Tag Archives: planning

IRS Increases “Expensing” Amount To $2,500

December 3, 2015 | By: Robert A. Green, CPA

Click to read Green's blog post

Click to read Green’s blog post

In general, a business must capitalize property for purposes of depreciation. For smaller purchases, the IRS allows expensing under its Tangible Property Regulations, since it’s inconvenient to maintain depreciation records on small amounts. The IRS increased the de minimis expensing amount to $2,500 from $500. Although the IRS mentions this rule change is effective for 2016, IRS Notice 2015-82 & News Release IR 2015-133 point out it’s Ok to use for open tax years. That means it’s an excellent year-end tax strategy for 2015.

For example, if a business trader purchases a new workstation in December 2015 for $7,500, try to break down the purchase into separate items with each invoice being under $2,500. For example, purchase the computer separate from the monitors and other equipment. With all items on separate invoices under $2,500, the entire $7,500 can be a 2015 business expense without any capitalization for fixed assets and related depreciation. That leads to faster expensing, tax benefits and less compliance work.

“There is no specific requirement that it must be on separate invoices,” said Darren Neuschwander, CPA. “It can all be on one invoice, but it may draw more IRS attention and require more time to breakout. Separate invoices is good practical guidance to avoid this issue. Under the change, the new $2,500 threshold applies to any such item substantiated by an invoice.”

Learn more in our Dec. 3, 2015 Webinar recording: Year-End Tax Planning For Traders. Scroll to 42:07 to 48:35 in “Trader Tax Status.” It starts with “Great news about…“Expensing.”

 

Year-End Tax Planning For Traders (Recording)

November 5, 2015 | By: Robert A. Green, CPA

Join CPA members Robert A. Green, Darren Neuschwander and Adam Manning for this important Webinar event. Our CPAs are working with clients on 2015 year-end tax planning.

In this Webinar, learn how to:

  • Avoid wash sale losses.
  • Qualify for trader tax status benefits.
  • Accelerate or defer income.
  • Avoid tax hikes on upper-income taxpayers.
  • Take advantage of lower tax rates and brackets.
  • Maximize all types of deductions.
  • Maximize use of entities.
  • Maximize use of health insurance and retirement plans.
  • Avoid underestimated tax penalties.

We invite you to register and attend the live event at no charge and we plan to offer a complimentary recording.

Year-End Planning For Entities: Payroll, Retirement And Health Insurance (Recording)

November 4, 2015 | By: Robert A. Green, CPA

Join CPA members Robert A. Green, Darren Neuschwander and Adam Manning for this important Webinar event.

If you operate an S-Corp trading company or S-Corp or C-Corp management company, you need to execute officers’ compensation (payroll) before year-end if you want employee-benefit plan deductions. You also need to establish some retirement plans before year-end including a Solo 401(k) plan or a defined-benefit plan. The elective deferral portion of a Solo 401(k) must be funded and integrated with year-end payroll. (You can fund the profit sharing plan portion in 2016.) If you don’t act before year-end, you will lose these valuable tax benefits.

In this Webinar, learn how to:

  • Maximize and plan employee-benefit plan deductions including retirement plans and health insurance premiums.
  • Determine the appropriate amount of officers’ compensation.
  • Execute payroll in December when you have visibility on annual trading gains, losses and expenses.
  • Add officers’ health insurance premiums to officer W-2 taxable wages.
  • Select a payroll tax service provider. (We recommend Paychex.)

Examples Worksheet (PDF). (We revised the Defined Benefit Plan column after the Webinar.)

 

Common Tax-Planning Questions

October 30, 2015 | By: Robert A. Green, CPA

Here are the top questions we often ask our clients. Consider your answers and contact us to find out if there are specific tax moves you should make before year-end. Read our year-end tax planning series: Smart Tax Saving Moves For 2015Retirement Plan Strategies for 2015 and Tax Moves for Business Owners in 2015.

  1. Should you sell some losing investment positions to offset capital gains (tax loss selling) before year-end?
  2. Do you have a wash sale loss problem and can you fix all or part of it for 2015?
  3. Have you done whatever you can to use up capital loss carryovers?
  4. Have you maximized long-term capital gains rate benefits?
  5. Should you form a trading business entity to unlock employee-benefit plan deductions including health insurance premiums and a retirement plan?
  6. When is it too late to form an entity in 2015 and consider one instead for Jan. 1, 2016?
  7. How can you maximize employee-benefit plan deductions by year-end?
  8. If you have high income, is a defined benefit plan better than a defined contribution plan?
  9. Will you get good bang for the tax buck on purchasing new equipment before year-end?
  10. Do you qualify for trader tax status (business expense) in 2015 or will you qualify in 2016?
  11. Should you elect Section 475 MTM in your new entity within 75 days of inception?
  12. Is Section 988 ordinary treatment or Section 1256(g) capital gains treatment better for your forex trading through year-end?
  13. Is a Roth IRA conversion a good idea for you before year-end?
  14. Is an NOL carry back or carry forward better or should you soak up the NOL with a Roth IRA conversion in the current year?
  15. What tax brackets are in you in for 2015 and should you defer or accelerate income at year-end?
  16. Do you face an underestimated tax payment penalty and what can you do to avoid it?
  17. Are you avoiding tax hikes on upper-income taxpayers including Obamacare Net Investment Tax as best you can?

