4 Top Child and Dependent Tax Exemptions

Some countries give a flat money amount to families for each child they have. Seems a lot simpler sometimes than the myriad of options available for claiming dependents on your annual tax return. But we aren't other countries, so below I've outlined the top 4 exemptions you can take if you have kids.

1. Earned Income Tax Credit

If your income is below a certain level and how many children you have. If you earn up to $47,955 or $53,505 if married and filing jointly, and have 3 or more children, you qualify. If you have 2 children, it's $44,648 or $50,198 if married and filing jointly. Lastly, if you have just 1 child then your earnings and adjusted gross income has to be less than $39,396 or $44,846 if married and filing jointly.

This credit can give you up to $6,269 maximum for 3 children or $506 if you have no children. This tax credit is also refundable. This means if you owe less than the credit, IRS will pay you back the difference!

2. Dependency Exemption

Each child you claim as a dependent earns you $4,050 as an exemption. An exemption reduces your income that is subject to federal taxes. So if you make $50,000, with the dependency exemption, you can lower that taxable amount by $4,050 or more!

For those in the 15-25% tax bracket, you can save $600-$1,100! The higher your tax bracket, the more impact this has on your tax savings.

3. Child and Dependent Care Credit

This is a credit that reduces your taxes based on what you spend for childcare. The credit is between 25-35% of your childcare expenses. The exact amount is dependent on your income. Many types of care are included in this credit, including private kindergarten, after school programs, daycare and more.

4. Child Tax Credit

This is a $1,000 credit you may be able to take for any child under 17 that you can claim as a dependent. The credit is determined by your income, single or married.

If you aren't sure which deductions or credits you can claim, and what your taxable income is, give me a call!

The IRS has a great chart with an outline about all child related benefits, which you can find here.

When are estimated taxes to the IRS due?

If you're self-employed, knowing when estimated taxes are due can help avoid any issues with the IRS.

Why is this important for self-employed people specifically? Generally if you are employed, you have taxes withheld from each paycheck. But this is generally not the case with contractors or others who own their own business. This means you may have to pay the IRS estimated taxes throughout the year, and there are deadlines for this.

The next estimated tax due in 2016 is January 15.

Generally the schedule is as follows:

First Quarter: April 15 (Jan 1 - Mar 31)
Second Quarter: June 15 (Apr 1 - May 31)
Third Quarter: September 15 (Jun 1 - Aug 31)
Fourth Quarter: January 15 (Sept 1 - Dec 31)

Your accountant can easily calculate what you owe. If you are using a tax software, generally they can do this as well. You can pay electronically or via check. You can get the address on where to mail a payment here.

How to Calculate Your Tax Withholdings

Did you know the IRS has a withholding calculator? Well, they do! If you are an employee, get your recent pay stubs and income tax return and you can estimate the taxes that your employer will withhold.

These and other online tools are really helpful to understand what you will owe and to budget accordingly. If you owe taxes versus getting a refund, as a general rule, it's always helpful to get this amount as early as possible so you can save enough to pay your taxes in time. It also helps for your overall budgeting as it gives a clear picture of what your net salary will be. You can then plan how much to budget for groceries, bills, rent or mortgage, etc.

Speaking with your accountant or certified financial planner can ensure you calculate this correctly as well as create a budget that fits your needs and lifestyle.

2014 Tax Return Prep - What You Can Do NOW To Prepare!

Many of my clients ask me around this time what they can be doing to prepare for next year's tax season to make sure they are on track and can avoid last minute problems or delays. 

 

Below are some events that can affect your tax return for this year, so make sure to notify your tax preparer if any apply to you. In some cases, knowing ahead of time and getting the right documentation or information needed, can reduce your tax owed, or at the very least allow you to avoid any unexpected surprises before it's too late! 

 

In 2014 did you...

• Get married, divorced or become a widow?
• Change jobs?
• Has your spouse started working? Stopped working?
• Did you have an increase or decrease in your income?
• Did you have a significant gain from the sale of stocks and bonds?
• Did you buy or sell property?
• Did you start a business? Acquire a business? Sell a business?
• Did you buy or sell a home? 
• Did you retire?
• Did you begin withdrawing from a retirement account or pension?
• Did you turn 70.5?
• Did you refinance your home? Take out a second mortgage?
• Did you inherit anything? 
• Did you have a child? (If so, congrats!)
• Did you purchase anything significant for your business?
• Are you planning on buying and/or selling a vehicle for your business?
• Did you document your charitable contributions properly?
• Do you need to adjust your estimated tax payments?
• Did you purchase health insurance through the healthcare exchange this year? Do you qualify for an insurance subsidy? 
• Did you have income from investments or gains from their sale? 
• Are you aware of any new tax laws for this year?

