Ask TaxMama Issue 574 – Happy Halloween
October 29, 2010 by Tax Blog
Filed under Questions & Answers
Dear Family,
This is shaping up to be a scary weekend. There are Howloween parties for costumed pets and Haute Dogs all over the place. The amusement parks have added special <a href="http://www.halloweenhorrornights.com/hollywood/2010/overview2.html?source=google_hhn10”>new attractions to spook the willing. And there are over 400,000 results when you search for <a href="http://www.google.com/search?q=Howloween&ie=utf-8&oe=utf-8&aq=t&client=firefox-a&rlz=1R1GGGL_en_US370#hl=en&expIds=17259,17315,23628,23670,239”>Halloween parties for children.
But we adults have one less thing to fear – the wrath of the FTC. (different than the Wrath of Kahn, though that has been running on TV all week.) When you read IRS News, you will learn that the FTC has decided to hold off enforcing the ‘no retainer’ rule for tax professionals who are helping our clients deal with tax debt. Some of us paid Kallie and Mark Guimond of the National Policy Group to present our case to the Federal Trade Commission. At the same time, the legislative team at NAEA was working on this as well.
Last week, NAEA reported that The FTC attorneys (of which there were many) received NAEA’s presentation well and clearly made a good faith effort to understand the role of enrolled agents as federally licensed tax practitioners and the high ethical standards set forth under Circular 230. At the end of the hour-plus meeting, the attorneys were clearly still in information-gathering mode and suggested we continue the discussion. Well, after getting all this great information, the FTC has decided to exempt us their new Telemarketing Sales Rule (TSR or “the Rule”) – for now.
Why should you care if you’re not a tax professional? Because if you, or someone you know, needs help with an IRS or state tax debt, tax pros would have been reluctant to work your case. The FTC’s TSR rules would have put the tax pro community into a position to do 20-50 hours of work – without any ability to get paid for it. We’re nice people. And we do want to help you. But…we want to decide when to do it free – not be forced to give away our services.
Keep watching. In November, you’ll see a new launch of Suze Orman’s Money Minded Moms website. You’ll be meeting a team of passionate writers to help you deal with money, family, health, wealth and more.
Upcoming Events
November 11, 9:00 am PT Roger B. Adams, EA
November 9, 11:00 am PT – Eva Rosenberg, EA Doing Tax Research Online for Free
Upcoming on CPE LINK – with CPE for CPAs, EAs, and more
http://taxmama.com/earn-cpe-without-leaving-the-office/
Preview the series on YouTube
http://www.youtube.com/watch?v=UCMdSFFTwI8
The IRS Practice Series (all times in Pacific Time)
Team taught with Eva Rosenberg, EA, Tom Buck, CPA and Sonya Wilt, EA
Nov 1, 10:00am – Hands-on Collections Workshop
Dec 7, 10:00am – 6 Simple Steps to an Offer-in-Compromise (form 656)
Dec 10, 9:00am – The Un-agreed Collection Alternatives and Appeals
http://www.cpelink.com/teamtaxmama
SELF-STUDY at CPE LINK:
Homebuyers Credits for Tax Professionals
The specific laws related to your clients. How to get it rigth the first time. What to watch out for. And how to overcome IRS Rejections.
IRS Practice Series: Overview of Collection Issues – Price = ZERO:
This on-demand webcast provides a broad overview of the collections process. From preparing the Power of Attorney – IRS Form 4868, to freezing the collection activity, to Offers-in-Compromise and Appeals, the course will explore the numerous collection issues a practitioner may encounter and lay the ground work for the IRS Practice Series. Topics will be covered in more detail in the dozen courses of The IRS Practice Series – leading to a Tax Mediary (CTM) Certificate upon completion of the series.
http://www.cpelink.com/teamtaxmama
EA Class News
We’ve had a lot of fun this week, learning collections issues, and how to fill out forms. We learned how to make a really good living as an EA. This weekend, we’ll do the fourth and final, Final Review for Part 3. And we’re done! All the live classes are over.
We will be having hand-holding sessions every other week in November and December for those folks still studying for the EA Exams. http://irsexams.com/registration/
Remember, you can get a 10% discount on the EA Class if you register for TaxMama’s Family first.
http://taxmama.com/membership/family-membership/
The discount code can be found in the Family Look-Ups resource.
http://taxmama.com/family-member-resources/
Other TaxMama News:
At Equifax this week, TaxMama tells you how to optimize your retirement contributions; Ilyce Glink gives you 4 tips to buy a HUD home. Dan Solin gives you strategies to outsmart Uncle Sam at Tax Time. Linda Rey discusses pet insurance. The Equifax Credit Experts explain how closing an account affects your credit score. http://www.equifax.com/blog/tax/en_ff
This week’s AccountingWeb.com blog tells you how amusing Tax Court can be.
http://www.accountingweb.com/blogs/accountingweb/talk-taxmama
In IRS News, IRS has released the new limits for retirement plans. And the FTC has released tax pros from a needless burden.
