Regulating Tax Return Preparers

Do you realize that hairdressers are more heavily regulated than a mom and pop tax shop who offers to prepare your tax return? There is even reported to be a Laundromat in the Bronx offering tax prep services.

In most states, anyone can set up shop and offer tax preparation services without needing to demonstrate any level of competency.  Currently, only three states (California, Maryland, and Oregon) have laws addressing the necessary qualifications to prepare federal or state income tax returns.

Shouldn’t you look for a well-qualified individual to prepare your taxes? After all, you are legally responsible for the information in your tax return whether you pay someone else to prepare it or not.

The Internal Revenue Service tried to regulate unregistered tax preparers but has been temporarily stopped as the result of U.S. District Judge James E. Boasberg’s ruling in favor of three independent tax preparers. The judge found the IRS had exceeded its statutory authority in imposing requirements for mandatory testing and continuing education for tax return preparers. Congress is considering giving the IRS that authority.

Not everyone is waiting on the IRS.  The state of New York, Department of Taxation and Finance, proposed amendments to its Personal Income Tax Regulations and Procedural Regulations to regulate New York tax return preparers. The proposed rules would add requirements imposing minimum standards on who can become a tax return preparer, instituting a continuing education requirement, and requiring a competency exam, all similar to the IRS‘s Registered Tax Return Preparer  (RTRP) program.

To further muddy the water, the new Commissioner of the IRS, John Koskinen, has come out in favor of a volunteer tax preparer certification. This is basically the RTRP approach only on a volunteer basis rather than a mandatory requirement.

Three approaches to regulating tax preparers have been offered:

1.     Wait until Congress gives the IRS authority to regulate tax preparers.
2.     Implement tax preparer regulations by state governments.
3.     Adopt a volunteer certification program.

Only time will tell which of these options will win. Which one do you think should be used?

Health Care Reform Raises Rates and Reduces Exemptions

Effective for 2013, new rules have increased taxes or reduced exemptions on higher earning taxpayers, making effective year-end tax planning even more important.

Under the Affordable Care Act there is a higher payroll tax and surtax on unearned income of higher-income individuals. Under the American Taxpayer Relief Act of 2012 higher tax rates apply to ordinary income, capital gains and dividends, while at the same time limitations are imposed on the use of the personal exemption and itemized deductions.

For tax years beginning after Dec. 31, 2012, the following new rules apply:

• Increased payroll tax.  A new 0.9% hospital insurance tax (FICA payroll tax) applies to wages received in excess of $250,000 for joint returns; $125,000 for married filing separate; and $200,000 for all other taxpayers. The additional 0.9% tax also applies to self-employment income that meets or exceeds the above thresholds.
• Surtax on unearned income. An unearned income Medicare contribution tax is imposed on individuals, estates, and trusts. For an individual, the tax is 3.8% of the lesser of (1) net investment income or (2) the excess of modified adjusted gross income over $250,000 for a joint return or surviving spouse, $125,000 for married filing separate, and $200,000 for all others.
• Higher individual income tax rates. The income tax rates for most individuals stay the same as in 2012. However, a new 39.6% rate applies for 2013 income above $450,000 for joint filers and surviving spouses; $425,000 for heads of household; $400,000 for single filers; and $225,000 for married filing separately.
• Increased capital gain and dividend tax rates. The top 2013 tax rate for capital gains and dividends rises to 20% for taxpayers with incomes exceeding $450,000 for joint filers and surviving spouses; $425,000 for heads of household; $400,000 for single filers; and $225,000 for married filing separately.
• Personal exemption phase out. There is a personal exemption phase out  for 2013 with a beginning threshold of $300,000 for joint filers and surviving spouses; $275,000 for heads of household; $250,000 for single filers; and $150,000 for married filing separately. Under the phase out, the total amount of exemptions that can be claimed by a taxpayer is reduced by 2% for each $2,500 (or portion thereof) by which the taxpayer's adjusted gross income exceeds the above threshold.
• Limited itemized deductions for high earners. There is a limit on itemized deductions for 2013 for earners with a threshold of $300,000 for joint filers and surviving spouses; $275,000 for heads of household; $250,000 for single filers; and $150,000 for married filing separately. Thus, the itemized deductions of taxpayers subject to this limitation will be reduced by 3% of the amount by which their adjusted gross income exceeds the threshold amount. The reduction will not exceed 80% of otherwise allowable itemized deductions..

