L. 2013, S608 (P.L. 266), effective 07/01/2013, provides a sales tax exclusion for postage that is separately stated on an invoice, bill of sale, or similar document  For purposes of the postage charges exclusion, postage charges do not include any charges for mail or parcel delivery by any means other than through the U.S. mail.

Please contact us with any questions.

Please contact us with any questions you have regarding the Affordable Care Act.

This repeal is retroactive to January 1, 2013.  Estates for decedents in 2013 who have paid inheritance tax will receive a refund.  Refund claims will need to be filed to receive the refund.

This repeal is a long time coming. Indiana was one of the few remaining states with an inheritance tax.  In 2012, Indiana residents saw a glimpse of the eventual elimination of the inheritance tax when a new law was passed to put in place a plan to phase out the inheritance tax over a nine year period.

This repeal should help to keep the retired, wealthy Indiana residents from moving to Florida or other states with no inheritance tax.  Now, if we could just improve the weather!

A warranty contract now includes extended service contracts. Also, tax paid on items used under optional warranty contracts is based on the acquisition cost of the warranty’s service provider. The acquisition cost does not reflect any deductible collected from a customer. In situations where a dealer or service provider uses or installs items under a warranty sold by a third-party warrantor, the dealer or service provider is responsible for all sales tax attributable to all taxable items used under the warranty. The bulletin provides two examples discussing sales tax responsibility when there is a third party warranty. Finally, for transactions where sales tax was collected and remitted on the sale of optional warranty contracts before the publishing of the January 2013 version of the bulletin, a retail merchant will not be required to collect sales tax or self-assess use tax on any parts used to fulfill the terms of the contracts. Read the full bulletin.

Please contact your Somerset tax advisor for additional details.

The Congressional research service is proposing ways to save the social security looming financial gap thru more taxes. This may become a hot button again in Congress in the near future.

For 2013, the FICA tax rate for employers is 7.65%—6.2% for OASDI and 1.45% for HI. For 2013, an employee pays:

1. 6.2% Social Security tax on the first $113,700 of wages (maximum tax is $7,049.40 [6.20% of $113,700]), plus
2. 1.45% Medicare tax on the first $200,000 of wages ($250,000 for joint returns; $125,000 for married taxpayers filing a separate return), plus
3. 2.35% Medicare tax (regular 1.45% Medicare tax + 0.9% additional Medicare tax) on all wages in excess of $200,000 ($250,000 for joint returns; $125,000 for married taxpayers filing a separate return). (Code Sec. 3101(b)(2))

There is a maximum amount of compensation subject to the OASDI tax, but no maximum for HI.

In the Social Security Administration (SSA) Board of Trustees’ 2012 annual report to Congress, the Trustees projected that, in the long-term, the dollar level of the combined trust funds will decline beginning in 2012 until assets are exhausted in 2033. Projected OASDI costs will generally increase more rapidly than projected non-interest income through 2035 due to the retirement of the “baby-boom” generation. After 2035, projected increases in life expectancy will still cause OASDI costs to increase relative to non-interest income (i.e., payroll taxes, taxes on scheduled benefits, and general fund transfers), but at a slower rate.

Given the declining assets and increasing costs described above, the report projected that 100% of scheduled benefits can continue to be paid through 2032, dropping to approximately 75% in 2033 through the 75-year projection period. For more details on the report, including the Trustees’ recommendations.

When the Social Security program began in 1937, earnings subject to payroll tax represented 92% of covered earnings. In 2007, the share of covered earnings had fallen to 83%, with 6% of workers earning more than the wage base. Overall, the percentage of payroll that is taxed has declined due to a rise in earnings inequality (i.e., the salaries for top earners are growing faster than those of workers whose earnings fall below the cap).

2013 report. In a new report, CRS analyzes four policy options to address the Social Security shortfall:

1. Raise the maximum taxable limit to $214,500 (i.e., the maximum taxable limit required so that 90% of covered earnings would have been subject to the payroll tax in 2012) and retain the 12.4% payroll tax rate, with the additional tax revenues used to help close Social Security’s projected long-term financing gap.
2. Raise the maximum taxable limit to $214,500, but reduce the payroll tax rate to 11.4% so payroll tax revenues remain unchanged.
3. Raise the maximum taxable limit to $214,500, and use half of the additional revenue to reduce the projected long-term financing gap and the other half to reduce the payroll tax rate to 11.9%. (This approach combines options (1) and (2))
4. Raise the maximum taxable limit to $214,500, retain the 12.4% payroll tax rate on earnings below the limit, and levy a 2% payroll tax rate on earnings above the limit.

For tax periods beginning on January 1, 2013, and thereafter, a taxpayer that pays on a quarterly basis will exclude the first $1 million of taxable gross receipts on its first quarter return and carry forward any unused portion of the exclusion amount to subsequent quarters within the same calendar year. Taxpayers may not carry forward any unused amount from calendar year 2012 into calendar year 2013.

