Archive for the ‘Health Care’ Category

Details of The Individual Mandate Under the Affordable Care Act

May 7, 2013

Introduction

Beginning January 1, 2014, the Affordable Care Act will require most individuals to have “minimum essential (health) coverage” for themselves and their dependents or pay a penalty.  The coverage requirement and penalty are collectively known as the “Individual Mandate.” Some individuals and their dependents may qualify for an exemption to the mandate, and therefore not have to carry minimum essential coverage or pay a penalty.

The Internal Revenue Service and Department of Health and Human Services recently issued proposed regulations regarding:

●   Coverage that will qualify as minimum essential coverage

●   When and how penalties will be determined and paid

●   Individuals exempt from the penalty for not carrying minimum essential coverage

●   How individuals can apply for an exemption

Background

1.  Coverage that will Qualify as Minimum Essential Coverage

An individual will be considered to have minimum essential coverage for any month in which he or she is enrolled in any of the following plans for at least one day during that month:

●   Employer group health plan

●   Individual health insurance policy

●   Student health coverage

●   State high risk pool coverage

●   Medicare Advantage Plan

●   Government plan such as Medicare, Medicaid, TRICARE or veterans coverage

●   Coverage for non-U.S. citizens provided by another country

●   Refugee medical assistance provided by the ‘Administration for Children and Families’

●   Coverage for AmeriCorps volunteers

2.  When and How Penalties will be Determined and Paid

The first penalties will be due with 2014 tax returns filed in 2015, and be determined by calculating the greater of a flat dollar amount or a set percentage of income. The annual penalties for 2014 through 2016 are outlined below.  Beginning in 2017, penalties will increase each year by a cost-of-living adjustment.

●   2014: The greater of $95 per adult and $47.50 per child under age 18 (maximum of $285 per family) or 1% of income over the tax-filing threshold.

●   2015: The greater of $325 per adult and $162.50 per child under age 18 (maximum of $975 per family) or 2% of income over the tax-filing threshold.

●   2016: The greater of $695 per adult and $347.50 per child under age 18 (maximum of $2,085 per family) or 2.5% of income over the tax-filing threshold.

3.  Individuals Exempt from the Penalty for Not Carrying Minimum Essential Coverage

The following individuals will be exempt from paying a penalty if they do not carry minimum essential coverage:

●   Individuals who cannot afford coverage. Coverage is considered unaffordable if an individual’s contribution toward minimum essential coverage is more than 8% of his or her annual household income. Monthly contributions are calculated at 1/12 the annual household income to determine if they exceed 8%.

●   Taxpayers with income below the tax-filing threshold.

●   Individuals who qualify for a hardship exemption. A hardship exemption is available to individuals who would otherwise be eligible for Medicaid under the expanded eligibility of provisions of ACA, but who are not eligible because their state chose not to expand Medicaid.  Also eligible for exemption will be individuals with a personal or financial hardship that prevents them from being able to afford coverage.

●   Individuals who have a gap in minimum essential coverage of less than three consecutive months in a calendar year.

●   Member of religious groups who object to coverage on religious principles.

●   Members of health care sharing ministries, i.e., non-profit religious organizations whose members share medical costs.

●   Individuals in prison.

●   Individuals who are not U.S. citizens.

●   Members of Native American tribes.

U.S. citizens living in a foreign country will be exempt if they meet certain requirements, such as residing abroad for an entire calendar year.  Residents of the U.S. territories of Guam, American Samoa, Northern Mariana Islands, Puerto Rico, and the Virgin Islands will automatically be deemed to have minimum essential coverage, and therefore be exempt from penalties.

4.  How Individuals Can Apply for an Exemption

Depending on the type of exemption, individuals can apply to their state’s Health Care Exchange or to the IRS when filing their tax return. If an application to an Exchange is approved, the Exchange will issue a certificate of exemption and notify the IRS.

●   Religious and hardship exemptions are only available by applying to an Exchange.

