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 resulted in several changes to the U.S. tax code that affect individuals purchasing health care insurance through the health care exchanges. Let's take a closer look at what it all means for you.
Individual Shared Responsibility Payment
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 percent of your yearly income (whichever is higher), with substantial increases in subsequent years. For example, in 2015, the penalty is $325 or approximately 2 percent of income, whichever is higher. In 2016, it increases to $695 or 2.5 percent of income (again, whichever is higher), indexed for inflation thereafter.
The individual shared responsibility payment is capped at the cost of the national average premium for the bronze level health plan available through the Health Insurance Marketplace in 2014. You will make the payment when you file your 2014 federal income tax return in 2015.
For example, a single adult under age 65 with household income less than $19,650 (but more than $10,150) would pay the $95 flat rate. However, a single adult under age 65 with household income greater than $19,650 would pay an annual payment based on the 1 percent rate.
For any month in 2014 that you or any of your dependents don't maintain coverage and don't qualify for an exemption, you will need to make an individual shared responsibility payment with your 2014 tax return filed in 2015.
However, if you went without coverage for less than three consecutive months during the year you may qualify for the short coverage gap exemption and will not have to make a payment for those months. If you have more than one short coverage gap during a year, the short coverage gap exemption only applies to the first.
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.
Qualifying coverage does not include coverage that may provide limited benefits, such as coverage only for vision care or dental care, workers' compensation, or coverage that only covers a specific disease or condition.
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 percent 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).
A special hardship exemption applies to individuals who purchase their insurance through the Health Insurance Marketplace during the initial enrollment period for 2014 but due to the enrollment process have a coverage gap at the beginning of 2014.
Premium 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.
If you purchased coverage through the Health Insurance Marketplace (sometimes referred to as health care exchanges), you may be eligible for the premium tax credit. This refundable tax credit helps people with moderate incomes afford health insurance coverage they purchase through the exchange.
The premium tax credit can help make purchasing health insurance coverage more affordable for people with moderate incomes. To be eligible for the credit, you generally need to satisfy three rules.
First, you need to get your health insurance coverage through the Health Insurance Marketplace. The open enrollment period to purchase health insurance coverage for 2014 through the Health Insurance Marketplace runs from October 1, 2013 through March 31, 2014.
Second, you need to have household income between one and four times the federal poverty line. For a family of four for tax year 2014, that means income from $23,550 to $94,200.
Third, you can't be eligible for other coverage, such as Medicare, Medicaid, or sufficiently generous employer-sponsored coverage.
If you are eligible for the credit, you can choose to "get it now" by having some or all of the credit paid in advance. These payments go directly to your insurance company to lower what you pay out-of-pocket for your monthly premiums during 2014. Or you "get it later" by waiting to get the credit when you file your 2014 tax return in 2015.
If you wait to get the credit, it will either increase your refund or lower your balance due. Your 2014 tax return will ask if you had insurance coverage or qualified for an exemption. If not, you may owe a shared responsibility payment when you file in 2015.
If you choose to receive the credit in advance, changes in your income or family size will affect the credit that you are eligible to receive. If the credit on your tax return you file in 2015 does not match the amount you have received in advance, you will have to repay any excess advance payment, or you may get a larger refund if you are entitled to more.
It is important to notify the Health Insurance Marketplace about changes in your income or family size as they happen during 2014 because these changes may affect your premium tax credit.
Changes in circumstances that you should report to the Health Insurance Marketplace include, but are not limited to:
• an increase or decrease in your income
• marriage or divorce
• the birth or adoption of a child
• starting a job with health insurance
• gaining or losing your eligibility for other health care coverage
• changing your residence
Reporting the changes will help you avoid getting too much or too little advance payment of the premium tax credit. Getting too much means you may owe additional money or get a smaller refund when you file your taxes. Getting too little could mean missing out on premium assistance to reduce your monthly premiums.
