House members on November 16 approved, by a 422-to-0 margin, legislation repealing the 3-percent withholding tax imposed on federal contractors while providing tax credits for employers who hire military veterans. The measure is the first portion of President Obama’s failed jobs package to receive full bipartisan support in both the House and Senate.

The estimated $11.2-billion cost of repealing the withholding tax is offset by changing the calculation of modified adjusted gross income in determining eligibility for some health care credits, including Medicaid, and the Children’s Health Insurance Program. The 3-percent withholding tax was imposed six years ago on federal contractors to crack down on tax avoidance as part of the Tax Increase Prevention and Reconciliation Act of 2005.

The $1.6-billion cost of the veterans’ hiring provisions is offset by delaying scheduled fee reductions on mortgage applications for loans guaranteed by the Department of Veterans Affairs. The bill offers a tax credit of up to $5,600 for hiring veterans who have been looking for a job for more than six months, as well as a $2,400 credit for veterans who are unemployed for more than four weeks, but less than six months. The measure also calls for a tax credit of up to $9,600 for hiring veterans with service-connected disabilities who have been looking for a job for more than six months.

The Senate unanimously approved on November 10 after Senate Majority Leader Harry Reid, D-Nev., added the VOW to Hire Heroes Bill of 2011 as an amendment). The House had initially approved legislation repealing the 3-percent withholding tax on October 27 but the Senate amendment required the lower chamber to hold another vote. President Obama has stated his support for the measure.

As year-end approaches, we are helping our clients look for ways to minimize their 2011 income taxes.

If you are saving for college for your own children or for grandchildren and you pay Indiana income taxes, let the State of Indiana help you.

Section 529 college savings plans are specifically designed to help save for college.  Some features of these plans include:

• Contributions into the account are not tax deductible.
• Contributors are not subject to income limitations.
• Earnings on the account are tax-deferred.
• Distributions from the account are excluded from income if used for qualified higher education expenses.
• Contributions to a 529 account are considered a completed gift and are excluded from the contributor’s estate.
• Contributors can elect to take contributions larger than the annual gift exclusions into account ratably over five years.  For example, an individual can contribute $65,000 to a 529 in 2011 without gift tax consequences provided no other gifts are made to the account beneficiary in 2011.  For years 2012 – 2015, the $13,000 ($65,000 / 5) gift allocated to that year is taken into account for the annual gift tax exclusion in effect for those years.

Each state offers it own plan, which can typically be used by both residents and non-residents.  Generally, distributions can be used at any qualified post-secondary institution and are not limited to the specific state where the plan is held.

As an incentive to encourage savings for college, Indiana taxpayers are eligible for a state income tax credit of 20% of contributions to their Indiana CollegeChoice 529 account, up to a $1,000 credit per year.  Where else can you get a 20% return?

Contributions must be made by December 31st to be eligible for the credit.

If you would like to discuss this benefit in more detail and learn how it applies to your specific situation, please contact us.

In seeking for additional sources of revenue, many states are focusing on recovering revenue lost from sales by out-of-state Internet retailers to residents in their respective states. 

Thirteen states currently have what is commonly referred to as Amazon-type laws (which originated from New York State’s direct attack on Amazon.com) or seller notification requirements enacted to address this situation.  Twelve states currently have pending legislation. 

Amazon-type laws are laws that impose a use tax collection obligation on out-of-state sellers that enter into an agreement with one or more in-state residents, who directly or indirectly refer potential purchasers to retailers by a link on a website (or through other means) for a commission or other form of payment. 

A number of Indiana state lawmakers have indicated that they intend to lobby for legislation allowing states to collect sales taxes on Internet purchases.  Proponents of the legislation argue that this legislation is needed to level the playing field for brick-and-mortar retailers.  Opponents claim that current use tax laws address this issue and all that is needed is enforcement of current laws.

In addition, Simon Property recently filed suit against the Indiana Department of Revenue claiming the state’s decision to exempt Amazon from sales tax collection gives Amazon an unfair advantage.   

