New Health Care Legislation
A commentary by Karla Dennis, CEO of Cohesive
 

Greetings friends and clients,
 
Any fan of classic horror knows the story: Baron Von Frankenstein retires to his dark and foreboding castle with the concept that he can create life from inanimate flesh. He robs graves to gather the bits and portions to piecemeal together a body suitable for experimentation. Then, just because he can, the doctor animates the corpse.  In the end, the creation kills its creator and runs amok. In the original Victorian novel by Mary Shelly, the monster goes off to a frozen wilderness, hoping against hope that it will eventually die...since it is essentially immortal, having been brought back from death.
 
The analogy is not far from fact. The health care legislation just passed by the Democratic House of Representatives comprises such a monster. Without going into any of the contentious details, simply focusing on the taxes imposed, here is the monster just brought to life: 
 
The imposition of a new 3.9 percent Medicare payroll tax.

Raising the capital gains tax to 24 percent from 15 percent, which includes repealing the Bush tax cut - a 60 percent tax increase. So instead of keeping 85 cents on the extra dollar invested, you will only get to keep 76 cents. That's a 10 percent drop in the after tax incentive for capital formation. 

There are even deeper cuts to Medicare Advantage, which will mean fewer and less attractive Medicare Advantage plans available to seniors.  

Walgreens in the state of Washington, will not be accepting any new Medicaid patients starting April 16th. Others will follow.
 
There are increases in the employer penalties for not complying with the mandates which will hitall businesses with more than 50 employees. 
 
Democrats' health bill cuts Medicare by $523 billion.  

Here is the way the cuts break down:
·        $202.3 billion in cuts to seniors Medicare health plans including massive cuts targeting the extra benefits and reduced cost sharing that seniors receive through Medicare Advantage;
·        $156.6 billion in cuts to inpatient and outpatient hospital services, inpatient rehab facilities, long-term care hospitals.  There's no expanded care anywhere
·        $39.7 billion in cuts to home health reimbursements;
·        $22.1 billion in additional cuts to hospitals by slashing reimbursements designed to assist hospitals that serve low-income patients;
·        $20.7 billion in cuts to the Medicare improvement fund;
·        $13.3 billion in yet-to-be-determined Medicare cuts from the hands of an unelected federal board. 
 

In all, the bill would generate $409.2 billion in additional taxes by 2019, according to an analysis by the congressional Joint Committee on Taxation, a nonpartisan agency.

The bill also imposes about $69 billion more in penalties for individuals and businesses who don't meet mandates to buy insurance, according to the Congressional Budget Office, another nonpartisan agency.

Higher Medicare Taxes

Most of the revenue would come from higher Medicare taxes on about 1 million individuals earning more than $200,000 and about 4 million couples filing jointly who make more than $250,000.

The legislation would for the first time apply Medicare taxes to investment income received by these households beginning in 2013. The 3.8 percent rate would apply to unearned income such as realized capital gains, dividends, interest, rents, and royalties. It wouldn't apply to other income subject to income taxes, including interest from municipal bonds and retirement accounts such as 401(k) plans until funds are withdrawn.

Obama's budget proposes to allow the existing 15 percent tax rate on dividends and capital gains to rise to 20 percent in 2011 for the same high-earners. Layering a 3.8 percent Medicare tax on top of that would mean a new top rate on dividends and capital gains of 23.8 percent. The top tax rates on interest and rental income would rise to as high as about 44 percent, assuming other Obama tax increases on high-earners are enacted.

The bill also increases the individual's share of Medicare tax currently imposed on salaries starting at $200,000 for individuals and $250,000 for couples to 2.35 percent, from 1.45 percent currently.

Cost to Couples

The combination of the new Medicare taxes and Obama's budget proposals, if they were in place this year, would cost a married couple with a household income of $5 million an extra $287,100 in taxes, according to analysis by the consulting firm Deloitte Tax in Washington.

The Medicare taxes superseded an earlier Senate proposal to tax high-value employer-provided insurance coverage, dubbed "Cadillac plans." That 40 percent excise tax was delayed until 2018, when it would begin to apply to benefits over $10,200 for individuals and $27,500 for couples.

