The Mayans and Tax Reform

1) The Mayans and Tax Reform

2) Sandy Pension Loans

3) Income is Rising!

4) Interest Rates at IRS

1). It is the day before the end of the Mayan calendar, and if in fact you're getting a chance to read this, the world has not come to an end. While not at least the way many had anticipated. You probably took a shower this morning, and with any kind of luck headed off to your office. Frankly, I had wondered how anyone could believe a culture of fellows wearing loin cloths, sacrificing animals on stone altars dictating the end of the world to a culture that had harnessed the atom and sent men to the moon. But I wasn't willing to take any chances. I thought I would get this bulletin done and over to the Bar Association early enough so that if the world did end on Friday, December 21, I could not be accused of dereliction of my duty up until the last. All was proceeding normally, with thoughts of the Mayans behind me until I took a look at the morning's New York Times. There tucked away in the business section was a horizontal bar graph that made me shudder. Right before my eyes the Mayan prediction became clear. The graph set forth selected 2012 tax expenditures. It demonstrated the amount of loot the federal government was losing by each of the tax deductions and credits depicted. Now you may want to pick up a pencil and draw your own graph to get the full picture. If you are old enough you may be nostalgic for “Winky Dink and Me” where a cartoon character asked us kids to draw on our TV screens to save him from peril. Let me explain the graph: far and away the exclusion of employer health care contributions gets the longest bar at $128.1 billion. The second is reduced tax rates on dividends and long-term capital gains, receiving a length of 93.1 billion. Going down, the mortgage interest deduction accounted for 83.7 billion. The exclusion of capital gains at death rings in a paltry 36.3 billion. Next in the graph is deductions for charitable contributions at 32.4 billion, followed by exclusion of interest on state and local government bonds at 32.1 billion. Near the bottom is exclusion of capital gains on sales of primary residences 22.9 billion and lastly, property tax deductions of 15.1 billion. Now if you have drawn the graph correctly, you see depicted before you, a Mayan version of the end of the tax world. It is no coincidence, I believe that on this important last full day of the world, a noted newspaper has portrayed by a humble bar graph a tax cliff. But what does it all mean? The answer is that there is a New World coming just as the Mayans predicted and it will be one where there will be fewer exclusions for employer health care contributions, a different take on dividend and long-term capital gain taxation and a major revision in allowable mortgage interest deductions whether by cap or formula of some kind. Don't blame me. I think the Mayans were predicting this 5000 years ago.

2). In IRS Announcement 2012 – 44, the Service has eased the rules for 401(k) and similar employer sponsored retirement plans to make loans and hardship distributions to Sandy storm victims and members of their families. The tax law imposes certain requirements that must be met to avoid treating a loan as a taxable distribution. Plans must also contain language authorizing these loans. According to the announcement loans may be paid to an employee or former employee due to hardship needs arising from hurricane Sandy. These can be made to persons whose principal residence or place of employment on October 26, 2012 was located in one of the counties that have been identified as covered disaster areas. This includes most counties in New Jersey. Plan administrators may rely on representations from the employee as to the need for an amount of hardship distribution unless the plan administrator has actual knowledge to the contrary. Persons affected should consult their plan administrators to see whether they may qualify for such loans.

3). They say Noah floated about for some time waiting for the flood waters to recede. Historians now say there may have been, in fact, such a flood and an Ark to go along with it. Noah just had to wait things out. The American economy has been floating about for the last several years. But now there is good news. The dove has returned and land is within sight. The Internal Revenue Service recently released its fall 2012 edition of its Statistics of Income Bulletin. The IRS keeps yearly track of such things as gross income, taxable income and tax paid. According to the bulletin, in 2010 adjusted gross income reported on individual returns totaled $8.1 trillion, which was a 6.1% increase from the previous year. This was the first increase in adjusted gross income after two years of decreases. Business income also had large increases in 2010. Total rental and royalty net income increased 40.5%, partnership and S. corporation income rose by 14.3%. Business or professional income rose by 9.1%. And total income tax also increased: taxable income by 8.1% and total income tax by 9.9%. We are not going to drown.

4). With the kind assistance of the folks in Washington, the IRS will once again maintain the same interest rates on underpayments and refunds that they did last quarter. The rate will remain unchanged at 3%.