If you have a business you probably shouldn't be a Sole Proprietorship. It's really that simple. A Sole Proprietorship has no separation of business liability and personal liability. This means that if you get sued, your house, your car, even your future earnings are potentially at stake. I used to say that if you're small, you can wait, but I'm really not so sure about that anymore.
It does cost quite a bit of money to change your classification, but it's fairly easy, and you don't have to get too complicated. It costs between $200 and $600 dollars to become a Single Member Limited Liability Corporation, and you don't even have to change the way you file taxes. As a Single Member LLC, if you get sued, or have liabilities, only the business assets are at stake.
There are other entities to consider, but they are beyond the scope of this little post. I just wanted to make the point that you should already be thinking about how to protect your personal assets from business problems. Get some advice, or do some research, but don't wait. You never know what's coming.
Saturday, November 30, 2013
Friday, November 29, 2013
Weird Obamacare Incentives and Strategies - 4
This is the fourth (and possibly last) in a series of posts that have me a bit conflicted.
They could be interpreted as political, and, as advice, some of it may
be considered unethical, but the point of the posts is to point out
things in the law that provide negative incentives, and, at the same
time, point out actions that can have big negative consequences on
someone receiving a Premium Tax Credit (hereafter referred to as a
subsidy.) They are primarily designed to ensure that people don't make
huge mistakes with huge consequences. They should not be interpreted as
me suggesting that you manipulate the rules in any illegal or unethical
way. If you continue reading these posts you will understand what I
mean.
This one's more than that. It's really a post about how the Affordable Care Act raises the bar on the already extensive incentives for not reporting all income received. Many would call this cheating, and it is. But most people have a moral continuum on cheating (I can't, in my capacity as a tax guy, have this continuum, but, as an individual, I don't have to condemn someone for manipulating the system - though I can't help.)
As an example, most people would be understanding of waitstaff who don't report all their cash tips to their employer. Anyone who knows someone in this industry understands how common this is. It results in some tax savings, but robs them of some credit to Social Security. In some situations (such as with Earned Income Credit (EIC)) people might be surprised how dramatic the savings can be - and might find themselves less sympathetic - but that's not the point of this post.
I think most people don't lose sleep over the contractor who receives the majority of their income in a format that is reported to the IRS, but doesn't report the occasional "under the table" transaction. The sympathy would drop if the contractor encouraged cash payments with a discount in order to avoid taxes, and I think would disappear altogether for one who earns all of their income, especially if it's substantial "under the table."
To be clear, all of the above is black and white under the law. It is cheating, and, if the IRS finds out, they will come after you, and there will be very little sympathy. Also, if I'm your tax guy, I will report all income you receive that I know about, and I will ask about, and document your answers if there is indication of unreported income (especially if EIC is involved.) I am required to do this - and I take my job seriously - since doing so protects you as well as me.
The Affordable Care Act changes all this. Now, the waiter who fails to report his tip income is not only cheating on his taxes in a common, if illegal, way, he is now defrauding the government of health care benefits by receiving a subsidy for insurance in excess of what he is entitled to. The tax return is the entry point for a subsidy, and is the final calculation to determine any rebate or repayment. Even worse, since the exchanges are now a pathway to Medicare, many people in this situation could end up receiving Medicare and other government benefits they don't deserve. The contractors described above can face even worse moral dilemmas, though we may not be as sympathetic to some.
It's possible to dismiss all of this and say, honesty is the best policy, and have no sympathy for the cheaters, and there's some truth to that. My problem with that attitude is that when you take the system overall, coupled with the mandate to get insurance, many people will be faced with impossible choices. If they decide to turn over a new leaf, and be honest about all their income, and also follow the law and obtain health insurance, they could face an enormous change in economic circumstances:
Imagine a waiter or waitress with two children and a reported income of $24,000 but actual income of $32,000, that has only been reporting the $24,000. With absolutely no withholding other than mandatory social security and medicare, he/she would be getting a tax refund of $6004 and would be eligible for Medicaid.* Claiming all income would result in a tax change of $3547 (mostly at the return, though $612 would be withheld from paychecks to cover Social Security and Medicare). He/She would also now have to pay at least $48 per month for MINIMUM coverage for their family. Resulting in a net change in disposable income of $4123 per year or $344 per month. Put yourself in their shoes and try to make that choice. Before you say, "But now they have medical insurance!", remember that they were eligible for FREE healthcare before reporting their additional income.
