by NFS | Dec 10, 2010 | Archives
WASHINGTON – The Internal Revenue Service today announced that interest rates for the calendar quarter beginning January 1, 2011, will decrease by one percentage point. The rates will be:
three (3) percent for overpayments [two (2) percent in the case of a corporation];
three (3) percent for underpayments;
five (5) percent for large corporate underpayments; and
zero and one-half (0.5) percent for the portion of a corporate overpayment exceeding $10,000.
Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points. Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points. The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.
The interest rates announced today are computed from the federal short-term rate during October 2010 to take effect November 1, 2010, based on daily compounding.
by NFS | Dec 9, 2010 | Archives
WASHINGTON BUREAU — House Democrats today passed a non-binding resolution rejecting a tax-cut package negotiated by Obama administration officials and congressional Republicans.
The House Democrats were especially critical of a provision in the agreement that would provide a $5 million per-person estate tax exemption.
The resolution passed by a voice vote, according to House Ways and Means Committee staffers.
Rep. Lloyd Doggett, D-Texas, said the resolution was adopted by a “very loud voice vote” and that he believes House Speaker Nancy Pelosi, D-San Francisco, will respect the views of the caucus.
The package, “in the form that it was negotiated, it is not acceptable to the House Democratic caucus,” Rep. Chris Van Hollen, D-Md., said. “It’s as simple as that.”
The House Democrats’ action came as Senate Democrats weighed options for having the package come up for a vote there Monday.
Senate Democrats must resort to a parliamentary maneuver because tax measures are supposed to originate in the House.
The House Democratic Caucus is “very upset” about the package negotiated by the White House, and there is a push to not vote on the package, regardless of what the Senate does, Ways and Means staffers said.
The estate tax provision in the package would provide a $5 million exemption and a 35% tax maximum estate tax rate. The provision would expire in two years.
Democrats support a provision backed by Rep. Earl Pomeroy, D-N.D. That provision, passed in 2009, would set a $3.5 million exemption and a 45% maximum tax rate. Pomeroy was defeated for reelection last month.
Other package features opposed by House Democrats include payroll tax language, the Ways and Means staffers said.
After the caucus vote, Obama administration officials said they remain confident that “the major components” of the tax compromise will pass, according to White House representative Jen Psaki.
A Democratic advisor to the White House said that Senate Democrats “have several vehicles they can use” as the legislative base for the tax package, and that they are working on a plan to pass a tax bill and “then jam the House” with that legislation.
The White House-Republican tax package includes a 2-year extension of the Bush-era tax cuts. This extension could cost about $314 billion, according to the Congressional Research Service.
The Association for Advanced Life Underwriting (AALU), Falls Church, Va., has been active in estate tax negotiations.
“We continue to work with lawmakers to reiterate the importance of sustainable estate tax reform in the range of 2009 law, as well as the importance of reunifying the gift and estate tax levels as these important discussions move forward,” AALU President Nat Perlmutter says in a statement.
by NFS | Dec 9, 2010 | Archives
The 2010 Small Business Jobs Act, enacted on Sept. 27, 2010, provides a new opportunity for Roth 401(k) plan participants to convert their existing 401(k) plan balances into Roth 401(k)s.
“The Act also allows participants making the conversion in 2010 to spread the tax hit over a two-year period,” said Richard O’Donnell, a senior retirement plan analyst at the Tax & Accounting business of Thomson Reuters.
A Roth 401(k) plan has a “qualified Roth contribution program” that allows participants to make “designated Roth contributions” in lieu of all or some of the elective deferrals that they could otherwise make under a 401K plan. For example, if a participant defers $10,000 to his 401(k) plan that has a Roth program, he can elect to have some (or all) of his $10,000 deferral placed in the Roth portion of the plan. The downside is that amounts contributed to the Roth portion are not made on the pre-tax basis that typically applies to 401(k) contributions. The upside is that when the participant takes a distribution, those contributions, plus their associated earnings, are received free of federal income tax. So, the Roth 401(k) acts similar to a Roth IRA in that there is no tax advantage for contributions made to the plan, however, distributions from the plan are tax-free.
