Health care reform-who really benefits? No one knows for sure...yet.

The Health Care Reform Bill was one of the most controversial pieces of legislation passed down since the creation of Social Security. There is no question that this issue and the way it was handled by lawmakers has left the Citizens of the United States quite….well, divided. Not to mention confused, frustrated and unhappy.

What We Know, What We Don’t Know

It doesn’t help matters much that the new law is so large and complicated that it leaves even economic experts wondering what the real result will be in the future. The rest of us are left to figure it out on our own or with the help of the media, neither option based purely on fact but more on supposition and opinion.

Here is what we DO Know:

Only small employers who are eligible to receive the healthcare tax credits really benefit. Big employers who already have health insurance coverage won’t be impacted (except with higher premiums and excise taxes on “Cadillac plans”).  Interestingly big employers without insurance will now be forced to provide insurance or risk major penalties, obviously impacting their bottom lines.  Low income individuals receive credits too but since many of these same people qualify for benefits under the current system, the overall impact of the healthcare bill on them is debatable.

Another issue is employees who do not want health insurance (mainly young people without children, but also those who do not qualify for healthcare subsidies and can’t afford health insurance on their own).  These people will be fined severely under the healthcare bill.

The bill does address issues with preexisting conditions, cancellation of coverage, coverage of dependents, preventative healthcare, and healthcare exchanges accessible by individuals and small companies.

Here is what we DON’T Know:

What the bill fails to address is cost containment of premiums and other healthcare costs which are expected to continue to rise as fast or faster in the future.  This is why no one knows how much healthcare will really cost under the healthcare reform bill several years into the future and is one reason companies are passing along more of the cost to employees.

We also are left to see what kinds of deductibles are imposed on those with preexisting conditions or in high risk groups. There is the possibility that the deductibles will make it just as impossible for these people to seek medical care until it’s catastrophic as it is now with no health insurance. This would negate any theorized cost savings offered by insuring these same individuals.

In a Perfect World

It would have been nice, instead of reinventing the wheel, to see the Federal Government focus on regulating the insurance industry in a way that would promote competition, innovation and ethical business practices among health insurers and the health industry.

In a perfect world our government probably should have started with some of the main problems that Americans agree on like: Insurance companies denying coverage or charging unreasonable rates for Americans who suffer with pre-existing conditions; or the medical industry charging outrageous prices for cash paying Americans who can’t afford health insurance, who are not eligible for Medicaid or Medicare but are willing to pay a reasonable price for the medical services they received.

Unfortunately, special interest groups and lobbyists got involved in the negotiations on Health Care Reform because a lot of money was at stake.  So now we wait to see how this all plays out and what the actual cost will be. Several States have filed suit claiming the fines on individuals are unconstitutional so we will keep you posted on any new information as it becomes available.

More Regulation Ahead

The bill was signed into law July 21, 2010 largely in response to the Great Recession which began in late 2007.  Although we’re still scratching our heads and wondering how this could happen, economists have come to the conclusion that the recession resulted from easy credit (both industry and government) and securitization of mortgages which led to widespread speculation eventually hurting global trade, consumer confidence, and employment.  Deregulation of financial services is seen by many to have helped fuel the financial crisis.

In order to right the ship, so to speak, the government has responded mainly by relaxing fiscal and monetary policies neither of which has helped the economy much.

Financial Re-Reform

The next move is to address the financial services oversight policies. An overhaul of the financial services industry of this magnitude has not been seen since the Securities Exchange Acts and Glass-Steagall Act of the 1930s.  The bill covers virtually every facet of the financial services industry.  Some of the key provision of the law:

1. A new Financial Stability Oversight Council responsible for monitoring the entire financial industry in the U.S.  It reports to Congress and may place certain non-banking financial companies under the Federal Reserve due to risk and stability.  This addresses the too big to fail taxpayer bailout that occurred with AIG.  Large banks will have to issue detailed financial reports to the council including assessments of the companies’ impact on the economy and must meet stricter capital and risk management standards.
2. Tighter regulation and additional reporting of investment advisors, specifically aimed at large hedge funds.
3. A new Federal Insurance Office which will require additional reporting by insurance companies.  Health insurers are notably exempt.
4. The Volcker Rule is back which prohibits banks from a wide range speculative trading and investing activities, issues at the heart of some bank failures.
5. Over-the-counter derivatives are no longer exempt from SEC regulation.  These securities (credit default swaps in particular) were key to many bank failures early in the recession because of over-speculation resulting in too big to fail Wall Street taxpayer bailouts.
6. Investor protection measures include additional disclosures to investors and greater fiduciary responsibility from brokers.
7. Executive compensation of public corporations will be subject to shareholder vote every 3 years, and compensation committees for public companies must be independent.
8. A new Bureau of Consumer Financial Protection will regulate lending practices to prevent fraud and predatory lending.  Residential mortgages will be subject to stricter standards to prevent careless and risky lending.
9. The SEC is given oversight of the major statistical rating agencies in response to failed methodologies and ethical concerns throughout the industry.  Investors can now sue for gross negligence.

