Tax Trend: 2010 Tax Relief Act An Overview

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1 The recently enacted Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 is a sweeping tax package that includes, among many other items, an extension of the Bush-era tax cuts for two years, estate tax relief, a two-year patch of the alternative minimum tax (AMT), a two-percentage-point cut in employee-paid payroll taxes and in selfemployment tax for 2011, new incentives to invest in machinery and equipment, and a host of retroactively resuscitated and extended tax breaks for individuals and businesses. Here's a look at the key elements of the package: The current income tax rates will be retained for two years (2011 and 2012), with a top rate of 35% on ordinary income and 15% on qualified dividends and long-term capital gains. Employees and self-employed workers will receive a reduction of two percentage points in Social Security tax in 2011, bringing the rate down from 6.2% to 4.2% for employees, and from 12.4% to 10.4% for the self-employed. A two-year AMT patch for 2010 and 2011 provides a modest increase in AMT exemption amounts and allows personal nonrefundable credits to offset AMT as well as regular tax. Without the patch, an estimated 21 million additional taxpayers would have owed AMT for Key tax credits for working families that were enacted or expanded in the American Recovery and Reinvestment Act of 2009 will be retained. Specifically, the new law extends the $1,000 child tax credit and maintains its expanded refundability for two years, extends rules expanding the earned income credit for larger families and married couples, and extends the higher education tax credit (the American Opportunity tax credit) and its partial refundability for two years. Businesses can write off 100% of their new equipment and machinery purchases, effective for property placed in service after September 8, 2010 and through December 31, For property placed in service in 2012, the new law provides for 50% additional first-year depreciation. Many of the traditional tax extenders are reinstated for two years, retroactively to 2010 and through the end of Among many others, the extended provisions include the election to take an itemized deduction for state and local general sales taxes in lieu of the itemized deduction for state and local income taxes; the $250 above-the-line deduction for certain expenses of elementary and secondary school teachers; and the research credit. After a one-year hiatus, the estate tax will be reinstated for 2011 and 2012, with a top rate of 35%. The exemption amount will be $5 million per individual in 2011 and will be indexed to inflation in following years. Estates of people who died in 2010 can choose to follow either 2010's or 2011's rules. Omitted from the new law: Repeal of a controversial expansion of Form 1099 reporting requirements. Also not included: Extension of the Build America Bonds program, which permits state and localities to issue federally-subsidized municipal bonds.

2 New Rules Require Rental Property Owners to Issue 1099s The recently enacted Small Business Jobs Act, P.L , contained one provision that may have escaped the notice of taxpayers who own rental property, but will affect them starting in January. Under the provision, owners of property who receive rental income will be required to issue Forms 1099 to service providers for payments of $600 or more during the year. The act subjects recipients of rental income from real estate to the same information-reporting requirements as taxpayers engaged in a trade or business. Thus, rental income recipients making payments of $600 or more to a service provider in the course of earning rental income are required to provide an information return (typically, Form 1099-MISC, Miscellaneous Income) to the IRS and to the service provider. This provision will apply to payments made after December 31, 2010, and will cover, for example, payments made to plumbers, painters or accountants in the course of earning the rental income. While rental property owners will not actually issue the required 1099s until early 2012, they need to start keeping adequate records of payments starting January 1, 2011, so they will be prepared to issue correct 1099s. They will also need to obtain the name, address and taxpayer identification number of the service provider, using Form W-9 or a similar form. Exceptions The law provides an exception for individuals who can show that the requirement will create a hardship for them. The IRS is directed to issue regulations on this, but has not done so yet, so there is currently no guidance on what constitutes sufficient hardship to qualify for the exception or how a taxpayer would demonstrate that hardship. The law also contains an exception for individuals who receive rental income of not more than a minimal amount. Again, the IRS is directed to issue regulations to determine what constitutes not more than a minimal amount but has not done so yet. If such guidance is not forthcoming before January 1, all individuals who receive rental income should start keeping records of payments to service providers so they are prepared to issue 1099s in The law also contains an exception for members of the military or employees of the intelligence community if substantially all their rental income comes from renting their principal residence on a temporary basis. Information Return Penalties Taxpayers should also be aware that in addition to creating a new reporting requirement, the act increases the penalties for failure to file a correct information return. The first-tier penalty (correct information return filed after the prescribed filing date but on or before the date that was 30 days after the prescribed filing date) increases from $15 to $30; the second-tier penalty (Correct information return filed after the date that was 30 days after the prescribed filing date but on or before August 1 of the calendar year in which the required filing date occurred) increases from $30 to $60; and the third-tier penalty (correct information return not filed on or before August 1 of the calendar year in which the required filing date occurred) increases from $50 to $100. For small business filers (with average annual gross receipts under $5 million), the calendar-year maximum increases from $25,000 to $75,000 for the first-tier penalty; from $50,000 to $200,000 for the second-tier penalty; and from $100,000 to $500,000 for the third-tier penalty. The minimum penalty for each failure due to intentional disregard increases from $100 to $250.

