International Executive Services
TAX
US Tax Update 2009 and Hot TopicsMichael KoehlerSteuerberater, CPA, Manager Tax
Warsaw, February 17, 2010
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NOTICE
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The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.
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DATED MATERIAL
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Agenda
Due Dates, TY 2009 in numbers
Tax UpdatesHaiti Charity BillTax provisions expired in 2009 and expiring in 2010Tax Extenders Act 2009International Tax EnforcementForeign Account Tax Compliance Act (FATCA)Senate’s Jobs Creation BillsEstate & gift tax updateHealth Care Reform BillsAdministration’s Tax Proposal 2011
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Due Dates
Initial due date - April 15, 2010Extension dates-
June 15, 2010 - Automatic Extension for taxpayers abroadOctober 15, 2010December 15, 2010January 30, 2011
Forms4868
6 month extension through October 15, 2010 Additional 2 month extension through December 15 valid for taxpayers abroad with written request to the Philadelphia Center
2350 First year abroad electing foreign earned income and housing exclusion
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TY 2009 in numbers
Single MFJ MFS HOH
Standard deduction $5,700 $11,400 $5,700 $8,350
Tax brackets 10% 15% 25% 28% 33% 35%
≤ $8,350 ≤ $33,950 ≤ $82,250≤ $171,550≤ $372,950> $372,950
≤ $16,700 ≤ $67,900≤ $137,050≤ $208,850≤ $372,950> $372,950
≤ $8,350 ≤ $33,950 ≤ $68,525≤ $104,425≤ $186,475> $186,475
≤ $11,950 ≤ $45,500≤ $117,450≤ $190,200≤ $372,950> $372,950
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TY 2009 in numbers
Personal Exemption: $3,650 (min. $2,333)
401(k) contribution limit: $16,500IRA contribution limit: $5,000Roth IRA AGI limitation: $166,000 (MFJ), $0 (MFS) or
$105,000 (Single or HOH)
FICA threshold: $106,800
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Haiti Charity Bill
Signed into law on January 22, 2010
Cash contributionsAfter January 11, 2010 and before March 1, 2010For relief of Haiti earthquake victimsTo U.S. qualified charityCan be treated as if made on December 31, 2009
Caution: Itemized deduction phase out repealed in 2010
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2009 Expired Provisions
Increased AMT exemption amountAdditional standard deduction for real estate taxDeduction for State and local sales taxAllowance for additional IRA contributions in certain bankruptcy casesAbove the line deduction for qualified tuition and related expenses
Other business and energy related provisions
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2010 Expiring Provisions
First time home buyer creditReduced capital gains tax ratesDividends taxed at capital gains tax rates10% tax bracketIncrease of refundable child tax creditMaking work pay creditRepeal of personal exemption phase-out
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Tax Extenders Act of 2009
Extend provisions expired in 2009 for 1 year until 12/31/2010
Deduction for State and local sales taxAdditional standard deduction for real property taxAbove-the-line deduction for qualified tuition and related expenses
Revenue provisionsForeign Account Tax Compliance ActTax carried interest as ordinary income
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International Tax Enforcement
Growing concerns that taxpayers with international investments are underpaying their U.S. taxes while at the same time the IRS may lack sufficient information and tools to identify these issues and to pursue effectively
An estimated 800 new hires at the IRS devoted to international enforcement
After tax returns are filed, prepare for or even anticipate increased scrutiny from the IRS
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International Tax Enforcement
IRS identified various issues including foreign tax credit, international financing, transfer pricing and information return filing issues
Automatic assessment of penalties for late filed Forms 5471 of corporate taxpayers
If successful, automatic assessment of penalties could be expanded to other taxpayers and/or other forms
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International Tax Enforcement
Foreign Bank Account ReportingFinancial interest and/or signature authority over foreign bank accountsAggregate value exceeding $10,000Failure to file FBAR subject to both criminal and civil penalties
Civil penalties: up to the greater of $100,000 or 50% of the account balanceCriminal penalties: fine up to $250,000 and imprisonment for 5 years
Not considered tax return informationDistribution to other law enforcement agencies not limited by nondisclosure rules
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International Tax Enforcement
Foreign Bank Account Reporting cont.