Previously, a calendar quarter taxpayer would exclude $250,000 on each of the four quarterly returns in the calendar year (due May 10, August 10, November 10, and February 10). The taxpayer was permitted to carry forward any unused exclusion amount for three calendar quarters.

The information release includes examples to further illustrate the changes to the exclusion. Commercial Activity Tax Information Release CAT 2013-01, Ohio Department of Taxation, February 2013

PPACA provides one test to determine if an employer is subject to the Employer Mandate Penalties:  are you an Applicable Large Employer?  To be deemed an Applicable Large Employer your must have on average 50 or more Full-Time Equivalents during the Look-Back Period. 

The Full-Time Equivalent (FTE) determination calculation as of January 1 of the current year, using the prior calendar year as a Look-Back Period, is as follows:

1. Pool 1 – Number of Full-Time Employees (defined as 130 or more hours per month)
2. Pool 2 – Full-time -Equivalents (defined as all other employee hours divided  by 120)
3. Add pool 1 and pool 2 together
4. By statute, this is to be calculated each month, then averaged for the Look-Back Period of the prior calendar year

Proposed regulations provide a Safe Harbor methodology involving the use of a Measurement Period and an ensuing Stability Period.  Proposed regulations provide a special transitional rule for 2013 that allow you to designate any consecutive 6 months as your Look-Back Period. 

The 50 FTEs are determined on a controlled group and affiliated service group basis.  There is an exception to the general rule above if Seasonal Employees cause you to equal or exceed the 50 FTE limit in only 4 months during a 12-month Look-Back Period.

If you fail the test for the Look-Back Period, you will NOT be subject to the Employer Mandate penalties during the current year.  However, you are required to revisit the determination each year. 

If you are deemed an Applicable Large Employer, then you will be subject to one of three different penalty structures.  First, you can be penalized if you do not provide qualifying coverage to substantially all of your Full-Time Employees and their dependents.  Second, you can be penalized if you provide qualifying coverage to substantially all of your Full-Time Employees and their dependents and the coverage is not good enough.  Last, beginning in 2018, you can be penalized if you provide qualifying coverage to substantially all of your Full-Time Employees and dependents and the coverage is too good. 

It is worth mentioning here that these penalties are deemed to be an Excise Tax and, as such, are NOT tax deductible.  Therefore, to avoid penalty, taxpayers in the highest tax brackets should double the amount of the Employer Mandate Penalties in order to compare to the cost of offering tax deductible health insurance to employees.

First, the penalty of not offering qualifying coverage to substantially all of your full-time Employees and their dependents (commonly referred to as the Pay Penalty) is calculated as follows:

• All Full-Time Employees (minus the first 30) multiplied by $2,000. Please note: this penalty is triggered in full if even one Full-Time Employee receives a subsidy on a governmental Health Insurance Exchange. 

The 30 excluded Full-Time Employees must be allocated over your Controlled Group and Affiliated Service Group. However, the Pay Penalty is triggered on an employer-by-employer basis within the Controlled and Affiliated Group if applicable.

Second, the penalty of offering qualifying coverage deemed not good enough (commonly referred to as the Play Penalty) is calculated as follows:

• $3,000 for each individual employee who receives a subsidy on a governmental Health Insurance Exchange and to whom you are offered coverage fails Affordability or Minimum Value Tests.  The total Play Penalty assessed cannot exceed the value of the Pay Penalty calculated if you had opted not to offer qualifying coverage to all of your Full-Time Employees and their dependents.

The Affordability Test dictates that the employee share of self-only coverage cannot exceed 9.5% of income.  There are several Safe Harbor Methodologies available to help you comply with this requirement.

The Minimum Value test dictates that the offered plan must cover at least 60% of health care costs expected to be incurred.  This is an actuarial determination and again, there are several Safe Harbor Methodologies available to help employers comply with the requirement.

Lastly, the penalty of offering coverage deemed too good (commonly referred to as the Cadillac Penalty) is effective beginning in 2018 and is calculated as follows:

• 40% of excess premium over what is allowed.  The maximum allowable premiums are $10,200 for single coverage and $27,500 for family coverage.

Assets that must be reported on Form 8938 if the dollar reporting threshold is exceeded include:

• Financial accounts maintained by a foreign financial institution, such as savings, deposit, checking, and brokerage accounts held with a bank or broker-dealer. Such an account must be reported even if its contents include, in whole or in part, investment assets issued by a U.S. person (e.g., U.S. stocks or securities).
• If held for investment but not in a financial account, stock or securities issued by someone who is not a U.S. person, any other interest in a foreign entity, and any financial instrument or contract held for investment with an issuer or counter-party that is not a U.S. person. Examples: stock or securities issued by a foreign corporation; a note, bond or debenture issued by a foreign person; an interest rate swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap or similar agreement with a foreign counterparty; and a partnership interest in a foreign partnership.
• An interest in a foreign pension or deferred compensation plan, valued as of the last day of the year. If the taxpayer doesn’t know, or have reason to know, based on readily accessible information the end-of-year fair market value, the maximum value is the value of the cash and/or other property distributed to him during the year (and if there were no distributions, the value of the interest in the plan is zero).
• A contract to sell precious metals held for investment to a foreign person.

