You can download a printable version here. Here are highlights of changes & other important tax information. Many deductions and credits are limited by one?s Adjusted Gross Income (AGI) or modified AGI (MAGI).
On 12/17/10, the Tax Relief, Unemployment Insurance Reauthorization & Job Creation Act of 2010 (?2010 Tax Relief Act?) was signed. It extended the ?Bush Tax Cuts?.
Important Rates & Amounts - 2010 Standard deduction (non-itemizers): Single $ 5,700 Over 65, unmarried ? add $1,400 Married filing Joint (MFJ) $11,400 Over 65, unmarried & blind ? add $2,800 Married Filing Separate(MFS)$ 5,700 Over 65, married ? add $1,100 Head of Household (HH) $ 8,400 Over 65, married & blind ? add $2,200 Personal Exemption $ 3,650
Maximum FICA Wage Base (2010 & 2011) $106,800.00 Maximum Social Security Tax Withheld 2010 - $4,485.60 & 2011 - $6,621.60
Taxpayer-Friendly Changes
Current tax rates extended. Maybe the most important attributeof the 2010 Tax Relief Act is that the 2010 marginal individual income tax rates will remain the same through the 2012 tax year. After that they are scheduled to increase as follows:
Current 2010 ? 2012 marginal rate 10% 15% 25% 28% 33% 35% Scheduled 2013 (was 2011) increase N/A 15% 28% 31% 36% 39.6%
Capital Gains The maximum long-term capital gain & qualified dividend tax rate remains 15% through 2012. Rates may be lower depending on the year & the tax bracket. Collectibles are taxed at a 28% rate.
Mortgage Forgiveness Debt Relief. Up to $2 million of discharged qualified principal residence indebtedness may be excluded from income depending on some variables.
Itemized/Standard Deductions For those using the standard deduction, there are up to 2 additional amounts that may be added on a Schedule L: A. Sales tax paid on the purchase of a new vehicle (limited to tax paid on $49,500). B. Net disaster loss from a federally-declared disaster. The real property tax deduction for non-itemizers is no longer available.
A deduction for state & local sales tax on large purchases (in lieu of state income tax) was extended through 2011.
The mortgage insurance premium deduction was extended through 2011. AGI must be < $110,000 & the loan must after 12/31/2006.
Premiums paid for long-term care insurance may be deductible as a medical expense.
Charity All money contributions must have written supporting documentation. Cash donations of $250 or more require written acknowledgement from the charity. Non-cash donations must be in ?good? condition or better. ?Good? is not defined. Non-cash donations of any amount require a receipt from the donee. Non-cash donations > $500 require tax return detail ? date/how acquired, cost, etc. Donations of more than $5,000 require attaching a ?qualified appraisal?.
The provision allowing taxpayers over 70 ½ to exclude up to $100,000 from gross income money distributed from an IRA (& some other retirement accounts) sent directly to a charity was extended through 2011. This can be a great strategy for those that are having some of their social security benefits taxed, those that don?t itemize, etc.
Credits (dollar-for-dollar reductions of tax).
The first-time homebuyer credit was available from April 9, 2008, through April 30, 2010 in three different formats. The original ?credit? was $7,500 & was really an interest-free loan which needs to start being repaid with the filing of one?s 2010 return. The repayment period is 15 years. The final version included an $8,000 ?real? credit & a $6,500 ?long-time resident? buyers credit. The credit was extended through 9/30/10 if there was a binding contract in place 4/30/10. The 2010 credit may be claimed on either the 2009 or 2010 returns. To qualify, the maximum purchase price can?t exceed $800,000. The taxpayer?s AGI can?t exceed $145,000 filing single/MFS or $245,000 MFJ. There?s more information at www.irs.gov/newsroom/article/0,,id=187935,00.html
The child tax credit amount of $1,000 per child, maximum 2 children, was extended through 2012. It may be refundable if earned income exceeds $3,000.
Make Work Pay Credit of $400 ($800 MFJ) expires after 2010.