http://taxmama.com/category/asktaxmama/irs-news/
In Money Funnies today, we meet a 98-year-old woman making an accounting of her life in church.
http://taxmama.com/category/asktaxmama/money-funnies/
In TaxQuips this week, we start the week with Jacqueline who sold an option to someone to buy her land. He paid her for a few years. But never bought the land. How does she handle the payments she received? We have an argument going on this one. How do YOU think this should be reported? Land Option . Jon is ill and in pain. His doctor told him it was time to apply for Social Security Disability. But they keep turning him down. What’s a guy to live on until SSDI wises up? Nothing to Live on . Riki is tired of getting stuck with bills after the holidays. Isn’t there a better way to spend? Holiday Credit Cards . We end the week with Mike who won the lottery and wants to share some money with Mom. Won Lottery .
http://taxmama.com/category/tax-quips/
This month’s MarketWatch column is to come. What do you think I should write about?
http://www.marketwatch.com/Journalists/Eva_Rosenberg
As always, we love your feedback, opinions and ideas.
You are what makes all this fun – and interesting!
Please use the Comments link online.
http://taxmama.com/asktaxmama/ask-taxmama-issue-574
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FTC Enforcement Deferred for Tax Debt Relief Services
[TaxMama Note: This change is the result of efforts by folks at the National Policy Group and the legislative team at NAEA. With the support of members, these teams explained to the FTC how tax professionals are regulated by the IRS. Removing tax debt firms from their ruling would still leave FTC with the power to deal with fraudulent activities. Stand by for more information as it comes in.]
The Federal Trade Commission has issued an enforcement policy statement on a new FTC rule that protects consumers by barring debt relief firms from collecting up-front fees. In its statement, the FTC says that while most companies that sell debt relief services over the telephone are now prohibited from charging fees before settling or reducing a consumer’s credit card or other unsecured debt, it will defer enforcement of the new rule for tax debt relief services.
The ban on advance fees reflects changes that the FTC made to its Telemarketing Sales Rule last July. These change take effect today. During the FTC’s education and outreach efforts earlier this month, some tax debt relief companies expressed uncertainty about whether the Rule applied to them. Specifically, they questioned whether tax debts are “unsecured,” which would make them subject to the Rule. The FTC currently is considering these concerns, and until further notice, will defer enforcing the Rule with respect to “services that represent, directly or by implication, to renegotiate settle, or alter the terms of obligation between a person and a taxing entity (tax debt relief services).”
The enforcement policy states, however, that tax debt relief services must comply with the FTC’s Telemarketing Sales Rule, except for the debt relief amendments, during the enforcement deferral period. It also reminds providers that they must comply with the FTC Act, which prohibits unfair and deceptive practices. The FTC’s Enforcement Policy on Debt Relief Amendments to the Telemarketing Sales Rule can be found on the agency’s website and as a link to this press release.
The Commission vote approving the policy was 4-0-1, with Commissioner J. Thomas Rosch not participating.
Information for Businesses and Consumers
The FTC has issued a new list of frequently asked questions about the new rule, providing expanded advice on how businesses can comply with the debt relief rule, and building on earlier guidance that the agency issued in July. The FAQs help businesses determine if they are covered by the new rule, and discuss how fees may now be collected. “Debt Relief Services & the Telemarketing Sales Rule: What People are Asking.”
The FTC also released a new video providing business guidance about the new rule, which can be found at http://business.ftc.gov/multimedia/videos/debt-relief-services-and-telemarketing-sales-rule. Finally, the compliance guide for business, “Debt Relief Services & the Telemarketing Sales Rule: A Guide for Business,” released in July, can be found on the agency’s website at http://www.ftc.gov/bcp/edu/pubs/business/marketing/bus72.pdf. Information for consumers, “Settling Your Credit Card Debts,” can be found at http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre02.shtm.
The Federal Trade Commission works for consumers to prevent fraudulent, deceptive, and unfair business practices and to provide information to help spot, stop, and avoid them. To file a complaint in English or Spanish, visit the FTC’s online Complaint Assistant or call 1-877-FTC-HELP (1-877-382-4357). The FTC enters complaints into Consumer Sentinel, a secure, online database available to more than 1,800 civil and criminal law enforcement agencies in the U.S. and abroad. The FTC’s Web site provides free information on a variety of consumer topics.
- Ask TaxMama :: Where taxes are fun and answers are free
- TaxQuips :: The number ONE free tax podcast online
- IRS News at TaxMama.com :: Where you can find more IRS News
FTC Enforcement Deferred for Tax Debt Relief Services
October 29, 2010 by Tax Blog
Filed under Questions & Answers
[TaxMama Note: This change is the result of efforts by folks at the National Policy Group and the legislative team at NAEA. With the support of members, these teams explained to the FTC how tax professionals are regulated by the IRS. Removing tax debt firms from their ruling would still leave FTC with the power to deal with fraudulent activities. Stand by for more information as it comes in.]
