Alternative minimum tax may get new patch

http://www.sfgate.com/business/networth/article/Alternative-minimum-tax-may-get-new-patch-4083552.php
Kathleen Pender, Chronicle Columnist


Nobody likes the alternative minimum tax - an alternative tax system that was originally designed to make sure wealthy people who used a lot of esoteric tax shelters paid some federal income tax. Most of those shelters are gone now and the AMT is mainly hitting higher-income people who pay a lot of state income and real estate taxes and, to a lesser extent, families with a lot of children.

Taxpayers are supposed to compute their taxes under both the AMT and the regular system and pay whichever is higher. Although AMT rates are lower - the top rate is 28 percent compared with a maximum rate of 35 percent under the regular tax system (or 39.6 percent if the Bush tax cuts expire) - fewer deductions are allowed under the AMT.

The result is that most higher-income people owe AMT, especially if they live in high-tax states. Nationwide, only 2.8 percent of tax returns filed in 2010 owed AMT, but 4.5 percent of those coming from California did. Among those in California with adjusted gross income between $200,000 and $1 million, about 85 percent owed AMT. Above $1 million it is somewhat less common because the super-rich often owe more under the regular tax system.

The AMT has been in the news lately because Congress still has not passed a so-called patch that would prevent it from reaching further down into the middle class and hitting an estimated 33 million taxpayers in 2012 compared with about 4 million in 2011. Most people think Congress will pass a patch.

What's less well known is that for some people, the AMT has a silver lining. Assuming Congress passes a patch for 2012 and 2013, people who are in AMT and stay in AMT will be somewhat protected from an increase in regular income tax rates if the Bush-era tax cuts expire.

That's because they will still be paying a top AMT rate of 28 percent even if the top regular rate goes to 39.6 percent. This won't be true for everyone in AMT; people who fall out of the AMT could see their taxes go up.

To understand why, you have to know how the tax is computed.

To calculate AMT, you start with your taxable income under the regular tax system, then add back deductions not allowed under the AMT. This includes state and local income and property taxes, miscellaneous itemized deductions and the personal exemptions you get for yourself, spouse and dependents.

How AMT works

From this, you subtract a flat amount known as the AMT exemption (which phases out over a certain income level).

If what is left is greater than zero, you calculate a tentative AMT at a rate of 26 percent up to a certain amount of income and 28 percent over that. If this is bigger than your regular income tax, you pay the excess as an additional tax. That additional tax shows up on tax returns as alternative minimum tax.

The amount can be substantial: In 2010, people with $200,000 to $500,000 in adjusted gross income who were subject to AMT paid an extra $6,150, on average.

The Bush tax cuts reduced regular marginal tax rates, but left the AMT, including the exemption amount, alone. As regular taxes came down and people's incomes grew, more people got pushed into AMT.

Several patches

To prevent it from falling into the middle class, Congress has been passing temporary, one-year increases in the exemption amount at the end of each year. This is the patch.

For 2011, the exemption was $74,450 for married couples filing a joint return and $48,450 for singles. If Congress passes a patch for 2012, which is expected, those amounts would rise about 2.4 percent for 2012 and the AMT would hit roughly the same number of people as in 2011.

Without a patch, the amounts would revert to $45,000 for couples and $33,750 for singles - and throw about 29 million more people into AMT.

Among people with $75,000 to $100,000 in income, the percentage subject to AMT would rise from 1 percent to 52 percent, and their average tax increase would be about $1,600, according to Bob McIntyre, director of Citizens for Tax Justice. Even so, the bulk of the alternative minimum tax - 82 percent - would still be paid by people making more than $100,000, he says.

Congress is expected to patch the AMT by raising the exemption amount this year, but what happens next year?

If Congress approves another patch for 2013 but the Bush tax cuts expire and regular rates go up, many people who are in AMT will be somewhat protected from higher taxes if they are still in AMT next year; their tax rate will still be 28 percent.

Unusual possibilities

People who are in AMT now but go back into the regular tax system if the Bush tax cuts expire would see a tax increase. This could, perversely, make them "nostalgic for the AMT," says Patrick Geddes, chief investment officer with Aperio Group.

This could happen to people who are on the borders of AMT at both the high and low end of the income spectrum.

Republicans have proposed extending all of the Bush tax cuts; President Obama favors letting taxes go up only for people making more than $250,000 (married) or $200,000 (single).