 

If you answered yes to any of these questions or aren't quite sure, it's best to be in touch with your tax preparer as soon as possible so you can begin to address any potential issues before April 2015. It makes it a lot easier on you AND your accountant if you are aware of any issues or differences from last year so you can handle any issues and tax advantage of any tax benefits this year! 

 

*The checklist above was modified from a version that appeared in my quarterly newsletter whcih I send to all clients. Tax Tips & News, Fall 2014 Volume XXXIII, Number 2.*

The Affordable Care Act and Covered California

No matter what your political affiliation is and your thoughts on the Affordable Care Act, there seems to be much confusion across the country about what it means for them, how to get coverage or find out what the cost of a plan is, and how to learn more.

There has been much talk about how the website roll out has come with many glitches and problems, but what many don't realize, especially as California residents, is that you don't have to go to healthcare.gov in order to find out more about plans and to sign up. California is one of the few states that have set up their own exchange with their own website (not without some issues of course) and phone number.

The consensus seems to be that right now with so many issues with the online enrollment, calling and speaking with a representative over the phone is the right way to go. If you are in California, you can visit https://www.coveredca.com/ to learn more about the exchange in CA or call 1-800-300-1506.

The website is complete with helpful information, including...

Enrollment Assistance 
Shop and Compare Tool 
Events Near You to Learn More 
FAQ

If you have any questions about how the Affordable Care Act might affect you, as an individual, small business or otherwise and how to navigate the penalty for not signing up...please be in touch. There are many confusing and complicated tax implications of this bill and I'm here to help. Whether you think this law is wonderful or terrible (I won't tell you what I think unless you come in ;) we can all agree that everyone deserves to have affordable health care and access to affordable services.

Jeff Stone - 12352 Woodley Ave Granada Hills, CA 91344 - 818-368-5374 - jmss@earthlink.net

Check me out on Facebook!
And learn more about me and my business on my website!
If you are already a loyal client, please consider reviewing my business on Yelp!

800-300-1506

800-300-1506

Itemizing vs. Standard Deduction: Six Facts to Help You Choose

From IRS Tax Tip Newsletter 2013-37 

Itemizing vs. Standard Deduction: Six Facts to Help You Choose

When you file a tax return, you usually have a choice to make: whether to itemize deductions or take the standard deduction. You should compare both methods and use the one that gives you the greater tax benefit.

The IRS offers these six facts to help you choose.

1. Figure your itemized deductions.  Add up the cost of items you paid for during the year that you might be able to deduct. Expenses could include home mortgage interest, state income taxes or sales taxes (but not both), real estate and personal property taxes, and gifts to charities. They may also include large casualty or theft losses or large medical and dental expenses that insurance did not cover. Unreimbursed employee business expenses may also be deductible.

2. Know your standard deduction.  If you do not itemize, your basic standard deduction amount depends on your filing status. For 2012, the basic amounts are:

• Single = $5,950
• Married Filing Jointly  = $11,900
• Head of Household = $8,700
• Married Filing Separately = $5,950
• Qualifying Widow(er) = $11,900

3. Apply other rules in some cases. Your standard deduction is higher if you are 65 or older or blind. Other rules apply if someone else can claim you as a dependent on his or her tax return. To figure your standard deduction in these cases, use the worksheet in the instructions for Form 1040, U.S. Individual Income Tax Return.

4. Check for the exceptions.  Some people do not qualify for the standard deduction and should itemize. This includes married people who file a separate return and their spouse itemizes deductions. See the Form 1040 instructions for the rules about who may not claim a standard deduction.

5. Choose the best method.  Compare your itemized and standard deduction amounts. You should file using the method with the larger amount.

6. File the right forms.  To itemize your deductions, use Form 1040, and Schedule A, Itemized Deductions. You can take the standard deduction on  Forms 1040, 1040A or 1040EZ.

For more information about allowable deductions, see Publication 17, Your Federal Income Tax, and the instructions for Schedule A. Tax forms and publications are available on the IRS website at IRS.gov  You may also call 800-TAX-FORM (800-829-3676) to order them by mail.

Ten Facts about Capital Gains and Losses

Ten Facts about Capital Gains and Losses

The term “capital asset” for tax purposes applies to almost everything you own and use for personal or investment purposes. A capital gain or loss occurs when you sell a capital asset.

Here are 10 facts from the IRS on capital gains and losses:

1. Almost everything you own and use for personal purposes, pleasure or investment is a capital asset. Capital assets include your home, household furnishings, and stocks and bonds that you hold as investments.