 

Tax Moves For Business Owners In 2015

October 28, 2015 | By: Robert A. Green, CPA

A cash method business can often accelerate or defer sales, billing and collection of revenue around year-end. If they sell their business or assets they can either use the installment method to defer capital gains, or elect out of that method to report the entire capital gain in the current tax year.

Businesses can accelerate or defer purchases of fixed assets and expenses around year-end as well. And, they have many options for how to depreciate and amortize fixed and intangible assets, respectively.

Accrual-method businesses can delay providing goods or services to customers until after Jan. 1. There are also special rules allowing accrual method taxpayers to deferring revenue received in advance of shipment of goods or services. Read about other smart moves for operating businesses on The Tax Advisor.

Keep an eye out on “tax extenders”on depreciation discussed in our blog post Smart Tax Savings Moves For 2015. Traders don’t often exceed old rules (which currently apply for 2015) allowing up to $25,000 of purchases for Section 179 (100%) depreciation whereas other types of businesses certainly do. The 50% bonus first-year depreciation deduction also lapsed but businesses can use the half-year conversion to similar effect.

If you expect debt cancelation and expect related debt-cancelation taxable income, it may pay to defer that taxable event to 2016.

Payroll and self-employment taxes
An operating business can use the S-Corp structure to reduce payroll taxes by 50% or more (subject to new guidance pending from the IRS). S-Corps don’t pass through self-employment income (SEI) triggering self-employment (SE) tax as partnerships and sole proprietorships do. Consider the SE tax reduction loophole for management companies and other types of business.

Traders use a S-Corp trading company (or C-Corp or S-Corp management company along with a trading partnership) to unlock employee-benefit plans including retirement and health insurance premium deductions. Sole proprietor traders can’t have these tax breaks. It’s hard to arrange them on trading partnership returns.

Both payroll and Solo 401(k) retirement plans must be executed or established before year-end. A SEP IRA can be established up until the due date of the tax return including extensions, although a Solo 401(k) is a much better plan for traders. Learn more in our blog post Retirement Plan Strategies For 2015.

Retirement Plan Strategies For 2015

| By: Robert A. Green, CPA

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Click to read Green’s post on Forbes

There’s still ample time in 2015 to rearrange the timing of your investments, trading, retirement and business affairs to improve your overall taxes for 2015 and surrounding years.  In this second blog post of our year-end tax planning series I focus on retirement plans.

Retirement plans for traders can be used several ways. You can trade in the retirement plan, build it up with annual tax-deductible contributions, borrow money from it to start a trading business and convert it to a Roth IRA for permanent tax-free build-up. Whatever the use, traders often need help through these important planning opportunities. There are plenty of pitfalls to avoid like early withdrawals subject to ordinary income tax rates and 10% excise tax penalties, and penalties on prohibited transactions.

Tax-advantaged growth
Many Americans invest in the stock market through their 401(k), IRA or other types of traditional retirement plan. Capital gains and losses are absorbed within the traditional retirement plans with zero tax effect on current year tax returns. Only withdrawals (or distributions) generate taxable income at ordinary tax rates. The retirement plan does not benefit from lower long-term capital gains rates. Traditional retirement plans aren’t disenfranchised from deducting capital losses, since a reduction of retirement plan amounts due to losses will eventually reduce taxable distributions accordingly.

Defined contribution plan vs. defined benefit plan
Most private companies switched to defined contribution plans, whereas public-sector unions still use richer defined benefit plans. In a defined contribution plan, the contribution is defined as a percentage of compensation, whereas in a defined benefit plan, the retirement benefit itself is defined.

If you own and operate a small business, consider a Solo 401(k) defined contribution plan. It combines a 100% deductible “elective deferral” contribution ($18,000 for 2015) with a 25% deductible profit-sharing plan contribution on an employer-level plan. There is also a “catch up provision” ($6,000 for 2015) for taxpayers age 50 and over. Together, the maximum tax-deductible contribution is $53,000 per year and $59,000 including the catch up provision (based on 2015 and 2016 IRS limits).

Consistently high-income business owners, including trading businesses with owner/employees close to age 50, should consider a defined-benefit retirement savings plan (DBP) for significantly higher income tax and payroll tax savings vs. a defined-contribution retirement savings plan (DCP) like a Solo 401(k). Read our blog post Defined-benefit plans offer huge tax breaks.

