Bangerter, Lund and Associates - Certified Public Accountants - Certified Public Accountants

July 2010 Newsletter

Bangerter, Lund & Associates, Inc.

With the first half of 2010 behind us, we would like to take this opportunity to let you know what is happening and what to expect during the remainder of this year.  Items which affect Individual taxpayers are listed below.  Business owners, please be sure to also review your information which appears after the Individual information.

INDIVIDUALS

First-Time Home Buyer Credit – Time to close on new home has been extended

With just days remaining before its week-long Independence Day recess, the House passed legislation giving nervous homebuyers extra time to complete their closings on their properties and still qualify for the $8,000 first-time homebuyer’s tax credit. Lawmakers approved the Homebuyers Assistance and Improvement Bill of 2010 (HR 5623) to extend the current deadline for the tax credit from June 30 to September 30, 2010.  The extension is only good for taxpayers who already entered into a written, binding contract by April 30, 2010.

Potential Tax Bracket Changes

Individual tax rates. President Obama urged Congress in his Fiscal Year (FY) 2011 federal budget proposals to extend the individual marginal rate cuts enacted in 2001 but allow the top two individual marginal income tax rates to revert to 36 percent and 39.6 percent respectively after 2010. Higher income individuals also would pay 20 percent tax on qualified dividends and capital gains after 2010 under the president's proposal. Congress is expected to take up the individual marginal rate cuts and the dividend/capital gains tax rates over the summer of 2010.

Health Care Reform

Now that Congress has passed a landmark health care reform package, much work needs to be done in dealing with new requirements. While the end result of the legislative process is necessarily health care related, the tax law plays a major role in its implementation. From the tax credits and subsidies used to expand health coverage, to the many penalties, fees and surtaxes designed to pay for it, the Tax Code is front and center.

Two new laws. Health care reform is actually made up of two new laws: the Patient Protection and Affordable Care Act of 2010 and the Health Care and Education Reconciliation Act of 2010. The Patient Protection Act was crafted largely in the Senate and sets out the general framework of health care reform. The Reconciliation Act was prepared in the House to modify the Patient Protection Act, especially in the areas of tax credits and cost sharing for individuals to help make coverage more affordable. Common features to both laws are delayed effective dates for many of the provisions, which make strategic planning all that more important.

New taxes and penalties. Viewing the historic health care reform package from the context of the Tax Code, many new taxes and penalties stand out immediately above the rest. Initially, we would advise taking particular note of the following highlights:

• Individuals who earn more than $200,000 for the year ($250,000 for married couples) will pay an additional 0.9 percent in Hospital Insurance (Medicare) tax, starting in 2013;
• Individuals whose adjusted gross income for the year exceeds $200,000 ($250,000 for joint filers), whether from wages or otherwise, will also pay an additional 3.8 percent Medicare tax on net investment income, starting in 2013;
• Employers with 50 or more employees that do not offer coverage or offer coverage that does not meet new minimum essential coverage requirements will pay a penalty per employee, starting in 2014;
• Small for-profit employers with no more than 25 employees are entitled to up to a 35 percent tax credit on the cost of providing health insurance for employees, starting immediately in 2010 (small tax-exempt employers may qualify for a reduced credit);
• Young adults may remain on their parents' health insurance plans through age 26;
• The health care reform package extends the income tax exclusion to any employee's child who has not attained age 27 as of the end of the tax year;
• Most individuals will be required to obtain health insurance or be subject to a penalty tax starting in 2014;
• Tanning Salons will have an extra 10% excise tax added to their tanning bed fees beginning July 1, 2010.  If a health club has indoor tanning services, no portion of the membership fee is subject to the tax, provided the tanning is inconsequential to the club’s main purpose as a fitness facility.  The excise tax does not apply to lotions and products purchased from a salon, nor does it apply to phototherapy performed by, and on the premises of, a licensed medical professional.
• Tax credits to subsidize the cost of health insurance premiums will be available to individuals earning up to 400 percent of the poverty level, starting in 2014;
• Health flexible savings arrangement (FSA) dollars will be limited to prescription medications with some exceptions after 2010, along with a $2,500 annual cap on expenses covered under health FSAs, after 2012;
• A 40 percent excise tax will be imposed on high-cost, "Cadillac" employer-sponsored health coverage, starting in 2018;
• Fees will be imposed on the pharmaceutical industry and health insurance providers , starting in 2011 and 2014, respectively;
• Limits on tax-subsidized medical expenses will be imposed by raising the itemized medical expense deduction floor for regular tax purposes from 7.5 percent to 10 percent, generally starting in 2013.

Exchanges. The health care reform package requires each state to establish an insurance exchange by 2014 to help individuals and qualified employers obtain coverage. Coverage will be offered at various levels. Qualified individuals may be eligible for premium assistance tax credits, cost-sharing or vouchers to help pay for coverage through an insurance exchange. An individual's income, whether or not coverage is provided by his or her employer, will be taken into account when determining if the individual qualifies for a premium assistance tax credit, cost-sharing or voucher.