Year-end tax planning may be especially productive this year because timely action by the taxpayer could secure significant tax breaks.

What do you think?

View related Checkpoint Learning online CPE courses and webinars

The Many Tax Implications of DOMA

The Supreme Court’s decision to strike down the definition of “marriage” as defined in the Defense of Marriage Act (DOMA) is going to have far-reaching tax implications for married same-sex couples. The decision makes it clear that the federal government must recognize a lawful same-sex marriage. However, it left many unanswered questions. Following are just some of those questions:

1. Will the court’s decision be applied retroactively, and if so, to what extent?

2. Since some federal benefits are determined by place of residence, what is the effect on same-sex married couples who marry in one of the states where same-sex marriage is legal, but later relocate to one of the states where it is not legal?

3. Will same-sex married couples be permitted to amend their tax returns for prior years?

4. What if a couple is married in a state that recognizes same-sex marriage, but at December 31, 2013, the couple lives in a state that does not recognize same-sex marriage? Can they file a joint return for 2013?

5. What about decisions made based on filing status that are now too late to correct, such as Roth IRA contributions?

6. Will individuals who filed for automatic extensions for the 2012 tax year have guidance available in time to meet the October 15, 2013, extended deadline?

7. Will the court’s opinion affect same-sex couples in states that sanction domestic partnerships or civil unions?

8. What is the impact on employers with operations in multiple states? Can they apply a single standard or must they apply each state’s rules?

9. Are same-sex spouses entitled to all the survivorship rights given traditional married couples under a tax-qualified retirement plan?

10. Spouses who had health-care coverage, through their employer, for their same-sex partners were taxed on those benefits. Can prior year(s) tax returns be amended to reduce income by those amounts in order to have the tax refunded?

11. Employee Benefit Cafeteria plans can, but are not required to, permit mid-year election changes for certain events. If a plan permits mid-year election changes in connection with the marriage of opposite-sex couples does it have to allow the same change for same-sex couples?

12. What if an employer is based in a state that does not recognize same-sex marriages but has an employee who marries a same-sex partner in a state that does? Which state’s definition of marriage will apply?

And the list goes on.

Same-Sex marriage is legal in 13 states and the District of Columbia but is not legal in the other 37 states. Historically the IRS has deferred to states’ definition of marriage when applying federal tax rules. However if the IRS keeps the state residency policy, then the people in the 37 states where same-sex marriage is not expressly endorsed have gained virtually nothing, tax wise, from the Supreme Court’s decision.

With over an estimated 1,000 federal statutes that now need to be evaluated, and possibly amended to bring them into compliance with the new definition of marriage, looks like Congress will have plenty to keep them busy for years to come.

What do you think?

NEW webinar: The Next Step for DOMA: Implications and Opportunities
This webinar explores the key tax effects of the decision, including filing status, amended returns and protective refund claims, divorce and community property issues, and estate and gift tax planning opportunities. 2 CPE credits. More information.

DOMA Ruling Explained

On June 26, 2013 the Supreme Court ruled the Defense of Marriage (DOMA) act unconstitutional in a 5-4 decision. Specifically, the court struck down section 3 of the act which defines “marriage” as a legal union between one man and one woman and “spouse” as a person of the opposite sex who is a husband or wife. Upon repeal of DOMA, the federal government will now recognize all legal same sex unions in states that allow same sex unions. This aspect of the ruling is quite clear. 

What is not yet clear is the implication this will have on federal tax law and the affect this ruling will have on same sex couples immediately and moving forward. In some ways, this ruling will simplify tax law: same sex couples filing jointly in their state will now be able to file jointly with the federal government as well. Some aspects of the law are less simple and will require further clarification from the IRS as time passes.

Details of the Ruling

Traditionally, the regulation of marriage is an authority granted to the separate states. There are some examples where federal law regulates marriage in order to further federal policy, but generally the federal government seeks to limit the implications of these exceptions. The Supreme Court deemed DOMA §3 unconstitutional because of the far reaching implications of the provision—it affected over 1,000 federal statutes and many regulations.

