1. 1 Legislation and Other Hot Topics Quarterly Executive Meeting Los Angeles, CA January 27, 2010

2. 2 Key Provisions that Expired in 2008 and 2009 Many deductions and credits The Estate Tax The Alternative Minimum Tax

3. 3 H.R. 4213, Tax Extenders Act Passed the House of Representatives, 12/9/09; 241 to 181 Extenders  Traditional tax extenders  Other expiring provisions Other provisions and “pay fors” Source: House Ways and Means Committee, H.R. 4213 Tax Extenders Act of 2009 (December 8, 2009) http://waysandmeans.house.gov/media/pdf/111/Extenders_Summary.pdf. http://waysandmeans.house.gov/media/pdf/111/Extenders_Summary.pdf

4. 4 Traditional tax extenders Individual provisions include:  Deduction of State and local general sales tax  Additional standard deduction for real property taxes  Above-the-line deduction for qualified tuition  Above-the-line deduction for expenses of primary and secondary teachers

5. 5 Traditional tax extenders, cont. Business provisions include:  R& D tax credit, § 41  15-year straight-line cost recovery for leasehold improvements, restaurant buildings and improvements, and retail improvements

6. 6 Traditional tax extenders, cont. Charitable provisions  Provisions encouraging contributions Of real property for conservation purposes Of food inventory Of book inventories to public schools Of computer equipment for educational purposes  Tax-free distributions from IRAs

7. 7 Tax Extenders Act, cont. Community Assistance Programs  Tax incentives for Empowerment Zones, etc. General Disaster Tax Relief Provisions  Casualty loss provisions, etc. Energy Tax Provisions  Tax incentives for biodiesel, etc.

8. 8 Estate Tax 2010 Estate tax repealed 2011 Comes back with  Rates as high as 60 percent  $1,000,000 exemption Efforts to restore 2009 tax retroactively  Rates as high as 45 percent  $3,500,000 exemption Source: Joint Committee on Taxation, Technical Explanation of H.R. 4154, The “Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act of 2009 (JCX-57-09) (December 3, 2009).

9. 9 Estate Tax, cont. Complicated carryover basis rules Options include  Retroactive extension for one year  Reform/ Replace Retroactivity would be Constitutional  United States v. Carlton, 512 U.S. 26 (1994) But politics are a challenge

10. 10 The Alternative Minimum Tax 4.5 million taxpayers hit in 2009 Number kept small by annual extensions  Expired at the end of 2009 Hits 27 million taxpayers in 2010  One out of six taxpayers; an additional $3,900 in tax  Nearly every married taxpayer with income between $100,000 and $500,000 Source: Congressional Budget Office, http://cboblog.cbo.gov/?m=201001.http://cboblog.cbo.gov/?m=201001

11. 11 Tax Returns Affected by the Alternative Minimum Tax (Millions)

12. 12 Key Provisions that Expire in 2010 Provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001, except:  A few IRS pension and IRA provisions made permanent by the Pension Protection Act of 2006 Source: Joint Committee on Taxation, List of Expiring Federal Tax Provisions, 2008-2020 (JCX-20-09) (March 9, 2009).

13. 13 Key Provisions that Expire in 2010, cont. Reduced capital gains rate, §1(h) Dividends at capital gains rates, §1(h) Refundable child credit floor amount, §24(d) American Opportunity Tax credit, § 25A(i) Portions of the earned income tax credit, § 32 Making work pay credit, § 36A Lots more

14. 14 Source: CBO, http://www.cbo.gov/ftpdocs/108xx/doc10828/12-4-2009-Elmendorf_G-30_Presentation.pdf.http://www.cbo.gov/ftpdocs/108xx/doc10828/12-4-2009-Elmendorf_G-30_Presentation.pdf

15. 15 Source: CBO, http://www.cbo.gov/ftpdocs/108xx/doc10828/12-4-2009-Elmendorf_G-30_Presentation.pdf.http://www.cbo.gov/ftpdocs/108xx/doc10828/12-4-2009-Elmendorf_G-30_Presentation.pdf

