This newsletter is intended to provide generalized information that is appropriate in certain situations. It is not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding federal tax penalties that may be imposed on any taxpayer. The contents of this newsletter should not be acted upon without specific professional guidance. Please call us if you have questions.
The Patient Protection and Affordable Care Act of 2010, in concert with the enactment of the Health Care and Education Tax Credits Reconciliation Act of 2010, resulted in a number of changes to the US tax code. As such there are a number of tax implications for individuals and businesses. With healthcare exchanges set to open on October 1, it's time to take a closer look at what it all means for you.
Healthcare Exchanges, which are also referred to as Health Insurance Marketplaces, are officially open for enrollment on October 1, 2013. Some of these exchanges are run by the state in which you reside. Others are run by the federal government.
Individuals (including self-employed) who do not currently have insurance or buy insurance on their own can use these marketplaces to buy insurance, which becomes effective January 1, 2014. When you get health insurance through the Marketplace, you may be able to get the new advance Premium Tax Credit that will immediately help lower your monthly premium.
The Congressional Budget Office projects that seven million--primarily uninsured people--will use the exchanges to purchase private health insurance. The rest, including the 170.9 million people already covered by their employer's insurance, as well as the 101.5 million enrolled in government health programs, are not affected and need not take any action.
Starting January 2014, United States citizens and legal residents must obtain minimum essential health care coverage for themselves and their dependents, have an exemption from coverage, or make a payment when filing a 2014 tax return in 2015. The Individual Mandate is also known as the Individual Shared Responsibility Payment.
The payment varies and is based on income level. In 2014, the basic penalty for an individual (no dependents) is $95 or 1% of your yearly income (whichever is higher), with substantial increases in subsequent years. For example, in 2015, the penalty is $325 or approximately 2% of income, whichever is higher. In 2016, it increases to $695 or 2.5% of income (again, whichever is higher), indexed for inflation thereafter.
Most people already have qualifying health care coverage and will not need to do anything more than maintain that coverage throughout 2014. Self-insured ERISA policies used by larger employers, as well as Medicare, Medicaid, and CHIP (Children's Health Insurance Program), and all of the health insurance plans offered by the exchanges fall under the category of minimum essential health care coverage.
Note: Certain individuals are exempt from the tax and include: (1) people with religious objections; (2) American Indians with coverage through the Indian Health Service; (3) undocumented immigrants; (4) those without coverage for less than three months; (5) those serving prison sentences; (6) those for whom the lowest-cost plan option exceeds 8% of annual income; and (7) those with incomes below the tax filing threshold who do not file a tax return($10,000 for singles and $20,000 for couples under 65 in 2013).
Refundable Tax Credit
Effective in 2014, certain taxpayers will be able to use a refundable tax credit to offset the cost of health insurance premiums so that their insurance premium payments do not exceed a specific percentage of their income. Qualified individuals are those with incomes between 133 percent and 400 percent of the federal poverty level. A sliding scale based on family size will be used to determine the amount of the credit. In addition, married taxpayers must file joint returns to qualify.
FSA (Flexible Spending Arrangements) contributions are limited to $2,500 per year starting in 2013 and indexed for inflation after that.
New Rules for HSAs and Archer MSAs
Tax on non-qualified distributions from HSAs and Archer MSAs that are used to cover the cost of over the counter medicine without a script increased to 20 percent starting in 2011. Medical devices, eyeglasses, contact lenses, copays, and deductibles are not affected, nor is Insulin even if it is non-prescription.
Medicare Part D
Medicare Part D, the tax deduction for employer provided retirement prescription drug coverage, was eliminated in 2013.
Increase in AGI Limit for Deductible Medical Expenses
In 2013 the limit for deductible medical expenses increased to 10 percent of AGI (7.5% in prior years); however, the 7.5 percent threshold continues through 2016 for taxpayers aged 65 and older, including those turning 65 by December 31, 2016.
Health Coverage of Older Children
The cost of employer provided health care coverage for children (through age 26) on tax returns is excluded from gross income.
