On February 1, Treasury released the General Explanations of the Administration’s Fiscal Year 2011 Revenue Proposals (Greenbook) indicating it’s time to get your wallet out. The Greenbook is a blueprint of the tax law changes the Obama Administration wants Congress to enact. Along with the Greenbook, Treasury released Summary Tables and the White House’s Report on the Budget.
Surprises in the proposals include a one-year extension of the temporary increase in expensing for small business and a one-year extension of the 50% temporary bonus depreciation for certain property. As predicted last year, the President wants to let the Bush tax cuts expire for taxpayers with adjusted gross income (AGI) in excess of $250,000, extend for one year the grab bag of extenders, increase taxes on a number of foreign transactions and impose restrictions on estate and gift tax planning. The proposals will impose significant new burdens on businesses in terms of complying with increased government reporting requirements. In addition, the proposals would permit the government to exercise “strong-arm” tactics in collecting taxes. Given the IRS’ inability to understand its own laws and regulations, this should give us all pause.
Here is a quick summary of what is included in the proposals. The highlighted items are provisions that will have the most significant impact on middle and upper middle income taxpayers:
- Extend the Making Work Pay Credit one more year through the end of 2011 – This is the $400 credit for middle class taxpayers with earned income
- Provide $250 Economic Recovery Payments and Special Tax Credit – This is essentially an extension of the $250 credit paid to retirees and certain government retirees last year.
- Extend COBRA Health Insurance Premium Assistance resulting from an involuntary termination of employment prior to January 1, 2011.
- Provide Additional Tax Credits for Investment in Qualified Property Used in a Qualifying Advanced Energy Manufacturing Project
- Extend Temporary Increase in Expensing for Small Business for one more year through 2010 (i.e., maximum $250,000 deduction, with a phase-out threshold that begins at $800,000 of qualifying investment).
- Extend 50% Temporary Bonus Depreciation for Certain Property for one more year through 2010. This provision does nothing to stimulate the economy because it is needed simply to prevent business taxpayers from losing ground. For taxpayer’s who have exhausted their tax depreciation by claiming bonus depreciation in prior years, this provision puts off the day of reckoning by one year.
- Extend the election for claiming additional research or minimum tax credits in lieu of the 50% bonus depreciation for one more year through 2010.
- Extend Option for Cash Assistance to States in Lieu of Low-Income Housing Tax Credits
- Expand the Earned Income Tax Credit (EITC) – This would make permanent the expansion of the EITC for workers with three or more qualifying children.
- Expand the Child and Dependent Care Tax Credit so that it phases out between $15,000 and $85,000 of adjusted gross income (AGI).
- Provide for Automatic Enrollment in IRAs and Double the Tax Credit for Small Employer Plan Startup Costs – Employers in business for at least two years that have more than ten employees would be required to offer an automatic IRA option to employees, under which regular contributions would be made to an IRA on a payroll-deduction basis. This could be avoided if the employer sponsored a qualified retirement plan, SEP, or SIMPLE for its employees.
- Expand Saver’s Credit
- Extend American Opportunity Tax Credit
- Eliminate Capital Gains Taxation on Investments in Small Business Stock
- Make Research & Experimentation Tax Credit Permanent – The provision included in the President’s budget does NOT require the use of the alternative simplified research credit (mandatory use of the less beneficial alternative simplified research credit was proposed in 2009).
- Remove Cell Phones from Listed Property – This provision would eliminate the need for strict substantiation of the use of business provided cell phones and eliminate certain limitations on their depreciation.
- Continue certain expiring provisions through calendar year 2011- This provision would extend for one more year 43 or so special interest provisions that do nothing to make the tax system more fair or enhance the competitiveness of the US economy.
- Impose a Financial Crisis Responsibility Fee – This is a “retribution tax” to be imposed on financial institutions. When Putin wanted to take over the oil industry in Russia, he made many of the same arguments and used some of the same tactics used against U.S. banks this past year. I never thought that I would live to see the day that my government would do many of the same things my grade school teacher told me the “Red Commies” were doing behind the Iron Curtain.
