Obama Health Law: Failure To Comply Gets Costlier by 2016

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One of the few things most Americans know about the Affordable Care Act, according to a new Kaiser Family Foundation poll, http://kff.org/health-reform/poll-finding/kaiser-health-tracking-poll-september-2013/, is that it imposes a penalty on those who fail to carry health coverage. Still, they may not realize the penalty gets a lot stiffer after 2014, potentially changing the calculation of whether it’s worth going without coverage.

Someone not insured by the end of the first quarter of 2014 will be assessed a penalty of $95 per adult and $47.50 per child or 1% of household income, whichever is higher.

The Internal Revenue Service will compute the 1% of household income penalty on any income in excess of the tax filing threshold, which would be about $10,000 next year. So a person with income of $50,000 would pay the 1% penalty on $40,000 of income, or $400.

In 2015, the penalties rise to $325 per person ($162.50 per child) or 2% of income. The following year, they rise to $695 per person ($347.50 per child) or 2.5% of income. In following years, the increase is tied to the rise in the cost-of-living rate.

No matter how much one’s income, the fine is capped at a level roughly equal to the cost of a basic policy available on one of the new health-insurance exchanges opening Tuesday.

All this means that for “the young invincible”, who is sure that they won’t get sick and don’t want to pay for health coverage, may find it advantageous in 2014 to pay the $95 penalty and take their chances. But by 2016, it will likely make more financial sense to go on the exchange and buy an inexpensive policy than to pay a large penalty and get nothing.

For most people, the penalty isn’t an issue because they already have qualifying health coverage from their employer or from a government program like Medicare.

The IRS will collect penalties but the agency is somewhat constrained in how it will be able to go after the money. Consumers won’t be subject to criminal penalties.

The health law prohibits the government from using liens or seizure of property to collect payments. The IRS hasn’t provided detailed guidance yet, but the agency has said that if someone owes a penalty, it “may offset that liability against any tax refund” due in future years.

Some people will be exempted from the health insurance requirement, including federally recognized Indian tribe members, prisoners and some religious groups. States can also provide hardship exemptions to individuals or families.

4 Tax Breaks Every College Student Should Know About

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With three of my grandchildren currently attending college, I thought this to be a good time to revisit some of the most lucrative tax breaks out there for college students and/or their parent(s).

In the last three decades, college enrollment has increased 11%, while tuition has shot up 200%, a recent report finds (see http://www.nerdwallet.com/blog/investing/2013/73-retirement-norm-millennials/) Today’s college students will graduate into a mediocre job market with median student loan debt of $23,300.00 (see http://www.businessinsider.com/millennials-may-not-be-able-to-retire-until-age-73-2013-10).

Facing such bad odds and with the national student debt nearing $1 trillion, it has never been more important for the college students as well as recent grads to keep as much of their earnings as possible.  Yet the US Government Accountability Office  (see http://www.gao.gov/assets/600/590970.pdf) reported that Americans left behind nearly $800 million in college tuition tax benefits back in 2009 — an average of $466 per person.

The 4 Tax Breaks:

The American Opportunity Credit. Students are eligible to claim up to $2,500 for the first four years of post-secondary education. And since 40% of the credit is refundable, that means students can get back up to $1,000 on their refund — even if they don’t owe any taxes, according to the IRS. What qualifies: Tuition and fees, course-related books, supplies, and equipment. Income: Couples filing jointly who earn less than $160,000; single-filers who earn less than $80,000.

The Lifetime Learning Credit. Students earning less than $60,000 (single-filers) or $120,000 (married, filing jointly), can claim up to $2,000 education-related expenses.

Tuition and fee deductions. Like the American Opportunity Credit, students earning less than $80,000 (single) or $160,000 (married, filing jointly) can deduct up to $4,000 in tuition and fees on their annual tax returns. Use it while you can — this tax break is set to expire at the end of 2013 unless lawmakers extend it.

Student loan interest deduction. If you’ve taken out a federal or private student loan, you’re eligible to deduct up to $2,500 worth of interest paid on the loan as an “above-the-line” exclusion from your income. You don’t have to itemize your deductions in order to claim it.

Note:  College students can only claim one of the above tax credits per year, but parents supporting more than one child in college can claim tax credits on a per-student basis.

