Wednesday, September 17, 2014
WHAT I LEARNED (OR WAS REMINDED) AT THE NATP TAX FORUM
Here are some items of interest or note that were discussed in the educational sessions at last week’s NATP Tax Forum in Atlantic City.
· THE AFFORDABLE CARE ACT – INDIVIDUALS AND BUSINESS
These 2 sessions were the most popular of the Forum. They were probably attended by every registrant. Perhaps they should have been offered together in one “general session” on the first day.
If there was ever any question these sessions verified the fact that, while the basic concept of “Obamacare” – attempting universal health insurance coverage without resorting to UK-like “socialized medicine – is sound, the Affordable Care Act (ACA) is without a doubt a complex and convoluted mucking fess. Like the Earned Income Credit, and the distribution of other government social benefits, the administration and enforcement of ACA does NOT belong in the US Tax Code! Like the excessive due diligence requirements for claiming the EIC, the ACA causes tax preparers to become Social Workers.
The “individual mandate” for health insurance coverage took effect in 2014. If you and your family did not have “ACA-compliant” health insurance coverage, via either an employer-provided plan or direct purchase, for all of 2014 you may be subject to a penalty. This penalty is not easy to calculate and could be expensive.
However many taxpayers who were not properly covered for all of 2014 may be exempt from the penalty under the “individuals who cannot afford coverage“ exemption. This exemption applies of the cost of “ACA-compliant” health insurance is more than 8% of the modified Adjusted Gross Income of the “household”.
Individuals who acquired insurance via the Obamacare Marketplace and were granted an “advance premium credit” to reduce the monthly out-of-pocket premium payment will be issued new IRS Form 1095-A. Related IRS Forms 1095-B, issued by insurance providers, and 1095-C, issued by employers, are not required to be sent to taxpayers for 2014. But the instructor believed that many insurance providers will be issuing Form 1095-Bs for 2014.
And only those who acquired insurance through the Obamacare Marketplace, and receive a 2014 Form 1095-A, will be eligible for a “premium tax credit”. The amount of the advance credit applied to the premiums, which was based on anticipated 2014 income, will be reconciled to the credit to which the taxpayer is entitled using actual 2014 income on the 2014 Form 1040, and excess advances are paid back, any additional credit is applied to tax liability and can be “refundable”, or one can “break even”.
The “employer mandate” does not take effect until 2015 or 2016, depending on the total number of employees.
· NEW DEVELOPMENTS – INDIVIDUALS AND BUSINESS
There was a separate session for each. However, with the exception of the ACA-related items, discussed in more detail in separate sessions (see above), there have been no new developments.
The 2 “New Development” sessions listed the various temporary tax items that expired on December 31, 2013, and have not yet been extended. Many items, in both categories, will probably be extended, but not until after the November elections. So, once again, there will no doubt be delays in the 2015 start date for IRS processing of 2014 income tax returns.
One of the business items that is currently in limbo concerns pre-tax treatment of employer-provided mass transit employee benefits. There is a good chance this will be extended at year end, and I expect that I will need to once again deal with a few corrected W-2s sent to clients in late spring, resulting in amended returns, as I did a year or so ago.
In the Individuals session we were told that a net Schedule D loss can be used to reduce net investment income subject to the Net Investment Income Tax (NIIT). Apparently when the NIIT was taught by NATP last year it was stated that this could not be done.
· PARTNERSHIPS: SELF-EMPLOYMENT TAX AND GUARANTEED PAYMENTS
A partner, whether general or limited, can NEVER also be an employee of a partnership entity. A partner should NEVER receive both a K-1 AND a W-2 from the same partnership entity. A partner NEVER receives a salary; he/she may receive a “guaranteed payment” from the partnership, regardless of the amount of profit or loss, in exchange for services provided to the partnership, which is a deductible item for the partnership (and reduces net taxable income or increases the net deductible loss passed through to partners) and reported on the Form K-1 of the partner receiving the payment.
In the past I have on at least two occasions had a client give me a K-1 and a W-2 from the same partnership entity. On these rare occasions the Form 1065, and Form K-1, for the partnership and the W-2 were prepared by a CPA firm.
Included in the guaranteed payment to a partner reported on Form K-1 can be health insurance premiums paid by the partnership for the partner’s individual or family coverage. This is included in the income of the partner reported on Schedule E Page 2, and is deducted out as a “self-employed health insurance deduction” adjustment to income on the bottom portion of Page 1 of Form 1040. So for income tax purposes it is a wash. However, because the insurance premium payment is included in “guaranteed payments” it is subject to self-employment tax.
This is different to the treatment of health insurance premiums paid for a more than % owner of a sub-S corporation who is also an employee. The premium payments are included in Box 1 or Form W-2 and deducted as an adjustment to income. However these payments are NOT subject to FICA tax and are not included in wages reported in Box 3 or Box 5 on the W-2.
· HELPING DELINQUENT TAXPAYERS
If you owe a substantial amount of back taxes to the IRS or state tax authorities NEVER contact an agency that advertises on television, whether or not the ad actually says they can get you “off the hook” for “pennies on the dollar”. Contact an independent tax professional. If they do not personally deal with collection issues they can refer you to a legitimate source that does. To be honest, this is my personal advice and not that of the seminar leader.
· NET INVESTMENT INCOME TAX (NIIT)
The session attempted to make the attendees “NIIT wits”.
This component of ACA began with 2013 returns, and had impacted a few of my clients. Luckily the investment income of these clients was limited to interest, dividends, and investment-related capital gains so the income subject to the tax was easily identified.
The NIIT is a “surtax” because it is a tax on income that has already been taxed. It is a tax that is in addition to the regular income tax and the dreaded Alternative Minimum Tax (AMT). It has no impact whatsoever in the calculation of the dreaded AMT.
The actual legislation creating the NIIT was only 2 pages long, but those 2 pages have generated about 270 pages of IRS regulations so far, most of which was first published on 12/13/13. Because of the “newness” of the tax there is much of its application that has not yet been decided by the IRS and areas of it are subject to interpretation.
The NIIT income thresholds at which the surtax kicks in - $200,000 if “unmarried”, $250,000 if married filing jointly, and $125,000 if married filing separately - are fixed and are not indexed for inflation. So it will affect more and more taxpayers each successive year as incomes grow.
Posted by Robert D Flach