TaxEffects………………a Newsletter

December 2013

Taxes …the Final Frontier

These are the explanations from your Tax Sage,

To explore complex new tax laws,

To seek out new rhymes and more reason,

To boldly go where no one Tax Code has gone before…

Get ready to boldly go where our tax law has not gone before…

Rarely do we get to experience historical change, especially in a country comprised of many who can claim “been there, done that”.  In 2013, we experienced implementation of two pieces of legislation; one had passed years ago and is finally coming into play for tax purposes, and the other is a brand-spanking new federal ruling acknowledging State Law.  I’m referring respectively to the opening of the HealthCare Marketplace on October 1st as the next step in the progression of the Affordable Care Act signed into law in 2010, and the US Supreme Court ruling on DOMA (Defense of Marriage Act) in late June allowing the federal government to recognize the same-sex marriages of those married in states who have legalized Same-Sex marriage. Both have tax implications and will be discussed in this Newsletter along with other standard tax updates and changes.

As always, let’s review some “housekeeping” rules first, which guide you to reaching my office in preparation for Tax Season:

  • Tax Season Office Hours –Mon thru Sat, 9am – 8:30pm.  Tax Day is April 15th for 2014.
    • Building Rules at The Chanin Building, NYC– I am located within the Chanin Building on the southwest corner of E. 42nd Street and Lexington Avenue.  You will need to present photo ID to the security desk prior to coming to the 17th Fl. If arriving after 6pm or on a Saturday, only the Lexington Avenue entrance is open (otherwise there are entrances on both 42nd and 41st St).  Once you have arrived on the 17th Fl, the receptionist will contact me.  If the receptionist is not there (on evenings or Saturdays), you can use the phone in the waiting area and dial (212) 551-1141 (or use the instructions provided by the phone).
    • Delivery of Tax Materials – Due to a heavier client load in the month of March, I will need to have your tax mailing or drop-off by March 20th in order to meet an April 15th deadline.
    • Advance Delivery of Tax Documents–You will be able to send your tax papers to me in advance via a secure portal I have been utilizing (ShareFile).  If you are able to scan your documents, you can email me to request to upload your paperwork, and if you haven’t previously been supplied with a login, I will send an email to you providing you with information on how to upload your pdf to your folder on this portal.

Affordable Care Act (“ACA”) – Individual Healthcare Marketplace and New Medicare Taxes (For full details visit: http://www.irs.gov/uac/Affordable-Care-Act-Tax-Provisions):

The Healthcare Marketplace opened on October 1st, and omitting any commentary on how the federal Marketplace is operating, we need to understand our responsibility as individuals and employers.  The ACA will require, effective January 1, 2014, all individuals to obtain “minimum essential” insurance coverage.  Depending on income levels, you may be entitled to a tax credit or subsidy to assist with your insurance costs, or you may qualify for Medicaid.

As you no doubt already know, many states have provided their own Marketplace for individuals and small businesses which started on  loan, if yours is one of those business, you might want to consider getting professional Business Debt Help. For those within those states, you are not reliant on the federal Marketplace website (i.e., NY, CA, CO, CT, and MA to mention a few). 

It is important for all to be aware of penalties which can be assessed if one does not have insurance coverage and can afford it (according to federal standards).  Please refer to healthcare.gov for details (https://www.healthcare.gov/what-if-someone-doesnt-have-health-coverage-in-2014/).  Note: In 2014, the penalty assessed to an individual is the higher of $95 or 1% of your income (which could be significant).  This % will continue to increase, and in 2016 it will be 2.5% rather than the 1% in 2014.

Small business (in 2014, defined as less than 50 employees) will simply need to notify their employees in writing of the individual’s obligation to obtain insurance.  A link to a sample letter is provided. http://www.dol.gov/ebsa/pdf/FLSAwithoutplans.pdf

NEW Medicare Tax imposed, due to the ACA, on higher income levels –

  • On Earnings – An additional Medicare Tax of .9% (.009) will be required for Individuals with earnings of $200,000 or more (Married Joint, it’s $250,000 when combined with Spouse and Married filing Separate is only an income level of $125K).  Your employer will withhold this if all your earnings come from one employer, but your spouse may not have it withheld properly if his/her earnings don’t also exceed the threshold.  Remember, it’s a combined earnings total of $250K and above for Married Joint filers (this includes Net Self Employment Income).  Also, important to note, the tax is assessed only on the earned income exceeding the threshold.  (Full details: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Questions-and-Answers-for-the-Additional-Medicare-Tax )
  • On Investment Income – See attached link for full definition of Net Investment Income (http://www.irs.gov/uac/Newsroom/Net-Investment-Income-Tax-FAQs ) – With Modified Adjusted Gross Income (AGI including tax-exempt interest & dividend income) exceeding $200,000 for Individual filers and $250K for Married Joint (only $125K for Married Separate), you will now pay an additional 3.8% Medicare Tax on your Net Investment Income.