2. A capital gain or loss is the difference between your basis of an asset and the amount you receive when you sell it. Your basis is usually what you paid for the asset.

3. You must include all capital gains in your income.

4. You may deduct capital losses on the sale of investment property. You cannot deduct losses on the sale of personal-use property.

5. Capital gains and losses are long-term or short-term, depending on how long you hold on to the property. If you hold the property more than one year, your capital gain or loss is long-term. If you hold it one year or less, the gain or loss is short-term.

6. If your long-term gains exceed your long-term losses, the difference between the two is a net long-term capital gain. If your net long-term capital gain is more than your net short-term capital loss, you have a 'net capital gain.’ 

7. The tax rates that apply to net capital gains are generally lower than the tax rates that apply to other types of income. The maximum capital gains rate for most people in 2012 is 15 percent. For lower-income individuals, the rate may be 0 percent on some or all of their net capital gains. Rates of 25 or 28 percent can also apply to special types of net capital gains.

8. If your capital losses are greater than your capital gains, you can deduct the difference between the two on your tax return. The annual limit on this deduction is $3,000, or $1,500 if you are married filing separately.

9. If your total net capital loss is more than the limit you can deduct, you can carry over the losses you are not able to deduct to next year’s tax return. You will treat those losses as if they occurred that year.

10. Form 8949, Sales and Other Dispositions of Capital Assets, will help you calculate capital gains and losses. You will carry over the subtotals from this form to Schedule D, Capital Gains and Losses. If you e-file your tax return, the software will do this for you.

For more information about capital gains and losses, see the Schedule D instructions or Publication 550, Investment Income and Expenses. They are both available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

VIA IRS Tax Tip Issue #2013-28

13 Deductions That Could Cut Your Tax Bill

For all the talk about tax changes at the end of 2012, many people are still left wondering what it means for them.

" 'Is it a big deal? Or is it business as usual?' are questions I'm hearing," says Scott Halliwell, CERTIFIED FINANCIAL PLANNER™ practitioner with USAA.

"While many issues were resolved, a lot of taxpayers still aren't sure how their tax returns and deductions are affected," he says.

If you're one of those people, brush up on these 13 deductions before tackling your tax return. They are worth reviewing, as they could lower your tax bill.

1. Traditional IRA contributions. You have until April 15, 2013, to contribute up to $5,000 to a traditional IRA for 2012 and, if you qualify, deduct it on your tax return. Here are some guidelines:

• If you were 50 or older on the last day of 2012, you can contribute up to $6,000.
• If you (and your spouse if you're married) weren't covered by an employer's retirement plan in 2012, you can generally deduct your contribution in full.
• If you were covered by an employer plan, you can only take a full deduction if your modified adjusted gross income was $58,000 or less ($92,000 or less for married couples filing jointly). Your deduction is reduced if your modified adjusted gross income was more than $58,000 but less than $68,000 ($92,000 and $112,000 for married couples filing jointly). Above those levels, you may still contribute, but you can't take a deduction.
• If your spouse was covered by a retirement plan at work but you weren't, you're eligible to take a full or partial deduction if your combined adjusted gross income was below $183,000. SeeIRS Publication 590 for more details.

2. Self-employed retirement plans. If you work for yourself, you can open a Simplified Employee Pension IRA by April 15, 2013, and deduct your contribution on your 2012 return.SEP IRAs may be an easy way to create your own retirement plan, and they can allow much higher contributions than traditional IRAs. Contributing to a SEP IRA does not exclude you from making an IRA contribution, but it may affect whether you can take a deduction for it. (A SEP IRA is considered an employer-sponsored plan).

3. Mortgage interest. You're allowed to deduct interest paid on your primary mortgage, as well as home equity loans, home improvement loans and lines of credit. In general, you may deduct interest on up to $1 million of primary mortgage debt and up to $100,000 of home equity balances.

4. State and local taxes. The federal government generally allows taxpayers to deduct property and income taxes paid to state and local governments.

5. Sales tax. If you didn't pay much state income tax — or live in a state that doesn't tax income at all — you may be able to choose to deduct sales tax instead. And you typically don't need receipts — simply calculate an assumed amount using an IRS table or online calculator.

6. Charitable gifts. Donations to charity may ease your tax burden, but only if you have the right documentation. Cash contributions — regardless of the amount — require a canceled check or dated receipt. Any contribution of $250 or more requires bank or payroll deduction records or a written acknowledgement from the charity. Noncash contributions valued at more than $5,000 generally require an appraisal.