Medicare Tax Increases for High Income Earners
Starting in 2013, there is an additional 0.9 percent Medicare tax on wages above $200,000 for individuals ($250,000 married filing jointly).
Also starting in 2013, there is a new Medicare tax of 3.8 percent on investment (unearned) income for single taxpayers with modified adjusted gross income (MAGI) over $200,000 ($250,000 joint filers). Investment income includes dividends, interest, rents, royalties, gains from the disposition of property, and certain passive activity income. Estates, trusts and self-employed individuals are all liable for the new tax.
Exemptions are available for business owners and income from certain retirement accounts, such as pensions, IRAs, 401(a), 403(b), and 457(b) plans, is exempt.
If you run an income-generating business with no employees, then you're considered self-employed (not an employer) and can get coverage through the Marketplace and use it to find coverage that fits your needs.
Note: You are not considered an employer even if you hire independent contractors to do some work.
If you currently have individual insurance, that is a plan you bought yourself and not the kind you get through an employer, you may be able to change to a Marketplace plan.
Note: You can't be denied coverage or charged more because you have a pre-existing health condition.
Small Businesses (50 or Fewer Employees)
If you have 50 or fewer full-time equivalent (FTE) employees (generally, workers whose income you report on a W-2 at the end of the year) you are considered a small business under the health care law.
As a small business, you may get insurance for yourself and your employees through the SHOP (Small Business Health Options Programs) Marketplace. This applies to non-profit organizations as well.
And, if you have fewer than 25 employees, you may qualify for the Small Business Tax Credit (see next section). Non-profit organizations can get a smaller tax credit.
Note: Beginning in 2016, the SHOP Marketplace will be open to employers with 100 or fewer FTEs.
As an employer, you must provide notification to your employees of coverage options available through the Marketplace and are required to provide this notice to all current employees and to each new employee beginning October 1st, 2013, regardless of plan enrollment status or full or part-time employment. The Department of Labor has sample notices that employers can use to comply with this regulation. One notice is for employers who do not offer a health care plan and the second for employers who offer a health care plan.
Small Business Health Care Tax Credit
Small businesses and tax-exempt organization that employ 25 or fewer, full-time equivalent workers with average incomes of $50,000 or less, and that pay at least half (50%) of the premiums for employee health insurance coverage are eligible for the Small Business Health Care Tax Credit. For tax years 2010 through 2013, the maximum credit is 35 percent for small business employers and 25 percent for small tax-exempt employers such as charities.
Starting in 2014, the tax credit is worth up to 50% of your contribution toward employees' premium costs (up to 35% for tax-exempt employers). The tax credit is highest for companies with fewer than 10 employees who are paid an average of $25,000 or less. The smaller the business, the bigger the credit is.
Note: The credit is available only if you get coverage through the SHOP Marketplace.
Additional Tax on Businesses Not Offering Minimum Essential Coverage
Effective January 1, 2015 an additional tax will be levied on businesses with 50 or more full-time equivalent (FTE) employees that do not offer minimum essential coverage. This penalty is sometimes referred to as the Employer Shared Responsibility Payment or "Play or Pay" penalty.
You may have to pay this additional tax if you have 50 or more full-time equivalent employees and at least 1 of your full-time employees gets lower costs on their monthly premiums through the Marketplace.
Note: Employers with fewer than 50 FTE employees are considered small businesses and are exempt from the additional tax.
The amount of the annual Employer Shared Responsibility Payment is based partly on whether you offer insurance.
Note: Unlike employer contributions to employee premiums, the Employer Shared Responsibility Payment is not tax deductible.
A health plan meets minimum value if it covers at least 60% of the total allowed costs of benefits provided under the plan. To determine whether other coverage meets minimum value, please contact us for assistance.
Note: All plans in the Marketplace meet minimum value, so any coverage offered through the SHOP Marketplace should qualify.