Furthermore, rather than promote consistency, DOMA treated married couples within the same state differently, imposing restrictions, stigma and disabilities onto a state defined class. Those judges striking DOMA were concerned with the equal protection issues and they argued that the law makes unequal a subset of state-sanctioned marriages in areas ranging from taxes to Social Security and veterans' benefits. It is important to note that the scope of this ruling is confined to only “lawful marriages.”

Immediate Tax Implications

The following are among the tax breaks newly available to legally married same-sex couples:

... the right to file a joint return;

... the opportunity to get tax-free employer health coverage for the same-sex spouse;

... the opportunity for either spouse to utilize the marital deduction to transfer unlimited amounts during life to the other spouse, free of gift tax;

... the opportunity for the estate of the first spouse to die to get a marital deduction for amounts transferred to the surviving spouse;

... the opportunity for the estate of the first spouse to die to transfer the deceased spouse's unused exclusion amount to the surviving spouse;

... the opportunity to consent to make "split" gifts (i.e., gifts to others treated as if made one-half by each); and

... the opportunity for a surviving spouse to stretch out distributions from a qualified retirement plan or IRA after the death of the first spouse under more favorable rules than apply for nonspousal beneficiaries.

Many other tax provisions are affected by a taxpayer's marriage status, such as the deductibility of alimony paid to a spouse or former spouse and the availability of the innocent spouse protections.

Planning Tips

Married same-sex couples who filed separate federal returns due to DOMA should consider filing amended returns with claims for refund, where applicable. Filing jointly may produce a lower combined tax than the total tax paid by the same-sex spouses filing as single persons, but this can also produce a higher tax, especially if both spouses are relatively high earners. Tax professionals should calculate for their same sex couple clients their past returns to determine if an amended return will result in a refund.

Married same-sex couples should also amend their estate plans to take advantage of many of the favorable provisions listed above. It is estimated that there are more than 100,000 same sex marriages in the USA. This means that as many as 300,000 amended returns could potentially be required in the near future. Tax professionals should consider filing protective claims for tax returns for which the statute may be about to expire.

Areas for Further Exploration

Because the recent ruling limits its scope to “lawful marriages” it is yet to be seen how the federal government will handle domestic partnerships and civil unions of same sex couples. It is possible that the current ruling will only affect those couples living in states where same sex marriage is legal.

Additionally, the Supreme Court did not strike down section 2 of DOMA which allows states to refuse to recognize same sex marriages performed in other states. Because of this, a couple may be legally married in one state, but living in a state that does not recognize their marriage as valid. It is yet to be seen how the government will view these marriages on a federal level.

Tax professionals will have to wait for the IRS to issues procedures for dealing with these complicated situations.

The Gear Up Editorial Team

Revisions to the Indoor Tanning Services Excise Tax

The excise tax for indoor tanning services has been around since 2010 as part of the Patient Protection and Affordable Care Act. This tax is the government’s way of trying to get you to stop using indoor tanning services, since using them may cause skin cancer.

This is an example of the U.S. government again enacting legislation in an attempt to influence the choices we make. They learned from Prohibition that outlawing an activity often has little effect on our choices so they opted for the next best thing—they taxed it.

The Internal Revenue Service has revised and finalized the regulations for the 10% excise tax on Indoor Tanning Services (ITS) imposed by this legislation. The temporary regulations, effective July 1, 2010, were revised by the 2013 final version. The final regulations are effective as of June 11, 2013; however, there could be additional revisions in the future.

Some of the 2010 temporary regulations were retained while others were revised or superseded by the 2013 final regulations. Following is a summary of some of the more significant items that changed and those that have stayed the same.

Qualified Physical Fitness Facilities (QPFF)

1. Certain QPFFs, with membership fees that include access to indoor tanning facilities, were exempted from the excise tax by the 2010 regulations even though the QPFFs provide basically the same indoor tanning services as non QPFFs.

2. The 2010 regulations limit the definition of a QPFF to a business that does not charge separately for its ITS, offer ITS to the general public, or offer different membership rates based on access to the ITS. If the business meets all three conditions it is exempted from the tax.