Tips if You Are Selling Your Home (Principal Residence)

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If you’re selling your main home sometime this year, here are some helpful tips for you. Even if you make a profit from the sale of your home, you may not have to report it as income.

Here are 10 tips from the IRS to keep in mind when selling your home.

1. If you sell your home at a gain, you may be able to exclude part or all of the profit from your income. This rule generally applies if you’ve owned and used the property as your main home for at least two out of the five years before the date of sale.

2. You normally can exclude up to $250,000 of the gain from your income ($500,000 on a joint return). This excluded gain is also not subject to the new Net Investment Income Tax, which is effective in 2013. (See my blog posted on August 13, 2013)

3. If you can exclude all of the gain, you probably don’t need to report the sale of your home on your tax return.

4. If you can’t exclude all of the gain, or you choose not to exclude it, you’ll need to report the sale of your home on your tax return. 5. You’ll also have to report the sale if you received a Form 1099-S, Proceeds From Real Estate Transactions.

6. Generally, you can exclude a gain from the sale of only one main home per two-year period.   7. If you have more than one home, you can exclude a gain only from the sale of your main home. You must pay tax on the gain from selling any other home. If you have two homes and live in both of them, your main home is usually the one you live in most of the time.

8. Special rules may apply when you sell a home for which you received the first-time homebuyer credit. See Publication 523 for details.

9. You cannot deduct a loss from the sale of your main home. This is not the only area where you get to pay tax on the gain, but do not get to exclude the loss!

10. When you sell your home and move, be sure to update your address with the IRS and the U.S. Postal Service. File Form 8822, Change of Address, to notify the IRS.

IRS Releases Draft of Form 8960 Net Investment Income Tax, the 3.8% Medicare Tax for 2013

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Posted on August 13 2013 by Alice

On August 7, 2013 the IRS released the first draft of thehttp://www.irs.gov/pub/irs-dft/f8960–dft.pdf. Form 8960 will report the new 3.8% Medicare tax on net investment income and will be filed with the 2013 Form 1040 U.S. Individual Income Tax Return and 2013 Form 1041 U.S. Income Tax Return for Estates and Trusts.

Beginning this year, individuals, estates and trusts whose modified AGI (adjusted gross income) exceed the threshold amount will be subject to the new 3.8% Net Investment Income Tax (NIIT). The threshold amounts are:

Married Filing Joint – $250,000
Married Filing Separate – $125,000
Single/Head of Household – $200,000
Estates/Trusts – $11,650

Net investment income for purposes of the NIIT calculation includes dividends, interest, rent, royalties, commercial annuities, net capital gains on assets that produce net investment income and passive trade or business income as well as income from financial instrument trading.  Net investment income is the income after deductions for expenses that are “properly allocable” to the income.

Investment income does not include wages, active business income, pension/IRA distributions, or tax-exempt income.

The IRS is accepting comments on Form 8960 until September 27th.  The instructions for Form 8960 will be released later this year

Should You Buy or Lease Your Next Vehicle?

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Buying or leasing tips

  • Shop wisely. Advertised deals may be too good to be true once you read the fine print. To qualify for the deal, you may need to meet certain requirements, or pay more money up front.

  • To get the best deal, be prepared to negotiate the price of the vehicle and the terms of any loan or lease offer.

  • Read any contract you’re asked to sign, and make sure you understand any terms or conditions.

  • Calculate both the short-term and long-term costs associated with each option.

After declining dramatically a few years ago, auto sales are up, leasing offers are back, and incentives and deals abound. So if you’re in the market for a new vehicle, should you buy it or lease it? To decide, you’ll need to consider how each option fits into your lifestyle and your budget.

The chart below shows some points to compare.

