Cabin Business

Dr. Pam Spikes, CPA, is a professor of accounting at the University of Central Arkansas. Dr. Patricia Mounce, CPA, is associate professor of accounting at UCA.

Congress still has four months in which to make changes to the 2010 tax law. At this point no one knows exactly what is to come. However, we can only assume that some recent tax changes that will affect 2010 tax returns will remain as enacted.

Several tax provisions affecting individual taxpayers are scheduled to expire in 2009 unless Congress acts to extend them. Common among these are the educator’s deduction, the tuition and fees deduction, and having the choice to deduct state income tax or sales tax. At risk for non-itemizers is the loss of the additional standard deduction for property taxes and sales tax on vehicles.

A major concern for many years has been the increasing number of taxpayers who, in addition to paying regular income tax, are subject to alternative minimum tax. If Congress fails to change the exemption levels, millions of additional taxpayers will find themselves incurring this penalty tax.

Not all changes have negative consequences. One beneficial change for high-income taxpayers relates to Roth IRA conversions. Starting in 2010, persons with more than $100,000 modified AGI will be free to switch a traditional IRA to a Roth IRA. Tax on 2010 conversions can be spread over two years. Another positive change in the tax law is an increase in the domestic production activities deduction from six percent to nine percent in 2010.

Estate tax planning has been in somewhat of a limbo state since 2001. Since that time, exemption levels have gradually increased while tax rates have decreased. Under the current law, the estate tax will be eliminated in 2010. However, it is scheduled to reappear in 2011 at the exemption amounts and rates in effect in 2001. If it reverts back to the 2001 levels, exemptions will be reduced from $3.5 million (2009 level) to a mere $1 million (2001 level) with a maximum tax rate of 55 percent. The 2001 provision was enacted because the small exemption amount led to family members having to sell off property from family farms and closely held business in order to pay estate taxes. However, assets were passed to beneficiaries at a stepped-up basis equal to fair market value, thus minimizing gain upon sale. If Congress chooses to permanently eliminate the estate tax, although it sounds good, there is still a downside for beneficiaries to consider. Upon ultimate sale of an asset, gain (or loss) will be measured by the difference in proceeds and the decedent’s basis in the property. For business property that has been depreciated, this basis may be zero, creating a 100 percent gain on the sale.

History has shown that Congress is unpredictable. However, one thing that is relatively certain is that Congress will make some last-minute changes. We are left to guess what impact they will have on taxpayers.