Economists: Reform the tax code

http://money.cnn.com/2010/12/22/news/economy/economist_survey_tax_reform/index.htm
By Chris Isidore, senior writer December 22, 2010: 11:28 AM ET

NEW YORK (CNNMoney.com) -- April 15 could be a lot easier for most American taxpayers if economists get their way.

Nearly half of economists surveyed by CNNMoney.com think overhauling the current system would be the best tax policy going forward. Reform would mean lower tax rates but an end to many of the deductions and special treatment enjoyed by certain taxpayers.

"Significantly lower ... tax rates in exchange for reducing tax [deductions and breaks] makes the most sense in terms of increasing growth," said David Berson, chief economist of the PMI Group.

Nearly a quarter of the economists would pick an even more radical change to the tax system -- imposing a so-called value added tax, or VAT, a form of national sales tax common in many other advanced economies.

See more survey results
The tax debate that has dominated in Congress for the last few months -- whether to extend the Bush-era tax cuts, or let rates rise to pre-2000 levels on some or all taxpayers -- had relatively little support among the economists, with only a handful picking those choices as the most effective long-term tax strategy.

Several of the economists favor implementing both tax reform and a VAT.

"Actually, we need a combination," wrote David Wyss, chief economist with Standard & Poor's. "The fiscal outlook is disastrous, and unless draconian cuts in Medicare and Social Security are made, taxes will have to rise."

The idea of reforming the tax code has been gaining greater support in Washington, with both President Obama and Federal Reserve Chairman Ben Bernanke voicing support for tax reform, and several blue ribbon groups looking at the issue of deficit reduction say tax reform should be part of the solution.

There is less agreement among economists as to exactly what tax reform would entail and which tax breaks should be exempted, if any.

While Wyss and some others think tax reform and a VAT should be used to increase tax collections and reduce the federal deficit, George Mokzran, senior economist with Huntington Funds, said he thinks it's important that tax reform be revenue neutral, meaning it doesn't raise the tax burden on taxpayers overall.

Mokzran would like to see a flat tax on all sources of income with no exemptions.

Other economists believe tax reform should keep at least some form of the mortgage interest deduction in place in order to prevent rattling the still-fragile housing market.

Congress Sends Tax Cut Extension Bill to President

Late on Thursday, after some procedural delays, the House of Representatives agreed to the Senate's version of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, HR 4853, and by a vote of 277 to 148 sent it to President Barack Obama for his signature. The bill is the result of a deal negotiated by the White House and members of Congress, and the president is expected to sign it today.

EGTRRA Tax Cuts Extended for Two Years
Under current law, the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA, P.L. 107-16), other than those made permanent or extended by subsequent legislation, sunset and won't apply to tax or limitation years beginning after 2010. (Sec. 901 of EGTRRA)

The 2010 Tax Relief Act postpones the Sec. 901 EGTRRA sunset rule for two years. That is, under the 2010 Tax Relief Act, the income tax provisions of EGTRRA, other than those made permanent or extended by subsequent legislation, will sunset and will not apply to tax or limitation years beginning after 2012 (instead of 2010). Thus, all of the following favorable tax rules (among others) will remain in place through 2012.

Tax rates. The income tax rates for individuals will stay at 10%, 15%, 25%, 28%, 33% and 35% (instead of moving to 15%, 28%, 31%, 36% and 39.6%). Additionally, the size of the 15% tax bracket for joint filers and qualified surviving spouses will remain at 200% (instead of dropping to 167%) of the 15% tax bracket for individual filers.

According to the Joint Committee on Taxation Explanation of the 2010 Tax Relief Act, the tax rate schedules for 2011, as adjusted for inflation, will be as follows:

FOR MARRIED INDIVIDUALS FILING JOINT RETURNS AND SURVIVING SPOUSES, THE 2011 RATE BRACKETS WILL BE:

If taxable income is: -- The tax will be:

Not over $17,000 -- 10% of taxable income
Over $17,000 but not over $69,000 -- $1,700.00 plus 15% of the excess over $17,000
Over $69,000 but not over $139,350 -- $9,500.00 plus 25% of the excess over $69,000
Over $139,350 but not over $212,300 -- $27,087.50 plus 28% of the excess over $139,350
Over $212,300 but not over $379,150 -- $47,513.50 plus 33% of the excess over $212,300
Over $379,150 -- $102,574.00 plus 35% of the excess over $379,150

FOR SINGLE INDIVIDUALS (OTHER THAN HEADS OF HOUSEHOLDS AND SURVIVING SPOUSES), THE 2011 RATE BRACKETS WILL BE:

If taxable income is: -- The tax will be:

Not over $8,500 -- 10% of taxable income
Over $8,500 but not over $34,500 -- $850.00 plus 15% of the excess over $8,500
Over $34,500 but not over $83,600 -- $4,750.00 plus 25% of the excess over $34,500
Over $83,600 but not over $174,400 -- $17,025.00 plus 28% of the excess over $83,600
Over $174,400 but not over $379,150 -- $42,449.00 plus 33% of the excess over $174,400
Over $379,150 -- $110,016.50 plus 35% of the excess over $379,150

FOR HEADS OF HOUSEHOLDS, THE 2011 RATE BRACKETS WILL BE:

If taxable income is: -- The tax will be:

Not over $12,150 -- 10% of taxable income
Over $12,150 but not over $46,250 -- $1,215.00 plus 15% of the excess over $12,150
Over $46,250 but not over $119,400 -- $6,330.00 plus 25% of the excess over $46,250
Over $119,400 but not over $193,350 -- $24,617.50 plus 28% of the excess over $119,400
Over $193,350 but not over $379,150 -- $45,323.50 plus 33% of the excess over $193,350
Over $379,150 -- $106,637.50 plus 35% of the excess over $379,150

FOR MARRIEDS FILING SEPARATE RETURNS, THE 2011 RATE BRACKETS WILL BE:

If taxable income is: -- The tax will be:

Not over $8,500 -- 10% of taxable income
Over $8,500 but not over $34,500 -- $850.50 plus 15% of the excess over $8,500
Over $34,500 but not over $69,675 -- $4,750.00 plus 25% of the excess over $34,500
Over $69,675 but not over $106,150 -- $13,543.75 plus 28% of the excess over $69,675
Over $106,150 but not over $189,575 -- $23,756.75 plus 33% of the excess over $106,150
Over $189,575 -- $51,287.00 plus 35% of the excess over $189,575

Standard deduction for marrieds. EGTRRA increased the basic standard deduction for a married couple filing a joint return to twice the basic standard deduction for an unmarried individual filing a single return.

If the EGTRRA sunset kicked in, the standard deduction for married taxpayers filing jointly (and qualified surviving spouses) would drop to 167% of the standard deduction for single taxpayers, and the standard deduction for married taxpayers filing separately would continue to be one-half of the standard deduction for joint filers.

Under the Senate passed 2010 Tax Reform Act, the standard deduction for married taxpayers filing jointly (and qualified surviving spouses) remains at 200% (rather than 167%) of the standard deduction for single taxpayers for 2011. (The standard deduction for marrieds filing separately is half of the joint filer amount.)

The standard deduction will be $11,600 (up from $11,400 for 2010); for marrieds filing separately, it will be $5,800 (up from $5,700 for 2010).

Pease and PEP limitations won't apply. For 2011 and 2012:

• Itemized deductions of higher-income taxpayers will not be reduced (under the EGTRRA sunset rule for the "Pease limitation," after 2010 they would have been reduced by 3% of AGI above an inflation-adjusted figure, but the reduction couldn't exceed 80%).
• A higher-income taxpayer's personal exemptions will not be phased out when AGI exceeds an inflation-adjusted threshold (under the EGTRRA sunset rule for the "Pease limitation," after 2010 they would have been phased out).

For Current law's rules for the following tax provisions also will remain in place through 2012:

• 2011 the personal exemption amount will be $3,700 (up from $3,650 for 2010).
• Coverdell Education Saving Accounts (CESAs), formerly called education IRAs;
• exclusion for employer-provided educational assistance under Code Sec. 127 ;
• exemption from the payments-for-services rule for amounts received under certain Government health professions scholarship programs;
• above-the-line student loan interest deduction; credit for employer-provided child care facilities;
• adoption credit and adoption assistance programs exclusion, arbitrage rebate for school construction bonds, tax-exempt private activity bonds for qualified education facilities, American opportunity tax credit, extended earned income tax credit (EITC);
• tax relief for Alaska native settlement funds; credit for household and dependent care; and
• child tax credit.

JGTRRA Rules for Capital Gains and Qualified Dividends Extended for Two Years
The Senate passed 2010 Tax Reform Act defers for two years the sunset rule of Sec. 303 of the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA, PL 108-27). Thus, through Dec. 31, 2012, long-term capital gain (with the exception of 28% rate gain and unrecaptured section 1250 gain) will continue to be taxed at a maximum rate of 15%. If the JGTRRA sunset rule went into effect, long-term capital gain would face a tax of 20% (18% for assets held more than five years)). And before 2013, qualified dividends paid to individuals will be taxed at the same rates as long-term capital gains (instead of being taxed under the JGTRRA sunset rule at the same rates that apply to ordinary income).

