ACA and Tax Filing

While everyone was talking about last year being the year everyone finally felt the impacts of the Affordable Care Act (ACA) with the roll out of the federal and state exchanges, for CPAs and anyone filing a tax return, the 2014 tax returns filed in 2015 will be the year of even greater impacts. That is because this is the first year people’s tax returns include requirements under the ACA. There are two big requirements; one affects everyone and the other impacts anyone buying insurance on the exchanges.

The new requirement that impacts everyone is that you have to report if you had qualifying health insurance, otherwise you have to pay a penalty. If you had insurance, the requirement will be as easy as checking a box (unless you are audited). On the other hand, those who didn’t have insurance have some work ahead of them. Unfortunately, many taxpayers have also been misinformed. They are under the impression that those without insurance will be charged a penalty of $95. First off, the penalty is $95 per member of the household (with a cap of 3). That means for anyone without insurance and at least two dependents, the minimum penalty is $285. But, it gets worse. For 2014, the penalty per person is the greater of $95 or 1% of taxable income. For a middle class family with taxable income of $40,000 that means the penalty per person is $400, not $95 and for a taxpayer with 3 or more members of the household that means the penalty is $1,200 not $285. This means there are going to be people who thought it was cheaper to not buy insurance that will be getting a much smaller refund or even making an additional tax payment come March and April.

By the way, the penalty increases in 2015 to $325 or 2% per person. This means that same family making $40,000 will pay a penalty of $2,400 next year (because it is greater than the $975 of the minimum for 3 people). The percentage of taxable income is really much more important in determining the penalty than the listed dollar minimums. However that doesn’t make for an easy sound bite, so most people don’t realize the penalty is really based on a percentage of net income.

The second new requirement is for those who obtained insurance through the exchanges, they must reconcile the tax credits they got to reduce the cost of insurance to the actual tax credits they were due. When the insurance buyer input their information to determine the credits they could obtain, he/she had to estimate their income, marital status and dependents for 2014. The actual amounts for these items is likely to be different from the estimates provided. If the person ended up with less income, then they will be due additional credits. More likely, the person will have earned more than their estimate and will end up owing back to the government a portion of the credits they received. The big problem is the group of people having to make these computations is the same group that can’t seem to properly compute the earned income tax credit (EITC). Last year 24% of the EITC paid was in error. I don’t have high hopes that the computation of the ACA credits will be any better.

At least the news stories covering the 2015 tax filing season may be a little more interesting this year.

The Stealth Tax

Here is a quiz.

What is one of the fastest growing “taxes” on corporations that isn’t even called a tax?

Need another hint. This “tax” is different in every state, but the once common factor is that every state says it is making corporations pay it so the state can get the money to its rightful owners.

Still stumped?

The “tax” I am talking about is the abandoned or unclaimed property (AUP) laws.

All 50 states have such laws. The theory is that the state will hold the property until it is claimed by its rightful owner. But since the state doesn’t look very hard for that person, what usually ends up happening is the money sits in the state coffers and can be used for other things. Generally AUP is due to the state of last known residence of the rightful owner, but if that state is unknown, then often the state of incorporation for the corporation with the property takes claim on the property.

Delaware, because of its beneficial corporate law structure is the state of incorporation for many companies. Last year Delaware brought in $566.5 million to its state coffers – the third largest source of revenue for the state. And with such a large amount of money at stake, Delaware is becoming one of the most aggressive pursuers of AUP. The state, like many others, hires independent contractors to “audit” companies. The contractors get paid a percentage of the AUP they find. Of course you know how that works. If you only get paid if you find something, more often than not, you are going to find something.

The rise of gift cards has also heightened states’ interest in AUPs. All of those unused gift card balances are AUPs, often with no known owner – fresh meat for a ravenous state searching for revenue. New Jersey went has far as to require companies to turn over the entire amount of unused gift card balances more than 2 years old. Fortunately, the court found that New Jersey’s actions were unlawful. The problem is that the full gift card amount did not take into account the profit the company expected to earn when the gift card was used. The court said taking the entire balance was not only taking unclaimed property, but also was the taking of property that was rightfully the company’s.

Of course, I don’t think the saga will end there. I could see a new law coming about which requires a company to show the average profit they get and then leave that portion with the company and take the rest. It would seem such a law would meet the requirements the court set out.

They say there are only two things certain in life – death and taxes. Maybe that saying needs to be amended to three things – death, taxes and AUP.

Filing Taxes

Every CPA in business and Industry has faced the same questions as soon as someone finds out they are a CPA.  The question can take a hundred different forms, but they are all about the same; someone wants to have a question about income taxes answered.  I generally try to keep up with the latest tax issue just so I know enough to send them in the right direction.  Today, the hot tax topics are around the Affordable Care Act.  From the additional 0.9% Medicare tax on wages over certain limits to the 3.8% Medicare tax on investment income (once again over certain limits) to the penalties for not obtaining medical insurance, there sure seems to be a lot of questions and even more misinformation out there.

It seems, however, more people are beginning to understand CPAs do many things other than taxes so more often than not, when I tell people I’m a CPA, they then ask what I do instead of immediately going into their tax question.  Once I tell them what I do instead of asking me tax questions, because they realize I don’t do taxes for a living, they do on occasion ask me if I file my own taxes.  I am proud to say I do file my own taxes, at least if you can say using tax software to fill out the forms and file them is doing your own taxes.  I say that because I recently met a CPA who takes pride in still filing out their tax forms by hand.

While I think that is a little extreme, there are many people, many CPAs, who wouldn’t think of filing their own taxes.  I consider my personal taxes just short of too complicated for me to handle.  I don’t have passive income, partnership income or complex investments, but I do buy and sell stock every year and I do file a schedule C for the work I do as a referee.  Of course that is about as simple a schedule C as you can get.  There is no home office deduction because my workspace is the pitch and there is no place in my house dedicated to my work as a referee.  Of course, I am very careful to record all of my earnings throughout the year and declare all of them on my taxes.  Beyond a simple a matter of integrity, putting my CPA license on the line to save a few hundred dollars in tax by committing fraud and not declaring all of my referee earnings would seem to be about as stupid as it could get.

Being a home owner and charitable contributor, it is worth the effort to itemize my deductions, and of course I have some interest and dividend income.  All of that is fairly straight forward.  The part that starts to concern me is calculating the credits and deductions for college tuition for my two girls. Come to think of it, without the software help, I don’t know if I would feel comfortable taking on that complex part of the tax code and then the Alternative Minimum Tax is always fun.  If that wasn’t mostly automated I would really hate have to manually calculate my taxes twice each year.  Talk about unreasonable punishment!

So, do you still file your own return?  Or have you given up and turned it over to someone else?  If the tax code has become so complex that even CPAs are giving up on filing their own tax returns, then maybe it really is time for some serious simplification of our tax code.