It is clear that with the explosion of Internet sales, resolutions will continue to be sought through legislation and the court. The outcome of which is sure to affect all of us as retailers or consumers. 

At Somerset, we stay abreast of these situations so we can proactively advise our clients. Please contact us for help.  We welcome your comments and questions.

The Internal Revenue Service announced the cost-of-living (COLA) adjustments applicable to dollar limitations for pension plans and other items for the 2012 tax year.  Below are a few of the limits that increased.

• The limits on elective deferrals for employees who participate in a 401(k), 403(b), 457 and a Thrift Savings Plan increased from $16,500 for 2011 to $17,000 for 2012.
• The annual limitation for Code Section 415© for defined contribution plans will increase in 2012 to $50,000 from $49,000 in 2011.
• The annual compensation limit under Code Section 401(a)(17) increased to $250,000 from $245,000.
• For defined benefit plans, the annual benefit limit increases from $195,000 for 2011 to $200,000 for 2012.
• For 2012, a ‘highly compensated employee’ is defined as one with compensation of $115,000, an increase from 2011.  As did the definition of a ‘key employee’ increased from $160,000 to $165,000.
• The Social Security wage base increased to $110,100 for 2012; previously $106,800 set in 2009.

Notable limitations that remained unchanged from 2011 to 2012:

• Individuals who are age 50 and above can make catch-up contributions to a 401(k), 403(b), 457 or other retirement plan.  The catch-up limit remains unchanged for 2012 at $5,500.
• The annual limit for an IRA contribution remains at $5,000.  The catch-up amount for IRAs also remains unchanged for 2012 at $1,000.
• The maximum contribution to a SIMPLE remains at $11,500.

Follow this link to the Full IRS Announcement, which includes a COLA Increases Table for pre-2003 dollar limitations.  For any questions regarding these changes or your specific tax situation, please contact Somerset for more details.

For each policy year ending after September 30, 2012, a health-plan-paid fee finances the Patient-Centered Outcomes Research Trust Fund (PCORTF) which will carry out the provisions of the Health Care Act relating to comparative clinical effectiveness research. This fee was added by the Health Care Act.

Each specified health insurance policy and each applicable self-insured health plan must for each policy year ending after September 30, 2012, pay a fee equal to the product of $2 ($1 for policy years ending during 2013) multiplied by the average number of lives covered under the policy. The issuer of the health insurance policy or the self-insured health plan sponsor is liable for and must pay the fee.

A specified health insurance policy is any accident or health insurance policy (including a policy under a group health plan) issued with respect to individuals residing in the U.S. The term doesn’t include any insurance if substantially all of the policy’s coverage consists of excepted benefits. Excepted benefits include (i) coverage only for accident, or disability income insurance or any combination of accident and disability income insurance; (ii) coverage issued as a supplement to liability insurance; (iii) liability insurance, including general liability insurance and automobile liability insurance; (iv) workers’ compensation or similar insurance; (v) automobile medical payment insurance; (vi) credit-only insurance (for example, mortgage insurance); (vii) coverage for on-site medical clinics; and (viii) other similar insurance coverage, specified in regulations, under which benefits for medical care are secondary or incidental to other insurance benefits.

An applicable self-insured health plan is any plan for providing accident or health coverage if any portion of the coverage is provided other than through an insurance policy and the plan is established or maintained:

(A) by one or more employers for the benefit of their employees or former employees;
(B) by one or more employee organizations for the benefit of their current or former members;
(C) jointly by one or more employers and one or more employee organizations for the benefit of employees or former employees;
(D) by a VEBA described in Code Sec. 501(c)(9) ;
(E) by any organization described in Code Sec. 501(c)(6) ) (e.g., business leagues, chambers of commerce); and
(F) for a plan not described in the preceding items, by a multiple employer welfare arrangement, a rural electric cooperative or a rural telephone cooperative association. (Code Sec. 4976(c)(2))

For a policy year ending in any fiscal year beginning after September 30, 2014, the dollar amounts in effect for the plan year will be equal to the sum of the dollar amount for plan years ending in the previous fiscal year (as adjusted under this provision), plus an amount equal to the product of: (1) the dollar amount for plan years ending in the previous fiscal year, multiplied by (2) the percentage increase in the projected per capita amount of National Health Expenditures, as most recently published by the Secretary of Health and Human Services before the beginning of the fiscal year.

