I spent a whole day in income tax school a couple of weeks ago focusing on two areas; The Affordable Care Act, a subject we continue to write about because it changes every tax return we will prepare next year, and new rules concerning the deductibility of repairs or improvements. The instructor started the presentation with this comment. “We are not here to have a political discussion today about Obamacare. With that said, as you will find, Obamacare is a law that is overly complex and overly burdensome.” For example, consider the calculation of whether a taxpayer is not covered by an approved health insurance policy in 2014. It is not $95.00 as many people believe including me until recently. . When a tax return is filed for the 2014 calendar year, the filer must show proof of medical insurance or a tax penalty is imposed, calculated as follows:
For 2014:
If one or more individuals in the household do not have health insurance, calculate the penalty as the greater of the following two tests:
- Flat Dollar Amount: $95 for each adult family member (kids 18 and younger are $47.50), not to exceed a household total of $285.
- Percent of Income Amount: 1 percent of annual household income (you may subtract exemptions and standard deductions). The law has a provision that the penalty amount calculated under this “Percent of Income” test will not exceed the actual cost of a “bronze level” plan in the state insurance marketplace. If 1 percent of a very high income (say $1 million) is $10,000, but the cost of a bronze level plan inside the exchange is $5,000 per year, the “Percent of Income” penalty would be capped at the $5,000.
An Example:
James works for Acme Construction. His wife works for a dental office. They each take their employer-provided medical plan for themselves. However, they choose not to cover their two children on the medical insurance since they feel the premium cost is too expensive. Their combined household income is $65,000 after subtracting standard exemptions and deductions. For 2014, this family would owe $95 under the flat dollar amount ($47.50 for each child) or $650 under the percent of income amount. Since the penalty is the greater of these two tests, they owe a $650 penalty for not having all family members covered by a health insurance plan. Calculation from affordable insurance.com.
What is interesting is the penalty, or as defined by the Supreme Court ruling an excise tax, for not having health insurance is somewhat a toothless tiger. The IRS cannot use any of their usual collection tactics to collect the penalty. No interest. No liens. No levies. They can only collect from future refunds. However, if you have received governmental assistance (credit) to reduce the amount of healthcare premiums due through the healthcare marketplace, and make a mistake, things are much different. If you understated your income on your application and received too much credit for your health insurance payments, you now have a tax liability due and payable with your tax return. IRS is allowed to use their full powers to collect this deficiency. That means liens, interest and levies. It appears at this point that the form used to reconcile the credit obtained through the health care, 1095A, to taxpayers that received assistance will more than likely not be distributed by the January 31, 2015 due date. This form is mandatory in order to prepare those taxpayer’s tax return. In fact, it may be not be available until April 2015. I hope the experts are wrong. IRS is planning on sending notices this fall to those taxpayers it believes may have misstated their income on their healthcare marketplace application. The hope is to avoid the issues involved with assessment of additional taxes and the more than likely bad press that will follow with the enforced collection of that tax.
And even more IRS issues continue to be front page news. 60 Minutes on September 21, featured a story about the proliferation of identity theft and fraudulent tax return refunds. Apparently Florida is the nation’s leader in fraudulently filed tax returns. Stolen identities are easily available in the “Sunshine State.” IRS can’t detect if it is sending multiple refunds to the same address, whether the W2 information is correct, or whether the preloaded debit card scheduled to receive the tax refund really belongs to the real life taxpayer. Fraudulent tax refunds based on identity theft are estimated to grow to $21 billion dollars in the next two years. Almost immediately after the story was televised the IRS responded with some proposed solutions. Essentially the IRS is looking to require employers to file their previous years W2 forms electronically by January 31 of the next year. It appears to be a reasonable solution. In order to file a fraudulent tax return you need two pieces of information, the stolen Social Security Number and a valid taxpayer identification number in order to enter fraudulent W2 information. If the IRS can check the W2 information in real time you eliminate the ability of the crook to file a fraudulent return. Social Security number and employee’s W2 forms have to match. If they don’t match, no refund. Seems to be a simple solution since we are required to furnish our employees their W2 forms by January 31.
