Categories
Federal Income Tax

Credentials

When it comes to selecting a tax return preparer, it is important to understand his or her credentials.  Albert Bergen is a Certified Public Accountant licensed as both an individual and an accounting firm to practice in the state of Maine.

Maine CPAs need to complete 150 or more college credit hours, including at least 15 credit hours of accounting, have at least two years of supervised accounting experience, and pass a series of rigorous tests which cover a variety of finance, accounting, audit, and business subjects as well as income tax regulations.   Certified Public Accountants must adhere to a strict code of professional conduct in addition to the tax preparer regulations published in the Treasury Department’s Circular 230,  and must complete 40 hours of continuing professional education (CPE) annually.  This means that CPAs who chose to focus their practices on income taxes are the ideal professionals for small businesses and a solid choice for individuals.

Enrolled agents can become licensed by applying to become an enrolled agent and either passing a rigorous exam covering income tax topics and the regulation of income tax preparers or having a certain amount of experience working for the IRS.   Enrolled agents must complete 72 hours of continuing professional education every three years and must comply with the tax preparer regulations published in the Department of the Treasury’s Circular 230.  This means that enrolled agents are a solid choice of tax professional for individuals, but may not necessarily have the accounting or finance background to advise small business clients effectively, unless they have sought that knowledge out independently of their professional licensing.

Registered Tax Return Preparer is a new designation that was intended to ensure a basic minimum standard of competency among individuals who prepare a tax return for compensation.  Those regulations were struck down by the US Supreme Court as an over-reach of the IRS’s authority.  Accordingly, there are currently (October, 2013) no testing or professional education requirements for RTRPs.

There are a few other groups authorized to prepare tax returns for the public, but they are less common and can explain their qualifications themselves.  Individuals who prepare tax returns for compensation without signing them, or by entering “Self Prepared” on the preparer’s signature line are operating outside of the regulations governing income tax preparers and should not be used.

Categories
Affordable Care Act Federal

Obamacare for Maine individuals

The Affordable Care Act (ACA or “Obamacare”) is  set to take full effect beginning in 2014.  Maine didn’t set-up its own health insurance exchange, so Maine taxpayers who who want to buy an individual plan that might be eligible for the Obamacare tax credit must use the federal exchange.  The Obama administration claims that the exchange website now works 90% of the time, and the deadline for enrolling has been moved because of all of the earlier website problems.  Individuals who want insurance through the exchange now have until December 23rd to buy it if they want it to take effect for January 1.

Obamacare Overview for Maine Taxpayers

It seems to be impossible to read or watch any sort of news without see at least one story about the Affordable Care Act.  There are some articles that just give straight facts, and a lot of articles that spin them for one side or the other.  There isn’t a lot of specific information out there about how Obamacare will affect people in Maine.  The provisions of the Affordable Care Act aren’t state-specific, but variations in demographics and how the ACA has been implemented mean that its effects do vary from state-to-state.  This post is meant to explore some of the ways that individuals in Maine might be affected differently than people in other states.

Obamacare, Generally

The Affordable Care Act uses a carrot-and-stick approach to try and increase the number of Americans with health insurance.  The carrots are tax credits.  There are credits to help small employers afford group health plans and credits to help individuals buy their own health insurance if their employers don’t offer affordable health plans.  The sticks are penalties.  Large employers who don’t subsidize health plans for their full-time employees are subject to penalties, and individuals who the government believes can afford health face penalties of their own.  The employer provisions may provide material for a different post, but this one will focus on the parts of the ACA that affect individuals.

Individual ACA Tax Credit

First, the carrot.  The ACA provides a tax credit for many individuals who earn between 138% and 400% of the federal poverty level (FPL) and don’t have access to an affordable health plan through their employers, Medicare, or Medicaid.  The FPL is different in Alaska and Hawaii, but in 2013 it is $11,490 for an individual, $15,510 for a family of 2, $19,530 for a family of 3, and $23,550 for a family of 4 in Maine and the 48 contiguous states.  A single individual may be eligible for a credit if he or she earns between $15,856 and $45,960.  A family of 4 may receive a credit if they earn between $32,499 and $94,200.   Individuals who earn less than the FPL are not eligible for a tax credit because they were intended to be covered by a federally-funded expansion of Medicaid (called “Mainecare” in Maine) to cover people earning up to 138% of the FPL.   Maine chose not to participate in the expansion of Medicaid, so families earning less than 138% of the FPL may find themselves without access to Mainecare and without a tax credit to help pay for insurance.