3. The 2013 regulations maintained this exemption despite complaints that the exemption creates an unfair competitive advantage for exempt QPFFs.

Free or Discounted Indoor Tanning Services (ITS)

1. The final 2013 regulations specify that the tax only applies if an amount is paid for ITS.

2. If services are provided at a reduced rate, the tax applies to the amount actually charged for the tanning services.

3. The 2013 regulations specify that the tax does not apply to ITS received for redemption of “bonus points” from a loyalty or similar program.

4. For promotions that include a “free” tan with the purchase of a specific number of tans the purchased tans are considered as a reduction to the price of all of the tans rather than a package of purchased tans at full price along with a “free” tan. The tax is applied to the purchase of the package of tans rather than the redemption of the additional tan.

Bundled Services

1. The 2010 regulations provided a formula to determine the amount reasonably attributable to ITS included in a bundle of services. The 2013 regulations leave the bundled rules intact.

2. If the ITS are bundled with other goods and services, the provider must manually calculate the amount of the payment for the bundled services that is attributable to ITS.

3. The final 2013 regulations authorize the Treasury Department and the IRS to issue future guidance to identify additional options for making this calculation.

Gift Cards

1. An undesignated payment card is defined by the 2010 temporary regulations as an item that can be redeemed for goods or services that may or may not include ITS.

2. The 2010 temporary regulations imposed an excise tax only when the card is redeemed for ITS, not when it is purchased. It was pointed out that a provider can only collect the tax when the card is purchased not when it is redeemed for ITS.

3. The 2013 regulations do not change the 2010 requirements however, they authorize the Treasury Department and the IRS to issue future guidance with respect to undesignated payment cards.

4. As required by the 2010 temporary regulations the excise tax must be reported and paid quarterly on Form 720 “Quarterly Federal Excise Tax Return.”

Membership and Enrollment Fees

1. The 2013 final regulations clarify that the excise tax on ITS is imposed on amounts paid for monthly membership and enrollment fees to a provider of ITS, other than a qualified QPFF, even if the member does not use any ITS’s during the period to which the fees relate.

2. Some providers charge a fee that allows the member to skip one or more months of membership dues without being charged an enrollment fee when they restart their monthly membership. Amounts paid to temporarily suspend a periodic membership program are considered amounts paid for ITS and are subject to the excise tax.

The government has taxed alcohol, cigarettes and now indoor tanning services to try to legislate good health practices. I don’t think that they have been very successful with either alcohol or cigarettes and they probably won’t be very successful with indoor tanning services either. What do you think?



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Here Comes the Judge: New Ruling for Registered Tax Return Preparers

On Friday January 18, 2013, Judge James E. Boasberg of the United States District Court for the District of Columbia struck down the IRS’s Registered Tax Return Preparers (RTRP) program and enjoined the IRS from enforcing the regulations.

The Court’s Decision

• Boasberg ruled against the IRS and in favor of the unenrolled tax preparers. The ruling eliminates the requirement for unenrolled tax return preparers to pass the RTRP examination or to obtain 15 hours of continuing professional education each year in order to prepare income tax returns for pay.
• The ruling states that tax return preparers are not “representatives who practice before the IRS.” The court equated “practice” with advising and assisting taxpayers in presenting their cases before the IRS, and filing a tax return would not be described as “presenting a case.”
• The ruling also granted permanent injunctive relief, enjoining the IRS from enforcing its regulation scheme against unenrolled tax preparers.

Options for the IRS

The IRS has the following options:
• Abandon any further attempts to regulate unenrolled tax preparers.
• Appeal the judge’s ruling.
• Seek congressional statutory authority to regulate RTRPs.

Options for the Unenrolled Tax Preparer

RTRP’s have the following options:
• Go about business as usual with no need to pass the RTRP exam or obtain the required continuing education.
• Continue to comply with the RTRP regulations voluntarily.
• Become an Enrolled Agent.

