Foreign Bank Account Reports (FBAR) Due June 30th

The Treasury Department requires every U.S. citizen or resident, including all forms of organizations, having a financial interest in, or signature or other authority over a financial account in a foreign country to file a Foreign Bank Account Report (FBAR). The report is made for each calendar year using form TD F 90-22.1 and must be received by the government no later than June 30th of the next year. No extension of time to file the report is permitted. The report is a separate filing and is not included with your income tax return, although certain questions in your income tax return about foreign bank accounts must be answered. The report is required if the aggregate value of all foreign accounts exceed $10,000 at any time during the calendar year. Some foreign financial accounts may not be readily apparent.  For example, one local bank offered local companies a sweep account that paid a higher rate of interest that was actually located in the Cayman Islands!  Civil penalties for not filing on time can range from a minimum of $10,000 to the greater of $100,000 or 50% of the account value.  Criminal penalties can range from a fine of up to $500,000 plus 10 years in jail.  Clearly the US government is serious about forcing FBAR compliance.  The government assumes noncompliance is indicative of tax fraud.

The 2010 HIRE Act added new disclosure requirements for those with more than $50,000 of "specified foreign financial assets" for tax years beginning on or after March 19, 2010.  In this situation, disclosure in the income tax return is required, but this does not relieve the FBAR requirement.  The penalty for failing to disclose this information in the income tax return is $10,000 and increases $10,000 every 30 days thereafter, not to exceed $50,000.

Health Care Reform, Part 4: Mandated Health Insurance Begins in 2014

Starting in 2014 individuals will be required to purchase "minimum essential" health insurance coverage for each month or else pay a penalty.  Individuals covered by Medicare or Medicaid (and certain other exceptions) are exempt from the mandate.  The amount of the penalty is computed using a formula that takes into account the person's household income and a flat dollar amount.  In 2014 the monthly penalty is 1/12 of the greater of $95 or 1% of income for the year.  In 2015 the penalty increases to the greater of $325 or 2% of income.  In 2016 the penalty increases to the greater of $695 or 2.5% of income.  The penalty is computed upon each household member age 18 or older.  The penalty for those under age 18 is one-half the adult amount.  An upper cap on the penalty limits the total amount of penalty assessed upon a household to a flat dollar cap of $285 in 2014, $975 in 2015, and $2,085 in 2016.  In addition, the household penalty may not exceed the national average annual premium for the "bronze" level of coverage through the coming insurance exchange.  The calculation of the penalty is so complex that it is to be administered by the IRS and collected on the individual's income tax return!  Even though assessment and collection of the penalty is through the income tax system, non-payment of the penalty does not result in additional interest or penalty.  The IRS is also prohibited from filing liens and levies against property, and may not criminally prosecute those who do not pay the penalty.

Also starting in 2014, employers with an average of 50 full-time employees (FTEs) not offering "minimum essential" health insurance coverage to its FTEs must pay a penalty.  The penalty is an "excise tax" equal to the number of FTEs over a 30-FTE threshold during any month, times 1/12 of $2,000 (adjusted for inflation).  In addition, if the employer offers health insurance and an employee whose household income falls below certain thresholds instead enrolls in a health insurance exchange for which the employee receives a premium tax credit or cost-sharing reduction, then the employer must pay a penalty equal to $3,000 times 1/12 for each month the employee is so enrolled.  An upper-cap to the penalty applies.  This second penalty does not apply if the employer provides such employee a "free choice voucher."  The voucher obligates the employer to pay to the insurance exchange an amount that the employer would have paid in providing coverage to the employee under the plan offered by the employer.

These are complicated provisions for which the IRS will need to issue guidance as to implementation.  Individuals and employers are in this together.  Indeed, the health care law calls these penalties "shared responsibility" penalties.

Health Care Reform, Part 3: 2013 Tax Changes

The largest tax impact from health care reform for individuals occurs in 2013.  Four significant changes are as follows:

Increased Medicare Tax on Employees and the Self-Employed.  The Medicare tax is currently 2.90% of wages.  The employee and the employer each pay one-half, or 1.45%.  Self-employed individuals pay both halves, or 2.90%, and may deduct one-half of that amount from income taxes for the deemed employer's share.  For earnings after 2012, the Medicare tax rate on the employee one-half rises to 2.35% on wages exceeding $250,000; $200,000; or $125,000 for joint, single, or separate return filers respectively.  The employer's tax rate remains at 1.45%.  Although the employer isn't subject to the tax rate increase, the employer must withhold the additional 0.90% tax once wages exceed $200,000 regardless of the employee's marital status.  Any shortfall or overage in this additional Medicare withholding tax is the responsibility of the employee and is reported on the income tax return.  The Medicare tax rate for the self-employed rises to 3.80% at the $250,000/$200,000/$125,000 income levels, but there is no increase to the income tax deduction because the rate increase is for the deemed employee's share.  This increased tax on wages has the effect of increasing the cost of the so-called "marriage penalty" where two-earner spouses do not receive the same tax treatment as two-earner, non-married couples.

Medicare Surtax on Unearned Income.  Beginning in 2013, individuals, trusts, and estates are subject to a new, additional Medicare tax of 3.80% on the lesser of:  1) net investment income, or 2) the excess of (modified) adjusted gross income over certain thresholds.  The thresholds are $250,000; $200,000; or $125,000 for joint, single, or separate return filers respectively.  The threshold for trusts and estates is the top income tax bracket amount which is currently only $11,200.  Net investment income includes interest, dividends, capital gains, annuities, rents, royalties, and passive activity income less related investment expenses.  Investment income does not include active trade or business income and gains from disposing of interests in active businesses in which the taxpayer materially participates, distributions from IRAs and qualified retirement plans, tax-exempt interest, gain excluded under from the sale of a principal residence, and any self-employment income.  This is a significant tax increase.  Coupled with the sunset of the Bush tax cuts in 2011, the top federal tax rate in 2013 on ordinary investment income would be 43.4% and on long-term capital gains 23.8%.  A future article will review planning ideas to reduce the impact of this new tax.

Reduction in Itemized Medical Deductions.  Currently unreimbursed medical expenses must exceed 7.5% of AGI to net an itemized tax deduction.  Beginning in 2013 the threshold increases to 10.0% for taxpayers under age 65.  For those age 65 and older, the 10.0% threshold starts in 2017.

Reduction in Health FSA Contributions.  Beginning in 2013, the maximum contribution amount permitted to a flexible spending account for medical expenses is $2,500.  There is no upper limit under current law, except for that imposed under the employer's cafeteria plan.