Some energy credits were extended through 2011 but the benefits were reduced: A. Thenon-business energy credit (IRC §25C). It was reduced from 30% in 2010 (maximum $1,500) to 10% in 2011 of qualifying energy improvements to a principal residence. They include insulation systems, exterior windows & doors, metal & asphalt roofs & biomass fuel stoves. In 2011 there is a $500 lifetime limit. B. TheResidential Energy Efficient Property Credit (IRC §25D) It is 30% (no maximum) of the cost of solar, photovoltaic, fuel cell, wind & geothermal heat pump equipment improvements. Must be to a U.S. residence but it does not need to be a primary residence. Pools & hot tubs don?t apply. The credit runs through 2016. C. Alternative Fuel Motor Vehicle Credit now consists of 6 separate credits for vehicles that include several technologies. Hybrids Qualified fuel cell Advanced lean burn Alternative fuel vehicles New Qualified Plug-in Electric Drive Motors Plug-in Electric Conversion Credit
The hybrid credit is limited to the first 60,000 qualifying vehicles sold by each manufacturer. A list of available vehicles & credits available at www.fueleconomy.gov.
The Plug-in conversion credit is 10% of the cost of converting vehicle. Maximum credit is $4,000. It applies to property placed in service between 2/17/ 09 -12/31/11.
The Plug-in Electric credit has a maximum amount of $7,500. It currently applies to the 2011 Chevy Volt, 2011 Nissan Leaf, 2008-10 Tesla Roadster & the CODA sedan.
There is also a 10% credit, maximum of $2,500, for electric drive low-speed vehicles, motorcycles & 3-wheeled vehicles - those generally found in retirement communities.
The Savers Credit is a nonrefundable credit for contributions by an eligible taxpayer (low income) to a qualified retirement plan. The maximum credit is $2,000.
The maximum adoption credit is $13,710 & now refundable.
Education
The $250 (max) deduction for educator expenses (supplies) was extended through 2011.
Up to $4,000 for qualified post-secondary education tuition is deductible through 2011
The deduction for student loan interest, up to $2,500, was extended through 2012.
The American Opportunity Tax (formerly Hope) Credit was extended through 2012. A. It?s now available for the first 4 years of college (formerly 2). B. The maximum credit increased is $2,500 per student (formerly $1,800). C. It may offset Alternative Minimum Tax (AMT). D. Qualified expenses now include materials. E. Up to 40% of the credit may be refundable. F. It?s available to people with incomes of $160k - $180k married ($80k - $90k single).
The Lifetime Learning Credit is still available with a maximum of $2,000 per return.
For IRC §529 plans. For 2010, qualifying expenses include computer technology used for post-secondary education (in addition to tuition, fees, books, supplies, etc.).
The Coverdell Education Savings maximum contribution amount of $2,000 was extended through 2012. It is not tax deductible ? earnings are not taxed if used for education.
Real Estate
Taxpayers have been able to exclude up to $250,000 ($500,000 for MFJ) of gain on the sale of a house if it was the principal residence 2 out of the previous 5 years. Effective for sales 1/1/09, the gain from the sale of a principal residence might not be excluded from gross income for periods that the home was not used as the principal residence (nonqualified use). The ?nonqualified? use period does not include any portion of the 5-year period after the last date the property was used as a principal residence. Translation: If you rented the house out after you lived there you may avoid tax on the gain.
The Energy-efficient property deduction is $1.80 per square foot for buildings that achieve a 50% (overall) energy saving.
RETIREMENT PLANNING
Required minimum distributions (RMD?s) are mandatory in 2010. 50% penalty for non-compliance.
Avoid early (before age 59 ½) distributions from retirement accounts. Besides income taxes, there is a 10% federal & 2 ½% California excise tax unless an exception is met.
If social security benefits are received prior to reaching full retirement age, $1 in benefits will be deducted for each $2 earned above the annual limit. Here is the maximum earned income allowed before for Social Security benefits are reduced:
PERIOD ANNUAL LIMIT Under Full Retirement Age 2010 & 2011 $14,160 Year of Full Retirement Age 2010 $37,680 Full Retirement Age or Older All No Limit
Medicare Part B premiums are normally withheld from one?s benefit check. For those with MAGI of < $170,000 MFJ, $85,000 single, the monthly withholding is $96.40. As income increases, that amount can reach $353.60.