●   Individuals who cannot afford coverage, who experience short-term coverage gaps, who are not U.S. citizens, or who have household income below the tax-filing threshold may apply for an exemption through the IRS when filing their federal tax return.

●   Members of a health care sharing ministry, individuals in prison, and members of Native American Tribes may apply for an exemption through an Exchange or through the IRS when filing their federal tax return.

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Small Business Health Care Tax Credit for Small Employers

May 7, 2013

Beginning 2010, eligible small employers may claim a tax credit if the employer makes non-elective contributions that pay for at least one-half of the cost of health insurance premiums for the coverage of participating employees.  For tax years 2010 through 2013, the maximum credit is 35% for small business employers and 25% for small tax-exempt employers. An enhanced version of the credit will be effective beginning January 1, 2014.  In general, on January 1, 2014, the rate will increase to 50% and 35% respectively, allowing the cost of providing insurance to be even lower for employers.

Can you claim the credit?

To be eligible, you must cover at least 50% of the cost of single (not family) health care coverage for each of your employees.  You must also have fewer than 25 full-time equivalent employees.  Those employees must have average wages of less than $50,000 a year.  Also, the amount of the credit you receive works on a sliding scale.  The smaller the business or charity, the greater the credit allowed.

Full-time equivalent employees are defined as follows: for example, if you have 50 employees that work 20 hours per a week each, this is the equivalent of 25 full-time employees.

Credit in tax years after 2013

In 2014, major provisions of the Affordable Care Act (ACA) take effect, including the establishment of Health Insurance Exchanges and, in many states, the expansion of Medicaid.  Many of these new provisions will affect small business’ approach to offering healthcare coverage to employees.

Beginning 2014 and beyond, the 50% credit for employers is the lessor of:

  1. The total amount of non-elective contributions that the employer makes on behalf of its employees during the tax year under a contribution arrangement for premiums for qualified health plans
  2. The total amount of non-elective contributions that would have been made during the tax year if each employee had taken into account (1) or had enrolled in a qualified health plan that had a premium equal to the average premium tax for the small group market in the rating area in which the employee enrolls for coverage.

2013 Health Care Reform Compliance Checklist

February 11, 2013

We are pleased to share with you the excellent compliance checklist forwarded to us by our friend and client Blane Peters of Wood Gutmann & Bogart Insurance Brokers.

This checklist is for employers for 2013, to ensure compliance with the requirements of the Affordable Care Act.  You can download the checklist at this link here.

Nienow & Tierney, LLP has had a 20 year relationship with Blane Peters, and would highly recommend him if your business has liability and business insurance needs.  You can learn more about Blane here.

2012 Year-End Tax Planning

November 12, 2012

Year-end tax planning is always complicated by the uncertainty that the following year may bring and 2012 is no exception. Indeed, 2012 is one of the most challenging in recent memory for year-end tax planning. A combination of events – including possible expiration of some or all of the “Bush-era” tax cuts after 2012, the imposition of new so-called Medicare taxes on investment and wages, doubts about renewal of tax extenders, and the threat of massive across-the-board federal spending cuts – have many taxpayers asking how can they prepare for 2013 and beyond, and what to do before then. The short answer is to quickly become familiar with expiring tax incentives and what may replace them after 2012 and to plan accordingly.

INDIVIDUAL TAX PLANNING

“Bush-era” Tax Cuts – The phrase “Bush-era” tax cuts is the collective term for the tax measures enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). EGTRRA and JGTRRA made over 30 major changes to the Tax Code that are scheduled to sunset at the end of 2012.

The 2010 Tax Relief Act extended the reduced individual income tax rates from the Bush-era tax cuts. Unless extended further, the reduced individual income tax rates will disappear after 2012 to be replaced by higher rates. The current 10, 15, 25, 28, 33 and 35 percent rate structure would be replaced by the higher pre-Bush 15, 28, 31, 36 and 39.6 percent rates.