The Federal Trade Commission has issued an enforcement policy statement on a new FTC rule that protects consumers by barring debt relief firms from collecting up-front fees. In its statement, the FTC says that while most companies that sell debt relief services over the telephone are now prohibited from charging fees before settling or reducing a consumer’s credit card or other unsecured debt, it will defer enforcement of the new rule for tax debt relief services.
The ban on advance fees reflects changes that the FTC made to its Telemarketing Sales Rule last July. These change take effect today. During the FTC’s education and outreach efforts earlier this month, some tax debt relief companies expressed uncertainty about whether the Rule applied to them. Specifically, they questioned whether tax debts are “unsecured,” which would make them subject to the Rule. The FTC currently is considering these concerns, and until further notice, will defer enforcing the Rule with respect to “services that represent, directly or by implication, to renegotiate settle, or alter the terms of obligation between a person and a taxing entity (tax debt relief services).”
The enforcement policy states, however, that tax debt relief services must comply with the FTC’s Telemarketing Sales Rule, except for the debt relief amendments, during the enforcement deferral period. It also reminds providers that they must comply with the FTC Act, which prohibits unfair and deceptive practices. The FTC’s Enforcement Policy on Debt Relief Amendments to the Telemarketing Sales Rule can be found on the agency’s website and as a link to this press release.
The Commission vote approving the policy was 4-0-1, with Commissioner J. Thomas Rosch not participating.
Information for Businesses and Consumers
The FTC has issued a new list of frequently asked questions about the new rule, providing expanded advice on how businesses can comply with the debt relief rule, and building on earlier guidance that the agency issued in July. The FAQs help businesses determine if they are covered by the new rule, and discuss how fees may now be collected. “Debt Relief Services & the Telemarketing Sales Rule: What People are Asking.”
The FTC also released a new video providing business guidance about the new rule, which can be found at http://business.ftc.gov/multimedia/videos/debt-relief-services-and-telemarketing-sales-rule. Finally, the compliance guide for business, “Debt Relief Services & the Telemarketing Sales Rule: A Guide for Business,” released in July, can be found on the agency’s website at http://www.ftc.gov/bcp/edu/pubs/business/marketing/bus72.pdf. Information for consumers, “Settling Your Credit Card Debts,” can be found at http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre02.shtm.
The Federal Trade Commission works for consumers to prevent fraudulent, deceptive, and unfair business practices and to provide information to help spot, stop, and avoid them. To file a complaint in English or Spanish, visit the FTC’s online Complaint Assistant or call 1-877-FTC-HELP (1-877-382-4357). The FTC enters complaints into Consumer Sentinel, a secure, online database available to more than 1,800 civil and criminal law enforcement agencies in the U.S. and abroad. The FTC’s Web site provides free information on a variety of consumer topics.
- Ask TaxMama :: Where taxes are fun and answers are free
- TaxQuips :: The number ONE free tax podcast online
- IRS News at TaxMama.com :: Where you can find more IRS News
IRS Announces Pension Plan Limitations for 2011
WASHINGTON — The Internal Revenue Service today announced cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2011. In general, these limits will either remain unchanged, or the inflation adjustments for 2011 will be small. Highlights include:
- The elective deferral (contribution) limit for employees who participate in section 401(k), 403(b), or 457(b) plans, and the federal government’s Thrift Savings Plan remains unchanged at $16,500.
- The catch-up contribution limit under those plans for those aged 50 and over remains unchanged at $5,500.
- The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are active participants in an employer-sponsored retirement plan and have modified adjusted gross incomes (AGI) between $56,000 and $66,000, unchanged from 2010. For married couples filing jointly, in which the spouse who makes the IRA contribution is an active participant in an employer-sponsored retirement plan, the income phase-out range is $90,000 to $110,000, up from $89,000 to $109,000. For an IRA contributor who is not an active participant in an employer-sponsored retirement plan and is married to someone who is an active participant, the deduction is phased out if the couple’s income is between $169,000 and $179,000, up from $167,000 and $177,000.
- The AGI phase-out range for taxpayers making contributions to a Roth IRA is $169,000 to 179,000 for married couples filing jointly, up from $167,000 to $177,000 in 2010. For singles and heads of household, the income phase-out range is $107,000 to $122,000, up from $105,000 to $120,000. For a married individual filing a separate return who is an active participant in an employer-sponsored retirement plan, the phase-out range remains $0 to $10,000.
- The AGI limit for the saver’s credit (also known as the retirement savings contributions credit) for low-and moderate-income workers is $56,500 for married couples filing jointly, up from $55,500 in 2010; $42,375 for heads of household, up from $41,625; and $28,250 for married individuals filing separately and for singles, up from $27,750.
Below are details on both the unchanged and adjusted limitations.
Section 415 of the Internal Revenue Code provides for dollar limitations on benefits and contributions under qualified retirement plans. Section 415(d) requires that the Commissioner annually adjust these limits for cost of living increases. Other limitations applicable to deferred compensation plans are also affected by these adjustments under Section 415. Under Section 415(d), the adjustments are to be made pursuant to adjustment procedures which are similar to those used to adjust benefit amounts under Section 215(i)(2)(A) of the Social Security Act.
