Anderson ZurMuehlen Blog

Seniors: Consider These Tax Breaks When Filing for 2016

Are you an “experienced” taxpayer? Here are a couple of age-based tax breaks that seniors shouldn’t overlook when filing their 2016 returns.

1. Claim Your Rightful Medical Expense Deductions

If you’re 65 years of age or older, you may have fallen into the habit of automatically claiming the standard deduction instead of itemizing your deductions. Taking the standard deduction is often the optimal strategy for seniors who pay minimal mortgage interest or state and local income or property taxes. In addition, seniors are entitled to a larger standard deduction than younger people are.

But the standard deduction isn’t always the better option for seniors with significant medical expenses. If you paid Medicare insurance premiums or had other significant health care costs in 2016, itemizing deductions (including medical expense deductions) could result in a lower federal income tax bill.

Which option is better for you? For 2016, you can only deduct medical expenses to the extent that they exceed 10% of your adjusted gross income (AGI) or 7.5%, if either you or your spouse was 65 or older as of December 31, 2016. While surpassing the AGI threshold may seem daunting, many seniors will easily clear the hurdle if they include all of their medical expenses.

When adding up your expenses, remember to count premiums for Medicare insurance, which qualify as health insurance premiums for purposes of the itemized deduction for medical expenses. Specifically, premiums for Medicare Parts A, B, C and D, as well as for Medigap coverage, qualify. (See “Understanding Medicare Insurance Deductions” below.)

Premiums for qualified long-term care (LTC) insurance also count as medical expenses for itemized deduction purposes, subject to the following age-based limits for 2016:

Age as of Dec. 31 Maximum LTC Premium Amount
61 to 70 $3,900
Over 70 $4,870

For each covered person, count the lesser of premiums paid in 2016 or the applicable age-based limit. Beyond insurance premiums, add any out-of-pocket medical costs, such as insurance co-payments and dental and vision care deductibles. These expenditures also count as medical expenses for itemized deduction purposes.

Once you’ve evaluated whether your medical expenses exceed the AGI threshold, consider other categories of expenses that can be itemized, including:

    • State and local income taxes (or state and local general sales taxes if you choose to claim them instead),
    • State and local property taxes,
    • Qualified residence interest on a first or second home, and
    • Charitable donations.

You should itemize if the total of your itemizable expenses exceeds your 2016 standard deduction amount of:

Filing Status Under 65 on Dec. 31 65 or Older on Dec. 31
Single $6,300 $7,850
Married, filing jointly $12,600 $13,850, if one spouse is at least 65;
$15,100, if both spouses are 65 or older
Head of household $9,300 $10,850

Also, bear in mind that the AGI threshold for seniors to claim medical expense deductions is set to increase to 10% of AGI regardless of their age, starting in 2017, thanks to a provision in the Affordable Care Act (ACA). However, that could change if the ACA is repealed or revised — or if Congress passes tax reform legislation that takes effect in 2017.

2. Make Retirement Account Catch-Up Contributions

If you’re 50 or older, you can make extra “catch-up” contributions each year to certain types of tax-favored retirement accounts.

Important note: If you were 50 or older as of December 31, 2016, you have until April 18, 2017, to make a catch-up contribution for the 2016 tax year.

Which retirement accounts qualify for catch-up contributions?

Traditional IRAs. Deductible contributions to traditional IRAs can create tax savings. But many seniors have too much income to qualify for a deduction. If you don’t qualify for deductible IRA contributions, you can always make nondeductible contributions and thereby benefit from the traditional IRA’s tax-deferred earnings advantage. The maximum catch-up contribution for traditional and Roth IRAs (combined) is $1,000 for 2016.

Roth IRAs. Contributions to Roth IRAs don’t generate any up-front tax savings, but — assuming you’ve had at least one Roth IRA open for over five years — you can take tax-free withdrawals from Roth IRAs after age 59½. There are also income restrictions on Roth contributions. Again, the maximum catch-up contribution for traditional and Roth IRAs (combined) is $1,000 for 2016.

Employer-sponsored qualified retirement accounts. Some company retirement plans also allow employees to make catch-up contributions. If permitted under your plan, you can make extra salary-reduction contributions of up to $6,000 to your 401(k), 403(b) or 457 account, starting the year you turn 50.

Salary-reduction contributions are subtracted from your taxable wages, resulting in a federal income tax deduction. If your state has a personal income tax, you’ll generally get a state tax deduction, too. You can use the resulting tax savings to help pay for part of your catch-up contributions — or you can set the tax savings aside in a taxable account to further increase your retirement-age wealth.

Important note: It’s too late to make a catch-up contribution to your company plan for the 2016 tax year. But it’s not too early to make one for the 2017 tax year.

