Affordable Care Act

Hiring Someone? You Must Have Employees Fill Out These Forms.

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Most employers know that when they hire a new employee, they must have the employee fill out a Form W4 so the employer can determine the amount of taxes to withhold from the employee’s paycheck.  Unfortunately, there are other forms new employees must fill out or the employer could be subject to penalties.  This post will describe those other forms.

Form I-9

Form I-9 is required to document verification of the identity and employment authorization of each new employee (both citizen and noncitizen) to work in the U.S.  Employers are responsible for completing this form and retaining the form.

Newly hired employees must complete and sign Section 1 of the form no later than the first day of employment.  Under this section, the employee states his citizenship/residency status under penalty of perjury.  The employer must then obtain documentation that verifies the employee’s identity and employment authorization.  This can be done by obtaining a copy of the employee’s driver’s license and Social Security Card, although other forms of documentation may be obtained.

Michigan New Hire Reporting Form

Federal law requires employers to report information about newly hired and rehired employees to a state agency within 20 days of the hire/rehire.  The information on this form is matched with state and national data to help collect child support through income withholding and reduce fraudulent unemployment and workers’ compensation payments.

A copy of the Michigan New Hire Reporting Form can be obtained here.

Affordable Care Act Notices

This requirement came into existence two years and is described in more detail here.  An employer covered by the Fair Labor Standards Act must provide each of its employees (part-time and full-time) with a notice informing the employees of their right to enroll in health insurance coverage through a state insurance marketplace (exchange).

Employers who have at least 1 employee engaged in commerce and who have gross annual sales of $500,000 or more are covered by the Fair Labor Standards Act.  So many employers are subject to this requirement.

The Department of Labor has two model forms employers can use to give to their employees.  If you already provide health coverage for your employees, use this model form.  If you do not provide health coverage for your employees, use this model form.

Form W-4

Finally, employees fill out Form W-4 so their employers can determine how much estimated tax should be withheld from the employees’ paychecks.   If an employee’s allowances under state income tax differ from the number of allowances under the Federal Form W-4, the employee may fill out a Form MI-W4 to claim a different number of allowances for state income tax purposes.

If you have questions on how this relief applies to you, give us a call.

 

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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.

 

Penalty Relief for Paying Back the Obamacare Premium Tax Credit

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Background

Individuals who signed up for health insurance through an exchange may have been eligible for a Premium Tax Credit to help them pay for health insurance.  The credit was paid directly to the health insurance provider during the year.  The amount of the credit was based on estimated household income for 2014.  Now that 2014 is over, and actual household income is known, the amount of the credit must now be reconciled based on actual household income.

If a taxpayer received a higher Premium Tax Credit that she was supposed to receive (i.e., her actual household income was higher than her estimated household income), she will have to pay the excess credit back when she files her 2014 tax return.

The payment of the excess credit to the IRS is treated as an additional tax.  Since it is treated as an additional tax, there are two issues:

  • whether taxpayers will be subject to late payment penalties if they cannot afford to pay back the amount of the additional tax by the due date of their returns.
  • whether taxpayers will be subject to underpayment penalties because their estimated tax payments and tax withholding were insufficient to cover this additional tax

Luckily, the IRS just issued guidance stating that taxpayers will not be subject to either penalty if they meet certain conditions.  This relief is only available for 2014 tax returns, so if taxpayers expect any of their 2015 Premium Tax Credit will be paid back, they will have to increase their 2015 federal income tax withholding or estimated tax payments to avoid these penalties.

This relief does not apply to the Shared Responsibility Penalty (the penalty for not having health insurance) because the penalties do not apply to the Shared Responsibility Penalty anyway.