Excise Tax on High Cost Employer-Sponsored Insurance
Effective in 2018, a 40 percent excise tax indexed for inflation will be imposed on employers with insurance plans where the annual premium exceeds $10,200 (individual) or $27,500 (family). For retirees age 55 and older, the premium levels are higher, $11,850 for individuals and $30,950 for families.
Excise Tax on Medical Devices
Effective January 1, 2014, a 2.3 percent tax will be levied on manufacturers and importers on the sale of certain medical devices.
Indoor Tanning Services
A 10 percent excise tax on indoor tanning services went into effect on July 1, 2010. The tax doesn't apply to phototherapy services performed by a licensed medical professional on his or her premises. There's also an exception for certain physical fitness facilities that offer tanning as an incidental service to members without a separately identifiable fee.
Don't hesitate to call us if you need assistance navigating the complexities of the new health care act. We're here to help.
Lending money to a cash-strapped family member or friend is a noble and generous offer that just might make a difference. But before you hand over the cash, you need to plan ahead to avoid tax complications down the road.
Let's say you decide to loan $5,000 to your daughter who's been out of work for over a year and is having difficulty keeping up with the mortgage payments on her condo. While you may be tempted to charge an interest rate of zero percent, you should resist the temptation. Here's why.
When you make an interest-free loan to someone, you will be subject to "below market interest rules". IRS rules state that you need to calculate imaginary interest payments from the borrower. These imaginary interest payments are then payable to you and you will need to pay taxes on these interest payments when you file a tax return. Further, if the imaginary interest payments exceed $14,000 for the year, there may be adverse gift and estate tax consequences.
Exception: The IRS lets you ignore the rules for small loans ($10,000 or less), as long as the aggregate loan amounts to a single borrower are less than $10,000 and the borrower doesn't use the loan proceeds to buy or carry income-producing assets.
In addition, if you don't charge any interest, or charge interest that is below market rate (more on this below), then the IRS might consider your loan a gift, especially if there is no formal documentation (i.e. written agreement with payment schedule) and you go to make a nonbusiness bad debt deduction if the borrower defaults on the loan--or the IRS decides to audit you and decides your loan is really a gift.
Formal documentation generally refers to a written promissory note that includes the interest rate, a repayment schedule showing dates and amounts for all principal and interest, and security or collateral for the loan, such as a residence (see below). Make sure that all parties sign the note so that it's legally binding.
As long as you charge an interest rate that is at least equal to the applicable federal rate (AFR) approved by the Internal Revenue Service, you can avoid tax complications and unfavorable tax consequences.
AFRs for term loans, that is, loans with a defined repayment schedule, are updated monthly by the IRS and published in the IRS Bulletin. AFRs are based on the bond market, which change frequently. For term loans, use the AFR published in the same month that you make the loan. The AFR is a fixed rate for the duration of the loan.
Any interest income that you make from the term loan is included on your Form 1040. In general, the borrower, in this case your daughter cannot deduct interest paid, but there is one exception: if the loan is secured by her home, then the interest can be deducted as qualified residence interest--as long as the promissory note for the loan was secured by the residence.
If you have questions about the tax implications of loaning a family member money, don't hesitate to call us. We're here to help.
Millions of Americans have hobbies such as sewing, woodworking, fishing, gardening, stamp and coin collecting, but when that hobby starts to turn a profit, it might just be considered a business by the IRS.
Definition of a Hobby vs. a Business
The IRS defines a hobby as an activity that is not pursued for profit. A business, on the other hand, is an activity that is carried out with the reasonable expectation of earning a profit.
The tax considerations are different for each activity so it's important for taxpayers to determine whether an activity is engaged in for profit as a business or is just a hobby for personal enjoyment.
Of course, you must report and pay tax on income from almost all sources, including hobbies. But when it comes to deductions such as expenses and losses, the two activities differ in their tax implications.
Is Your Hobby Actually a Business?
If you're not sure whether you're running a business or simply enjoying a hobby, here are some of the factors you should consider:
An activity is presumed to be for profit if it makes a profit in at least three of the last five tax years, including the current year (or at least two of the last seven years for activities that consist primarily of breeding, showing, training, or racing horses).
