Federal Tax Law Changes
Effects on 2009 return filing
and 2010 tax planning
S. Kay Bell, tax journalist and author of
“The Truth About Paying Fewer Taxes”
Presented Jan. 12, 2010, to the
Austin Chapter, Texas Society
of Certified Public Accountants
Tax-writing History
or Who’s to Blame?
Article I, Section 7
of the Constitution of the
United States provides:
All Bills for raising
Revenue shall originate
in the House of
Representatives;
but the Senate may
propose or concur with
Amendments as on
other Bills.
Continual Meddling
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Congress, when it’s not fighting amongst
itself, can never leave well enough alone.
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From October 2008 to November 2009, one
tax law – the first-time homebuyer credit –
was changed three times.
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The IRS lists more than two dozen individual
tax return changes for this filing season.
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An old Capitol Hill joke is that the official
subtitle of every tax bill is The Accountants’
Full Employment Act.
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Or maybe it’s not a joke. 80% of taxpayers
last year hired a tax preparer or used tax
software to complete their returns.
Astounding Tax Code Growth
In 1913, CCH’s
Standard Federal Tax
Reporter needed 400
pages to discuss the
Internal Revenue Code.
Last year, it contained
70,320 pages.
Any guesses as to the
2010 edition’s size?
Perpetual Procrastination
• Compounding the problem of all the new laws
we have to cope with each year is lawmakers’
tendency to wait until the last-minute … if they
finally do get around to making changes.
• Extenders are perennial problems.
• Potential for disaster: In 2010, the estate tax
died because of Congressional inaction.
Key New 2009 Tax Laws
Affecting Individuals
• First-time and move-up
homebuyer credits
• Making Work Pay and
government retiree credits
• Savings Bond purchases
with refund money
• Tax-exempt unemployment
compensation
• Roth rollover expansion
• Casualty loss limit increase
• American Opportunity
Education Credit
• New auto sales tax
deduction
• EITC tweaks for filers
with three or more kids
• Energy-efficient home
improvement credit
• No RMDs
• Second home sale
exclusion limits
• New 1040 Forms L & M;
Revisions to Schedules A
&B
Key New 2009 Tax Laws
Affecting Businesses
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Increased Section 179 expensing
Extension of bonus depreciation
Expanded net operating loss carryback
Exclusion of gain on the sale of some
small-business stock
• Reduced estimated tax safe harbor
• COBRA continuation subsidy
Key New 2010 Laws … So Far
• No more income limits for Roth IRA conversions
• No more high-income taxpayer phase-outs
• Homebuyer credit available for part of the year
• Repayment of original first-time homebuyer $7,500 “credit” begins
• Last chance for some energy-related breaks: hybrid vehicle and
home energy-efficiency improvements
• Domestic production activities deduction for certain businesses
increased
Everlasting Extenders
• Ostensibly temporary tax laws that are
regularly extended, hence the name
• Why not permanent? Short-term, relatively
small budget costs are easier to offset, as
the House is required to do.
• And then we have the planning issues
when they lapse or are passed late.
Should I do this? Will that still be
deductible when I file? Who knows?
Problems for All
When laws are extended at the very end of a tax year,
or retroactively the next tax year, a vicious cycle is set in motion.
For taxpayers:
Even more confusion
and frustration
than usual.
For tax and financial professionals:
Extra time required to track
changes, consult with clients.
Law flux complicates tax advice, strategies.
For the IRS:
Law changes/continuations approved after printing deadline = reprints = $$$$
Even online form changes take time, delaying filing acceptance dates and processing.
Laws that Lapsed in 2009:
Popular Individual Extenders
• IRC § 62(a)(2)(D) – Deduction for elementary and
secondary school teachers and other educators
• IRC § 63(c)(1) – Additional standard deduction for state
and local real property taxes
• IRC § 164 – State and local sales tax deduction
• IRC § 165(h) – Deduction for personal casualty losses
in federally declared disasters
• IRC § 222 – Deduction for tuition and related expenses
• IRC § 408(d)(8) – Allowance for tax-free distributions
from individual retirement plans for charitable purposes
Laws That Lapsed in 2009:
Estate Tax
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“Throw Momma From the Train”
Planning issues
Retroactivity – Constitutional questions
Political battles – Committed anti-estate
tax contingent not likely to make it easy
for this law to be reinstated
• Court battles probable
What’s on the Tax Horizon?
• Health Care
• Alternative Minimum Tax
• “Creative” Revenue Options
• Tax Day of Reckoning: 1.1.11
• Complete Tax Overhaul
Paying for Health Care
• Various tax options
• Businesses and
individuals affected
• Staggered effective
dates
The AMT
• 1969 loophole closer on wealthy (back
then defined as $200,000 AGI) now affects
more middle-class filers.
