THIS JUST IN - THE BREAKING NEWS CONTINUES!

U.S. District Judge Reed O’Connor ruled last night that the Affordable Care Act is unconstitutional - because of a recent change in federal tax law. 

According to O’Connor the reduction of the Individual Mandate tax penalty to 0 in the GOP Tax Act effectively guts the ACA because the U.S. Supreme Court upheld Obamacare in 2015 based on the conclusion that the mandate would be an unconstitutional exercise of federal power without the tax penalty.

The decision states -

"The Individual Mandate can no longer be fairly read as an exercise of Congress's Tax Power and is still impermissible under the Interstate Commerce Clause—meaning the Individual Mandate is unconstitutional."

As the individual mandate was an "essential" element of the ACA, the whole of Obamacare was therefore unconstitutional,

What does this mean for the 2018 tax return?  As the White House officially explained (highlight is mine), after a tweet by Trump expressing his glee at the decision, “We expect this ruling will be appealed to the Supreme Court.  Pending the appeal process, the law remains in place.”  

The Supreme Court had upheld the ACA as constitutional in 2012 and 2015, but, as the Judge explained, this decision is based on the finding in the 2015 decision.

The GOP Tax Act reduced the Individual Mandate penalty to 0 effective with tax year 2019.  The existing penalty for not having “adequate” health coverage for the full year, and not exempt from the penalty under any of the identified exceptions, was still in place for 2018.

So, until the Supreme Court has provided the final word on this decision, as the White House statement says “the law remains in place”. 

Whether it is appropriate to “remain silent” on health insurance coverage on the 2018 Form 1040 - not checking the box on the top of the “postcard” 1040, not calculating an Individual Mandate penalty on Line 61 of Schedule 4, and not including Form 8965 with the return – will depend on the IRS and Treasury Department reaction to this decision.

The two Obamacare surtaxes - the additional Medicare tax and the 3.8% Net Investment Income Tax (NIIT) - are also affected by this decision.  Another potential question for the 2018 return - can these taxes be calculated on the appropriate IRS forms but not entered on Line 62 of Schedule 4 and Line 14 of the "postcard" 2018 Form 1040?  Again, we must wait for IRS and/or Treasury Department guidance.  

The ruling came on the eve of today’s deadline for Americans to sign up for coverage in 2019 via the Obamacare marketplace (www.healthcare.gov).  Despite the ruling, Americans can still sign up for health coverage through the marketplace up until 11:59 PM today (Saturday, December 15^th).  

Personally, while I strongly support the Premium Tax Credit component of Obamacare, and the requirement for health insurance to cover pre-existing conditions, I oppose the Individual Mandate and corresponding penalty and some other items in the Act.  The ACA, like the recent GOP Tax Act, was written hastily to get an early legislative victory for the President (then Obama).  Also like the GOP Tax Act, no member of Congress who voted on the ACA, either for or against, actually read it – they just did what they were told to do by their Party’s leaders.

I will report on more developments related to the Form 1040 as they happen.

TTFN

KEEPING A CONTEMPORANEOUS MILEAGE LOG

A recent post at the ROTH AND COMPANY TAX UPDATE BLOG written by Joe Kristan, a CPA who just happens to also be a 1040 expert (because of his individual training and experience – and not because he passed the CPA exam), provided some good advice for taxpayers who use their car for business - “If you are going to forge your travel calendar, at least get the year right”.

Joe opened the post by reminding us -

“The tax law has strict rules for supporting travel expenses.  You need to be able to document your travel with records showing the date, amounts, and business purpose.  For mileage, the tax law likes a contemporaneous diary.”

Joe’s post discussed a court case related to an IRS audit of the 2008 travel expenses of a Florida real estate agent.  It appears the taxpayer submitted a day planner as a “contemporaneous diary”.

“. . . the day planner included an order form which provided a convenient way for the owner to purchase a new day planner for the coming year. In this case, the order form was for the calendar year 2014, a fact that completely undermined Ms. [real estate agent]‘s testimony that she recorded information in the day planner contemporaneously in 2008.”

It should come as no surprise to anyone that there are taxpayers out there who do not keep a “contemporaneous” written travel log – and “recreate” a log if questioned by the IRS.  Over the years I have become aware of tax preparers who kept an inventory of blank past year diaries and pocket date books on hand for such a purpose.

Joe’s bottom line is wise -

“The moral: There are a lot of ways the IRS can trip you up if you try to cook up your mileage diary retroactively.  If you really want the deduction, record your travel as you go, either on an old-fashioned auto log or one of those smartphone mileage apps.”

It is not difficult, or even time-consuming, to actually keep a contemporaneous travel log.  I would not be surprised if taxpayers found that by keeping such a log they end up with more business miles than they would have estimated.

