Tag Archives: taxes

It’s not too late to trim your 2019 tax bill

Fall is in the air and that means it’s time to turn your attention to year-end tax planning. While several clear strategies and tactics emerged during the first tax filing season under the Tax Cuts and Jobs Act (TCJA), 2019 and subsequent years bring potential twists that must be considered, too. Let’s take a closer look at year-end tax planning strategies that can reduce your 2019 income tax liability.

Deferring income and accelerating expenses

Deferring income into the next tax year and accelerating expenses into the current tax year is a time-tested technique for taxpayers who don’t expect to be in a higher tax bracket the following year. Independent contractors and other self-employed individuals can, for example, hold off on sending invoices until late December to push the associated income into 2020. And all taxpayers, regardless of employment status, can defer income by taking capital gains after January 1. Be careful, though, because by waiting to sell you also risk the possibility that your investment might become less valuable.

Bear in mind, also, that there may be other reasons that taking the income this year can be more beneficial. For starters, future tax rates can go up. It’s possible that income tax rates might increase substantially by 2021, especially for those with higher incomes, depending on 2020 election results. In any event, in 2026, the higher tax rates that were in place for 2017 are scheduled to return.

Moreover, taxpayers who qualify for the qualified business income (QBI) deduction for pass-through entities (that is, sole proprietors, partnerships, limited liability companies and S corporations) could end up reducing the size of that deduction if they reduce their income. It might make more sense to maximize the QBI deduction — which is scheduled to end after 2025 — while it’s available.

Timing itemized deductions

The TCJA substantially boosted the standard deduction. For 2019, it’s $24,400 for married couples and $12,200 for single filers. With many of the previously popular itemized deductions eliminated or limited, some taxpayers can find it challenging to claim more in itemized deductions than the standard deduction. Timing, or “bunching,” those deductions may make it easier.

Bunching basically means delaying or accelerating deductions into a tax year to exceed the standard deduction and claim itemized deductions. You could, for example, bunch your charitable contributions if it means you can get a tax break for one tax year. If you normally make your donations at the end of the year, you can bunch donations in alternative years — say, donate in January and December of 2020 and January and December of 2022.

If you have a donor-advised fund (DAF), you can make multiple contributions to it in a single year, accelerating the deduction. You then decide when the funds are distributed to the charity. If, for instance, your objective is to give annually in equal increments, doing so will allow your chosen charities to receive a reliable stream of yearly donations (something that’s critical to their financial stability), and you can deduct the total amount in a single tax year.

If you donate appreciated assets that you’ve held for more than one year to a DAF or a nonprofit, you’ll avoid long-term capital gains taxes that you’d have to pay if you sold the property and (subject to certain restrictions) also obtain a deduction for the assets’ fair market value. This tactic pays off even more if you’re subject to the 3.8% net investment income tax or the top long-term capital gains tax rate (20% for 2019).

What if you’re looking to divest yourself of assets on which you have a loss? Rather than donate the asset, the better move from a tax perspective is more likely going to be to sell it to take advantage of the loss and then donate the proceeds.

Timing also comes into play with medical expenses. The TCJA lowered the threshold for deducting unreimbursed medical expenses to 7.5% of adjusted gross income (AGI) for 2017 and 2018, but it bounces back to 10% of AGI for 2019. Bunching qualified medical expenses into one year could make you eligible for the deduction.

You also could bunch property tax payments (assuming local law permits you to pay in advance). This approach might, however, bring your total state and local tax deduction over the $10,000 limit, which means that you’d effectively forfeit the deduction on the excess.

As with income deferral and expense acceleration, you need to consider your tax bracket status when timing deductions. Itemized deductions are worth more when you’re in a higher tax bracket. If you expect to land in a higher bracket in 2020, you’ll save more by timing your deductions for that year.

Loss harvesting against capital gains

2019 has been a turbulent year for some investments. Thus, your portfolio may be ripe for loss harvesting — that is, selling underperforming investments before year end to realize losses you can use to offset taxable gains you also realized this year, on a dollar-for-dollar basis. If your losses exceed your gains, you generally can apply up to $3,000 of the excess to offset ordinary income. Any unused losses, however, may be carried forward indefinitely throughout your lifetime, providing the opportunity for you to use the losses in a subsequent year.

