Reinstated: the $5,520.00 Employer Provided Education Assistance allowance - through May 31, 1997. Note - specifically excluded are graduate level courses, leading to a degree, taken after June 30, 1996.

For the employee to get the refund, it’s as easy as 1-2-3:

1) Ask the employer for a W-2c (corrected W-2) - As the employer, you must prepare corrected W-2’s for all affected employees

2) File a 1040X with "IRC 127" written at the top of the page. The IRS will do the computations if this is the only reason for the amended return.

3) Go back to the employer to get the employee’s share of social security back. (on $5,250 @ 7.65% that’s worth over $400.00). Now it’s up to the employer to give back that money.

Naturally, since you, the employer, are unlikely to have the funds to return money to the employee

You will have to file Form 941 or Form 843 to get the excess FICA taxes paid. It won’t be necessary to include the employees‘ signatures as long as you can assure the IRS that the refunds will go back to the employees.

Incidentally, they will not be assessing penalties or interest if the employer had not withheld income or employment taxes or failed to report the educational assistance in the first place. Thrilling.

As a successful businessperson who can afford to buy boats, luxury vehicles and other expensive item, you can go on a spending spree - the tax is phased out 1% per year, dropping from 9% in 1996 to 0% by 2002.

I won’t go into detail,... But, for those who have given up their U.S. citizenship (or are planning to) simply to avoid taxation, Congress strengthened the laws to nab you. These laws will also affect long-term U.S. residents who leave to avoid taxes. The effective date is on or after February 6, 1995.

How will the U.S. collect any applicable funds? Well, they will simply take stocks, bonds, real estate or other assets still located in this country to cover the taxes. Oh yes, there is an offset for foreign taxes paid, but I suppose one would have to file U.S. tax returns in order to take advantage of that. See the changes to IRC 877.

A slight modification to IRC 280A(c)(2) extends the office in home deduction to those people whose home is the "sole fixed location" of their inventory and/or samples. According to CCH (from the House Committee Report), the space is not required to be used exclusively for the storage of inventory or samples, just regularly. Interestingly, the example used describes cosmetics. Do you think that Avon has this much pull? Or is it really Amway in disguise?

Those of you whose crystal balls work as well as mine, have always taken this adjustment, even in-between times. I hate to amend returns for piddly items. But now we’re set through 2006:

1996 30% Reinstated in 1995, but the rate remains the same for 1996

1997 40%

1998-2002 45% (Kind of stuck in a rut!)

2003 50%

2004 60%

2005 70%

2006 80%

We never get to take a full deduction for our medical expenses. And we sure as heck don’t get to reduce our self-employment taxes by the cost of our high medical premiums.

Alternative - Check into the BizPlan. If you’ve got a spouse, put him/her to work for you and pay for their medical coverage and the family’s medical expenses. Your spouse may cover you as his/her dependent. (I don’t see anything in the new laws to negate IRC 105.) Read on....

What a great program. Effective January 1, 1997, you can create a medical Savings Account (MSA), similar in handling to an IRA (i.e., see banks and insurance companies). And it is an adjustment to income, so it is not subject to the 7.5% medical deduction floor AND it helps reduce AGI, so both the medical and misc. expense deductions might increase. It’s actually a good idea - if you can get there first.

Only the first 750,000 plans established in 1997 will qualify. So how do you know if your plan will qualify? Beats me! Check with your bank or insurance company to get verification that you have a qualified plan before you start stashing your savings.

Small employers (no more than 50 employees) may reduce medical premiums. Change your employee medical coverage to high-deductible or catastrophic coverage only plans and pass the costs to the employee. The employees of these "small" employers may go out and open an MSA. What kind of coverage may you have and still qualify to open an MSA? Medicare supplemental, per-diem hospitalization, coverage for accidents or long-term care.