3 Summary of Penalties for Information Returns: Pre-Small Business Act General penalty Pre-Small Business Act Small business penalty New general penalty New small business Penalty First tier penalty $ $15 (maximum $75,000) $15 (maximum $25,000) $30 (maximum $250,000) $30 (maximum $75,000) Second tier penalty $ $30 (maximum $150,000) $ $30 (maximum $50,000) $60 (maximum $500,000) $60 (maximum $200,000) Third tier penalty $ $50 (maximum $250,000) $ $50 (maximum $100,000) $100 (maximum $1,500,000) $100 (maximum $500,000) For returns required to be filed after 2010, the above changes double the basic per return penalty amount, but they increase the maximum limits even more dramatically. The maximum limit on the third-tier penalty is six times as large as under pre-small Business Act law. Expanded 1099 Reporting After 2011 Currently, payments to corporations are exempted from the 1099 information reporting requirements, but starting for payments after December 31, 2011, businesses (including, now, individuals who receive rental income) will be required to file an information return for all payments aggregating $600 or more in a calendar year to a single payee, including corporations (other than a payee that is a tax-exempt corporation). This change was made by the Patient Protection and Affordable Care Act, P.L , which was enacted in March. That act also expanded the information reporting requirements to include gross proceeds paid in consideration for property. The IRS has established an optional revenue procedure (Rev Proc ) for payors who make payments in the course of their trade or business through payment cards to determine whether the payments are reportable. In general, this revenue procedure classifies businesses by Merchant Category Codes (MCCs) according to whether they predominantly furnish services (for which payments are reportable) or predominantly provide goods (for which payments are not reportable). A payment card organization may assign MCCs, or equivalent Industry Codes, to merchant/payees that accept its payment cards and notify cardholder/payors that use its payment card of the MCC or equivalent Industry Code assigned to a merchant/payee. A cardholder/payor may then rely on the MCC or equivalent Industry Code assigned to a merchant/payee in determining whether a payment card transaction with that merchant/payee is subject to reporting under the expanded 1099 information reporting requirements. Users of Form 8109 Tax Payment Coupons As of December 31, 2010, financial institutions will no longer accept tax deposits made with the Form 8109 Payment Coupon. Many businesses, private foundations, and others have used federal tax deposit (FTD) coupons to deposit their federal taxes with the IRS. They use the coupons to pay payroll taxes, corporate taxes, private foundation excise taxes, and many other types.