Maximizing your retirement contributions

As always, individual taxpayers should consider making their maximum allowable contributions for the year to their IRAs, 401(k) plans, deferred annuities and other tax-advantaged retirement accounts. For 2019, you can contribute up to $19,000 to 401(k)s and $6,000 for IRAs. Those age 50 or older are eligible to make an additional catch-up contribution of $1,000 to an IRA and, so long as the plan allows, $6,000 for 401(k)s and other employer-sponsored plans.

Accounting for 2019 TCJA changes

Most — but not all — provisions of the TCJA took effect in 2018. The repeal of the individual mandate penalty for those without qualified health insurance, for example, isn’t effective until this year. In addition, the TCJA eliminates the deduction for alimony payments for couples divorced in 2019 or later, and alimony recipients are no longer required to include the payments in their taxable income.

Act now

The future of tax planning is uncertain — even without dramatic change in Washington, D.C., many of the most significant TCJA provisions are set to expire within six years. Contact us for help with your year-end tax planning.

© 2019

Passports and Taxes – Can your passport be revoked?

If you owe the IRS back taxes, they can revoke or refuse to renew your USA passport.

The Fixing America’s Surface Transportation (FAST) Act of 2015, the IRS is required to notify the State Department of taxpayers the IRS has certified as owing a “seriously delinquent tax debt” (IRC Sec. 7345). In July 2019, the IRS temporarily suspended passport certification procedures for anyone who had a case open with the Taxpayer Advocate Service (TAS).

Image result for passport

Since then, the agency has determined that a blanket, systemic exception for anyone with an open TAS case is overly broad and could undermine the effectiveness of the FAST Act to collect a seriously delinquent tax debt. Therefore, the IRS will resume passport revocation procedures for affected taxpayers. According to the IRS, the agency will continue to fairly and impartially oversee the certification process with the State Department to uphold the law while also respecting the rights of all taxpayers.

For more information, see www.irs.gov/newsroom/update-on-passport-certifications-and-taxpayer-advocate-service .

Summer: A good time to review your investments

You may have heard about a proposal in Washington to cut the taxes paid on investments by indexing capital gains to inflation. Under the proposal, the purchase price of assets would be adjusted so that no tax is paid on the appreciation due to inflation.

While the fate of such a proposal is unknown, the long-term capital gains tax rate is still historically low on appreciated securities that have been held for more than 12 months. And since we’re already in the second half of the year, it’s a good time to review your portfolio for possible tax-saving strategies.

The federal income tax rate on long-term capital gains recognized in 2019 is 15% for most taxpayers. However, the maximum rate of 20% plus the 3.8% net investment income tax (NIIT) can apply at higher income levels. For 2019, the 20% rate applies to single taxpayers with taxable income exceeding $425,800 ($479,000 for joint filers or $452,400 for heads of households).

You also may be able to plan for the NIIT. It can affect taxpayers with modified AGI (MAGI) over $200,000 for singles and heads of households, or $250,000 for joint filers. You may be able to lower your tax liability by reducing your MAGI, reducing net investment income or both.

What about losing investments that you’d like to sell? Consider selling them and using the resulting capital losses to shelter capital gains, including high-taxed short-term gains, from other sales this year. You may want to repurchase those investments, so long as you wait at least 31 days to avoid the “wash sale” rule.

If your capital losses exceed your capital gains, the result would be a net capital loss for the year. A net capital loss can also be used to shelter up to $3,000 of 2019 ordinary income (or up to $1,500 if you’re married and file separately). Ordinary income includes items including salaries, bonuses, self-employment income, interest income and royalties. Any excess net capital loss from 2019 can be carried forward to 2020 and later years.

Consider gifting to young relatives

While most taxpayers with long-term capital gains pay a 15% rate, those in the 0% federal income tax bracket only pay a 0% federal tax rate on gains from investments that were held for more than a year. Let’s say you’re feeling generous and want to give some money to your children, grandchildren, nieces, nephews, or others. Instead of making cash gifts to young relatives in lower federal tax brackets, give them appreciated investments. That way, they’ll pay less tax than you’d pay if you sold the same shares.

