Get Ready for Onerous New 1099 Reporting Rules

With the ever-increasing cost of healthcare, you should be vigilant in looking for related tax deductions that are available to you. As we will explain below, a rule change taking effect this year makes a deduction for medical expenses harder for most taxpayers, but you may be overlooking some deductible health insurance premiums that will offset the harsher rule.

Higher Threshold for Itemized Medical Write-Offs

Ten Important Facts about Medical Expense Deductions 1. If you qualify, you can normally claim the costs of diagnosing, treating, easing or preventing disease. 2. The deduction is limited (see main article for the exact limitations based on your income, the tax year and your age). 3. Most people don't qualify to take a deduction unless they have a large amount of medical expenses that are not reimbursed. For example, let's say your AGI is $40,000 and you paid medical expenses of $2,500 in 2012. You are 50 years old. For 2012, you cannot deduct any of your medical expenses because they are not more than 7.5 percent of your AGI. 4. You must itemize deductions on your tax return in order to claim medical expenses. 5. The costs of prescription drugs and insulin are eligible for the deduction. 6. Costs paid for medical and dental care and some long-term care insurance qualify. 7. You can include medical and dental costs that you paid in 2012, even if you received the services in a previous year. Keep good records to show the amounts you paid. 8. You may be able to claim the cost of travel to obtain medical care. This includes the cost of public transportation, an ambulance, tolls and parking fees. If you use your car for medical travel, you can deduct the actual costs, including gas and oil or deduct the standard mileage rate for medical travel, which is 23 cents per mile for 2012 (24 cents for 2013). 9. You must reduce your total medical expenses for the year by all reimbursements you receive from insurance companies or other sources. This includes payments from Medicare. 10. If you qualified for medical or dental expenses that would have been deductible in an earlier year, but you did not claim them, you can file an amended tax return for the year in which you overlooked the expenses. An amended return must generally be filed within three years from the date the original return was filed or within two years from the time the tax was paid, whichever is later.

Before this year, you could claim an itemized deduction for qualified medical expenditures for you, your spouse, and your dependents -- to the extent those expenses exceeded 7.5 percent of your adjusted gross income (AGI). Your AGI is the number at the bottom of page 1 of your Form 1040. It includes all taxable income items and is reduced by certain write-offs including those for moving expenses, deductible IRA contributions, alimony payments, and student loan interest.
The 7.5 percent-of-AGI hurdle was hard enough to clear. Now, thanks to the 2010 healthcare legislation, an even higher 10 percent-of-AGI threshold applies to most taxpayers -- effective for this year and beyond.
Exception: If either you or your spouse will be 65 or older as of December 31, 2013, the unfavorable 10 percent-of-AGI threshold will not affect you until 2017 (until then, the 7.5 percent-of-AGI threshold will continue to apply in your case).

Key Point: For the 2012 tax year, the more-favorable 7.5 percent-of-AGI threshold applies to taxpayers of all ages. So the higher threshold, which takes effect this year, does not affect the 2012 tax return due April 15, 2013 (or October 15 if you file for an extension).
Regardless of which percent-of-AGI threshold applies, don't overlook medical expenses that could push you over the applicable threshold. Health insurance premiums often comprise the biggest category of allowable expenses. Here's what you can include in the potentially deductible pot.
Common Health and Dental Insurance Premiums

You can include garden-variety health and dental insurance premiums to cover you, your spouse, and your dependents--including children. You cannot deduct premiums to cover an under-age-27 adult child unless he or she qualifies as your dependent (that generally means you must provide over half the child's support for the year). Source: Internal Revenue Code Section 213.
Premiums for Medicare Parts A, B, C, and D and Medigap Coverage

The IRS now admits that Medicare insurance premiums count as health insurance premiums for purposes of the itemized deduction for medical expenses. Specifically, premiums for all four Medicare Parts -- A, B, C, and D -- should qualify and premiums for Medigap coverage should too.
Medicare Part A is commonly called hospital insurance coverage. Most eligible individuals are automatically covered for Part A without having to pay premiums because the Part A premiums are considered paid from Medicare taxes on your wages while you or your spouse were working. However if you did not pay Medicare taxes, you may have to pay premiums to get Part A coverage. If so, the Part A premiums for 2012 could have been as much as $451 per month per covered person (up to $5,412 for the year).

Medicare Part B is commonly called medical insurance coverage. Part B coverage together with Part A coverage is often called "original" Medicare. Part B mainly covers doctors and outpatient services, and most people must pay monthly premiums for this coverage. For 2012, you probably paid the standard monthly Part B premium of $99.90 ($1,199 per covered person for the year). Higher-income individuals paid more--up to a monthly maximum of $319.70 for 2012 (up to $3,836 per covered person).

