Twice in a
couple of weeks I have heard:
“They should check on the Exchange.”
The Exchange
refers to the health insurance marketplace.
In both cases
we were discussing someone who is between jobs.
The idea, of
course, is to get the subsidy … as someone is unemployed and can use it.
There might also
be a tax trap here.
When you
apply for Obamacare, you provide an estimate of your income for the coverage
year. The answer is intuitive if you are applying for 2020 (as we are not in
2020 yet), but it could also happen if you go in during the coverage year. Say
you are laid-off in July. You know your income through July, and you are guessing
what it might be for the rest of the year.
So what?
There is a
big what.
Receive a
subsidy and you have to pay it back – every penny of it – if your income
exceeds 400% of the poverty line for your state.
Accountants refer
to this as a “cliff.” Get to that last dollar of income and your marginal tax
rate goes stratospheric.
Four times
the poverty rate for a single person in Kentucky is approximately $50 grand. Have your income come in at $50 grand and a dollar
and you have to repay the entire subsidy.
It can hurt.
How much latitude
does a tax preparer have?
Not much. I
suppose if we are close we might talk about making a deductible IRA
contribution, or selling stock at a loss, or ….
There may be
more latitude if one is self-employed. Perhaps one could double-down on the
depreciation, or recount the inventory, or ….
Massoud and
Ziba Fanaieyan got themselves into this predicament.
The Fanaieyans
lived in California. He was retired and owned several rental properties. She
worked as a hairstylist.
They
received over $15,000 in subsidies for their 2015 tax year.
Four times
the California poverty line was $97,000.
They reported
adjusted gross income of $100,767.
And there
was (what I consider) a fatal preparation mistake. They failed to include Form
8962, which is the tax form that reconciles the subsidy received to the subsidy
to which one was actually entitled based on income reported on the tax return.
The IRS sent
a letter asking for the Form 8962.
The Fanaieyans
realized their mistake.
Folks, for
the most part tax planning is not a retroactive exercise. Their hands were
tied.
Except ….
Mr. Fanaieyan
remembered that book he was writing. All right, it was his sister’s book, but
he was involved too. He had paid some expenses in 2012 and 2013. Oh, and he had
advanced his sister $1,500 in 2015.
He had given
up the dream of publishing in 2015. Surely, he could now write-off those
expenses. No point carrying them any longer. The dream was gone.
They amended
their 2015 tax return for a book publishing loss.
The IRS
looked at them like they had three eyes each.
To Court
they went.
There were technical
issues that we will not dive into. For example, as a cash-basis taxpayer, didn’t
they have to deduct those expenses back in 2012 and 2013? And was it really a
business, or did they have a (dreaded) hobby loss? Was it even a loss, or were
they making a gift to his sister?
The Court
bounced the deduction. They had several grounds to do so, and so they did.
The Fanaieyans
had income over four times the poverty level.
They had to
repay the advance subsidies.
I cannot
help but wonder how this would have turned out if they had claimed the same
loss on their originally-filed return AND included a properly-completed Form
8962.
Failing to
include the 8962 meant that someone was going to look at the file.
Amending the
return also meant that someone was going to look at the file.
Too many
looks.