Alternative Minimum Tax (AMT) "Patched" for Two Years
Under the Senate passed 2010 Tax Reform Act, the AMT exemption amounts for 2010 will be as follows:

• Married individuals filing jointly and surviving spouses: $72,450, less 25% of AMTI exceeding $150,000 (zero exemption when AMTI is $439,800);
• Unmarried individuals: $47,450, less 25% of AMTI exceeding $112,500 (zero exemption when AMTI is $302,300) (different amount applies for a child subject to the kiddie tax); and
• Married individuals filing separately: $36,225, less 25% of AMTI exceeding $75,000 (zero exemption when AMTI is $219,900). But AMTI is increased by the lesser of $36,225 or 25% of the excess of AMTI (without the exemption reduction) over $219,900.

Under the Senate passed 2010 Tax Reform Act, the AMT exemption amounts for 2011 will be as follows:

• Married individuals filing jointly and surviving spouses: $74,450, less 25% of AMTI exceeding $150,000 (zero exemption when AMTI is $447,800);
• Unmarried individuals: $48,450, less 25% of AMTI exceeding $112,500 (zero exemption when AMTI is $306,300) (different amount applies for a child subject to the kiddie tax); and
• Married individuals filing separately: $37,225, less 25% of AMTI exceeding $75,000 (zero exemption when AMTI is $223,900). But AMTI is increased by the lesser of $37,225 or 25% of the excess of AMTI (without the exemption reduction) over $223,900.

Without the "patch" in the Senate passed 2010 Tax Reform Act, post-2009 AMT exemption amounts would have plummeted to their pre-EGTRRA levels. For 2010, they would have been $45,000 for married individuals filing jointly and surviving spouses, $33,750 for unmarried individuals; and $22,500 for married individuals filing separately.

Also for 2010 and 2011, many nonrefundable personal credits will be allowed against the AMT (without the "patch," they couldn't offset AMT).

Estate Tax Relief
EGTRRA phased out the estate and generation-skipping transfer taxes so that they were fully repealed in 2010, lowered the gift tax rate to 35% and increased the gift tax exemption to $1 million for 2010. Under the EGTRRA sunset rule, the estate tax was set to return in 2011, with the top estate and gift tax rate reverting to 55%. For 2010, under EGTRRRA, the basis rules for inherited property were to be similar to the gift tax rules but with many opportunities for heirs to get increases in basis. Under the EGTRRA sunset rule, the pre-EGTRRA step-up in basis rules were to return for 2011.

The Senate passed 2010 Tax Relief Act:

• Lowers estate and GST taxes for 2011 and 2012 by increasing the exemption amount (technically, the applicable exclusion amount) from $1 million to $5 million (as indexed and rounded to the nearest multiple of $10,000 after 2011) and reducing the top rate from 55% to 35%.
• Allows estates of decedents dying in 2010 to choose between (1) estate tax (based on a $5 million exemption and 35% top rate) and a step-up in basis or (2) no estate tax and modified carryover basis. In technical terms, the Act achieves this choice by making the estate tax and basis changes effective retroactively for estates of decedents dying after 2009 but allowing the opt-out choice for estates of decedents dying in 2010.
• For gifts made after Dec. 31, 2010, reunifies the gift tax with the estate tax, with an applicable exclusion amount of $5 million and a top estate and gift tax rate of 35%.
• Provides that the GST tax exemption for decedents dying or gifts made after Dec. 31, 2009, is equal to the applicable exclusion amount for estate tax purposes (e.g., $5 million for 2010). Therefore, up to $5 million in GST tax exemption may be allocated to a trust created or funded during 2010. Although the GST tax is applicable in 2010, the GST tax rate for transfers made during 2010 is 0%. The GST tax rate for transfers made in 2011 and 2012 will be 35%.
• For a decedent dying after Dec. 31, 2009, and before the enactment date, provides that the due date for filing an estate tax return, making any payment of estate tax, and disclaiming an interest in property passing by reason of death is not to be earlier than the date that's nine months after the enactment date.
• Effective for estates of decedents dying after Dec. 31, 2010, allows the executor of a deceased spouse's estate to transfer any unused exemption to the surviving spouse.

Incentives for Businesses to Invest in Machinery and Equipment
The Senate passed 2010 Tax Relief Act OKs the following major new incentives for businesses to invest in machinery and equipment:

1. A 100% writeoff in the placed-in-service year of the cost of property eligible for bonus depreciation under Code Sec. 168(k) . This will apply for property acquired and placed in service after Sept. 8, 2010, and before Jan. 1, 2012;
2. A 50% bonus first-year depreciation allowance under Code Sec. 168(k) for property placed in service after Dec. 31, 2011, and before Jan. 1, 2013;
3. Extension through Dec. 31, 2012, of the election to accelerate the AMT credit instead of claiming additional first-year depreciation; and
4. For tax years beginning after Dec. 31, 2011, setting the maximum expensing amount under Code Sec. 179 at $125,000 and the investment-based phaseout amount at $500,000 (under current law, the expensing figures drop from $500,000/$2 million for 2010 and 2011 to$25,000/$200,000 after 2011). Also, off-the-shelf computer software will qualify for the Code Sec. 179 expensing election if placed in service in a tax year beginning before 2013.

Temporary Employee/Self-Employed Payroll Tax Cut for 2011
Under current law, employees pay a 6.2% Social Security tax on all wages earned up to $106,800 (in 2011) and self-employed individuals pay 12.4% Social Security self-employment taxes on all their self-employment income up to the same threshold. For 2011, the Senate passed 2010 Tax Reform Act gives a two-percentage-point payroll/self-employment tax holiday for employees and self-employeds. As a result, employees will pay only 4.2% Social Security tax on wages and self-employment individuals will pay only 10.4% Social Security self-employment taxes on self-employment income up to the threshold.

The maximum savings for 2011 will be $2,136 (2% of $106,800).

Host of Expired Business Tax Breaks Retroactively Reinstated and Extended Through 2011

The following business tax breaks that expired at the end of 2009 will be retroactively reinstated and extended through 2011:

• research credit;
• Indian employment tax credit;
• new markets tax credit;
• railroad track maintenance credit;
• mine rescue team training credit;
• employer wage credit for activated reservists;
• 15-year writeoff for qualifying leasehold improvements, restaurant buildings and improvements, and retail improvements;
• 7-year writeoff for motorsports entertainment facilities;
• accelerated depreciation for business property on an Indian reservation; enhanced charitable deductions for contributions of food inventory, for contributions of book inventories to public schools and for corporate contributions of computer equipment for educational purposes;
• election to expense mine safety equipment;
• special expensing rules for certain film and television products;
• expensing of environmental remediation costs;
• allowance of the Code Sec. 199 domestic production activities deduction for activities in Puerto Rico;
  
• modification of tax treatment of certain payments to controlling exempt organizations;
• treatment of certain dividends of regulated investment companies (RICs);
• RIC qualified investment entity treatment under FIRPTA;
• exceptions for active financing income;
• look-thru treatment of payments between related controlled foreign corporations under foreign personal holding company rules;
• basis adjustment to stock of S corporations making charitable contributions of property;
• empowerment zone tax incentives;
• tax incentives for investment in the District of Columbia;
• temporary increase in limit on cover over of rum excise taxes to Puerto Rico and the Virgin Islands; and
• American Samoa economic development credit.

Other Business Tax Breaks Extended Through 2011
The following business tax breaks are extended through 2011:

• the work opportunity tax credit; and
• qualified zone academy bonds.

Long List of Tax Breaks for Individuals Retroactively Reinstated and Extended Through 2011
All of the following tax breaks for individuals that expired at the end of 2009 will be retroactively reinstated and extended through 2011:

• the $250 above-the-line deduction for certain expenses of elementary and secondary school teachers;
• the election to take an itemized deduction for State and local general sales taxes in lieu of the itemized deduction permitted for State and local income taxes;
• increased contribution limits and carryforward period for contributions of appreciated real property (including partial interests in real property) for conservation purposes;
• the above-the-line deduction for qualified tuition and related expenses;
• the provision that permits taxpayers age 70 1/2 or older to make tax-free distributions to charity from an Individual Retirement Account (IRA) of up to $100,000 per taxpayer, per tax year (additionally, individuals will be allowed to treat IRA transfers to charities during January of 2011 and as if made during 2010);
• look-thru of certain RIC stock in determining gross estate of nonresidents; and
• disregard of refunds in the administration of federal or federally assisted benefit programs.

Other Individual Tax Breaks Extended Through 2011
The following tax breaks for individuals that were set to expire at the end of 2010 will be extended through 2011:

• the increase in the monthly exclusion for employer-provided transit and vanpool benefits equal to that of the exclusion for employer-provided parking benefits (i.e., $230 per month);
• treatment of mortgage insurance premiums as deductible qualified residence interest; and
• exclusion of 100% of gain on certain small business stock.

Other Provisions Extended Through 2011
The list of energy-related provisions that will be extended through 2011 are:

• the $1.00 per gallon production tax credit for biodiesel, as well as the small agri-biodiesel producer credit of 10 cents per gallon;
• the $1.00 per gallon production tax credit for diesel fuel created from biomass;
• the placed-in-service deadline for qualifying refined coal facilities;
• the credit for manufacturers of energy-efficient residential homes;
• the $0.50 per gallon alternative fuel tax credit (but the credit will not be extended for any liquid fuel derived from a pulp or paper manufacturing process);
• deferral of gain on qualified electric utilities' sales or dispositions of electric transmission property;
• the suspension on the taxable income limit for purposes of depleting a marginal oil or gas well;
• grants for specified energy property in lieu of tax credits;
• the income tax credit for alcohol used as fuel;
• the reduced credit for ethanol blenders;
• the excise tax credit for alcohol used as fuel;
• the payment for alcohol fuel mixture;
• additional duties on imported ethanol;
• the energy efficient appliance credits (in new amounts and with new requirements);
• the Code Sec. 25C credit for energy-efficient improvements to existing homes, but reinstating the credit as it existed before passage of the American Recovery and Reinvestment Act (standards for property eligible under Code Sec. 25C are updated to reflect improvements in
• energy efficiency));
• the 30% investment tax credit for alternative vehicle refueling property.

