[Revenews] 2010 Connection Issues

[PURKEYPILE Steve]

For tax year 2010, Oregon is tied to the definition of federal taxable income as of December 31, 2009.   Couple that with a very busy Congressional session in 2010 and we've got a great deal of uncertainly when it comes to filing the 2010 Oregon tax return.   We know that the upcoming 2011 legislature will consider reconnect bills but given the state's challenging budget situation, there is no way to predict what a final bill may look like.  At this time, if your client is affected by any of the issues listed below, there are two options:
Option 1: Delay the filing of the tax return until the legislature indicates its policy preference in this area. This does not necessarily mean that you have to wait to file until the legislature has adjourned.  We hope the legislature will act quickly to resolve this issue early on in the session.
Option 2: Go ahead and file under current law.  If you choose this option, an add back on the Oregon return will be required in some situations.  Below is a list of what codes to use when adding back items for Oregon purposes.  We will keep you updated via this listserve and our website of any developments.

(Note: For tax year 2011, current law provides for the rolling reconnect to resume, but this is also subject to change in the 2011 session.)

100% expensing of equipment and machinery by businesses - this provision is effective for items placed in service after September 8, 2010.  Prior law (which Oregon is also not connected to) allowed 50% expensing for items placed in service in 2010.  Current Oregon law allows for up to $134,000 in expensing up to a ceiling of $530,000.  The difference between the amount allowed under federal law and Oregon law must be added back using addition code 101.

Tax Extenders extended for two more years - this provision extends expired (or expiring) tax deductions for two more years (2010 and 2011).   Under current Oregon law, these tax deductions have expired for 2010 and, if taken on the federal return, must be added back to the Oregon return using addition codes listed below. The provisions are:
*           Tax free distributions from IRAs for charitable purposes (use addition code 131)
*           Contribution of capital gain real property for conservation purposes (use addition code 131)
*           The $250 above-the-line deduction for educators who purchase items for their classrooms or students (use addition code 132)
*           The option to deduct state and local sales tax in lieu of income tax (this should reduce federal itemized deductions by using line 24, as usual)
*           The tuition and fees above-the-line deduction (Note: For 2010, a subtraction is currently not allowed on the Oregon return when a taxpayer elects a federal education credit in lieu of the tuition and fees deduction) (use addition code 132)


Self-Employment tax deduction for health insurance - this provision allows business owners to deduct health insurance costs incurred in 2010 for themselves and their family members in calculating their 2010 self-employment tax.  When taxpayers proceed to take the above-the-line deduction of ½ of their self-employment tax they will be receiving less of a deduction than they would be allowed under current Oregon law.  Taxpayers should use code 346 to take a subtraction for the difference between ½ of the self-employment tax deduction (Form 1040, line 27) calculated with the health insurance deduction and without.

Imputed income for health coverage provided to certain adult children - this provision of the health reform law extends the tax exemption for health insurance coverage provided to adult children by their parent's employer for those who are age 19-26 (keeping in mind that previous law provided for an exemption for adult children through age 23 if they are also a student - this is still the case).  The fair market value of the cost of health insurance is imputed income and is taxable to Oregon*.  Keep in mind that the cost of the coverage is figured as if the insurance were purchased in an arm's length transaction and not what the employer may actually be paying.  Taxpayers should use addition code 133 to report this imputed income on the Oregon return. (*Note that this provision only pertains to tax year 2010.  Current law provides that we return to a rolling reconnect beginning in tax year 2011.)

Please continue to keep an eye out for future listserve posts or check the practitioner page of our webpage for more information in the weeks ahead.

Questions?  Do not reply to this email.  Email your questions to prac.revenue at state.or.us<mailto:prac.revenue at state.or.us>.



Steve Purkeypile
Personal Income Tax Policy
Oregon Department of Revenue


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