UNITED STATES TAX
ISSUES
Two key pieces of President Obama’s health reform
legislation, the Patient Protection and Affordable Care Act of 2010, were to
take effect on January 1, 2014, namely the requirement for entities with more
than 50 full time employees are required to provide affordable health care
insurance to their employees or face a stiff fine and individuals must also buy
health insurance or a pay a penalty tax on their 2014 U.S. Federal individual
income tax return. Recently, the requirement for entities with more than 50
full time employees to provide affordable health care insurance to their
employees was delayed until January 1, 2015 but the requirement for individuals
to have medical insurance by January 1, 2014 or pay a penalty was not deferred.
Individual Medical Insurance
The penalty tax for being uninsured is $95 per adult and
$47.50 per family member under the age of 18 to a maximum penalty in 2014 of
$285 per family (equivalent to a husband, wife and 2 children under the age of
18). Penalties will be significantly higher in 2015 and 2016. With the
unavailability of employer provided insurance until 2015 individuals will be
forced to buy coverage from a pool of commercial and private insurance carriers
in each state.
How will the Internal Revenue Service (IRS) enforce the
penalty? With great difficulty. The legislation requires employers to send the
IRS a report detailing employee coverage so that the IRS can determine who is
uninsured. With the employer report now being deferred until 2015 the IRS will
not know who is insured and who is not in 2014. The IRS is further handcuffed
in that it is barred from filing a lien on a individual’s assets, nor charge
interest on the unpaid balance. It can only garnish a refund to offset the
penalty tax due.
Medicare
When you reach the age of 65 you are eligible to sign up for
Medicare Part B which covers outpatient services. With many Americans now
continuing working past the age of 65 they usually choose remain covered under
their employer’s health plan. And some employer plans allow you to continue
coverage upon retirement. If you do so you may be risking nonpayment of your
claims even though you have medical insurance. Why? If you did not sign up for
Medicare at age 65, once you retire Medicare gives you 8 months to enroll. If you
do not do so within this period you have to wait for the annual enrollment
window, January 1 to March 31 with coverage starting on July 1. What’s the
problem? The problem you have is that once you retire your employer’s health
plan views Medicare as the primary provider and themselves as the secondary
provider. So if you did not sign up for Medicare your claims to your employer’s
health plan will likely be rejected.
Wrongful Termination and Discrimination Settlements
In a private letter ruling the IRS stated that a settlement
of a lawsuit for discrimination or wrongful termination are considered wages to
the ex-employee as the payment was to settle a wage based claim and in cases where
the employer also agreed to pay the plaintiff’s legal expenses such payment was
also considered wages to the ex-employee subject to withholding and tax.
Inheritance of An Individual Retirement Account (IRA)
You are 25 years old and your favorite Uncle just died and
bequeathed you his traditional IRA and his Roth IRA, each with a fair market
value of $500,000. You remember that your own financial advisor told you that
you do not have to take a required minimum distribution from your IRA until you
reach the age of 70 ½ and that there is no requirement to ever take a required
minimum distribution from your Roth IRA and you sit back dreaming of 45 years
of tax deferred growth in your uncle’s, now yours, IRA.
What your financial advisor did not tell you is that those
rules do not apply to an inherited IRA from someone other than your spouse. If
you fail to take a required minimum distribution from both accounts in the year
after your Uncle died you will be subject to a 50% penalty on the amount that
should have been withdrawn from both IRA’s even though the distribution from
the Roth IRA would have been tax free.
Other tax issues that could cause the 50% penalty to be
incurred include titling the account improperly, not dividing the IRA among
multiple heirs and ignoring non-person beneficiaries. If you inherit an IRA get
competent tax advice immediately.
Hiding Your Money Outside the U.S.
For United States citizens who decided to cheat on their
taxes by hiding their money in Switzerland, primarily because of the ostensible
secrecy regarding Swiss accounts, getting caught is an increasing possibility. With
numerous Swiss banks already under investigation for criminal fraud the Justice
Department and the Swiss Government have entered into an agreement that allows
Swiss banks to come forward, voluntarily identify all accounts held in their
bank, past and present, by U.S. citizens, pay substantial fines and help the
U.S. follow the money trail to other Swiss banks or to banks in other
countries. In exchange for this voluntary disclosure the Justice Department
will agree not to criminally prosecute the Swiss bank and its employees.
October 15 Filing Deadline
2012 U.S. Federal individual income tax returns must be
filed on or before October 15, 2013. No further extension of time to file is
available. We have found that the list of procrastinators grows longer each
year. It becomes especially difficult when dealing with expatriates who travel
extensively who realize at the last second that they are nowhere near ready and
also discover the need to go on a 3 week business trip. What to do? Our
suggestion to clients is to file the return on time, as is, overpay the tax due
and then file an amended tax return before year end and apply the refund
against their 2013 4th quarter estimated tax payment.
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Pursuant to the requirements
relating to practice before the Internal Revenue Service, any tax advice in
this communication is not intended to be used, and cannot be used, for the purpose
of (i) avoiding penalties imposed under the United States Internal Revenue
Code, or (ii) promoting, marketing or recommending to another person any tax
related manner.
The tax advice given by this
column is, by necessity, general in nature. You should, of course, check with
your own U.S.
tax consultant as to how specific transactions affect you since tax advice
varies with individual circumstances.
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