For purposes of the procedure and administration provisions of the Code, the fees imposed are treated as if they were taxes. These fees won’t apply to policy years ending after September 30, 2019.

We have provided a link to IRS Notice 2011-35, which gives much more detail regarding this fee. How the fee will be paid is yet to be determined. We will keep you posted of any updates as they become available.

The Indiana General Assembly recently enacted a bill that changes the way Indiana adjusted gross income is determined.  One change that will impact individual taxpayers is that they will now be required to add back the amount of any interest received on bonds for states other than Indiana.  This interest is tax-exempt for federal adjusted gross income purposes.  Indiana bonds will continue to be tax-exempt for Indiana adjusted gross income purposes. 

This change is effective for obligations purchased on or after January 1, 2012.

If you are interested in speaking with one of Somerset’s tax professionals about how this change may impact your current investment strategy - please contact us here.  

For a complete listing of the changes to the way Indiana adjusted gross income is determined, please follow this link: www.in.gov/dor/reference/files/cd40.pdf

Today, October 3, 2011, is the due date for the first estate tax returns eligible for the new portable estate tax exclusion. Estates of married decedents dying after December 31, 2010 wishing to pass along the unused estate and gift tax exclusion must file an estate tax return.  So even if the gross estate is under $5 million, the executor must file a Form 706 to make this election to allow the unused exclusion to pass to the surviving spouse. Executors of decedents’ estates are granted an automatic six-month extension to file Form 706, which is requested by timely filing a Form 4768, Application for Extension of Time To File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes.

The new portable estate tax exclusion is effective for estates of decedents dying after 2010 and before 2013.  The 2010 Tax Relief Act allows a deceased spouse’s unused estate tax exclusion to be shifted to the surviving spouse.

• To understand the new portable estate tax exclusion in place for 2011 and 2012 decedents, review the following example.  For a married decedent dying in 2011 with an estate of $4 million, the executor of the first-to-die’s estate would elect to carryover the remaining $1 million of the decedent’s $5 million exclusion. The surviving spouse would then have a basic exclusion amount of $6 million to be used for taxable transfers made during life or at death.

Another item to note regarding the new portable estate tax exclusion is if a surviving spouse is predeceased by more than one spouse, the amount of unused exclusion that is available for use by the surviving spouse is limited to the lesser of $5 million or the unused exclusion of the last deceased spouse. The “last deceased spouse” limitation is applicable whether or not the last deceased spouse has any unused exclusion and it makes no difference if his estate made a timely election to allow the surviving spouse to use the deceased spousal unused exclusion amount.

Please contact us if you have any questions on the above or if you need any assistance.

Did you convert a traditional IRA to a Roth IRA in 2010? Has the balance in your Roth IRA fallen since the conversion? If so, you can undo (recharacterize) the conversion until October 17, 2011, and potentially save a lot of tax. By returning the money to your traditional IRA account you eliminate the tax on the prior Roth conversion. If you’ve already filed your 2010 tax returns, file an amended 2010 tax return to remove the Roth conversion income from Form 8606. Since the 2010 year allowed an equal deferral of Roth conversion income to 2011 and 2012, no 2010 tax would be refunded since the tax has not been paid yet. However, if you elected not to defer the Roth conversion income and recognized it all in 2010 you would recoup the tax previously paid. You then must wait 30 days after the recharacterization before you are able to reconvert the funds back to a Roth. Reconverting the smaller balance to a Roth will produce a lower tax bill overall (assuming the same tax brackets).

