September 5, 2013 Client Newsletter

I did a bit of traveling last month. Driving to New Orleans to attend the IRS Nationwide Tax Forum and the Detroit area to visit my son and daughter in law.  I have to tell you that things are, at least anecdotally, looking better outside the State of Illinois.

For example in Canton, Mississippi just north of Jackson, the nine tenth of a mile long (I actually used my odometer while driving back on I 55 because it really has to be seen to be believed) Nissan assembly plant added 1,000 new jobs last year.  Its’ payroll now exceeds $200 million dollars.  The plant is non unionized.  The governor of Mississippi, Phil Bryant, is adamantly opposed to attempts to unionize the plant.  In the local media I found this quote from him, "I don't believe personally, that we would see this growth in the automobile industry, to include Toyota and Nissan and the many suppliers, if we had union growth in the state of Mississippi" said Bryant. Imagine an Illinois governor making that statement.

Local author Elmore Leonard was buried in Birmingham Michigan the day we had dinner at a local restaurant.  Despite the Detroit bankruptcy we found that this suburb of 20,000 was not participating in the hard times shared with its neighbor.  

As we ate dinner outside, I could not believe the parade of luxury cars driving past.  It seems that every other car was either a BMW, Lexus, or Mercedes.  We even caught sight of a Bentley.  Not an American branded car in sight it seemed.  Ironic. Granted Birmingham is an affluent suburban community.  And the news of the day was the city of Birmingham, Michigan settling a lawsuit with a woman who was arrested for protesting in front of a local fur retailer. And that CNN named Birmingham, Michigan one of the hundred best places to live in the United States. Even in the shadow of Detroit, and all its issues, this city just seemed to have a vibrant downtown filled with local small businesses that you have a hard time finding here.  

Onward to the IRS Nationwide Tax Forum.

The most attended seminar highlighted the changes for 2013 taxes filed in 2014.  I have summarized the changes that were highlighted at the seminar.

1. Schedule A deductions will be limited by income.  Specifically if you are making more than $250, 000 per year you will see a limit on the amount of itemized deductions you will be able to take.
2. The business mileage rate has been increased to 56.5 cents per mile.
3. IRA deductions have been increased to $5500.00 per year.  It you are 50 plus you can now deduct $6,500.
4. There are now six different tax rates.  The highest rate is now 39.6%.  This rate does not take into account even additional excise and medicare taxes which push the effective rate even higher.
5. Schedule D Capital gain rates are now 15% unless your income is over $400,000.  The Capital gain rates will then be 20%.  Unless you tell your broker otherwise, they will sell the last securities you purchased first, instead of the first securities you purchased.  
6. Medical expenses are not harder to deduct.  Unless you are over age 65 you will not be able to deduct any medical expenses under 10% of your adjusted gross income.  The old threshold was 7.5%
7. There is an additional medicare tax of .9% for all incomes over a certain threshold starting at $200,000 for single taxpayers.  This new tax is the first employment tax ever related to 1040 income and the IRS believes that it will catch some married taxpayers by surprise.
8. The per diem Office in the Home deduction of $1,500 is a victory for small business owners.  We talked about this new “legitimized” deduction in a previous newsletter. Available online at our blog.
9. New rules for Schedule D Capital gains reporting now allows us to report sales in the aggregate.  I attended one of the best seminars at the forum presented by an accountant from New York who was cariticture in himself.  He detailed the real problems certain stock brokerages are having meeting record keeping requirements. The bottom line is the large brokerage houses are just not following the reporting law.  In addition the IRS has issued the new draft 2013 1099 B form that now has 32, yes count them, 32 boxes.  That is 13 more boxes than the 2088 1099 B form.  I pity the poor person who is foolish enough to try to prepare a Schedule D on their own this year.
10. Innocent spouse relief is now easier than ever to get from the IRS. If you spouse is up to no good you do not have to pay tax liabilities that were clearly not your making. In the past this has been a somewhat daunting chore.
11. The IRS continues to step up its’ program to find non filers.  The penalty for not filing your tax return is 5% a month up to 25% of the tax due.  And that penalty is not the only one that is being assessed at record numbers.  Additional penalties and interest will be assessed for not filing and evidently harder to abate.