If Obama's plan wins, some people with incomes above $200,000/$250,000 won't be affected because they will still be in AMT, paying a top rate of 28 percent (assuming that rate does not change). "If you are deep into AMT, you are not going to be affected," Geddes says. "AMT may make the debate (over marginal tax rates) moot for a lot of high-end taxpayers."

Take a hypothetical married couple with two children and $400,000 in income, including $5,000 in long-term capital gains and $5,000 in qualified dividends. They have $70,000 in itemized deductions, including $45,000 in state income and property taxes.

In 2012, they would owe $93,900 in taxes, according to CCH, a tax information firm.

In 2013, under the Obama plan, their regular marginal rate would rise to 36 from 33 percent, but they would still be in AMT. Their tax bill would go up by $900, less than a 1 percent increase.

(The example assumes the AMT exemption is patched at $78,750 for 2012 and 2013 and that capital gains are taxed 20 percent and dividends are taxed as ordinary income in 2013.)

What happens to any individual depends on their unique circumstances. Taxpayers can use calculators at the Tax Policy Center (calculator.taxpolicycenter.org) or Tax Foundation (mytaxburden.org) to estimate their tax under various scenarios, but it helps to know something about taxes and the policy options.

If Congress overhauls the tax system, all bets are off. The AMT could be abolished or replaced with some better way of making sure that the super-rich don't pay a lower effective tax rate than people earning less.

Who pays AMT?

Only 2.8 percent of federal tax returns filed in 2010 owed alternative minimum tax, but 4.5 percent of returns from California had it. AMT is most common among taxpayers with $200,000 to $1 million in income.

Adjusted gross income	Calif. returns with AMT	U.S. returns with AMT
$0-75,000	0.1%	0.1%
75,000-100,000	1.3	0.8
100,000-200,000	9.6	5.9
200,000-500,000	85.4	74.4
500,000-1 million	86.6	67.3
Over 1 million	40.0	28.6
Total	4.5	2.8

Source: Internal Revenue Service statistics

Kathleen Pender is a San Francisco Chronicle columnist. Net Worth runs Tuesdays, Thursdays and Sundays. E-mail: kpender@sfchronicle.com Blog: sfgate.com/pender Twitter: @kathpender

IRS Warns AMT Could Affect 60 Million Taxpayers Unless Patched

http://www.accountingtoday.com/news/IRS-Warns-AMT-Taxpayers-Patched-64643-1.html

Washington, D.C. (November 13, 2012)

By Michael Cohn

 

The head of the Internal Revenue Service told lawmakers that if Congress fails to extend the traditional patch for the Alternative Minimum Tax, approximately 60 million Americans could be affected and about 33 million taxpayers could pay the AMT for tax year 2012.

In a letter to the leaders of the tax-writing House Ways and Means Committee and the Senate Finance Committee, Acting Commissioner Steven T. Miller also warned that tax season could be delayed for up to a month next year if Congress does not act soon.

“A number of other tax provisions affecting individuals also expired at the end of 2011,” he wrote. “These include tax deductions for educators' out-of-pocket classroom expenses, tuition and related fees for higher education, and state and local sales taxes. The last provision is of particular importance to taxpayers in states with no income tax.

"These tax law changes are generally not as complex and do not present anything near the operational risk associated with the AMT patch," Miller added. "Two years ago, Congress enacted legislation extending these provisions retroactively in mid-December 2010. As a result, the IRS made the necessary changes to its forms and systems, and delayed the opening of the 2011 filing season by four weeks for approximately 9 million affected taxpayers. If the IRS were presented with a similar scenario of late enactment of tax extenders legislation this year, I would anticipate a similar outcome. There would be some inconvenience and delayed refunds for a substantial number of taxpayers, but the overall risk to the tax filing season would be manageable.”

Congress has returned to session this week after the elections with taxes among the top items on its agenda. The so-called “fiscal cliff” is looming with the expiration of the Bush-era tax rates and dozens of other traditional “tax extenders” at the end of the year, along with the prospect of automatic cuts in both defense spending and discretionary spending unless Congress and the Obama administration can agree on a deficit reduction plan. The nation is also once again approaching its borrowing limit and Congress will soon need to agree to raise the debt ceiling.

