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CCH 2012 TAX BRIEFINGS – EDUCATION

EDUCATION

President Obama emphasized during his campaign the need to continue improving
education across the nation. The thrust of the Obama Administration’s tax
incentives for education during his first term has focused on higher education
and job retraining programs. The President, however, also does not want
Congress to curtail certain funding of public education, a spendingside issue
that may be considered in negotiating the extension of current tax breaks. In
addition to supporting renewal of the above-the-line higher education tuition
deduction, the following education tax breaks are currently also up for
renewal:

American Opportunity Tax Credit

President Obama campaigned on making permanent the temporary American
Opportunity Tax Credit (AOTC). The AOTC, which is an enhanced version of the
HOPE education credit, is scheduled to expire after 2012.

IMPACT.

The AOTC applies to 100 percent of the first $2,000 of qualified tuition and
related expenses and 25 percent of the next $2,000, for a total maximum credit
of $2,500 per eligible student. Additionally, the AOTC applies to the first
four years of a student’s post-secondary education. The AOTC also allows for
partial refundability for qualified taxpayers.

Comment

If the AOTC expires, it will be replaced by the traditional HOPE education tax
credit.

Coverdell ESAs

After 2012, the $2,000 annual contribution amount for Coverdell education
savings accounts (Coverdell ESAs) is scheduled to revert to $500. At the same
time, the expanded definition of qualified education expenses for elementary
and secondary school would also expire.

Student loan interest deduction

Under current law, certain enhancements to the student loan interest deduction
are scheduled to expire after 2012. If not extended, the incentive would only
be available for the first 60 months after repayment begins and would phase-out
for taxpayers with adjusted gross income between $40,000 and $55,000 ($60,000
and $75,000 for married couples filing joint returns).

CCH 2012 TAX BRIEFINGS – HEALTH CARE – Salt Lake City CPA

Salt Lake City CPA Health Care

HEALTH CARE

President Obama’s second term is expected to see the continuing implementation
of the Patient Protection and Affordable Care Act (Affordable Care Act). Many
tax-related provisions in the Affordable Care Act are scheduled to take effect
in 2013 and beyond, including:

• ▪ 3.8 percent Medicare contribution tax (2013)

• ▪ 0.9 percent additional Medicare tax (2013)

• ▪ $2,500 contribution limit on health flexible spending accounts (2013)

• ▪ Increased threshold for itemized medical expenses (2013)

• ▪ New tax on medical devices (2013)

• ▪ State health insurance exchanges (2014)

• ▪ Individual shared responsibility payments (the individual mandate) (2014)

• ▪ Employer shared responsibility payments (2014)

• ▪ Premium assistance tax credit (2014)

• ▪ No annual dollar limits on health insurance coverage (2014)

• ▪ Increase in small employer health insurance tax credit (2014)

• ▪ New tax on “Cadillac” health insurance plans (2018)

Comment

In 2012, the GOP-controlled House attempted to repeal all or parts of the
Affordable Care Act, but the bills died in the Democraticcontrolled Senate. It
is unclear if this pattern will be repeated in 2013. The House GOP has strongly
signaled its opposition to the IRS’s proposed regulations on the Code Sec. 36B
premium assistance tax credit and is likely to continue to oppose them. The
GOPcontrolled House may also try to reduce funding to the IRS and other federal
agencies responsible for implementing the Affordable Care Act.

Comment

The U.S. Supreme Court upheld the Affordable Care Act’s individual insurance
mandate in NFIB v. Sebelius, 2012-2 ustc ¶50,573. However, opponents argue that
the employer’s shared responsibility payment was not addressed by the Court in
NFIB v. Sebelius. Some taxpayers have also challenged the Affordable Care Act’s
contraceptive provisions.

Medicare Contribution Tax

The Affordable Care Act imposes a 3.8 percent Medicare contribution tax on the
unearned income of higher-income individuals, estates and trusts effective
January 1, 2013. The Medicare contribution tax applies to net investment income
(NII), and will generally apply to passive income. The Medicare contribution
tax also applies to capital gains from the disposition of property. For
individuals, the Medicare contribution tax will apply to the lesser of the
taxpayer’s NII or the amount of “modified” adjusted gross income (AGI
with foreign income added back) above a specified threshold.

IMPACT.

