ACA: Business and Individual Issues (Including Extenders Update)

Transcription

1 ACA: Business and Individual Issues (Including Extenders Update) Phone: Fax: Your California solution since 1975

2 ACA: Business and Individual Issues (Including Extenders Update)

3 This publication is distributed with the understanding that the authors and publisher are not engaged in rendering legal, accounting or other professional advice and assume no liability in connection with its use. Tax laws are constantly changing and are subject to differing interpretation. In addition, the facts and circumstances in your particular situation may not be the same as those presented here. Therefore, we urge you to do additional research and ensure that you are fully informed before using the information contained in this publication. Federal law prohibits unauthorized reproduction of the material in ACA: Business and Individual Issues (Including Extenders Update) manual. All reproduction must be approved in writing by Spidell Publishing, Inc. This is not a free publication. Purchase of this electronic publication entitles the buyer to keep one copy on his/her computer and to print out one copy only. Printing out more than one copy and any electronic distribution of this publication is prohibited by international and United States copyright laws and treaties. Illegal distribution of this publication will subject the purchaser to penalties of up to $100,000 per copy distributed.

4 ACA: BUSINESS AND INDIVIDUAL ISSUES (INCLUDING EXTENDERS UPDATE) Course objectives: The purpose of this course is to provide a comprehensive exploration of the Affordable Care Act and to prepare tax professionals for new 2015 requirements. Extenders will also be discussed. Topics addressed include: the PATH Act, net investment income tax, the PTC, shared policy allocations, individual shared responsibility payments, filing Forms 1095, and much more. After completing this course, you will be able to: Identify what is included in essential health benefits Choose elements of net investment income necessary to compute NIIT Determine when to withhold the 0.9% additional Medicare tax Recall when a shared policy allocation is required and where to report it Identify who the provider is for self-insured plans Recall how the PATH Act has affected the Cadillac Tax Category: Taxes Recommended CPE Hours: CPAs/PAs 2 Tax EAs/CRTPs 2 Federal Tax Update Level: Update Prerequisite: General tax preparation knowledge is required. Advanced Preparation: None Expiration Date: February 2017

5 Table of Contents Extenders... 1 Individuals... 1 Educator expenses... 1 Tuition deduction... 1 State and local general sales tax deduction... 1 Deduction of mortgage insurance premiums... 1 Charitable contributions... 1 Child Tax Credit... 1 Due diligence requirements... 1 American Opportunity Tax Credit... 2 Due diligence requirements... 2 Nonbusiness Energy Property Credit... 2 Residential Energy Efficient Property Credit (Solar Credit)... 2 Earned Income Tax Credit... 2 Principal residence COD exclusion... 3 No California conformity... 3 Transfer of IRA funds directly to charity plans... 3 Business... 3 Bonus depreciation... 3 Qualified improvement property... 3 IRC IRC 179 for real estate... 4 Other IRC 179 provisions... 4 Restaurant property, leasehold improvements, and qualified retail improvement property... 4 Luxury car caps limitations... 4 Phase-downs after Transportation fringe benefits... 5 Small business stock... 5 Built-in gains... 5 Research Credit... 5 Applicable against AMT... 5 Applicable against FICA... 5 Expensing costs of film and TV production... 5 Seven-year write-off of motorsport racing track facilities... 5 Three-year depreciation on racehorses... 6 Accelerated depreciation for business property on Indian reservations i Spidell Publishing, Inc.

6 50% expensing of mine safety equipment... 6 S corporation shareholder basis adjustment for charitable contributions... 6 Enhanced deduction for food inventory... 6 Differential wage payments... 6 Work Opportunity Tax Credit... 6 New Markets Credit... 7 Indian Employment Credit... 7 Alternative Fuel Vehicle Refueling Property Credit... 7 Credit for Two-Wheeled Electric Plug-In Vehicles... 7 New Energy Efficient Home Credit... 7 Credit for Fuel Cell Vehicles... 7 PATH Act conformity chart... 7 Affordable Care Act Introduction the basics of the act Insurance exchanges What are exchanges? California exchange Requirements for health plans Required coverage Plan levels Individuals % additional income tax on investment income California nonconformity Rules of general application Treas. Regs Application to individuals Treas. Regs Application to estates and trusts Treas. Regs Definition of net investment income Treas. Regs Income items specifically exempt Net gains from the disposition of property Treas. Regs (d) Deductions Treas. Regs (f) Trade or business exception Trade or business income to which tax applies Treas. Regs Trading in financial instruments or commodities Treas. Regs (c) Passive activities Treas. Regs (b) Income from partnerships and S corporations Dispositions of interests in partnerships and S corporations Prop. Treas. Regs % additional Medicare tax on earned income Wages subject to Medicare tax Withholding is reported as Medicare Joint returns and withholding ii Spidell Publishing, Inc.

7 Self-employed taxpayers Taken into consideration for underpayment and estimated tax purposes Premium Tax Credit (PTC) Who is eligible for the tax credit? How the credit is determined Limit on PTC Advance payments of PTC Family matters Must file joint Family size Household income Reconciling the credit on the tax return Reconciling credit where income isn t what was expected PTC shared policy allocations Reporting a shared allocation Different dependents (the shifting enrollee ) Taxpayers divorced or legally separated Taxpayers filing separate returns Taxpayers who marry during the taxable year PTC and deductions for medical insurance Self-employed circular computation PTC and itemized deductions Taxpayers who filed using incorrect Forms 1095-A are not required to amend Delay in issuance of 1095s IRS announces that 1095s are not necessary to file 1040s Best practices for 2014 may apply to Individual shared responsibility payments (penalties) go up in Information needed to determine penalty ACA for business IRS provides limited relief for health reimbursement plans Small Employer Health Insurance Credit may begin for an employer in any year Shared responsibility for employers begins in Employer shared responsibility flowchart Employer reporting requirements begin for The Cadillac Tax a first look iii Spidell Publishing, Inc.

8 EXTENDERS On December 15, 2015, a bipartisan agreement was reached on tax extenders in the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act). It was quickly passed by Congress and signed by the President. PATH makes permanent several provisions of the law that have been subject to several rounds of extenders. It also extends several provisions through 2019 and others through INDIVIDUALS EDUCATOR EXPENSES The above-line deduction for educator expenses is made permanent. Moreover, it is enhanced in two ways: The $250 maximum amount will be indexed for inflation in tax years ending after 2015; and Qualifying expenses will include costs incurred in taking professional development courses. (Act 104) TUITION DEDUCTION The tuition deduction is extended retroactively to 2015 and through (Act 153) STATE AND LOCAL GENERAL SALES TAX DEDUCTION The deduction for state and local sales tax is made permanent. (Act 106) DEDUCTION OF MORTGAGE INSURANCE PREMIUMS The deduction of mortgage insurance premiums is extended retroactively to 2015 and through (Act 152) CHARITABLE CONTRIBUTIONS The liberalized rules for qualified conservation contributions are made permanent. (Act 111) CHILD TAX CREDIT The enhanced Child Tax Credit is made permanent. Prior to the Act, the refundable portion of the Child Tax Credit was 15% of the amount by which the taxpayer s earned income exceeds $3,000. This provision is made permanent. (Act 101) Due diligence requirements The Act requires that paid preparers will be subject to the same due diligence requirements to which they are currently subject with respect to the Earned Income Tax Credit and the same penalty of $500. (Act 208) This requirement goes into effect for the 2016 tax year Spidell Publishing, Inc.

9 Comment Presumably, the IRS will develop a form similar to Form 8867, Paid Preparer s Earned Income Credit Checklist, for purposes of the Child Tax Credit. Alternatively, they may modify Form 8867 to accommodate both credits. AMERICAN OPPORTUNITY TAX CREDIT The American Opportunity Tax Credit is made permanent. (Act 102) Due diligence requirements The Act requires that paid preparers will be subject to the same due diligence requirements to which they are currently subject with respect to the Earned Income Tax Credit and the same penalty of $500. (Act 208) This requirement goes into effect for the 2016 tax year. Comment Presumably, the IRS will develop a form similar to Form 8867, Paid Preparer s Earned Income Credit Checklist, for purposes of the American Opportunity Tax Credit. Alternatively, they may modify Form 8867 to accommodate both credits. Note that, under the Trade Preferences Extension Act of 2015, taxpayers are no longer allowed to claim the credit unless the taxpayer is in possession of Form 1098-T, Tuition Statement. This change is effective for tax years beginning in NONBUSINESS ENERGY PROPERTY CREDIT The credit is extended for two years to apply to property placed in service after December 31, 2004, and before January 1, Minor modifications are made to the definitions of qualified property. (Act 181) RESIDENTIAL ENERGY EFFICIENT PROPERTY CREDIT (SOLAR CREDIT) The PATH Act extends the credit for qualified solar electric property and qualified solar water heating property to property placed in service before January 1, 2022: For property placed in service between January 1, 2017, and December 31, 2019, the credit amount is 30%; For property placed in service between January 1, 2020, and December 31, 2020, the credit amount is 26%; and For property placed in service between January 1, 2021, and December 31, 2021, the credit amount is 22%. Labor and installation costs allocable to the onsite preparation, assembly, or original installation of the qualified solar electric property and for piping or wiring to interconnect such property to the dwelling unit can be taken into account in computing the credit. EARNED INCOME TAX CREDIT The enhanced credit for taxpayers with three or more qualifying children is made permanent. (Act 103) In addition, the Act prohibits an individual from retroactively claiming the credit by Spidell Publishing, Inc.

10 amending a return in any prior year in which the individual for whom the credit is claimed did not have a valid Social Security number. (Act 204) PRINCIPAL RESIDENCE COD EXCLUSION The Act retroactively extends the exclusion for cancellation of debt on a qualified principal residence so that it applies to debts discharged before January 1, In addition, the Act modifies the exclusion to apply to discharges that occur in 2017 if the discharge is pursuant to a written agreement entered into in (IRC 108(a)(1)(E); Act 151) No California conformity In a surprise move, Governor Brown vetoed AB 99, which would have extended California s qualified principal residence indebtedness exclusion for COD income through For 2014 California returns, taxpayers were forced to look to the insolvency exclusion, or report the income and pay the tax. TRANSFER OF IRA FUNDS DIRECTLY TO CHARITY The Act makes permanent the ability of individuals at least 70½ years old to exclude from gross income qualified charitable distributions from IRAs of up to $100,000 per year. (IRC 408(d)(8)(F); Act 112) 529 PLANS 529 rules are enhanced in the following ways: Computer technology and equipment are permanently allowed as qualified higher education expenses for purposes of 529; and Individuals are allowed a 60-day rollover period for nonqualified distributions; that is, the law will give individuals up to 60 days to redeposit the distribution into a qualifying account for that individual without the distribution being taxable. (Act 302) BUSINESS BONUS DEPRECIATION The Act retroactively extends 50% bonus depreciation for two years. Thus, it applies to qualified property placed in service before January 1, 2018 (before January 1, 2019, for certain longer-lived property and transportation property). (Act 143) After 2017, bonus depreciation is phased down: 40% in 2018; and 30% in Qualified improvement property Bonus depreciation is enhanced to include as qualified property certain improvements to an interior portion of a building which is nonresidential real property if such improvement is placed in Spidell Publishing, Inc.

11 service after the date that building was first placed in service. (Act 143(b)(2)) Such improvements do not include: The enlargement of the building; Any elevator or escalator; or The internal structural framework of the building. IRC 179 The Act retroactively makes permanent the $500,000 expense limitation and the $2 million phaseout threshold. (Act 124) In addition, both limitations will be indexed for inflation for taxable years beginning after IRC 179 for real estate IRC 179 for qualified real estate is made permanent. (Act 124(c)) As a consequence, the limitation on carryovers of disallowed expensing to tax years beginning after 2015 is removed. In addition, the $250,000 limitation with respect to qualifying real property is eliminated. Other IRC 179 provisions Computer software: Computer software as qualifying property for IRC 179 purposes is made permanent. (Act 124(b)) Revoke election: The ability to revoke an IRC 179 election without the consent of the IRS is made permanent. (Act 124(d)) Heating and air conditioning units now qualifying property The Act provides that, for property placed in service after December 31, 2015, heating and air conditioning units are treated as eligible property for purposes of IRC 179. (Act 124(e)) RESTAURANT PROPERTY, LEASEHOLD IMPROVEMENTS, AND QUALIFIED RETAIL IMPROVEMENT PROPERTY The Act retroactively makes permanent the 15-year straight-line recovery period for qualified real estate. (Act 123) LUXURY CAR CAPS For vehicles placed in service after December 31, 2015, and before January 1, 2018, the Act provides that the limitations under IRC 280F for passenger cars that are qualified property are increased by $8,000. (Act 143(b)(1)) 2015 limitations Thus, the first-year limit for a passenger automobile placed in service in 2015 is $11,160. For a light van or truck, the limit is $11, Spidell Publishing, Inc.

12 Phase-downs after 2017 The $8,000 increase will be phased down after 2017: $6,400 in 2018; and $4,800 in After 2019, there will be no increase unless Congress acts to extend bonus depreciation. TRANSPORTATION FRINGE BENEFITS The Act makes permanent the monthly exclusion amounts for transit passes and van pool benefits so that they match the exclusion for qualified parking benefits. (Act 105) Thus, the maximum amounts for 2015 will be $255. SMALL BUSINESS STOCK The Act makes permanent the exclusion of 100% of the gain on small business stock under IRC (Act 126) Thus, qualifying stock purchased on or after September 28, 2010, will qualify for the 100% exclusion. BUILT-IN GAINS The Act makes permanent the five-year holding period for purposes of computing built-in gain on the conversion of a corporation from a C corporation to an S corporation under IRC 1374(d). (Act 127) RESEARCH CREDIT The Act makes permanent the Research Credit. (Act 121) Applicable against AMT The Act enhances the credit for eligible small businesses ($50 million or less in gross receipts). For tax years that begin after December 31, 2015, a qualifying taxpayer may claim the credit against the alternative minimum tax. (Act 121(b)) Applicable against FICA The Act further enhances the credit for even smaller eligible small businesses ($5 million or less in gross receipts). For tax years beginning after December 31, 2015, a qualifying taxpayer may claim up to $250,000 per year of the credit against employer FICA tax liability. (Act 121(c)) EXPENSING COSTS OF FILM AND TV PRODUCTION The Act retroactively extends the expensing deduction under IRC 181 for productions beginning before January 1, In addition, the deduction is enhanced to include certain qualified live theatrical productions. (Act 169) SEVEN-YEAR WRITE-OFF OF MOTORSPORT RACING TRACK FACILITIES The Act retroactively extends the seven-year straight-line cost recovery period for motorsports entertainment facilities under IRC 168(i)(15)(D)). Thus, the shortened write-off applies to qualifying facilities placed in service before January 1, (Act 166) Spidell Publishing, Inc.

13 THREE-YEAR DEPRECIATION ON RACEHORSES The Act retroactively extends three-year depreciation on racehorses under IRC 168 for racehorses placed in service before January 1, (Act 165) ACCELERATED DEPRECIATION FOR BUSINESS PROPERTY ON INDIAN RESERVATIONS The Act retroactively extends accelerated depreciation of property on an Indian reservation under IRC 168(j)(8) for property placed in service before January 1, (Act 167) 50% EXPENSING OF MINE SAFETY EQUIPMENT The Act retroactively extends the election to treat 50% of the costs of mine safety equipment under IRC 179E as an expense in the year the equipment is placed in service. (Act 163) S CORPORATION SHAREHOLDER BASIS ADJUSTMENT FOR CHARITABLE CONTRIBUTIONS The Act makes permanent the rule first established under the Pension Protection Act of 2006 that says that a shareholder s basis in his S corporation stock is reduced by the adjusted basis of property contributed to a charity rather than the property s fair market value. (IRC 1367(a)(2); Act 115) ENHANCED DEDUCTION FOR FOOD INVENTORY The enhanced deduction for food inventory under IRC 170(e)(3)(C)(iv) is made permanent. In addition, the limitation on deductible contributions of food inventory is increased from 10% to 15% of taxable income. (Act 113) DIFFERENTIAL WAGE PAYMENTS The credit for employers that pay differential wages payments to employees for periods that they are called to active duty with the U.S. military is made permanent. In addition, for tax years beginning after December 31, 2015, the Act removes the 50-employee limitation; that is, an employer of any size will be eligible for the credit. (IRC 45P; Act 122) WORK OPPORTUNITY TAX CREDIT The Act retroactively extends the WOTC so that it applies to qualified workers who begin work for the employer before January 1, (Act 142) In addition, with respect to workers who begin work after December 31, 2015, the credit also applies to employers who hire qualified long-term unemployed individuals (those who have been unemployed for 27 weeks or more). The credit for long-term unemployed workers is 40% of the first $6,000 of wages. (IRC 51(d)(1)(J); Act 142(b)) Spidell Publishing, Inc.

14 NEW MARKETS CREDIT The Act retroactively extends the New Markets Credit under IRC 45D through In addition, it provides up to $3.5 billion in qualified equity investments for each calendar year from 2015 through The carryover period for unused credits is extended through (Act 141) INDIAN EMPLOYMENT CREDIT The Act retroactively extends the credit under IRC 45A to tax years beginning before January 1, (Act 161) ALTERNATIVE FUEL VEHICLE REFUELING PROPERTY CREDIT The Act retroactively extends the credit under IRC 30C to apply to property placed in service after December 31, 2014, and before January 1, (Act 182) CREDIT FOR TWO-WHEELED ELECTRIC PLUG-IN VEHICLES The Act retroactively extends the credit under IRC 30D(g) to apply to property acquired after December 31, 2014, and before January 1, (Act 183) The credit for three-wheeled vehicles was not extended. NEW ENERGY EFFICIENT HOME CREDIT The Act retroactively extends the credit under IRC 45L to apply to homes acquired before January 1, (Act 188) CREDIT FOR FUEL CELL VEHICLES The Act retroactively extends the credit under IRC 30B to apply to vehicles acquired before January 1, (Act 193) PATH ACT CONFORMITY CHART To download a copy of the PATH Act conformity chart that appears on the following pages, go to: Website Spidell Publishing, Inc.

15 Spidell s California Taxletter PATH Act Conformity Chart Description Conformity? IRC PITL R&TC * CTL R&TC ** Permanent extension and modification of deduction for educator expense deductions Extension of above-the-line deduction for qualified tuition and related expenses Permanent extension of deduction of state and local general sales taxes Extension of mortgage insurance premiums treated as qualified residence interest Permanent extension and of liberalized rules for qualified conservation contributions No. CA does not conform No. CA does not conform No. CA does not conform No. CA does not conform No. 62(a)(2)(D) N/A N/A 164(b)(5) 17220(b) N/A 163(h)(3)(E)(iv) N/A 170(b)(1)(B), 170(b)(2)(B) , , Enhanced child tax credit made permanent No. No CA credit 24 N/A N/A Enhanced American Opportunity Tax Credit made permanent Enhanced Earned Income Tax Credit made permanent Extension through 2016 and modification of the principal residence COD exclusion Permanent extension of IRA to charity deduction No. No CA credit 25A N/A N/A No. CA has own credit amounts No. California s exclusion expired after N/A 108(a)(1)(E) N/A Yes. 408(d)(8) 17501(b) N/A Improvements to 529 plans No N/A Extension and modification of bonus depreciation Permanent extension of $500, with $2 million phaseout threshold; indexed for inflation after 2015 Permanent extension of 179 for qualified leasehold improvements, qualified restaurant buildings and qualified retail improvements. Elimination of separate $250,000 limitation. Permanent extension of 179 for computer software Permanent extension of ability to revoke a 179 election without the consent of the IRS Permanent extension of 15-year straightline cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements Extension and enhancement of bonus depreciation for luxury autos No. CA does not allow bonus depreciation No. California s 179 remains at $25,000 with $200,000 phaseout threshold 168(k) 17250(a)(4) (b)(1) (b) No. 179(f) No. 179(d)(1)(A) No. 179(c)(2) No. CA does not recognize 15-year recovery period No. CA does not allow bonus depreciation 168(e)(3)(E)(iv), (v), and (ix) , (a)(6) , (continued)

16 Spidell s California Taxletter Description Conformity? IRC PITL R&TC * CTL R&TC ** Permanent extension of parity for exclusion from income for employer provided transit passes and van pool benefits with parking benefits Permanent extension of exclusion of 100% of gain on certain small business stock Permanent extension of 5-year S corporation built-in gains holding period Permanent extension and modification of research credit Extension of credit for 2-wheeled plug-in electric vehicles Extension of credit for energy-efficient new homes No. Although CA has more expansive exclusion No. CA does not allow exclusion No. California s period remains at 10 years No. CA has its own credit 132(f)(2) 17131, N/A N/A 1374(d)(7) N/A , , No. No CA credit 30D N/A N/A No. No CA credit 45L N/A N/A Extension of credit for fuel cell vehicles No. No CA credit 30B N/A N/A Extension of special expensing rules for certain film and TV production costs Permanent extension of basis adjustment to stock of S corporations making charitable contributions of property Extension and modification of Work Opportunity Credit Permanent extension of modification of charitable deduction for food inventory contributions Extension of 7-year recovery period for motorsports entertainment complexes Extension of classification of certain race horses as 3-year property Limitation on designation of dividends by REITs Debt instruments of publicly offered REITs and mortgages treated as real estate assets Asset and income test clarification regarding ancillary personal property No No. 1367(a)(2) N/A , No. No CA credit 51 N/A N/A No. 170(e)(3)(C) No. 168(i)(5) 17250(a)(11) No. 168(e) 17201, Yes. 857 N/A 24870, Yes. 856 N/A Yes. 856 N/A Hedging provisions Yes. 856 N/A Rollovers permitted from other retirement plans into SIMPLE retirement accounts Technical amendment relating to rollover of certain airline payment amounts Yes. 408(p)(1)(B) N/A Yes. Uncodified amendment to N/A Church plan clarification Yes Extension of modification of tax treatment of certain payments to controlling exempt organizations No. 512(b)(13) N/A , (continued)

17 Spidell s California Taxletter Description Conformity? IRC PITL R&TC * CTL R&TC ** Extension and modification of employer wage credit for employees who are active duty members of the uniformed services Extension of treatment of certain dividends of RICs Extension of Subpart F exception for active financing income. Extension of minimum low-income housing tax credit rate for nonfederally subsidized buildings Extension of military housing allowance exclusion for determining whether a tenant in certain countries is low-income Extension of RIC qualified investment treatment under FIRPTA No. No CA credit 45P N/A N/A No. 871(k) N/A N/A No. 953, 954 N/A N/A No No. Sec of the Housing Assistance Tax Act. N/A N/A No. 897(h)(4)(A) N/A N/A Extension of New Markets Tax Credit No. No CA credit 45(D) N/A N/A Extension of look-thru treatment of payments between related controlled foreign corporations under foreign personal holding company rules No. 954 N/A N/A Extension of Indian Employment Tax Credit No. No CA credit 45A N/A N/A Extension and modification of Railroad Track Maintenance Credit Extension of Mine Rescue Team Training Credit No. No CA credit 45G N/A N/A No. No CA credit 45N N/A N/A Extension of qualified zone academy bonds No. 54E N/A N/A Extension and modification of accelerated depreciation for business property on Indian reservation Extension of election to expense mine safety equipment Extension of deduction allowable with respect to income attributable to domestic production activities in Puerto Rico Extension and modification of empowerment zone tax incentives Extension of temporary increase in limit on cover over of rum excise taxes to Puerto Rico and Virgin Islands Extension of American Samoa Economic Development Credit No. 168(j)(8) No. 179E No , No N/A N/A No N/A N/A No. Sec. 119(d) of Tax Relief and Health Care Act. Moratorium on medical device excise tax No N/A N/A Extension and modification of credit for nonbusiness energy credit Extension of credit for alternative fuel vehicle refueling property N/A N/A No. No CA credit 25C N/A N/A No. No CA credit 30C N/A N/A (continued)

