Friday, May 7, 2010

Small Business Tax Credit

One of the first health care reform provisions to go into effect under the Patient Protection and Affordable Care Act is the new small employer health insurance credit for small businesses that provide health care coverage to their employees.

This credit is worth up to 35% of eligible insurance premiums. The IRS announced that it will be sending postcards to more than 4 million business and not-for-progit organizations to inform them of the new credit.

Eligibility Qualifications for 2010:

  • Have a maximum of 25 full time employees for the year*

  • Pay no more than $50,000 annual wage per full time employee

  • Pay at least 50% of the health insurance premiums on a qualifying plan.

* Full time employees are determined by the IRS term FTE (Full Time Equivalent) Employees. For purposes of the small business credit, FTE employees means a number of employees equal to the number determined by dividing:

  1. The number of total hours of service for which wages are paid by the employer to nonseasonal employees during a taxable year, by

  2. 2080

  3. The result is rounded down to the next whole number to determine the number of FTE employees.

Do Not count more than 2080 hours for any employee, and don't count any employees that fall into the following categories:

  • Business owners - including: sole proprietors, LLC members, 5% or more owners in a C corporation, partners in a partnership, 2% shareholders in an S corporation

  • Family members of the individuals listed above

  • Employees that are considered seasonal employees.

We will discuss this new tax credit in detail in our next post.

Tuesday, May 4, 2010

California offers a New Home and First-Time buyer Credit

Beginning May 1, 2010, Californians who purchase a new home and California first-time home buyers can qualify for one of two state tax credits.

Only one of the credits may be claimed per taxpayer, and there are some general guidelines:
  • The home must be a principal residence; rental and investment properties don't qualify.
  • The home must be purchased on or after May 1, 2010 and before January 1, 2011.

    However, a binding contract entered into by December 31, 2010 may also qualify if the escrow closes by August 1, 2011.

    Also, if you enter into a contract before May 1, 2010, you may also qualify if escrow closes on or after May 1, 2010.
  • The credit is 5% of the purchase price of the home up to a maximum of $10,000.
  • Unlike the federal credit, the California credit is nonrefundable (can't reduce the taxpayers tax liability below zero) and must be claimed in equal amounts over 3 successive tax years. No more than one-third of the credit may be claimed in any one year.

    This tax can't be carried back or forward, so if your tax liability for one year is already at zero, you can't 'hold' your credit and apply to a different year.

There is a limit to how much money the California government is willing to spend. There is a cap of $100 million for the New Home Credit and $100 million for the First-Time Buyer Credit. So if they run out of funds before you purchase your house, you are out of luck.

Check the state website for updates regarding these limits. Once the funds are completely allocated, home buyers will no longer be issued a Certificate of Allocation. This certificate is required to claim the tax credit on a California income tax return.

Friday, April 30, 2010

Can HSA funds be used for insurance premiums?

This is a question that comes up quite often. Can HSA funds be used for insurance premiums? The answer, is in fact, a definitive maybe.

Heaslth insurance premiums are generally not qualified medical expenses for HSA purposes. However, there are four specific exceptions where premiums are considered qualified expenses:
  1. COBRA premiums
  2. Premiums for a long-term care contract
  3. Medical premiums
  4. Premiums paid while the taxpayer is receiving unemployment benefits.

If none of these exceptions are applicable, then the health insurance premiums are not qualified expenses and you should not withdraw funds from your HSA to pay them.

What happens if you have already withdrawn funds to pay for an unqualified insurance premium?

If your HSA plan allows for repayment due to a mistake made with reasonable cause, make the repayment immediately. Reasonable cause includes a reasonable, but incorrect assumption that your premiums are a qualified expense. The amount MUST be repaid no later than April 15 of the year following the year of the mistake. If these steps are taken the amount repaid is not included on FORM 1099-SA and is not subject to tax or penalty.