Strategy: Traditional year-end planning techniques should be considered along with some variations on those strategies. Instead of shifting income into a future year, taxpayers may want to recognize income in 2012, when lower tax rates are available, rather than shift income to 2013. Another valuable year-end strategy is to "run the numbers" for regular tax liability and alternative minimum tax (AMT) liability. Taxpayers may want to explore whether certain deductions should be more evenly divided between 2012 and 2013, and which deductions may qualify, or will not be as valuable, for AMT purposes.

Qualified Capital Gains – Unless Congress takes action, the tax rates on qualified capital gains are also scheduled to increase significantly after 2012. The current favorable rates of zero percent for taxpayers in the 10 and 15 percent brackets and 15 percent for all other taxpayers will be replaced by pre-2003 rates of 10 percent for taxpayers in the 15 percent bracket and a maximum 20 percent rate for all others.

Strategy: Now is also a good time to consider tax loss harvesting strategies to offset current gains or to accumulate losses to offset future gains (which may be taxed at a higher rate). The first consideration is to identify whether an investment qualifies for either a short-term or long-term capital gains status, because one must first balance short-term gains with short-term losses and long-term gains with long-term losses. Remember also that the "wash sale rule" generally prohibits one from claiming a tax-deductible loss on a security if one repurchases the same or a substantially identical asset within 30 days of the sale.

Dividends – Under current law, tax-favorable dividends’ tax rates are scheduled to expire after 2012. Qualified dividends are currently eligible for a maximum 15 percent tax rate for taxpayers in the 25 percent and higher brackets and zero percent for taxpayers in the 10 and 15 percent brackets.

If Congress takes no action, qualified dividends will be taxed at the ordinary income tax rates after 2012 (with the highest rate scheduled to be 39.6 percent not taking into account the 3.8 percent Medicare contribution tax for higher income individuals).

Strategy: Qualified corporations may want to explore declaring a special dividend to shareholders before January 1, 2013.

3.8 Percent Medicare Contribution Tax – Taking effect immediately on January 1, 2013, the Medicare surtax will be imposed on a taxpayer’s “net investment income” (NII) and will generally apply to passive income. The Medicare surtax will also apply to capital gains from the disposition of property. However, the Medicare surtax will not apply to income derived from a trade or business, or from the sale of property used in a trade or business. For individuals, the Medicare surtax is based on the lesser of the taxpayer’s NII or the amount of “modified” adjusted gross income (MAGI) above a specified threshold.

The MAGI thresholds are:

  • $250,000 for married taxpayers filing jointly
  • $200,000 for single

NII includes:

  • Gross income from interest, dividends, annuities, royalties and rents, provided this income is not derived in the ordinary course of an active trade or business;
  • Gross income from a trade or business that is a passive activity;
  • Gross income from a trade or business of trading in financial instruments or commodities; and
  • Net gain from the disposition of property, other than property held in an active trade or business.

NII does not exclude:

  • Distributions from qualified retirement plans or IRAs
  • Veterans’ benefits
  • Gain excluded on sale of principal residence
  • Interest on tax exempt bonds

Strategies:

  • Do not postpone the first year IRA distribution to 2013 on reaching age 70.5.
  • Trust returns are also subject to the Medicare Contribution Tax.  Trust income will often reach the highest tax brackets much quicker than individuals.  Make sure that all income has been distributed from the trust before year end.

Additional 0.9 Percent Medicare Tax – Also effective January 1, 2013, higher income individuals will be subject to an additional 0.9 percent HI (Medicare) tax. This additional Medicare tax should not be confused with the 3.8 percent Medicare surtax. The additional Medicare tax means that the portion of wages received in connection with employment in excess of $200,000 ($250,000 for married couples filing jointly) will be subject to a 2.35 percent Medicare tax rate. The additional Medicare tax is also applicable for the self-employed.

Strategy: Taxpayers may want to explore the possibility of accelerating income into 2012.

End of Payroll Tax Holiday – For the past two years, an employee’s share of Old Age, Survivors and Disability Insurance (OASDI) taxes has been reduced from 6.2 percent to 4.2 percent (with comparable relief for the self-employed). Under current law, that reduction is scheduled to expire after December 31, 2012. On January 1, 2013, an employee’s share of OASDI taxes will revert to 6.2 percent, effectively increasing payroll taxes across the board.

