William L. Stark and Company
Certified Public Accountants and Business Consultants
The House has approved two tax bills that are part of Republicans’ three-pronged "Tax Reform 2.0" package. The two measures, approved by the House on September 27, focus on retirement savings and business innovation.
The House has approved two tax bills that are part of Republicans’ three-pronged "Tax Reform 2.0" package. The two measures, approved by the House on September 27, focus on retirement savings and business innovation.
The most controversial bill of the package, which would make permanent tax reform’s individual and small business tax cuts enacted last December, was approved by the House on September 28 (see the following story in this Issue). At this time, the Senate is neither expected to vote on the Tax Reform package before midterm elections in November nor approve the Tax Reform 2.0 package in its entirety.
Tax Reform 2.0
The Tax Reform 2.0 package was approved by the House Way and Means Committee on September 13. The following three bills are included in the package:
The House approved HR 6757 on September 27 by a 240-to-177 vote. HR 6756 was approved minutes later by a 260-to-156 vote.
Savings Accounts
HR 6757 proposes an expansion of certain savings incentives. Among other things, the bill would eliminate the age limit on individual retirement account (IRA) contributions. Additionally, it would create a Universal Savings Account (USA) to which individuals could contribute up to $2,500 annually. Withdrawals from USA accounts would be tax free. Tax-advantaged funds in USA accounts could be used for purposes other than retirement. Also, the bill would expand Code Sec. 529 plans to permit use for expenses related to trade schools, home schooling, and up to $10,000 in total distributions for student loan repayment.
Business Innovation
HR 6756 would improve the tax treatment of certain start-up business expenses. The bill would allow new businesses to write off up to $20,000 of start-up and organization expenditures. Additionally, HR 6756 would allow for a change in start-up ownership without triggering limits on certain tax benefits.
Democratic Criticism
Democrats remain united in their opposition of Republicans’ Tax Reform 2.0 efforts. The lack of Democratic support makes the package’s success in the Senate, at least in current form, highly unlikely.
At least 60 Democratic votes would be needed for approval. Senate Majority Leader Mitch McConnell, R-Ky., has said that the Senate will not take up any bills in the package until the requisite votes are accounted for.
Specifically, Democrats criticize HR 6760 for extending TCJA provisions, a law that Democrats claim primarily benefits wealthy individuals and corporations. However, some Democratic support is expected in the Senate on the business innovation bill, HR 6756. There is talk on Capitol Hill that the bill could be approved by Congress in the lame duck session toward the end of the year.
White House
The Trump administration announced its support of the Tax Reform 2.0 package in a September 26 Statement of Administration Policy. The White House praised HR 6760 for "preventing a tax increase on millions of middle-income families and small businesses after 2025." Additionally, the Trump administration praised HR 6757, saying it would "assist start-up companies and entrepreneurs by allowing them to write off more costs associated with starting their new business and by allowing them to raise capital and expand without losing their previously accrued tax benefits."
The House has approved a tax bill that would make permanent tax reform’s individual and small business tax cuts enacted last December. The controversial bill is part of Republican’s three-bill "Tax Reform 2.0" package, two of which cleared the House on September 27 (see the previous story in this Issue).
The House has approved a tax bill that would make permanent tax reform’s individual and small business tax cuts enacted last December. The controversial bill is part of Republican’s three-bill "Tax Reform 2.0" package, two of which cleared the House on September 27 (see the previous story in this Issue).
Individual, Small Business Tax Cuts
The House approved the Protecting Family and Small Business Tax Cuts Act of 2018 (HR 6760) on September 28 by a 220-to-191 vote. The bill would make permanent certain individual and small business tax cuts enacted under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97).
HR 6760 would make permanent certain TCJA individual tax cuts that are set to expire after 2025. These TCJA provisions were made temporary to comply with certain Senate budget rules applicable to the reconciliation process requiring only a simply GOP majority. Notably, these provisions include, among others:
HR 6760 would reduce federal revenue by $631 billion over the next decade, according to a cost estimate by the nonpartisan Joint Committee on Taxation (JCT), (JCX-79-18). However, House Ways and Means Chairman Kevin Brady, R-Tex., highlighted the JCT’s findings particular to the bill’s macroeconomic effects. "Tax Reform 2.0 will permanently provide over $140 billion in annual tax relief for middle-class families, boost American GDP and investment, and create 1.1 million new jobs," Brady said in a statement, citing to the JCT report.
