Professional Tax Savers

Professional Tax Savers Kenneth Spielman, William Andersen and Gabriel Bentovim

01/29/2015

INFORMATION REGARDING NEW HEALTHCARE PORTION OF TAX RETURNS

In addition to the normal thrills and chills of the income tax filing season, this year people will have the added excitement of figuring out how the health law figures in their 2014 taxes.

The good news is that for most folks the only change to their filing routine will be to check the box on their Form 1040 that says they had health insurance all year.

"Someone who had employer-based coverage or Medicaid or Medicare, that's all they have to do," says Tricia Brooks, a senior fellow at Georgetown University's Center for Children and Families.

But for others, there are several situations to keep in mind.

If you were uninsured for some or all of the year

If you had health insurance for only part of 2014 or didn't have coverage at all, it's a bit more complicated. In that case, you'll have to file Form 8965, which allows you to claim an exemption from the requirement to have insurance or calculate your penalty for the months that you weren't covered.

On page 2 of the instructions for Form 8965 you'll see a lengthy list of the coverage exemptions for which you may qualify. If your income is below the filing threshold ($10,150 for an individual in 2014), for example, you're exempt. Likewise if coverage was unaffordable because it would have cost more than 8 percent of your household income or you had a short coverage gap of less than three consecutive months.

Some of the exemptions have to be granted by the health insurance marketplace, but many can be claimed right on your tax return. The tax form instructions spell out where to claim each type of exemption.

If you do have to go to the marketplace to get an exemption, be aware that it may take two weeks or more to process the application. Act promptly if you want to avoid bumping up against the April 15 filing deadline, says Timothy Jost, a professor and specialist in health law at Washington and Lee University who is an expert on the health law.

If you don't qualify for a coverage exemption

If none of the exemptions apply to you, you'll owe a penalty of either $95 or 1 percent of your income above the tax filing threshold, whichever is greater. The penalty will be prorated if you had coverage for at least part of the year. The instructions for Form 8965 include a worksheet to calculate the amount of your penalty.

If you received a premium tax credit for a marketplace plan

Under the health law, people with incomes between 100 and 400 percent of the federal poverty level ($11,490 to $45,960 for an individual in 2013) could qualify for premium tax credits for 2014 coverage bought on the exchanges.

The marketplace determined the amount of premium tax credit people were eligible for based on their estimated income. At tax time those estimates will be reconciled against actual income. People whose income was lower than they estimated may have received too little in advance premium tax credits. They can claim the amount they're owed as a tax refund.

People whose income was higher than estimated and received too much in advance premium tax credits will generally have to pay back some or all of it.

If you bought a plan on the marketplace, you'll receive a Form 1095-A from your state marketplace by Jan. 31 that spells out how much your insurer received in advance premium tax credits. You'll use that information to complete Form 8962.

Assuming the information on the form is correct, "It should be easy to reconcile," says Judith Solomon, vice president for health policy at the Center on Budget and Policy Priorities. Tax software programs and tax preparers also should know how to make the calculations, she said.

Many lower income consumers and seniors can get free tax preparation assistance through the IRS Volunteer Income Tax Assistance and the Tax Counseling for the Elderly programs

01/25/2013

Married Couples Penalized By New Tax Laws
January 17, 2013 • Bloomberg News

It pays to be single -- that is, when it comes to high earners’ tax bills.

U.S. taxpayers with income of more than $200,000 a year will see federal tax rates rise this year on wages and investments. Tax increases will pinch married couples faster than individuals, especially if both spouses work and have capital gains and dividend income, said Joseph Perry, partner-in-charge of tax and business services at the accounting firm Marcum LLP.

In the law passed by Congress Jan. 1, multiple thresholds for higher rates kick in for married couples only $50,000 above where they hit for singles. Married taxpayers with income of at least $300,000 also face limits on the value of deductions and personal exemptions that were reinstated for 2013.

“If they’re sending a message, it’s not to be married,” Perry said of U.S. tax policy. “People who are married, working, earning two good salaries, are being penalized.”

The budget deal struck by Congress and new taxes stemming from the 2010 health-care law are exacerbating the long- established marriage penalty for high earners. The added bite will affect taxes they pay for 2013, and not the current filing season that starts this month.

