Obamacare and the Individual Mandate

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The health care coverage mandates under the Affordable Care Act are scheduled for January 1, 2014.  So what will it mean for individuals? There are penalties and “carrots” associated with the looming health care changes.

Starting in 2014 if your employer doesn’t offer insurance, you will be able to buy it directly from an affordable insurance exchange. An “exchange” is a supposedly transparent and competitive insurance marketplace where individuals and small businesses can buy affordable and qualified health benefit plans. Exchanges will offer a choice of health plans that meet certain benefit and cost standards.

As an individual who needs health care, in addition to the incentives offered by your employer if you are employed, there are incentives for you to obtain adequate health insurance.  Beginning in January 2014, insurance companies will be prohibited from refusing to sell coverage or renew policies based pre-existing conditions or from charging higher rates based on gender or health status. Additionally, depending on your income, advanceable tax credits will be available on qualified insurance coverage. The advanceable tax credit will lower your monthly premium payments so that you will not have to wait for the tax season to arrive to realize the benefit. This is the carrot.

Here’s the penalty: unless you meet the criteria for an exemption, you’re going to pay Uncle Sam if you don’t have health insurance. This is the “individual mandate.” The imposed fee is intended to help offset the costs of caring for uninsured Americans. Exemptions from the individual mandate for obtaining health insurance include religious reasons or where the least expensive health insurance policy available exceeds 8% of income. Unpaid fees may result in IRS tax problems since the IRS will be charged with collection.

If you don’t meet the criteria for an exemption, and you choose to not obtain health insurance, you will pay Uncle Sam nonetheless. The amount is tiered year to year beginning in tax year 2014. For year 2014, if you don’t have qualified health coverage, the minimum fee will be the greater of 1% of your annual income or a flat amount of $95. In tax year 2016, this penalty will increase to the greater of 2.5% of your annual income or a flat amount ranging from $695 to $2,085, depending on your household size. After year 2016, the penalty will be increased annually by the cost-of-living adjustment.

Tax Incentives for Small Businesses under Obamacare

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The health care coverage mandates under the Affordable Care Act are scheduled for January 1, 2014.  So what will it mean for business owners?

The small business health care tax credit is the carrot for small business owners to contribute to their employee’s health care. Beginning in 2014, Uncle Sam’s carrot for small businesses that pay at least half of their employee premiums for qualified health insurance coverage, and employ 25 or fewer workers with an average income of $50,000 or less, is a tax subsidy on the health insurance premiums they pay.

The maximum qualified subsidy is 50% and is available to small businesses with an average payroll for full-time equivalent employees of $25,000 and ten or less full time employees. The subsidy is presently scheduled to be reduced by 3.35% per additional employee and 2% per additional $1,000 of average income.

Therefore, the savvy small business owner, who is doing good by contributing to their employee’s health insurance will be able reduce their expenses by paying careful attention to their workforce and wages paid. It may be necessary to consult with an experienced CPA or tax attorney for a more individualized understanding of these tax incentives.

Chaos Predicted at the IRS if Congress Doesn't Act

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The Alternative Minimum Tax (AMT) was written into the tax code in 1969, its purpose being to prevent wealthy Americans from completely avoiding income taxes through crafty tax planning strategies.  The AMT was meant to ensure that those who have the means to contribute to the public coffers do not get undeserved tax relief.  But the AMT income threshhold that was established back in 1969 did not account for inflation.  The only reason the middle class normally avoids having to pay an AMT is because each year Congress puts together temporary legislation that raises the threshhold.

Except Congress hasn’t done so this year.  And according to IRS management, their systems will not be able to process tax returns until they get this yearly AMT patch that they are accustomed to getting each year.  They could begin to reprogram their computers now, but it appears that they are waiting until January 1, 2013 to see if lawmakers can agree on a permanent fix.

A mad scramble in January would mean delays; delays in processing returns and delays in paying out tax refunds.  Acting commissioner, Steven Miller, says that the consequence would be that taxpayers would temporarily be unable to file, but I think what he means is that the returns would not be processed.

