The easiest legal way to lower the amount of taxes you pay is to maximize your deductions. How?
There are three (3) main types of deductions.
Adjustments to income that appear at the bottom of page one of your personal tax return.
Business deductions that appear on your business tax returns (LLC – Partnership – Corporations, etc.)
If you are self-employed (includes partners & “S” Corporate shareholders), 100% of your health insurance premium, including long-term care insurance (subject to age limits), is deductible on page 1 as an AGI adjustment and it can also reduce your self-employed social security tax.
Teacher’s expenses ($250 limit per taxpayer – with the excess allowed as an itemized deduction), plus tuition and fees.
Various retirement plan contributions.
Other allowed page 1 deductions.
Itemized deductions that appear on Schedule A of your personal tax return.
Your standard vs. itemized deductions should always be compared.
You may deduct the greater amount.
Millions of taxpayers miss this valuable deduction every year. You get to make this choice each year. It is not dependent on your prior year choice. Thus, by doubling up on deductions (pay ahead on real estate taxes, charitable contributions, etc.), in one year, you can increase your itemized deductions for that year and then use the standard deduction (which usually increases each year) in the following year.
The following items are deductible as itemized deductions on your federal income tax return:
Medical expenses paid by you, including dental costs, eyeglasses, health insurance, including long-term care (see below), which, beginning with 2013, exceed 10.0% of your AGI. This change does not affect taxpayer(s) over 65 until the end of 2016. Thus, on a joint return if one partner is over 65, the 7.5% exclusion will remain for both. Long-term care insurance premiums are considered medical expenses, but there is a limit to the yearly deduction, $1,460 for 2016 ($1,530 for 2017) for individuals between 51 and 60; $3,900 for 2016 ($4,090 for 2017) for individuals between 61 and 70; and $4,870 for 2016 ($5,110 for 2017) for those over 70. New Jersey allows a medical expense deduction for costs that exceed 2% of your total income.
All state and local income tax or sales tax, whichever is higher, is still allowed for 2016, plus real estate, unemployment and personal property (intangible) taxes.
Mortgage interest on mortgages up to $1,000,000 for personal and one vacation residence, (yachts, mobile homes and travel trailers may qualify), subject to some limitations. Interest expense on home equity loans up to $100,000 regardless of how the loan proceeds were used, plus points and investment interest, subject to some restrictions. Mortgage insurance premiums on new principal residence mortgages (FHA, VA, etc.) are still deductible for 2016, subject to AGI limitations.
Charitable contributions, including non cash gifts. Proof is now required for all cash contributions of any amount. Estimated amounts are not allowed. A substantiation letter is required for each individual gift that exceeds $250. Non cash contributions over $250 require receipts; over $500 require receipts plus additional information; and over $5,000 require an appraisal. Donations of artwork, stock or other appreciated property can be deducted at the current fair market value with some limitations. Note: Deductions for donations of vehicles, boats, motor homes, etc. have been substantially restricted. Check with us before making this type of donation.
Unreimbursed business and work-related expenses, professional/union dues, costs incurred searching for employment, investment advisory fees, safe deposit box fees, tax preparation fees, etc., are deductible subject to the 2% of AGI limitation on the accumulated total.
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IMPORTANT DUE DATES – For December Year-end Businesses and Individuals
- “S” Corporate Tax Returns (fiscal years, two and a half months after their year end);
- Partnerships (now two and a half months after year end);
- Estate and Trust Returns (now two and a half months after year end);
- LLC Tax Returns for Partnerships and “S” Corporations.
- Individual Tax Returns;
- “C” Corporate Tax Returns (now due three and a half months after year end);
- LLC Tax Returns for Single Members;
- First Individual Estimate Payment
A six-month filing extension is generally available for individual and corporation income tax returns, but partnership, LLC, Sub S Corporations, and estate and trust returns that supply K-1 reports to participants can only get a five-month extension, making their final extended due date September 15th. Taxes, however, must be paid by the original due date in order to avoid penalties and interest.
Make sure your Social Security or Federal I.D.
number is properly entered on all of your tax returns
and any checks for tax payments.
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Estimated Tax Payments
For 2016 and 2017, individuals and corporations must pay at least 90% of current year’s tax, or 100% of the prior year’s tax. If your Adjusted Gross Income (AGI) is over $150,000, you must pay 100%, some limited exceptions apply.
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Alternative Minimum Tax
A 2013 permanent fix increases exempt income annually by the government’s standard inflation formula. Millions of taxpayers will now avoid this costly tax trap. This fix may now allow those who escaped AMT in prior years to avoid it in future years, but if you were subject to AMT in prior years then you will probably be subject to it again. The 2016 exempt income amounts are $83,800 ($84,500 in 2017) for joint filers and $53,900 ($54,300 in 2017) for single filers.
Recent Tax Changes That May Affect Your Tax Return
The new Medicare tax of .9% applies to all earned income over $200,000, regardless of filing status. Employers must withhold and remit this additional tax once an employee has earned $200,000 of gross compensation. This additional tax will also affect self-employed taxpayers.
Additionally, some tax returns will have a 3.8% Net Investment Income Tax, sometimes referred to as “the unearned Medicare contribution tax,” on a calculated threshold amount of $200,000 – single; $250,000 – married/joint. The calculations for this tax are complex and must be calculated on an individual basis.