The following disaster relief provisions will also be extended through 2011:

• the time for issuing New York Liberty Zone bonds, effective for bonds issued after Dec. 31, 2009;
• the increased rehabilitation credit for qualified expenditures in the Gulf Opportunity Zone (GO Zone);
• the placed-in-service deadline to claim additional low-income housing credits for buildings in GO Zones;
• tax-exempt bond financing; and
• the additional depreciation deduction claimed by businesses equal to 50% of the cost of new property investments made in the GO Zone (expenditures in 2011 will be eligible if the property is placed in service by Dec. 31, 2011).

http://www.journalofaccountancy.com/Web/20103669.htm

The House of Representatives on Thursday by a vote of 277–148 passed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, HR 4853, which would postpone the sunset of the 2001 and 2003 tax cuts, reduce the estate tax, extend a large number of expired provisions, and extend unemployment benefits. The bill now goes to President Barack Obama for his signature, which is expected soon.

The House passed the Senate’s version of the bill without amendment. Prior to the vote on the bill, the House rejected, by a vote of 194–233, a motion that would have stricken the estate tax provisions in the bill and replaced them with an estate tax provision providing for a 45% rate and a $3.5 million exemption.

The bill has provisions covering the estate tax, expiring tax cuts, expired tax provisions and an alternative minimum tax (AMT) patch.

The bill postpones the scheduled sunset of the lower tax rates introduced in 2001 by the Economic Growth and Tax Relief Reconciliation Act (EGTRRA, PL 107-16); those rates will now continue through 2012. The bill also continues the lower capital gains tax rate introduced by the Jobs and Growth Tax Relief Reconciliation Act of 2003 (PL 108-27) through 2012.

The EGTRRA’s repeal of the itemized deduction phaseout and the personal exemption phaseout are extended by the bill for two years.

For 2011 only, the bill reduces the rate for the Social Security portion of payroll taxes to 10.4%, by reducing the employee rate from 6.2% to 4.2% (the employer’s portion remains at 6.2%).

The bill includes an AMT patch for 2010 and 2011. For 2010, the AMT exemption amounts will be $47,450 for unmarried individuals and $72,450 for married individuals filing jointly. For 2011, the amounts will be $48,450 and $74,450, respectively.

The bill extends the 100% bonus depreciation for business property acquired after Sept. 8, 2010, and before Jan. 1, 2012, and placed in service before Jan. 1, 2012 (or before Jan. 1, 2013, in the case of certain property). The bill also sets the expensing limitation under IRC § 179 at $125,000 and the phaseout threshold amount at $500,000 for 2012. The bill then reduces these amounts to $25,000 and $200,000 for tax years beginning after 2012.

The bill temporarily reinstates the estate tax, with an estate tax rate of 35% and an estate tax exemption of $5 million (adjusted for inflation after 2011).

The bill also extends a large number of expired or expiring provisions, including:

• The increased standard deduction for married taxpayers filing jointly, scheduled to expire after 2010, would continue for two years;
• The $1,000 child tax credit amount would continue for two years, instead of reverting to $500;
• The increased starting and ending points for the earned income credit would continue for two years;
• The $3,000 amount for the child and dependent care credit, which is scheduled to revert to $2,400 after 2010, would continue for two years;
• The American opportunity tax credit would continue for two years;
• The temporary 100% exclusion of gain from the sale of certain small business stock under IRC § 1202, enacted by the Small Business Jobs Act of 2010, would be extended through 2011.

For more details of what is in the bill, see “Provisions in the Senate’s Tax Cut Extension Bill.”

Senate passed Obama-GOP tax deal

http://news.yahoo.com/s/ap/20101215/ap_on_bi_ge/us_tax_cuts

WASHINGTON – In a reach across party lines, the Senate overwhelmingly passed sweeping legislation Wednesday to prevent a Jan. 1 income tax increase for millions and to renew jobless benefits for the long-term unemployed.

A House vote is expected by Thursday.

Within moments of the 81-19 Senate vote, President Barack Obama urged the House to follow suit without making any changes — a slap at rebellious liberals working to stiffen the terms of an estate tax provision they characterize as a giveaway to millionaires and billionaires.

"I know there are different aspects of this plan to which members of Congress, on both sides of the aisle, object," Obama said. "That's the nature of compromise. But we worked hard to negotiate an agreement that's a win for middle-class families and a win for our economy. And we can't afford to let it fall victim to either delay or defeat."

At its core, the legislation provides a two-year extension of the tax cuts at all income levels that Congress approved while George W. Bush was president. Without action, they will expire on Dec. 31.

The bill also would cut 2011 Social Security taxes for all wage earners, a reduction that will mean an extra $1,000 in take home pay for an individual earning $50,000.

In addition, the legislation renews a program of jobless benefits for millions who were laid off more than six months ago. Officials said that without the bill, government checks will be cut off for two million Americans over the holidays, and millions more over the next year.

Energy tax provisions, including extension of a government subsidy for ethanol and breaks for producers of other alternatives to oil, were added in recent days to strengthen lawmakers' support for the measure.

The legislation amounted to the first fruits of a new era of divided government, a deal sealed little more than a week ago by Obama, who is nursing a fragile economic recovery midway through his term, and Republicans whose position was greatly strengthened in last month's elections.

Concessions made by the president sparked criticism from liberals who were angered at tax cuts for the wealthy that he had long criticized. Some provisions agreed to by Republican leaders brought objections from conservatives unhappy that the cost of the jobless benefits would swell the federal budget deficit.

And in the hours before final passage, lawmakers on both sides maneuvered for political gain, a sign of renewed struggle in 2011.

A Democratic attempt to ease the paperwork burden imposed by this year's big health care bill was blocked by Republicans. Democrats countered by vetoing a GOP alternative that would have included offsetting spending cuts.

In the end, though, the tax bill drew support from 44 Democrats and 37 Republicans, testament to the appeal of lower taxes and renewal of a program of aid for victims of the recession at a time of 9.8 percent unemployment. Fourteen Democrats and five Republicans voted against the bill.

Obama's call for the House to accept the Senate-passed measure continued a postelection season of contentiousness between the president and Democrats distressed that they lost their majority in November.

Democratic House leaders said they intended to have the bill debated and voted on by Thursday, but declined to say what their approach would be to the estate tax.

Their dilemma was evident — trying to keep faith with members of the rank and file who want to change the legislation, yet avoid at all costs having Democrats saddled with blame if taxes increase on Jan. 1.

That's what the Senate Republican leader, Sen. Mitch McConnell of Kentucky, warned might happen if the bill was changed.

"This agreement is not subject to being reopened," he said on Tuesday. "In other words, we have an understanding."

However, McConnell's insistence didn't extend to a series of Republican attempts to make modifications in the moments before Senate passage.

He and other Republicans sided with a failed attempt by Sen. Jim DeMint, R-S.C. to make the tax cuts permanent, and again when Sen. Tom Coburn, R-Okla., unsuccessfully proposed spending cuts to cover the cost of the unemployment benefits.

In the House, Obama's liberal critics were outspoken.

A closed-door meeting of the rank and file ended inconclusively Tuesday night, and afterward Rep. David Wu, accused the president of showing weakness in the face of an emboldened Republican Party.

"He has no street cred," the Oregon Democrat told reporters. "This tax bill is a thin part of the problem. They're going to get eaten alive by the Republicans in this chamber," he added, referring to White House officials.

By far the most controversial element of the bill concerned the estate tax. Under the measure, individual estates as large as $5 million would pass to heirs tax free — an amount that would reach $10 million for couples — with the balance taxed at a rate of 35 percent.

Under the Bush-era tax cuts, the estate tax was repealed for 2010, but scheduled to return on Jan. 1 with a top rate of 55 percent on the portion of estates above $1 million — $2 million for couples.

Unhappy with the more generous approach that Obama agreed to, House Democrats voted in a closed-door meeting last week they would not permit the legislation to reach the floor without changes.

They have since retreated from their ultimatum, and now hope they can change the measure on the floor to restore the tax to levels in effect in 2009. At the time, individuals could pass $3.5 million to their heirs, tax-free. Couples could pass $7 million, with a little tax planning, and the balance was taxed at a top rate of 45 percent.

For more coverage, click http://www.nytimes.com/2010/12/16/us/politics/16cong.html

Obama-GOP tax bill clears Senate hurdle with ease

http://thecaucus.blogs.nytimes.com/2010/12/13/senate-advances-tax-cut-package/
Shortly after 4:30 p.m., the vote tally was 69 to 10, with eight Democrats, one Republican, Senator John Ensign of Nevada, and one independent, Senator Bernard Sanders, of Vermont, in opposition.

The final tally was 83 to 15. Forty-five Democrats and 37 Republicans supported moving the measure ahead; opposing votes came from nine Democrats, five Republicans and one independent, Bernard Sanders of Vermont.

The tax package is likely to be brought to the floor in the House on Wednesday.

