Tax preparers face a roster of issues going into the 2014 filing season

[kcjenkins]

Looks Like Trouble

Tax preparers face a roster of issues going into the 2014 filing season

12/01/2013

By Roger Russell

The delayed start to the filing season, taxpayers' confusion regarding the implications of the Affordable Care Act, uncertainty over the continuation into 2014 of a number of expiring provisions, the reintroduction of personal exemption phase-outs and Pease limitations on itemized deductions for high-income earners, and the Supreme Court decision on the Defense of Marriage Act are just a few of the issues that will impact practitioners as they gear up for the 2014 filing season.

The Internal Revenue Service announced a delay of approximately one to two weeks to the start of the 2014 filing season to allow adequate time to program and test tax processing systems following the 16-day federal government shutdown in October. The agency said that it is exploring options to shorten the expected delay and will announce a final decision on the start date in December. It said it would start accepting and processing individual returns no earlier than Jan. 28, 2014, and no later than Feb. 4, 2014.

There's a high likelihood that if you don't talk to your clients in December, you won't have happy clients in April, according to wealth management specialist and CFP Russ Holcombe. "High-wage earners, even those just making between $500,000 and $600,000 adjusted gross income, will owe between $10,000 and $13,000 more this year," he said. "People don't like paying taxes, but they especially don't like paying taxes that they're not prepared for. ... The sooner the client knows and the more time they have to think about it before they come to visit, the better. Tax planning and tax communication are more critical this year than ever."

HEALTH SCARE

The Affordable Care Act, with its fees, penalties and fines, is confusing to taxpayers and practitioners alike, noted Beanna Whitlock, a Reno, Nev.-based practitioner and educator, and former director of National Public Liaison for the IRS. "I'm concerned that the average practitioner has not been made aware that the individual mandate begins in January," she said. "We have a three-month grace period before the taxpayer is penalized for not having insurance. Any taxpayer that comes in on April 1 or later should be asked if they have insurance."

"Single persons think they have a $95 penalty, but they don't realize that the penalty is the greater of 1 percent of household income after the exclusions. So for a single person with an income of $400,000, the penalty would be 1 percent of $200,000, which is $2,000, not the $95 they were expecting," she said. "Taxpayers are totally unaware of this secondary calculation. ... Taxpayers want their preparers to take the initiative on this, and if they don't, next year the taxpayers will go to one of the chains."

Another caution is the fact that taxpayers who receive a subsidy to purchase insurance through the health care market will have the responsibility to give it back if it turns out they made more, she said: "If I say my income is between 100 and 400 percent of the federal poverty level, the government will subsidize my insurance; when I come to my preparer and it turns out I shouldn't have received that much, I'm going to have to give it back."

"It's confusing," she said, "but the tax professional will be at the heart of helping the taxpayers understand."

FROM YEAR TO YEAR

Last year, the mantra of postponing income and accelerating deductions was reversed, noted Mark Luscombe, principal analyst at CCH: "It turned out to be good advice for wealthier taxpayers. This year, we're back to the usual advice of accelerating deductions and postponing income."

"While we went through 2012 with expired tax provisions that were not retroactively reinstated until Jan. 1, 2013, they are in effect through the end of 2013, so we won't have to worry about whether or not they will be in effect," he continued. "The only issue is you might want to accelerate some of the deductions to 2013 if you think there's the possibility they won't be around next year. While they have been regularly renewed in the past, it's not at all clear they will be around for the long term if Congress gets serious about fundamental tax reform."

Marc Gerson, former majority tax counsel to the U.S. House of Representatives Committee on Ways & Means and a tax attorney for Miller & Chevalier, believes that Congress will not act on the extenders before the end of the year as Congress continues to focus on fundamental reform of the code. He remains hopeful, as the taxpayer community likely will advocate for a timely extension before expiration at the end of the year. There are several reasons that less attention is being paid to the extenders this year, according to Robert Kerr, senior director of government relations at the National Association of Enrolled Agents. "One reason is that [the Alternative Minimum Tax] is no longer the engine that drives the extender train. Each year we didn't have a fix, we had a growing number of people on the AMT bubble."