Employees and self-employed folks may put away a percentage of their health insurance deductibles: up to 65% (individual) and 75% (family). You may put aside up to $3,000 for individuals and $5,500 for a whole family! No guarantees that your MSA will be among the first 750,000 each year. If you can set up one, the benefits can be well worth the trouble. Earnings on funds won’t taxed until used.

The really good part for employees: Any funds not used, roll over to the next year and may accumulate, so you can build up a substantial, interest-bearing, emergency medical reserve. This would be great if it were universally available - write to your legislators and tell them you and your clients want this pilot program expanded and made universally available!.

IRS has been aggressively pursuing employers in the eternal "is s/he an employee or independent contractor?" battle. We don't have to fight the ambiguity of IRS’s "20 Theses" (or the list that has no weighted measurement for any factor). Congress has decreed that the reasonable basis test is satisfied if you relied on:

1) Judicial precedent, published rulings, technical advice or letter ruling to the employer;

In a revision to IRC 1003(h), insurance proceeds received as a result of any Presidential-declared disaster no longer have to be used to replace the actual item destroyed to avoid taxation. Taxpayers may use the proceeds for any tangible trade or business property.

In other words, the flood demolishes the motel. Taxpayer uses the proceeds to buy a factory and sewing machines and starts making dresses.

This provision affects qualifying disasters after December 31, 1994 (that’s AFTER the Northridge Quake and the Rodney King riots) - but there is a special provision to permit inclusion of the Oklahoma City bombing on December 21, 1994. (Do you think that’s because an IRS office was involved?)

This a very generous provision for those of folks who somehow forgot to take depreciation on things like rental property all those years, when they should have. In the past, they lost the right to take the deduction. But if we did the returns properly, when they sold the asset, we deducted the ‘allowable’ depreciation from the basis, didn’t we?

Now, Rev Proc. 96-31 permits a streamlined procedure to take a one-time "catch-up" deduction. Taxpayer must file a completed Form 3115 Request to Change Accounting Method 180 days or more before the beginning of the tax year in which the deduction is taken. (Ok. Not so generous. You can’t use it for 1996 or 1997? But if you file now, you might get it for 1998 - if they don’t repeal it.) Don’t do this yourself. Get professional help.

This expenses increases just a bit each year from 1997 - 2000. But in 2001, it really takes a leap! $4,000. Here’s the schedule:

1997 $18,000

1998 18,500

1999 19,000

2000 20,000

2001 24,000

2002 24,000

2003+ 25,000

Did they really have to tell us this? We could have guessed. Corporations may not take a deduction for interest on any loans taken with respect to company-owned life insurance policies, annuities, endowment contracts, etc. that cover an officer or anyone with a financial interest in the company. (Well heck, they took away the right to borrow against KEOGHs. What do you expect?)

There is an exception for policies covering certain key personnel where the debt is $50,000 or less (does that number sound familiar?) and the interest rate is below a specified cap. This denial is for interest paid or accrued after October 13, 1995.

With their usual efficiency, Congress passed this bill to cover only employees hired on or before September 30, 1997. (Another extender bill will be required.)

Still under IRC 51, but reduced from 40% to 35% of the first $6,000 of wages ($3,000 for qualified summer youth)

A new Form 8850, which we have yet to see, must be filled out by the employer upon hiring the employee. It must be submitted to the appropriate State agency within 3 weeks after the employee starts to work.

Warning - You cannot use this credit for employees hired from December 31, 1994 through September 30, 1996. If you use this credit, remember to reduce the deduction for wages by the amount of the credit taken.

Who are the 7 targeted groups (down from 10)?

1) A qualified IV-A (AFDC) recipient

2) A qualified Veteran (a member of a family receiving AFDC or Food Stamps)

3) A qualified ex-felon (from a family whose income is of 70% of BLS standards, hired within 1 year of last conviction or release from prison)

4) A high-risk youth

5) A vocational rehabilitation referral

6) A qualified summer youth employee

7) A qualified food stamp recipient

Research Credit - The old one expired on 6/30/95. The new law provides the credit for 7/1/96 to 5/31/97. The credit is 20% and there are some changes you’ll need to read about if you have clients using this credit. Look out for definitions of start up companies - they may be beneficial.