 

New Tax on Medical Devices

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Beginning on January 1, 2013, medical device manufacturers will have to pay a 2.3% tax on the gross income from many of their products.

The excise tax is on the medical device manufacturers and importers (who) will now have access to 30 million new customers due to the health care law.

~ Treasury Department spokeswoman, Sabrina Siddiqui

I’m not sure what is meant by this statement.  She appears to be justifying the new law in hopes that these companies won’t see it as the tax problem that it is.  She appears to be saying that the new tax should not be difficult to pay since medical device makers will have so much more business under Obamacare.

The new tax does not cover over-the-counter medical products such as hearing aids, eyeglasses, or cotton swabs.  It mostly applies to devices used by doctors and nurses inside medical facilities. There seems to be some ambiguity in the law with respect to items that could be considered medical or non-medical, such as latex gloves. Job security for the tax attorney, I suppose.

Bill Would Allow IRS to Levy Federal Employees More Easily

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A new bill making its way through the legislature would allow the IRS to levy Thrift Savings Plan (TSP) accounts.  A TSP is offered to employees of the federal government as a way to save for retirement and is modeled after the private sector 401(k).  But unlike a 401(k), a TSP has always been safe from IRS levy due to provisions in the original 1986 statute.  If this bill makes it past the Senate and becomes law, which is expected to happen before the end of the year, the IRS will be given an additional arrow in its tax collection quiver.  Federal employees have always been vulnerable to wage garnishment and bank levy if they have delinquent tax accounts, but now their TSP accounts won’t be safe either.  Compared to other taxpayers, civil servants are generally better about paying their taxes (an impressive 96% compliance rate).  However, this new legislation is supposed to result in collection of more than $24 million in revenue over the next 10 years due to the sheer number of present and former federal employees.

Colorado Can't Tax Pot Sales Without Voter Approval

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On November 6th, Colorado voters approved a constitutional amendment (Amendment 64) legalizing recreational marijuana.  Over 54 percent of voters were in favor of the constitutional amendment, but it would be interesting to know how many of those people are “non-smokers.”  I would guess that a majority of those who voted in favor of legalization were more interested in the “fringe benefits” than they were in getting high with their friends.  For example, now the state’s law enforcement personnel will be able to spend more time on violent crimes rather than small-time drug possession.  Also, now the state will be able to collect an estimated $40 million per year from a 15% tax on marijuana sales.  Or will it?

The Taxpayer Bill of Rights in Colorado prohibits any kind of new tax burden without voter approval.  According to Colorado Attorney General John Suthers, the tax must first be approved by the state legislature and then the voting public.  Perhaps the best way to avoid this tax problem would have been to include precise tax language directly in the pot legalization bill, but for whatever reason, that didn’t happen.

Voters Have Spoken: They Like Their Pot and Soda

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Medical marijuana has been legal in California and other states for some time now, but Washington and Colorado are the first states to legalize recreational pot.  Do they realize the tax problems that they will face in the future?  The problems that medical marijuana dispensaries in California have faced time and time again are likely the same problems in store for Washington and Colorado, only on a larger scale.  At the root of the controversy is the fact that the federal government still classifies marijuana as a controlled substance and they will not always turn their head the other way just because the people have passed a state ballot measure.  One of the ways this emerges in the tax world is the “pot shops” are not allowed the same business expenses that other businesses would be allowed, so their tax bills are higher.  At least in California, the IRS has made it clear that there will be no tax relief for pot shops as long as the federal government still sees the drug as a controlled substance.

The Soda

Would a soda tax help reduce obesity?  We won’t know now — soda tax measures were shot down in the California cities of El Monte and Richmond.  Of course soda companies are filthy rich, and they spent an estimated $3.5 million to dissuade voters from passing tax increases on sugary beverages in these two towns.  As with any controversy, there are often attractive arguments to be made on both sides, and the groups with the most money and power are normally better able to get their message out.  At least that’s how the proponents of the soda tax see it.  The opposition (“Big Soda”) sees a soda tax as harmful to small businesses and not the right way to fight obesity.

