Plan now to avoid surprises from the Affordable Care Act when filing 2014 taxes

2014 was the first year Americans had access to health insurance options through the Affordable Care Act (the “ACA”). With this new access to insurance came the obligation to purchase it or face new tax consequences. If you opted not to buy health insurance in 2014, you may be faced with a penalty when you file your 2014 tax returns. Even if you did buy insurance through one of the insurance marketplaces, you may have new tax forms to complete and some surprises when it comes to your refund or tax bill.

For most taxpayers, the impact on their tax filing will be minimal, requiring those who were covered to simply check a box indicating they had insurance throughout the year. Those who received subsidies to purchase insurance and who later had increases in their 2014 salary may be required to pay back some of that subsidy. Those whose salary decreased may receive a larger than expected refund.

As these provisions are new to everyone, there may be confusion for taxpayers and tax preparers alike. Unfortunately, due to recent budget cuts, the IRS expects to be able to speak with only half of the people who call in for assistance.

While gearing up for the 2014 tax season, it’s helpful to understand some the most important provisions of the ACA:

  • 1. Exemptions: The ACA provided some exemptions that allow taxpayers to opt out of purchasing insurance without any penalties, including hardship, affordability and religion. There are different methods for applying for an exemption depending on the type of exemption you are requesting. To learn more, go to: https://www.healthcare.gov/fees-exemptions/apply-for-exemption/
  • 2. Penalties: Those who do not qualify for an exemption, were insured for only part of the year, or remain uninsured will be required to pay a penalty called “The Individual Shared Responsibility Payment.” The penalty is set to increase over the coming years, so compare not to see if it is more beneficial for you to pay the penalty or buy insurance. The Tax Policy Center has designed a calculator to help you determine your penalty is you opt to remain uninsured: http://taxpolicycenter.org/taxfacts/acacalculator.cfm.
  • 3. Reconciling: Those who purchased subsidized insurance on the exchanges received an advance on a tax credit. At the time of requesting the subsidy for insurance in 2014, the amount of the subsidy was calculated based on the taxpayer’s 2012 income. The amount of the subsidy granted will be reconciled in the taxpayer’s 2014 filing using the taxpayer’s actual 2014 income and that will affect the taxpayer’s refund or bill. Changes in an individual’s personal circumstances, such as divorce, marriage or a new child can also impact those numbers.
  • There’s still time to plan. Taxpayers facing a loss in premium subsidies because of an increase in income can reduce their income to qualify for the credits. For example, they can contribute to an IRA by April 15, 2015, for the 2014 tax year.

    Planning for the ever-changing Medicaid rules

    The Affordable Care Act fills in current gaps in coverage for the poorest Americans by creating a minimum Medicaid income eligibility level across the country. Beginning in January 2014, individuals under 65 years of age with income below 133 percent of the federal poverty level (FPL) will be eligible for Medicaid.

    For many of our clients, Medicaid coverage is not an option. Nonetheless, there are still important steps that one can take to guard assets, protect your estate, and prepare for the possibility that you or your spouse will need long-term care: purchase long-term care insurance or self-insure.

    Long-term care insurance generally covers home care, assisted living, adult daycare, respite care, hospice care, nursing home and Alzheimer’s facilities. From a tax perspective, premiums paid on long-term care insurance product may be eligible for an income tax deduction and benefits paid from a long-term care contract are generally excluded from income.

    Self-insuring fits if your investment assets are sufficient to earmark a portion of your net-worth to cover possible long-term care needs. Before you decide, keep in mind that, once a change of health occurs, insurance may not be available. As always with financial planning, the best time to think about your long-term care strategy is before you need it.

    Massachusetts enacts the Massachusetts Uniform Probate Code (“MUPC”) Many other states have or will do the same

    (While the following applies to Massachusetts, there are many other states that have recently made the same changes)
    Massachusetts adopted the “MUPC” on March 31, 2012. It affects almost every aspect of the law of wills and the administration of estates including changes outlined below:
    • Personal Representative: The law does away with classifications of executors, temporary executors, administrators, special administrators and the like by adopting the one-size-fits-all title of “personal representative.” The personal representative acts for people with a will (“testate”) or people without (“intestate”).
    • Descendants: Any portion of the estate which passes to the decedent’s descendants will pass under a new system of distribution called “per capita at each generation.” Under this rule, living children inherit equally. If a child pre-deceases the parents, and has living children, the shares of all deceased children are combined and divided equally among all the surviving children.
    • Effect of Divorce on the Estate Plan: The impact of divorce is broadened from partially revoking wills and unfunded revocable trusts to expressly apply to non-probate transfers, such as life insurance policies and trusts, whether funded or unfunded, in the case where an individual has the sole power to make certain changes to at the time of the divorce or annulment. The new law also operates to revoke bequests to relatives of the ex-spouse, as well as appointments of such relatives of executor or trustee under certain situations.
    • Effect of Marriage on Will: Where marriage used to automatically revokes a prior will, the MUPC does not provide for such automatic revocation. Instead, the will survives, and any legacy to descendants of the decedent (who are not descendants of the new spouse) is preserved. If any part of the estate is left to persons other than such descendants, the new spouse would receive his or her intestate share under law, to be satisfied from the assets left to such other persons (and from any bequests made to the surviving spouse, if any, in the premarital will). The testator’s choice of personal representative and guardian of minor children is also preserved. Note that this rule can be avoided by updating the will after marriage.
    Because of these changes to the MUPC, it is important that your estate planning documents are up to date. If you have not updated your estate plan recently, be sure to do so as soon as possible.

