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Major Changes to Form 1099
Yet another huge alteration with the Health Care Reform: starting in 2012, all companies will have to issue a Form 1099 to any individual or corporation from which they buy in excess of $600 in goods or services in a tax year. This will, in effect, cause potentially millions of new tax documents to be issued each year. Currently, a Form 1099 is issued by individuals or businesses to their independent contractors or is used to record income supplementary to wages or salaries for individual workers.
Chris Hesse, director of taxation at CPA firm LeMaster Daniels PLLC in Washington state says, “Under the new law, businesses will be required to send a 1099 to other businesses for virtually all purchases. And for the first time, 1099s are to be sent to corporations. This is a huge new imposition on American business, costing the private economy much more than any additional tax that the IRS might collect as a result.”
This provision would ultimately make it much harder for businesses to understate revenue while simultaneously forcing them to identify to whom the business expenditures are being paid.
Neil deMause, contributing writer of CNNMoney.com, explains the effects of the new law, “If a freelance designer buys a new iMac from the Apple Store, they'll have to send Apple a 1099. A laundromat that buys soap each week from a local distributor will have to send the supplier a 1099 at the end of the year tallying up their purchases.”
The end result of this mandate is for the IRS to amass an expected $17 billion over the next 10 years from companies that would otherwise under-report on their tax returns. Due to the extreme controversy surrounding this provision, a Congressional repeal is likely to occur in the near future.
New Law Includes 3.8% Medicare Tax on Investment Income
Buried deep inside the new The Health Care and Education Reconciliation Act of 2010 signed by President Obama on March 30, 2010: a 3.8% Medicare tax on investment income.
Buried deep inside the new The Health Care and Education Reconciliation Act of 2010 signed by President Obama on March 30, 2010: a 3.8% Medicare tax on investment income. This new tax law that managed to tiptoe its way into the bill has caused a bitter uproar across the country. What exactly does all this mean? Effective January 1, 2013, those with income exceeding $200,000 (single) and $250,000 (joint) will be subject to a 3.8% Medicare tax on all investment income including interest, dividends, capital gains, annuities, and rental income. Additionally, there is a 0.9% surtax on regular wages in excess of $200,000 (single) and $250,000 (joint). This increases the current 1.45% tax to 2.35%. This will essentially affect all income from Schedules B, D, and E of the tax return. There are a few exceptions to this provision. The American Society of Pension Professionals and Actuaries (ASPPA) has confirmed that distributions from qualified retirement plans, such as 401(k) and pension plans, will be excluded from the increased Medicare tax.
For example, Joe and his wife Mary have a combined salary of $225,000 in 2013. Furthermore, they have $50,000 of net investment income. The 3.8% surtax would apply to $25,000 of income, the amount exceeding the $250,000 threshold. Consequently, Joe and Mary’s additional tax would be $950 ($25,000 x 3.8%).
To circumvent this new tax, you can increase your contributions to Traditional IRAs, Roth IRAs, qualified retirement plans, and municipal bonds. Also, Roth IRA distributions are tax-free and will not affect Modified Adjusted Gross Income. Given that this law will take effect in 2013, it is imperative to start preparing for the future and the plausible environment of increased taxes.
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