The IRS says that it looks at all facts when determining whether a hobby is for pleasure or business, but the profit test is the primary one. If the activity earned income in three out of the last five years, it is for profit. If the activity does not meet the profit test, the IRS will take an individualized look at the facts of your activity using the list of questions above to determine whether it's a business or a hobby. (It should be noted that this list is not all-inclusive.)
Business Activity: If the activity is determined to be a business, you can deduct ordinary and necessary expenses for the operation of the business on a Schedule C or C-EZ on your Form 1040 without considerations for percentage limitations. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is appropriate for your business.
Hobby: If an activity is a hobby, not for profit, losses from that activity may not be used to offset other income. You can only deduct expenses up to the amount of income earned from the hobby. These expenses, with other miscellaneous expenses, are itemized on Schedule A and must also meet the 2 percent limitation of your adjusted gross income in order to be deducted.
What Are Allowable Hobby Deductions?
If your activity is not carried on for profit, allowable deductions cannot exceed the gross receipts for the activity.
Note: Internal Revenue Code Section 183 (Activities Not Engaged in for Profit) limits deductions that can be claimed when an activity is not engaged in for profit. IRC 183 is sometimes referred to as the "hobby loss rule."
Deductions for hobby activities are claimed as itemized deductions on Schedule A, Form 1040. These deductions must be taken in the following order and only to the extent stated in each of three categories:
If your hobby is regularly generating income, it could make tax sense for you to consider it a business because you might be able to lower your taxes and take certain deductions.
Still wondering whether your hobby is actually a business? Give us a call; we'll help you figure it out.
With floods, tornadoes, hurricanes, earthquakes, and other natural disasters affecting so many people throughout the US this year, many have been left wondering how they're going to pay for the cleanup or when their businesses will be able to reopen. The good news is that there is some relief for tax payers--but only if you meet certain conditions.
Recovery efforts after natural disasters can be costly. For instance, when Hurricane Irene struck last year causing widespread flooding, many homeowners were not covered because most standard insurance policies do not cover flood damage.
Tax Relief for Homeowners
Fortunately, personal casualty losses are deductible on your tax return as long as the property is located in a federally declared disaster zone AND these four conditions are met:
1. The loss was caused by a sudden, unexplained, or unusual event.
Natural disasters such as flooding, hurricanes, tornadoes, and wildfires all qualify as sudden, unexplained, or unusual events.
2. The damages were not covered by insurance.
You can only claim a deduction for casualty losses that are not covered or reimbursed by your insurance company. The catch here is that if you submit a claim to your insurance company late in the year, your claim could still be pending come tax time. If that happens you can file an extension on your taxes. Call us if you need help filing an extension or have any questions about what losses you can deduct.
3. Your losses were sufficient to overcome reductions required by the IRS.
The IRS requires several "reductions" in order to claim casualty losses on your tax forms. The first is that effective December 31, 2009 you must subtract $100 from the total loss amount. This is referred to as the $100 loss limit.
Second, you must reduce the amount by 10 percent of your adjusted gross income (AGI) or adjusted gross income. For example, if your AGI is $25,000 and your insurance company paid for all of the losses you incurred as a result of flooding except $3,100 you would first subtract $100 and then reduce that amount by $2500. The amount you could deduct as a loss would be $500.
4. You must itemize.
As it now stands, you must itemize your taxes in order to claim the deduction. If you normally don't itemize, but have a large casualty loss you can calculate your taxes both ways to figure out which one gives you the lowest tax bill. Contact us if you need assistance figuring out which method is best for your circumstances.
Tax Relief for Homeowners and Businesses
The IRS often provides tax relief for those affected by natural disasters such as the individuals and businesses impacted by the recent severe storms, flooding, landslides and mudslides in Colorado. The tax relief postpones certain tax filing and payment deadlines to Dec. 2, 2013. It includes corporations and businesses that previously obtained an extension until Sept. 16, 2013, to file their 2012 returns and individuals and businesses that received a similar extension until Oct. 15. It also includes the estimated tax payment for the third quarter of 2013, which would normally be due Sept. 16.Certain taxpayers in the counties of Adams, Boulder, Larimer and Weld will receive tax relief, and other locations may be added in coming days following additional damage assessments by the Federal Emergency Management Agency (FEMA). If you've been affected by a natural disaster, please call our office. We'll help you figure out when your tax payments are due.