- Require Accrual of Income on Forward Sale of Corporate Stock
- Require Ordinary Treatment of Income from Day-to-Day Dealer Activities for Certain Dealers in Commodities, Derivatives and Other Securities
- Modify Definition of “Control” for Purposes of Section 249
- Reinstate Superfund Taxes
- Reinstate Superfund Excise Taxes
- Reinstate Superfund Environmental Income Tax
- Make Unemployment Insurance Surtax Permanent
- Repeal LIFO Method of Accounting for Inventories – Congress is going to do this because LIFO cannot be used under IFARs. Why let a revenue source go to waste?
- Repeal Gain Limitation for Dividends Received in Reorganization Exchanges
- Defer Deduction of Interest Expense Related to Deferred Income
- Foreign Tax Credit Reform: Determine the Foreign Tax Credit on a Pooling Basis
- Foreign Tax Credit Reform: Prevent Splitting of Foreign Income and Foreign Taxes
- Tax Currently Excess Returns Associated with Transfers of Intangibles Offshore – Wisconsin and many of the states already strong-arm their taxpayers with a similar provision so why shouldn’t the Federal government get in on the fun?
- Limit Shifting of Income through Intangible Property Transfers
- Disallow the Deduction for Excess Nontaxed Reinsurance Premiums Paid to Affiliates
- Limit Earnings Stripping by Expatriated Entities
- Repeal 80/20 Company Rules
- Prevent the Avoidance of Dividend Withholding Taxes
- Modify the Tax Rules for Dual Capacity Taxpayers
- Combat Under-Reporting of Income on Accounts and Entities in Offshore Jurisdictions
- Require Increased Reporting on Certain Foreign Accounts
- Require Increased Reporting with Respect to Certain Recipients of FDAP Income or Gross Proceeds
- Repeal Certain Foreign Exceptions to Registered Bond Requirements
- Require Disclosure of Foreign Financial Assets to Be Filed with Tax Return
- Impose Penalties for Underpayments Attributable to Undisclosed Foreign Financial Assets
- Extend Statute of Limitations for Significant Omission of Income Attributable to Foreign Financial Assets
- Require Reporting of Certain Transfers of Assets to or from Foreign Financial Accounts
- Require Third-Party Information Reporting Regarding the Transfer of Assets to or from Foreign Financial Accounts and the Establishment of Foreign Financial Accounts
- Permit the Secretary to Require Electronic Filing by Financial Institutions of Certain Withholding Tax Returns
- Establish Presumption of U.S. Beneficiary in Case of Transfers to Foreign Trusts by a U.S. Person
- Treat Certain Uncompensated Uses of Foreign Trust Property as a Distribution to U.S. Grantor or Beneficiary
- Reform Treatment of Insurance Companies and Products
- Modify Rules that Apply to Sales of Life Insurance Contracts
- Modify Dividends-Received Deduction for Life Insurance Company Separate Accounts
- Expand Pro Rata Interest Expense Disallowance for Corporate-Owned Life Insurance (COLI)
- Permit Partial Annuitization of a Nonqualified Annuity Contract
- Eliminate Oil and Gas Company Preferences
- Repeal Enhanced Oil Recovery Credit
- Repeal Credit for Oil and Gas Produced from Marginal Wells
- Repeal Expensing of Intangible Drilling Costs
- Repeal Deduction for Tertiary Injectants
- Repeal Exemption to Passive Loss Limitation for Working Interests in Oil and Gas Properties
- Repeal Percentage Depletion for Oil and Natural Gas Wells
- Repeal Domestic Manufacturing Deduction for Oil and Gas Production
- Increase Geological and Geophysical Amortization Period for Independent Producers to Seven Years
- Eliminate Coal Preferences
- Repeal Expensing of Exploration and Development Costs
- Repeal Percentage Depletion for Hard Mineral Fossil Fuels
- Repeal Capital Gains Treatment of Certain Royalties
- Repeal Domestic Manufacturing Deduction for Coal and Other Hard Mineral Fossil Fuels
- Tax Carried (Profits) Interests as Ordinary Income
- Modify the Cellulosic Biofuel Producer Credit
- Eliminate the Advanced Earned Income Tax Credit
- Deny Deduction for Punitive Damages
- Repeal Lower-of-Cost-or-Market Inventory Accounting Method – If there are any dealers in used vehicles still in business when this provision passes, they will quickly find they cannot afford to remain in business if this is enacted as proposed.