What this won’t include: earned income, retirement income from qualified plans and social security, unemployment, tax-exempt income, S-Corp profits and partnership income for those who are not passive partners, to name a few.  Sources of income which will be included: passive income such as taxable interest, dividends, capital gains, income from other passive activities (such as rental property and MLPs), and more.

The Medicare Tax will be calculated on the lesser of the Net Investment Income or the amount that exceeds the thresholds mentioned above.

Next up, DOMA US Supreme Court ruling…

Same-Sex couples legally married within states that have legalized Same-Sex Marriage (not including Civil Unions or Domestic Partnerships), are now recognized by Federal law, too.  Couples do not need to reside within the state where they were wed to be considered married for Federal tax purposes; however, state law is relevant for the state tax filing requirements within their home state.

How does this affect taxes, and what taxes does it affect?  (For full details, IRS link provided: http://www.irs.gov/uac/What’s-Hot)

  1. Gift & Estate Tax – We will be filing amended returns for those who gifted their spouse and filed a Gift Tax return for tax years 2010–2012. Also, Form 843 can be filed to request an abatement of estate or gift taxes paid for tax years 2010–2012.
  2. Income Tax – For tax returns filed after September 16, 2013, all Same-Sex married couples can file only as Married Filing Joint or Married Filing Separately for federal purposes and state purposes if they live within a state that acknowledges their legal marriage.  We will also review and determine if there is a tax benefit to filing a joint federal tax return for years 2010–2012 (depending on the date of your marriage).
  3. Other Issues to Consider – 1) Amending to exclude “domestic partner” benefits included in your taxable income (i.e., cost of health insurance premiums on W-2 form).  Again, this applies only to legally-married Same-Sex couples. We would amend Form 1040 for open tax years 2010–2012 (depending on date legally wed).  2) Increasing Estimated Tax payments for tax year 2013 and beyond since your only choices for tax filing status is one of Married Joint or Married Separate.  Since “Single” is now off the table, you could end up owing more money to Uncle Sam. 3) Notifying me of your marriage (applies to everyone) since your tax status can no longer be Single or Head of Household.

With regards to any marriage, please contact my office to alert me to any change in your status, especially if I don’t already work with both you and your spouse.  There is always something to discuss or plan for, tax-wise, when one “ties the knot”.  (Can you say “Marriage Penalty”?)  Last, you are considered married for the entire year no matter what day you are married during the tax year (marrying on December 31st is considered being married for that entire year!)

Let’s move on to standard updates in tax law.  One should be mindful of common year-end tax planning strategies, and get the full bang for your buck in the following areas:

  • Max-out on your retirement plans – Please make an IRA contribution or fully maximize your 401K, etc.  Speak with your banker/financial advisor (if dealing with an IRA or SEP/Simple plan) or your benefits person (if dealing with an employer plan).  The maximum contributions for 2013 & 2014, respectively, are as follows: 401K – $17,500 for 2013 and 2014 ($23,000 if over age 50, for both 2013 & 2014), IRA – $5,500 ($6,500 if over age 50) for 2013 and remaining the same in 2014, SEP plan * – $51,000 for 2013, increasing to $52,000 in 2014, and SIMPLE plan – $12,000 for 2013 & 2014 ($14,500 if over age 50, for 2013 & 2014).  Note: a SEP is limited to the lower of 25% of Net Income or $51,000 in 2013, plus there is a $5,500 “catch-up” contribution those age 50 and over can make annually.  In addition, the caps for the Defined Benefit plans are $205,000 in tax year 2013 and increasing to $210,000 in 2014.
  • Investment activities – The American Taxpayer Relief Act of 2012 (enacted January 2, 2013) extended the following long-term capital gains rate:  1) For Individuals in the 10-15% tax bracket, the “Granny Tax” is back, which is a ZERO % rate.  2) A 15% capital gains rate applies to Individuals in the 25%, 28%, 33%, or 35% brackets.  3) For Individuals in the highest bracket of 39.6%, the 20% long-term capital gains rate will apply.
  • Tax Credits – The American Taxpayer Relief Act of 2012 also extended the 1) American Opportunity Tax Credit (Tuition tax credit) through 2017.  This tuition credit has a maximum $2,500 credit available to those in their first 4 years of post-secondary education.  2) Child Tax Credit of $1,000 became permanent and the refundable portion has been extended through 2017.  The Affordable Care Act has provided for a Refundable Health Insurance Premium Assistance Credit available to those purchasing health insurance on one of the Exchanges (Marketplace), for taxpayers with lower incomes not exceeding 400% of the federal poverty level.  There are other qualifications, such as married taxpayers must file jointly. (For full details: http://www.irs.gov/uac/Newsroom/Questions-and-Answers-on-the-Premium-Tax-Credit)
  • Itemizing Medical Expenses – The ACA made changes to the “floor” an individual must exceed before beginning to deduct medical expenses.  When itemizing medical deductions on Schedule A, you will now need to exceed 10% of your Adjusted Gross Income (formerly was 7.5%) unless you are over age 65. Those age 65 and over have a “floor” of 7.5% through tax year 2016.
  • Health Savings Accounts (HSAs) – The ACA could produce a larger group of individuals (or employers) with high-deductible medical insurance plans. The HSA was created for high deductible plans for individuals who don’t utilize their insurance plans often, thereby creating an ability to set money aside for future medical spending.  The HSA account has a tax-deferred feature allowing a Single individual to contribute up to $3,250 for 2013 ($6,450 for a family), increasing to $3,300 in 2014 ($6,550 family), saving pre-tax dollars while being allowed to spend this savings on qualifying medical expenses.  The HSA account should increase in popularity.  I recommend looking into establishing this account if you are healthy and have (or will have) a high-deductible insurance plan. (A High Deductible plan is defined as having an annual deductible of not less than $1,250 (Self-only) and $2,500 (Family) with combined deductible and other out-of-pocket expenses not exceeding $6,250 (Self-only) and $12,500 (Family) for 2013, increasing to $6,350 and $12,700, respectively.  (More details on HSAs http://www.treasury.gov/resource-center/faqs/taxes/pages/health-savings-accounts.aspx)
  • Estimated Tax Payments – For those who need to prepay taxes, remember that your final payment is due on January 15, 2014.  If you need to pay estimated taxes to a state or locality, you may want to pay by December 31, 2013 in order to take advantage of a federal itemized tax deduction for state taxes paid.  However, if you know you have an Alternative Minimum Tax issue, don’t pay your state taxes prior to 1/1/14.  If you are uncertain whether you should be making a 4th quarter estimated tax payment or would like to re-assess how much to pay, please place a quick call to my office for a review of your 2013 income.
  • Give, Give, Give!! – A tax deductible donation will count for the 2013 tax year as long as you make that donation by December 31, 2013.  Remember, gifts in kind (goods) are the type of donation that make a difference to the nonprofit organization and do not over-burden your bank account.  Examples: a Coat Drive, food donation to your local Food Pantry, or towels & sheets to an animal sanctuary or shelter.  Remember: note the items being donated (detailing is important) and you must receive a receipt from the nonprofit. (See below for recordkeeping rules.)

Standard Mileage Rate – For tax year 2013, the mileage rate for business use of your automobile was increased to 56.5 cents and will increase again to ___ cents for 2014.  The mileage rate for medical & moving was 24 cents for 2013 and may remain the same in 2014.  Charitable mileage remains the same at 14 cents for 2013 and 2014. The 2014 Rates will be posted soon: http://www.irs.gov/Tax-Professionals/Standard-Mileage-Rates

Earned Income subject to FICA (Social Security Tax) – increases to $117,000 in 2014 from $113,700 for the 2013 tax year. 

Payments to Subcontractors – This is an area of concern not only for my self-employed and small business clients, but for anyone who is entitled to this business deduction. If you pay over $600 to any individual for work he/she performed for you, you are required to obtain his/her name, address and Tax ID # in order to be able to issue a 1099-MISC form by Jan. 31st, 2014.  If you need me to issue this 1099, please contact me a week prior to Jan. 31st with the pertinent information.  Please make it a standard practice to issue a W-9 to your independent contractors (for completion by that individual) prior to paying the subcontractor.

Charitable Contributions – The tax laws have not lightened, but have continued to tighten.  Therefore, I am unable to deduct any gift to charity (whether a donation of goods or money) unless there is a receipt. For any individual donation over $250, we also need a letter of acknowledgment (issued timely by the charity).  For Non-Cash Charity, we must have the acknowledgment letter and your detailed list of what was donated, the valuation of the items donated (and the source used for determining the value), as well as the cost (or estimate of the original cost of the item).  Please note: No matter what anyone tells you, we cannot value your time.  Therefore, if you are volunteering, you can only deduct expenses incurred for your volunteer work, and you should submit those receipts to the charity and have them provide you with a receipt.

Please consult my Facebook page, searching for Janice Hayman Tax Accountant, for additional information since I post topics here throughout the year.  Stay safe and be festive!  Wishing peace and happiness to us all …

                                                                                                                                                                                                     Cheers,                                                                                                                                                                                                                                                                                                                   Janice