Here is a very good write up on the proposed extension by Ed Zollars, CPA:
http://ascpa.wordpress.com/2010/12/14/tax-relief-unemployment-insurance-reauthorization-and-jobs-creation-act-of-2010-3/

http://news.yahoo.com/s/ap/20101213/ap_on_bi_ge/us_tax_cuts
By DAVID ESPO, AP Special Correspondent David Espo, Ap Special Correspondent – 38 mins ago

WASHINGTON – Far-reaching legislation to avert a Jan. 1 income-tax increase for millions won overwhelming support in a Senate test vote on Monday, backed by an uneasy and unusual alliance between the White House and lawmakers in both parties.

Even before the vote was complete, President Barack Obama said the show of support "proves that both parties can in fact work together to grow our economy and look out for the American people."

Senate passage, expected within a day or two, would set up a final showdown in the House between Obama and liberals in his own party who want the White House to scale back the billions the bill includes in relief ticketed for the rich.

In his remarks, the president gave no indication he was willing to accept further changes to the measure he negotiated with senior Republicans.

"I understand those concerns," he said of the objections from some of his usual allies in Congress. "I share some of them. But that's the nature of compromise, sacrificing something that each of us cares about."

Despite strong criticism from fellow Democrats, Obama has made passage of the bill a key year-end priority, essential for the economy as it struggles to recover from the worst recession in decades.

In the Senate, Majority Leader Harry Reid, D-Nev., and his GOP counterpart, Mitch McConnell of Kentucky, were joint sponsors of the bill, a symbolic gesture of bipartisanship on an issue that produced nothing but gridlock until midterm elections gave Republicans additional leverage in negotiations.

"We're telling the American people to keep money that's rightfully theirs, so they can spend it and invest it as they please," said McConnell.

In a jab at Democrats, he added, "This is an important shift, and the White House should be applauded for agreeing to it."

Sen. Max Baucus, D-Mont., who chairs the Senate Finance Committee, said, "This bipartisan compromise is about creating jobs. Extending middle class tax cuts will help create jobs. ... Job creation needs to be our number one priority."

The bill needed 60 votes to clear a procedural hurdle. It achieved that level quickly in a long roll call, although no final tally was expected for hours.

The bill would provide a two-year reprieve in the tax increases scheduled to take effect on Jan. 1 at all income levels, reduce Social Security taxes for every wage earner in 2011 and extend an expiring program of jobless benefits for the long-term unemployed. The estimated cost, $858 billion over two years, would be added to already-huge federal deficits.

The measure represents a reach across party lines after two years of political combat in which Republicans wanted a permanent extension of all the tax cuts enacted when George W. Bush was president, while Democrats insisted rates be permitted to rise on incomes over $200,000 for individuals and $250,000 for couples.

Despite the bipartisanship in the Senate, disgruntled House Democrats have vowed to block a final vote unless the legislation is changed to scale back the tax relief for the nation's wealthiest.

"I think we're going to have a vote on the Senate bill, with possible changes," House Majority Leader Steny Hoyer, D-Md., said. "We may have it with amendments, we'll see what the process is."

The compromise emerged a week ago after private talks involving the White House and top leaders in Congress, including Republicans who emerged from midterm elections with significantly increased strength.

In the days since, Obama has drawn strong criticism from liberals unhappy that he agreed to changes in the estate tax and income tax that will benefit the rich. Firing back, he said failure to compromise would produce gridlock at a time the economy is still frail and unemployment is at a persistently high rate of 9.8 percent.

The administration's outgoing top economic adviser, Lawrence Summers, said in a speech a few hours before the vote that the agreement should increase consumer spending and help the economy "now and for the next several years."

On the other end of the political spectrum, some conservatives have spoken out against the bill, saying that the renewal of jobless benefits should be offset by spending cuts elsewhere in the budget.

In fact, even supporters of the bill were at pains to point out parts they found objectionable.

Baucus singled out the decision to leave tax rates unchanged on upper income earners.

Sen. John McCain, R-Ariz., highlighted a series of energy tax breaks added to the bill late last week, including an extension of the federal subsidy for ethanol.

McConnell cited "the Democrats' insistence that we borrow the money we need to pay for a further extension of unemployment insurance. In my view, if both parties agree that the debt is a serious problem, we shouldn't be writing checks that we don't have the money to cover."

Many House Democrats objected strongly to a change in the estate tax that Republicans won as part of the deal. The first $5 million of a couple's estate could pass to heirs without taxation, and an additional $5 million could be passed along for the spouse. The balance would be subject to a 35 percent tax rate.

The estate tax was repealed for 2010. But under current law, it is scheduled to return next year with a top rate of 55 percent on the portion above $1 million, $2 million for couples.

Provisions in the Senate's Tax Cut Extension Bill

Congress appears poised to approve tax-cut extension
HR 4853 has been introduced in the Senate and could be voted on as early as today. The bill encompasses the tax-cut deal negotiated by members of Congress and the White House last week. Among its many provisions, HR 4853 would continue the estate tax in its 2009 form, maintain tax rates at their current levels and extend a large number of expired or expiring tax preference items. In its extenders provisions, the bill goes well beyond what had been reported when the deal was negotiated, according to this article.

http://www.journalofaccountancy.com/Web/20103647.htm
Senate Majority Leader Harry Reid, D-Nev., introduced legislation late Thursday that would postpone the sunset of the 2001 and 2003 tax cuts, reduce the estate tax, and extend a number of expired provisions, as well as extending unemployment benefits. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Senate Amendment 4755 to HR 4853, incorporates elements of the deal struck by congressional and Obama administration negotiators on Dec. 6, but also incorporates many provisions that were not reported to be part of that deal.

The bill has provisions from four of the five tax areas that were considered to be important for Congress to address during its current “lame duck” session: the estate tax, expiring tax cuts, expired tax provisions, and an alternative minimum tax (AMT) patch. The bill as introduced does not address the expanded Form 1099 reporting requirements.

In 2001, when Congress enacted the Economic Growth and Tax Relief Reconciliation Act (EGTRRA, PL 107-16), it included a sunset provision, under which most EGTRRA changes would expire after 2010. This was designed to keep the costs of the bill small enough to ensure widespread support in Congress. HR 4853 would amend EGTRRA to postpone that sunset until after 2012.

Reid will reportedly seek to file a cloture motion on the bill on Monday. This would clear the way for a vote on the bill in the Senate. The bill’s prospects in the House of Representatives are unclear because on Dec. 9, House Democrats voted to oppose consideration of any tax bill based on the deal struck on Dec. 6.

Extension of EGTRRA Tax Cuts
The EGTRRA introduced a new 10% tax bracket for individuals and reduced the tax brackets above the 15% bracket to 25%, 28%, 33% and 35%. Those changes were scheduled to sunset after 2010, so that in 2011 the 10% rate would disappear (with income in that bracket reverting to the 15% bracket) and the other rates would revert to 28%, 31%, 36% and 39.6%, respectively. With the bill’s postponement of the EGTRRA sunset, those rates would continue through 2012.

The EGTRRA also lowered the capital gains tax rate to 15% (0% for taxpayers in the 10% and 15% tax brackets), which is also scheduled to expire after 2010. The bill’s postponement of the EGTRRA sunset would continue the lowered capital gains tax rate through 2012.

The EGTRRA’s repeal of the itemized deduction phaseout and the personal exemption phaseout also sunset in 2011, but would be extended by the bill for two years.

For 2011 only, the legislation would also reduce the rate for the Social Security portion of payroll taxes to 10.4%, by reducing the employee rate from 6.2% to 4.2% (the employer’s portion remains at 6.2%).

AMT Patch
The AMT exemption amount has been temporarily increased by legislative action several times in recent years. The most recent patch was for 2009; for 2010 the AMT exemption amount has reverted to its statutory amount: $45,000 for married individuals filing jointly, less 25% of alternative minimum taxable income exceeding $150,000; $33,750 for unmarried individuals, less 25% of alternative minimum taxable income exceeding $112,500.

The bill includes an AMT patch for 2010 and 2011. For 2010, the AMT exemption amounts would be $47,450 for unmarried individuals and $72,450 for married individuals filing jointly. For 2011, the amounts would be $48,450 and $74,450, respectively.

The bill would also extend through 2011 the ability to use nonrefundable personal credits to offset AMT (under IRC § 26(a)).

Bonus Depreciation and Section 179 Expensing
The bill would allow taxpayers to deduct 100% of the cost of business property acquired after Sept. 8, 2010, and before Jan. 1, 2012, and placed in service before Jan. 1, 2012 (or before Jan. 1, 2013, in the case of certain property). The bill would also extend the election to accelerate AMT credits in lieu of bonus depreciation through 2012, although property manufactured, constructed or produced during 2010 would not be eligible for the election.

The bill would also set the expensing limitation under IRC § 179 at $125,000 and the phaseout threshold amount at $500,000 for 2012. The bill would then reduce these amounts to $25,000 and $200,000 for tax years beginning after 2012.

Estate Tax
The EGTRRA enacted a slow repeal of the estate and generation-skipping transfer (GST) taxes. Under the EGTRRA provisions, the estate and GST tax rates gradually declined until the estate and GST taxes were eliminated in 2010. Under the EGTRRA sunset provision, the estate tax repeal was to be in effect for 2010 only. After that, the estate and GST regime in place before the passage of the EGTRRA would spring back to life, as if the EGTRRA had never been enacted. This means that starting Jan. 1, 2011, the estate tax exemption would be $1 million (adjusted for inflation), the tax rate would be 55%, and the state death tax credit would be revived.

