Congress repeals new 1099 reporting rules for landlords and businesses
Two provisions included in 2010 tax laws have been repealed by Congress, bringing an end to the unpopular expanded information reporting on Form 1099 for certain business payments and rental property expense payments.
Here’s the background on this issue. The 2010 health care legislation included a provision that would have required businesses that purchased goods and services from any vendor to file a Form 1099 if the total amount was $600 or more in a year. Both the vendor and the IRS had to receive a copy of the Form 1099. The big change made by this law was that payments made to corporations were no longer exempt from this reporting requirement, beginning in 2012.
A different 2010 law, the Small Business Jobs Act, imposed new Form 1099 reporting requirements on landlords. Effective for payments made after December 31, 2010, owners of rental property were generally required to file a Form 1099 for rental-related payments to any provider for services totaling $600 or more for the year.
In April Congress passed legislation that repeals both of these reporting requirements. On April 14, President Obama signed the law, which is titled the Comprehensive 1099 Taxpayer Protection and Replacement of Exchange Subsidy Overpayments Act of 2011. This means the long-standing exception to Form 1099 reporting for most payments made to corporations remains in effect, and reporting is not required for payments made in connection with rental properties.
THERE’S A TAX COST TO FORGIVEN DEBT
The economic benefits of having a debt forgiven are obvious. But you may face some unexpected tax consequences: This act of forgiveness could result in “cancellation of debt” (COD) income. In other words, you’ll be taxed on the amount of the debt reduction.
However, there are certain key exceptions and exclusions to the basic rules. So you may be able to avoid any adverse tax results.
Here’s how it works. If a personal debt is forgiven or canceled, you’re generally required to report the amount as taxable income on your individual tax return. (A business debt is reflected on the appropriate return for the entity or proprietorship.) For this purpose, a debt is any indebtedness for which you are legally liable or which attaches to property you own. In addition, you must report any interest attributable to the debt being forgiven or cancelled.
Nevertheless, these rules don’t apply to gifts or bequests, cancellation of certain student loans, cancelled debt paid by a cash-basis taxpayer that is otherwise deductible, and a qualified purchase price reduction provided by a seller. Furthermore, the following five types of cancelled debt are specifically exempted from the COD income rules:
- Cancellation of qualified principal residence indebtedness.
- Debt cancelled in a Title 11 bankruptcy case.
- Debt cancelled due to insolvency.
- Cancellation of qualified farm indebtedness.
- Cancellation of qualified real property business indebtedness.
The exclusion for residential debt is particularly noteworthy to many taxpayers. It was established by a 2008 law providing relief to homeowners in the wake of the mortgage foreclosure crisis. The law capped this tax exemption from COD income at $2 million of qualified debt.
Kamlesh H. Patel, CPA, can be reached at (813) 949-8889 or e-mail [email protected] or [email protected].
Finance
May is Disability Insurance Awareness Month.
ABOUT 3 IN 5 FULL-TIME WORKERS CONCERNED ABOUT HAVING ENOUGH MONEY DURING A PERIOD OF SUDDEN INCOME LOSS
When asked to list their assets, many people may fail to include their ability to earn an income. However, if that ability is impaired because of a disability, many are likely to be left financially unprotected.
“People underestimate the emotional and financial impact that a serious illness or injury can have. Disability income insurance is a key part of a family’s financial safety net and can protect your family by replacing a portion of your income if you are unable to work,” says Dev Goswami, Florida Financial Group in Jacksonville. “Anyone who depends on their income, even if you’re young and healthy, needs disability insurance.”
In fact, three out of every five full-time employees are concerned about having enough money to pay bills during a period of sudden income loss, according to the ninth annual MetLife Study Employee Benefits Trends. This issue can be compounded for people who do not have any disability income protection or feel that their coverage is inadequate
Disability income protection can provide valuable protection, helping to ensure that day-to-day living expenses are covered and that long-term financial goals can still be met. While any amount of protection helps, it is important to have the right amount of coverage in place to meet financial needs should a disability occur. The importance of this protection to sustain an income is underscored by the fact that 40 percent of respondents already report living paycheck to paycheck.
To begin, Goswami suggests considering the following:
* If you become sick or injured and are unable to work for a period of time, will you be able to continue to pay your bills? Which bills will you be able to continue to pay and which will you have to delay?
* If you have a nest egg of savings from which you plan to draw in an emergency, how long would that money last?
* How much income would you need to sustain mortgage payments, utilities, food and clothing costs, transportation needs and debt payments such as car and college loans if you were unable to work?
“Even people who are young or healthy can get sick or hurt. People may think they have coverage through workers compensation or Social Security but that is most often not the case. Most causes of disability are not work-related and, therefore, not covered by workers compensation. In addition, Social Security disability benefits are not available if you are expected to be out of work for less than a year,” says Goswami.
Goswami suggest these tips when obtaining coverage:
* If your employer provides a group disability plan, determine the percentage of income it covers, what the waiting period is before benefits begin and the length of time that you’d be covered.
* Is the amount of coverage provided by your employer enough for your financial situation? For example, group disability coverage offered by an employer as an employee benefit may not cover additional sources of income such as bonuses or incentive compensation. If your employer offers the opportunity to purchase additional coverage to meet your needs, there are advantages to buying disability protection through the workplace including the convenience, group rates, limited underwriting and payroll deductions.
* If you don’t have coverage through work or are not able to obtain enough, you should consider purchasing an individual disability income policy.
* A good rule of thumb is to buy enough disability insurance to protect 60 percent – 80 percent of your after-tax income to cover your essential monthly expenses. Many people – especially high-wage earners – will need an individual policy to maximize their income replacement percentage.
* If your group long-term disability plan is employer-paid, then 100 percent of the benefit will generally be taxable. Individual coverage is typically paid for with after-tax dollars, so these benefits are generally income tax-free.
* Most disability policies have a waiting period (elimination period) before benefits are paid. When purchasing an individual policy, the length of your waiting period should be determined by asking yourself, “How long can I go without a paycheck?” The longer the waiting period, the lower the premium.
* Be sure to understand the maximum duration that benefits will be paid. The most frequently offered benefit periods are two years, five years and to age 65.
Dev Goswami, CFP®, can be reached at (904) 541-1760, email [email protected] or visit www.devgoswami.com