Part B premiums are usually withheld from your Social Security benefits. If so, the amount withheld for the year will show up as an adjustment on Line 3 of Form SSA-1099 (Social Security Benefit Statement), which you should have received from the Social Security Administration (SSA). Part B premiums can add up to significant dollars, especially for married couples when they are being paid for both spouses.

Medicare Part C is for private Medicare Advantage health plan coverage, which is supplemental to government-provided Part A and Part B coverage. Premiums vary depending on the plan. If you have Part C coverage, you don't need Medigap coverage (described immediately below).

Medicare Part D is for private prescription drug coverage. Premiums vary depending on the plan. Higher-income folks pay an "adjustment amount" in addition to basic plan premiums. For 2012, the adjustment amount can be up to $66.40 per month (up to $797 per covered person). Adjustment amounts are withheld from your Social Security benefits and will show up as an adjustment on Line 3 of Form SSA-1099, which you should have received from the SSA.

Medigap Insurance is private supplemental insurance that functions as an alternative to Part C coverage. Premiums vary depending on the plan.

Premiums for Qualified Long-Term Care Insurance

These premiums also count as medical expenses for itemized deduction purposes, subject to the age-based limits shown below. For each covered person, count the lesser of:

• Premiums paid in the applicable year or
• The applicable age-based limit.

The age-based limits for 2012 and 2013 are listed below.

Premiums Paid in 2012
Age as of 12/31/12	Max Amount Treated as Medical Expense
40 or under	$ 350
41-50	660
51-60	1,310
61 to 70	3,500
Over 70	4,370

Premiums Paid in 2013
Age as of 12/31/13	Max Amount Treated as Medical Expense
40 or under	$ 360
41-50	680
51-60	1,360
61 to 70	3,640
Over 70	4,550

Special Health Insurance Write-Off for Self-Employed Folks

Self-employed individuals who pay their own medical and dental insurance premiums are generally allowed to deduct these costs "above the line" on page 1 of Form 1040. This is a good deal because you need not itemize to benefit from an above-the-line deduction. More good news: You can deduct the cost to cover an under-age-27 adult child, even if he or she does not qualify as your dependent.

Estimated Taxes: Pay as You Go or Pay the Price

Monday, April 15 is the deadline for the first quarterly 2013 estimated tax payment for calendar year taxpayers. If you make estimated tax payments, be aware that there have been a number of changes made to the tax law this year that might change the amount of estimated tax

The four estimated tax deadlines for 2013 fall on: ·    April 15, 2013; ·    June 17, 2013; ·    September 16, 2013; and ·    January 15, 2014.

you owe.

Who Must Make Payments?

The federal income tax is a pay-as-you-go system. You must generally pay tax as you earn or receive income during the year. If you don't have enough tax withheld and paid to the IRS and you owe at least $1,000 in tax for 2013 after withholding and credits, you must make estimated payments. In general, you're required to pay annually in four installments.

People who are in business for themselves usually pay their taxes this way. But you may also have to make estimated payments if you receive income such as dividends, interest, capital gains, alimony, rents, and royalties. Estimated tax is used to pay not only income tax, but self-employment tax and alternative minimum tax.

Fortunately, the tax law provides "safe harbors" for avoiding an estimated tax penalty. No penalty is imposed if your annual payments equal at least:

• 90 percent of the current year's tax liability, or
• 100 percent of the prior year's tax liability (110 percent if your previous year's AGI was over $150,000).

The penalty can also be avoided if you did not receive income evenly throughout the year and paid installments on an "annualized basis." Your tax adviser can provide more information on whether this option is available in your situation.

Remember: If you make federal estimated tax payments, you might also be required to make state estimated tax payments.

Tax Law Changes for 2013

There are a number of tax changes that became effective this year that you should take it into account when determining the amount of quarterly estimated tax payments to make. For example:

1. The Additional Medicare Tax. Beginning January 1, 2013, a 0.9 percent additional Medicare tax applies to wages, Railroad Retirement Tax Act compensation, and self-employment income. The extra 0.9 percent Medicare tax applies to:

• Salary and/or self-employment (SE) income above $200,000 for unmarried individuals.
• Combined salary and/or net SE income above $250,000 for married joint-filing couples.
• Salary and/or net SE income above $125,000 for married individuals who file separately.

2. The Tax on Net Investment Income. A new 3.8 percent "Net Investment Income Tax" (also called the Medicare surtax) kicked in on January 1, 2013. It is only imposed on certain high-income taxpayers.
Individuals will owe the tax if they have net investment income and also have modified adjusted gross income over the following thresholds:

• $200,000 for singles or heads of household.
• $250,000 for married couples filing jointly (or qualifying widow(er) with dependent child.
• $125,000 for married individuals filing separately.

In general, investment income includes, but is not limited to: interest, dividends, capital gains, rental and royalty income, non-qualified annuities, income from businesses involved in trading of financial instruments or commodities, and businesses that are passive activities to the taxpayer.