The maximum deductible employee retirement plan contributions are as follows:
Plan Maximum Amount Additional Amount if Age 50+
The IRA contribution amount is the same for a Roth and spousal IRA.
The maximum total deduction for defined contribution retirement plans (employee & employer) - SEP, 401(k), 403(b) & 457 plan ? for 2010 & 2011 is $49,000.
If the taxpayer is an ?active participant? in an employer-sponsored retirement plan, the IRA deduction is phased out when the (AGI) exceeds the following amounts: SINGLE JOINT MARRIED FILING SEPARATE 2010 $56,000 - $66,000 $89,000 - $109,000 $0 - $10,000 2011 $56,000 - $66,000 $90,000 - $110,000 $0 - $10,000
If an individual is not but the spouse is an active participant in a qualified retirement plan, the IRA deduction is phased-out in accordance with the table below:
SINGLE JOINT MARRIED FILING SEPARATE 2010 $105,000 - $120,000 $167,000 - $177,000 $0 - $10,000 2011 $107,000 - $122,000 $169,000 - $179,000 $0 - $10,000
Effective 1/1/10, ?DB(k)? retirement plans, a combination of defined benefit (pension) & 401(k) plans, became available for employers of between 2 - 500 employees.
Pension benefits received by a non-spouse beneficiary may be transferred into an inherited IRA. If the decedent hasn?t started taking distributions, the beneficiary may elect to have the balance distributed (& taxed) over his/her life expectancy.
Partial Annuitization. Beginning 2011, taxpayers may partially annuitize a life insurance contract, nonqualified annuity or endowment over a period of at least 10 years.
Pensions & social security benefits are subject to IRS levy. Unemployment benefits are not.
There is a once-in-a-lifetime direct trustee-to-trustee rollover from an IRA to a Health Savings Account (HSA). It?s not subject to tax or penalty.
The required minimum distribution tables will be posted on our website.
Roth IRA?s.
A write-up on traditional IRA to Roth IRA conversions went out at the end of December. Here is some general information:
Similar to traditional IRA?s, contributions can only be made if the taxpayer has earned income. The contribution cannot exceed the amount of earned income. The maximum contribution is limited by the taxpayer?s AGI ? it is the same schedule as the ?spouse is an active participant in a retirement plan? schedule above.
As of 12/31/09, the law only allowed conversions from a traditional IRA or other qualified plan (currently deductible but taxed when withdrawn) to a Roth IRA (not deductible but potentially not taxed when withdrawn) if AGI was less than $100,000. As of 1/1/10, three major changes took effect regarding traditional-to-Roth IRA conversions. First, the $100,000 AGI limit was eliminated. Second, amounts converted in 2010, at the taxpayer?s election, may be excluded from 2010 gross income. Instead, half may be taxed in 2011 & remainder taxed in 2012. Third, MFS filers may now do Roth conversions. The previous Roth letter discussed this in detail.
If someone doing a Roth conversation later get buyers remorse & decides that it wasn?t such a great idea, the conversion can be recharacterized, i.e., undone, as late as the extended due date of the returns (October 15) even if the return is not extended.
HEALTHCARE BILLS
The Patient Protection & Affordable Care Act of 2010 & the Health Care & Education Reconciliation Act of 2010 together include over $400 billion in revenue raisers. Their provisions will affect everyone. They mandate that all individuals (with a few exceptions) have health care coverage by 2014 or pay a penalty. For those that don?t have employer-sponsored coverage, insurance ?exchanges? will be set up to facilitate shopping for insurance. Available plans must be ?qualified health plans? that meet government standards. Financial assistance will be available to ensure that individuals are not spending over a certain percentage of their income on health insurance. Starting 2010 & phasing in through 2018 there will be new & lost tax deductions, credits & taxes.
