HEALTH CARE REFORM ACT SUMMARY

Understanding the process that has taken place to reconcile the Health Care Reform Act.

On December 24^th, 2009 the Senate approved the Patient Protection and Affordable Care Act.  A “side bill” was also issued called the Health Care and Education Tax Credits Reconciliation Act of 2010.  Congress did this deliberately to bypass the filibuster provision which requires 60 Senate votes to pass a bill.  By doing so the House was able to make the necessary changes and get enough votes by way of the budget-reconciliation rules.  These rules allowed the Senate to pass the final package with 51 votes instead of 60.

This method essentially creates a loophole around the 60-vote super-majority requirement.   It created a means for the House and Senate to vote on simple majority, straight up.  Some would consider this “forcing the bill through” against traditional voting standards.

What Does the Bill Seek to Accomplish?

1) All individuals not covered by Medicaid or Medicare would be required to obtain health care coverage.

• In short, everyone must have healthcare coverage or fines will be imposed.

2) Lower-Income individuals will receive a credit or voucher to help pay for the cost of insurance.

• Based on your relationship of income to poverty level you may be eligible for advanced payment of the premium assistance tax credits.

3) Employers (with 50 or more employees) must offer qualifying coverage to employees or pay fines.

• Requires automatic enrollment for mid to large size employers
• Additional taxes are owed if healthcare coverage is not offered.
• If healthcare coverage is outside the affordable standards set forth (cost compared to income), a penalty of up to $3,000 per employee may be imposed.

4) Provisions that control insurance company practices.

• Prohibit insurance companies from using pre-existing conditions to deny coverage.
• There will be caps on deductibles and annual out of pocket spending is capped at $5,000.
• Policies can’t be cancelled when someone becomes sick.

5) Small employers will receive tax credits to offset the cost of insurance.

• A small employer is considered an employer with less than 25 employees and average annual wages of less than $40,000.

6) The creation of a reinsurance program for early retiree coverage.

7) Creates a national voluntary insurance program for purchasing community living assistance services and support.

8 ) Adoption credit becomes fully refundable and is increased to $13,170.

It seems that through tax credits to lower-income earners and small business’s, more wealth will be “redistributed” to provide everyone with healthcare.  The taxes, which will be mentioned below, will subsidize healthcare coverage for lower income individuals and smaller businesses as well as other government run programs.

What About the Taxes to Pay For All of this?

1) An increased Medicare tax of .09 percent for individuals who exceed income thresholds ($200k single, $250k married).

• A flat tax of 3.8% on investment income subject to the same income thresholds.

2) An excise tax of 40% on employers whose premium payments exceed $10,200 for individual coverage and $27,500 for family coverage.  The average cost per person is said to be about $10,700.  This will not be in effect until 2018.

• Simply put, if your plan is above government standards you will pay a heavy price on the value over that standard.
  • One could assume that employers will pass this cost down to their employees in the form of higher premiums.

3) Penalties on individuals who do not obtain coverage starting in 2014.

• The penalty is the greater of $95 or 1 percent of your income.  This will increase to $695 or 2.5% of your income by 2016.

4) Excise taxes on medical equipment and pharmaceutical sales will be in effect in 2018

5) Penalties on non-qualified distributions from HSA’s will be increased from 10% to 20%.

6) The threshold for itemized medical deductions will rise from 7.5% to 10% starting in 2013.

As I outline the revenue raisers (new taxes) and provisions of the Health Care Reform act a couple of things stood out.  I feel as though we are being indirectly squeezed into a standard of healthcare that the government now defines.  If you don’t have coverage, you will be fined. If your coverage is exceeds the average, you will be fined.  There is a valid concern that we will be pigeonholed into a certain standard of health care coverage. The other thing that stood out to me is the continuing policy to redistribute wealth.

There are many other facets to the bill. By 2014, states will have to set up Small Business Health Option Programs called “SHOP Exchanges,” where small businesses (under 100 employees) will be able to pool together to buy insurance.

More than 30 states have stated that they cannot afford the cost of requirements like this.

I am also concerned that this passive form of price control on the insurance industry will balance out in a negative fashion for the quality of our healthcare.  I am happy that more people will be covered, that people with pre-existing conditions will have a way to obtain coverage, but are federal mandates on health care coverage unconstitutional?  After all, you’re forcing a consumer to buy a product or pay fines.