7. Education costs. Up to $2,500 in interest on loans for qualified higher education expenses may be deductible if your adjusted gross income is less than $75,000 ($150,000 if you're married and filing a joint return). A portion of your tuition and fees may be deductible if your adjusted gross income is $80,000 or less ($160,000 on a joint return). There are also two tax credits for college costs: the American Opportunity Credit and the Lifetime Learning Credit (See IRS Publication 970).

8. Medical and dental costs. The government sets a high hurdle for these expenses: You may be able to only deduct them if they exceed 7.5% of your adjusted gross income. Be aware that the Patient Protection and Affordable Care Act decreases this deduction for the 2013 tax year because those expenses generally will be deductible only if they exceed 10% of your adjusted gross income. The law does include a temporary waiver for seniors and their spouses if either has reached age 65 before the close of tax years 2013-2016.

9. Health insurance. Self-employed taxpayers get a break on one of their biggest financial headaches. In general, they may be able to deduct all of their health insurance premiums.

10. Health savings accounts. If your family was covered by a high-deductible health insurance plan in 2012, you may be able to contribute up to $6,250 to a health savings account ($3,100 if it only covered yourself). Contributions are deductible, and withdrawals for qualified medical expenses are tax-free. Similar to IRAs, you have until April 15, 2013, to contribute for the 2012 tax year.

11. Job-related moving expenses. If you moved to take a new job, you may be able to deduct your expenses if you pass these two IRS tests:

• Your new job must be at least 50 miles farther from your old home than your old job. If you didn't have a previous job, your new one must be at least 50 miles from your old home. If you're in the military with permanent change of station orders, you do not have to meet these rules.
• If you're an employee, you must work full time for at least 39 weeks during the 12 months after you arrive in the general area of your new job. If you're self-employed, you have to work full time for at least 39 weeks during the first 12 months and 78 weeks during the first 24 months.

12. Guard and Reserve travel expenses. If you traveled more than 100 miles to attend a drill and spent the night, you may be able to deduct lodging expenses, half the cost of your meals and 55.5 cents per mile for travel. You also can deduct tolls and parking fees.

13. Out-of-pocket teacher expenses. Teachers, aides, counselors and principals — kindergarten through 12th grade — should be able to deduct up to $250 for classroom supplies purchased in 2012.

Reprinted from USAA.com  https://www.usaa.com/inet/pages/advice-taxes-taxdeductions?EID=corp_cc_13_03_U250-04&akredirect=true 

Voluntary Worker Classification Settlement Program

Excerpt from IRS Tax Tips Issue 2013-23

IRS Expands Voluntary Worker Classification Settlement Program; Relief From Past Payroll Taxes Available to More Employers Who Reclassify Their Workers As Employees

WASHINGTON — The Internal Revenue Service has expanded its Voluntary Classification Settlement Program (VCSP) paving the way for more taxpayers to take advantage of this low-cost option for achieving certainty under the law by reclassifying their workers as employees for future tax periods.

The IRS is modifying several eligibility requirements thus making it possible for many more interested employers, especially larger ones, to apply for this program. Thus far, nearly 1,000 employers have applied for the VCSP which provides partial relief from federal payroll taxes for eligible employers who are treating their workers or a class or group of workers as independent contractors or other nonemployees and now want to treat them as employees. Businesses, tax-exempt organizations and government entities may qualify.

Under the revamped program, employers under IRS audit, other than an employment tax audit, can qualify for the VCSP. Furthermore, employers accepted into the program will no longer be subject to a special six-year statute of limitations, rather than the usual three years that normally applies to payroll taxes. These and other permanent modifications to the program are described in Announcement 2012-45 and in questions and answers, posted on IRS.gov.

Normally, employers are barred from the VCSP if they failed to file required Forms 1099 with respect to workers they are seeking to reclassify for the past three years. However, for the next few months, until June 30, 2013, the IRS is waiving this eligibility requirement. Details on this temporary change are inAnnouncement 2012-46.

To be eligible for the VCSP, an employer must currently be treating the workers as nonemployees; consistently have treated the workers in the past as nonemployees, including having filed any required Forms 1099; and not currently be under audit on payroll tax issues by the IRS. In addition, the employer cannot currently be under audit by the Department of Labor or a state agency concerning the classification of these workers or contesting the classification of the workers in court.

Interested employers can apply for the program by filing Form 8952, Application for Voluntary Classification Settlement Program, at least 60 days before they want to begin treating the workers as employees.

Employers accepted into the program will generally pay an amount effectively equaling just over one percent of the wages paid to the reclassified workers for the past year. No interest or penalties will be due, and the employers will not be audited on payroll taxes related to these workers for prior years. Employers applying for the temporary relief program available for those who failed to file Forms 1099 will pay a slightly higher amount, plus some penalties, and will need to file any unfiled Forms 1099 for the workers they are seeking to reclassify.