Example: Ron converted his traditional IRA of $500,000 to a Roth in 2010. He reported the $500,000 of conversion income on his 2010 Form 8606, but due to the special rule for 2010, he deferred the taxability of the gain equally to 2011 and 2012. By 08/26/11 his Roth IRA had declined to $300,000. Therefore, on 08/27/11 Ron recharacterized his 2010 Roth conversion back into his traditional IRA and filed an amended 2010 tax return removing the Roth conversion income originally reported. Now he won’t have to recognize the $250,000 of conversion income in 2011 and 2012. On 09/30/11 Ron did a new Roth conversion at the lower account value of $300,000. He will report the $300,000 of conversion income on his 2011 tax return. Assuming his tax rate is 35% for all years involved, he will have saved $70,000 (($500,000 - $300,000)x 35%) in federal tax.

Please contact us for help.

As CPAs assisting with client IRS audits, we see the items frequently looked at and challenged. One such item is the personal use of employer-provided vehicles to owners and employees.

Generally, the value of an employer-provided auto is a fringe benefit that must be included as compensation to the employee. 

The exception to this rule is when an employee utilizes a vehicle that qualifies as a non-personal-use vehicle (QNV)–simply stated, a vehicle that is not likely to be used for personal purposes or is used minimally. Examples of QNVs are police, fire and public safety vehicles, vehicles with a gross vehicle weight over 14,000 lbs, delivery trucks, buses, tractors, cement mixers, etc.

If the employer-provided vehicle is not a QNV, then an amount should be calculated for the fair market value of personal use. This amount should be included in the employee wages and subject to income tax withholding and payroll taxes. The value is based on what it would cost to lease a similar vehicle for the same period the auto is available for personal use.

The IRS provides three methods of calculating this value:

1. Annual Lease Value Method (ALVM)
2. Commuting Value Method (CVM)
3. Cents-per-Mile Method (CPMM)

The ALVM amounts are based on the vehicle’s fair market value on the first day that the vehicle is made available for personal use. See Auto Lease Value Table in IRS 2011 Publication 15-B on page 26 and see IRS 2011 Publication 15-B on page 27:  http://www.irs.gov/pub/irs-pdf/p15b.pdf

If purchased in an arm’s length transaction, this is the cost of the vehicle. The FMV is redetermined every 5 years on January 1 of that year or sooner if the vehicle is transferred to another employee. If the vehicle is not used for a full year, the amounts are prorated based on the number of days the vehicle was available. If used for less than 30 days, there is a separate calculation. 

The CVM values the employee’s personal use of the vehicle at $3.00 per round trip and $1.50 per one way commute.  This method can be used in 5 circumstances: 1) if multiple employees car pool in the same vehicle, 2) the employee is required to commute, 3) personal use is prohibited by the employer, 4) no personal use occurs or 5) the employee is not a control employee. All of these limited requirements are provided given that any personal use would be very minimal if at all.

The CPMM can be used in 2 circumstances: 1) if the company vehicle is valued at less than $15,300 for a passenger auto and $16,200 for a truck or van and 2) the employer expects the car to be used regularly for business the entire year, or the vehicle must be used at least 10,000 miles during the year. This method should be used the first day an employee uses the vehicle for personal purposes. Once used, this method should be used as long as it meets the eligibility requirements above. The exception to this is if the vehicle later qualifies for the CVM, then the CVM can be used.

To accurately record business and personal use mileage and have a defendable position with the IRS should you ever be examined, one should keep a mileage log detailing total business and personal mileage and follow the 5-W rule to document the business purpose: When was the use, why and what was the purpose, where did you go, and who did you meet.

Lastly, as long as the personal use of the company vehicle is recorded and properly included in employee compensation, the company can recover the cost of the vehicle as 100% business use listed property on Form 4562.

Somerset can help calculate the personal use of auto add-back to wages if you need assistance–please contact us.

