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18 posts from March 2015

03/16/2015

Obamacare Court Battle

Now that arguments have been made before U.S. Supreme Court justices in the battle over the legality of Obamacare-related public subsidies (King v Burwell), predictions about the impact of their decision are taking shape. The nation’s highest court is requested to determine whether federal subsidies to help pay for health care coverage can be legally issued in the 36 states that did not form exchanges offering health insurance.

ACA Graphic Stethoscope on FlagThe Court’s decision is expected in late June.  If it rules in favor of the federal government’s Affordable Care Act mandates, it will become more entrenched into law and states will be required to take action to set up state exchanges.  If the court rules in favor of the plaintiffs, the law’s operating foundation for keeping insurance affordable may be negated, thereby basically shutting down the national health care insurance program.

Currently, government numbers show 7 million people have requested the subsidies in order to pay for part or all of their health insurance premiums. Without the subsidies, many in this group may be forced to opt out of buying health insurance altogether and will claim the “hardship exemption".  They would, in effect, be returning to the same status they had (no health insurance coverage) before the Affordable Care Act was available.

The more people who use the hardship exemption, the weaker the participation rate; resulting in higher premium costs for those who are insured via the exchanges.  Insurance companies say because they must offer insurance to everyone, that scenario may mean predominantly sick people will buy health insurance on the exchanges, causing everyone’s rates to rise.  Higher rates may cause more people to drop out of the exchanges and so on.

For the 36 states that have not set up their own exchanges, a ruling for the government means they will have to create exchanges in order for their residents to receive federal subsidies. Many states already tried to create the exchanges when the ACA was first enacted, but were plagued by operational and technological problems as well as funding needs they considered unsustainable.

Officials on both sides of the issue predict it would be several years before the exchanges could be operational, leaving a long-term coverage gap and causing more rate hikes that could challenge the ACA’s viability nationally.

The actual cost to individuals of the Affordable Care Act is constantly adjusting as many Americans are signing up through those exchanges that do exist in their states because of deadline pressures as shown in a recent analysis by Forbes business magazine.

Congressional action remains stalled with Democrats wanting to strengthen some mandates of the law while some Republicans are fighting to repeal or defund it and implement an as-yet-to-be-detailed alternative system.  Either way, the decision this June will have historical significance.

Meanwhile, regarding this tax season and your 2014 individual income tax returns, the law requires you and everyone reported on your return to confirm you have health care coverage or qualify for an exemption.  Otherwise, the IRS will collect a “payment” from you (which most regard as a tax) as mandated by the Individual Shared Responsibility Provision.

If you have any questions about how the Affordable Care Act is affecting you or your business, please contact us at McRuer CPAs online or call us at 816.741.7882 and one of our tax experts can help you.

03/13/2015

IRS Cuts Affect Tax Refunds and Audits

As we file 2014 individual tax returns and pay federal income taxes, it’s hard to imagine the IRS having on-going budget troubles. Yet, IRS Commissioner John Koskinen is requesting an additional $2 billion to keep up with service requests, timely refunds and enforcement actions such as tax audits on individuals and businesses.

1040 form with glasses and penniesIn a previous edition of The ReSource, we have given details of the delays and complaints associated with the decline in IRS customer service responses as the IRS has cut its staff and switched to more automated systems.  Now, political payback is cutting deep as the agency faces ongoing heat for mixing politics with taxes due to allegations of targeting conservative groups and paying for expensive “training” retreats.

Last month, Congress approved a $10.9 billion budget for the IRS for fiscal year 2015, which ends in June.  It is the lowest level of funding for the embattled agency since 2008 with total budget amounts declining $1.2 Billion in the last 5 years. 

Whether a taxpayer thinks there should be more or less of the IRS, the budget push-me-pull-you debate is affecting the taxpayer’s experience in a number of ways.  Commissioner Koskinen describes it as “changes” in how the IRS will do business with taxpayers this tax season.

Here are some of the issues that may impact you directly:

Refund Delays:  Nearly 8 out of 10 tax filers receive a federal tax refund. The average amount paid is close to $2,800, according to the most recent filing statistics.  Refunds from electronically filed returns are usually processed in about 3 weeks, but the IRS warns staff cutbacks have increased processing time up to an average of 5 weeks. Taxpayers who file paper returns are now being told their refund check might not be processed for 7 weeks.

Audit Declines:  The number of audits in 2014 declined 6% overall from the previous year while experts cannot agree on what the audit numbers will be in 2015.  The audit predictions range from roughly 1% to 6% of total individual and business tax returns. 

