By Bernard Freeman
Affordable Care and Taxes
When President Obama signed into law new healthcare reform in March 2010, pilule he wasn’t solely overhauling America’s healthcare landscape as we knew it, but also our tax system.
The Affordable Care Act created a variety of tax credits and penalties for both individuals and business owners that you must pay special attention to while filing your income taxes. The healthcare act includes several tax law changes that began impacting the tax system for 2013 federal income tax returns due April 15, 2014.
According to the National Association of Tax Professionals, here are the main takeaways from the tax adjustments caused by the Affordable Care Act:
- Employees report the total amount paid by them and their employer for health insurance premiums, flexible spending beyond payroll deductions and other premiums.
This information must be reported on returns.
- For itemized deductions, the threshold for deducting medical expenses increases to 10 percent of your adjusted gross income.
- A 3.8 percent tax on net investment income is now applied to taxpayers at higher income levels based on filing status.
According to the IRS, taxpayers who bought 2015 insurance coverage through the Health Insurance Marketplace should report changes in circumstances to the Marketplace when they happen. Doing so will help taxpayers receive accurate advance payments of the premium tax credit.
Receiving too much or too little in advance can affect the amount of your refund or how much you may owe when you file your tax return. To keep your taxes on the level and to avoid any surprises in April, follow the rules associated with your state’s marketplace.
Those who come prepared leave with few surprises. That could be a motto of tax professionals, who urge clients to keep track of vital financial information throughout the year.
Before you head to your tax preparer or start filling out your tax forms at home, be sure to compile all of the necessary information to properly complete your return on time.
What You Will Need to File
Before visiting your tax preparer or sitting down to complete your forms on your own, be sure these materials are available and ready to reference:
- Social Security cards for the taxpayer, spouse and dependents
- Birth dates for primary and secondary earners and dependents on the tax return
- Wage and earning statements (W-2, W-2G, and 1099-R forms) from all employers
- Interest and dividend statements from banks (1099 forms)
- A copy of last year’s federal and state returns, if available
- Bank routing numbers and account numbers for direct deposit
- Other relevant information about income and expenses (such as total amount paid for day care, day care provider identifying number or tax ID).
Prepare Your Documents
If you’re a business owner, you should consider preparing monthly financial statements if you’re not already. This will help you better understand how your business is doing, financially speaking. There are plenty of professionals available to help you with the process, and planning throughout the year will make the year-end tax processes much easier.
Individuals should take the same approach, especially if they do freelance or contract work to supplement their regular income. Compile all of your invoices and payments to make sure you’re keeping accurate books.
Everyone’s home filing cabinet or online storage cloud should have copies of previous years’ tax returns. This will help you maintain consistent filing information from year to year and can keep you on track if you’re handling the filing of your own tax return.
You can deduct a broad range of your expenses to help lower your tax bill or even get a refund. Most of the deductions are subject to limitations, so be sure to check with a tax professional before submitting your list to the Internal Revenue Service.
Your tax preparer can enter your information and determine if it’s better for you to itemize or take the standard deduction. This will depend on how many deductions you can come up with compared to the deduction that is standard for your tax bracket.
From the IRS, here is a list of possible expenses to deduct from your taxes this year:
- Union or professional affiliation dues;
- Subscriptions to work-related magazines and other publications;
- Business liability insurance premiums;
- The cost of protective work clothing, such as safety shoes or glasses;
- Tools and supplies used in your work;
- Employer-required medical examinations;
- Tuition for classes that maintain or improve the skills required for your present job;
- Expenses for a job search, including resume costs, career counseling and employment agency fees;
- Depreciation on your computer or cellular phone;
- The fees your financial institution charges to maintain your IRA account;
- Fees you pay to get your taxes done, or if preparing your return yourself, costs related to research, books or publications; and
- Legal fees that you pay to protect your taxable income, including fees for assistance in helping you keep your job or for tax planning purposes.
Small Business Tax Tips
Running a small business has many perks, one of them being the amount of deductions you can pile up at tax time. Everything from mileage to independent contractor payments can help defray taxes.
Even if you’re not the most financially savvy entrepreneur, you can lean on a CPA or other tax professional to walk you through your tax returns, as well as to give you tips on making the most of your deductions and business expenses.
Small Business Computing offers a number of tips for small businesses at tax time, including keeping track of all business expenses throughout the year and always opting to deduct mileage instead of actual auto expenses. Here are a couple of others:
- Keep business and personal expenses separate, which means maintaining different checking accounts and credit cards for the business.
- Review the Small Business Jobs Act Tax, signed into law in 2010, which has nearly 20 initiatives aimed at decreasing the tax burden of small businesses.
Donations Are Deductible
Company donations of money, supplies and property are all deductible expenses, according to the Internal Revenue Services. As are bonuses awarded to your employees, partners and officers.
You also should consider devoting a portion of your time for professional development endeavors. By taking a class or seminar, you are not only broadening your expertise; you’re also creating a helpful tax deduction.
Tracking Your Personal Deductions
If you use your home for your business, you should be able to deduct mortgage interest, insurance, utilities, repairs and depreciation.
If your business is a corporation or partnership, you can deduct actual expenses for non-personal use of your personal vehicle, according to the IRS. Actual expenses may include costs for fuel, maintenance and parking fees. Keep detailed mileage records comprised of date, total miles, tolls, parking and the purpose of the trip. This will help give your accountant plenty of information for filing your tax return.
Prevent Tax Fraud
Just like any form of identity theft, the tax-related variety can be a frustrating, scary experience. It occurs when someone uses your stolen Social Security number to file a tax return claiming a fraudulent refund.
This type of criminal act can go undetected until you receive an IRS notice or try to file your return. If your Social Security number has already been used to file a return, you will be rejected by your tax preparer’s system.
What can you do to make sure you’re not the next victim of tax-related identity theft? The key is being diligent about your personal information. The IRS has put together a detailed list of common pitfalls that lead to identity theft. Follow them and incorporate the main points of emphasis into your everyday information protection efforts.
- The IRS does not initiate contact with taxpayers by email or social media to request personal or financial information, so any unexpected email purporting to be from the IRS is always a scam. Taxpayers are urged to forward any scam email claiming to be from the IRS to email@example.com.
- Another example of a common scam is an urgent, unsolicited phone call from someone claiming to be an IRS agent threatening you with arrest or deportation if you fail to pay immediately. Report these calls and other IRS impersonation schemes to the Treasury Inspector General for Tax Administration at 800-366-4484 or online at IRS Impersonation Scam Reporting at treasury.gov.
- If you discover a website that claims to be the IRS but does not begin with www.irs.gov, forward the link to firstname.lastname@example.org.
The best way to protect your identity is through vigilance. Be mindful of what is going on around you. Do not routinely carry your Social Security card with you, and be careful about sharing your number.
The IRS urges Americans to check their credit on an annual basis, as well as their Social Security Administration earnings statement. Dramatic changes in either one of these documents can be a tipoff to illegal identify theft.