Miller noted that the expiring tax provisions have added uncertainty for next tax season. “This year has been particularly challenging due to several unresolved tax issues,” he wrote. “When Congress takes action well after this planning process is underway, there is potential for substantial disruption to the filing season ahead. As Congress returns this week, I wanted to provide you with a detailed description of the effects on IRS operational planning if the current uncertainty regarding the AMT and extenders continues.”

Miller noted that the AMT applies to individual taxpayers with incomes above specific thresholds set by law, but for many years, Congress has been enacting "patches" to index these income thresholds for inflation in order to prevent millions of taxpayers from being subject to the AMT. The last such patch expired on Dec. 31, 2011.

“More specifically, for tax year 2011, the AMT exemption amount (as indexed for inflation) was $48,450 for individuals and $74,450 for married taxpayers filing jointly,” he explained. “Because of these thresholds, only about 4 million taxpayers paid AMT for tax year 2011. Under current law, however, the thresholds revert to much lower levels for 2012—$33,750 for individuals and $45,000 for married taxpayers filing jointly. At these levels, approximately 33 million taxpayers would pay AMT for tax year 2012 (with returns filed in the spring of 2013). This is about 28 million more taxpayers who would pay the AMT than if the exemption amounts were increased as in the past.”

Miller also pointed out that the AMT patch has historically been accompanied by a special tax credit ordering rule that applies to all taxpayers claiming certain tax credits, whether they owe the AMT or not. “The ordering rules change the order in which a number of popular tax credits are applied against tax liability, and how they may be used to offset both regular and alternative minimum tax,” he explained. “Taken together, the changes to the AMT exemption amount and the special tax credit ordering rules could affect more than 60 million taxpayers—nearly half of all individual income tax filers. In addition, the changes to the tax credit ordering rules that result from a lapse in the AMT patch are highly complex and cut deeply into the core tax processing logic of IRS's critical filing season technology systems.”

In prior years—most recently in 2007 and 2010—Congress allowed the AMT patch to lapse for more than 11 months, but then retroactively reinstated it, Miller observed. “In both 2007 and 2010, the IRS consulted with Congress and was provided with bipartisan, bicameral assurances that Congress was working expeditiously to enact a patch. The IRS, in turn, made a risk-based decision to leave its systems programmed assuming that Congress would continue its historical practice and again enact extensions of both the increased AMT exemption amount and the special tax credit ordering rules.”

To stay consistent with past practice, Miller said he has instructed the IRS staff again this year to leave its core systems "as-is" with respect to the AMT, and hold off on the substantial design and engineering work that would be required in order to revert the core tax systems back to 1998 law, which will otherwise apply for 2012 in the absence of any action by Congress. “Therefore, if Congress enacts an AMT patch, including both increased exemption amounts and the special tax credit ordering rules, before the end of the 2012 calendar year, the IRS would likely be able to open the 2013 tax filing season with minimal delays for most taxpayers,” he said. “However, if there is no AMT patch enacted by the end of the year, the IRS would be forced to operate the 2013 tax filing season based on the expiration of the AMT patch. There would be serious repercussions for taxpayers.”

Without an AMT patch, Miller noted, about 28 million taxpayers would be faced with a very large, unexpected tax liability for the current tax year (2012). “In addition, in order to allow time for the IRS to make the programming changes necessary to conform our processing systems to reflect expiration of the AMT patch and the credit ordering rules, the IRS would, at minimum, need to instruct more than 60 million taxpayers that they may not file their tax returns or receive a refund until the IRS completes the necessary systems changes,” he added.” Because of the magnitude and complexity of the changes, it is entirely possible that these taxpayers would not be able to file until late March 2013, if not even later. Tens of millions of these taxpayers would unexpectedly have to pay additional income tax for 2012, leaving them with a balance due return or a much smaller refund than expected.

For millions of other taxpayers, refunds would be delayed.

“Finally, because the AMT patch already expired at the end of 2011, there is no ability to consider partial year extensions of the AMT (since by the end of 2012 it would have already lapsed for an entire year),” he noted.

Lawmakers greeted the news with dismay. “Congress must act now to address our unfinished business and give middle-class families certainty by extending this expiring relief,” said Ways and Means ranking member Sander Levin, D-Mich., in a statement.  “Just as there is no reason not to extend the middle class tax cuts immediately, there is no reason Congress does not act on a bipartisan basis as it has in the past to fix the AMT. The consequences of inaction would be enormous for millions of middle class taxpayers. Extending AMT relief will prevent a substantial and unexpected tax increase on millions of Americans.”