Bullet Tax?

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If Cook County board president, Toni Preckwinkle, has her way, it’s going to be more expensive to buy bullets in Chicago.  She is pushing for a $.05 per bullet tax to take effect as a means of curbing violent crime in a city that has tallied 409 homicides so far this year.  And there’s also the bonus of raising about $1 million per year for county coffers.  Yet our governments continue to burden citizens with additional tax responsibilities when the need for tax relief is greater than ever.

We’ve discussed sin taxes before: the cigarette tax, Denmark’s short-lived tax on fatty foods (the so-called “fat tax“), the soda tax controversy in New York and the bay area of Northern California.  The problem is these taxes typically cause an unfair burden on those who use these things responsibly (although I’m not sure it’s possible to smoke cigarettes responsibly) and they fail to really control the “bad behavior.”

And this is not just the tax attorney talking; the same problems have been identified by opponents of the bullet tax.  Won’t people go to neighboring counties to buy their ammo?  Won’t this infringe on the rights of lawful gun owners?  Why should law abiding citizens have to pay for the county’s budget shortcomings?

Fresh Start Tax Relief Deadline Looms

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The Tax Penalty Relief provisions of the Internal Revenue Service’s (IRS) Fresh Start Tax Relief programs announced earlier this year, have a crucial deadline of October 15, 2012, next Monday. The IRS announced earlier in the year new penalty relief for the unemployed on failure-to-pay penalties, which are one of the biggest penalties a financially distressed taxpayer faces on an IRS tax bill.

To assist those most in need, a six-month grace period on failure-to-pay penalties was made available to certain wage earners and self-employed individuals. The request for an extension of time to pay will result in relief from the failure to pay penalty for tax year 2011 only if the tax, interest and any other penalties are fully paid by October 15, 2012.

The penalty relief is available to two categories of taxpayers:

  • Wage earners who have been unemployed at least 30 consecutive days during 2011 or in 2012 up to the April 17 deadline for filing a federal tax return earlier this year.
  • Self-employed individuals who experienced a 25 percent or greater reduction in business income in 2011 due to the economy.

This specific penalty relief is subject to income limits. A taxpayer’s income must not exceed $200,000 if he or she files as married filing jointly or not exceed $100,000 if he or she files as single or head of household. This penalty relief is also restricted to taxpayers whose calendar year 2011 balance due does not exceed $50,000.

The failure-to-pay penalty is generally half of 1 percent per month with an upper limit of 25 percent. Under this new relief, taxpayers can avoid that penalty until next Monday, October 15, 2012. However, the IRS is still legally required to charge interest on unpaid back taxes and does not have the authority to waive this charge, which is currently 3 percent on an annual basis.

The Tax Code Exclusion for the .00039 Percent

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White House Press Secretary, Jay Carney, told reporters today that President Obama would support a bill to exempt US olympic athletes from paying income taxes on olympic prize money.  He was referring to a bill introduced by Sen. Marco Rubio (R-FL) last week.

Well, the President believes that we should support efforts, like I think the bill you’re referencing, to ensure that we are doing everything we can to honor and support our Olympic athletes who have volunteered to represent our nation at the Olympic Games. So he supports that bill. If it were to get to his desk, he would support it.

~ Press Secretary Jay Carney

Tax Girl points out that bills like this further complicate the tax code in an era when we should be more interested in simplifying.  It seems this was nothing more than a strategic election-year political statement, as it doesn’t make sense to carve out a tax help exception for such a small segment of society.  How small of a segment?  Well, we sent 529 athletes to the London Games this year.  And as of June 8, 2012, the IRS had received 137,200,000 individual tax returns for the 2012 filing season.  I’m all about increasing tax relief opportunities but, conservatively speaking, (since many return filers are still under extension) we’re talking about .00039 percent of taxpayers benefiting from such an exclusion!