Get started before year-end
Contact your tax advisor in early November as these plans take time to consider, establish and fund. Several large online brokers offer Solo 401(k) plans, otherwise known as Individual 401(k)s. Paychex, our recommended service provider for payroll tax compliance, also offers the Solo 401(k) product and integrates it with payroll tax compliance. The Paychex Solo 401(k) product contains the plan loan feature, whereas I only know of one large broker that also offers a plan loan feature (TD Ameritrade). Direct-access trading is allowed with all these options. (Paychex has a team dedicated to GreenTraderTax clients – brochure.)

Only a few top brokers offer a defined benefit plan product.

Solo 401(k) defined contribution plans and defined benefit plans must be established before year-end, so get started by early December. IRAs can be established and funded after year-end by April 15. A SEP IRA can be established and funded by the due date of the tax return including extensions, so if you miss the Solo 401(k) deadline, that could be a last resort option.

A Solo 401(k) is better for most traders in most situations than a SEP IRA, because it has a 100% deductible elective deferral in addition to profit sharing plan and the SEP IRA only has the profit sharing plan. In a Solo 401(k), it takes a lower amount of wages to maximize the higher contribution amount versus a SEP IRA. Because traders are in control of the compensation amount they can achieve a higher income tax benefit versus a lower payroll tax cost with a Solo 401(k).

Contributions to IRAs
Traditional and Roth IRAs allow a small annual contribution if you have earned income: $5,500 per person if under age 50 and $6,500 if 50 and older (2015 and 2016 limits). If you (and your spouse) are not active in an employer-sponsored retirement plan, or if either of you are active but your modified adjusted gross income (AGI) doesn’t exceed certain income limits, you may contribute to a traditional tax-deductible IRA.

Non-deductible IRA. If you have earned income, you should also consider making a non-deductible IRA contribution, which doesn’t have income limits. The growth is still tax deferred and you are not taxed on the return of the non-deductible contributions in retirement distributions. The general rule applies: If you deduct the contribution, the return of it is taxable, but if you don’t deduct the contribution, the return of it is non-taxable. Income growth within the plan is always taxed unless it’s inside a Roth IRA.

Contributions require SEI or wages
Many traders are interested in making tax-deductible contributions to retirement plans for immediate income tax savings in excess of payroll tax costs and to actively trade those accounts with tax deferral and growth until retirement. But, there is an obstacle: Trading gains and portfolio income are not self-employment income (SEI) or compensation, either of which is required for making contributions to a traditional or Roth retirement plan. (The exception to this is futures traders who are full-fledged dealer/members of options or futures exchanges; their individual futures gains are considered SEI.) You can overcome this obstacle with a trading business entity — S-Corp trading company or C-Corp management company — paying compensation to the owner/trader. This strategy does not work for investment companies, though.

Early withdrawals vs. a qualified plan loan
If you need to withdraw money from a traditional retirement plan before retirement age 59 ½ for IRAs and age 55 for a 401(k), in addition to the distribution being taxable income, you’ll probably owe a 10% excise tax penalty subject to a few limited exceptions (Form 5329). In lieu of an early withdrawal, consider a loan from a qualified plan like a Solo 401(k). IRAs are not qualified plans and loans would be a prohibited transaction blowing up the IRA, making it all taxable income. You can borrow up to the lower of $50,000 or 50% of plan assets, and you must repay the loan with market interest over no longer than five years and a quarterly basis.

Required minimum distributions
Per Thomson Reuters, “Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retired plan) if you have reached age 70½. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. If you turned age 70½ in 2015, you can delay the first required distribution to 2016, but if you do, you will have to take a double distribution in 2016 — the amount required for 2015 plus the amount required for 2016. Think twice before delaying 2015 distributions to 2016 — bunching income into 2016 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2016 if you will be in a substantially lower bracket that year.”

Roth retirement plans and conversions
A Roth retirement plan is different from a traditional retirement plan. The Roth plan has permanent tax savings on growth, whereas the traditional retirement plan only has deferral with taxes owed on distributions in retirement. Distributions from a Roth plan are tax-free unless you take an early withdrawal that exceeds your non-deductible contributions to the plan over the years (keep track well).

Consider annual contributions to a Roth IRA. The rules are similar to traditional IRA contributions. Also, consider a Roth IRA conversion before year-end 2015 to maximize use of lower tax brackets, offset business losses and fully utilize itemized deductions.

Here’s an example: Assume a trader left his job at the end of 2014 and incurred trading losses in 2015 with trader tax status and Section 475 MTM ordinary loss treatment as a sole proprietor. Rather than carry back an NOL that could draw IRS attention, or carry forward the NOL to subsequent years when income isn’t projected, this trader rolls over $300,000 from his prior employer 401(k) to a Rollover IRA and enacts a Roth IRA conversion for $300,000 before year-end. He winds up paying some taxes within the 15% ordinary tax-rate bracket. If the trader skipped a Roth conversion, he would lose tax benefits on his itemized deductions including real estate taxes, mortgage interest, charity, and miscellaneous itemized deductions. This trader’s Roth account grows in 2016 and he chooses to skip a recharacterization. (If a recently converted Roth account drops significantly in value in the following year, a taxpayer may reverse the Roth conversion with a “recharacterization” by the due date of the tax return including extensions (Oct. 15).

