Tuesday, February 8, 2011

Obama Budget Proposes Broader Unemployment Taxes


WASHINGTON—President Barack Obama's budget proposal is expected to give states a way to collect more payroll taxes from businesses, in an effort to replenish the unemployment-insurance program. The plan could cause controversy at a time when the administration is seeking to mend fences with corporate America.

The proposal would aim to restock strained state unemployment-insurance trust funds by raising the amount of wages on which companies must pay unemployment taxes to $15,000, more than double the $7,000 in place since 1983.

The plan, which would take effect in 2014, could increase payroll taxes by as much as $100 billion over a decade, according to a person involved in its construction.

By proposing to enlarge the pool of wages subject to unemployment taxes, the White House appears to be offering states a more politically palatable way to raise revenues than to boost tax rates. States could keep the tax rates they have, or even lower them somewhat, and still raise considerably more revenue than they are raising now.

The unemployment insurance program is a joint federal-state program. The federal unemployment insurance tax rate of 6.2% on the new, larger base would be reduced, so that the U.S. would be taking in no more revenue than it does under the current system, a person familiar with the plan said.

To avoid hitting businesses with a tax increase during the economic recovery, the proposal would delay the new rules until 2014. The plan is expected to be included in Mr. Obama's budget proposal for fiscal 2012, to be released Monday.

Any proposal would need congressional approval.

State governments have had to borrow heavily from the federal government to cover the jobless benefits they provide. States are responsible for the first 26 weeks of benefits, and many have seen their reserve funds wiped out.

More than 40 states raised their unemployment-insurance payroll taxes last year to boost revenues.

The proposal comes as the White House is trying to improve relations with business groups while also pushing them for financial help to shore up the unemployment insurance system, drained by prolonged high joblessness.

Republican aides on Capitol Hill reacted warily. Increasing levies on businesses in the next few years could hit a wall of opposition among Republicans, said one senior G.O.P. tax aide in the Senate. Mr. Obama delivered a speech on Monday to the U.S. Chamber of Commerce, trying to repair frayed relations with business and offering areas of possible cooperation.

Mr. Obama has promised business an effort to simplify the corporate tax code while lowering the corporate tax rate. Pushing for higher unemployment taxes could reignite tensions.
—Sara Murray contributed to this article.

Friday, February 4, 2011

Stock Sale Tax Rules Force Make-or-Break Choices


The new cost basis reporting rules won’t affect this year’s returns, but they are already in effect.

Beginning on Jan. 1, 2011, it became mandatory for brokers and other financial intermediaries to report cost basis information on Form 1099-B to investors and to the Internal Revenue Service for equities acquired on or after that date. The new requirements, spelled out in the Emergency Economic Stabilization Act of 2008, also will cover mutual funds acquired on or after Jan. 1, 2012, and debt securities, options and private placements acquired after Jan. 1, 2013.

The rules take aim at the practice of deciding after the fact what stock was sold where an investor holds different lots of the same stock, each with a different cost basis. For example, an investor holds three lots, with a cost basis of $40 for the first lot, $60 for the second lot, and $100 for the third lot. If shares are sold for $90, the investor might decide at a later date which ones were sold—those with a high cost basis, creating a loss, those with a medium cost basis, creating a small gain, or those with a low cost basis, creating a larger gain.

“Starting this year investors have to decide what they’re selling, and communicate this to the broker immediately,” said Stevie Conlon, CPA, Esq., senior director and tax counsel at Wolters Kluwer Financial Services. “You can’t do it later. You have to identify lots that were sold no later than the settlement date of sale. Before this, people would look at the stock they had sold at the end of the year or at the end of every month and determine which were the best lots to have sold.”

“The final regulations are clear that the taxpayer must select the lot that was sold no later than the settlement date, which would be the date of the trade plus three days,” she said. “This is probably what the law was before, but the law and the new regulations make it specific. In the old days it wouldn’t be obvious to the IRS that you changed something later. Now, the broker must issue a Form 1099-B for the stock sold this year that was bought after January 1 of this year.”

“Next February investors will receive a Form 1099-B showing the cost basis under that rule,” she said. “It will show the cost basis that was communicated to the broker by the settlement date, or the broker will be required to use FIFO. If what you put on your tax return doesn’t match, it will be obvious that you picked a different method after the fact. There will be taxpayers that are unsatisfied with both their broker and their tax adviser.”

This is a momentous issue due to the way that taxpayers normally interact with their advisers, Conlon indicated. “It requires getting tax advice on a recurring basis, almost in real time. That’s very different from an adviser’s normal involvement with a client at year-end planning sessions and tax return time,” she said. “Under the new rules, you’re locked in by whatever you select. It forces you to make an analysis about what’s the right lot to sell on an ongoing basis. The adviser has to be involved at the time of the trade, and that’s significant.”

Conlon advised tax preparers to explain the new rules to their clients during tax season, if they haven’t already. “The sooner you can educate your clients about the new rules, the better it will be at the end of the year,” she said.

Thursday, February 3, 2011

Senate Passes 1099 Repeal Amendment

The Senate approved an amendment Wednesday to repeal the expanded 1099 information reporting requirements in the health care reform law. For more information, read http://www.accountingtoday.com/news/Senate-Passes-1099-Repeal-Amendment-57177-1.html