Here are a list of developments that occurred earlier in the year and the tax implications that follow them.
Obama Care Penalty Exemptions
For taxpayers who didn’t have health care insurance in 2015, they may be eligible for waiver of the penalty which is $325 person ($162.50 for each child under age 18). Exemptions are for:
(1) Taxpayers who can’t afford to pay the premium. This applies if the minimum net premium exceeds 8.05% of household income.
(2) Those without coverage for less than three months
(3) Household income below the following thresholds (for those 65 and over, it is slightly higher).
- $10,300 for single taxpayers
- $13,250 for head of households
- $20,600 for married filing joint return
- A “hardship” causing them not to have coverage. To qualify, a taxpayer must submit an application and documentation to the health care exchange before filing their tax return. If an exemption has not been granted before filing, they should put ”pending” in column C, Part 1 of form 8965 and file their return while waiting for an exemption.
Obama Care Tax Credit for Small Businesses
For 2015, if an employer has 10 or fewer employees, and the average salary is less than $28,500, the credit is 50% (35% for exempt groups) of the premium the employer paid. If the business has more than 10 employees, the credit is phased out-when they have 25 or more employees or the average salary is more than $51,600, the credit is zero. To qualify for the credit, the business must pay at least half the premiums and is generally available only for policies purchased on a Small Business Health Care Options Program Marketplace. The credit can be claimed only twice after 2013. The deduction for medical care insurance is reduced by the credit.
Penalty for Non-deductible Bonuses
A corporation deducted employee-shareholder bonuses based on book income after expenses, excluding the bonus. The IRS determined that part of that amount was not allowable and was recharacterized as a dividend. The IRS assessed a 20% accuracy related penalty because they said the company lacked substantial authority for its original filing position. The company appealed the IRS decision to the U.S. Tax Court which upheld the IRS determination [Brinks, Gibson & Lione, TC Memo. 2016-8].
Damages for Emotional Distress
A court awarded a taxpayer compensation from the employee’s former employer when she sued for discrimination because she suffered severe emotional distress from his retaliation for refusing to provide a medical accommodation for an earlier workplace injury. The taxpayer claimed the damages were not taxable because the emotional trauma was related to her previous work place injury. The IRS said the damages were taxable because they were not a result of a direct physical injury. The taxpayer appealed the IRS decision to the U.S. Tax Court which upheld the IRS determination [Barbato, TC Memo. 2016-23].
Charitable Contribution Pass-through
A family owned a C-corporation and a partnership indirectly. The partnership intended to make a charitable donation, but due to an error, the corporation issued the check. A couple years later the taxpayer discovered the error and had the partnership reimburse the corporation. The partnership took a deduction, which was passed through to the partners. The partnership corrected the audited financial statements and notified the donee. The IRS said the partners could not deduct the contribution, passed through from the partnership, on their personal tax return. The taxpayers appealed the IRS decision to the U.S. District court which overruled the IRS [Green, District Court, OK].
Tax Year for Reporting Compensation
When a company uses the accrual method of accounting, they can take a deduction for employee compensation in the year the compensation is accrued if it is paid within 2 ½ months of the following tax year. The question is: in which year does the employee report the compensation-in the year it is accrued or in the year it is received? The IRS states that the employee must report the income in the year it is received. But, there is an exception for corporations whose employees directly or indirectly own more than 50% of the stock. In this case, the compensation can be deducted in the year of accrual only if the employee reports the compensation in the same year the corporation accrued it. This limitation also applies to owners of an S-corporation, personal service corporation, and partnership.
It is well known that taxpayers have been victims of identity theft and the IRS is taking measures to prevent it by requiring employers and corporations to file W-2s and 1099s with the IRS earlier. But identify theft can also happen to tax return preparers. Preparers should make sure their EFIN used for electronic filing isn’t being used improperly by others. This can be determined by using the IRS.
E-services online tools to see how many returns have been e-filed under the preparer’s EFIN. If the number of returns is more than the number of returns the preparer knows have been submitted, they should contact the IRS. Also, taxpayers should be aware of and report to the IRS any suspicious e-mails and phone calls purportedly received from the IRS. The IRS does not send correspondence by e-mail or call taxpayers. They only notify taxpayers and preparers by mail.