Also, after recent market corrections in indexes and many individual stocks, consider a Roth conversion at lower amounts to benefit from a potential recovery in markets inside the Roth IRA where that new growth is permanently tax-free. Converting at market bottoms is better than market tops.

DOs and DON’Ts of using IRAs and other plans
Learn the DOs and DON’Ts of using IRAs and other retirement plans in trading activities and alternative investments (read our blog post). Many traders may be triggering IRS excise-tax penalties for prohibited transactions including self-dealing and/or UBIT (unrelated business income tax) by using their IRAs and other retirement funds to finance their trading activities and alternative investments. Spot these problematic schemes early, like the IRA-owned LLC. Avoid “blowing up” your IRA, which means it becomes taxable income; plus there are severe penalties.

When it comes to retirement plans and tax savings, it’s wise to do tax planning well before year-end to maximize your available options. The door closes on many at year-end.

Traders Expo NYC: Trader Tax Law Update

January 22, 2015 | By: Robert A. Green, CPA

David GrandeyJoin me at The Traders Expo New York, February 28–March 2,
to learn the latest strategies for trading stocks, ETFs, commodities, futures & forex, watch pros explain live trades, test drive cutting-edge products, and receive exclusive discounts & prize giveaways! Please see my speaking schedule below and register free now.

Trader Tax Law Update: Current Developments, Obamacare Taxes, Trader Tax Status, Key Tax Elections, Entities, and Retirement Plans
March 1, 8:00 am – 9:00 am EST

This presentation will cover:

  • Current developments including tax reform, tax changes, and court cases.
  • Obamacare taxes: individual health insurance mandate (tax penalties, exemptions, premium tax credits, and claw backs of subsidies) and the net investment income tax on upper-income taxpayers.
  • How to save thousands with trader tax status (business treatment) and discover key trader tax strategies and tax elections. Investors have important elections to make, too.
  • Tips for preparing a trader tax return for 2014 with maximum tax benefits.
  • The key tax treatment differences between securities, Section 1256 contracts (futures, all types of options, ETFs, forex, precious metals, and more).
  • The best types of entities and retirement plans for traders.

There is no recording of this live event. 

6 Items For Your Year-End Tax Shopping List

December 9, 2014 | By: Robert A. Green, CPA

Join Green NFH CPAs and year-end tax planning experts Robert A. Green and Adam Manning in this Webinar.

Getting through your holiday “to-do” list is important for enjoying the holidays. The list may be long, but if you want gifts from Uncle Sam-ta, here are 6 items to add. Just be sure to execute them before year-end.

1. Make portfolio and business transactions for significant tax advantages.
2. Don’t get caught paying taxes on phantom income.
3. You’ve set up your entity, but unless you execute compensation and employer 401(k) plans before year-end, its tax deductions will go down the drain.
4. Don’t miss the boat on 2015; set up your trading business and entity for Jan. 2.
5. Don’t get slapped with an underestimated tax payment penalty.
6. The clock is ticking on RMDs, charitable contributions, gifts and FSAs.

As background material for our Webinar, read our short blog “6 items for your year-end tax shopping list.”

6 Items For Your Year-End Tax Shopping List

| By: Robert A. Green, CPA

Don’t let valuable tax deductions go down the drain. Attend our Dec. 11 webinar (or watch the recording) to discuss this content.

By Robert A. Green

Getting through your holiday “to-do” list — sending cards, gift buying, wrapping presents and baking cookies — is important for enjoying the holidays. The list may be long, but if you want gifts from Uncle Sam-ta, here are 6 items to add to it. Just be sure to execute them before year-end.

1. Make portfolio and business transactions for significant tax advantages.
Consider year-end transactions like selling winning or losing investment portfolio or business positions, invoicing clients and purchasing business items. If you are in the top tax bracket, defer income and accelerate expenses to reduce Obama-era tax hikes on income and net investment taxes (the combined federal tax rate is 44%). If you’re in lower tax brackets, accelerate income and defer expenses to utilize potentially wasted itemized deductions and take advantage of lower marginal tax brackets. A Roth IRA conversion is great for soaking up lower tax rates.  Learn more in our year-end tax planning blog and webinar.

2. Don’t get caught paying taxes on phantom income.  (Ouch! That would hurt.)
If you take a loss on a security toward year-end and buy back a substantially identical position in any of your taxable and/or IRA accounts within 30 days before or after, it’s considered a wash sale loss deferral (and permanently lost with an IRA). Break the chain on wash sales by not buying the position back in 30 days and get credit for the full tax loss in 2014.  Business traders should consider a Section 475 MTM election in 2015 to convert year-end wash sale losses on trading positions into business ordinary losses on Jan. 1. Turn garbage into gold!