Democratic Support
Although the TCJA did not receive one Democratic vote, HR 6760, which extends many of the TCJA’s individual provisions, received three Democratic votes. Ten Republicans voted against the bill, all of whom hail from high-tax states and oppose the $10,000 annual cap on the SALT deduction.
Over 40 Democrats voted for the Family Savings Act of 2018 (HR 6757) and the American Innovation Act of 2018 (HR 6756), which focus on enhancing savings accounts and start-up business tax breaks. All three bills are now headed to the Senate, where the package is not expected to be considered before midterm elections in November. Additionally, the entire package is not expected to be approved by the Senate. However, it is considered likely on Capitol Hill that HR 6757, which promotes retirement and family savings, could be approved by the Senate in the lame-duck session.
"It’s encouraging to receive 44 Democratic votes in support of elements of Tax Reform 2.0," Brady said in a September 28 statement. "I’m confident that working with the Senate we can advance bipartisan bills to the President’s desk," he added.
Democratic Criticism
Although the Tax Reform 2.0 package did receive some Democratic support in the House, Democrats in both the House and Senate remain largely opposed to Republican efforts to extend the TCJA’s individual and small business tax cuts. Many Democrats have criticized the TCJA for primarily benefiting wealthy individuals and corporations.
"The Republicans’ tax 2.0 legislation is another reckless tax cut for the wealthy that leaves behind average, hardworking families," Ways and Means Committee ranking member, Richard Neal, D-Mass., said on the House floor just prior to the HR 6760 vote. "In less than a year, House Republicans have handed out trillions of tax cuts for the wealthy and big corporations," Neal added in a September 28 statement released after the 2.0 package cleared the chamber.
Meanwhile, House Speaker Paul Ryan, R-Wis., praised the Tax Reform 2.0 package for propelling economic growth and helping middle income taxpayers. "On top of making lower rates for individuals and small businesses permanent, these bills create new savings options for families to plan for education and retirement,"Ryan said in a September 28 statement.
Looking Ahead
House lawmakers left Washington, D.C. on September 28 to begin campaigning ahead of midterm elections in November. The Senate is not expected to take up the Tax Reform 2.0 package, if at all, until later this fall.
As for whether any of the three bills will become law this year, Brady remains optimistic. "We had 41 Democratic votes in support of retirement savings and that innovation for start-ups. I think that has a very good chance, with bipartisan support of getting to the President’s desk this year," Brady said in a September 28 televised interview. "The [individual tax cuts] permanency bill, that’s separate, will go to the Senate after today. [Senate Majority] Leader Mitch McConnell, has made it clear – when he sees a path for 60 votes, he’ll bring it forward."
Stakeholders are urging the IRS to clarify its guidance on tax reform’s new passthrough deduction. The IRS held an October 16 public hearing on proposed rules for the new Code Sec. 199Apassthrough deduction at its headquarters in Washington D.C. The IRS released the proposed regulations, REG-107892-18, on August 8.
Stakeholders are urging the IRS to clarify its guidance on tax reform’s new passthrough deduction. The IRS held an October 16 public hearing on proposed rules for the new Code Sec. 199Apassthrough deduction at its headquarters in Washington D.C. The IRS released the proposed regulations, REG-107892-18, on August 8.
Over 20 stakeholders and practitioners spoke at the hearing. Additionally, over 300 comments on the proposed rules have been submitted to Treasury and the IRS.
Passthrough Deduction
The new 20-percent deduction of qualified business income for passthrough entities, subject to certain limitations, was enacted as part of tax reform legislation last December. The Tax Cuts and Jobs Act ( P.L. 115-97) created the new Code Sec. 199A passthrough deduction for noncorporate taxpayers, effective for tax years beginning after December 31, 2017. The deduction is scheduled to sunset in 2026.
Rental Real Estate
Several speakers at the hearing asked the IRS for guidance clarifying whether rental real estate activities are eligible for the deduction. Additionally, Troy Lewis, testifying on behalf of the American Institute of Certified Professional Accountants (AICPA), asked the IRS for guidance on specific circumstances in which rental real estate activities would not produce qualified trade or business income pursuant to the adopted Code Sec. 162 standard.