The EGTRRA also repealed the step-up in basis for assets passing at death. Instead, inherited assets are subject to a modified carryover basis rule in 2010. Under this rule, a recipient’s basis in property acquired from a decedent will be the lesser of the adjusted basis of the property at death or the fair market value (FMV) on the date of death. The carryover basis provision also sunset after Dec. 31, 2010.

HR 4853 would temporarily reinstate the estate tax at its 2009 levels, with an estate tax rate of 35% and an estate tax exemption of $5 million (adjusted for inflation after 2011). For estates of decedents dying in 2010, an election will be available either to be subject to the reinstated estate tax or to be subject to the modified carryover basis rule. Estates of decedents dying in 2010 would be given an extension to file an estate tax return until nine months after the date of enactment of HR 4853.

The bill would also reinstate the generation-skipping transfer tax, and the due date for filing a return would be extended to nine months after the date of enactment of HR 4853. However, for generation-skipping transfers made during 2010, the tax rate will be zero.

The bill would also restore the unified credit against gift tax for gifts made after 2010.

Extension of Expired Provisions
A variety of temporary tax provisions, often referred to as “extenders,” expired at the end of 2009; more are scheduled to expire at the end of 2010. These expired provisions include tax credits, deductions and various tax incentives. The bill would extend many of these expired provisions, including:

• The increased standard deduction for married taxpayers filing jointly, scheduled to expire after 2010, would continue for two years;
• The $1,000 child tax credit amount would continue for two years, instead of reverting to $500;
• The increased starting and ending points for the earned income credit would continue for two years;
• The $3,000 amount for the child and dependent care credit, which is scheduled to revert to $2,400 after 2010, would continue for two years;
• The American opportunity tax credit would continue for two years;
• The temporary 100% exclusion of gain from the sale of certain small business stock under IRC § 1202, enacted by the Small Business Jobs Act of 2010, would be extended through 2011.

Tax Credits
The following temporary tax credits would also be extended through 2011 by the bill:

• IRC § 25C credit for nonbusiness energy property (which would also be returned to the limitations and standards applicable before amendment by the American Recovery and Reinvestment Act of 2009, PL 111-5);
• IRC § 30C alternative fuel vehicle refueling property credit;
• IRC § 40 credit for alcohol used as fuel;
• IRC § 40A credit for biodiesel and renewable diesel fuel;
• IRC § 41 research and development credit
• IRC § 45(d)(8) credit for refined coal facilities;
• IRC § 45A Indian employment tax credit;
• IRC § 45D new markets tax credit;
• IRC § 45G credit for certain railroad track expenditures;
• IRC § 45L new energy-efficient home credit;
• IRC § 45M energy-efficient appliance credit;
• IRC § 45N mine rescue team training credit;
• IRC § 45P employer wage credit for active duty members of the uniformed services;
• IRC § 51 work opportunity credit;
• IRC § 54E qualified zone academy bonds (but not the section 1397E credit for holders of qualified zone academy bonds, and the section 6431 refundable credit is repealed);
• IRC § 1400C credit for first-time D.C. homebuyers;
• IRC §§ 6426 and 6427 excise tax credits for alternative fuels; and
• American Samoa economic development credit under the Tax Relief and Health Care Act of 2006.

Deductions
The following expired and expiring temporary deductions would also be extended through 2011 by the bill:

• IRC § 62(a)(2)(D) deduction for elementary and secondary school teachers;
• IRC § 163(h)(3)(E) treatment of mortgage insurance premiums as interest;
• IRC § 164 state and local sales tax deduction;
• IRC § 168(e)(3)(E) 15-year straight-line cost recovery for qualified leasehold improvements and for qualified restaurant improvements;
• IRC § 168(i)(15)(D) seven-year cost recovery period for motor sports entertainment complexes;
• IRC § 168(j) accelerated depreciation for property on Indian reservations;
• IRC § 170(b)(1)(E) contributions of capital gain real property made for conservation purposes;
• IRC § 170(e)(3)(C) enhanced deduction for contributions of food inventory;
• IRC § 170(e)(3)(D) enhanced deduction for contributions of book inventory to public schools;
• IRC § 170(e)(6) enhanced deduction for corporate contributions of computer equipment for educational purposes;
• IRC § 179E(g) election to expense advanced mine safety equipment;
• IRC § 181(f) expensing treatment for certain film and television productions;
• IRC § 198(h) expensing of environmental remediation costs;
• IRC § 199(d)(8) deduction for income attributable to domestic production activities in Puerto Rico;
• IRC § 222 deduction for tuition and related expenses; and
• IRC § 1367(a)(2) basis adjustment to stock of S corporations making contributions to charity.

Other Extended Provisions
Other expired and expiring provisions that would be extended through 2011 by the bill include:

• IRC § 132 parity for exclusion from income for employer-provided mass transit passes and parking benefits;
• IRC § 168(n) expensing and special depreciation allowance for qualified disaster assistance property (extended through 2012);
• IRC § 408(d)(8) allowance for tax-free distributions from individual retirement plans for charitable purposes;
• IRC § 451 special rule for sales or dispositions to implement FERC or state electric restructuring policy for qualified electric utilities;
• IRC § 512(b)(13) special rules for certain amounts received by tax-exempt organizations from controlled entities;
• IRC § 613A(c) suspension of limitation on percentage depletion for oil and gas from marginal wells;
• IRC § 871(k) treatment of regulated investment company dividends and assets;
• IRC § 897(h) qualified investment entity treatment of regulated investment companies under the Foreign Investment in Real Property Tax Act of 1980;
• IRC §§ 953(e) and 954(h) exceptions for active financing income;
• IRC § 954(c) look-through treatment of payments between related controlled foreign corporations;
• IRC § 2105(d) look-through of certain regulated investment company stock in determining gross estate of nonresidents;
• IRC § 1367(a) basis adjustment to stock of S corporations making charitable contributions of property;
• IRC § 1391 empowerment zone incentives;
• IRC §§ 1400, 1400A and 1400B District of Columbia Enterprise Zone incentives;
• IRC § 1400L(b) New York Liberty Zone bonus depreciation;
• IRC § 1400N Gulf Opportunity Zone incentives; and
• IRC § 7652(f) “cover over” of tax on distilled spirits to Puerto Rico and the U.S. Virgin Islands;
• Grants under the American Recovery and Reinvestment Act of 2009 for specified energy property in lieu of tax credits.

Provisions Not Extended
A few expired provisions that were contained in earlier proposed extenders legislation but that do not appear in HR 4853 include:

• IRC § 30B credit for alternative motor vehicle credit for advanced lean burn technology motor vehicles, qualified hybrid motor vehicles, and qualified alternative fuel vehicles;
• IRC § 165(h) deduction for personal casualty losses in federally declared disasters;
• IRC § 172(j) carryback of net operating losses attributable to federally declared disasters; and
• IRC § 1400E renewal community tax incentives.

Refunds and Federal Assistance
Under the bill, any refund made to an individual would not be taken into account as income for purposes of determining eligibility for any federal assistance or assistance under a state or local program financed by federal funds (new IRC § 6409).

How the Tax Deal Could Affect Your Finances

http://online.wsj.com/article/SB10001424052748703518604576013942450422736.html
Edited by CRISTINA LOUROSA-RICARDO

President Obama called the bipartisan tax agreement announced last week a "framework." There's still no comprehensive outline of the proposals. And its passage by Congress isn't assured.

But the deal does address a range of tax issues that have been in question for months or years. Here's how the various provisions could affect taxpayers.

Individual tax rates: The Bush-era tax rates would be extended for two years for all taxpayers. Current rates would remain in place, with a top rate of 35%.

Capital gains: Current rates would be extended, and the top rate on long-term capital gains would remain at its historic low of 15% for two years.

Dividends: Current rates would be extended, and the top rate for qualified dividends -- those on most stocks held longer than two months -- would remain 15% for two years.

Payroll tax: The agreement calls for a two-percentage-point cut in an employee's portion of payroll (FICA) taxes, just for 2011. The change would make the tax 4.2%, instead of 6.2%, on the first $106,800 of wages per worker, according to the nonpartisan Tax Policy Center.

Alternative minimum tax: A two-year "patch," for 2010 and 2011, would keep the AMT exemption at or near current levels.

Extenders: The framework doesn't address several popular "extenders" that will expire this year or have already done so, but White House officials said they were included in the agreement for 2010 and 2011. Among them: transfers of IRA assets to charities by those over age 70 1/2; a state and local sales-tax deduction for itemizers; an additional standard deduction for real-estate taxes; and a deduction for teachers' expenses.

Unemployment insurance: Federal benefits would be extended at their current level for 13 months, through 2011.

Selected tax credits: The framework proposes to extend the $1,000 child credit and maintains its expanded refundabilty for working families for two years. It also would expand the Earned Income Tax Credit for larger families and married couples, and maintain both the higher-education tax credit and its partial refundabilty for the same period.

-- Laura Saunders
The Wall Street Journal

Spending Payroll Windfall

Working taxpayers will get a little, temporary raise, if the payroll-tax reduction in the tax agreement goes into effect. It isn't life-changing money -- the benefit tops out at $2,100 per year for anyone making $106,800 or more -- but it's enough to have a ripple effect if used wisely.

