2014 TAX LAW CHANGES & UPDATES
Obamacare Health Insurance and Taxes
Since its introduction in 2010 our understanding of Obamacare has evolved, and I would like to expand on some of our previous statements. Effective for 2014, everyone was required to have health insurance.
But why should you be concerned? Because there is a penalty if you do not purchase health insurance!
When preparing your 2014 tax return this year, if we do not show that you had health insurance coverage during the entire year for each family member, a penalty of $95 will be assessed each month you did not have coverage. That is $95 per month for each non-covered family member. This penalty will be assessed unless you qualify for one of the few exemptions available.
Within three years this amount increases to almost $695 per month or $8,340 per year for each person who does not have insurance in your family.
You need to provide us one or more new forms:
- Form 1095-A – Confirms State Marketplace Coverage
- Form 1095-B – Insurance Confirmation of Coverage
- Form 1095C – Large Employer Coverage Confirmation
- Form 8965 – State Health Insurance Exemption
A credit may be available if you pay for your own insurance and your family income is under $95,000 for a family of four and your employer does not provide health insurance. The income level decreases with fewer members in the family and the credit is based on your level of income.
For those of you who have taken advantage of the credit by getting a reduction in your monthly insurance pre-miums based on estimated income, an adjustment may be needed. When we file your return, we will calculate your credit based on your actual income and determine if you are due an additional credit, or owe the IRS. We will spend additional time with each of you during your tax appointment this year to make these calculations.
Small Employer Health Insurance Credit
There is a small employer health insurance credit of 50% of health insurance premiums paid in 2014. This credit is subject to several limitations, but if you have less than 25 Full Time Equivalent employees and pay an average wage of $25,000, or less it is worth reviewing.
The credit is not a simple calculation. Let us know immediately if you think you might benefit from this credit as we need to work with you now.
Foreign Bank Accounts-Penalties if Unreported
If you or your spouse have $10,000 or more in a foreign account, an electronically filed Form FinCen 114, must be submitted online by June 30. Foreign accounts less than $10,000 must be reported on Schedule B. The IRS and Treasury Department now assess penalties if you do not report foreign accounts and file the forms timely. Please notify us of ANY foreign bank or investment accounts, regardless of balances.
Fraudulent IRS Collection Phone Calls & More
Many of you have received phone calls purporting to be from the IRS demanding immediate payment upon the threat of imprisonment if not sent the same day. Never ever will the IRS call demanding immediate payment. These calls are being made by criminals. They may have knowledge of personal information, but they are not legitimate calls. If you receive one of these calls, hang up immediately. Then, call our office and we will confirm that you do not owe any additional money.
With so many fraudulent tax returns filed, the IRS has created an entire division focused on Identity Theft. We are finding that the IRS now holds refunds for an extended period of time for many reasons. This allows time to confirm that you are due the refund even if there has not been identity theft. If there has been identity theft, your refund can be held for more than a year while the IRS determines what has happened. If you think that there was Identity Theft, fax Form 14039 to the IRS at 855-807-5720. You must also file an Identity Theft report with your local police department.
One IRS response to identity theft is to issue regulations authorizing the use of truncated tax ID numbers—your Social Security number. Some forms are required to show your full Social Security number, but you will begin seeing TTIN’s showing XXX-XX-1234 on forms 1098, 1099 and 5498.
IRS Audit Issues
The IRS and many states are sending out a lot of notices trying to collect additional taxes. If you do receive a notice, please fax or scan both sides of the notice ASAP and then call us. We can usually tell very quickly what the issue is if we have the notice in front of us and it saves all of us time.
The most prevalent audit is the correspondence audit where the IRS either matches to reported income on 1099’s or selects one or two items such as donations or mortgage interest. They only give 30 days to respond, so do not delay in getting us a copy of the notice.
Audit Documentation from early years is Critical for Capital Losses, Property Sales and Rental Property with Passive Losses. We have seen the IRS request documentation for purchases of property and improvements when the purchase date is 10, 20 or 30 years ago. The IRS is auditing rental property rents and expenses for prior years when one has passive losses, with the intent to deny the passive loss carryover in the year the property is sold. They are also auditing prior year capital losses in the year the loss is used. Normally one need only keep tax records for about five years, but when you own a property and if you have passive losses, you must keep your records for all the years including receipts and cancelled checks.
Home Mortgage Interest continues to be a focus of the IRS. They are looking to see if you have refinanced your mortgage or taken out a Home Equity Line of Credit that is more than $100,000 greater than what your initial mortgage was at the time of refinance. Never throw out your escrow closing statements when you refinance as we will need to go back to those statements!
IRS Mileage Rates for 2014
The IRS mileage rate is 56 cents per mile in 2014 and increases to 57.5 cents in 2014. Medical and moving mileage is at 23.5 cents in 2014, but drops to 23 cents in 2015. Charitable mileage remains at 14 cents per mile for 2014 and 2015 as Congress sets this rate.