The limitations that are adjusted by reference to Section 415(d) generally will remain unchanged for 2011. This is because the cost-of-living index for the quarter ended Sept. 30, 2010, while greater than the cost-of-living index for the quarter ended Sept. 30, 2009, is less than the cost-of-living index for the quarter ended Sept. 30, 2008, and, following the procedures under the Social Security Act for adjusting benefit amounts, any decline in the applicable index cannot result in a reduced limitation. For example, the limitation under Section 402(g)(1) on the exclusion for elective deferrals described in Section 402(g)(3) will be $16,500 for 2011, which is the same amount as for 2009 and 2010. This limitation affects elective deferrals to Section 401(k) plans, Section 403(b) plans, and the federal government’s Thrift Savings Plan.
Effective Jan. 1, 2011, the limitation on the annual benefit under a defined benefit plan under section 415(b)(1)(A) remains unchanged at $195,000. Pursuant to section 1.415(d)-1(a)(2)(ii) of the Income Tax Regulations, the adjustment to the limitation under a defined benefit plan under section 415(b)(1)(B) is determined using a special rule that takes into account that the cost-of-living indexes for the quarter ended Sept. 30, 2009, and for the quarter ended Sept. 30, 2010, were both less than the cost-of-living index for the quarter ended Sept. 30, 2008, and that the cost-of-living index for the quarter ended Sept. 30, 2010, is greater than the cost-of-living index for the quarter ended Sept. 30, 2009. For a participant who separated from service before Jan. 1, 2010, the participant’s limitation under a defined benefit plan under section 415(b)(1)(B) is unchanged (i.e., the adjustment factor is 1.0000). For a participant who separated from service during 2010, the limitation under a defined benefit plan under Section 415(b)(1)(B) for 2011 is computed by multiplying the participant’s 2010 compensation limitation by 1.0118 in order to reflect changes in the cost-of-living index from the quarter ended Sept. 30, 2009, to the quarter ended Sept. 30, 2010.
The limitation for defined contribution plans under Section 415©(1)(A) remains unchanged for 2011 at $49,000.
The Code provides that various other dollar amounts are to be adjusted at the same time and in the same manner as the dollar limitation of Section 415(b)(1)(A). After taking into account the applicable rounding rules, the amounts for 2011 are as follows:
The limitation under Section 402(g)(1) on the exclusion for elective deferrals described in Section 402(g)(3) remains unchanged at $16,500.
The annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) remains unchanged at $245,000.
The dollar limitation under Section 416(i)(1)(A)(i) concerning the definition of key employee in a top-heavy plan remains unchanged at $160,000.
The dollar amount under Section 409(o)(1)(C)(ii) for determining the maximum account balance in an employee stock ownership plan subject to a 5 year distribution period remains unchanged at $985,000, while the dollar amount used to determine the lengthening of the 5 year distribution period remains unchanged at $195,000.
The limitation used in the definition of highly compensated employee under Section 414(q)(1)(B) remains unchanged at $110,000.
The dollar limitation under Section 414(v)(2)(B)(i) for catch-up contributions to an applicable employer plan other than a plan described in Section 401(k)(11) or Section 408(p) for individuals aged 50 or over remains unchanged at $5,500. The dollar limitation under Section 414(v)(2)(B)(ii) for catch-up contributions to an applicable employer plan described in Section 401(k)(11) or Section 408(p) for individuals aged 50 or over remains unchanged at $2,500.
The annual compensation limitation under Section 401(a)(17) for eligible participants in certain governmental plans that, under the plan as in effect on July 1, 1993, allowed cost of living adjustments to the compensation limitation under the plan under Section 401(a)(17) to be taken into account, remains unchanged at $360,000.
The compensation amount under Section 408(k)(2)(C) regarding simplified employee pensions (SEPs) remains unchanged at $550.
The limitation under Section 408(p)(2)(E) regarding SIMPLE retirement accounts remains unchanged at $11,500.
The limitation on deferrals under Section 457(e)(15) concerning deferred compensation plans of state and local governments and tax-exempt organizations remains unchanged at $16,500.
The compensation amounts under Section 1.61 21(f)(5)(i) of the Income Tax Regulations concerning the definition of “control employee” for fringe benefit valuation purposes remains unchanged at $95,000. The compensation amount under Section 1.61 21(f)(5)(iii) remains unchanged at $195,000.
The Code also provides that several pension-related amounts are to be adjusted using the cost-of-living adjustment under Section 1(f)(3). After taking the applicable rounding rules into account, the amounts for 2011 are as follows:
The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for married taxpayers filing a joint return is increased from $33,500 to $34,000; the limitation under Section 25B(b)(1)(B) is increased from $36,000 to $36,500; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D), is increased from $55,500 to $56,500.