3. You’ve set up your entity, but unless you execute compensation and employer 401(k) plans before year-end, its employee-benefit plan tax deductions will go down the drain.
Watch our video about how to use Paychex. It takes up to two weeks to sign up and execute compensation and an employer 401(k) plan, so get going today. If you want to save thousands of dollars with retirement plan and health insurance tax deductions (employee-benefit plans) for 2014, you must act on time. Plan to pay the 401(k) elective deferral portion by year-end. You can wait to fund the 25% profit-sharing plan through the due date of your 2014 tax return (including extension).

4. Don’t miss the boat on 2015; set up your trading business and entity for Jan. 2.
If you’ve been waiting to set up your trading business entity, starting on Jan. 2, 2015 is more convenient and beneficial. It breaks the chain on wash sales with your individual taxable and IRA accounts at year-end, since the entity is a different taxpayer identification number. 2015 tax compliance is easier and lower in cost, since you’ll report the entire year’s trading business activity on the entity return and skip individual tax compliance for part of the year in connection with trading activities.

It’s a little tricky to time the entity formation to a Jan. 2 start date. We can form a single-member LLC disregarded entity in December so you can execute the legal paper work and open the bank and trading accounts before year-end. We’ll add your spouse and or file the S-Corp election effective Jan. 1, 2015. As a disregarded entity in 2014, the SMLLC doesn’t force a partnership or S-Corp tax filing for 2014, even for a simple inactive entity tax return. However, in some states like California, we should wait until Jan. 2 to form the LLC, since that state charges a $800 minimum tax on LLCs even for just a few days in 2014. Consider our entity formation service.

5. Don’t get slapped with an underestimated tax payment penalty.
Get caught up with your 2014 estimated income taxes. Many traders underpay estimated taxes during the year, viewing the underestimated tax penalty as a low-cost margin loan. Why prepay taxes when you aren’t sure how the year will wind up? The Q4 estimate is due Jan. 15, 2015, so you can see where you stand at year-end first. Consider paying the state before year-end for another 2014 tax deduction, unless you trigger AMT and don’t get that benefit (state taxes are an AMT preference item).

6. The clock is ticking on RMDs, charitable contributions, gifts and FSAs.
Do your required minimum distributions (RMDs) from retirement plans, including Inheritor IRAs, and charitable contributions and gifts before year-end.  If you have a flexible spending account (FSA) with an employer, you must “use it or lose it” before year-end.

Contact us ASAP: We are standing by to help our clients with these transactions.

Happy holidays from all of us at Green NFH, LLC.

Adam Manning contributed to this blog.

 

Obamacare Ushers In Several New Tax Forms For 2014

October 30, 2014 | By: Robert A. Green, CPA

The Patient Protection and Affordable Care Act (also known as Obamacare) enacted in 2012 has taken several years to implement and phase in. But now that the Obamacare 2014 individual health insurance mandate is in effect, many taxpayers will face confusion over tax penalties, exemptions, premium tax credits, claw backs of subsidies (advanced credits) and extra tax-preparation fees to comply with Obamacare on 2014 tax filings. In this post, I help clarify the details of the mandate.

There are three scenarios for dealing with the mandate on 2014 tax returns:

1.  Off-exchange coverage: If you had ACA-compliant health insurance coverage for all of 2014 — either an individual plan purchased directly from an insurance company (off exchange), an employer plan or government-sponsored programs like Medicare or Medicaid — there’s little to do. You may receive a new IRS Form 1095-B reporting your health insurance coverage from an insurance company and, if applicable, a Form 1095-C from your employer. Both of these tax forms are not mandatory for 2014. Give the 1095s to your accountant and you’re finished. There won’t be any penalties, premium tax credits or return of exchange subsidies.

2.  On-exchange coverage: If you purchased your 2014 health insurance on an exchange (marketplace), you will receive a mandatory Form 1095-A from the marketplace and you must file new tax Form 8962 (Premium Tax Credit).  When you applied for your 2014 health insurance coverage, you submitted estimates of your 2014 income which the exchange relied on for pricing your plan, perhaps offering a subsidized plan with “advanced credits.” The purpose of Form 8962 is to determine your rightful premium tax credit based on income reported on your 2014 tax return and to reconcile advanced credits (if any) with the premium tax credit calculated on Form 8962. Estimates probably won’t match actual income, especially for traders who have fluctuations in trading gains and losses.Therefore, one of three things will happen on Form 8962:

i.   You will have a tax liability caused by advanced credits being greater than the premium tax credit.

ii.  You will have a tax credit caused by advanced credits being less than the premium tax credit.

iii. No tax liability or credit because you used an exchange but did not receive an advanced credit and there is no premium tax credit.