Tax Relief Tips
The IRS also states that you have two options when it comes to deducting casualty losses on your tax returns. You can deduct the losses in the year in which they occurred or claim them for the prior year's return. So if you were affected by a natural disaster this year you can claim your losses on your 2013 tax return or amend your 2012 tax return and deduct your losses. If you choose to deduct losses on your 2012 tax return, then you have one year from the date the tax return was due to file it.
Confused about whether you qualify for tax relief after a recent natural disaster? Give us a call. We'll help you figure out the best way to handle casualty losses related to hurricanes and other natural disasters.
October 1, 2013 marked the first day of the shutdown of the federal government--the first since 1995-1996. Without a clear idea of how long this "lapse in appropriations" is expected to continue, here's a look at how taxpayers are affected.
During the shutdown, approximately 86,000 IRS employees have been furloughed and IRS operations are limited. Despite this, tax law remains in effect, and in that respect it's "business as usual."
Individuals and businesses should keep filing their tax returns and making deposits with the IRS, as they are required to do so by law. All other tax deadlines remain in effect, including those covering individuals, corporations, partnerships and employers. The regular payroll tax deadlines remain in effect as well.
Where's My Refund?
Although the IRS will accept and process all tax returns with payments, it is unable to issue refunds during the shutdown. Tax refunds will not be issued until normal government operations resume. This includes the "Where's my refund?" service.
October 15 Tax Filing Deadline
Individuals who requested an extension of time to file should file their returns by October 15, 2013. According to the IRS, more than 12 million taxpayers requested an automatic six-month extension this year, but have yet to file.
Members of the military and others serving in Afghanistan or other combat zone localities typically have until at least 180 days after they leave the combat zone to both file returns and pay any taxes due. People with extensions in parts of Colorado affected by severe storms, flooding, landslides and mudslides also have more time, until Dec. 2, 2013, to file and pay.
Taxpayers are urged to file electronically, because most of these returns will be processed automatically. You can file your tax return electronically or on paper--although the processing of paper returns will be delayed until full government operations resume. Payments accompanying paper tax returns will still be accepted as the IRS receives them.
Tax software companies, tax practitioners and Free File will remain available to assist with taxes and continue to accept and file tax returns.
For taxpayers seeking assistance, only the automated applications on the regular 800-829-1040 telephone line will remain open.
The IRS website, www.IRS.gov, will remain available, although some interactive features may not be available.
Individual taxpayers are still able obtain to tax transcript using the automated process. Transcripts will be sent to their address of record within 5 to 10 calendar days. Please note however, that during the shutdown transcript requests by third parties, such as financial institutions, cannot be processed through the Return and Income Verification Services and Income Verification Express Service. These processes are not automated and require actions by IRS employees, are not available due to the current lapse in government appropriations.
Levies and Liens
During the shutdown, no levies or liens--either those generated systemically or those manually generated by employees--will be issued; however, taxpayers may still receive levy or lien correspondence with October mailing dates. These notices were printed before IRS shut down operations were fully complete. It is standard practice for these notices to be printed with a future date to allow for mailing time to reach taxpayers.
In addition, the IRS notes that other letters related to liens and levies, such as notifications that a taxpayer could potentially be subject to a lien or a levy at a future date, continue to be automatically generated by IRS systems during the appropriations lapse.
Note: These notices are not actual levies or liens; just a notification of potential future action. Please contact us if you need more information.
During the shutdown, the only enforcement actions undertaken by the IRS for non-criminal cases involve isolated instances where immediate action is necessary to protect the government's interest. As such, any enforcement action in this category, seizures for instance, would be extremely limited, for example, where the expiration of the statute of limitations on collection action is imminent.
