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Does Uncle Sam Have a Birthday Gift for You This Year? Ages 0-49

birthday, birthday cake, candlesFor your birthday this year, you may have received a special gift from a loved one or favorite friend. Depending on the number of candles on this year’s birthday cake, you may also get a gift from Uncle Sam when you file your tax return next tax season.

In this two part series, we will learn that in some situations the gift may not be because you reached a certain age, but will be the result of the age your dependent(s) or spouse turned this year. Unfortunately, not all of Uncle Sam’s gifts will be welcomed, because some birthdays mark the end of eligibility for certain credits or exclusions of income. Others signal the start of needing to include retirement benefits in income.

How the IRS Defines and Adult’s Age and Birthday

Under common law, a person attains a given age on the day before his or her birthday. This can impact the taxpayer’s return for certain age-related tax issues. For example, a taxpayer whose 65th birthday is on January 1 is considered to be age 65 as of December 31 of the prior year. That person is eligible for an additional standard deduction amount for the prior year.

How the IRS Defines a Child’s Age and Birthday as Dependents

When it comes to children, the IRS ruling is different, on several tax provisions, discussed in this article. The child reaches a given age on the actual date the child was born, instead of the day before.

How Old Are You on Your Next Birthday?

If you or someone in your family reaches one of the following ages this year, here is how your tax return may be impacted:

Age 0 – Well, OK, zero is not really an age. But, if your dependent is born in 2015, you can claim a $4,000 exemption allowance for the child. Exemptions are subtracted from your gross income to determine your taxable income. Your taxable income determines your marginal tax bracket. So, for example, if you are in the 25% tax bracket, each exemption allowance reduces your tax by $1,000.

Age 13 – Most people know that if you pay child care expenses while you or your spouse work, it is tax credit. You can claim a credit for child care expenses. But, did you know that the same is true if you pay child care while you look for work? Unfortunately, this credit ends when the qualifying child, who is your dependent, turns 13 years old in the calendar year. Only expenses for child care up to the date of the child’s 13th birthday will be eligible for the credit. This is the same if you receive dependent care benefits from your employer. The value of those benefits is taken out from your income once the child turns 13. An exception to the age limit applies if the dependent child is not physically or mentally able to care for himself or herself.

Age 17 – One of the requirements for the child tax credit is that the qualifying child be younger than 17 at the end of the tax year. If your child turns 17 during 2015, you will not be allowed to claim the child tax credit for this child for current or any future year. The amount of the credit is $1,000 per eligible child, subject to a phase-out based on your adjusted gross income (AGI).

Age 18 – To claim an adoption credit for expenses you paid to adopt a child, the child must have been younger than 18 at the time you paid or incurred the expenses. A child turning 18 during the year is an eligible child for the part of the year he or she was younger than 18. The age limitation does not apply if the person you adopted is physically or mentally unable to take care of himself or herself.

Age 19 – To be a qualifying child for dependency purposes, the child must be younger than 19 as of the end of the year. However, if the child is a full-time student, they must be younger than 24. So, if your child’s 19th birthday was in 2015 and he or she is not a full-time student for some part of at least 5 months during the year, you cannot claim the child as a dependent under the definition of a qualifying child. Once again, the age limit does not apply for a child who is unable to physically or mentally provide care for themselves. Depending upon both the child’s income and who provided the majority of the child’s support, you may be able to use a different definition to claim the dependency.

Age 24 – Are you still claiming your older-than-18 child as a dependent based on the child being a full-time student status? Meaning, the child does not provide more than half of his or her own support. If so, you won’t be able to claim the child’s dependency under that rule starting in the year the child has his or her 24th birthday. Depending on the child’s gross income and other factors, you may still be entitled to the dependency exemption, but under the “other” dependent rules and not the “qualifying child” rules.

