News & Events


May 2012 was relatively quiet on the Tax front. There were, however, some important developments worth noting, specifically regarding (1) the new health care law, (2) distributions from IRAs, (3) the new 3.8% Medicare Tax, (4) the Republicans stated intention of extending for at least another year the “Bush Tax Cuts, and (5) proposed legislation restricting the ability of states to subject non-residents to their state income tax:

 

2010 Health Care Reform Act Could Result in Companies Dropping Their Health Insurance Coverages – The Republicans on the House Ways and Means Committee released a report on May 1, 2012, summarizing the results of a health care inquiry directed to the nation’s Fortune 100 companies. The report stated that the 71 companies that responded to the inquiry could save an estimated $28.6 billion in 2014 alone by eliminating the health insurance coverage they presently provide for their 5.9 million U.S. employees, even in the face of the new excise tax that first becomes effective in 2014. The new excise tax will be imposed on a “large employer” (generally, an employer with at least 50 full-time employees) that does not provide “minimum essential coverage” for its employees. The report, entitled “BROKEN PROMISE: Why ObamaCare Will Force Americans to Lose the Health Care Coverage They Have and Like” states that the “Patient Protection and Affordable Care Act” (sometimes referred to as the “2010 Health Care Reform Act” or more simply as “ObamaCare”) “threatens the stability and sustainability of the employer-based health insurance system-even among the nation’s most prosperous companies”.
 
Rollovers to IRAs From Employer-Sponsored Plans Can Result in Increased Taxes – On May 9, 2012, the 7th Circuit U.S. Court of Appeals affirmed a Tax Court holding that a taxpayer was subject to the 10% premature distribution excise tax under the Internal Revenue Code, based on the following facts:

  • The taxpayer, A, was a participant in the tax-qualified retirement plan of this employer, X.
  • In 2005, at age 56, A terminated his employment with X and transferred his retirement benefits under X’s plan to his IRA as a tax-free rollover.
  • In 2006, at age 57, A received a distribution from his rollover IRA in order to pay for the cost of his tuition to the London School of Economics.
  • If A had instead left his money in X’s retirement plan, and taken his distribution to pay for his tuition directly from the retirement plan, A would have been required to recognize ordinary income in the amount of the distribution, but A would not have been subject to the 10% premature distribution tax assessed on the amount distributed based on an express exception found in Section 72 of the Internal Revenue Code.
  • But, since A took his distribution from an IRA, and since the above noted exception only applied to distributions to an “employee” by his employer’s tax-qualified retirement plan, A was nevertheless found liable for the 10% premature distribution tax.
 
MORAL OF THIS STORY – Before rolling-over your retirement benefits from your employer’s retirement plan to your IRA, give serious thought to your future plans for the use of such monies. Depending on what and when you intend to use your retirement benefits for, it may be best, at least from an income tax standpoint, to simply leave the funds with your former employer’s plan, IF the plan permits you to do so.
 
The Increase in the Medicare Tax Rate to 3.8% For 2013 Can Apply to Trusts and Estates, Not Just Individuals – Effective for tax years commencing on or after January 1, 2013, many trusts and estates will become subject to the new 3.8% Medicare tax under Section 1411 of the Internal Revenue Code. Section 1411 will impose on trusts and estates a 3.8% tax on the lesser of (i) the “undistributed net investment income” of the trust or estate, and (ii) the excess of its “adjusted gross income” over the dollar amount at which the highest tax bracket for trusts and estates begins. This “dollar amount” for 2012 is $11,650. For 2013 (and each year thereafter for which this new tax is in effect), the “dollar amount” will be increased by the prior year’s cost of living adjustment. While the term “net investment income" is defined in the Internal Revenue Code, in some respects it is poorly defined. In recognition of this, the IRS has stated that it intends to release very soon proposed regulations on exactly what is meant by the term "net investment income".
 
The Republicans in the House of Representatives Will Vote to Extend the “Bush Tax Cuts” – On May 15, 2012, House Speaker John Boehner (R – OH) stated that he will call for a vote by the House sometime before the November elections to (1) extend for at least another year the “Bush Tax Cuts” (those tax cuts in the federal income tax laws enacted in 2001 and 2003 that are presently scheduled to expire on December 31, 2012), and (2) implement a fast-track process for fundamental reform of the Internal Revenue Code in 2013. According to Rep. Boehner:

“Any sudden tax hike would hurt our economy, so this fall – before the election – the House of Representatives will vote to stop the largest tax increase in American history. This will give Congress time to work on broad-based tax reform that lowers rates for individuals and businesses while closing deductions, credits, and special carve outs. . . . . . Our bill to stop the New Year’s Day tax increase will also establish an expedited process by which Congress would enact real tax reform in 2013. . . . . The Ways & Means Committee will work out the details, but the bottom line is: if we do this right, this will be the last time we ever have to confront the uncertainty of expiring tax rates. We’ll have replaced the broken status quo with a tax code that maintains progressivity, taxes income once, and creates a fairer, simpler code.”

Rep. Boehner warned the public, however, that engaging in a broad-based tax reform of the Internal Revenue Code would mean that some people will pay more in taxes and some will pay less.
 
House of Representatives Votes To Bar States From Taxing Certain Non-Residents – On May 15, 2012, the U.S. House of Representatives passed a bill that would create a clear national threshold for when states can tax the wage income of non-resident workers. The bill, the Mobile Workforce State Income Tax Simplification Act (H.R. 1864), would permit a state to subject a non-resident of that state, but who works in the state, to that state’s income tax  on his earnings while employed in the state only if he performs work in the state for more than 30 days during the calendar year. In the words of Rep. Howard Coble (R – NC), a co-sponsor of the bill, “Tax simplification – on both the federal and state level – will allow workers and employers to predict their tax liabilities with accuracy and expend fewer resources researching the nuances of each state’s tax law.”