Unanswered Questions

Certainly, these measures will further protect financial consumers in the long-run, but at what cost?  Two major regulatory issues were the repeal of the Glass-Steagall act in 1999 and relaxing of the Volcker Rule, both of which directly addressed stability of the financial services industry.

Now we have several new large bureaucracies, a massive amount of new paperwork requirements and reviews, and reports to Congress.  Is it too much, too late?  Should the government have this much oversight given the failure of Wall Street to regulate itself?

The government still has the option to bailout companies and Fannie Mae and Freddie Mac are missing from this piece of legislation.  Much of the oversight is discretionary, meaning inconsistencies will occur depending on political agendas.

Unresolved issues are determining which financial companies the government can and will take over and how far will oversight of financial stability extend to non-financial companies. So, now we all get to “wait and see”.

Tax planning for Average Joes? You bet!

Many people don’t think they make enough to worry about tax planning, but what they don’t realize is no matter what your income level, tax planning can help you make adjustments that will significantly reduce your tax liability.

If given the choice, would you rather owe $148.67 or be getting a check for $352.10? See, not bad, huh?

With a little planning, knowledge and effort on your part, you could actually be looking forward to tax day for once!

Here are some ways the Average Joe can save on taxes:

1. Self-employed? Make sure you’re taking full advantage of tax deductions including most ordinary business expenses which can include money spent generating business, retaining clients, vehicle expenses, health insurance and capital expenditures.
2. IRAs. If you’re like a good amount of American’s you’ve seen your retirement savings sucked dry by the stock market. Planning now will ensure proper handling of IRA retirement contributions including the new unlimited Roth IRA conversion provision available in 2010, and allow you to address issues with retirement plans that have declined in value.
3. Education. If you or a dependent are attending school you need to be sure to claim all credits and deductions available to you–it’s free money, don’t miss out on it!
4. Bankruptcy/Foreclosure. You’ve already suffered enough if you’ve endured bankruptcy or a foreclosure this year, so a little planning now will avoid further headaches ahead. Minimize the taxable income impact of a home foreclosure or bankruptcy petition.
5. What If? There are several big tax changes waiting for Congress to either reverse or put into action, all of which could dramatically affect your tax bill. Planning now, as best you can, for potential tax rate hikes after 2010 for ordinary income and investment income keeps you from being blind-sided in the coming months.

So, hopefully these tax saving ideas will inspire you to take a look at your own situation and get you thinking about asking for some tax advice this year. Knowing what to expect and how to maneuver your finances throughout the year for maximum tax savings is the beginning of taking control of your finances, rather than letting your finances control you.

tax hike loose ends left undone

Right now taxpayers across the Country are on pins and needles waiting to find out if their tax rates are going up or not. Unfortunately it looks like we’ll all have to wait even longer for the answer.

Congress is in recess August 9 to September 12 and then only have until October 8 (Senate TBD) to wrap up a mess of legislative business before they adjourn until the end of the year. Let’s not forget there is the distraction of critical midterm elections on November 2.

Some of the unfinished business includes (1) the tax extenders bill which would keep in place many of the Bush tax cuts from 2001 and 2003 including favorable marginal tax rates and capital gains tax rates, (2) legislation to address alternative minimum tax exemption levels, (3) legislation regarding the expiration of the 2010 repeal of estate tax, and (4) the controversy surrounding the S Corporation self-employment FICA tax bill.

All these issues are stalled at the moment due primarily to political wrangling and hesitation amidst the upcoming election, and may very well not be resolved until the next congressional session.  This makes accurate tax planning and forecasting difficult, but still as important as ever for all individual, business and nonprofit taxpayers given the current economy and potential impact of sizeable future tax increases.

Want to be the Master of Your Universe?