"Without further guidance clarifying when the rental of real estate would fail to rise to the level of a section 162 trade or business, unnecessary ambiguity exists that will likely create a divergence in practice," the AICPA said in its written comments. "Taxpayers are thus left to pursue their own interpretation of the rules under section 199A and the IRS will likely face greater complexity of administration."
Likewise, the Council for Electronic Revenue Communication Advancement (CERCA) submitted comments highlighting the uncertainty as to whether and when a rental property is generally considered a qualifying trade or business for purposes of the Code Sec. 199A deduction. Notably, CERCA referenced the preamble to the regulations that indicates taxpayers should look to existing case law to determine whether rental activities meet the Code Sec. 162 standard. However, existing case law does not consistently apply a set of factors that taxpayers could reliably apply as rules, according to CERCA.
Determining that all rental real estate is a trade or business for purposes of the deduction would significantly simplify the deduction, Iona Harrison said, testifying on behalf of the National Association of Realtors. Making such a determination would also simplify IRS administration, she added.
SSTB
Several speakers and a number of comment letters requested that the IRS clarify its definition of a specified service trade or business (SSTB). The SSTB limitation is one of the most controversial provisions of the deduction. SSTBs are considered a "trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading, dealing in certain assets or any trade or business where the principal asset is the reputation or skill of one or more of its employees," according to the IRS.
To that end, Major League Baseball (MLB) has pitched its assertion to the IRS that professional sports clubs are neither "personal services corporations" nor provide "services," as defined in Code Sec. 1202(e)(3)(A). The Office of the Commissioner of Baseball, which governs the 30 MLB clubs, has asserted in written comments that the business of a professional sports club is not an SSTB under Code Sec. 199A. Thus, "its owners should be allowed the full 199A deduction," Commissioner Robert D. Manfred, Jr. wrote in submitted comments.
Questions Remain
The October 16 public hearing served more as an opportunity for stakeholders to highlight issues rather than a forum for the IRS to provide answers. Treasury and the IRS are expected to consider hearing testimony and written comments when finalizing the rules. The regulations are expected to be finalized before the 2019 tax filing season.
Top Senate tax writers have introduced a bipartisan bill to prevent duplicative taxation on digital goods and services. The bill aims to establish a framework across multiple jurisdictions for taxation of digital goods and services, including electronic music, literature, and mobile apps, among other things.
Top Senate tax writers have introduced a bipartisan bill to prevent duplicative taxation on digital goods and services. The bill aims to establish a framework across multiple jurisdictions for taxation of digital goods and services, including electronic music, literature, and mobile apps, among other things.
The Digital Goods and Services Tax Fairness Act (Sen. 3581) was reintroduced on October 11 by Senate Finance Committee (SFC) ranking member Ron Wyden, D-Ore., and SFC member John Thune, R-S.D. A similar measure was previously introduced in 2015 by Thune and Wyden in the 114th Congress. A companion bill is expected to be reintroduced in the House.
Digital Marketplace
While the digital marketplace continues to evolve, federal law addressing taxation of digital goods and services "lags" behind, according to a joint press release issued by Thune and Wyden. "As a result, some consumers can be taxed multiple times on a single digitally delivered product or service by different tax jurisdictions," Thune said. "Our bipartisan legislation simply prevents this duplicative and discriminatory taxation, which will help ensure today’s digital economy isn’t held back unnecessarily and can continue to offer opportunities to entrepreneurs and consumers alike," Thune added.
"Preventing unfair taxes on music, books and other important goods and services benefits consumers and innovators alike," Wyden said. "This bipartisan legislation solves a 21st century tax riddle by establishing a comprehensive set of rules for states to follow."
The IRS has released Draft Instructions for the 2018 Form 1040. Additionally, the IRS has cautioned taxpayers that the draft instructions are subject to change. The IRS released a draft of the 2018 Form 1040 and six accompanying schedules last June.
The IRS has released Draft Instructions for the 2018 Form 1040. Additionally, the IRS has cautioned taxpayers that the draft instructions are subject to change. The IRS released a draft of the 2018 Form 1040 and six accompanying schedules last June.
Generally, the IRS does not release draft forms but has done so in this case as a "courtesy," the instructions state. "Do not rely on draft forms, instructions, and publications for filing,"the IRS wrote. Further, drafts of instructions and publications generally undergo some changes before being finalized, the IRS noted.