Revised Form TD F 90-22.1 in October 2008Voluntary disclosure initiative in 2009
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Foreign Account Tax Compliance Act
November 18, 2009: introduced as a separate bill
December 7, 2009: attached to Tax Extenders Bill 2009 as revenue offset
December 9, 2009: House approves Tax Extenders Bill 2009
December 22, 2009: Senate will consider Tax Extenders Bill 2009 when it reconvenes in January 2010
February 11, 2010: Attached to Senate’s Jobs Creation Bills
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Foreign Account Tax Compliance Act
Increase foreign financial asset reportingDepository or custodial accounts at foreign financial institutionsStocks or securities issues by a foreign personOther financial instruments or contracts held for investment issued by a foreign personAny interest in a foreign entityAggregated value over $50,000Disclosure statement as part of the income tax returnIn addition to FBARFailure to disclose, same penalties as for FBAR
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Foreign Account Tax Compliance Act
Increase of statue of limitation6 years instead of 3 yearsUnderreporting of gross income in excess of $5,000 from foreign financial assets required to be reported
New 40% accuracy related penalty
Passive Foreign Investment Company (PFIC) Reporting
Form 8621 required Currently: only if distribution received or PFIC shares disposedIn the future: annually
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Foreign Account Tax Compliance Act
Foreign banks required toIssue Forms 1099, orProvide information about US customers to the IRS
Name of account ownerTaxpayer identification numberAccount numberAccount balanceIncome earnedGross withdrawals from account
30% withholding tax on US income
Similar reporting requirements for other foreign entities with respect to their >10% U.S. owners
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Foreign Account Tax Compliance Act
Disclosure of assistance in acquiring or forming of foreign entities
Any person, including tax advisors, lawyers, etc. forMaterial aid, assistance or advice toU.S. person acquiring a direct or indirect interest in foreign entityRequired to file an information return
Identity of U.S. personIdentity of foreign entityOther information as required by the Secretary
Gross income from such assistance or advice in excess of $100,000Penalty: greater of $10,000 or 50% of gross income
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Senate‘s Jobs Creation Bills
February 11, 2010 2 separate bills introducedSenate Finance Committee Leaders
Hiring Incentives to Restore Employment ActIncludes Tax Extenders, FATCA, Economic Substance Doctrine
Senate Majority LeaderHiring Incentives to Restore Employment ActIncludes FATCADoes not include Tax Extenders
Create tax incentives for small business to encourage job creation
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Estate & Gift Tax Update
Current law as enacted in 2001Exemption of $3.5 million for estate tax in 2009Exemption of $1 million for gift tax in 2009Maximum tax rate 45% in 2009 (35% in 2010)No estate tax for 2010
Sunset provisionBeginning 2011, reverts back status before 2001Unified exemption of $1 million for estate and gift taxMaximum tax rate 55%
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Estate & Gift Tax Update
December 3, 2009House approves „Permanent Estate Tax Relief for Families, Farmers and Small Businesses Act of 2009“Permanently extends estate and gift tax provisions of 2009
Exemption of $3.5 million for estate tax in 2009Exemption of $1 million for gift tax in 2009Maximum tax rate 45%
No repeal of estate tax for 2010Senate has not scheduled consideration of estate tax bill
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Health Care Reform Bills
House and Senate version of the Health Care Reform Bill include various tax provisions
Increase of additional tax on distributions from HASFrom 10% to 20%Distributions before age of 65 used for other than qualified medical purposes
Limitation of contributions to flexible spending arrangements to $2,500 per yearAGI limitation for medical expenses as itemized deductions
Increased from 7.5% to 10%
Additional medicare tax on high-income taxpayersAdditional 0.9 on wages of individuals over $200,000 ($250,000 MFJ)
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Health Care Reform Bills
Adoption creditIncreased from $10,000 to $13,170Made refundable
Additional tax of 2.5% of modified AGIIndividuals not obtaining acceptable health care coverage for themselves or dependentsDependents, nonresident aliens and certain individuals residing outside the U.S. should be exempt
Income surtax5.4%Modified AGI in excess of $500,000 ($1 million MFJ)
Economic substance doctrineChange taxpayer’s economic position in a meaningful waySubstantial purpose other than tax treatment
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Administration‘s Tax Proposal 2011
Reinstate 36% and 39.6% tax rates10%, 15%, 25% and 28% tax brackets continue with thresholds indexed for inflation33% and 35% tax rates eliminated36% tax bracket starts at $190,650 for singles ($231,300 MFJ)39% tax bracket should start where old 35% rate applied
Increase of maximum capital gains and dividends tax rate for higher-income tax payers
20% instead of 15%Taxpayers subject to 36% and 39.6% tax brackets
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Administration‘s Tax Proposal 2011
Restore phase-outs of itemized deductions and personal exemptions
Single taxpayer with AGI exceeding $200,000 ($250,000 MFJ)Limit the tax benefit of itemized deductions to 28%
Changes to AMTIndex the phase-out of AMT exemption and the threshold for 28% AMT rate for inflationContinue temporary “patches” to set AMT exemption amountNew maximum capital gains and dividends rate for higher-income taxpayer also apply to AMT
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Administration‘s Tax Proposal 2011
Extend the „Making Work Pay Credit“ for 1 year (until end of 2011)Modifications of income limits for refundable child tax creditAdjustments to phase-out of nonrefundable child care creditChange “Saver’s Credit” from nonrefundable tax credit to matching contribution to taxpayer’s qualified retirement planReplace HOPE scholarship credit permanently with American Opportunity Tax CreditMake permanent temporary features of the earned income tax credit
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Administration‘s Tax Proposal 2011
Extend certain 2010 expiring provisions through December 31, 2011
Did not provide list of provisions planned to be extendedDid not propose to extend:
First time home buyer creditAdditional standard deduction for real estate taxesSales tax deduction for purchase of motor vehicleLimited exclusion of unemployment compensation
Codify economic substance doctrineChange taxpayer’s economic position in a meaningful waySubstantial purpose other than tax treatmentLacking economic substance: 30% penalty for understatements (20% with adequate disclosure)
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Administration‘s Tax Proposal 2011
Worker classificationRevenue Act of 1978 prohibited the IRS from
Reclassifying an independent contractor to employee statusIssuing guidance addressing the proper classification of workers
Allow the IRS to require the service recipient to prospectively reclassify workers who are currently misclassifiedDirect the IRS to issue guidance that
Interprets common law in a neutral mannerProvides safe harbors and/or rebuttable presumptions
Anticipated that new enforcement activity would focus mainly on proper worker classification
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Administration‘s Tax Proposal 2011
Repeated willful failure to file a tax return becomes a felony
3 years within any 5 consecutive year periodAggregate tax liability for the period is at least $50,000
Estate and gift tax changesMake 2009 law permanentRequire consistency in property value for transfer and income taxModify rules on valuation discounts
International tax enforcementFATCARequire reporting on transfers to and from foreign account by the taxpayer and by the bank if aggregate value of such transfers exceed $50,000
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