Understanding the Health Insurance Mandate

Beginning in 2014, the Affordable Care Act will impose the new requirement that all people in the United States, with certain exceptions, have minimum essential health care insurance or they will be subject to a penalty. How this will affect your family will depend upon a number of issues.

Already Insured
If you have insurance through Medicare, Medicaid, or the Veterans Administration, then you will not be subject to the penalty. You will also avoid the penalty if you are insured through an employer plan or a private insurance plan that provides minimum essential care. US individuals and those claimed as their dependents who reside outside the US are deemed to have adequate coverage and are not subject to the penalty.

Some Are Exempt from the Penalty
Certain individuals are exempt from the health insurance mandate and are therefore not subject to the penalty. Included are:

• Those unlawfully present in the US
• Those whose income is below the federal tax filing requirement (the sum of the standard deduction and exemption amounts for the filer and spouse, if any)
• Those who cannot afford coverage based on formulas contained in the law (generally when the cost of the insurance coverage exceeds 8% of the individual's household income)
• Members of American Indian tribes
• Incarcerated individuals, certain religious objectors, and those meeting hardship requirements

Household Income
The term "household income" is used as a measure of who qualifies for a premium assistance subsidy or tax credit and is used extensively in calculations related to the mandatory insurance requirements.

Household income includes the modified adjusted gross incomes (MAGIs) of an individual, the individual's joint filing spouse, if any, and all of the individual's dependents that are required to file a tax return(1).

MAGI is an individual's regular adjusted gross income plus non-taxable social security and railroad retirement benefits, excluded foreign earned income, and non-taxable interest and dividends.

(1) An individual is required to file a tax return if their income exceeds the sum of their standard deduction and allowable exemptions. Thus, for example, a single person who only made $1,000 for the year would not be required to file a return and their income would not be included in the household income even if they did file to claim a refund.

Can't Afford Coverage?
Families with household incomes below 400% of the federal poverty guideline may receive help to pay all, or a portion of, the cost of the premiums for health insurance.

Where the household income is below 100% of the federal poverty level, the family qualifies for Medicaid. There are no premiums for Medicaid.

If the household income is between 100% and 400% of the federal poverty level (FPL), the family qualifies for an insurance premium subsidy, also known as a premium assistance credit, provided the insurance is purchased through a government marketplace (exchange). The actual credit is based upon the current year's household income but can be estimated and allowed in advance as a subsidy. When it is used in advance as a subsidy and the subsidy turns out to be greater than the allowable credit, the excess subsidy may have to be paid back. On the other hand, if the subsidy was not used or the subsidy was less than the credit, the difference becomes a refundable credit on the tax return.

The maximum credit is available at 100% of the poverty level and becomes less as the percentage increases and is totally phased out at 400% of the poverty level.

For family sizes larger than 4, increase the 100% rate by $4,020 for each additional child. Dollar amounts for Alaska and Hawaii are larger. Note that the table is condensed for this brochure and the actual percentage of poverty level will need to be extrapolated for income not shown in the table. For 2014, the FPL amounts are those in effect on October 1, 2013, the opening date for 2014 enrollment in plans offered through a government marketplace.

Credit/Subsidy Qualifications
To qualify for the credit, an individual must:

• Have household income for the year of at least 100% but not more than 400% of the federal poverty level
• Purchase the insurance through a government marketplace (exchange)
• Not be claimed as a dependent of another
• Not be eligible for minimum essential care through Medicaid
• If married, file a joint tax return
• Not be offered minimum essential insurance under an employer-sponsored plan

How Much Will the Subsidy Be?
The amount of the subsidy is based on need and therefore those in the lowest percentage of the poverty level will receive the greatest subsidy. The government has predetermined how much each family must pay toward their own insurance in the form of a percentage of the family's household income. To determine how much a family must pay toward their own insurance, first determine where their income falls within the poverty table above and then determine their percentage from the table below. That percentage represents the portion of their household income that they should pay toward their own insurance.

Note: the table is condensed for this brochure and the actual percentage of household income that must be paid toward one's own insurance will need to be extrapolated for poverty levels between those shown.

Once the percentage in the right-hand column is determined, multiply that by the family's household income to determine what the family's annual responsibility is and divide it by 12 to determine their monthly responsibility.

Then, to determine the subsidy, go to the government marketplace and determine the cost of the Silver(2) level of insurance for the family and subtract the amount they are required to pay themselves; the difference, if any, is the subsidy.