18 Spidell s California Taxletter Description Conformity? IRC PITL R&TC * CTL R&TC ** Extension of second generation biofuel producer credit Extension of biodiesel and renewable diesel incentives Extension and modification of production credit for Indian coal facilities Extension of credits with respect to facilities producing energy from certain renewable resources Extension of special allowance for second generation biofuel plant property Extension of energy efficient commercial buildings deduction Extension of special rule for sales or dispositions to implement FERC or state electric restructuring policy for qualified electric utilities Safe harbor for de minimis errors on information returns and payee statements Prevention of retroactive claims of earned income credit after issuance of social security number and restrictions on taxpayers who claimed credits in prior year Prevention of retroactive claims of child tax credit and restrictions on taxpayers who claimed credits in prior year Prevention of retroactive claims of American Opportunity Tax Credit and restrictions on taxpayers who claimed credits in prior year Treatment of credits for purposes of certain penalties Increase the penalty applicable to paid tax preparers who engage in willful or reckless conduct Exclusion for amounts received under the work colleges program Elimination of residency requirement for qualified ABLE programs Exclusion for wrongfully incarcerated individuals Clarification of special rule for certain governmental plans No. No CA credit 40 N/A N/A No 40A, 6426 N/A N/A No. No CA credit 45 N/A N/A No. No CA credit 45(d) N/A N/A No. 168(l) No. 179D No. 451(i) 17551(f) No No N/A No. No CA credit 24 N/A N/A No. No CA credit 25A N/A N/A No. 6664, No No N/A No. 529A No. 139F N/A. (Although CA has its own exclusion under R&TC Sec ) No N/A (continued)

19 Spidell s California Taxletter Description Conformity? IRC PITL R&TC * CTL R&TC ** Treatment of early retirement distributions for nuclear materials couriers, U.S. capitol police, and diplomatic security special agents Prevention of extension of tax collection period for members of the armed forces who are hospitalized as a result of combat zone injuries No. 72(t)(10)(B) 17085(c)(1) N/A No. 7508(e) N/A Restriction on tax-free spinoffs involving REITs No. 355(a) N/A Restriction on tax-free spinoffs involving REITs Yes 856(c) N/A Reduction in percentage limitation on assets of REIT which may be taxable REIT subsidiaries Prohibited transaction safe harbors Repeal of preferential dividend rule for publicly offered REITs Authority for alternative remedies to address certain REIT distribution failures Modification of REIT earnings and profits calculation to avoid duplicate taxation Treatment of certain services provided by taxable REIT subsidiaries No. 856(c)(4)(B)(ii) N/A No. Prohibited transaction tax inapplicable 857(b)(6)(C) N/A 24872(g) No. 562 N/A N/A No. 562 N/A N/A No. 857 N/A et seq. No. 857 N/A 24870, Exception from FIRPTA for certain stock REITs No. 897 N/A N/A Exception for interests held by foreign retirement or pension funds Increase in rate of withholding of tax on dispositions of U.S. real property interests Interest in RICs and REITs not excluded from definition of U.S. real property interests Dividends derived from RICs and REITs ineligible for deduction for U.S. source portion of dividends from foreign corporations Deductibility of charitable contributions to agricultural research organizations No. 897 N/A N/A No N/A N/A No. 897 N/A N/A No. 245(a) N/A N/A No. 170(b)(1) Treatment of timber gains No. 1201(b) N/A Updated ASHRAE standards for energy efficient commercial buildings deduction Exclusion from gross income of certain clean coal power grants to noncorporate taxpayers Clarification of valuation rule for early termination of certain charitable remainder unitrusts Prevention of transfer of certain losses from tax indifferent parties Treatment of certain persons as employers with respect to motion picture projects No. 179D N/A No. Uncodified Sec. 343 N/A N/A No N/A No No N/A N/A

20 AFFORDABLE CARE ACT The Patient Protection and Affordable Care Act of 2010 (ACA) (HR 3590, PL ) and the Health Care and Education Reconciliation Act of 2010 (H.R. 4872, P.L ) include more than $400 billion in revenue raisers, as well as new health care provisions for individuals and employers. Starting in 2010 and phasing in through 2018, the Acts provide a host of new deductions, lost deductions, new credits, new taxes, and entirely new tax concepts (e.g., household income ). INTRODUCTION THE BASICS OF THE ACT In a nutshell, the Acts mandate that all individuals (with exceptions noted below) have health care coverage by 2014 or pay a penalty. For those who do not have employer-sponsored coverage, insurance exchanges will be set up to facilitate shopping for insurance. The available plans must be qualified health plans that meet certain standards set by the government. There will be financial assistance available to ensure that individuals are not spending more than a certain percentage of their income on their health care premiums. INSURANCE EXCHANGES Insurance exchanges are one of the cornerstones of the ACA, and since they are firmly at the intersection of many of the most important and complex provisions of the ACA, it s important to understand them before discussing those provisions. What are exchanges? By 2014, each state was required to establish an exchange to help individuals and employers obtain coverage. At press time, only 16 states and the District of Columbia had established exchanges. The federal government established exchanges in the remaining states. Plans participating in each exchange will be accredited for quality to determine if it is a qualified plan. A qualified plan must provide essential health coverage, at a minimum, and must meet certain cost-sharing limits. The exchanges are intended to provide one-stop shopping, thereby facilitating comparisons of competing plans and, ultimately, to make the marketplace for health insurance more competitive. California exchange California s exchange is Covered California. ( REQUIREMENTS FOR HEALTH PLANS Also affecting all aspects of the ACA are certain requirements that must be met by all new plans, including those sold on an exchange (there are certain exceptions for grandfathered plans) Spidell Publishing, Inc.

21 Required coverage All health plans must provide essential health benefits including items and services within the following 10 benefit categories: Ambulatory patient services; Emergency services; Hospitalization; Maternity and newborn care; Mental health and substance abuse; Prescription drugs; Rehabilitative services and devices; Laboratory services; Preventive and wellness services and chronic disease management; and Pediatric services including oral and vision care. Plan levels The ACA requires all new policies, including plans sold on an exchange (except stand-alone dental, vision, and long-term-care plans) to comply with one of four benefit categories that provide for certain levels of benefits at the following actuarial levels: Bronze plan 60% Silver plan 70% Gold plan 80% Platinum plan 90% As the percentage of expenses paid by the health plan increases, the percentage of expenses paid by the individual decreases. The health plans that cover more of your medical expenses usually have a higher monthly payment, but you will pay less whenever you receive medical care. You can choose to pay a higher monthly cost so that when you need medical care, you pay less. Or you can choose to pay a lower monthly cost so that when you need medical care, you pay more. What are actuarial levels? The actuarial value measures the generosity of a plan for a standard population. Thus, the cost-sharing structure may vary from one plan to another. For example, one plan may have a higher deductible than another, but compensate by having a lower coinsurance percentage once the deductible is met. (For an excellent, and lengthy, analysis of potential actuarial values of plans at different levels, see What the Actuarial Values in the Affordable Care Act Mean (April 2011) Kaiser Family Foundation. INDIVIDUALS 3.8% ADDITIONAL INCOME TAX ON INVESTMENT INCOME Beginning in 2013, the law imposes an additional net investment income tax (NIIT) at the rate of 3.8% on individuals, estates, and trusts. (IRC 1411) Spidell Publishing, Inc.

22 California nonconformity This is a federal issue only. California does not impose an additional tax on net investment income. For individuals, the tax is 3.8% of the lesser of: Net investment income; or The excess of modified adjusted gross income (MAGI) over the threshold amount. MAGI is adjusted gross income increased by any amount excluded under IRC 911 as foreignearned income net of the deductions and exclusions disallowed with respect to the foreign-earned income. The threshold amounts are the same as the threshold amounts for the additional 0.9% Medicare tax on earned income: $250,000 for joint returns; $125,000 for married filing separate; and $200,000 for all others. The threshold amounts are not indexed for inflation, so an increasing number of taxpayers may be affected in each succeeding year. Example of additional NIIT In 2014, Maggie has $90,000 of interest income and no other income. She is not subject to the additional NIIT because she is under the $200,000 MAGI threshold. In 2015, she gets a job and earns $140,000, and still earns $90,000 of interest income. She will pay NIIT on investment income of: MAGI $230,000 Threshold 200,000 Excess 30,000 Investment income 90,000 Lesser of excess or investment income 30,000 Tax rate 3.8% NIIT $ 1,140 MAGI and its effect Even though NIIT is a tax on investment income, additional forms of other income may cause the taxpayer s NIIT to go up. Rules of general application Treas. Regs When IRC 1411 was enacted, it was placed in a new chapter of the Internal Revenue Code Chapter 2A. It is the sole occupant of that chapter. Nothing in the provision or in the provision s legislative history indicates that Congress intended that a term used in that section would mean the same meaning ascribed to it for other purposes of the Code (for example, Chapter 1, pertaining to most of the income tax law). The regulations start by emphasizing that, generally, the rules for regular tax purposes apply for NIIT purposes; that is, an item recognized as an income or deduction item for regular tax purposes Spidell Publishing, Inc.

23 is also recognized for NIIT purposes. Conversely, an item deferred, excluded, or otherwise not recognized for regular tax purposes is also not recognized for NIIT purposes. For example, gain deferred in a like-kind exchange under IRC 1031 is also deferred for NIIT purposes. Application to individuals Treas. Regs Nonresident aliens The NIIT applies to U.S. citizens and residents. It does not apply to nonresident aliens. A U.S. person married to a nonresident alien generally files married filing separate. Accordingly, the U.S. person determines his or her own MAGI and net investment income, and is subject to a $125,000 threshold. However, if they file an election under IRC 6013(g) to file a joint return, they are treated as filing joint for NIIT purposes. They must combine their MAGI and their net investment income and they can use the full $250,000 threshold. U.S. territories The treatment of bona fide residents of U.S. territories varies depending on whether the individuals are residents of Guam, the Northern Mariana Islands, or the U.S. Virgin Islands, who are not subject to the tax, or Puerto Rico or American Samoa, who may be subject to the tax. (Treas. Regs (a)(2)(iv)) Short taxable year If a taxpayer dies during the year, the threshold amount is not prorated. (Treas. Regs (d)(2)(i)) For example, the threshold amount remains at $200,000 for Year 1 even if a single taxpayer dies in January of Year 1. However, a taxpayer who changes his or her annual accounting period must prorate the threshold amount based on the number of months in the short year. Application to estates and trusts Treas. Regs For estates and trusts, the tax is 3.8% of the lesser of: Undistributed net investment income; or The excess of AGI over the dollar amount at which the highest estate and trust income tax bracket begins. Caution For 2015, the highest estate and trust income tax bracket begins at $12,300. The tax bracket is indexed for inflation. For 2016, the highest bracket begins at $12,400. Note: The threshold amount for trusts is considerably lower than the threshold amounts for individuals. Subject trusts Congress did not provide a rule specifying the particular trusts subject to IRC The regulations specify that IRC 1411 applies to ordinary trusts described in Treas. Regs (a). It does not apply to business trusts, certain state law trusts, pooled income funds, cemetery perpetual care funds, qualified funeral trusts, and exempt trusts (even excluding unrelated business taxable income of exempt trusts) Spidell Publishing, Inc.

24 Undistributed net investment income The regulations adopt the class system of income categorization, generally embodied in IRC , to arrive at the trust s net investment income reduction in the case of distributions that are comprised of both net investment income and net excluded income items. Definition of net investment income Treas. Regs Net investment income is investment income reduced by deductions properly allocable to such income. Investment income includes: Category 1: Gross income from dividends, interest, annuities, royalties, and rents, less allocable deductions, unless these items are derived in the ordinary course of a trade or business to which the NIIT does not apply; Category 2: Other gross income derived from a trade or business to which the NIIT applies; and Category 3: Net taxable gain attributable to the disposition of property other than property held in a trade or business to which the NIIT does not apply. (IRC 1411(c)(1)) Generally, the 3.8% NIIT does not apply to trades or businesses. Trades or businesses to which the 3.8% NIIT does apply include: A trade or business treated as a passive activity under IRC 469; and A trade or business of trading in financial instruments or commodities, as defined in IRC 475(e)(2). Income items specifically exempt Although income items are not investment income unless they are specifically included by the Code or regulations, the regulations spell out certain specific items that are not included. Income from tax-exempt trusts Generally, a recipient of a distribution from a tax-exempt trust (other than noncharitable beneficiaries of a charitable remainder trust) is not liable for income tax on the distribution because the distribution is tax-exempt income. However, there are certain situations in which a distribution from a tax-exempt trust is taxable income. For example, certain distributions are taxable income if they are not used for qualified purposes: The income portion of distributions from a qualified tuition program ( 529 plan ) or Coverdell education savings accounts that are not used for qualified education purposes; and Distributions from health savings accounts or Archer medical savings accounts that are not used for qualified medical purposes. Even though these distributions, or portions thereof, are taxable for regular income tax purposes, they are not treated as investment income for NIIT purposes. (Preamble to Prop. Treas. Regs. 5.F) Distributions from retirement plans The Code, the regulations, and the Preamble all provide that distributions from retirement plans are not investment income. (IRC 1411(c)(5); Treas. Regs ; Preamble 9) Such distributions would, however, be taken into account in determining the net investment income MAGI threshold Spidell Publishing, Inc.

25 The regulations make clear that the rules under IRC 1411(c)(5) are to be construed broadly both to types of plans and types of distributions. The rules apply to: A qualified plan under IRC 401(a); A qualified annuity plan under IRC 403(a); A tax-sheltered annuity under IRC 403(b); An individual retirement account; A Roth IRA; and A deferred compensation plan of a government under IRC 457(b). The rules apply to items treated as distributions under the tax law, including: Actual distributions; Rollovers; Roth conversions; and Corrective distributions of excess contributions or deferrals. Income subject to self-employment tax The Code, the regulations, and the Preamble all provide that income subject to self-employment tax is not investment income. (IRC 1411(c)(6); Treas. Regs ; Preamble 10) Income from trades or businesses The Code, the regulations, and the Preamble all provide that income from trades or businesses to which the tax does not apply is not investment income. (IRC 1411(c)(1)(A)(i); Treas. Regs (b); Preamble 5.A.vi) The trade or business exception has one of its most important applications in the area of gains. For individuals engaged directly in a trade or business, the determination is made at the individual level. Net gains from the disposition of property Treas. Regs (d) Net investment income includes net gain to the extent taken into account in computing taxable income. The trade or business exception applies. The rules for regular tax purposes generally apply in determining whether there has been a disposition of property. For example, if a partner receives a distribution in excess of the partner s adjusted basis in his partnership interest and recognizes gain under IRC 731(a), the gain is treated as investment income. As another example, to the extent gain from a like-kind exchange is not recognized for regular income tax purposes, it is also not recognized for purposes of recognizing net investment income under IRC Gains and losses Under the final regulations, losses in excess of gains may be used to offset other investment income as a properly allocable deduction, but only to the extent the losses are allowable to reduce taxable income for purposes of the regular tax. (Treas. Regs (f)(4)) In other words, for purposes of the NIIT, a taxpayer must have other investment income in order to be able to claim losses in excess of gains, but only to the extent those losses would be allowable for purposes of the regular tax Spidell Publishing, Inc.

26 Examples of gains and losses In 2015, George s income includes: $10,000 capital loss on the sale of stock not from a trade or business; $60,000 of dividends and interest; and $25,000 of gains on the sale or trade of business assets. The $10,000 capital loss can offset investment income for NIIT purposes because it can be used for regular tax purposes to offset the $25,000 of gains from the trade or business property. Thus, his net investment income is $50,000 for NIIT purposes. Assume he didn t have the $25,000 of gain on the business property. In that case, because he can use $3,000 of the capital loss for regular tax purposes, he can also use $3,000 for NIIT purposes. In this case, the $3,000 capital loss allowed would reduce his investment income from $60,000 to $57,000. Capital loss carryforwards Because capital gains and losses attributable to investment activities are separated from gains and losses generated in trade or business activities, separate computations of loss carryforwards are required. (Treas. Regs (d)(4)(iii)) The capital loss carryforward to the next year for NIIT purposes is reduced by the lesser of: The amount of capital loss taken into account in the current year under the regular tax; or The amount of net capital loss excluded from net investment income in the immediately preceding year. Comment This rule requires an adjustment only when there are excluded losses generated from a trade or business embedded in a capital loss carryforward. Thus, if Jim s $19,000 loss had been from an investment loss rather than a trade or business loss, the treatment for NIIT purposes would have been the same as for regular tax purposes. Pre-effective date carryforwards A taxpayer may use a capital loss carryforward from a year prior to 2013 in offsetting gains derived in a year in which IRC 1411 is in effect and may use the entire amount of the carryforward regardless of what type of investment activity generated the loss carryforward (i.e., even if they are attributable to active trades or businesses). Principal residence exclusion allowed The regulations make clear that any exclusion of gain on the sale of a principal residence under IRC 121 allowed for regular tax purposes is also allowed for NIIT purposes. (Treas. Regs (h), Ex. 4) Spidell Publishing, Inc.

27 Deductions Treas. Regs (f) The regulations provide that only certain deductions against investment income are allowable. Allowable deductions include: Deductions from rents and royalties as allowed under IRC 62(a)(4); Deductions allocable to passive activities and to the business of trading in financial instruments or commodities, to the extent the deductions have not been taken into account in determining self-employment income; The penalty on early withdrawals of savings under IRC 62(a)(9); Investment interest expenses; Investment expenses; and State, local, and foreign income taxes allocable to NIIT. In addition, the regulations provide that carryovers of deductions for NIIT purposes are allowed in the same manner as allowed under the provisions for the regular income tax. NOLs The 2012 proposed regulations provided that in no event could a net operating loss deduction be taken into account in determining net investment income. The final regulations change this rule and allow an NOL deduction to the extent that the NOL is attributable to a net investment loss. (Treas. Regs (f)(2)(iv)) The applicable loss in any taxable year is the lesser of: The amount of the NOL for the loss year that the taxpayer would incur if only items of investment income subject to the NIIT and only properly allocable deductions from net investment income are taken into account; or The amount of the taxpayer s NOL for the year. (Treas. Regs (h)) The applicable NOL deduction in any taxable year is the NIIT portion of the NOL carryforward (calculated per above) multiplied by a fraction: The numerator of which is the NIIT NOL; and The denominator of which is the total NOL. See the example under the heading of Dispositions of passive activities on page 25. Investment interest expense Investment interest is allowed as a deduction to the extent allowed under IRC 163(d)(1) (that is, to the extent of net investment income as determined under IRC 163). As a result, net investment income cannot be less than zero for purposes of the NIIT. Any carryover for regular tax purposes under IRC 163(d)(2) may also be carried over for NIIT purposes. (Treas. Regs (f)(3)(A)) Investment expenses Investment expenses described under IRC 163(d)(4)(C) are allowable as deductions for purposes of determining the NIIT. These deductions are subject to the 2% of AGI limitation for regular tax purposes (the IRC 67 limitation) and also for NIIT purposes. (Treas. Regs (f)(3)(B)) Deduction for state, local, and foreign taxes The original proposed regulations provided a deduction for allocable state, local, and foreign income taxes that are deductible under IRC 164(a)(3) for regular tax purposes. (Treas Spidell Publishing, Inc.

28 Regs (f)(3)(C)) The final regulations generally retain that deduction, but clarify some points missing in the proposed regulations. The 2012 proposed regulations provided that the deduction must be allocated on any reasonable basis, but strongly suggested that the deduction should be made pro rata on the basis of the taxpayer s net investment income as a percentage of total gross income. For example, if 20% of the taxpayer s gross income is net investment income, then 20% of the taxpayer s deduction for income taxes paid is deductible for NIIT purposes. The IRS declined in the final regulations to provide additional examples of any reasonable basis. They did clarify, however, that if a taxpayer elects to take a credit for foreign taxes paid, the taxpayer cannot take a deduction for those taxes for NIIT purposes; that is, the taxpayer may only take a deduction for foreign taxes paid for NIIT purposes if the taxpayer deducts them for purposes of the income tax. (Treas. Regs (f)(3)(B)(iii)) The proposed regulations did not provide for rules similar to the rules for regular tax purposes, that state tax refunds be included in income in the year received. However, the final regulations provide that the recovery or refund of an amount previously deducted will reduce the amount of the deduction in the year of recovery (that is, it will not be treated as income in the year of recovery; it will be treated as a reduction in the amount of deduction in the year of recovery) to the extent the taxpayer received a tax benefit for NIIT purposes. Moreover, the amount of the reduction in the year of recovery is based on the ratio used in the year of the deduction, even though the ratio may be different in the year of recovery. 2% miscellaneous itemized deductions and phaseout The IRS has made a substantial change to the way allocable itemized deductions are treated for purposes of the NIIT. (Treas. Regs (f)(7)) They have abandoned the pro rata approach under the proposed regulations in favor of an approach that treats miscellaneous itemized deductions (the deductions subject to the 2% floor under IRC 67) as allocable deductions (before applying the itemized deduction phaseout) in the amount of the lesser of: The specific dollar amount of miscellaneous itemized deductions before applying the 2% reduction that is allocable to net investment income; or The total amount of all miscellaneous deductions allowed after application of the 2% reduction. Itemized deductions for high-income taxpayers above a specified threshold are subject to a phaseout under IRC 68. In determining the amount of net investment income, the amount of properly allocable itemized deductions subject to the IRC 68 phaseout is the lesser of: The sum of the specific dollar amount determined after application of the 2% limitation plus the specific dollar amount of itemized deductions (those not subject to the 2% limitation) that are properly allocable to net investment income (generally, investment interest expense); or The total amount of all deductions allowed after application of IRC 68 (excluding itemized deductions that are not subject to phaseout, such as medical expense, casualty loss, and investment interest expense). Practice Pointer Undoubtedly, tax software will handle most of the computations for us but not all. For example, software cannot know which miscellaneous itemized deductions are deductible in computing NIIT. It will be up to us, and our knowledge of the rules, to designate those expenses Spidell Publishing, Inc.

29 Trade or business exception The Code, the regulations, and the Preamble all provide that income from trades or businesses to which the tax does not apply is not investment income. (IRC 1411(c)(1)(A)(i); Treas. Regs (b); Preamble 5.A.vi) In brief, income derived in a trade or business is not net investment income. The regulations provide a four-part test to determine whether an activity is a trade or business: The income is derived from the ordinary course of an active trade or business; The business is not a passive activity to the taxpayer; The business is not in the trading of financial instruments; and The income is not portfolio income derived from the working capital of the business. NIIT does not apply to qualifying trades or business conducted by a sole proprietor, partnership, or S corporation. However, income, gain, or loss on working capital is not treated as derived from a trade or business and thus is subject to the tax. (IRC 1411(c)(3)) Working capital is discussed below. Income from employment An employee is treated as engaged in the trade or business of being an employee. (Preamble 5.A.vii) Amounts treated as paid by an employer to an employee that are treated as wages for purposes of IRC 3401 (pertaining to withholding on wages) are not net investment income. Level at which determination is made In the case of an individual, estate, or trust that owns or engages in a trade or business directly or through an entity treated as a disregarded entity, the determination of whether gross income is derived in a trade or business is made at the individual level. (Treas. Regs (b)) In the case of a trade or business held through ownership in an interest in a trade or business through a passthrough entity, the determination is made: At the entity level, in the case of the business of trading in financial instruments or commodities; or At the owner level, in the case of any other business. Working capital The trade or business exception does not apply to income, including capital gain, generated from working capital, even if the working capital is in a qualifying trade or business. (IRC 1411(c)(3); Treas. Regs ) IRC 1411(c)(3) provides that a rule similar to IRC 469(e)(1)(B) shall apply, which in turn provides that any income, gain, or loss attributable to an investment of working capital shall be treated as not derived in the ordinary course of a trade or business. The term working capital is not defined in either IRC 469 or IRC 1411, but it generally refers to capital set aside for use in, and the future needs of, a trade or business. (Preamble 7) However, it appears, based on language in the Preamble and the one example provided on the subject (Treas. Regs (b)), that income from working capital includes all income derived from the liquid assets of the entity that aren t operating assets. Allocable deductions are allowed. (Treas. Regs (a)) Spidell Publishing, Inc.