Buying considerations Leasing considerations
Ownership When the vehicle is paid for, it’s yours. You can keep it as long as you want, and any retained value (equity) is yours to keep. You don’t own the car–the leasing company does. You must return the vehicle at the end of the lease or choose to buy it at a predetermined residual value; you have no equity.
Monthly payments You will have a monthly payment if you finance it; the payment will vary based on the amount financed, the interest rate, and the loan term. When comparing similar vehicles with equal costs, the monthly payment for a lease is typically significantly lower than a loan payment. This may enable you to drive a more expensive vehicle.
Mileage Drive as many miles as you want; a vehicle with higher mileage, though, may be worth less when you trade in or sell your vehicle. Your lease will spell out how many miles you can drive before excess mileage charges apply (typical mileage limits range from 12,000 to 15,000).
Maintenance When you sell your vehicle, condition matters, so you may receive less if it hasn’t been well maintained. As your vehicle ages, repair bills may be greater, something you generally won’t encounter if you lease. You generally have to service the vehicle according to the manufacturer’s recommendations. You’ll also need to return your vehicle with normal wear and tear (according to the leasing company’s definition), so you may be charged for dents and scratches that seem insignificant.
Up-front costs These may include the total negotiated cost of the vehicle (or a down payment on that cost), taxes, title, and insurance. Inception fees may include an acquisition fee, a capitalized cost reduction amount (down payment), security deposit, first month’s payment, taxes, and title fees.
Value You’ll need to consider resale value. All vehicles depreciate, but some depreciate faster than others. If you decide to trade in or sell the vehicle, any value left will be money in your pocket, so it may pay off to choose a vehicle that holds its value. A vehicle that holds its value is generally less expensive to lease because your payment is based on the predicted depreciation. And because you’re returning it at the end of the lease, you don’t need to worry about owning a depreciating asset.
Insurance If your vehicle is financed, the lien holder may require you to carry a certain amount of insurance; otherwise, the amount of insurance you’ll need will depend on personal factors and state insurance requirements. You’ll be required to carry a certain amount of insurance, sometimes more than if you bought the vehicle. Many leases require GAP insurance that covers the difference between an insurance payout and the vehicle’s value if your vehicle is stolen or totaled. GAP insurance may be included in the lease.
The end of the road You may want to sell or trade in the vehicle, but the timing is up to you. If you want, you can keep the vehicle for many years, or sell it whenever you need the cash. At the end of the lease, you must return the vehicle or opt to buy it according to the lease terms. Returning the vehicle early may be an option, but it’s likely you’ll pay a hefty fee to do so. If you still need a vehicle, you’ll need to start the leasing (or buying) process all over.

Vehicles and Section 179

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One of the more popular uses of the Section 179 Deduction has been for vehicles. In fact, several years ago the Section 179 deduction was sometimes referred to as the “Hummer Tax Loophole,” because at the time it allowed businesses to buy large SUV’s and write them off. While this particular use (or abuse) of the tax code has been modified with the limits explained below, it is still true that Section 179 can be advantageous in buying vehicles for your business.

Vehicles used in your businesses qualify – but certain passenger vehicles have a total depreciation deduction limitation of $11,060, while other vehicles that by their nature are not likely to be used more than a minimal amount for personal purposes qualify for full Section 179 deduction. Here are the general guidelines for using the Section 179 Deduction for vehicle purchases (full policy statement available at: irs.gov)

Update / IRS Guidelines for Vehicles in 2013

The IRS has not yet released guidance concerning Section 179 and Bonus Depreciation as it relates to vehicles for the year 2013. The guidance will be published in the Internal Revenue Bulletin sometime after April 15th, 2013. So be patient, and check back here often for the release date.

Please note that there are a number of qualifications for vehicles, all with varying tax treatment.

What are the limits on Typical Passenger Vehicles?

For passenger vehicles, trucks, and vans (not meeting the guidelines below), that are used more than 50% in a qualified business use, the total deduction for depreciation including both the Section 179 expense deduction as well as Bonus Depreciation
is limited to $11,060 for cars and $11,160 for trucks and vans.

Exceptions include the following vehicles:

  • §Ambulance or hearse used specifically in your business;
  • §Taxis, transport vans, and other vehicles used to specifically transport people or property for hire;
  • §Qualified non-personal use vehicles specifically modified for business (i.e. van without seating behind driver, permanent shelving installed, and exterior painted with company’s name).

Limits for SUVs or Crossover Vehicles with GVWR above 6,000lbs
Certain vehicles (with a gross vehicle weight rating above 6,000 lbs but no more than 14,000 lbs) qualify for expensing up to $25,000 if the vehicle is financed and placed in service prior to December 31 and meet other conditions.

What Vehicles Qualify for the full Section 179 Deduction?