Relatively modest catch-up contributions can accumulate into a large sum over time. To illustrate, suppose you turned 50 in 2016 and decide to contribute an extra $1,000 to your IRA each year for the next 15 years. Assuming a modest 4% annual return on investment, you’ll accumulate about $22,000 in your retirement savings account by the time you turn 65.

As an added bonus, making larger deductible contributions to a traditional IRA can also lower your annual tax bills. (Additional Roth IRA contributions won’t lower your annual tax bills, but you’ll be able to take more tax-free withdrawals later in life.)

The incremental savings can be even greater if your company’s retirement plan allows catch-up contributions. For example, if you turn 50 in 2016 and contribute an extra $6,000 to your company plan for each of the next 15 years, you’ll accumulate about $131,000 by the time you turn 65, assuming a modest 4% annual return. Plus, contributions to employer-sponsored plans are deductible, which lowers your annual tax bills.

Contact Your Tax Advisor

Seniors may be eligible for some special tax breaks that aren’t available to younger people. Before filing your 2016 tax return, contact your tax advisor to make sure you take advantage of any special breaks that may be available.

Understanding Medicare Insurance Deductions

Don’t forget to include all Medicare and supplemental insurance costs when totaling up your medical expenses for 2016. Here are descriptions of the major types of Medicare coverage:

Medicare Part A: Hospital insurance coverage. Most eligible individuals are automatically covered for Part A without paying any premiums, because the premiums are considered paid from Medicare taxes on wages while you or your spouse was working. However, if you didn’t pay Medicare taxes while you worked and you’re not eligible for free coverage, you could have paid a monthly premium of up to $411 for 2016, depending on your income.

Medicare Part B: Medical insurance coverage. Even if you don’t qualify for Medicare Part A coverage, you may be eligible to enroll in Medicare Part B coverage. This insurance covers doctor bills for treatment in or out of the hospital, as well as the costs of medical equipment, tests and services provided by clinics and laboratories. It doesn’t cover other medical expenses, such as routine physical exams or medications.

For 2016, you probably paid the standard monthly premium of $104.90 ($1,259 per covered person for the year). Higher-income individuals paid more — up to a monthly maximum of $389.80 for 2016 (up to $4,678 per covered person).

Medicare Part C: Private Medicare Advantage health plan coverage. This coverage is supplemental to government-provided Part A and Part B coverage. Premiums vary depending on the plan. If you have Part C coverage, you don’t need Medigap coverage (below).

Medicare Part D: Private prescription drug coverage. Premiums for this coverage vary depending on the plan. People with higher income levels pay a surcharge called the “adjustment amount” in addition to the basic premiums. For 2016, the adjustment amount could have been up to $69.10 per month (up to $829 per covered person).

Medigap insurance. This is private supplemental insurance that functions as an alternative to Part C coverage. Premiums vary depending on the plan.

Q&A on Potential Border Taxes

Q&A on Potential Border Taxes

Many people are talking about a border tax these days, but how many know what proposals from the White House and Congress really mean?
The highly debated proposal from President Donald Trump would impose a tariff, or border tax, on manufactured goods imports from certain countries, most notably China and Mexico. Republicans in Congress agree that action is needed, but have proposed an alternative border adjustment tax. With the news coming out of Washington D.C. confusing at times, there are several critical questions relating to both plans. This Q&A attempts to clear up some of the issues.

Q. How would the proposed Trump plan work?

A. The aim of the tariff, or border tax, is to discourage U.S. companies from importing goods from certain firms outside the United States, particularly some that have set up shop in Mexico and elsewhere to produce goods for the U.S. market. Although details have remained vague, Trump has said that the tariff would be “very major” and could be as high as 35%, a figure he once proposed should apply to automobiles made by U.S. companies in Mexico. The tariff would be accompanied by Trump’s proposed across-the-board reduction in corporate tax rates to 15%.

This plan, however, would likely violate the North American Free Trade Agreement (NAFTA). But Trump has long advocated changing that pact and other trade agreements and has threatened to pull out of NAFTA.

Q. What about the Republican plan?

A. Leading Republicans in the House of Representatives — notably Speaker Paul Ryan (Rep.-WI) — would include a border adjustment tax as part an overhaul of the corporate tax system. Along with reducing corporate income taxes to 20%, that plan would shift taxation to a territorial-based system in which companies are taxed where income is earned. The cost of imported parts or goods for use or sale in the United States would no longer be tax-deductible, while income from exports would be excluded from tax. This approach is designed to bring manufacturing and other firms back into the country.

Initially, Trump characterized this tax plan as being “too complicated,” but later signaled a willingness to work with the House leadership. If this approach is implemented, companies would have to factor in the higher cost of imports, minus any deduction.