Below is what I advise in the “USING YOUR CAR FOR BUSINESS” section of my special report THE SCHEDULE C NOTEBOOK: 

“If you use your car for business you must keep ‘contemporaneous’ records of your business mileage. This means that you should record the information on the day the trip occurs.

Record each business trip separately.  Enter the date, location, business purpose and miles driven for each trip in some kind of diary, account book, or expense log.  If you do not have EZ Pass you should also note any toll expenses.  If you do have EZ Pass, you can identify the appropriate tolls on the monthly statement.  I also enter in my travel log the quarter I put in the parking meter while visiting a client – any expense for which I do not receive an actual paper receipt.

You should start off the year by entering the total miles on your car on the morning of January 1st in your log – and end the year by entering the speedometer reading after your last trip on December 31st. If you sell the car during the year, enter the total miles on the date of sale and enter the beginning mileage on your new car on the day you drive it off the lot. In addition to the business miles driven for the year you will also need to know the total miles driven for the year.”

I use a simple pocket date book to record my business trips and parking, tolls, and pay phone expenses.  In addition to tracking business miles you can use the book to track mileage, related parking and tolls, and local transportation costs for medical care.

I discuss an alternative method of tracking business miles – “sampling” – in my 2009 post “Bride of Keeping Track of Business Mileage”. 

TTFN

THE DEATH OF DOMA

I was watching Ellen DeGeneres’s talk show while having a late breakfast at the County Café in Beach Lake yesterday morning when the program was interrupted to report on the Supreme Court decision on the Defense of Marriage Act (DOMA).  An odd coincidence, don’t you think?

As fellow tax-blogger Jason Dinesen, EA, who had blogged extensively on same-sex tax issues, reported at DINESEN TAX TIMES – “DOMA Ruled Unconstitutional”.

TAXGIRL Kelly Phillips Erb explains in her announcement of the decision (“Supreme Court Rules DOMA Unconstitutional – And It Was a Tax Case”) –

“. . . it wasn’t so much about the individual rights of folks to marry but the rights of states to write their own laws defining marriage”.

The decision did not say that same-sex marriages should be legal, or that same-sex couples have a legal right to marry.  It says that the federal government has no right to deny benefits to same-sex individuals who have married, and reside, in a state that has legalized same-sex marriage. 

What is unclear is what happens if a couple that was legally married in a state that has legalized same-sex marriage moves to a state that has not.

As with anything else, I first look at the decision from a federal tax point of view.  How will it affect my 1040 clients? 

When it comes to the federal Estate Tax the decision is a true victory that will benefit same-sex couples.  It allows same-sex couples who are legally married and reside in states that permit same-sex marriage to be able to take advantage of the Estate Tax unlimited “marital deduction”.

Kelly’s post refers to an estate tax example that was cited in the decision - 

“Edith Windsor, a resident of New York, married Thea Spyer, her partner of 40 years, and that marriage was recognized by the state of New York. However, Spyder’s estate was required to pay more than $363,000 in federal estate taxes at her death because the federal government did not recognize same sex marriages.”

But what about the federal income tax?  As a result of the decision same-sex couples, again who are legally married and reside in states that permit same-sex marriage, will be able to, as Jason points out in his post, “prepare their federal and state tax returns as a married couple, using married person tax law, same as any other married couple”.

This will very likely generate income for the US Treasury.  Jason explains -

“Will all same-sex couples pay less in income taxes because of this ruling? NO, not necessarily. In my practice, 2/3 of my clients who are in same-sex marriages will actually PAY MORE in income taxes by filing as a married couple rather than as two single people.”

Why?  Because of the “marriage penalty”.  While there will be some same-sex couples who will now be able to take advantage of the “marriage benefit” on their 1040s, I do believe that more often than not a same-sex couple consists of two working “spouses” – more so than “traditional” married couples – and the couple will now end up paying much more in federal income tax than when they filed as two single individuals.

In my own practice I do not expect this decision to really have any effect.  Most of my clients are from New Jersey.  While NJ has provided for “domestic partnerships” and “civil unions”, it has not gone “all the way” and legalized actual same-sex “marriages” - and I expect the decision applies only to what is identified under state law as “marriage”.  I do have some New York clients, but none are, or will become, same-sex couples married under NY state law – and I do not accept any new 1040 clients.

Russ Fox has some advice for same-sex couples who have extended their 2012 returns and will now be able to file as married at his blog TAXABLE TALK.  He posts “DOMA Done – But Don’t File That Joint Return Just Yet”, explaining -

“I suspect it will be two months (maybe more) before the IRS is ready to accept such returns.”

Although, to be honest, I am not sure why – unless the IRS computers can identify the sex of files from the Social Security numbers and will not accept same-sex married returns.

To download the decision click here.

As an aside – I do believe that television shows like WILL AND GRACE and MODERN FAMILY are partially responsible for the widespread acceptance of same-sex marriage and for this decision being possible.  Television can change the world!

TTFN