Some taxpayers may be relieved that the risk of being audited has decreased slightly, but the conclusions are based on the percent of audits compared to the number of tax returns filed.  More fraudulent tax returns are being filed each year due to tax-related identity theft.  Fewer audits may mean it will be more difficult to detect this kind of tax fraud just as new enforcement agencies are gaining steam.

Audit Hassles: Even though last year’s audit numbers report a decline, taxpayers complain they are receiving more correspondence audits, which are computer-generated letters triggered by an automated tax form-matching program.  The correspondence letters request timely answers, but there are mounting frustrations due to the inability to connect with a “live” IRS auditor.

Hiring Freeze:  IRS officials say budget cutbacks and the resulting hiring freeze will result in nearly 4,000 fewer full-time employees at the agency by the end of June.  When those numbers are added to the headcount losses in the last 6 years, the IRS has lost nearly 17,000 full-time workers.

Less Taxpayer Help:  Officials’ statements warn that fewer than half the taxpayers that call the agency for help will be able to get through to an actual person.

Technology Timing:  Updates that were in line for streamlining IRS internal and processing systems are being delayed to avoid taking up staff time for training and testing the new systems.  Among the updates included the latest taxpayer protection tools against identity theft.

Possible Shutdown:  Commissioner Koskinen says the agency may implement a money-saving temporary shutdown as a last resort.  To minimize disruptions, he says the agency may close for two days after the main tax-filing season, possibly in May or June.

The best taxpayer defense is to make certain your federal income tax return and necessary documentation is mistake-free to avoid audits and delays. 

If you have questions about how the IRS cuts may affect your federal income tax filing, contact us at McRuer CPAs for more information.

03/10/2015

Choosing Direct Deposit for Tax Refunds

There are several good reasons to choose direct deposit as a way to receive your tax refund from the IRS.

First of all, it’s faster and more convenient.  Using digital resources to file electronically and selecting an electronic way to receive your refund can cut 2 to 3 weeks off the time of processing and delivering your refund check.

Bigstock-Tax-Refund-41648152With direct deposit, there is less worry about when a check will arrive, when you’ll have time to deposit it and how long it will take to clear through your bank’s approval process in order for you to use the money.  You also won’t have to be concerned about the possibility of your check being stolen or “lost” in the mail.

It is relatively easy to file for direct deposit of your refund.  The only issue some taxpayers face is entering the correct bank account and routing number on the request form.  So, when filling out the direct deposit authorization form, check those numbers carefully.

Another helpful option associated with direct deposit is you will be able to split the deposit of your tax refund into several financial accounts.  It does require filling out another form, FORM 8888 Allocation of Refund, to provide more account details.  You may split your electronic tax refund between checking, savings and certain retirement, health and education accounts.  You are limited to using up to three of your and/or your spouse’s personal accounts (if filing jointly).

Some banks require the names of both spouses to be on the selected bank account(s) IF the tax refund is from a joint return.  So, you may want to contact your banker to confirm those details.  You may not split deposits into accounts owned by others who are not listed as a taxpayer on tax return.  For example, you may not automatically designate using part of your refund to pay your tax preparer.

Additionally, the IRS has new rules that will not allow more than three electronic direct deposit refunds into a single financial account or pre-paid debit card.  Taxpayers who exceed the limit will receive an IRS notice and a paper refund.

Find out more about direct deposit and split refund options in the IRS Publication 17.  Please contact us if you have any questions.

03/09/2015

Tax-Related Identity Theft on the Rise

New statistics released by the Law Enforcement Assistance Program show progress is being made in the discovery of tax-related identity theft cases, but they also indicate that these cases are on the rise.  Warning: Know who you are dealing with when it comes to sharing your personal information as well as who you choose to prepare your tax return.

Tax identity theft graphic

In most cases, the identity thieves are using stolen social security numbers and other taxpayer information to file fake tax returns in order to receive fraudulent tax refunds.  They are using information stolen from government, organization and business databases and some even claim to be tax preparers and accountants to collect personal information.

Now due to an increase in criminal activity, more small businesses are being notified to protect their clients’ personal data and to monitor more closely for data breaches.

The newly released IRS Top Ten Identity Theft Prosecutions list shows tax-related identity thieves are working all across the country.  The number one case involves a 2 small business owners in North Carolina who used stolen names, birth dates and social security numbers, some collected by their business store fronts, to file more than 1,000 false returns to collect nearly $4 million dollars in fraudulent tax refunds.