However, the plan may violate World Trade Organization (WTO) rules. The WTO permits border adjustments for indirect levies (such as value added taxes), but a direct tax on income may be banned.

Q. What is the history of imposing tariffs?

A. Prior to the introduction of the federal income tax in 1913, tariffs were the main source of revenue for the U.S. government. They reached a high in 1930 when tariff legislation was passed to protect workers during the Great Depression. After other countries responded with their own high tariffs, the United States gradually cut back. These reductions were subsequently enhanced by WTO efforts to lower tariffs.

Currently, U.S. tariffs are assessed on a wide number of goods, ranging from automobiles to running shoes. Non-agricultural products, which account for the vast majority of goods imported into the United States, have an average import tariff of 2%. About half of all industrial goods entering the country are exempt from tariffs. Since 1994, NAFTA has gradually eliminated U.S. tariffs applying to Canada and Mexico.

Q. What is expected to happen if the Trump tariff is imposed?

A. For starters, by raising costs for U.S. importers, the proposed Trump tariff would encourage companies to increase domestic production, while eliminating some of the benefits of manufacturing in countries with lower wages. The Trump administration expects that the tariff would help restore manufacturing jobs as domestic production climbs.
But critics assert that the border tax would also likely result in higher prices for U.S. consumers, especially if other countries react negatively, as many expect them to do (see Is This a Declaration of War? below). Ultimately, a trade war could produce shock waves around the world and could even conceivably lead to a recession or, worse, a depression.

Q. Does President Trump have the authority to impose his tariff plan?

A. Some of Trump’s actions since he took office have raised constitutional issues that haven’t yet been resolved. But it appears that he would be standing on relatively firm ground with tariff-related actions. Congress has the constitutional power to regulate commerce with foreign countries, but that power has often been delegated to the president.

For example, under the Trade Act of 1974, Trump may be able to impose tariffs on countries that violate trade agreements or engage in unfair trade practices. That law effectively allows the president to levy temporary surcharges of up to 15% for as long as 150 days. (Back in 2009, former President Obama relied on this provision to apply a tariff on tire imports from China.) Alternatively, Trump might rely on emergency powers that would allow him to restrict imports in the name of national security.

Q. Could Congress override Trump’s tariff plan?

A. Yes, but it takes a two-thirds majority in both houses of Congress to override a presidential veto. Based on the current makeup of both chambers and the general support that Republicans have shown the new president thus far, this scenario would appear to be unlikely.

Furthermore, if any actions are found to violate NAFTA or the WTO, President Trump has the potential option of simply bowing out of those agreements. In other words, if a tariff plan is implemented, it is likely to stand up to scrutiny.

© 2017

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Deduct All of the Mileage You’re Entitled to — But Not More

Rather than keeping track of the actual cost of operating a vehicle, employees and self-employed taxpayers can use a standard mileage rate to compute their deduction related to using a vehicle for business. But you might also be able to deduct miles driven for other purposes, including medical, moving and charitable purposes.

What are the deduction rates?

The rates vary depending on the purpose and the year:

Business: 54 cents (2016), 53.5 cents (2017)

Medical: 19 cents (2016), 17 cents (2017)

Moving: 19 cents (2016), 17 cents (2017)

Charitable: 14 cents (2016 and 2017)

The business standard mileage rate is considerably higher than the medical, moving and charitable rates because the business rate contains a depreciation component. No depreciation is allowed for the medical, moving or charitable use of a vehicle.

In addition to deductions based on the standard mileage rate, you may deduct related parking fees and tolls.

What other limits apply?

The rules surrounding the various mileage deductions are complex. Some are subject to floors and some require you to meet specific tests in order to qualify.

For example, miles driven for health-care-related purposes are deductible as part of the medical expense deduction. But medical expenses generally are deductible only to the extent they exceed 10% of your adjusted gross income. (For 2016, the deduction threshold is 7.5% for qualifying seniors.)

And while miles driven related to moving can be deductible, the move must be work-related. In addition, among other requirements, the distance from your old residence to the new job must be at least 50 miles more than the distance from your old residence to your old job.

Other considerations

There are also substantiation requirements, which include tracking miles driven. And, in some cases, you might be better off deducting actual expenses rather than using the mileage rates.

So contact us to help ensure you deduct all the mileage you’re entitled to on your 2016 tax return — but not more. You don’t want to risk back taxes and penalties later.

And if you drove potentially eligible miles in 2016 but can’t deduct them because you didn’t track them, start tracking your miles now so you can potentially take advantage of the deduction when you file your 2017 return next year.

© 2017

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Do you Need to File a 2016 Gift Tax Return by April 18?