We will have booklets that go into detail on the bills. Here is a link: www.irs.gov/newsroom/article/0,,id=220839,00.html
2010 There is a new income tax credit for small employers that provide employee health care benefits. Requirements/highlights include: A. There are no more than 25 full-time equivalent employees (FTE). B. Average annual wages of no more than $50,000 per employee. C. It is claimed on the employer?s annual income tax return on form 8941. D. It may be as high as 50% of premiums paid, depending on # of FTE?s & wages. E. The 1st phase is 2010 ? 2013. The second is a 2-consecutive-year period after 2013. The 1st phase credit is 35% & the 2nd is 50% (25% & 35% for non-profits). F. An employer may qualify for all 4 years of phase 1 but only a max of 2 in the second. G. For the second phase, coverage must be offered in an exchange. H. There is a formula that uses ?benchmarks? that are on a state-by-state basis for 2010. I. A plan qualifies if it requires the employer to make contributions for every employee: 1. That is at least 50% of the premium cost for single coverage. 2. Is a uniform percentage for each employee. J. The federal insurance deduction is reduced by the amount of the credit. K. The credit is not refundable but may reduce Alternative Minimum tax (AMT).
Self-employed owners, > than 2% shareholders of S corporations > 5% owners & family members are not treated as employees.
There is no requirement that small employers provide A) Employee coverage B) Dependents coverage C) Coverage extended to a dependent?s spouse or dependents . For those that do, however, there were important changes to dependency coverage that are tricky. Any plan that offers dependent coverage must now provide coverage for adult children up to the day the dependent turns 26. An employer may voluntarily offer coverage until the end of the plan year in which the dependent turns 26. There are other rules that govern the deduction for health insurance for self-employed people. California did not conform to all the federal changes.
Other Health Care Changes
The penalty for non-qualified distributions from Health Savings Accounts (HSA?s) & Medical Savings Accounts (MSA?s) after 12/31/10 will increase to 20%. For this purpose, qualified expenses for drugs or insulin must be prescribed by a physician.
Effective for years after 12/31/10, employers must include on the employee?s W-2 the value of the employee?s health insurance coverage paid by the employer. At the same time, the IRS also said that it will not be mandatory for 2011. This requirement is for reporting purposes & will not affect taxable income.
Various industries (indoor tanning, medical devices) will be subject to new excise taxes.
Bear in mind through all these changes that, particularly for younger people, it may be simpler & more cost-efficient to purchase an individual policy.
2013 - New Taxes Beginning 2013, individuals will pay an additional .9% Medicare Hospital Insurance (HI) tax on wages & self-employment income on amounts earned above certain thresholds. The employer?s share will not change. The threshold amounts are below.
There will also be an additional HI tax on individuals, estates & trusts of 3.8% on net investment income. For individuals, the tax is 3.8% of the lesser of A) Net investment income or B) The excess of MAGI over a the threshold amount. The thresholds are:
$250,000 Joint Returns $125,000 Married Filing Separate $200,000 All Others
Net investment income generally includes dividends, interest, rents, annuities, royalties & capital gains. There are some restrictions & exceptions. Specifically excluded items include tax-exempt bond interest, veterans benefits, the non-taxable gain from the sale of a principal residence, social security benefits & retirement plan distributions. It is possible to be subject to both taxes.
In 2013, the threshold for deducting medical expenses as an itemized deduction will increase from 7.5% to 10% of AGI. Exception: For 2013 ? 2016, those 65 & older can continue to use the 7.5% threshold.
In 2013, small employers (100 or fewer employees) can create a ?simple cafeteria plan?
2014 In 2014, some taxpayers will be allowed a refundable credit to help subsidize the purchase of health insurance through a state health benefit exchange. To qualify, the taxpayer must A) Have ?household income? at least 100% but not more than 400% of the federal poverty line & B) Not have health insurance under an employer plan. The current poverty line is $10,830 plus $3,740 for each additional family member. The IRS will pay the premium assistance directly to the insurer.