    Tax Law Changes Coming, including raised capital gains and dividend tax rates

    This month, President Obama released his proposed FY 2014 budget which contains new taxes, limits on deductions, and other changes intended to meet the goal of raising more than $580 billion in revenue.
    The most significant of these is the termination of capital gains breaks and qualified dividend treatment, causing them both to be taxed as ordinary income. The Kiplinger Tax Letter suggests taking capital gains before 2015 to lock in the lower rate. However, as always, do not let a tax strategy override a good investment plan.
    Here is a summary of other changes that may affect you:
    The 28% Limitation:
    • Affects married taxpayers filing jointly with income over $250,000 and single taxpayers with income over $200,000.
    • Limits the tax rate at which these taxpayers can reduce their tax liability to a maximum of 28%.
    • Applies to all itemized deduction including charitable contributions, mortgage interest, employer provided health insurance, interest income on state and local bonds, foreign excluded income, tax-exempt interest, retirement contributions and certain above-the-line deductions.
    The “Buffet Rule”
    • Households with income over $1 million pay at least 30% of their income (after charitable donations) in tax.
    • Implements a “Fair Share Tax,” which would equal 30% of the taxpayer’s adjusted gross income, less a charitable donation credit equal to 28% of itemized charitable contributions allowed after the overall limitation on itemized deductions. The Fair Share Tax would be phased in, starting at adjusted gross incomes of $1 million, and would be fully phased in at adjusted gross incomes of $2 million.
    Estate, gift, and generation-skipping transfer (GST) Tax
    • Reintroduce rules that were in effect in 2009, except that portability of the estate tax exclusion between spouses would be retained.
    • This change would take effect in 2018.
    • Top tax rate would be 45% and the exclusion amount would be $3.5 million for estate and GST taxes, and $1 million for gift taxes.
    The Kiplinger Tax Letter anticipates the changes being acted on as early as 2014. On April 23, 2013, Max Baucus (D-MT), the head of the Senate Finance Committee, announced he would retire from the U.S. Senate at the end of his term in 2015. In The Kiplinger Tax Latter, Vol. 88, No. 9, Kiplinger predicts that “he’ll push to make revamping the tax code his legacy.”
    You may feel as though you are done with taxes and do not need address them for another year. Resist that urge and schedule a meeting with us so we can review the potential impact of proposed tax changes on your portfolio and investments. We can also discuss the best strategies for saving money on your 2013 and 2014 tax returns.