I recently wrote a series on the various tax deductions and credits available to help you better afford continuing education like the Lifetime Learning Credit, the American Opportunity Credit & Student Loan Interest Deductions. If you’ve been toying with the idea of going for your Masters, I’ve got some good news for you especially if you’re a higher earning taxpayer that is having your Lifetime Learning Credit and the Tuition Deduction phased out.

A recent court ruling (Singleton-Clarke. TC Summary Opinion 2009-182) in favor of allowing a taxpayer to deduct almost $15,000 of tuition she paid to get her MBA has opened the door for deductions in similar situations. This means you may now be able to deduct your education expenses for that Masters.

Granted it’s not a blank check, there are a few rules you need to go by in deciding if you are eligible. If either of these rules applies to you, you can take the deduction:

Rule #1: You’re going back to school because the education is required by your employer or by law to keep your current job.

Rule #2: You’re going back to school to maintain or improve skills you need in your present work.

Keep in mind you can’t deduct your expenses (even if you meet the criteria of the rules above) if the education is required to meet preexisting minimum educational requirements of your current job or if it qualifies you for a new trade or business.

If you DO qualify, then you can deduct the education expenses as business expenses. If you’re an employee, unreimbursed business expenses are deductible as miscellaneous expenses on Schedule A (although the 2% of AGI floor applies). Self employed folks will deduct the expenses in full on Schedule C.

What you can deduct:

• Tuition, books, supplies, lab fees, etc.
• Some transportation and travel costs
• Other related expenses like the cost of producing term papers or school projects

What you can’t deduct:

• Personal or capital expenses like the cost of a new laptop
• Value of leave time you use to attend classes

By the way, if you’re a business owner and you pay for an employee’s education expenses under a qualified educational assistance plan, you can receive up to $5,250 of annual tax-free reimbursements. Not bad, eh?

Pay the Piper Now or Deal With the Consequences

Ah fairy tales—not usually the cheeriest of stories, but what they lack in “PCness” and happy endings, they tend to make up for by offering a moral. If you remember the story of the Pied Piper, you know he gave the towns-folk a chance to pay him fairly for the service he provided; when they refused, he exacted payment that was much more costly than his original fee. So therein lies the moral…pay up when you’re asked nicely or you will pay dearly.

Now that the State of Florida is facing more budget deficits they’re starting to look around for ways to shore up their losses—the easiest target is, of course, tax evaders or “missed” tax revenue. This is revenue that likely would never be collected or the statute of limitations would expire before collection could occur. So they will begin scrutinizing business tax returns with a more cynical eye.

But, like the Pied Piper, the State of Florida is giving businesses the choice to pay up or now or risk expensive penalties and fees down the road. Beginning on July 1^st the State has introduced a new tax amnesty program that offers businesses a chance to pay up voluntarily without fear of facing penalties and reduced interest.

Pay no penalty and only 50% of the interest due if you:

• are reporting a tax liability that the DOR did not know about
• are filing a late return for a tax obligation previously unknown to DOR
• are responding to a letter of inquiry or a self-audit request

Pay no penalty and only 75% of the interest due if you:

• are responding to a DOR bill, delinquency, audit or other assessment

Florida will charge a 10% administrative fee for taxes that are 90 days delinquent.  No waiver is available and the fee is based on the total tax due, with penalties and interest, as calculated before the amnesty provision.

So yes, it may hurt to pay up what you owe now, but considering the tax savings will far outweigh the costs of not doing so, can you really afford not to?  The DOR is making installment payment programs available with 12.5% down and the remaining  payable within 7 months or the full amount of penalties and interest will be due.

This program only runs from July 1, 2010 until September 30, 2010 and it covers all personal and business taxes and fees except for unemployment tax and Miami-Dade County Lake Belt fees.

Visit the FDR website for more details about the program, including a list of some often overlooked taxes.

new 1099 reporting requirements = massive paperjam

By now you’ve probably heard quite a bit about the new 1099 reporting requirements that were included in the Health Care Reform Bill and the concerns for the disproportionate burden it will place on independent contractors, freelancers and small business owners.

If not, here’s a brief recap: Any taxpayer with business income will be required to issue 1099 forms to all vendors that have been paid $600 or more for goods and/or services.

What this means for small businesses and independents is much more finite tracking of expenses, in other words,  higher bookkeeping fees and higher accounting fees.

Because of the monumental amount of data this will generate however, the IRS has been given free rein to interpret this new rule. So there is hope yet that they will find a way to reduce the burden on taxpayers AND themselves in complying with these new measures.