Age 25 – If you are a lower-income taxpayer who is at least 25 years old before the end of the year, and you do not have a qualifying child, you may be eligible for the earned income credit. If you are married, and file a joint return, either you or your spouse must meet the age requirement. This age requirement for the earned income credit does not apply if you have a qualifying child.

Age 27 – There are various provisions of the Patient Protection and Affordable Care Act that apply to a child younger than 27. This means an adult child  who has not had his or her 27th birthday as of December 31st. For example, your younger-than-27 child may be included on your health insurance plan, even if the child is not your dependent. If you are self-employed, the premiums you paid for the health insurance coverage of a child younger than 27 can be included as part of the above-the-line deduction of health insurance costs you may be able to deduct.

Next week we will tell you about the birthday surprises you could experience starting at age 50 and beyond. If you or a member of your tax family celebrated a milestone birthday (or half-birthday) this year and you have questions as to how the tax implications of that event will affect your return, please give Alex Franch, BS EA  a call at 781-849-7200.

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photo credit: Birthday Cake via photopin (license)

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Employee Travel: Preventing Tax Problems

employee travel, overnight, travel, business travel, Employee travel can signal tax problems. It can be a headache for the employer. It can be a headache for the employee to if the tax regulations are not followed. It is common practice for companies to send employees on business trips. If the rules are followed, the cost of employee travel will be fully deductible to the employer. The exception are meals, which are only 50% deductible, and are a tax-free reimbursement to the employee. In addition, the reimbursement is not subject to FICA or payroll withholding.

On the other hand, if the rules are not followed, the expenses are still deductible by the employer. However, the reimbursement must be added to the employee’s taxable wages. Those wages are subject to both FICA and payroll withholding.

Ordinary and Necessary Business Expenses

An employer is able to deduct ordinary and necessary business expenses. These expenses include employee travel and lodging expenses that are job-related. The expenses cannot be defined as lavish or extravagant by the IRS. Otherwise they are known as Working Condition Benefits or fringe benefit. Any such item that is deductible by the employer is not included in the employee’s salary. In addition, an advance or reimbursement made to an employee, under an Accountable Plan, which requires the employee to adequately account for the expenses and return any excess advances, is deductible by the employer. This type of plan is not subject to FICA or income tax withholding.

Reimbursements not made under an Accountable Plan are fully taxable to the employee. The only way for the employee to deduct the expenses is as a miscellaneous itemized deduction on his or her Form 1040. To do that, the employee must itemize the deductions on the Schedule A, instead of taking the standard deduction. The employee business expense category on Schedule A is subject to a 2% of AGI nondeductible threshold (Adjusted Gross Income). Often, this results in the employee deducting only a portion of the expenses or none of the expense at all.

With the exception noted below, to deduct the cost of lodging and meals, the taxpayer must be away from home overnight. Overnight is defined by the IRS as any trip that requires sleep or rest to enable the taxpayer to continue working.

Away-From-Home Rule Exception

Under an exception to the Away-From-Home Rule, the cost of local lodging is deductible. This deduction is restricted to the following:

  1. The lodging is necessary for the individual to participate fully in
  2. For the purpose for a bona fide business meeting, conference, training activity, or other business function.
  3. For the duration cannot exceed five calendar days, and
  4. Does not happen more frequently than once per calendar quarter.

For an employee, the employer must require:

  1. The employee to remain at the activity or function overnight
  2. The lodging must not be lavish or extravagant, and
  3. There can be no significant element of personal pleasure, recreation, or benefit.

Employee Travel for a Temporary Living Arrangement

A taxpayer’s home, for purposes of determining if he or she is away from home and can deduct lodging and meals, is generally where the taxpayer normally lives and works. However, that fact is sometimes difficult to determine, in which case the IRS has numerous special rules that apply.
An away-from-home assignment, at a single location, lasting for one year or less, is considered temporary, and the travel expenses are deductible. If the assignment is longer, there is a good chance the expenses will not be deductible based upon some complex rules.