Failure to maintain qualifying health coverage for oneself & one?s dependents will make one subject to a ?shared responsibility penalty?. The penalty will be reported & paid on the individual income tax return. The penalty is the greater of: YEAR 2014 $95 or 1% of income in excess of the filing threshold 2015 $325 or 2% of income in excess of the filing threshold 2016 $695 or 2.5% of income in excess of the filing threshold 2017 & later, amounts will be indexed for inflation.
Large employers will be liable for not offering affordable basic health insurance coverage. Large is generally defined as having 50 or more full-time employees. The penalty can be assed for either not offering coverage or offering coverage that is ?inadequate? for at least one employee. This means at least one employee is enrolled in an insurance exchange & receives a premium assistance tax credit.
There will be extensive health insurance reporting to employees & the IRS.
2018 ? ?Cadillac Tax? Beginning 2018, there will be a 40% excise tax on the amount by which the employee?s health coverage premiums exceed certain thresholds. The starting amounts are $10,200 for single & $27,500 for family coverage.
Some of the new healthcare laws have been challenged (some successfully) in various states courts. Many of these provisions will likely be decided by the US Supreme Court.
COBRA. Not related to the 2010 bills, workers who were involuntarily terminated between 9/1/08 ? 5/31/10 are allowed to maintain health insurance coverage by paying 35% of the premium for a maximum of 15 months. Anyone paying full COBRA after 2/17/09 should contact the plan administrator about getting a refund or credit. The subsidy is not taxable. Go to www.irs.gov/newsroom/article/0,,id=204708,00.html.
BUSINESS Payroll Payroll Tax Holiday (2010). For qualified employees, employers are relieved from paying their share of social security tax (6.2%) on wages paid after 3/18/10. Generally, qualified employees are those hired after 2/3/10 & before 1/1/11 who certify (on form W-11) that they were employed for no more than 40 hours in the 60-day period ending on the date that employment begins. Restrictions: Generally the employee can?t be hired to replace another employee unless the employee quit or was terminated for cause. Also, the employee can?t be related to the employer (spouse?s are excepted). The 6/30/10 filing was the first that allowed the tax reduction. For benefits missed returns may be amended.
Credit for Retained Workers (2011). Workers qualifying for the payroll tax holiday may also qualify for an employer credit of up to $1,000 if they remain employees for at least 52 weeks. The employees wages for the last 26 weeks must equal or exceed 80% of those for the first 26 weeks.
Social Security Tax Cut (2011). For 2011, the employee social security tax rate will be reduced from 6.2% to 4.2%. The employer ?match? will remain at 6.2%. (SE) Self-employment tax will also be reduced 2%. The 50% SE deduction will stay at 7.65%.
Other Business 100% Bonus Depreciation ? HUGE!. For qualifying fixed assets placed in service after 9/8/10 & before 1/1/12, 100% of the cost may be expensed. For qualifying assets bought between 1/1/10 ? 9/8/10, 50% of the cost may be expensed. Qualifying means the property A) Is original-use (new) B) Has a tax life of 20 years or less C) Is tangible D) Must be used inside the U.S. ?Listed property? (such as autos) are excluded. Unlike §179 property, the deduction is not limited by business income or the amount of property purchased or subject to recapture.
Asset Expensing (§179). For tax years 2010 & 2011 qualifying asset purchases, up to $500,000 can be deducted in the year of acquisition (double the 2009 amount). This benefit starts to phase-out when asset purchases exceed $2 million (its gone after $2.5 million). Unlike bonus depreciation, used property qualifies.
15-year depreciation for qualified real property was extended through 2011. Qualified real property includes qualified A) Leasehold improvements B) Restaurant property & C) Retail improvement property. It is also eligible for §179 expensing up to $250,000.
Business vehicle depreciation is more restrictive. An $8,000 increase in first-year depreciation of qualified autos & light trucks was extended through 2010.Therefore, the maximum first-year depreciation for a vehicle that is used 100% for business is $11,060. Vehicles with a gross vehicle weight (GVW) of 6,000 lbs. or more are still allowed up to a $25,000 write-off. Vehicle GVW is on www.intellichoice.com.