Below is the Fact Sheet, released by the White House on September 19, 2011, of President Obama’s Deficit Reduction Plan. Although leading Republican lawmakers have indicated that any tax increases will not be acceptable, the President has included tax increases as part of his deficit reduction plan. President Obama has indicated that he will not accept any cuts in Medicare benefits for seniors without asking the wealthiest Americans and biggest corporations to pay their fair share.

Given the above positions, the possibility of this deficit reduction plan summarized below becoming law is slim to none. However, it is a place to start and will hopefully lead to some legislation that will help our country move forward in a positive manner. Somerset CPAs will be here to monitor and keep all of you posted of the progress and planning opportunities related to whatever legislation does get enacted.
Stay tuned!

White House fact sheet: Obama administration: Deficit-reduction plan
September 19, 2011

Fact Sheet: Living Within Our Means and Investing in the Future - The President’s Plan for Economic Growth and Deficit Reduction

Overview

The health of our economy depends on what we do right now to create the conditions where businesses can hire and middle-class families can feel a basic measure of economic security. In the long run, our prosperity also depends on our ability to pay down the massive debt the federal government has accumulated over the past decade. Today, the President sent to the Joint Committee his plan to jumpstart economic growth and job creation now - and to lay the foundation for it continue for years to come.

The President’s Plan for Economic Growth and Deficit Reduction lives up to a simple idea: as a Nation, we can live within our means while still making the investments we need to prosper - from a jobs bill that is needed right now to long-term investments in education, innovation, and infrastructure. It follows a balanced approach: asking everyone to do their part, so no one has to bear all the burden. And it says that everyone - including millionaires and billionaires - has to pay their fair share. Overall, it pays for the President’s jobs bill and produces net savings of more than $3 trillion over the next decade, on top of the roughly $1 trillion in spending cuts that the President already signed into law in the Budget Control Act - for a total savings of more than $4 trillion over the next decade. This would bring the country to a place, by 2017, where current spending is no longer adding to our debt, debt is falling as a share of the economy, and deficits are at a sustainable level.

The American Jobs Act

• Tax cuts to help businesses hire and grow
  ○ Cutting the payroll tax in half on the first $5 million in payroll, targeting the benefit to the 98 percent of firms with payroll below this threshold.
  ○ A complete payroll tax holiday for added workers or increased wages up to $50 million
  ○ Extending 100 percent expensing into 2012
  ○ Reforms and regulatory reductions to help entrepreneurs and small businesses access capital
• Putting workers back on the job while rebuilding and modernizing America
  ○ A “Returning Heroes” hiring tax credit for veterans
  ○ Preventing up to 280,000 teacher layoffs, while keeping cops and firefighters on the job
  ○ Immediate investments in infrastructure, school buildings, and neighborhoods as well as a bipartisan National Infrastructure Bank
• Pathways back to work for Americans looking for jobs
  ○ The most innovative reform to the unemployment insurance program in 40 years and extension of emergency unemployment insurance preventing 6 million Americans looking for work from losing benefits
  ○ A $4,000 tax credit to employers for hiring the long-term unemployed
  ○ Prohibiting employers from discriminating against unemployed workers when hiring
  ○ Expanding job opportunities for low-income youth and adults
• Tax relief for every American worker and family
  ○ Cutting payroll taxes in half for 160 million workers next year
  ○ Allowing more Americans to refinance their mortgages
• Fully paid for as part of the President’s long-term deficit reduction plan

Paying for Our Investments and Reducing the Deficit

• The plan produces approximately $4.4 trillion in deficit reduction net the cost of the American Jobs Act.
  ○ $1.2 trillion from the discretionary cuts enacted in the Budget Control Act.
  ○ $580 billion in cuts and reforms to a wide range of mandatory programs;
  ○ $1.1 trillion from the drawdown of troops in Afghanistan and transition from a military to a civilian-led mission in Iraq
  ○ $1.5 trillion from tax reform
  ○ $430 billion in additional interest savings
• To spur economic growth and job creation, the plan includes one-time investment and relief in the American Jobs Act. That adds to the deficit in 2012 but is fully paid for over 10 years, and deficit reduction phases in starting in 2013, as the economy grows stronger.
• Deficit reduction is achieved in a balanced approach, with a spending cut to revenue ratio for the entire plan (including discretionary cuts) of 2 to 1.