Do You Need More Information?

The rules for the tax treatment of travel expenses and temporary away-from-home assignments can be complex. Please give Alex Franch, BS EA  at this office a call at 781-849-7200 for further details or assistance.

 

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Health Reimbursement Plans: Beware of Penalties

2015_08_20 Health Reimbursement Plans2m Health Reimbursement Plans, Healthcare, Health, Reimbursement PlansHealth reimbursement plans and rules have been very interesting these days. They can save you a lot of money, if used appropriately.

Beginning in 2015, large employers defined as those with 100 or more full-time employees must begin offering health insurance coverage to their employees. Then, in 2016, employers with 50 or more full-time employees must do the same or face penalties. These are called the “large employer health coverage excise tax.”

Employers with fewer than 50 full-time employees are never required to offer their employees an insurance plan. However, qualified small employers who do provide coverage may qualify for the small business health insurance credit.

In the past, many smaller employers have simply reimbursed their employees for the cost of insurance. They found it less expensive. And, they had fewer administrative costs than having a group insurance plan. However, under the Affordable Care Act (ACA, or Obamacare for short), a group health plan that reimburses employees for the employees’ substantiated individual insurance policy premiums must satisfy the market reforms for group health plans. Most commentators believe an employer payment plan will fail to comply with the ACA annual dollar limit prohibition. This is because an employer payment plan is considered to impose an annual limit up to the cost of the individual market coverage purchased through the arrangement. Also, an employer payment plan cannot be integrated with any individual health insurance policy purchased under the arrangement. Thus, reimbursement plans may be subject to a very draconian penalty.

Small Business Employers, Did You Get the Notice?

Back in February, the IRS issued Notice 2015-17. This provides small employers limited relief from the stiff $100 per day, per participant, penalties under IRC §4980D for health insurance reimbursement plans that had been addressed in Notice 2013-54. In particular, that notice provided:

    • Transitional relief for employers that do not meet the definition of large employers (i.e., employers with 50 or more employees). This relief is granted for all of 2014 and for January 1 through June 30, 2015; and
  • Relief for S corporations that pay for or reimburse premiums for individual health insurance coverage for 2% shareholders, as previously addressed in Notice 2008-1. The relief period is indefinite, and the IRS states that taxpayers may continue to rely on Notice 2008-1 “unless and until additional guidance” is provided.

The Small Employer Health Reimbursement Relief is Expired

2015_08_20 Health Reimbursement Plans QuoteWell, June 30, 2015 has come and gone. So has the small employer relief. Therefore, employers who still reimburse employees for their medical expenses are in danger of being subject to the $100 per day ($36,500 a year) per employee penalty. Compared to the annual $2,000 penalty that large employers face for not providing insurance to their full-time employees, the penalties on small employers are substantial enough to bankrupt them. What does this mean? The large employer who fails to provide any insurance pays a penalty of only $2,000 per year per employee while the employer who helps employees by reimbursing them for the cost of insurance gets hit with an up to $36,500-per-employee penalty.

This is true even if the employer is a small employer (50 or fewer full-time employees) who is under no legal obligation to provide health insurance plans for its employees. They just want to offer reimbursements simply to help the employees. Does this seem fair? We will let you form your own opinion. You are welcome to leave a comment below to go over to our Facebook or Google+ pages to express your thoughts.

Will Congress step in to alleviate the problem? Maybe yes and maybe no. Employers must decide if it is worth the risk to depend on Congress to act.

There is one firm, Zane Benefits, which claims to have solved the problem with a reimbursement plan that complies with the code. Of course, there are others who argue that it does not.

Bottom Line: Understand your risks if your business has a medical reimbursement plans and consider other options.

If you have questions related to your business and employees or about the tax consequences or benefits regarding health reimbursement plans, please give Alex a call at 781-848-7200. He can help you sort through the tax treatments for you or your business large or small.

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