Last year you may have made significant gifts to your children, grandchildren or other heirs as part of your estate planning strategy. Or perhaps you just wanted to provide loved ones with some helpful financial support. Regardless of the reason for making a gift, it’s important to know under what circumstances you’re required to file a gift tax return.

Some transfers require a return even if you don’t owe tax. And sometimes it’s desirable to file a return even if it isn’t required.

When filing is required

Generally, you’ll need to file a gift tax return for 2016 if, during the tax year, you made gifts:

  • That exceeded the $14,000-per-recipient gift tax annual exclusion (other than to your U.S. citizen spouse),
  • That exceeded the $148,000 annual exclusion for gifts to a noncitizen spouse,
  • That you wish to split with your spouse to take advantage of your combined $28,000 annual exclusions,
  • To a Section 529 college savings plan for your child, grandchild or other loved one and wish to accelerate up to five years’ worth of annual exclusions ($70,000) into 2016,
  • Of future interests — such as remainder interests in a trust — regardless of the amount, or
  • Of jointly held or community property.

When filing isn’t required

No return is required if your gifts for the year consist solely of annual exclusion gifts, present interest gifts to a U.S. citizen spouse, qualifying educational or medical expenses paid directly to a school or health care provider, and political or charitable contributions.

If you transferred hard-to-value property, such as artwork or interests in a family-owned business, consider filing a gift tax return even if you’re not required to. Adequate disclosure of the transfer in a return triggers the statute of limitations, generally preventing the IRS from challenging your valuation more than three years after you file.

Meeting the deadline

The gift tax return deadline is the same as the income tax filing deadline. For 2016 returns, it’s April 18, 2017 (or October 16 if you file for an extension). If you owe gift tax, the payment deadline is also April 18, regardless of whether you file for an extension.

Have questions about gift tax and the filing requirements? Contact us to learn more.

 

© 2017

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Factoring Uncertainty into the Value of Your Business

 

Businesses currently face numerous uncertainties in the marketplace. As President Trump and Republican congressional leaders work toward fulfilling their campaign promises, tax laws could substantially change, the estate tax could be repealed, and various laws and regulations (including the Dodd-Frank and Affordable Care Acts) could be repealed or revised. Interest rates and inflation could both rise. Economic relationships with other countries could also change. Some of these changes could be good for your business, while others could have negative effects on the value of your business.

History Lesson

Business valuation professionals are no strangers to dealing with market uncertainties — and neither are business owners and investors. The approach to valuing a business interest doesn’t change because of the uncertainties surrounding the current political environment.

Under the market and income approaches, the value of a business continues to be a function of expected economic returns and market, industry and specific company risk. These fundamentals didn’t change during other events that caused uncertainty earlier in the 21st century, such as the terrorist attacks on September 11, 2001, or the Great Recession that lasted from December 2007 to June 2009.

Key Considerations

Here are some considerations when valuing a business in today’s volatile political climate.

Public market returns. The inputs that valuators use to determine discount rates and pricing multiples are typically based, in part, on data from the public stock and bond markets. So far, public markets have reacted to the election results in a positive manner. In general, the proposed changes to taxes and business regulations are likely to lower expenses and increase cash flow for many businesses.

Company-specific risks. A factor that has changed substantially is the risk associated with specific companies and industries — and valuators face challenges as they attempt to measure these risks. For example, proposed regulatory changes might increase the value of companies that operate in the energy sector or the manufacturing sector. On the flipside, they might adversely affect the value of companies that operate in the government contracting or health care sectors.

Known (or knowable) information. Many private business valuations are prepared with a year-end effective date, because it corresponds to the cut-off date for their annual financial statements. Valuation experts can only use information known or knowable at the date of the valuation. But what did we know as of December 31, 2016?

Valuation experts constantly monitor market conditions. Realistically, at the end of 2016 and even today, there are many unknowns. The specific details of tax reforms and other regulatory proposals haven’t been fully put into effect or made into law. Since we can only speculate on what will happen in the future, business valuators must focus on the likelihood that the subject company will achieve its expected future income. The risk that a company won’t meet its financial forecasts is factored into its discount rate.

Contact a Valuation Pro

Experienced appraisers understand the importance of reacting to events that cause added uncertainty with an objective, measured response, rather than a knee-jerk response. In today’s marketplace, they understand that politicians have many divergent plans that may (or may not) be approved or take effect.

In the meantime, business owners and investors should stay calm and carry on. A valuation professional can help you stay atop the latest tax and regulatory changes and understand how they could impact your company’s expected return and risk profile in the future.

Contact Dan Vuckovich at 406.727.0888 for questions or more information.

