© 2010 Law Offices of David L. Silverman, J.D., LL.M, Lake Success, NY 11042 (516) 466-5900
2010 Tax Outlook
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I. Proposals From the White House
President Obama favors permanently extending tax cuts enacted in 2001 and 2003 for individuals with incomes above $200,000 and families with incomes above $250,000, but allowing tax cuts for those whose income exceeds those thresholds to expire in 2010. Under the proposal, the two top individual income tax rates would rise from 33% to 36%, and from 35% to 39.6%. President Obama also proposes the following changes:
¶ Capping at 28% the rate at which high-income households can itemize their deductions. Today, the value of a deduction is equal to the taxpayer’s top income tax bracket. The White House estimates that capping the rate on deductions could produce $291 billion in revenues over 10 years.
¶ Reinstating the estate tax in 2011 with a $3.5 million exemption amount and a 45% tax rate.
¶ Eliminating the capital gains tax on small business stock held for at least five years. The measure would apply only to stock acquired after February 17, 2009. “Small businesses” are companies with gross assets of $50 million or less.
¶ Permanently changing the Alternative Minimum Tax (AMT) in such a way that it would no longer effect middle-income families. The cost of such a change is estimated to be $660 billion over 10 years. The AMT “patch” expired on 12/31/09.
¶ Extending the “Make Work Pay” credit, which increases workers’ paychecks by a few dollars each pay period. The extension is expected to cost $61.2 billion over 10 years.
¶ Raising taxes on investment fund manager profits. Currently, profits paid to managers of hedge funds are taxed at the 15% capital gains tax rate. Mr. Obama would seek to tax that remuneration as ordinary income.
¶ Permanently expanding the low-income tax credit. The stimulus package in 2009 temporarily expanded the earned income tax credit for low-income families with three or more children. The expansion meant that those families could claim a credit equal to 45% of their qualifying earnings, up from 40%, for a maximum credit of $5,657. President Obama favors making the expansion permanent. The estimated cost would be $15.2 billion over 10 years.
¶ Expand the child-care tax credit, by allowing families making less than $85,000 to double the child and dependent care tax credit for which they currently qualify. The cost is estimated to be $12.6 billion over 10 years.
¶ Permanently extend the American Opportunity Tax Credit and make it partially refundable. The credit is worth up to $2,500 for higher education expenses, up from $1,800 previously. Making the credit permanent would cost an estimated $75.4 billion over 10 years.
¶ The Administration may propose as part of the fiscal year 2011 budget a new fee on banks, insurance companies, and other financial businesses with more than $50 billion in assets. The fee would be expected to raise $90 billion over 10 years.
II. Proposals From the Capitol
Various tax relief provisions are set to expire in 2010. If Congress fails to act, (i) current individual ordinary income tax rates would return to pre-2001 levels; (ii) the capital gains tax rate would increase to 20 percent; (iii) dividends, now taxed at 15 percent, would be taxed as ordinary income; and (iv) the estate tax would return with a $1 million exemption and a 55 percent top tax rate.
The Joint Committee on Taxation estimates that a tax relief bill in 2010 which preserves most or all of the 2001 and 2003 tax cuts, and extends the estate tax at 2009 levels, will reduce federal revenues by more than $2.1 trillion through 2019.
Although both the House Ways and Means Committee and the Senate Finance Committee are expected to hold hearings this year on tax reform, it appears unlikely that major tax reform legislation will occur in 2010. Charles Rangel (D-NY), Chairman of House Way and Means, introduced a bill in 2009 which proposed lowering the corporate tax rate to 30.5 percent, but raising additional revenues through base broadening. Mr. Rangel may introduce a similar bill this year which could reduce corporate rates to as low as 28 percent, but with further base broadening make the legislation revenue-neutral.
Congress has also expressed support for a tax on securities transactions. While the Administration opposes such a bill, a securities transaction tax bill (H.R. 4191) introduced by Rep. Peter DeFazio (D-OR) has been estimated by its sponsors to have the potential to raise $150 billion over 10 years.
