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By Editor, July 7, 2011

The recent storms have made the tax treatment of losses, and recoveries related to such events an important topic.  Special tax treatment is provided for Federally Declared Disaster Areas, including an option to claim the loss deduction on the 2010 (prior year) tax return and exclusion from taxation of Qualified Disaster Relief Payments.

The following counties in Alabama have been determined to be Federally Declared Disaster Areas as a result of the recent storms:

Autauga, Bibb, Blount, Calhoun, Chambers, Cherokee, Chilton, Choctaw, Clarke, Colbert, Coosa, Cullman DeKalb, Elmore, Escambia, Etowah, Fayette, Franklin, Greene, Hale, Jackson, Jefferson, Lamar Lauderdale, Lawrence, Limestone, Madison, Marengo, Marion, Marshall, Monroe,  Morgan, Perry, Pickens, Shelby, St. Clair, Sumter, Talladega, Tallapoosa, Tuscaloosa, Walker, Washington, and Winston.

The IRS provides the following information regarding casualty losses:

Casualty Losses – Definition

A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual.

• A sudden event is one that is swift, not gradual or progressive.
• An unexpected event is one that is ordinarily unanticipated and unintended.
• An unusual event is one that is not a day-to-day occurrence and that is not typical of the activity in which you were engaged.

Casualty Losses – Disaster Loss

A disaster loss is a casualty loss that occurred in an area determined by the President of the United States to warrant federal disaster assistance. These places are known as “Federally Declared Disaster Areas”.

Casualty Losses – Loss Proof

The following is information needed to support a casualty loss claim:

• The type of casualty (car accident, fire, storm, etc.) and when it occurred.
• That the loss was a direct result of the casualty.
• That you were the owner of the property, or if a lessee, that you were contractually liable for the damage.
• Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery.
• Documentary evidence to support the claimed allowable loss.

Casualty Losses – To Prove a Loss

Records may have to be reconstructed. The information gathered will be used for tax purposes, as well as insurance reimbursement.

Casualty Losses – Claiming Disaster Losses on a Return

• Affected taxpayers in a Federal Disaster Area have the option of claiming disaster-related casualty losses on their federal income tax return either in the tax year the casualty occurred or the immediate preceding tax year.
• Depending on when the disaster occurred, claiming the loss on an original or amended return for last year may get the taxpayer an earlier refund. But, waiting to claim the loss on this year’s return could result in a greater tax saving, depending on other income factors.

Casualty Losses – Pub 547 and Pub 584

• Individuals may deduct personal property losses that are not covered by insurance or other reimbursements, but they must first subtract $100 for each casualty event and then subtract ten percent of their adjusted gross income from their total casualty losses for the year.
• Details on figuring a casualty loss deduction can be found in IRS Publication 547, Casualty, Disasters and Thefts.
• Publication 584, Casualty, Disaster and Theft Loss Workbook is designed to help you figure loss on personal-use property. It contains schedules to help you compute loss on your main home, personal property and your vehicles. However, the schedules are for information purposes only. You must file Form 4684 to report your loss on Form 1040.

Casualty Losses – Determination

To determine the amount of casualty loss to claim for damaged or destroyed property, you must:

• Determine the adjusted basis of the property before the disaster.
• Determine the decrease in Fair Market Value (FMV) of the property as a result of the disaster.
• Then, from the smaller of the adjusted basis or the FMV,
• Subtract any insurance or other reimbursement received.
• All individual losses are subject to:
  • 2% AGI limit if used for business by employee.
  • $100 deductible per event.
  • 10% AGI limit per annum.

Casualty Losses – Federally Declared Disaster Areas

In any federally-declared disaster area:

• No gain is recognized on any insurance proceeds received for “unscheduled” personal property that was part of the contents of a main home.
• Payments for the home and any scheduled property are treated as one payment. Any of this money used to replace any type of replacement property is not a recognized gain.
• Disaster relief payments or assistance do not reduce the casualty loss unless they replace lost or destroyed property.
• Disaster unemployment payments are unemployment income and are taxable.
• Post-disaster grants are generally not included in income. See IRC 139.  However, do not include as casualty losses any amounts covered by the grant payments.
• Taxpayers have the option to claim disaster-related casualty losses for either the year of occurrence or the prior year.  However, the State of Alabama allows a claim for the loss only in the year the loss occurs.
• Taxpayers should put the assigned Disaster Designation in red ink at the top of their tax forms. [For example, “Alabama/ Severe Storms, Tornadoes, Straight-line Winds and Flooding.” ]
• Taxpayers should include in income:
  • Temporary living payments from insurance that are in excess of the actual increase in temporary expenses.
  • The excess goes on line 21 of Form 1040.

