Warning: Creating default object from empty value in /nfs/c06/h01/mnt/157023/domains/taxationbrief.com/html/wp-content/themes/blox/framework/zilla-theme-functions.php on line 141
Uncategorized | Taxation Brief

Boehner’s “New Revenue”

Well, that didn’t take long regarding tax reform after the election.

John Boehner:

We’re willing to accept new revenue under the right conditions.

Pray tell, what does “new revenue” mean?  Raising tax rates? Limiting deductions? Boehner previously said that raising rates isn’t an option, so it may well be limiting deductions.

 

The IRS & Legalized Marijuana, Not so Fast

Forbes on legalized marijuana after the 2012 election:

But no matter how “legal” the states make it the IRS is federal and that means trouble. American businesses pay tax on their net not their grossincome and business expenses are as American as apple pie. But Section 280E of the tax code denies deductions for any business trafficking in controlled substances. This black letter rule to stop drug dealer tax deductions also covers medical marijuana since federal law still classifies it as a controlled substance.

In other words, marijuana dispensaries in states where marijuana is legal for either medical or recreational use, cannot deduct any expenses.

IRS Announces Qualified Disaster Treatment of Payments to Victims of Hurricane Sandy

IRS:

The Internal Revenue Service today alerted employers and other taxpayers that because Hurricane Sandy is designated as a qualified disaster for federal tax purposes, qualified disaster relief payments made to individuals by their employer or any person can be excluded from those individuals’ taxable income.

The Marketplace Fairness Act & The Marketplace Equity Act

Proposed legislation in Congress seeks to grant authority to states to compel remote sellers, e.g. catalog- & internet-based sellers, to collect sales tax from their customers, whether the customers and sellers are located in the same state or not. Both proposed laws address concerns raised by the U.S. Supreme Court in two decisions: National Bellas Hess v. Illinois Department of Revenue, 386 U.S. 753 (1967), and Quill v. North Dakota, 504 U.S. 298 (1992).

The “Dormant” or “Negative” Commerce Clause

The U.S. Federal Government is only granted limited powers by the U.S. Constitution and all others are reserved to the states. Perhaps the most noteworthy of those powers granted is the plenary power to regulate interstate commerce, i.e. commerce that affects more than one state. This power is often called the “commerce clause” power. A close corollary to the commerce clause power is the “negative” or “dormant” commerce clause, which implicitly prohibits states from unduly burdening interstate commerce.

“Complicated Obligations”

In 1967, the U.S. Supreme Court decided National Bellas Hess v. Illinois Department of Revenue and wrote the following regarding Illinois’ efforts to collect sales tax from sellers who did not have a physical presence in Illinois:

The many variations in rates of tax, in allowable exemptions, and in administrative and record-keeping requirements could entangle [the seller’s] interstate business in a virtual welter of complicated obligations to local jurisdictions.

In other words, the Court was concerned that the administrative burden associated with complying with the each state’s sales tax laws was too great to impose upon remote sellers.

This holding was subsequently upheld when the U.S. Supreme Court decided Quill v. North Dakota in 1992. In that case, the Court stated:

[O]ur decision is made easier by the fact that the underlying issue is not only one that Congress may be better qualified to resolve, but also one that Congress has the ultimate power to resolve. No matter how we evaluate the burdens that use taxes impose on interstate commerce, Congress remains free to disagree with our conclusions.

In other words, the Court interpreted the U.S. Constitution as allowing Congress to pass legislation that allows states to compel sellers to collect sales tax.

Proposed Legislation

Both the proposed Marketplace Fairness Act, making its way through the U.S. Senate, and the proposed Marketplace Equity Act, making its way through U.S. House of Representatives, seek to reduce potential administrative burden placed upon sellers by requiring that each state simplify its tax code before it can compel remote sellers to collect sales tax from buyers in such states.