Apparently Obamacare is pushing a lot of businesses to turn employees into independent contractors.  The IRS relies upon referrals from states, specifically from workers compensation claims.  State audits always lead to IRS referrals and subsequent IRS audits/inquiries.  I am passing this on to you verbatim from one seminar, “Independent Contractors versus employees is not a choice. It is the law.”  So you are warned this is one area that IRS is taking a very close look at. Something that they seem to be telling us every year.

Not to muddy up the subject is the Deno Trucking case.  This trucking company treated all its drivers from day one as independent contractors. The case wound its way through the courts with a victory for the taxpayer. The IRS lost because the Ohio courts found in a workers compensation case that the driver was in fact an independent contractor, for workers compensation purposes, and not an employee.  The court did find that the non taxable per diem paid to the drivers was unreasonable and is meriting a closer look by the IRS examiners. Non taxable per diem for truck drivers continues to be a growing trend in the trucking industry.  It is legal to a point.  However, some companies are paying their drivers almost half of their total pay as reimbursement for meals and other expenses that are totally out of whack with reality.  And that means trouble.

Next month the Affordable Healthcare Insurance Exchanges will be open for business. And it appears that insurance costs are going up as a result.  I just heard on the NPR Marketplace program today that large labor unions are opposed to the changes.  Apparently the law will undercut and decimate generous union healthcare plans. The president of Laborers International Union of North America, Terry O'Sullivan, warned that he anticipates the Affordable Care Act will come with "destructive consequences" in a letter written to President Obama and Congressional leaders. O'Sullivan cites particular fears for construction workers, who are often covered by multiemployer plans. Under the Affordable Care Act, there is a $63 per-person penalty for such plans, a tax that O'Sullivan anticipates will come out of the pockets of the workers he represents.

The repercussions of an increase in the cost of health insurance will extend beyond this initial deduction. It will dismantle current collective bargaining agreements, thus making union companies less competitive and nonunion companies more attractive.

By the way insurance premiums for the Illinois Health Care Exchanges appear to be a big mystery.  The Chicago Tribune speculated on August 14, 2013 that due to a lack of competition the premiums are likely to go up.

Illinois officials once expected that as many as 16 insurers would sell some 250 health plans via the exchange. But only six insurers, including the state's largest, Blue Cross and Blue Shield of Illinois, have signed up. They will offer 165 insurance plans. UnitedHealthcare, the state's second-largest insurer, decided not to participate.

Does the relative lack of competition, the absence of a big player like UnitedHealthcare and the Obamacare demands for certain coverages mean that Illinois rates will be higher than they are now?

Sounds like a real possibility. But Illinois officials won't say if bad news is coming. Maybe they're waiting for the PR firm that was awarded a $35 million contract last month to promote the Illinois exchange to get up to spin speed.

After attending the IRS Affordable Health Care session I couldn’t help but notice three women discussing the session after it broke up.  One woman was as angry as angry could be.  She was just livid about the record keeping burdens the law was placing on her clients including the months during which each employee and any of their dependents was covered by health insurance. IRS cannot process the amount the tax forms required to meet this recordkeeping requirement she argued.  She was also upset about UPS’ decision to drop spouses from their healthcare plan.  It was just announced that day.  Maybe she was married to a UPS employee.  According to Marketwatch, by denying coverage to spouses, employers not only save the annual premiums, but also the new fees that went into effect as part of the Affordable Care Act. This year, companies have to pay $1 or $2 “per life” covered on their plans, a sum that jumps to $65 in 2014. And health law guidelines proposed recently mandate coverage of employees’ dependent children (up to age 26), but husbands and wives are optional.

Enough about all this upbeat stuff, I will write more about the IRS Nationwide Tax Forum next month.