Gains on Casualty Losses

If you receive an insurance payment or other reimbursement in excess of the adjusted basis of damaged or destroyed property you will have a gain:

• The gain is the amount received minus the adjusted basis in the property.
• If your main home is destroyed and the insurance proceeds result in a gain:
• You can treat this as a sale of residence subject to the same rules.
• If the home was not used or owned for 2 of the last five years a reduced maximum gain exclusion will apply.
• If located in a Federally Declared Disaster Area, you can postpone any “recognized” gain on your main home if you buy a new home within 4 years of the end of the year the disaster occurred, or
• You can recognize the gain and report it.
• You do not have to recognize gain on destroyed/damaged business property if it is replaced within two years of the end of the tax year in which the gain is realized.
• If received payment in 2011 resulting in a gain, you must replace the property prior to 1/1/2014 to defer the gain. 
• You cannot postpone the gain if you buy replacement property from a related party. This applies to:
  • C Corps
  • Partnerships in which more than 50% of the capital or profits is owned by a C Corp
  • All others if the total realized gain for the year is over $100,000.
• To defer the gain:
  • You must buy property specifically to replace the damaged or destroyed property in order to defer the gain.
  • The basis of the replacement property will be the adjusted basis of the property being replaced.

Reporting Casualty Gains/Losses

Report loss on return for year it occurred. If the event took place in a federally declared disaster, you can amend the prior year return.

The election to amend must be made by:

• Due date (without extensions) for filling your income tax return for the tax year in which the disaster actually occurred.
• Due date (with extensions) for filing the return for the preceding tax year.
• Once the election is made, it can be revoked within 90 days of making the election. The taxpayer must:
  • Return any refund or credit received from making the choice.
  • If revoked prior to getting a refund, must return refund within 30 days of receiving it for the revocation to be effective. 

Individual Returns:

• Losses go on Form 4684 and carry to Schedule A.
• Gains go on Form 4684 and carry to Schedule D.
• Includes losses on income-producing property and property used in performing services as an employee (held less than one year).
• Have the option to claim disaster-related casualty losses for either the year of occurrence or the prior year.

Business and income producing property:

• Losses are reported on Form 4684 and carry to various forms.
• Business use of home carries to Form 8829
• .Other business property carries to Form 4797.

Rental Properties:

• Report on Form 4684 and then on Form 4797.
• Have 2 years from the close of tax year when you realize the gain to replace the property and defer the gain.
• Losses are not limited by Form 8582.

Insurance Reimbursement after filing:

• If less than expected (and accounted for on casualty loss) include the difference as a loss on the return for the year when you can reasonably say you’re not getting any more money.
• If greater than expected (and accounted for on casualty loss) include the difference as income in the year received.

Reporting Casualty Gains/Losses –Net Operating Losses

• Individual or Business casualty losses can generate Net Operating Losses (NOL).
• NOLs generated by casualty losses can be carried back or forward the same as any other NOL.

Reporting Casualty Gains/Losses -What’s Not Included

Losses do not include:

• A reduction in profits or
• Loss of income.

The recent storms have been traumatic for many.  There is some tax relief to assist with recovery from these disasters.  Please contact us and we will help you take full advantage of the available tax relief.

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By Editor, June 5, 2011

Although business is business and pleasure is pleasure, the world rarely adheres to absolutes. Thus, this time of year you may want to mix some vacation days with your business travel. With a little planning, you can get Uncle Sam to subsidize your downtime. Here are the strategies for doing just that.

Combine Business and Vacation Plans for Domestic Travel

If you go on a business trip within the U.S. and add on some vacation days, you know you can deduct some of your expenses. The only question is how much. First, let’s cover just the pure transportation expenses. By this, we mean the costs of getting to and from the scene of your business activity, which includes travel to and from your departure airport, the airfare itself, baggage fees and tips, cabs to and from the destination airport, and so forth. Costs for rail travel or to drive your personal car also fits into this category. The bottom line is your domestic transportation costs are 100% deductible, as long as the primary reason for the trip is business rather than pleasure. On the other hand, if vacation is the primary reason for your travel, none of your transportation expenses are deductible.