Strategy: Taxpayers may want to explore the possibility of accelerating bonuses and wages into 2012.

Alternative Minimum Tax – The alternative minimum tax rates (26 and 28 percent on the excess of alternative minimum taxable income over the applicable exemption amount) are not scheduled to change in 2013. However, exposure to the AMT may change as a result of the scheduled sunset of the regular tax rates. Because the determination of AMT liability requires a comparison between regular tax and AMT computations, the higher regular tax rates post-2012 may help lower AMT exposure by the same amount.

However, taxpayers should not ignore the possibility of being subject to the AMT, as this may negate certain year-end tax strategies. For example, if income and deductions are manipulated to reduce regular tax liability, AMT for 2012 may increase because of differences in the income and deductions allowed for AMT purposes.

As in past years, taxpayers are waiting to see if Congress will enact an AMT “patch” for 2012. The last patch, which provided for increased exemption amounts and use of the nonrefundable personal credits against AMT liability, expired after 2011.  If another “patch” is not enacted by Congress, the AMT exemption will drop from $74,450 (married taxpayers filing jointly) in 2011 to $45,000 in 2012.

Personal Exemption/Itemized Deduction Phaseouts – Higher income taxpayers may also be subject to the return of the personal exemption phaseout and the so-called Pease limitation on itemized deductions. Both of these provisions were repealed through 2012. However, they are scheduled to return after 2012 unless the repeal is extended.

Revival of the personal exemption phaseout rules would reduce or eliminate the deduction for personal exemptions for higher income taxpayers starting at “phaseout” amounts that, adjusted for inflation, would start at $267,200 AGI for joint filers and $178,150 for single filers.

In addition, return of the Pease limitation on itemized deductions (named for the member of Congress who sponsored the legislation) would reduce itemized deductions by the lesser of:

  • Three percent of the amount of the taxpayer’s AGI in excess of a threshold inflation-adjusted amount projected for 2013 to be $178,150 (joint filers), or
  • 80 percent of the itemized deductions otherwise allowable for the tax year.

Strategy: Taxpayers should watch AGI limitations when determining deductions and credits to report in 2012/2013.  Taxpayers should consider paying deductible items in 2013 when tax rates are higher and could result in a more advantageous tax benefit.

Education – American Opportunity Tax Credit. In 2009, Congress enhanced the Hope education credit and renamed it the American Opportunity Tax Credit (AOTC). The temporary enhancements, including a maximum credit of $2,500, availability of the credit for the first four years of post-secondary education, and partial refundability for qualified taxpayers, are scheduled to expire after 2012. Under current law, less generous amounts will be available with the revived Hope education credit.

Coverdell Education Savings Accounts. Similar to IRAs, Coverdell Education Savings Accounts (Coverdell ESAs) are accounts established to pay for qualified education expenses. Under current law, the maximum annual contribution to a Coverdell ESA is $2,000, and qualified education expenses include elementary and secondary school expenses. Unless extended, the maximum annual contribution for a Coverdell ESA is scheduled to decrease to $500 after 2012.

Employer-Provided Education Assistance. Under current law, qualified employer-provided education assistance of up to $5,250 may be excluded from income and employment taxes. However, the 2010 Tax Relief Act only made the exclusion available through 2012.

Student Loan Interest. Individual taxpayers with MAGI below $75,000 ($150,000 for married couples filing a joint return) may be eligible to deduct interest paid on qualified education loans up to a maximum deduction of $2,500, subject to income phaseout rules. The enhanced treatment for the student loan interest deduction is scheduled to expire after 2012.  The student loan interest deduction would be limited to the first 60 months of payment.

Higher Education Tuition Deduction. The above-the-line higher education tuition deduction expired after 2011. The maximum $4,000 deduction was available for qualified tuition and fees at post-secondary institutions, subject to income phaseouts.