Orphan Drug Credit: If you have clients that qualify, you must have more expertise in this area than I have - you’re on your own.

No longer must you guess how long the intangible asset, the book, manuscript, film, etc. will generate income so that you can depreciate the costs. (Imagine using the income-forecast method for Gone With The Wind or A Christmas Carol!) The new act defines limits and formulas.

See IRC 167(g) for details.

Year Amount

1983-85 $.08

1986 .09

1987 .10

1988 .105

1989-91 .11

1992-93 .115

1994-5 .12

1996 .12 (yup, it’s still the same!) .

Shareholders have been increased from 35 to 75 for tax years beginning after 1996.

Banks that don't use the reserve method of accounting may now be S-Corps

Now, S-Corps may have 80% C or S-Corp. subsidiaries. Just think of the flow charts you can create!

BINGO! The IRS is authorized to validate certain S-Elections that were previously considered invalid. This affects years after 1982. They are authorized to treat a late election as timely based on reasonable causes. This could get some of our clients out of jams. Definitions are unclear and it is uncertain how this will affect closed years. It seems the discretion is in the hands of the IRS - or the courts, if the Service proves unreasonable.

TEFRA audit provisions are repealed, but now it’s up to us to provide consistency in the returns of S-Corps and their shareholders.

A small business corporation that previously terminated the S-Corp. election during the five-year period before enactment (Aug. 5, 1996) may reelect Sub S status.

If taxpayers inherited S-Crop Stock from someone who was short-sighted enough to die after the date of enactment of the SBA, they must reduce the stepped-up basis by any increase that is attributable to the Income In Respect of the Decedent (IRD). What is considered IRD? The decedent’s pro-rata share of any income item from the S-Corp. that would have been treated as income if the decedent had received the K-1.

There is a rule under IRC 1237 that permits individuals who own subdivided parcels to avoid treating them as ordinary income property simply because they’ve been subdivided. However, the rule only applied to non-corporate taxpayers. The new law extends this privilege to S-Corps. (but not to C-Corps.)

The Savings Incentive Match Plan for Employees (SIMPLE) was created by the Small Business Job Protection Act. It permits employers with 100 or fewer employees, who each earned at least $5,000 in the previous year, to adopt a simple retirement plan. It may be in the form of either an IRA or a 401(k) plan. employees may each contribute up to $6,000 per year and employers must make matching contributions. Employees aren’t taxed on the assets or earnings until withdrawal.

So, where’s the simple part? The plan is not subject to the maze of non-discrimination rules and computations of the normal 401(k).

Reporting is expected to be similar to the SEPs, with separate boxes to appear on Form 1099-R for reporting. Box 13 on Form W-2 will also be expanded to accommodate another plan. See Form 5305-SIMPLE for details.

A note from NSTP - "Early concern over the contents of the form have caused some tax experts to question whether the form itself conflicts with the ‘new’ laws. Now, the Department of Labor has notified IRS that it sees problems and will amend its participant contribution regulations effective January. The changes will involve SIMPLE plans that contain IRAs. The conflict arises from the an analysis of the ‘new’ laws contained in the Small Business Job Protection Act of 1996 and Title I or ERISA. Labor argues that the SIMPLE plans that involve IRAs should fall in line with ERISA rules."

So that it’s easier for us to compute taxable pension distributions, Congress repealed:

5-year Averaging on lump sum distributions is not available after 1999.

Exclusion for Employer-Provided Death Benefits - this $5,000 benefit is repealed for those unfortunate enough to die after the enactment date of the Small Business Act. (You know, August 2, 1996)

Not repealed, simply simplified:

We now have a Simplified Method for taxing annuity distributions - for qualified plans, IRC 403 (a) & (b) and contracts under IRC 72. The computation for the non-taxable return of basis:

Divide the investment in the contract by a specified number of monthly payments (unless the number of payments is fixed, then use the actual number of payments):

Age of Primary Annuitant Number of Anticipated

at the Annuity Starting Date Payments

55 and under 360

56-60 310

61-65 260

66-70 210

71 and over 160

This method does not apply to someone age 75 or older starting to collect an annuity, unless there are less than 5 years of guaranteed payments.

