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.
Thursday, May 27, 2010
Wednesday, May 19, 2010
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.
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.
Friday, May 7, 2010
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.
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.
Thursday, April 29, 2010
Health Care Reform, Part 2: 2011 & 2012 Tax Changes
The most significant tax changes occurring in 2011 pertain to the sunset of the 2001 tax cuts enacted by Pres. Bush. Those changes will be discussed in a later blog post as this article focuses on tax changes enacted by the health care reform act.
- A new type of employee benefit plan, the Simple Cafeteria Plan, will be available beginning in 2011. The rules will ease traditional restrictions on participation by company owners so that more small business can provide tax-free benefits to their employees. A small business is defined as one with 100 employees or less. A "cafeteria plan" is established by an employer to offer a "menu" of certain nontaxable benefits from which participating employees may select. Examples of benefits include medical spending accounts and dependent care assistance.
- Over-the-counter medicines will no longer be eligible for tax-free reimbursement from Flexible Spending Accounts, Health Reimbursement Accounts, Archer Medical Savings Accounts, and Health Savings Accounts beginning in 2011. The penalty on nonqualified distributions from Health Savings Accounts will increase from 10% to 20% and on Archer Medical Savings Accounts from 15% to 20%.
- Employers are required to report the total cost of providing employer-sponsored health insurance coverage to each employee on his or her Form W-2, starting with the 2011 plan year. This is for information reporting only and does not make such benefits taxable. UPDATE: On October 12, 2010, the IRS released Notice 2010-69 wherein this W-2 reporting will not be mandatory for W-2s issued for 2011 in order to provide employers with additional time to make the changes to their systems to comply with the reporting requirement. UPDATE #2: The IRS subsequently released Notice 2011-28 that further delays the requirement of W-2 disclosure until W-2s are issued for 2012 compensation for small employers filing less than 250 W-2s.
- Beginning in 2012, all businesses must report payments of $600 or more on Forms 1099 for all persons and entities providing services or property to the business. Currently, Form 1099 is not required to be prepared for payments to corporations or for the receipt of property. Businesses that do not complete the required Forms 1099 are subject to penalties. UPDATE: New legislation enacted on April 14, 2011 repeals the expansion of Form 1099 reporting.
Friday, April 23, 2010
Health Care Reform Act, Part I: 2010 Tax Changes
Now that the April 15th tax day has come and gone, it is time to look ahead at some of the tax law changes that have been enacted as part of the Health Care Reform Act. Since there are so many changes, we'll examine them over a series of postings.
After a long and contentious process, Pres. Obama and the Democrats in Congress forced through a series of laws that resulted in a reform of the health care system. The final piece, the Health Care and Education Reconciliation Act of 2010 was signed on March 30, 2010. An estimated $437 billion in new taxes, fees, and penalties were enacted to partially pay for the nearly $1 trillion in costs, as estimated over the next 10 years. The balance is supposed to be paid for by Medicare cost savings and other assumptions. Several tax changes take effect in 2010.
First, a small employer tax credit is available to help offset the cost of employer-provided health insurance where the employer pays at least half of the premium cost. A small employer is defined as one with no more than 25 employees whose average annual wages do not exceed $50,000. In 2010 through 2013 a tax credit of up to 35% of the cost of the premium paid by the small employer is available. After 2013, a 50% credit is available for two years if the insurance is purchased through an "insurance exchange." The full tax credit is only available to small employers with 10 or fewer employees with average annual wages not exceeding $25,000. The tax credit phases out as the number of employees or the average annual wages increases to 25 and $50,0000 respectively. Very detailed rules apply to qualify for and compute the credit.
Second, the adoption tax credit for qualified adoption expenses is increased to $13,170 and becomes a refundable credit for 2010 and 2011. The credit phases out for those with modified adjusted gross income from $182,520 to $222,520.
Third, a 10% excise tax is imposed on individuals paying for indoor tanning services provided on or after July 1, 2010.
Fourth, the so-called "economic substance doctrine" has been enacted into law effective for transactions entered into on or after March 30, 2010. A transaction is treated as having economic substance only if it changes the taxpayer's economic position in a meaningful way (apart from federal tax effects) and the taxpayer has a substantial, non-tax purpose for entering into the transaction. Failure to meet this standard will result in the loss of expected tax benefits and the imposition of a 20% or 40% penalty. There are no exceptions to this penalty for disclosure or for reasonable cause. This provision is not intended to affect normal business transactions or prevent the realization of tax benefits consistent with Congressional purpose.
