Let’s talk about the premium tax credit … the Obamacare subsidy available to eligible individuals who buy health insurance through an exchange. Temporary easings in the March stimulus law hike the credit amount and let more people qualify.
Who is eligible for the premium credit? Prior to 2021, the credit was available for people with household incomes ranging from 100% to 400% of the federal poverty level, who met other rules. For 2021 and 2022, some people with incomes over 400% of the poverty level can also get credits, depending on the cost of the policy. The credit amount is higher for 2021 and 2022, thus reducing the monthly premiums even more. According to a government agency, monthly premiums after these new savings will decrease on average by $85 per policy. Democratic lawmakers would like to make these 2021 and 2022 changes permanent.
Individuals eligible for Medicare or other federal insurance don’t qualify.
Nor do people who can get affordable health coverage through their employer.
The credit is estimated when you go on an exchange to buy insurance. The estimated premium subsidy for 2022 is based on your expected 2022 income. Begin with your 2020 modified adjusted gross income … AGI plus tax-free interest, nontaxable Social Security benefits and tax-exempt foreign earned income. Then add or subtract expected income changes. The lower your modified AGI, the bigger the credit.
People who qualify for the credit can choose to have it paid in advance directly to the health insurance company in order to lower their monthly premiums.
Let the exchange know of any changes that could affect the credit amount, including a change in income. For example, if you lost your job and report lower income, the exchange will increase the subsidy for future months, thus putting more money into your pocket. The exchange will decrease the subsidy if you report higher income. Notifying the exchange now can mitigate surprises when you file your 1040 next year.
If you’re now getting subsidies for buying insurance through an exchange …
You must file a 2021 return and properly report the health premium credit, even though your income may be below the filing threshold or you expect a refund. You will have to attach Form 8962 to your Form 1040 to compute the actual credit, list any advance payments made to the insurer, and reconcile the two figures. The exchange will send you Form 1095-A to help with the 8962 calculations. If your credit exceeds the premium advances, you can claim the excess on the 1040. If the credit is less than the advances, most will need to repay all or part of the excess. (More-liberal rules, which suspended the repayment requirement, applied only for 2020.)
Filers who faultily report health premium credits are juicy audit targets.
IRS is on the prowl for people who get subsidies for buying insurance on an exchange and either don’t file returns or file but erroneously report the credit. Its computers flag returns showing modified AGIs above the limit to take the break.
Tax Returns
Don’t fret if you need information on a return that you’ve thrown out or lost.
Taxpayers can use the free Get Transcript online tool on IRS’s website to view and immediately print a tax transcript, which is a summary of key data on a tax return. Alternatively, mail Form 4506-T or call 800-908-9946 to order one.
People seeking copies of actual tax returns must request them by mail using Form 4506. There is a $43 fee per return, and it can take IRS up to 75 days to process the request. However, if you live in a federally declared disaster area, you can get the fee waived and the agency will expedite the processing.
The 250-return e-filing mandate is changing. Currently, electronic filing is required for taxpayers who file at least 250 returns with the Revenue Service for the calendar year, including information returns such as W-2s and 1099s, income tax returns and employment tax returns. The 2019 Taxpayer First Act lowers the 250-return threshold to 10 over a period of years, to be implemented by IRS regulations. The agency has now issued proposed regs on this mandate.
The return threshold falls to 100 for returns required to be filed next year …
And to 10 for returns filed after 2022. IRS proposes that all returns filed by a taxpayer be aggregated for the purpose of determining these thresholds.
Disaster Losses
If you suffer damage from a federally declared disaster in 2021 …
The tax laws can be of help. If your home, car or belongings were damaged by a hurricane, tornado, widespread flooding or other presidentially declared disaster, you can deduct your losses to the extent you are not reimbursed by insurance. Your loss is equal to the smaller of the property’s adjusted basis or decline in value, less any insurance proceeds that you received or expect to receive in the future.
Only itemizers can claim a deduction for damage to nonbusiness property.