Here are numbers for our family at various income levels. The one thing not included here is that, in addition to paying or receiving the taxes and insurance discussed in the list, their will be an increase in withholding equal to 7.65% of the unreported income. This means that if you want to calculate the net effect of a reporting difference between two incomes, you have to multiply the difference in income by 7.65% and add it to the increase. I assume no withholding other than Social Security and Medicare, so everything is settled on the tax return. I include a range of numbers for insurance from crappiest to best available insurance.
Income of $24,000 gets refund of $6004 and pays nothing for health insurance
Income of $28,000 gets refund of $4312 and pays nothing for health insurance
Income of $32,000 gets refund of $3069 and pays $576 to $1260 for health insurance annually
Income of $35,000 gets refund of $2001 and pays $960 to $1656 for health insurance annually
Income of $40,000 gets refund of $157 and pays $1680 to $2364 for health insurance annually
Income of $45,000 pays a tax bill $1187 and pays $2388 to $3084 for health insurance annually
Using that list you can calculate the "cost" of claiming all reported income by comparing the change in taxes and insurance, and adding 0.0765 times the difference in income to the difference in taxes and insurance. For example, in my $24,000 to $32,000 calculation, I subtracted $3069 from $6004 to get $2935 tax difference, subtracted 0 from $576 to get $576 health insurance difference, and multiplied $8000 (32,000-24,000) by 0.0765 to get $612 Social Security/Medicaid withholding difference. This gave me a grand total of $4123.
For contractors it's even worse. Instead of 0.0765, you multiply the difference by 0.153 since they pay the employer's portion of Social Security and Medicare too.
The cynical person would call the resulting numbers the amount by which the taxpayer defrauded the government, another person might call it the price of honesty. I think we can all understand why some people do it, and the difficult decision someone with limited income can face when it comes to taxes. That decision is made worse by the Affordable Care Act. It's not my place here to say if the benefits outweigh the costs, but this is a cost that few people have considered.
If you are in this situation, I feel for you, but I hope this post helps you plan ahead and be prepared for what may happen. I'm happy to help you with this, but be aware that if I file your taxes, I'll expect honesty. taxadvisor@email.com
*I used 2013 tax numbers and Rhode Island State Health Exchange since they have the best tools for estimating healthcare costs. The tax numbers may be a bit off since I was winging it with a calculator, but their close.
Previous Obamacare Incentive Posts:
http://supertaxgenius.blogspot.com/2013/11/weird-obamacare-strategies-and.html
http://supertaxgenius.blogspot.com/2013/11/weird-obamacare-strategies-and_16.html
http://supertaxgenius.blogspot.com/2013/11/weird-obamacare-incentives-and.html
This one's more than that. It's really a post about how the Affordable Care Act raises the bar on the already extensive incentives for not reporting all income received. Many would call this cheating, and it is. But most people have a moral continuum on cheating (I can't, in my capacity as a tax guy, have this continuum, but, as an individual, I don't have to condemn someone for manipulating the system - though I can't help.)
As an example, most people would be understanding of waitstaff who don't report all their cash tips to their employer. Anyone who knows someone in this industry understands how common this is. It results in some tax savings, but robs them of some credit to Social Security. In some situations (such as with Earned Income Credit (EIC)) people might be surprised how dramatic the savings can be - and might find themselves less sympathetic - but that's not the point of this post.