Deficits and Debt

• The Joint Committee plan significantly reduces deficits and puts the country on a fiscally sustainable path by 2017.
  ○ The deficit is projected to fall to 2.3 percent of GDP in 2021. By comparison, if we did nothing, the deficit would be 5.5 percent of GDP in 2021.
  ○ Reaches “primary balance”— where our current spending is no longer adding to our debt — in 2017. At that point, current spending is no longer adding to our debt, debt is falling as a share of the economy, and deficits are at a sustainable level.
• The President’s plan would reduce the national debt as a share of economy.
  ○ Stable or falling debt as a share of the economy is a key metric of fiscal sustainability.
  ○ If we did nothing, the national debt would rise to 90.7 percent of GDP in 2021. By contrast, under the President’s plan, the national debt would fall to 73.0 percent of GDP in 2021 — or an improvement of almost 18 percentage points.

Health Savings

• The plan includes $320 billion in health savings that build on the Affordable Care Act to strengthen Medicare and Medicaid by reducing wasteful spending and erroneous payments, and supporting reforms that boost the quality of care. It accomplishes this in a way that does not shift significant risks onto the individuals they serve; slash benefits; or undermine the fundamental compact they represent to our Nation’s seniors, people with disabilities, and low-income families.
• The plan includes $248 billion in savings from Medicare.
  ○ Within this total, 90 percent of the savings, or $224 billion, comes from reducing overpayments in Medicare.
  ○ Any savings that affect beneficiaries do not begin until 2017.
  ○ The plan does not propose to change the eligibility age for Medicare benefits.
• Other health and Medicaid savings amount to $72 billion.
• Because of the structural nature of these reforms, health savings grow to over $1 trillion in the second decade.
• The President will veto any bill that takes one dime from the Medicare benefits seniors rely on without asking the wealthiest Americans and biggest corporations to pay their fair share.

Other Mandatory

• The plan includes $250 billion in savings from other mandatory programs.
• Included within these savings are:
  ○ $33 billion in savings from agriculture subsidies, payments, and programs
  ○ $42.5 billion in reforms to Federal employee benefit programs, including programs for civilian employees and military personnel.
  ○ $4.1 billion from the disposal of unused government assets.
  ○ $92.2 billion from restructuring government operations and reducing government liabilities.
  ○ $77.6 billion from improving Federal program management and reducing waste and abuse.

Revenues

• The President calls on the Committee to undertake comprehensive tax reform, and lays out five principles for it to follow: 1) lower tax rates; 2) cut wasteful loopholes and tax breaks; 3) reduce the deficit by $1.5 trillion; 4) boost job creation and growth; and 5) comport with the “Buffett Rule” that people making more than $1 million a year should not pay a smaller share of their income in taxes than middle-class families pay.
  ○ Tax reform should draw on the specific proposals the President has put forward, together with elimination of additional inefficient tax breaks. If the Joint Committee is unable to undertake comprehensive tax reform, the President believes the discrete measures he has proposed should be enacted on a standalone basis. Their enactment as a standalone package still would significantly improve the country’s fiscal standing, represent an important step toward more fundamentally transforming our tax code, and serve as a strong foundation for economic growth and job creation.
  ○ To advance this debate, the President is offering a detailed set of specific tax loophole closers and measures to broaden the tax base that, together with the expiration of the high-income tax cuts, would be more than sufficient to hit the $1.5 trillion target. These include:
   Allowing the 2001 and 2003 tax cuts for upper income earners to expire ($866 billion)
   Limiting deductions and exclusions for those making more than $250,000 a year ($410 billion)
   Closing loopholes and eliminating special interest tax breaks (approximately $300 billion)