This tax year there are many changes, and everyone who is required to file a tax return will be affected in some manner. I will address the most important ones.
AFFORDABLE CARE ACT (ACA)
What Everyone Needs to Know
The Affordable Care Act is nearing completion of the first year of enforcement. Politics aside, the tax ramifications affect everyone.
Proof Requirement
Tax preparers are required under the ACA to determine if individuals were properly covered and, if not, to calculate the appropriate penalty. Failure on the preparer’s part to properly verify this results in a $500 fine per return—for the preparer. For 2014 you will have no penalty if you had health insurance for 9 full months. While we must calculate the penalty if no proof of insurance is provided, the law has no real teeth as to the penalty. If you do not pay the penalty, currently the IRS cannot come after you, charge penalties, garnish wages or assets, put the debt into collections, or any other form of collections. Your options are:
Option A: You can bring a statement from your insurance company (or from MaineCare, if you are so covered) that lists the names of the insured, the months covered for each person, and a statement that the insurance meets the minimum requirements of ACA. Your employer should be requesting that these letters be sent to you; however, it is your responsibility to have the letter for your taxes. If you’re self-employed, you must request the letter yourself. This must be on an insurance company’s letterhead; there is no exception to this rule if you bring this proof.
Option B: I can verify for you, but, due to the time involved, the fee will be at least $100.
Option C: If you have no insurance, just tell me.
Option D: Persons who prepare their own returns are not required to verify they have coverage or to calculate the penalty. However, if you fail to calculate it and are due a refund, the IRS will redo your tax return, take the money, and your refund will be delayed 8-20 weeks.
Option E: Everyone on your return must be covered by health insurance to avoid the penalty.
Option F: For retirees who have Medicare, I can calculate your months from the SSA form you bring when we prepare your taxes. If retired less than 9 months bring proof of insurance as well or if you are not covered by Medicare for any reason.
Tax on “High Income”
For those with “high incomes” there will be an additional 3.8% tax on the “excess” income to pay for the ACA subsidy program. The excess calculation involves several steps, but any individual with more than approximately $200,000 and married couple with more than $250,000 in income will pay the full surcharge.“Excess” is defined as the amount over the limit. In addition, for those with wages (earned income) over the limits, you will have a 0.9% surcharge.
There is currently some guidance confusion from the IRS and Congress on the exact dollar amount and penalty, as there have been many committee meetings about this over the past several months. I expect surcharges to start at a much lower income rate in the future; however, at this time ,the White House is fighting the lower income limits.
Investment-Surcharge Penalty
Part of ACA is an investment-surcharge penalty which is also planned to be at 3%. However, sale of your primary residence is still exempt from investment income so long as the gain is less than $250,000 individual or $500,000 married. This penalty would not be in addition to the 3.8% but simply part of the formula.
FOR BUSINESS OWNERS
197 Depreciation
197 Depreciation has returned to normal rates, which is limited to $25,000 total for the year. I am pleased about this because, even though many people took advantage of the higher limits over the years, all that was really accomplished by the high limits was a deferral of taxes due, and most people who took the extra depreciation will now have to pay back the money at higher tax rates then if they had taken normal depreciation. Those who financed the equipment will be harmed the most.
Thankfully, most of you listened to my advice, so this year when you hear your friends and neighbors complain about how hard taxes have hit them you can finally feel better about not taking advantage of the “generosity” of Congress.
Section 125 Plans
For businesses with employees I am now setting up Section 125 plans, which will save you and your employees money when buying health insurance—whether or not you provide insurance. There are very few win-win situations in today’s world and this is one of them; however, we must have three people enrolled for the plan to work. In early 2015, I will be offering group and individual policies through Blue Goose. At no cost to you, this company that will shop several insurers to find you the best price. That lets you provide data to just one company rather than having to prepare to meet several companies.
Capital Gains and Qualified Dividends
Capital-gain rates have been returned to pre-recession rates. The rate is 20% long term and 28% short term unless your effective tax rate is lower. However, there are no free gain rates as there have been for that past five years. If you have a profit, you will be paying taxes.
Qualified dividends rates still apply.
CHILD TAX CREDIT
It appears so far that the child tax credit will be continued at the rate of $1,000 per child under 16. This is currently planned to extend to 2018 with certain restrictions which will not affect anyone in my practice. I hope everyone is using the money wisely, because this “gift” is not financially sustainable and is still in debate by several committees.
TAX PREPARATION RATES
Tax preparation fees for 2014 for basic returns will start at $100 and self-employed will be starting at $200. While this is an increase over 2013 my rates are still about half that of tax franchises, and you have the ability to ask me questions year round—and, unlike most preparers, I have been qualified by the IRS to represent you, if needed, for an audit.
Please call if you have questions. Also, I am accepting new clients this year if you know someone who wants to suffer with the rest of us.