16. 16 Senate-passed Health Care Bill - Revenue Offset Provisions 40% excise tax on health coverage in excess of $8,500/$23,000 indexed for inflation by CPI-U plus 1% and increased thresholds for over age 55 retirees or certain high-risk professions; levied at insurer level; employer aggregates and issues information return for insurers indicating amount subject to the excise tax; nondeductible; high 17 state transition relief Employer W-2 reporting of value of health benefits Source: Joint Committee on Taxation, Estimated Revenue Effects of the Manager’s Amendment to the Revenue Provisions Contained in the “Patient Protection and Affordable Care Act” (JCX-61-09) (December 19, 2009).

17. 17 Senate-passed Health Care Bill, cont. Conform the definition of medical expenses for health savings accounts, Archer MSAs, health flexible spending arrangements, and health reimbursement arrangements to the definition of the itemized deduction for medical expenses (excluding over-the-counter medicines prescribed by a physician) Increase the penalty for nonqualified health savings account distributions to 20% Limit health flexible spending arrangements in cafeteria plans to $2,500, indexed to CPI-U after 2011

18. 18 Senate-passed Health Care Bill, cont. Require information reporting on payments to corporations Additional requirements for section 501(c)(3) hospitals Impose $2.3 billion annual fee on manufacturers and importers of branded drugs Impose annual fee on manufacturers and importers of certain medical devices Impose annual fee on health insurance providers

19. 19 Senate-passed Health Care Bill, cont. Study and report of effect on veterans health care Eliminate deduction for expenses allocable to Medicare Part D subsidy Raise 7.5% AGI floor on medical expenses deduction to 10%; AGI floor for individuals age 65 and older (and their spouses) remains at 7.5% through 2016 $500,000 deduction limitation on taxable year remuneration to officers, employees, directors, and service providers of covered health insurance providers

20. 20 Senate-passed Health Care Bill, cont. Raise the hospital insurance tax on wages and self-employment income in excess of $200,000 ($250,000 joint) by 0.9 percentage points, unindexed Modification of section 833 treatment of certain health organizations Impose 10% excise tax on indoor tanning services

21. 21 The proposed Financial Crisis Responsibility Fee Require the Financial Sector to Pay Back For the Extraordinary Benefits Received Responsibility Fee Would Remain in Place for 10 Years or Longer if Necessary to Fully Pay Back TARP Raise Up to $117 Billion to Repay Projected Cost of TARP Source: http://www.whitehouse.gov/sites/default/files/financial_responsibility_fee_fact_sheet.pdf.http://www.whitehouse.gov/sites/default/files/financial_responsibility_fee_fact_sheet.pdf

22. 22 Financial Crisis Responsibility Fee, cont. Levied on the Largest Financial Firms  Those with more than $50 billion in assets  Hits both domestic firms and U.S. subsidiaries of foreign firms Fee Assessed at Approximately 0.15 Percent of Covered Liabilities Per Year

23. 23 Financial Crisis Responsibility Fee, cont. Liabilities Subject to the Fee Would Be Defined as:  Covered Liabilities = Assets - Tier 1 capital - FDIC-assessed deposits (and/or insurance policy reserves, as appropriate)  Exempting FDIC-Assessed Deposits and Insurance Policy Reserves

24. 24 About the Author Jonathan Barry Forman (“Jon”) is  the Professor in Residence at the Internal Revenue Service Office of Chief Counsel, Washington, DC, for the 2009-2010 academic year;  the Alfred P. Murrah Professor of Law at the University of Oklahoma College of Law; and  the author of Making America Work (Washington, DC: Urban Institute Press, 2006). Jon can be reached at (202) 622-7639; Jonathan.B.Forman@irscounsel.treas.gov; www.law.ou.edu/faculty/forman.shtml Jonathan.B.Forman@irscounsel.treas.gov www.law.ou.edu/faculty/forman.shtml