New One-Year Delay of the Health Insurance Mandate for Midsized Employers

On February 10, 2014, the IRS announced that employers with 50 to 99 full-time employees (counting “equivalents”) may wait until January 1, 2016 to comply with the requirement for “large” employers to offer affordable, minimum essential health insurance coverage to their full-time employees.  The start of the employer mandate was previously delayed from January 1, 2014 to January 1, 2015.  With this announcement, there are three categories of employers: 

1.     Small employers with less than 50 FTEQs, not subject to the mandate,

2.     Midsize employers with 50 but less than 100 FTEQs, subject to the mandate beginning January 1, 2016, and

3.     Large employers with 100 or more FTEQs, subject to the mandate beginning January 1, 2015.

To qualify for the delay, the IRS says that employers must not reduce their workforce or hours of service in order to qualify and they must maintain their previously offered health insurance.

For large employers, new regulations phase-in the percentage of full-time employees that must be offered affordable, minimum essential health insurance.  For 2015, at least 70% must be offered insurance.  The percentage rises to 95% in 2016 and beyond.

Distributions from a Grandparent or 3rd Party Owned College Savings 529 Plan May Negatively Impact Student College Aid Eligibility

With rising tuition costs, 529 plans have become a popular way for family members to help fund a student’s college education.  However, distributions from such plans may actually decrease a student’s eligibility for federal financial aid.

When a student applies for federal aid, he or she must fill out the Free Application for Federal Student Aid (FAFSA). Eligibility is determined based on the assets and income of a student and their parents, with income being more heavily weighted.  Although, 529 plans owned by grandparents or other third parties, such as aunts or uncles, are not included as assets for FAFSA purposes, any qualified distributions to the student is counted as untaxed income received by the student, thereby decreasing the student’s federal aid eligibility.

Below is a reproduction of a chart created by Mark Kantrowitz (see his article here) that shows the treatment of 529 plan funds for FAFSA purposes:

529 Plan Owner	Treatment of Asset	Treatment of Qualified Distributions	Treatment of Non-Qualified Distributions
Dependent Student	Parent Asset	Ignored	Taxable Income to Beneficiary
Parent of Dependent Student	Parent Asset	Ignored	Taxable Income to Beneficiary
Independent Student	Student Asset	Ignored	Taxable Income to Beneficiary
Grandparent, Noncustodial Parent or other third party	Ignored	Untaxed Income to Beneficiary	Taxable Income to Beneficiary

Strategies

Funds from plans owned by the student’s parents should be used first, and funds from the grandparent owned 529 should be reserved until the student’s final year of college when the student will no longer be applying for future aid.  Since eligibility is based on the previous year’s income and assets, funds used for a student’s final year of college will not negatively impact a student’s eligibility for aid.  Those funds can also be used after graduation to pay off student loans.  Delaying distributions from the grandparent’s 529 plan will not only avoid requiring the student to report additional income, but using the parent’s 529 plan first will result in lower assets being reported in subsequent years, which may increase federal aid for a student’s sophomore or junior year of college.

Some states allow 529 plan funds to be transferred from one plan to another.  If grandparents or other relatives have 529 plans, they can transfer those funds to a plan owned by the parent. The assets of the plan would still be counted in the financial aid calculation, but distributions from the 529 plan would not be counted as income to the student.  The state of Utah allows a transfer between plans, however, such transfers may not be eligible for state income tax benefits and any tax credits or deductions previously claimed must be recaptured. 

Unpleasant Surprises are in Store for Many 2013 Tax Return Filers

Taxpayers are currently obtaining their 2013 tax information and organizing their financial data this month.  Many taxpayers are vaguely aware of the major tax increases that took effect a year ago.  But for higher income taxpayers, the reality of writing larger checks to the U.S. Treasury won’t hit until their tax returns are completed over the next two months.  Listed below are the various ways your taxes will increase for 2013 and for future tax years.  These increases underscore the need for year-round tax planning.

·       The top ordinary income tax rate is now 39.6% instead of 35.0%.  The new tax rate bracket begins when taxable income exceeds $450,000 for joint; $400,000 for single; $425,000 for head of household; and $225,000 for married filing separately statuses.  These thresholds are indexed for future inflation.

·       The top long-term capital gain tax rate is now 20% instead of 15%.  The new tax rate begins when taxable income exceeds $450,000 for joint; $400,000 for single; $425,000 for head of household; and $225,000 for married filing separately statuses.  These thresholds are indexed for future inflation.

·       A brand new income tax of 3.8% is imposed upon net investment income.  This complicated new tax was enacted as part of the Affordable Care Act (Obamacare).  Investment income is defined broadly for this purpose and includes the business income of pass-through entity owners who do not materially participate in the business.  The tax applies to individuals having modified adjusted gross income over $250,000 for joint; $200,000 for single; $200,000 for head of household; and $125,000 for married filing separately statuses.  These thresholds are NOT indexed for future inflation.
In addition, this new tax applies to income tax returns of estates and trusts when adjusted gross income exceeds the start of the top income tax bracket for estates and trusts, which is only $11,950 in 2013.  Unlike for individuals, this threshold is indexed for future inflation.

·       Itemized deductions are reduced by a percentage of AGI.  The amount of the reduction is 3% of the excess of adjusted gross income over $300,000 for joint; $250,000 for single; $275,000 for head of household; and $150,000 for married filing separately statuses.  These thresholds are indexed for future inflation.  The effect of the loss of itemized deductions is equivalent to an increased income tax rate of 1.2%.

·       Personal exemptions are reduced by a percentage of AGI.  The total amount of personal exemptions are reduced by 2% for each $2,500 (or portion thereof) by which adjusted gross income exceeds $300,000 for joint; $250,000 for single; $275,000 for head of household; and $150,000 for married filing separately statuses.  Personal exemptions are totally phased out once AGI exceeds these thresholds by $122,501.  These thresholds are indexed for future inflation.  During the phase-out range, the effective marginal tax rate increase is roughly one percentage point per exemption.

·       Medicare tax rate increases 0.9 percentage points.  Taxpayers having wages and self-employment income above certain thresholds will be assessed an additional Medicare tax on their income tax returns.  Employers are only required to withhold the extra tax when compensation exceeds $200,000.  Because the extra tax applies on a combined basis for joint return filers, insufficient tax will have been withheld on dual income couples.  The threshold amounts are 250,000 for joint; $200,000 for single; $200,000 for head of household; and $125,000 for married filing separately statuses.  These thresholds are NOT indexed for future inflation.