Both proposed acts also set an exemption for sellers that generate less than a stated amount of sales per year. The Marketplace Fairness Act proposes that sellers with total annual gross U.S. sales less than $500,000 be exempt from collecting sales tax in states where they do not have a physical presence. In contrast, the Marketplace Equity Act proposes that sellers be required to collect sales tax from customers in states where a seller does not have a physical presence if a seller has total annual gross U.S. sales greater than $1,000,000 or if a seller generates more than $100,000 in sales from customers in any particular state.

If some version of the bills is passed, the effect upon catalog- and internet-based sellers that do not qualify for an exemption will likely be substantial in terms of revenue, accounting, and information systems.

This brief overview of some important considerations associated with the Marketplace Fairness Act & the Marketplace Equity Act is by no means comprehensive. Always seek the advice of a competent professional when making important legal and financial decisions.

IRS Extends Fling Deadline in Sandy’s Wake

The Wall Street Journal:

The tax agency says the relief will apply mainly to businesses in the storm-impacted Northeast and Mid-Atlantic states whose payroll and excise tax returns and payments are normally due on Wednesday. The deadline will be extended until Nov. 7. No action is required by the taxpayer to obtain the extension.

In addition, further deadline relief could be granted depending upon declarations made by FEMA.

 

The Looming “Fiscal Cliff” of 2012

The much-discussed “fiscal cliff” facing the United States is the result of federal tax and spending policy changes that will become effective January 1, 2013, caused largely by the following: 1) the expiring “Bush tax cuts,” 2) the Patient Protection and Affordable Care Act (often called “Obamacare”), and 3) the Budget Control Act (passed in 2011 to increase the debt ceiling).

1) Expiring “Bush Tax Cuts”

The Economic Growth and Tax Relief Reconciliation Act of 2001, or EGTRRA, substantially modified portions of the Internal Revenue Code, including, among other things, income tax rates (including capital gains and dividend tax rates), and effective estate & gift tax exclusions. All the 2001 tax cuts were set to expire at the end of 2010 but were mostly extended until January 1, 2013 by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“Tax Relief Act of 2010”).

Unless Congress passes legislation similar to Tax Relief Act of 2010, which the President also signs into law, income tax rates will increase  by about 3% to 5% for most tax brackets, with the exception of the 15% bracket which will not increase. Some rates that apply to specific types of income, e.g. long-term capital gains & dividends, will increase substantially. In particular, long-term capital gains will increase by about 5% to 10%. In addition, dividend rates will increase by 13% to 24.6%.

The expiration often EGTRRA will also substantially change the effective estate & gift tax exclusions. The estate tax exclusion will drop from $5.12 million to $1 million, which will result in the imposition of a 55% federal tax on estates in excess of $1 million. The lifetime effective federal gift tax exemption will also be reduced from $5.12 million to $1 million, which will result in a similar imposition of a 55% federal tax on total gifts exceeding $1 million during a person’s lifetime, excluding gifts in amounts less than the annual exclusion.

The non-partisan Congressional Budget Office (“CBO”) estimates that the expiration of the Bush Tax Cuts will result in a tax increase of approximately $500 billion in 2013.

2) The Patient Protection and Affordable Care Act

The Patient Protection and Affordable Care Act will impose a 3.8% surtax on some types of income, subject to certain thresholds beginning in 2013. The applicable thresholds and the manner in which the surtax is calculated vary widely depending upon whether the taxpayer is an individual or an estate or non-exempt trust.

In general, the 3.8% surtax is applicable to net investment income, which is the sum of investment income in excess of allowable investment expenses. For estates and non-exempt trusts, the surtax is only applicable to net investment income received but not distributed in a tax year. For individuals, the surtax is applicable to net investment income received by the taxpayer in a tax year.

For individuals, the income threshold amounts depend on the filing status of the taxpayer and are $250,000 for married couples filing jointly, $125,000 for married couples filing separately, and $200,000 for all other individuals. For

estates and non-exempt trusts, however, the effective threshold will likely be about $12,000.

