Interesting to note with all the attention that has been focused on the healthcare reform law, a minor change with a major impact is dodging the spotlight. As this article from CNN notes, an enormous bureaucratic burden is looming.

The change revolves around expanding the use of 1099s from pertaining to contract labor to now including any individual or corporation from which companies purchase goods and services. Whereas in the past, companies that paid contractors more than $600 over the year needed to issue a 1099, the new law calls for companies that purchase anything over $600, from anyone – an individual or a corporation – to do the same. A small company that buys $2,000 worth of office supplies from Staples? 1099. A moving company that buys $750 worth of accessories from Autozone? 1099.

Amazing that a few small word changes will results in millions of additional forms being sent. The Administration stands by the change, saying that when it goes into effect in 2012 it will cut down on fraud while aiding in data collection. As for its placement in the healthcare reform bill, CNN makes a nice point:

Why did these tax code revisions get included in a health-care reform bill? Welcome to Washington. The idea seems to be that using 1099 forms to capture unreported income will generate more government revenue and help offset the cost of the health bill.

A Democratic aide for the Senate Finance Committee, which authored the changes, defended the move.

“Information reporting improves tax compliance without raising taxes on small businesses,” the aide said. “Health care reform includes more than $35 billion in tax cuts for small businesses…indicating that during these tough economic times, Congress is delivering the tax breaks small businesses need to thrive.”

Adapting to the new law will certainly prove onerous – especially for small businesses – and tax preparers will need to help their clients stay ahead of the game.

In past MFA blogs on the subject of Roth IRA conversions, we’ve discussed how to determine if a Roth conversion makes sense for you; we’ve highlighted the estate planning benefits of a Roth IRA; and we’ve outlined several conversion strategies worthy of consideration (segregation strategy and arbitrage strategy).

By now, countless individuals have decided that a Roth conversion makes sense for them, but many are still perplexed by how to determine the best option for paying the tax on a 2010 conversion. Normally, an individual would be required to report all of the income (as ordinary income) from a Roth conversion on their 2010 tax return. However, for those who convert in 2010, a special provision offers flexibility in deciding when to report the conversion income. This special tax deferral rule, which presently applies to 2010 conversions only, allows an individual the option to report half the income from the conversion on their 2011 tax return and the other half on their 2012 return. Essentially, that means spreading the tax burden over a three-year period.

For example, if an individual holds a traditional IRA worth $500,000 and they convert the entire amount to a Roth IRA in 2010, they can report the entire $500,000 on their 2010 tax return or, alternatively, they can report half of the resulting income ($250,000) on their 2011 federal tax return and the other $250,000 on their 2012 return. The taxes on the 2011 income are due by April 15, 2012 and the taxes on the 2012 income are due on April 15, 2013, although an individual might have to make quarterly estimated tax payments for those years. In some cases, this could allow for a very meaningful deferral of tax payments.

Deferring any conversion tax as long as possible might seem like a no-brainer, but unfortunately, it’s not that simple. Bear in mind that just because the income is evenly split over two years, that does not necessarily mean the tax is evenly split as well. Much depends in part on an individual’s 2010 income, deductions, tax credits, and marginal tax rate, versus what these project to be in 2011 and 2012. For some individuals deferring may make the most sense, yet for others it can bump them into a higher tax bracket and/or render them ineligible for certain deductions or credits in not just one year but two, because of the income phase-out impact.

Adding to the confusion is the looming expiration of the Bush tax cuts. If the cuts are allowed to expire, this may result in higher tax rates for 2011, potentially offsetting or exceeding the tax payment deferral benefits.

Of course, assumptions about future taxes, in and of themselves, do not yield a complete analysis of when to report the conversion income. The potential earning power of the retained tax dollars during the deferral time period, inflationary assumptions, as well as an individual’s particular liquidity situation must all be considered. As each IRA owner’s financial and tax situation is different from the next, so too will be the relative value each places on these various factors, further influencing this decision. The key is for each person to make a tax reporting decision most appropriate for their unique situation.

Clearly, there are many issues to consider throughout the process of deciding how and when to pay taxes on a Roth conversion. Individuals should seek the guidance of a skilled practitioner with extensive tax planning experience to ensure conversion taxes are minimized. We at MFA have developed a proprietary approach to analyzing our clients’ particular Roth conversion tax situation and would be more than happy to discuss our methodology with you.

Through many of my conversations with CFOs, controllers and owners of mid-market and smaller companies, I’ve noticed a running theme that more emphasis should be placed on the tremendous opportunities afforded by the Hiring Incentives to Restore Employment (HIRE) Act (see this March 2010 MFA Perspectives for more detail on the HIRE Act). While most are vaguely aware that the Act was signed into law back in March of this year, there is less understanding of the tangible tax benefits this Act offers for private sector employers – for profit and nonprofit organizations – as well as state colleges and universities.

As companies once again look to expand their workforce, the HIRE Act tax incentives provide a boost of urgency for businesses to hire new workers. The payroll tax exemption puts money into a company’s cash flow immediately, since the tax is simply not collected in the first place. Also worth mentioning is that the threshold to qualify for the full new hire retention tax credit is relatively low – $16,129 in wages will be required to earn the full $1,000 credit ($16,129 x 6.2 percent = $1,000).

Below is an outline of the new hiring and retention incentives, including important qualification criteria and details on how to claim the tax benefits. Execution, or a company’s ability to quickly recruit and hire, will be key to taking maximum advantage of these incentives. Hiring qualifying workers sooner rather than later will draw the most out of the Act, as the tax credits diminish over time and disappear completely by January 1, 2011.

Details of the New Tax Benefits

Payroll Tax Exemption

Gives a qualified employer an exemption from paying the employer share of Social Security employment taxes (6.2 percent of the first $106,800 of wages) for wages paid in 2010. (more…)