Example: Family of two with a household income of $31,020. From the Federal Poverty Level Chart it is determined that a family of 2 with that income is at 200% of the federal poverty level. Using the 200% of poverty level it is determined from the second table that their responsibility toward their own insurance should be 6.3% of their household income or $1,954 (.063 x $31,020) or $162.83 per month. If the cost of the Silver level of insurance is $350 per month, then the premium subsidy would be $187.17 ($350 - $162.83).

(2) Insurance acquired through the marketplace (exchange) is available in four levels of cost (premium), with varying metal designations. The least expensive is the Bronze coverage, which is also the insurance that provides the "minimum essential coverage" needed to avoid a penalty. Next is the Silver level, which is referred to as the "benchmark premium." The Silver or benchmark premium is the one used when determining the subsidy. The Gold and Platinum designations complete the four levels of coverage. The Bronze coverage, on an overall average, is supposed to cover 60% of the insured's medical cost. Silver plans cover 70%, the Gold 80%, and the Platinum 90%.

Paying Back Excess Subsidies
When an insured individual receives a subsidy in excess of the allowable credit based upon the current year's household income, some portion, but not necessarily all, of the excess must be paid back on the tax return for the year. If the household income is above 400% of the poverty level then the entire amount of the excess must be repaid. If the insured's household income is between 100% and 400% of the poverty level, then payback is capped at the following amounts:

Penalty for Not Being Insured
Beginning in 2014, there is a penalty for not being insured unless one of the exemptions mentioned earlier is met. The penalty is being phased in over three years. The monthly penalty for 2014 is the greater of $7.92 per uninsured adult plus $3.96 for each uninsured child(3), but not to exceed $23.75 per month for a family, OR, 1% of household income in excess of the individual's income tax filing threshold(4) divided by 12.

In 2016, when the penalty is fully phased in, the monthly penalty will be $57.92 per uninsured adult and $28.96 per uninsured child(3), not to exceed $173.75 per family OR 2.5% of household income over the income tax filing threshold(4) divided by 12.

The penalty can never be greater than the national average premium for a minimum essential coverage plan purchased through a government marketplace (exchange).

(3) The child rate will apply to family members under the age of 18.
(4) Filing threshold is the sum of the standard deduction and personal exemption amounts for the tax filer and spouse, if any.

Example: A married couple without insurance in 2014 has one dependent child and a household income of $50,000. The couple's standard deduction is $12,400 and with two exemptions at $3,950 each, their filing threshold for 2014 is $20,300. Their monthly penalty is the greater of $19.80 (2 x $7.92 plus $3.96) or $24.75 (.01 x ($50,000 - $20,300)/12). Thus their monthly penalty would be $24.75.

There is no penalty when the first lapse in coverage during a year is less than three months.

Insurance Marketplaces
Residents of states that did not set up their own exchanges must use the federal marketplace.

All policies sold through a marketplace have standardized applications, no pre-existing exclusions, and pre-set copays and deductibles. Where an insured family's household income is between 100% and 200% of the federal poverty level, copays and deductibles are reduced by two-thirds. They are reduced by 1/2 where the insured's income is between 200% and 300% , and 1/3 for those between 300% and 400%. Individuals who need to purchase health insurance are not required to use the government marketplaces – they can purchase plans privately. However, privately purchased plans will not be eligible for the premium assistance credit or subsidy, but if they meet the minimum essential coverage requirements, they will qualify the individual to avoid the mandatory coverage penalty. Those shopping for health insurance should check both the private and government marketplaces to compare their net out-of-pocket premium costs.

Dependents
The filer, or filers if filing jointly, is subject to the penalty for every dependent who can be claimed on their tax return. That includes children, parents, and other related individuals. This is true even if they do not claim the dependent, but were qualified to do so.

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Are You Required to File 1099s?

Article Highlights:

• A business that pays an independent contractor $600 or more in a year must file Form 1099-MISC.
• Form W-9 is used to collect the independent contractor’s data.
• Deadlines for issuing 2013 1099-MISCs are January 31, 2014 (to independent contractors) and February 28, 2014 (to the IRS).

If you use independent contractors to perform services for your business and you pay them $600 or more for the year, you are required to issue them a Form 1099-MISC after the end of the year to avoid facing the loss of the deduction for their labor and expenses. The 1099s for 2013 must be provided to the independent contractor no later than January 31, 2014.

It is not uncommon to have a repairman out early in the year, pay him less than $600, and then use his services again later, and have the total for the year exceed the $600 limit. As a result, you may overlook getting the information needed to file the 1099s for the year. Therefore, it is good practice to have individuals who are not incorporated complete and sign the IRS Form W-9 the first time that you use their services. Having properly completed, and signed, Form W-9s for all independent contractors and service providers eliminates any oversights, and protects you against IRS penalties and conflicts.