© 2017

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The “Manufacturers’ Deduction” isn’t Just for Manufacturers

The Section 199 deduction is intended to encourage domestic manufacturing. In fact, it’s often referred to as the “manufacturers’ deduction.” But this potentially valuable tax break can be used by many other types of businesses besides manufacturing companies.

Sec. 199 deduction 101

The Sec. 199 deduction, also called the “domestic production activities deduction,” is 9% of the lesser of qualified production activities income or taxable income. The deduction is also limited to 50% of W-2 wages paid by the taxpayer that are allocable to domestic production gross receipts.

Yes, the deduction is available to traditional manufacturers. But businesses engaged in activities such as construction, engineering, architecture, computer software production and agricultural processing also may be eligible.

The deduction isn’t allowed in determining net self-employment earnings and generally can’t reduce net income below zero. But it can be used against the alternative minimum tax.

How income is calculated

To determine a company’s Sec. 199 deduction, its qualified production activities income must be calculated. This is the amount of domestic production gross receipts (DPGR) exceeding the cost of goods sold and other expenses allocable to that DPGR. Most companies will need to allocate receipts between those that qualify as DPGR and those that don’t — unless less than 5% of receipts aren’t attributable to DPGR.

DPGR can come from a number of activities, including the construction of real property in the United States, as well as engineering or architectural services performed stateside to construct real property. It also can result from the lease, rental, licensing or sale of qualifying production property, such as:

  • Tangible personal property (for example, machinery and office equipment),
  • Computer software, and
  • Master copies of sound recordings.

The property must have been manufactured, produced, grown or extracted in whole or “significantly” within the United States. While each situation is assessed on its merits, the IRS has said that, if the labor and overhead incurred in the United States accounted for at least 20% of the total cost of goods sold, the activity typically qualifies.

Contact us to learn whether this potentially powerful deduction could reduce your business’s tax liability when you file your 2016 return.

 

 

© 2017

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IRS Updates FAQs on Certain ACA Provisions

The Trump Administration and the Republican majority in Congress plan to repeal and replace the Affordable Care Act (ACA) in the coming months. In the meantime, however, employers must continue to comply with the existing rules for 2016, including the information reporting requirements and shared responsibility provisions.

The IRS previously issued three sets of FAQs that provide guidance on employer responsibilities under the Affordable Care Act (ACA). This guidance was recently updated to include significant clarifications and help employers ensure that they’re in compliance with the rules. Here, we highlight the extensive updates that were issued in December 2016 and that you may find useful in fulfilling your information-reporting obligations for 2016, if you’re subject to the requirements.

Background

The employer shared responsibility provisions of the ACA require an applicable large employer (ALE) to pay a penalty if it doesn’t offer minimum essential health coverage (or doesn’t offer coverage that is affordable and provides minimum value) to its full-time employees and at least one full-time employee purchases coverage through a health insurance marketplace and receives a premium tax credit. Full-time employees are generally those who average at least 30 hours of service per week during a given month.

An ALE for a calendar year is an employer that employed an average of at least 50 full-time employees or the equivalent on business days during the preceding calendar year. To determine the number of full-time equivalent employees (FTEs), the overall hours worked by part-time employees during a month are added up, and the total is divided by 120 hours (equal to four weeks multiplied by 30 hours per week) and added to the number of full-time employees. However, the actual penalty is applicable solely to the health coverage status of full-time employees, not FTEs.

FAQs on Information Reporting

There are various reporting requirements associated with the employer shared responsibility provisions that apply to both coverage providers and employers. In general, every health insurance issuer, sponsor of a self-insured health plan, government agency that administers government-sponsored health insurance programs and other entity that provides “minimum essential coverage” must file annual returns reporting information for each individual for whom such coverage is provided. They also must furnish a written statement to each individual listed on the return showing the information that must be reported to IRS for that individual.

The information reported on Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns, and Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, is used to determine whether an employer may be liable for a penalty under the employer shared responsibility provisions of the ACA, as well as the amount of any penalty. Form 1095-C is also used by the IRS and the employee in determining the eligibility of the employee (and his or her family members) for the premium tax credit.

The FAQs provide additional information about completing these forms for the 2016 calendar year (for filing in 2017). Here’s what’s been revised under the updated guidance:

Question 9. Do ALE members that are combined to form a single employer (an “aggregated ALE group”) file one authoritative transmittal reporting summary information for all ALE members in the aggregated ALE group?

The revisions clarify that an aggregated ALE group may not file one authoritative transmittal reporting summary information for all members in the group. Rather, the reporting requirements apply separately to each member.

Question 26. Should an ALE member report coverage under a Health Reimbursement Arrangement (HRA) for an individual who’s enrolled in both the HRA and the employer’s other self-insured major medical group health plan?