Those thresholds would be indexed to inflation, which grows at a slower pace than the cost of health care, meaning more employers would likely face the levy over time.

Other provisions likely to affect higher-income individuals would scale back tax preferences associated with paying out-of- pocket medical expenses. Starting in 2013, Americans under 65 won't be able to deduct medical expenses until they exceed 10 percent of income, up from 7.5 percent now; retirees would keep the lower threshold.

Savings Accounts

The bill in 2011 places new restrictions on what can be purchased using special savings accounts funded with pre-tax dollars including health savings accounts. Improper withdrawals from the accounts also would be hit with a new 20 percent tax.

And the legislation for the first time would place a $2,500 limit on what can be contributed to employer-sponsored flexible spending accounts, another type of account funded with pre-tax dollars that can be used to pay for medicines, co-payments, and other expenses.

Employers currently set their own limits, typically between $3,000 and $5,000 in the absence of a government cap. This change would cost an average worker about $625 in tax savings, according to Wage Works Inc., a San Mateo, California, company that administers 1.5 million accounts.

Esoteric Taxes

Consumers who frequent tanning salons would pay a 10 percent excise tax.

 Those who buy devices such as wheelchairs would pay a 2.9 percent excise tax.

Drugmakers may pass on a $3 billion annual fee.

Insurers would be denied deductions for executive pay over $500,000.

Under the reconciliation bill, individuals who don't purchase insurance would be subject to a fine of $325 in 2015 and $695 in 2016. Individuals may be subject to a charge equal to as much as 2.5 percent of their income in 2016, if the total is greater than the flat payment. The bill provides for the hiring of an additional 17,000 new IRS agents strictly assigned to enforce the mandate.

Employers with 50 or more workers would pay $2,000 per worker if they don't offer health insurance. The legislation offers a small business tax credit to help pay for employer- provided premiums.
And I am only scratching the surface on this legislation. It cuts deeper...much deeper.
At the moment, a coalition of 9 states are filing suit to stop it. We at Cohesive will stay abreast of it all and keep you informed. If this all does come to the forefront, we pledge to study it at length and offer you the very best solutions we can find.
 

To Your Success,
Karla K. Dennis - The Tax Diva

 

Tax benefits for hybrid vehicles
January 2009

The trend toward buying energy-efficient vehicles continues. If you bought a hybrid car last year-or if you're searching for a new car this year-consider all the tax implications.
Under the current tax law, you may be entitled to a credit of up to $3,000 for a 2008 model or one of the newer '09 models. The credit replaced the previous “clean-air deduction” for vehicles.
However, be aware that the tax credits may be reduced for the most popular models. At a certain point, the credit no longer is available.
Reason: The IRS certifies a particular make and model as being eligible for the credit. The exact amount of the hybrid vehicle credit depends on a computation involving the mileage savings and the fuel economy for the car's weight class. The better the car's performance, the higher the credit.
Under the 2005 energy law, the credit begins to phase out in the second calendar quarter after the calendar quarter in which at least 60,000 of the manufacturer's qualified passenger automobiles and light trucks have been sold. Once the manufacturer hits the 60,000 mark, the credit for all hybrid models it produces are reduced by 50% for a six-month period and then by 75% for the following six-month period. Finally, the credit disappears for good.
We can help you determine the available tax benefits for purchasing a hybrid vehicle. Do not hesitate to call our office to obtain more information.

Very truly yours,
John W. Northup, CPA

P.S. Don't overlook the potential tax benefits in this area. Call (530) 367-3520 to schedule a consultation.