Avoiding the Failure to Pay Penalty

To avoid the penalty assessed for failing to pay tax due by the due date of the return, taxpayers must:

  • be current with their filing and payment obligations
  • have a balance due for the 2014 year due to the excess Premium Tax Credit and
  • report the amount of the excess Premium Tax Credit on their timely filed 2014 tax return, which may be extended

 Avoiding the Underpayment Penalty

To avoid the penalty for under-withholding and underpayment of tax estimates due to the excess Premium Tax Credit, taxpayers must:

  • be current with their filing and payment obligations and
  • report the amount of the excess Premium Tax Credit on their timely filed 2014 tax return, which may be extended

Taxpayers will be treated as being current with their filing and payment obligations if, as of the date they file their 2014 tax returns, they:

  • have filed, or filed an extension for, all currently required federal tax returns
  • paid or have entered into an installment agreement (which is not in default), an offer in compromise, or both to satisfy a federal tax liability

While this guidance allows taxpayers to avoid penalties, taxpayers must still pay interest on the excess Premium Tax Credit until it is paid back in full.

Claiming Relief from Failure to Pay Penalty

The IRS will send a notice assessing the penalty.  Taxpayers should submit a letter to the IRS that contains the statement, “I am eligible for relief granted under Notice 2015-9 because I received excess advance payment of the premium tax credit.”

Taxpayers who file by April 15, 2015 will be entitled to relief even if they have not fully paid the underlying liability by the time they request relief.

Taxpayers who file after April 15, 2015 must fully pay the underlying liability by April 15, 2016 to be eligible for relief.

Claiming Relief from Underpayment Penalties

Taxpayers should check box A in Part II of Form 2210, complete page 1 of the form, and include the form with their tax return, along with the statement, “Received excess advance payment of the premium tax credit.”

If you have questions on how this relief applies to you, give us a call.

 

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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.

 

 

How the Affordable Care Act Will Affect this Tax Season

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This is the first tax season that will be impacted by the Affordable Care Act’s premium subsidy and penalty for not having health insurance.  This post will provide an overview of what to expect over the next few months.  I have included links to prior blog posts about specific aspects of the Affordable Care Act.

 The Challenge for this Tax Season

Beginning with 2014 tax returns, individuals must prove that they had qualifying health insurance for each month of the year.  Providers of health insurance coverage will be required to report health insurance information to individuals so they have proof of coverage for each month of the year. The challenge for the 2014 coverage year is that only individuals who purchased coverage through the health insurance exchange will receive Form 1095-A  that reports to them the months they had coverage, who in their family had coverage, and the amount of any premium assistance credit they received during the year.  Other health insurance providers (e.g., employers) are not required to provide this information for the 2014 year—they will be required to report this information on Form 1095 beginning with the 2015 coverage year.

 Reconciling the Premium Assistance Credit

During 2014, qualifying individuals received the Premium Assistance Credit based on estimated 2014 income they provided last year when they applied for coverage.  Now that their 2014 income is known, they will reconcile the Premium Assistance Credit received based on estimated income with their actual income.  They will be required to either refund any excess credit (actual income higher than estimated), or may be entitled to an additional credit (actual income lower than expected).  The amount of credit required to be paid back to the government may be limited.  The reconciliation is done on Form 8962.

 The Penalty for Not Having Health Insurance

Individuals who did not have health insurance for each month of the year will be subject to the Shared Responsibility Penalty.  There are a number of exemptions an individual may qualify for that allows her to avoid the penalty.  These exemptions are claimed on Form 8965.  However, individuals are required to apply for certain exemptions directly from the exchange (and before they file their tax return).

As mentioned above, only individuals who purchased coverage through an exchange will receive a Form 1095-A that establishes the months they had qualifying coverage.  All other individuals must maintain their own proof of coverage (e.g., monthly health insurance statements, employer summary plan descriptions, etc.)  While the IRS cannot enforce the Shared Responsibility Penalty by lien or levy, they can reduce an individual’s refund by the amount of the penalty and/or send tax notices to individuals.  Neither situation will be pleasing.

 There’s Always Next Year…

Beginning with the 2015 coverage year (relevant to next tax season), applicable large employers who are required to provide health insurance to their employers will issue Form 1095-C .  Other employers will report health insurance information to their employers via Form 1095-B.

 

If you have questions about how this applies to you, please contact us.

 

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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.

The New Medicare Tax on Investment Income

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Under the 2010 Health Care Act, Medicare taxes will be going up for certain people on January 1, 2013.  There are two separate Medicare tax increases.  One will be a 3.8% Medicare tax on unearned income.  The other is a 0.9% Medicare tax on wages and self-employment income.  This post describes the 3.8% Medicare Contribution Tax on unearned income.