The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for taxpayers filing as head of household is increased from $25,125 to $25,500; the limitation under Section 25B(b)(1)(B) is increased from $27,000 to $27,375; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D), is increased from $41,625 to $42,375.
The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for all other taxpayers is increased from $16,750 to $17,000; the limitation under Section 25B(b)(1)(B) is increased from $18,000 to $18,250; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D), is increased from $27,750 to $28,250.
The deductible amount under § 219(b)(5)(A) for an individual making qualified retirement contributions remains unchanged at $5,000.
The applicable dollar amount under Section 219(g)(3)(B)(i) for determining the deductible amount of an IRA contribution for taxpayers who are active participants filing a joint return or as a qualifying widow(er) is increased from $89,000 to $90,000. The applicable dollar amount under Section 219(g)(3)(B)(ii) for all other taxpayers (other than married taxpayers filing separate returns) remains unchanged at $56,000. The applicable dollar amount under Section 219(g)(7)(A) for a taxpayer who is not an active participant but whose spouse is an active participant is increased from $167,000 to $169,000.
The adjusted gross income limitation under Section 408A©(3)(C)(ii)(I) for determining the maximum Roth IRA contribution for married taxpayers filing a joint return or for taxpayers filing as a qualifying widow(er) is increased from $167,000 to $169,000. The adjusted gross income limitation under Section 408A©(3)(C)(ii)(II) for all other taxpayers (other than married taxpayers filing separate returns) is increased from $105,000 to $107,000.
The dollar amount under Section 430©(7)(D)(i)(II) used to determine excess employee compensation with respect to a single-employer defined benefit pension plan for which the special election under section 430©(2)(D) has been made is increased from $1,000,000 to $1,014,000.
Related Item: Revenue Procedure 2010-40 contains certain inflation adjusted tax items for tax year 2011.
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IRS Announces Pension Plan Limitations for 2011
October 29, 2010 by Tax Blog
Filed under Questions & Answers
WASHINGTON — The Internal Revenue Service today announced cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2011. In general, these limits will either remain unchanged, or the inflation adjustments for 2011 will be small. Highlights include:
- The elective deferral (contribution) limit for employees who participate in section 401(k), 403(b), or 457(b) plans, and the federal government’s Thrift Savings Plan remains unchanged at $16,500.
- The catch-up contribution limit under those plans for those aged 50 and over remains unchanged at $5,500.
- The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are active participants in an employer-sponsored retirement plan and have modified adjusted gross incomes (AGI) between $56,000 and $66,000, unchanged from 2010. For married couples filing jointly, in which the spouse who makes the IRA contribution is an active participant in an employer-sponsored retirement plan, the income phase-out range is $90,000 to $110,000, up from $89,000 to $109,000. For an IRA contributor who is not an active participant in an employer-sponsored retirement plan and is married to someone who is an active participant, the deduction is phased out if the couple’s income is between $169,000 and $179,000, up from $167,000 and $177,000.
- The AGI phase-out range for taxpayers making contributions to a Roth IRA is $169,000 to 179,000 for married couples filing jointly, up from $167,000 to $177,000 in 2010. For singles and heads of household, the income phase-out range is $107,000 to $122,000, up from $105,000 to $120,000. For a married individual filing a separate return who is an active participant in an employer-sponsored retirement plan, the phase-out range remains $0 to $10,000.
- The AGI limit for the saver’s credit (also known as the retirement savings contributions credit) for low-and moderate-income workers is $56,500 for married couples filing jointly, up from $55,500 in 2010; $42,375 for heads of household, up from $41,625; and $28,250 for married individuals filing separately and for singles, up from $27,750.
Below are details on both the unchanged and adjusted limitations.
Section 415 of the Internal Revenue Code provides for dollar limitations on benefits and contributions under qualified retirement plans. Section 415(d) requires that the Commissioner annually adjust these limits for cost of living increases. Other limitations applicable to deferred compensation plans are also affected by these adjustments under Section 415. Under Section 415(d), the adjustments are to be made pursuant to adjustment procedures which are similar to those used to adjust benefit amounts under Section 215(i)(2)(A) of the Social Security Act.
The limitations that are adjusted by reference to Section 415(d) generally will remain unchanged for 2011. This is because the cost-of-living index for the quarter ended Sept. 30, 2010, while greater than the cost-of-living index for the quarter ended Sept. 30, 2009, is less than the cost-of-living index for the quarter ended Sept. 30, 2008, and, following the procedures under the Social Security Act for adjusting benefit amounts, any decline in the applicable index cannot result in a reduced limitation. For example, the limitation under Section 402(g)(1) on the exclusion for elective deferrals described in Section 402(g)(3) will be $16,500 for 2011, which is the same amount as for 2009 and 2010. This limitation affects elective deferrals to Section 401(k) plans, Section 403(b) plans, and the federal government’s Thrift Savings Plan.