Please comment with your thoughts and additional information I have missed.  I am an expert in tax but not in politics or law. I have clients who are Doctors and Surgeons and I look forward to eventually picking their brains on their thoughts.

-Joe

A Quick Look at the 2010 HIRE Act

The first major bill of the year was passed in mid March.  Driven by the continuing desire to stimulate the economy this bill offers hiring incentives through the “forgiveness” of payroll tax and credits to employers who retain workers for a period of time.  The bill also extends the increased Sec. 179 deduction amount through 2010 and increases the standards of discloser for individuals with foreign assets.

If a qualifying individual is hired between February 3^rd 2010 and January 1^st 2011, the employer will not be required to pay the 6.2% FICA tax through 2010.  That could be a payroll tax savings of up to $6,621 for each employee hired.  The employee must not have been employed for more than 40 hours during the 60-day period ending on the date the individual begins employment.  Also, the qualifying individual cannot displace a current employee.  How will this savings benefit small business and employees?

-       Possible higher wages for employees

-       Employ more workers

Of course the business could just retain the profits or lower prices on goods for sale.

Employees who qualify for the above measure will also generate a tax credit of up to $1,000 if retained for over 52 weeks.  Because of the 52-week requirement, employers wont starting seeing this benefit until they file their 2011 tax returns.

The Sec. 179 depreciation credit will be $250,000 for business who place under $800,000 of assets into service in 2010.  This is an extension of what was available in 2008.  This extra first year depreciation tool is supposed to encourage small business to spend money on placing new assets into service.  Remember, in some situations it is not always advantageous to completely depreciation your assets in one year.

One last thing that really stuck out to me was the foreign financial assets disclosure requirement.  If the aggregate value of an individual’s foreign financial asset exceeds $50,000, they must disclose information about those assets or face penalties up to $50,000.  The value considered is the highest value of the asset during the year, not the value on Dec. 31^st.  If you have assets overseas, the government wants to know about it!

The incentives for hiring and retaining workers is expected to cost about 4.2 billion in 2010 and 5.6 billion in 2011.

Next up, the Extenders Act..

Emailer Question LTC

Some of my clients are interested in single premium prepaid long-term care contracts. They also have a refund feature on these products. How do they deduct the long-term care costs when there are annual limits, but they pay it all at once? Also, what happens when they get a refund?

For any taxpayer who is governed by §213 (individuals, sole proprietors, partners, members in an LLC taxed as a partnership, and 2% or greater shareholders in an S corporation) the deduction is limited by the dollar ceiling. Under the Code’s literal language only deductions made during that year would be deductible. I checked for any IRS rules on this and did not see any.

It would seem reasonable that one could amortize the cost over the period of coverage and apply that to the annual limits, but I was unable to verify this so far. If anyone wants to comment on this please do.

When it comes to the refund feature of a LTC contract, any refund or complete surrender or cancellation of the contract is includable in gross income to the extent of any deduction or exclusion allowed for the premiums.

-Joe

How long do I keep my Tax Return ??

It should come as no surprise that after we file our tax returns every year they become a quick afterthought.  So how long should we “pack away” our tax return and supporting documents?

Taxes may ordinarily be assessed within 3 years of filing your return.   The three-year period starts on the day after the return is filed.  The return is considered filed on the date the IRS receives the return and if it is filed early it is treated as filed on the due date of the return. Basically the 3-years starts April 15th, or later if filed later.  Don’t worry, if you amend your return the 3-year period does not reset.

This 3-year statue prevents the IRS from being able to collect any unpaid tax by a court proceeding or levy after the 3-year assessment period has expired.

So generally, we are told to keep our tax returns for at least 3 years.  Sometimes there are reasons to keep them even longer.

When the IRS mails a statutory notice of deficiency they are temporarily prohibited from making an assessment.  This suspends the 3-year period during that time.  If the taxpayer files a petition the suspension does not end until 60 days after the tax court makes a decision.

It is also important to know that the 3-year assessment period does not apply to fraud cases. In short, if the taxpayer files a false or fraudulent return with the intent to avoid tax, that tax may be collected at anytime. Any portion of an underpayment attributable to fraud may also be collected at any time.

Because the 3-year rule does not apply to fraud cases, it is better to not file a false return and wait until an accurate return can be filed.   This way the 3-year period will at least start at some point. Filing the false or fraudulent return will block the 3-year period from ever starting, allowing the tax to be collected at any time.