The court ruling striking down the RTRP regulations does not have any effect on the IRS’s Preparer Tax Identification Number (PTIN) requirements. All paid tax return preparers will still have to obtain their PTIN each year.
If you plan to, or have already become an RTRP, I would recommend that you voluntarily take the 15 hours of continuing education each year. If the IRS does obtain the authority to regulate unenrolled tax preparers (which I believe is the likely outcome), you will be ready and up-to-date on the latest tax laws.

Here at Thomson Reuters, we have created courses, webinars, and a subscription package designed specifically to meet RTRP regulations. Regardless of the outcome of this ruling, we are happy to have developed products that are customized specifically for tax return preparers who need clear and succinct update training to meet the needs of their clients each tax season.

I think the IRS will probably seek congressional statutory authority to regulate RTRPs; however, with Congress’s lack of ability to pass any meaningful legislation it may take a very long time. What do you think?

THE AMERICAN TAXPAYER RELIEF ACT OF 2012 --SO WHERE’S THE RELIEF?

On January 9, 1984 a Wendy’s TV commercial first aired touting their hamburgers as having more meat than similar competitor’s burger. Three elderly ladies stand at the pickup window of one of the competitors looking at a very large hamburger. The first lady keeps saying over and over “It certainly is a big bun.” They remove the top half of the bun to disclose a very small meat patty. Finally the shortest member of the group, a woman who could barely see over the counter, asks, “Where’s the beef?” I think we should ask Congress, “Where’s the relief?”

I don’t see how they can call a piece of legislation, “The American Tax Relief Act of 2012” (ATRA) when the Act did not extend the 2% payroll tax reduction allowing the rate to increase back to its previous level of 6.2% of wages. By not sustaining the reduced rate they have in fact increased the taxes of every working American by 2%.


Pork Provisions

It has been estimated that ATRA includes some $70 billion in “Pork Barrel” spending. Congress’s addiction to pork has given us both new and increased deductions that will add to the deficit instead of reducing it. Some of my favorites include:


• Increased rebate amounts to Puerto Rico and the Virgin Islands of a tax on rum imported into the US. Estimated costs $222 million.

• Quicker write off of improvements by motorsport race tracks (NASCAR). Estimate costs $78 million.

• Tax breaks for TV and movie producers that allow them to more quickly write off expenses. Estimated costs $248 million.

• Tax credits of up to $2,500 for purchasing electric powered motorcycles. Estimated costs $7 million.

Here are some of the more significant provisions included in the bill:

Alternative Minimum Tax

Probably one of the better things included in the legislation was to make permanent the Alternative Minimum Tax (AMT) threshold and indexing it to inflation. The new threshold amount is $78,750 and $50,600 for married and single respectively.

Capital Gains and Dividends

The current maximum tax rate of 15% on net capital gains was extended permanently at 15% except for individuals earning $450K for married filing jointly and $400K for aingle filers. For these individual the rate increases to 20%.

Estate, Gift and Generation-skipping Tax

The tax exemption for the estate, gift, and generation-skipping tax was permanently extended at $5 million per person and indexed to inflation; however, the top rate was increased to 40%.

Individual Income Tax Rates

Current individual income tax rates (10% - 35%) were permanently extended, except for those individuals making $400K or more and married joint filers making $450K or more. For these taxpayers the top tax rate is increased to 39.6% .

Personal Exemption and Itemized Deductions Limitations

The personal exemption phase-out and the itemized deductions phase-out were repealed by the Act except for taxpayers with adjusted gross income of $300K for married filing jointly, $275K for head of household, and $250K for single.

It appears that ATRA has at least put a Band Aid on the budget but has done nothing to address the long term issue of deficit spending. By trying to ignore the problem they have been successful in taking a set of complex rules and regulations (Internal Revenue Code) and made them almost incomprehensible.

What do you think?

Special Studies on the American Taxpayer Relief Act Now Available

Thomson Reuters is pleased to offer five Special Studies on the American Taxpayer Relief Act, the new tax law recently signed by President Obama.

• 2012 Taxpayer Relief Act Protects Key Individual Tax Breaks
• Business Tax Breaks Retroactively Reinstated and Extended by the 2012 Taxpayer Relief Act
• Individual Tax Breaks Retroactively Reinstated and Extended by the 2012 Taxpayer Relief Act
• Estate and Gift Tax Relief in the 2012 Taxpayer Relief Act
• Energy-Related Tax Provisions Extended by 2012 Taxpayer Relief Act

 To receive a free copy of the above special studies visit this download page.