The IRS doesn’t specify how to determine if the primary reason for domestic travel is business. Obviously, the number of days spent on business versus pleasure is the key factor. We can look to the rules covering foreign travel for guidance on this issue. They say your travel days count as business days, as do weekends and holidays if they fall between days devoted to business, and it would be impractical to return home. “Standby days,” when your physical presence is required, also count as business days, even if you’re not called upon to work on those days. Any other day principally devoted to business activities during normal business hours is also counted as a business day, and so are days when you intended to work, but couldn’t due to reasons beyond your control (local transportation difficulties, power failure, etc.).

For domestic trips, you should be able to claim business was the primary reason for a sojourn whenever the business days exceed the personal days. Be sure to accumulate proof about this and keep the proof with your tax records. For example, if your trip is made to attend client meetings, log everything on your daily planner and copy the pages for your tax file. If you attend a convention or training seminar, keep the program and take some notes to show you attended the sessions.

Once at the destination, your out-of-pocket expenses for business days are fully deductible. Out-of-pocket expenses include lodging, hotel tips, meals (subject to the 50% disallowance rule), seminar and convention fees, and cab fare. Expenses for personal days are nondeductible (except in the “Saturday Night Stayover” situation explained later in this letter).

Example: You are a sole proprietor. You arrange a business meeting with an important client in San Francisco on Wednesday morning. You fly out Sunday evening and spend all day Monday sight-seeing. Tuesday you spend most of the day preparing for the meeting, attend the meeting the next morning, take the client to lunch, and return home Wednesday night. So, Sunday, Tuesday, and Wednesday count as business days. The business meeting obviously necessitated the trip, and you clearly didn’t spend an unreasonable amount of time on personal activities. Therefore, you can deduct your airline tickets, plus your lodging for Sunday and Tuesday nights, 50% of your meals for Sunday, Tuesday, and Wednesday, your other out-of-pocket expenses for those days, and 50% of the cost of lunching with your client.

Maximizing the Tax Benefits of a Saturday Night Stayover

A great way to maximize deductions for the personal portions of a trip is with a Saturday night stayover that reduces the overall cost of the trip. If you can show staying the extra day or two costs less (or no more) than coming back home immediately after the business meeting is over, the IRS allows you to deduct your additional meal and lodging expenses (subject to the 50% disallowance rule for meals) for the extra day(s). Naturally, you still must have a dominant business purpose for making the trip in the first place. Be sure to document that your airfare savings equaled or exceeded the out-of-pocket costs of staying the extra day(s). Keep the proof with your tax records.

Example: You have a business meeting in New York on Monday morning. You and your spouse fly into town Saturday morning and spend the weekend sightseeing. Your round trip airfare is only $400 versus $1,200 if you came in Sunday night and left Monday. In this situation, Saturday is a personal day since you would normally fly in Sunday. No problem. As long as your meal and lodging expenses for Saturday are no more than $800, you can write-off your whole trip (subject to the 50% disallowance rule for meals). Of course, you generally can’t deduct the additional costs for your spouse (his or her airfare and meals and any extra charges for having two people instead of one in the hotel room), and you can’t deduct purely personal expenses like show tickets and baseball games. Still, this is a great deal taxwise.

Deducting Foreign Travel Costs

When you travel outside the U.S. primarily for business reasons, the general rule is that you must allocate all your travel expenses, including transportation, between business and personal. However, there are two big exceptions, and you often can plan ahead to take advantage of them. You can deduct 100% of your transportation expenses if the trip is primarily for business and you meet either of the following rules:

• The One-week Rule. You’ll meet this rule if your business trip is a week or less, not counting the day you leave, but counting the day you return. In this case, you can deduct 100% of your transportation costs and 100% of your other out-of-pocket expenses for business days (subject to the 50% disallowance rule for meals). You cannot deduct out-of-pocket costs incurred on vacation days. The good news: Weekends and holidays falling between business days count as business days. Ditto for an intervening weekday between two business meeting days. “Standby days” when your physical presence is required for business also count, even if you spend most of your time on personal pursuits during those days. Finally, business days include the day of your return trip plus days you intended to work, but couldn’t due to reasons beyond your control.
• The 25% Rule. You can also deduct 100% of your transportation expenses for trips lasting over a week, as long as you spend less than 25% of your days on vacation. For this purpose, count the day of departure and day of return as business days, as long as you are traveling to or from the business destination. Also, count all the other types of business days mentioned under the one-week rule above. Once again, however, you cannot deduct meals, lodging, and other expenses allocable to personal days.