Repayments of excess premium assistance may be limited to an amount between $400 and $2,500 depending on your income and filing status. However, if advance payment of the premium tax credit was made but your income for the year turns out to be too high to receive the premium tax credit, you will have to repay all of the payments that were made on your behalf, with no limitation. Therefore, it is important that you report changes in circumstances that may have occurred since you signed up for your plan.
Changes in circumstances also may qualify you for a special enrollment period to change or get insurance through the Health Insurance Marketplace. In most cases, if you qualify for the special enrollment period, you will have sixty days to enroll following the change in circumstances.
Don't hesitate to call us if you need assistance navigating the complexities of the Affordable Care Act. We're here for you!
Tax rules on rental income from second homes can be complicated, particularly if you rent the home out for several months of the year, but also use the home yourself.
There is however, one provision that is not complicated. Homeowners who rent out their property for 14 or fewer days a year can pocket the rental income, tax-free.
Known as the "Master's exemption," it is used by homeowners near the Augusta National Golf Club in Augusta, GA who rent out their homes during the Master's Tournament (for as much as $20,000!). It is also used by homeowners who rent out their homes for movie productions or those whose residences are located near Super Bowl sites or national political conventions.
Tip: If you live close to a vacation destination such as the beach or mountains, you may be able to make some extra cash by renting out your home (principal residence) when you go on vacation--as long as it's two weeks or less. And, although you can't take depreciation or deduct for maintenance, you can deduct mortgage interest, property taxes, and casualty losses on Schedule A.
In general, income from rental of a vacation home for 15 days or longer must be reported on your tax return on Schedule E, Supplemental Income and Loss. Your rental income may also be subject to the net investment income tax. You should also keep in mind that the definition of a "vacation home" is not limited to a house. Apartments, condominiums, mobile homes, and boats are also considered vacation homes in the eyes of the IRS.
Further, the IRS states that a vacation home is considered a residence if personal use exceeds 14 days or more than 10 percent of the total days it is rented to others (if that figure is greater). When you use a vacation home as your residence and also rent it to others, you must divide the expenses between rental use and personal use, and you may not deduct the rental portion of the expenses in excess of the rental income.
Example: Let's say you own a house in the mountains and rent it out during ski season, typically between mid-December and mid-April. You and your family also vacation at the house for one week in October and two weeks in August. The rest of the time the house is unused.
The family uses the house for 21 days and it is rented out to others for 121 days for a total of 142 days of use during the year. In this scenario, 85 percent of expenses such as mortgage interest, property taxes, maintenance, utilities, and depreciation can be written off against the rental income on Schedule E. As for the remaining 15 percent of expenses, only the owner's mortgage interest and property taxes are deductible on Schedule A.
Questions about vacation home rental income? Give us a call. We'll help you figure it out.
Of all the retirement plans available to small business owners, the SIMPLE IRA plan (Savings Incentive Match PLan for Employees) is the easiest to set up and the least expensive to manage.
These plans are intended to encourage small business employers to offer retirement coverage to their employees. SIMPLE IRA plans work well for small business owners who don't want to spend a lot of time and pay high administration fees associated with more complex retirement plans.
SIMPLE IRA plans really shine for self-employed business owners. Here's why...
Self-employed business owners are able to contribute both as employee and employer, with both contributions made from self-employment earnings.
SIMPLE IRA plans calculate contributions in two steps:
1. Employee out-of-salary contribution
The limit on this "elective deferral" is $12,000 in 2014, after which it can rise further with the cost of living.
Catch-up. Owner-employees age 50 or older can make an additional $2,500 deductible "catch-up" contribution (for a total of $14,500) as an employee in 2014.
2. Employer "matching" contribution
The employer match equals a maximum of 3 percent of employee's earnings.
Example: A 52-year-old owner-employee with self-employment earnings of $40,000 could contribute and deduct $12,000 as employee, and an additional $2,500 employee catch-up contribution, plus $1,200 (3 percent of $40,000) employer match, for a total of $15,700.
SIMPLE IRA plans are an excellent choice for home-based businesses and ideal for full-time employees or homemakers who make a modest income from a sideline business.