BUSINESSES

HIRE Act. President Obama signed the Hiring Incentives to Restore Employment (HIRE) Act in March, providing businesses with payroll tax relief, a worker retention tax credit and enhanced Code Sec. 179 expensing. Payroll tax forgiveness applies to wages paid to covered workers who are on the employer's payroll after March 18, 2010 and before January 1, 2011. The covered employee must begin employment after February 3, 2010 and before January 1, 2011. The HIRE Act also allows employers to claim a worker retention credit for qualified employees.

Health care reform. On March 23, 2010, President Obama signed comprehensive health care reform legislation (the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act). The health care reform package does not mandate employer-provided coverage but beginning in 2014 large employers that do not offer coverage will pay a penalty. Large employers that offer coverage but the coverage fails to meet minimum essential standards will also pay a penalty. Tax credits for small employers are available immediately for 2010 tax years. Individuals must obtain minimum essential coverage after 2013 unless they are treated as exempt; otherwise they will pay a penalty. Starting in 2013, the new law broadens the Medicare tax base for higher income taxpayers, including amounts paid on investment income, and, after 2017, imposes an excise tax on high-dollar health insurance plans.

This letter provides a description of the small business tax credit and illustrations of the phaseout for qualifying employers' contributions toward their workers' health insurance premiums. This credit is available for businesses with fewer than 25 full-time equivalent employees (FTEs) with average annual wages of less than $50,000. Small employers will be eligible for a tax credit, provided they contribute at least 50% toward their employees' health insurance.

Starting this year and through 2013, the credit will cover up to 35% of a qualified for-profit employer's contributions to health insurance.

Example: If WindPower, Inc. paid 60% of employees' health premiums, the maximum small business tax credit through 2013 is 35% of WindPower's contribution. Assuming the average total premium for WindPower is $7,500 per employee, and WindPower's contribution is $4,500 (60%) per FTE, the maximum tax credit is $1,575 per FTE (35% of $4,500).

Beginning in 2014, the maximum credit is 50% of the employer's contribution toward premiums. The small business tax credit that is available beginning in 2014 only is available to an employer for 2 consecutive tax years, beginning with the first year that the employer offers coverage through an exchange. Thus, the small business tax credit is potentially available for a total of 6 years - the initial credit availability from 2010 through 2013, plus the 2-year credit period beginning as early as 2014.

Small employers can claim the full credit amount if they meet the following two criteria:

1. The employer has 10 or fewer FTEs. FTEs are calculated by dividing the total hours worked by all "employees" (see description below) during the tax year by 2,080 (with a maximum of 2,080 hours for any one employee).
2. The employer's average taxable wages are $25,000 or less. This is calculated by dividing the aggregate amount of wages paid to the "employees" during the year by the number of FTEs (and then rounding to the nearest $1,000).

For calculating the number of FTEs and their wages, the term "employees" excludes seasonal workers (working no more than 120 days during the year). In addition, the term "employees" excludes the following: a self-employed individual, a 2% shareholder in an S corporation, a 5% owner of an eligible small business, or someone who is related to or a dependent of these people. Thus, for example, the business will not receive a credit for small business owners or their family members.

Small employer's will find the full credit phased out as the number of FTEs increases from 10 to 25 and as average employee compensation increases from $25,000 to $50,000. Below is a table to help determine, as a percentage, the amount of the maximum tax credit employers will receive on their contribution toward an employee's health insurance from 2010 through 2013.

Small Business Tax Credit as a Percent of

Employer Contribution to Premiums for 2010-2013

Example: If WindPower, Inc. paid 60% of their 11 FTEs health premiums and the average wage was $30,000, the maximum small business tax credit through 2013 is $1,170 (26% of WindPower's $4,500 contribution).

For 2010-2013, the "employer contribution" for the year will be calculated as the lesser of (1) the employer's actual premium contribution, or (2) the contribution the employer would have made if each of those same employees had enrolled in a plan with a premium equal to the average premium (determined by the Secretary of Health and Human Services [HHS]) for the small group market in the state, or area in the state, in which the employer offers health insurance. Any premium paid pursuant to a salary reduction arrangement under a §125 cafeteria plan is not treated as paid by the employer.

For qualifying employers, the small business health insurance tax credit is a general business credit. This type of credit is not refundable but is limited by the employer's actual tax liability. In other words, if a company had a year in which it ended up paying no taxes (i.e., it had no taxable income after accounting for all its other deductions and credits), then the small business tax credit could not be used for that year as there would be no income tax for this credit to reduce. However, as a general business credit, an unused credit amount can generally be carried back for 1 year and carried forward up to 20 years.

We hope this information on the new small business health insurance credit is helpful.  As always, if you have any questions we are happy to answer them for you.  Please call our office at (801) 397-1000 weekdays between 8am and 5pm for details on how the new changes may affect your specific situation.

Sincerely,

Bangerter, Lund & Associates, Inc.