An Interim Report On Tax Season

I was speaking with a colleague earlier this week who wants to set up a tax storefront. That means a place that prepares taxes, probably only individual taxes and only for a few months a year. Think H&R Block, but without a franchise involved. I suspect he would be successful, but like any business start-up the cash drain is difficult to pull off.

And he asked me if tax seasons are getting “harder.” Yes, he is younger than me. I am getting to that age.

I hesitated on his question, as my long-standing position is that the accounting firm determines the difficulty of the season for its employees. Some firms do a good job, and other firms simply do not care. It is one of the reasons that the average career of an accountant in a CPA firm is little more than that of an NFL player.

Bet you did not know that.

Still, there are issues for tax practitioners that did not exist a few years ago – or even last year.

I was speaking this week with a good friend about whether it was safe for him to prepare his personal tax return on TurboTax. Depending upon the year and other factors, he prepares a draft return and I review it for him. Last year he changed jobs and states, so I expect I will review his return this year.

Why TurboTax? It turns out that a number of states experienced suspicious electronic filing activity this year and, upon investigation, in many cases the electronic return was filed using TurboTax.

Let’s be fair, though. That does not mean that the information came from TurboTax. There have enough recent breeches of data security that the information may have come from elsewhere.

Intuit, the parent of TurboTax, responded aggressively to this development, as you would imagine. A number of states, including Kentucky and Minnesota, temporarily halted the processing of electronically filed returns.  Meanwhile TurboTax encouraged its customers to log-in and review their accounts. They instructed their customers to review their direct-deposit information specifically.

Makes sense.

Why the states? In the past, fraudsters have targeted the IRS rather heavily. The IRS responded with stricter identity measures, including lockdowns on any tax refunds and the required use of security passwords. Florida was so hard-hit, for example, that one can request a federal security PIN number under a pilot program – even if one was not the victim of identity theft.

It may be that the fraudsters saw easier picking elsewhere.

Then we have the information documents to prepare a tax return.

I am reading that the federal health insurance marketplace has sent out approximately 800,000 erroneous Forms 1095-A. This is not insignificant and represents approximately one-in-five people using the marketplace. These forms are new and are issued by the exchanges to individuals who purchased insurance there. They include information on any government subsidy, so they are an important tax document.  For example, even if you are not otherwise required to file a tax return, you must file if you received a subsidy.

The error concerns the “benchmark plan” premium and doesn’t concern the amount of subsidy itself. The “benchmark plan”” is the second lowest cost silver plan for where one lives, and it is part of the arithmetic to settle-up whether one received too much or too little subsidy. As you know, if you received too much subsidy you have to pay it back.

Taxpayers who received Forms 1095-A are encouraged to wait until March before filing their individual tax returns. Not a problem. Surely these are people who do even meet with their tax advisors until March.

Meanwhile, it has finally dawned on some politicians that people may not realize the effect of ObamaCare on them until they file their 2014 taxes. There will be rude surprises for those who did not acquire insurance and now have to pay the penalty. Perhaps they acquired insurance but were over-subsidized, and now they have to repay the excess subsidy.

Wait until they learn that the penalty will go up every year.

Then there is a problem with the timing of obtaining health insurance. ObamaCare requires everyone to have insurance in place by February 15 – which of course is two months earlier than April 15, when taxes are due. That may be the first time people understand this Rube Goldberg contraption foisted 50-shades-of-grey style upon society. What happens then? Well, in addition to owing the penalty for 2014 it would appear that one would also owe a penalty for some part of 2015 – at least until one can acquire health insurance. The penalty goes month by month.

Many politicos – not the brightest class emerging from natural selection – are now up in arms, demanding that deadlines be changed, penalties ameliorated and so on. I suppose there is a nuance there, but it escapes me. 

Somewhat on cue, on February 20 the Center for Medicare and Medicaid Services declaimed that the enrollment period shall reopen from March 15 to April 30.

To which I have two questions:

1. What happened to the period from February 15 to March 15?
2. Why is the Center for Medicare and Medicaid Services changing the law?

On February 13 - which seems a lifetime ago at this point - the IRS finally provided some guidance on how to comply with the new repair Regulations effective with the 2014 tax returns. Considering that their first pass at the Regulations required almost everyone with real estate or other depreciable property to file for a change in accounting method - a change which the IRS mandated, by the way - the IRS then had the temerity to say that we also had to formally ask them for permission to change. I had and have a stack of real estate partnership returns in my office waiting on their guidance. Forests have been felled by tax practitioners divining for weeks and months what the IRS wanted from us this year in order to comply with their new Regulations. 