More information is available on IRS.gov, keyword “VCSP.”

The Fiscal Cliff

Now that the election is over, all anyone seems to be talking about is the fiscal cliff. Will the government prevent it? What will it take to reach a deal? But most importantly, what will it mean for the average American come tax time.

What is the fiscal cliff?

The fiscal cliff essentially means that on January 1, 2013 if there is no deal to avoid the cliff, automatic spending cuts will take effect. Additionally, Bush's tax cuts that have been in place for almost a decade will also expire. Most people will agree, no matter which side of the political spectrum they are on, that any deal that will prevent us from going over the cliff will be a combo of tax increases and spending cuts. Everyone is up in arms about a solution for the fiscal cliff since the ramifications of both spending cuts and an increase in taxes will cause major problems. The general repercussion is that for an increase in the amount of taxes an individual pays, he will see less in return in terms of government services.

How will a failure to come up with a solution to the fiscal cliff affect the average American family?

Here is the average tax breakdown the a family pays:

10% of income up to $17,400
15% of income from $17,401- $70,700

The "average" family in the U.S. is made up of 2.6 people, earning around $50,000. As it stands now, the base tax rate this "average" family will pay is $4,845. If the Bush tax cuts expire, this family will pay 15% for all income, which equals to $6,397, or an increase of $1,552. For a family making $50,000 this is a huge blow to their budget. This equates to less spending and less spending, never a good thing to jumpstart an economy.

What about deductions?

While our average family above doesn't actually pay $4,845 in taxes, since there are many deductions that lower the tax amount they pay, another potential ramification of the fiscal cliff is the disappearance of many deductions Americans rely on to lower their taxes. For example, the Child Tax Credit gives around a $1,000 deduction, after January 1, it will be around $500. Another example, the 2% social security tax cut (for the first $110,000 in income) is also scheduled to end on January 1. This equates to, for the average family, a $1,000 tax increase.

What's the solution?

Republicans want to prevent the Bush tax cuts from expiring. Democrats don't want too many spending cuts, especially a disproportionate amount of cuts that will affect lower income Americans. As of today,  both sides of the aisle seem more intent on fighting and getting their way than actually coming up with a viable solution. It reamins to be seen what will happen.

Will the fiscal cliff narrowly be avoided like the debt ceiling last year? Will we go over it and suffer the consequences? Stay tuned. The literal ball will drop at midnight on January 1st, wil the figurative ball drop as well?

The Affordable Care Act

I am always getting questions about the tax provisions provided by the Affordable Care Act.

Below is a great article from the IRS explaining the Affordable Care Act and the tax provisions implemented through it. It's a bit lengthy and as always with government, a bit confusing. So if you have any questions, feel free to call me to chat or to set up an appointment at my Granada Hills office to see how it can apply to you!

You can reach me at (818) 368-5374 or via my website: http://www.astonesthrowsite.com/contact.php

The Affordable Care Act was enacted on March 23, 2010. It contains some tax provisions that are in effect and more that will be implemented during the next several years. The following is a list of provisions for which the IRS has issued proposed and/or final guidance; additional information will be added to this page as it becomes available.

Minimum Value

On April 26, 2012, the Department of the Treasury and IRS issued Notice 2012-31, which provides information and requested public comment on an approach to determining whether an eligible employer-sponsored health plan provides minimum value. Starting in 2014, whether such a plan provides minimum value will be relevant to eligibility for the premium tax credit and application of the employer shared responsibility payment. 

Information Reporting on Health Insurance Coverage

On April 26, 2012, the Department of the Treasury and IRS issued Notices 2012-32 and 2012-33, which invited comments to help inform the development of guidance on annual information reporting related to health insurance coverage. The information reporting is to be provided by health insurance issuers, certain employers that sponsor self-insured plans, government agencies and certain other parties that provide health insurance coverage.

Disclosure of Return Information

On April 27, 2012, the Department of the Treasury and the IRS issued proposed regulations with rules for disclosure of return information to be used to carry out eligibility determinations for advance payments of the premium tax credit, Medicaid and other health insurance affordability programs. The proposed regulations solicit public comments.

Small Business Health Care Tax Credit

This new credit helps small businesses and small tax-exempt organizations afford the cost of covering their employees and is specifically targeted for those with low- and moderate-income workers. The credit is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have. In general, the credit is available to small employers that pay at least half the cost of single coverage for their employees. Learn more by browsing our page on the Small Business Health Care Tax Credit for Small Employers and our news release.