Generally, for purposes of this tax, net investment income includes interest, dividends, rents, royalties, and net gain attributable to the disposition of property. The sale of a principal residence may be included in this calculation, if the net gain on the sale exceeds $250,000 – single; $500,000 married/joint.
Net investment income does not include income and gain derived in the ordinary course of a non-passive trade or business. It also does not include distributions from qualified pension, profit sharing or stock bonus plans. However, these distributions may be taken into account in the calculation of MAGI.
Foreign banks accounts and other interests
Ownership of foreign bank accounts and other assets held outside the USA (offshore) and their related income continue to be an area of intense IRS scrutiny along with citizenship questions. If you are not a US citizen or have dual citizenship, your tax advisor needs to know your citizenship status, as well as your foreign bank account and investment information.
Our “Quick Guide to Retirement Planning” is on the “Planning” page.
The various contribution limits are on our Annual Tax Reference Guide on the “Resources” page. The AGI upper phase-out limits for deductible IRA’s, by an active participant in an employer-sponsored plan, for 2016 have been increased to $118,000 for joint filers ($119,000 for 2017), when both spouses are active participants and $71,000 for single filers ($72,000 for 2017).
A working spouse, who is not an active participant in an employer-sponsored plan, may make a tax deductible contribution if their joint AGI is less than $194,000 in 2016 ($196,000 in 2017), even though the other spouse is an active participant.
Roth IRA contribution (not deductible) fully phase-out limits for 2016 are: $194,000 ($196,000 for 2017) for joint filers and $132,000 for 2016 ($133,000 for 2017) for single filers.
** This Is Important! **
Check all of your IRA and employer-sponsored retirement plans
for designated beneficiaries, including secondary beneficiaries.
Generally, it should be a person(s) and not your estate or a trust.
Mariette is our best source of information for this topic.
The key to this area is accountability. The five W’s (who, what, where, when and why) is the best method to satisfy any IRS challenge. Reimbursement plans must meet the IRS deductibility requirements. An employee/taxpayer must be required to report and justify any reimbursed expense, including the business purpose and mileage information. If expense reimbursement is based strictly on these figures, there isn’t any tax impact. However, a non-accountable plan (documentation isn’t provided), such as a car or travel allowance, will result in taxable income to the employee/taxpayer, plus it will subject the employer to payroll taxes and is includible as taxable income on the W-2. (see the next blog topic about vehicle usage)
Per Diem allowances (see our Annual Tax Reference Guide on the “Resources” page, then look at Tax Info) can be paid to employees if they own less than 10% of the company, in lieu of exact expense reporting. Travel and other cost of living expenses for a temporary job assignment, which is for less than one year, are deductible.
Employees who deduct unreimbursed business expenses as part of their itemized deductions (Schedule A, Miscellaneous Deductions) are subject to the 2% AGI limitation.
Social and golf club dues, political contributions (PAC) and lobbyist travel are not deductible. Meals and entertainment, including sporting events, are only 50% deductible. Working through lunch and overtime meals for employees, trade association dues and similar items are 100% deductible.
Personal use of company owned vehicles
Business use of personally owned vehicles
The Internal Revenue Service Publication 463 – Travel, Entertainment and Car Expenses (50 pages), and Publication 15-B – Employer’s Tax Guide to Fringe Benefits (31 pages) has several lengthy discussions about the deductibility and taxation of vehicles. The best usage support is a contemporaneously maintained auto log that details the date, business place or reason and the total number of miles traveled. This log will support the percent of business vs personal usage and determine the allowable tax deduction and/or personal usage charge based on either total operating costs or the IRS allowed cents per mile charge.
In lieu of a well-kept auto log, there may be some limited alternatives. Company owned business vehicles with permanently attached advertising (totally wrapped is the best) may qualify for its advertising value or employees whose usage restriction allows only commuting and no other personal use may qualify for the $3.00 per day roundtrip commuter charge either as a deduction from their pay checks or as an added taxable fringe benefit to their annual W-2.
Contact our office for more guidance on this topic as it applies to your specific situation.
IRS Matching Forms 1099 By Mariette T. O’Malley, CPA, J.D. (Tax) CFP®
Several years ago, when Ebay/PayPal/Amazon agreed to give the IRS access to seller information, it made front page news. Now Ebay/PayPal/Amazon just issue Form 1099’s to sellers with over a specified dollar/transaction amount in a calendar year.
These Forms 1099 can create a tax issue for the casual Ebay/PayPal/Amazon seller. The IRS now has the ability to 100% match 1099’s to your tax return and determine if there is unreported income on your tax return. The IRS then sends an assessment notice for the tax on the unreported income.
However, most of the items sold on Ebay/PayPal/Amazon have a basis to the seller either purchase price, or date of death value on inherited items. Some sellers also have selling expenses, such as advertising, shipping, packing supplies, etc. Your basis in the item sold, plus your expenses reduce your gross proceeds and thus reduce your tax on the sale.
Usually, items sold on Ebay/PayPal/Amazon by casual sellers are classiﬁed as personal assets which are subject to the capital gains tax rules. This means if you have a gain, it may be eligible for the lower capital gains tax rate; however, a loss on the sale of a personal asset is not deductible.
So that ugly painting you bought at a yard sale for $100 and sold on Ebay for $1,000, leaves you with a net gain of $900, taxed at the capital gains tax rate; but the Jimmy Choo shoes you bought for $500 and sold on Ebay for $50, leaves you with a net personal loss of $450, which is not deductible.