The modified AGI thresholds for individuals are $250,000 for married taxpayers
filing jointly and surviving spouses; $125,000 for married taxpayers filing
separately; and $200,000 for single taxpayers and heads of household. These
threshold amounts are not indexed for inflation.

IMPACT.

The Medicare contribution tax is not applicable to income derived from a trade
or business, or from the sale of property used in a trade or business.

NII for purposes of the Medicare contribution tax includes gross income from
interest, dividends, annuities, royalties, and rents, provided this income is
not derived in the ordinary course of an active trade or business; gross income
from a trade or business that is a passive activity (within the meaning of Code
Sec. 469); gross income from a trade or business of trading in financial
instruments or commodities; and net gain (taken into account in computing
taxable income) from the disposition of property that is not held in an active
trade or business.

Comment

The IRS is expected to issue guidance about the 3.8 percent Medicare
contribution tax before year-end.

IMPACT.

Higher-income taxpayers also are faced with a top rate on ordinary income of
39.6 percent and a 20 percent capital gains rate if the President follows
through on his campaign promise to allow the Bush-era tax cuts to expire for
these higher-income taxpayers. That creates an effective top rate of 43.4
percent on all NII-taxed income, except capital gains, which will be taxed at a
23.8 percent effective top rate.

Additional Medicare Tax

The Affordable Care Act also imposes an additional 0.9 percent Medicare tax on
higher-income individuals, effective January 1, 2013. The additional Medicare
tax applies to total wages, other compensation, and self-employment income that
exceeds the applicable threshold amount for the individual’s filing status.

IMPACT.

The threshold amounts are (not adjusted for inflation): $200,000 for
individuals; $250,000 for married couples filing a joint return; and $125,000
for married couples filing separate returns.

Itemized Deduction for Medical Expenses

For tax years beginning after December 31, 2012, the Affordable Care Act
increases the 7.5 percent threshold for itemizing medical expenses to 10
percent. However, the Affordable Care Act temporarily exempts individuals age
65 and older from the 10 percent threshold.

Comment

Taxpayers (or their spouses) who are age 65 or older before the close of the
tax year may continue to apply the 7.5 percent threshold for tax years ending
before 2017.

Comment

For AMT purposes the itemized deduction threshold for medical expenses remains
unchanged at 10 percent.

Health Flexible Spending Arrangements

After 2012, the Affordable Care Act caps the maximum salary reduction
contribution to a health flexible spending arrangement (health FSA) at $2,500.
Salary reductions in excess of $2,500 will subject the employee to tax on
distributions from the health FSA. The $2,500 limit will be indexed for
inflation for tax years beginning after December 31, 2013.

Comment

Effective January 1, 2011, the Affordable Care Act prohibited health FSA
dollars from being used to reimburse the cost of over-the-counter medicines
(except insulin).

Medical Devices

The Affordable Care Act imposes a 2.3 percent excise tax on the sale of
qualified medical devices by manufacturers, producers and importers after
December 31, 2012.

IMPACT.

The excise tax does not apply to many medical devices that are commonly
purchased by consumers such as eyeglasses, contact lenses, hearing aids and
other devices generally sold to the public at retail for individual use.

(Salt Lake City CPA Health Care)

CCH 2012 TAX BRIEFINGS – POSSIBLE BLUEPRINTS FOR TAX REFORM

POSSIBLE BLUEPRINTS FOR TAX REFORM

For true tax reform to move forward, Washington observers maintain that the full weight of the White House must be behind it. They point to former President Ronald Reagan’s leadership that was necessary in 1986 to combine the force of the White House, Treasury Department and the IRS in accomplishing the last major overhaul of the Tax Code. Based upon President Obama’s campaign statements, the President may be ready to make such a commitment to help establish a legacy for his second term.