I think most people don't lose sleep over the contractor who receives the majority of their income in a format that is reported to the IRS, but doesn't report the occasional "under the table" transaction. The sympathy would drop if the contractor encouraged cash payments with a discount in order to avoid taxes, and I think would disappear altogether for one who earns all of their income, especially if it's substantial "under the table."
To be clear, all of the above is black and white under the law. It is cheating, and, if the IRS finds out, they will come after you, and there will be very little sympathy. Also, if I'm your tax guy, I will report all income you receive that I know about, and I will ask about, and document your answers if there is indication of unreported income (especially if EIC is involved.) I am required to do this - and I take my job seriously - since doing so protects you as well as me.
The Affordable Care Act changes all this. Now, the waiter who fails to report his tip income is not only cheating on his taxes in a common, if illegal, way, he is now defrauding the government of health care benefits by receiving a subsidy for insurance in excess of what he is entitled to. The tax return is the entry point for a subsidy, and is the final calculation to determine any rebate or repayment. Even worse, since the exchanges are now a pathway to Medicare, many people in this situation could end up receiving Medicare and other government benefits they don't deserve. The contractors described above can face even worse moral dilemmas, though we may not be as sympathetic to some.
It's possible to dismiss all of this and say, honesty is the best policy, and have no sympathy for the cheaters, and there's some truth to that. My problem with that attitude is that when you take the system overall, coupled with the mandate to get insurance, many people will be faced with impossible choices. If they decide to turn over a new leaf, and be honest about all their income, and also follow the law and obtain health insurance, they could face an enormous change in economic circumstances:
Imagine a waiter or waitress with two children and a reported income of $24,000 but actual income of $32,000, that has only been reporting the $24,000. With absolutely no withholding other than mandatory social security and medicare, he/she would be getting a tax refund of $6004 and would be eligible for Medicaid.* Claiming all income would result in a tax change of $3547 (mostly at the return, though $612 would be withheld from paychecks to cover Social Security and Medicare). He/She would also now have to pay at least $48 per month for MINIMUM coverage for their family. Resulting in a net change in disposable income of $4123 per year or $344 per month. Put yourself in their shoes and try to make that choice. Before you say, "But now they have medical insurance!", remember that they were eligible for FREE healthcare before reporting their additional income.
Here are numbers for our family at various income levels. The one thing not included here is that, in addition to paying or receiving the taxes and insurance discussed in the list, their will be an increase in withholding equal to 7.65% of the unreported income. This means that if you want to calculate the net effect of a reporting difference between two incomes, you have to multiply the difference in income by 7.65% and add it to the increase. I assume no withholding other than Social Security and Medicare, so everything is settled on the tax return. I include a range of numbers for insurance from crappiest to best available insurance.
Income of $24,000 gets refund of $6004 and pays nothing for health insurance
Income of $28,000 gets refund of $4312 and pays nothing for health insurance
Income of $32,000 gets refund of $3069 and pays $576 to $1260 for health insurance annually
Income of $35,000 gets refund of $2001 and pays $960 to $1656 for health insurance annually
Income of $40,000 gets refund of $157 and pays $1680 to $2364 for health insurance annually
Income of $45,000 pays a tax bill $1187 and pays $2388 to $3084 for health insurance annually
Using that list you can calculate the "cost" of claiming all reported income by comparing the change in taxes and insurance, and adding 0.0765 times the difference in income to the difference in taxes and insurance. For example, in my $24,000 to $32,000 calculation, I subtracted $3069 from $6004 to get $2935 tax difference, subtracted 0 from $576 to get $576 health insurance difference, and multiplied $8000 (32,000-24,000) by 0.0765 to get $612 Social Security/Medicaid withholding difference. This gave me a grand total of $4123.
For contractors it's even worse. Instead of 0.0765, you multiply the difference by 0.153 since they pay the employer's portion of Social Security and Medicare too.