3) The Budget Control Act

In order to raise the so-called “debt ceiling” and stave off a default by the United States on its debt obligations, Congress passed the Budget Control Act in 2011. This Act requires, among other things, a minimum total reduction in federal spending of $1.2 trillion through 2021.

The Budget Control Act prescribes a procedure that Congress and the President must follow to reduce the budget in order to avoid sequestration, i.e. automatic across-the-board budget cuts beginning January 1, 2013. If sequestration occurs, the automatic cuts will reduce the 2013 budget by about $110 billion. About half of the cuts will be defense-related and the other half will be split among Medicare provider payments and insurance plans, farm price supports, and other programs. Some expenditures, however, are exempt from sequestration, i.e. Social Security, Medicaid, Food Stamps, and Supplemental Security Income (“SSI”).

The Fiscal Cliff

The Congressional Budget Office (“CBO”) estimates that the expiration of the Bush Tax Cuts, the 3.8% Medicare surtax, and sequestration will reduce the federal budget deficit from about $1.1 trillion in 2012 to about $641 billion in 2013. As a result, the CBO estimates the economic growth in the U.S. will decline by about 0.5% and result in around 9% unemployment.

This brief overview of some important considerations associated with the Economic Growth and Tax Relief Reconciliation Act of 2001, the Patient Protection and Affordable Care Act, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 1010, and the Budget Control Act is by no means comprehensive. Always seek the advice of a competent professional when making important legal and financial decisions.

This brief overview of some important considerations associated with the Economic Growth and Tax Relief Reconciliation Act of 2001, the Patient Protection and Affordable Care Act, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 1010, and the Budget Control Act is by no means comprehensive. Always seek the advice of a competent professional when making important legal and financial decisions.

Annual State-Local Tax Burden Ranking

Tax Foundation:

Since 2000, state and local burdens have increased from 9.3 percent to 9.9 percent. During the 2010 fiscal year, however, burdens remained fairly stable, only decreasing
slightly from their 2009 levels.

Of particular note, the study doesn’t look at the revenue collected rather the burden upon the taxpayer:

For each state, we compute this measure of tax burden by totaling the amount of
state and local taxes paid by state residents to
both their own and other governments and
then divide these totals by each state’s total income.

REITS & Expanding Asset Types

National Real Estate Investor:

Recent additions to the REIT structure include billboards and related sign superstructures, floating gaming facilities, racking/shelving for computer servers and document storage, cell towers and electricity transmission lines. Beyond those, experts see potential in a number of assets that could be classified as real property such as railroad tracks, farmland and sporting venues such as arenas and ballparks.

As a part of this broadening of asset types that are considered real property, the IRS seemingly tries to determine an entity’s intent as to wether a particular asset is personal or real property.

IRS 2013 Inflation Adjustments

Forbes:

The annual exclusion for gifts rises to $14,000 in 2013, up from $13,000 this year. Each taxpayer can give any number of individuals $14,000 a year each without worrying about gift tax.

 

 

You can put five years of annual gifts into a 529 college savings plan for each child at once (you need to file a gift tax return). That’s $140,000, up from $130,000, for a couple, per child.

The IRS also adjusted, inter alia, the amounts that can be contributed to 401(k), 403(b) plans, and most 457 plans.

 

Social Security Tax Base Increases for 2013

Social Security Administration:

[T]he maximum amount of earnings subject to the Social Security tax (taxable maximum) will increase to $113,700 from $110,100.  Of the estimated 163 million workers who will pay Social Security taxes in 2013, nearly 10 million will pay higher taxes as a result of the increase in the taxable maximum.

A two-year reduction of the Social Security tax rate, 4.2% as opposed to 6.2%, for employees is scheduled to expire at the end of 2012. If the reduction expires, the maximum Social Security tax employees would pay during 2013 is $7,049.40; however, if the reduction is extended, that amount would drop to $4,775.40.