Even if you don’t qualify for either of the above two exceptions, you (or, more likely, your employer) can still deduct 100% of your transportation costs if you’re traveling on behalf of your employer under a reimbursement or travel allowance arrangement and you’re not a managing executive of the company or related to your employer. Finally, in sort of a catchall provision, 100% of your transportation costs to foreign destinations are deductible if you can prove a personal vacation was not a consideration in choosing to make the trip.

If 100% of your transportation expenses aren’t deductible under any of the above rules, the business percentage of your transportation costs are still deductible—assuming the trip is primarily for business. To calculate the business percentage, divide the days spent principally on business activities by the total number of days outside the country, counting departure and return days. The travel days count as business days, just as the other types of days are considered business days for purposes of the one-week rule and 25% rule. You can also deduct the out-of-pocket expenses allocable to your business days (subject to the 50% disallowance rule for meals).

Example: On Thursday, you fly to Paris for customer meetings on Friday and Monday. You vacation the following Tuesday through Friday and return home Saturday. The two travel days, the two meeting days, and the weekend days in between count as business days. However, the four vacation days amount to 40% of your time, so you fail the 25% test. Therefore, you must allocate your airfare between business and personal. You can deduct 60% of your airfare, plus your out-of-pocket expenses for the six business days.

Example: Same as above, except this time you have only two vacation days (20% of your total days). Remember, the weekend days between your business meetings also count as business days. Now you can deduct 100% of your airfare because you pass the 25% test. You can also deduct your out-of-pocket expenses for the eight business days.

Example: Same as above, except this time you return home on Thursday, three days after concluding your business meetings. Now, your trip is considered to last only a week (the departure day doesn’t count). So, you can deduct 100% of your airfare under the one-week rule. You also deduct your out-of-pocket expenses for all the business days.

Travel to Attend Foreign Conventions

If the reason for a trip outside North America is to attend a business convention directly related to your trade or business, you may qualify for deductions. However, you must follow all of the foreign travel rules just discussed plus show it was just as reasonable for the meeting to be held on foreign soil as in North America and that the time spent in business meetings or activities was substantial when compared to that spent sight-seeing and other personal activities. Otherwise, you can only deduct the registration fees and other costs directly related to business while on your trip. Regardless of the location, you cannot deduct travel costs to attend investment or financial planning conventions and seminars.

Fortunately, the stricter rules for foreign conventions are inapplicable in many cases because the definition of “North America” for this purpose is very liberal. It includes Canada, Mexico, Puerto Rico, the U.S. Virgin Islands, American Samoa, the Northern Mariana Islands, Guam, the Marshall Islands, Micronesia, Palau, Netherlands Antilles, Bahamas, Aruba, Antigua, Barbuda, Barbados, Bermuda, Costa Rica, Dominica, Dominican Republic, Grenada, Guyana, Honduras, Jamaica, Saint Lucia, Trinidad and Tobago, Midway Islands, Palmyra Atoll, Baker Island, Howland Island, Jarvis Island, Johnston Island, Kingman Reef, and Wake Island.

Conventions on Cruise Ships

Deductions related to conventions directly related to your trade or business that are held aboard cruise ships are limited to $2,000 per individual per calendar year. In addition, the ship must be a U.S. registered vessel, and all of its ports-of-call must be in the U.S. or its possessions. Finally, the following information must be attached to your return in the year the deduction is claimed:

1.    A signed statement showing the total days of the trip (excluding travel to and from the ship), the number of hours each day spent attending scheduled business activities, and the program of the convention’s scheduled business activities.

2.    A statement signed by an officer of the sponsoring organization that includes a schedule of each day’s business activities and the number of hours you attended those activities.

Conclusion

We hope this information helps you plan some lovely trips that also deliver some nice tax breaks. However, we realize the rules explained here are rather complicated. Please contact your Wilson Price accountant if you have questions or want more information.