Senate Panel Passes Bipartisan Tax Extenders Bill

The Senate Finance Committee approved legislation Thursday on a 19 to 5 vote extending dozens of tax cuts known as tax extenders, including a two year alternative minimum tax patch.  Other provisions would extend the ability for school teachers to deduct expenses for school supplies, mortgage debt relief to 2013 and 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, along with the above-the-line deduction for qualified tuition-related expenses and tax-free distributions from individual retirement plan for charitable purposes. Energy-related provisions include an extension of the wind energy production tax credit for one year, through Dec. 31, 2013, while changing the "placed in service" date for the wind energy facility to when construction begins.

For more information, see http://www.finance.senate.gov/newsroom/chairman/release/?id=e3290a69-8fa4-4a6d-8c3a-756ea03a4224

Blowing up the tax code

http://money.cnn.com/2010/11/11/news/economy/simpson_bowles_tax_reform/index.htm
By Jeanne Sahadi, senior writerNovember 12, 2010: 7:57 AM ET
NEW YORK (CNNMoney.com) -- So much to love. So much to hate.

That's what everyone will find in the tax reform proposals laid out this week by the co-chairmen of President Obama's fiscal commission.

And that may also be the best indication that Erskine Bowles and Alan Simpson got something right.

The truth is, there's no escaping the need to make serious tradeoffs on taxes if the goal is to create a tax code that supports economic growth, provides enough revenue to fund everything Americans want their government to do, and achieves real deficit reduction when paired with spending cuts. (10 biggest cuts the co-chairmen recommend)

Of course, politicians aren't yet willing to acknowledge those tradeoffs. Most Republicans still cleave publicly to the idea that taxes are the devil's spawn and must be beaten back. And most Democrats think that only the wealthiest should ever have to pay more in taxes.

That doesn't mean there isn't something for them to like in the Bowles-Simpson proposal.

For one thing, the co-chairmen propose simplifying the tax code, while lowering rates. They would also eliminate the Alternative Minimum Tax (a.k.a. the crazy-making-calculate-your-taxes-twice-to-see-if-you-owe-more tax).

Think you're smart about the deficit? Try this
In exchange, their proposal calls for a reduction -- or the complete elimination -- of the hundreds of tax deductions, credits and exemptions in the code.

Tax breaks reduce the amount of revenue the government takes in by more than $1 trillion a year, much of which comes from just a few of the biggest and most popular ones like the mortgage interest deduction.

Many experts regard tax breaks as a stealth form of spending. That's because the lost revenue doesn't appear anywhere on the federal budget. And once a break is passed into law, it's rare that anybody reviews its effectiveness.

"They're unsustainable. They have no oversight. And they really cost this country a bundle," Simpson told CNN.

Still, as the co-chairmen know all too well, removing them will elicit all sorts of "shrieking," as the ever-tart-tongued Simpson has put it many times. Tax breaks are enjoyed by many powerful special interests -- to say nothing of many Americans.

Fewer breaks = lower rates
Bowles and Simpson offer two options that slash tax breaks. And by doing so, they can lower income tax rates.

In their "zero plan" option, breaks are eliminated altogether. Under that scenario, individual income tax rates -- which they reduce from six brackets to three -- can fall substantially.

For instance, the lowest two rates (10% and 15%) could fall to 8%. The middle two rates (25% and 28%) could drop to 14%. And the top two rates (33% and 35%) could drop to 23%.

The corporate rate, meanwhile, could drop to 26% from 35%, to make it more attractive for companies to invest in the United States.

On the other hand, of course, lawmakers could choose to retain tax breaks. But the fewer they prune, the less rates can be lowered.

The second option from Simpson and Bowles, building on a bipartisan proposal in Congress, would reduce the mortgage interest deduction. The tax break would apply only to the first $500,000 of a loan on one's primary residence, about half of what counts today.

The second option would also repeal the state and local tax deduction and various other itemized deductions.

Individual tax rates under that plan would be 15%, 25% and 35%.

Another big proposed change under both reform plans would affect investment income. Capital gains and dividends, which are currently taxed at 15%, would be taxed as ordinary income -- that is, at higher rates.

More revenue on tap
The Simpson-Bowles tax reform options would raise an estimated $80 billion in additional revenue in 2015 and $160 billion by 2020. Their plan overall would cap federal revenue at 21% of GDP.