Health Flexible Spending Arrangements

Effective Jan. 1, 2011, the cost of an over-the-counter medicine or drug cannot be reimbursed from Flexible Spending Arrangements (FSAs) or health reimbursement arrangements unless a prescription is obtained. The change does not affect insulin, even if purchased without a prescription, or other health care expenses such as medical devices, eye glasses, contact lenses, co-pays and deductibles. This standard applies only to purchases made on or after Jan. 1, 2011. A similar rule went into effect on Jan. 1, 2011, for Health Savings Accounts (HSAs), and Archer Medical Savings Accounts (Archer MSAs). Employers and employees should take these changes into account as they make health benefit decisions. For more information, see news release IR-2010-95, Notice 2010-59, Revenue Ruling 2010-23 and our questions and answers. FSA and HRA participants can continue using debit cards to buy prescribed over-the-counter medicines, if requirements are met. For more information, see news release IR-2010-128 and Notice 2011-5.

In addition, starting in 2013, there are new rules about the amount that can be contributed to an FSA. Notice 2012-40 provides information about these rules and flexibility for employers applying the new rules and requests comments about other possible administrative changes to the rules on FSA contributions. The Notice provides instructions on how to submit comments.

Proposed Regulations Issued on Medical Device Excise Tax

On Feb. 3, 2012, the IRS and the Treasury Department issued proposed regulations on the new 2.3-percent medical device excise tax (IRC §4191) that manufacturers and importers will pay on their sales of taxable medical devices starting in 2013. Additional information is available in the Medical Device Excise Tax FAQs.

Health Insurance Premium Tax Credit

Starting in 2014, individuals and families can take a new premium tax credit to help them afford health insurance coverage purchased through an Affordable Insurance Exchange. Exchanges will operate in every state and the District of Columbia. The premium tax credit is refundable so taxpayers who have little or no income tax liability can still benefit. The credit also can be paid in advance to a taxpayer’s insurance company to help cover the cost of premiums. On May 18, 2012, the IRS issued final regulations which provide guidance for individuals who enroll in qualified health plans through Exchanges and claim the premium tax credit, and for Exchanges that make qualified health plans available to individuals and employers.

The portion of the law that will allow eligible individuals to use tax credits to purchase health coverage through an Exchange is not effective until 2014.

Exchanges will offer individuals a choice of health plans that meet certain benefit and cost standards. The Department of Health and Human Services (HHS) administers the requirements for the Exchanges and the health plans they offer. Additional information about the Exchange can be found at www.healthcare.gov and in IRS REG-131491-10 issued on Aug. 12, 2011.

Health Coverage for Older Children

Health coverage for an employee's children under 27 years of age is now generally tax-free to the employee. This expanded health care tax benefit applies to various work place and retiree health plans. These changes immediately allow employers with cafeteria plans –– plans that allow employees to choose from a menu of tax-free benefit options and cash or taxable benefits –– to permit employees to begin making pre-tax contributions to pay for this expanded benefit. This also applies to self-employed individuals who qualify for the self-employed health insurance deduction on their federal income tax return. Learn more by reading our news release or this notice.

Excise Tax on Indoor Tanning Services

A 10-percent excise tax on indoor UV tanning services went into effect on July 1, 2010. Payments are made along with Form 720, Quarterly Federal Excise Tax Return. The tax doesn't apply to phototherapy services performed by a licensed medical professional on his or her premises. There's also an exception for certain physical fitness facilities that offer tanning as an incidental service to members without a separately identifiable fee. For more information on the tax and how it is administered, see the Indoor Tanning Services Tax Center.

Reporting Employer Provided Health Coverage in Form W-2

The Affordable Care Act requires employers to report the cost of coverage under an employer-sponsored group health plan on an employee’s Form W-2, Wage and Tax Statement, in Box 12, using Code DD. Many employers are eligible for transition relief for tax-year 2012 and beyond, until the IRS issues final guidance for this reporting requirement.

The amount reported does not affect tax liability, as the value of the employer excludible contribution to health coverage continues to be excludible from an employee's income, and it is not taxable. This reporting is for informational purposes only, to show employees the value of their health care benefits so they can be more informed consumers.

More information about the reporting can be found on Form W-2 Reporting of Employer-Sponsored Health Coverage.

Adoption Credit

The Affordable Care Act raises the maximum adoption credit to $13,360 per child, up from $13,170 in 2010 and $12,150 in 2009. The adoption tax credit is refundable for tax year 2011, meaning that eligible taxpayers can get it even if they owe no tax for that year. In general, the credit is based on the reasonable and necessary expenses related to a legal adoption, including adoption fees, court costs, attorney’s fees and travel expenses. Income limits and other special rules apply. In addition to attaching Form 8839, Qualified Adoption Expenses (see instructions), eligible taxpayers must include with their 2011 paper tax return one or more adoption-related documents to avoid delaying their refund. Taxpayers may also be asked, after filing their returns, to substantiate any qualified adoption expenses they paid.