Start-up businesses can deduct (instead of amortize over 15 years) up to $5,000 of organization costs. For start-up expenses, the maximum expense was increased for 2010 from $5,000 to $10,000. For 2011 it?s scheduled to return to $5,000.
Premiums paid for health insurance by self-employed individuals have been deductible for income tax purposes since 1987. For 2010 only, the premiums will also be deductible for self-employment (social security) tax purposes also.
Small Business Stock Exclusion ? future benefit. For qualified small business stock acquired after 2/17/09 & before 1/1/11, 75% of the gain on the sale is excluded from income. For purchase between 9/28/10 ? 1/1/11 the exclusion is 100%. For acquisitions pre 2/18/09 the exclusion is 50%.
Draconian 1099 Reporting Changes. Beginning in 2012 (for 2011 business year) the Health Care Act requires issuance of 1099s in 3 new situations (if the aggregate > $600): A) To corporations. B) For goods & tangible property C) Of gross proceeds.
This includes utilities, restaurants, gas stations, inventory, etc. Credit & debit card & other 3rd party network transaction payments are exempt. Non-compliance rules are becoming more strict & penalties for late or not filing are increasing effective 1/1/11.
Penalty increases. Effective 1/1/11, late filing penalties for information returns are as follows: < 30 days late - $30; > 30 days late but before August 1 $60; after August 1 $100. Intentional failure to file is $250. The amounts are per form, i.e., per 1099.
Health insurance premiums paid by an S corporation for its shareholder(s) should be included on the shareholder?s W-2.
Cell phones are no longer classified as ?listed property?, i.e., they are no longer subject to ?heightened substantiation requirements?. That means there will not be a requirement that every call have proof that it had a business purpose.
As of 1/1/10, S corporations & partnerships that file late will be penalized $195 per shareholder or partner per month.
Health Insurance & medical expense deduction ? Sec. 105 medical reimbursement plan & sec. 106, health insurance premium plans allow sole proprietors to hire a spouse & deduct health insurance premiums, medical reimbursements, etc.
ESTATE & GIFT TAX
The 2009 exclusion (the amount shielded from estate tax) was $3.5 million. For estates of individuals who died in 2010, the estate & generation-skipping transfer tax (GST), as well as the global step-up (or step-down) in asset bases upon death, disappeared. It was replaced with the following, ?modified basis? changes: 1) A $1.3 million overall step-up in basis. 2) $3 million step-up to a surviving spouse. 3) Other basis additions equal to the decedent?s capital loss carryovers, NOL?s, etc.
The 2010 Tax Relief Act enacted the following: A) Utilize the above rules or B) Return to the pre 2010 rules with the following changes: 1. The estate tax & the generation skipping tax (GST) exclusion amount jumps from $3.5 million to $5 million through 2012. 2. The top tax rate drops from 45% to 35%.
For deaths in 2011, the estate of the surviving spouse may qualify to use the unused exclusion amount of the predeceased spouse. The exclusion is the sum of: A) The basic exclusion (currently $5 million & B) The unused exclusion of the predeceased spouse. For FAQ?s, go to www.irs.gov/businesses/small/article/0,,id=224519,00.html.
Gift Taxes. The 2010 Tax Relief Act increased the lifetime gifting exclusion amount from $1 million to $5 million for 2010 ? 2012. That?s the amount that can be gifted over a lifetime without incurring a gift tax liability. The maximum tax rate is 35%. The 2010 & 2011 annual gift tax exclusion is $13,000. That?s the amount that can be gifted year to any individual without affecting the $5 million lifetime exclusion.
MISCELLANEOUS
The 2009 exclusion from income of up to $2,400 of unemployment benefits is gone.
Effective 2010, any individual who, during the tax year, holds an interest in a ?specified foreign financial asset? must attach to his tax return the ?Required Information? if the aggregate value of all the individual?s foreign assets exceeds $50,000. This is in addition to previously existing law that U.S. persons report annually account information if the aggregate value of all foreign financial accounts exceeds $10,000.