The cynical person would call the resulting numbers the amount by which the taxpayer defrauded the government, another person might call it the price of honesty. I think we can all understand why some people do it, and the difficult decision someone with limited income can face when it comes to taxes. That decision is made worse by the Affordable Care Act. It's not my place here to say if the benefits outweigh the costs, but this is a cost that few people have considered.
If you are in this situation, I feel for you, but I hope this post helps you plan ahead and be prepared for what may happen. I'm happy to help you with this, but be aware that if I file your taxes, I'll expect honesty. taxadvisor@email.com
*I used 2013 tax numbers and Rhode Island State Health Exchange since they have the best tools for estimating healthcare costs. The tax numbers may be a bit off since I was winging it with a calculator, but their close.
Previous Obamacare Incentive Posts:
http://supertaxgenius.blogspot.com/2013/11/weird-obamacare-strategies-and.html
http://supertaxgenius.blogspot.com/2013/11/weird-obamacare-strategies-and_16.html
http://supertaxgenius.blogspot.com/2013/11/weird-obamacare-incentives-and.html
Monday, November 25, 2013
Weird Obamacare Incentives and Strategies - 3
This is the third in a series of posts that have me a bit conflicted.
They could be interpreted as political, and, as advice, some of it may
be considered unethical, but the point of the posts is to point out
things in the law that provide negative incentives, and, at the same
time, point out actions that can have big negative consequences on
someone receiving a Premium Tax Credit (hereafter referred to as a
subsidy.) They are primarily designed to ensure that people don't make
huge mistakes with huge consequences. They should not be interpreted as
me suggesting that you manipulate the rules in any illegal or unethical
way. If you continue reading these posts you will understand what I
mean.
This particular post requires some further clarification: Tax advice is not necessarily good life advice. If you ask me if buying a house will improve your tax situation, the answer is often yes, but that doesn't mean you should buy a house. There are tons of things that go into deciding to buy a house, and, to be honest, tax consequences should be pretty low on the list. One of my best bits of tax advice is that you should rarely be doing something for the tax benefits alone. Know the tax implications of what you're doing, and then make the best decision that works for you and your whole situation.
When it comes to marriage, this is even more important. Unfortunately, the tax distortions that marriage causes can be big, and the Affordable Care Act makes them bigger. The point of this post is not to suggest that you do or don't get married, but instead to make sure you understand how important it is to figure out the impact of a marriage on your tax situation.
A basic tax example is the Earned Income Credit. If you make $20,000 a year and have two children, marrying someone who makes $50,000 a year with no kids is going to increase your taxes dramatically. Similarly, if you make $20,000 and have two children, and are getting an Affordable Care Act subsidy, marrying someone who makes $50,000 could have a BIG impact on your subsidy, and thus, your ultimate tax situation (hopefully your new spouse can add you to their insurance.) There are too many variables to cover specifics in this column, but, here's the best advice I can give:
If you're planning to get married, have a good long talk about finances. Make sure both of you understand each others financial situation, tax situation, and health insurance situation. Try to anticipate your married tax situation by combining incomes and running the numbers. You may need to seek expert advice on this by speaking to one or both of your Tax Guy's. Most important, if you are getting a subsidy for health insurance, keep the exchange informed if you get married (or divorced, or have more kids, or lose custody, or make more money).
Please don't think I'm suggesting you let taxes keep you from getting married. I just want to make sure no one is surprised come tax time - believe me, I've had that conversation with clients many times at the tax desk, and it's not pleasant. A lot of trouble and stress can be avoided by getting advice upfront, so adjustments can be made to minimize the impact.
Feel free to contact me with questions: taxadvisor@email.com
This particular post requires some further clarification: Tax advice is not necessarily good life advice. If you ask me if buying a house will improve your tax situation, the answer is often yes, but that doesn't mean you should buy a house. There are tons of things that go into deciding to buy a house, and, to be honest, tax consequences should be pretty low on the list. One of my best bits of tax advice is that you should rarely be doing something for the tax benefits alone. Know the tax implications of what you're doing, and then make the best decision that works for you and your whole situation.