The new reporting requirements begin in 2012, here’s a breakdown of the requirements as the rules exist today:

1. Companies still have to report payments totaling $600 or more for each vendor for the year, but now have to begin reporting 1099s for payments to corporations (tax-exempt corporations are still exempt from reporting).
2. Currently, most payments for goods and merchandise are exempt.  However, companies will need to start reporting both goods and services under the new reporting requirements.
3. Basically, the 1099-Misc forms are being expanded from reporting payments to independent (non payroll) contractors to reporting virtually all payments to all vendors.
4. This will greatly impact the Accounts Payable function for all companies by requiring W-9s and TIN verification for all vendors a company plans on paying $600 or more in 2012.  If a vendors fails to supply a W-9 then backup withhold will be required.
5. The fine for noncompliance increases from $50 to $250 for each 1099 not properly reported.
6. Currently, companies that issue more than 250 1099s must file them electronically.  With the new 1099 reporting requirements, many companies will be subject to this, meaning additional software, installation and training.
7. New Form 1099-K will start in 2011 which will require merchant card and payments processors to report 1099-Ks to vendors broken out by month.  This will greatly impact the online retailing industry (e.g. eBay) for merchants with sales over $20,000 or 200 transactions.  This form was introduced in the Housing Assistance Tax Act of 2008.

There are more than a few kinks that need to be worked out on this ruling. Two of these problems involve reconciling the 1099 payment reports against the gross income reported by recipients on their tax returns: (a) different bases of accounting (e.g. cash vs. accrual), and (b) calendar year vs. fiscal year.  1099s are issued on cash basis calendar year, but this may not be what the recipient uses.  This has always been a reconciling issue but with the new 1099s this problem will be much worse because of the volume.

Another problem arises with travel expenses in which non-accounting personnel fail to get W-9s from every restaurant or gas station or expense for incidentals.  It is unclear if an IRS database will be readily available to help companies with these issues, particularly in cases involving store names that are different from the actual tax reporting entity.

While the reporting burden will hit all companies, small businesses will be hit particularly hard, probably resulting in additional hiring or outsourcing, either of which is expensive.  Large companies may already have the resources in the accounting area to accommodate, but it is still an added cost burden.

We’re keeping a close watch on this one to see how the IRS decides to interpret their instructions and how this will play out for small businesses.

Source: MinnPost.com

If given the choice would you rather pay higher taxes or donate to the charity or charities of your choice? Surprisingly the US government does give tax payers that choice, up to a point. If you haven’t been taking advantage of this before, now is a good time to begin. You get to feel good about helping others AND you get a tax break!

According to Giving USA 2009, in 2008 (the year the economy really tanked) Americans still managed to give—in fact the generosity of Americans raised an estimated $307.65 BILLION for charities. Even though this number is impressive, it is actually a 2% drop from 2007 and was the first decline in giving since 1987. Less money for charity means more Americans in need will be leaning on the government, adding to the need to increase taxes.

Warren Buffet, Bill Gates and a growing number of other top US billionaires are leading the way with The Giving Pledge. So, you may not be a billionaire but if you have the choice of charity over taxes, why not take it?

Here are a few guidelines to help get you started:

1. Charitable organization are nonprofit 501(c)(3) religious, charitable, educational, scientific, literary, and governmental groups.
2. You must itemize deductions on Form 1040, which typically affects only those with sizeable mortgage interest and real estate taxes.  At this time, there is no significant legislation that would get around this requirement.
3. Keep all receipts. The IRS has expanded their record-keeping requirements significantly. For instance, donations of $250 or more now require written acknowledgment from the organization.
4. In the case of donated automobiles, boats, or airplanes, the donation may be limited to the gross proceeds received. Donated property over $5,000 usually requires an appraisal. For these types of donations, it is best to see your tax adviser.
5. You may also be able to deduct mileage for charitable work and out-of-pocket expenses such as supplies to be used at a charitable event.
6. You can donate cash contributions up to 50% of your adjusted gross income, and up to 30% of your AGI for donated property items. There are special exclusions available for donated IRA distributions.
7. A carryover is available for contributions exceeding these amounts.
8. If you are donating stock that has dropped substantially in value there are special capital gain implications that you need to speak to your tax adviser about.
9. The President is looking at limiting all itemized deductions (not just charitable gifts) to an effective tax rate 28% for families earning more than $250,000, but these are the families that make the largest charitable contributions, even though they are probably in the 35% tax bracket which will revert back to 39.6% in 2011 under the President’s proposed budget.