The good news is that new laws have given rise to more efficient joint criminal investigations between federal, state and local law enforcement officials.  They are now able to discover the tax-related crimes sooner and share information to result in more prosecutions.

In fiscal year 2014, federal agencies report a 75% increase in the success of law enforcement cases with 748 convictions and sentencings in FY 2014 compared to 438 in FY 2013. 

New laws also allow courts to impose higher sentences resulting in a rise in incarceration rates last year from 7.1% of convictions to 87.7% of convictions.  The amount of time convicted offenders must serve in jail is also increasing from an average 38 months in jail (3.2 years) to 43 months (3.6 years). The longest prison sentence handed out in 2014 was 27 years.

How do you protect your personal information from this kind of tax-related crime?  Stay alert and ask more questions.

  1. The IRS never communicates with a taxpayer by email, text or social networking to collect personal or financial information.
  2. The IRS does not make phone calls to taxpayers to collect information nor to demand payments.
  3. If you receive notice that more than one tax return has been filed under your social security number, contact the IRS right away.
  4. If you receive a notice that you received wages from an employer unknown to you, this could be a sign that someone is filing a fraudulent return using your social security number.
  5. If you receive a notice that a government benefit has been cancelled because of an income change and you have not had an income change, your information may have been used to file for a fraudulent refund.
  6. Ask more questions to be confident that your tax preparer is certified and working for a real company with a good track record.

You can find out more information in the Taxpayer Guide to Identity Theft, which explains what to do to prevent identity theft as well as what to do if you believe you have already been a victim of this kind of crime.

Our tax preparation experts at McRuer CPAs are trained and experienced professionals ready to help you.  If you have any questions about tax-related identity theft, contact us for more information.

03/07/2015

Taxes on Unemployment Benefits

Unemployed man in tie holding signTaxes on unemployment benefits may seem like a double-whammy for someone who has lost their job or can’t find work, but the benefits are considered taxable income and are subject to federal and state taxes.

There are different types of unemployment benefits paid under either federal or state law, but both are taxable as income and may also be subject to withholding.

Union benefits to unemployed workers may also be taxable including benefits paid from regular union dues. Some unions provide special fund contributions that are not deductible, but when unemployment benefits are paid out of that fund, only the portion that is above what the worker paid into the fund is considered to be taxable income.

To ensure the proper amount of tax is withheld, a taxpayer can file a Voluntary Withholding Request to have federal income tax withheld from unemployment checks.  The worker may also make estimated tax payments during the year to avoid penalties.

There are a few options to help if a taxpayer is struggling financially.  If income has decreased from the previous year, he or she may qualify for certain tax credits.  If a taxpayer cannot pay federal income taxes owed, there are some steps to take to ease the burden, but nevertheless, remember a tax return must be filed to avoid penalties.

For more information, review the IRS’ online information, “What Ifs” for Struggling Taxpayers.

03/05/2015

Going App for Taxes

The IRS has released its updated 5.0 version of IRS2Go.  The mobile device app helps taxpayers check their refund status, sign up for tax tips and connect to videos that explain tax topics. 

Mobile-devicesThe IRS2Go app also uses zip codes to help users locate nearby IRS Volunteer Income Tax Assistance (VITA) Centers and Tax Counseling for the Elderly (TCE) Programs for those who may qualify for free tax advice and assistance.

The new version has an updated internal design look and there are a few changes providing easier navigation.  Since it’s launch in 2011, the free app has been downloaded to more than 40 million mobile devices.

You may download the IRS2Go app free of charge from the Google Play Store for Android devices or from the Apple App Store for Apple devices.  IRS2Go is available in both English and Spanish.

03/04/2015

Business Tax Issues When a Worker Becomes Disabled

Life happens.  So, it’s not uncommon that an employee may have to step away from work responsibilities for a short term or long term due to injury, accident on the job, illness and more.

Disabled workerBusinesses who have provided disability insurance as a benefit option to employees have income tax reporting obligations regarding those benefits.

This issue is one that can lead to mistakes about taxation on disability premiums and benefits.  Who pays the premium for disability coverage and whether it is paid with pre-tax or post-tax dollars are key factors in determining the taxability of disability benefit payments.

Disability Premium Payments: Generally, when long-term or short-term disability benefits are provided through a non-elective group insurance policy through a third party carrier, the employer pays for the premium with pre-tax dollars and that premium payment is not reportable as income to the employee.