    Planning ideas for the impact of tax law changes in 2013

    The only way that the American Taxpayer Relief Act of 2012 provides relief to high income taxpayers is by ending uncertainty. The wait is over and we now know what we can for tax planning; guessing based on the last news from Washington is over.
    So, what planning can you do? Start with reviewing all the changes below. Then consider how they apply to you and what you can affect to bear less of a tax burden in this or future years – see the “action” items below in each section.
    **Payroll**
    **Social Security:** The payroll tax holiday ended so that the Social Security tax rates have returned to 6.2% (up from 4.2%) for 2013 wages up to the taxable wage limit of $113,700.
    **Action:** //not much to do on this one, because it ends a set maximum each year, unlike the Medicare tax below.//
    **Health insurance funding via additional Medicare tax:** The Patient Protection and Affordable Care Act adds a .9% tax applies to single individuals earning over $200,000 and married couples who earn over $250,000 and file jointly. This raises the rate from 1.45%, will rise to 2.35%. However, employers must withhold the Additional Medicare Tax from **all** workers, regardless of marital status, from wages exceeding $200,000.
    Action: bunch income in one year (defer/accelerate if you can get below the range – see rates below).
    **New Ordinary Income Tax Rate:**
    For most individuals, the federal income tax rates for 2013 will be the same as last year: 10%, 15%, 25%, 28%, 33%, and 35%. However, the maximum rate for higher-income folks increases to 39.6% (up from 35%). This change only affects singles with adjusted gross income (AGI) above $400,000, married joint-filing couples with income above $450,000, heads of households with income above $425,000, and married individuals who file separate returns with income above $225,000.
    **Action:** //bunch income into one year (defer/accelerate if you can get below the range – especially if you coordinate earned income with net realized gains). The goal is to shift income (and deductions, as discussed below) from one year to another so that the total tax for both years is less. This is easier for self-employed or owners of private companies, as they can shift income within reasonable limits. Also, with large portfolios, there is some ability to put net gains in one year rather than another. As stated below, you can move all dividend and taxable interest paying investments into qualified plans, keeping your asset allocation but lessening the tax burden.//
    **New Long-Term Gains and Dividends Tax Rate:**
    The tax rates on long-term capital gains and dividends are the same as last year for most taxpayers. However, the rate goes to 20% (up from 15%) for singles with AGI above $400,000, married joint-filing couples with income above $450,000, heads of households with AGI above $425,000, and married individuals who file separate returns with AGI above $225,000. When you add in the new 3.8% Medicare surtax, you get a combined rate of 23.8% on long-term gains and dividends.
    **Action:** //Once again, shift net gains into one year and put dividend paying investments in qualified plans.//
    **Stealth rate increases:**
    **Personal and Dependent Exemption Deduction Phase-Out:** The 2009 phase-out rule for personal and dependent exemption deductions has been restored, so your personal and dependent exemption write-offs are reduced if not even completely eliminated. This phase-out starts at the following AGI thresholds: $250,000 for single filers, $300,000 for married joint-filing couples, $275,000 for heads of households, and $150,000 for married individuals who file separate returns.
    **Itemized Deduction Phase-Out:** As above, the 2009 phase-out rule for itemized deductions has been restored, so you can potentially lose up to 80% of your write-offs for mortgage interest, state and local income and property taxes, and charitable contributions if your AGI exceeds the applicable threshold: $250,000 for single filers, $300,000 for married joint-filing couples, $275,000 for heads of households, or $150,000 for married individuals who file separate returns. The itemized deductions are reduced by 3% of the amount by which your AGI exceeds the threshold, up to a maximum of 80% of the total affected deductions.
    **Medical Expenses:** The floor above which medical expenses can be deducted goes from 7.5% to 10%.
    **Action:** //for each of these, try to move deductions into one year, and bunch income to another, so that the total tax for both years is less.//
    **Alternative Minimum Tax Help**
    The AMT “patch”, which prevented millions having this add-on tax, has higher exemptions and allows various personal tax credits. The new law makes the patch permanent, starting with 2012. The change will keep about 30 million households out of the AMT.
    **Action:** you can identify which AMT items affect you and bunch them into one year, to save taxes on another.

    //**Gift and Estate Tax Rules Made Permanent**//
    For 2013 and beyond, the new law permanently installs a unified federal estate and gift tax exemption of $5 million (adjusted annually for inflation, making it $5,250,000 for 2013) and a 40% maximum tax rate (up from last year’s 35% rate). Also, you can still leave your unused estate and gift tax exemption to your surviving spouse (the “portable exemption”).
    **Action:** //review your assets to see if you can gift any now, even if in a trust for future ownership change, and also check to see if any such gifts help on state estate taxes. You may want to consider a second-to-die policy in an irrevocable trust, if your assets will exceed the credits after gifts.//

    **Other changes**
    **Action:** //see if any apply, then shift income and deductions so you benefit from them.//
    **American Opportunity Higher Education Tax Credit Extended:** The American Opportunity credit, providing up to $2,500 for up to four years of undergraduate education, was extended through 2017.
    **Higher Education Tuition Deduction Extended:** While this deduction was set to expire at the end of 2011, the new law restores it for 2012 and 2013, allowing for as much as $4,000 or $2,000 for higher-income folks.
    Option to Deduct State and Local Sales Taxes Extended*: This option also expired in 2011 but is restored for 2012 and 2013, giving taxpayers with little or no state income taxes the option to claim an itemized deduction for state and local sales taxes.
    **Charitable Donations from IRAs Extended:** This option also expired in 2011 but is restored for 2012 and 2013, allowing IRA owners who had reach age 70½ to make charitable donations of up to $100,000 directly out of their IRAs. The donations count as IRA required minimum distributions.
    For 2012, you can still act if you do so this month – it will be treated as a December 2012 transaction.
    **$250 Deduction for K-12 Educators’ Expenses Extended:** Yet another deduction that expired in 2011 is restored for 2012 and 2013, allowing teachers and other K-12 educators a $250 “above the line deduction” for school-related expenses that they paid.
    **$500 Energy-Efficient Home Improvement Credit Extended:** Finally, another credit that expired in 2011 is restored for 2012 and 2013, allowing taxpayers could claim a tax credit of up to $500 for certain energy-saving improvements to a principal residence.