The credit is designed to limit the taxpayer’s cost for a mid-level (called “Silver”) plan to a percentage of their income that depends upon their income.  The price of the silver plan referenced for figuring the tax credit will vary based upon the taxpayer’s age, smoking or nonsmoking status, and where they live.  Here in Maine, plans are cheapest in Cumberland county and more expensive in most other parts of the state, including Androscoggin county.  The ACA reduces the net cost the referenced plan to an amount between 3% and 9.5% of the taxpayer’s modified adjusted gross income.  Because the policy premiums drive the tax credit, the final amount of the credit varies with income, age, county of residence, and whether or not the taxpayer smokes.

 

Obamacare Maine Plans

There are two insurers offering plans in Maine through the health insurance exchange.  Maine Community Health Options is a new insurance cooperative headquartered locally in Lewiston.  Anthem, of course, has been offering health insurance in Maine for many years.   Maine’s Office of Professional and Financial Regulation maintains a page with information about the plans, including some cost information, but this cost information is difficult to navigate.  The best way to get exact pricing is to go through the full process of applying for insurance and also the tax credits to help pay for it at healthcare.gov.  For a quicker idea of what Obamacare will cost you,  the Henry J. Kaiser Family Foundation maintains a calculator that can give a quick estimate.

According to this calculator, a family of three (two adults, both age 34, and one child) in Auburn earning the city’s median income of $41,649 would have a gross premium of $11,739 for a Silver-level plan, but would be eligible for a premium credit of $8,922.  This brings the total cost of the plan to $2,817.  At a monthly cost of just over $234, this compares very well with many employer-sponsored plans this author is familiar with.

The story changes a bit for an older family with a higher income.  A couple age 54, with a combined income of $80,000, would have a gross premium of $13,555 per year.  This family would be  paying just under $1130 per month and would not be eligible for a tax credit to offset the premium.  Such a couple may be better-able to afford the premiums than a younger family with a lower income and a child, and it is probably less than they would have paid for similar insurance before the Affordable Care Act, but “affordable” may still not be an accurate description for such a policy.

Summary

The average Mainer who wants to have health insurance should do fairly well under the affordable care act.  This is especially true for lower-income families.  Mainers earning 400% or more of the poverty level do less well, especially if they would have preferred to go uninsured and take their chances without the federal mandate.

 

 

 

 

Resources

Henry J. Kaiser Family Foundation Subsidy Calculator http://kff.org/interactive/subsidy-calculator/

Obamacare Plans Costlier in Maine than in Other States

Obamacare Facts.  www.obamacarefacts.com

Maine Community Health Options.  www.maineoptions.org

Categories
Amended Federal Income Tax

Amended Returns

Sometimes a tax return  which has already been filed needs to be changed or corrected.  The forms filed to correct income tax returns are called amended returns.  For individuals or married couples, they consist of a form highlighting the changes for the IRS (called a 1040x) and a corrected individual tax return (form 1040).  They can also include other forms or information that are needed to inform the IRS why the change is needed.

Reasons to File Amended Returns

Amended returns can result in an additional refund or more tax to be paid.  One common reason why people need to amend their tax returns is that they’ve filed too early.  Taxpayers who expect to have refunds sometimes file very early in the year to claim their refunds, only to receive a form (1099) reporting additional income that they had forgotten about.  When they receive the additional form, they need to file an amended return and pay the additional tax that is due on the income that was left off of the original return.

Amending a return to pay additional tax is no fun at all, but sometimes taxpayers can amend their returns to get additional money back.  This can happen because the original return contains an error in the IRS’s favor, because the taxpayer became aware of new information that helps the taxpayer, or because information that  was reported on a correct original return could have been reported in a different correct way to yield a better result.   Occasionally it even makes sense to amend prior return to pay additional tax when doing so sets the taxpayer up save even more money in the current year.