The Obamacare Website says individuals can use an exchange even without getting a subsidized plan, but we heard from taxpayers that they were not permitted to use some state exchanges unless they qualified for subsidies. Some individuals say they received a better quote off exchange compared to on exchange without subsidies. Expect to receive new tax information document IRS Form 1095-A from the exchange reporting your coverage and any advanced credits paid for a subsidized plan. Give the 1095s to your accountant and he or she will prepare Form 8962. Tax software should have an input area to enter Form 1095 information and calculate Form 8962 and the premium tax credit.

3. No health insurance coverage: If you did not have ACA-compliant health insurance coverage for 2014 — and that includes large gaps in coverage — and you don’t qualify for an exemption from Obamacare, then you will owe a shared-responsibility payment (tax penalty). Apply to an exchange to receive a Form 8965 exemption for certain types of exemptions, and for others types of exemption claim them on a self-prepared Form 8965. As of Oct. 29, the IRS had not yet released a draft tax form for calculating the shared responsibility payment.

The shared responsibility payment is whichever amount is larger of the following: For 2014, the payment is either $95 per adult and $47.50 per child (up to $285 for a family) or 1% of household income. For 2015, it’s either $325 per adult and $162.50 per child (up to $975 for a family) or 2% of household income. For 2016, it’s either $695 per adult and $347.50 per child (up to $2,085 for a family) or 2.5% of household income. Per the IRS Website, “the individual shared responsibility payment is capped at the cost of the national average premium for the bronze level health plan available through the Marketplace in 2014.” As has been widely publicized, the shared responsibility payment is not enforceable by the IRS. That means the IRS will offset the payment against tax refunds due, but it can’t file liens, levy assets or start collection proceedings for this payment. The IRS may fully enforce claw-backs of advanced credits (subsidies) reported on Form 8962.

The 2014 Form 1040 has three lines dealing with the Obamacare health insurance mandate:

  1. Tax (line 46): Excess advance premium tax credit repayment. Attach Form 8962.
  2. Payment (line 69): Net premium tax credit. Attach Form 8962.
  3. Other Taxes (line 61): Health care: individual responsibility (see instructions). Full-year coverage (box to check).

Open enrollment through exchanges for 2015 coverage
Traders should consider special strategies for purchasing 2015 health insurance coverage through exchanges. The open enrollment period runs from Nov. 15, 2014 to Feb. 15, 2015. Most individuals will purchase 2015 insurance before they deal with Obamacare tax compliance on 2014 tax returns.

If you want to receive a premium tax credit on Form 8962, you need to enroll through an exchange, not directly with an insurance provider or employer. You can’t receive premium tax credit if you are eligible for other “minimum essential coverage,” such as employer-sponsored coverage that’s considered adequate and affordable. Traders should use a reasonable basis for providing the exchange with an estimate of household income perhaps qualifying for a subsidized plan with advanced credits. Some exchanges ask for monthly household income for either 2014 or 2015. Remember, you will have to square up with the IRS on a 2015 Form 8962 but at least you’re in the game for filing a Form 8962 and receiving a premium tax credit. Many traders may have low income in 2015 and they should keep this opportunity open. High-income sole proprietors have confidence they won’t get a premium tax credit and they can skip the exchange all together if working directly with an insurance provider is more convenient.

The exchange system is inconvenient for traders who have fluctuating income
Most individuals consider ACA-compliant non-subsidized health insurance plans expensive. If your household income is above 400% of the Federal Poverty Line, you or your family won’t qualify for a subsidized plan on the exchange. You may even face obstacles in using an exchange. No worries, you can purchase an individual or employer ACA-compliant health insurance plan directly through an insurance company. Just keep in mind that rules out the possibility of getting a premium tax credit if you wind up with household income under 400% of the Federal Poverty Line since the insurance must be purchased through an exchange to qualify for the credit.

Many traders have wide fluctuations in trading gains and losses from year-to-year. They could easily fall under 400% of the Federal Poverty Line in 2014 and qualify for an exchange-subsidized plan for the year of 2015. But these traders may wind up with large trading gains in 2015, thereby triggering an “excess advance premium tax credit repayment” (claw back of subsidies) on their 2015 Form 8962. The big problem is the exchange requires an estimate of income before the coverage year starts, and traders don’t know their income until the year ends. Tip: Traders can use an exchange but decline the subsidies up front and file for a premium tax credit if their income is under 400% of the federal poverty line.

There are five new Obamacare tax forms for 2014

1.  Form 1095-A: Health Insurance Marketplace Statement. The exchange issues this form to individuals who purchased insurance through an exchange for 2014. (Similar to a bank or broker that issues a tax information Form 1099.) Its instructions state: “You received this Form 1095-A because you or a family member enrolled in health insurance coverage through the Health Insurance Marketplace. This Form 1095-A provides information you need to complete Form 8962, Premium Tax Credit (PTC). You must complete Form 8962 and file it with your tax return if you want to claim the premium tax credit or if you received premium assistance through advance credit payments (whether or not you otherwise are required to file a tax return). The Marketplace has also reported this information to the IRS. If you or your family members enrolled at the Marketplace in more than one qualified health plan policy, you will receive a Form 1095-A for each policy.”  If the Form 1095-A does not list any advanced credits and you are confident your income will be well above 400% of the Federal Poverty Line, you don’t have to prepare Form 8962.  Some taxpayers may easily generate the form with their tax software and choose to attach it with their return just in case IRS computers look for it.