30 Trade or business income to which tax applies Treas. Regs NIIT applies to income generated by the conduct of a trade or business if such trade or business is either: The trade or business of a trader trading in financial instruments or commodities; or A passive activity with respect to the taxpayer. (IRC 1411(c)(2)) Trading in financial instruments or commodities Treas. Regs (c) Determining whether trading in financial instruments or commodities rises to the level of a trade or business is a question of fact. (Preamble 6.C.i) A securities dealer is a person who regularly purchases securities from, or sells securities to, customers in the ordinary course of a trade or business. (IRC 475(c)(1)) A trader seeks profit from short-term swings and receives income principally from selling on an exchange rather than from dividends, interest, or long-term appreciation. A person will be a trader, and therefore engaged in a trade or business if his trading is frequent, regular, and continuous. An investor is a person who purchases and sells securities with the principal purposes of realizing investment income in the form of interest, dividends, and gains from appreciation in value over a relatively long time. Whether income is for a trader or an investor, it does not seem to make a difference for purposes of the NIIT. For traders, it s investment income even if the trader is engaged in a trade or business under IRC 1411(c)(2). For investors, it s investment income under the general rules of IRC 1411(c)(1). Allocable deductions Investors report expenses on Schedule A as miscellaneous itemized deductions. Those deductions are subject to the 2% of AGI limit and allocation. Traders report expenses on Schedule C. Although trading income is exempt from self-employment tax (IRC 1402(b)), trading expenses reported on Schedule C may be applied against self-employment income from other sources. (Treas. Regs (c), Ex. 4) The regulations allow a deduction for expenses incurred to the extent the expenses do not reduce self-employment income. Passive activities Treas. Regs (b) Income from passive activities is investment income. (IRC 1411(c)(1)(A)) The term passive activity for NIIT purposes has the same meaning as IRC 469, which provides that a passive activity is any activity that involves the conduct of a trade or business in which the taxpayer does not materially participate. In addition, it includes any rental activity, except if the taxpayer qualifies as a real estate professional, or if the rental activity meets the exception for short-term rentals. (IRC 469(c)(2), 469(c)(7); Treas. Regs T(e)(3)(ii)) Fresh start for grouping Recognizing the heightened importance of the status of a business activity as passive or nonpassive, the regulations provide an opportunity for a taxpayer to regroup activities that the taxpayer had previously grouped. (Treas. Regs (b)(3)(iv)) Generally, once a taxpayer has made a grouping election, the election cannot be revoked Spidell Publishing, Inc.

31 Taxpayers may make a regrouping election in any tax year that begins in 2013 or later in which NIIT would apply to the taxpayer without regard to the effect of the regrouping (the first year in which they have net investment income and the applicable income threshold is met). A taxpayer may only regroup activities once, and any regrouping will apply to the tax year for which the regrouping is done and all later years. The regrouping must be disclosed in accordance with the requirements of Rev. Proc and Treas. Regs (e) that requires a written statement be filed with an original income tax return. Caution Not all passive activities can be grouped. They can only be grouped if they are an appropriate economic unit. See Treas. Regs (c)(1). Short-term rental exception The proposed regulations follow the rule under IRC 469 that provides that activities involving short-term rentals are not rental activities. Generally, Treas. Regs T(e)(3)(ii) provides that an activity is not a rental activity for a taxable year if, for such taxable year, the average period of customer use of the property is seven days or less, or the average period of use is 30 days or less and significant personal services are provided. Real estate professionals In the original proposed regulations, the IRS took a balk on real estate professionals, stating only that a taxpayer who qualifies as a real estate professional is not necessarily engaged in a trade or business with respect to the rental real estate activities. Rental real estate has a double whammy against it for purposes of the NIIT. It is Category 1 income (rents) and it is also Category 2 income (passive). By meeting the requirements of a real estate professional and materially participating in any particular rental real estate activity, the taxpayer overcomes the Category 2 problem; the activity is no longer passive. As the IRS implied in the original proposed regulations, the taxpayer is still left with the Category 1 problem, and it is not clear whether the taxpayer would meet the trade or business exception. Although the taxpayer meets the material participation requirement for a trade or business, the taxpayer is left combing through decades of court decisions looking for a definition of trade or business only to find that it has never been decided whether rental real estate is a trade or business. Recognizing that a taxpayer can meet the requirements of a real estate professional primarily in nonrental real estate activities (e.g., construction) and meet the material participation requirements with respect to rental real estate with minimal participation (through one of the seven tests in Treas. Regs T), the IRS has provided a safe harbor that, if met, will qualify income from the rental real estate for the trade or business exception. (Treas. Regs (g)(7)) The safe harbor test provides that if a real estate professional participates in any particular rental real estate activity for more than 500 hours per year or more than 500 hours in five of the last 10 years, the rental income from that rental real estate activity is treated as derived in a trade or business and meets the trade or business exception, and is therefore not included as net investment income. Self-charged rents and self-charged interest The final regulations provide an exception for self-charged rents and self-charged interest. (Treas. Regs (f)) Spidell Publishing, Inc.

32 Self-charged rents Generally, self-charged rents exist when a taxpayer rents property for use in an activity in which the taxpayer materially participates. In order to avoid allowing the taxpayer to reduce ordinary income from the activity (such as Schedule K-1, line 1 income from an interest in an S corporation or partnership) while simultaneously generating passive income on the personal side, the rental income is recharacterized as nonpassive. (Treas. Regs (f)(6)) The final regulations provide that, in the case of rental income recharacterized as nonpassive, the rental income is deemed to be derived in an active trade or business. Self-charged interest The final regulations provide that, in the case of self-charged interest received from a nonpassive entity owned by the same taxpayer, the amount of interest income excluded from net investment income will be the taxpayer s allocable share of the nonpassive interest deduction. Dispositions of passive activities When a taxpayer disposes of his or her interest in a passive activity in a complete disposition, the gain or loss from the sale is aggregated with current-year passive income and losses and carryover losses from prior years. If the net result is a gain, it can be offset by losses from other passive activities. If the net result is a loss and the loss exceeds the aggregate net income or gain from all other passive activities (including carryover losses), it is treated as a loss that isn t from a passive activity. (IRC 469(g)(1)(A)) In the case of a gain, it is investment income because it is passive gain. The proposed regulations did not address a loss, although a strict reading of the rules would indicate that the loss could not be used because it was treated as nonpassive for purposes of the regular tax. The final regulations state simply that losses allowed in computing taxable income by reason of IRC 469(g) are taken into account, in the same manner as they are for purposes of the regular tax. (Treas. Regs (g)(9)) The IRS recognizes that IRC 469(g) losses allowed by reason of the disposition of the passive activity are allowed in full because they represent true economic losses. Comment A complete disposition of a passive activity at a loss might be the most likely means by which a taxpayer generates an NIIT NOL. Active participation The proposed regulations do not address the $25,000 active participation allowance. However, it would appear that the allowance is irrelevant because the allowance only applies to taxpayers with AGI below $150,000. Therefore, any taxpayer able to use the allowance has AGI too low to be concerned with NIIT. Income from partnerships and S corporations Whether an item on a Schedule K-1 is investment income is a two-level test, depending on: The taxpayer s relationship to the entity (active or passive); and The nature of the income Spidell Publishing, Inc.

33 Taxpayer s relationship to the entity If the taxpayer is passive with respect to his interest in the entity, then all items of income flowing through Schedule K-1 are Category 2 income (i.e., passive income). The taxpayer does not have to otherwise consider the nature of the income. The nature of the income If the taxpayer materially participates in the entity, you must next consider the nature of the income represented on each line of Schedule K-1. Generally, that will mean that line 1 income will not be investment income because it is trade or business income. Most other line items, such as for rents, dividends, and interest, will be investment income because they are Category 1 income items. The one area where it could go either way is capital gains. If the capital gains are from investments made by the entity, the income is investment. However, if they are from sales of operating assets, the income is trade or business income not subject to the NIIT. Dispositions of interests in partnerships and S corporations Prop. Treas. Regs The original proposed regulations provided that any gain on the sale of an interest in a partnership or S corporation was presumptively investment income for purposes of the NIIT. The taxpayer could overcome this presumption with respect to some or all of the gain by using a look-through deemedsale approach similar to that required under IRC 751 for purposes of the regular tax. Recognizing that the issue is complex, the IRS withdrew the previously issued Proposed Regs. under and issued new proposed regulations on the issue. The new proposed regulations continue to employ the deemed-sale approach but also provide a simpler alternative method. Comment Keep in mind that these rules are only applicable if the taxpayer is active (materially participates) in the business. If not, the gain is passive income and is, therefore, Category 2 income subject to the tax. Under the new regulations, the analysis is reversed. Rather than prove the amount that is not subject to the tax, the amount of net gain on the sale of an interest that is treated as investment income is the lesser of: The overall gain or loss on the sale of the interest; or The gain attributable to investment income. (Prop. Treas. Regs ) Simplified optional method Although the standard method is vastly simplified from the 2012 proposed regulations, it still contains one major flaw: The partner or shareholder is dependent on the entity to provide the necessary information and the entity, in turn, is burdened with reporting requirements. An eligible owner may use the simplified optional method. Under this method, the amount of gain or loss on a sale attributable to investment income is based on the historic percentage of total income allocated to the partner or shareholder that is investment income. By historic, the regulations refer to the Section 1411 Holding Period which is the year of disposition and the transferor s two taxable years preceding the disposition or the time period the transferor held the interest, whichever is less. (Prop. Treas. Regs (a)(2)(iii)) Spidell Publishing, Inc.

34 An eligible owner, generally, is one whose gain on sale is less than $250,000 or one whose (1) gain is less than $5,000,000, and (2) at all times during the Section 1411 Holding Period was a less-than-5% owner. Required statement Any transferor applying Prop. Treas. Regs must attach a statement to the transferor s return for the year of disposition including the following information: The taxpayer s name and identification number; The name and identification number of the entity in which the interest was transferred; The amount of gain or loss on the disposition of the interest for regular tax purposes; and The amount of adjustment to gain or loss for purposes of the NIIT. Information reporting by entity The passthrough entity must provide the transferor with the information needed to compute the transferor s allocable share of gain or loss from Section 1411 property unless the transferor is eligible to use the simplified optional method. Certain partnership payments The new proposed regulations offer guidance on partnership payments under IRC 707 (guaranteed payments) and under IRC 736 (payments to retiring partners). The new proposed regulations provide that a guaranteed payment to a partner under IRC 707(c) is excluded if received for services but included if received for capital. (Prop. Treas. Regs (g)(10)) In addition, the regulations provide lengthy analysis of IRC 736 payments which are payments from the partnership to a retiring partner in liquidation of the partner s interest in the partnership. (If the retiring partner sells his interest to another partner or partners or to an unrelated person, the rules regarding dispositions of interests apply.) In general, IRC 736(b) payments are distributions in exchange for partnership property and, as such, are treated as gains from the disposition of property subject to NIIT unless the trade or business exception applies. (Prop. Treas. Regs (g)(11)) If the trade or business exception applies, the retiring partner must apply the rules regarding dispositions of interests to determine the amount subject to tax. It does not matter whether the payments are classified as ordinary income or capital gain. Payments under IRC 736(a) are taken into account in a manner consistent with the item s treatment for income tax purposes. 0.9 % ADDITIONAL MEDICARE TAX ON EARNED INCOME Beginning in 2013, individuals pay an additional 0.9% Medicare Hospital Insurance (HI) tax on wages and self-employment income on amounts earned above certain threshold amounts. (IRC 1401(b), 3101(b)) The threshold amounts are the same as the threshold amounts for the 3.8% NIIT discussed earlier: $250,000 for joint returns; $125,000 for married filing separate; and $200,000 for all others Spidell Publishing, Inc.

35 These threshold amounts are not indexed for inflation. Under current law, the HI tax rate is 2.9% of earned income without limit. Half (1.45%) is paid by the employee through withholding and half (1.45%) is paid by the employer. A self-employed individual pays the entire 2.9%. Under the new law, if income exceeds the threshold amounts, the employee s share will increase, but the employer s share will remain at 1.45%. For self-employed individuals, the rate will increase from 2.9% to 3.8%. (IRC 1401(b)(2)(A)) Wages subject to Medicare tax In FAQs, the IRS has clarified that wages subject to the tax are wages subject to Medicare tax. Thus, a taxpayer will use the box 5 amount from Form W-2, not the box 1 amount. Comment The most common difference will arise when a taxpayer makes contributions to a 401(k) or other plan offering elective deferrals. Withholding is reported as Medicare Withholding will be included in box 6 of the W-2, included in Medicare tax withheld. The taxpayer will have to back out the amount of 0.9% withholding from the amount in box 6. Specifically: Employers must begin withholding the additional Medicare tax in the pay period in which it pays wages to the employee exceeding the $200,000 threshold and not earlier, regardless of filing status; Withholding will be based on wages subject to Medicare tax; The additional Medicare tax applies to employees who are nonresident aliens or U.S. citizens living abroad; An employee can t request additional withholding specifically for the Medicare tax. However, an employee may submit Form W-4 and request additional income tax withholding; and Employees are responsible for the tax even if their employer fails to withhold. Joint returns and withholding In the case of a joint return, the tax is applied based on the combined earned income of both spouses. There is no additional tax on the employer. However, employers are required to withhold the additional 0.9% HI tax from an employee s salary in excess of $200,000 without regard to a spouse s income. (IRC 3102(f)(1)) This can create an underpayment or overpayment that, as in the case of multiple employers, the employee will pay or claim on Form Self-employed taxpayers The same threshold amounts apply to self-employed individuals. (IRC 1401(b)) Spidell Publishing, Inc.

36 Source of SE income Self-employment income generally comes from four sources: Schedule C; Schedule F; Schedule K-1 (Form 1065); and Schedule E (royalties subject to SE tax). Thus, it seems the most likely source of the amount used for self-employment income is Schedule SE. Self-employment loss can t offset wages Although coordinated, the 0.9% tax on wages is covered under a different Code section than the 0.9% tax on self-employment income (IRC 3121 and 1401, respectively). They are coordinated at IRC 1401(b)(2)(B), which provides that the threshold amount for the self-employment tax is reduced by the amount of wages taken into account in determining the FICA tax. SE loss may offset SE income even between spouses A self-employment loss may offset self-employment income. This is true even between spouses, contrary to the rules regarding the SE tax (which is computed with respect to individual taxpayers). Not deductible as SE tax In the case of self-employed individuals, the deduction for one-half of self-employment tax will be computed without regard to the additional HI tax. (IRC 164(f)(1)) Taken into consideration for underpayment and estimated tax purposes Congress has made it clear that the additional HI tax payable with the income tax return is a tax that affects the computation of any penalty, including the underpayment penalty, and, as such, must be considered when figuring estimated tax payments. (Committee Reports 5028; Joint Committee on Taxation. Technical Explanation of the Revenue Provisions of the [Health Care Act]. JCX-18-10, p March 21, 2010) PREMIUM TAX CREDIT (PTC) A taxpayer is allowed an advanceable and refundable credit to help subsidize the purchase of health insurance through a state health benefit exchange ( Marketplace ). (IRC 36B) To qualify, the taxpayer must have household income of at least 100% (138% in California) but not more than 400% of the federal poverty line for a family of the size involved, and the taxpayer must not receive health insurance under an employer-sponsored plan (including COBRA) or certain government plans, such as Medicare or Medicaid. (IRC 36B(c)(1)(A)) Individuals purchasing health insurance through the Marketplace may choose to have the credit paid in advance in the form of direct government payments to the health insurance provider. Any difference between the advance credit and the allowable credit may be claimed or paid with the individual s tax return Spidell Publishing, Inc.

37 California qualifications Although the federal poverty line is the same in California, a family does not qualify for the PTC if they qualify to be on Medicaid (Medi-Cal in California). In California, a family qualifies for Medi-Cal with household income up to 138% of the poverty line. Therefore, the bottom of the range qualifying for the PTC is 138% in California. For individuals who purchase a qualified health care plan through the Marketplace, the advanced subsidy amount (formally called premium assistance ) will be determined on a sliding scale, starting at the federal poverty line and going up to 400% of the federal poverty line. The individual will report his or her income level to the exchange, and the amount of the subsidy will be determined. The IRS will make advanced payments directly to the insurance plan, and the individual is responsible for the difference. IRS FAQs on the PTC are available at: Website Can both a PTC and a shared responsibility penalty be reported on one tax return? Yes, and it might not be uncommon. Here are two simple situations in which it might happen: 1. A family purchases qualifying coverage from the Marketplace early in the year. They qualify for and receive an advanced PTC. Mid-year, they stop paying premiums and go without insurance, without a qualifying exemption, for the rest of the year. 2. A family purchases health insurance for the husband, wife, and two minor dependents, and they are eligible for a PTC. Later in the year, Junior moves back in with the family. He is claimed as a third dependent and, as such, is part of the household. Junior never got insurance, and because he s part of the family s return, there will be a penalty. Who is eligible for the tax credit? Applicable taxpayers enrolled in a qualified health plan through an exchange may be able to claim a PTC. Applicable taxpayer A taxpayer will be an applicable taxpayer if: The taxpayer s household income for the tax year equals or exceeds 100% (138% in California) but doesn t exceed 400% of the poverty line for the family size involved; The taxpayer may not be claimed as a dependent by another taxpayer; and The taxpayer files a joint return if married. (IRC 36B(c)(1)) Individuals who are not legally present in the United States or who are incarcerated are excluded as applicable taxpayers, and they cannot claim the credit Spidell Publishing, Inc.

38 Eligibility for exchange An applicable taxpayer will be eligible for the credit only for a month that at least one member of the taxpayer s family: Is enrolled in a qualified health plan through an exchange; Isn t eligible for coverage through a government program such as Medicaid, Medicare, Children s Health Insurance Program (CHIP), or TRICARE; and Isn t able to get affordable coverage through an employer plan that provides minimum value. When is coverage affordable? An employer-sponsored plan is affordable if the portion of the annual premium the employee must pay for self-only coverage does not exceed 9.5% of the employee s household income. The affordability test applies only to the portion of the annual premiums for self-only coverage and does not include any additional cost for family coverage. If the employer offers multiple health coverage options, the affordability test applies to the lowest-cost option that also meets the minimum value test. Caution Note that the affordability threshold (9.5%) is different than the affordability threshold for the individual shared responsibility penalty (8%), discussed later in this chapter. What is minimum value? An employer-sponsored plan provides minimum value if the plan covers at least 60% of the expected total allowed costs for covered services (essentially, bronze level coverage). Below 100% of poverty line not eligible Individuals with household incomes below 100% (138% in California) of the poverty line are not eligible to take the tax credit. Instead, they are eligible for Medicaid (Medi-Cal is California s program). However, if an exchange projects that the taxpayer s household income will be above 100% of the poverty level for the tax year, it may recommend the taxpayer as eligible for an exchange (and not eligible for Medicaid). How the credit is determined A taxpayer s PTC is: Determined by reference to the premium amount for the second lowest cost silver plan, offered by an exchange in the rating area where the taxpayer resides; and Based on the percentage of income the cost of premiums represents. Second lowest cost silver plan For purposes of the PTC, the second lowest cost available silver plan, among the silver plans offered by insurance companies that participate in the exchange pool, is called the benchmark plan. Example of benchmark plan Jackson buys health insurance on an exchange. The four silver plans available to him have annual premiums of $8,000, $8,200, $8,500, and $8,600. The benchmark plan costs $8,200. Jackson is not required to buy that plan. He may buy any plan. However, for purposes of computing his PTC, the figure used will be $8, Spidell Publishing, Inc.

39 Percentage of income The applicable percentage will rise from 2% for taxpayers with household income at 100% of the poverty line for the family size involved to 9.5% for those at 300% of the poverty line. The applicable percentage represents the maximum share of household income that a taxpayer will have to pay for health insurance in an exchange-purchased qualified health plan. Applicable Percentage Household income relative to the poverty line Premium contribution percentage range Up to 133% 2.0% 3.0% 133% 150% 3.0% 4.0% 150% 200% 4.0% 6.3% 200% 250% 6.3% 8.05% 250% 300% 8.05% 9.5% 300% 400% 9.5% 2015 Federal Poverty Line for D.C. plus All States Except Alaska and Hawaii Size of family Poverty line 400% 1 $11,770 $47,080 2 $15,930 $63,720 3 $20,090 $80,360 4 $24,250 $97,000 Note: The poverty line is $11,770, plus $4,160 for each additional family member. Thus, for a family of nine, it would be $45,050 ($11,770 + (8 $4,160)). In Alaska and Hawaii, the poverty lines are slightly higher. Poverty lines for several recent years are available at: Website Yes, there is a marriage penalty Note that a single individual may qualify for the PTC with income up to $47,080. Thus, two unmarried single individuals can each get credits with combined incomes up to $94,160. Once they tie the knot, their maximum qualifying income goes down to $63, Spidell Publishing, Inc.

40 Example of PTC The Adams family purchases a gold plan with premiums of $11,000 per year. They are a family of four with household income of $60,625, which is 250% of the poverty line for a family of four (referring to the 2015 poverty line figures, above). The benchmark premium in their area is $7,500 per year. Limit on PTC Their PTC is: Household income $60,625 Contribution percentage 8.05% Expected contribution $ 4,880 Benchmark premium $ 7,500 Expected contribution (4,880) PTC $ 2,620 The PTC is limited to the actual amount of premiums that were paid for the plan that was chosen. (Treasury Fact Sheet ) As a result, no one receives a credit that is larger than the amount they actually pay for their plan. Advance payments of PTC The PTC may be payable in advance, with advance payments made directly to the insurance company on the family s behalf. A taxpayer who is eligible for an advanced assistance payment may decline it and receive the full amount of the credit on their tax return. (IRS Health Care Tax Tip (February 25, 2014)) However, see the Practice Pointer on page 36. Family matters PTC eligibility and the amount of the credit itself are affected by the family size and household income. Must file joint A married couple must file a joint return to claim the PTC. If the couple files separate returns, neither is eligible for the credit. (IRC 36B(c)(1)(C)) Exception for victims of domestic abuse The IRS has carved out an exception to the general requirement of filing a joint return. If a taxpayer is married and files a separate return, the taxpayer may still qualify for the PTC if they meet the criteria of Notice , which allows the credit for certain victims of domestic abuse. Family size Family size includes a husband and wife and the number of individuals for whom the taxpayer is allowed a dependent exemption under IRC 151. (IRC 36B(d)(1)) The credit must be reduced with respect to any dependent claimed who is not lawfully present in the U.S. (IRC 36B(e)) Spidell Publishing, Inc.

41 Lawfully present A taxpayer may claim a dependent exemption for an individual who is a resident of Canada or Mexico. But an alien individual who resides in Canada or Mexico isn t lawfully present in the U.S. for PTC purposes. Household income Household income means an amount equal to: The taxpayer s modified adjusted gross income (MAGI); plus The MAGI of all other individuals who: o o Are counted in family size; and Are required to file an income tax return for the year under IRC 1 without regard to IRC 1(g)(7) (that is, without regard to the exception for a child whose parents elect to report the child s unearned income on their own return). (IRC 36B(d)(2)) Modified adjusted gross income is adjusted gross income, plus: The amount excluded under the IRC 911 foreign-earned income exclusion; Tax-exempt interest income; and The excluded portion of Social Security benefits. Dependents required to file IRC 36B(d)(2)(A)(ii)(II) states that the MAGI of a dependent must be included in household income only if the dependent is required to file a return under IRC 1. However, IRC 1 deals with tax rates and does not deal with requirements to file. In the absence of IRS guidance, the instructions to Form 1040 provide for who is and is not required to file. For example, the instructions state that a single dependent, not over age 65 or blind, must file if his or her earned income is over $6,300 or his or her unearned income is over $1,050 (in the latter case, the income would be counted if over $1,050 regardless of whether his or her parents elect to report the unearned income on their own returns). If the dependent s income does not meet the threshold for filing under IRS instructions, the dependent s income is not included in household income. Example of dependent s income Randy and Sandy are married filing joint and report $42,000 of MAGI. Their daughter, Candy, is a freshman at the local community college. She works part time at the local 8-12 store and earned $3,000 of W-2 income. Candy s income is not included in household income because she is not required to file an income tax return Spidell Publishing, Inc.