How to avoid accumulated earnings tax

In the current economic climate, it's a good idea for your company to save money for emergencies. However, if a company keeps too much in the way of earnings and profits, it could be socked with an "accumulated earnings tax" on top of regular corporate income tax.
The accumulated earnings tax was designed to avoid excessive accumulations within a company. It applies to "accumulated taxable income" (i.e., taxable income, with certain adjustments, less the dividends-paid deduction and an accumulated tax credit). The minimum credit for this purpose is $250,000 ($150,000 for personal service corporations). So if you keep the accumulation below the $250,000/$150,000 mark for the year, you're in the clear.
Prior to 2003, dividends were taxed at ordinary income rates reaching as high as 39.6%. So high-income business owners had a powerful tax incentive to stockpile profits and earnings instead of paying out highly taxed dividends. But a 2003 tax law reduced the tax on qualified dividends to 15%. At the same time, the rate for the accumulated earnings tax was lowered to 15%.
The 15% tax rate has since been extended through 2010. Then it reverts to the scheduled 39.6%
Even with the current 15% rate, this is a stiff price to pay for keeping emergency funds on hand. What's more, the situation will become dire in a couple of years.
Fortunately, if you exceed the minimum credit amount, there's a fallback position. No penalty tax is imposed on amounts accumulated for a "reasonable business need." To qualify under this safe-harbor, you must show that you have a definite plan for using the money and that the plan was in place during the applicable tax year.
We can help your company devise a strategy for avoiding the accumulated earnings tax while it preserves a reasonable amount of corporate assets. Call our office to arrange an in-depth consultation.

Very truly yours,

John W. Northup, CPA

P.S. The penalty for excess accumulations in 2009 is greater than it's been in recent years.

The Tax Strategist www.TheTaxStrategist.net

 

Six ways to make your business “Go Green”

Besides helping to save the planet, your small business can actually save taxes by “going green.” Here are six prime examples:

1. Encourage use of mass transit. Your firm can offer mass transit passes to your workers. These passes, or reimbursements to obtain transit fare, are tax-free up to an annual limit indexed for inflation. For 2008, an employee may receive mass transit benefits of up to $115 per month, without paying income tax.
2. Set up car pools. Employees may ride back and forth from work in a company-owned “commuter highway vehicle.” The tax-free limit for 2008 is $115 per month per employee.
3. Allow employees to work from home. Although there's no specific tax break on the books for at-home workers, employees may qualify for home office deductions if the arrangement is made for the employer's convenience.
4. Build up energy tax savings. A business owning a commercial building can claim a special tax deduction for meeting certain energy-efficient standards. If you qualify, the deduction is equal to $1.80 per building square foot less any aggregate deductions claimed in prior years.
5. Drive a better tax bargain. You can claim a tax credit for hybrids or other vehicles that use alternative fuel sources. The credit for a hybrid vehicle may range from $250 to $3,400 depending on its fuel economy.
6. Write off equipment fast. Under section 179, your business may be able to currently deduct up to $250,000 of the cost of energy-efficient equipment placed in service this year. What's more, you can also claim the 50% “bonus depreciation” deduction for new equipment purchased this year. Best of all, the Section 179 deduction can be combined with bonus depreciation.

Very truly yours,
John W. Northup, CPA

P.S. These tax strategies can be adapted to your firm's situation. Call us at (530) 367-3520 to examine your particular facts and circumstances.We can help you develop an overall plan of action that meets your objectives. Give us a call to learn more.

The Tax Strategist www.TheTaxStrategist.net

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Generate energy tax breaks

Several clients have asked us about the tax incentives for energy savings contained in the new economic stimulus law (the American Recovery and Reinvestment Act of 2009). The new law changes may benefit both individual and business taxpayers. Following is a brief overview.

For individuals: The new law triples the residential energy credit to 30% of qualified expenditures (up from 10%). Furthermore, the lifetime $500 dollar cap is eliminated. It's been replaced by an overall limit of $1,500 for 2009 and 2010 combined. The changes are effective for energy-saving installations made after 2008 and before 2011.
The enhanced residential energy credit covers a wide range of improvements, including insulation materials; exterior windows (including skylights); exterior doors and central air conditioners.
The new law also removes the dollar caps for the separate 30% credit for expenditures on qualified solar hot water property, geothermal heat pumps and wind energy property. Caveat: A $500 cap per .5 kilowatt hour of capacity applies to qualified fuel cell property costs.
For businesses: A business building owner may claim a tax deduction equal to $1.80 per square foot of new or existing commercial buildings that meet certain conditions. Alternatively, partial deductions of up to $.60 per square foot are available for eco-friendly improvements affecting the building envelope, lighting systems or heating and cooling systems.
Under last year's Emergency Economic Stabilization Act, deductions may be claimed for property placed in service after 2006 and before 2014 if certain conditions are met.
Finally, the 2009 Stimulus Act includes numerous other technical modifications. For instance, it extends the credit for electricity produced from renewable sources through 2013 (through 2012 for wind facilities).
This is only a brief summary of the key rules. Call our office to determine how you may benefit from the tax law changes.