The important thing is, you must report all sales of this sort, whether you receive a Form 1099 or not.
Sales & Use Tax – Are You Compliant? By David J. O’Malley, CPA
With the states receiving less money from the federal government to help run some of the more popular federally mandated state sponsored programs, they have turned to audits as a way to increase revenue without increasing taxes on the voting taxpayers of their state. Whether you agree or not, audits are a necessary evil in our society in order to keep honest, hardworking taxpayers from paying a greater share in taxes in order to make up for those that are cheating the system. Unfortunately most of the cheaters and schemers seem to fall through the cracks unscathed while the same honest, hardworking overburdened taxpayers become victims to the audits. Therefore, it is imperative for business owners to become more aware of the sales and use tax rules in order to make sure they are compliant and not at risk in the event of audit. This is not easy; because the rules can be complicated and vary not only by state(s) but also sometimes by industry. For this reason it is always a good idea to consult with your professional tax adviser whenever there is doubt about sales tax questions and/or issues.
The following checklist should help business owners become more compliant and possibly minimize their risk:
1. Nexus – Should you be filing and paying sales tax in more than one state? If you have a presence in another state (make deliveries using a company vehicle or have employees working in different states) then you need to file sales tax returns and possibly other tax returns with that state. However, if you use a common carried (such as USP or Federal Express, etc.) for deliveries and bonified indiviual contractors for installation, then you do not have a presence in that state and do not have any state filing requirements.
2. Exempt Organizations, Exemptions & Capital Improvements – Make sure you obtain the required signed forms from these organizations (churches, schools & municipalities, or Exemptions for the manufacturing process, or research development project or capital improvements projects) Generally, labor is exempt on capital improvements, but material is not.
3. Resale Certificates – If you charge your customers sales tax on a product or job, make sure that you provide a resale certificate to your supplier so the tax authority does not receive the sales tax twice. If you are a wholesaler and do not charge sales, tax, make sure you have a resale certificate from all of your customers.
4. File accurate sales tax returns – Make sure the sales tax returns are complete and prepared correctly. The returns require that you report your total gross sales (taxable and non-taxable), less exempt sales (non-taxable) and then taxable sales. We have seen many sales tax return prepared showing just the taxable sales, this is wrong and will cause an audit.
5. Reconcile your Sales Tax Returns to your Income Tax Return – Reconcile the sales tax returns that you have filed to make sure that the combined gross sales on these returns agree with the total gross sales on your income tax return. The states look at this. If there is a significant difference between the two, it could increase your odds of being audited. If you are an accrual taxpayer, prepare a schedule that reconciles the difference between the two returns. While you are at it, also reconcile the amount you report on your Income Tax Return for payroll to the amount that you reported on Forms W-2 and W-3. This is another audit trap. All business tax returns that are prepared by O’Malley and O’Malley, LLP, CPA’s, have a reconciliation schedule in the clients file for the reported sales tax total gross income and reported payroll (W/2’s) and payroll taxes.
6. Use Tax Expense – be sure to report and pay the use tax on any out of state purchases that were not taxed at the time of purchase. For example, if you have a business in New Jersey and you buy a computer online from an out of state company and there was no tax paid at the time of purchase, you are required to pay a 7% use tax in New Jersey (of the state where it be used), on the cost of the computer. These purchases usually are made by credit cards and are often overlooked by business owners when filing their sales and use tax returns. Some business owners are under the belief that if they purchased something from out of state, they can avoid the sales and use tax altogether. This is not true.
7. Meeting with the Auditor – We recommend that our clients do not meet the auditor. We usually have the auditor come to our office and we always attempt to limit the auditors’ access to our client.
A sales and use tax audit can be lengthy. The auditor will usually select a particular period for a sample. They will then take the total amount of additional sales and use tax they feel you owe for the sample period and multiply that by the audit period, usually three to ﬁve years. if the auditor selects a sample period with $500 in sales and use tax omissions, you are looking at several thousand dollars in additional taxes plus interest and penalties. How long and costly the audit is depends on your record keeping. Do you have copies of the proper forms stating the Exempt Organization, manufacturing exemption, capital improvement certificate, resale certificate, etc.? Did you reconcile your gross sales from your sales tax returns to your income tax return? Did you account for all of the out of state purchases? By being more diligent and keeping accurate records you limit your exposure and thus limit the cost.
If you use part of your home for business, you may be able to claim a deduction for office in home expenses, such as utilities, insurance, maintenance, depreciation, etc. To qualify for this deduction, you must use the area of your home regularly and exclusively as your principal place of business, or a place of business where you meet and deal with clients, patients, or customers in the normal course of business, or if you use a space in your home exclusively and regularly for administrative and management activities of your trade or business and you do not have another permanent location where you can conduct these activities. Employees must also prove that they used their home office for the convenience of their employer.
Because the definition of “principal place of business”
has been expanded, more individuals are able
to qualify for the home office deductions and there
is now an IRS-approved simplified calculation method.
IRS Regulations and Substantiation Test
As in prior years the Internal Revenue Service requires all paid tax preparers to sign the tax returns, be registered and have a Preparer Tax Identification Number, PTIN. Each O’Malley & O’Malley, LLP tax adviser (all State licensed CPA’s and PA’s) has their own PTIN, and they stay up-to-date by attending Continuing Professional Education courses and through the years have performed tax preparation services in accordance with Internal Revenue regulations and maintain high ethical standards. We welcome this registration and its mandated education requirements.