Under the updated guidance, enrollment in an HRA must generally be reported in the same manner as enrollment in other minimum essential coverage, unless an exception applies. One such exception is that if an individual is covered by two or more plans that provide minimum essential coverage and that are provided by the same reporting entity, reporting is required for only one of them for that month.

Question 27. Should an ALE member report coverage under an HRA for an individual who’s eligible for the HRA because the individual is enrolled in the employer’s insured group health plan?

The revised guidance states that if an individual is eligible for an HRA because the individual is enrolled in an employer’s insured group health plan for which reporting is required, reporting generally isn’t required for the HRA.

However, an ALE member must report HRA coverage for an employee who’s enrolled in the HRA but not enrolled in another group health plan of the employer.

FAQs on Offers of Health Insurance Coverage

Certain employers are required to report to the IRS information about whether they offered health coverage to their employees and, if so, information about the coverage offered. This information also must be provided to employees. With respect to reporting offers of health insurance coverage, the FAQs provide that:

Question 23. For purposes of reporting, including reporting facilitated by a third party, may an ALE member file more than one Form 1094-C?

The revisions explain that an ALE member may file more than one Form 1094-C, provided that one (and only one) of those transmittals is an “authoritative transmittal” reporting aggregate employer-level data for the ALE member.

Question 24. May an ALE member satisfy its reporting requirements for an employee by filing and furnishing more than one Form 1095-C that together provide the necessary information?

Under the updated guidance, an ALE member may not satisfy its reporting requirements for an employee by filing and furnishing more than one Form 1095-C that together provide the necessary information. There must be only one Form 1095-C for each full-time employee for that full-time employee’s employment with the ALE member.

FAQs on the Shared Responsibility Rules

If you still have questions about whether you’re considered an ALE for 2016 and whether you’ve complied with the shared-responsibility requirements, you may find the revised FAQs regarding the employer shared responsibility provisions helpful:

Question 8. If an employer hires additional employees, including some part-time employees, how does it determine if the entity has become large enough to be an ALE?

The revisions clarify that if an employer hires additional employees, including some part-time employees, during the current calendar year, the employer must take those employees into account when determining if it’s an ALE for the next calendar year.

Question 9. Do the employer shared responsibility provisions apply only to large employers that are for-profit businesses or to other large employers as well?

The revisions clarify that all employers that are ALEs are subject to the employer shared responsibility provisions. This includes for-profit, government and nonprofit employers, regardless of whether the entity is a tax-exempt organization.

Question 20. Is a full-time equivalent employee different than a full-time employee?

According to the revised answer to this question, the number of an employer’s FTEs is relevant only for purposes of determining whether the employer is an ALE.

Question 24. How does an employer count a particular employee’s hours of service if that employee works for two employers that are treated as one employer under the employer shared responsibility provisions (for example, different subsidiaries under a parent corporation that together form an aggregated ALE group)?

The rules for combining employers that have a certain level of common, or related, ownership, apply for purposes of determining whether an employer employs at least 50 FTEs.

Question 28. What counts as an “offer of coverage” under the employer shared responsibility provisions?

The updated guidance stipulates that an ALE makes an “offer of coverage” to an employee if it provides the employee an effective opportunity to enroll in the coverage (or to decline coverage) at least once for each plan year. Coverage refers to minimum essential health coverage under an eligible employer-sponsored plan.

Question 34. For purposes of the employer shared responsibility provisions, in determining what counts as an offer of coverage to at least 95% of an employer’s full-time employees (and their dependents), does an employer have to take into account full-time employees (and their dependents) that are eligible for coverage through another source?

Under the revisions, the determination of what counts as an offer of coverage to at least 95% of an ALE’s full-time employees applies regardless of whether any full-time employees have coverage from another source, such as Medicare, Medicaid or a spouse’s employer.

Question 43. Who’s an employee’s dependent for purposes of the employer shared responsibility provisions?

The revisions explain that a dependent is an employee’s child, including a child who has been legally adopted, or legally placed for adoption with the employee, who has not reached age 26. A dependent doesn’t include:

  • A spouse, or
  • A stepchild, foster child or child who doesn’t reside in the United States (or a country contiguous to the United States) and who isn’t a U.S. citizen or national.

Question 44. If an ALE is made up of multiple employers (called ALE members), is each separate ALE member liable for its own employer shared responsibility payment, if any?

According to the updated answer, if an ALE is made up of multiple ALE members, each separate ALE member is liable for its own employer shared responsibility payment.

Still Got Questions?

The rules for providing health care benefits can be overwhelming to employers. These FAQs offer some guidance, but tax and financial professionals can help explain the shared responsibility provisions and the related reporting requirements using plain English. Contact your advisors for additional guidance.