(You can count your ownership period plus the gift recipient’s ownership period for purposes of meeting the more-than-one-year rule.)

Even if the appreciated shares have been held for a year or less before being sold, your relative will probably pay a much lower tax rate on the gain than you would.

Increase your return

Paying capital gains taxes on your investment profits reduces your total return. Look for strategies to grow your portfolio by minimizing the amount you must pay to the federal and state governments. These are only a few strategies that may be available to you. Contact us about your situation.

© 2019

You may have to pay tax on Social Security benefits

During your working days, you pay Social Security tax in the form of withholding from your salary or self-employment tax. And when you start receiving Social Security benefits, you may be surprised to learn that some of the payments may be taxed.

If you’re getting close to retirement age, you may be wondering if your benefits are going to be taxed. And if so, how much will you have to pay? The answer depends on your other income. If you are taxed, between 50% and 85% of your payments will be hit with federal income tax. (There could also be state tax.)

Important: This doesn’t mean you pay 50% to 85% of your benefits back to the government in taxes. It means that you have to include 50% to 85% of them in your income subject to your regular tax rates.

Calculate provisional income

To determine how much of your benefits are taxed, you must calculate your provisional income. It starts with your adjusted gross income on your tax return. Then, you add certain amounts (for example, tax-exempt interest from municipal bonds). Add to that the income of your spouse, if you file jointly. To this, add half of the Social Security benefits you and your spouse received during the year. The figure you come up with is your provisional income. Now apply the following rules:

If you file a joint tax return and your provisional income, plus half your benefits, isn’t above $32,000 ($25,000 for single taxpayers), none of your Social Security benefits are taxed.
If your provisional income is between $32,001 and $44,000, and you file jointly with your spouse, you must report up to 50% of your Social Security benefits as income. For single taxpayers, if your provisional income is between $25,001 and $34,000, you must report up to 50% of your Social Security benefits as income.
If your provisional income is more than $44,000, and you file jointly, you must report up to 85% of your Social Security benefits as income on Form 1040. For single taxpayers, if your provisional income is more than $34,000, the general rule is that you must report up to 85% of your Social Security benefits as income.
Caution: If you aren’t paying tax on your Social Security benefits now because your income is below the floor, or you’re paying tax on only 50% of those benefits, an unplanned increase in your income can have a significant tax cost. You’ll have to pay tax on the additional income, you’ll also have to pay tax on (or on more of) your Social Security benefits, and you may get pushed into a higher tax bracket.

For example, this might happen if you receive a large retirement plan distribution during the year or you receive large capital gains. With careful planning, you might be able to avoid this tax result.

Avoid a large tax bill

If you know your Social Security benefits will be taxed, you may want to voluntarily arrange to have tax withheld from the payments by filing a Form W-4V with the IRS. Otherwise, you may have to make estimated tax payments.

Contact us to help you with the exact calculations on whether your Social Security will be taxed. We can also help you with tax planning to keep your taxes as low as possible during retirement.

© 2019

Plug in tax savings for electric vehicles

While the number of plug-in electric vehicles (EVs) is still small compared with other cars on the road, it’s growing — especially in certain parts of the country. If you’re interested in purchasing an electric or hybrid vehicle, you may be eligible for a federal income tax credit of up to $7,500. (Depending on where you live, there may also be state tax breaks and other incentives.)

However, the federal tax credit is subject to a complex phaseout rule that may reduce or eliminate the tax break based on how many sales are made by a given manufacturer. The vehicles of two manufacturers have already begun to be phased out, which means they now qualify for only a partial tax credit.

Tax credit basics

You can claim the federal tax credit for buying a qualifying new (not used) plug-in EV. The credit can be worth up to $7,500. There are no income restrictions, so even wealthy people can qualify.

A qualifying vehicle can be either fully electric or a plug-in electric-gasoline hybrid. In addition, the vehicle must be purchased rather than leased, because the credit for a leased vehicle belongs to the manufacturer.