Some limits apply to Roth 401(k)s, for example, employer-matching contributions are not allocated to the Roth portion of a 401(k) plan. Further, once a deferral is contributed to the Roth portion of the plan, it must remain there. Unlike contributions made to regular Roth IRAs, there is no “recharacterization” provision to undo it. Therefore, a contribution to the Roth portion of a 401(k) plan is irrevocable.
O’Donnell notes that the 2010 Small Business Jobs Act provides new rules for Roth 401(k) plans that can provide plan participants with tax planning opportunities:
• The Act allows plan participants to convert in-service distributions from the non-Roth portion of their plan into Roth contributions. Participants who are eligible for an in-service distribution under their 401(k) plan (typically, once a participant reaches age 59 ½, or becomes disabled) can transfer qualifying, eligible rollover distributions to the Roth portion of the plan. Distributions that were not previously taxed will need to be included in taxable income. However, once distributed from the Roth portion of the 401(k) plan, these amounts and their earnings will be tax-free.
• This provision allows participants to “convert” their pre-tax employee deferrals and employer contributions into post-tax Roth contributions, without needing to take a distribution from the plan and then contribute that amount to a Roth IRA.
• However, amounts in a 401(k) plan account subject to distribution restrictions cannot be converted to Roth 401(k) contributions. Therefore, if a plan does not allow for in-service distributions or distributions before normal retirement age, Roth 401(k) conversions cannot be made.
• The 10 percent tax on early withdrawals (which generally applies to the taxable portion of a plan distribution made before the participant has reached age 59 ½, unless an exception applies) does not apply to distributions that are made as part of a Roth 401(k) conversion. However, “this relief comes with a caveat — a ‘recapture’ rule applies to distributions within a specified five-tax-year holding period,” said O’Donnell. “So, amounts contributed to the Roth portion of the 401(k) plan must remain there for five years to avoid this tax.”
• As an additional benefit, a participant may elect to spread the tax hit from the Roth contribution over two years for conversion distributions made in calendar year 2010. Under this provision, the participant includes one-half of the distribution that is subject to tax in income in 2011 and the other half in 2012. This defers taxes on the conversion and may lower the tax rate that would otherwise apply to the amount converted.
• This two-year tax-deferral tax must be accelerated, however, if the participant receives a distribution from the Roth portion of the 401(k) plan in 2010 or 2011. Acceleration is also required if the participant dies before 2012, unless a surviving spouse acquires the entire account and elects to continue the deferral.
• Instead of electing this two-year deferral, a participant may elect to include the entire taxable amount of the distribution in 2010 gross income. “This may be the best option for those who expect to be in higher tax brackets in 2011 and 2012,” said O’Donnell. Once made, a participant may not revoke this election after the due date, including extensions, of his 2010 federal income tax return.
Plan sponsors must amend their plans to permit Roth 401(k) conversions. However, sponsors have until the later of the last day of the year in which the amendment takes effect or December 31, 2011, to make the amendment for participants to take advantage of the tax deferral for 2010 conversions.
by NFS | Dec 8, 2010 | Archives
Check out the NFS December Estate Ideas – http://ping.fm/kDyyZ
by NFS | Dec 7, 2010 | Archives
WASHINGTON, D.C. – President Obama announced a deal Monday evening to extend the Bush-era tax rates for two years, as well as other tax breaks and unemployment benefits, after Republican and Democratic congressional leaders forged a compromise in meetings with administration officials.
However, the deal to extend the Bush tax cuts even for those making more than $250,000 a year met with criticism from some Democrats who accused the president of giving in to Republican tactics and violating one of his campaign pledges.
House Democrats passed a bill last week to extend the income tax rates only for those making less than $250,000 a year, but the Senate failed last Saturday to pass two versions of the bill that would have extended the current tax rates for those making less than $250,000 or $1 million a year. Vice President Joe Biden plans to meet with members of the Senate Democratic caucus on Tuesday to sell the plan to them.