A U.S. individual living abroad can exclude up to $91,500 of foreign earned income if he/she satisfies certain requirements
As of 12/31/10, there was no licensing or education requirements for preparers of federal tax returns. Effective 1/1/11, there are 2 new requirements: A) All federal tax return preparers must be registered with the IRS & obtain a Preparer Tax ID Number (PTIN) & B) They will be subject to a competency exam & continuing education requirements. This covers preparers of payroll tax & other federal forms.
Also effective 1/1/11, tax preparers that file more than federal 100 tax returns are required to electronically file them. California has had a requirement for about 8 years.
Credit card payment. The IRS accepts payments for most types of taxes by credit card, including payroll taxes. This includes American Express, Discover, MasterCard & VISA. The firms that facilitate the activity charge a 2.5% ?convenience fee?. They are A. Official Payments Corporation, 800-272-9829; www.officialpayments.com. B. Link2Gov Corporation 888-729-1040; www.pay1040.com Information is on the IRS website, www.IRS.gov , then credit card options page.
The Basic FDIC insurance amount is now permanently $250,000 per account.
Not frequently enforced, there is a late-filing individual income tax penalty of $135.
CALIFORNIA ? INDIVIDUAL
California tax law is more similar than dissimilar to federal law. There are many differences, some of which will be highlighted, including:
1. California Registered Domestic partners must file as married. 2. US Social security & unemployment benefits are not taxable by CA. Foreign social security is taxable. 3. CA does not have an exclusion for foreign earned income. 4. CA doesn?t have bonus depreciation & the §179 expense is far less generous. 5. CA doesn?t currently allow loss carry-backs. 6. CA doesn?t recognize Health Savings Accounts. 7. CA doesn?t have different tax rates for various kinds of income, i.e., no capital gain no qualified dividend rates, no self-employment tax, etc.
The .25% individual income tax rate increase from 2009 is scheduled to sunset 1/1/11 ? (scheduled being the operative word). Governor Brown has announced that he will push to keep it active. Also, the dependent exemption is scheduled to increase from $99 to $297.
For home sales after 12/31/09, California conforms to the federal provision that allows a surviving spouse a $500,000 exclusion of gain on the sale up to 2 years from the date of death of the decedent spouse.
All 2010 state estimated tax payments are still on a fast track & due as follows:. 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. 2010 30% 40% 0% 30%
California has implemented the following income tax withholding rules:
Backup Withholding: Effective 1/1/10, individuals subject to federal backup withholding (28%), are also subject to California backup withholding of 7%. Real Estate: For applicable sales, sellers must withhold 3 1/3% of the sales price or 9.55% of the estimated gain. For property sold by an S corporation, the rate is 11.05%. Out-of-state Income Payments: Payments to non-resident payees for income from California sources (i.e., partners, shareholders, etc.) are also subject to 7% withholding.
California offered a credit for the purchase of a new, principal residence between 3/1/09 ? 2/28/10. The credit is the lesser of 5% of the purchase price or $10,000. It has expired.
California has a $5,000 rebate for plug-in car purchases. Funding is limited; only about 1,200 will qualify. Later applicants will go on a waiting list in the event there is future funding. The 2011 Nissan leaf qualifies but the Chevy Volt does not. Other lesser-known models qualify & certain commercial vehicles may be eligible for rebates up to $20,000.
California issued IOU?s may be used as currency for all state agencies .
California has conformed to the federal late-filing penalty of $135.
California has a cancellation of debt forgiveness program.
Getting information. The Franchise Tax Board (FTB) website, www.ftb.ca.gov/, has a ?MyFTB? section that allows taxpayers to check information about their current year returns, including refund status, setting up installment agreements, estimates paid, etc.
The FTB has also implemented a variety of methods for making payments, including credit cards, pay by phone, E-pay, Web pay & On-line banking. The latter 3 allow for scheduling payments in advance. Only the credit card option has a fee.
Effective 2011, the FTB will begin assessing penalties on certain individuals that fail to make payments electronically. Electronic payment is mandatory if the taxpayer has made a single FTB payment > $20,000, or filed a CA tax return with a tax liability > $80,000 for a tax year on or after 1/1/09. It may be possible to opt out of the e-pay requirements. Access FTB WebPay at www.ftb.ca.gov/online/webpay.