Legislators, of course, are hoping you'll do what Americans usually do with extra cash: buy things, patriotically heating up the economy. In fact, studies show that structuring a tax cut in precisely this way -- a little bit over a longer period of time, as opposed to a lump sum -- stimulates spending, not saving.

Will many people actually stash the cash? Probably not, says Ross Eisenbrey, vice president at the Economic Policy Institute, a think tank: "Most people are probably going to spend it."

But perhaps you'd do better to set your own agenda. Experts say there are ways to use the cash that will turn that 2% raise into a much bigger windfall. Here are three of them:

Juice retirement savings. Contribute that extra 2% to a 401(k) or individual retirement account. In this instance, you also would save on taxes since the added contribution to those plans would be pretax. Contributing the money to a Roth IRA would also be a small tax lottery because experts largely expect taxes to rise after 2012 -- making today's after-tax dollars (Roth contributions are made with after-tax dollars) "cheaper" than they will be in the future.

Create a health-care kitty. The cost of health care is expected to go up next year -- an expense most families haven't yet felt, or budgeted for, but one the payroll-tax cut could well cover.

Employees are projected to pay about 15% more next year for health-insurance deductibles and co-payments, with the average deductible about $675 for a single person and about $1,500 for a family with a preferred-provider insurance plan, according to the Kaiser Family Foundation.

Upgrade your appliances. As appliances get older, they get more expensive, says Scott Brown, owner of New Hampshire-based appliance-repair company Samurai Repair Man. They break and need repairs, and they get less efficient, which means higher energy bills.

-- AnnaMaria Andriotis
SmartMoney.com

Financial Literacy

Ever wonder how good the fellow residents of your state are at managing household finances? Find out on the website usfinancialcapability.org.

A small spoiler: New York, New Jersey and New Hampshire were among the top five states in at least three of five measures of financial capability, according to a survey of more than 28,000 people released last week.

Financial capability was measured based on these components: how many households spend more than their income; whether individuals had a "rainy day" fund to cover three months' worth of expenses in case of an emergency; how many individuals used nonbank borrowing methods in the past five years; how high individuals scored on five financial literacy questions; and how well individuals comparison-shopped, obtained credit reports and checked credit scores, and understood financial contracts.

The survey was funded by the FINRA Investor Education Program Foundation in consultation with the Treasury Department and the President's Advisory Council on Financial Literacy.

-- Maya Jackson Randall
Dow Jones Newswires

—The Aggregator features news and commentary from The Wall Street Journal and other publications. Email: cristina.lourosa@wsj.com

Add-ons turn tax cut bill into 'Christmas tree'

http://news.yahoo.com/s/ap/20101211/ap_on_bi_ge/us_tax_cuts
By FREDERIC J. FROMMER and MARY CLARE JALONICK, Associated Press

WASHINGTON – In the spirit of the holiday season, President Barack Obama's tax-cut deal with Republicans is becoming a Christmas tree tinseled with gifts for lobbyists and lawmakers. But that hardly stopped the squabbling on Friday, with Bill Clinton even back at the White House pleading the president's case.

While Republicans sat back quietly, mostly pleased, Democrats and other liberals were going at each other ever so publicly. As Clinton lectured on Obama's behalf, Vermont independent Bernie Sanders castigated the agreement for the TV cameras in the mostly empty Senate chamber.

The tax deal, reached behind the scenes and still informal, now includes ethanol subsidies for rural folks, commuter tax breaks for their cousins in the cities and suburbs and wind and solar grants for the environmentalists — all aimed at winning votes, particularly from reluctant Democrats.

The holiday additions are being hung on the big bill that was Congress' main reason for spending December in Washington, long after the elections that will give Republicans new power in January. The measure will extend Bush-era tax cuts, averting big tax increases for nearly all Americans, and keep jobless benefits flowing.

Republicans generally liked that agreement, worked out by Obama and GOP leaders. Democrats generally didn't, hence the add-ons.

It's all expected to come to a decisive vote next week, total cost by the latest congressional estimate: $857.8 billion.

On Friday, there were contrasting events for public consumption.

On Capitol Hill, Sanders spoke vigorously for 8 1/2 hours in a virtually empty chamber, urging defeat of a measure he said would give "tax breaks to millionaires and billionaires who don't need it." He finally ended his speech, conceding "It has been a long day."

At the White House, Obama turned over the briefing room microphone to former President Clinton who declared, "I don't believe there is a better deal out there." All sides, he said, "are going to have to eat some things they don't like."

The add-ons were being attached behind the scenes.

Almost $5 billion in subsidies for corn-based ethanol and a continuing tariff to protect against ethanol imports were wrapped up and placed on the tree Thursday night for farm-state lawmakers and agribusiness lobbyists. Environmentalists won more grants for developers of renewable energy, like wind and solar.

For urban lawmakers, there's a continuation of about-to-expire tax breaks that could save commuters who use mass transit about $1,000 a year. Other popular tax provisions aimed at increasing production of hybrid automobiles, biodiesel fuel, coal and energy-efficient household appliances would be extended through the end of 2011 under the new add-ons.

The package also includes an extension of two Gulf Coast tax incentive programs enacted after Hurricane Katrina to spur economic development in Mississippi, Louisiana and Alabama.

The ethanol money was added despite a growing congressional opposition to subsidizing the fuel after decades of government support. Last month, 17 Republican and Democratic senators wrote to leaders calling the tax breaks "fiscally indefensible," since there's already a law in place that requires ethanol be blended into gasoline.

"Historically the government has helped a product compete in one of three ways: Subsidize it, protect it from competition or require its use. We understand that ethanol may be the only product receiving all three forms of support from the U.S. government at this time," the senators wrote.

But ethanol still has powerful supporters on Capitol Hill, including Iowa Sen. Charles Grassley, the top Republican on the Senate Finance Committee and a key negotiator on the Senate tax bill. Adding the ethanol tax breaks was designed to help shore up the votes of many rural Democratic as well as Republican senators.

But while the add-ons may have won more votes for the Obama-GOP deal the Senate, their potential impact is less clear in the House, where Democrats have criticized the package as a tax giveaway to the rich.

Minnesota Rep. Collin Peterson, a conservative Democrat who steps downs as chairman of the House Agriculture Committee in January, says he would have voted against the bill if it had contained some of the clean energy tax incentives and nothing for ethanol.

"I know this will help some members in the House, different parts of this will help different members," he said.

Still, Peterson said the credits for the corn-based fuel probably won't last forever. He said Rep. Jim Clyburn of South Carolina, the House's No. 3 Democrat, told the caucus it was important to include ethanol in the bill, and some members booed him. That wouldn't have happened a few years ago, Peterson said.

Rep. Earl Pomeroy, D-N.D., who lost re-election in November, sponsored the House version of legislation extending the ethanol tax breaks. But he says he still can't support the bill because of his opposition to provisions cutting estate taxes for the wealthiest Americans.

"There may be some that vote for the package that otherwise hate it because of the ethanol provision, but my sense is that ethanol alone isn't going to be something that puts us over the top," he said.

A spokesman for Rep. Earl Blumenauer, D-Ore., a leader in the effort to win tax credits for wind and solar energy, said his boss still hasn't been won over yet on the package. He said the extension was necessary but not sufficient for Blumenauer's support. "His vote will depend on what the final version looks like," said spokesman Derek Schlickeisen.

Rep. Jay Inslee, a Washington Democrat, also was not won over by the renewable energy extension, despite being a big supporter of the program.

"It's one of the best things we have in the federal government for job creation. It is incredibly important. And it's nuts not to finance it by simply letting the upper-income tax brackets expire," he said. "I think there's a better deal out there potentially available and we ought to fight for it."

And there's the possibility the added goodies will have opposite the intended effect for some lawmakers. Rep. Jeff Flake, R-Ariz., said the add-ons could turn his fiscally conservative colleagues against the bill.

"You don't want to be accused out there of supporting stimulus three," he said. "It will knock some votes off in the House, but more than anything it will show the voters out there that things haven't changed with Republicans."

Push for tax reform growing

All of a sudden, there is a push for tax reform. It would really be nice if some of the proposals made by the Deficit Commission could be made into law, streamlining the tax code, lowering tax rates and limiting deductions. I just hope this is not just another piece of social engineering legislation.

Here is what President Obama said on December 9, 2010,

"I think we're going to have to have a conversation over the next year. And if you think about the last time we reformed our tax system back in 1986 -- it didn't happen right away, by the way. It required a lot of conversations among a lot of different parties. But people of good will came together and realized that if we eliminate what happens to the tax code every decade or so, loopholes get built in, special interest provisions get built in, the nominal rates end up high. But the actual tax rates that well-connected folks or people who have good accountants pay end up being a lot lower. Ordinary people end up getting squeezed."

