Under current law, in addition to exposure to federal income taxation at graduated rates, wages and self-employment income are subject to FICA taxes of 15.3%. FICA taxes are comprised of Social Security taxes, and Medicare taxes.

The Social Security tax makes up 12.4% of the FICA tax, and applies to wages and self-employment income up to an annual ceiling ($106,800 in 2010). Self-employed individuals are responsible for paying this entire amount, but half of the amount paid may be deducted for Federal income tax purposes. Employees are responsible for paying only half of this tax, and the employer is responsible for paying the other half.

The Medicare tax makes up the remaining 2.9% of the FICA tax, and applies to all wages and self-employment income (i.e., no annual ceiling). Again, self-employed individuals are responsible for paying this entire amount, but may deduct half of the amount paid for Federal income tax purposes. Employees are responsible for paying only half of this tax (i.e., 1.45%, the "Employee's Medicare Tax"), and the employer is responsible for paying the other half (i.e., 1.45%, the "Employer's Medicare Tax").

Under the Health Care Act, beginning January 1, 2013, for individuals earning more than $200,000 per year ($250,000 for per year for married couples filing jointly), the Employee's Medicare Tax rate will increase by 0.9% on wages earned in excess of those threshold amounts. As a result, those affected will have their Employee's Medicare Tax increase from 1.45% to 2.35%. There is no increase to the Employer's Medicare Tax. Self-employed individuals are subject to a similar increase, resulting in an increase from 2.9% to 3.8% on all self-employment income earned over the threshold amounts. However, the amount that may be deducted by a self-employed individual remains at only half of the 2.9% - stated differently, self-employed individuals may not deduct any portion of the additional 0.9% tax.

For more information regarding this topic, please e-mail your requests to Julie L. Cavanaugh, or call Julie at (248) 457-7228.

Checklists help avoid oversights, especially when time is short. With the last quarter of what some have dubbed the "year of the Roth IRA Conversion" nearly upon us, we offer our 2010 Roth IRA Conversion Checklist.

It can be found here: 2010 Roth IRA Conversion Checklist

For more information regarding this topic, please e-mail your requests to Salvatore J. LaMendola, or call Sal at (248) 457-7204.

On January 16, 2008, the United States Supreme Court issued its decision in Knight v Commissioner, 552 U.S. 181, 128 S.Ct. 782 (2008). The Court held that costs paid to an investment advisor by a non-grantor trust or estate generally are subject to the 2% floor for miscellaneous itemized deductions. The test set forth by the Supreme Court was whether or not trust-related administrative expenses constituted expenses which are "commonly incurred by individual taxpayers". The Supreme Court stated that IRC Section 67 "excepts from the 2% floor only those costs that would be uncommon for such a hypothetical taxpayer to incur." The Court held that investment advisory expenses are not among such "uncommon expenses, insofar that it is not uncommon or unusual for individuals to hire an investment advisor." In other words, in order for a non-grantor trust or estate to deduct investment advisory fees, the 2% floor for miscellaneous itemized deductions must first be satisfied.

In light of the Knight decision, the Treasury Department and Internal Revenue Service stated that it would promulgate final regulations consistent with the Supreme Court's decision. To date, the government has not concluded its final regulations. In 2008, the Treasury Department issued IRS Notice 2008-32 which provided that taxpayers could, in fact, deduct the full amount of "unbundled" fiduciary fees (i.e., those that are integrated as part of one commission or fee paid to the Trustee or Personal Representative) without regard to the 2% floor. Later in 2008, the IRS published another notice which extended a taxpayer's ability to deduct the full amount of the unbundled fiduciary fees to taxable years that began before January 1, 2009.

In light of the fact that the IRS has not concluded its final regulations, it recently issued Notice 2010-32 which further extends its interim guidance to allow a full deduction of "bundled" fiduciary fees without regard to the 2% floor for all tax years beginning before January 1, 2010.

We will keep you apprised (in a future edition of our E-Updates) once the final regulations have been promulgated.

For more information regarding this topic, please e-mail your requests to Thomas P. Cavanaugh, or call Tom at (248) 457-7218.

In an interview aired on C-SPAN, Assistant Treasury Secretary for Tax Policy, Michael Mundaca, suggested that the Obama Administration was considering an election to apply the 2009 estate tax to 2010 decedents. The election could allow estates valued under $3.5 million to avoid the estate tax while gaining a stepped-up basis in assets beyond the $1.3 million exemption currently allowed.

"If you have an estate that is below that amount, you're sort of stuck now," said Michael Mundaca. "The problem is for a lot of people not having the estate tax in place is going to be a burden." Giving taxpayers a choice of whether to apply the tax to 2010 transactions is an option being considered and discussed with lawmakers, Mundaca said. "That is one of the options that is on the table," Mundaca said.

The U.S. House of Representatives, largely led by Democrats, last year had passed an extension of the 2009 rates, but Senators clashed over the level of the tax. The Obama administration backs the House of Representatives policy, which taxed estates at 45 percent above an exemption of $3.5 million for individuals and above $7 million for couples (with proper planning). Without action, under current law the top tax rate will rise to 55 percent, with an exemption level of $1 million, in 2011.

Republicans, who'd prefer an exemption of $5 million (adjusted for inflation) with a top rate of 35%, or no estate tax at all, should be motivated to make a deal with Democrats.

For more information regarding this topic, please e-mail your requests to Julius Giarmarco, or call Julius at (248) 457-7200.