42 Reconciling the credit on the tax return For taxpayers who receive advance credits, the actual credit may not equal the amounts of credits paid in advance. The difference may occur when: The taxpayer doesn t apply for the advance credit or doesn t apply until after he or she begins paying premiums for which the taxpayer is eligible for the credit; The taxpayer s income wasn t what was expected i.e., the income was different from the income used to compute the advance payment (the advance payment is based on the income tax return from two years previous); The taxpayer s number of dependents changes; or The taxpayer s marital status changes. Therefore, the credit must be reconciled on the tax return and any excess payment must be recaptured on the return, and any additional credit to which the taxpayer is entitled must be claimed on the return. Must file a return A taxpayer must file a tax return, even if not otherwise required, if: During the tax year, they received any amount of advanced credit; or They declined the advanced credit and want to receive the refundable credit that s available to them. Reporting life and income changes to the exchange Both the IRS and Covered California require an individual to report mid-year changes to income or family circumstances including: Marriage or divorce; Birth or adoption of a child; Change in income; Get health coverage through employment or government insurance; Change of residence; Change in disability status; Change in dependents; Pregnancy; and Change in filing status. These changes may affect an individual s eligibility for the advanced credit and/or the amount of the advance credit. Individuals are instructed to not report these changes by mail but to report them either online or by phone. Website Telephone (800) Spidell Publishing, Inc.

43 Reconciling credit where income isn t what was expected Because the tax return for two years previous is used to compute the advance payments, there may be a significant difference between the actual amount of credit and the advanced credit. If the advance payment is less than the amount of credit to which the taxpayer is entitled, the shortfall is treated as a refundable credit on the taxpayer s return. If the advance payments exceed the credit allowed, the income tax liability imposed for the tax year is increased by the difference. However, solely for purposes of an additional tax liability caused by an increase in income (and not for other reasons such as a change in the number of dependents), there is a limit on the increase in tax. (Treas. Regs. 1.36B-4(a)(3)(i)) Household income relative to poverty line Limitation of Payback of Excess Advance Credits All filing statuses except single Single Less than 200% $600 $300 At least 200% but less than 300% $1,500 $750 At least 300% but less than 400% $2,500 $1, % or more No limit No limit Example of credit difference Martha is single and purchases a health plan in 2015 on an exchange. She got advance credits of $4,800. When she filed her 2015 return, her actual credit was $5,200. She may claim a refundable credit of $400, the excess of her computed credit over the amount of her advance credit. Assume the opposite happened, and her income went up in 2015 and her actual credit was only $1,000. In that case, she would owe an additional tax of $1,250. The excess is $3,800 ($4,800 $1,000), but it is capped at $1,250. Her additional tax is $1,250. Practice Pointer The example of Martha, above, may be a perfect example of why it s never a good idea to turn down the advanced credit. As noted previously, taxpayers may turn down the advance credit, pay the entire premium from their own funds, and get the full PTC on their tax returns. But, if they do so, they don t enjoy the possible benefit of the payback limitations Spidell Publishing, Inc.

44 True client story: The first step s a doozy! Cliffs are common in the tax law. But the ACA may have the El Capitan of cliffs, as a CPA friend of mine discovered in doing a client s return. In early 2012, the clients left good jobs to start their own little Mom n Pop. You know how new businesses sometimes go not so great at first. So, in 2014, they went to the Marketplace to buy health insurance. Because the advance credit is based on household income from two years previous, they got a generous advance credit of $8,550. But, you know how new businesses go better after a couple of years. So, in 2014, their income was up, and when the CPA computed their PTC, they had an excess advance credit. Fortunately for them, there are limitations on the payback amount based on household income as a percentage of the poverty line. For a married couple with income between 300% and 400% of the poverty line, the limit is $2,500. But 400% is the cliff. Go above it, and there is no limitation. The clients, it turned out, were $98 shy of that 400% limit. So, they were required to pay back $2,500. Had they made another $98, they would have been required to pay back the entire $8,550. So, another $98 of income would have increased their tax by $6,050. That, by the way, is a tax rate of 6,173% in this case. And people complain about a 39.6% rate! PTC SHARED POLICY ALLOCATIONS Taxpayers must do a shared policy allocation if any one of five scenarios applies: 1. Divorce: The taxpayer divorced or legally separated in the taxable year and: a. The policy covered at least one individual in the taxpayer s family (including the taxpayer); and b. The policy covered at least one individual in the former spouse s family (including the former spouse). 2. Married filing separate: The taxpayer is filing a separate return and: a. The policy covered at least one individual in the taxpayer s family; and b. The policy covered at least one individual in the spouse s family. 3. Other taxpayer claiming a dependent: The taxpayer indicated to the Marketplace at enrollment that he intended to claim a dependent exemption for an individual and: a. The policy covered that individual; but b. Another taxpayer will claim that individual as a dependent. 4. Claiming dependent exemption for policy purchased by another taxpayer: This is the reverse of #3. 5. Other allocation scenarios: The most notable one is taxpayers who marry during the year Spidell Publishing, Inc.

45 Comment A shared policy allocation must be done whenever there are two or more individuals included on a Form 1095-A that are not included on the same tax return for that year. Common examples include: 1. Junior lives with Dad at the beginning of the year and Dad gets insurance on the exchange that covers himself and Junior. However, before the end of the year, Junior moves in with Mom and she claims him as her dependent. Therefore, Junior is not included in Dad s household for purposes of the PTC. 2. Junior lives with Dad at the beginning of the year but moves out on his own mid-year and becomes self-supporting. Because Dad can t claim Junior as a dependent, Junior is not included in Dad s household for purposes of the PTC. 3. Husband and wife are married at the beginning of the year and get insurance on the exchange. They divorce during the year. How is a shared policy allocation done? Generally, a shared policy allocation distributes dollar items on the Form 1095-A between the owner of the policy and the tax return where individuals named on the Form 1095-A appear. The items allocated include the cost of premiums, the second lowest cost silver plan and the advance PTC. For example, considering the above scenarios: 1. Dad would allocate to Mom. 2. Dad would allocate to Junior. 3. The ex-spouse named as the insured would allocate to the other ex-spouse. The exact method of allocation depends on the situation involved (divorce, changing dependents, etc.). Note, too, that the allocation must be done regardless of the total number of months during the year that the sharing takes place. Consider example 2, above. Assume that Junior is living with Dad at the beginning of the year, and Dad gets a policy on the Marketplace that includes Junior. Now assume that Junior moves out on his own in April and remains on his own the rest of the year. Dad might continue to keep Junior on his policy for the rest of the year. Or, Junior might get a job in April where he is covered, and Dad might remove him from the policy at that time. Regardless, Dad will need to do a shared policy allocation either for the entire year (if Junior is on the policy for the entire year) or for a portion of the year (if Junior is on the policy for just January through April). Is it complex? In one word, yes. Publication 974, Premium Tax Credit, contains 51 pages. Of those 51 pages, 15 are devoted to shared policy allocations (and another 18 pages to the interaction between the selfemployed health insurance deduction and the PTC; see page 52 below) Spidell Publishing, Inc.

46 Reporting a shared allocation A shared allocation is reported by checking the box on line 9 of Form 8962 and completing Part 4 of the form. Different dependents (the shifting enrollee ) If the taxpayer (the enrolling taxpayer ) enrolls an individual in a qualified health plan through the Marketplace and another taxpayer (the claiming taxpayer ) claims an exemption for the individual (the shifting enrollee ), then for purposes of computing each taxpayer s PTC, each item on the Form 1095-A must be allocated between the enrolling taxpayer and the claiming taxpayer. These items include: Total premiums; Premiums for second lowest cost silver plan; and Advance PTC. Note that the claiming taxpayer and the shifting enrollee may be the same person; i.e., a person who becomes self-supporting and claims their own exemption. The enrolling taxpayer and claiming taxpayer may agree on any allocation percentage between 0% and 100%. (Treas. Regs. 1.36B-4(a)(1)(ii), 1.36B-4T(a)(1)) If they don t agree on an allocation percentage, the percentage is equal to the number of shifting enrollees claimed as a personal exemption deduction by the claiming taxpayer divided by the number of individuals enrolled by the enrolling taxpayer in the same qualified health plan as the shifting enrollee. How does the enrolling taxpayer inform the claiming taxpayer? The enrolling taxpayer receives the Form 1095-A. If the enrolling taxpayer and the claiming taxpayer cannot agree on an allocation so that the default allocation must be used the enrolling taxpayer must send a copy of Form 1095-A to the claiming taxpayer. Example of default allocation percentage Alice enrolls herself and her three children in a qualified health plan. On her tax return, one of the children is claimed by Allison, the child s aunt. If Alice and Allison don t agree on an allocation percentage, the allocation percent is 25% (representing one of the four individuals named on the policy and included on Form 1095-A) Spidell Publishing, Inc.

47 Example of shared allocation Dad and Junior Dad is single. At the beginning of the year, he expects Junior to live with him the entire year. He purchases family coverage in the Marketplace that includes Junior. In April, Junior moves out and gets a job as a software engineer that includes coverage. Dad gets new self-only coverage that begins in May. Dad s income for the year is $24,000. Junior makes $120,000. Dad and Junior are not getting along at the end of the year. Dad sends Junior a copy of Form 1095-A along with a brief letter explaining to him that he must allocate 50% of the amounts for January through April on his own return. See the Forms 8962 that follow for Dad and Junior. Also see the Health Insurance Marketplace Statement that includes all the information from Dad s Form 1095-A including monthly premiums paid, the premium amount for the second lowest cost silver plan and the advance credit. Notice the change that occurs after April when Dad converts to self-only coverage. The discussion of this example continues after the forms Spidell Publishing, Inc.

48 Form 1095-A Health Insurance Marketplace Statement 2014 G Keep for your records QuickZoom to Form 1095-A, Health Insurance Marketplace Statement QuickZoom to Form 8962, Premium Tax Credit (PTC) Name(s) Shown on Return Your Social Security No. DAD CLIENT Owned by (check one): Spouse covered: X Taxpayer Spouse Part I Recipient Information 1 Marketplace Identifier 2 Marketplace-assigned Pol. No. 3 Policy Issuer s Name CALIFORNIA BLUE DOG 4 Recipient s name 5 Recipient s SSN 6 Recipient s DOB DAD CLIENT /01/74 7 Recipient s spouse s name 8 Spouse s SSN 9 Spouse s DOB 10 Policy start date 11 Policy termination date 12 Street address (including apartment no.) 01/01/14 12/31/ MAIN STREET 13 City or town 14 State or province 15 Country and ZIP or foreign postal code ANYTOWN CA Part II Coverage Household Check this box to populate the Name, SSN, and DOB for everyone listed on the return in Part II. Note: Checking this box again will repopulate the information below and overwrite existing entries. A. Covered Individuals Name B. Covered Covered Individual First Individual SSN C. Date of Birth D. Start Date E.Termination Date Last 16DAD CLIENT /01/74 01/01/14 12/31/ Part III Household Information Month Copy Feature A. Monthly Premium Amount B. Monthly Premium Amt C. Monthly Advance Payment See help for of Second Lowest Cost of Premium Tax Credit more info. Silver Plan (SLCSP) JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER Annual Totals , , ,460.

49 Form 8962 Department of the Treasury Internal Revenue Service Name shown on your return Premium Tax Credit (PTC) Attach to Form 1040, 1040A, or 1040NR. Information about Form 8962 and its separate instructions is at Your social security number DAD CLIENT Part 1: Annual and Monthly Contribution Amount 1 Family Size: Enter the number of exemptions from Form 1040 or Form 1040A, line 6d, or Form 1040NR, line 7d. 1 2 a Modified AGI: Enter your modified AGI (see instructions) a b Enter total of your dependents' modified AGI (see instructions) b 3 Household Income: Add the amounts on lines 2a and 2b Federal Poverty Line: Enter the federal poverty amount as determined by the family size on line 1 and the federal poverty table for your state of residence during the tax year (see instructions). Check the appropriate box for the federal poverty table used. a Alaska b Hawaii c Other 48 states and DC 4 OMB No Attachment Sequence No. 73 Relief (see instructions) 5 Household Income as a Percentage of Federal Poverty Line: Divide line 3 by line 4. Enter the result rounded to a whole percentage. (For example, for enter the result as 154, for enter as 155.) (See instructions for special rules.) % 6 Is the result entered on line 5 less than or equal to 400%? (See instructions if the result is less than 100%.) Yes. Continue to line 7. No. You are not eligible to receive PTC. If you received advance payment of PTC, see the instructions for how to report your Excess Advance PTC Repayment amount. 7 Applicable Figure: Using your line 5 percentage, locate your applicable figure on the table in the instructions a Annual Contribution for Health Care: b Monthly Contribution for Health Care: Divide Multiply line 3 by line a 1,589. line 8a by 12. Round to whole dollar amount 8b 132. Part 2: Premium Tax Credit Claim and Reconciliation of Advance Payment of Premium Tax Credit 9 Did you share a policy with another taxpayer or get married during the year and want to use the alternative calculation? (see instructions) Yes. Skip to Part 4, Shared Policy Allocation, or Part 5, Alternative Calculation for Year of Marriage. No. Continue to line Do all Forms 1095-A for your tax household include coverage for January through December with no changes in monthly amounts shown on lines 21 32, columns A and B? Yes. Continue to line 11. Compute your annual PTC. Skip lines and continue to line 24. Annual Calculation 11 Annual Totals Monthly Calculation A. Premium Amount (Form(s) 1095-A, line 33A) A. Monthly Premium Amount (Form(s) 1095-A, lines 21 32, column A) B. Annual Premium Amount of SLCSP (Form(s) 1095-A, line 33B) B. Monthly Premium Amount of SLCSP (Form(s) 1095-A, lines 21 32, column B) 24,000. C. Annual Contribution Amount (Line 8a) C. Monthly Contribution Amount (Amount from line 8b or alternative marriage monthly contribution) D. Annual Maximum Premium Assistance (Subtract C from B) D. Monthly Maximum Premium Assistance (Subtract C from B) No. Continue to lines Compute your monthly PTC and continue to line 24. E. Annual Premium Tax Credit Allowed (Smaller of A or D) E. Monthly Premium Tax Credit Allowed (Smaller of A or D) 26 Net Premium Tax Credit: If line 24 is greater than line 25, subtract line 25 from line 24. Enter the difference here and on Form 1040, line 69; Form 1040A, line 45; or Form 1040NR, line 65. If you elected the alternative calculation for marriage, enter zero. If line 24 equals line 25, enter zero. Stop here. If line 25 is greater than line 24, leave this line blank and continue to line Part 3: Repayment of Excess Advance Payment of the Premium Tax Credit 27 Excess Advance Payment of PTC: If line 25 is greater than line 24, subtract line 24 from line 25. Enter the difference here Repayment Limitation: Using the percentage on line 5 and your filing status, locate the repayment limitation amount in the instructions. Enter the amount here F. Annual Advance Payment of PTC (Form(s) 1095-A, line 33C) F. Monthly Advance Payment of PTC (Form(s) 1095-A, lines 21 32, column C) 29 Excess Advance Premium Tax Credit Repayment: Enter the smaller of line 27 or line 28 here and on Form 1040, line 46; Form 1040A, line 29; or Form 1040NR, line For Paperwork Reduction Act Notice, see your tax return instructions. BA REV 11/14/14 PR Form 8962 (2014) 1 24, , January February March April May June July August September October November December Total Premium Tax Credit: Enter the amount from line 11E or add lines 12E through 23E and enter the total here. 24 4, Advance Payment of PTC: Enter the amount from line 11F or add lines 12F through 23F and enter the total here. 25 5,

50 Form 8962 (2014) Page 2 Part 4: Shared Policy Allocation Complete the following information for up to four shared policy allocations. See instructions for allocation details. Shared Policy Allocation 1 30 a Policy Number (Form 1095-A, line 2) b SSN of taxpayer sharing allocation c Allocation start month d Allocation stop month Allocation percentage applied to monthly amounts e. Premium Percentage f. SLCSP Percentage g. Advance Payment of the PTC Percentage Shared Policy Allocation 2 31 a Policy Number (Form 1095-A, line 2) b SSN of taxpayer sharing allocation c Allocation start month d Allocation stop month Allocation percentage applied to monthly amounts e. Premium Percentage f. SLCSP Percentage g. Advance Payment of the PTC Percentage Shared Policy Allocation 3 32 a Policy Number (Form 1095-A, line 2) b SSN of taxpayer sharing allocation c Allocation start month d Allocation stop month Allocation percentage applied to monthly amounts e. Premium Percentage f. SLCSP Percentage g. Advance Payment of the PTC Percentage Shared Policy Allocation 4 33 a Policy Number (Form 1095-A, line 2) b SSN of taxpayer sharing allocation c Allocation start month d Allocation stop month Allocation percentage applied to monthly amounts e. Premium Percentage f. SLCSP Percentage g. Advance Payment of the PTC Percentage 34 Have you completed shared policy allocation information for all allocated Forms 1095-A? Yes. Multiply the amounts on Form 1095-A by the allocation percentages entered by policy. Add allocated amounts across all allocated policies with amounts for non-allocated policies from Forms 1095-A, if any, to compute a combined total for each month. Enter the combined total for each month on lines 12 23, columns A, B, and F. Compute the amounts for lines 12 23, columns C E, and continue to line 24. No. See the instructions to report additional shared policy allocations. Part 5: Alternative Calculation for Year of Marriage Complete line(s) 35 and/or 36 to elect the alternative calculation for year of marriage. For eligibility to make the election, see the instructions for line 9. To complete line(s) 35 and/or 36 and compute the amounts for lines 12 23, see the instructions for this Part Alternative entries for your SSN 36 Alternative entries for your spouse's SSN REV 11/14/14 PR a Alternative family size b Monthly contribution c Alternative start month d Alternative stop month a Alternative family size b Monthly contribution c Alternative start month d Alternative stop month Form 8962 (2014)

51 Form 1095-A Health Insurance Marketplace Statement 2014 G Keep for your records QuickZoom to Form 1095-A, Health Insurance Marketplace Statement QuickZoom to Form 8962, Premium Tax Credit (PTC) Name(s) Shown on Return Your Social Security No. JUNIOR CLIENT Owned by (check one): Spouse covered: X Taxpayer Spouse Part I Recipient Information 1 Marketplace Identifier 2 Marketplace-assigned Pol. No. 3 Policy Issuer s Name CALIFORNIA BLUE DOG 4 Recipient s name 5 Recipient s SSN 6 Recipient s DOB JUNIOR CLIENT /01/92 7 Recipient s spouse s name 8 Spouse s SSN 9 Spouse s DOB 10 Policy start date 11 Policy termination date 12 Street address (including apartment no.) 01/01/14 01/01/15 13 City or town 14 State or province 15 Country and ZIP or foreign postal code Part II Coverage Household Check this box to populate the Name, SSN, and DOB for everyone listed on the return in Part II. Note: Checking this box again will repopulate the information below and overwrite existing entries. A. Covered Individuals Name B. Covered Covered Individual First Individual SSN C. Date of Birth D. Start Date E.Termination Date Last 16JUNIOR CLIENT /01/92 01/01/14 01/01/ Part III Household Information Month Copy Feature A. Monthly Premium Amount B. Monthly Premium Amt C. Monthly Advance Payment See help for of Second Lowest Cost of Premium Tax Credit more info. Silver Plan (SLCSP) JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER Annual Totals , , ,860.

52 Form 8962 Department of the Treasury Internal Revenue Service Name shown on your return Premium Tax Credit (PTC) Attach to Form 1040, 1040A, or 1040NR. Information about Form 8962 and its separate instructions is at Your social security number JUNIOR CLIENT Part 1: Annual and Monthly Contribution Amount 1 Family Size: Enter the number of exemptions from Form 1040 or Form 1040A, line 6d, or Form 1040NR, line 7d. 1 2 a Modified AGI: Enter your modified AGI (see instructions) a b Enter total of your dependents' modified AGI (see instructions) b 3 Household Income: Add the amounts on lines 2a and 2b Federal Poverty Line: Enter the federal poverty amount as determined by the family size on line 1 and the federal poverty table for your state of residence during the tax year (see instructions). Check the appropriate box for the federal poverty table used. a Alaska b Hawaii c Other 48 states and DC 4 OMB No Attachment Sequence No. 73 Relief (see instructions) 5 Household Income as a Percentage of Federal Poverty Line: Divide line 3 by line 4. Enter the result rounded to a whole percentage. (For example, for enter the result as 154, for enter as 155.) (See instructions for special rules.) % 6 Is the result entered on line 5 less than or equal to 400%? (See instructions if the result is less than 100%.) Yes. Continue to line 7. No. You are not eligible to receive PTC. If you received advance payment of PTC, see the instructions for how to report your Excess Advance PTC Repayment amount. 7 Applicable Figure: Using your line 5 percentage, locate your applicable figure on the table in the instructions a Annual Contribution for Health Care: b Monthly Contribution for Health Care: Divide Multiply line 3 by line a line 8a by 12. Round to whole dollar amount 8b Part 2: Premium Tax Credit Claim and Reconciliation of Advance Payment of Premium Tax Credit 9 Did you share a policy with another taxpayer or get married during the year and want to use the alternative calculation? (see instructions) Yes. Skip to Part 4, Shared Policy Allocation, or Part 5, Alternative Calculation for Year of Marriage. No. Continue to line Do all Forms 1095-A for your tax household include coverage for January through December with no changes in monthly amounts shown on lines 21 32, columns A and B? Yes. Continue to line 11. Compute your annual PTC. Skip lines and continue to line 24. Annual Calculation 11 Annual Totals Monthly Calculation 12 January 13 February 14 March 15 April 16 May 17 June 18 July 19 August 20 September 21 October 22 November 23 December A. Premium Amount (Form(s) 1095-A, line 33A) A. Monthly Premium Amount (Form(s) 1095-A, lines 21 32, column A) B. Annual Premium Amount of SLCSP (Form(s) 1095-A, line 33B) B. Monthly Premium Amount of SLCSP (Form(s) 1095-A, lines 21 32, column B) 120,000. C. Annual Contribution Amount (Line 8a) C. Monthly Contribution Amount (Amount from line 8b or alternative marriage monthly contribution) D. Annual Maximum Premium Assistance (Subtract C from B) D. Monthly Maximum Premium Assistance (Subtract C from B) No. Continue to lines Compute your monthly PTC and continue to line 24. E. Annual Premium Tax Credit Allowed (Smaller of A or D) E. Monthly Premium Tax Credit Allowed (Smaller of A or D) 24 Total Premium Tax Credit: Enter the amount from line 11E or add lines 12E through 23E and enter the total here Advance Payment of PTC: Enter the amount from line 11F or add lines 12F through 23F and enter the total here Net Premium Tax Credit: If line 24 is greater than line 25, subtract line 25 from line 24. Enter the difference here and on Form 1040, line 69; Form 1040A, line 45; or Form 1040NR, line 65. If you elected the alternative calculation for marriage, enter zero. If line 24 equals line 25, enter zero. Stop here. If line 25 is greater than line 24, leave this line blank and continue to line Part 3: Repayment of Excess Advance Payment of the Premium Tax Credit 27 Excess Advance Payment of PTC: If line 25 is greater than line 24, subtract line 24 from line 25. Enter the difference here Repayment Limitation: Using the percentage on line 5 and your filing status, locate the repayment limitation amount in the instructions. Enter the amount here ,000. F. Annual Advance Payment of PTC (Form(s) 1095-A, line 33C) F. Monthly Advance Payment of PTC (Form(s) 1095-A, lines 21 32, column C) 29 Excess Advance Premium Tax Credit Repayment: Enter the smaller of line 27 or line 28 here and on Form 1040, line 46; Form 1040A, line 29; or Form 1040NR, line ,432. For Paperwork Reduction Act Notice, see your tax return instructions. BA REV 11/14/14 PR Form 8962 (2014) 1 11, ,432. 1,432.

