Wednesday, February 26, 2014

Updated with recent IRS clarifications: What Will Be My Penalty If I Don't Get "Health Care Coverage" in 2014?


Updated August 19, 2014

What will be the penalty I will pay under the Affordable Care Act if I don't get "Health Care Coverage" in 2014?


The IRS explains:

If you don’t maintain health insurance coverage, you will need to either seek an exemption or make an individual shared responsibility payment for the period that you are not covered with the 2014 income tax return you file in 2015.

What is an individual shared responsibility payment?  Here is the answer from the IRS:

You may be exempt from the requirement to maintain qualified coverage if you:
  • Have no affordable coverage options because the minimum amount you must pay for the annual premiums is more than eight percent of your household income,
  • Have a gap in coverage for less than three consecutive months, or
  • Qualify for an exemption for one of several other reasons, including having a hardship that prevents you from obtaining coverage, or belonging to a group explicitly exempt from the requirement.
A special hardship exemption applies to individuals who purchase their insurance through the Marketplace during the initial enrollment period for 2014 but due to the enrollment process have a coverage gap at the beginning of 2014.
For any month in 2014 that you or any of your dependents don’t maintain coverage and don’t qualify for an exemption, you will need to make an individual shared responsibility payment with your 2014 tax return filed in 2015.
However, if you went without coverage for less than three consecutive months during the year you may qualify for the short coverage gap exemption and will not have to make a payment for those months. If you have more than one short coverage gap during a year, the short coverage gap exemption only applies to the first.
If you (or any of your dependents) do not maintain coverage and do not qualify for an exemption, you will need to make an individual shared responsibility payment with your return. In general, the payment amount is either a percentage of your income or a flat dollar amount, whichever is greater. You will owe 1/12th of the annual payment for each month you (or your dependents) do not have coverage and are not exempt. The annual payment amount for 2014 is the greater of:
  • 1 percent of your household income that is above the tax return threshold for your filing status, such as Married Filing Jointly or single, or
  • Your family’s flat dollar amount, which is $95 per adult and $47.50 per child, limited to a maximum of $285.
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. You will make the payment when you file your 2014 federal income tax return in 2015.
For example, a single adult under age 65 with household income less than $19,650 (but more than $10,150) would pay the $95 flat rate.  However, a single adult under age 65 with household income greater than $19,650 would pay an annual payment based on the 1 percent rate.
Find out more about the individual shared responsibility provision, as well as other tax-related provisions of the health care law at www.IRS.gov/aca.  For more information about your coverage options, financial assistance and the Marketplace, visit HealthCare.gov.

1 percent of your household income that is above the "tax return threshold" 

So you may have to pay a penalty of 1 percent of your household income that is above the "tax return threshold" for your filing status.  What is the "tax return threshold" the penalty is based upon?  I could not find this specifically on the IRS website but my best guess is it is the threshold above which you are required to file a tax return (in most cases).  The IRS now (the end of July 2014) provided clarifications to help us understand the "tax return threshold" is indeed the threshold above which you are required to file a tax return (in most cases).  In addition, the IRS now defines your "household income" as:
Household income is the adjusted gross income from your tax return plus any excludible foreign earned income and tax-exempt interest you receive during the taxable year. Household income also includes the incomes of all of your dependents who are required to file tax returns.
These clarifications could be significant for taxpayers living in a foreign country that are not "U.S. citizens who are not physically present in the United States for at least 330 full days within a 12-month period are treated as having minimum essential coverage for that 12-month period."  If they do not meet these qualifications they may now even with their "foreign earned income exclusion" be subject to the penalty because their income will not be below the "tax return threshold." Since the definition of "household income" now includes the "excludible foreign earned income," many who thought they would avoid the penalty now appear to be subject to the penalty.  This of course is subject to change but I would not count on it.  For more on the U.S. citizens that meet the  "not physically present in the United States" requirement see my post here. 


These changes demonstrate the ever changing world of U.S. Income Taxes and the Afford Care Act.  Be careful.

Now with these classifications you can get a better idea of what to expect regarding the "Individual Shared Responsibility Provision" or penalty.


This is not technically an "income tax" issue but it is implemented partially through the IRS and your federal income tax return.  While questions about health care coverage or insurance are not in my field of expertise and may cause my head to explode, I would be happy to address what affect your choices will have on your federal income tax return to the best of my ability at this time.  

The CPA Superhero wants you to succeed in business, life and retirement.  If I can be of service to you please contact me. I am very interested in businesses with long term opportunities and potential.  While my main business is preparing tax returns, I also work with clients to manage and develop their business(es).




