2017 Year End Tax Planning: Welcome to a New Era of Government

Washington Watch by Charles K. O’Malley, CPA, CFP®

In addition to Chuck’s “Washington Watch,” this issue also includes figures subject to annual adjustment in an easy-to-read Tax Reference Guide, see page 4.  An expanded multi-year guide is accessible at our website www.omalleycpa.com on either the “Home” page or the “Resources” page, plus “Topics” on the “Blog” pages provides information about the tax laws affecting the preparation of your 2016 tax return.

Since August 2012 we have frequently reported on Kathy O’Malley’s cancer survival progress. Your responses have been overwhelming and as of January 9, 2017, we are pleased to report that her latest scans indicate that Kathy is currently totally cancer free. The most recent lung tumor was successfully eliminated by radiation treatments.

Included in this edition of O’Malley News & Views, on a separate insert page, is Chuck’s evaluation of how your prayers, the excellent medical care from the University of Pennsylvania and Kathy’s very positive attitude have led her to not only be with us for a fifth Christmas after that fateful news, but also to be healthy. Additionally, Chuck discusses how Medicare and a superb Medigap insurance policy was a major financial assistance and in reality prevented them from medical bankruptcy. Medical costs are the primary cause of personal bankruptcies.

Welcome To A New Era Of Government

At high noon on January 20, 2017, our Federal Government went from a divided government, (Democrat President, Barack Obama with veto power) to a single party rule, GOP control of both Houses of Congress, plus GOP President, Donald J. Trump in the White House.

While on the surface, based on a purely arithmetic majority, this single party rule is what might be expected, it may be some time before we really know how this new one party GOP control will actually work and govern.

In the Senate the Democrats have only forty-eight (48) votes, counting the two (2) Independent Senators, Bernie Sanders, (VT) and Angus King, (ME),  to the GOP’s fifty-two (52) votes, plus Vice President Mike Pence’s tie breaker vote, so this is the only place for any possible consensus   legislation.  Thus, for the Democrats to sponsor and/or support any new legislation, they will only have the power of their voice to persuade or if possible, convince at least three (3) GOP Senators to vote with them and against the party in control – not a likely scenario.

The other extreme possibility to prevent solid GOP only control, would be for the non-conforming (splinter faction) of the GOP,  namely, the Freedom Caucus (Tea Party Groups), to not agree with every last legislative detail – again not a likely scenario.

The Tea Party is, loosely, a group of GOP members who among other things,  object to the excessive spending of both the George W. Bush and Barack Obama administrations during the past sixteen (16) years.  They have been successful on several occasions with threats to shut down the Government over the budget, debt limits and numerous spending measures.  While they may not be able to stop new legislation, they will probably slow down the speed and rubber stamping of some of the proposals.  Additionally, based on some of the recent Presidential Executive orders, President Trump’s position on the issues may still be evolving.

How good is your reading of the political tea leaves? How accurate is your crystal ball for predicting the future?

We will all just have to wait and see what develops as ideas, repeals, reforms and other unknown and uncertain changes are introduced, explored and either rejected or passed. The members of the old guard, the regular conservative GOP Party, are usually in favor of less government intervention, less regulations, lower taxes, reduced spending, more states rights and efforts to reduce the cost of entitlement programs.

How will their agenda mix and match with Trump’s agenda?

The effort to repeal Obamacare (the 2010 Affordable Care Act) is apparent. There have already been more than sixty (60) attempts and now could be the opportune time to pass a repeal, which President Trump will be willing to sign. The President has already issued an Executive Order to “start rolling back Obamacare” and in January, Congress via budget resolution, started the repeal procedure. However, many GOP Senators and Representatives are now concerned about supporting repeal without a good replacement plan.

The problem with repealing Obamacare are many:

  • Currently all health care policies must insure parent’s children up to age 26.
  • Currently all health care policies must cover pre-existing conditions.
  • Currently all health care policies can not charge a higher premium just because they are insuring a woman.
  • Currently all health care policies can not have a lifetime dollar limit on benefits.

These are all universal guarantees that have been added to all health care policies since 2012 and not just in the Affordable Care Act, Obamacare exchange policies.

  • A new one year renewal period just ended on January 31, 2017, and everyone who renewed and/or signed up for the 2017 health care coverage (including exchange subsidies) expects to be covered until the end of 2017.
  • If a repeal is effective in 2017, the additional tax (revenue producing) provision in the Affordable Care Act may quickly disappear, along with some of the confusing regulations affecting employers, but this will only decrease the funding for the exchange subsidies, plus the additional funding that has been made available to the states for their administration of Medicaid, which is a federally mandated program administered by the states. Again, time will tell us what will ultimately happen. Stay tuned!

Are You Confused?