- Require Information Reporting on Payments to Corporations
- Require Information Reporting for Rental Property Expense Payments
- Require Information Reporting for Private Separate Accounts of Life Insurance Companies
- Require a Certified Taxpayer Identification Number from Contractors and Allow Certain Withholding
- Require Increased Information Reporting for Certain Government Payments for Property and Services
- Increase Information Return Penalties
- Require Greater Electronic Filing of Returns
- Implement Standards Clarifying when Employee Leasing Companies Can Be Held Liable for their Clients’ Federal Employment Taxes
- Increase Certainty with Respect to Worker Classification
- Codify “Economic Substance” Doctrine – If this provision is passed as proposed, the IRS will have carte blanche to disallow most tax planning transaction at will.
- Allow Assessment of Criminal Restitution as Tax
- Revise Offer-in-Compromise Application Rules
- Expand IRS Access to Information in the National Directory of New Hires for Tax Administration Purposes – More spying under the guise of “information exchange.”
- Make Repeated Willful Failure to File a Tax Return a Felony
- Facilitate Tax Compliance with Local Jurisdictions
- Extend Statute of Limitations where State Adjustment Affects Federal Tax Liability
- Improve Investigative Disclosure Statute
- Clarify that Bad Check Penalty Applies to Electronic Checks and Other Payment Forms
- Impose a Penalty on Failure to Comply with Electronic Filing Requirements
- Require Consistent Valuation for Transfer and Income Tax Purposes
- Modify Rules on Valuation Discounts
- Require a Minimum Term for Grantor Retained Annuity Trusts (GRATS) – This provision would essentially eliminate GRATs as an estate planning tool for anyone age 60 or over because the GRAT will have to have a minimum term of at least 10 years and the remainder interest cannot be zeroed out.
- Reinstate the 36-Percent Rate for Taxpayers with Income Over $250,000 (Married) and $200, 000 (Single) - as promised.
- Reinstate the Limitation on Itemized Deductions for Taxpayers with Income Over $250, 000 (Married) and $200,000 (Single) – as promised.
- Reinstate the Personal Exemption Phaseout (PEP) for Taxpayers with Income Over $250, 000 (Married) and $200,000 (Single) – as promised.
Impose a 20-Percent Rate on Capital Gains and Dividends for Taxpayers with Income Over $250, 000 (Married) and $200,000 (Single) – This is actually an unexpected benefit since the President could have let the dividend rate go back to the rate applicable to ordinary income (i.e., a top rate of 39.6%). - Limit the Tax Rate at Which Itemized Deductions Reduce Tax Liability to 28 Percent – as promised.
- Support Capital Investment in the Inland Waterways
- Extend and Modify the New Markets Tax Credit
- Reform and Extend Build America Bond
- Restructure Assistance to New York City: Provide Tax Incentives for Transportation Infrastructure – All I have to say about this one is why?
- Implement Unemployment Insurance Integrity Legislation
- Levy Payments to Federal Contractors with Delinquent Tax Debt
- Authorize Post-Levy Due Process
- Increase Levy Authority to 100 Percent for Vendor Payments
- Allow Offset of Federal Income Tax Refunds to Collect Delinquent State Income Taxes for Out-of-State Residents – Currently, Federal and state revenue agencies are in a state of melt-down in terms of providing adequate training and support for their agents. Most agents don’t understand the vast majority of the laws they are entrusted to enforce and widespread errors are frequently made by revenue officials as they grab for whatever revenue they can get their hands on. Giving any government more leeway in offsetting refunds against questionable tax bills will lead to additional hardships for already strapped taxpayers and require the use of expensive lawyers and accountants just to get back that to which you are entitled.