A Tale of Two Plans

There are barely 10 days left in 2012, and we are still waiting for Congress and the White House to forge an agreement that would prevent more than $600 billion dollars in tax increases and spending cuts from going into effect on January 1, 2013.

The House Republicans were originally scheduled to bring their Plan B legislation to the floor of the House for a vote. The bill would have raised the marginal income tax rate on household income in excess of $1 million. The Democrats felt that the $1 million dollar threshold was too high. The bill was unlikely to pass in the Senate in its current state.

The Republican bill (Plan B) would have:

• Allowed the top marginal income tax rate, capital gains rate, and dividend rate to expire after 2012 for taxpayers earning over $1 million per year. The top tax rate on ordinary income would increase to 39.6% for these taxpayers, and the top rate on capital gains and qualified dividends would increase to twenty percent (20%).
• Permanently extended the Bush-era tax cuts for taxpayers with income below the $1 million threshold
• Kept the estate tax at its current level. The current estate tax structure has a 35% top rate and a $5 million exemption. The exemption is indexed for inflation.
• Permanently increased the exemption for the individual alternative minimum tax (AMT) and indexed the exemption for inflation. (It is about time that Congress ended the charade of patching the AMT exemption amounts every year or two.) This provision would have been effective for tax years after December 31, 2011; i.e., it would have been retroactive to the beginning of this year.
• Permanently increased the Section 179 expensing limitation to $250,000 and indexed the limitation for inflation after 2013. The limitation would, however, be reduced if the cost of Section 179 property placed into service during the year exceeded $800,000.

Plan B did not include the spending cuts that House Speaker Boehner had offered in his previous negotiations with the White House. In addition, the plan did not reinstate the personal exemption phase-out limitations or the limitations on itemized deductions.

The Republican plan was announced when House Speaker Boehner rejected an offer from the President that called for $1.2 trillion in new tax revenue. President Obama's offer included provisions that would have allowed most of the Bush-era tax cuts to expire for taxpayers who earned over $400,000. The President’s offer included about $1.2 trillion in spending cuts.

The White House's plan to avoid the fiscal cliff reportedly includes the following:

• Permanently extends the Bush-era tax rates for those taxpayers earning below $400,000
• Returns the estate tax to its 2009 structure when the top tax rate was 45% and there was a $3.5 million exemption per spouse.
• Raises the top capital gains rate and dividend rate to 20%
• Reinstates the personal exemption phase-out limitations and the limitations on itemized deductions for married taxpayers earning over $250,000 and single filers earning over $200,000.
• Permanently patches the individual AMT exemption amounts
• Imposes caps on itemized deductions and major exclusions for upper-income taxpayers effective in 2014.

Although Plan B probably would not have passed in the Senate, it did provide a possible starting point for negotiations between the House and Senate that might have resulted in a compromise that would be acceptable to both chambers.

President Obama pointed out this week that he has offered a balanced deficit-reduction plan with more than $1 trillion in spending cuts. He feels that the White House’s offer is close enough to the Republican plan that it should be possible for both sides to approve his plan by Christmas.

On Thursday, December 20, the Republicans cancelled the vote on their “Plan B” tax plan.  The House Speaker indicated that there were not enough votes to pass the Republican bill.  Apparently the bill narrowly cleared a procedural hurdle this afternoon and that made passage of the bill look unlikely. The House also recessed abruptly. 

Based upon reports earlier today, it seems unlikely that a deal will be reached before December 25. Even if an acceptable compromise is reached, any final vote would probably occur after Christmas.

While most of the attention regarding the fiscal cliff has focused on the negotiations between Congress and the White House, the IRS is strongly urging Congress to pass the alternative minimum tax patch quickly. The IRS Commissioner said that nearly 100 million taxpayers out of the 150 million taxpayers who are expected to file could be prevented from filing their taxes until March 2013 or thereafter. This number is an increase from the 60 million affected taxpayers that the Commissioner estimated in November.