The trick, of course, is to know how much was invested in the contract. Which of your clients have that information?

For our purposes, the investment in the contract is defined as the amount of premiums or other contributions paid (i.e., the after-tax contributions), less the amount received before the annuity starting date that was excluded from gross income.

If a lump sum is received in connection with the annuity, treat the lump sum payment as being received before the annuity starts. Deduct the lump sum payment from the total investment (not below -0-). Then divide what’s left of the total investment (if anything) by the anticipated payments, to determine the non-taxable portion of the annuity.

Not by our benevolent government!

What happens if the annuitant (the poor guy receiving the annuity) dies before s/he gets it all, and the contract has a refund feature? The unrecovered investment is deducted on the annuitant’s final return, after reporting the full amount received, of course.

When a contract has a refund feature, IRC 72 requires that that the investment in the contract be modified by the present value of the refund feature. A bit complicated. So this tax act simplified that computation and made it go away.

Can you imagine? Being penalized for not taking your own money! Anyway, if the taxpayer is still employed at age 70 1/2, the law no longer requires that the taxpayer start taking distributions from qualified plans. This exception does not cover IRAs and 5% owners of the business with the otherwise-qualified plan. They must still start taking the money as before, by April 1 of the year after they turn 70 1/2..

The new requirement is that distributions start by April 1 of either

1) the year following the year the taxpayer turns 70 1/2 or

2) the taxpayer retires.

Make note - retiring later requires that the accrued benefit, once the taxpayers must start taking it, is increased to reflect the benefits they would have received had they started taking them in time.

Some Nondiscrimination rules and their complex computations are repealed.

1) Effective after 1996, Highly compensated is 1) a 5% owner or 2) received compensation of over $80,000 in the preceding year and, the employer so chooses, was in the top 20% of the most highly paid employees.

2) Family Aggregation Rules repealed - since we don’t get to share anyway, we are no longer penalized for being highly compensated just because Dad is. (All family members are no longer treated as a single employee for computation purposes.)

3) Combined plan limit repealed - the overall limit on the annual contributions and benefits that applies to participants in both defined benefit and defined contribution plans has been repealed, but not until limitation years beginning after 1999. The 15% excise tax on excess distributions from qualified plans, TSAs and IRAs has been suspended until the repeal of the combined limit takes effect.

4) Other stuff - technical. Ask the Plan manager.

Congress has wised up. For employee benefit purposes, leased employees are your employees if they meet certain logical tests. Wonder how that will affect the entire computer and engineering consulting industry?

Finally, some recompense - veterans returning from active duty may make up contributions missed while away in the service. Under the Uniformed Services Employment and Reemployment Rights Act (USERRA), the time served is considered time worked for the purposes of the qualified plan. The employer will not be penalized for exceeding the contribution limits or jeopardize the qualified status of the plan. The employer may make the matching contributions that should have accrued if the veteran had remained on the job. (Frankly, it is not clear to me if the employer MUST make the contributions. If that is the case, re-hiring a veteran could be a very costly provision.) For more data - see IRC 414(u) and ERISA section 408(b)(1).

In IR-96-43, the new retirement-related cost of living (COLAs) adjustments have been announced:

$125,000 Maximum Annual Benefit of a Defined Benefit Plan

30,000 The maximum annual addition to a defined plan (unchanged)

160,000 The threshold amount for the excess distribution penalty (up from $155,000)

400 The compensation minimum fore which SEP coverage is required (unchanged)

Eva has also created a fanciful gift registry on the Internet at URL: http://www.mywishlist.com and can be reached by e-mail at taxwriter@taxmama.com

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