IRS Form W-9, Request for Taxpayer Identification Number and Certification, is provided by the government as a means for you to obtain the data required to file the 1099s from your vendors. It also provides you with verification that you complied with the law should the vendor provide you with incorrect information. We highly recommend that you have a potential vendor complete the Form W-9 prior to engaging in business with them. The form can either be printed out, or filled out onscreen and then printed out. The W-9 is for your use only and is not submitted to the IRS. If you don’t have a W-9 for a vendor you used in 2013 and paid $600 or more, you should make every attempt to obtain one.

In order to avoid a penalty, copies of the 1099s need to be sent to the IRS by February 28, 2014. They must be submitted on magnetic media, or on optically scannable forms (OCR forms). This firm prepares 1099s in OCR format for submission to the IRS with the 1096 submittal form. This service provides recipient and file copies for your records.

Please attempt to have the information to this office by January 20, 2014, in order that the 1099s can be provided to the service providers by the January 31^st due date.

If you need assistance or have questions, please give our office a call. 

(601) 649-5207

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Revising Your W-4? Seek Professional Advice First

Article Highlights:

• Form W-4 is used to establish payroll-withholding amounts.
• Incorrectly completed W-4s can result in under-withholding and unexpected year-end tax liability.
• The IRS’s W-4 calculator is only suitable for simple returns.
• Commonly encountered problems in getting the W-4 completed to establish the proper amount of withholding.

This time of year, many employers will request updated W-4 forms from their employees (and the equivalent state form for those who live in a state with income tax). The W-4 form allows you to specify your filing status and the number of dependent exemptions to be used for determining the amount of income tax to be withheld from your payroll. Although the IRS provides an online W-4 calculator, it is generally suitable only for more simple returns, and may not be appropriate in all cases, since it does not take into account all income adjustments, credits, and deductions available. Be careful when completing the W-4 form, because errors can create some significant financial problems.

Let’s say that you are married and have two dependents. On your tax return, you claim four exemptions. The natural thing for you to do would be to claim “married” and four exemptions on the W-4. However, for W-4 purposes, the exemption for the taxpayer and spouse are automatically built into the married rates, and only two exemptions need to be claimed. The result, of course, is that the taxpayer ends up claiming more exemptions than he or she actually is entitled to, which can result in under-withholding, if the standard deduction is used.

It is common practice and acceptable for taxpayers to claim additional exemptions when they would otherwise have excessive withholding. Over-withholding may occur because the withholding tables do not account for large itemized deductions or other situations that might reduce the worker’s taxable income.

It’s also quite common for taxpayers to increase their exemptions to provide more take-home pay from their payroll checks. In doing so, they are essentially borrowing tax money from the government, which they will have to repay – along with possible penalties and interest – when they file their return the following year. That might seem like a good idea now, but it could lead to an unexpected tax liability at tax time. This is where a professional tax projection can more accurately establish appropriate withholding amounts.

Determining the appropriate number of exemptions to claim on the W-4 can be tricky if you have other substantial income on which no tax is withheld or when both spouses of a married couple are employed. The guidance of a tax professional may be beneficial in these and other cases, to help determine the W-4 withholding allowances and to analyze how the withholding amount may affect the need for estimated tax installment payments.

If you feel you need assistance in determining your withholding amount and completing the W-4 to produce the correct withholding, please call our office. 

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You May Need to File Nominee 1099s

Article Highlights:

• To avoid taxes on income you share with another person reported under your ID number, you need to file a nominee 1099 form.
• These rules do not apply to income shared with a spouse.
• You may need to file one or more 1099s.

If you receive income in your name that actually belongs to someone else, aside from your spouse if married filing jointly, you are a nominee. This means you must file a 1099 form with the IRS appropriate to the type of income you received and give a copy of it to the income’s actual owner.

One of the most common nominee situations is a joint bank account or brokerage account with all of its income reported under your Social Security (SS) number. You will need to provide the IRS and your account co-owner with a 1099 reporting the co-owner’s share of the income under his or her SS number. Then, when you file your return, you need to show all the income but back out the co-owner’s share as a “nominee amount.”

The type of 1099 to file depends upon the type of income: 1099-INT for interest, 1099-DIV for dividends, and 1099-B for the proceeds from selling stocks and bonds. If the joint account is a brokerage account that has produced interest and dividend income, along with stock or bond sales, the nominee will need to prepare one of each type of 1099 for each co-owner.

You should provide Forms 1099-INT and 1099-DIV as a nominee to the recipients by January 31, while the deadline for Form 1099-B is February 15. To avoid penalties, you need to send copies of the 1099s to the IRS by February 28, on magnetic media or optically scannable paper forms (OCR forms). This firm prepares 1099s in OCR format for submission to the IRS along with the required 1096 transmittal form. This service provides recipient and file copies for your records.