53 Form 8962 (2014) Page 2 Part 4: Shared Policy Allocation Complete the following information for up to four shared policy allocations. See instructions for allocation details. Shared Policy Allocation 1 30 a Policy Number (Form 1095-A, line 2) b SSN of taxpayer sharing allocation c Allocation start month d Allocation stop month Allocation percentage applied to monthly amounts e. Premium Percentage f. SLCSP Percentage g. Advance Payment of the PTC Percentage Shared Policy Allocation 2 31 a Policy Number (Form 1095-A, line 2) b SSN of taxpayer sharing allocation c Allocation start month d Allocation stop month Allocation percentage applied to monthly amounts e. Premium Percentage f. SLCSP Percentage g. Advance Payment of the PTC Percentage Shared Policy Allocation 3 32 a Policy Number (Form 1095-A, line 2) b SSN of taxpayer sharing allocation c Allocation start month d Allocation stop month Allocation percentage applied to monthly amounts e. Premium Percentage f. SLCSP Percentage g. Advance Payment of the PTC Percentage Shared Policy Allocation 4 33 a Policy Number (Form 1095-A, line 2) b SSN of taxpayer sharing allocation c Allocation start month d Allocation stop month Allocation percentage applied to monthly amounts e. Premium Percentage f. SLCSP Percentage g. Advance Payment of the PTC Percentage 34 Have you completed shared policy allocation information for all allocated Forms 1095-A? Yes. Multiply the amounts on Form 1095-A by the allocation percentages entered by policy. Add allocated amounts across all allocated policies with amounts for non-allocated policies from Forms 1095-A, if any, to compute a combined total for each month. Enter the combined total for each month on lines 12 23, columns A, B, and F. Compute the amounts for lines 12 23, columns C E, and continue to line 24. No. See the instructions to report additional shared policy allocations. Part 5: Alternative Calculation for Year of Marriage Complete line(s) 35 and/or 36 to elect the alternative calculation for year of marriage. For eligibility to make the election, see the instructions for line 9. To complete line(s) 35 and/or 36 and compute the amounts for lines 12 23, see the instructions for this Part Alternative entries for your SSN 36 Alternative entries for your spouse's SSN REV 11/14/14 PR a Alternative family size b Monthly contribution c Alternative start month d Alternative stop month a Alternative family size b Monthly contribution c Alternative start month d Alternative stop month Form 8962 (2014)

54 Example of shared allocation Dad and Junior (further discussion) The final result is that Dad has a payback amount of $80, and Junior has a payback amount of $1,432. Note that Junior is over the income limitations for the PTC, so the only relevant item is the advanced credit, which he must pay back in its entirety. Moreover, because Junior s income is more than 400% of the poverty line, he doesn t enjoy the benefits of the payback limitations. Remember that they can allocate the shared policy in any percentages on which they may agree. Consider the following chart, which shows the results based on: Dad s income held constant at $24,000; Junior s income varies at $120,000 and $12,000; The allocation percentages from Dad to Junior at 0%, 20%, 50%, and 100%. Results of Allocations Additional Credit/(Repayment) Allocation percentage to Junior 0% 20% 50% 100% Dad s income of $24,000 $224 $104 ($ 80) $ 144 Junior s income of $120,000 n/a ( 572) ( 1,432) ( 2,860) Net family effect $224 ($468) ($1,512) ($2,716) Dad s income of $24,000 $224 $104 ($ 80) $144 Junior s income of $12,000 n/a Net family effect $224 $144 $144 $627 Rule of thumb Although there is no hard-and-fast rule, it would appear that allocating as much as possible to the lower-income taxpayer produces the best overall family results. It might take some experimentation to achieve the best results. Practice Pointer This might be a practice-building opportunity. By convincing Junior to let you do his return in order to get the best PTC results, you may be able to convert him into a permanent client. Taxpayers divorced or legally separated Each former spouse must be allocated a percentage of the premiums, the premium amount for the applicable benchmark plan, and the advanced PTC. The amounts can be allocated in any reasonable proportion the former spouses agree on, but all items must be allocated in the same proportion. In the absence of an agreement, the default allocation is 50% to each. (Treas. Regs. 1.36B-4(b)(3)) Exception: If, for a period, a plan covers only one of the taxpayers (and one or more dependents), the benchmark premium, the premium for the actual plan, and the advance credit payments for that period are all allocated entirely to that taxpayer Spidell Publishing, Inc.

55 Taxpayers filing separate returns Generally, married taxpayers must file joint to claim the credit; they cannot file separate. (IRC 36B(c)(1)(C)) However, there are two situations in which a married individual not filing joint may claim the credit: A taxpayer files separate because the individual is a victim of domestic abuse or spousal abandonment (Notice ); or A married taxpayer is eligible to file as head of household. Separate returns without relief conditions If taxpayers file separate returns, half of any advance credit is allocated to each spouse if the qualified health plan covered both spouses. However, if the plan covered only one of the spouses, all of the advance payments are allocated to that spouse. Because no credit is allowed, generally, on a separate return, each spouse will have an overpayment that must be repaid. Each spouse is allowed to use the repayment limitation based on his or her income as it relates to the poverty line. Head of household Married individuals may file as head of household if they live apart from their spouse for at least the last six months of the taxable year, have a dependent child, and meet certain other requirements. (IRC 2(b), 7703(b)) Married filing separate because of abandonment or domestic abuse If filing a separate return because of domestic abuse or spousal abandonment, qualifying taxpayers must check the Relief box in the upper right-hand corner of Form A qualifying taxpayer is treated as meeting the married filing joint requirement. The taxpayer will use the benchmark premium that applies to his or her own household income, computes the credit based on his or her own income, and takes account of 50% of the advance premiums. Taxpayers who marry during the taxable year Taxpayers who got married during the year will have to combine their amounts and may be eligible for an alternative calculation. Like other taxpayers, newly married taxpayers compute their PTC using family size and household income as reported on the joint return regardless of whether the taxpayers were married or single during the entire year. Alternative method The regulations provide an alternative computation method. (Treas. Regs. 1.36B-4(b)(2)) Under this alternative method, the credit for the single months is computed separately for each spouse as if each taxpayer s annual income was one-half of the actual household income for the year, the credit for the married months is computed using actual household income for the year, and the PTC is the sum of the credits computed for the single months and the married months. However, to avoid allowing taxpayers an increased amount of additional PTC resulting from marriage, the final regulations cap any additional PTC allowed to a taxpayer under this alternative computation method at the amount of additional credit that results from computing the credit under the general rule Spidell Publishing, Inc.

56 Caution In other words, the alternative method cannot be used to increase a PTC refund over any amount computed under the general rule; it can only reduce an amount owed. Practice Pointer Generally, the alternative method will result in a lower excess PTC. Eligibility for the alternative method A newly married couple is eligible for the alternative method if: They were married as of the last day of the tax year; They file a joint return; They were both unmarried on January 1 of the tax year; and Anyone in either premarriage family received an advance PTC. Example of newly married Bob and Carol are single at the beginning of Carol has no dependents, and Bob has two dependent daughters. They each purchase health insurance on the Marketplace; Carol gets self-only coverage, and Bob gets coverage for himself and his daughters. They get married on July 27, On August 1, 2014, they get new coverage covering the new family. Both of them get advance PTCs. The amount is determined on their projected income, and their projected income turns out to be the exact amounts of their actual income. (continued) Spidell Publishing, Inc.

57 Facts: Example of newly married (continued) Carol Bob Joint A Income $40,000 $35,000 $75,000 B Percentage of poverty level 358% 183% 325% C Contribution percentage 9.50% 5.52% 9.50% D Benchmark $5,200 $10,000 $14,000 E Contribution (A C) $ 3,800 $ 1,932 $ 7,125 F PTC (D - E) $ 1,400 $ 8,068 $ 6,875 Standard method: G Advance payments Carol Jan. Jul. (7/12 $1,400) $ 819 Bob Jan. Jul. (7/12 $8,068) 4,704 Joint Aug. Dec. (5/12 $6,875) 2,865 Total advance payments $8,388 H Benchmark premiums Carol Jan. Jul. (7/12 $5,200) $ 3,033 Bob Jan. Jul. (7/12 $10,000) 5,833 Joint Aug. Dec. (5/12 $14,000) 5,833 Total benchmark premiums $14,699 I Contribution amount (9.5% $75,000) $7,125 J Credit (H - I) 7,574 Additional tax (G - J) $ 814 Alternative method: Premarriage PTC Carol benchmark premium (7/12 $5,200) $3,033 Carol contribution amount (7/12 9.5% $37,500) 2,078 K Paula PTC $ 955 Bob benchmark premium (7/12 $10,000) $5,833 Bob contribution amount (7/12 $6.12% $37,500) 1,339 L Bob PTC $4,494 Marriage PTC Benchmark premium (5/12 $14,000) $5,833 Contribution amount (5/12 9.5% $75,000) 2,969 M Marriage PTC $2,864 Total PTC (K + L + M) $8,313 Total advance payments (G) 8,388 Additional tax $ Spidell Publishing, Inc.

58 Why the alternative calculation works Notice in the example of Bob and Carol that under the standard method, their incomes are combined thereby invoking the marriage penalty discussed on page 32. Using the alternative methods, their joint incomes are split and considered separately. Electing the alternative calculation Qualifying taxpayers elect the alternative method by completing Part 5 of Form The instructions to Form 8962 state that the worksheet to compute the alternative calculation is contained in Publication 964. PTC AND DEDUCTIONS FOR MEDICAL INSURANCE A taxpayer who pays for health insurance may be entitled to take a deduction either as a Schedule A itemized deduction for medical expenses or as an above-the-line deduction for selfemployed health insurance. If the taxpayer gets a PTC, a problem arises if the final credit is not the same as the advance credit (note that it s rare that the final credit and advance credit are the same). Self-employed circular computation In the case of a self-employed taxpayer, the problem is that the PTC is based on MAGI, and MAGI is net of any deduction for self-employed health insurance. Therefore, the taxpayer must know the amount of the self-employed health insurance deduction to compute the PTC, but also must know the amount of the PTC to compute the amount of the selfemployed health insurance deduction. In other words, a repayment or an additional credit changes the self-employed health insurance deduction, which changes AGI, which changes the PTC, which changes the self-employed health insurance deduction, which changes AGI, which goes on forever Spidell Publishing, Inc.

59 Example of self-employed health insurance and the PTC Gladys is self-employed and has $20,000 of net income from her business, which also equals her total income. She purchased qualifying insurance on the Marketplace at a cost of $6,000 and received advanced PTC payments of $4,000. Her share of the premiums was $2,000. Presumptively, her self-employed health insurance deduction is $2,000, the amount she actually paid. A deduction of $2,000 would reduce her MAGI to $18,000. Let s say, based on $18,000 of household income, that her actual credit is $4,500, so she gets an additional refundable credit of $500. Now her actual share of premiums is $1,500 ($2,000 paid less refundable PTC of $500). Now she must recompute her credit on household income of $18,500. This would then change her PTC, which would change the cost of her premiums, which would change her MAGI, and so on. Computation methods The IRS has provided two optional computation methods that a self-employed taxpayer can use to compute the deduction for self-employed health insurance (IRC 162(l)) and the PTC. (Rev. Proc ; Treas. Regs (l)-1T) In addition, the IRS has 18 pages of discussion and worksheets in Publication 974, Premium Tax Credit. PTC and itemized deductions After going to such great lengths to clarify the deduction issue regarding the PTC and the selfemployed health insurance deduction, the IRS offered absolutely no guidance for 2014 at all regarding the PTC and the Schedule A deduction for medical expenses. Consider this scenario for purposes of discussion: Assume for example that a taxpayer s premiums are $200 per year (wouldn t that be nice!) and the taxpayer gets a $100 advance credit. Thus, the taxpayer pays premiums out-of-pocket of $100. Scenario 1: Final credit $100: The taxpayer has neither a repayment or an additional credit. Scenario 2: Final credit $80: The taxpayer has to make a $20 repayment with his return. Scenario 3: Final credit $120: The taxpayer gets an additional credit of $20 on his return Spidell Publishing, Inc.

60 We tested ProSeries and Lacerte. Software gives different results for 2014 In the above scenario, after completing the 1095-A worksheet, ProSeries carries the reconciled amount to Schedule A. Thus, if the taxpayer has a final credit of $80 and has to make a $20 repayment, ProSeries carries $120 to Schedule A ($100 premium paid during the year plus $20 repayment). If the final credit was $120, ProSeries carries $80 to Schedule A ($100 premiums paid less $20 additional credit). Lacerte does not carry any of the amounts to Schedule A. In our discussions with the two software companies, Lacerte stated that they did not have guidance as to how to treat the payments and expressed surprise that other software companies made the decision to apply the amounts retroactively back to 2014 even though the repayment was made or the additional credit was received in A ProSeries representative stated, I don t have any better answer than the IRS has instructed us to do it like this and has signed off of the Schedule A and 1095-A. I don t have anything in writing. IRS clarifies in 2015 Pub. 502 After saying nothing in 2014, the IRS clarified in the 2015 edition of Publication 502 that the Schedule A deduction for insurance premiums is the amount that is net of any Premium Tax Credit. Thus the deductions for the three scenarios, above, are: Scenario 1: $100 Scenario 2: $120 Scenario 3: $80 Amended return? There would seem to be nothing to prevent a taxpayer who qualified for a deduction in 2014 and failed to take that deduction from amending the 2014 to take the deduction. Taxpayers who filed using incorrect Forms 1095-A are not required to amend The U.S. Department of the Treasury has announced that taxpayers may, but are not required to, file an amended return if they have already filed their returns using an erroneous Form 1095-A. ( The Treasury states that about 20% of tax filers who purchased health insurance from the federal Marketplace received Forms A that included incorrect amounts for the benchmark premium, a key figure in computing the PTC. The error may have gone either way. Thus, a taxpayer who claimed too much credit is not required to amend and may keep the excess credit. A taxpayer who claimed too little may amend and claim additional credit. No time limit is stated in the Treasury s announcement, so it appears that a taxpayer has until the expiration of the normal statute of limitations on claims for refund to file an amended return Spidell Publishing, Inc.

61 DELAY IN ISSUANCE OF 1095s IRS announces that 1095s are not necessary to file 1040s The IRS has announced that it is not necessary for taxpayers to wait until they receive their Forms 1095-B or 1095-C in order to file their tax returns. (HCTT ) The deadline for insurers, other coverage providers, and certain employers to provide Forms 1095-B and 1095-C to recipients was delayed until March 31, 2016, causing concern as to whether taxpayers would have to wait to receive them before filing. Note: It is still necessary to wait to receive Form 1095-A before claiming a Premium Tax Credit; however, those forms were not delayed. Best practices for 2014 may apply to 2015 On its website, the IRS issued two sets of Return Preparer Best Practices with respect to: The Individual Shared Responsibility Provisions; and The PTC. Both begin by noting that there are no special or specific due diligence requirements related to Affordable Care Act (ACA) issues. Under general due diligence requirements, tax preparers may rely on statements made by their clients. Website Caution These sets of guidelines are explicitly for Although these guidelines were still on the IRS s website at the time these materials went to press, it s likely that the guidelines will be very different in The difference: In 2014 the employer reporting requirements were not yet in effect, and in 2015 they are in effect. Therefore, it would appear that in 2015 everyone with qualifying coverage will have that coverage reported on one (or more) of the Form 1095 series. However, see note above regarding delay in issuance of 1095s. Suitable documentation that may substantiate coverage For 2014, the IRS stated that documentation may include the following: Any Form 1095; Form W-2; or Other documentation that may substantiate coverage, such as: o o o o Medical bills showing that an amount was paid by health insurance; Documentation or statement from an employer indicating health insurance coverage; Medicare card; or Record of advance payments of the PTC. Again, these are not due diligence requirements, and other documentation may qualify in the professional judgment of the tax preparer. Many practitioners are saying that they may ask their clients to sign a statement that they have qualifying coverage Spidell Publishing, Inc.

62 Premium Tax Credit In order to claim a PTC, a client must receive Form 1095-A or other documentation from the Marketplace. A client may receive more than one such form. If a client does not have Form 1095-A, the IRS states that we must refer them to the Marketplace so that they may obtain either a Form 1095-A or a statement of their account. INDIVIDUAL SHARED RESPONSIBILITY PAYMENTS (PENALTIES) GO UP IN 2015 The ACA provides that U.S. citizens and legal residents must maintain qualifying health coverage for themselves and their dependents or be subject to a shared responsibility penalty. The penalty is phasing in starting in (IRC 5000A) The penalty is reported and paid on the individual s personal tax return. For most uninsured individuals over the age of 18, the penalty is the greater of the following: For 2014, $95 or 1% of household income in excess of the filing threshold, limited to the cost of premiums; For 2015, $325 or 2% of household income in excess of the filing threshold; For 2016, $695 or 2.5% of household income in excess of the filing threshold; and For 2017 and thereafter, these amounts will be indexed for inflation. Note 1: The applicable dollar amounts are per member of the household without qualifying coverage where: Dependents under the age of 18 are counted as one-half of a member; and The maximum applicable dollar amount is 300% (thus, the equivalent of three members of the household). Note 2: For 2015, the filing threshold amounts are $10,300 (single) and $20,600 (joint). The penalty is capped at the average cost of a bronze health plan. For 2015, the amount is $207 per month per member of the household with a maximum of $1,035 for a shared responsibility family with five or more members. (Rev. Proc ) Spidell Publishing, Inc.

63 Example of penalty with dependents Jackie and Audrey file joint in 2014 and They have a 10-year-old daughter, Annie, they claim as a dependent. They don t have insurance during the entire year. Their household income in 2014 is $40,300, and in 2015 it s $40,600. For purposes of this example, assume the taxpayer does not qualify for an exemption from the penalty for lack of affordability or for any other reason Income $40,300 $40,600 Filing threshold amount - 20,300-20,600 Excess 20,000 20,000 Applicable percentage 1% 2% Penalty based on income Applicable dollar amount Household size* Penalty based on dollar amount Greater net (penalty amount) $ 238 $ 813 * For purposes of the individual shared responsibility payment, a member of the household under age 18 counts as one-half of a family member. Information needed to determine penalty In 2014, the IRS delayed reporting requirements for qualified coverage. That meant there were gaps in the information we needed to determine if a client had qualifying coverage. In 2015, however, providers of minimum essential coverage (other than self-insured applicable large employers (ALEs)) are required to issue Form 1095-B, Health Coverage. Employers that are ALE s are required to issue Form 1095-C, Employer-Provided Health Insurance Offer and Coverage. Therefore, along with other information we ll receive from clients, it will be much easier to make the determination as to whether the client has qualifying coverage: Insurance purchased on an exchange is reported on Form 1095-A, Health Insurance Marketplace Statement; and Medicare coverage is reported on Form 1099-SA. Caution Everyone who files a tax return must either check the full-year coverage box on line 61, pay the penalty on line 61, or file Form 8965 to claim an exemption. California nonconformity California does not conform to the personal responsibility requirement to maintain minimum essential coverage or to the excise tax (penalty for failure to maintain such coverage) Spidell Publishing, Inc.

64 Source/Documentation for Coverage Exemptions EX = May only be granted by exchange EX/TR = May be granted by exchange or claimed on tax return TR = May only be claimed on tax return EX EX/ TR TR Code Coverage is considered unaffordable The amount you would have paid for employer-sponsored coverage or a bronze level health plan (depending on your circumstances) is more than 8% of your actual household income for the year as computed on your tax return A Short coverage gap You went without coverage for less than three consecutive months during the year B Citizens living abroad and certain noncitizens A: U.S. citizen who is a bona fide resident of a foreign country or U.S. territory; or A U.S. citizen or resident who spent at least 330 full days outside of the U.S. during a 12-month period C Household income below the return filing threshold Your household income is below the minimum threshold for filing a No code tax return Members of a health care sharing ministry You are a member of a health care sharing ministry, which is an organization described in IRC 501(c)(3) whose members share a common set of ethical or religious beliefs and have shared medical expenses in accordance with those beliefs continuously since at least December 31, 1999 Members of federally recognized Indian tribes You are a member of a federally recognized Indian tribe E Incarceration You are in a jail, prison, or similar penal institution or correctional facility after the disposition of charges F Members of certain religious sects You are a member of a religious sect in existence since December 31, 1950, that is recognized by the Social Security Administration (SSA) as conscientiously opposed to accepting any insurance benefits, including Medicare and Social Security D No code Limited benefit Medicaid and TRICARE programs You are enrolled in certain types of Medicaid and TRICARE programs that are not minimum essential coverage H (continued) Spidell Publishing, Inc.

65 Hardships: Source/Documentation for Coverage Exemptions (continued) Fiscal-year employer-sponsored plan You were eligible for, but did not purchase, coverage under an employer plan that started in 2013 and ended in 2014 (exemption was available only in 2014) EX EX/ TR TR Code H Your gross income is below the filing threshold to file a tax return No code Two or more family members aggregate cost of self-only employer-sponsored coverage exceeds 8% of household income, as does the cost of any available employersponsored coverage for the entire family G You purchased insurance through the exchange during the initial enrollment period but have a coverage gap at the beginning of 2015 G You are experiencing circumstances that prevent you from obtaining coverage under a qualified health plan No code ACA FOR BUSINESS IRS provides limited relief for health reimbursement plans On February 18, 2015, we received transition relief from the $100 per day penalty for maintaining a nonqualifying health reimbursement plan. (Notice ) The health reimbursement relief provides: No penalty for small employers through June 30, 2015; S corporations may continue to reimburse 2% shareholders of S corporations; Employers may raise the compensation of employees to assist in the purchase of health insurance; and Employers may establish plans integrated with government insurance including Medicare and TRICARE. Caution Note that at press time, the IRS had not extended penalty relief for small employers beyond June 30, Background Businesses have long relied on Revenue Ruling Under that ruling, reimbursements to an employee for the employee s share of premiums for medical insurance were treated as contributions by the employer to the health plan. Therefore, they were deductible by the employer and excluded from the employee s income much like the direct payments by the employer to the insurance company. The ruling required that the employee provide proof to the employer that the insurance is in force Spidell Publishing, Inc.

66 However, in September 2013, the IRS issued Notice , which stated that health reimbursement plans that cover more than one employee are considered group health plans and are subject to the requirements of the ACA. Under the ACA, group health plans are required to provide certain minimum essential benefits. By their very nature, health reimbursement plans cannot meet some of the requirements, including prohibitions on annual limits and preventive care rules. Employers were shocked to learn that if they continued using such arrangements, starting in 2014 they risked a penalty of $100 per day per participating employee. (IRC 4980D) Relief for small employers Notice provides that no penalty will be assessed for 2014 for employers that are not applicable large employers for 2014 and for January 1, 2015, through June 30, 2015, for employers that are not ALEs for An ALE is an employer that employed on average at least 50 full-time equivalent employees on business days during the preceding calendar year. For determining whether an entity was an ALE for 2014, an employer may determine its status by reference to a period of at least six consecutive calendar months of 2013, and may refer to a period of six consecutive calendar months in 2014 for determining ALE status for Relief for S corporations is indefinite Notice provides that if an S corporation pays for or reimburses premiums for individual health insurance coverage covering a 2% shareholder, the payment or reimbursement is included in the shareholder s income, but the 2% shareholder employer may deduct the premiums as an aboveline deduction. (IRC 162(l)) The latest guidance provides: The IRS is considering publication of further guidance on this issue; Until further guidance is issued (and at least through 2015, whether or not such guidance is issued before the end of 2015), S corporation shareholders may continue to rely on Notice ; The IRS reaffirmed that a plan covering just one employee is not a group plan and is, therefore, not subject to Notice and the penalties under IRC 4980D; and If an employee is covered under a reimbursement arrangement with family coverage and another employee is covered by that same coverage as a spouse or dependent of the first employee, the arrangement would be considered to cover only the one employee. Thus, if an S corporation has, as its sole shareholder employees, a husband and wife, it is not subject to Notice The Notice stresses that it does not apply to employees of S corporations who are not 2% shareholders. Practice Pointer Although general relief for small employers expired June 30, 2015, relief for S corporations is still in effect and will remain in effect until further notice. Medicare and TRICARE premium reimbursements An arrangement under which an employer directly pays or reimburses Medicare Part B and/or Part D premiums for employees is an employer payment plan subject to the ACA and Notice if it covers two or more active employees. The arrangement must be integrated with another Spidell Publishing, Inc.

