2014 Tax Update
Health Insurance Changes hit Everyone’s Tax Return!
The biggest change hitting your tax return this year will be as a result of switching from RomneyCare to the Affordable Care Act (ObamaCare). Under RomneyCare you got a Form 1099-HC from your insurance company. Now, you will get a different form. Those who have get insurance through work will get a Form 1095. If you get insurance through the MA Health Connector
you’ll get a Form 1099-H. (Note: In MA. the MA Health Connector did not function all year, so we’re waiting to see what form you get.)
The other big change is how the premium subsidies work. Under RomneyCare we would determine the subsidies you were eligible for by looking at your previous year’s tax return. So, your 2012 income determined the subsidies you were entitled to in 2013. Under the Affordable Care Act, they (were supposed to) ask you to estimate your 2014 income and give you an ADVANCE on the tax credit you expect to get, paid directly to your health insurance company. Then, at tax time, you get a Form 1099-H from your insurance company reporting exactly how much subsidy they received on your account, and you do the new Form 8885 to true it up: figure how much subsidy you were actually entitled to now that you know your 2014 “household income.”
“Household Income” is a new concept, too. If you get a subsidy for your health insurance premiums, we will have to combine the modified adjusted gross incomes of everyone who is claimed on your 1099-H, and anyone who is claimed as a dependent on your tax return and/or is covered under your health insurance policy. We’ll want to do those tax returns together so we can fill in the Form 8885 for the insurance holder.
Premium tax credits are available on up to 400% of Federal Poverty Level, about $46,000 for a single person. If your combined modified adjusted gross income is under 400% of poverty level, there is a cap to the amount you have to repay if you got too much of an advance on your premium subsidy. See the dollar threshholds here: [Federal Poverty Guidelines]
If you estimate your income to be under 250% of poverty level (see link above), you are also eligible for copay subsidies. It looks like they don’t have to be repaid if you turn out to earn 251% of poverty level (although your premium tax credit will need adjusting.)
So, my advice is to estimate your income high for 2015, but stay under 250% of the poverty level if you’re close to that threshhold, and when you do tax planning near the end of the year make sure you keep your income under 400% of the poverty level if you’re close to that threshhold. We do these sorts of planning engagement here, but if you want to do it yourself, here are websites with more information about calculating modified adjusted gross income and on the premium tax credits: [Berkeley Labor Center Website] [IRS Website]
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Working Under the Table is a Thing of the Past
Because there is so much incentive to stay under these income thresholds to receive subsidized care, they are practically forcing everyone to issue 1099-MISC to subcontractors. (The Contractor might tell you they are paying you under the table, but when they go to do their own taxes and discover they have to pay $650 in fines for paying someone $1000 without issuing a 1099, they will change their minds and send the 1099-MISC late.) The Department of Labor was just given a huge budget increase to go out searching for unreported labor. In MA the Department of Unemployment Insurance is the database used to determine your income for the estimate of your subsidy eligibility, and they want to make sure everyone is reported in that system. Worker’s Comp is after 1099 workers, too, because they get more insurance premiums if they include those. When someone says “we never did 1099s before” I have to explain that it’s written right into those 402 pages of the Affordable Care Act.
I can get 1099 forms for free. Let me know if you want some. I can either do the forms for you or give you the blank forms to do yourself. Basically, the rule is, if you want to deduct what you paid someone, you need to send them a 1099 if they are a sole proprietor, LLC, partnership, or an attorney, and paid them over $600 during the year. The best thing to do is to give them a W9 (get one here:http://www.irs.gov/pub/irs-pdf/fw9.pdf) and ask them to fill it out. It gets you the information you need in January to do the 1099 and it gives them a heads up that you’re declaring it.
Big Changes for Landlords
There is a complex change in the way buildings are viewed for depreciation schedules. It mostly affects landlords. My old rule of thumb was “if there was a dumpster involved, capitalize it. If there wasn’t, call it repairs.” Sadly, Congress did not choose my method. Landlords, I am putting together an article for next month’s Landlords Business Association newsletter. There’s some good as well as bad mixed in. Let me know if you’d like to receive the article.
Expiring Tax Deductions
There are a number of tax deductions that expired at 12/31/2013. Most people think that Congress will extend them, but they haven’t yet so we can’t be sure they will. These include popular deductions like the $250 in school supplies deduction for teachers, and the ability to make charitable contributions right from your IRA instead of taking an RMD. Watch the news – and my Facebook page – for more information as it develops.
Identity Theft and Tax Returns
Fraudulent tax returns using stolen identities have become a massive issue, over-running all other fraud and endangering the very concept of getting a quick refund. I’ve been talking about this for years, but this year it really blew up. A new thing that has shown up on the scene: fraudulent preparers! Last year I heard there was a guy offering to pay people to do their returns for them. He was changing it after they filed to get a larger refund, but redirecting the excess (fraudulent) part to his own bank account. Not legal – I am not allowed to siphon off your refund to pay the tax prep bill –but it is technically possible.
Because of all this, MA now require random taxpayers to go online and confirm their identity using credit bureau information before they will issue a refund. Since they’re using Experian for the MA Health Connector my guess is that they’ll use it for this, too. It’s probably a good idea to go check your Experian credit report (see Financial Wellness Checklist, below).
Year End Tax Planning:
Tax planning issues vary substantially from person to person and situation to situation.
The AMT patch has been made permanent, so AMT issues are a matter of timing now. The 0% rate on capital gains and dividends is still in place for people in the 15% bracket or lower. The biggest traps, though, pertain to people who are near the 400% of the Federal Poverty Level ($94,200 for a family of four). If you get subsidized health insurance you want to try very, very hard to make sure you keep your adjusted gross incomeunder that line.
For people who don’t normally file tax returns: if you have so little income that you’re going to have no taxes, this is a good year to stop deferring the taxes on “tax-deferred income” like IRAs and 401(k)s and either move them to a taxable account or convert them to a Roth IRA. I’d rather see someone take $10,000/year out of their Trad. IRA than take nothing out for 10 years and then need $100,000 out all at once. Lump sums of retirement income cause all sorts of havoc and many a taxpayer has discovered that they deferred the taxes so long that they ended up paying them at the highest tax bracket of their lives.
If you have a child in college there are advantages to paying at least $4,000 towards tuition in this calendar year, even if the bill isn’t due until 2015. (You can prepay some.)
Make sure family members who are over 65 and paying real estate taxes or rent check out whether they are eligible for the MA Circuit Breaker Credit. It’s over $1,000 for people who are paying a significant portion of their income towards housing costs. It’s getting harder to find places to do their tax returns for free because of all the preparer fraud out there. We do them, though!