Absent swift congressional action, the Commissioner said that nearly 30 million taxpayers will become subject to the AMT unless the AMT patch issue is resolved soon. The resulting situation could cause lengthy delays in tax refunds and unexpectedly higher tax liabilities for taxpayers who were previously unaware that they would be subject to the AMT. Congress probably does not need to be reminded that there is a large block of registered voters among those 30 million taxpayers.

While Congress and the White House search for the sanity clause, we can at least thank Santa for our presents next week. Perhaps some of our elected officials in Washington need to have some spectral visitors stop by during the holiday season, not unlike Ebenezer Scrooge.

Coal in the Stocking: Proposed Regulations for Two New Taxes

Coal in the Stocking: Proposed Regulations for Two New Taxes

After enjoying Thanksgiving and a bountiful feast with my family and friends, I wondered how Congress and the White House would approach the issue of the looming fiscal cliff. Thus far, they have lived up to my expectations. It will be interesting to see how their game plays out over the upcoming weeks.

Recently, we learned more about two new taxes related to the Health Care and Education Reconciliation Act (HCERA) and the Patient Protection and Affordable Care Act (PPACA). The Department of the Treasury and the IRS gave us an early holiday gift by releasing proposed regulations related to the Net Investment Income Tax and Additional Medicare Tax. Since many tax practitioners are busy in December with year-end tax planning, the release of the proposed regulations is timely. The comment period ends on March 5, 2013, for both sets of rules.

Net Investment Income Tax

The new Net Investment Income Tax (NIIT) goes into effect starting in 2013. The Health Care and Education Reconciliation Act of 2010 added new Section 1411 to the Internal Revenue Code (IRC) and is effective for taxable years beginning after December 31, 2012. The 3.8 percent NIIT applies to individuals, estates, and trusts that have certain investment income above certain statutory threshold amounts.

Individuals will owe the tax if they have net investment income and also have modified adjusted gross income over the following amounts:

Filing Status	Threshold Amount
Married filing jointly	$250,000
Married filing separately	$125,000
Single	$200,000
Head of household (with qualifying person)	$200,000
Qualifying widow(er) with dependent child	$250,000

Note: These thresholds are not indexed for inflation.

Here is a list of what is generally included in net investment income:

·         Interest

·         Dividends

·         Capital Gains

o   Capital gains from sales of stocks, bonds, and mutual funds

o   Capital gain distributions from mutual funds

o   Gain from the sale of investment real estate (including gain from sale of a second home that is not a primary residence)

·         Rental and royalty income

·         Non-qualified annuities

·         Income from businesses involved in the trading of financial instruments or commodities

·         Businesses that are passive activities to the taxpayer (within the meaning of IRC Sec. 469)

The tax does not apply to any amount of gain from the sale of a personal residence that is excluded from gross income for regular income tax purposes.

The IRS indicated that the tax will be reported on and paid with Forms 1040 and 1041.

Estates and trusts are subject to the tax if they have (1) undistributed net investment income and (2) adjusted gross income over the dollar amount at which the highest tax bracket for an estate or trust begins in the taxable year. For tax year 2012, this threshold is $11,650. There are special computations rules for certain unique types of trust. In addition, there are some trusts that are not subject to the Net Investment Income tax.

Taxpayers who anticipate that they will exceed the thresholds listed above might accelerate net investment income to 2012 or take some gains in 2012 rather than facing the Net Investment Income Tax of 3.8 percent and the possibility of additional taxes if certain Bush-era tax cuts are not extended through 2013.

Additional Medicare Tax

The IRS also released its proposed rules regarding the Additional Medicare Tax. The tax applies to an individual’s wages, Railroad Retirement Tax Act compensation, and self-employment income that exceeds a threshold amount based on the individual's filing status. The rate of Additional Medicare Tax is 0.9 percent.

An individual is liable for the Additional Medicare Tax if the individual's wages, compensation, or self-employment income (together with that of his or her spouse if filing a joint return) exceed the threshold amount for the individual's filing status:

Filing Status	Threshold Amount
Married filing jointly	$250,000
Married filing separately	$125,000
Single	$200,000
Head of household (with qualifying person)	$200,000
Qualifying widow(er) with dependent child	$250,000

Taxable wages not paid in cash, such as noncash fringe benefits, are subject to the Additional Medicare Tax, if, in combination with other wages, they exceed the individual's applicable threshold. Tips are subject to the tax also.