There are other reasons why the 3-year limitation may not hold up, or be extended.  The rules may become even more convoluted when considering partnerships and LLCs.  It is important to at least consider the minimum, 3 years from the date your return is considered filed.

Also remember, on the other side of the coin, you have the same 3-years to file a tax return and claim a refund!

And on this one I felt the need to include a disclaimer

In accordance with IRS Circular 230, the information on this Web site is not intended or written to be used, and cannot be used as or considered a “covered opinion” or other written tax advice and should not be relied upon for the purpose of avoiding tax-related penalties under the Internal Revenue Code; promoting, marketing, or recommending to another party any transaction or tax-related matter(s) addressed herein; for IRS audit, tax dispute or other purposes

Tapping into Retirement Money Early

Taking money from you retirement account, IRAs or annuities are never advised because there may be harsh penalties as well as funding limits that will keep you from being able to catch back up in full.

Generally distributions taken before you are 59 ½ will be subject to an additional 10% penalty on the taxable amount.

If you have lost your job and you need to tap into your IRA, there are some exceptions to the 10% penalty you may want to look into.

Disability – unable to engage in any substantial gainful activity

Substantially Equal Period Payments – this is an option that will give you a steady income stream based on your life expectancy for at least 5 years and until your 59 ½.   Always advise with a professional before selecting this option.

Medical Expenses – Any qualifying medical expenses in excess of 7.5% of your AGI are exempt whether or not you itemize.

Health Insurance for Unemployed Persons – Premiums can be included for spouse and children as well.  Taxpayer must have received unemployment comp for 12 consecutive weeks.

Education Expenses – payments can be for taxpayer, spouse, child, stepson, stepdaughter, or grandchild.

First time home purchase – limited to $10,000 lifetime for each IRA owner.  Must be for principal residence.

These are not all of the exceptions, but they may be useful during difficult times.  The home purchase exception, education exception and health insurance exception don’t apply to qualified plans such as 401ks.

If your money is in an employer sponsored plan, consider a loan, usually low interest rates are offered and you can borrow up to half your vested balance with a max of $50,000.

Remember, the 10% penalty ONLY applies to taxable distributions, with one exception.  If you convert your IRA to a Roth, you must wait 5 years before the 10% penalty falls off the converted basis.

A great reason Roth IRAs may be a good emergency vehicle, contributions may be withdrawn first, and they are not subject to income tax or the 10% penalty. Also, inherited IRAs are not subject to early withdraw penalties.

If you have your retirement money in a non-qualified annuity, only the gain is subject to the 10% penalty.  Withdrawals will come out of gain first.

FY2011 Outlined in Treasury Green Book

Acting as a blueprint for Congress, the Green Book is usually released around early February and covers the tax proposals that the Administration hopes to pass through Congress. It is our best indicator of what direction Congress wants to take our country in for the coming year.

We have a deficit, a huge one, and at the same time we are spending at record rates to hold a seemingly broken economy afloat. So the first thing I wanted to look at in the Green Book were the revenue raisers.

• Couples with income over $250,000 and singles over $200,000 will see tax rates increase to the pre-Bush era (35% and 39.6% top tier rates).
• A 20% tax rate on capital gains and dividends would be in effect for the same taxpayers as mentioned above.
• A codification of the economic substance doctrine to eliminate the lower-of-cost-or-market value and LIFO methods of accounting for inventory.
• A “bank tax” that assesses a 15 basis point fee on covered assets for financial institutions with consolidated assets of $50 billion or more.

A major emphasis in the Green Book to provide economic relief is to create jobs and help small business’s. Not easy to do when your other goal is to reduce the federal deficit! Here are some bullet points I want to summarize.

• Extending the enhanced Code Sec. 179 deduction for small business’s to 2010.
• Extending bonus depreciation to 2010.
• A new $5,000 small business job creation tax credit. Elimination of the capital gains tax for investments in small business stock.
• Making the research and experimentation tax credit permanent. Removal of cell phones from the definition of listed property for purposes of substantiating business versus personal use.

It is confusing to me that there are tax incentives for small business while there will be tax hikes only for those who earn over $200k. The reason being is that most small business owner’s fall into that category. I like the idea of forcing companies to provide automatic enrollment in IRAs if they don’t already offer an employer plan. This is something employees could still opt out of but it may encourage retirement savings.