When it comes to marriage, this is even more important. Unfortunately, the tax distortions that marriage causes can be big, and the Affordable Care Act makes them bigger. The point of this post is not to suggest that you do or don't get married, but instead to make sure you understand how important it is to figure out the impact of a marriage on your tax situation.
A basic tax example is the Earned Income Credit. If you make $20,000 a year and have two children, marrying someone who makes $50,000 a year with no kids is going to increase your taxes dramatically. Similarly, if you make $20,000 and have two children, and are getting an Affordable Care Act subsidy, marrying someone who makes $50,000 could have a BIG impact on your subsidy, and thus, your ultimate tax situation (hopefully your new spouse can add you to their insurance.) There are too many variables to cover specifics in this column, but, here's the best advice I can give:
If you're planning to get married, have a good long talk about finances. Make sure both of you understand each others financial situation, tax situation, and health insurance situation. Try to anticipate your married tax situation by combining incomes and running the numbers. You may need to seek expert advice on this by speaking to one or both of your Tax Guy's. Most important, if you are getting a subsidy for health insurance, keep the exchange informed if you get married (or divorced, or have more kids, or lose custody, or make more money).
Please don't think I'm suggesting you let taxes keep you from getting married. I just want to make sure no one is surprised come tax time - believe me, I've had that conversation with clients many times at the tax desk, and it's not pleasant. A lot of trouble and stress can be avoided by getting advice upfront, so adjustments can be made to minimize the impact.
Feel free to contact me with questions: taxadvisor@email.com
Saturday, November 23, 2013
Electronic Filing Delay for 2013
For like the twentieth time, the IRS has failed to realize that we live under a dysfunctional and incompetent government and just kind of assumed that everything was going to work fine and nothing would interfere with their ability to start accepting electronic returns.
Wrong Again!
It would have been foolish to schedule a little extra lead time into programming for the 2014 filing season (sarcasm alert). I mean, after all, Congress already passed all the laws necessary for this year so there won't be any last minute changes, so, what could possibly go wrong?
Government Shutdown!
Oh crap! Didn't see that coming. It's not like it's ever happened before (like 16 times). So, the public gets screwed again. There will be up to a two week delay in accepting electronically filed returns, so, instead of Jan 21st, it will be between Jan 28th and Feb 4th. This means up to a two week delay in getting refunds issued.
You can still see your tax guy as soon as you get your paperwork ready, but they won't be able to send it in until the IRS begins accepting returns, and that will be the point that the 10-21 day clock starts for refunds. Paper filing won't help. That's too slow anyway.
So plan ahead if you like your refund quick. You probably should assume your money won't be here until Feb 25th, that way you most likely won't be disappointed. Sorry.
The IRS news release is HERE
Wrong Again!
It would have been foolish to schedule a little extra lead time into programming for the 2014 filing season (sarcasm alert). I mean, after all, Congress already passed all the laws necessary for this year so there won't be any last minute changes, so, what could possibly go wrong?
Government Shutdown!
Oh crap! Didn't see that coming. It's not like it's ever happened before (like 16 times). So, the public gets screwed again. There will be up to a two week delay in accepting electronically filed returns, so, instead of Jan 21st, it will be between Jan 28th and Feb 4th. This means up to a two week delay in getting refunds issued.
You can still see your tax guy as soon as you get your paperwork ready, but they won't be able to send it in until the IRS begins accepting returns, and that will be the point that the 10-21 day clock starts for refunds. Paper filing won't help. That's too slow anyway.
So plan ahead if you like your refund quick. You probably should assume your money won't be here until Feb 25th, that way you most likely won't be disappointed. Sorry.
The IRS news release is HERE
Saturday, November 16, 2013
Weird Obamacare Strategies and Incentives - 2
This is the second in a series of posts that have me a bit conflicted.