The credit equals $2,500 for a vehicle powered by a four-kilowatt-hour battery, with an additional $417 for each kilowatt hour of battery capacity beyond four hours. The maximum credit is $7,500. Buyers of qualifying vehicles can rely on the manufacturer’s or distributor’s certification of the allowable credit amount.

How the phaseout rule works

The credit begins phasing out for a manufacturer over four calendar quarters once it sells more than 200,000 qualifying vehicles for use in the United States. The IRS recently announced that GM had sold more than 200,000 qualifying vehicles through the fourth quarter of 2018. So, the phaseout rule has been triggered for GM vehicles, as of April 1, 2019. The credit for GM vehicles purchased between April 1, 2019, and September 30, 2019, is reduced to 50% of the otherwise allowable amount. For GM vehicles purchased between October 1, 2019, and March 31, 2020, the credit is reduced to 25% of the otherwise allowable amount. No credit will be allowed for GM vehicles purchased after March 31, 2020.

The IRS previously announced that Tesla had sold more than 200,000 qualifying vehicles through the third quarter of 2018. So, the phaseout rule was triggered for Tesla vehicles, effective as of January 1, 2019. The credit for Tesla vehicles purchased between January 1, 2019, and June 30, 2019, is reduced to 50% of the otherwise allowable amount. For Tesla vehicles purchased between July 1, 2019, and December 31, 2019, the credit is reduced to 25% of the otherwise allowable amount. No credit will be allowed for Tesla vehicles purchased after December 31, 2019.

Powering forward

Despite the phaseout kicking in for GM and Tesla vehicles, there are still many other EVs on the market if you’re interested in purchasing one. For an index of manufacturers and credit amounts, visit this IRS Web page. Contact us if you want more information about the tax breaks that may be available for these vehicles.

© 2019

Vehicle-expense deduction ins and outs for individual taxpayers

It’s not just businesses that can deduct vehicle-related expenses. Individuals also can deduct them in certain circumstances. Unfortunately, the Tax Cuts and Jobs Act (TCJA) might reduce your deduction compared to what you claimed on your 2017 return.

For 2017, miles driven for business, moving, medical and charitable purposes were potentially deductible. For 2018 through 2025, business and moving miles are deductible only in much more limited circumstances. TCJA changes could also affect your tax benefit from medical and charitable miles.

Current limits vs. 2017

Before 2018, if you were an employee, you potentially could deduct business mileage not reimbursed by your employer as a miscellaneous itemized deduction. But the deduction was subject to a 2% of adjusted gross income (AGI) floor, which meant that mileage was deductible only to the extent that your total miscellaneous itemized deductions for the year exceeded 2% of your AGI. For 2018 through 2025, you can’t deduct the mileage regardless of your AGI. Why? The TCJA suspends miscellaneous itemized deductions subject to the 2% floor.

If you’re self-employed, business mileage is deducted from self-employment income. Therefore, it’s not subject to the 2% floor and is still deductible for 2018 through 2025, as long as it otherwise qualifies.

Miles driven for a work-related move in 2017 were generally deductible “above the line” (that is, itemizing isn’t required to claim the deduction). But for 2018 through 2025, under the TCJA, moving expenses are deductible only for certain military families.

Miles driven for health-care-related purposes are deductible as part of the medical expense itemized deduction. Under the TCJA, for 2017 and 2018, medical expenses are deductible to the extent they exceed 7.5% of your AGI. For 2019, the floor returns to 10%, unless Congress extends the 7.5% floor.

The limits for deducting expenses for charitable miles driven haven’t changed, but keep in mind that it’s an itemized deduction. So, you can claim the deduction only if you itemize. For 2018 through 2025, the standard deduction has been nearly doubled. Depending on your total itemized deductions, you might be better off claiming the standard deduction, in which case you’ll get no tax benefit from your charitable miles (or from your medical miles, even if you exceed the AGI floor).

Differing mileage rates

Rather than keeping track of your actual vehicle expenses, you can use a standard mileage rate to compute your deductions. The rates vary depending on the purpose and the year:

  • Business: 54.5 cents (2018), 58 cents (2019)
  • Medical: 18 cents (2018), 20 cents (2019)
  • Moving: 18 cents (2018), 20 cents (2019)
  • Charitable: 14 cents (2018 and 2019)

In addition to deductions based on the standard mileage rate, you may deduct related parking fees and tolls. There are also substantiation requirements, which include tracking miles driven.

