Taxable Talk

After huffing and puffing and bloviating some more, Congress passed the compromise measure extending the Bush Tax Cuts for two years. It will be signed by President Obama in the next few days. Here’s what’s in and out and what this means for you.

1. All of the current (2010) marginal tax rates will remain unchanged through 2012.
2. The Estate Tax will be at 35% for estates above $5 million for 2011 and 2012.  As of now, the Estate Tax will move back to 55% on estates above $1 million for 2013.  The estate tax adds portability of the $5 million estate tax exemption; as noted in Joe Kristan’s post, this will add work for tax professionals–many estates which otherwise would not need to file an Estate Tax return will have to.
3. The AMT patch has been added for both 2010 and 2011 (but not 2012).  The AMT exemption for 2010 will be $47,450 for individuals and $72,450 if married filing jointly.
4. The bill lowers the social security tax on employees by 2% (to 4.2% from 6.2%) for 2011 only.  The employer portion of this tax will remain at 6.2%.
5. Most of the tax breaks that needed to be extended were extended for2010 and 2011.  These include the R&D credit, the teachers’ tax deduction of $250, and credits on energy efficient appliances.  One tax break has vanished, though: You can no longer deduct property tax paid unless you itemize your deductions.
6. This makes 2010 tax planning like most years.  In my most recent newsletter I wrote, “…[T]his year is the first time in the last twelve years where I’m advising many clients to move income into the current year rather than deferring income into the following year.  That’s because income tax rates are definitely going up, and this year you likely want to consider paying more in tax.”  This is no longer true.  Thus, the normal rules apply: In general, you should accelerate deductions and defer income. If you think you will be hit with AMT this may not be the case, and you should contact our office to discuss your specific situation.

So Merry Christmas, taxpayers, and enjoy the gift that Congress has left in your stockings for the New Year.

I’m in Las Vegas (I have an audit here tomorrow morning), and it’s definitely a good locale given the fight over the Obama/GOP compromise on the Bush Tax Cuts. The 111th Congress has but a couple of weeks left, but one major issue still exists: Will the compromise pass as is, will it be modified in some manner, or will it fail and tax rates rise for everyone?

I haven’t a clue which whey this will end, and it’s very hard for me to give good tax advice when the tax rate could be x or y. Will certain items be extended or not?

Las Vegas is a perfect place to discuss this as it’s definitely the location for any discussion of betting odds. But I don’t know what those odds are, and I think it will be much wiser for me to just see the results in a week.

The same is true for poker aficionados who are waiting to see if Senator Harry Reid (D-NV) will insert into the compromise or some other piece of ‘must-pass’ legislation a measure that would clearly legalize and regulate online poker in the United States.

I’ll let you know when we have facts rather than speculation.

Senate negotiators and President Obama reached an agreement on temporarily extending the Bush Tax Cuts for two years. Included with this will be two years of a $5 million estate tax exclusion with estates over this amount taxed at 35%. Also included was an extension of unemployment benefits.

There’s also a new tax reduction: The social security (FICA) tax one employees will be reduced for one year from 6.2% to 4.2%. The employers’ share would remain at 6.2%.

What was apparently agreed to is an outline; the exact details must still be worked out. Still, perhaps it’s a compromise both sides can live with. Or as Peter Pappas notes, perhaps its a measure that ideologues on both sides will reject. The very liberal wing of the Democratic party in the House is the most likely to balk at this agreement.

Still unknown at this point is the annual AMT patch and online gambling legislation. We’ll likely know more on both of these by week’s end.

It appears that there will be a temporary extension of the Bush Tax Cuts for two years. At least, that’s the direction Congress is moving in from news reports. While the House passed a motion to only approve an extension of the cuts for the “Middle Class,” that bill died in the Senate. President Obama signaled a willingness to compromise if there’s an extension of unemployment benefits. So there’s the probable compromise: Extension of the Bush Tax Cuts for all along with an additional one-year of unemployment benefits.