Among the expiring provisions, Kerr noted, are the deduction for state and local sales taxes; the deduction for mortgage insurance as qualified interest; the above-the-line deduction for qualified tuition and related expenses; the above-the-line deduction for certain expenses of elementary and secondary school teachers; the Work Opportunity Tax Credit; the increase in expensing and the expansion of the definition of Section 179 property; the research and experimentation tax credit; and the 15-year straight-line cost recovery for qualified leasehold, restaurant, and retail improvement.

For businesses, the year-end issues under the ACA are not quite so significant as they are for individuals, Luscombe noted: "The small-business credit for providing health insurance has been around for three years, and the penalty for not providing employees with insurance has been postponed. So there's nothing coming into effect in January 2014 for business, but there are some for individuals."

"There are a lot of changes regarding the tax treatment of same-sex couples," Luscombe said. "There have been firms that have specialized in this area, but that may change now that the federal government and the IRS have changed. It's considered to be more mainstream, and firms may view it as part of their regular services. Those clients now have to make the decision to change their filing status and whether it makes sense to amend their returns if they were legally married in prior years. It may or may not make sense to amend their returns, depending on the effect of the marriage penalty in their situation."

The requirements in the regulations on the capitalization of costs related to acquire, produce or improve tangible property require some action by the year's end in terms of setting up a de minimis program and determining what change of accounting method to apply, Luscombe indicated.

CALMER, HOPEFULLY

Every year there's a certain amount of legislative confusion and uncertainty in tax, but last year there was wholesale chaos, observed Thomas Long, senior tax analyst at Thomson Reuters. "Because of the American Tax Relief Act, it's a more stable environment this year, but there's still uncertainty," he said. "There's the 0.9 percent payroll tax from the ACA, and the new 3.8 percent surtax on net investment income. These come into play for higher-income individuals at different thresholds. And with PEP and Pease coming back in, higher-income individuals now have restrictions on the amount of personal exemptions and itemized deductions that they can take."

The Supreme Court decision striking down Section 3 of the Defense of Marriage Act raised a number of issues, according to Catherine Murray, tax analyst at Thomson Reuters. "There's a whole new class of people that have to take filing issues into account," she commented. "They have to go through the traditional questions that married couples do as to whether to file separately or jointly."

One piece of good news for taxpayers is the IRS relaxation of the "use it or lose it" rule for health flexible spending arrangements, according to Murray. "Under the federal rules, if there was any money left in the account at the end of the year, it would be lost," she said. "This provided a number of questionable incentives, such as having procedures that were not necessary at the end of the year, or not putting away as much for health care as is advisable. Now, at the plan sponsor's option, employees can carry over up to $5,000 of the unused amount remaining in the account at the end of the year."

[Guest Taxed]

>>> So for a single person with an income of $400,000, the penalty would be 1 percent of $200,000, which is $2,000, not the $95 they were expecting," she said.

A single person making $400,000 and no health insurance should pay that without complaining and then get their head examined as soon as they get Obamacare!

[joanmcq]

Thank you for this article. It summarizes nicely what to advise clients for end of year planning.

[kcjenkins]

>>> So for a single person with an income of $400,000, the penalty would be 1 percent of $200,000, which is $2,000, not the $95 they were expecting," she said.

A single person making $400,000 and no health insurance should pay that without complaining and then get their head examined as soon as they get Obamacare!

A healthy, single, 30 something with that income probably spends a few 100 at most on medical a year, and thinks it is smarter to just pay their medical bills out of pocket rather than buy insurance. And they are correct. Which is why the ACA needs them in the exchange, so that their excess payments can go to others. And whether you think they are dumb to make that choice, it still will be a shock to them, with all the news stories talking about $95 penalty, to learn that they will be hit for $2000.

[joanmcq]

Someone that age's insurance will cost less than the $2000/ yr. so it would be stupid not to get covered and risk an accident, or sudden illness that could wipe them out.

[grmy2h]

For businesses, the year-end issues under the ACA are not quite so significant as they are for individuals, Luscombe noted: "The small-business credit for providing health insurance has been around for three years, .

Thank you for this article. It summarizes nicely what to advise clients for end of year planning.

We should probably point out to clients that the credit is only available if you purchase the insurance through the marketplace. That part is new this year.

[MsTabbyKats]

I know the kind of clients it's going to affect.....those "just getting by".