Depreciation, Expensing & Section 179
The 50% Bonus Depreciation expired last year and the Section 179 Deduction drops to $25,000 in 2014. The Section 179 Deduction phase out is $200,000 for 2014.
The IRS has also come out with regulations defining what can be expensed as operating expenses vs. being depreciated. They are now defining $200 as the maximum amount a business can expense unless there is a written procedure to write off asset with a cost of $500 or less. Please call us to discuss what is required to document this threshold in writing.
Employee (W-2) or Subcontractor (1099)?
The IRS and many states continue to make one of their major focuses to identify independent contractors who should really be treated as employees. If you are paying individuals who are not licensed or who work primarily for you, you are responsible to pay them as an employee, not as an Independent Contractor.
In addition many of you own a business and hire subcontractors or pay commissions or rents during the year. If you make payments totaling $600 or more to any individual, attorney, or unincorporated business, you must prepare and file a 1099-MISC which must be given to them by January 31 and filed with the IRS by the end of February (March if e-filing).
One of the questions that must now be answered on each Sch. C as well as Corporate, LLC or Partnership returns is whether you make payments that would require you to file Form 1099. If so, did you file all required 1099’s? We cannot sign your return without responding to this question, so give us a call if you have any questions about preparing these forms.
Roth Conversion & IRA/Retirement Plans
There are no limits when rolling you r traditional IRA into a Roth IRA. If tax rates go up in future years, a rollover in 2014 will be a wise decision as all earnings in a Roth IRA are nontaxable so long as you are over 59 ½ and have had the Roth IRA for at least 5 years. You will pay tax on the amount converted at current rates.
If you have funds in a Profit Sharing Plan, SIMPLE IRA or any other type of retirement plan, you cannot make a direct rollover to an IRA. However, if you can roll those funds into a traditional IRA, you can then roll the funds to a Roth IRA. Give us a call as there are limits as to how many rollovers can be done each year.
The maximum contribution to a Roth or Traditional IRA is $5,500 for 2014 & 2015. If you are over 50, you can increase the maximum contribution to your IRA by an additional $1,000.
If you are in a Traditional or Roth 401(k) plan, a 457 plan, or a 403(b) plan, your maximum contribution is $17,500 for 2014 and $18,000 for 2015. If over 50, add $5,500 to the maximum contribution for 2014 and $6,000 for 2015.
Contributions to a profit sharing plan for small businesses are now 25% of compensation or 100% of an employee’s earnings, up to a maximum of $52,000 if a “Defined Contribution Plan” is established for 2014 and increases to $53,000 for 2015.
Employees participating in a SIMPLE IRA can contribute up to $12,000 from their paychecks for 2014 and $12,500 for 2015. If 50 and older, increase this amount by $2,500 in 2014 and $3,000 for 2015.
If you turned 70 ½ during 2014 or prior, you have a minimum distribution that must be paid to you before December 31.
State Tax Changes
If you live in California and own a foreign corporation or LLC, such as a corporation formed in Nevada, you must register and pay California tax. If California discovers that you have not registered, you will not only be forced to pay the tax, but will now owe a penalty of $2,000. This same penalty also applies if you operate your business entity when it is in suspension, for not filing tax returns, or not filing out the annual Statement of Ownership timely, which can be done online.
California no longer has an Enterprise Zone Credit which was an incentive to encourage businesses to locate in low income areas and hire individuals living in those areas. Unused Enterprise Zone Credits can be carried over for 10 years. A new hiring credit is now available with much more limited coverage, and there are some sales tax credits that can be claimed. Give us a call if you have any questions. We will refer you to someone who specializes in this area.
TAX PLANNING STRATEGIES
Tax planning should be done throughout the year, not solely at year end. Unless you will be impacted by the Fiscal Cliff or the AMT (in which case some of the recommendations are reversed), it is often beneficial to accelerate all possible deductions into the current year.
Contribute the maximum possible to a 401(k) plan, Tax Sheltered Annuity, Deferred Compensation Plan, SEP, and/or IRA (preferably a Roth IRA). Those who acquaint themselves with our philosophy of financial planning understand the long-term value of investing the maximum possible in such a plan. An added plus is that your employer will often match your contributions. This can double your contribution and maximize your future earnings.
In fact, you should contribute to a Roth IRA even if you have a 401(k), SEP, IRA, or 403(b) plan at work. Unless your income exceeds $129,000 for a single individual ($191,000 for a married couple) or you file as married filing separate, take advantage of the Roth IRA.
Shift income to children when taxable income exceeds $73,800 for a married couple in 2014 ($36,900 for singles). Children under 18 can make $2,000 of unearned income (i.e. interest, dividends, and capital gains) before having to pay tax at their parents’ rate. Children under 18 can also be paid a wage from their parents business (proprietorship or partnership only) and earn up to $6,200 without paying taxes as long as they have no unearned income. If a child contributes $5,000 to an IRA, they can be paid up to $11,200 without paying any tax. In addition, their parents need not pay social security or unemployment taxes on those earnings.