3. A Limit on Itemized Deductions. Beginning in 2013, itemized deductions may be reduced for single filers with an adjusted gross income of more than $250,000 ($300,000 for married taxpayers filing jointly and $150,000 for those married filing separately).

4. Payroll Tax Rate Increase. For 2011 and 2012, the Social Security tax withholding rate on an employee's salary was temporarily reduced from the normal 6.2 to 4.2 percent. If you are self-employed, the Social Security tax component of the self-employment tax was reduced from the normal 12.4 to 10.4 percent. Unfortunately for working folks, the payroll tax cut is over.

For 2013, the Social Security tax can hit up to $113,700 of salary at a 6.2 percent rate and up to $113,700 of self-employment income at a 12.4 percent rate.

5. Rates on Ordinary Income. For most individuals, the federal income tax rates for 2013 will be the same as they were for 2012: 10, 15, 25, 28, 33, and 35 percent. However, the maximum rate for higher-income folks increases to 39.6 percent (up from 35 percent). This change only affects single taxpayers with taxable income of $400,000 ($450,000 for married taxpayers filing jointly and $425,000 for heads of households).

6. Long-Term Capital Gains and Dividend Rates: The tax rates on long-term capital gains and dividends in 2013 will also remain the same as last year for most individuals. However, the maximum rate for higher-income folks increases to 20 percent (up from 15 percent). This change only affects singles with taxable income 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.

Other Tax Changes

In addition to the six changes listed above, there have been a number of other tax law changes implemented this year. For example, it is now more difficult to qualify to claim medical and dental expense deductions if you are under age 65. Certain tax breaks were increased slightly due to inflation, such as personal exemption amounts and standard mileage rates for business driving.

If you think that your estimated tax payments should be adjusted this year due to the tax law changes described above, consult with your tax adviser.

Employers: Gain Extra Time to Claim the Work Opportunity Tax Credit

The IRS announced it is providing an extension of time to employers that want to claim the Work Opportunity Tax Credit (WOTC). Specifically, employers have more time -- up to April 29, 2013 -- to file the required IRS form to claim the valuable tax credit. (IRS Notice 2013-14)

Which Individuals Are Members of Targeted Groups? ·  Veterans who meet certain requirements; ·  TANF Recipients (those receiving benefits under the Temporary Assistance for Needy Families program); ·  SNAP (Food Stamp) Recipients; ·  Designated Community Residents (living in Empowerment Zones or Rural Renewal Counties); ·  Vocational Rehabilitation Referral (An individual with a disability who completed, or is completing, rehabilitative services from a state-certified agency, an Employment Network under the Ticket to Work program, or the U.S. Department of Veteran Affairs). ·  Ex-felons (An individual who has been convicted of a felony and has a hiring date that is not more than 1 year after the conviction or release from prison.) ·  Supplemental Security Income Recipients; and ·  Summer Youth Employee (16 or 17 year old living in Empowerment Zones and working between May 1 and September 15).

Basic information: The WOTC can be claimed by employers hiring individuals who are members of targeted groups. The amount of the credit is a percentage of wages paid in the first year. The maximum credit a for-profit employer can claim is $9,600 for each worker ($6,240 for tax-exempt organizations).

 

The WOTC was retroactively extended by the American Taxpayer Relief Act, which was enacted on January 2, 2013. Before the law passed, wages for purposes of the WOTC didn't include amounts paid or incurred to:

• A non-veteran worker who began a job after December 31, 2011; or 
• A veteran worker who started a job after December 31, 2012.

The American Taxpayer Relief Act retroactively extended the WOTC so that it applies to eligible veterans and non-veterans who start working for an eligible employer before January 1, 2014.

 

The problem is the law granted a two-year WOTC extension for qualifying non-veterans (one-year for qualifying veterans) but it didn't provide a procedure for employers to meet a requirement for claiming it.

 

Here is the general process:

• An employer must obtain certification that an individual is a targeted group member before the employer can claim the credit.
• Certification of an individual's targeted group status is obtained from a state employment office called a Designated Local Agency (DLA).
• An employer must submit IRS Form 8850 to the DLA no later than the 28th day after the individual begins work.

Therefore, employers who qualify for the credit may have had eligible workers on their payrolls for months before the American Taxpayer Relief Act made them retroactively eligible for a WOTC.

 

Under IRS Notice 2013-14, here is the relief:

1. If you are a for-profit (taxable) employer that hired a member of a targeted group, other than an eligible veteran, between January 1, 2012 and March 31, 2013, you can submit IRS Form 8850 to your DLA by April 29, 2013.
2. If you are an employer (tax-exempt or taxable) that hired an eligible veteran between January 1, 2013 and March 31, 2013, you can submit IRS Form 8850 to your DLA by April 29, 2013. Tax-exempt organizations can only claim the WOTC for hiring eligible veterans -- and not other targeted groups.

If you have questions about how to claim the WOTC for certain employees your business or organization hires, contact your tax adviser.