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By Editor, May 4, 2011

IRA owners and beneficiaries who have reached age 70 1/2 are permitted to make cash donations to IRS-approved public charities directly out of their IRAs. These so-called qualified charitable distributions, or QCDs, are federal-income-tax-free to you, but you get no itemized charitable write-off on Form 1040. That’s OK because the tax-free treatment of QCDs equates to an immediate 100% deduction without having to worry about restrictions that can delay itemized charitable write-offs. QCDs have other tax advantages too. Here is what you need to know.

QCD Basics

A QCD is a cash payment of an otherwise taxable distribution, by your IRA trustee, directly to a qualified public charity. The funds must be transferred directly from your IRA trustee to the charity. You cannot receive the funds yourself and then make the contribution to the charity. However, the IRA trustee can give you a check made out to the charity that you then deliver to the charity.

You cannot arrange for more than $100,000 of QCDs in any one year. If your spouse has IRAs, he or she has a separate $100,000 limitation. If you are the beneficiary of an IRA (as opposed to an account owner), you too are eligible for the QCD deal if you are at least age 70 1/2.

You must get and keep substantiation of the contribution from the charity. Also, you must not have received any benefit in return for making the contribution.

The QCD privilege is scheduled to expire at the end of this year, so if you want to take advantage of the idea, it is not too soon to start thinking about it.

Income Tax Benefits

QCDs are not included in your Adjusted Gross Income (AGI). This lowers the odds that you’ll be affected by various unfavorable AGI-based phase-out rules. In addition, you don’t have to worry about the 50%-of-AGI limitation that can delay itemized deductions for garden-variety cash donations to public charities.

QCDs count as a payouts for purposes of the Required Minimum Distribution (RMD) rules. Therefore, you can donate all or part of your 2011 RMD amount (up to the $100,000 limit on QCDs) and thereby convert taxable RMDs into tax-free QCDs.

Does the QCD Deal Work for You?

The QCD privilege is beneficial for seniors in the following circumstances:

• You don’t itemize deductions. Under the “normal” rules, only itemizers get any income tax benefit from charitable donations. Making QCDs will save taxes whether you itemize or not because neither you nor your heirs will ever have to pay income taxes on the donated amounts.
• Your itemized charitable donations would be delayed by the 50%-of-AGI limitation. Making QCDs will avoid this unfavorable limitation.
• You want to avoid being taxed on RMDs that you are forced to take from your IRAs. The QCD strategy does the trick while also allowing you to satisfy your charitable inclinations.

Conclusion

If you’re interested in taking advantage of the tax-saving QCD strategy for 2011, you will need to arrange with your IRA trustee for money to be paid out to one or more qualifying charities by year-end.

If you have questions about QCDs or want more information, your Wilson Price accountant.

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By Editor, April 11, 2011

On April 5, the Senate, by a vote of 87 – 12, approved the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011 (the 1099 Act) retroactively repealing the expanded Form 1099 information reporting rules added by recent legislation. The bill was signed by President Obama on April 14^th.

Repeal of Expanded 1099 Reporting Rules for Businesses

Currently, businesses are required to file a Form 1099-MISC to report payments of $600 or more made to persons who provide nonemployee services to the business. Reporting is not required if the payments are made to a corporation.

Effective for payments made after 2011, the Health Care Act extended this 1099 reporting requirement to include gross payments of $600 or more for the purchase of any type of property. It also did away with the exception for corporations. So, thanks to the Health Care Act, starting in 2012, businesses were going to have to report all payments of $600 or more for the purchase of property and services, even those made to corporations.

Businesses quickly cried foul on this recordkeeping and reporting nightmare in the making—not even the IRS liked this provision. Congress and the President agreed on the need for its repeal. But in true Washington fashion, it took awhile. Finally, the 1099 Act repeals the Health Care Act’s extension of the Form 1099 reporting requirements for payments made to corporations and payments made for the purchase of property.

Bottom Line: The Form 1099 reporting rules for businesses do not change after 2011. Thus, businesses will have to report payments of $600 or more to service providers. However, payments to corporations will not need to be reported, nor will payments for property.