The deduction for personal exemptions is the same for all taxpayers, $4,040 for 2016 and 2017, but they are subject to the phase-out limitations discussed below.
Phase-Out of Deductions
The phase-out reduction rules will apply to all of your itemized deductions and personal exemptions when AGI exceeds $311,300 for 2016 ($313,800 in 2017) for joint filers and $259,400 for 2016 ($261,500 in 2017) for single filers.
Child Tax Credits
The dependent child tax credit has been made permanent. Joint filer families with AGI under $110,000 and single parents with AGI under $75,000 will continue to receive a credit of up to $1,000 for each dependent child under age seventeen. The credit will be reduced $50 for each $1,000 of additional income. If you qualify for this credit, it is in addition to the child care and/or earned income credits and, under certain conditions, may be refundable.
Dependent children under 19, or dependent students under 24, cannot claim themselves as an exemption on their own tax returns. This exemption prohibition is important and if not followed by the child/dependent student can cause the parents tax return to be rejected. Dependent children may not be required to file a tax return if their investment income is below $1,050 for 2016 ($1,050 for 2017) and/or their earned wages are below $6,300 for 2016 ($6,350 for 2017). However, a tax return is required to receive a refund of withheld income tax. Children under 18 with investment income over $2,100 in 2016 ($2,100 in 2017) are taxed at their parents’ tax rate (Kiddie Tax) and must file Form 8814.
Tax-exempt or tax-deferred bonds
may be a solution for these young taxpayers.
Saving for Education
Section 529 Plans continue to improve. They offer tax-free earnings. The annual contribution of $14,000, or a special one time $70,000 (five years at once) is allowed. If a joint gift, double the contribution limits. They do not have phase-out limitations and offer lots of flexibility. More information is available at www.collegesavings.org and www.collegesavings.com or www.upromise.com.
Tax-Exempt Interest Income
To maximize your after tax income, you must first know your tax bracket. The higher your tax bracket, the greater the benefit from tax-exempt investments. See our Equivalent Percent of Interest Income Table on the “Planning” page. Income yield will be affected if bonds are purchased above or below face value. Generally, bonds must be invested in your resident state to be tax free on your state return.
Qualifying dividends (generally domestic corporations held for more than 60 days) and long-term capital gains will be taxed at 0% if your regular tax rate does not exceed 15%, or at 15% if your regular tax rate exceeds 15%, but does not reach the 39.6% rate. Taxpayers whose taxable income for 2016 exceeds $466,950 ($470,700 in 2017) for joint filers and $415,050 ($418,400 in 2017) for single filers will be taxed at a 20% rate on qualified dividends.
All investments should be reviewed periodically for risk, balance and diversification.
Bank account balances, including internet banks, are FDIC insured for up to $250,000 per each individually titled account to a $3,000,000 maximum for married couples with IRA’s and multiple trusts, any excess is not insured. Treasury bills and US Bonds are an excellent alternative to traditional bank instruments. Although not insured, they are backed by the US Government and tax free on the state return.
Watch your investments closely and beware of schemes and con-artists. As many investors have found, if the income sounds too high, there may be a problem; don’t get caught in a Ponzi scheme. You will sleep better if your money is invested in public mutual funds or bona-fide listed companies through reputable brokers with SIPC insurance. Their fraud coverage is $500,000 per person, per account.
Find out how the fund is invested.
Does their mix meet your risk tolerance and diversification requirements?
The “Risk Pyramid”, on our “Planning” page may help you determine your investing comfort level. Mariette and Chuck are both Certified Financial Planner TM Professionals, and Personal Financial Specialists (an AICPA designation for CPA’s who have passed the CFP® examination), but they are not investment advisors (stock pickers) and do not sell any products. Our services are limited to analyzing and planning. We do, however, have reliable contacts with local investment advisors as well as Dan Wiener and Jim Lowell’s premier firm Adviser Investments for investing in Vanguard and Fidelity funds. Their recommendations are based on who is the fund manager and how the fund is invested.
Social Security and Medicare
Google, “You’ve earned a say” for a lot of AARP information on these timely topics. See our Annual Tax Reference Guide on our “Resources” page for a list of Social Security data. If you need more specific information, contact Social Security at 1 800 772 1213 or on the Internet at www.socialsecurity.gov. Discuss your Social Security planning options with one of our tax advisers.
How Secure is Social Security?
According to a recent Pew Research Survey, 31% of those over 50, to 47% of those under 50, do not think Social Security benefits will be available for them when it is their turn to collect.
They may be wrong!
According to the annual Trustees Report dated July 19, 2015, the Social Security Trust Fund is strong and healthy. In 2014, after paying benefits to 42 million retired workers, there was $25 billion in excess of collected revenue, $884 billion collected, $859 billion paid. Since 1958, collected revenue has exceeded paid benefits in 26 of the 57 years, 45.6% of the time. During 2014, 166 million workers paid into the Social Security Trust Fund, almost 4 workers paying into the system for every retired person receiving benefits.