Effective Jan. 1, 2011, the limitation on the annual benefit under a defined benefit plan under section 415(b)(1)(A) remains unchanged at $195,000. Pursuant to section 1.415(d)-1(a)(2)(ii) of the Income Tax Regulations, the adjustment to the limitation under a defined benefit plan under section 415(b)(1)(B) is determined using a special rule that takes into account that the cost-of-living indexes for the quarter ended Sept. 30, 2009, and for the quarter ended Sept. 30, 2010, were both less than the cost-of-living index for the quarter ended Sept. 30, 2008, and that the cost-of-living index for the quarter ended Sept. 30, 2010, is greater than the cost-of-living index for the quarter ended Sept. 30, 2009. For a participant who separated from service before Jan. 1, 2010, the participant’s limitation under a defined benefit plan under section 415(b)(1)(B) is unchanged (i.e., the adjustment factor is 1.0000). For a participant who separated from service during 2010, the limitation under a defined benefit plan under Section 415(b)(1)(B) for 2011 is computed by multiplying the participant’s 2010 compensation limitation by 1.0118 in order to reflect changes in the cost-of-living index from the quarter ended Sept. 30, 2009, to the quarter ended Sept. 30, 2010.
The limitation for defined contribution plans under Section 415©(1)(A) remains unchanged for 2011 at $49,000.
The Code provides that various other dollar amounts are to be adjusted at the same time and in the same manner as the dollar limitation of Section 415(b)(1)(A). After taking into account the applicable rounding rules, the amounts for 2011 are as follows:
The limitation under Section 402(g)(1) on the exclusion for elective deferrals described in Section 402(g)(3) remains unchanged at $16,500.
The annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) remains unchanged at $245,000.
The dollar limitation under Section 416(i)(1)(A)(i) concerning the definition of key employee in a top-heavy plan remains unchanged at $160,000.
The dollar amount under Section 409(o)(1)(C)(ii) for determining the maximum account balance in an employee stock ownership plan subject to a 5 year distribution period remains unchanged at $985,000, while the dollar amount used to determine the lengthening of the 5 year distribution period remains unchanged at $195,000.
The limitation used in the definition of highly compensated employee under Section 414(q)(1)(B) remains unchanged at $110,000.
The dollar limitation under Section 414(v)(2)(B)(i) for catch-up contributions to an applicable employer plan other than a plan described in Section 401(k)(11) or Section 408(p) for individuals aged 50 or over remains unchanged at $5,500. The dollar limitation under Section 414(v)(2)(B)(ii) for catch-up contributions to an applicable employer plan described in Section 401(k)(11) or Section 408(p) for individuals aged 50 or over remains unchanged at $2,500.
The annual compensation limitation under Section 401(a)(17) for eligible participants in certain governmental plans that, under the plan as in effect on July 1, 1993, allowed cost of living adjustments to the compensation limitation under the plan under Section 401(a)(17) to be taken into account, remains unchanged at $360,000.
The compensation amount under Section 408(k)(2)(C) regarding simplified employee pensions (SEPs) remains unchanged at $550.
The limitation under Section 408(p)(2)(E) regarding SIMPLE retirement accounts remains unchanged at $11,500.
The limitation on deferrals under Section 457(e)(15) concerning deferred compensation plans of state and local governments and tax-exempt organizations remains unchanged at $16,500.
The compensation amounts under Section 1.61 21(f)(5)(i) of the Income Tax Regulations concerning the definition of “control employee” for fringe benefit valuation purposes remains unchanged at $95,000. The compensation amount under Section 1.61 21(f)(5)(iii) remains unchanged at $195,000.
The Code also provides that several pension-related amounts are to be adjusted using the cost-of-living adjustment under Section 1(f)(3). After taking the applicable rounding rules into account, the amounts for 2011 are as follows:
The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for married taxpayers filing a joint return is increased from $33,500 to $34,000; the limitation under Section 25B(b)(1)(B) is increased from $36,000 to $36,500; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D), is increased from $55,500 to $56,500.
The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for taxpayers filing as head of household is increased from $25,125 to $25,500; the limitation under Section 25B(b)(1)(B) is increased from $27,000 to $27,375; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D), is increased from $41,625 to $42,375.
The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for all other taxpayers is increased from $16,750 to $17,000; the limitation under Section 25B(b)(1)(B) is increased from $18,000 to $18,250; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D), is increased from $27,750 to $28,250.
The deductible amount under § 219(b)(5)(A) for an individual making qualified retirement contributions remains unchanged at $5,000.
The applicable dollar amount under Section 219(g)(3)(B)(i) for determining the deductible amount of an IRA contribution for taxpayers who are active participants filing a joint return or as a qualifying widow(er) is increased from $89,000 to $90,000. The applicable dollar amount under Section 219(g)(3)(B)(ii) for all other taxpayers (other than married taxpayers filing separate returns) remains unchanged at $56,000. The applicable dollar amount under Section 219(g)(7)(A) for a taxpayer who is not an active participant but whose spouse is an active participant is increased from $167,000 to $169,000.