67 group plan if it is to be ACA-compliant and avoid the penalty. Such an arrangement is deemed integrated if: The employer offers a group plan (other than the employer payment plan) to the employee that does not consist solely of excepted benefits and provides minimum value; The participant employee is enrolled in Medicare Parts A and B; The payment plan is available only to employees who are enrolled in Medicare; and The payment plan is limited to reimbursement of Medicare Parts B and D premiums and excepted benefits including Medigap premiums. Similar requirements are in effect for TRICARE reimbursement arrangements. Note: TRICARE provides civilian health benefits for military personnel, military retirees, and the dependents. Increased employee compensation The IRS makes clear that an employer may increase an employee s taxable compensation to make it easier for the employee to purchase health insurance coverage but cannot condition the increase on the employee actually purchasing coverage. The IRS also notes that employers may provide information about the Marketplace or the PTC so long as the employer does not make endorsements of particular policies or health insurance providers. What type of arrangement is permitted? There are still two categories of arrangements that remain permissible: fully-integrated arrangements and HIPAA-excepted arrangements. HIPAA-excepted arrangements: Generally, HIPAA-excepted benefits include retiree-only plans and plans that cover only dental and vision. Therefore, an employer that does not offer an ACAcompliant health insurance plan to its employees can offer an HRA or FSA that offers just HIPAAexcepted benefits to its employees without running afoul of Notice Fully-integrated arrangements: An arrangement will qualify if it is integrated with a qualified health plan that is ACA-compliant. There are two integration methods that depend on whether or not the qualified health plan (QHP) offers minimum value (i.e., whether the plan covers at least 60% of the total allowed cost of benefits). Comment If the employer provides a QHP, then the requirements of a group health plan under the ACA are met. This opens the door for a reimbursement arrangement because even though the arrangement is a group health plan, by being integrated with the QHP, it is part of a group health plan in which the requirements have been met Spidell Publishing, Inc.

68 No minimum value limited reimbursement QHP must be offered with more than HIPAA-excepted benefits Employee must be actually enrolled in QHP HRA reimburses only: Copayments and deductibles Premiums under the QHP Medical expenses that are not essential health benefits (i.e., dental and vision) Allowable Reimbursement Arrangements Minimum value open ended reimbursement QHP must be offered providing minimum value Employee must be actually enrolled in QHP Arrangement may reimburse any medical expense covered in IRC 213(d) IRS tightens noose on health reimbursement arrangements The IRS has issued Notice regarding health insurance reimbursement arrangements. Practitioners have expressed disappointment that this Notice failed to provide some much-needed clarity to the issue. In fact, at 32 pages, it seemed to further muddy the waters and also seemed to further tighten the noose. Notably, the Notice stated that if an employee has self-only coverage but also has an HRA that provides coverage to his spouse or entire family, such an arrangement is not fully integrated. Caution Note that the rules are very complex and generally beyond the scope of tax professionals. The rules are found not only in the Tax Code, but also in ERISA, HIPPA, and the Health Services Act. For now, the nondiscrimination rules of the ACA do not impact insured plans. Under Notice , the IRS stated that they will delay enforcement of these rules until regulations are issued. However, the nondiscrimination rules do impact self-insured plans such as HRAs and cafeteria plans. Small Employer Health Insurance Credit may begin for an employer in any year For tax years beginning in 2010, the Affordable Care Act provides a credit for small employers who provide health coverage for their employees. Generally, the credit is available for employers with no more than 25 full-time equivalent employees (FTE) and average annual wages no greater than $50,000 per employee per year. (IRC 45R) The credit may be as high as 50% of premiums paid. Two phases to credit There are two phases to the credit, during which the credit rate and qualifications are different: ; and The two-consecutive-year period after 2013, starting with the first year the employer offers qualifying coverage Spidell Publishing, Inc.

69 Note: An employer may qualify for the credit in as many as six tax years (if that employer had begun receiving the credit in 2010). The first year that an employer files Form 8941 claiming the credit is the first year of the twoconsecutive year credit period even if the employer is only eligible to claim credit for part of the first year or is not eligible at all in the second year. (Treas. Regs. 1.45R-3(f)) Initial credit is open-ended Thus, an employer may first claim the credit in any year. There is no sunset year on the credit. Once an employer takes the credit in a taxable year, the taxpayer is eligible for the credit in only one more year the year following the year the taxpayer first takes the credit. Therefore, there is nothing to prevent an employer from waiting until 2019 to first take the credit. Once the taxpayer takes the credit in 2019, the taxpayer is only eligible to take the credit in 2020 and in no other year. Qualifying plan defined A plan qualifies if it is a qualifying contribution arrangement. A contribution arrangement is qualifying if it requires the employer to make nonelective contributions on behalf of every employee who enrolls in the employer plan: In an amount that is at least 50% of the premium cost; and In a uniform percentage for all employees. (IRC 45R(d)(4)) SHOP Exchange only beginning in 2014 For taxable years beginning after December 31, 2013, the credit is available only with respect to premiums paid by a small employer for a qualified health plan offered by the employer to its employees through a SHOP Exchange. (TD 9672) For tax years beginning after 2013, an arrangement is a qualifying arrangement if it requires an eligible small employer to make a nonelective contribution (i.e., pay a premium) on behalf of each employee who enrolls in a qualified health plan offered to employees by the employer through a SHOP Exchange in an amount equal to a uniform percentage (not less than 50%) of the premium cost of the health plan. A nonelective contribution is any contribution other than an employer contribution under a salary reduction arrangement. (IRC 45R(e)(3)) Therefore, any amount contributed under a cafeteria plan within the meaning of IRC 125 is not treated as an employer contribution for purposes of the credit. California nonconformity California does not conform to this provision. For California purposes, the taxpayer will receive a full deduction for the amount of the health insurance, with no reduction for the amount of the credit. Shared responsibility for employers begins in 2015 Beginning in 2015, an ALE will be liable for an assessable payment (technically, an excise tax) for not offering affordable basic health insurance coverage to its employees. (IRC 4980H) Generally, an applicable large employer is one with 100 or more full-time employees (or full-time equivalents ) in 2015 or 50 or more full-time employees in The excise tax is nondeductible for income tax purposes. (IRC 275(a)(6), 4980H(c)(7)) Spidell Publishing, Inc.

70 Specifically, the assessable payment will be assessed by the IRS if any full-time employee is certified to the employer to have purchased health insurance through a state exchange with respect to which a PTC is allowed to the employee if the employer either: Does not offer qualified health care coverage for all its full-time employees; or Offers minimum essential coverage that is either: o o Unaffordable to that employee; or Consists of a plan under which the plan s share of the total allowed costs of benefits fails the minimum value test. What is unaffordable? Coverage is unaffordable to an employee if the employee s share of the premium would cost the employee more than 9.5% of that employee s household income. If an employer offers multiple health care coverage options, the affordability test applies to the lowest-cost self-only option available to the employee that also meets the minimum value requirement. Generally, an employer will not know an employee s household income. Therefore, regulations provide three optional safe harbors. An employer may choose to use one or more of these safe harbors but must do so on a uniform basis for all employees in a category. Categories generally include specified job categories, nature of compensation, geographic locations, and similar bona fide business criteria. (Treas. Regs H-5(e)(2)(i)) W-2 safe harbor: Coverage is treated as affordable to a full-time employee if that employee s required contribution does not exceed 9.5% of the employee s W-2 wages reported in box 1. Application of this safe harbor is determined after the end of the calendar year on an employee-byemployee basis. (Treas. Regs H-5(e)(2)(ii)) Rate of pay safe harbor: The rate of pay safe harbor generally is based on the employee s rate of pay at the beginning of the coverage period, with adjustments permitted for an hourly employee if the rate of pay is decreased but not if the rate of pay is increased. (Treas. Regs H-5(e)(2)(ii)) The determination is made monthly. The rate of pay safe harbor is satisfied if the self-only coverage that provides minimum value does not exceed 9.5% of an amount equal to 130 hours multiplied by the lower of the employee s hourly rate of pay as of the first day of the coverage period or the employee s lowest hourly rate of pay during the calendar month. For nonhourly employees, the safe harbor is satisfied if the employee s required contribution does not exceed 9.5% of the employee s monthly salary. Federal poverty line safe harbor: The federal poverty line safe harbor generally treats coverage as affordable if the employee contribution for the year does not exceed 9.5% of the federal poverty line for a single individual for the applicable calendar year. (Treas. Regs H-5(e)(2)(iii)) What is minimum value? A plan fails to provide minimum value if the plan s share of the total allowed costs of benefits provided under the plan is less than 60% of those costs. (Preamble II.B; Treas. Regs H- 1(a)(28); IRC 36B(c)(2)(C)(ii)) The Department of Health and Human Services and the IRS have produced a minimum value calculator. By entering certain information about the plan, such as deductibles and copays, into the calculator, employers can get a determination as to whether the plan provides minimum value. (Q&A 20) Spidell Publishing, Inc.

71 Website The IRS Q&A on the Employer Shared Responsibility provisions is available at: Provisions-Under-the-Affordable-Care-Act Computing the assessment Under IRC 4980H, there are two types of assessments that can be imposed. An employer cannot be subject to both for the same calendar month. The penalty is the lesser of: The (a) penalty : Large employers that do not offer health insurance (IRC 4980H(a); Treas. Regs H-4); or The (b) penalty : Large employers that offer health insurance but have one or more employee(s) who qualify for PTCs. (IRC 4980H(b); Treas. Regs H-5) Employers who fail to meet the rules for offering coverage If an employer fails to offer coverage to its full-time employees and even one employee is certified to have purchased insurance through an exchange and is allowed a PTC, the assessable payment is equal to the product of: The applicable payment amount ; and The number of individuals employed by the employer in excess of 30 (80 for 2015) as fulltime employees during any month. The applicable payment amount is $ for any month (the equivalent of $2,000 per year). The amount is adjusted for inflation after The inflation-adjusted amounts are $2,080 for 2015 and $2,160 for Example of assessment for no coverage offered to any employee Big Employer fails to offer minimum essential coverage for the entire year of 2015 and has 150 full-time employees. Ten of the employees receive the PTC after enrolling in an exchange. For 2015, Big Employer will be assessed an excise tax of $145,600 calculated as follows: Total full-time employees 150 Threshold (80) Subject number 70 Applicable payment amount (annualized) $2,080 Total assessment $145,600 Note: The assessment would be the same even if only one employee received the PTC. Employers who offer coverage If an employer offers coverage but one or more employees qualify for health coverage assistance, the assessable payment, computed on a monthly basis, is equal to the product of: The number of full-time employees for any month who receive health coverage assistance; and 1/12 of $3,000. After 2014, the $3,000 amount is adjusted for inflation. The inflation-adjusted amounts are $3,120 for 2015 and $3,240 for The amount is limited to the amount that would be paid if the employer offered no coverage to any employee (as computed above) Spidell Publishing, Inc.

72 Example of assessment for employer that offers coverage Assume from the above example that Big Employer offers coverage to employees but that 10 of the employees buy insurance on an exchange and receive PTCs because Big Employer s coverage is unaffordable to them. On an annualized basis, the excise tax would be $3, employees = $31,200. The tax is limited to the tax that would be assessed if Big Employer offered no coverage ($145,600 as computed in the above example). Therefore, Big Employer s tax is $31,200. What does it mean to offer coverage? An applicable large employer is treated as offering health insurance coverage to its full-time employees and their dependents for a calendar month if, for that month, the employer offers the coverage to at least 95% of its full-time employees. However, 2015 transition relief provides that for 2015: The threshold is only 70% (Preamble XV.D.7); and Coverage does not have to be offered to dependents so long as the employer is taking steps toward satisfying the dependent coverage requirement. (Preamble XV.D.5) However, this transition relief is not available to employers that offered dependent coverage during either the plan year that began in 2013 or the plan year that began in 2014 and subsequently dropped dependent coverage. (Q&A 33) Practice Pointer Note that these requirements to offer coverage pertain only to exempting the employer from the (a) penalty, i.e., the penalty on employers that do not offer insurance. Even if the employer meets these requirements, it may still be subject to the (b) penalty. What is an offer? Whether an offer has been made depends on a facts and circumstances test of whether an employee has been given a reasonable opportunity to enroll. (Preamble IX.A) The offer can be made electronically. An offer must be made at least once with respect to each plan year. An employer who autoenrolls its full-time employees in qualifying health coverage is treated as offering coverage so long as it provides the employees an effective opportunity to opt out. Dependents In order to meet the requirement of offering coverage, the employer must offer to cover the employee s dependents; however, the employer does not have to pay for a dependent s coverage. Remember that in determining affordability, the determination is based on the employee s cost of self-only coverage. The term dependent means a child as defined in IRC 152(f)(1) but excluding a stepchild or foster child of an employee who has not attained age 26. A child is a dependent for the entire calendar month during which he or she attains age 26. (Treas. Regs H-1(a)(12)) Spidell Publishing, Inc.

73 90-day waiting period An employer cannot use a waiting period of more than 90 days from a full-time employee s date of hire plus up to one month for orientation before offering qualifying coverage. (TD 9671) If a group health plan conditions eligibility on a new employee having completed a reasonable and bona fide employmentbased orientation period, the orientation is not considered to be designed to avoid compliance with the 90-day waiting period limitation if the orientation period is for no more than one month. Example of waiting period Humongous Corp. hires Fred on October 16. The company sponsors a group health plan and has a policy that all employees undergo a one-month orientation period. Fred completes his orientation period on November 15. Coverage must be offered to Fred no later than February 14, which is the 91st day after he completes his orientation. Applicable large employer An applicable large employer (for a calendar year) is an employer who employed an average of at least 50 full-time employees during the preceding calendar year. (IRC 4980H(c)(2)(A)) As noted above, in a transition rule, the threshold is 100 for Key points include: Aggregation rules: All employers treated as single employers under the aggregation rules are treated as single employers for purposes of the excise tax; FTEs: The count of full-time employees includes full-time equivalents; New employer: For an employer that was not in existence throughout the preceding calendar year, the determination is based on the average number of employees reasonably expected to be employed in the current calendar year; Employee: The term employee is determined under common law tests (Notice ); Entities: All employers that are large employers are subject to the employer shared responsibility provisions, including for-profit, nonprofit, and government entity employers (Q&A 7); Employees eligible for other insurance: All employees are counted, including those eligible for health coverage from another source, including Medicare, Medicaid, or a spouse s employer; Foreign: For purposes of determining whether an employer is an applicable large employer, an employer generally takes into account only work performed in the United States. Thus, employees working only abroad, whether or not U.S. citizens, generally will not be taken into account for purposes of determining whether the employer is an applicable large employer (Q&A 13, 14); Volunteers: Hours contributed by volunteers for a government or tax-exempt entity, such as volunteer firefighters and emergency responders, are not counted as employees; Education employees: Teachers and other education employees are not treated as part-time or seasonal simply because their school is closed during the summer; Student work-study programs: Work performed by students under a federal or state workstudy program is not counted in determining whether they are full-time employees; and Adjunct faculty: Employers of adjunct faculty are required to use a method of crediting hours of service that is reasonable in the circumstances. To provide a bright line approach, the final regulations provide that an employer may credit an adjunct faculty member with 2.25 hours of service per week for each hour of teaching or classroom time Spidell Publishing, Inc.

74 Identify the employer The first step is to identify the entity or entities that constitute the employer. The determination is made on the basis of a controlled or affiliated group. (Treas. Regs H-1(a)(16)) All entities treated as a single employer under IRC 414(b), (c), (m), or (o) are treated as a single employer. Under these rules, generally, if at least 80% of the interests of each entity are held by one or more common owners, the group is treated as a single employer. Caution The rules are very complex and fact-specific. If in doubt, consult an attorney with ERISA experience. Identify the employees An employee for purposes of the employer shared responsibility provisions is an employee under common law not including a leased employee, a sole proprietor, a partner in a partnership, a two-percent shareholder in an S corporation, or a statutory employee as defined under IRC (Treas. Regs H-1(a)(15)) Caution The IRS acknowledges that a worker reclassification audit that results in reclassification of one or more workers to employee status could (1) increase the number of full-time employees above the threshold or (2) cause a (b) penalty due to the employee s change of status. (Preamble XII) The IRS says tough luck. In fact, the IRS says that even if the employer is granted relief under 530 (of the Revenue Act of 1978), it doesn t help for purposes of the employer shared responsibility provisions. Comment regarding 530: Section 530 of the Revenue Act of 1978 (not 530 of the IRC) provides possible relief for an employee in a reclassification audit. Section 530 states in part that an individual will not be considered an employee if a taxpayer treated him or her and other workers performing similar tasks as nonemployees for all periods, had a reasonable basis for doing so, and filed required information and other returns (such as Form 1099-MISC) consistently with that status. Count all employees to determine ALE For purposes of determining whether an employer is an applicable large employer, all employees are counted (subject to a limited exception for certain seasonal workers), regardless of whether the employees are eligible for health coverage from another source, such as Medicare, Medicaid, or a spouse s employer. Thus, an applicable large employer with full-time employees who are eligible for health coverage through another source, such as Medicare, Medicaid, or a spouse s employer, will be subject to the employer shared responsibility provisions regardless of whether those employees are eligible for coverage from another source. But, employees who are eligible for Medicare or Medicaid are not eligible for a PTC. If no full-time employee receives a PTC (for example, because all of an employer s full-time employees are eligible for Medicare or Medicaid), the employer will not be subject to an employer shared responsibility payment. (Q&A 10) Hours of service Generally, a full-time employee is an employee who is employed an average of 30 hours per week. (IRC 4980H(c)(4)) Because months are uneven and there may be different numbers of work days in any month, a worker is deemed to have worked an average of 30 hours per week in a month if the employee works 130 hours in that month. (Treas. Regs H-1(a)(21)) Spidell Publishing, Inc.

75 Counting hours: For hourly workers, an employer must calculate actual hours of service from records of hours worked and hours for which payment is made or due (in other words, for vacation pay, sick pay, jury duty, etc.). (Treas. Regs H-3(b)(2); Q&A 16) Employees not paid on an hourly basis: For employees not paid on an hourly basis, employers would be permitted to calculate hours under any of three methods: Counting actual hours; Using a days-worked method in which an employee is credited with eight hours of work even if the employee only works one hour in the day; or Using a weeks-worked method in which an employee is credited with 40 hours of work even if the employee only works one hour in the week. (Treas. Regs H-3(b)(3)) Different methods for different classes of employees: An employer must use one of these three methods for all nonhourly employees. An employer may use different methods for different classifications of nonhourly employees, so long as the classifications are reasonable and consistently applied. In addition, an employer may switch methods for each calendar year. (Treas. Regs H-3(3)(b)(2)(ii)) Seasonal workers If the sum of an employer s full-time workers and FTEs exceeds the threshold (100 in 2015; 50 thereafter) for 120 days or less during the year, and the employees in excess of the threshold who were employed during that period of no more than 120 days are seasonal workers, the employer is not an applicable large employer. (Treas. Regs H-2(b)(2)) Employers may use a reasonable, good faith interpretation of the term seasonal worker. (Treas. Regs (a)(39)) Example of seasonal workers During 2015, Big Ski has 40 full-time employees for the entire calendar year, none of whom are seasonal workers. During their season, Big Ski also employs 80 seasonal workers for four months who are full-time employees. Before applying the seasonal worker exception, Big Ski has 40 full-time employees during each of eight calendar months of 2015 and 120 full-time workers during four calendar months. The average is 67 employees per month during the year. Big Ski s workforce exceeded 100 full-time employees for no more than four calendar months (treated as the equivalent of 120 days) in calendar year 2015, and the number of full-time employees would be less than 100 during those months if seasonal workers were disregarded. Accordingly, Big Ski is not an applicable large employer. (Treas. Regs H-2(d), Ex. 3) Full-time employees and full-time equivalents (FTEs) Whether a worker is a full-time employee matters for two reasons: For purposes of determining whether the employer is an applicable large employer (50 or more full-time employees), i.e., whether the employer is subject to the employer shared responsibility provisions (Q&A 15); and For purposes of determining whether an employer is subject to the (b) penalty because one or more full-time employees received the PTC Spidell Publishing, Inc.

76 Full-time workers: For each calendar month, identify and count each employee who averaged at least 30 hours of service per week in that month (or 130 hours in that month). This is the number of full-time employees. Full-time equivalents: Count the aggregate hours of service worked by non-full-time employees for each month (not to exceed 120 hours of service for any one employee). Divide the aggregate hours by 120. The result is the number of FTEs for the month. Example of counting employees In June 2015, Apex Inc. employs 48 employees who are full-time employees (they all perform 130 hours or more of service during the month). It also employs eight other employees who work an aggregate of 480 hours during the month (none of whom work more than 120 hours during the month). Apex employs 52 employees during June of 2015 (48 + ( )). Computing status as applicable large employer Specifically, to determine its status as an applicable large employer (or not) for the current year, the employer must: 1. Count the number of full-time employees in each month of the preceding year, i.e., those that averaged at least 30 hours per week or 130 hours in a month; 2. Calculate the number of FTEs by adding the total hours worked by part-time employees for the month by 120; 3. Add #1 and #2 to get the total number of full-time equivalents during the month; 4. Repeat this calculation for every calendar month in the 12-month period, and compute the sum of the 12-month totals; and 5. Divide the result of #4 by 12. (Treas. Regs H-2(b)) The result, if not a whole number, is rounded to the next lower whole number. If the result of this calculation is less than 50 (less than 100 in 2015), the employer is not an applicable large employer. Employer not in existence in prior year An employer not in existence throughout the preceding calendar year is an applicable large employer for the current calendar year if the employer is reasonably expected to employ an average of at least 50 full-time employees (including FTEs) in the current calendar year, and it actually employs an average of at least 50 full-time employees during the year. (Treas. Regs H-2(b)(3); Q&A 5) An employer is treated as not having been in existence throughout the prior calendar year only if the employer was not in existence on any business day in the prior calendar year. Employer not a large employer in prior year To address the concern that employers need time to address becoming an applicable large employer, the regulations provide that, with respect to an employee who was not offered coverage at any point in the prior calendar year, if the applicable large employer offers coverage on or before April 1 of the first year in which the employer is an applicable large employer, the employer will not be subject to either an (a) penalty or a (b) penalty. If the large employer fails to offer coverage on or before April 1 of that year, the employer may be subject for those initial months in addition to any subsequent calendar months for which coverage is not offered. (Preamble V.F; Treas. Regs H-2(b)(5)) Spidell Publishing, Inc.