"So typically, the idea is, simplifying the system, hopefully lowering rates, broadening the base -- that's something that I think most economists think would help us propel economic growth. But it's a very complicated conversation."

http://money.cnn.com/2010/12/10/news/economy/tax_reform/index.htm
Tax reform -- not just cuts -- needed
By Chris Isidore, senior writer, December 10, 2010: 10:58 AM ET

http://www.nytimes.com/2010/12/10/us/politics/10tax.htm
Obama Weighs a Broad Tax Overhaul
By JACKIE CALMES
Published: December 9, 2010

http://www.bloomberg.com/news/2010-12-10/obama-directs-his-staff-to-analyze-options-for-overhaul-of-u-s-tax-system.html
Obama Directs His Staff to Analyze Options for Overhaul of U.S. Tax System
By Nicholas Johnston - Dec 9, 2010 9:12 PM PT

The Obama Tax Cuts: What They Mean For You

It's probably premature to say the Obama-GOP tax deal is a done deal as there are a lot of grumblings from Democratic lawmakers. But with President Obama apparently putting his foot down, it does appear the final outcome will most likely be something quite close to the deal.

http://finance.yahoo.com/taxes/article/111520/obama-tax-cuts-what-they-mean
by Carla Fried
Tuesday, December 7, 2010

We finally know what will happen to the expiring Bush tax cuts -- they won't expire for another two years. In a compromise announced by President Obama last night, the Bush tax rates become the Obama tax rates for 2011 and 2012. And for everyone, not just families making less than $250,000. The compromise? The Republicans will agree to extend unemployment benefits for another 13 months and won't demand that the $60 billion cost be offset by a cut in federal spending.

Not only did the wealthy get a two-year pass on their income tax rate, but they are also going to benefit from two other features of the compromise:

A one-year cut in the payroll tax: To make up for the loss of the expiring Making Work Pay tax credit -- the middle-class tax cut that no one really noticed -- the White House extracted a one-year reduction in the Social Security payroll tax paid by employees from 6.2 percent to 4.2 percent. What's interesting is that Make Work Pay had an income limit: it was completely phased out for individuals making $95,000 or more, and joint filers with income above $190,000. The proposed 2011 payroll tax reduction apparently applies to everyone, at a reported cost of $120 billion in foregone tax revenue. That means an extra $2,172 in the 2011 paychecks for all Americans making at least $108,600, the current maximum amount of income subject to the FICA tax. The goal of this tax break is to give a jolt to the anemic economic recovery on the assumption that everyone -- the middle class and the truly wealthy -- will go out and spend that money.

A big break in the estate tax. When we last left off with the estate tax in 2009, it was being levied on estates above $3.5 million ($7 million for married couples) at a top rate of 45 percent. The estate tax has been on hiatus in 2010 and was scheduled to come roaring back next year at its 2001 level: a 55 percent tax on estates above $1 million. No one really expected that to happen, but the deal announced by President Obama sure seems like a huge capitulation to the Republicans. In fact, the President went out of his way in the press conference announcing the deal to clarify that he wasn't too pleased with this outcome. The new estate tax rate will only be levied on estates over $5 million ($10 million for couples), and the 45 percent rate of 2009 dips to 35 percent for 2011 and 2012.

Assuming the framework of the deal announced Monday night makes its way through Congress, here's what you can look forward to in 2011 and 2012 and some tips on how you should respond:

Income tax rates: Nothing changes from today. The top two tax brackets, which President Obama had vowed to raise, will instead remain at 33 percent and 35 percent. Even the millionaires and billionaires will see their tax rate hold steady, not just the middle class.

[Tax-Cut Deal Poses New Challenges]

Strategy: As you would normally, if you have the option of deferring income (and thus, taxes) into next year, go for it. But pull as many deductions as possible into this year so you can benefit from those now. If you've converted a Roth retirement account this year, or plan to by year-end, it certainly makes sense to take advantage of the one-time tax deal being offered for 2010 conversions that allows you to spread the tax bill over the next two years.

Capital gains and dividend taxes: No change here, either. President Obama had wanted the current 15 percent rate to float up to 20 percent for wealthy Americans in the top two tax brackets. But the compromise keeps the rate at 15 percent for everyone.

Strategy: This increases the allure of dividend stocks even more for income-starved investors.

A "patch" for the Alternative Minimum Tax (AMT): A patch that will raise the AMT exemption to account for inflationhas been agreed to. According to the New York Times, the threshold for the AMT will be adjusted so that as many as 21 million households would not be subject to it.

Strategy: Relax.

[Why Obama Made the Tax Deal]

And what happens after 2012? Well, that's going to make for some interesting debates during the 2012 Presidential election cycle. In announcing the compromise, President Obama pushed the notion that leaving rates where they are for the next two years was a necessary interim step to help spur more economic growth, but that long-term we had to make "hard choices." If I were a federal employee, I'd be wondering why I was singled out as a sacrificial revenue lamb for 2011 and 2012. Last week the President announced a pay freeze for most federal employees. Yet today the word is that the rest of Americans, especially the uber-wealthy, won't be asked to make any such sacrifice in 2011 and 2012. But long-term, if we don't eventually bring in more revenues and start reining in the federal deficit, we are all going to be paying an enormous price.

Obama and GOP in Deal on Tax Cuts

http://www.nytimes.com/2010/12/07/us/politics/07cong.html

It would reduce the 6.2 percent Social Security payroll tax on all wage earners by two percentage points for one year, putting more money in the paychecks of workers. For a family earning $50,000 a year, it would amount to a savings of $1,000.

For a worker slated to pay the maximum tax, $6,621.60 on income of $106,800 or more in 2011, the cut would mean a savings of $2,136. That tax cut would replace the central tax break for middle- and low-income Americans in last year’s economic stimulus measure, White House officials said.

The deal also includes continuation of a college-tuition tax credit for some families, an expansion of the earned-income tax credit and a provision to allow businesses to write off the cost of certain equipment purchases. The top rate of 15 percent on capital gains and dividends would remain in place for two years, and the alternative minimum tax would be adjusted so that as many as 21 million households would not be hit by it.

In addition, the agreement provides for a 13-month extension of jobless aid for the long-term unemployed. Benefits have already started to run out for some people, and as many as seven million people would potentially lose assistance within the next year, officials said.

In addition to dropping his opposition to any extension of the current income tax rates on income above $250,000 for couples and $200,000 for individuals, he agreed to a deal on the federal estate tax that infuriated many members of his party. The deal would ultimately set an exemption of $5 million per person and a maximum rate of 35 percent — a higher exemption and far lower rate than many Democrats wanted.
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http://online.wsj.com/article/SB10001424052748704156304576003441518282986.html?mod=WSJ_hp_LEFTTopStories
Deal Struck on Tax Package
Grand Bargain Includes One-Year Drop in Wage Levy, Estate Tax of 35%
By JONATHAN WEISMAN, JOHN D. MCKINNON And JANET HOOK

WASHINGTON—President Barack Obama reached agreement Monday with Republican leaders in Congress on a broad tax package that would extend the Bush-era income tax cuts for two years, reduce worker payroll taxes for one year and give more favorable treatment to business investments.

Other elements of the deal include a temporary reinstatement of the estate tax at 35%—the level favored by most Republican lawmakers—as well as an extension of jobless benefits for the long-term unemployed.

"We have arrived at a framework for a bipartisan agreement,'' Mr. Obama said on Monday night, capping weeks of negotiations with leaders in Congress.

The outcome of the negotiations is vital, because the current tax levels signed into law by President George W. Bush expire on Dec. 31. Unless Congress acts, tax rates on virtually all Americans who pay income taxes will rise on Jan. 1. That could affect economic growth and even holiday sales.

In reaching the deal, Mr. Obama brushed past the demands of many in his own party to curb tax cuts for the wealthy. Some liberal lawmakers and activists were left seething, particularly over last-minute concessions to Republicans on the estate tax. Democratic leaders didn't agree to the deal during meetings on Monday with Mr. Obama and Vice President Joe Biden, according to a House aide.

"I can tell you with certainty that legislative blackmail of this kind by the Republicans will be vehemently opposed by many, if not most, Democrats," said Rep. John Conyers (D., Mich.).

In the Senate, Tom Harkin (D., Iowa) called it "an understatement'' to say he was disappointed.

White House officials will now try to persuade Democrats to back the agreement, but anger on the left suggests that Mr. Obama might need to rely heavily on Republican support to move legislation through Congress.

Republican leaders spoke highly of the agreement. In a statement, House Republican Whip Eric Cantor said, "No one gets everything they want in a deal, but our top priority is to restore certainty to the private sector so that businesses small and large can start hiring again."

Senate Republican Leader Mitch McConnell also praised the deal and asked that Democrats in Congress now "show the same openness to preventing tax hikes the administration has already shown.''

Mr. Obama acknowledged that the agreement marked a significant reversal for him, as he has long argued that income tax cuts for couples earning more than $250,000 should expire. If the political stalemate continued and led to a broad tax increase, Mr. Obama said, "that could cost our economy well over a million jobs.''

The deal would extend a raft of business tax breaks, including credit for spending on research. It would extend current tax rates on capital gains and dividends for two years, including for higher earners. It would also maintain protection for middle-class families from the alternative minimum tax.

As part of the deal, the White House is proposing a provision to encourage more investment in plant and equipment, by letting companies claim deductions on 100% of most kinds of investment.

Under the agreement between the White House and congressional Republicans, the estate tax rate would be set at 35% for two years and would apply only to estates over $5 million. Under current law, the estate tax has lapsed for 2010 and is set to spring next year to 55%.

A program of extended benefits for the long-term unemployed, which lapsed last month, would be revived for 13 months, the White House said. The jobless benefits would be financed by federal borrowing rather than by spending cuts.

For Mr. Obama, reaching a deal with the GOP on taxes could help him score points with moderates and independents, an increasingly important constituency, by underscoring his ability to work with newly empowered Republicans. But the discussions have angered some liberal groups, who say Democrats should engage the GOP in a showdown, even if that risks letting the tax cuts expire for all income levels. In an email to its members, the liberal Moveon.org said, "They've given up on this critical issue without a fight."