Get help

Do you have questions about deducting vehicle-related expenses? Contact us. We can help you with your 2018 return and 2019 tax planning.

© 2019

State Income Tax Filing Requirements and Economic Presence

Scope: This memo is intended to provide general guidance on how state income tax return filing requirements are determined and to provide an explanation of the Economic Presence standard which several states are now using to determine if a business entity has a tax return filing requirement in that state. Vertical Advisors (VA) determines state tax return filing requirements based on information provided to us from our clients. However, the historic state income tax filing requirements are based on the general standard as described below but each business will ALSO need to decide whether state filing requirements under the Economic Presence standard should be considered. VA is available to be engaged to review income tax filing requirements for our clients.

General Standard: There are multiple factors that affect state tax return filing requirements. This memo is meant to provide a general overview. A detailed analysis of state tax attributes would be needed to fully understand the state tax return filing requirements for a particular business. Attributes that are considered when determining state tax return filing requirements are as follows:

  1. Sales by state
  2. Wages by state (could also include vendor or independent contractors)
  3. Fixed assets by state

Historically, when a business has two or more of the attributes listed above, a state tax return would be required for that state. However, several states are now using the more aggressive Economic Presence standard which can cause a state tax return filing requirement even if only one attribute exists which is usually sales in that state.

Economic Presence Standard: Under the Economic Presence standard, a state tax return may be required if any one of the following conditions exists:

  • Any income derived in the state
  • Sales in the state exceeding certain threshold
  • Licensed intangible properties in the state
  • Doing business or seeking profits in the state

The Economic Presence standard is not new and approximately 43 states currently have an Economic Presence standard. Although the Economic Presence standard has existed for years, the states were not aggressively enforcing tax return filing requirements under this standard. However, due mainly to the growth of the e-commerce industry, it is now common for a company to transact business in several states in which the only connection to that state may be the sales with no actual physical presence in that state. Under the general standard, without a physical presence in the state, there was no state return filing requirement and thus the states could not assess income tax on businesses that had only sales in those states.

Under Economic Presence, the sales alone can cause a tax return filing requirement. Since each state defines Economic Presence standard differently, a detailed analysis by state would be required to understand the possible state tax return filing requirements under the Economic Presence standard.

Conclusion: As mentioned earlier, Vertical Advisors reviews state tax return filing requirements consistent with the general standard and information provided by our clients. However, since states are becoming more aggressive in applying the Economic Presence standard, each business will need to decide if they want to retain us to consider their specific income tax return filing requirement, allocate their internal resources, or to disregard the laws. We recommend a diligent review of income tax return filing requirements annually.

We feel it makes sense to review state tax return filing requirements under the Economic Presence standard and the general standard approach. Ignoring state tax return filing requirements under the Economic Presence standard can result in tax notices, possible penalties and examinations. However, since not all states are aggressively applying the Economic Presence standard, a business will need to balance the risk of not filing against the cost of preparing possibly several state tax returns. For more information on how state income tax filing requirements including the Economic Presence test may affect your business, please contact us.

Young Entrepreneurs Are More Likely to Rely on a CPA at Tax Time

For self-employed individuals, getting a little help from an expert accountant can make filing taxes a lot easier. Just as teachers are the authority when it comes to education, CPAs are the authority on all things taxes. But who uses accountants today, and what purpose do you serve in the eyes of your clients?

In an effort to better understand how entrepreneurs interact with accountants and pay their taxes, we commissioned an independent survey of 500 self-employed workers ages 18 and up, in the US. What we found may be the key to helping you prioritize your client relationships in 2019.

Older and younger taxpayers use accountants differently

Would you believe self-employed workers aged 18-24 are more likely to use an accountant than those 55 and older? It’s true! While 28 percent of self-employed workers aged 18-24 rely on an accountant to do their taxes, the same can only be said for 21 percent of workers over the age of 54.