77 Example of first year as large employer As of January 1, 2016, Big Deal, Inc. has been in existence for a number of years and did not average more than 50 employees (including FTEs) in In 2016, Big Deal hires many new employees and averages more than 50 employees for every month throughout the year. Thus, in 2017, Big Deal is an applicable large employer for the first time. For all of 2017, Big Deal had the same 60 full-time employees. In 2016, Big Deal offered coverage to 20 of those employees and offered coverage in 2017 to those same employees for the entire year. With respect to the 40 full-time employees who were not offered coverage in 2016, Big Deal offers coverage in 2017 beginning on April 1. Big Deal may not be assessed an (a) penalty because: It is the first year it is an applicable large employer; It continued to offer coverage to employees who were offered coverage in the prior year; and It offered coverage to full-time employees who were not offered coverage in the prior year no later than April 1. Big Deal may still be assessed a (b) penalty with respect to any employee for any calendar month for which the offer is not affordable and for which the employee receives a PTC. How will an employer know that it owes a shared responsibility payment? Employers will not be required to include the employer shared responsibility payment on any tax return that they file. The IRS will adopt procedures that ensure employers receive certification that one or more employees have received a PTC. The IRS will contact employers to inform them of their potential liability and provide them an opportunity to respond before any liability is assessed or notice and demand for payment is made. The contact for a given calendar year will not occur until after the due date for employees to file individual tax returns for that year claiming PTCs and after the due date for applicable large employers to file the information returns identifying their full-time employees and describing the coverage that was offered (if any). If it is determined that an employer is liable for an employer shared responsibility payment after the employer has responded to the initial IRS contact, the IRS will send a notice and demand for payment. That notice will instruct the employer on how to make the payment Spidell Publishing, Inc.

78 Employer shared responsibility flowchart Spidell Publishing, Inc.

79 Practice Pointer Reducing exposure to the employer mandate Commonly mentioned strategies for reducing exposure to the employer mandate include the following: Hire part-time employees: Hiring employees to work under 30 hours per week will not keep an employer from being treated as an applicable large employer because part-time workers still count as FTEs. But it will reduce exposure to the assessable payment because a part-time worker who gets the PTC does not count toward causing an assessable payment; Hire independent contractors: Note the caution above, however. A worker classification audit could have very bad results for an employer who improperly classifies workers; Hire temporary employees through a staffing firm: This can work, but note that the IRS has made it clear it will not tolerate a situation where a staffing agency hires a client employer s part-time workers, and then leases them back to the client on a part-time basis so that the workers are working two part-time schedules, one for the employer and one for the staffing agency, that together add up to full-time work; Contract out work: Because of the aggregation rules, contracting out must be done to an unrelated entity; Hire seasonal employees; and Offer insurance to lowest-paid employees: The lowest paid workers are most likely to qualify for government subsidized coverage on a government insurance exchange (and thereby cause an assessable payment). For example, a professional firm might want to provide employer-subsidized coverage to office staff, but not to highly paid partners and associates. Employer reporting requirements begin for 2015 The Affordable Care Act imposes some new annual reporting requirements, the specific objective of which is to inform the IRS and individuals about who has access to minimum essential coverage (MEC), and when an employer shared responsibility assessment might be owed. In addition, these requirements are intended to facilitate the determination about who is eligible for premium assistance and who might be subject to the individual shared responsibility payment. (IRC 6055, 6056) The reporting requirements were set to take effect in 2015 for coverage provided in However, the requirements were delayed one year. Thus, the first returns will be due in 2016 for coverage provided in (Notice ) IRC 6055 s requirements: Are generally for providers of minimum essential coverage; Are reported on Form 1095-B; and Help the IRS administer the ACA s individual mandate. IRC 6056 s requirements: Are generally for ALEs to report to the IRS whether they offer coverage to full-time employees and their dependents; Are reported on Form 1095-C; and Help the IRS administer ACA s shared responsibility provision for ALEs Spidell Publishing, Inc.

80 General requirements Any person that provides minimum essential coverage to an individual must report to the IRS and furnish information returns to that individual including the following: Health insurance issuers, or carriers, for insured coverage; Plan sponsors of self-insured group plans; and The executive department or agency of a governmental unit that provides coverage under a government-sponsored plan. Eligible employer-sponsored coverage is: A self-insured group health plan under which coverage is offered by or on behalf of an employer to an employee; or Group health insurance coverage offered by an employer to an employee. Eligible employersponsored coverage includes COBRA coverage and retiree coverage. Sponsor versus provider It is the responsibility of the provider to send out the appropriate Form 1095 (B or C): Sponsor: The person who arranges the health coverage. In the case of employer coverage, it is the employer; and Provider: The company or organization that actually pays the medical bills. In the case of an insured plan, it is the insurance company. In the case of a self-insured plan, it is the employer. Filing requirements Generally, a health coverage provider must file Form 1095-B, Health Coverage, along with a transmittal Form 1094-B, Transmittal of Health Coverage Information Returns. In the case of an applicable large employer, the employer must file Form 1095-C, Employer- Provided Health Insurance Offer and Coverage along with a transmittal Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns. An ALE is required to file Form 1095-C with the IRS, as well as provide a copy to all full-time employees, regardless of whether the ALE offers health insurance coverage. The ALE must also file Form 1095-C if an employee waives coverage that was offered. If the ALE s plan is insured, the insurance company will file the Forms 1095-B. However, if the ALE s plan is self-insured (self-funded), the ALE will file Form 1095-C. The provider is also responsible for furnishing participants with a copy of Form 1095-B except for ALEs with self-funded plans. In those cases, the employer is responsible for furnishing participants with a copy of Form 1095-C. Comment Thus, in the case of small employers (those that are not ALEs) that purchase employee insurance through an insurance company, no action will be required on the employer s part; the insurance company will file the forms Spidell Publishing, Inc.

81 Individual/group Employer Reporting Requirements IRC 6055 required form (sent by) Individual (from Exchange) 1095-A (Exchange) Individual (off Exchange) 1095-B (Insurance company) Small group (both SHOP and off-exchange) 1095-B (Insurance company) Small group, self-funded 1095-B (Employer) ALE, fully insured Form 1095-B (Insurance company) IRC 6056 required form (sent by) N/A N/A N/A N/A 1095-C, Sections I, II (Employer) ALE, self-funded N/A 1095-C, all sections (Employer) ALE levels different Caution Note that for 2015 (only), there are different ALE thresholds for purposes of the employer shared responsibility payment and employer reporting requirements: Employer shared responsibility payment: 100 FTEs; and Employer reporting requirements: 50 FTEs. Due dates delayed In Notice , the IRS has delayed the deadline for filing Forms Generally, the deadline is the same as the deadline for filing W-2s; that is, the forms must be provided to the recipients no later than January 31 of the year following the calendar year of coverage and must be filed with the IRS no later than February 28 of the year following the calendar year of coverage (March 31 if filed electronically). A provider that is required to file 250 or more Forms 1095-B or 250 or more Forms 1095-C must file the returns electronically. For 2015, however, the IRS has delayed the deadline to March 31 for recipients and May 31 to the IRS Spidell Publishing, Inc.

82 Form 1095-B Department of the Treasury Internal Revenue Service Health Coverage Information about Form 1095-B and its separate instructions is at VOID CORRECTED OMB No Part I Responsible Individual 1 Name of responsible individual 2 Social security number (SSN) 3 Date of birth (If SSN is not available) Street address (including apartment no.) 5 City or town 6 State or province 7 Country and ZIP or foreign postal code 8 Enter letter identifying Origin of the Policy (see instructions for codes): Small Business Health Options Program (SHOP) Marketplace identifier, if applicable Part II Employer Sponsored Coverage (see instructions) 10 Employer name 11 Employer identification number (EIN) 12 Street address (including room or suite no.) 13 City or town 14 State or province 15 Country and ZIP or foreign postal code Part III Issuer or Other Coverage Provider (see instructions) 16 Name 17 Employer identification number (EIN) 18 Contact telephone number 19 Street address (including room or suite no.) 20 City or town 21 State or province 22 Country and ZIP or foreign postal code Part IV Covered Individuals (Enter the information for each covered individual(s).) (a) Name of covered individual(s) (b) SSN (c) DOB (If SSN is not available) (d) Covered all 12 months (e) Months of coverage Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec For Privacy Act and Paperwork Reduction Act Notice, see separate instructions. Cat. No B Form 1095-B (2015)

83 Form 1095-C Department of the Treasury Internal Revenue Service Employer-Provided Health Insurance Offer and Coverage Information about Form 1095-C and its separate instructions is at Part I Employee 1 Name of employee 2 Social security number (SSN) VOID CORRECTED OMB No Applicable Large Employer Member (Employer) 7 Name of employer 8 Employer identification number (EIN) 3 Street address (including apartment no.) 9 Street address (including room or suite no.) 10 Contact telephone number 4 City or town 5 State or province 6 Country and ZIP or foreign postal code 11 City or town 12 State or province 13 Country and ZIP or foreign postal code Part II Employee Offer and Coverage Plan Start Month (Enter 2-digit number): 14 Offer of Coverage (enter required code) All 12 Months Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec 15 Employee Share of Lowest Cost Monthly Premium, for Self-Only Minimum Value Coverage $ $ $ $ $ $ $ $ $ $ $ $ $ 16 Applicable Section 4980H Safe Harbor (enter code, if applicable) Part III Covered Individuals If Employer provided self-insured coverage, check the box and enter the information for each covered individual. (a) Name of covered individual(s) (b) SSN (c) DOB (If SSN is not available) (d) Covered all 12 months (e) Months of Coverage Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec For Privacy Act and Paperwork Reduction Act Notice, see separate instructions. Cat. No M Form 1095-C (2015)

84 The Cadillac Tax a first look Beginning after 2019, a 40% excise tax is imposed on the excess benefit provided by an employer-sponsored health plan to an employee that exceeds a threshold amount. (IRC 4980I) That 40% excise tax on high-cost health benefits is the so-called Cadillac Tax. The Cadillac Tax was originally scheduled to go into effect in 2018, but the PATH Act delayed implementation until Starts Timeline for Health Care Provisions Provision Extended coverage for adult children Adoption credit and exclusion enhanced Tax credits for small businesses Tax on indoor tanning services Penalty increase for nonqualified HSA/MSA distributions Prescribed drugs only for HSA, MSA, HRA, and FSA Simple cafeteria plans for small business Individual (I) Business (B) 2012 Information reporting requirements B Additional Medicare taxes Increase in medical itemized threshold FSAs limited to $2,500 $250 doughnut hole rebate I Premium assistance credits Shared responsibility penalties Large-employer requirements Exchanges open 2020 Excise tax on Cadillac plans B What you need to know now When the ACA was enacted, the Cadillac Tax seemed distant. Moreover, it seemed like it wouldn t apply to too many employers and employees, it seemed like it would be a relatively minor assessment when it occurred, and it seemed like it would be easy to calculate. Clients will be asking questions When tax season 2016 rolls around, the Cadillac Tax will be less than two years away. This discussion is meant to prepare you to answer clients questions including whether the client will be subject to the tax and approximately what their liability will be. It s too early to get into all of the details. I I B B I I B I I B I I B I Spidell Publishing, Inc.

85 May get overturned A mix of business groups and labor unions are pushing to eliminate the Cadillac Tax. Originally thought to affect only the select few, that no longer appears to be the case. Labor unions, for example, are known for offering employee-friendly benefits that may feel the pinch of the tax within a few years. There is bipartisan support in Congress for repealing the tax. As of this writing, several lawmakers have introduced legislation to repeal the Cadillac Tax. Computing and paying the Cadillac Tax The excise tax on high cost employer-sponsored health coverage is based on any excess benefit provided by an employer to an employee with respect to employer-sponsored health coverage. The excess benefit is the amount by which the aggregate cost of such coverage exceeds a threshold amount. The excess benefit is determined on a monthly basis. The tax is 40% of the excess benefit. Employer-sponsored health coverage Employer-sponsored health coverage is health coverage offered by an employer to an employee. Note the following: It doesn t matter whether the employer or employee pays the premiums. It includes premiums paid by the employer and excludable from the income of the employee under IRC 106 and also includes coverage paid for by the employee with after-tax dollars; It includes coverage paid for by a self-employed individual if the cost of the coverage is treated as an above-line self-employed health insurance deduction under IRC 162(l); and It includes not only insured and self-insured plans but also FSAs, HSAs, and MSAs (employer pretax contributions only, HRAs, on-site medical clinics providing more than de minimis care, and more). Certain benefits are not included. The most common such benefits are: Long-term care; Accident and disability; and Excluded benefits (most commonly dental and vision). Threshold amounts The base threshold amounts for 2018 are initially set at $10,200 for self-only coverage and $27,500 for family coverage. (IRC 4980I(b)(3)) The initial threshold amounts may be increased (but not decreased) by certain inflation factors. After 2018, the threshold amounts will be adjust annually. The adjustments are indexed to the CPI-U as determined by the Department of Labor. Adjustments to threshold amounts Certain adjustments are made to the threshold amounts for: Age and gender; Certain individuals receiving retiree benefits; and Employees in high-risk professions Spidell Publishing, Inc.

86 Determined by employer, paid by provider The amount of excess payment is determined by the employer, who reports the amount to the provider and to the IRS (on forms not yet provided by the IRS). The provider must pay the tax. The coverage provider is: The health insurance provider, when the employer-sponsored plan is a group health plan; The employer, when the employer-sponsored coverage consists of coverage under which the employer makes contributions to an HSA or MSA; or The person that administers the plan benefit, when any other employer-sponsored coverage is involved. Thus where the employer serves as the plan administrator to a self-insured plan, an FSA, or HRA, the excise tax is paid by the employer. Multiple plans This means that when multiple plans are involved, the employer is obligated to allocate the excess payments, and multiple entities may be responsible for the tax. Example of multiple plans In 2018, an employee elects self-only coverage under a major medical policy with premiums of $9,500. The employee also contributes $2,500 to a health FSA that the employer self-administers. Therefore, the employee s aggregate cost of coverage is $12,000. There are no adjustments to the threshold amount for that employee (for gender, age, or high-risk profession). Therefore the threshold amount for the employee is $10,200. The excess benefit amount is $1,800 ($12,000 - $10,200). The excess benefit amount is allocated to the insurance company and to the employer as: Insurance company: ($9,500 $12,000) $1,800 = $1,425 Employer: ($2,500 $12,000) $1,800 = $375 The tax paid by each is: Insurance company: $1,425 40% = $570 Employer: $375 40% = $150 Reimbursing the insurance company Insurance companies will obviously expect to be reimbursed for any excise tax it pays with respect to a customer/employer. To the extent that any charge back is included in premiums for the following year, the charge back amount will not be treated as premiums for purposes of the excise tax. The IRS has not yet provided clear guidance regarding how an employer will calculate the amount of charge back included in premiums. A large number of employers will be hit with this excise tax Jason Furman, an Obama economic adviser stated in 2009 that the Cadillac Tax will affect only a small portion of the very highest-cost health plans a total of 3 percent of premiums. However, according to a study done by the Kaiser Family Foundation, 26% of employers offering health benefits could be subject to the Cadillac Tax in 2018 unless they make changes to their plans. ( How Many Employers Could be Affected by the Cadillac Plan Tax?, Kaiser Family Foundation News Release, August 25, 2015) Spidell Publishing, Inc.

87 The analysis also estimates that the 26% number will grow to 30% in 2023 and 42% in 2028 if their plans remain the same and health benefit costs increase at expected rates. Unequal inflation rates Increases in the threshold amounts are tied to the CPI-U as determined by the Department of Labor. However, according to the Congressional Budget Office, that inflation rate will be 2% over the next decade while health care spending per enrollee will grow by an average of 5.6%. That means greater excess benefits over time ensnaring more employers in the tax. Avoiding the tax By starting to make modifications now, employers can phase in changes over a few years (and give employees the chance to get used to the changes. Some of the things that employers can do to avoid the tax and compliance costs include: Offer fewer plan choices to employees (remember that employee payments still count toward excess benefits); Get lower-cost plans with increases to deductibles and other cost sharing; and Convert HRAs and FSAs to covering only excepted benefits (generally, dental and vision) Spidell Publishing, Inc.

88 GLOSSARY Accrual: a basis of accounting whereby revenues are recorded when earned and expenses are recorded as incurred Achieving a Better Life Experience (ABLE) Act: a tax-advantaged savings plan for disabled individuals similar to IRC 529 Qualified Tuition Plans (QTPs) Acquisition indebtedness: the principal indebtedness incurred when buying, building, or substantially improving an individual s qualified residence. Qualified residence interest is deductible as acquisition indebtedness subject to a limit on such indebtedness of $1 million ACRS: the accelerated cost recovery system, a method of depreciation based on recovery periods determined by the IRS rather than useful life. ACRS was replaced by MACRS for property placed in service after 1986 Additional Child Tax Credit: available to families with at least three qualifying children. This credit reimburses taxpayers for the nonrefundable portion of the Child Tax Credit. Taxpayers who exclude from gross income any foreign-earned income or foreign housing costs under IRC 191 may not claim the Additional Child Tax Credit after December 31, 2014 Adjusted gross income (AGI): income calculated from an individual s gross income (all income earned in the tax year) and used to determine what amount is taxable. The modifications to gross income are all above-the-line deductions and include, but are not limited to, medical expenses, unreimbursed business expenses, retirement plan contributions, alimony, and loss from the sale or exchange of property Alternative minimum tax (AMT): an income tax that ensures that individuals and corporations that benefit from various exclusions, credits, and deductions will pay at least some tax. The AMT is assessed on an adjusted amount of taxable income above a specified threshold Annual Filing Season Program (AFSP): a program aimed at recognizing the efforts of noncredentialed tax return preparers. By completing 18 hours of continuing education, including a 6-hour federal tax law refresher, the participants are included in a public database of return preparers on the IRS website Applicable large employer (ALE): an employer that has employed a minimum of 50 full-time employees on business days during the prior calendar year Basis: the amount of an individual s capital investment in property for tax purposes, which includes sales tax and other expenses. If property is acquired in other ways, e.g., by gift or inheritance, other rules apply when determining basis. Specifically, basis for property acquired from a decedent is the fair market value at date of death (unless it is income in respect of a decedent) Benchmark plan: for purposes of the PTC, the second lowest cost available silver plan among the silver plans offered by insurance companies that participate in the health care exchange pool Bonus depreciation: an added amount of deductible depreciation above what is usually available that is taken in the first year that an item is placed in service. It is offered in addition to the maximum IRC 179 expense limits 2016 Spidell Publishing, Inc.

89 BIG tax: built-in gains tax that is imposed when a C corporation elects S corporation status. The imposition of the tax prevents the S corporation election from being used to evade the consequences of a C corporation taxable liquidation BSA E-filing System: supports electronic filing of Bank Secrecy Act forms such as FinCEN 114 for FBAR reporting Cadillac tax: an excise tax on high cost employer-sponsored health coverage based on any excess benefit provided by an employer to an employee with respect to employer-sponsored health coverage. The excess benefit is determined monthly and is taxed at 40% Cafeteria plan: a reimbursement plan meeting the requirements of IRC 125 whereby participants can receive specific benefits on a pretax basis. Participants must be allowed to choose among at least one taxable benefit (e.g., cash) and one qualified benefit that is excludable from gross income (e.g., health care benefits) Cancellation of debt (COD): occurs when a creditor cancels, forgives, or discharges a debt. The amount forgiven is considered income to the debtor and must be reported and taxed as ordinary income unless an exclusion or exception applies Capitalize: a method in accounting whereby a cost is recorded as an asset, not an expense. In this way, companies can acquire assets with a long lifespan and spread out the cost over an extended period of time Carryback: the application of a deduction or credit from a current tax year to a prior tax year in order to reduce tax liability in the previous year Carryforward: the act of applying a loss or credit from a current year to profits in future years to reduce tax liability Cash basis: an accounting method whereby revenues are recorded when the cash is received, and expenses are recorded when cash is paid out Cost of goods sold (COGS): the accumulated total of all costs that can be attributed to the creation and production of goods sold Courtesy disconnect: a term used when the IRS hangs up on a taxpayer because they are overloaded with incoming calls CUSIP number: an identification number assigned by the Committee on Uniform Securities Identification Procedures to all U.S. and Canadian registered stocks and U.S. government and municipal bonds Deceased spouse unused exclusion (DSUE): the amount of the first deceased spouse s unused estate tax exclusion that is used to compute the exclusion amount for the surviving spouse who has elected portability De minimis: as it pertains to accounting, a benefit or expense that is so small, accounting for it becomes unreasonable or impractical 2016 Spidell Publishing, Inc.

90 De minimis safe harbor election: allows taxpayers to write off or expense certain tangible personal property items that would otherwise have to be capitalized and depreciated over several years. Taxpayers can expense purchases of items costing up to $500, or $5,000 for those with an applicable financial statement Depreciation: an annual allowance that reflects the reduction in the value of an asset due to wear and tear, deterioration, or obsolescence, resulting in an income tax deduction in order to recover the costs or other basis of specific property Disregarded entity: a business entity which is considered to be an undivided part of the owner of the entity for federal tax purposes. The owner files Schedule C with their personal income tax return like a sole proprietorship. Absent the election for an LLC to be treated as a corporation, the default classification for a single-member LLC is disregarded entity Donor advised fund: a philanthropic vehicle administered by a public charity for the purpose of managing charitable donations from individuals, families, or organizations. The donor surrenders ownership of what is donated to the fund but may advise on how the account should be invested Earned income: any income received from active participation in a trade or business, which may include wages, salary, commissions, bonuses, and tips. Equitable owner: ownership by someone who does not have legal title. Whether or not someone is an equitable owner is determined on a case-by-case basis under state law Exemption Certificate Number (ECN): a number that is provided by the Marketplace when an individual qualifies for a health insurance exemption. It is unique to the individual and must be used when filing federal taxes to identify the years the individual did not have health insurance coverage Excise tax: a tax paid when a purchase is made on a specific product or service. The tax may be hidden in the price of the goods or activities sold FATCA: Foreign Account Tax Compliance Act under which a U.S. taxpayer holding an interest in a specified foreign financial asset must attach to his or her income tax return Form 8938, Statement of Foreign Financial Assets, for each asset if the aggregate value of all the individual s specified foreign financial assets exceeds specific dollar thresholds FBAR: Report of Foreign Bank and Financial Accounts, filed on FinCEN Form 114, used to report an interest in or signature authority over a foreign financial account including, but not limited to, a bank or brokerage account, mutual fund, or trust. The filing due date has been moved from June 30 to April 15 for taxable years beginning after December 31, 2015 FICA: The Federal Insurance Contributions Act which imposes a tax on employees and employers to fund its two components: Medicare and Old Age, Survivor, and Disability Insurance (OASDI) Flexible Spending Account (FSA): a special account where individuals can put pretax dollars from their paychecks to use for certain out-of-pocket health care expenses, including copayments and deductibles. FSAs are available through job-based health plans where employers can also make contributions. The funds cannot be used to pay for insurance premiums 2016 Spidell Publishing, Inc.