Of course, that does bring up some issues:

• When will the AMT Patch be passed?
• Will legislation pass dealing with the Estate Tax or will I be doing lots of Estate Tax Returns in the future?
• Will Harry Reid (D-NV) insert online poker legislation into either the AMT Patch bill or the Bush Tax Cut/Unemployment Benefits legislation?

Add to this the possibility that Harry Reid will insert online poker legalization into this bill and it should be an interesting week in Washington.

The poker world is abuzz with word that Senate Majority Leader Harry Reid (D-NV) is circulating legislation that would legalize online poker in the United States. Poker newsgroups, such as 2+2, have long threads on the proposed legislation. Here’s what’s known at this point:

1. The proposed legislation is circulating in various drafts in Washington.  Like the UIGEA that, in theory, made financing online gambling illegal, this legislation would be attached to some “must-pass” legislation.  The two most obvious targets are the AMT patch and the compromise bill that would extend the Bush Tax Cuts and unemployment benefits.
2. The bill would implement a United States-based licensing scheme, with licensing run through state licensing boards.  Given that Harry Reid is from Nevada, the Nevada Gaming Commission would likely be preeminent in such matters.
3. In one draft of the legislation, states that have legalized poker (except Washington) would be considered to have “opted in” to the legislation; states without legalized poker would be considered to have “opted out.”  States would be able to switch, probably by a vote of the state legislature and such legislation being signed by the state’s governor.  If you’re a resident of Utah, it’s likely you will be out of luck.
4. Eventually, current providers of online poker would be allowed to apply for licenses.  It’s likely it will be some time before they’ll actually be able to obtain the licenses.
5. The bill makes other types of online gambling (e.g. online blackjack) a clear violation of the Wire Act.
6. There will likely be other impacts depending on the exact wording of the legislation.

For the online gambling community, you need to remember that this is draft legislation being circulated behind the scenes. There is a good chance this legislation is not attached to anything, and does not make it into law. And as always, the devil is in the details, and this Congress has been quite good about voting on legislation first and then reading it second (e.g. Obamacare).

In one way this is deja vu. Back in 2006, then Senator Bill Frist pushed through the UIGEA by attaching it to the Safe Ports Act. It will be interesting to see if the effective end of the UIGEA for online poker comes about by legislation attached to some other must-pass bill.

The 111th Congress will likely be remembered in history books for profligate spending and going against voters’ wishes. Sure, some of President Obama’s agenda was enacted (such as Obamacare), but most of it wasn’t wanted by voters. The public responded by voting out many Democrats. However, the 111th Congress will be back in session one last time in a ‘lame duck’ session.

As Jim McTague reports in Barron’s, the upcoming tax season will almost certainly be worse than usual. First, it’s almost certain that an AMT patch will be enacted. (If an AMT patch is not enacted, somewhere around 25% of Americans, including many middle-class families, would be hit with AMT. Congresscritters are well aware that the outcry would last years, and would ensure that they wouldn’t be Congresscritters the next time they come up for an election.) However, will the Senate consider that patch this week? Or what about the budget? No, food safety will dominate the Senate this week.

What this means is that the IRS must assume an AMT patch won’t be enacted, and the agency won’t update their computers until one is. That means the IRS probably won’t accept electronic returns (or process most paper returns) until sometime in February.

Next, what about the Bush Tax Cuts. President Obama has said he’d like to see those extended for the “middle class” while Republicans want them extended for everyone. I don’t see anything passing the 111th Congress, so while I think eventually we will see such legislation, and some to all of the Bush Tax Cuts will be extended, the IRS will be forced to assume that none of them will be.

What does this mean? Well, if you get a paycheck, the withholding tables the IRS will issue will assume higher tax rates, and you will get less money in early 2011. Assuming that some sort of extension of the Bush Tax Cuts eventually passes, we’ll see revised withholding tables sometime during 2011. Until that happens, you will receive less pay. As I’ve said before, the elimination of a tax cut is a tax increase.