Do you ever wonder if our government is suffocating under the weight of people who - having accomplished little more than going to a name school or playing at politics - think they now have the chops to bludgeon those of us who actually accomplish something every day? 

Back to our initial question though: are tax seasons getting “harder?”

I don’t think “harder” is the word I would use for for it.

Suit Against Subsidies Could Derail ObamaCare

Did you hear about the court decision in Halbig, et al v Sebelius? The suit was brought by six businesses against the employer mandate under ObamaCare. The federal District Judge, Paul Friedman, refused a preliminary injunction against the government, but he did say the case would be decided on an expedited basis.  That court joins Pruitt v. Sebelius, a case from Oklahoma. There is yet another suit to be heard by month-end in Richmond, Virginia.

What is going on?

They are suing over the employer penalty under ObamaCare - the $2,000 or $3,000 penalty, depending upon whether the employer offers insurance and whether the insurance meets politically correct criteria. The employer penalty triggers when an employee qualifies for a subsidy on the public exchange (the “Marketplace”). One qualifies if one’s income is below 400% of the federal poverty line and meets other criteria. The employer would then be required to subsidize some of the cost through that $2,000/$3,000 penalty.

What does it take to qualify for an individual subsidy?

Let’s do something that Congress apparently did not do when this passed this law: let’s read it:

Let’s start with Section 1311(b):

          Sec 1311(b) AMERICAN HEALTH BENEFIT EXCHANGES.—

(1) IN GENERAL.—Each State shall, not later than January 1, 2014, establish an American Health Benefit Exchange (referred to in this title as an ‘‘Exchange’’) for the State that…

We read that each state is to establish an Exchange.

What if the state fails to establish an Exchange?

         

Sec 1321 (c) FAILURE TO ESTABLISH EXCHANGE OR IMPLEMENT REQUIREMENTS.

(1) IN GENERAL.—If—

(A) a State is not an electing State under subsection (b); or

(B) the Secretary determines, on or before January 1, 2013, that an electing State—

(i) will not have any required Exchange operational by January 1, 2014; or

(ii) has not taken the actions the Secretary determines necessary to implement—

(I) the other requirements set forth in the standards under subsection (a); or

(II) the requirements set forth in subtitles A and C and the amendments made by such subtitles;

the Secretary shall (directly or through agreement with a not for profit entity) establish and operate such Exchange within the State and the Secretary shall take such actions as are necessary to implement such other requirements.

We read that the Secretary will establish the Exchange.

How does an individual get to a subsidy?

SEC. 1401. REFUNDABLE TAX CREDIT PROVIDING PREMIUM ASSISTANCE FOR COVERAGE UNDER A QUALIFIED HEALTH PLAN.

(a) IN GENERAL.—Subpart C of part IV of subchapter A of chapter 1 of the Internal Revenue Code of 1986 (relating to refundable credits) is amended by inserting after section 36A the following new section:

SEC. 36B. REFUNDABLE CREDIT FOR COVERAGE UNDER A QUALIFIED

HEALTH PLAN.

(a) IN GENERAL.—In the case of an applicable taxpayer, there shall be allowed as a credit against the tax imposed by this subtitle for any taxable year an amount equal to the premium assistance credit amount of the taxpayer for the taxable year.

(b) PREMIUM ASSISTANCE CREDIT AMOUNT.—For purposes of this section—

(1) IN GENERAL.—The term ‘premium assistance credit amount’ means, with respect to any taxable year, the sum of the premium assistance amounts determined under paragraph (2) with respect to all coverage months of the taxpayer occurring during the taxable year.

‘‘(2) PREMIUM ASSISTANCE AMOUNT.—The premium assistance amount determined under this subsection with respect to any coverage month is the amount equal to the lesser of

(A)   the monthly premiums for such month for 1 or more qualified health plans offered in the individual market within a State which cover the taxpayer, the taxpayer’s spouse, or any dependent (as defined in section 152) of the taxpayer and which were enrolled in through an Exchange established by the State under 1311 of the Patient Protection and Affordable Care Act, or

(B)    the excess (if any) of— ‘‘(i) the adjusted monthly premium for such month for the applicable second lowest cost silver plan with respect to the taxpayer, over ‘‘(ii) an amount equal to 1/12 of the product of the applicable percentage and the taxpayer’s household income for the taxable year

Whoa. If the nuns taught me how to read English, I see that the taxpayer has to be enrolled in an Exchange pursuant to Section 1311. Section 1311 requires “each state” to do something, otherwise Section 1321 kicks in.