Jeff Haywood, CPA
The CPA Superhero
972-439-1955
jeff.jhtaxes@gmail.com


Follow the CPA Superhero on Twitter too at:
twitter.com/jeffhaywoodCPA


My posts contain general information that does not fit every situation, they are not all inclusive, and as always for your tax situation everything "depends on facts and circumstances."  In addition, the information/IRS requirements are always subject to change.  So call me to talk about your specific facts and circumstances and what you want to accomplish.


Tuesday, February 25, 2014

Are You Required To Report Your Foreign Bank and Financial Accounts?

Reporting Your Foreign Bank and Financial Accounts:

There has been much discussion about the requirements for a U.S. person to report their foreign bank and financial accounts.  There is much confusion as the requirements are relatively new and, of course, undergoing further changes.  Even the name "U.S. person" is an odd term and so are many of the requirements but the bottom line is we want to meet our obligations as U.S. persons.

Reason for Reporting Requirements:

In this case we are talking about just reporting requirements.  That means the FBAR and FATCA requirements are requirements to report certain foreign bank and financial accounts under certain circumstances.  The reason behind the reporting requirement relates to the requirement on U.S. income tax returns to report all of your worldwide income.  So rest assured that if you report all your worldwide income on your U.S. income tax returns you should have no problems with your U.S. income tax returns.  The requirement to report your foreign accounts is designed by the U.S. government to uncover banks and financial institutions in which people are hiding money and worldwide income and thus cheating on their U.S. income tax returns.

At an IRS seminar I attending this summer it was explained the IRS is getting very good at finding these financial institutions and U.S. persons with accounts in them.  One objective of the reporting requirement is not necessarily to get you who report your worldwide income but to find where the guy down the street is hiding his worldwide income.

The Reporting Requirements:

The requirements to report foreign bank and other financial accounts come under two different requirements.  One is the Report of Foreign Bank and Financial Accounts (FBAR) and the other is the Foreign Account Tax Compliance Act (FATCA).

FBAR:


Beginning with the FBAR > Per the IRS: If you have a financial interest in or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account, exceeding certain thresholds, the Bank Secrecy Act may require you to report the account yearly to the Internal Revenue Service by filing electronically a Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR). See the ‘Who Must File an FBAR’ section below for additional criteria.

This means there are new forms for the FBAR.  According to the IRS the current FBAR Guidance is as follows:

FinCEN introduces new forms


On September 30, 2013, FinCEN posted, on their internet site, a notice announcing FinCEN Form 114, Report of Foreign Bank and Financial Accounts (the current FBAR form). FinCEN Form 114 supersedes TD F 90-22.1 (the FBAR form that was used in prior years) and is only available online through the BSA E-Filing System website. The system allows the filer to enter the calendar year reported, including past years, on the online FinCEN Form 114. It also offers an option to “explain a late filing,” or to select “Other” to enter up to 750-characters within a text box where the filer can provide a further explanation of the late filing or indicate whether the filing is made in conjunction with an IRS compliance program.
On July 29, 2013, FinCEN posted a notice on their internet site that introduced a new form to filers who submit FBARs jointly with spouses or who wish to have a third party preparer file their FBARs on their behalf. The new FinCEN Form 114aRecord of Authorization to Electronically File FBARs, is not submitted with the filing but, instead, is maintained with the FBAR records by the filer and the account owner, and made available to FinCEN or IRS on request.

Filing deferral for certain individuals with signature authority only, effective through June 30, 2015

FinCEN Notice 2013-1 extended the due date for filing FBARs by certain individuals with signature authority over, but no financial interest in, foreign financial accounts of their employer or a closely related entity, to June 30, 2015.
Chronology Pertaining to This Filing Deferral
May 31, 2011 (rev. June 6, 2011)
FinCEN Notice 2011-1 provides filing extension to June 30, 2012 extension for:
  • An employee or officer of an entity under 31 CFR § 1010.350(f)(2)(i)-(v) who has signature or other authority over and no financial interest in a foreign financial account of a controlled person of the entity; or
  • An employee or officer of a controlled person of an entity under 31 CFR § 1010.350(f)(2)(i)-(v) who has signature or other authority over and no financial interest in a foreign financial account of the entity, the controlled person, or another controlled person of the entity.
For purposes of FinCEN Notice 2011-1, a controlled person is a United States or foreign entity more than 50 percent owned (directly or indirectly) by an entity under 31 CFR § 1010.350(f)(2)(i)-(v).
June 17, 2011FinCEN Notice 2011-2 extended due date for filing to June 30, 2012, for certain officers of employees of investment advisors registered with the Securities and Exchange Commission who have signature authority over, but no financial interest in, foreign financial accounts of their employer.
February 14, 2012FinCEN Notice 2012-1 extended the deadline to file to June 30, 2013, for those persons identified in Notice 2011-1 and Notice 2011-2.
December 26, 2012FinCEN Notice 2012-2 further extended the due date for filing to June 30, 2014.
December 17, 2013FinCEN Notice 2013-1 further extended the due date for filing to June 30, 2015.