If your plan does not allow for repayment because of a mistake due to reasonable cause, you may still repay the amount under the general 60-day rollover rule. But only one 60-day rollover is allowed each year, so pay attention to your payments.

If you have mistakenly made unqualified premium payments with HSA funds and have already passed the 60-day rollover period on a plan that doesn't allow for repayment be prepared to pay taxes and penalties come April 15th.

Tuesday, April 27, 2010

April Legislative Watch

Legislative activities in the month of April include the House version and the Senate version of the Taxpayer Act:

House of Representatives
Taxpayer Assistance Act - (HR4994, The Taxpayer Assistance Act of 2010) Last week the House voted 399-9 in favor of HR4994. Although passage in the Senate is likely, it's not yet on the Senate calendar. One of the most important provisions in the bill would remove cell phones from the definion of listed property so that employees would not be required to account for personal-use of employer provided phones.

Taxpayer Protection Act - (S3215, The Taxpayer Protection Act of 2010) was introduced in the Senate on Friday, April 16th. This bill includes several important provisions:
  • Authorizes a $35 million grant program for Volunteer Income Tax Assistance (VITA) programs. This is the grant money that pays for free volunteer tax preparation by organizations such as AARP. It is worth noting that a similar provision was removed from the bill in the House (HR4994) before it passed, so it's likely this will be eventually stripped from the Senate bill as well.
  • Enhances regulations placed on paid tax preparers. This would require unenrolled preparers to register and pass a competency exam and background check to enter the profession. It also requires annual continuing education and re-testing every 3 years.
  • Prohibits the IRS from providing a debt indicator for Refund Anticipation Loans before verifying that the refund won't be offset. This means that unless there is a specific reason for a previous IRS debt to be divulged, this bill will keep it private.
  • Provides an alternative payment method, such as a pre-paid credit card or debit card for unbanked taxpayers.

Sunday, April 25, 2010

Gambling Winnings now Taxed in New Hampshire

Tax Form DP-300 Finally Released!

Haven't heard of Form DP-300? If you are a resident of New Hampshire, or hit a lucky streak while visiting New Hampshire, you might want to read on.

In July of 2009 the state of New Hampshire legislature passed a law that imposes a 10% tax on gross gambling winnings. Although the form required to file this new tax – Form DP-300, wasn't available until late February, 2010, you may still be required to file for the 2009 tax year.

Who is required to pay? This new tax applies to all New Hampshire residents, regardless of where they received the winnings. So if you currently reside in the granite state but hit the jackpot in Las Vegas, Nevada, you will still have to pay the newly imposed taxes in the state of New Hampshire. When it comes to taxes, what happens in Vegas doesn't stay in Vegas.

Not a resident of New Hampshire? Don't breathe easy just yet, if you had any gambling winnings in the state of New Hampshire, you too will be subject to the 10% tax. The determining factor is if you received a federally required W-2G form from a New Hampshire payer.

The form itself is fairly simple, with most of the information required available on the W-2G form.

However, if you aren't sure if this new tax applies to you, it's in your best interest to follow up and file as soon as possible. Lack of knowledge will not excuse you from paying interest and penalties if you don't file on time. Form DP-300 gives you the opportunity to determine how much you might own in interest. The interest rate is 6% or decimal equivalent .000164. The equation to figure out the exact amount (Number of days x daily rate decimal equivalent x Tax due = interest) is also detailed on the back side of the form.

The penalties for failure to pay and failure to file are much stiffer. The penalty for failure to pay is 10% unless you fraudulently attempt to hide your winnings, then the penalty jumps to 50% of the amount of non-payment.

Example: You won $10,000 at the Happy New Hampshire Casino, because you were late to discover the new tax law, you filed form DP-300 two weeks late. Your fees would be:

Tax - $1000 (10%)

Interest - $2.296 (14 days x .000164 x $1000)

Penalty - $100 (10% of nonpayment)

Total - $1,102.296

Form DP-300 can be found at