If you have questions about filing 1099s as a nominee, please call our office. 

(601) 649-5207

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What Happens When Social Security Funds Run Out?

Article Highlights:

• Without Congressional action, Social Security will become insolvent in 2033.
• Benefits could shrink to 77% of the current levels and/or payments could be delayed.
• Individuals need to take proactive steps to supplement Social Security.

This subject comes up over and over again and Congress keeps kicking it down the road, not wanting to deal with the political fallout that will result if taxes are increased or benefits are reduced to fund future Social Security benefits. The last change Congress made was to gradually extend the full retirement age from the age of 65 to the age of 67 between 2002 and 2025.

Our Social Security system not only provides retirement benefits, but also provides disability and survivor benefits to covered workers and their families. The Social Security system receives funding from numerous sources, including the Social Security payroll tax (FICA) on wages, self-employment tax on the income of self-employed individuals, income tax on the taxable part of Social Security benefits, and interest on current trust fund assets.

In the Social Security Administration's 2013 Annual Report, the Board of Trustees projected trust fund exhaustion by the year 2033. It also projected that in 2033, the first year of projected insolvency, the program would only have enough tax revenues to pay about 77% of scheduled benefits. That percentage would decline to 72% in 2087. If that happens, the monthly payment of benefits could be delayed, disrupting the predictability of the current payment schedule.

A recent study by the Congressional Research Service (CRS) concluded that the sooner Congress acts, the smaller the changes to Social Security need to be. Making changes now would spread the costs over a larger number of workers, and over a longer period of time. Changes could be slowly phased in, rather than making abrupt cuts in benefits and/or increases in taxes, thus allowing workers to plan in advance for their retirements.

Relying solely on government benefits for retirement is risky. Proactive retirement plans may be a better option for your golden years. The current tax code provides for numerous retirement incentives including Traditional IRAs, Roth IRAs, 401(k) plans, self-employed retirement plans, and a Saver’s Tax credit for lower income individuals. A little saved each year can become a significant retirement income source in the future.

If we can help you plan for your retirement, or explain the various tax-favored retirement plans available, please call our office.

(601) 649-5207

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Stop Tax Identity Theft in Its Tracks

Imagine after sending in your annual tax return, you receive a notice from the Internal Revenue Service saying that another return has already been filed using your name and Social Security number—and claiming a refund. Sound impossible? It can happen if you become one of a growing number of victims of tax return identity theft. According to one estimate, tax-related identity theft cases have soared more than 650% since 2008. At the least, this crime can lead to a delay in your refund, but the consequences may be much more serious. In addition, you may face a larger problem with identify theft if the scammer is also running up credit card debt or taking out loans in your name.

To avoid becoming a victim, we recommend steps such as safeguarding your Social Security number and other financial information, keeping an eye on changes to your credit ratings and taking precautions with electronic transfers of confidential information. Be sure to contact us if you believe you have been a victim of identity theft or would like advice on the best ways to secure your financial information. 

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Smart Disaster Planning Steps

Too often natural disasters strike and serve as reminders that it’s important for both individuals and businesses to protect themselves against the potential financial consequences of such events. A few smart steps we recommend include making electronic backups of important records, including your insurance policies, tax returns, bank and credit card account information, and vital records.  It is critical that you store this backup in a separate location that will be easy to access if your area suffers damage.  You should also take the time to take pictures or videos of your home or business and store them separately in case you need to make an insurance claim.

If you run a business, you must consider how you will get up and running again after a disaster. It’s a good idea to develop contingency plans that will enable employees to work from home or elsewhere if your location is damaged or inaccessible. Both businesses and families should consider using phone trees or other methods to maintain contact in an emergency. Review your contact and contingency plans every year to be sure they are up to date.

Want further advice on protecting your family’s or business’s financial well-being in case of a disaster? We can help. Contact us today with all your financial questions. 

(601) 649-5207

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Take the Uncertainty Out of Health Care Reform

If you’re not sure what the new health care law means to you, you’re not alone. A poll by the Kaiser Family Foundation revealed that just over a third of the public had tried to find out more information about the law—the Affordable Care Act—in recent months. About half of the respondents to the survey said they remain confused about the law and its provisions.

If you have questions we can provide the answers you need. Among other things, our individual clients should be aware of the Shared Responsibility Provision that becomes effective on January 1, 2014. Under the provision, people of all ages, including children, must either have minimum essential health coverage, qualify for an exemption or make a payment when they file their tax return. We can help you understand whether your coverage meets the law’s requirements, how gaps in coverage will be treated and what circumstances qualify for an exemption. Contact us today to find out how the health care law will affect you. 

