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Archives for February 2016

Keep An Eye Out for Obamacare Tax Forms

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Form 1095Tax season 2016 is well under way.  This tax season is the second year that the Affordable Care Act has an effect.  Last year was the first year the Form 1095-A was distributed to taxpayers who purchased health insurance from the exchange.  This form was used to (1) prove that individuals had qualifying health insurance coverage to avoid the Shared Responsibility Penalty and (2) calculate the Premium Subsidy available to qualifying individuals to help them afford their health insurance premiums.

This year, two more forms will be issued to taxpayers so they can prove that they had qualifying health insurance throughout 2015.  Form 1095-C will be issued to employees who work for Applicable Large Employers (ALEs).  ALEs are employers that employ 50 or more full time equivalents and are required to provide their employees with health insurance under the Affordable Care Act.

Form 1095-B will be issued by all other providers of health insurance (e.g., small employers, Medicaid, etc.)

The deadline for the Marketplace to provide Form 1095-A is February 1, 2016.  The deadline for coverage providers to provide Forms 1095-B and employers to provide Form 1095-C has recently been extended to March 31, 2016.

Yes, Forms 1095-B and 1095-C don’t have to be issued until March 31, 2016 while the deadline to file tax returns this year is April 18 (Emancipation Day is being recognized on April 15 so the filing deadline is April 18).  Many taxpayers therefore won’t receive Forms 1095-B or 1095-C by the time they file their tax returns.  It is not necessary to wait to receive these two forms in order to file.  Taxpayers may instead rely on other information about their health coverage and employer coverage to prepare their returns.  Taxpayers should retain health insurance statements and other proof that they had coverage during 2015.

Taxpayers who will receive Form 1095-A must wait until they receive this form to file their tax returns.  The form has important information required to calculate the Premium Subsidy.

To see how this applies to you, give us a call at 248-538-5331.

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

IRS Is On Lookout for Falsely Padded Deductions

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taxes-1060125_1280Each year the IRS publishes a list of its Dirty Dozen tax scams list. The list usually includes scams such as abusive trusts, improperly inflating refundable credits such as the earned income tax credit, and hiding income or assets offshore.

A new entrant for 2016 is falsely padding deductions on tax returns. Recently, the IRS warned taxpayers to avoid the temptation of falsely inflating deductions or expenses on their tax returns to under pay what they owe or to increase their refunds.

The audit rate for personal tax returns is under 1% so many people feel they can inflate their deductions and there is little chance the IRS will find out. However, if the IRS does audit a return with inflated deductions, the taxpayer is in for a nightmare experience.

Civil Penalties

Significant civil penalties may apply for taxpayers who file incorrect tax returns, including:
• 20% of the disallowed for filing an erroneous claim for refund or credit
• $5,000 if the IRS determines a taxpayer has filed a “frivolous tax return.” A frivolous tax return is one that does not include enough information to figure the correct tax or that contains information clearly showing that the tax reported is substantially incorrect
• In addition to the full amount of tax owed, a taxpayer could be assessed a penalty of 75% of the amount owed if the underpayment on the return resulted from tax fraud

Criminal Penalties

Criminal penalties may also be imposed for actions such as:
• Tax evasion
• Willful failure to file a return, supply information, or pay any tax due
• Fraud and false statements
• Preparing and filing a fraudulent tax return
• Committing identity theft

The actual punishment for criminal actions include substantial monetary penalties and jail time.

Most tax return preparers will prepare returns honestly. However a cottage industry for tax scam artists exists. These preparers manufacture tax returns that grossly overstate deductions and create tax returns that qualify for substantial refundable credits such as the earned income tax credit.

The IRS published guidance to taxpayers on properly selecting a tax return preparer.

 

To see how this applies to you, give us a call at 248-538-5331.

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Avoid Paying Tax When Student Loans are Discharged

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student loan forgivenessThe nation’s student loan debt amounts to $1.3 trillion. Unfortunately, many students finish college with crushing debt without the gainful employment needed to pay off the debt. In some cases, student loans may be discharged or paid off by another party.

When debt is forgiven, the amount forgiven is generally taxable income to the borrower.
Fortunately, there are a few special provisions that help students avoid paying tax on discharged student loans.

Excluding Debt Forgiveness in General

There are two primary provisions that allow taxpayers to exclude debt forgiveness from taxable income:
• When the taxpayer is insolvent (i.e., the taxpayer’s total liabilities exceed her total assets), debt discharge income is excludable to the extent of the taxpayer’s insolvency (see example below)
• When the taxpayer’s debt is discharged through bankruptcy, debt discharge income is fully excluded from taxable income

Example: Joan has $100,000 in student loan debt and is unable to find a job in her profession. The student loan is her total debt and the value of all her assets is $25,000. To determine insolvency, Joan’s total assets ($25,000) are subtracted from her total liabilities ($100,000) and Joan’s insolvency is $75,000. Therefore, Joan can exclude $75,000 from taxable income. She must pay tax on the remaining $25,000 of debt forgiveness.

Example 2: Same facts as above except that Joan’s student loan is forgiven through bankruptcy (incredibly difficult to do). Since the student loan was discharged in bankruptcy, the full $100,000 discharged is not taxable.

Special Provisions for Student Loan Forgiveness

Tax Exclusion if Student Loan is Forgiven When Student Works in Certain Professions
Congress enacted a special rule that excludes student loan debt forgiveness from taxable income if the student works for a certain period of time in certain professions and for any of a broad class of employers. Congress enacted this special rule for certain student loans to encourage students to go into such occupations as medicine, nursing, and teaching in rural and low-income areas.

Department of Education Student Loan Discharges
The Education Department can use at least a couple procedures to discharge federal student loans.

Under the Closed School discharge process, the department can discharge a student loan when the student was attending a school at the time it closed or if the student withdrew within a certain period before the closing date. Student loans discharged under this program are excludable from taxable income.

Under the Defense to Repayment discharge process, the Education Department is required to discharge a federal Direct Loan if a student establishes, as a defense to repayment, that the school’s actions would give rise to a cause of action (lawsuit) against the school under state law. Student loans forgiven under this program are taxable unless the student qualifies under the insolvency or bankruptcy exceptions described above.

In 2015, the IRS ruled that students who took out student loans to finance attendance at a school owned by Corinthian Colleges, Inc. (eg, Everest, Everest University Online, Everest College Phoenix, Heald College, WyoTech) are able to exclude student loan debt forgiveness if the student loan was discharged under either the Closed School discharge process or the Defense to Repayment discharge process. This relief helps students whose student loans were discharged under the Defense to Repayment provision by not requiring them to prove insolvency or file for bankruptcy.

When Student Loans are Paid by an Employer

When an employer pays a student loan for an employee, it is taxable compensation to the employee. Simple enough.

 

To see how this applies to you, give us a call at 248-538-5331.

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.