The delayed start to the filing season, taxpayers' confusion regarding the implications of the Affordable Care Act, uncertainty over the continuation into 2014 of a number of expiring provisions, the reintroduction of personal exemption phase-outs and Pease limitations on itemized deductions for high-income earners, and the Supreme Court decision on the Defense of Marriage Act are just a few of the issues that will impact practitioners as they gear up for the 2014 filing season.
The Internal Revenue Service announced a delay of approximately one to two weeks to the start of the 2014 filing season to allow adequate time to program and test tax processing systems following the 16-day federal government shutdown in October. The agency said that it is exploring options to shorten the expected delay and will announce a final decision on the start date in December. It said it would start accepting and processing individual returns no earlier than Jan. 28, 2014, and no later than Feb. 4, 2014.
There's a high likelihood that if you don't talk to your clients in December, you won't have happy clients in April, according to wealth management specialist and CFP Russ Holcombe. "High-wage earners, even those just making between $500,000 and $600,000 adjusted gross income, will owe between $10,000 and $13,000 more this year," he said. "People don't like paying taxes, but they especially don't like paying taxes that they're not prepared for. ... The sooner the client knows and the more time they have to think about it before they come to visit, the better. Tax planning and tax communication are more critical this year than ever."
The Affordable Care Act, with its fees, penalties and fines, is confusing to taxpayers and practitioners alike, noted Beanna Whitlock, a Reno, Nev.-based practitioner and educator, and former director of National Public Liaison for the IRS. "I'm concerned that the average practitioner has not been made aware that the individual mandate begins in January," she said. "We have a three-month grace period before the taxpayer is penalized for not having insurance. Any taxpayer that comes in on April 1 or later should be asked if they have insurance."
"Single persons think they have a $95 penalty, but they don't realize that the penalty is the greater of 1 percent of household income after the exclusions. So for a single person with an income of $400,000, the penalty would be 1 percent of $200,000, which is $2,000, not the $95 they were expecting," she said. "Taxpayers are totally unaware of this secondary calculation. ... Taxpayers want their preparers to take the initiative on this, and if they don't, next year the taxpayers will go to one of the chains."
Another caution is the fact that taxpayers who receive a subsidy to purchase insurance through the health care market will have the responsibility to give it back if it turns out they made more, she said: "If I say my income is between 100 and 400 percent of the federal poverty level, the government will subsidize my insurance; when I come to my preparer and it turns out I shouldn't have received that much, I'm going to have to give it back."
"It's confusing," she said, "but the tax professional will be at the heart of helping the taxpayers understand."
FROM YEAR TO YEAR
Last year, the mantra of postponing income and accelerating deductions was reversed, noted Mark Luscombe, principal analyst at CCH: "It turned out to be good advice for wealthier taxpayers. This year, we're back to the usual advice of accelerating deductions and postponing income."
"While we went through 2012 with expired tax provisions that were not retroactively reinstated until Jan. 1, 2013, they are in effect through the end of 2013, so we won't have to worry about whether or not they will be in effect," he continued. "The only issue is you might want to accelerate some of the deductions to 2013 if you think there's the possibility they won't be around next year. While they have been regularly renewed in the past, it's not at all clear they will be around for the long term if Congress gets serious about fundamental tax reform."
Marc Gerson, former majority tax counsel to the U.S. House of Representatives Committee on Ways & Means and a tax attorney for Miller & Chevalier, believes that Congress will not act on the extenders before the end of the year as Congress continues to focus on fundamental reform of the code. He remains hopeful, as the taxpayer community likely will advocate for a timely extension before expiration at the end of the year. There are several reasons that less attention is being paid to the extenders this year, according to Robert Kerr, senior director of government relations at the National Association of Enrolled Agents. "One reason is that [the Alternative Minimum Tax] is no longer the engine that drives the extender train. Each year we didn't have a fix, we had a growing number of people on the AMT bubble."
Among the expiring provisions, Kerr noted, are the deduction for state and local sales taxes; the deduction for mortgage insurance as qualified interest; the above-the-line deduction for qualified tuition and related expenses; the above-the-line deduction for certain expenses of elementary and secondary school teachers; the Work Opportunity Tax Credit; the increase in expensing and the expansion of the definition of Section 179 property; the research and experimentation tax credit; and the 15-year straight-line cost recovery for qualified leasehold, restaurant, and retail improvement.
For businesses, the year-end issues under the ACA are not quite so significant as they are for individuals, Luscombe noted: "The small-business credit for providing health insurance has been around for three years, and the penalty for not providing employees with insurance has been postponed. So there's nothing coming into effect in January 2014 for business, but there are some for individuals."
"There are a lot of changes regarding the tax treatment of same-sex couples," Luscombe said. "There have been firms that have specialized in this area, but that may change now that the federal government and the IRS have changed. It's considered to be more mainstream, and firms may view it as part of their regular services. Those clients now have to make the decision to change their filing status and whether it makes sense to amend their returns if they were legally married in prior years. It may or may not make sense to amend their returns, depending on the effect of the marriage penalty in their situation."
The requirements in the regulations on the capitalization of costs related to acquire, produce or improve tangible property require some action by the year's end in terms of setting up a de minimis program and determining what change of accounting method to apply, Luscombe indicated.
Every year there's a certain amount of legislative confusion and uncertainty in tax, but last year there was wholesale chaos, observed Thomas Long, senior tax analyst at Thomson Reuters. "Because of the American Tax Relief Act, it's a more stable environment this year, but there's still uncertainty," he said. "There's the 0.9 percent payroll tax from the ACA, and the new 3.8 percent surtax on net investment income. These come into play for higher-income individuals at different thresholds. And with PEP and Pease coming back in, higher-income individuals now have restrictions on the amount of personal exemptions and itemized deductions that they can take."
The Supreme Court decision striking down Section 3 of the Defense of Marriage Act raised a number of issues, according to Catherine Murray, tax analyst at Thomson Reuters. "There's a whole new class of people that have to take filing issues into account," she commented. "They have to go through the traditional questions that married couples do as to whether to file separately or jointly."
One piece of good news for taxpayers is the IRS relaxation of the "use it or lose it" rule for health flexible spending arrangements, according to Murray. "Under the federal rules, if there was any money left in the account at the end of the year, it would be lost," she said. "This provided a number of questionable incentives, such as having procedures that were not necessary at the end of the year, or not putting away as much for health care as is advisable. Now, at the plan sponsor's option, employees can carry over up to $500 of the unused amount remaining in the account at the end of the year." (Note: Due to an editorial error, an earlier posting of this story said employees could carry over up to $5,000, but our sharp-eyed readers caught it and brought it to our attention in the Comments section below. Kudos to them, and our apologies for the original error.)
Roger Russell is senior editor for tax at Accounting Today. This story first appeared in the December issue of Accounting Today.
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