Also be aware that the deadlines for filing ACA information forms are fast approaching. The due date for filing 2016 Forms 1094-B, Transmittal of Health Coverage Information Returns; 1095-B, Health Coverage, 1094-C and 1095-C with the IRS are February 28, 2017, if not filing electronically, or March 31, 2017, if filing electronically. However, the IRS extended the information reporting deadlines until March 2, 2017, for furnishing 2016 Forms 1095-B and 1095-C to individuals.

In the meantime, stay tuned for changes to health care coverage requirements. Health care reform has been made a top priority during President Trump’s first 100 days in office and Congress has already begun to pass related legislation.

© 2017

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Tax Fraud Awareness: How to Protect Your Identity and Assets

 

The IRS, taxpayers and tax preparers share a common enemy: identity thieves. We all have a part to play in the fight against tax-related identity theft. Your role starts by learning the mechanics and warning signs. From there, taxpayers can take proactive steps to protect their data online and at home.

Understand How Tax Fraud Happens

Dishonest individuals may steal taxpayers’ personal and financial information from sources outside the IRS, such as social media accounts where people tend to share too many details or bogus phishing emails that appear to come from the IRS or a bank. Once they obtain an unsuspecting taxpayer’s data, thieves may use it to file fraudulent federal and state income tax returns, claiming significant refunds.

Paperless e-filing facilitates these scams: Thieves submit returns electronically, based on falsified earnings, and receive refunds via mail or direct deposit. Sure, the IRS maintains records of wages and other types of taxable income reported by employers, but they don’t usually match these records to the information submitted electronically before issuing refund checks. By the time the IRS notifies a victim that it’s received another tax return in his or her name, the thief is long gone and has already cashed the refund check.

In addition to refund fraud, thieves may use stolen personal information to access existing bank accounts and withdraw funds — or open new ones without the taxpayer’s knowledge. Criminals are becoming increasingly sophisticated and their ploys more complex, making identity theft harder to detect.

Recognize the Warning Signs

Taxpayers are the first line of defense against these scams. The IRS lists the following warning signs of tax-related identity theft:

Your electronic tax return is rejected. When the IRS rejects your tax return, it could mean that someone else has filed a fraudulent return using your Social Security number. Before jumping to conclusions, first check that the information entered on the tax return is correct. Were any numbers transposed? Did your college-age dependent claim a personal exemption on his or her tax return?

You’re asked to verify information on your tax return. The IRS holds suspicious tax returns and then sends letters to those taxpayers, asking them to verify certain information. This is especially likely to happen if you claim the Earned Income tax credit or the Additional Child tax credit, both of which have been targeted in refund frauds in previous tax years. If you didn’t file the tax return in question, it could mean that someone else has filed a fraudulent return using your Social Security number.

You receive tax forms from an unknown employer. Watch out if you receive income information, such as a W-2 or 1099 form, from a company that you didn’t do work for in 2016. Someone else may be using the phony forms to claim a fraudulent refund.

You receive a tax refund or transcript that you didn’t ask for. Identity thieves may test the validity of stolen personal information by sending paper refunds to your address, direct depositing refunds to your bank or requesting a transcript from the IRS. If these tests work, they may file a fraudulent return with your stolen data in the future.

You receive a mysterious prepaid debit card. Identity thieves sometimes use your name and address to create an account for a reloadable prepaid debit card that they later use to collect a fraudulent electronic refund.

If you suspect foul play, contact your tax preparer immediately. He or she can help determine whether you’re a victim of tax-related identity theft and identify steps to remedy the situation.

Take Preventive Measures

You may wonder how many taxpayers file electronic vs. paper returns. “There are 150 million households that file federal and state tax returns involving trillions of dollars…. More than 90% of these tax returns are prepared on a laptop, desktop or even a smartphone — whether they’re done by an individual or a tax preparer. This is a massive amount of sensitive data that identity thieves would love to get access to.… With 150 million households, someone right now is clicking on an email link they shouldn’t, or skipping an important computer security update, leaving them vulnerable to hackers,” said IRS Commissioner John Koskinen in a recent statement about the Security Summit Group. (See “IRS Creates Security Summit Group” above.)

How can you actively safeguard your personal data online and at home? Here are four simple ways to thwart tax-related identity theft:

1. Keep your computer secure. Simple, cost-effective security measures add up. For example, use updated security software that offers firewalls, virus and malware protection and file encryption. Be stingy with personal information, giving it out only over encrypted websites with “https” in the web address. Also back up computer files regularly and use strong passwords (with a combination of capital and lowercase letters, numbers and symbols).

2. Avoid phishing and malware scams. Be leery of emails you receive from unknown sources. Never open attachments unless you trust the sender and know what’s being sent. Don’t install software from unfamiliar websites or disable pop-up blockers.