2018 Form 1040
Starting with the 2019 tax filing season, many taxpayers will be able to file federal income taxes on a new postcard-sized Form 1040. The IRS planned to finalize the new base 2018 Form 1040 this summer, an IRS spokesperson previously told Wolters Kluwer. "This early release is part of our standard process to invite stakeholder input into draft forms before finalizing them," the IRS spokesperson told Wolters Kluwer after the official release of the draft 2018 Form 1040.
Shorter Form, Six Schedules
The new, two-sided Form 1040 is intended to replace and consolidate current Forms 1040, 1040A and 1040EZ. "This new approach will simplify the 1040 so that all 150 million taxpayers can use the same form," the IRS said.
The shortened form reflects many of the changes to the tax code enacted under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97). Some of these changes include the higher standard deduction and the elimination of certain deductions and personal exemptions. The new form now has 23 lines, decreased from 79. However, there are now six separate schedules that some taxpayers who continue to itemize will need to include with their return.
The IRS’s new Commissioner was officially sworn in on October 1 by Treasury Secretary Steven Mnuchin. IRS Commissioner Charles "Chuck" P. Rettig will lead the implementation of tax reform enacted last December under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97).
The IRS’s new Commissioner was officially sworn in on October 1 by Treasury Secretary Steven Mnuchin. IRS Commissioner Charles "Chuck" P. Rettig will lead the implementation of tax reform enacted last December under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97).
New IRS Commissioner
"I am honored, privileged and most humbled by the opportunity to serve with you as Commissioner," Rettig said in an internal IRS message obtained by Wolters Kluwer on October 2. "The foundation of my becoming Commissioner is a deep appreciation for the IRS, its workforce and our country."
The Senate confirmed Rettig’s nomination for IRS Commissioner by a 64-to-33 bipartisan vote. The Senate Finance Committee advanced Rettig’s nomination in July. President Donald Trump announced his nomination of Rettig last February.
IRS Priorities Moving Forward
Rettig outlined several IRS priorities in his message to IRS employees. Those priorities include, among others, implementing tax reform, balancing taxpayer service with tax enforcement, and deterring tax fraud.
"I know the Service has many challenges…I also know we must continue rebuilding trust with taxpayers while implementing the once-in-a-generation tax reform bill passed by Congress in December," Rettig said. "We must work on our IT modernization efforts," he added.
Additionally, while the IRS has been working toward moving more taxpayer services online, notably, Rettig emphasized the importance of providing personalized service to taxpayers. "Providing high-quality, personalized service is a critical component in helping taxpayers understand and comply with their filing and reporting obligations,"Rettig wrote.
Rettig’s term as the 49th IRS Commissioner is scheduled to expire on November 12, 2022. John Koskinen’s term as IRS Commissioner ended in November 2017. David Kautter, Assistant Secretary for Tax Policy at Treasury, has been serving as acting IRS Commissioner in the interim.
The Senate Small Business Committee held an October 3 hearing on expanding opportunities for small businesses through the tax code. Senate lawmakers examined tax reform’s effect on small businesses and discussed witnesses’ proposals to address ambiguity in the new tax code.
The Senate Small Business Committee held an October 3 hearing on expanding opportunities for small businesses through the tax code. Senate lawmakers examined tax reform’s effect on small businesses and discussed witnesses’ proposals to address ambiguity in the new tax code.
Various provisions of the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) were discussed among lawmakers and witnesses. Specifically, Opportunity Zones under the TCJA were of particular focus.
Opportunity Zones
The TCJA created certain tax benefits for long-term business investment in Qualified Opportunity Zones, which generally include economically distressed communities. Although the TCJA did not receive a single Democratic vote, the Opportunity Zones program was generally based on a bipartisan bill sponsored by Sens. Tim Scott, R-S.C., and Cory Booker, D-N.J.
The TCJA’s Opportunity Zones program established tax incentives to spur business investment in these low-income communities to produce economic growth. Investor tax benefits include:
"Opportunity Zones are the most innovative and ambitious federal attempt to encourage long-term private investment in low-income communities in at least a generation," John Lettieri, president and CEO of Economic Innovation Group, testified. However, "investors have yet to receive the formal guidance or regulatory clarity needed to inform their decision-making," he added.
