates) for employers that pay their state unemployment tax contributions timely. However, employers in states that have not repaid money borrowed from the federal government to pay unemployment benefits are not eligible for the full FUTA tax credit adjustment. For 2011, employers in 20 states are subject to a reduction in the FUTA tax credit adjustment as a result of unpaid federal loans. This reduction means an overall increase in their FUTA tax rates, retroactive to January 1, 2011 with amounts due on Federal Form 940 by January 31, 2012. Kentucky and Indiana are both offset credit reduction states with a credit reduction rate of .3% and .6%, respectively.

The applicable 2011 net FUTA tax rate (after the appropriate credit adjustment) for Indiana and Kentucky:

  • Applied to wages earned before 7/1/11:  1.4%  (In), 1.1% (Ky)
  • Applied to wages earned after 7/1/11: 1.2% (In), .9% (Ky)

Please consult irs.gov for a more in-depth explanation and instructions for completion of the revised Form 940 for 2011.

State Unemployment Insurance Taxable Wage Base – The Indiana taxable wage base for state unemployment insurance remains the same as 2011 at $9,500. This means Indiana employers will pay state unemployment taxes on the first $9,500 an employee earns during 2012.

Effective January 1, 2012, the Kentucky taxable wage base will increase from $8,000 to $9,000.   This means Kentucky employers will pay state unemployment taxes on the first $9,000 an employee earns during 2012.

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