McKonomics

New Case May Create Refund Opportunity for Severance Pay (Court Rules that Severance Payments Are Not Wages)

A recent U.S. District Court case may provide a unique tax-saving opportunity for employers who have been forced to lay off workers during the recent economic downturn.  In a surprising move, the Court said that severance payments made to the workers do not constitute "wages" for payroll tax purposes. Thus, the company was able to collect a refund of more than $1 million!

 

In the wake of this new case, you can file a protective refund claim for open tax years if your company previously paid the full amount of payroll taxes on severance payments. But you may have to act fast to file a claim for the 2006 tax year.

 

Let's start with some basics. As a general rule, "wages" that are subject to income tax withholding are also treated as wages for employment tax purposes. For 2010, an employee must pay a 6.2 percent Social Security tax on the first $106,800 of wages and a 1.45 percent Medicare tax on all wages. The employer must also pay its corresponding share of these employment taxes.

Key Changes in the New Healthcare Law

The new Patient Protection and Affordable Care Act of 2010, and its accompanying reconciliation law, provide broad-based changes for employers as well as many individuals. In addition to virtually mandating health insurance coverage for all U.S. citizens, this massive health care reform legislation includes several other far-reaching tax provisions.

 

The changes generally take effect over time -- in some cases, you won't see them for two to four years. But advance planning can maximize tax advantages for some and minimize tax disadvantages for others.

 

Here's a brief summary of some of the provisions.

New Hiring and Retention Incentives For Employers

On March 18, 2010, President Obama signed the new Hiring Incentives to Restore Employment Act (HIRE) into law. This federal legislation creates brand-new tax breaks for hiring and retaining unemployed workers, extends the enhanced business equipment deduction that was available last year, and reinforces the "Build America Bond" program.

 

Here's a quick rundown on these three key tax breaks:

 

Employers Get a Payroll Tax Holiday for New Hires -- Plus a Potential Tax Credit Bonus. Normally, an employer is required to pay its share of Social Security taxes on wages earned by employees. For 2010, the portion of the tax is 6.2 percent on the first $106,800 of wages.

Roth IRA Conversions: Is The Time Right? Evaluate Relevant Factors Before Converting

For many taxpayers, the opportunity to make a Roth IRA conversion is finally here. Beginning in 2010, you can convert a traditional IRA to a Roth, regardless of your income. Prior to 2010, such a conversion was allowed only in a year in which your modified adjusted gross income (MAGI) didn't exceed $100,000.

 

The elimination of the $100,000 dollar cap was actually part of the Tax Increase and Prevention Reconciliation Act, which was enacted in 2006, so we waited four years for this opportunity to kick in.

Uncle Sam and States Look for Revenue in Worker Classification

Businesses that treat workers as independent contractors face an increasing risk that state and federal agencies will contest the classification of some of these individuals. Although independent contractor relationships have long been an audit target, governments experiencing deep financial pressures are scrutinizing them with new fervor.

 

Latest example: In his fiscal 2011 budget, President Obama proposes to focus more on employers using independent contractors. For the next fiscal year, the budget allocates $25 million to the Department of Labor for a joint effort with the IRS that includes hiring investigators to find workers who can be re-categorized as employees.

 

The result for Uncle Sam will be increased revenue. The Obama budget states the initiative will bring in an additional $7 billion over 10 years.

Identity Theft: Keep Your Name Clear

Identity theft is a growing problem. It can result in a ruined credit record and even the loss of your life savings.

 

Many people think it's a problem that could not happen to them. But even if you are careful about storing personal papers securely, there are many ways an identity thief can get information. For example, making a change of address to divert your mail, rummaging through your trash, or posing as someone who has a legitimate need for information, such as a landlord or a creditor.

 

With the data in hand, the thief may then, among other things, change the mailing address on your credit card account and run up charges; open a new credit card account in your name and not pay the bills, establish phone or wireless service; open a bank account and write bad checks; file for bankruptcy under your name, and buy cars using a loan.

 

Here are some of the precautions you should take to prevent identity theft:

Ten Myths About Starting a Business

1."I'm broke, so it's a good time to start a business." New ventures drain bank accounts fast, so plan on having at least two year's worth of income in addition to start-up costs, which vary depending on the business. Then, you can devote all your time and energy without having to hold down a job at the same time.

 

2. "I need a little more practice before I launch my business." Many people start new businesses based on their experience, but it's easy to keep putting it off because you need "more practice." At some point, you have to take the leap from "practicing" to "owning a business."

Five Questions Business Owners Should Answer Now

The recession has "bottomed out," former Federal Reserve Chairman Alan Greenspan recently stated. But he warned that the recovery will be "slow" and "trudging."

 

Although the comments of Greenspan and other economists are cautious, they are good news for struggling business owners who are waiting for a return to prosperity. With the economy showing some signs of recovery, now is the time to position your company to reap the benefits of improved conditions.

 

Here are five questions business owners and executives can answer to help assess their readiness to take advantage of upcoming opportunities and challenges.

Income Tax : One-Year Repeal Could Mean Tax Savings For You

For years, higher-income taxpayers have worried about their itemized deductions and personal exemption write-offs being phased out. This means that they didn't get the full benefit of the most popular itemized deductions such as mortgage interest, state and local taxes, charitable contributions, and miscellaneous deductions.

 

Thankfully, these "phase-out" rules have been getting phased out since 2006, as part of the "Bush tax cuts."

 

The good news: For 2010, the phase-out rules are gone. The bad news: It's only a one-year reprieve. The rules are scheduled to reappear in 2011 with sharper teeth as the Bush tax cuts expire.

No Estate Tax is a Good Thing...Right?

Generally speaking, the fact that we currently have no federal estate tax is a good thing. However, the unprecedented temporary repeal may cause problems for some estates.

Most advisors assumed the Senate would extend the 2009 estate tax exemption and rate structure through 2010. Little did we know, the healthcare reform battle would be at the forefront of our legislator's minds and the looming estate tax repeal would go unchanged. Here we are, roughly a month into 2010 and no word on if and how Congress will fix this mess. Will new legislation be passed during 2010? Will it be retroactive? How do we deal with basis step-up? We will save those debates for another time. For now, we want to focus on a simple, yet BIG issue that the current repeal may cause for many estates.