The adjusted gross income limitation under Section 408A©(3)(C)(ii)(I) for determining the maximum Roth IRA contribution for married taxpayers filing a joint return or for taxpayers filing as a qualifying widow(er) is increased from $167,000 to $169,000. The adjusted gross income limitation under Section 408A©(3)(C)(ii)(II) for all other taxpayers (other than married taxpayers filing separate returns) is increased from $105,000 to $107,000.
The dollar amount under Section 430©(7)(D)(i)(II) used to determine excess employee compensation with respect to a single-employer defined benefit pension plan for which the special election under section 430©(2)(D) has been made is increased from $1,000,000 to $1,014,000.
Related Item: Revenue Procedure 2010-40 contains certain inflation adjusted tax items for tax year 2011.
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Old and Accountable
October 29, 2010 by Tax Blog
Filed under Questions & Answers
All of us should live so long as to be this kind of old person!
Toward the end of Sunday service, the Minister asked, ’ How many of you have forgiven your enemies?’
80% held up their hands.
The Minister then repeated his question. All responded this time, except one small elderly lady.
‘Mrs. Neely,’ Are you not willing to forgive your enemies?
‘I don’t have any.’ She replied, smiling sweetly.
‘Mrs. Neely, that is very unusual. How old are you? ’
‘Ninety-eight, ‘she replied. The congregation stood up and clapped their hands.
‘Oh, Mrs. Neely, would you please come down in front & tell us all how a person can live ninety-eight years & not have an enemy in the world? ’
The little sweetheart of a lady tottered down the aisle, faced the congregation, and said,
’ I outlived the witches. ’
Courtesy of Saroj Sharma, EA in Northridge, CA www.sharmafinancial.com
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Would Trimming the U.S. Corporate Tax Rate Matter?
A terrific story the other day by Jesse Drucker at Bloomberg got me thinking: Would it really matter very much if the U.S. cut its corporate tax rate from the current 35 percent to 25 percent? While that idea has growing support in Congress, it may be a classic case of closing the barn door long after the horse has escaped. It may be that only a fundamental change in the way we tax multi-national companies, and not just a cut in rates, can fix the many problems that vex our corporate tax system.
Jesse took a deep dive into the tax status of Google Inc. and found that thanks to some clever—but apparently perfectly legal—planning, Google cut its taxes by more than $3 billion over the past three years and drove its overseas tax rate to 2.4 percent. Jesse figured Google boosted after-tax earnings by 26 percent last year alone with just some clever tax tricks.
Read the story for all the gory details, but essentially, Google’s strategy relies on its ability to shift intellectual property, such as the rights to its search technology, to foreign subsidiaries that reside in low-tax countries. The game is simple: Shift as many costs as possible to a high-tax jurisdiction such as the U.S. and move as much income as possible to a low-tax country such as Ireland. That’s exactly what Google did. In fact, to maximize its tax savings, Google shuffled its income to Ireland, then to shell companies in Bermuda and then to another shell in the Netherlands and finally back to Bermuda. Once Google’s income completed the tax equivalent of the Grand Tour, its tax liability on foreign income was roughly nothing. And Goggle is hardly the only company doing this.
In theory, for the purpose of calculating U.S. tax, Google’s Irish subsidy is supposed to pay the same price for technology as an unrelated company would. The Internal Revenue Service struggles to calculate this “transfer pricing” when it applies to an auto bumper. It is overwhelmed when it must do the same for intangibles such as search technology, software, or drug patents. Just think about it: What would Google charge Yahoo for the rights to its technology? A gazillion dollars? Two gazillion? The result is open-season on the Tax Code. And that (along with the large number of businesses that don’t file as corporations) explains why, despite having among the highest statutory corporate rates in the world, the tax generates relatively little revenue.
President Obama wants to raise more by cracking down on some egregious overseas tax gimmicks. But let’s face it, the IRS will never catch up with these constantly evolving strategies. And even more than a rate cut, these enforcement efforts only dodge fundamental problem.
In part, we still have a tax system that was designed for factory-heavy manufacturers. But we have an economy whose value increasingly lies with human capital-based companies such as Google. It is not so easy for a company to move a factory (though, of course, hardly impossible). But moving licenses or financial assets can be done with the click of a mouse. And if all it takes is that mouse and a couple of sharp lawyers to drive a company’s tax rate to effectively nothing, merely cutting the U.S. corporate rate to 25 percent won’t accomplish very much.
The real problem may be the fundamental structure of the U.S. corporate tax system. The U.S. attempts to tax worldwide income while giving companies a credit for taxes they pay to those countries where they earn foreign income. Many other industrialized companies instead use a territorial system, which taxes only income earned at home. Others use a hybrid.
It is time to think way outside of the box. There are plenty of options for dramatic reform. We could cut the corporate rate below even 25 percent but also require multinationals to pay tax immediately rather than letting them defer their liability for years as they do today. We could follow the rest of the world and consider some form of territorial system. We could repeal the corporate tax entirely and enact a Value-Added Tax. None of these is perfect, but each has advantages over the current mess.