After a long and contentious process, Pres. Obama and the Democrats in Congress forced through a series of laws that resulted in a reform of the health care system. The final piece, the Health Care and Education Reconciliation Act of 2010 was signed on March 30, 2010. An estimated $437 billion in new taxes, fees, and penalties were enacted to partially pay for the nearly $1 trillion in costs, as estimated over the next 10 years. The balance is supposed to be paid for by Medicare cost savings and other assumptions. Several tax changes take effect in 2010.
First, a small employer tax credit is available to help offset the cost of employer-provided health insurance where the employer pays at least half of the premium cost. A small employer is defined as one with no more than 25 employees whose average annual wages do not exceed $50,000. In 2010 through 2013 a tax credit of up to 35% of the cost of the premium paid by the small employer is available. After 2013, a 50% credit is available for two years if the insurance is purchased through an "insurance exchange." The full tax credit is only available to small employers with 10 or fewer employees with average annual wages not exceeding $25,000. The tax credit phases out as the number of employees or the average annual wages increases to 25 and $50,0000 respectively. Very detailed rules apply to qualify for and compute the credit.
Second, the adoption tax credit for qualified adoption expenses is increased to $13,170 and becomes a refundable credit for 2010 and 2011. The credit phases out for those with modified adjusted gross income from $182,520 to $222,520.
Third, a 10% excise tax is imposed on individuals paying for indoor tanning services provided on or after July 1, 2010.
Fourth, the so-called "economic substance doctrine" has been enacted into law effective for transactions entered into on or after March 30, 2010. A transaction is treated as having economic substance only if it changes the taxpayer's economic position in a meaningful way (apart from federal tax effects) and the taxpayer has a substantial, non-tax purpose for entering into the transaction. Failure to meet this standard will result in the loss of expected tax benefits and the imposition of a 20% or 40% penalty. There are no exceptions to this penalty for disclosure or for reasonable cause. This provision is not intended to affect normal business transactions or prevent the realization of tax benefits consistent with Congressional purpose.
Wednesday, March 17, 2010
Congress Passes the 2010 Hiring Incentives to Restore Employment (HIRE) Act
On March 17, 2010, Congress passed a new "jobs bill" that Pres. Obama is expected to quickly sign. The HIRE Act provides a "tax holiday" for employers who hire "qualified individuals." The 6.2% employer portion of the Social Security tax is waived on wages paid after the date of enactment through the end of 2010 to qualifying new hires. No waiver is available for the employer's 1.45% share of the Medicare tax. A qualified individual must start work after February 3, 2010 and before January 1, 2011. Such individual must certify that he or she has not been employed for more than 40 hours during the 60-day period ending on the date of hire. Many special rules apply, such as the new hire cannot displace a current employee unless the current employee leaves voluntarily or is fired for cause. In addition to the payroll tax savings, the employer will receive up to $1,000 of tax credits for each qualifying new hire who is employed for at least 52 consecutive weeks. Again, special rules apply.
The HIRE Act extends the 2009 enhanced levels of business equipment expensing under Code Section 179. The expensing limit is $250,000, reduced for purchases over $800,000, for purchases made in tax years beginning in 2010. Previously, those limits would have been $125,000 and $500,000. Note that the expensing limit is based upon purchases made during "tax years" and not simply calendar year 2010. The HIRE Act did not extend the 50% bonus depreciation for new equipment purchases that expired on December 31, 2009.
The HIRE Act extends the 2009 enhanced levels of business equipment expensing under Code Section 179. The expensing limit is $250,000, reduced for purchases over $800,000, for purchases made in tax years beginning in 2010. Previously, those limits would have been $125,000 and $500,000. Note that the expensing limit is based upon purchases made during "tax years" and not simply calendar year 2010. The HIRE Act did not extend the 50% bonus depreciation for new equipment purchases that expired on December 31, 2009.
Thursday, February 11, 2010
Income from the Cancellation of Indebtedness
Recent tough economic times have led some lenders and borrowers to work out debt modifications, including the cancellation or forgiveness of some or all of the debt. The amount of the cancelled debt generally must be reported as income on your tax return. If a financial institution forgives the debt, it is required to issue Form 1099-C, reporting the amount of the forgiveness to the IRS. There are many specific provisions that excuse the debtor from having to pay tax on the forgiven debt. These include the following:
- Discharge of a private debt from a relative or friend that is intended as a gift,
- Discharge of student loans of doctors, nurses and teachers who agree to serve in rural or low income areas and meet certain conditions,
- Discharge of debt that, if paid, would have resulted in a tax deduction (e.g. accrued mortgage interest expense),
- Reduction in price for the purchase of property,
- Discharge of debt through bankruptcy,
- Discharge of debt of an insolvent taxpayer,
- Discharge of qualified farm debt,
- Discharge of qualified real property business debt, and
- Discharge of qualified principal residence debt.
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