Question: What if a state does nothing (thereby removing Section 1311) and the federal government steps in under Section 1321. Would someone in that state be receiving a subsidy as defined under Section 1401 or not?

Can the federal government be a “state?”

Let’s look at Section 1304(d):

Sec 1304(d) STATE.—In this title, the term ‘‘State’’ means each of the 50 States and the District of Columbia.

Looks like the answer is “no.”

Considering that there are approximately three dozen states that did not set-up their own Exchange, how does the federal government propose to get an employer to pay that $2,000/$3,000 penalty despite the language in Sections 1401 and 1311?

The IRS comes to the rescue by proposing the following Regulation:

         

a taxpayer is eligible for the credit for a taxable year if . . . the taxpayer or a member of the taxpayer’s family (1) is enrolled in one or more qualified health plans through an Exchange established under section 1311 or 1321 of the Affordable Care Act . . .”

         

Good grief! Well, one thing about Tony is that he could always count on Paulie and Christopher to back him up.

Does law mean nothing to this crowd? Perhaps the law is flawed, perhaps it was poorly drafted, but it still law. How many times have I read about unintended consequences of the alternative minimum tax or about some poor taxpayer being hung out to dry because he/she did not get that “special” piece of paper the IRS wanted in order to substantiate a transaction?  How did the IRS invariably defend its position? By arguing that the law is the law and that Congress should remedy any inequity.  

In a swell of self-importance, the Administration and its enablers refuse to accept that the same law that applies to you or me also applies to them. Instead they argue that:

         

(1) Justice Roberts decided that the penalties are a tax. The Anti-Injunction Act precludes plaintiffs from challenging the imposition of a tax before it is actually assessed.

(2) The plaintiffs lack standing due to the speculative nature of any claimed injuries.

(3) Following the White House announcement of the one-year delay of the employer mandate, the court should also delay its consideration.

(4) The language around subsidies represents but one of the ACA’s many drafting errors.

(5) Congress clearly intended to have tax credits available in all the states.

Let me get this straight: their argument is that Tony did not clearly intend for me to defend myself until after I was shot, because before then any self-defense would be speculative and contingent on the actions of someone for whom English is a second language. 

Really?

Let us review history to understand how we got into this mess. The House had a bill. The Senate had a bill. The bills were different. The Senate wanted to force the states to absorb the Exchanges, but it ran into a problem with Pritz v United States (1997):

[T]he Federal Government may not compel the states to implement, by legislation or executive action, federal regulatory programs.’’

The Senate instead added a provision for federally established exchanges as a backup option for states that refused to set up exchanges.

Remember that bill could not obtain bipartisan support, and it was passed on a Saturday night at late hour, after the Louisiana Purchase, the Cornhusker Kickback and who-knows-what-else. The Democrats had lost their Senate 60-vote majority in January 2010, meaning they could not override the expected filibuster.  To push the bill through the Senate, Reid forced a reconciliation vote - a tactic normally reserved to limit debate on budget bills. This tactic however did not allow for a normal Senate-House joint committee process to reconcile burrs in the law. How could it? It was designed for budget and debt ceiling items, not for something like this.

Let’s see what happens in Halbig and Pruitt. Judge Paul Friedman hopes to have his opinion out by February.

How Will You Report The ObamaCare Subsidy On Your Tax Return?

It is called the “premium assistance tax credit,” and it refers to the subsidy that people will receive under the ObamaCare individual mandate. It will begin in 2014, and it is supposed to make insurance more affordable for people under 400% of the federal poverty line (FPL). I am not really sure how the politicians came up with 400%, as many if not most of us would agree that 4 times the poverty line is nowhere near poverty. For example, if you are married and have a child, 400% of the FPL is $78,120. That picks up a lot, if not the majority, of people in the Cincinnati area. 

OBSERVATION: I did not realize that Washington views the average Cincinnatian as impoverished and in need of their help.  How did we ever survive this blight before?

Starting next year, you have to address your health insurance, either by receiving it through work, remaining on your parent’s policy, buying it in the private marketplace or on the public exchange. If you don’t, tax advisors are supposed to calculate a tax penalty when preparing your 2014 taxes in April 2015. If you do, then tax advisors may have to go through a separate calculation to determine whether the government paid too much or too little subsidy toward your health insurance. As a tax advisor, I say … whoopee. You would think the government could at least put me on its 401(k) plan for doing its yeoman work.