Child Tax Credit – Taxpayers who claim the child tax credit need to plan for its scheduled reduction after 2012. Absent Congressional action, the child tax credit, at $1,000 per eligible child for 2012, will be $500 per eligible child, effective January 1, 2013.

Sales Tax Deduction – Before 2012, qualified taxpayers could deduct state and local general sales taxes in lieu of deducting state and local income taxes. The 2010 Tax Relief Act last extended the optional itemized deduction for state and local general sales taxes, which had been available since 2004, to tax years 2010 and 2011. Unless extended again, the deduction for state and local general sales taxes will not be available for tax year 2012 and beyond.

Qualified Mortgage Insurance Premiums – For the period 2007 through 2011, premiums paid for qualified mortgage insurance could be treated as qualified residence interest and deducted as an itemized deduction, subject to certain restrictions. Renewal of this tax break into 2012 is uncertain at this time.

ESTATE/GIFT TAX PLANNING

There have been few areas of the Tax Code that have been subject to as much uncertainty as the federal estate tax.   In 2001, Congress passed legislation that repealed the estate tax in the calendar year 2010.  Under the 2010 Tax Relief Act, federal estate taxes applied to decedents dying after December 31, 2009 but before January 1, 2013.  Through 2012, each individual taxpayer can gift up to $5.12 million out of their estate without paying gift taxes.  Any gifts over the exemption amount are subject to a maximum tax rate of 35%.  Starting in 2013, the estate/gift tax exemption amount is reduced to $1 million and the maximum tax rate jumps up to 55%.

Strategy:  A comprehensive estate plan should be implemented to take advantage of this opportunity to transfer $5 million out of an individual’s estate.  This transfer could ultimately save over $2 million in estate taxes.  Individuals should consider transferring real estate or investments to their beneficiaries now to avoid the estate taxes later.

BUSINESS TAX PLANNING

Code Sec. 179 expensing – Code Sec. 179 gives businesses the option of claiming a deduction for the cost of qualified property all in its first year of use rather than claiming depreciation over a period of years. For 2010 and 2011, the Code Sec. 179 dollar limitation was $500,000 with a $2 million investment ceiling. The dollar limitation for 2012 is $139,000 with a $560,000 investment ceiling. Under current law, the Code Sec. 179 dollar limit is scheduled to drop to $25,000 for 2013 with a $200,000 investment ceiling.

Strategy: Businesses should consider accelerating purchases into 2012 to take advantage of the still generous Code Sec. 179 expensing. Qualified property must be tangible personal property, which one actively uses in one’s business, and for which a depreciation deduction would be allowed.  The amount that can be expensed depends upon the date the qualified property is placed in service; not when the qualified property is purchased or paid for.  Additionally, Code Sec. 179 expensing is allowed for off-the-shelf computer software placed in service in tax years beginning before 2013.

Bonus depreciation – The first-year 50 percent bonus depreciation deduction is scheduled to expire after 2012 (2013 in the case of certain longer-production period property and certain transportation property). Unlike the Section 179 expense deduction, the bonus depreciation deduction is not limited to smaller companies or capped at a certain dollar level. To be eligible for bonus depreciation, qualified property must be depreciable under Modified Accelerated Cost Recovery System (MACRS) and have a recovery period of 20 years or less. The property must be new and placed in service before January 1, 2013 (January 1, 2014 for certain longer-production period property and certain transportation property).

Businesses also need to keep in mind the relationship of bonus depreciation and the vehicle depreciation dollar limits.  Code Sec. 280F(a) imposes dollar limitations on the depreciation deduction for the year a taxpayer places a passenger automobile in service within a business, and for each succeeding year. Sport utility vehicles and pickup trucks with a gross vehicle weight rating in excess of 6,000 pounds are exempt from the luxury vehicle depreciation caps.

Expiring business tax incentives – Many temporary business tax incentives expired at the end of 2011. In past years, Congress has routinely extended these incentives, often retroactively, but this year may be different. Confronted with the federal budget deficit and across-the-board spending cuts scheduled to take effect in 2013, lawmakers allow some of the business tax extenders to expire permanently. Certain extenders, however, have bipartisan support, and are likely to be extended.  They include the Code Sec. 41 research tax credit, the Work Opportunity Tax Credit (WOTC), and 15-year recovery period for leasehold, restaurant and retail improvement property.