Many vehicles that by their nature are not likely to be used for personal purposes qualify for full Section 179 deduction including the following vehicles:

  1. Heavy “non-SUV” vehicles with a cargo area at least six feet in interior length (this area must not be easily accessible from the passenger area.) To give an example, many pickups with full-sized cargo beds will qualify (although some “extended cab” pickups may have beds that are too small to qualify).
  2. Vehicles that can seat nine-plus passengers behind the driver’s seat (i.e.: Hotel / Airport shuttle vans, etc.).
  3. Vehicles with: (1) a fully-enclosed driver’s compartment / cargo area, (2) no seating at all behind the driver’s seat, and (3) no body section protruding more than 30 inches ahead of the leading edge of the windshield. In other words, a classic cargo van.

Other Considerations

Vehicles can be new or used (“new to you” is the key).

The vehicle can be financed with certain leases and loans, or bought outright.

The vehicle in question must also be used for business at least 50% of the time – and these depreciation limits are reduced by the corresponding % of personal use if the vehicle is used for business less than 100% of the time.

Remember, you can only claim Section 179 in the tax year that the vehicle is “placed in service” – meaning when the vehicle is ready and available – even if you’re not using the vehicle. Further, a vehicle first used for personal purposes doesn’t qualify in a later year if its purpose changes to business.

FAFSA (Free Application for Federal Student Aid).

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Clients who are applying for financial aid for their college-aged children often ask  us for help in completing their FAFSA (Free Application for Federal Student Aid). The FAFSA is used to determine the family’s financial need and includes information from the tax return.

The IRS now has a data retrieval tool http://www.fafsa.ed.gov/help/irshlp9.htm that enables a parent or student to access and transfer their tax return information directly to the FAFSA. Using this tool will ensure the FAFSA has accurate information and also means a copy of the tax return will not have to be submitted.

The tool is available on the FAFSA website. If the student or parents qualify, they will be given the opportunity to retrieve, display and transfer their federal  tax information. To qualify, one must have filed a 2011 tax return, have a valid Social Security Number, and not have changed marital status since December 31, 2011.

 Help using the tool is available on the FAFSA website. Encourage your clients to use it. That will be one less thing you need to do!

Questions and Answers for the Additional Medicare Tax

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The following questions and answers provide employers and payroll service providers information that will help them as they prepare to implement the Additional Medicare Tax which goes into effect in 2013. The Additional Medicare Tax applies to individuals’ wages, other compensation, and self-employment income over certain thresholds; employers are responsible for withholding the tax on wages and other compensation in certain circumstances. The IRS has prepared these questions and answers to assist employers and payroll service providers in adapting systems and processes that may be impacted.

BASIC FAQs

  1. When does Additional Medicare Tax start? Additional Medicare Tax applies to wages and compensation above a threshold amount received after December 31, 2012 and to self-employment income above a threshold amount received in taxable years beginning after December 31, 2012.
  2. What is the rate of Additional Medicare Tax? The rate is 0.9 percent.
  3. When are individuals liable for Additional Medicare Tax? An individual is liable for Additional Medicare Tax if the individual’s wages, compensation, or self-employment income (together with that of his or her spouse if filing a joint return) exceed the threshold amount for the individual’s filing status:
    Filing Status Threshold Amount
    Married filing jointly $250,000
    Married filing separately $125,000
    Single $200,000
    Head of household (with qualifying person) $200,000
    Qualifying widow(er) with dependent child $200,000
  4. What wages are subject to Additional Medicare Tax? All wages that are currently subject to Medicare Tax are subject to Additional Medicare Tax if they are paid in excess of the applicable threshold for an individual’s filing status. For more information on what wages are subject to Medicare Tax, see the chart, Special Rules for Various Types of Services and Payments, in section 15 of Publication 15, (Circular E), Employer’s Tax Guide.
  5. What Railroad Retirement Tax Act (RRTA) compensation is subject to Additional Medicare Tax? All RRTA compensation that is currently subject to Medicare Tax is subject to additional Medicare Tax if it is paid in excess of the applicable threshold for an individual’s filing status. All FAQs that discuss the application of the Additional Medicare Tax to wages also apply to RRTA compensation, unless otherwise indicated.
  6. Are nonresident aliens and U.S. citizens living abroad subject to Additional Medicare Tax? There are no special rules for nonresident aliens and U.S. citizens living abroad for purposes of this provision. Wages, other compensation, and self-employment income that are subject to Medicare tax will also be subject to Additional Medicare Tax if in excess of the applicable threshold.
  7. Additional Medicare Tax goes into effect for taxable years beginning after December 31, 2012; however, the proposed regulations (REG-130074-11) are not effective until after the notice and comment period has ended and final regulations have been published in the Federal Register. How will this affect Additional Medicare Tax requirements for employers, employees, or self-employed? Additional Medicare Tax applies to wages, compensation, and self-employment income received in tax years beginning after December 31, 2012. Taxpayers must comply with the law as of that date. With regard to specific matters discussed in the proposed regulations, taxpayers may rely on the proposed regulations for tax periods beginning before the date that the final regulations are published in the Federal Register. If any requirements change in the final regulations, taxpayers will only be responsible for complying with the new requirements from the date of their publication.