An eligible employee may choose to have the employer pay for the long-term disability on an after-tax basis electing to be taxed currently on the premiums paid by the employer.  In that case, the employer would allocate the appropriate proportion of the group premium to that employee and it would be included as a taxable addition to the employee’s gross annual income on that employee’s W-2.

Disability Payments:  If an employee has purchased his or her own disability insurance policy entirely out of his or her own pocket with post-tax dollars, amounts received as disability payments following a qualifying event, such as personal injury or sickness, are not taxable and do not have to be reported as income. This is the only scenario when all of the disability benefits are tax free.

If an employee and the employer have both paid a portion of disability insurance premiums, then the percentage of the premium that was paid by the employer is applied to the total benefits paid and that percent of the benefits is considered to be taxable.

Benefits received are also 100% taxable if an employer pays a portion of the of the premium and an employee pays the balance with pre-tax dollars or the employee pays 100% of the premium with pre-tax dollars.

Insurers must provide employers with a report of the amount of disability payments made to employees.  Employers must then provide employees with accurate Forms W-2 detailing disability payments they received even if the employee no longer works for the business.

As with other income, the taxable disability payments are also subject to federal and state withholding.  An employee can request that their insurance provider withhold the necessary taxes from taxable disability payments or the employee can make estimated tax payments to avoid penalties.

An exception is made for disability payments compensating for injuries incurred as a direct result of a terrorist attack against the United States.  These payments are not taxed as income in most cases. This tax provision provides relief to victims of the September 11, 2001 attacks, the 1995 Oklahoma City bombing and the 2001 anthrax terrorist act.

For more information on disability benefits and taxation issues related to them, contact McRuer CPAs online or call us at 816.741.7882 or check out IRS information online to determine how this issue may affect you, your business and/or your employees.

03/02/2015

Defining Taxable Income in Today’s Marketplace

It’s no secret that most income is taxable and must be reported on your federal income tax return.  However, did you know that even your state income tax refund may be taxable as income?  At the peak of individual income tax preparation season, let’s review what income is taxable and what is not to help you file an accurate tax return.

Accountant1Most taxpayers realize taxable income includes money they earn, like wages, tips, business income, interest and dividends.  But taxes may also be due on various other payments taxpayers receive.  Among the most commonly overlooked sources of taxable income include bartering, tax refunds and scholarships.

Bartering income: In today’s online marketplace the popularity of bartering is booming. Bartering is an exchange of property and services.  In fact, it's so popular that the primary business of some businesses is facilitating and documenting bartering between businessess.  As far as income tax is concerned, the fair market value of property or services made through bartering is taxable as income whether or not that bartering occurred online.

State income tax refund: Many taxpayers don’t realize that even a state or local income tax refund may be taxable depending upon whether you itemized your deductions.  If you did not itemize your deductions on your federal tax return for the same year to which your state or local tax refund applies, you do not have to report the refund as income.  But, if you received a state or local income tax refund this year relating to an itemized deduction you filed in an earlier year, you may have to include all or part of the refund as income on your tax return.  You may have received a Form 1099-G detailing this income.  Whether or not you owe taxes on it, you must report the refund on your federal tax return.

Scholarships:  Many taxpayers who receive scholarships helping them pay their education costs don’t realize that the scholarship payment is tax free only if it is used to pay for certain costs, like tuition and required books.  But, the portion of the scholarship money that is used for room and board is taxable income.

Other income may or may not be taxable depending upon a variety of circumstances.  Here is a review of some other common income sources that raise the most questions.

Life and Disability Insurance: Life insurance proceeds received upon the insured person’s death are usually not taxable.  However, if you redeem your own life insurance policy for its cash value, the amount you receive exceeding what you paid for the policy is taxable.  Disability Insurance payments may also be taxable in many instances.  Businesses often overlook that they must also report this income paid to employees.

Court awards: Court awards or settlements for personal injury or sickness are usually tax free, but punitive damages or compensation for lost wages are usually taxable.

IRAs: Money you take out of an IRA may or may not be taxable depending upon the kind of IRA.  Money taken out of a traditional IRA is generally taxable, but money withdrawn from a Roth IRA is usually tax-free.

Some income is only partially taxable or is not subject to any income tax.  For example, child support payments, gifts, inheritances, and welfare benefits are usually tax-free.  Unemployment benefits are taxable income.  Social security benefits below certain income levels are usually tax-free.  However, once the taxpayer’s income exceeds a certain level, taxes are due on the benefit exceeding the income limits.

Today, the tendrils of taxation twist through and attach to a wide range of income sources.  If you need more information about how taxes may affect income you have received, please contact McRuer CPAs for more information.

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