The Trust Fund has $2.8 trillion in low interest paying Treasury Bonds. They help finance the government’s debt. However, the trustees have urged Congress to increase the payroll tax from 6.2% to 7.5% for both employees and employers (15% for self-employed), to keep the Trust Fund solvent for the next 75 years. Without a rate increase or other changes, such as allowing income above the current earning limit of $118,500 to be subject to the payroll tax rate, (as is the case with the Medicare Tax), or age and benefit adjustments, the trustees project a benefit reduction in 2033 to 77%, and then to 72% in 2088.
Yes, Congress needs to pass legislation to prevent the projected shortfalls, just as they did 33 years ago, in 1983, when Tip O’Neal (D-MA) was the Speaker of the House and Howard H. Baker, Jr. (R- TN) was the Senate Majority Leader and the GOP’s most popular President, Ronald Reagan was in the White House. Keeping Social Security strong and healthy for future retiring generations will take cooperation and compromise between the political parties and their various special interest caucuses to pass the necessary fixes.
However, the GOP members of Congress would prefer to privatize Social Security and turn Medicare into Voucher Program. Read the new “Blog/Topic” – Why Good Quality Health Insurance Is So Important!
The sooner this is done the less painful it will be for all of us!
There are many national groups such as The AARP, The American Academy of Actuaries, The National Organization of Women, various financial planning groups (Social Security Benefits are a major part of retirement planning) and our own national professional group, the AICPA, who are pressing Congress for action.
The more pressure that is put on Congress the sooner they will respond.
Note: The benefit enhancing loophole for married couples known as “File and Suspend” was be eliminated on April 30, 2016. This will reduce some Trust Fund distributions.
This is how it worked:
Upon reaching full retirement age, one spouse files for Social Security benefits and immediately suspends them. Filing for benefits makes the other spouse eligible for spousal benefits (which cannot be claimed until the primary worker files for them), but since the primary worker’s benefits are suspended, the initial filer can earn the delayed retirement credits of 8% per year until age 70. At that point, (age 70) the file-and-suspend spouse reclaims their higher benefit, and the other spouse gives up the spousal benefit, and instead takes their own, now higher, personal monthly benefit payment. A win-win for married couples, but costly to the Social Security Trust Fund. 8% annual cost vs. the low Treasury Bond interest income, a net annual loss of approximately 5% to 6%.
A provision in the BBA of 2015, stated that when you suspended your benefits, you not only suspended them for yourself, but also for anyone else entitled to benefits based on your earnings, presumably, this includes ex-spouses.
Pending several “repeal and replace” proposals, and Presidential Executive Orders, currently, the following is still the law!
The Patient Protection and Affordable Care Act of 2010
(also known as “Affordable Care Act” and/or “ObamaCare”)
If you Google for “the text of the Affordable Care Act” or any other combination of the law’s title, you will receive numerous options ranging from a 2,409 page (December 24, 2009) Senate (as passed) version, plus a 55 page House reconciliation from January 5, 2010 or a shorter 974 page compilation version, as amended through May 1, 2010. Lots of reading, or you may opt for one of the many summaries in both long and short form versions. There is also an Employer’s Guide to Health Reform (2014) available for $39.95 from OCH — , call 888-336-8818. Obviously, there is way too much content for us to detail here, so the following is our interpretation of some of the more important facts of this very controversial law. lt passed the Senate at the end of 2009 and the House at the beginning of 2010 with yes votes from only Democrats; the then minimum required 60 votes in the Senate, plus 219 yes votes to 212 no votes (including 34 Democrats) in the House. The Affordable Care Act (ObamaCare) has survived over 60 repeal attempts through January 2016 and a 2012, a 5 to 4 Supreme Court decision with President Bush appointed Chief Justice, John G. Roberts, Jr., casting the deciding vote. While there may be future attempts to repeal this law, it is unlikely that it can be repealed prior to 2017. There may be successful amendments offered to modify and/or improve the law, but by 2017 many of the more popular provisions (see below) will be too universally accepted for a 100% repeal of this law.
What is its Purpose?
To provide an acceptable, uniform health insurance coverage plan(s) for everyone in America. Every citizen and legal non-citizen is required to participate in one of the government standardized coverage plan(s) acquired from any non-government owned insurance companies, within or outside of the exchanges. This way the insurance companies will be able to spread their risk pool over participants of all ages, with all types of medical conditions. Doing this is expected to stabilize costs (there will be winners and losers) and to substantially reduce the use of hospital emergency rooms by un-insured people for routine medical care, which indirectly costs all of us. Hospitals are not allowed to refuse care to un-insured people who do not appear to have the ability to pay for medical care. Because the uniform minimum insurance coverage requirement exceeded many of the existing plans, a lot of the existing plans were not available for renewal (cancelled) and their replacement plans may have a higher premium.
The Individual Health Insurance coverage mandate rules have not been extended.
All individuals are required to have proper health insurance coverage or they will be subject to an additional tax fee charge (penalty) on their tax return, due April 15th for the prior year. The charge is the greater of 2% of their annual household income (MAGI), or $325 per adult, plus $163 per child, or $975 for a family. In 2016, this charge will increase to the greater of 2.5% of MAGI or $695 per adult, plus $347 per child or $2,085 for a family.
What Types of Plans Are There, and What is Required as Minimum Coverage?
There are four levels of basic health insurance coverage plans, referred to as bronze, silver, gold and platinum. The higher the level, the better the coverage (lower co-pays) and the higher the monthly premium cost. The following government sponsored medical plans are an acceptable alternative: Medicare (generally only available for people over age 65); CHIP; TRICARE; Veterans Coverage Plans; Medicaid (now available for anyone who has an income below 138% of the Federal Poverty Level and similar government sponsored plans; plus eligible employer sponsored plans, including COBRA and retiree benefit coverage. Lots of choices, so everyone should be able to comply with this law, without any undue hardship.
