Wednesday, June 30, 2010

S Corporation Changes Pending

We typically like to focus on planning ideas here on our blog, but we feel that’s important to make Personal Service S Corp firms aware of a pending aspect of a Bill currently in Congress to reinstate a set of expired tax breaks. An addendum to the bill includes a Self-Employment tax change that will result in an increase. Firms in the following fields should be aware of this possible change: Accounting, Law, Health, Actuarial Science, Engineering, Architecture, Lobbying, Consulting, Brokerage Services, Investment Management, Sports, and Performing Arts.

Currently, owners of S Corps pay a tax on 15.3% of the first $106,800 of wages, and 2.9% on any wages above that. Any additional profits flow through to the owners’ individual income tax returns as dividends and are exempt from self-employment tax but are subject to income tax. This portion of the new legislation will end this advantage of electing an S Corp by requiring owners to pay self-employment tax on their entire profit.

In its current form, this bill only affects small (3 or fewer owners) professional service corps. The dividend pass through option still exists for owners of larger personal service S Corps, or for S Corps that aren’t in the professional service fields listed above.

If you’re an owner of a personal service S Corp, please stay apprised of this bill and how it affects your tax position.

info@mcarthurco.com
704.544.8429

Monday, June 14, 2010

More Healthcare...

I’m sure that if you've been listening, you’ve heard that high income taxpayers will be responsible for a Medicare “surtax” on earnings in excess of $250,000. In the recently passed legislation, this is true, but it does not take effect until after 2012. Specifically, an additional 0.9% Medicare surtax will be levied for W-2 wages and self-employed earnings in excess of $250,000 for married individuals filing jointly or $200,000 for single individuals. Currently, the aggregate Medicare tax rate is 2.9% with one half paid by the employer and the other half paid by the employee. A self-employed individual pays the entire 2.9%, but is then allowed to deduct half of that on their Federal Income Tax return. These are the basic rules, but let’s look at some intricacies that could come into play in your given tax situation.

Married Filing Jointly – 2 Income Family

If you are in a family that both the Husband and Wife are working, both bringing home $175,000 for a total of $350,000, then you fall into bracket of owing the 0.9% Medicare surtax. Although your individual wages are under $250,000, your combined earnings are what is reported; therefore, pushing you into the 0.9% surtax territory. Since neither the Husband’s nor the Wife’s wages exceed $250,000, then the respective employers will not withhold the additional 0.9% Medicare surtax. Therefore, on their joint return they would have to pay an additional Medicare surtax on $100,000, the excess of their $250,000 threshold.

Self Employed Individuals

As mentioned above for self employed individuals, they are responsible for the full share of Medicare taxes but are allowed a deduction of one-half of what they pay in. This one-half deduction is not valid for the excess surtax amount. For example, if you make $300,000 in self employment earnings, you are liable for 2.9% Medicare tax up to $200,000. For the next $100,000 in excess of $200,000, the self employed individual is liable for the 2.9% plus the 0.9% excess. Further, the 0.9% excess is not eligible for the one-half deduction for Federal Income tax purposes.

Next time, we are going to move away from specifics on the Health Care legislation and start to focus on small business and midyear tax planning. Until then (especially if you’re in the South), stay cool!

info@mcarthurco.com
704.544.8429

Tuesday, June 1, 2010

Healthcare & Tax Implications Continued...

Below, we are going to discuss some other areas to be aware of that are on the horizon.

Reimbursements from Health Savings Accounts (HSA’s), Flexible Spending Accounts (FSA’s), and Medical Savings Accounts (MSA’s)

Effective for distributions made after December 31, 2010, Over-the-Counter medications (non-prescription) will not be reimbursed any longer.

Increased Penalties

For non-qualified distributions made from HSA’s and Archer MSA’s that are not used for “qualified” medical expenses , the penalty has been increased to 20% for any distributions meeting this description made after December 31, 2010. This represents a 10% increase for the HSA penalty and a 5% increase for the Archer MSA penalty.

Capping FSA Contributions

Beginning with tax years after December 31, 2012, FSA contributions will be capped at $2,500 for health FSA’s. This dollar amount will be indexed for inflation after 2013.

7.5% Floor Increased to 10%

Medical expense deductions currently only come into play for those of us that have them in excess of 7.5% of AGI. If your 1040 adjusted gross income is $100,000, then not a single medical expense dollar you spend is deductible until you reach $7,500 in expenses. The new law raises this Floor to 10% beginning with tax years after December 31, 2012. So, with that same AGI of $100,000, your medical expenses now have to be in excess of $10,000 before they become deductible. For individuals who are 65 and older (and spouses), the AGI Floor of 7.5% will remain in place through 2016.

This legislation encompasses a lot to digest, and much of it is not effective immediately. Rather, it is being phased in over a number of years. The above items are a few that many of our clients will be effected by and dealing with. Although they are not in place for this 2010 tax season, they should be noted as planning for the future is done. Next week, we will check back in on this issue by examining the legislation‘s stance on high-income taxpayers and medicare taxes.

info@mcarthurco.com
704.544.8429