The imputed cost of group-term life insurance coverage in excess of $50,000 is subject to social security and Medicare taxes, and to the extent that, in combination with other wages, it exceeds $200,000, it is also subject to Additional Medicare Tax withholding.

An employer is responsible for withholding Additional Medicare Tax from the wages or compensation paid to an employee in excess of $200,000 per calendar year. This is done without regard to the individual's filing status or wages paid by another employer. An individual may owe more than the amount withheld by the employer, depending on the individual's filing status, wages, compensation, and self-employment income. If this is the case, the individual should make estimated tax payments and/or request additional tax withholding using Form W-4, Employee's Withholding Allowance Certificate.

Individuals who are liable for the Additional Medicare Tax will calculate the Additional Medicare Tax liability on their individual income tax returns (Form 1040). They will also report the Additional Medicare Tax withheld by their employers on their Form 1040.

Note: An individual might have two jobs where his or her wages are below the $200,000 threshold at each job. However, the sum of those wages may exceed the threshold at which Additional Medicare Tax is owed. If any employee anticipates such a situation, he or she can make estimated tax payments and/or request additional income tax withholding using Form W-4.

Employers will be relieved to learn that there is no employer match for the Additional Medicare Tax. However, an employer that does not meet its withholding, deposit, reporting, and payment responsibilities for the Additional Medicare Tax may be subject to all applicable penalties.

Note: Taxpayers can be subject to the Net Investment Income Tax and Additional Medicare Tax but not on the same type of income.

While most of the attention during the past two weeks has been focused on the end of the Bush-era tax cuts and the fiscal cliff, this week's release of proposed regulations for taxes relating to the health care laws reminds us that we already have some concrete tax increases in place for 2013.

The Fiscal Cliff: A Perfect Storm

What is the Fiscal Cliff and how might our country be affected? The Fiscal Cliff is a “perfect storm” of three components: revenue increases, spending cuts, and the spiraling debt incurred by our government—paired with Congress’s failure to act to right any of these issues. Unless Congress acts to by the end of 2012, we will go over the fiscal cliff, likely sending our country into a double-dip recession. Watch this brief video with Winford Paschall, CPA, and Robin Thompson to hear more...

Checkpoint Learning offers Fiscal Cliff CPE webinars in addition to hundreds of online and webinar tax and accounting courses; click here to check them out: http://cl.thomsonreuters.com/CourseFinder/Search?keyword=W198T,W197T

RTRP Solutions from Checkpoint Learning and Quickfinder

Robin Thompson, Shari Phelps, and Pam Schieffer provide a quick look at how Checkpoint Learning and Quickfinder have teamed up to provide tax reference and continuing education designed specifically for the new Registered Tax Return Preparer designation. Quickfinder offers quick reference handbooks in multiple formats (including on iPad and Android tablets) that include helpful information that RTRPs need to know specific to their new designation requirements. Checkpoint Learning provides an online CPE course package with CPE tracking designed for RTRPs, and a Quickfinder-branded downloadable trio of print-based self-study courses (with online grading) that exactly meet the annual continuing education requirements for RTRPs. Big savings are available with either option; take a look to learn more.

For more information, please see:
http://cl.thomsonreuters.com/CPESolutions/RTRP
and
http://www.quickfinder.com/tax_products/tax_preparation/1040-reg-tax-return-p...

Quickfinder and Checkpoint Learning are part of the Tax & Accounting business of Thomson Reuters.

Gear Up Fall CPE Conferences: What’s New

Robin Thompson and Kirk Langman, Operations Manager for Instructor-Led Training for Thomson Reuters Tax & Accounting, talk about Gear Up CPE Conferences, particularly Royal Flush and Magic Week fall CPE conferences. Hear about what’s new for fall 2012 and what makes these week-long CPE conference events so popular with tax and accounting professionals. 

Find out more at http://cl.thomsonreuters.com/GearUp/Conferences