So how do you calculate whether the government paid too much or too little? That is our topic this week.

We will need two tables to do this. The first is the FPL table by household size.

The second table provides the phase-out of the subsidy as one’s income increases through the FPL table.

When you and I meet in April 2015, I will know your 2014 adjusted gross income (AGI), which starts off this exercise. A good definition of AGI is the amount of money you made before you deduct your house, taxes, contributions and kids. I will then have to make some adjustments to it, if you have certain items on your return:

·        I will add tax -exempt interest

·        I will add the untaxed portion of your social security

·        If you worked overseas I will add the exempted portion of your salary

You now have something called modified adjusted gross income (MAGI).

Let’s say that you are married, have a toddler and your MAGI is $55,000. You have a modest home, an older car and are living the dream. 

The table tells me that you are under 400% of the FPL (which is $78,120 for a family of 3), so we next talk about your health insurance. You tell me that you do not have insurance at work. Your wife is staying at home and being a mom. You went and bought a health policy on the public exchange. You purchased an Anthem bronze plan costing $715 per month. That $715 however was before the subsidy, to which we will return in a moment.

We now have your actual 2014 income, and we have to settle-up with the government. If you were under-subsidized, you will get a check. If you were over-subsidized, you have to return the money. 

NOTE: The subsidy is being paid directly to the insurer. You never see this check. It is very possible that you never even paid attention to the subsidy amount, as you were focusing only on your out-of-pocket.

At MAGI of $55,000, you are at 282% of the FPL ($55,000/$19,530). We now go to the next table. There is a sliding scale between 250% and 300% FPL, going from 8.05% to 9.5% of MAGI. You are somewhere in the middle, so we have to do some math:

            282 – 250 = 32

            32/50 = 64%

            9.5% - 8.05% = 1.45%

            1.45% * 64% = 0.93%

            8.05% + 0.93% = 8.98%

Your premiums are limited to 8.98% of your MAGI. As we said, your income was $55,000. That means your share of the premiums caps-out at $4,939.

How much was your subsidy? Total annual premiums were $8,580 ($715 * 12 months). Your cap is $4,939. The difference is $3,641, or $303 per month. If your subsidy was less than $303/month, I have good news for you. If it was more, then I have bad news, as you will be writing the government a check.  How do we know the subsidy? There will be a new tax form – Form 1095-A- that will be issued about the same time as your W-2. You will have to bring that form to me when preparing your taxes.

There are limits on how much you have to repay the government:

·        If you are below 200% of the FPL, the most you have to pay back is $600

·        Between 200% and 300% the maximum is $1,500

·        Between 300% and 400% the maximum is $2,500

The $600/$1,500/$2,500 limits are for a family. It is one-half that amount if you are single.

By the way …. IF your MAGI exceeds 400% FPL, then you have to repay ALL the subsidy with your tax return.

The above limits ($600/$1,500/$2,500) do not apply if the government owes you. This could happen if your income dropped significantly, such as your employer moving you to part-time.

You may have read that the White House delayed the employer reporting for one year. It will now start in 2015 (for 2014), rather than 2014 (for 2013). The White House believes that it has limited the potential for fraud because of the requirement to settle-up the individual mandate when filing the individual income tax return. You can see their point.

I am very uncomfortable with this action, however. Since when does a White House get to decide which laws it wants to enforce and which laws it does not? What if the next president decides to “suspend” the corporate tax for a year? This White House is creating precedence for that White House to do so.

What we have now are three categories of health consumers:

(1) Over 400%: you pay full boat. The exchanges and subsidies mean nothing to you.

(2) Between 133% and 400% of the FPL: you may be subject to the above, depending upon your insurance situation at work.

(3) Below 133%: you are likely enrolled in Medicaid and pay no premiums at all. This however will vary by state, as many states did not participate in the Medicaid expansion under ObamaCare.

You cannot deduct the portion of your health insurance that is being subsidized. However, since the medical deduction threshold is increasing to 10% (from 7.5%) of AGI, it is highly unlikely that you will ever deduct medical expenses again, unless you have exceptional circumstances. 

And there is how the government intends that people will settle up their ObamaCare if they qualify for a subsidy. Seems reasonable, as in I-haven’t-been-in-the-real-world-and-earned-a-real-paycheck-for-many-years-now and how-hard-can-it-be-to-build-a-website sort of way.

After all, what could possibly go wrong?