Repeal of Expanded 1099 Reporting Rules for Rental Real Estate

Before 2011, the 1099 reporting requirements applied only to payments made in the course of a trade or business. Payments made in a passive investment activity were not subject to these requirements. For payments made after 2010, the Small Business Jobs Act of 2010 (SBA) provided that (with a few exceptions not important for this article) any person receiving rental income from real estate (landlords) would be considered to be engaged in a trade or business and, thus, would be subject to the same 1099 reporting requirements that apply to businesses. Accordingly, thanks to SBA, for 2011, landlords would generally be required to file Form 1099-MISC to report payments of $600 or more made to noncorporate service providers (for things like yard care, painting, and accounting). And, for payments after 2011, they would be required to report payments made to corporations and payments made for the purchase of property just like other honest to gosh businesses.

Fortunately, the 1099 Act repeals the SBA extension of the 1099 reporting requirements to landlords who are not otherwise considered to be engaged in a trade or business of renting property. As a result, landlords making payments of $600 or more to a service provider (such as a plumber, painter, or accountant) will not be required to file Form 1099-MISC, unless their rental activities rise to the level of a trade or business.

Bottom Line: The 1099 reporting rules for landlords do not change after 2010.

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By Editor, March 4, 2011

Background

The Self-employed Health Insurance Deduction has long been available for the health insurance of the self-employed individual, his or her spouse, and any dependent children. But, there are a number of important taxpayer-friendly developments for 2010, including a surprising change in interpretation by the IRS.

IRC Sec. 162(l)(2) allows self-employed proprietors and partners, and more-than-2% S shareholders treated as partners for fringe benefits, to deduct 100% of their health insurance as a page 1, for-AGI income tax deduction. To be eligible for this deduction, the taxpayer must have a health insurance plan that can be considered as associated with a business activity. Also, the taxpayer must not be eligible to participate in a health insurance plan that is subsidized by any other employer. The deduction is limited to the taxpayer’s self-employment income, or in the case of an S shareholder, the wages subject to payroll taxes.

Nondependent Children under Age 27 Can Now Be Covered

One of the features of the Health Care legislation passed last March provides that effective as of 3/30/10, an employee may receive tax-free treatment for employer-provided health insurance for a child who has not attained age 27 by the end of the year, regardless of whether the child is eligible as a tax return dependent. Prior to this legislation, an employee would have had taxable compensation to the extent an employer paid for health insurance for a nondependent child.

This legislation made a corresponding change to the self-employed health insurance deduction of a self-employed taxpayer. If a self-employed individual pays the health insurance premium for a nondependent child who has not attained the age of 27 by 12/31/10, premiums paid after 3/30/10 are includable in the self-employed health insurance deduction.

Example 1: Phil, a self-employed proprietor, has been claiming the self-employed health insurance deduction for his family. The health policy covers himself, his spouse, and their 20 year-old dependent daughter, a college student. Phil’s older child, Flip, age 25, was recently laid off from his W-2 job in a nearby community and is again living at home. Phil is helping Flip by paying his separate health insurance policy and also covering a few other essential expenses. Beginning 3/30/10, Phil may include Flip’s health insurance premiums in computing the self-employed health insurance deduction on his Form 1040 .

Medicare Part B Premiums Can Count as Part of the Deduction

For several years, the IRS instructions to Form 1040, for the self-employed health insurance deduction line on page 1, have stated at that Medicare Part B premiums could not be treated as part of the deduction. Of course, this guidance was only applicable to someone over age 65 and older enrolled in Medicare who also had self-employment income. But many self-employed taxpayers stay active past age 65.

Surprisingly, the 2010 Form 1040 instructions, at line 29, now state “Medicare B premiums can be used to figure the deduction.”

We have not seen any other IRS guidance explaining this change in position. Earlier guidance on this point was informal: IRS instructions, an IRS Publication, and a 1995 Field Service Advisory memo (FSA 3042, 12/19/95). However, the current Form 1040 instructions can be relied upon, and apparently reflect an updated position of the IRS. Accordingly, the Medicare B premium should be claimed as part of the line 29 self-employed health insurance deduction beginning in 2010.

The Medicare B premium amount, of course, is disclosed on the Form SSA-1099 . For the last several years, the Medicare B premiums assessed by the Social Security Administration have been income-sensitive. For 2010, the annual amount ranges from approximately $1,300 to $4,200. Further, if both spouses are enrolled in Medicare, these amounts will generally be doubled.