I have a few in their 30s....working at various places....w/o insurance. (The artist types...lots of W-2s & 1099-Miscs....very little income on each)

I just did an amended return for 2012 this week. The TP is mid-40s. The spouse is mid-20's. I had to add a Schedule C....so I asked about health insurance, assuming they had it (because they just had a baby in 2013)....and was surprised that they didn't. (Home birth with mid-wife!)

With their income...health insurance would compete with eating.

I guess we're going to have a lot of learning to do for Tax Season 2015.

[David1980]

A healthy, single, 30 something with that income probably spends a few 100 at most on medical a year, and thinks it is smarter to just pay their medical bills out of pocket rather than buy insurance. And they are correct. Which is why the ACA needs them in the exchange, so that their excess payments can go to others. And whether you think they are dumb to make that choice, it still will be a shock to them, with all the news stories talking about $95 penalty, to learn that they will be hit for $2000.

True for most in most years. The only expense they have is maybe a checkup. I'd worry about the unexpected though. Severe auto accident for example with $200,000 in medical bills could wipe out a lot of savings. The folks making $30k probably wouldn't care so much, bankruptcy being an option to avoid paying. Someone making $200k would hopefully have a lot more to lose in savings and not want the bankruptcy option. Personally, I don't advise my clients whether or not to purchase health insurance. The tax/consequence sure. But I'm not their financial adviser, I don't do financial work (as I always remind them when asked finance questions.)

[Randall]

David1980, I was going to mention possible accidents too. Scary how high these bills can get quickly.

[Gail in Virginia]

It doesn't even take much of an accident. Ten years ago, my son fell off our back porch (about 3 feet high) and broke his arm. I added up the bills that the insurance company paid, and it was over $30,000. Glad we had insurance - our part was slightly less than $3,000. - a much easier number to cope with although it seemed like an awful lot at the time. I am sure that it would be even more now.

[GeneInAlabama]

It doesn't even take much of an accident. Ten years ago, my son fell off our back porch (about 3 feet high) and broke his arm. I added up the bills that the insurance company paid, and it was over $30,000. Glad we had insurance - our part was slightly less than $3,000. - a much easier number to cope with although it seemed like an awful lot at the time. I am sure that it would be even more now.

The hospital would have charged you a whole lot more than the $30,000. The insurance company only pays a fraction of the amount and the hospital writes the rest off. The hospital will usually give you only a 10% discount if you pay within 30 days.

[kcjenkins]

Someone that age's insurance will cost less than the $2000/ yr. so it would be stupid not to get covered and risk an accident, or sudden illness that could wipe them out.

I am not disagreeing with you on that, I was just saying that many of them are not thinking of that, because of all the news stories talking about a $95 penalty. So if you have young clients making big bucks, you may want to inform them of the possible penalty before yr-end.

[Guest Taxed]

I can tell you from personal experience in MA that most of these young people who end up paying a penalty will buy insurance the next year, especially if they got sick after paying the penalty and then had to pay for treatment.

[easytax]

You have a point here that also raises (to me) a good question ---- when they get sick and decide to go for insurance ---- will not the insurance companies "have to take them" and now pick up where ever they are? Have a heart attack, get semi fixed -- need open heart to be scheduled later that week, etc. (chose time frame) --- now ---- is not the insurance company on the hook --- can't NOT take them because of pre-existing condition (heart attack, last week).

I ask this because some people will say -- I'm healthy, don't make a lot of money, so penalty (eerrr tax, sorry) won't be that much and anyway, I don't get a refund -- so the IRS can't get money from me ---- so go on their merry way. Now they get sick and --- guess what -- they are covered (or can be) --- bite the bullet and buy some insurance.

Take it a step farther (yes, I have all kinds of scenarios and know people who would do these things (result of prior life in law enforcement) -- who get the open heart or what ever and now drop insurance UNTIL they need it again???? a couple of months insurance payments might be cheaper than a whole year - yes?

Again, anyone have any input on this -- I am really curious (but don't want to be back into insurance and definitely not ACA stuff.

[Jack from Ohio]

The penalty does not come into play till tax year 2014 tax returns. However, there are deadlines for having insurance.

[Guest Taxed]

If you had a crystal ball and knew wen you may need insurance you could do that and time your purchase.

In MA the emergency rooms will only do emergency service if you show up without insurance. Certified Health counselors are available at most hospitals to sign you up right there if necessary.