Very truly yours,

John W. Northup, CPA

P.S. It is important to understand these tax breaks and what documentation to secure before you make any energy-saving installations. Contact us at (530) 367-3520 to obtain an assessment.

The Tax Strategist www.TheTaxStrategist.net

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Bailout law strategies    December 2008

The Emergency Economic Stabilization Act of 2008-informally called the “bailout law” in the media-extends a wide variety of tax breaks that had expired after 2007. Generally, the extensions continue through 2009.
There are several strategies that may provide benefits for taxpayers under the new law. For example:

o Pay next semester's tuition. Under the bailout law, the above-the-line deduction for qualified higher education expenses is restored.
o Buy a 'big-ticket' item. The new law reinstates the optional deduction for state and local sales taxes. Even if you use the IRS tables, you can tack on the sales tax for certain big-ticket items.
o Give to charity from your IRA. If you're age 70_ or older, the tax law allows you to transfer contributions of up to $100,000 from an IRA to a charity without incurring any tax.
o Add on property tax deductions. Earlier this year, the new housing law authorized a one-time property tax deduction for nonitemizers. Now the bailout law extends the special deduction for another year.
o Resume business research activities. The new bailout law revives the tax credit for qualified research activities conducted by a business. In addition, it enhances the alternative simplified credit while repealing the alternative incremental credit.
o Claim faster building write-offs. Generally, it takes 39 years to write off the cost of most building improvements. However, Congress previously authorized a 15-year write-off period for qualified restaurant and leasehold improvements. The bailout law extends this tax treatment through 2009.
o Donate business goods to charity. The new law revives enhanced deductions for donations of food, books and computers through 2009.
Of course, this is only an overview of provisions in the new law that may work to your tax advantage. For more information, call us to set up a meeting.

Very truly yours,

John W. Northup, CPA

P.S. We can help you develop a personalized plan geared to your particular situation. Call (530)367-3520 with questions and to schedule an appointment.

The Tax Strategist www.TheTaxStrategist.net

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Avoid new employment tax crackdown

The IRS has announced it is teaming up with more than half the states to crack down on employment tax violations. These information-sharing agreements, which are included under the IRS' Questionable Employment Tax Practice (QETP) initiative, are intended to provide a centralized and uniform means for improving compliance.

State agencies, the U.S. Labor Department, the National Association of State Workforce Agencies, the Federation of Tax Administrators and the IRS all worked together on various aspects of the agreements.
As of this writing, 29 states have agreed to participate. They are: Arizona, Arkansas, California, Colorado, Connecticut, Hawaii, Idaho, Kentucky, Louisiana, Maine, Massachusetts, Michigan, Minnesota, Nebraska, New Hampshire, New Jersey, New York, North Dakota, Ohio, Oklahoma, Rhode Island, South Carolina, South Dakota, Texas, Utah, Vermont, Virginia, Washington and Wisconsin. Others may soon join the fold.

The IRS and the states hope joint efforts will reduce fraudulent filings, uncover tax avoidance schemes and ensure proper worker classifications. In particular, distinguishing which workers should be treated as independent contractors and which should be classified as employees has long been a point of contention.
As a result, it is recommended that employers consult with their business advisors to ensure they are in full compliance with both federal and state employment tax laws. You may schedule an in-depth evaluation by calling us at (530)367-3520 (ph & fx) 24/7 (answer machine equipped).

Very truly yours,John W. Northup, CPA

P.S. The risks are substantial. If the IRS assesses additional taxes, an employer may also owe interest and penalties, which can double the cost.

The Tax Strategist www.TheTaxStrategist.net

 

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