Potpourri of New Tax Provisions

The Internal Revenue Code has long been used as a tool to incentivize/discentivize behavior as well as a funding mechanism. What has become more pronounced, of late, and seems to be accelerating, is the very narrowly targeted and oftentimes short-lived changes. For example, the one time Making Work Pay Tax Credit claimed on Schedule M that was routinely overlooked by earlier filers necessitating a publicity blitz by the Internal Revenue Service and required a whole new form to claim.

Recently, Congress passed both the Hiring Incentive to Restore Employment (HIRE) Act and Health Care Reform, which contain a variety of tax provisions with varying effective dates, and soon may be followed with a Small Business Jobs Act. While some of the new tax provisions provide relief to taxpayers as others impose new obligations, one unifying principle unites all of these provisions - they will complicate your tax returns over the next few years.

The information below provides a brief overview of some of the many changes that are found in the recent legislation passed or being considered by Congress.

The HIRE Act

The HIRE Act generally exempts employers from paying Social Security taxes for the remainder of the 2010 calendar year for employees hired after February 3, 2010, who were previously unemployed or underemployed for the 60 days prior to their hire date. Further, if these new hires are continuously employed for 52 consecutive weeks after their hire date, the employer is entitled to a $1,000 business tax credit.

Health Care Reform Legislation

Health Care Reform legislation implemented many changes and the tax provisions were not spared from this process. However, many of these provisions will not take effect for several years. The following highlights just a few of these looming tax changes:

· Starting in July 2010, a 10 percent tax will be imposed on indoor tanning services.

· Starting in 2011, for informational purposes only, employers must include the cost of employer sponsored health care on employee's W-2.

· Starting in 2011, individuals' health savings accounts, flexible spending accounts and Archer medical saving accounts can only be used to pay for prescribed drugs or insulin.

· Starting in 2013, there will be a .9 percent tax increase in the Medicare Hospital Tax on individual's wages over $200,000 if single and $250,000 if married.

· Starting in 2013, a 3.8 percent Medicare Hospital Tax will be imposed on unearned income (interest, capital gains, dividends) for individuals with an adjusted gross income over $200,000 if single and $250,000 if married.

· Starting in 2014, a penalty will be imposed on individuals who do not have health insurance and do not satisfy one of the statutory exceptions (e.g., religious, income, incarceration).

· Starting in 2018, a 40 percent excise tax will be imposed on the excess of annual employer sponsored health insurance premiums over $10,200 for singles and $27,500 for families.

Small Business Jobs Act

There is currently legislation in Congress aimed at providing support to small businesses. The main provision within this legislation excludes from an individual’s gross income any gain from the sale of qualified small business stock acquired after March 15, 2010, and before January 1, 2012, provided certain requirements are satisfied. If passed, this could provide a strong incentive for individuals to invest in small businesses, as individuals have the potential to acquire tax free investments. Also included in this legislation, however, is the increase in penalties for the failure to file correct information returns and the limitation of Grantor Retained Annuity Trusts to a period not less than 10 years.

Taxpayer Assistance Act of 2010

There is also legislation that has passed the House of Representatives, which relaxes requirements for businesses to take deductions on cell phones used for business purposes.

Accompanying each of these provisions are detailed, and at times, complex rules and regulations that both individuals and businesses should be cognizant of as the tax landscape continues to evolve. For more information on these new tax laws, you can contact Tom Schnellenberger, chair of the Ice Miller Tax Group.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.