And two offsets apply: The loss that you calculate is first reduced by $100. The balance is deductible only to the extent it exceeds 10% of adjusted gross income. (More-generous rules apply for taking losses from disasters in 2018, 2019 and 2020.)
The rules for deducting casualty losses on business assets are more liberal. A business casualty loss needn’t be attributable to a federally declared disaster. The $100 and 10%-of-AGI offsets don’t apply. And nonitemizers can write off losses.
2021 disaster losses can be claimed on either your 2021 or 2020 tax return. That’s because individuals can opt to take the loss on the return for the disaster year or the return for the year preceding the disaster. If you’ve already filed your 2020 1040, you can amend it to take the write-off by filing Form 1040-X. Note that for this purpose, the due date for filing the amended return is six months after the filing date for 2021 returns. For 2021 disaster losses, this translates to Oct. 17, 2022.
Taxpayers use Form 4684 to calculate and report disaster losses. They’ll enter the FEMA disaster declaration number on the form, which can be found at www.fema.gov/disasters. Note that IRS does a poor job of policing this requirement, according to Treasury inspectors, who found that 35% of 4684 forms processed for 2019 had a missing or invalid FEMA number, or the number didn’t match the location of the reported disaster. IRS had vowed in years past to do better, but other priorities and the coronavirus pandemic put agency monitoring of this rule on the back burner.
Computing the amount of loss to your home or belongings can be difficult.
Luckily, IRS has multiple safe harbors to help you with this calculation. For example, one method lets a homeowner with casualty losses of $20,000 or less take the lesser of two repair estimates to determine the decrease in the home’s value. Another has a table to compute the replacement cost of personal belongings destroyed in the presidentially declared disaster. See Rev. Proc. 2018-08 for these and more.
Capital Losses
Capital losses can offset capital gains plus up to $3,000 of other income.
Any excess losses are carried forward indefinitely until exhausted. An investor who tried to carry back his capital losses from a worthless investment as net operating losses and claim a refund on his previously filed tax returns learned this rule the hard way. Individuals may carry back excess ordinary losses incurred in a trade or business, but not losses from a capital asset. The taxpayer argued that his losses were derived from a trade or business, but a district court didn’t buy it, saying he was instead a passive investor (Swartz, D.C., N.Y.).
Exempt Groups
Charity insiders who use funds for personal use can draw a huge tax penalty. The treasurer and wife of the founder of a 501(c)(3) tax-exempt organization received regular payments from the group. She argued the amounts were compensation, but she didn’t perform any services for the charity. The Tax Court said the payments violated the excess benefit rules. It hit her with a 25% excise tax on the money she got, plus an additional 200% excise tax because she didn’t timely repay the charity the amount of the excess benefit, as required under law (Ononuju, TC Memo. 2021-94).
Payroll Taxes
A tax break for firms that give workers paid time off to get COVID-19 vaccines. Businesses and tax-exempt organizations with fewer than 500 employees that provide paid sick and family leave to workers affected by the coronavirus get a limited payroll tax credit against the employer’s portion of Medicare taxes. This includes not only paid leave taken by workers to receive coronavirus vaccinations or to recover from any illness or condition related to the vaccinations, but also leave taken to help a family member or other individual with the vaccine and side effects. These payroll tax credits are available for wages paid for employee leave taken from April 1, 2021, through Sept. 30, 2021. Self-employed individuals also qualify.
Businesses get more IRS guidance on a coronavirus-related payroll tax break:
The employee retention tax credit for businesses that are financially hurt by the pandemic but keep paying wages to employees. The newest guidance covers the ERTC changes applicable for the last two quarters of 2021 (Notice 2021-49).
Lawmakers are seeking to end this tax break early. Currently, the ERTC is slated to expire at the end of the year. The Senate bipartisan infrastructure proposal would move up the expiration date to Sept. 30. Ending it early would raise $8.2 billion.