If living expenses are covered by your day job (or your spouse's job), you would be free to put all of your sideline earnings, up to the ceiling, into SIMPLE IRA plan retirement investments.
A Truly Simple Plan
A SIMPLE IRA plan is easier to set up and operate than most other plans. Contributions go into an IRA you set up. Those familiar with IRA rules - in investment options, spousal rights, creditors' rights - don't have a lot new to learn.
Requirements for reporting to the IRS and other agencies are negligible. Your plan's custodian, typically an investment institution, has the reporting duties. And the process for figuring the deductible contribution is a bit easier than with other plans.
What's Not So Good About SIMPLE IRA Plans
Once self-employment earnings become significant however, other retirement plans may be more advantageous than a SIMPLE IRA retirement plan.
Example: If you are under 50 with $50,000 of self-employment earnings in 2014, you could contribute $12,000 as employee to your SIMPLE IRA plan plus an additional 3 percent of $50,000 as an employer contribution, for a total of $13,500. In contrast, a 401(k) plan would allow a $30,000 contribution.
With $100,000 of earnings, it would be a total of $15,000 with a SIMPLE IRA plan and $42,500 with a 401(k).
Because investments are through an IRA, you're not in direct control. You must work through a financial or other institution acting as trustee or custodian, and you will generally have fewer investment options than if you were your own trustee, as you would be in a 401(k).
It won't work to set up the SIMPLE IRA plan after a year ends and still get a deduction that year, as is allowed with Simplified Employee Pension Plans, or SEPs. Generally, to make a SIMPLE IRA plan effective for a year, it must be set up by October 1 of that year. A later date is allowed where the business is started after October 1; here the SIMPLE IRA plan must be set up as soon thereafter as administratively feasible.
If the SIMPLE IRA plan is set up for a sideline business and you're already vested in a 401(k) in another business or as an employee the total amount you can put into the SIMPLE IRA plan and the 401(k) combined (in 2014) can't be more than $17,500 or $23,000 if catch-up contributions are made to the 401(k) by someone age 50 or over.
So someone under age 50 who puts $9,000 in her 401(k) can't put more than $8,500 in her SIMPLE IRA plan for 2014. The same limit applies if you have a SIMPLE IRA plan while also contributing as an employee to a 403(b) annuity (typically for government employees and teachers in public and private schools).
How to Get Started with a SIMPLE IRA Plan
You can set up a SIMPLE IRA plan account on your own, but most people turn to financial institutions. SIMPLE IRA Plans are offered by the same financial institutions that offer any other IRAs and 401k plans.
You can expect the institution to give you a plan document and an adoption agreement. In the adoption agreement you will choose an "effective date" - the beginning date for payments out of salary or business earnings. That date can't be later than October 1 of the year you adopt the plan, except for a business formed after October 1.
Another key document is the Salary Reduction Agreement, which briefly describes how money goes into your SIMPLE IRA plan. You need such an agreement even if you pay yourself business profits rather than salary.
Printed guidance on operating the SIMPLE IRA plan may also be provided. You will also be establishing a SIMPLE IRA plan account for yourself as participant.
401k, SEPs, and SIMPLE IRA Plans Compared
Please contact us if you are a business owner interested in exploring retirement plan options, including SIMPLE IRA plans.
If you start a business, one key to success is to know about your federal tax obligations. Not only will you probably need to know about income taxes, you may also need to know about payroll taxes as well. Here are five basic tax tips that can help get your business off to a good start.
1. Business Structure. As you start out, you'll need to choose the structure of your business. Some common types include sole proprietorship, partnership and corporation. You may also choose to be an S corporation or Limited Liability Company. You'll report your business activity using the IRS forms which are right for your business type.
2. Business Taxes. There are four general types of business taxes. They are income tax, self-employment tax, employment tax and excise tax. The type of taxes your business pays usually depends on which type of business you choose to set up. You may need to pay your taxes by making estimated tax payments.
3. Employer Identification Number. You may need to get an EIN for federal tax purposes. Give us a call to find out if you need this number. If you do need one, we are available to guide you through the process of applying for it online.