Clarity/Reporting Metrics
Witnesses told lawmakers that definitional clarity and proper reporting metrics for the Opportunity Zone program are needed. Lettieri noted that Treasury has broad authority in determining Congressional intent for defining key terms pertaining to Qualified Opportunity Zone business and investment. "These rules must be designed with practical considerations and basic market flexibility in mind. If too narrow in scope or impractical in nature, the rules would undermine the very purpose for which this incentive was created," Lettieri testified.
Additionally, John Arensmeyer, founder and CEO of Small Business Majority, stressed the importance of measuring the program’s success. Those metrics should include evaluating success "based on the number of jobs created, where those jobs are located, employee wages and the number of businesses created, particularly businesses formed by women or people of color," Arensmeyer told lawmakers.
Treasury
Treasury Secretary Steven Mnuchin recently expressed his support for Opportunity Zones. "I couldn't be more excited about the opportunity zones," Mnuchin said in an interview last week. "I think there's going to be over $100 billion dollars in private capital that will be invested in opportunity zones," he added.
Comment. The Office of Management and Budget’s Office of Information and Regulatory Affairs (OIRA) is currently reviewing proposed IRS regulations on "Capital Gains Invested in Opportunity Zones."Generally, OIRA has 45 days to review proposed regulations but may expedite the process to 10 days for rules applicable to tax reform. According to the OIRA website, the proposed rule was submitted to OIRA on September 12, and the status of review is pending.
An LLC (limited liability company) is not a federal tax entity. LLCs are organized under state law. LLCs are not specifically mentioned in the Tax Code, and there are no special IRS regulations governing the taxation of LLCs comparable to the regulations for C corporations, S corporations, and partnerships. Instead, LLCs make an election to be taxed as a particular entity (or to be disregarded for tax purposes) by following the check-the-box business entity classification regulations. The election is filed on Form 8832, Entity Classification Election. The IRS will assign an entity classification by default if no election is made. A taxpayer who doesn't mind the IRS default entity classification does not necessarily need to file Form 8832.
An LLC (limited liability company) is not a federal tax entity. LLCs are organized under state law. LLCs are not specifically mentioned in the Tax Code, and there are no special IRS regulations governing the taxation of LLCs comparable to the regulations for C corporations, S corporations, and partnerships. Instead, LLCs make an election to be taxed as a particular entity (or to be disregarded for tax purposes) by following the check-the-box business entity classification regulations. The election is filed on Form 8832, Entity Classification Election. The IRS will assign an entity classification by default if no election is made. A taxpayer who doesn't mind the IRS default entity classification does not necessarily need to file Form 8832.
"Check-the-Box" Election
An LLC with more than one member can elect tax status as:
An LLC with only one member can elect tax status as:
The IRS will assign the following classifications if no entity election is filed for an LLC (the default rules):
Typically, an LLC with more than one member will elect to be taxed as a partnership, whereas a single-member LLC will elect to be disregarded and taxed as a sole proprietorship.
If you have any questions relating to LLCs, their benefits, drawbacks, or their treatment under the Tax Code, please contact our offices.
The IRS has issued proposed reliance regulations on the 3.8 percent surtax on net investment income (NII), enacted in the 2010 Health Care and Education Reconciliation Act. The regulations are proposed to be effective January 1, 2014. However, since the tax applies beginning January 1, 2013, the IRS stated that taxpayers may rely on the proposed regulations for 2013. The IRS expects to issue final regulations sometime later this year.
The IRS has issued proposed reliance regulations on the 3.8 percent surtax on net investment income (NII), enacted in the 2010 Health Care and Education Reconciliation Act. The regulations are proposed to be effective January 1, 2014. However, since the tax applies beginning January 1, 2013, the IRS stated that taxpayers may rely on the proposed regulations for 2013. The IRS expects to issue final regulations sometime later this year.
The surtax applies to individuals, estates, and trusts. The surtax applies if the taxpayer has NII and his or her "modified" adjusted gross income exceeds certain statutory thresholds: $250,000 for married taxpayers and surviving spouses; $125,000 for married filing separately; and $200,000 for individuals and other taxpayers. The tax is broad and can raise tax bills by hundreds, if not thousands, of dollars.