Just as a side note, keep in mind that giving locally also contributes directly to improving your community, stimulating your local economy and creating real results you can see. Whether you routinely give to charities or you have a one-time endowment to donate, now may be the time to talk to your tax advisor about the tax savings that can result from proper charitable gift planning.

I suppose here would be a good opportunity to plug the  2010 MDA Lockup benefit I’m participating in this year. We’re trying to raise $3,200 by July 22, so if you need to start making charitable donations click here to take your first step!

Image courtesy of The Real Deal

Amidst optimistic reports that the economy has begun to turn around and rebuild after the massive housing bubble burst of 2008/9 there are still many feeling the aftershocks of negative financial impact.

One segment hardest hit in Florida is the Condo & Home Owners Associations that had been so popular with buyers in recent years. Unfortunately, with growing numbers of members defaulting on their loans or just refusing to pay their membership dues, other home or condo owners in good standing have had to endure higher fees and Associations have been limited in their recourse to recoup lost income. That is until now.

Thanks to Senate Bill 1196, HOAs and COAs have been given a little more latitude to “encourage” delinquent members to pay up. The bill was signed into law on June 1; it goes into effect July 1 of this year and should provide some much needed financial relief to struggling associations. It also includes “distressed condo relief” provisions that defer or exempt certain residential buildings from expensive upgrades.

Delinquent Fees

• Associations may suspend owner’s usage rights of common areas if they are overdue on paying a special assessment by 90 days. This doesn’t include access to the building unit (including elevators), parking or public utilities.
• Owner liability for unpaid assessments extended from 6 months to 12 and includes units in foreclosure.
• Associations may directly collect rent from tenants for future “monetary obligations” without the need for court action and is also given the power to evict tenants. However because there is no contract between a tenant and association, the effect of this is unclear.
• Associations are not responsible for ordinary landlord responsibilities like maintenance and upkeep on individual units.
• This bill will also allow homeowners associations, but not condos, to file a lien when fines reach $1,000.

Insurance

• An independent insurance appraisal will be required every 36 months at replacement cost.
• The requirement that the association be a named insured has been repealed.
• The option that associations may purchase insurance for an owner at owner’s expense for failure of owner to provide proof of insurance has also been repealed.
• Minimum coverage of $2,000 with maximum deductible of $250 per loss is now a requirement.

History of SB 1196:

http://www.flsenate.gov/session/index.cfm?Mode=Bills&SubMenu=1&BI_Mode=ViewBillInfo&BillNum=1196&Year=2010&Chamber=Senate

IRS closing S-Corp Tax Loop Holes

As a trusted tax advisor I am in the position of researching new proposed tax laws and passing that information on to my clients. Sometimes a new bill comes along that I feel is important for my clients and readers to get a heads up on due to the major tax implications. This latest bill has quietly moved through the House and is on its way up the ladder.

A bill titled “The American Jobs and Closing Tax Loopholes Act of 2010″ was passed by the house on 5/28/2010. The US House and Senate plans to raise the taxes of Small Business Owner S-Corporation’s starting in 2011 through H.R. 4213. This bill targets small personal and professional service businesses with 3 or fewer professionally skilled individuals (performing artists, athletes, accountants, lawyers, actuaries, architects, consultants, engineers, health professionals, veterinarians, lobbyists, brokers, and investment advisors) with the goal of raising over $11 billion in SECA Tax over the next 10 years!

So what does this mean to me?

The SECA tax is an additional 15.3% of taxable income earned by S-Corporations.  This is only the beginning of this far reaching SECA Tax.  If our elected officials pass this bill for small personal and professional service businesses, it is only a matter of time until a SECA tax is placed on all S-Corporations. The tax implications are huge! For example:  an S-Corporations owner who has a taxable income of $50,000 from his or her S-Corporation business could be taxed an additional $7,650 on top of the Federal Taxes.

What can I do?

It’s important to let your representative’s know how you feel about this bill, and quickly. Click the link below to contact your Senator now!  Let your Senator know if you don’t agree with H.R. 4213, “The American Jobs and Closing Tax Loopholes Act of 2010″, Section 413: the 15.3% SECA tax on S-Corporations could hurt small business in the United States.

To contact your senator:

http://www.senate.gov/general/contact_information/senators_cfm.cfm

Click here to read the white paper on this bill.