People, who do not currently have health care insurance, either personally or through their employers, may sign up for health care insurance at www.healthcare.gov. Most Americans who make less than 400% of the federal poverty level ($47,080 for individuals and $97,000 for a family of four), are eligible for subsidies to help pay for their health insurance premiums. You must use the exchange(s) to receive the subsidies, either as a reduction of your monthly premium payment or as a year end tax credit, when ﬁling your tax return.
The following requirements have been in effect since 2010:
- Eliminated lifetime and unreasonable annual limits on essential health benefits, such as emergency services; maternity and newborn care; mental health sen/ices; and pediatric oral and vision care, to name a few
- Provided assistance for those who are uninsured because of pre-existing conditions
- Required coverage for preventive services and immunizations
- Extended dependent coverage up to age 26
- Developed uniform coverage documents so consumers can make apples-to—apples comparisons when shopping for health insurance
- Capped and limited insurance company non-medical, administrative expenditures
- Ensured consumer(s) have access to an effective appeals process and provide consumer(s) a place to turn for assistance navigating the appeals process and accessing coverage
- Created a temporary re-insurance program to support coverage for early retirees
- Established an internet portal to assist Americans in identifying insurance coverage options
- Facilitated administrative simplification to lower health system costs
- Prohibited recessions of health insurance policies
Additional requirements as of January 1, 2014:
- Individual mandate, minimum standards, exchanges, subsidies, and others, as discussed above
- Guaranteed issue, prohibits insurers from denying coverage to individuals due to pre-existing conditions, and a partial community rating requires offering the same premium price to all applicants of the same age and geographical location without regard to gender or most pre-existing conditions, but excluding tobacco use.
- Reforms to Medicare system are meant to promote greater efficiency in the healthcare delivery system by restructuring Medicare reimbursements from fee-for-service to bundled payments. Under the-new payment system, a single payment is paid to a hospital and a physician group for a defined, episode of care (such as a hip replacement) rather than individual payments to individual service providers. ln addition it has been asserted that the Medicare Pan D, prescription coverage gap (commonly called the “donut hole”) will shrink incrementally, closing completely by January 1, 2020.
What Are The Tax Costs of ObamaCare?
ln addition to tax fees (penalties) to individuals and families for not having health care insurance coverage, there may be some additional taxes:
- Additional Medicare Tax of .9% on earned income over $200,000 single; $250,000 married/joint
- Additional Medicare Tax on investment income of 3.8% over $200,000 single; $250,000 married/joint except for the excluded gain on the sale of your principal personal residence and does not include earned business income and/or W-2 income.
- A 2.5% decrease in the deductible of medical costs on itemized deductions, with some limited exceptions for people over age 65.
- A 10% tax on indoor tanning services
- An employer mandate for businesses with over 50 full-time equivalent employees to make available health insurance coverage within the 9.5% of income limit for full-time employees or pay $2,000 per employee or $3,000 if employee uses tax credits to buy insurance on the exchange.
See www.obamacarefacts.com for additional information and to dispel some of the myths.
Could Medicare For All Be An Acceptable Alternative?
This is not a new idea. Every year since 2003 (long before the Affordable Care Act of 2010 was approved), the most senior member of the House of Representatives, 50 year plus member Congressman John Conyers, Jr. (D-MI), had introduced and re-introduced his bill, HR 676, “Expanded and Improved Medicare for All Act”… “Medicare for all, everybody in, nobody out”.
Again on February 3, 2015 with 46 Democratic co-sponsors, HR 676 was re-introduced to the 114th Congress. In the past, HR 676 has always died in a committee or sub-committee, despite his many attempts to get an up or down vote from all members of the House.
No law is ever perfect, but a recent poll indicates that more than half of Americans, including 80% of Democrats and 25% of Republicans, support expanding health reform to include, “Medicare for All”.
It was a Presidential Campaign issue prompted by Bernie Sanders, who claimed that twenty-nine (29) million Americans still did not have health insurance and millions more were underinsured, plus many had unaffordable co-pays and/or high deductibles. Additionally, he stated that the U.S. spends more on health care per person, and as a percentage of gross domestic product, than any other advanced nation in the world, but even all that money had not made Americans healthier than the rest of the world. Quite simply, in our high-priced health care system that leaves millions overlooked, we spend more and yet end up with less.
There are many facts that need to be considered in order to make an informed decision. The most influential ones are the history of the 160 year old pro and con debate over government sponsored and/or supported healthcare; the continuing dissatisfaction with the Affordable Care Act (ObamaCare); and how effectively Medicare has actually worked since it was enacted more than fifty (50) years ago on July 30, 1965. The internet is loaded with lots of information on all of these topics and more.
A Brief History Of The Long Quest For Healthcare
In 1854, then President Franklin Pierce declared, “…the federal government should not commit itself to social welfare…”, as he vetoed one of the earliest federal healthcare proposals.
In 1883 Germany started one of the first systems for workers’ compulsory sickness insurance; Sweden followed in 1891; Denmark in 1892 and, by 1912, about a dozen European countries, including the U.K. had some form of government subsidized universal healthcare, or at least the beginnings of it. Canada started its quest in 1916 with its ﬁrst local province success in 1946 with additional successes during 1962, but it was 1984 before all of Canada had an acceptable working system (91% approval rating), 68 years from start to finish.