They could be interpreted as political, and, as advice, some of it may
be considered unethical, but the point of the posts is to point out
things in the law that provide negative incentives, and, at the same
time, point out actions that can have big negative consequences on
someone receiving a Premium Tax Credit (hereafter referred to as a
subsidy.) They are primarily designed to ensure that people don't make
huge mistakes with huge consequences. They should not be interpreted as
me suggesting that you manipulate the rules in any illegal or unethical
way. If you continue reading these posts you will understand what I
mean.
This one I would say is definitely unethical, but I'm not sure if it's technically illegal. The behavior has a built in penalty, but that's where the loophole is.
I have repeatedly advised, and continue to advise, keeping the healthcare exchanges informed of changes in family size and income to ensure the most accurate subsidy is received, thus avoiding a big payback at tax time due to increasing income or decreasing family size. The information on the IRS and healthcare.gov websites indicate that providing this information is mandatory, and follows up with pointing out that if you don't, you could end up paying back excess subsidies at tax time - but that's not always the case. As long as household income remains below 400% of the poverty line, repayment is capped.
It is theoretically possible to calculate your new subsidy when your income increases, or family size decreases, compare it to your maximum repayment amount, and determine whether or not you will come out ahead by not informing the exchange about your change in status. You could then save enough money to cover the maximum repayment, while still getting a lower insurance payment than you qualified for.
Ordinarily I would provide numbers, examples, and links so that you can calculate how this affects you. I'm not going to do that this time. I consider this strategy unethical at a minimum, so, if you want to do it, you can do the research yourself. I will provide the maximum repayment amounts for 2014, but not poverty levels and subsidy amounts. (I'm including the maximum repayments because they are part of the tax law and there are plenty of reasons to know them other than manipulating the system.) Let me be clear - I do not advocate doing this, and my post should in no way be interpreted as a suggestion or recommendation.
Here are the maximum penalty amounts for a Single Taxpayer:
Normally I would encourage you to contact me for assistance at this point. If you are trying to do this, don't ask me for help.
This one I would say is definitely unethical, but I'm not sure if it's technically illegal. The behavior has a built in penalty, but that's where the loophole is.
I have repeatedly advised, and continue to advise, keeping the healthcare exchanges informed of changes in family size and income to ensure the most accurate subsidy is received, thus avoiding a big payback at tax time due to increasing income or decreasing family size. The information on the IRS and healthcare.gov websites indicate that providing this information is mandatory, and follows up with pointing out that if you don't, you could end up paying back excess subsidies at tax time - but that's not always the case. As long as household income remains below 400% of the poverty line, repayment is capped.
It is theoretically possible to calculate your new subsidy when your income increases, or family size decreases, compare it to your maximum repayment amount, and determine whether or not you will come out ahead by not informing the exchange about your change in status. You could then save enough money to cover the maximum repayment, while still getting a lower insurance payment than you qualified for.
Ordinarily I would provide numbers, examples, and links so that you can calculate how this affects you. I'm not going to do that this time. I consider this strategy unethical at a minimum, so, if you want to do it, you can do the research yourself. I will provide the maximum repayment amounts for 2014, but not poverty levels and subsidy amounts. (I'm including the maximum repayments because they are part of the tax law and there are plenty of reasons to know them other than manipulating the system.) Let me be clear - I do not advocate doing this, and my post should in no way be interpreted as a suggestion or recommendation.
Here are the maximum penalty amounts for a Single Taxpayer:
- Up to 200% of poverty level: $300
- 200% to 300% of poverty level: $750
- 300% to 400% of poverty level: $1250
Normally I would encourage you to contact me for assistance at this point. If you are trying to do this, don't ask me for help.