Who exactly will be paying in all that extra revenue? A specific break-out by income groups is still in the works.

It is likely that more people would end up with higher -- rather than lower -- tax bills, a commission staffer said. But he also noted that the revised tax code would probably be more progressive.

No one will like paying more, of course. But the staffer said the comparison shouldn't be to what someone is paying today but rather to what that person is likely to pay in the future if no changes to the tax code or to the federal balance sheet are made.

Translation: Taxes are going up one way or the other. The question is will those higher taxes be levied in a system that is widely considered to be outdated, overly complex and highly inefficient, or in a system that is simpler and smarter?

Lawmakers Promise to Patch AMT

http://www.webcpa.com/news/Lawmakers-Promise-Patch-AMT-56272-1.html
Washington, D.C. (November 9, 2010)
By WebCPA Staff

A bipartisan group of key congressional committee chairmen pledged to patch the alternative minimum tax this year and wrote to IRS Commissioner Doug Shulman telling him to plan for AMT relief.

Congress tends to temporarily fix the AMT each year to prevent it from ensnaring another 20 million or more taxpayers. But the infighting in Congress and crowded legislative calendar have prevented Congress from patching the AMT until the lame duck session.

Senate Finance Committee Chairman Max Baucus, D-Mont., and House Ways and Means Committee Chairman Sander Levin, D-Mich., along with Finance Ranking Member Chuck Grassley, R-Iowa, and Ways and Means Ranking Member Dave Camp R-Mich., pledged Tuesday to “do everything possible” to enact 2010 AMT relief to ensure tax certainty for 21 million taxpayers. The bipartisan tax policy leaders wrote to Shulman stating the agency should “take all steps necessary to plan for changes” to present law so that, in the aggregate, not one additional taxpayer faces higher taxes in 2010 due to the AMT.

“As the leaders of the Congressional tax-writing committees, we want to assure you that Congress is working on legislative relief,” they wrote. “We will work to craft the AMT provision so that, in the aggregate, not one additional taxpayer faces higher taxes in 2010 due to the onerous AMT. Such legislation will allow the personal credits against the AMT and the exemption amounts for 2010 to be set at $47,450 for individuals and $72,450 for married taxpayers filing jointly.”

They added that they planned to enact AMT relief legislation in a form mutually agreeable to Congress and the President.

Recovery Act Reminders for 2009

http://www.journalofaccountancy.com/Issues/2009/Oct/20091725.htm
By ELLEN COOK, CPA, ANNA FOWLER, CPA, PH.D., ANNETTE NELLEN, ESQ., CPA, NORA STAPLETON, CPA and JOSEPH W. WALLOCH, CPA
OCTOBER 2009

Given the breadth and variety of tax relief provisions in the American Recovery and Reinvestment Act (ARRA) of 2009, PL 111-5, one or more could affect your clients’ individual returns for the 2009 tax year. Many are intended to provide relief for taxpayers in financial distress, stimulate consumer spending or provide an incentive for more environmentally friendly living. They cover everything from tax treatment of unemployment benefits to child credits. Tax organizers and client letters should already reflect these measures; the following is a summary of some of the most prominent points to cover in correspondence and discussions with clients.

INCOME
Net operating losses. The ARRA amended IRC § 172(b)(1)(H) to allow eligible small businesses to carry back a 2008 net operating loss (NOL) up to five years instead of the otherwise available two-year limit.

The IRS issued a clarifying revenue procedure because many taxpayers had inadvertently submitted invalid elections to claim a three-, four- or five-year carryback for 2008 NOLs (Revenue Procedure 2009- 26, 2009-19 IRB 935). It modifies and supersedes Revenue Procedure 2009-19. To be eligible for the longer carryback period, the loss must arise from an eligible small business—a proprietorship, partnership or corporation with average gross receipts of $15 million or less for the three-year period ending in 2008 (section 172(b)(1)(H)(iv)).

Under section 172(d)(4)(C), a deduction for losses under section 165(c) from a transaction entered into for profit or from theft or casualty may be treated as a business deduction even if not attributable to the taxpayer’s trade or business. Consequently, the Service pointed out in Revenue Ruling 2009-9 in connection with losses from fraudulent investments (“Ponzi schemes”), this NOL carryback relief is also available to individuals who claim a section 165(c) loss sustained after Dec. 31, 2007, and who are otherwise eligible under the average gross receipts test. The NOL must have arisen in a tax year ending in or beginning in 2008.