Assets that do not have to be reported on Form 8938 include:

• Foreign real estate (e.g., personal residence or rental property). But if held through a foreign entity (e.g., partnership, or estate), then the interest in the entity is a specified foreign financial asset that is reported on Form 8938.
• Foreign currency holdings.
• Directly held shares of a U.S. mutual fund that owns foreign stocks and securities (neither the fund nor its holdings are reported).
• A financial account maintained by a U.S. financial institution that holds foreign stocks and securities. Examples of financial accounts maintained by U.S. financial institutions include: U.S. Mutual fund accounts IRAs, 401(k) plans, qualified U.S. retirement plans, and brokerage accounts maintained by U.S. financial institutions.
• A financial account maintained by a U.S. branch or U.S. affiliate of a foreign financial institution (any specified foreign financial assets in that account also do not have to be reported).
• A financial account (e.g., depository, custodial or retirement account) held through a foreign branch or foreign affiliate of a U.S.-based financial institution.
• Payments or the rights to receive the foreign equivalent of social security, social insurance benefits or another similar program of a foreign government.
• Directly held tangible assets, such as art, antiques, jewelry, cars and other collectibles.
• Directly held precious metals, such as gold (but gold certificates issued by a foreign person are reportable).

The filing of Form 8938 does not relieve a taxpayer of the separate requirement to file a FBAR (Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts) if he is otherwise required to do so, and vice-versa. Depending on a taxpayer’s situation, he may have to file Form 8938 or the FBAR or both forms, and certain foreign accounts may be required to be reported on both forms. (For a side-by-side comparison of Form 8938 and FBAR requirements, see http://www.irs.gov/businesses/article/0,,id=255986,00.html)

Following are other provisions, listed in the order in which they are effective.

Expanded Dependent Coverage in Health Plans. Effective for plan years beginning on or after September 23, 2010, health insurance plans that offer coverage for dependent children must continue to offer that coverage until the child reaches age 26. Since most health plans use the calendar year as a plan year, this means that beginning in 2011 (for most individuals), an adult child can continue to be covered under a parent’s health insurance until age 26. The adult child does not have to qualify as a dependent for income tax purposes to be covered under the health insurance. However, for plan years beginning before 2014, grandfathered plans do not have to offer the coverage if the adult child is eligible for coverage through an employer-sponsored plan that is not a parent’s plan. Additionally, health insurance coverage for an adult child who has not turned age 27 as of the end of the parent’s tax year (generally, a calendar year) is not taxable to the parent. These provisions apply to self-employed individuals also, so they can take an above-the-line deduction for the health insurance costs of qualifying adult children.

Reimbursement of Over-the-counter Medication Costs. Prior to the health care legislation, certain over-the-counter medications not prescribed by a doctor qualified as reimbursable medical expenses through a health reimbursement account (HRA) or a health flexible spending arrangement (health FSA). Additionally, Health Savings Accounts (HSAs) and Archer Medical Savings Accounts (Archer MSAs) could provide tax-free distributions for certain over-the-counter medications not prescribed by a doctor. For reimbursements of expenses incurred after December 31, 2010, the cost of over-the-counter drugs
not prescribed by a doctor are no longer qualifying medical expenses for HRAs and health FSAs. Likewise, distributions from HSAs and Archer MSAs for over-the-counter drugs not prescribed by a doctor are nonqualified distributions. However, insulin and doctor-prescribed over-the-counter medications continue to be qualified medical expenses.

Increased Penalties on Distributions from HSAs and Archer MSAs Used for Nonmedical Purposes. For distributions made after December 31, 2010, distributions from an HSA or Archer MSA that are used for nonmedical purposes are subject to regular income tax and an additional penalty tax of 20%.

Threshold on Medical Expenses Deduction Increased to 10% of Adjusted Gross Income (AGI). Currently, for regular income tax purposes, taxpayers can take an itemized deduction for unreimbursed medical expenses only to the extent that those expenses exceed 7.5% of the taxpayer’s AGI. Generally, this threshold increases to 10% of AGI, effective for tax years beginning after December 31, 2012. However, if an individual is age 65 or older, the increased threshold does not apply until tax years beginning after December 31, 2016.