For other information, see our news release, tax tip, questions and answers, flyer, Notice 2010-66,Revenue Procedure 2010-31, Revenue Procedure 2010-35 and Revenue Procedure 2011-52.

Medicare Shared Savings Program

The Affordable Care Act establishes a Medicare shared savings program (MSSP) which encourages Accountable Care Organizations (ACOs) to facilitate cooperation among providers to improve the quality of care provided to Medicare beneficiaries and reduce unnecessary costs. More information can be found in Notice 2011-20, which solicited written comments regarding what additional guidance, if any, is needed for tax-exempt organizations participating in the MSSP through an ACO. This guidance also addresses the participation of tax-exempt organizations in non-MSSP activities through ACOs. Additional information on the MSSP is available on the Department of Health and Human Services website.

The Centers for Medicare and Medicaid Services has released final regulations describing the rules for the Shared Savings Program and accountable care organizations. Fact Sheet 2011-11 confirms that Notice 2011-20 continues to reflect IRS expectations regarding the Shared Savings Program and ACOs, and provides additional information for charitable organizations that may wish to participate.

Qualified Therapeutic Discovery Project Program

This program was designed to provide tax credits and grants to small firms that show significant potential to produce new and cost-saving therapies, support U.S. jobs and increase U.S. competitiveness. Applicants were required to have their research projects certified as eligible for the credit or grant. IRS guidance describes the application process.

Submission of certification applications began June 21, 2010, and applications had to be postmarked no later than July 21, 2010, to be considered for the program. Applications that were postmarked by July 21, 2010, were reviewed by both the Department of Health and Human Services (HHS) and the IRS. All applicants were notified by letter dated October 29, 2010, advising whether or not the application for certification was approved. For those applications that were approved, the letter also provided the amount of the grant to be awarded or the tax credit the applicant was eligible to take.

The IRS published the names of the applicants whose projects were approved as required by law. Listings of results are available by state.

Learn more by reading the IRS news release, the news release issued by the U.S. Department of the Treasury, the page on the HHS website and our questions and answers.

Group Health Plan Requirements

The Affordable Care Act establishes a number of new requirements for group health plans. Interim guidance on changes to the nondiscrimination requirements for group health plans can be found inNotice 2011-1, which provides that employers will not be subject to penalties until after additional guidance is issued. Additionally, TD 9575 and REG-4003810, issued by DOL, HHS and IRS, provide information on the summary of benefits and coverage and the uniform glossary. Notice 2012-59provides guidance to group health plans on the waiting periods they may apply before coverage starts. Other information on group health plan requirements is available on the websites of the Departments of Health and Human Services and Labor and in additional guidance.

Tax-Exempt 501(c)(29) Qualified Nonprofit Health Insurance Issuers

The Affordable Care Act requires the Department of Health and Human Services (HHS) to establish the Consumer Operated and Oriented Plan program (CO-OP program). It also provides for tax exemption for recipients of CO-OP program grants and loans that meet additional requirements under section 501(c)(29). IRS Notice 2011-23 outlined the requirements for tax exemption under section 501(c)(29) and solicited written comments regarding these requirements as well as the application process. Revenue Procedure 2012-11, issued in conjunction with temporary regulationsand a notice of proposed rulemaking, sets out the procedures for issuing determination letters and rulings on the exempt status of organizations applying for recognition of exemption under 501(c)(29).

An overview of the CO-OP program is available on the Department of Health and Human Services website.

Medicare Part D Coverage Gap “donut hole” Rebate

The Affordable Care Act provides a one-time $250 rebate in 2010 to assist Medicare Part D recipients who have reached their Medicare drug plan’s coverage gap. This payment is not taxable. This payment is not made by the IRS. More information can be found at www.medicare.gov.

Additional Requirements for Tax-Exempt Hospitals

The Affordable Care Act added new requirements for charitable hospitals. (See Notice 2010-39 andNotice 2011-52.) On June 22, 2012, the IRS issued proposed regulations which provide information on the requirements for charitable hospitals relating to financial assistance and emergency medical care policies, charges for emergency or medically necessary care provided to individuals eligible for financial assistance, and billing and collections. Comments on the proposed regulations are requested by Sept. 24, 2012.

