Fall Tax Developments Update

Filed in Employment, Retirement, Tax Law by on October 15, 2009

The following is a summary of several important tax developments that have occurred in the past three months that may affect you, your family, your investments, and your livelihood. Please call us for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.

Administration launches new initiative to boost retirement savings. The Administration has issued a barrage of guidance designed to increase retirement savings. Three revenue rulings, four notices, and new IRS website explanations make it easier for employers to provide for automatic retirement plan enrollments and automatic contribution increases, permit unused leave to be converted into retirement savings, give employees a clearer understanding of rollover options, and permit income tax refunds to be used to purchase U.S. Savings Bonds. The new developments will, to be sure, make it easier for employers to offer automatic enrollments, and enhance the chances that taxpayers won’t spend their lump-sum payouts. However, the real trail blazers are the ruling that permits the dollar value of unused paid time off to be contributed to a 401(k) plan, and Treasury’s new policy of allowing taxpayers to funnel tax refunds directly into U.S. Savings Bonds.

Next year’s tax figures increase slightly if at all. Inflation data that is finalized each August is used by the IRS to compute the following year’s standard deductions, exemptions, tax brackets and other key items. While the IRS has not yet released its “official” computations (it has until Dec. 15 to do so), a reputable publisher of tax law information has calculated the figures for 2010. It has determined that, because of the extremely low inflation over the past 12 months, for the first time ever, many key tax items will not increase next year or will increase only slightly. Items that won’t increase include the personal exemption and the standard deduction for all but heads of household. Some tax brackets will remain the same but most will increase slightly.

IRS can examine tax accrual workpapers. A Federal appellate court has held that so-called tax accrual workpapers are not protected by the work-product privilege. That privilege protects work done for litigation, not in preparing financial statements, and the workpapers were prepared to support financial filings and gain auditor approval. As a result, the IRS could examine the tax accrual workpapers in auditing the taxpayer.

Simplified per diem rates increased effective Oct. 1, 2009. Reimbursements of an employee’s business travel costs (lodging, meal and incidental expenses (M&IE)) at a per diem rate are payroll-and income-tax free if simplified substantiation is provided and the daily rate doesn’t exceed the federal per diem rate (the maximum amount that the federal government reimburses its employees) for the locality of travel for that day. While the per diem rates vary by travel destination, employers can make reimbursements at the simplified “high-low” per diem rates, which assign one per diem rate to high-cost areas within the continental U.S., and another to non-high-cost areas.

Source: Federal Tax Updates on RIA Checkpoint Newsstand 10/15/09

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