Wednesday, November 13, 2013
Weird Obamacare Strategies and Incentives - 1
This is the first in a series of posts that have me a bit conflicted. They could be interpreted as political, and, as advice, some of it may be considered unethical, but the point of the posts is to point out things in the law that provide negative incentives, and, at the same time, point out actions that can have big negative consequences on someone receiving a Premium Tax Credit (hereafter referred to as a subsidy.) They are primarily designed to ensure that people don't make huge mistakes with huge consequences. They should not be interpreted as me suggesting that you manipulate the rules in any illegal or unethical way. If you continue reading these posts you will understand what I mean.
The Premium Tax Credit is calculated based on household income. To quote the IRS Q&A section: "For purposes of the premium tax credit, your household income is your modified adjusted gross income plus that of every other individual in your family for whom you can properly claim a personal exemption deduction and who is required to file a federal income tax return. Modified adjusted gross income is the adjusted gross income on your federal income tax return plus any excluded foreign income, nontaxable Social Security benefits (including tier 1 railroad retirement benefits), and tax-exempt interest received or accrued during the taxable year. It does not include Supplemental Security Income (SSI)."
This means that any dependent you are claiming will count against your household income as soon as they are required to file a tax return. This may require a family with working age children to seriously consider the impact of that child taking a job. As soon as the child crosses the filing threshold (generally equal to the single standard deduction) their income counts toward household income and thus reduces the subsidy available. This can be aggravated if the child has sources of non-taxable income such as Social Security from a deceased parent. Social Security alone will not require a child to file a tax return, but if the child gets a job and is thus required to file, the Social Security instantly counts as income when calculating the subsidy.
As an aside, many people get Social Security and SSI confused. The easy way to know you are getting Social Security (which is reported on tax returns) and not SSI (which is not reported) is receipt of a 1099SSA (the long pink form). If you get a 1099SSA, the income is potentially taxable and should be reported to your tax guy to see if it needs to be included on a tax return.
Back on subject...The problem of children getting jobs is exacerbated by the fact that when you apply for the subsidy, you are up to a year ahead of the actual year on which the subsidy is based, so you may not know your child will be working during the tax year in question at the time you apply for the subsidy.
Bottom Line: If you have children who are of an age to get a part time job, you need to consider the impact of that job on your Health Insurance subsidy. This is not me saying don't let them get a job. It's me warning you to pay attention to their income, especially if they are receiving other non-taxable income like Social Security, and make the best decision for your family and household based on what you value with regard to your children working. If they are working, ensure you know if they will be close to going above the filing threshold, and let the exchange know so your subsidy can be lowered during the year, vice having to pay a bunch back on the tax return.
Remember, the worst case scenario is receiving a big subsidy, having household income/size change such that you go above 400% of the poverty line, and not informing the exchange of it. This will result in a VERY ugly tax year!
IRS Q&A on the Premium Tax Credit is HERE
The Premium Tax Credit is calculated based on household income. To quote the IRS Q&A section: "For purposes of the premium tax credit, your household income is your modified adjusted gross income plus that of every other individual in your family for whom you can properly claim a personal exemption deduction and who is required to file a federal income tax return. Modified adjusted gross income is the adjusted gross income on your federal income tax return plus any excluded foreign income, nontaxable Social Security benefits (including tier 1 railroad retirement benefits), and tax-exempt interest received or accrued during the taxable year. It does not include Supplemental Security Income (SSI)."
This means that any dependent you are claiming will count against your household income as soon as they are required to file a tax return. This may require a family with working age children to seriously consider the impact of that child taking a job. As soon as the child crosses the filing threshold (generally equal to the single standard deduction) their income counts toward household income and thus reduces the subsidy available. This can be aggravated if the child has sources of non-taxable income such as Social Security from a deceased parent. Social Security alone will not require a child to file a tax return, but if the child gets a job and is thus required to file, the Social Security instantly counts as income when calculating the subsidy.
As an aside, many people get Social Security and SSI confused. The easy way to know you are getting Social Security (which is reported on tax returns) and not SSI (which is not reported) is receipt of a 1099SSA (the long pink form). If you get a 1099SSA, the income is potentially taxable and should be reported to your tax guy to see if it needs to be included on a tax return.