There are other extensions that are aimed at economic recovery. One has to wonder why more of the same will be better.  Continue spending, increase taxes only on those who actually provide for the majority of jobs, and so on.  I am no economist, but it is hard to envision much positive change from the FY2011 Budget outlined in the Green Book.  Now seems like the best time ever to start some short-term and long-term tax planning with your tax practitioner.

Go Back to School!

The American Opportunity Credit. – Make it work for you.  This education credit helps parents and students pay for college and college-related expenses.

Here’s how you can benefit from it when you file your 2009 taxes (and for 2010 too).

The American Opportunity Credit can be claimed for expenses paid for any of the first four years of post-secondary education.

The credit is worth up to $2,500 and is based on a percentage of the cost of qualified tuition and related expenses paid during the taxable year.

Qualified expenses now includes expenditures for required course materials

You may receive a tax credit based on 100 percent of the first $2,000 spent plus 25 percent of the next $2,000 paid during the taxable year.

Forty percent of the credit is refundable, so even those who owe no tax can get up to $1,000 of the credit for each eligible student as cash back.

It always pays to sharpen your educational skills.  Consider post grad studies today.

Your Friend – The Focus Group

What Are You Earning?

Have you ever heard the term, what is your real rate of return? Inflation is annually assumed to be about 3%, and then there are fees and taxes, which also eat into your return. Unless you’re in a Roth IRA or in some type of UL you probably wont get out of paying taxes on earnings!

I read a great article recently that highlighted what rate of return you probably need to achieve to earn the “real rate of return” that you think you are getting. The article gives a range of 11 – 13% a year before cost and inflation to achieve a real return of about 6%. Don’t we all feel like we should be able to achieve a 6% rate of return on our investments? Well maybe not, but I do!

A big part of achieving that real rate of return may be to limit fees, trade less, hold longer, and to implement tactical tax strategies. Maybe you can fund a Roth IRA instead of a standard brokerage account, or fund a pension, which you can eventually convert to a Roth IRA. Timing can be everything. Sometimes you can sell appreciated assets or investments to absorb tax losses and deductions, effectively reducing the tax you paid on the investments.

Unfortunately we can’t lower inflation, but you can also consider using a portion of your portfolio to hedge against it! Consider gold, commodities, oil and gas or even REITs.

There are thousands of philosophies on earning the highest potential real rate of return. No matter what that philosophy is, you can’t underestimate the importance of tax strategy.

Your Friend – The Focus Group

Why You Should E-File

Here are two important reasons to e-file your return.  

• It’s fast Your tax return will get processed more quickly if you use e-file.  If there is an error on your return, it will typically be identified and can be corrected right away.  If you file electronically and choose to have your tax refund deposited directly into your bank account, you will have your money in as few as 10 days.  
• It’s safe The IRS is fully committed to protecting your tax information and e-filed returns are protected by the latest technology. In 20 years, nearly 800 million e-filed returns have been processed safely and securely by the IRS.   

When you e-file your tax return an electronic receipt is generated notifying you that the IRS received your tax return.   

E-file is available 24 hours a day, seven days a week; you are not restricted by post office hours.  

If you owe money to the IRS, e-file also allows you to file your tax return early and delay payment up until the due date.  

In 37 states and the District of Columbia, you can simultaneously e-file your federal and state tax returns.

Counting Beans is Easier with Technology

Does your CPA Utilize Technology?

I recently read an article in the Journal of Accountancy that really hit me in a funny way.  As if I do not get enough slack for being a tax geek already, I also love technology.  Improved efficiency means more time is spent on thinking and helping the client reduce their tax burden while also lowering costs to the consumer.  It may also mean more efficient record retention and less stress when tax season comes.   Virtual communication is a great enhancement to phone and in-person interviews.  It is fast and provides documentation to the practioner.

The Journal of Accountancy cites that out of 100 high-performing firms, 75% already have a paperless strategy in place.  They also mention that 90% expect to within 3 years. Some of the top paperless strategies are mentioned to be.

•      Document retention and destruction policy.
•      Policies and procedures using scanned documents.
•      The storage of digital information.
•      Using multiple monitors for more efficient tax preparation.

The Journal of Accountancy cites many more statistics.  If you’re interested, the article is written by Alexandra DeFelice in the January 2010 issue. 

The Focus Group has long been using all of these forms of paperless strategies.  It is all about maximizing value to the consumer, and this is a major step in bringing value in today’s environment.  Expect your CPA to utilize paperless strategies as well as the ability to E-file.