Theodore Roosevelt, 1901-1909, during the Progressive Era (he was the 1912 losing presidential candidate for the Bull Moose Party) supported health insurance because he believed that, “…no country could be strong whose people were sick and poor…”.
Thirteen of the eighteen presidents who follow him believed in and supported some form of government sponsored and/or supported healthcare. However, despite efforts from many labor groups (unions) at various points in time, even with some limited support from The American Medical Association, plus proposed healthcare legislation in 1917 by the California Social Insurance Commission and health insurance efforts in New York, Pennsylvania, Ohio and Illinois, the debate for compulsory national health insurance ended in disaster. The ﬁrst excuse was post WWI with anti-German socialist insurance opponents claiming it was, “…inconsistent with American values…”.
During the 1920’s, the rising cost of medical care reached the point that it was a more serious problem than the loss of wages due to sickness. Franklin D. Roosevelt (1933-1945) had multiple New Deal offerings that were to be included in the Social Security Bill of 1935. The proposed health insurance provisions were deleted because of AMA oppositions and the fear that including healthcare provisions would threaten passage of the entire Social Security legislation. Another attempt was the National Health Act of 1939, which failed due to the election of a more conservative Congress, but it resurfaced annually for the next 14 years. Had it passed, the act would have established compulsory national health insurance funded by payroll taxes. It had lots of support from organized labor, progressive farmers, and liberal physicians, but met opposition from groups that considered it, “socialized medicine”, which became a symbolic issue in the post WWII years against the, “Communist influence in America”, followed by “Cold War” concerns.
Harry S. Truman (1945-1953) strongly supported efforts were followed by Dwight D. Eisenhower’s (1953-1961) less than enthusiastic efforts, which enabled the AMA to kill any progress in Congress. John F. Kennedy (1961-1963) voiced strong support for the legislation that ultimately became Medicare and his brother, Ted Kennedy (United States Senate 1962-2009), called the enactment of Universal Healthcare the, “…cause of my life…”.
Lyndon B. Johnson (1963-1969) managed to get Medicare and Medicaid passed, which, while not universal healthcare for everyone, does cover approximately 30% of the United States population.
Richard Nixon (1969-1974), according to his top health aid, Stuart Altman, strongly supported healthcare reform and, to the objection of his cabinet, told Casper Weinberger, “…you get this done…”. Ted Kennedy, who initially backed the Nixon plan, at the last minute, under pressure from the labor unions, withdrew his support. Kennedy later stated that, “…walking away from that deal was one of the biggest mistakes of his life…”. Before Kennedy died, he is quoted as saying, “…that was the best deal we were going to get…”.
Every president since Nixon has supported some form of improvement to America’s healthcare system; Gerald Ford (1974-1977) endorsed the Nixon plan, Jimmy Carter (1977-1981) had his own plan to achieve universal coverage. Ronald Reagan (1981-1989) signed several healthcare improvement acts, including COBRA. George H. W. Bush (1989-1993), while he personally did not support any plan, had a good health team who put together a good Republican proposal. Bill Clinton (1993-2001) and First Lady Hillary Clinton tried very hard to pass a major overhaul of the healthcare system (aimed for universal coverage), but could not win Congressional support. George W. Bush (2001-2009) pushed for and signed the prescription drug coverage expansion of Medicare (D—plan), but it was Barack Obama (2009 to 2017) with a Democratic-controlled Congress that managed to get the Affordable Care Act of 2010 passed. This law is far from perfect and its current popularity is about 42% favorable and 52% unfavorable with the remaining 6% not commenting. Thus 160 years after Franklin Pierce declared, “…the federal government should not commit itself to social welfare…”, we have a healthcare law for citizens under 65 that more citizens dislike than like. However, after multiple Supreme Court challenge and over 60 attempts to repeal it, it is still the law and affects your tax return. The law has many strong, good points, but they have been overshadowed by its implementation problems, several delays, and confusion about employers’ insurance coverage requirements, including the lack of cost containment and coverage for small (under 50 participants) group plans, and privately purchased plans.
So, Can Medicare For All Be An Acceptable Alternative?
To answer that question you must learn what Medicare is, what it covers, and how it works!
Medicare is a national social insurance program, administrated by the United States federal government that pays both the doctors, hospitals, and other caregivers, following a prescribed payment schedule. It pays for about 50% of the cost of medical treatment, plus it includes prescription medication (Drug Plan) with various co-payment requirements for working and/or retired United States citizens (including anyone who has been a legal resident for 5 continuous years) and their spouses who have paid into the system through payroll or self-employment tax for 40 quarters, 10 years. There is a high-cost option available to applicants who do not have sufficient working credits. Medicare covers approximately 15% of the United States population, approximately 40,000 participants over 65 and approximately 8,000 participants under 65 who have a qualifying disability. All participants pay a mandatory monthly government insurance fee based on their adjusted gross income per their prior year’s tax return. The higher their income, the higher their mandatory monthly insurance fee. In addition, participants can choose from a variety of Medigap insurance policies, from approximately 30 different privately-owned insurance companies, to provide additional financial coverage for medical care costs not covered by Medicare. The government sets the various Medigap insurance coverage levels and standards, but the private insurance companies set their own prices for the additional Medigap insurance coverage, so you can shop for the best pricing.