A tax reform movement has been growing on Capitol Hill for several years as well and may provide a bipartisan opportunity on which to act. The House Ways & Means Committee held over a dozen hearings on tax reform in 2011 alone. In 2012, tax reform hearings before Ways & Means focused, among other issues, on closely-held businesses (March 7), retirement security (April 17), and capital gains (September 20). The Senate Finance Committee also held hearings in 2012 that included the examination of tax reform in connection with extenders (January 31), the state and local tax system (April 26), and education tax benefits (July 25). A March 1, 2012 letter from Ways & Means Chair Dave Camp, R-Mich, sums up the increasing resolve of those on Capitol Hill to follow through on tax reform:

“The Committee recognizes that a complex, burdensome, anti-growth tax code remains a significant obstacle to economic recovery and job creation. Accordingly, the Committee anticipates continuing its extensive efforts to simplify and reform the tax code for individuals, families, and employers …”

In the weeks leading up to the November elections, a number of lawmakers from both parties said that the Simpson-Bowles Plan (named for the co-chairs of the 2010 Presidential Commission on Fiscal Responsibility and Reform, Alan Simpson and Erskine Bowles) could serve as a framework for a tax and deficit reduction package in the lame-duck Congress and then for a more comprehensive overhaul of the Tax Code in the 113th Congress. President Obama appointed the 18-member commission of 10 Democrats and eight Republicans in early 2010. The commission, which met throughout 2010, issued its final report in December 2010. While the commission failed to reach a super-majority (14 of 18 members), members of Congress and the Obama Administration are now suggesting that the Simpson-Bowles plan be given a second look, to serve as a base from which both Democrats and Republicans can find common ground.

Six goals. The Simpson-Bowles plan has six goals:
• ▪ Achieve nearly $4 trillion in deficit reduction through 2020;
• ▪ Reduce the federal deficit to 2.3 percent of gross domestic product (GDP) by 2015 (2.4 percent excluding the plan’s Social Security reform);
• ▪ Reduce income tax rates, abolish the alternative minimum tax (AMT), and cut “backdoor spending” in the Tax Code;
• ▪ Cap federal revenue at 21 percent of GDP and get federal spending below 22 percent, and eventually to 21 percent;
• ▪ Ensure lasting Social Security solvency;
• ▪ Stabilize the national debt by 2014, and reduce it to 60 percent of GDP by 2023 and 40 percent of GDP by 2035.

Individuals. Various proposed tax reform plans would eliminate many income tax expenditures, simplify others and use the revenue to lower the individual income tax rates. The Simpson-Bowles plan projected that elimination of all deductions and credits would achieve a bottom individual tax rate of eight percent, a middle individual tax rate of 14 percent and a top individual tax rate of 26 percent.

IMPACT.
Some tax expenditures, such as the child tax credit, the earned income tax credit (EIC), the deduction for charitable contributions, and the deduction for home mortgage interest, would likely survive tax reform, many observers admit. However, retaining these incentives, or any others, would need to be offset by higher individual income tax rates.

IMPACT.
Flow-through of business income to the individual tax returns of sole owners, individual partners and S corporation shareholders creates a coordination problem in trying to align individual tax rates with proposed changes under corporate tax reform. Tackling both individual and corporate tax reform at the same time, however, may prove to be too large an undertaking. Treasury officials in the Obama Administration have appeared to favor concentrating on corporate tax reform first.

Capital gains/dividends. Under the Simpson-Bowles plan, all capital gains and dividends would be taxed at ordinary income rates (which will have been lowered by the elimination of tax expenditures). The plan notes that the effective tax rate on investment income could be reduced by excluding a portion of capital gains and dividends (for example, 20 percent) from income. However, to offset this exclusion while maintaining progressivity, the top tax rate on ordinary income would have to be increased.

Businesses. Many business tax expenditures would also be eliminated under the Simpson-Bowles plan and similar plans that aim to reduce the corporate tax rate. The Simpson-Bowles plan projects a top corporate tax rate of between 26 percent and 29 percent, contingent upon elimination of business tax expenditures.

Comment
The Simpson-Bowles plan specifies only a handful of business tax expenditures for elimination. These include the Code Sec. 199 domestic production activities deduction, and the Last In/ First Out (LIFO) method of accounting. The Obama Administration, in contrast, has made Code Sec 199 a centerpiece in providing a 25 percent effective tax rate for manufacturers under its corporate reform proposal issued in February 2012. The Administration’s FY 2012 Revenue Proposals (the “Green Book”), on the other hand, recommends repealing the LIFO method of accounting for inventories, a proposal that has been opposed by certain industry groups.

Territorial system. The Simpson-Bowles plan would gradually move the U.S from a worldwide system of taxation to a territorial system of taxation. Under a territorial system, income earned by foreign subsidiaries and branch operations would be exempt from U.S. taxation. The taxation of passive foreign-source income, however, would remain unchanged.