Senate Finance Chairman Baucus and Ranking Member Grassley have asked Treasury to examine foreign-source income reporting. Senator Grassley has expressed interest in tax-exempt issues, including hospitals and universities.
III. International Tax Proposals
To offset the expected the loss in individual tax revenues, the President has proposed legislation that would modify international tax rules for companies doing business abroad. This legislation is expected to raise $149 billion over 10 years. The entity classification rules, which the administration believes results in the avoidance of U.S. tax, would be modified to prevent foreign entities from electing to be taxed as disregarded entities.
The Administration also proposes (i) restricting rules which allow U.S. multinational corporations to claim foreign tax credit (FTCs) and (ii) addressing situations where a U.S. taxpayer claims FTCs paid on income that is not currently earned by that taxpayer under U.S. tax principles.
The business community is expected to oppose these proposals arguing that they would reduce the ability of U.S. companies to expand into foreign markets and compete against companies subject to more favorable tax rules.
IV. Tax Treaties
The U.S. entered into new tax treaties with Italy and France in 2009. Modifications of treaties with Switzerland and Luxembourg, generally updating exchange of information provisions, are nearing completion. Treasury is currently negotiating treaties with Poland, Israel, South Korea, Vietnam, Brazil, Chile and Columbia. Preliminary treaty discussions have been held with Venezuela, Singapore and Spain.
V. Proposals From Albany
Governor Paterson on January 19, 2010, released his executive budget proposal for New York’s 2010-011 fiscal year. Among the important changes:
¶ Payments made to a non-resident would be subject to tax in New York if the payments relate to a business, trade, profession or occupation previously carried on in New York, unless such treatment is prohibited by federal law. For example, payments made pursuant to covenants not to compete or termination agreements would be within ambit of the new law. The proposed change would be effective 1/1/10.
¶ Certain gains from the sale of S corporation stock would be treated as New York source income for non-resident shareholders. In Matter of Baum, DTA Nos. 820838 and 820838 (2/20/09), the Tax Appeals Tribunal held that a sale of stock should not be treated as a sale of the corporation’s assets for NYS tax purposes even though treated as a sale of assets for federal income tax purposes by reason of an election under IRC § 338(h)(10).
Under Mr. Patterson’s proposal, such a transaction would be treated as a sale of the S corporation’s assets (instead of a stock sale) and would require allocating the gain between New York and non-New York source income. The proposed change would apply to taxable years with respect to which the statute of limitations for seeking refund or assessing tax are still open.
¶ Under current NYS law, a resident trust is exempt from tax if (i) all trustees are domiciled outside of New York; (ii) the entire corpus of the property, including real and tangible property, is located outside of New York; and (iii) all income of the trust is sourced outside of New York. A resident trust is any testamentary trust created under the will of a decedent who was domiciled in New York and any irrevocable lifetime trust created by a New York domiciliary.
Under current law, a resident trust with no property in New York and no New York source income can avoid New York tax by appointing only out-of-state trustees. The bill would repeal this exemption, and would add a rule providing that a resident non-testamentary trust with no New York source income would be taxed based on the ratio of New York beneficiaries to the total number of beneficiaries. The change would be effective 1/1/2010.
¶ Under current NYS and NYC law, recording of a mortgage on real property is subject to the mortgage recording tax. However, no tax is imposed where a financing statement is filed to perfect a lender’s security interest in a cooperative housing unit. The proposed change would expand the tax base of the mortgage recording tax to include the principal amount of any loan secured by the filing of a financing statement. The rationale for the rule is that the filing of a financing statement for a lender’s security interest in a coop is analagous to the recording of a mortgage on real property. The proposed change would take effect on the first day of the third month after the proposed change becomes law and would apply to financing statements filed on or after that effective date.
¶ New York provides for an exemption against New York estate tax equal to the federal estate tax exemption amount (subject to a maximum of $1 million). By reason of the temporary “repeal” of the federal estate tax in 2010, there is no federal exemption amount for decedents dying in 2010. Therefore, without modification, taxable estates of decedents dying in 2010 subject to the NYS estate tax would be taxed on the full value of the estates without any estate tax exemption. The proposed change would preserve the $1 million exemption for decedents dying in 2010.