The election for the longer carryback period may be made on the original return by attaching a statement to a timely filed return and specifying the longer carryback period elected. If the tax year for the loss ended before Feb. 17, 2009, the taxpayer must make the election by the later of the due date (including extensions) or April 17, 2009. Alternately, the election can be made by filing an appropriate form and applying the carryback period selected.

The appropriate forms are 1139, Corporation Application for Tentative Refund; 1120X, Amended U.S. Corporation Income Tax Return; 1045, Application for Tentative Refund; 1040X, Amended U.S. Individual Income Tax Return; or amended 1041, U.S. Income Tax Return for Estates and Trusts. The form must be filed no later than the later of six months after the due date (including extensions) for the tax return of the loss year or April 17, 2009. (Note that this date is earlier than the typical due date for filing forms 1045 and 1139, which is within 12 months after the tax year of the NOL.)

The taxpayer does not need to file a statement or label with the form. Taxpayers selecting the option of filing an amended return must file the return for the earliest tax year to which the taxpayer is carrying back the loss.

A taxpayer who elected to waive the carryback was required to file the revocation and new election no later than April 17, 2009.

Unemployment compensation. For 2009, $2,400 of unemployment compensation is excluded from tax.

DEDUCTIONS
Motor vehicle taxes. Taxpayers may deduct “qualified motor vehicle taxes,” defined as state or local sales or excise taxes imposed on the purchase of a new qualified motor vehicle. The vehicle must be a passenger car, light truck or motorcycle weighing 8,500 pounds or less or a motor home. The vehicle must be acquired after Feb. 17, 2009, and before 2010. The deduction is limited to tax on the first $49,500 of the purchase price.

Taxpayers who itemize and elect to deduct general sales taxes rather than state and local income taxes may not claim the additional standard deduction for the vehicle sales tax. The deduction phases out for individuals with modified AGI between $125,000 and $135,000 ($250,000 and $260,000 if married filing jointly). The deduction is also allowed for alternative minimum tax (AMT) purposes if claimed as a standard deduction. Guidance is needed on whether the deduction is allowed for AMT when the taxpayer itemizes deductions.

Limitation on itemized deductions. In a news release April 7, 2009, the IRS said convenience fees associated with the electronic payment of federal tax, including payment of estimated tax, can be deducted as a miscellaneous itemized deduction (IR-2009-37). This reversed a previous policy. Accordingly, taxpayers who are able to file Form 1040, Schedule A, Itemized Deductions, and deduct miscellaneous deductions exceeding 2% of their adjusted gross income (AGI) will get a tax deduction for these fees.

Credit or debit card convenience fees charged for paying taxes electronically vary but average about 2.5% of the tax payment. The fees are deductible in the year they occur.

Most individuals still pay their federal tax obligations by check, but last year more than 4 million taxpayers paid their taxes electronically, according to the news release.

CREDITS
Child tax credit. While the amount of the child tax credit remains at $1,000 per dependent child under age 17, under the ARRA, the refundable portion is increased for tax years 2009 and 2010 to the extent of 15% of the taxpayer’s earned income over $3,000 (lowered from $8,500). Beginning in tax year 2009, a child who qualifies for the child tax credit must also be the taxpayer’s dependent.

Hope credit. For tax years beginning after Dec. 31, 2008, the section 25A Hope credit, renamed the American Opportunity Tax Credit by the ARRA, is increased to a maximum of $2,500 per year (100% of the first $2,000 of qualifying expenses and 25% of the next $2,000), with 40% of the credit refundable.

The credit is phased out for taxpayers with AGI between $80,000 and $90,000 ($160,000 and $180,000 for married filing jointly). The provision extended the credit to all four years of college and expanded the definition of qualifying expenses to include course materials. The Treasury Department is directed to study and report within one year of enactment on how to coordinate the section 25A education credits (including the Lifetime Learning Credit) with the federal Pell Grant program and the feasibility of requiring students to perform community service in return for the credits.

Energy credits. The ARRA introduced or extended a range of energy tax incentives for individuals and businesses, including credits for energy efficiency equipment and building components, plug-in electric drive vehicles (section 30D) and renewable energy production.

Earned income credit. For tax years 2009 and 2010, the earned income tax credit percentage for families with three or more qualifying children is increased from 40% to 45%.