Accountants and wealth advisers are recommending that high earners start planning and strategizing about how they recognize income from investments or when they take deductions.

Crossover Point

Three thresholds are now in effect at which higher taxes can affect top earners. Taxable income exceeding $450,000 a year for married couples and $400,000 for singles is the crossover point to the top income-tax bracket of 39.6 percent, from 35 percent, and the 20 percent rate for capital gains and dividends, compared with 15 percent.

The second threshold starts at adjusted gross income of more than $250,000 for married couples compared with $200,000 for individuals. Those are the markers for a new 3.8 percent surtax on investment income and a 0.9 percent added levy on wages starting this year. Both were enacted in 2010 to help finance the expansion of medical coverage.

Limits on the value of deductions and personal exemptions start at a third level: $300,000 a year for married couples and $250,000 for individuals.

Consider a couple living in New York state with each earning $280,000 in annual wages -- for a combined $560,000. The couple will pay about $22,000 more in taxes this year if they are married filing jointly than if they were single, according to an analysis by Perry. That assumes each of them has $20,000 in capital gains and dividends as well as $35,500 each in deductions for charitable contributions, mortgage interest and real estate taxes.

Personal Exemptions

As a married couple, more of their income is subject to the phase-outs on personal exemptions and limits on itemized deductions as well as the higher taxes on wages and investment income from both the health-care law and budget deal.

“They made it worse because of where they set the brackets,” Perry said of the marriage penalty as it applies to high-earning, married couples.

That’s because the thresholds for individuals and married couples at the higher rates are close together, said Scott Kaplowitch, a partner at the Boston-based accounting firm of Edelstein & Co. LLP.

“$50,000 isn’t really a big spread,” Kaplowitch said. “People may just cohabitate because it’s better from a tax perspective.”

Varying Rates

Penalties -- and bonuses -- for being married or single have existed in the tax code for decades because the system is based on household income and the rates vary, said Eugene Steuerle, co-founder of the Washington-based Tax Policy Center.

Lawmakers have adjusted since the 1940s where to set income- tax brackets to address inequities among different types of families including married couples and singles, said Dennis Ventry, a professor at the University of California, Davis School of Law who specializes in family taxation. Families often feel the so-called marriage penalty if they don’t account for it when deciding how much to withhold from their paychecks throughout the year for taxes, Ventry said.

The marriage penalty also affects lower-income households who may phase out of benefits such as the earned income tax credit because as a couple their income is too high, he said.

President George W. Bush’s income-tax cuts reduced the marriage penalty by setting the 10 percent and 15 percent brackets for married couples at double the amount for individuals, which essentially splits a couple’s income for tax purposes, Steuerle said.

Budget Deal

The budget deal passed Jan. 1 extended marriage-penalty relief for those brackets and for the standard deduction, which is used by those who don’t itemize. While that helped married couples in the lower-to-middle income tax brackets, the law didn’t apply the same relief to top earners, Steuerle said.

“Among the people most likely to be caught by this are two professionals, highly paid doctors or lawyers,” said Steuerle, whose Tax Policy Center is funded by the Brookings Institution and the Urban Institute.

High earners with significant income from capital gains and dividends may feel a bigger tax bite because they are married.

A married couple with taxable income of $600,000 a year is subject to the top 20 percent rate because they exceed the $450,000 threshold, while if they each recognized $300,000 individually they would pay at the 15 percent rate. That doesn’t include the 3.8 percent investment-income surtax.

Early Planning

The multiple levels of higher rates mean families should start planning early this year because there are ways to save on taxes or reduce their sting.

Married couples should review their withholding to make sure they are taking out enough from their paychecks for taxes, Ventry said. The higher-earning spouse usually should be the one accounting for the family’s exemptions and any additional withholding, because they are in the higher bracket, he said.

Couples also should consider installment sales of appreciated assets such as real estate or stakes in a business, said Baker Crow, senior vice president of the private wealth management group at Regions Financial Corp. That can help spread the income received over more than one year, he said.

Socking away investments that generate income in tax- deferred individual retirement accounts as well as harvesting losses throughout the year to offset gains are strategies for married couples, said Kent Kramer, chief investment officer of the investment advisory firm Foster Group.