Expanding the number of participants to include younger and statistically healthier people would increase the income flow to the Medicare Trust Fund and, at the same time, lower the average medical cost per participant. Anyone who has ever purchased group insurance, life, disability, health, etc. knows that the larger and more diverse the age of the group, generally the lower the individual’s cost. Insurance companies call this spreading the risk. It’s also true in automobile, homeowners, and general liability insurance; you get a discount if you buy several types of insurance from the same company. Generally, the larger the group being insured, the lower the individual’s insurance premiums.
Obviously, Medicare has a well-established trust fund, experienced administration and, in spite of future funding issues, generally the public consensus is to keep existing Medicare benefits for all participants, including future participants. The program has a 77% favorability rating and most people over 65 who are on Medicare, in spite of their political party affiliation, say,
“…Don’t tinker with my Medicare …”.
This program will remain secure for the long term if its income stream (revenue provided by taxes and insurance premiums) remain consistent with its ongoing benefit payments. The working public pays into this program from the very first day they work for legitimate, reported wages that include withholding taxes for Medicare, and continue to pay as long as they are working or self-employed, even while collecting benefits. Because of America’s aging population, the Medicare population is growing and in the future will include a larger percentage of the American population without any change in the age eligibility. Currently, Medicare covers the highest medical risk category (insurance pool) in America, thus the highest medical cost per participant, which in recent years, because of the rising cost of medical care, has caused a major political discussion. There are many who believe that the government should not be in the medical insurance business. This had been part of the political debate for both ObamaCare and Medicare, but Medicare is not a free ride; it is not an unpaid right or privilege. As stated above, all of the participants have paid into the trust fund during their working careers (those that hadn’t, pay a higher insurance premium), and everyone continues to pay while they are benefiting from the payment of their medical costs.
To help offset the growing cost of Medicare benefits, beginning on in 2013, anybody with earned income (wages) in excess of $200,000 for single ﬁlers and $250,000 for joint filers pay an additional 0.9% in Medicare tax on their excess income. Anybody with investment income (interest, dividends, capital gains, net rental income and other similar non-wage income) in excess of $200,000 for single ﬁlers and $250,000 joint filers pays 3.8% on their excess income. This is the first time that investment income has been taxed to produce Medicare Trust Fund revenue. These taxes were included in the Affordable Care Act of 2010.
There will certainly be efforts in the future to repeal The Affordable Care Act, but currently it is questionable if a 2/3 majority (67%) of Congress can be achieved to override any expected President Obama veto. Thus, I continue to raise the question,
“ls Medicare an acceptable alternative?”
“Should Medicare be made available for all U.S. citizens?”
This could easily be accomplished by eliminating the minimum age 65 eligibility requirement. The end result would be a substantially larger insurance risk pool that would include younger and statistically healthier people. This would lower the overall medical cost per participant and at the same time substantially increase the Medicare income with new revenues from the monthly insurance premiums from all of these younger participants. Additionally, the new participants, at their option, could choose from the same available Medigap insurance policies offered by the 30 plus independent (non-government) insurance companies.
If everyone is on Medicare from the day they are born (cradle to grave), the intended goal of The Affordable Care Act, that everyone have an acceptable standardized health insurance plan, would be 100% accomplished. Additionally, the medical community would benefit from a standardized claims processing system that they have used for years, and not the current multi-form system depending on what type of insurance coverage the patient has or doesn’t have and if the doctor(s) and/or the hospital is part of your insurance company’s network.
However, attempts to change Medicare may be proposed – see the new “Blog/Topic” – Why Good Quality Health Insurance Is So Important!
We welcome your comments (they can be anonymous) on this thought provoking subject. if we receive an acceptable quantity of pros and/or cons, we will publish the generic results in a future newsletter and pass the resulting information along to Congress. Fax your comments to 856-829-4422; email email@example.com, subject “Medicare” or just mail a note to our office.
A complex subject made more difficult by complicated tax laws. A divorce property settlement agreement may be one of the most important documents you will ever sign. Before you sign it, have one of our tax advisers analyze the agreement and explain its tax consequences.
The sale of your principal personal residence at a gain of up to $500,000 for joint filers or $250,000 for single filers, if you have lived there for two out of the last five years (there are some limited exceptions), will usually not be taxed. This rule applies only to your principal personal residence and does not include vacation, rental, or business properties.
Real Estate Loss Deductions
Real estate investments are normally capital assets, subject to the capital gain and loss rules. However, real estate rental losses are subject to the passive loss rules and are not always deductible. Suspended losses are carried forward until there is a profit or the property is sold. Taxpayers who are actively working in real estate (at least 750 hours per year) may be eligible to deduct their rental losses.
Domestic Workers Tax
The so-called “Nanny Tax” covers all domestic workers (over age 18), including baby-sitters and requires annual reporting of payroll taxes. The wage threshold is $2,000 for 2016 ($2,000 for 2017), per employee. Employers of domestic household workers must provide a W-2 by January 31st and file a Schedule “H” (Household Employment Taxes) as part of their personal tax returns. Domestic employers may also be subject to federal and state unemployment taxes, which may require quarterly state filings and workers’ compensation insurance. Check your homeowner’s insurance to see if you have coverage for domestic workers.
This newsletter is designed to provide general information about the subject matter. lt 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!