But these age groups also have different reasons for using an accountant. Fifty percent of self-employed taxpayers over the age of 55 view their accountant as an essential business advisor, while only 27 percent of those under 55 would say the same.

The biggest reason folks under 55 use an accountant, as opposed to just filing their taxes themselves? They don’t know how. In fact, 37 percent admit they’ve never done their taxes themselves and they never want to. Eighteen percent say doing it themselves is just a waste of time, while 17 percent claim they’ve tried and failed to do their own taxes in the past, prompting them to seek help.

With a new set of federal tax laws changing the game for everyone next year, there’s likely an even greater chance taxpayers will be relying on an accountant in 2019. That is, for those who’ve realized the tax reform took place. Out of our 500 survey respondents, 9 percent didn’t know there was a tax reform.

If they’re not using an accountant, what are they doing?

Overall, 32 percent of self-employed workers rely on an accountant to do their taxes, but that number begs the question: What about the remaining 68 percent?

As it turns out, the numbers are about even. Thirty-one percent of taxpayers say they’re doing their own taxes on paper, while the last third rely on a tax software like TurboTax.

Interestingly, younger self-employed workers are less inclined to use a tax software than their older counterparts. While 42 percent of self-employed workers aged 55 and over are most likely to file online or through another tax software option, only 33 percent of taxpayers aged 18-24 would say the same. Younger taxpayers are also more likely (but only by 1 percent) to file on paper. An interesting choice for the iGeneration.

 

Younger workers may be better for business

As an accountant, you should be heartened by these current trends. While you have yet to prove yourself an indispensable business resource in the eyes of young up-and-comers, your foot is well inside the door.

Many self-employed individuals aged 18-24 haven’t done their own taxes before, and they don’t want to start. Considering these young taxpayers are 23 percent more likely to be audited by the IRS than taxpayers 55 and older, they also have an incentive to invest in your services.

With this year’s tax season behind us, it’s a great time to look to the future. Continue to build a trusting relationship with your younger clients. They may not be your biggest customers yet, but soon enough, they could be.

4 New Ways You Can Avoid Fines For Not Having Health Insurance

There are already more than a dozen reasons people can use to avoid paying the penalty for not having health insurance. Now the federal government has added four more “hardship exemptions” that let people off the hook if they can’t find a marketplace plan that meets not only their coverage needs but also reflects their view if they are opposed to abortion.

It’s unclear how significant the impact will be, policy analysts said. That’s because the penalty for not having health insurance will be eliminated starting with tax year 2019, so the new exemptions will mostly apply to penalty payments this year and in the previous two years.

“I think the exemptions … may very marginally increase the number of healthy people who don’t buy health insurance on the individual market,” Timothy Jost, emeritus professor of law at Washington and Lee University in Virginia who is an expert on health law.

Under the new rules, people can apply for a hardship exemption that excuses them from having to have health insurance if they:

  1. Live in an area where there are no marketplace plans.
  2. Live in an area where there is just one insurer selling marketplace plans.
  3. Can’t find an affordable marketplace plan that doesn’t cover abortion.
  4. Experience “personal circumstances” that make it difficult for them to buy a marketplace plan, including not being able to find a plan in their area that gives them access to specialty care they need.

In California, two of those exemptions will be particularly relevant — the one related to abortion coverage and the one for people in counties where only one insurer sells through the state’s Affordable Care Act marketplace, Covered California.

The first new exemption, for people in areas with no marketplace plan, isn’t relevant for consumers anywhere in the United States this year. Since the Affordable Care Act’s marketplaces opened, there have been no “bare” counties.

However, in about half of U.S. counties — in which 26 percent of enrollees live — there is only one marketplace insurer this year, according to the Kaiser Family Foundation. (Kaiser Health News, which produces California Healthline, is an editorially independent program of the foundation.)

This includes California, where Anthem Blue Cross exited six counties and other communities this year, leaving an estimated 60,000 people with only one insurer.

The counties of Monterey, San Benito, San Luis Obispo, Santa Barbara, Inyo and Mono were left with only one insurance option: Blue Shield of California.

As for the abortion exemption, in many places it won’t be an issue either. Women in 31 states didn’t have access to a marketplace plan that covered abortion in 2016, according to a Kaiser Family Foundation analysis.