2.  Form 1095-B: Health Coverage. The insurance provider issues this form to individuals, although it’s not mandatory for 2014. Its instructions state: “This Form 1095-B provides information needed to report on your income tax return that you, your spouse and individuals you claim as dependents had qualifying health coverage (referred to as “minimum essential coverage”) for some or all months during the year. Individuals who do not have minimum essential coverage and do not qualify for an exemption may be liable for the individual shared responsibility payment. Minimum essential coverage includes government-sponsored programs, eligible employer-sponsored plans, individual market plans and miscellaneous coverage designated by the Department of Health and Human Services. For more information on minimum essential coverage, see Pub. 974, Premium Tax Credit (PTC).”

3. Form 1095-C: Employer-Provided Health Insurance Offer and Coverage. The employer issues this form to individuals, although it’s not mandatory for 2014. Its instructions state: “This Form 1095-C includes information about the health coverage offered to you by your employer. Form 1095-C, Part II, includes information about the coverage, if any, your employer offered to you and your spouse and dependent(s). If you purchased health insurance coverage through the Health Insurance Marketplace and wish to claim the premium tax credit, this information will assist you in determining whether you are eligible. For more information about the premium tax credit, see Pub. 974, Premium Tax Credit (PTC).” Some people used an exchange to receive subsidies even though their employer offered them a good health insurance plan as reported on Form 1095-C, so these individuals should be prepared for a claw back of subsidies on Form 8962.

4. Form 8962: Premium Tax Credit.  This tax form is prepared by taxpayers and/or their tax preparers. Its instructions state: “Complete Form 8962 only for health insurance coverage in a qualified health plan (described later) purchased through a Health Insurance Marketplace (also known as an exchange). This includes a qualified health plan purchased on www.healthcare.gov.” Caution: An “excess advance premium tax credit repayment” increases estimated income taxes due, whereas a “net premium tax credit” (payment) does not reduce estimated taxes due since payments are listed below tax liability. (That’s inconsistent and unfair in our view.)

The Federal Poverty Line and household income
Exchange subsidies and the Form 8962 premium tax credit are granted to individuals and families with household incomes between 100% and 400% of the “Federal Poverty Line.” Household income is also used for calculating the Obamacare shared responsibility payment for not having minimum essential coverage or an exemption from coverage (Form 8965). Household income is basically taxpayer’s adjusted gross income reported on the tax return plus: Social Security payments excluded from AGI, tax-exempt income (i.e. municipal bond interest), and Form 2555 exclusions for U.S. residents abroad (foreign earned income and housing allowance). Household income also includes the income of any dependents covered on the family insurance plan.

Tax planning tip: Try to defer income and accelerate losses and expenses for household income so you don’t go just a few dollars over 400% of the federal poverty line, as that would require a 100% claw-back of exchange subsidies on Form 8962.

An Obamacare website https://www.healthcare.gov/income-and-household-information/income/ confirms household income includes “Social Security payments, including disability payments — but not Supplemental Security Income (SSI).” According to Form 8962 instructions, social security benefits otherwise not subject to income tax are “added back” since you start with modified AGI rather than just AGI. Eighty-five percent of Social Security payments are included in AGI if the taxpayer exceeds the Social Security AGI threshold of $44,000 for married filing joint ($34,000 for all other taxpayers). Taxpayers under those thresholds exclude 100% of Social Security payments from AGI. Including all social security payments in household income pushes many seniors above the Federal Poverty Line and prevents them from getting a premium tax credit, but most seniors don’t use the exchange because they are covered under Medicare.

For a full description of household income, see Form 8962 instructions.

Federal Poverty Line Chart
(based on Form 8962 instructions; these numbers are slightly different for Hawaii and Alaska residents)

Family 100% of
Federal Poverty
400% of Federal
Size Line Poverty Line
1            11,490             45,960
2            15,510             62,040
3            19,530             78,120
4            23,550             94,200
5            27,570           110,280
6            31,590           126,360
7            35,610           142,440
8            39,630           158,520

5.  Form 8965: Health Coverage Exemptions and instructions. A state or federal exchange needs to issue Form 8965 for certain types of exemptions (like religious), and for other types of exemptions (such as a short coverage gap) the taxpayer may self-prepare the Form 8965. (Be diligent to apply to the appropriate exchange on time — exchanges won’t contact you first.) Taxpayers without a Form 8965 exemption or minimum essential coverage are subject to a shared responsibility payment (see above). For one-page summaries of the exemptions available, see http://www.irs.gov/uac/ACA-Individual-Shared-Responsibility-Provision-Exemptions or IRS Publication 5172 – Facts about Health Coverage Exemptions.