 

Opportunities to Amend for Refunds

Here some situations where taxpayers  should consider having a tax professional review their prior returns for opportunities to amend:

  • The taxpayer is in business and has spent significant money on equipment in recent years but the business has performed better or worse than expected since then.
  • The taxpayers are married but filed separate rather than joint returns for any of the past few years.
  • The taxpayers are a legally married same sex couple and were unable to file joint income tax returns before the Defense of Marriage Act (DOMA) was repealed.
  • The taxpayer has prepared his or her own return in the past, but has had new or more complicated tax situations in recent years and isn’t fully confident that the returns are correct.

These are just a few situations where it pays to have past returns reviewed and possibly amended by a tax professional, but there is a time limit on when you can do so.  For an amended return to result in a refund, it must be filed within three years of when the original return was filed or two years of when the tax was paid, whichever is later.  As of February, 2014, that means that individual income tax returns for 2010, 2011, and 2012 may still be amended to claim an additional refund if one is due.  Taxpayers will no longer be able to amend 2010 returns after April 15, 2014, unless the original returns were placed on extension during the 2010 filing season.  

Categories
Federal Filing Status Income Tax

Married Separately vs Married Jointly

Married taxpayers have the option of filing separate returns (with the status of Married Filing Separately, or MFS) or joint returns (Married Filing Jointly, or MFJ). Taxpayers are often unsure of which filing status will give them the best result, and there’s a common belief that filing separately is better than filing jointly. Under current tax law and in most common situations, the opposite is generally true. Married taxpayers who file joint returns tend to pay the same or less tax than they would if they filed separate returns.

To understand why, it’s important to consider the tax tables for joint and separate filers as well as some of the the special rules that apply to married taxpayers.  The 2013 tax rate tables for married taxpayers filing separately and filing jointly are provided below:

 

 Tax Tables – Joint and Separate

MFS MFJ
Taxable Income Rate Taxable Income Rate
$0 to $8925 10.0% $0 to $17,850 10.0%
$8,926 to $36,250 15.0% $17,851 to $72,500 15.0%
$36,251 to $73,200 25.0% $72,501 to $146,400 25.0%
$73,201 to $111,525 28.0% $146,401 to $223,050 28.0%
$111,526 to $199,175 33.0% $223,051 to $398,350 33.0%
$199,176 to $225,000 35.0% $398,351 to $450,000 35.0%
$225,001 and over 39.6% $450,001 and over 39.6%

The tax brackets for joint filers are twice as wide as the tax brackets for married taxpayers filing separately.  At first glance, it would appear that filing separately is no worse than filing jointly, but that is only true when both spouses would be in the same tax brackets on their separate returns.

 

Filing Status Comparison

The table below compares joint and separate filing status for a married couple where there primary wage earning earns $60,000 and their spouse earns $30,000.  They have no children, no other income, and they are claiming the standard deduction.

Spouse 1 Spouse 2 Total Joint
Income      60,000      30,000      90,000      90,000
Standard deduction      (6,100)      (6,100)    (12,200)    (12,200)
Exemptions      (3,900)      (3,900)      (7,800)      (7,800)
Taxable Income      50,000      20,000      70,000      70,000
Tax         8,429         2,554      10,983         9,608

This is a fairly common scenario, and the married taxpayers are already giving up $1,375 if they file separately rather than jointly.  With a larger difference in incomes between spouses, the difference in tax between the two filing statuses could be $10,000 or more.

Although there are times when filing separately will yield a lower tax, the most common reasons to file separately are not tax related.  Couples who are newly married, or couples who have had a rough patch may have filed separate returns because they simply weren’t comfortable with having merged finances.

Fortunately, married couples who have filed separately in recent years may be able to amend those returns and elect to file jointly instead.  Taxpayers can change from married filing separately to married jointly on an amended return filed within three years of the separate returns’ original due-date.  As of this post, tax returns for 2010, 2011, and 2012 may still be amended and, 2009 returns can be amended if the original returns were filed on extension.

 

 Resources

IRS Filing Status Tool

Form 1040 (Tax Tables), Tax Table and Tax Rate Schedules

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