[joanmcq]

If you miss open enrollment, you have to wait until the next open enrollment, just like with your employer insurance. So if you decide you'll risk it in march and have that heart attack in April, you're SOL until the next open enrollment for January of the next year.

[Christian]

Good grief ! My hair was already turning grey !

[Guest Taxed]

That is correct. In MA if you miss open enrollment deadline you have to wait until next enrollment start season unless certain exception applies.

[MsTabbyKats]

What I am wondering....I do perhaps 2 MA returns a year.

And, I have to put in "the data"....which took me a few tries until I got it right.

How confusing the IRS will make it for us?

As I recall...in MA everyone gets something (from the insurer I think) that has to be entered...with a big long number........

I'm imaging a messy 2015.......with people being oblivious and throwing out "their card".

And lots of numbers for us to enter....(fee goes up for this)

[Guest Taxed]

It is extremely easy in MA provided the taxpayer give you a form called 1099-HC received from the insurance company. That has all the info. yu need to complete the MA-HC form By law the ins companies are supposed to mail it out just like any other 1099 form. The exception is for medicare, medicaid and certain Govt. insurance programs like active military, tricare, veterans etc. But on the input scren you indicate why there is no 1099 by checking the correct box on the form.

Most non MA tax preparers make a big deal about it, but it is really not bad. If the Federal is anywhere close to the MA version it will be a breeze!

[Guest Taxed]

Today's Federal and State Tax News Highlights, C.1, House Will Not
Consider Tax Extender Legislation in 2013, (Dec. 9, 2013)
Click to open document in a browser
Legislation to extend the group of expiring provisions commonly known as tax extenders will not be considered
by Congress in 2013, House Ways and Means Chairman Dave Camp, R-Mich., told reporters on December 4.
House lawmakers will begin their winter district work period on December 13, but tax extender legislation is not
on the legislative floor schedule and no markup is planned in the Ways and Means Committee.
House Majority Leader Eric Cantor, R-Va., said that during the week of December 9, the House is likely to
consider legislation dealing with Medicare payment rates for physicians, a fiscal year 2014 budget conference
agreement and, possibly, a conference report on the farm bill. During his colloquy with House Minority Whip
Steny Hoyer, D-Md., on December 5, Cantor declined to respond to Hoyer’s suggestion that the House consider
tax extenders or trade adjustment assistance legislation before leaving Washington for the year.
Rather than following its typical pattern of passing a one- or two-year extension of tax incentives in late
December, Congress could approve an extenders bill in 2014 that applies retroactively, possibly as part of larger
comprehensive tax reform legislation. According to a November 5 Congressional Research Service (CRS) report
on the tax extenders by CRS public finance specialist Molly Sherlock, the expiring provisions include incentives
for individuals, businesses, the charitable sector, energy, community assistance, and disaster relief. Most of the
provisions set to expire at the end of 2013 were temporarily extended as part of the American Taxpayer Relief
Act (P.L. 112-240 ).
By Stephen K. Cooper, CCH News Staff

[kcjenkins]

Wonderful ! So we need to warn ALL our business clients, at a minimum, that they can not "assume" that any of the expiring credits, etc, will be extended. Even the ones we think that they will extend, we have to advise clients based on what the law IS, not what we think it might change into.

[easytax]

Since I'm curious (nosy) I went to IRS.gov to see if there was a 1099 HC. There wasn't (figured this was an MA form any way).

Found apparently that as a small practice --- I've been blessed ---- as I reviewed the instructions on the 1099 H from the feds and also the 8885 form (feds too). I say blessed because I've never had to file either of these for providers or recipients. Many forms and procedures have "confused" me in the past BUT with patience, study, slow reading, etc. -- I could figure them out.

From what I've seen, these (1099 H and 8885) may take a lot of time (for me).

Althought that's why many of us started doing taxes --- since we're mostly independently wealthy (like the truckers)

Anyway, here's HOPING "Taxed" wishes come true and the feds give us an easy way to work with requirements of the ACA.

Happy taxing ....

[Guest Taxed]

>>> Since I'm curious (nosy) I went to IRS.gov to see if there was a 1099 HC. There wasn't (figured this was an MA form any way).

For your viewing pleasure:

1099-hc.pdf