You should be, because we are dealing with a law that was never completely understood, nor negotiated between the two parties, it was passed in 2010, the last time the Federal Government was in a single party control, when the Democrats controlled both Houses of Congress and the White House.

To be good, effective, reasonable legislation, we need bipartisan effort which requires intelligent discussion, consensus building, cooperation and yes, compromises! As voting citizens, we should demand this from all of our legislators both at the Federal and the State levels regardless of which party banner they wish to represent!

Presidential Executive Orders now appear to be the preferred method to make changes and get things done quickly. While President Trump’s recent flurry of controversial Executive Orders has prompted many protest demonstrations and marches, Presidents George W. Bush and Barrack Obama both used Executive Orders to advance their agenda when they were unable to get Congress to pass their desired legislation. The difference then was, Congress was controlled by a different party than that of the previous Presidents. This time it appears that President Trump does not want to wait for his party’s Congressional action and approval, to quickly and selectively fulfill his desired campaign promises . Several of these Executive Orders rolled back previous Presidential Executive Orders, while others may have experienced a lot of debate and strong Congressional resistance. Some of these Executive Orders are already facing court challenges. Only time will tell which Executive Orders will survive and which ones will be rejected.

WHY GOOD QUALITY HEALTH INSURANCE IS SO IMPORTANT!

Are you concerned about your future health care, your Medicare and/or retirement benefits from Social Security? You should be! Why? There are many GOP Senators and Representatives, including Tom Price (R-GA), an orthopedic surgeon, (Trump’s pick to be Secretary of Health and Human Services), and Speaker of the House, Paul Ryan (R-WI), who want to reduce Medicare and Social Security benefits. A voucher system for Medicare and privatizing Social Security are their top priorities, along with delaying the age to be eligible for benefits.

Contact your elected officials and make them aware of your personal opinions!

This is a true story about my wife’s first four and a half (4-1/2) years as a cancer patient. In August 2012, Kathy was diagnosed with two types of Stage IV uterine cancer, which had spread throughout her whole body. She was told to gather her family together then, as she would probably not live until Christmas. Not the kind of news anyone wants to hear! At our giant, three generation family Thanksgiving gathering, that included many family friends, there were few dry eyes. Kathy was really sick and it showed. By then she had had major surgery and was already on chemotherapy. While I realized the seriousness of her medical condition and our pending life threating position, I was not prepared for the proposed long-term cost of medical treatment, if Kathy could withstand the poisonous drugs and survive. To this day, I can still remember the oncology doctor quizzing me as to what were our financial resources and how much and what kind of health care insurance coverage did we have. His recounting of a previous patient, who simply ran out of both insurance coverage and personal financial funds to continue medical treatments that were benefiting him, was down right frightening.

I wanted all possible efforts, at any cost, to be tried to save my bride of fifty-one years. We had spent a lifetime together and neither of us were prepared or ready for life to suddenly end. However, medical costs are the primary reason for personal bankruptcy, but to be forced to stop beneficial treatment for a loved one because of running out of money was unthinkable. Fortunately for us, Kathy was over sixty-five (65) and on Medicare (as we know it today), and we had selected “J” Plan Medigap insurance coverage, which did not charge either co-pays or deductibles. All medical cost were covered. What a lucky choice in spite of its high monthly cost. As of today, Kathy has had major surgery and multiple hospital stays, plus eighteen (18) months of chemotherapy, two (2) weeks of intense radiation and over twenty (20) pet scans. She is alive and healthy but is living with the prospect that her cancer, which has flared up after treatment, can do so again at any time in the future. She has reached this cancer/tumor free point because of excellent medical care by the staff at The Hospital of the University of Pennsylvania, hundreds of prayers from our many friends, business associates and clients and because she has had a very positive attitude that she was not going to give in to cancer.

In 1965, when Congress passed the President Lyndon B. Johnson sponsored Medicare laws, Kathy and I (both accountants) were working adults, and by 2012 we had paid into the system for over forty-seven (47) years. Also, because we were both self-employed, we had paid for both shares (the employees withheld share and the employers matching share), and because we are still working we are still paying for both shares. (See the tax cost table on the next page). Health insurance is not coverage that can be ignored until you need it and when you get sick then look for a plan (fortunately, ACA laws allow for pre-existing conditions), but for the system to work properly and uninterrupted, everyone must participate. While Medicare coverage benefits currently do not generally begin until age sixty-five (65), everyone starts paying for it on the very first day they start working for wages, even students working part-time. It’s an earned benefit that every working person should be entitled to regardless of their current age. Yes, its an expensive government entitlement program that has been continually funded by employees and matching employer contributions for more than fifty (50) years, that is the cost arrangement that our government has dictated, and it should continue as is, or be improved, but not reduced!