Who Must File an FBAR

United States persons are required to file an FBAR if:
  1. The United States person had a financial interest in or signature authority over at least one financial account located outside of the United States; and
  2. The aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year to be reported.

What is a United States person?  That is a great question.  Here is the guidance from the IRS:

United States person includes U.S. citizens; U.S. residents; entities, including but not limited to, corporations, partnerships, or limited liability companies, created or organized in the United States or under the laws of the United States; and trusts or estates formed under the laws of the United States.

Please note there are exceptions to the reporting requirement.  

Exceptions to the Reporting Requirement

Exceptions to the FBAR reporting requirements can be found in the FBAR instructions. There are filing exceptions for the following United States persons or foreign financial accounts:
  • Certain foreign financial accounts jointly owned by spouses;
  • United States persons included in a consolidated FBAR;
  • Correspondent/nostro accounts;
  • Foreign financial accounts owned by a governmental entity;
  • Foreign financial accounts owned by an international financial institution;
  • IRA owners and beneficiaries;
  • Participants in and beneficiaries of tax-qualified retirement plans;
  • Certain individuals with signature authority over, but no financial interest in, a foreign financial account;
  • Trust beneficiaries (but only if a U.S. person reports the account on an FBAR filed on behalf of the trust); and
  • Foreign financial accounts maintained on a United States military banking facility.
Review the FBAR instructions for more information on the reporting requirement and on the exceptions to the reporting requirement.
Also note the following Reporting and Filing Information from the IRS:

Reporting and Filing Information

A person who holds a foreign financial account may have a reporting obligation even though the account produces no taxable income. The reporting obligation is met by answering questions on a tax return about foreign accounts (for example, the questions about foreign accounts on Form 1040 Schedule B) and by filing an FBAR.
The FBAR is a calendar year report and must be filed on or before June 30 of the year following the calendar year being reported. Effective July 1, 2013, the FBAR must be filed electronically through FinCEN’s BSA E-Filing System. The FBAR is not filed with a federal tax return. A filing extension, granted by the IRS to file an income tax return, does not extend the time to file an FBAR. There is no provision to request an extension of time to file an FBAR.
A person required to file an FBAR who fails to properly file a complete and correct FBAR may be subject to a civil penalty not to exceed $10,000 per violation for nonwillful violations that are not due to reasonable cause. For willful violations, the penalty may be the greater of $100,000 or 50% of the balance in the account at the time of the violation, for each violation.  For guidance when circumstances such as natural disasters prevent the timely filing of an FBAR, see FinCEN guidance,FIN-2013-G002 (June 24, 2013).


The FBAR requirements relate to bank accounts.  The FATCA requirements also include foreign financial assets.

FATCA:

Below are the FATCA requirements per the IRS:
  • U.S. citizens, U.S. individual residents, and a very limited number of nonresident individuals who own certain foreign financial accounts or other offshore assets (specified foreign financial assets) must report those assets
  • Use Form 8938 to report these assets
  • Attach Form 8938 to the annual income tax return (usually Form 1040)
  • Taxpayers with a total value of specified foreign financial assets below a certain threshold do not have to file Form 8938
  • If the total value is at or below $50,000 at the end of the tax year, there is no reporting requirement for the year, unless the total value was more than $75,000 at any time during the tax year
  • The threshold is higher for individuals who live outside the United States
  • Thresholds are different for married and single taxpayers
  • Taxpayers who do not have to file an income tax return for the tax year do not have to file Form 8938, regardless of the value of their specified foreign financial assets.
  • Penalties apply for failure to file accurately
Alert: The reporting requirement for Form 8938 is separate from the reporting requirement for the FinCEN Form 114, Report of Foreign Bank and Financial Accounts (“FBAR”) (formerly TD F 90-22.1). An individual may have to file both forms and separate penalties may apply for failure to file each form.  See the Comparison of filing requirements for further information.
Third-party reporting: Foreign financial institutions may provide to the IRS third-party information reporting about financial accounts, including the identity and certain financial information associated with the account, which they maintain offshore on behalf of U.S. individual account holders.
Application to domestic entities: The IRS anticipates issuing regulations that will require a domestic entity to file Form 8938 if the entity is formed or used to hold specified foreign financial assets and the total asset value exceeds the appropriate reporting threshold. Until the IRS issues such regulations, only individuals must file Form 8938. For more information about domestic entity filing, see Notice 2013-10.