4 This year, the Financial Management Service (part of the Treasury Department) made a decision to discontinue the system that processes FTD coupons. Therefore, the IRS has chosen to eliminate the use of paper-based FTD coupons for all deposits and payments made after December 31, There is an exception for very small payments, which may be included with a tax return. The maximum amount of this exception varies by type of tax, but all max out at only a few hundred dollars. All other taxpayers who previously used a deposit coupon will now be required to make their payments electronically using the Electronic Federal Tax Payment System (EFTPS). EFTPS is a free service maintained by the Treasury Department that allows taxpayers to make payments online or by phone at any time. It also allows taxpayers to schedule payments up to 365 days in advance. In addition to business and private foundation taxes, EFTPS can also be used by individual taxpayers to make their estimated tax payments. Many businesses and private foundations are already using EFTPS. If that is your case, you do not need to take any action. However, if you are not registered for EFTPS at this time, you must enroll soon. Using EFTPS is quick and easy, but it takes several weeks to get registered, so it cannot be done at the last minute before a deadline. To enroll, simply go to and click on Enrollment, and enter the requested information. You ll need your tax identification number (SS# or EIN#), name and address as they appear on your tax return, bank routing number, and the account number for the account that will be used to make payments. Once you enroll, you ll be sent a PIN and instructions in the mail, which you can then use to select a password for login to EFTPS. Important changes in the way your EIT is collected Understanding and Complying with Act 32, a significant change in Pennsylvania Local Earned Income Tax Collection History of Act 32. Act 32 of 2008 was signed into law by Governor Rendell on July 2, Act 32 completely restructures the collection of local earned income taxes in Pennsylvania. The act provides for a three year transition period with all aspects of the law to be implemented by January 1, Employers in Pennsylvania will be obligated to withhold Local Earned Income Taxes on behalf of their employees. Act 32 reduces the number of local earned income tax collectors in Pennsylvania from approximately 560 to 69. A single Tax Collection District was established in each County, except Allegheny County, which has 4 Tax Collection Districts. The County/City of Philadelphia is exempt from the requirements of Act 32. Each Tax Collection District ( TCD ) established a Tax Collection Committee ( TCC ), made up of delegates from each political subdivision (taxing body) located in the TCD. By September 15, 2010, each TCC must appoint a Tax Officer (collector) to collect earned income taxes on behalf of all of the political subdivisions in each TCD. The appointed Tax Officer may be a political subdivision, public employee, tax bureau, county or a private entity. According to a July 2, 2008 press release issued by Governor Rendell, Act 32 includes a number of important improvements, including: Establishing uniform withholding, remittance and distribution requirements; Requiring that employers withhold all local income taxes imposed on the compensation of their employees and remit those taxes to only one collector, even if an employer operates in multiple counties;

5 Instituting a continually updated, comprehensive tax register, maximum twice-yearly rate changes, a uniform definition of taxable income and a system of appeals; Strengthening reporting requirements so that each tax dollar is tracked from the time it is withheld until it is received by the appropriate taxing jurisdiction; Requiring that the Commonwealth issue one set of rules and regulations that apply to all collectors, taxpayers and employers; Requiring that the Department of Community and Economic Development (DCED) develop uniform forms, notices, reports, returns, schedules, codes for school districts, municipalities and tax collection districts; Requiring that tax collectors keep a record of all public monies received and distributed and submit monthly reports to each taxing jurisdiction and the tax collection district that must be reconciled with other records in an annual audit; and Providing for more accountability, transparency, oversight and enforcement. What this means for Taxpayers In general, as of January 1, 2012, Taxpayers who currently file quarterly local earned income tax returns will no longer be required to do so because, pursuant to Act 32, their employers must do so on their behalf. Taxpayers will still be required to file final returns, reporting the amount of taxes withheld during the prior tax year. If for some reason an employer is exempt from withholding taxes on behalf of any employee, or fails to do so for any reason, that employee must still file and pay his or her local earned income taxes quarterly. Also, self-employed individuals must file quarterly returns, make quarterly payments and file a final return. What this means for Employers Employers must withhold taxes on behalf of employees and file returns with the Tax Officer selected by the TCD in which the employer is located. For employers located in multiple counties, the Act permits the employer to file in a single TCD or multiple TCDs. Many TCDs will collect both the Local Services Tax and Earned Income Tax from employers through a single Tax Officer. Please see the enclosed insert entitled Act 32: A Guide for Employers. Questions? Contact your Tax Services Representative: In Pennsylvania In New Jersey