By California law, abortion services must be covered in marketplace plans as well as by Medi-Cal, the state’s Medicaid program, and by most private health plans outside of the marketplace — except employer-funded ones. That means women in the Golden State might have trouble finding insurance that excludes abortions, experts said. New York and Oregon also have similar laws.

The ACA established several different types of exemptions from the penalty for not having coverage. Among them are exemptions for not being able to find coverage that is considered affordable or being without insurance for less than three consecutive months in a year. People claim these more common exemptions when they file their tax returns.

Hardship exemptions that had already been on the books protected people who faced eviction, filed for bankruptcy or racked up medical debt, among other difficulties. Consumers apply for these exemptions by submitting an application to the ACA insurance marketplace.

The new hardship exemptions apply to people in all 50 states, according to an official at the federal Centers for Medicare & Medicaid Services, which oversees the health law’s insurance marketplaces. To apply, people generally need to provide a brief explanation of the circumstances that made it a hardship for them to buy a marketplace plan, along with any available documentation, when they submit their application to marketplace officials. They can apply for the current calendar year or going back two years, to 2016.

It’s difficult to gauge how many people will try to take advantage of the changes, said Tara Straw, a senior policy analyst at the Center on Budget and Policy Priorities.

“People aren’t sure how to apply or if they’re eligible, and that discourages them from applying,” Straw said.

The penalty for not having health insurance in 2018 is the greater of $695 or 2.5 percent of household income.

During the 2017 filing season, there were more than 106 million tax returns reporting that all family members had health insurance, and nearly 11 million tax returns that claimed an exemption from the requirement to have it, according to a report from the Treasury Department’s inspector general for tax administration. In addition, more than 4 million returns reported paying penalties totaling nearly $3 billion for not having health insurance.

People often don’t realize they may owe a penalty until it’s time to do their taxes, said Alison Flores, a principal tax research analyst at H&R Block’s Tax Institute. H&R tax preparers first work to see if clients can qualify for an exemption that can be claimed on their tax returns. If that doesn’t work, they move on to the hardship exemptions. The preparers help people get the hardship exemption application, but it’s up to consumers to send it to the marketplace and get the exemption certificate.

The federal guidance about the new exemptions was released April 9, shortly before the end of the income tax filing season. People who’ve already filed their taxes and qualify for the new exemptions for 2016 or 2017 and get marketplace approval can file an amended tax return to receive a refund of any penalty they paid, said Katie Keith, a health policy consultant who writes regularly about health reform.

Bitcoin – The IRS stated it is taxable. Now what?

BitcoinOn March 25, 2014, the Internal Revenue Service (IRS) released Notice 2014-21 stating that virtual currency is treated as property. In English, this means that virtual currency like Bitcoin will be subject to income tax just like it is treated as cash or property.  The taxability will depend on the type of transaction and how it is received.  The type of tax treatment will be similar based on current transactions dealing with cash and existing tax laws.  Let’s look at three common examples:

Employment & Independent Contractor Relationship:  We all know, that if you work for someone as either a employee or independent contractor and you are paid in cash, that the cash amount is taxable as compensation or income.  Thus if you work for someone and they pay you in Bitcoin or another virtual currency, the IRS is now stating that transaction is taxable based on the fair market value (FMV) on the day of receipt (assuming the taxpayer is using the cash basis of accounting).  If a taxpayer is using the accrual method of accounting, income would be triggered differently.  Thus the employee or contractor would be taxed just like they received cash.  Some items to consider are:  (1) Will you receive a W-2 or 1099-k?, (2) The income most likely would be subject to self-employment tax, or Federal and state withholding, payroll tax and don’t forget additional Medicare tax (AKA Obamacare), (3) Tracking the income at the date of receipt will provide a tax basis / cost, (4) Tracking a gain or loss on the date of conversion from Bitcoin to cash or property.  Thus, there are many things to consider.  The fact that virtual currency will eventually be converted into cash or property creates an additional step not generally created if paid in cash.