Don’t forget about the ability to make gifts, now at $14,000 ($28,000 for couples) per year for 2014 to as many individuals as you desire. This provides a way to transfer assets to your children. You also have a gift tax exemption up to $5,340,000 in 2014, in addition to the annual gift.
Be aware, there is a potential conflict with shifting income to children. If you are trying to qualify for college scholarships or loans, 35% of a student’s assets must be considered available to pay tuition and reduces the ability to qualify for grants and low interest loans. Less than 6% of parents’ assets are considered.
Alternate capital gains and capital losses. Sell stocks with gains one year and those with losses in different years, so long as the losses are no more than $3,000 and you are in the 25-35% brackets. Capital losses up to $3,000 can be written off against ordinary income taxed at maximum rates. Capital gains on the other hand are taxed at a maximum rate of 15% if you are in the 15 or 25 percent tax brackets and 20% if you are in a higher bracket.
If you have significant capital losses, then take those losses in a year with significant capital gains so that you can realize the benefit of the losses. This way you will be allowed to deduct losses equal to the amount of capital gains in that year, plus $3,000. If the stock is worthless, sell it to an unrelated party for $1 and document the sale. Do not repurchase the same stock within 30 days as the loss will be disallowed.
Sell real estate on the installment sale method if you want to receive cash from the sale. Installment sales require only that you receive payment in at least two different years. You are taxed on the profit prorated by the cash received in each year. Be aware that in the year of sale, the IRS requires total payments to be reported, not the net cash you received. Also any depreciation recapture is taxed in full in the year of sale. One caveat to be aware of—if Congress changes the capital gains tax rules, all capital gains received after the date of the change will be taxed at the new rate.
Selling real estate? Do a tax-deferred exchange. A 1031 exchange can postpone tax on the sale of real estate until you sell the property received in the exchange. There are strict time requirements and limits on how you must handle debt and the proceeds from the sale. In addition it will cost $1-3,000 in accommodator and professional fees to handle the exchange.
Pay your January 1 mortgage payments for your home and rental properties by Christmas to enable the lender to receive and record the payment by December 31. Unless the lender receives and records the payment by December 31, they will report the payment of interest in the following year.
Accelerating contributions from next year into this year can be a very profitable move. This is one area Congress has never really touched, other than requiring receipts from the charity. Take full advantage of donating to your favorite charity. This includes clothing and other goods that should be donated by December 31. Do remember to obtain a receipt for any food or clothing donated.
Consider the following unless you will be affected by AMT.
Bunch your medical expenses every other year unless they exceed 10% of your AGI by a significant amount each year. For example, if you are making payments for orthodontia work, prepay as much as possible in the current year.
Prepay next year’s property taxes by December 31 if they are due within the first four months of the year.
Pay 4th quarter state income tax estimates by December 31. This estimate is due on January 15. By paying 15 days early, you receive the deduction a year earlier. This does not apply to the Federal estimate.
If miscellaneous deductions exceed 2% of your AGI, (i.e. $1,000 for an AGI of $50,000) accelerate all possible expenses into the current year. Most of our clients have sufficient job related expenses, investment deductions, and other deductions (including job-search expenses, continuing education, and tax preparation fees) to make it well worth your while to accelerate those expenses into this year.
As QuickBooks ® ProAdvisors, we work with many of you to review your QuickBooks ® on a periodic basis or at year-end to prepare for your tax return. We appreciate your going to our website www.clementcpa.com, clicking on the link to our QuickBooks® page and giving us feedback so future clients can appreciate the benefits of working with us.
THIRD-PARTY SERVICE PROVIDERS
Clement & Associates uses third-party service providers to provide professional services for our clients. If you should have any questions concerning this disclosure, please feel free to contact Steve and he will be happy to answer any questions you may have. This notice is in compliance with professional standards established by the American Institute of Certified Public Accountants (AICPA Professional Standards ET Sections 191.224-225 & 291.023-024).
IS YOUR EMAIL ADDRESS CORRECT?
During tax season, Steve will usually return emails when he cannot return phone calls due to the time constraints of his appointment schedule. Please make sure we have your current email address when you return your appointment card or the next time you call us. You can reach us at the following addresses:
Receptionist (Appointments, status of returns):
Pattie Hagen (Accounting/tax questions, missing info):
Jeremy Craig (QuickBooks® accounting & business tax returns):
Jonathan Clement (Tax/QuickBooks®/financial planning questions):
Steven Clement (Tax/QuickBooks®/financial planning questions):
WEB PAGE, NEWSLETTER, AND CHECKLISTS
Have you checked out Tax Tools on our web page at www.clementcpa.com lately? We have interactive worksheets for Non-Cash Contributions, Sch. C, Rentals, Auto Expenses, Employee Business Expenses, and other helpful checklists under Tax Tools. We also send out a monthly newsletter via email. If you have not begun receiving this newsletter, please add your name to our newsletter mailing list found under the Client Tools Tab or let us know when we meet.