Limit on Contributions to Health FSAs. A health FSA is one of a number of tax-advantaged arrangements that can be set up through an employer’s cafeteria plan. A health FSA allows an individual to set aside a portion of his or her wages on a pre-tax basis to pay for qualified medical expenses as defined in the cafeteria plan. Through 2012, there is no limit in the tax law on an employee’s salary reduction contribution amount to a health FSA (although some plans may have a limit). However, effective for plan years beginning after December 31, 2012, employee salary reduction contributions are limited to no more than $2,500 per year. The dollar amount will be indexed for inflation for plan years beginning after 2013.

Additional Medicare Tax on Wages. Currently, wages are subject to a 2.9% Medicare payroll tax. Workers and employers pay 1.45% each. The Medicare tax is levied on all of an employee’s wages subject to FICA taxes (i.e., there is no wage limit). Under the new law, effective in 2013, individuals earning more than $200,000 ($250,000 if married, filing a joint return; $125,000 if married, filing separately) must pay an additional 0.9% Medicare tax on their wages exceeding those base amounts. An employer will be required to withhold and remit the additional tax for any employee to whom it pays at least $200,000. Therefore, many individuals (especially those who are married and each earn less than $200,000, but earn more than $250,000 combined) will need to submit a new Form W-4 to their employer to adjust their federal income tax withholding (FITW) or make quarterly estimated tax payments to be sure they are not hit with an underpayment penalty when filing their income tax return each year.

Self-employed individuals pay both halves of the Medicare tax (2.9%), but are allowed to deduct half of this amount for income tax purposes. Under the new law, self-employed persons earning more than the threshold amounts will pay the additional 0.9% tax on amounts above the thresholds. The additional tax will not be deductible for income tax purposes. Self-employed individuals will need to adjust their quarterly estimated income tax payments to account for this additional tax.

Medicare Contribution Tax on Investments. Under current law, the Medicare payroll tax only applies to wages. Beginning in 2013, a new 3.8% Medicare tax (i.e., the Medicare contribution tax) will apply to some (or all) of the net investment income of taxpayers with an AGI above $200,000 (over $250,000 for married filing jointly and surviving spouses; $125,000 for married filing separately). Net investment income generally includes gross income from interest, dividends, royalties, and rents; passive activities trade or business gross income; and net gain from the disposition of property; reduced by deductions properly allocable to such income. The additional tax will not apply to distributions from tax-deferred retirement accounts [e.g., 401(k) plans and IRAs]. The tax will be calculated on the individual’s income tax return and due with his or her federal income tax. Affected individuals will need to either adjust their FITW or make quarterly estimated income tax payments to be sure they are not hit with an underpayment penalty when filing their income tax return each year.

Individual Mandate for Health Coverage. The health care reform legislation requires most U.S. citizens and legal residents (i.e., applicable individuals) to have minimum essential health insurance coverage every month beginning on or after January 1, 2014. Those who do not have such health insurance will be subject to a penalty for each month they do not have minimum essential coverage. The penalty will be the greater of a flat fee amount (for each individual not covered by health insurance) or a percentage of household income over a threshold amount.

Certain low-income individuals and individuals who meet certain financial hardship criteria are exempt from the mandate. In addition, members of an Indian tribe and individuals who either meet a religious conscience exception or are members of certain health care sharing ministries are exempt from the mandate.

Premium Assistance Credits and Cost-sharing-reduction Subsidies. To assist individuals in meeting the mandate for having minimum essential health insurance coverage, the legislation also provides for premium assistance credits and cost sharing-reduction subsidies. Beginning in 2014, some medium-income and low-income individuals will qualify for a premium assistance credit to help them pay the premiums on health insurance purchased in the individual market through the state insurance exchanges that will be operational by 2014. Individuals can elect to have this credit payable in advance directly to the insurer.

The premium assistance credit will be available (on a sliding scale basis) for individuals and families with incomes up to 400% of the federal poverty level ($44,680 for an individual or $92,200 for a family of four, using 2012 poverty level figures) who are not eligible for Medicaid, CHIP, a state or local public health program, employer-sponsored insurance that is both affordable and provides a certain minimum value, or other acceptable coverage.

Additionally, many of these individuals will be eligible for a cost-sharing-reduction subsidy that will assist them in paying any deductibles or other cost-sharing payments required under their health insurance coverage.

That is a brief highlight of the major provisions of the health care legislation that will affect individuals. Of course, with legislation this expansive, additional guidance from the IRS, Department of Labor (DOL), and Department of Health and Human Services (HHS) is being issued on a regular basis. We will keep you informed of major announcements from these agencies.

If you would like more details about any of these provisions or have questions about the effects of these provisions to you and your family, please do not hesitate to call.

The legislation also requires additional reporting requirements relating to employees. However, along with these additional requirements are some incentives, including tax credits for certain small businesses and the ability for certain small employers and their employees to save taxes by using a simple cafeteria plan. Read more….