For criminal issues, most IRS Criminal Investigation employees continue to work during this period, similar to other federal law-enforcement agencies, as well as undercover operations.
Tax Court closed at noon on Tuesday, October 1 and stopped accepting and serving documents such as petitions and motions, as well as electronic filings and hand deliveries. For those with deadlines that cannot be extended (i.e. set by statute), documents may be sent by US mail. The postmark serves as the filing date. If you have any questions relating to tax court, please contact us.
IRS - Miscellaneous
During the shutdown, all IRS audits and examinations will stop. All non-automated collection activity will also stop.
During the shutdown, the IRS will take also steps to protect ongoing bankruptcy, lien, and seizure cases and to prevent lapses in the statute of limitation.
Social Security checks will continue to be issued and mailed out via US mail, which is not shut down as it is not funded by the federal government. Field offices are open, but assistance may be limited.
Don't hesitate to call us if you need assistance. We're here to help!
If you itemize deductions on your tax return, you may be able to deduct certain miscellaneous expenses, which might reduce your federal income tax. With that in mind, let's take a closer look at miscellaneous deductions that might benefit you this tax season.
Deductions Subject to the Two Percent Limit. You can deduct most miscellaneous expenses only if they exceed two percent of your adjusted gross income. These include expenses such as:
Deductions Not Subject to the Two Percent Limit. Some deductions are not subject to the two percent of AGI limit. Some expenses on this list include:
Miscellaneous deductions are reported on Schedule A, Itemized Deductions. Be sure to keep records of your deductions as a reminder when you file your taxes in 2014.
Keep in mind that many expenses are not deductible. For example, you can't deduct personal living or family expenses. If you have questions about whether your expenses are deductible or need assistance with Schedule A, don't hesitate to give us a call.
Some people are surprised to learn they're due a large federal income tax refund when they file their taxes. Others are surprised that they owe more taxes than they expected. If this has happened to you, then it's time to check your federal tax withholding or payments.
Here are some tips to help you bring the tax you pay during the year closer to what you'll actually owe--and avoid a tax surprise when you file your 2013 tax return next year.
Wages and Income Tax Withholding
Simply go to the "Resources" section of our website, click on the Financial Calculators, select Taxation and look for Should I Adjust My Payroll Withholdings?
Self-Employment and Other Income
Questions about federal tax withholding? Give us a call today. We've got answers.
Whether you play the lottery, roll the dice, play cards, or bet on the ponies, all your winnings are taxable. If you're a casual gambler, here are six tips on figuring gambling income and loss.
1. Gambling income includes winnings from lotteries, raffles, horse races and casinos. It also includes cash and the fair market value of prizes you receive, such as cars and trips.
2. If you win, you may receive a Form W-2G, Certain Gambling Winnings, from the payer. The form reports the amount of your winnings to you and the IRS. The payer issues the form depending on the type of gambling, the amount of winnings, and other factors. You'll also receive a Form W-2G if the payer withholds federal income tax from your winnings.
3. You must report all your gambling winnings as income on your federal income tax return. This is true even if you do not receive a Form W-2G.
4. If you're a casual gambler, report your winnings on the "Other Income" line of your Form 1040, U. S. Individual Income Tax Return.
5. You may deduct your gambling losses on Schedule A, Itemized Deductions. The deduction is limited to the amount of your winnings. You must report your winnings as income and claim your allowable losses separately. You cannot reduce your winnings by your losses and report the difference.
6. You must keep accurate records of your gambling activity. This includes items such as receipts, tickets or other documentation. You should also keep a diary or similar record of your activity. Your records should show your winnings separately from your losses.
If you have questions about gambling income and losses, don't hesitate to call us.
Newlyweds and the recently divorced should ensure the name on their tax return matches the name registered with the Social Security Administration (SSA). A mismatch could unexpectedly increase a tax bill or reduce the size of any refund.
If you have any questions related to your requirements to the IRS after getting married or divorced, or need help changing your name with the SSA, give us a call. We're here to help.
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