91 Full-time equivalent (FTE) employees: used for the purpose of determining if the shared responsibility provisions apply to an employer. To arrive at the correct number of FTEs for a month, count the aggregate hours of service worked by non-full-time employees for each month (cannot exceed 120 hours of service for any single employee) and divide the aggregate hours by 120 General partner: a managing partner in a partnership who actively participates in the day-to-day running of the business. General partners have unlimited liability and are able to make decisions on behalf of the business without the knowledge or consent of the other partners Head of household: a filing status that provides a lower tax rate and a higher deduction than either the single or married/rdp filing separately status. To qualify, the taxpayer must be unmarried or considered unmarried at the end of the tax year, must have a qualifying child or qualifying relative living with them for more than half of the year, and must pay more than half of the cost of maintaining their home Health reimbursement plan: an employer-funded health benefit plan that can reimburse employees for their insurance premiums. A health reimbursement plan is not health insurance but rather a means of providing employees with a tax-advantaged benefit because the employer sets aside pretax dollars from which employees can pay for their health care expenses Hobby loss: a loss that is nondeductible and is a result of participating in an activity for pleasure, not profit. A hobby loss is not a business loss; however, if an activity is profitable for three years out of five consecutive years, it can be treated as a business in the years that a loss was realized. Under the hobby loss rules, taxpayers must show that they have engaged in the activity with an objective of making a profit in order to be entitled to take any deductions for ordinary and necessary expenses Income in respect of a decedent (IRD): income to which a decedent was entitled but did not receive prior to his or her death that is taxable to the recipient or the estate Individual shared responsibility payment: a fee or penalty for not having minimum essential health insurance coverage unless an exemption applies. U.S. citizens and legal residents must maintain qualifying coverage for themselves and their dependents IRC 1031 exchange: provides an exception to taxation on gain upon the sale of business or investment property, allowing taxpayers to postpone paying taxes if the proceeds of the sale are reinvested in similar property in a qualifying like-kind exchange Kiddie tax: a special tax on a person under age 17 who has earned income above an annually determined threshold. Income above the threshold is taxed at the parent s or guardian s rate. The tax deters shifting income to children in hopes of paying tax at the child s lower tax rate Like-kind exchange: a transaction or series of transactions that allows for the reciprocal transfer of property without generating a current tax liability when the first asset is sold Limited partner: a partner who typically does not have management responsibility in a partnership in which he or she has invested. Limited partners are not material participants in the partnership, do not receive dividends, and are generally not responsible for its debts Marketplace: a resource where individuals can review their health care options and enroll in coverage; also known as the health care exchange 2016 Spidell Publishing, Inc.

92 Medical savings account (MSA): a plans that combines high-deductible medical insurance with a tax-deferred savings account that employers can offer to their employees as part of a benefits plan. Individuals pay for health care costs from this account up to the amount of their deductible. Unused funds can be rolled over to the following year, or if withdrawn, the funds become taxable income Medicare: a national insurance program administered by the U.S. government for persons aged 65 and over who have worked and paid into the system. It also provides health insurance to individuals with disabilities who are under age 65 and to persons with end stage renal disease or amyotrophic lateral sclerosis (Lou Gehrig s disease) Minimum essential coverage (MEC): the minimum health care coverage required to avoid paying a penalty for not having insurance under the Affordable Care Act unless an exemption applies MACRS: the Modified Accelerated Cost Recovery System, a method of depreciation whereby taxpayers can recover basis in tangible property over an identified life through annual tax deductions, allowing for larger deductions in the early years of an asset s life and lower deductions in later years. MACRS replaced the accelerated cost recovery system (ACRS) for property placed in service post 1986 Modified adjusted gross income (MAGI): like adjusted gross income but with certain adjustments that were previously subtracted from income added back in. For example, alimony payments, IRA contributions, and tuition-related costs that may have been deducted when calculating AGI must be added back to compute MAGI myra: a retirement account for individuals (My Retirement Account) where the balance never goes down and there are no maintenance fees Nanny tax: a federal tax that is required to be paid by individuals who hire household workers (maid, babysitter, gardener, etc.) and pay them, in total, above a threshold amount for the tax year. It is not applicable for services performed by the taxpayer s parent, spouse, or if a babysitter is under age 18 and not primarily working in household employment Net investment income tax (NIIT): a 3.8% Medicare surtax on certain net investment income of individuals, estates, and trusts that have income above a statutory threshold amount. A child s income is included in the parent s computation of NIIT Nonrecourse debt: a loan that is secured usually by property as collateral whereby if the borrower defaults, the issuer of the loan can only seize the collateral. The borrower is not personally liable for the loan Nonqualifying stock option (NQSO): stock options that don t qualify for the same special treatment as incentive stock options that deliver a tax benefit to employees by being taxed at the capital gains tax rate. When an NQSO is exercised, it will result in more taxable income to the employee based on the difference between the grant price and the price on the date of exercise Net operating loss (NOL): a period when a company s allowable tax deductions are more than the company s taxable income with negative taxable income as a result. The loss may be carried back against income in prior years or carried forward as a deduction against future income 2016 Spidell Publishing, Inc.

93 Partial asset disposition: the ability to retire, replace, or dispose of part of an asset (like the roof of a building) whereby companies can claim an immediate loss and realize an immediate tax deduction Passive Foreign Investment Company (PFIC): a foreign corporation where at least 75% of the corporation s income is from passive activities, such as investments, or at least 50% of the company s assets for its taxable year are from assets used in the production of passive income, such as investments that generate interest, dividends, or capital gains Passive income: earnings from enterprises in which an individual does not materially participate, e.g., rental income, limited partnership income Passthrough entity: an entity such as a sole proprietorship, partnership, LLC, or S corporation where the entity itself is not subject to income tax, but instead the proportionate share of revenues and losses is passed through to the owners and/or investors to be taxed Portability election: an election by which a deceased spouse s unused exclusion (DSUE) amount is available to apply to the surviving spouse s ensuing transfers during life and at death Power of attorney: a legal document that authorizes an individual to act on someone else s behalf in legal and private matters. A durable power of attorney for medical care and finances is used if an individual becomes mentally incapacitated Premium Tax Credit: a refundable credit that is advanced to eligible individuals of low or moderate income to assist them in purchasing health care through a health care exchange, also known as the Marketplace Promissory note: a promise to pay contained in a signed document Pro rata: a method assigning a certain amount as it relates to its share of the whole; a proportionate allocation Protective claim for refund: either a formal claim or an amended return for a refund that is contingent on future events and may not be ascertainable until after the time period for a claim for refund runs out Provider: the organization that pays the medical bills. For insured health care plans, it is the insurance company; for a self-insured plan, it is the employer Publicly traded partnership: a limited partnership with two or more co-owners that is regularly traded on an established securities market without regard to the number of partners Pump and dump: a fraudulent scheme whereby investors are encouraged to buy shares in a company to artificially drive the price up, then selling one s own shares while the price is high Qualified tuition plan: also known as a 529 plan, the program allows taxpayers to prepay or contribute to an account set up to pay a student s qualified education expenses at an eligible educational institution Recourse debt: a loan for which the borrower is personally liable. With recourse debt, the lender can take the collateral and pursue the borrower s other assets to satisfy any remaining debt 2016 Spidell Publishing, Inc.

94 Refundable credit: a tax credit that is not limited by a person s tax liability. Even with no taxes owed, the credit applies Required minimum distribution (RMD): the minimum amount a taxpayer must withdraw from his or her retirement account every year by April 1 following the year the individual reaches age 70 ½. This includes withdrawals from an IRA, SEP IRA, SIMPLE IRA or other retirement plan account. Roth IRAs do not require withdrawals until the death of the owner. Penalties apply if RMD is not taken Restricted stock units: taxed differently than stock options in that they are taxed at the time they are vested, not at the time of sale. Upon vesting, they are categorized as income, and a portion of the shares will be withheld to cover income taxes Revocable transfer on death (TOD) deed: transfers real property to a beneficiary who acquires title to the property upon the death of the owner without going through probate. The owner does not make a completed gift for purposes of the gift tax because the deed does not create a present interest in the named beneficiary Roth IRA: a retirement account whose tax treatment is different from a traditional IRA. Although contribution limits are the same as for traditional IRAs, contributions are not tax deductible; however, there is no ordinary income tax upon withdrawal Safe harbor: a provision in the Tax Code which sets out terms and conditions that if complied with will assure a specific tax result that is typically a simpler method of determining a tax consequence Session of play: the approach to determine a wagering gain or loss for certain slot machine play. Per an IRS memorandum, it is determined based on the activity that occurs between the time a gambler enters and leaves a casino or when a gambler purchases and then redeems tokens Severe cognitive impairment: loss or deterioration in intellectual capacity that is (a) comparable to Alzheimer s disease and similar forms of irreversible dementia, and (b) measured by clinical evidence Shared policy allocation: an allocation that must be performed when there are two or more individuals included on Form 1095-A that are not on the same tax return for that year. The allocation distributes dollar items between the owner of the policy and the tax return where those individuals named on Form 1095-A appear Sharing economy: community-based online sharing of access to goods and services SHOP exchange: the Marketplace exchange for the Small Business Health Options Program where a small employer can get lower costs on group plans and claim tax credits. For 2015, employers with fewer than 50 full-time equivalent employees can use the SHOP exchange. For 2016, SHOP is available for employers with 100 or fewer employees SIMPLE retirement plan: a savings incentive match plan that allows employees and small employers to contribute to a traditional IRA. An eligible employer must have employed 100 or fewer employees who earned a minimum of $5,000 during the previous year. An eligible employee is one who received at least $5,000 as compensation during any two years prior to the current calendar 2016 Spidell Publishing, Inc.

95 year and who is reasonably expected to receive at least $5,000 in the current calendar year. Employers cannot maintain any other qualified plan SEP IRA: Simplified Employee Pension plan that allows self-employed individuals and small employers to contribute to retirement plans on behalf of themselves and their employees without the complexities of a qualified plan. All contributions are funded by the employer. Withdrawals are taxed as ordinary income Small employer health insurance credit: a credit for employers with no more than 25 full-time equivalent employees and average annual wages no greater than $50,000 per employee per year Sponsor: the individual who arranges health care coverage. In the case of an employer, the employer is the sponsor Step transaction doctrine: a doctrine that states that interrelated but formally separate steps in an integrated transaction are not to be considered independent of one another, resulting in federal tax liability being based on the entire transaction Substantial improvement: an improvement that adds to the value of a home, prolongs a home s useful life, or adapts a home to a new use Substantial supervision: continual supervision by another person that is necessary to protect the individual from threats to his or her safety, such as may result from wandering Transient Occupancy Tax (TOT): imposed on an accommodation, such as a hotel, inn, house, motel, or other lodging, that is rented for 30 days or less TRICARE: the health program of the United States Department of Defense Military Health System Unrelated business income (UBI): income derived from regular business activities that are unrelated to an exempt organization s purposes Addendum: California Glossary Anti-deficiency provision: enacted under Code of Civ. Proc. 580e, a statute that prohibits lenders from suing borrowers for any difference between what is owed on a mortgage and the price of a house upon foreclosure Cost-sharing arrangement (CSA): an arrangement by which controlled participants share the costs and risks of developing cost-shared intangibles in proportion to their reasonably anticipated benefits (RAB) shares. Payments received from controlled participants in a CSA for development costs are essentially cost reimbursements and are not considered gross receipts includable in the California apportionment sales factor Domicile: a legal term that does not have the same meaning as residence in California. For tax purposes, domicile is the place where an individual voluntarily establishes his/her true permanent home and principal establishment, and to which place that individual has the intention of returning 2016 Spidell Publishing, Inc.

96 whenever absent. Per 18 Cal. Code Regs (c), an individual can only have one domicile at any one time Earned income: any income received from active participation in a trade or business, which may include wages, salary, commissions, bonuses, and tips. California does not include self-employment income in the definition of earned income for purposes of the Earned Income Tax Credit Greenway easement: an authorized easement that may be granted to a public agency, a California Native American tribe, or a nonprofit corporation dedicated to land preservation, protection, or enhancement. A greenway is a separate path for bikes and pedestrians that must be located within 400 yards of an urban waterway where access to the property has been granted through an agreement with a property owner Mandatory e-pay: a law that requires individuals to make all future payments electronically once they have made an estimated tax or extension payment over $20,000, whether by check or electronically, for tax years beginning on or after January 1, 2009, or if they have filed an original return with over $80,000 in tax liability for those same tax years MyFTB: online access to tax account information and online services for individuals, business representatives, and tax preparers who must re-register online beginning January 4, 2016, for enhanced services POA Wizard: the online method of access when working with the FTB in setting up a Power of Attorney. The FTB will not accept a POA by mail or fax Registered Domestic Partnership: a legal relationship for same-sex couples or opposite sex couples when one partner is over age 62, established by filing either a Declaration of Domestic Partnership or a Confidential Declaration of Domestic Partnership with the California Secretary of State. In California, domestic partners receive the same benefits and protections as married couples. Beginning on or after January 1, 2007, domestic partners must use the same filing status as married couples Resident: a person who is in California for other than a temporary or transitory purpose or who is domiciled in California, but who is outside California for a temporary or transitory purpose Taxpayers Rights Advocate: a service to help taxpayers resolve their tax problems if they have been unable to do so through normal channels, which is independent of the FTB s Audit and Collections departments. The Advocate s authority extends to the following situations: erroneous action or inaction by the FTB in processing documents filed or payments made; unreasonable delay caused by the FTB; or erroneous written advice that doesn t qualify for relief under the Chief Counsel s authority. The BOE also has a Taxpayer Advocate whose authority is extended to cover all BOEadministered taxes and fees, not just sales and use taxes Web Pay: an online application for making an electronic payment directly from an individual s bank account for the payment of personal and business income taxes 2016 Spidell Publishing, Inc.

97 0.9 % additional Medicare tax % additional income tax on investment income A Active participation Advance payments of PTC American Opportunity Tax Credit... 2 AMT... 5 Applicable large employer B Benchmark plan C C corporation... 5 Cadillac tax Child Tax Credit... 1, 2 COD income... 3 Coverage exemptions D Dispositions of interests in partnerships and S corporations Due diligence... 1, 2 E Earned Income Tax Credit... 1, 2 Employer reporting requirements Estates and trusts Exclusion... 3, 5 F FICA... 5 Form 1094-B Form 1094-C Form 1095-A...38, 41, 44 Form 1095-B... 73, 75 Form 1095-C... 73, 76 Form Form , 45 G Grouping H Health plan levels Health plan requirements Health reimbursement plans Household income... 29, 34 INDEX I Income from partnerships and S corporations Income from tax-exempt trusts Individual shared responsibility payments.. 55 Insurance exchanges Investment interest expense J Joint returns and withholding M Medical expenses Medical insurance Minimum value (employer-sponsored plans) N Net gains from the disposition of property.. 18 Net investment income Net investment income tax Nonresident aliens Notice Notice P Passive activities PATH... 1, 2, 7 Payback of excess advance credits Poverty line Premium Tax Credit Principal residence exclusion Professional development... 1 Q Qualifying stock... 5 R Regrouping activities Retirement plans Rollover... 3 S S corporation... 5, 6 Self-employed health insurance Self-employed taxpayers Self-employment tax Shared policy allocations Shared responsibility for employers Shifting enrollee SHOP Exchange Spidell Publishing, Inc.

98 Short-term rental Silver plan Small Employer Health Insurance Credit Social Security... 3 Solar... 2 T Trade or business U Undistributed net investment income W Withholding is reported as Medicare Spidell Publishing, Inc.

99 NEW from Get the most practical CPE without leaving your office. Social Security: Planning and Preparing to Collect Presented by: Lynn Freer, EA, and Sandy Weiner, J.D. Friday, February 26 Noon to 2:00 p.m. Pacific time Or order on-demand and watch anytime With this two-hour webinar, you will: Beat the demise of claim and suspend must file by April 30, 2016 Help your client choose the time to start drawing Social Security Uncover specifics on how Social Security benefits are calculated See how a day can make a big difference in your check Determine options regarding benefits if the spouse has not earned the required 40 credits Understand how working and drawing Social Security benefits works Identify various insurance options available to Medicare recipients Understand how government employees may lose Social Security benefits $89 Webinar Add CPE for only $19 per additional attendee About the presenters: Lynn Freer, EA Lynn Ms. California Tax Freer is President of Spidell Publishing, Inc. She works closely with all state tax agencies and is often consulted for input on policy decisions. She always has the inside information on what s happening at the state level because she devotes herself full time to analyzing, writing about, and teaching California tax law and procedures. Lynn speaks at Spidell s annual Federal and California Tax Update Seminars as well as many other seminars. Sandy Weiner, J.D. Sandy Weiner, J.D., brings almost two decades of experience as a California tax analyst with an expertise in business tax issues. She assists practitioners with complex tax issues such as apportionment, combined reporting, and state credits and incentives. She is also an expert on conformity issues. She is a graduate of Colorado College with her J.D. from Hastings College of the Law. Spidell Publishing, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: This webinar has been designed to meet the requirements for the specified number of hours of continuing education for the California Board of Accountancy. Level: Basic. Fields of Study: Nontechnical. Delivery Method: Group Internet-Based. For more information regarding administrative policies, such as complaints or refunds, contact Spidell Publishing at (714) There are no prerequisites or advanced preparation required. P.O. Box Anaheim, CA webinars@spidell.com Phone: (714) Fax: (714) Website: caltax.com

100 # NEW from Social Security: Planning and Preparing to Collect Presented by: Lynn Freer, EA, and Sandy Weiner, J.D. Friday, February 26 Noon to 2:00 p.m. Pacific time Or order on-demand and watch anytime $89 webinar includes: This webinar includes CPE for one attendee: 2 hours of nontechnical credit for CPAs and 1.5 General MCLE for attorneys Reference manual and PDF of PowerPoint slides Add CPE for only $19 per additional attendee (must take an exam to receive credit) You must have computer speakers to listen to this webinar. Additional CPE Cost: $19 per attendee This webinar is designed to meet the requirements for 2 hours of continuing education. This webinar has been designed to meet the requirements of the the California State Board of Accountancy and the California Bar Association. This does not constitute an endorsement by these groups. The state boards of accountancy have final authority on the acceptance of individual courses for CPE credit. For more information regarding administrative policies such as complaints or refunds, contact Spidell Publishing at There are no prerequisites required. A listing of additional requirements to renew tax preparer registration may be obtained by contacting CTEC at P.O. Box 2890, Sacramento, CA , or by phone at , or on the internet at # Fill out and fax to (714) today! Social Security: Planning and Preparing to Collect Social Security: Planning and Preparing to Collect... $89.00* G Live: Friday, February 26 Noon to 2:00 p.m. Pacific time* G On-Demand: Watch it anytime! (available: July 15, 2015) $19 per additional attendee per webinar QTY: This course qualifies for up to 2 hours of CPE for one attendee. TOTAL $ G Payment enclosed. Check # G Charge my: G MC G Visa G AmEx G Discover Name Company Name Card Number Address City/State/ZIP Billing ZIP Exp. Date Security Code Phone Fax Signature *No refunds will be given after noon on February 25, We need your professional license/registration number(s) for continuing education credit. CPA No. PA No. Bar No. source code: WEB16 Additional Attendee CPE Information: Name address License/Registration number Register by fax (714) or phone (714) Register by mail P.O. Box Anaheim, CA Register online

101 SPIDELL S QUARTERLY TAX UPDATE WEBINARS YOUR SPECIAL PRICE! Join Spidell s Quarterly Update community for optimum tax fitness! Spidell s Quarterly Tax Update webinars have become a favorite of a cyber community of tax pros who thrive on this quick and meaty format structured by late-breaking tax news and driven by questions and discussion points. We address your tax dilemmas on the spot, compile them for your review, and revisit them in more depth at your request. Never be overwhelmed again by the thousands of cases and rulings every year, and stay on top of developments each step along the way. Stay tax fit by getting the answers you need most, right when you need them, in short two-hour sessions throughout the year. And Tim Hilger, CPA, Spidell s Senior Editor, will moderate your community and forward you the pertinent facts after the webinar. Very topical. Gave information about Court of Appeals decision handed down the morning of the webinar. Talk about hot off the presses. Owen Patotzka, CPA Lots of info in a small, concise format, presented in a knowledgeable manner. Can t get much better. Howard Shores, EA This concept of a quarterly 2-hour session is a great addition to the Spidell training. Deborah St. Martin, EA April 26 July 26 October 25 January 31, hours for CPAs, 2 federal tax update hours for EAs and CRTPs, and 1.5 hours of General MCLE for Attorneys Stay tax fit! Get the best price now and start your training. $199 for a full year of updates! P.O. Box Anaheim, CA webinars@spidell.com Phone: (714) Fax: (714) Website: caltax.com

102 SPIDELL S QUARTERLY TAX UPDATE WEBINARS YOUR SPECIAL PRICE! Here s the deal: The cost of a single webinar is $89, but subscribe to all four webinars and pay only $199! Save these dates for your Quarterly Tax Update Webinars: Tuesday, April 26 Tuesday, July 26 Tuesday, October 25 Tuesday, January 31, :00 p.m. 2:00 p.m. Note: Space is limited, so please reserve your place early. You must have computer speakers to listen to this webinar. Spidell Publishing, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: These webinars are designed to meet the requirements for up to 2 hours of continuing education for the California Board of Accountancy. Level: Update. Field of Study: Taxation. Delivery method: Group Internet-Based and Self-Study. For more information regarding administrative policies, such as complaints or refunds, contact Spidell Publishing at (714) General tax preparation knowledge is required. These webinars are designed to meet the requirements for 2 hours of continuing education. These webinars have been designed to meet the requirements of the IRS Return Preparer Office; including sections 10.6 and 10.9 of Department of Treasury s Circular No. 230 (Provider No. CRA7E); the California State Board of Accountancy; the California Bar Association; and the California Tax Education Council. This does not constitute an endorsement by these groups. The state boards of accountancy have final authority on the acceptance of individual courses for CPE credit. For more information regarding administrative policies such as complaints or refunds, contact Spidell Publishing at A listing of additional requirements to renew tax preparer registration may be obtained by contacting CTEC at P.O. Box 2890, Sacramento, CA , or by phone at , or on the internet at # Spidell s Quarterly Tax Update Webinars # Yes! I want to stay tax fit. Spidell s Quarterly Tax Update Webinars G All four webinars $199 G Live G On-demand* (If you miss your live webinar, you may convert to an on-demand.) TOTAL $ G Payment enclosed. Check # G Charge my: G MC G Visa G AmEx G Discover Name UPCOMING WEBINAR Company Name Tuesday, April 26 $89 G Live G On-demand* (select one) Card Number Billing ZIP Exp. Date Security Code Address City/State/ZIP Phone Fax Signature We need your professional license/registration number(s) for continuing education credit. CPA No. PA No. PTIN EA No. CRTP No. Bar No. (Required for electronic delivery) *On-demand webinars will be available one week after the live date. No refunds will be given after noon on the day before the webinar. source code: WEB16 Order online: Order by phone: (714) Order by fax: (714) Order by mail: P.O. Box 61044, Anaheim, CA

103 Supplement Get the most practical tax CPE without leaving your office. Regulatory Review: Practicing Within the Law Webinar Presenter: Arturo Ramudo, CPA, CISA Dates Available: Wednesday, April 27 Thursday, June 23 Noon to 2:00 p.m. Pacific Time This course addresses the various provisions of the California Accountancy Act and the California Board of Accountancy Regulations with an emphasis on those provisions currently applicable to the practice of public accountancy. Further, this course provides an overview of historic and recent disciplinary actions taken by the Board, highlighting the misconduct that led to discipline. Webinar Name and presenters Upon completion of this two-hour course, you will be able to: Apply the Board s rules and regulations to everyday practice Avoid discreditable acts that could result in Board discipline Identify events which must be reported to the Board Avoid commission and contingent fee impairments Comply with the Board s new continuing education requirements Understand the future requirements for retirement California Board of Accountancy Approved! About the presenter: Arturo Ramudo, CPA, CISA, a former Board of Accountancy investigator, is a nationally-recognized public speaker, researcher, and seminar leader with over 30 years of experience in ethics, standards of practice, and internal quality control. Mr. Ramudo owns and operates his own public accountancy firm offering services to both the public and private sectors. He represents CPAs before the California Board of Accountancy s disciplinary committee, provides litigation support, performs peer reviews, and offers advisory services concerning all aspects of ethical practice. $89 webinar features: Includes 2 hours of CPE for one attendee (CPAs only) Reference manual and PDF of PowerPoint slides You must have computer speakers to listen to this webinar Add CPE for only $19 per additional attendee Spidell Publishing, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: This webinar is designed to meet the requirements for 2 hours of continuing education for the California Board of Accountancy. Basic Level. Field of Study: Regulatory Review. Delivery method: Group Internet-Based. For more information regarding administrative policies, such as complaints or refunds, contact Spidell Publishing at (714) There are no prerequisites or advanced preparation required. P.O. Box Anaheim, CA webinars@spidell.com Phone: (714) Fax: (714) Web site: caltax.com