I am not suggesting that lowering the corporate rate while dumping as many targeted corporate tax subsidies as possible is a bad idea. In may, in fact, be the best we can do. But when lawmakers tell you how a modest rate reduction will make U.S. firms more competitive, keep Jesse’s story in mind. If you don’t believe me, just Google it.
Won Lottery
October 28, 2010 by Tax Blog
Filed under Questions & Answers
Today TaxMama hears from Mike from Chicago, Il who is excited. “I won the lottery and paid taxes on the winnings. I want to give my mother $1 million out of my after tax winnings. Will she have to pay taxes on the $1 million again? Or just on any interest it accumulates?”
Dear Mike,
Well, that’s amazing! Congratulations!
No, if you give your mother $1,000,000, she won’t have to pay taxes on it. But you might. There’s a gift tax, if you give someone more than $13,000 worth of gifts this year. (or $26,000 per couple).
You can avoid the gift tax by filing the Form 709 and taking advantage of your Unified Credit, using line 12.
Read the instructions for more detail about how this works.
You may only give away a total of $1,000,000 of gifts (in addition to the $13,000 per person, tax-free gifts) for your whole lifetime.
Let’s be clear on this. You may not give away One Million Dollars a year. Just One Million Dollars in your whole lifetime. So you’d be using up your whole lifetime exclusion from gift tax by giving your mother all that money at one time.
There are other ways to do these things. I really suggest that you speak with a good tax professional before you hand this money over to your mother. There are some fun, legal things to do to beat the taxes, long-term. In the meantime, give her $13,000 to play with.
Incidentally, did she give you money to buy the lottery ticket? Come on, aren’t you always borrowing money from her? If she did, then she owns a share of that ticket – and you should have given Mom her share before reporting your win to the Lottery Commission. There would have been no special tax consequences at that time.
Folks, for future reference, the time to do tax planning on a lottery win – is before you report your claim to the Lottery Commission. After you get paid – it gets expensive to share your win.
And remember, you can find answers to all kinds of questions about hitting the jackpot, and other tax issues, free. Where? Where else? At www.TaxMama.com.
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Number Of Estates Paying A Death Tax Declining
According to data released by the U.S. government on October 15, 2010, those individuals who pay a tax on inheritances has declined over the last decade.
The Internal Revenue Service says that about 17,000 estates in 2008 paid taxes when passed on compared with less than about 15,000 in 2009.
About 52,000 estates were taxed when passed onto heirs in 2001, according to the IRS.
Fewer estates are subject to the tax largely because of a gradual increase in the threshold value of estates taxed since 2001. In 2009, estates were taxed on values above $3.5 million for individuals, and $7 million for couples. The threshold for taxation has gradually risen since 2001 from $675,000.
The estate tax disappeared this year after lawmakers deadlocked on a way to extend it, but will automatically spring back with a threshold of $1 million for individuals at a rate of 55% if Congress doesn’t take action by 2011.
President Barack Obama and most Democrats back extension of the $3.5 million exemption, with a 45% rate.
Many Republicans want to scrap the tax, but some have offered a plan to exempt $5 million at a rate of 35%.
Estate tax planning is still necessary. In California, whatever the federal tax may be, state law will continue to impact estates differently and thus the need to address those differences remains high. Call an estate planning attorney for help – call Mitchell A. Port at (310) 559-5259.
Holiday Credit Cards
October 27, 2010 by Tax Blog
Filed under Questions & Answers
Today TaxMama hears from Riki in New York with this concern. “I’m looking for specific advice on how to take control of a large post-holiday credit card balance.”
Dear Riki ,
Actually, the best way to control post-holiday card balances is to start before the holiday.
Just because you have practically unlimited credit, doesn’t mean you should spend without control. (Let’s face it, with the 3-10 card offers in the mail each day, people DO have unlimited credit, don’t we?)
Here’s an idea:
First, decide how much you can really afford to spend on your holiday gifts. And I mean TOTAL. – EVERYBODY!
a) Take into account how many months you want to devote to paying off the balance. Let’s face it,
if you’re going to do this every year, you do not want that total to be more than you can pay off in
one year, including interest. Much too logical, isn’t it?
b) Take into account how much money you can afford to spend each month to pay off that balance. Remember, you still have to pay for your day-to-day charges throughout the year.
With this in mind, come up with your total.
Then, pick out ONE credit card, just one, to use for all the spending.
Put the card into a check cover, with a check register. Write that budget amount into the check register as your balance.
Carry a pencil with you. One with a really good eraser. You’ll see why soon. As you do your shopping, write the amount into the register, as if it were a check. BEFORE your make the purchase. Deduct it from your balance. Before each purchase, see if that leaves you enough for all your other shopping. If not, erase it – and select something else. Keep that up until you’re done.
If you’ve done it right, you’ve spent only what you’d planned to spend…or just a little more.
And you already know how you’re going to pay it back.
And remember, you can find answers to all kinds of questions about holiday spending, and other tax issues, free. Where? Where else? At www.TaxMama.com.
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