This is how good quality health insurance really works. You pay for it and hope you will never need it, but if you do, you want the coverage from the plan that you selected to be continually available. Unlike Medigap’s alphabet pick and choose coverage (you pick a coverage limit and pay a fixed fee), Medicare is a one size fits all plan, generally for people over 65, and the monthly premium cost increases as your income increases. Our government set up this one way contract, they wrote the rules and regulations, and we the working public had no choice but to sign up and agree to have part of our earnings withheld to pay for a future benefit that currently does not become available until we are sixty-five (or older as some are now suggesting), and then for only a limited amount of coverage that can be expanded by purchasing a Medigap policy from a private insurance company – not the government!

The Tax Cost Table on the next page will allow you to calculate how much of your tax money has been paid into the system for your future benefits. Simply multiply the annual tax rates by the wages on your Social Security statement and then double the amount to include your employer’s contribution or your self-employed surtax charges.

Below is your annual tax cost table for Social Security and Medicare:

Annual Tax Cost Table

*This is the amount witheld from the employees pay and an equal amount was also paid by the employer on behalf of each employee.
Since 1958 self-employes people have paid more and since 1984 generally self-employes people have paid twice this amount.
A) Reduced by 2% due to economic conditions
B) Beginning in 2013 a .9% surtax charge was added to earned income exceeding $200,000 for individuals and $250,000 for married filing jointly.

For example, a person in their mid 50’s, whose yearly earnings were at least the maximum annual taxable Social Security wage for the most recent thirty (30) years (1987 through 2016), will have accumulated approximately $364,527.00, plus thirty (30) years of government earnings for their Social Security and Medicare benefits, either as a self employed individual (paid both halves) or when considering the employers’ designated matching amounts. If your annual earnings were lower, then your accumulated amount will be lower, but if your annual earnings were higher, then your accumulated amount will be higher, due to taxable income increases in Medicare after 1990. Regardless of your earnings, this is obviously a substantial contribution towards an earned future government “Entitlement Benefit”.
Now some elected officials want to drastically reduce and/or void this contract. Don’t let Congress and the President reduce the benefits that you have accumulated. Get involved, write them now, before it is too late.

The next couple of years are lining up to present many proposed changes, the issues are numerous and include:

Tax Reforms Education Voter Suppression Defense
Regulations Reform Student Loans Campaign Financing Military
Government Spending Economy Minorities Immigration
Debt & Deficits Jobs LGBT Foreign Policy
Entitlement Programs Wages Peoples’ Rights Trade Policies
Health Care Social Issues States’ Rights Infrastructure
Medicare Environment Supreme Court Appointments Terrorism
Social Security Guns Federal Judge Appointments Mid-East Issues

And many more that may be addressed by Congress or with Presidential Executive Orders and court challenges.

The January 27, 2017 Kiplinger Tax Letter forecasted that tax reform will not happen during the first 100 days, in spite of a lot of House and Senate activity. They expect “… a first draft by mid-year, but don’t be surprised if tax reform is held until late this year, or more likely 2018 …”

O’Malley News and Views and Washington Watch will do our best to keep you informed of the many items and issues of interest as they make their way through Congress, so stay tuned.

THE ONLY CERTAINTY IN LIFE IS CONSTANT CHANGE!

WHAT’S NEW AT O’MALLEY & O’MALLEY, LLP

The merger of Jay R. Conway, P.C., a New Jersey Licensed Public Accountant, is progressing smoothly with Mariette and David working with Jay (who is still very active in the practice) and many of his clients on special projects or whenever Jay requires our assistance. Since 2002, Jay has consulted with O’Malley & O’Malley, LLP on various tax, accounting and planning issues and in late 2014 Jay decided it was time to make it a more formalized merger. Jay’s direct phone number is still (856) 786-9111 and our (856) 829-9100 is the backup number, if Jay is not available. As previously reported both offices are now connected to a new computer system with 10 workstations, and three Canon multi-purpose printers, that also copy, scan, fax, etc.—one even does it in color.

CLIENTS, FRIENDS & FELLOW PROFESSIONALS—A SPECIAL THANKS!

Our continued success would not be possible without your support and recommendations. We are actively looking for new clients – businesses, individuals and/or estates & trusts. 2016 was our best growth year ever and we are excited about the future. Your continued confidence and referrals are appreciated. Thank you for giving us the opportunity to serve you, your business associates, family members and friends.

This newsletter is designed to provide general information about the subject matter. It does not constitute professional advice. As required by United States Treasury Regulations, you should be aware that this communication is not intended to be used, and it cannot be used, for the purpose of avoiding penalties under the United States federal tax laws.

If you would like to discuss a particular item of interest please call our office –  856-829-9100