The payroll-tax reduction under discussion now would cut the 6.2% Social Security tax levied on a worker's wages to 4.2%. A worker making $40,000 a year would save $800, and some economists say that could help stimulate demand at a time when the economy remains relatively weak.

The employer's half of the tax—also 6.2%—wouldn't be affected under the White House proposal, and thus the cost of hiring new workers wouldn't be directly affected.

The payroll tax reduction would take the place of a $400-per-worker income-tax break that Mr. Obama included in the 2009 stimulus bill. That break, known as Making Work Pay, provides a tax credit of 6.2% on the first $6,450 of a worker's wages. It phases out for workers making more than $75,000.

Some Republicans prefer the payroll tax reduction to the Making Work Pay program because it goes to everyone who works, regardless of income. A senior administration official said that the payroll tax cut would cost $120 billion, twice that of Making Work Pay, and would give bigger benefits to some low-income workers.

Versions of a payroll tax cut have been considered before, and they enjoy a measure of support in Congress. But some Democrats are wary of any change to the payroll tax, which funds the Social Security program.
—Corey Boles and Martin Vaughan contributed to this article.

Write to Jonathan Weisman at jonathan.weisman@wsj.com and John D. McKinnon at john.mckinnon@wsj.com

For more, read http://voices.washingtonpost.com/ezra-klein/2010/12/an_imperfect_but_not-that-bad.html?sid=ST2010120606249

New Filing Thresholds for Nonprofits

http://institute.accountingtoday.com/news/IRS-Provides-New-Filing-Thresholds-Nonprofits-56532-1.html
WASHINGTON, D.C. (DECEMBER 3, 2010)
BY ACCOUNTING TODAY STAFF

The Internal Revenue Service has announced new filing thresholds for next year for tax-exempt organizations filing Form 990 series returns.

Organizations with gross receipts normally less than or equal to $50,000 must file Form 990-N (but may choose to file a complete Form 990 or Form 990-EZ). In prior years only organizations with gross receipts normally less than or equal to $25,000 could file the Form 990-N, also known as an "e-postcard."

Organizations with gross receipts greater than $50,000 and less than $200,000, and total assets less than $500,000, must file Form 990-EZ or a complete Form 990.

Organizations with gross receipts greater than or equal to $200,000, or total assets greater than or equal to $500,000, must file Form 990.

Private foundations must file Form 990-PF.

Saying 'Yes' to a Prenup

http://online.wsj.com/article/SB10001424052748704767804575655223931267664.html
By EMILY GLAZER

When 24-year-old Desiree Burns got married in March, she and husband, Timothy, settled into his house in Raleigh, N.C. They vacation at his timeshare in Florida. And Mr. Burns, 28, is helping to cover tuition costs since Ms. Burns has gone back to school.

Thanks to a prenuptial agreement, if they ever get divorced, Mr. Burns keeps the home and vacation spot. She gets the pets.

"I don't feel that it's right to take part of something that I wasn't part of before," Ms. Burns says.

The Burnses aren't alone. Prenups are becoming more common among younger couples. And the contracts aren't just about protecting individual assets and divvying up property in case of a divorce. More young adults also are using prenups to shield themselves from a partner's debt and to even the field when one spouse shoulders the financial burden early in the marriage.

The contracts help young couples have a frank talk about their finances, which often aren't discussed before marriage, says Gabriel Cheong, a divorce attorney with Infinity Law Group in Quincy, Mass.

"You want to be secure in the idea that you did this so long ago that you planned for your future out of love, rather than out of hate when you're getting a divorce," he says.

The cost of setting up a prenuptial agreement varies by geographic location and a person's financial complexities. Prices typically range from $500 to $2,000 per person.

So when is a prenup worth the expense -- and the potentially awkward conversation?

Many young adults, unable to find a job after graduation or laid off because they were the last hired, are returning to school. And that usually means taking on more debt. Mr. Cheong says he often sees situations where one spouse works full-time -- and supports a young family -- while the other goes to school full-time.

In this case, a prenup could specify that the spouse who bankrolled the education would get reimbursed if a divorce occurred. In Ms. Burns' prenup, for example, if she gets divorced within five years of finishing her degree, she must pay back half of the money her husband contributed.

Prenups also can address who is responsible for paying debt a person has coming into a marital union, such as credit cards or a car loan, as well as debt incurred during the marriage. (Otherwise, courts might split debt equally.)

Tom Petrelli, managing director of Philadelphia-based Petrelli Law, says clients can stipulate what happens if a spouse decides to change careers, and alters a couple's financial situation.

With the job market still tight in many industries, more young adults are opting to start their own business -- often running it from home. And in some cases, a spouse unofficially helps the business get off the ground. A prenup, lawyers say, can spell out how home-business assets would be divided if a marriage goes south.

And some people want to protect assets they could inherit some day. Hunter Lowder, 30, got a prenup with her husband, now 34, when they married six years ago to outline her 100% ownership of a trust that includes her family's commercial real estate, home construction and insurance businesses.

Ms. Lowder, who lives in Carmel Valley, Calif., says her sisters and cousins will all sign prenups so the businesses are passed down to their generation.

"When it affects other people and their ownership in a company and their future and their finances," Ms. Lowder says, "you can't just say 'I'm in love.'"
—Email: emily.glazer@wsj.com

Weighing a Custodial Account for Your Kid

I never like these UTMA/UGMA accounts for the reasons given below by the author, Bill Bischoff

http://www.smartmoney.com/personal-finance/taxes/custodial-accounts-for-your-kids-what-to-know/

Parents set up custodial accounts for their children for various reasons – but not always with the purest motives. Grandma gives $10,000 to little Freddie: Set up a custodial account. Parents want a tax shelter for little Jennifer’s college savings fund: Set up a custodial account. A single mom wants to hide cash so she can qualify for financial aid and go back to school: Move the money into her kid’s custodial account and take it back later. You get the idea. However, many parents fail to recognize that custodial accounts have significant legal and tax implications. Here are the five most important things to understand.

1. That Money Isn’t Yours Anymore
When funds are transferred into a minor child’s custodial account at a financial institution or brokerage firm, the funds now irrevocably belong to that child. Although the parent can, and usually does, function as the custodian (manager) of the account, the money can legally be used only for expenditures that benefit that child. In other words, parents are legally forbidden from using custodial account money for expenditures that benefit themselves (like a new car). And you can’t take money from one kid’s custodial account and use it to open up or supplement an account for another kid. Obviously, it can be a fine line between expenditures that benefit the child and those that benefit other family members. And I’ve never personally heard of a parent getting into legal hot water for raiding a custodial account. That said, staying on the right side of the law is the right thing to do.

2. Your Kid Will Gain Control at a Young Age
A minor child’s custodial account must be established under your state’s Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA). Under applicable state law (most states have UTMA regimes these days), your child will gain full legal control over the account once he or she ceases to be a minor. This will happen somewhere between age 18 and 21 (in most states it’s 21). Remember: Nice little kids eventually turn into obnoxious teenagers, and young adults are not necessarily much better. So consider the possibility of future “UGMA or UTMA regret” before taking the irrevocable step of putting money into your child’s custodial account.

3. Your Kid May Have to File Tax Returns and Pay Taxes
Any income from your child’s custodial account belongs to the child. If that income exceeds $950, a separate federal income tax return generally must be filed for the child using Form 1040, 1040A, or 1040EZ. The child will probably owe some tax, and the kiddie tax rules may make it higher (see below). A state income tax return may be required too.

Exception: If all of your child’s income consists of interest, dividends and mutual-fund capital gains distributions, you may qualify to simply include the income on your Form 1040 and pay the resulting extra tax with your return. For details on this simplifying option, see IRS Form 8814 (Parents’ Election to Report Child’s Interest and Dividends).

4. The Kiddie Tax Might Bite
It would be swell if children with substantial custodial accounts were allowed to pay the same tax rates on investment income as other unmarried individuals. If that was allowed to happen, a child’s 2010 ordinary income would typically be taxed at a federal rate of only 10% or 15%, and a 0% rate would typically apply to long-term gains and dividends. Unfortunately, the so-called kiddie tax prevents such happy outcomes. Under the kiddie tax rules, a minor child’s investment income above $1,900 may be taxed at the parent’s higher rates. So the federal rate on a child’s interest income could be as high as 35%, and long-term gains and dividends could be taxed at 15%. The Kiddie Tax is calculated on IRS Form 8615 (Tax for Certain Children Who Have Investment Income of More Than $1,900) or on the aforementioned Form 8814 (when allowed).

Bottom Line: In the good old days, a custodial account could function as an efficient tax shelter because the income was taxed at the child’s low rates. These days, the kiddie tax rules make it difficult for custodial accounts to deliver meaningful tax savings.

5. There Could Be Gift Tax Consequences
This year, you can take advantage of the annual federal gift tax exclusion to move up to $13,000 into a custodial account for each of your children. So can your spouse. You can do the same thing next year, and the year after that, and so on. Gifts up to the $13,000 annual limit don’t reduce your lifetime $1 million federal gift tax exemption. However, if you transfer more than $13,000, you must file a gift tax return on IRS Form 709 (United States Gift (and Generation-Skipping Transfer) Tax Return). You probably won’t actually owe any gift tax (thanks to the $1 million exemption), but you still have to file.

The Last Word
Custodial accounts are not as simple as advertised, and there’s even more to the story than I’ve told you here. For example, a healthy custodial account balance can reduce college financial aid awards. Check out www.fairmark.com/custacct/ for additional info.