3. Protect personal information. Treat personal information like cash. Don’t carry around your Social Security card in your wallet or purse. Be careful what you share on social media — identity thieves can exploit information about new car or home purchases, past addresses, vacations and even your children and grandchildren. Keep old tax returns in a safe location and shred them before trashing.

4. Watch out for scammers who impersonate IRS agents. IRS impersonators typically demand payment and threaten to arrest victims who fail to ante up. The Federal Trade Commission recently issued an alert about police raids on illegal telemarketing operations in India that led to the indictment of dozens of IRS impersonators. Remember: The IRS will never call to demand immediate payment, nor will they call about taxes you owe without first mailing you a bill.

Another simple way to prevent someone from filing a fraudulent return is simply to file your return as soon as possible. The IRS begins processing tax returns on January 23. If you file a tax return before would-be fraudsters do, their refund claims are more likely to be rejected for filing under a duplicate Social Security number.

Join the Fight

The deadline for filing your 2016 return is fast approaching. The IRS expects more than 70% of taxpayers to receive a refund for 2016, and it’s on high alert for refund fraud and other tax-related identity theft schemes. You can help the IRS in its efforts to fight tax fraud by watching for these warning signs and safeguarding your personal and financial information.

© 2017

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Help Prevent Tax Identity Theft by Filing Early

If you’re like many Americans, you might not start thinking about filing your tax return until close to this year’s April 18 deadline. You might even want to file for an extension so you don’t have to send your return to the IRS until October 16.

But there’s another date you should keep in mind: January 23. That’s the date the IRS will begin accepting 2016 returns, and filing as close to that date as possible could protect you from tax identity theft.

Why early filing helps

In an increasingly common scam, thieves use victims’ personal information to file fraudulent tax returns electronically and claim bogus refunds. This is usually done early in the tax filing season. When the real taxpayers file, they’re notified that they’re attempting to file duplicate returns.

A victim typically discovers the fraud after he or she files a tax return and is informed by the IRS that the return has been rejected because one with the same Social Security number has already been filed for the same tax year. The IRS then must determine who the legitimate taxpayer is.

Tax identity theft can cause major headaches to straighten out and significantly delay legitimate refunds. But if you file first, it will be the tax return filed by a potential thief that will be rejected — not yours.

Another important date

Of course, in order to file your tax return, you’ll need to have your W-2s and 1099s. So another key date to be aware of is January 31 — the deadline for employers to issue 2016 W-2s to employees and, generally, for businesses to issue 1099s to recipients of any 2016 interest, dividend or reportable miscellaneous income payments.

Delays for some refunds

The IRS reminded taxpayers claiming the earned income tax credit or the additional child tax credit to expect a longer wait for their refunds. A law passed in 2015 requires the IRS to hold refunds on tax returns claiming these credits until at least February 15.

An additional benefit

Let us know if you have questions about tax identity theft or would like help filing your 2016 return early. If you’ll be getting a refund, an added bonus of filing early is that you’ll be able to enjoy your refund sooner.

© 2017

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2017 Q1 Tax calendar: Key Deadlines for Businesses and Other Employers

 

Here are some of the key tax-related deadlines affecting businesses and other employers during the first quarter of 2017. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

January 31

  • File 2016 Forms W-2, “Wage and Tax Statement,” with the Social Security Administration and provide copies to your employees.
  • File 2016 Forms 1099-MISC, “Miscellaneous Income,” reporting nonemployee compensation payments in Box 7 with the IRS, and provide copies to recipients.
  • File Form 941, “Employer’s Quarterly Federal Tax Return,” to report Medicare, Social Security and income taxes withheld in the fourth quarter of 2016. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return. Employers that have an estimated annual employment tax liability of $1,000 or less may be eligible to file Form 944,“Employer’s Annual Federal Tax Return.”
  • File Form 940, “Employer’s Annual Federal Unemployment (FUTA) Tax Return,” for 2016. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it’s more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 10 to file the return.
  • File Form 945, “Annual Return of Withheld Federal Income Tax,” for 2016 to report income tax withheld on all nonpayroll items, including backup withholding and withholding on accounts such as pensions, annuities and IRAs. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 10 to file the return.

February 28

File 2016 Forms 1099-MISC with the IRS and provide copies to recipients. (Note that Forms 1099-MISC reporting nonemployee compensation in Box 7 must be filed by January 31, beginning with 2016 forms filed in 2017.)

March 15

If a calendar-year partnership or S corporation, file or extend your 2016 tax return. If the return isn’t extended, this is also the last day to make 2016 contributions to pension and profit-sharing plans.

Contact us for more information.

© 2016

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