According to Obamacare Mandate: Exemption and Tax Penalty, “The mandate’s exemptions cover a variety of people, including: members of certain religious groups and Native American tribes; undocumented immigrants (who are not eligible for health insurance subsidies under the law); incarcerated individuals; people whose incomes are so low they don’t have to file taxes (currently $9,500 for individuals and $19,000 for married couples); and people for whom health insurance is considered unaffordable (where insurance premiums after employer contributions and federal subsidies exceed 8% of family/household income); and those going without insurance for less than three months in a row … Hardship Exemption Update: If you had your plan canceled in 2014 due to the Affordable Care Act you now qualify for a hardship exemption in 2014. That means you won’t have to pay the shared responsibility payment if you decide to go without insurance and will qualify for low premium, high out-of-pocket catastrophic plans on your state’s health insurance marketplace.” U.S. residents abroad who qualify for Section 911 (foreign earned income exclusion) are deemed to have minimum essential coverage whether they do or not. That means they don’t apply for a Form 8965.

Obamacare is progressive taxation
Obamacare is the epitome of progressive taxation and transfer payments using fiscal policy. Upper-income taxpayers pay more to subsidize lower-income folks, and middle-class taxpayers pay their fair share of more expensive coverage that can’t rider out pre-existing conditions. Like many new major social programs enacted before it, some Obamacare tax hikes started on upper-income taxpayers before the new benefits were even provided, including Obamacare Net Investment Income Tax, which started in 2013 even though Obamacare benefits didn’t start until 2014. (Read more about Net Investment Income Tax reported on Form 8960.)

Open question: Are federal exchange subsidies legal?
One court ruled that federal exchange subsidies are illegal and another court overruled it. The Supreme Court agreed to hear the case (WSJ Nov. 7). Obamacare law authorizes subsidies “through an exchange established by the state,” it does not mention a federal exchange. Obamacare law contemplated that all states would have a state exchange but many states balked and chose to participate in HealthCare.gov, the federal exchange just as some also balked at Obamacare’s Medicaid expansion. Did Obamacare purposely provide an incentive to states to create their own exchange, or was leaving out subsidies for the federal exchange an inadvertent oversight? (Read more: http://www.cnbc.com/id/102137279 and http://www.cnbc.com/id/102147639.)

Two Helpful IRS Fact Sheets on ACA
Per Thompson Reuters on Nov. 10 “Affordable Care Act Provisions Impacting Individuals and Employers: Two new IRS fact sheets provide details on key provisions of the ACA. The IRS notes the most important ACA tax provision for individuals and families is the premium tax credit and individuals without coverage and those who don’t maintain coverage throughout the year must have an exemption or make an individual shared responsibility payment. These provisions will affect 2014 income tax returns filed in 2015. For employers, the workforce size is significant because that’s what determines the applicable ACA provisions. Generally different rules apply to employers with fewer than 50 employees. IRS Fact Sheets FS-2014-09 and FS-2014-10 are available at http://www.irs.gov/uac/Newsroom/Fact-Sheets-2014.”

The employer mandate was delayed
Individuals have felt the brunt of Obamacare compliance over the individual mandate. President Obama issued an executive order to delay the employer mandate. But that delay is ending soon. See CNBC Nov. 11 Obamacare Cadillac plans? You’re gonna pay for that….

More changes
Prior to Obamacare, S-Corps could reimburse employees for health insurance on a tax-free basis by not including health insurance reimbursements in employee taxable wages. But starting in 2014, S-Corps must include the health insurance reimbursements in taxable wages for income, FICA and Medicare taxes. Don’t skip over making this change as the Obamacare law includes a fine of $100 per employee, per day. An employer group health insurance plan still delivers tax-free benefits to employees. (Postscript 2/18/15: The IRS issued relief for the above draconian penalty. Read more.)

Bottom line
Consult with your tax adviser to discuss how Obamacare taxes will affect your 2014 tax return and how it may be best for you to obtain coverage for 2015.  There’s still plenty of confusion and new surprises will arise, so stay tuned for updates on our blog.

Postscript Nov. 24, 2014: The IRS published new guidance on ACA’s individual mandate, hardship exemption, and premium tax credit. Notice 2014-76Rev Proc 2014-62 and final regs for Section 5000A on the individual mandate. Notice 2014-76 “Individual Shared Responsibility Payment Hardship Exemptions that May Be Claimed on a Federal Income Tax Return Without Obtaining a Hardship Exemption Certification from the Marketplace.” Rev Proc 2014-62 “This table is used to calculate an individual’s premium tax credit.” The Rev Proc “announces the indexed applicable percentage table in Code Sec. 36B(b)(3)(A), which is used to calculate an individual’s premium tax credit for tax years beginning after calendar year 2015.”

Darren Neuschwander, CPA and Star Johnson, CPA contributed to this article.