Back on subject...The problem of children getting jobs is exacerbated by the fact that when you apply for the subsidy, you are up to a year ahead of the actual year on which the subsidy is based, so you may not know your child will be working during the tax year in question at the time you apply for the subsidy.
Bottom Line: If you have children who are of an age to get a part time job, you need to consider the impact of that job on your Health Insurance subsidy. This is not me saying don't let them get a job. It's me warning you to pay attention to their income, especially if they are receiving other non-taxable income like Social Security, and make the best decision for your family and household based on what you value with regard to your children working. If they are working, ensure you know if they will be close to going above the filing threshold, and let the exchange know so your subsidy can be lowered during the year, vice having to pay a bunch back on the tax return.
Remember, the worst case scenario is receiving a big subsidy, having household income/size change such that you go above 400% of the poverty line, and not informing the exchange of it. This will result in a VERY ugly tax year!
IRS Q&A on the Premium Tax Credit is HERE
Wednesday, November 6, 2013
Mortgage Tax Credit Information
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The information below is specific to South Carolina and the counties I live near, but the program is available in many states and follows the same general guidelines. Information specific to your state and county should be available at your state housing website. The information below should give you a general idea if you might qualify for the credit. If you are a realtor, you should be familiar with this information for your area:
The information below is specific to South Carolina and the counties I live near, but the program is available in many states and follows the same general guidelines. Information specific to your state and county should be available at your state housing website. The information below should give you a general idea if you might qualify for the credit. If you are a realtor, you should be familiar with this information for your area:
South
Carolina Mortgage Tax Credit
The SC Mortgage Tax Credit is a
Federal Credit of up to $2000 PER YEAR for purchasers of new homes that they
use as their primary residence. The
program is administered by the State of South Carolina through the SC State
Housing Finance and Development Authority (SC Housing).
The program starts with the
taxpayer and their realtor identifying that they might qualify, and then
identifying a qualifying lender. The
requirements to qualify vary from county to county, so I will provide specifics
for Charleston, Dorchester and Berkeley counties, as well as links to find out
the requirements from other counties.
These requirements can change at any time, so taxpayers, realtors and
banks need to confirm the numbers at closing.
The Lender is responsible for
providing the application and supporting documents to SC Housing who will subsequently
issue a Mortgage Credit Certificate to the taxpayer. This certificate allows the client to take
the credit on their Federal Taxes. There
is a onetime application fee of $500 and the lender can charge up to $200 as
well. These will be included in normal
closing costs. The lender can use the
expected credit amount as income to help the taxpayer qualify for the
loan. Only certain lenders can provide
these, so I am including a link to the list at the end of this document.
The credit amount is 30% of the
mortgage interest paid during the year, up to $2000. Any interest that is not used for the credit
may be used on Schedule A as a deduction.
The general requirements that
need to be met are:
o
The taxpayer must be purchasing a home for use
as a primary residence
o
The taxpayer must qualify as a first time home
buyer (the requirement for this is either not owned another home within three
years prior to closing or simply not own another home at the time of closing –
the requirement depends on the county)
§
For Berkeley and Dorchester Counties you need
only not own another home at the time of closing
§
For Charleston County you must not have owned
another home for 3 years prior to closing
o
The home must be a single family residence (certain
condominiums MAY qualify)
o
The home must be below a specified cost
§
For Charleston County this is $225,000
§
For Dorchester and Berkeley Counties this is
$255,000
o
The taxpayers household income must be below a
specified threshold
§
For Charleston County it is $61300 for
households of 2 or fewer persons and $70495 for households with 3 or more
persons
§
For Berkeley and Dorchester Counties it is
$73560 for households with 2 or fewer members and $85820 for households with 3
or more members
o
The loan must be for 30 years
Here are some links:
County by County Info: http://www.schousing.com/library/Homeownership/MCCProgramGuide.pdf
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