Small employer health insurance credit – A potentially valuable tax incentive has often been overlooked by small businesses, according to reports. Employers with 10 or fewer full-time employees paying average annual wages of not more than $25,000 may be eligible for a maximum tax credit of 35 percent on health insurance premiums paid for tax years beginning in 2010 through 2013. Tax-exempt employers may be eligible for a maximum tax credit of 25 percent for tax years beginning in 2010 through 2013.

The credit is scheduled to climb to 50 percent of qualified premium costs paid by for-profit employers (35 percent for tax-exempt employers) for tax years beginning in 2014 and 2015. However, an employer may claim the tax credit after 2013 only if it offers one or more qualified health plans through a state insurance exchange.

Today’s uncertainty makes doing nothing or adopting a “wait and see” attitude very tempting. Instead, multi-year tax planning, which takes into account a variety of possible scenarios and outcomes, should be built into one’s approach.

Please contact our office for more details on developing a tax strategy in uncertain times that includes consideration of certain tax-advantaged steps that may be taken before year-end 2012.

IRS Issues Guidance on $2,500 Health FSA Contribution Limit

June 4, 2012

Starting next year, employees will be able to contribute no more than $2,500 to a health flexible spending arrangement under new rules enacted in 2010’s health care legislation. The Internal Revenue Service on Wednesday issued guidance on how employers should implement this limit into their existing plans and clarified several issues.

A detailed analysis can be found at JournalofAccountancy.com.

IRS Increases Limits of Long-Term Care Deductibles

November 4, 2010

In what seems to be an apparent attempt to encourage taxpayers to plan ahead for long-term care, the Internal Service has increased the deductibility limits for long-term care insurance policies, while holding steady Social Security limits and payments.

The new deductible limits under Section 213(d)(10) for eligible long-term care premiums includable in the term “medical care” are as follows:

Attained Age Before Close of Taxable Year

40 or less – $340

More than 40 but not more than 50 – $640

More than 50 but not more than 60 – $1,270

More than 60 but not more than 70 – $3,390

More than 70 – $4,240

More detail is available here.

Mandatory Reporting of Health Care Costs Delayed

October 19, 2010

via Journal of Accountancy

On October 12th, the IRS issued a notice that gives relief to employers regarding the reporting of costs of group heath plan coverage to employees.  Notification to employees on Form W-2 will not be required for 2011.

Employers are now required to include the aggregate costs of employer-sponsored health care coverage on employees’ W-2s for tax years beginning on or after January 1, 2011 under the new health care reform legislation.  The IRS determined additional time is necessary for employers to make the necessary changes to comply with this requirement.  Under Notice 2010-69 issued by the IRS, emplyoers will not be subject to penalties for failure to meet the requirements in 2011.

Employers can still report the 2011 health care coverage costs to their employees on Box 12 of Form W-2 using the code “DD.”

IRS Releases Average Premiums for Determining Small Business Health Care Credit under the New Health Care Law

May 4, 2010

Via the Journal of Accountancy

On Monday, the IRS issued average small group market premiums for use in determining the new small business health care credit under IRC Section 45R, as enacted by the Patient Protection and Affordable Care Act.

Beginning in 2010, the act provides tax credits for small businesses (businesses with 25 or fewer employees and wages less than $50,000) of up to 35% of non-elective contributions the businesses make on behalf of their employees for insurance premiums.  The amount of the credit is based on a percentage of the lesser of: (1) the amount of non-elective contributions paid by the eligible small employer on behalf of employees under the arrangement during the tax year, and (2) the amount of non-elective contributions the employer would have paid under the arrangement if each such employee were enrolled in a plan that had a premium equal to the average premium for the small group market in the employer’s state. 

Revenue Ruling 2010-13, provides the information necessary to determine the average premium under number (2) above, and can be found here.