4. Accounting Method. An accounting method is a set of rules that determine when to report income and expenses. Your business must use a consistent method. The two that are most common are the cash method and the accrual method. Under the cash method, you normally report income in the year that you receive it and deduct expenses in the year that you pay them. Under the accrual method, you generally report income in the year that you earn it and deduct expenses in the year that you incur them. This is true even if you receive the income or pay the expenses in a future year.
5. Employee Health Care. The Small Business Health Care Tax Credit helps small businesses and tax-exempt organizations pay for health care coverage they offer their employees. A small employer is eligible for the credit if it has fewer than 25 employees who work full-time, or a combination of full-time and part-time. Beginning in 2014, the maximum credit is 50 percent of premiums paid for small business employers and 35 percent of premiums paid for small tax-exempt employers, such as charities.
For 2015 and after, employers employing at least a certain number of employees (generally 50 full-time employees or a combination of full-time and part-time employees that is equivalent to 50 full-time employees) will be subject to the Employer Shared Responsibility provision.
Have a business idea? Call us first. We'll make sure you have everything in place to make your new business a successful one.
Special tax benefits apply to members of the U. S. Armed Forces. For example, some types of pay are not taxable. And special rules may apply to some tax deductions, credits and deadlines. Here are ten of those benefits:
1. Deadline Extensions.
Some members of the military, such as those who serve in a combat zone, can postpone some tax deadlines. If this applies to you, you can get automatic extensions of time to file your tax return and to pay your taxes.
2. Combat Pay Exclusion.
If you serve in a combat zone, certain combat pay you get is not taxable. You won't need to show the pay on your tax return because combat pay isn't included in the wages reported on your Form W-2, Wage and Tax Statement. Service in support of a combat zone may qualify for this exclusion.
3. Earned Income Tax Credit.
If you get nontaxable combat pay, you may choose to include it to figure your EITC. You would make this choice if it increases your credit. Even if you do, the combat pay stays nontaxable.
4. Moving Expense Deduction.
You may be able to deduct some of your unreimbursed moving costs. This applies if the move is due to a permanent change of station.
5. Uniform Deduction.
You can deduct the costs of certain uniforms that regulations prohibit you from wearing while off duty. This includes the costs of purchase and upkeep. You must reduce your deduction by any allowance you get for these costs.
6. Signing Joint Returns.
Both spouses normally must sign a joint income tax return. If your spouse is absent due to certain military duty or conditions, you may be able to sign for your spouse. In other cases when your spouse is absent, you may need a power of attorney to file a joint return.
7. Reservists' Travel Deduction.
If you're a member of the U.S. Armed Forces Reserves, you may deduct certain costs of travel on your tax return. This applies to the unreimbursed costs of travel to perform your reserve duties that are more than 100 miles away from home.
8. Nontaxable ROTC Allowances.
Active duty ROTC pay, such as pay for summer advanced camp, is taxable. But some amounts paid to ROTC students in advanced training are not taxable. This applies to educational and subsistence allowances.
9. Civilian Life.
If you leave the military and look for work, you may be able to deduct some job hunting expenses. You may be able to include the costs of travel, preparing a resume and job placement agency fees. Moving expenses may also qualify for a tax deduction.
10. Tax Help.
Although most military bases offer free tax preparation and filing assistance during the tax filing season, you may need to contact an accounting professional during other times of the year. We're here to help, so don't hesitate to contact us with any questions you have about your taxes--no matter what time of the year it is.
September is often a time of transition, when people decide to make major life decisions--such as changing jobs. If you're looking for a new job, then you may be able to claim a tax deduction for some of your job hunting expenses--as long as it's in your same line of work.
Here's what you need to know about deducting these costs:
1. Same Occupation. Your expenses must be for a job search in your current occupation. You may not deduct expenses related to a search for a job in a new occupation.
2. Reimbursed Costs. If your employer or another party reimburses you for an expense, you may not deduct it.
3. Placement Agency. You can deduct employment and job placement agency fees you pay while looking for a job.
4. Resume Costs. You can deduct the cost of preparing and mailing copies of your resume to prospective employers.
5. Travel Expenses. If you travel to look for a new job, you may be able to deduct your travel expenses. However, you can only deduct them if the trip is primarily to look for a new job.