Timing Deductions

Timing of deductions also will be more of a focus this year, said Susan Bruno, an accountant and financial planner at Beacon Wealth Consulting LLC.

“If you have unusually high income one year, that’s probably not the year you want to make your normal contributions and deductions,” Bruno said.

The option for a married couple to file separately rather than jointly is still generally more expensive even with the higher rates, said Marcum’s Perry. And while couples face a marriage penalty, advisers aren’t seriously recommending divorce for tax reasons.

Some tax-conscious high earners who haven’t yet married may see staying single as a way to avoid the penalty. Steuerle, though, says there are other financial advantages to marriage such as the way Social Security benefits are structured.

“People who are less concerned about the formal marriage vow have more ability” to avoid the penalty, he said.

01/09/2013

Topic 515 - Casualty, Disaster, and Theft Losses (Including Federally Declared Disaster Areas)

Generally, you may deduct casualty and theft losses relating to your home, household items and vehicles on your federal income tax return. You may not deduct casualty and theft losses covered by insurance unless you file a timely claim for reimbursement, and you reduce the loss by the amount of any reimbursement or expected reimbursement.

A casualty loss can result from the damage, destruction or loss of your property from any sudden, unexpected, or unusual event such as a flood, hurricane, tornado, fire, earthquake or even volcanic eruption. A casualty does not include normal wear and tear or progressive deterioration.

A theft is the taking and removing of money or property with the intent to deprive the owner of it. The taking must be illegal under the law of the state where it occurred and it must have been done with criminal intent.

If your property is personal-use property or is not completely destroyed, the amount of your casualty loss is the lesser of:

•The adjusted basis of your property, or
•The decrease in fair market value of your property as a result of the casualty

The amount of your theft loss is generally the adjusted basis of your property because the fair market value of your property immediately after the theft is considered to be zero.

If your property is business or income-producing property, such as rental property, and is completely destroyed, then the amount of your loss is your adjusted basis.

The loss, regardless of whether it is a casualty or theft loss, must be reduced by any salvage value and by any insurance or other reimbursement you receive or expect to receive. The adjusted basis of your property is usually your cost, increased or decreased by certain events such as improvements or depreciation. For more information about the basis of property, refer to Topic 703, Publication 547, Casualties, Disasters, and Thefts, and Publication 551, Basis of Assets. You may determine the decrease in fair market value by appraisal, or if certain conditions are met, by the cost of repairing the property. For more information, refer to Publication 547.

Individuals are required to claim their casualty and theft losses as an itemized deduction on Form 1040, Schedule A (PDF) (or Form 1040NR, Schedule A (PDF), if you are a nonresident alien). For property held by you for personal use, once you have subtracted any salvage value and any insurance or other reimbursement, you must subtract $100 from each casualty or theft event that occurred during the year. Then add up all those amounts and subtract 10% of your adjusted gross income from that total to calculate your allowable casualty and theft losses for the year.

Casualty and theft losses are reported on Form 4684 (PDF), Casualties and Thefts. Section A is used for personal-use property, and Section B is used for business or income-producing property. If personal-use property was damaged, destroyed or stolen, you may wish to refer to Publication 584, Casualty, Disaster, and Theft Loss Workbook (Personal-Use Property). For losses involving business-use property, refer to Publication 584B (PDF), Business Casualty, Disaster, and Theft Loss Workbook.

Casualty losses are generally deductible in the year the casualty occurred. However, if you have a casualty loss from a federally declared disaster that occurred in an area warranting public or individual assistance (or both), you can choose to treat the loss as having occurred in the year immediately preceding the tax year in which the disaster happened, and you can deduct the loss on your return or amended return for that preceding tax year. Review Disaster Assistance and Emergency Relief for Individuals and Businesses on IRS.gov, for information regarding timeframes and additional information to your specific qualifying event.

Theft losses are generally deductible in the year you discover the property was stolen unless you have a reasonable prospect of recovery through a claim for reimbursement. In that case, no deduction is available until the taxable year in which it can be determined with reasonable certainty whether or not such reimbursement will be received.

If your loss deduction is more than your income, you may have a net operating loss. You do not have to be in business to have a net operating loss from a casualty. For more information, refer to Publication 536, Net Operating Losses for Individuals, Estates, and Trusts.

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Page Last Reviewed or Updated: December 18, 2012

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