Due to the relative newness of these reporting requirements and ongoing changes this is a very complicated matter related to U.S. income taxes and reporting.  I highly recommend you get help meeting your reporting requirements.

If you want the CPA Superhero to help you feel free to contact me using my information below. You can have a free half hour initial consultation for your current income tax situation.  Tax planning for your retirement involves a consultation fee.


Jeff Haywood, CPA
The CPA Superhero
972-439-1955
jeff.jhtaxes@gmail.com

Follow the CPA Superhero on Twitter too at:
twitter.com/jeffhaywoodCPA


My posts contain general information that does not fit every situation, they are not all inclusive, and as always for your tax situation everything "depends on facts and circumstances."  In addition, the information/IRS requirements are always subject to change.  So call me to talk about your specific facts and circumstances and what you want to accomplish.

Monday, February 3, 2014

How to Avoid Paying Income Taxes in Retirement



Retirement: How to Avoid Income Taxes

The trick to avoiding income taxes in retirement is to have access to income in retirement that comes from both taxable and non-taxable sources (has already been taxed) of money.  Realize there is a difference between taking taxable income and paying taxes on that income.  While income may be taxable to you, you will only be subject to taxes on the income that exceeds your allowed deductions and exemptions.  So you may be able to draw income from taxable sources up to the amount of your allowed deductions and exemptions and not pay Federal income tax on that income.


Taxable Income

Your taxable income can include withdraws from tax deferred retirement accounts, earned income - income you perform work to earn - typically reported to you on a W-2 or 1099, and investment income.  Types of investment income include interest, dividends, and capital gains on money you invested in non-tax deferred accounts.  Recognize that your already taxed money invested is not taxable again when you take it out of an investment only the income that investment makes is taxable.  

Non-Taxable Income

Non-taxable income can include investment income from tax free vehicles like municipal bonds and ROTH IRA accounts.  As mentioned above, you can also take money, not income, tax free from money that has already been taxed like money invested in investment accounts (as opposed to tax deferred retirement account).


Social Security Income

Some of your Social Security benefits may be taxable if you receive additional income and your modified adjusted gross income (MAGI) is more than the base amount for your filing status.  


Avoiding Income Taxes

So how much taxable income can you take without paying Federal Income Taxes on it?  Part of the retirement strategy is often having your home paid for in which case you will likely take the standard deduction on your tax return.  In 2014 the standard deduction for a Married Couple Filing a Joint tax return will be $12,400 plus an additional $1,200 for a couple over 65 years of age. Personal Exemptions will be $3,950 per exemption in 2014.  So a married couple over 65 years of age in 2014 could take $21,500 in taxable income without paying Federal Income Taxes on it.  If you then take the rest of the money you need from money that has already been taxed or non-taxable income you could live without paying any Federal Income Taxes.  So the key is having access to both taxable and non-taxable income or cash.

Rising Income Tax Rates

Many people expect income tax rates to rise in the near future so your tax planning is even more important now.  In an environment where future tax rates are expected to rise you have to consider paying tax on your money now versus deferring it to the higher tax-rate future.  It may be ideal to have a portion of your retirement money in non-tax deferred accounts and some in tax deferred accounts so as to be able to pull from both sources and avoid higher income tax rates in the future. Take a hard look at putting money into a ROTH IRA, if you are able, and putting taxed money into investment accounts for use in your retirement.  Avoid the trap of depending solely on tax-deferred accounts in your retirement.

Planning your retirement strategy should include a review of your potential income tax situation which can get very complicated.  I would be happy to help look at your retirement plan and your options to see how Federal Income Taxes will affect you.

If you want the CPA Superhero to help you succeed feel free to contact me using my information below. You can have a free half hour initial consultation for your current income tax situation.  Tax planning for your retirement involves a consultation fee.




Jeff Haywood, CPA
The CPA Superhero
972-439-1955
jeff.jhtaxes@gmail.com

Follow the CPA Superhero on Twitter too at:
twitter.com/jeffhaywoodCPA


My posts contain general information that does not fit every situation, they are not all inclusive, and as always for your tax situation everything "depends on facts and circumstances."  In addition, the information/IRS requirements are always subject to change.  So call me to talk about your specific facts and circumstances and what you want to accomplish.