Mining Operation: If you own or are a partner in a mining operation then the mining operation will generate income when a Bitcoin or virtual currency is mined.  Depending on the entity structure type  (i.e. sole-proprietorship,  C Corporation, S -Corporation, Partnership, LLC) the taxability of the income will be treated differently.  When a business is in the business to generate a profit, then expenses to run the business can be deductible against the income.  Side note, there are exceptions if the business is deemed illegal.  Anyway, thus in a virtual mining operation, the hardware, software, utilities and other operating expense can be used to reduce the taxable income.  Then depending on the entity structure, the income will be taxed differently.  The mining operation taxability is similar to any other for profit business, but again, another step is created due to a virtual currency being used.  Since virtual currency mining isn’t like normal manual labor mining, the tax issue of this business being active or passive is more relevant.  This again, can change the tax results.  For example, will Net Investment Income Tax (NIIT) / (AKA: Obamatax) be due?

When the virtual currency is mined, the FMV of that currency will generate income.  That currency value on that date should be tracked as it will generate income and also create a tax basis for the currency.  If the virtual currency is exchanged into US dollar, then the transaction has ended and income is generated.  However, if the virtual currency is held for a period of time, then the business should keep track of the FMV on the date it was mined and generated income.  Later when the virtual currency is exchanged into US currency, that transaction will create another taxable transaction based on currency exchange tax laws.  Thus tracking the virtual currency from mined date to exchange date is very important.  As with any business it is also important to make sure the business is properly tracking and supporting expenses and chooses the entity structure wisely.  For example, an S Corporation structure can generate less tax than a sole proprietorship or partnership / LLC.  Entity structures need to be throughly reviewed  based on the business operation and consideration of the partners / shareholders.

Let’s discuss an example.  A mining operation generates three (3) bitcoins.  The value of those bitcoins on the day they are mined is $700 a coin, so income under the new IRS ruling would be  $2,100 for that week. If the bitcoin is exchanged into cash on the mining date, then the income step is over. However, if the bitcoin isn’t exchanged into dollars on the mining date then the company needs to track the bitcoin and later when it is exchanged into cash at $800 a coin, there would be $300 of additional income.  However, if the exchange rate  is $600 a coin, there would trigger a $300 loss.  The mining income and exchange income should be tracked separately due to various tax laws.

If you are part of a pool mining operation, then the above still needs to be considered and then other tax items like, passive versus non-passive come up slightly differently.  Also, the pooling operating agreement should have an operating agreement, explanation about tax ramifications and who is the tax matters partner.  All these items discussed come up with any business.

Investing in Virtual Currency:  If an individual invests in virtual currency, then the transaction should be treated just like any other investment.  For example, buying a stock.  The opportunity to be taxed at the lower long term capital gains rate is possible.  The long term capital gains tax rates are generally either 15% or 20%, and then one must not forget the Net Investment Income Tax (NIIT) / (AKA Obamatax).  The individual will need to track their cost basis / tax basis, the date of purchase, the date of sale and the sales price.  The holding period will determine if the transaction will qualify for the reduced long term capital gains rate or not.

In summary, now that the IRS has taken the position that they will treat virtual currency like property from a tax law perspective, income tax now becomes an issue that virtual currency holders didn’t really have to worry about in the past.  It will be interesting to see any debate about the IRS notice and to see how the community will deal with the IRS notice.  Will the community provide the IRS with W-2’s, and 1099’s, or not?  Will the community report virtual currency holdings or not?  It is hard for the IRS to track transactions if they are not reported, but this IRS notice is telling the taxpayer, the law, and the taxpayer would need to comply.

If we look at how aggressive the IRS has been over the last five years regarding offshore bank accounts then one could argue that this taxation on virtual currency is here to stay. The community and network of virtual currency has also provided support that the currency is valuable and easily converted into good and world currencies.  So, if you are involved with virtual currencies, now is the time to speak with your tax advisor and create a plan on how to deal with the taxation and create a strategy just like any other successful business.

The IRS notice can be found at http://goo.gl/ONYs4y as of today.  However, if the link doesn’t work, go to www.irs.gov and search the website for Notice 2014-21.  Please feel free to ask questions and comments.  Please contact us if we can be of assistance.