Obama argued that the deal was necessary to sustain the economic recovery. “Make no mistake,” he said. “Allowing taxes to go up on all Americans would have raised taxes by $3,000 for a typical American family. And that could cost our economy well over a million jobs.”
The deal would also extend unemployment benefits for 13 months for those whose benefits ran out at the end of last month or would have run out by the end of the year. An estimated 2 million people were expected to lose their emergency unemployment insurance benefits by the end of December.
Other elements of the deal would extend several other tax breaks that the administration believes are crucial to generating jobs, sustaining the economy, and making higher education more affordable.
“In exchange for a temporary extension of the tax cuts for the wealthiest Americans, we will be able to protect key tax cuts for working families — the Earned Income Tax Credit that helps families climb out of poverty; the Child Tax Credit that makes sure families don’t see their taxes jump up to $1,000 for every child; and the American Opportunity Tax Credit that ensures over 8 million students and their families don’t suddenly see the cost of college shooting up,” said Obama.
The Making Work Pay payroll tax cut, which was introduced with last year’s economic stimulus bill, would be extended for another year under the deal, as well as bonus depreciation tax breaks that allow businesses to deduct the entire cost of purchasing equipment. “This agreement would also mean a 2 percent employee payroll tax cut for workers next year — a tax cut that economists across the political spectrum agree is one of the most powerful things we can do to create jobs and boost economic growth,” said Obama. “And we will prevent — we will provide incentives for businesses to invest and create jobs by allowing them to completely write off their investments next year.”
The agreement also encompasses the estate tax, which temporarily went to zero at the beginning of this year, but was scheduled to return in January at a rate of 55 percent for estates over $1 million. The tax rate will instead be capped at 35 percent for estates, with an exemption of $5 million for individuals and $10 million for couples.
The President said the tax cuts would help those who had been hit hardest by the recession, and whose taxes would otherwise go up while everybody else’s stayed the same. He also pointed out that the deal would help the unemployed.
“Under this agreement, unemployment insurance will also be extended for another 13 months, which will be welcome relief for 2 million Americans who are facing the prospect of having this lifeline yanked away from them right in the middle of the holiday season,” said Obama.
He noted that without a deal with Republican lawmakers, taxes would have gone up for everybody next year.
“What is abundantly clear to everyone in this town is that Republicans will block a permanent tax cut for the middle class unless they also get a permanent tax cut for the wealthiest Americans, regardless of the cost or impact on the deficit,” he said.
“We saw that in two different votes in the Senate that were taken this weekend,” Obama added. “And without a willingness to give on both sides, there’s no reason to believe that this stalemate won’t continue well into next year. This would be a chilling prospect for the American people whose taxes are currently scheduled to go up on January 1st because of arrangements that were made back in 2001 and 2003 under the Bush tax cuts.”
Obama emphasized that he was not willing to let that happen. “I know there’s some people in my own party and in the other party who would rather prolong this battle, even if we can’t reach a compromise,” he said. “But I’m not willing to let working families across this country become collateral damage for political warfare here in Washington. And I’m not willing to let our economy slip backwards just as we’re pulling ourselves out of this devastating recession.”
Senate Minority Leader Mitch McConnell, R-Ken., gave his endorsement on the deal. “I appreciate the determined efforts of the President and Vice President in working with Republicans on a bipartisan plan to prevent a tax hike on any American and in creating incentives for economic growth,” he said in a statement. “Their efforts reflect a growing bipartisan belief that a new direction is needed if we are to revive the economy and help put millions of Americans back to work. Members of the Senate and House will review this bipartisan agreement, but I am optimistic that Democrats in Congress will show the same openness to preventing tax hikes the administration has already shown.”
However, some Senate Democrats felt that Obama gave in too quickly to Republican demands during the negotiations. “I don’t know if he caved,” Sen. Sherrod Brown, D-Ohio, told CNN. “I think he could have gotten a better agreement.”
By Michael Cohn
Accounting Today