6. Work-Search Break. You can't deduct job search expenses if there was a substantial break between the end of your last job and the time you began looking for a new one.
7. First Job. You can't deduct job search expenses if you're looking for a job for the first time.
8. Schedule A. You usually deduct your job search expenses on Schedule A, Itemized Deductions. You'll claim them as a miscellaneous deduction. You can deduct the total miscellaneous deductions that are more than two percent of your adjusted gross income.
9. Premium Tax Credit. If you receive advance payment of the premium tax credit in 2014 it is important that you report changes in circumstances, such as changes in your income or family size, to your Health Insurance Marketplace. Advance payments of the premium tax credit provide financial assistance to help you pay for the insurance you buy through the Health Insurance Marketplace. Reporting changes will help you get the proper type and amount of financial assistance so you can avoid getting too much or too little in advance.
Give us a call if you have any questions about tax deductions related to a job search.
The Internal Revenue Service and the Treasury Inspector General for Tax Administration continue to hear from taxpayers who have received unsolicited calls from individuals demanding payment while fraudulently claiming to be from the IRS.
Based on the 90,000 complaints that TIGTA has received through its telephone hotline, to date, TIGTA has identified approximately 1,100 victims who have lost an estimated $5 million from these scams.
"There are clear warning signs about these scams, which continue at high levels throughout the nation," said IRS Commissioner John Koskinen. "Taxpayers should remember their first contact with the IRS will not be a call from out of the blue, but through official correspondence sent through the mail. A big red flag for these scams are angry, threatening calls from people who say they are from the IRS and urging immediate payment. This is not how we operate. People should hang up immediately and contact TIGTA or the IRS."
Additionally, it is important for taxpayers to know that the IRS:
Potential phone scam victims may be told that they owe money that must be paid immediately to the IRS or they are entitled to big refunds. When unsuccessful the first time, sometimes phone scammers call back trying a new strategy.
Other characteristics of these scams include:
If you get a phone call from someone claiming to be from the IRS, here's what you should do:
Taxpayers should be aware that there are other unrelated scams (such as a lottery sweepstakes) and solicitations (such as debt relief) that fraudulently claim to be from the IRS.
The IRS encourages taxpayers to be vigilant against phone and email scams that use the IRS as a lure. The IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels. The IRS also does not ask for PINs, passwords or similar confidential access information for credit card, bank or other financial accounts.
Recipients should not open any attachments or click on any links contained in the message. Instead, forward the e-mail to firstname.lastname@example.org.
To report a scam directly to the IRS, go to www.irs.gov and type "scam" in the search box.
If you think you've been a victim of a scam or need more information on how to report phishing scams involving the IRS, don't hesitate to contact us immediately.
Employees Who Work for Tips - If you received $20 or more in tips during August, report them to your employer. You can use Form 4070.
Individuals - Make a payment of your 2014 estimated tax if you are not paying your income tax for the year through withholding (or will not pay in enough tax that way). Use Form 1040-ES. This is the third installment date for estimated tax in 2014.
Corporations - File a 2013 calendar year income tax return (Form 1120 or 1120-A) and pay any tax due. This due date applies only if you made a timely request for an automatic 6-month extension.
S corporations - File a 2013 calendar year income tax return (Form 1120S) and pay any tax due. This due date applies only if you made a timely request for an automatic 6-month extension. Provide each shareholder with a copy of Schedule K-1 (Form 1120S) or a substitute Schedule K-1.
Partnerships - File a 2013 calendar year income tax return (Form 1065). This due date applies only if you were given an additional 5-month extension. Provide each shareholder with a copy of Schedule K-1 (Form 1065) or a substitute Schedule K-1.
Corporations - Deposit the third installment of estimated income tax for 2014. A worksheet, Form 1120-W, is available to help you make an estimate of your tax for the year.
Employers - Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in August.
Employers - Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in August.
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