Customer Refunds: Are You Doing Them Right?

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Refunds……You probably wince at the word. Some — like customer refunds for returns — are fairly uncomplicated, thanks to QuickBooks’ tools. Others, not so much. You may find yourself unable to balance your accounts receivable.

There are numerous scenarios that necessitate the use of credit memos, including overpayment, order cancellations and bad debt write-off. It’s critical that these are entered correctly. If they aren’t, you may lose a lot of the time that QuickBooks helped you save as you try to chase down a few dollars.

 

Figure 1: QuickBooks helps you identify refunds quickly.

Sending money back

Let’s say a customer pays for an order but cancels before it ships. You could:

  • Apply the balance to an existing invoice
  • Keep it as an available credit
  • Issue a refund

Click Customers | Create Credit Memos/Refunds. Select the correct customer and job (and A/R account, if you have more than one). Enter the items just as they appear on the invoice.

When you’re finished, click Save & New.  The Available Credit window opens, displaying your options:

Figure 2: The Available Credit window displays your credit balance options.

You would select Give a refund and click OK. The Issue a Refund window opens and should already be filled in. If everything is correct, click OK. The refund check has now been entered in the checking register, ready to be processed.

WARNING: If the invoice was paid with a credit card, it gets complicated. Your instructions will depend on whether you are using Intuit Merchant Service for QuickBooks or another merchant account service. You’ll also have to deal with transaction fees. We can help you deal with this.

Other refund options

If the customer has open invoices, you may want to choose Apply to an invoice in the Available Credit window. A list opens;  just select the correct invoice. Or if you want to have those extra funds available for other invoices but don’t want to apply them immediately, click Retain as an available credit.  When you want to use them, click the Apply Credits button in the lower right corner of the invoice.

Figure 3: When issuing a refund, QuickBooks can hold those funds to be applied to invoices later.

Sometimes, customers overpay an invoice or statement charge, or make a down payment for which there is no invoice. This is easy to fix. Open the Customer Payment screen (Customer Center | Transactions | Received Payments) and double-click the related payment. In the screen’s lower left corner, you’ll see this:

Figure 4: Click the correct option here.

Click the correct button, then Save & Close. The Issue a Refund window opens; you’d treat it the same way you did when you dispatched a return refund.

Another use

You can also use credit memos to write off bad debt if you are using the accrual method of accounting.

If you don’t already have a Bad Debt item in your item list, set up a new item as an Other Charge. Name it “Bad Debt” and match it to the correct account.

Open the Credit Memo window and select the customer, then select Bad Debt as the item. You’ll get a message saying that the item is associated with an expense account; click OK. Enter the write-off amount minus sales tax if taxable (be sure the Tax column is correct) and click Save & Close.

WARNING: Enter two lines on the credit memo if it combines both taxable and non-taxable items (both charged to the Bad Debt account), one for each type. Be sure that the Tax Columns are correct.

The Available Credit window opens. Select Apply to an invoice. Put a check mark next to the correct one and click Done.

Make refunds make sense

It seemed easier in the days when you just wrote a check for a refund or made an entry in a paper ledger, didn’t it? Using QuickBooks credit memos, though, helps you maintain records that follow standard accounting procedures and simplifies our understanding of your files. We’ll be glad to help you make sure that this sometimes-complex task is done right from the start.