First-time homebuyer credit. For home purchases after Dec. 31, 2008, and before Dec. 1, 2009, the ARRA increased the amount of the first-time homebuyer credit from $7,500 to $8,000 ($4,000 for married taxpayers filing separately). A first-time homebuyer is an individual who had no ownership interest in a principal residence in the United States during the three-year period ending on the date of the purchase of the home to which the credit applies. Further, taxpayers who remain in the home for 36 months are not required to repay the credit. In any case, no amount is required to be recaptured after the death of the taxpayer. The credit phases out for individuals with AGI between $75,000 and $95,000 ($150,000 to $170,000 AGI for joint filers).

The taxpayer may elect to treat a purchase during 2009 as made on Dec. 31, 2008, so it may be claimed on a 2008 amended return (the AGI limitations would then be based on 2008 information).

Notice 2009-12, 2009-6 IRB 446, explains how to divide the credit when two or more unmarried individuals purchase the principal residence. The notice provides several examples on how to claim the credit.

Making work pay credit. New section 36A allows a credit of the lesser of 6.2% of an individual’s earned income or $400 ($800 for married filing jointly). Earned income for these purposes includes net earnings from self-employment that are includable in taxable income, as well as combat pay excluded from gross income under section 112.

Effective for tax years 2009 and 2010, the credit is intended to offset an individual’s share of FICA on the first $6,452 of earnings. The credit is phased out at a 2% rate for individuals whose modified AGI exceeds $75,000 ($150,000 for married filing jointly). The credit is not available to nonresident aliens, individuals who may be claimed as a dependent by another taxpayer, or any estate or trust. It may be claimed through a reduction in wage withholding or in a lump sum on the tax return filed for the year the wages were earned.

The credit will be reduced by the onetime economic recovery payments of $250 provided by the Veterans Administration, Railroad Retirement Board and the Social Security Administration under ARRA §§ 2201 or 2202. New Schedule M, Making Work Pay and Government Retiree Credits, is attached to Form 1040 to compute theproper amount of the credit.

ALTERNATIVE MINIMUM TAX
AMT exemptions. The ARRA increased the AMT exemptions for 2009 to $70,950 for a joint return, $46,700 for single taxpayers and heads of household and $35,475 for married taxpayers filing separately. Commonly referred to as the “AMT patch,” this measure comes with an estimated cost of $70 billion to provide AMT relief to an estimated 26 million taxpayers. The ARRA also extends to tax years beginning in 2009 the rule allowing nonrefundable personal tax credits against AMT.

Adjustments in computing AMT. The ARRA allowance for up to a five-year carryback of NOLs for tax years beginning or ending in 2008 (see “Net operating losses” earlier) applies under the AMT as well as regular tax. However, the 90% limit on use of an AMT NOL did not change (a proposal to change the limit to 100% did not become law).

Middle-Income Tax Relief

http://www.webcpa.com/article.cfm?ARTICLEID=31160
Washington, D.C. (March 30, 2009)
By WebCPA staff

Senate Finance Committee Chairman Max Baucus, D-Mont., has announced legislation that would make existing tax breaks permanent for working families and individuals.

The measures would make permanent the 2009 exemption levels for the alternative minimum tax and index them for inflation, while permanently allowing personal credits against the AMT.

It would make permanent the 10, 25, and 28 percent individual tax rates (the 15 percent tax rate is already permanent), and make permanent the reduced threshold of $3,000 for the refundable portion of the child tax credit. The proposal would also make permanent the 2009 estate, gift, and generation-skipping transfer tax laws and index the exemption amount.

“Today we’re offering a piece of certainty during an uncertain time for millions of hardworking, honest Americans,” said Baucus. “These measures are not excessive or outrageous, but timely and targeted, and will build on earlier efforts to stabilize the economy,” he said.

Original co-sponsors of the Baucus legislation include Sens. Jay Rockefeller, D-W.Va., and Charles Schumer, D-N.Y.

http://money.cnn.com/2009/04/03/pf/taxes/potential_tax_changes/index.htm?section=money_topstories

Bringing in more revenue from corporations
One revenue raising idea is a reform of the deferral rule for U.S.-based multinationals. Currently, a U.S.-based company doesn't need to pay income tax on its foreign subsidiaries' profits unless and until the money is brought back to U.S. shores.

The provision makes it more attractive for companies to invest in countries with lower tax rates.

"Obama is serious about going after deferral," said Anne Mathias, director of research at Concept Capital.