The Medicare Contribution Tax (3.8%) on Unearned Income

This tax is levied on unearned income such as interest, dividends, annuities, royalties, rents, and capital gains.  It also includes flow through income from an LLC or S corporation in which the owners are not active (e.g., investors ).

The tax is 3.8% of the lesser of:

  • Net investment income OR
  • The excess of modified adjusted gross income over the applicable threshold amount

Some definitions:

Net Investment Income is investment income reduced by investment expenses (e.g., research expenses, advisory fees, etc.)

Modified Adjusted Gross Income is adjusted gross income increased by excluded foreign earned income (there is an exemption from U.S. tax for certain income earned overseas-but this is a topic for a separate blog post).

The Applicable Threshold Amount is $250,000 for joint filers or surviving spouses, $200,000 for single filers, and $125,000 for married filing separate filers.

Net Investment Income Does NOT Include:

  • Distributions from regular or Roth IRAs
  • Distributions from 401(k) or other qualified plans
  • Social Security Income
  • Life insurance proceeds
  • Municipal bond interest
  • Veterans’ benefits
  • Gain from the sale of a personal residence if the gain doesn’t exceed the exclusion amounts of $500,000 for a joint return and $250,000 for a single filer
  • Income from businesses where the owners materially participate

Example:  John files a joint return and has $150,000 in wages, $30,000 in interest income, $70,000 in rental income, and a $30,000 gain on the sale of a rental property.  John’s modified adjusted gross income is $280,000.  John’s net investment income is $130,000 (the $30,000 in interest, $70,000 in rental income, and $30,000 gain from the rental property).  John’s Medicare Contribution tax equals 3.8% times the lesser of:

  • Net investment income of $130,000 OR
  • The excess of modified adjusted gross income over the applicable threshold amount.  This amount is $30,000 ($280,000 modified adjusted gross income less $250,000 threshold amount).

John’s Medicare Contribution tax is therefore $1,140 (3.8% times $30,000).

Example 2: Jill has $200,000 in wages.  She is a passive investor in an S corporation, ABC Corp (i.e., outside of her investment in ABC Corp, she has no involvement in the business).  She has $100,000 in flow through income from ABC Corp.  She also sold some of her ABC Corp stock for a $50,000 gain.  Jill’s modified adjusted gross income is $350,000.  Since Jill is not active in ABC Corp, her flow through profit of $100,000 and her gain on sale of stock of ABC Corp of $50,000 are considered investment income.  Jill’s Medicare Contribution tax is calculated as 3.8% times the lesser of:

  • Net investment income of $150,000 OR
  • The excess of modified adjusted gross income over the applicable threshold amount.  This amount is $100,000 ($350,000 modified adjusted gross income less $250,000 threshold amount).

Jill’s Medicare Contribution tax is $3,800.

Example 3: Joan works full time in her S corporation, ABC Corp.  She has $200,000 in wages and $100,000 in flow-through profit from ABC Corp.  She also sold some of her ABC Corp stock for a $50,000 gain.  Based on Joan’s full time employment in ABC Corp, she materially participates in the business.  Since she materially participates, her flow through profit of $100,000 and gain on sale of stock of ABC Corp of $50,000 are NOT included in net investment income.  Therefore, Joan is not subject to the 3.8% Medicare Contribution tax.

Some tips on avoiding the Medicare Contribution Tax:

  • Try to accelerate income into 2012 so that modified adjusted gross income in 2013 will be under the threshold
  • People owning rental property should try to qualify as a real estate professional
    • This requires more than 50% of time spent in real estate activity and 750 hours per year in real estate activity
    • Consider investing in municipal bonds
      • Municipal bond interest is not subject to the 3.8% tax
      • It also does not increase modified adjusted gross income so it may reduce the tax on other investment income
      • Business owners should try to qualify as active owners in their businesses so that flow through income and gain on sale of ownership interests are not subject to the tax.

For more information on how this applies in your situation, please give us a call.

 

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.

Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230

 

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