Form 990, Schedule H, for tax year 2010 was revised to include a new Part V, Section B, to gather information on hospitals' compliance with the new requirements and on related policies and practices. To give the hospital community time to familiarize itself with the types of information the IRS is requesting, Part V, Section B of Schedule H was made optional for the 2010 tax year (seeAnnouncement 2011-37).

The IRS considered public input and made revisions to Part V, Section B for tax year 2011 (see theForm 990, Schedule H and instructions). Hospitals are required to complete all parts and sections of Schedule H for tax year 2011, with the exception of lines 1-7 of Part V, Section B, which relate to community health needs assessments (see Notice 2012-4). These lines are optional for 2011. The IRS continues to welcome public input on the new requirements for charitable hospitals under the Affordable Care Act.

Annual Fee on Branded Prescription Pharmaceutical Manufacturers and Importers

The Affordable Care Act created an annual fee payable beginning in 2011 by certain manufacturers and importers of brand name pharmaceuticals. On Aug. 15, 2011, the IRS issued temporary regulations and a notice of proposed rulemaking on the branded prescription drug fee. The temporary regulations describe the rules related to the fee, including how it is computed and how it is paid.

On Nov. 4, 2011, the IRS issued Notice 2011-92 which provides additional guidance on the branded prescription drug fee for the 2012 fee year. 

Modification of Section 833 Treatment of Certain Health Organizations

The Affordable Care Act amended section 833 of the Code, which provides special rules for the taxation of Blue Cross and Blue Shield organizations and certain other organizations that provide health insurance. IRS Notice 2010-79 provides transitional relief and interim guidance on the computation of an organization’s taxpayer’s Medical Loss Ratio for purposes of section 833, the consequences of nonapplication and changes in accounting method. Notice 2011-04 provides additional information and the procedures for qualifying organizations to obtain automatic consent to change its method of accounting for unearned premiums. Notice 2011-51 extends the transitional relief and interim guidance provided in Notice 2010-79 for another year to any taxable year beginning in 2010 and the first taxable year beginning after Dec. 31, 2010. Notice 2012-37 extends the transitional relief and interim guidance provided in Notice 2010-79 for another year to any taxable year beginning in 2012 and the first taxable year beginning after Dec. 31, 2012.

Medical Loss Ratio (MLR)

Beginning in 2011, insurance companies are required to spend a specified percentage of premium dollars on medical care and quality improvement activities, meeting a medical loss ratio (MLR) standard. Insurance companies that are not meeting the MLR standard will be required to provide rebates to their consumers beginning in 2012. For information on the federal tax consequences to an insurance company that pays a MLR rebate and an individual policyholder who receives a MLR rebate, as well as information on the federal tax consequences to employees if a MLR rebate stems from a group health insurance policy, see our frequently asked questions.

Limitation on Deduction for Compensation Paid by Certain Health Insurance Providers

The Affordable Care Act amended section 162(m) of the Code to limit the compensation deduction available to certain health insurance providers. The amendment goes into effect for taxable years beginning after Dec. 31, 2012, but may affect deferred compensation attributable to services performed in a taxable year beginning after Dec. 31, 2009. Initial guidance on the application of this provision can be found in Notice 2011-2, which also solicited comments on the application of the amended provision.

Employer Shared Responsibility Payment

Starting in 2014, certain employers must offer health coverage to their full-time employees or a shared responsibility payment may apply. Information may be found in news releases IR-2011-92and IR-2011-50 and Notices 2011-73, 2011-36 and 2012-17. Additionally, Notice 2012-58 expands upon and modifies previous guidance and describes safe harbors that employers may use to determine whether certain workers are full-time employees and to establish that coverage is affordable at least through the end of 2014. Notice 2012-59 provides related guidance for group health plans on the waiting periods they may apply before starting coverage.

Patient-Centered Outcomes Research Institute

The Affordable Care Act establishes the Patient-Centered Outcomes Research Institute. Funded by the Patient-Centered Outcomes Research Trust Fund, the institute will assist patients, clinicians, purchasers and policy-makers in making informed health decisions by advancing clinical effectiveness research. The trust fund will be funded in part by fees paid by issuers of health insurance policies and sponsors of self-insured health plans.

On April 12, 2012, the IRS and the Treasury Department issued proposed regulations on this fee. The IRS and Treasury request comment on the proposed regulations by July 16, 2012. Comments may be submitted electronically, by mail or hand delivered to the IRS. Additionally, a public hearing is scheduled for August 8, 2012. The preamble to the proposed regulations provides instructions on how to submit comments and participate in the public hearing.

For More Information

For tips, fact sheets, questions and answers, videos and more, see our Affordable Care Act of 2010: News Releases, Multimedia and Legal Guidance page.