The administration has said it wants to make a change but has yet to propose any specifics.

One idea discussed by lawmakers is to eliminate the deferral option so companies have to pay tax on their overseas profits when earned.

"The government doesn't want to subsidize U.S. companies to invest overseas," said tax policy expert Eric Toder, a senior fellow at the Urban Institute.

Another idea is to preserve the deferral option but prohibit companies that use it from deducting expenses incurred to support their overseas operations until they bring their profits back to U.S. shores.

The deduction measure would be "unwieldy," Mathias said. It would be hard for companies to separate deductible expenses from non-deductible ones when they stem from the same personnel or systems used to support U.S.-based and offshore operations. "It's simpler to just take away the deferral," she said.

Already corporations are lining up lobbyists to shoot down the idea. Kies, who served as the head of the Joint Committee on Taxation when Republicans controlled Congress, is one of them.

"This isn't a theory. We've tried this before and it ended disastrously," he said.

Kies noted that between 1986 and 2004, U.S.-based international shippers were denied deferral. The number of U.S.-based shippers shrank. When Congress reinstated deferral in 2004, the tax was cited as a cause of the decline for the U.S. shipping industry.

In other efforts to tax U.S. money abroad, Congress is trying to crack down on offshore tax havens, increasing enforcement both against the individuals who shelter their money in other countries and the banks that help them do so.

Extending tax cuts
Obama has proposed making permanent the income tax cuts put into place during the Bush administration for couples making less than $250,000 and for single filers making less than $200,000.

Senate Finance Chairman Max Baucus, D-Mont., has introduced legislation that would do just that.

On the other side of the debate are some tax experts and federal deficit hawks who worry about the effects tax cut permanency on the country's revenue and debt levels.

The Tax Policy Center estimates extending the cuts for middle and lower income families would reduce revenue by more than $2 trillion over 10 years relative to current law, which assumes the tax cuts would expire by 2011.

Reviving the estate tax
As things stand now, it would pay off mightily for heirs if their relatives die in 2010 -- the estate tax is slated to expire for that year and that year only. Come 2011, it's scheduled to revert to its 2001 level, where only the first $1 million of an estate would be exempt from the tax and the taxable portion of the estate would be taxed at rates up to 55%.

Obama has called for the estate tax to be made permanent at its 2009 levels adjusted for inflation going forward. That would mean the first $3.5 million of one's estate would be exempt from estate tax and taxable portions of the estate would be taxed at rates no higher than 45%.

Baucus included the provision in legislation he introduced last week.

Kies expects that lawmakers may pass a one-year extension of the 2009 estate tax parameters for 2010, and then include a more permanent extension in a broader piece of tax legislation next year.

The Tax Policy Center estimates making the 2009 levels permanent would reduce revenue by more than $300 billion over 10 years.

Curbing health insurance tax breaks
Health reform is one of the administration's leading agenda items that lawmakers are likely to take up in earnest this year. But many legislators favor paying for Obama's health reserve fund by limiting the tax break that employees receive when they buy their health insurance through work.

Right now the portion of premiums paid by employers is treated as tax-free compensation. And there is no limit on how much employers may contribute.

Lawmakers are considering capping the amount that would be treated as tax free.

Hiking taxes on carried interest
The president's 2010 budget calls for a portion of the profits paid to managers of hedge funds and private-equity funds to be taxed as ordinary income rather than as an investment gain. In other words, it would be subject to a much higher tax rate than the 15% long-term capital gains rate that the managers have been paying.

The administration estimated the provision could raise $24 billion over 10 years.

But the top tax writers in the Senate -- Baucus and Charles Grassley, R-Iowa -- indicated last week that change may not be coming in the near term.

"Private equity interests, I'm told, are not going to be paid in carried interest for the next several years," Baucus said, noting that it's less of an issue than it was when the money was flowing like water, according to Congress Daily.

But he allowed for the possibility that the proposal will be "in the mix" when international tax reform is considered in 2010.

Make permanent the Making Work Pay credit
The new tax credit for middle and low-income families, worth up to $400 per worker ($800 per working couple) is in place for 2009 and 2010.

The president proposed in his budget to make it permanent, but as of right now the idea is not likely to make it into lawmakers' budget resolution. That doesn't mean, however, it won't make it into future tax bills.

The Tax Policy Center estimates making the credit permanent would reduce revenue by $537 billion over 10 years. To top of page