Dependent Adult Protection. A state law was enacted to help protect dependent adults from dishonest custodians. It creates a presumption that a gift > $5,000 to a care custodian is the result of fraud or undue influence. It requires that an independent attorney certify that the gift is not the result of fraud or undue influence.
CALIFORNIA BUSINESS
In 2009, the Board of Equalization (BOE) began requiring that all ?qualified purchasers? (QP) register & report purchases subject to use tax. Use tax is California?s way of getting tax from sales that are not subject to sales tax, i.e., out-of-state purchases. QP?s are businesses with at least $100,000 in gross receipts that are not required to hold a seller?s permit. This includes rental income, farms, not-for-profits, etc. The BOE requires that an annual use tax return be filed electronically & any applicable tax be paid, by April 15 even if the business has a different fiscal year. A 1-year waiver for electronic filing may be obtained but a paper return would still be due. A return is due even if no tax is due. Form BOE 404-A must be completed to register. IMPORTANT! Even if you file for an income tax extension, the BOE use tax return & payment is still due April 15. If you want assistance filing the BOE return please contact our office before the deadline. Returns can be efiled at www.boe.ca.gov/elecsrv/efiling/sutd.htm.
The 2009 1% increase in sales & use tax is set to expire 7/1/11, dropping the statewide rate from 8.25% to 7.25%.
There are significant changes to California Net operating Losses (NOL?s). Carry-forwards from prior years are suspended in 2010 & 2011for : A) Individuals, estates & trusts with federal MAGI of $300,000 or more B) Corporations with pre-apportioned net income of $300,000 or more. C) NOL?s incurred after 12/31/07 have a 20-year carry-forward period. D) Suspended NOL?s will be allowed to tack-on the suspended years. A) Beginning in 2013, California is scheduled to start allowing NOL carry-backs. A year ago the carry back period was to begin in 2011.
California Limited Liability Companies (LLC?s) are subject to an annual tax of $800. If the gross receipts exceed $250,000, they are also subject to an annual fee, ranging from $900 to $11,790, depending on gross receipts. Beginning in 2009, the annual fee, for a calendar year LLC, is due June 15 of the current year.
Licensed contractors will be permitted to form LLC?s (previously disallowed). It appears that the effective date will be 1/1/12. The contractor-LLC must maintain a $1 million insurance policy or place on deposit or escrow $1 million, plus an additional $100k per licensee in excess of 5 employed. Each licensed member of the LLC will be liable for up to $1 million in damages occurring.
Effective 9/30/10 through 1/1/16, California will allow engineers & land surveyors to operate as limited liability partnerships (similar to LLC?s).
Businesses are required to withhold 7% of payments to domestic non-residents partners, shareholders, members, etc. if the amount paid is expected to exceed $1,500.
Jobs Credit. A carryover from 2009, it provides up to a $3,000 credit for each net increase in qualified full-time employees hired by a small business (20 or fewer employees). The credit is available for each full-time equivalent increase in employees over the previous (2009) year. It is not refundable but may be carried over 8 years. Of the $400 million allocated, only $37 million has been used. See form 3527.
Starting the 1st quarter of 2011, form DE6, Quarterly Wage & withholding Report, will be replaced with form DE9. DE7, the Annual Payroll Reconciliation, will also disappear.
Small Non-Profit Reporting. Beginning 2011, California will require that small (< $25k gross receipts) tax-exempt organizations (other than churches) file an annual notice.
There is a penalty of $18 per partner or shareholder per month, up to a maximum of 12 months, for filing partnership & corporate tax returns late.
File 1099?s! The FTB has disallowed deductions for payments to individuals that either should have been treated as employees (tax withheld) or no 1099 was sent.
The FTB is taking the position, supported by cases, that a foreign (out-of-state) LLC that has a managing member in California is doing business in California, even if the activity occurs in another state. This means that the out-of-state LLC is subject to the $800 annual tax, possibly the gross receipts fee & possibly filing an LLC return for California.
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