Business Taxes
Shareholder basis in S corporations is a big IRS enforcement priority. Owners of S corporations can deduct losses only up to their stock basis and loans that they make to the company. IRS knows that compliance in this area is deficient and is conducting audits. Exams are at the shareholder level. Agents are checking to see whether shareholders are properly tracking their basis.
Many S firm owners must include basis information with their 1040s. This requirement applies to shareholders who report a loss, dispose of their stock, or receive a distribution or loan repayment from the company. The shareholder must check a box on line 28 of Schedule E and attach a basis computation. These taxpayers now use the shareholder stock basis and debt basis worksheets in the Shareholder’s Instructions for Schedule K-1 (Form 1120-S) for this purpose. IRS is now proposing a new tax form for these S owners to complete instead: Form 7203, S Corporation Shareholder Stock and Debt Basis Limitations. We haven’t seen the 7203, but it will probably look similar to the K-1 worksheets.
Excise Taxes
Watch this deadline for truckers and other owners of heavy highway vehicles.
Form 2290 is due Aug. 31. The maximum $550-per-vehicle tax can apply to trucks, tractors, logging vehicles, buses, etc., weighing at least 55,000 pounds.
IRS has a feature for those who don’t know if they need to file the 2290. The online tool is called “Do I Need to Pay the Heavy Highway Vehicle Use Tax?”
Child Credit
Millions of families have begun receiving monthly child tax credit payments. These advance payments of up to $250 or $300 per child account for one-half of the family’s 2021 child tax credit. Lawmakers hope that these regular payments will help low-income families who struggle to make ends meet on a day-to-day basis. However, the payments don’t go just to low-income families. All families who qualify for the child credit will get payments from July through Dec. unless they opt out.
The monthly child credit payments aren’t taxable. On your 2021 Form 1040, which you file next year, you’ll reconcile the payments you got with your actual credit. If the child credit exceeds the payments that you received, you can claim the excess. If the credit is less than what you got, you may or may not have to repay the excess. IRS will mail a notice by Jan. 31, 2022, showing the total amount of payments made to you. Keep the letter with your tax records to help you fill out your 2021 return.
Low-incomers needn’t pay back credit overpayments. But others will have to. Families with 2021 modified adjusted gross incomes at or below $40,000 for singles, $50,000 for household heads and $60,000 for couples needn’t repay any overpayments. Those with 2021 modified AGIs of at least $80,000, $100,000 or $120,000, respectively, will need to repay the full amount of any overpayment when they file their 2021 1040s. Families with 2021 modified AGIs between the thresholds need to repay only a portion.
Enforcement
An IRS compliance program for large partnerships is in the works. This new regime will operate similarly to IRS’s large corporate audit program. Examiners will use data analysis to select firms for audit that present the highest risk of noncompliance. Agency officials expect to start exams within the next few months.
Government auditors chastise IRS on its improper payments of EITCs. IRS estimates that it wrongly refunded $16 billion in earned income tax credits in 2020 … a 24% improper payment rate. Last year, government auditors recommended that IRS update its strategy for addressing the root cause of erroneous EITC refunds. At that time, the Service neither agreed nor disagreed with the recommendation.
IRS wants more individual taxpayers to get identity-protection PINs as extra protection from tax identity theft. The IP PIN is a six-digit number assigned by IRS to help verify a taxpayer’s identity on returns filed either on paper or electronically. Getting an IP PIN is entirely voluntary. Taxpayers who want one must apply for it each year. To apply, go to www.irs.gov/IPPIN, select “Get an IP PIN,” and verify your identity. See IRS Publication 5367 for the complete details. The agency is calling on preparers to spread the word about IP PINs to their clients.
More reporting from virtual currency exchanges could be on the way. The Senate bipartisan infrastructure framework negotiated with the White House includes ideas to clamp down on tax noncompliance involving cryptocurrency by expanding the scope of information reporting. It would treat digital currency trades akin to stock sales, requiring brokers to report sales price, etc. And it would define cash more broadly, to include cryptocurrency for purposes of the rule that businesses file Form 8300 to report cash transactions of over $10,000 received from customers.