(601) 649-5207

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Maximize Your Medical Deductions

Article Highlights

• The medical deduction AGI floor has increased to 10%, up from 7.5%.
• For taxpayers age 65 or older and their joint-filing spouses, the AGI floor remains at 7.5% until 2017.
• For all taxpayers subject to the alternative minimum tax (AMT), the AGI floor is 10%.
• If you itemize your deductions, it may be appropriate to check your year-to-date health care costs and see if it would be beneficial to pay any outstanding medical expenses if you can reasonably afford to do so.

Beginning this tax year, the only medical expenses that you can deduct are those in excess of 10% of your adjusted gross income (AGI), up from the previous 7.5% AGI limitation. The limitation remains at 7.5% for taxpayers age 65 and over through 2016, unless they are subject to the alternative minimum tax, in which case it is 10% for them as well. For joint return filers not subject to the AMT, if either spouse is age 65 or older, the 7.5% of AGI limitation applies to their joint medical expenses.

If you don't itemize your deductions or are nowhere near exceeding the AGI limitation, you need not concern yourself with this deduction. On the other hand, if you do itemize and think you are close to meeting the AGI limitation, then it may be worth your time to summarize your medical expenses so far for the year and determine if it is advantageous to pay any outstanding medical bills before the end of the year. For example, if you are making payments for dental work, it might be worth it to pay off the balance you owe if you can reasonably afford to do so and if doing so will put you above the new AGI floor.

Use the following checklist to help you accumulate your deductible medical expenses. The list is by no means all-inclusive, and some of the deductions listed may have additional restrictions not included here.

Ambulance Artificial Limb Artificial Teeth Birth Control Pills Braille Books and Magazines Abortion, Legal Acupuncture Alcoholism Treatment Chiropractor Christian Science Practitioner Contact Lenses Crutches Dental Treatment Drug Addiction Treatment Drugs (Prescription) Eyeglasses Fertility Enhancement Guide Dog Hearing Aids Hospital Services Impairment-Related Expenses Insurance Premiums Laboratory Fees Laser Eye Surgery Lead-based Paint Removal Learning Disability Treatment

Medicare B & D Premiums Medical Services Medicines, Prescribed Mentally Retarded, Special Home for Nursing Home Nursing Services Operations Optometrist Organ Donors Osteopath Oxygen Prosthesis Psychiatric Care Psychoanalysis Psychologist Special Schools and Education Sterilization Stop Smoking Programs Surgery Therapy Vasectomy Weight-loss Program Wig (Cancer Patient)

Determining whether the tax benefits, after the AGI limitation is applied, warrant accelerating payment of any additional medical expenses for 2013 can be complicated; you may wish to call our office for assistance.

 (601) 649-5207

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Did You Collect the Needed W-9s?

Article Highlights:

·         The IRS Form W-9 is used to obtain independent contractors’ tax ID numbers.

·         Tax ID numbers are required when filing 1099s.

·         1099-MISCs must be issued to independent contractors that are paid $600 or more during the year for performing services for a trade or business.

If you used independent contractors to perform services for your business or trade, and you paid them $600 or more for the year, you must issue them a Form 1099-MISC after the end of the year to get the deduction for their labor and expenses and avoid potential penalties.  (This requirement generally does not apply to payments made to a corporation. However, the corporation exception does not apply to payments made for attorney fees and for certain payments for medical or health care services.)

It is not uncommon to have a repairman out early in the year, pay him less than $600, then use his services again later and have the total paid him for the year exceed the $600 limit.  If this happens, you may overlook the information needed to file 1099s for the year.  Therefore, it is good practice always to have individuals complete and sign the IRS Form W-9 the first time you use them.  This eliminates oversights and protects you against IRS penalties and conflicts. 

Many small business owners and landlords overlook this requirement during the year, and only realize in January that they have not collected the required documentation to issue 1099s.
If you have not collected W-9s throughout the year, do so before year’s end, so you will have them available when it comes time to prepare 1099s for the year. It is sometimes difficult to acquire contractor information after the fact, especially from those contractors with no intention of reporting the income, so it’s always better to get it up front.  

Form W-9 provides entries for the contractor’s name, contact information and tax ID number.  It also includes a signature block for the contractor, certifying the information and insulating you against penalties if he or she provides an incorrect or phony ID number.

If you have questions or need copies of the Form W-9, please call our office.  Our office can also assist you with your 1099 filing requirements next January.

(601) 649-5207

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