I agree with Mr. McTague’s conclusion:

Democrats and Republicans in the 111th haven’t worked together in two years…My advice: Assume the worst, and take some profits and income in 2010. And plan for less take-home pay in the first part of 2011.

I’m a small business owner. I’m now reasonably successful, but I look warily at what’s coming down the pipeline in Washington (and Sacramento, for that matter) and don’t like what I see.

Today, I read a great post on the TaxGirl and see:

Get the picture? Small businesses are very often about family. Interestingly, families are the very entities that Congress has deliberately exempted from many of the breaks offered to small businesses. I’m not sure how that’s supposed to make sense.

A few minutes later I read on the TaxProfBlog the impact if the Estate Tax comes back in full (55% tax on all estates greater than $1 million). Professor Caron has linked to a study by the American Family business Foundation which purports that the reinstatement of this tax could cost over 1.3 million jobs.

Last week, I read on RothTaxUpdates how the goal of letting the Bush Tax Cuts expire is to hurt small business. Joe Kristan links to the Tax Policy Blog and notes how the huge upcoming tax increase on pass-through entities is apparently the goal. Surprise, surprise: Most small businesses and most family businesses are organized as pass-through entities.

Let me ask you, what has Congress done in the past two years that has helped small businesses? The singular accomplishments are the Stimulus Plan, Cash for Clunkers, ObamaCare, and more regulations and taxes. If anyone wonders why incumbents are feeling the heat, they don’t have to go any further.

Hooray for new math,
New-hoo-hoo-math,
It won’t do you a bit of good to review math.
It’s so simple,
So very simple,
That only a child can do it!
–Tom Lehrer, “New Math”

That’s what I think of President Obama’s proposal for expensing of fixed assets. That was one part of his proposals to help the economy. Joe Kristan points out that it just speeds up depreciation from (say) five years to one year, but after five years the amount of income a company will have is identical. Of course, we’re also facing higher tax rates courtesy of the end of the Bush Tax Cuts…and that will wipe out any gains under this new plan.

But there’s a cost to this, too–and I’m not talking about whatever revenue ‘enhancements’ are proposed to balance the cost of this plan. Rather, many states will not conform to the new law (California is guaranteed not to). It will be yet another conformity issue for tax professionals and business owners to deal with.

If I were advising the President, I’d tell him there’s a simple fix to the economy. Just cut government spending and simplify the ridiculously complex Tax Code. Unfortunately, the chance of my advising the President is just about zero. Fortunately, that also appears to be the chance that this proposal becomes law.

What will the impact be of the elimination of the Bush Tax Cuts? Proponents of eliminating the cuts note that only 3% of small business owners will be impacted. Well, that’s true…but it’s anything but the whole story.

As Joe Kristan has noted, the real number is the amount of income that will be pushed up into higher tax brackets, and it’s a lot more than 3%. It’s 48%, as noted in a recent Wall Street Journal op-ed.

Joe has plenty more to say about it (here and here).

Today’s Orange County Register reminded me of an occurrence 29 years ago. On August 13, 1981, President Ronald Reagan signed into law the Kemp-Roth Tax Cut (the Economic Recovery Act of 1981). At the time, the economy looked horrible: inflation was high, unemployment was high, and the word ‘stagflation’ was in common use. The tax cuts led to an economic boon.

The Register gets this right:

On the 29th anniversary of the Reagan tax cuts, the political elite in Washington, D.C, led by President Obama, should heed the lessons of the 40th president. Burdening people further with taxes is the last thing we ought to be doing – we should be putting money back in the pockets of the taxpayers.

Today, the economy looks pretty miserable. While inflation isn’t high, unemployment is even higher, and there are no signs of economic growth. Unfortunately, President Obama isn’t a fan of President Reagan. He and his Secretary of the Treasury (Tim Geithner) are proposing tax increases (the ending of the Bush Tax cuts). The likelihood of tax increases stimulating the economy is the same as the Cubs making this year’s World Series.