Example 2: Ed and Edna, each age 67, both are enrolled in Medicare and receiving social security retirement benefits. Ed is still active as a self-employed partner in the farming partnership with their two sons. While Ed’s share of the partnership K-1 self-employment income is not large, he receives substantial rental income from the partnership for the use of his land, and he and Edna report a substantial AGI in their Form 1040. Their Medicare B premiums withheld from their social security benefits were the maximum in 2010 of $4,243 each. In preparing their Form 1040 for 2010, the IRS instructions indicate that Ed and Edna may claim the Medicare Part B premiums of $8,486 as additional self-employed health insurance.

For 2010 Self-employed Health Insurance

Is Deductible for SE Tax Purposes

In the September Small Business Jobs Act, Congress also adjusted the self-employed health insurance deduction in another manner. The legislation amended IRC Sec. 162(l)(4) to allow the deduction to be claimed both for income tax purposes and self-employment tax purposes in 2010. Previously, of course, the health insurance deduction had only been allowable for the income tax computation.

For 2010, this SE tax break makes the ability to claim post-3/30/10 health insurance for nondependent children (who do not attain age 27 by 12/31/10) more beneficial, and also makes the Medicare B premium deduction of greater value.

Other Implications of Reduced Self-employment Income in 2010

Does the reduction in self-employment income for 2010, because of the one-year deductibility of self-employed health insurance premiums, also affect other calculations driven by self-employment (SE) income? For example, a self-employed taxpayer’s earnings for qualified retirement plan purposes are based on SE income. So, for 2010, must SE income for this purpose be reduced by the health insurance deduction? And, the self-employed health insurance deduction itself is limited to the amount of the taxpayer’s SE income. Do we need to do a dreaded simultaneous equation to determine the health insurance deduction if SE income was low?

Here’s our analysis of these questions:

1. SE Income for Qualified Retirement Plan and IRA Funding. For both qualified plan and IRA purposes, earned income is defined by reference to IRC Sec. 401(c)(2) . In turn, IRC Sec. 401(c)(2) refers to net earnings from self-employment as defined in IRC Sec. 1402(a) . If the story ended here, we would need to reduce self-employed earnings for retirement plan funding in 2010 by the health insurance deduction. But the Committee Report to the legislation enacting the one year cut in SE income for health insurance says that “It is intended that earned income within the meaning of section 401(c)(2) be computed without regard to this deduction for the cost of health insurance.” It goes on to note that a technical correction to the legislation may be needed. As a result, SE income for retirement plan funding in 2010 should not be reduced for the health insurance deduction.

Income Limit for Self-employed Health Insurance Deduction. We won’t bore you with the citations on this one, as it is also addressed directly in the Committee Report of the September legislation. That language states that “earned income for purposes of the limitation applicable to the health insurance deduction is computed without regard to this deduction.” So again, we use SE income without the health insurance deduction as the business net income limit for this health insurance deduction (and no need to remember how to calculate a simultaneous equation!).

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By Editor, February 8, 2011

Information reporting required for rental property expense payments. Beginning with payments made in 2011, recipients of rental income from real estate must implement Form 1099 reporting.   Specifically, rental income recipients making payments of $600 or more to a service provider (such as a plumber, painter, or accountant) in the course of earning rental income are required to provide an information return (typically Form 1099-MISC) to IRS and to the service provider.

This means rental property owners should start now to acquire the names, addresses and social security or other taxpayer identification numbers for service providers, so that this information will be available when the time comes to issue the 1099s.

Exceptions. Exceptions are provided for individuals renting their principal residences (including active members of the military), taxpayers whose rental income doesn’t exceed an IRS-determined minimal amount, and those for whom the reporting requirement would create a hardship (under yet to be issued IRS regs).

Also, 1099-MISC reporting is not required for most payments to corporations during 2011, and is not required for credit card payments, if 1099 reporting for such payments is made by the credit card agency.

Increased information return penalties. For information returns required to be filed after December 31, 2010, the tax penalties for failure to timely file information returns are increased. For example, the minimum penalty for each failure due to intentional disregard will be increased from $100 to $250.

Back up withholding.  A payee furnishes social security number and other 1099 reporting data by completing Form W-9.  If a payee fails to provide such information, the rental property owner must implement 28% back up withholding with regard to such payee.

Illustration : A owns a 12-floor commercial building in the downtown area of City X. A rents out units as office or retail space in the building. A hires a plumber in 2011 to make repairs to the building and pays the plumber $2,000 for 2011. A is considered to be in a trade or business and must file an information return showing the $2,000 payment to the plumber.