• Complicated and costly to taxpayers who
really aren’t its target.
• Lip service to killing this parallel tax.
• Raises too much money to eliminate;
estimates range from $600 billion to
$800 billion over 10 years.
AMT Geography
10 states, plus D.C., with highest percentage
of total filers subject to alternative minimum tax:
New Jersey, New York, Connecticut, California, District of Columbia,
Maryland, Massachusetts, Rhode Island, Oregon, Minnesota and Virginia.
“Creative” Revenue Raisers
or What Else Can We Tax?
• Health care set the stage
• Specific, dedicated taxes
• Transaction tax, aka The Tobin Tax
• Raking in Roth dough?
Health Care Proposals
Opened the “Other” Tax Door
• Surtax on the wealthy
• Bo-Tax goes, Tanning Tax takes its place
• “Sin” taxes – Sugared beverages are the
latest fat tax target
Specific, Dedicated Taxes
• Isolates the debate
• Budgetary/tax response to line-item veto
• Afghan War Surtax
– Political posturing meets specific revenue stream
• Mileage taxes
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London has had a congestion zone vehicle tax since 2003
The Netherlands’ per-kilometer tax takes effect in 2012
Possibility of a U.S. federal per-mile tax floated earlier this year
Texas is contemplating a per-mile tax on drivers to replace the
state’s current per-gallon fuel excise tax
The Tobin Tax
• Named after James Tobin, the late
American economist and Nobel
laureate who in 1972 was the first
to suggest a securities transfer tax
to discourage currency speculation
and penalize short-term trading.
• Latest iteration – 0.25% tax on the
sale and purchase of stocks,
options, derivatives and futures.
– Retirement accounts would
be exempted.
• Concern – The tax, especially
in a struggling economy, would
stifle growth.
• Appeal – $150 to $300 billion/year.
Will the Roth IRA Survive?
• Expanded traditional-to-Roth conversion eligibility will
give the Treasury a short-term influx of tax revenue.
• Uncle Sam is hoping most who do convert in 2010
choose to defer taxes into 2011 and 2012 since tax rates
will likely be higher then.
• Given the deficit situation, there’s speculation that
Congress eventually will renege on Roth’s tax-free
status, at least partially.
• Most common prediction: A tax on Roth IRA distributions
analogous to the tax on some Social Security benefits.
• Precedent: Until 1983, Social Security benefits were
tax-free.
Mark Your Tax Calendars:
Big changes coming Jan. 1, 2011
Unless Congress acts:
• Individual income tax rates will go from
10%, 15%, 25%, 28%, 33% and 35% to
15%, 28%, 31%, 36% and 39.6%
• Capital gains tax rates that currently are 0% and 15%
depending on AGI revert back to 10% and 20%.
• Qualified dividends now taxed at lower capital gain rates
will again be taxed at higher ordinary income rates.
• Child credit falls from $1,000 per child to $500 per child.
• The estate tax will be fully reinstated at pre-phaseout
levels: a 55% rate and a $1 million exemption.
A Simplified Tax Code?
• Last major change: “historic” 1986 Act
• Bush 43’s Blue Ribbon Tax Reform Panel
– DOA because of
powerful real estate industry
• Obama’s Economic
Recovery Advisory Board
– Missed December deadline;
still “gathering information”
• Flat Tax/National Sales Tax
– Political divide, complicated by lobbyists for tax breaks
– Practical difficulty: Income tax so woven into entire economy
Is there a solution?
• Demand Congress do
its job in a timely manner.
– If lawmakers at least make
tax law changes well in advance
of expiration deadlines, everyone
will be better equipped to deal with
and plan for them.
• Bottom line
– Political expediency and
revenue needs vs. sound tax policy
Resources
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Internal Revenue Service
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http://waysandmeans.house.gov
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Ways and Means Committee
http://www.ustreas.gov
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http://waysandmeans.house.gov
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Senate Finance Committee
Joint Committee on Taxation
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Thomas/Library of Congress
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CCH
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Tax Analysts
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Tax Foundation
www.taxfoundation.org
WebCPA
http://www.webcpa.com/
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http://www.taxanalysts.com/
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National Taxpayer Advocacy Panel
http://www.improveirs.org
www.cch.com
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National Taxpayer Advocate
http://www.irs.gov/advocate/
http://thomas.loc.gov
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TIGTA
http://www.treas.gov/tigta/
www.jct.gov
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Congressional Budget Office
http://www.cbo.gov/
http://finance.senate.gov
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Treasury Department
Accounting Web
http://www.accountingweb.com/
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Don’t Mess With Taxes
http://dontmesswithtaxes.typepad.com/