Complex provisions
The regulations are extensive and complex. They address a number of issues that were not answered in the statute, such as the interaction of Code Sec. 1411 (the surtax provisions) and Code Sec. 469 (passive activity loss rules). Significant areas addressed in the proposed regulations include:
Some issues, however, are not yet addressed, such as the application of the Code Sec. 469 material participation rules to trusts and estates. Further guidance from the IRS is expected.
Borrowed definitions and principles
Net investment income that is subject to the new 3.8 percent tax generally includes interest and dividend income as well as capital gains from investments. But Code Sec. 1411 doesn't stop there, seeking to tax "passive activities" and contrasting those activities with a "trade or business" in often complex ways.
Because Code Sec. 1411 does not define many important terms, the regulations use definitions from several other Tax Code provisions. For example, the definition of a trade or business is determined under Code Sec. 162, regarding trade or business expenses. This definition is essential to Code Sec. 1411, since the application of each of the three categories of net investment income depends on determining whether the income is from a trade or business. The regulations also borrow the definition of a disposition, which applies to category (iii) income, from other provisions, such as Code Section 731 (partnership distributions) and Code Sec. 1001 (dispositions of property).
New elections available
The regulations provide certain elections that may be beneficial to many taxpayers. Taxpayers that engage in multiple activities under Code Sec. are allowed to make another election to regroup their activities. Taxpayers married to a nonresident alien can elect to treat their spouse as a U.S. resident, which allow more income to escape the 3.8 percent surtax.
Net investment income generally includes interest and dividend income as well as capital gains from investments. To prevent avoidance of the tax, the regulations include substitute payments of interest and dividends in the definition. The IRS also warned in the preamble to the proposed regulations that it will scrutinize activities designed to circumvent the surtax and will challenge questionable transactions using applicable statutes and judicial doctrines. The IRS further warned that taxpayers should figure their exposure to the 3.8 percent tax quickly since liability for this additional tax must be included in quarterly estimated tax computations and payments starting with first quarter 2013.
Please feel free to contact this office for a personalized review of how the 3.8 percent tax may impact you, and what compliance and planning steps should be considered as a consequence.
Effective January 1, 2013, a new Medicare tax takes effect. The Additional Medicare Tax imposes a 0.9 percent tax on compensation and self-employment income above a threshold amount. Unlike regular Medicare tax, the Additional Medicare Tax has no employer match but employers have withholding obligations. The IRS issued proposed reliance regulations about the Additional Medicare Tax in December 2012.
Effective January 1, 2013, a new Medicare tax takes effect. The Additional Medicare Tax imposes a 0.9 percent tax on compensation and self-employment income above a threshold amount. Unlike regular Medicare tax, the Additional Medicare Tax has no employer match but employers have withholding obligations. The IRS issued proposed reliance regulations about the Additional Medicare Tax in December 2012.
Medicare
Medicare is funded through payroll taxes. Employees and employers (and self-employed individuals) all pay into Medicare. Employees and employers each pay Medicare tax at a rate of 1.45 percent (self-employed individuals pay at a combined rate but are allowed to deduct half of the Medicare tax as an adjustment to income). The Additional Medicare Tax is a new tax that may apply to certain taxpayers in addition to regular Medicare tax. The new tax was part of the Patient Protection and Affordable Care Act (Affordable Care Act), which was passed by Congress in 2010. However, Congress delayed the start date of the new tax until 2013.
Liability
Generally, an individual is liable for Additional Medicare Tax if the individual's wages, compensation, or self-employment income (together with that of his or her spouse if filing a joint return) exceed the threshold amount for the individual's filing status. Only individuals with incomes above the threshold amount will be liable for the new tax and if their employer does not withhold it, they will have to pay it when then they file their returns.
The threshold amounts are: $250,000 for married couples filing jointly; $200,000 for single individuals, head of household (with qualifying person) and qualifying widow(er) with dependent child; and $125,000 for married couples filing separately.
Withholding
An employer must withhold Additional Medicare Tax from wages it pays to an individual in excess of $200,000 in a calendar year, without regard to the individual's filing status or wages paid by another employer. The IRS explained in its proposed reliance regulations that the employer has this withholding obligation even though an employee may not be liable for Additional Medicare Tax because, for example, the employee's wages together with that of his or her spouse do not exceed the $250,000 threshold for married couples filing jointly.
Let's look at an example from the IRS proposed reliance regulations:
Elena, who is married and files a joint return, receives $100,000 in wages from her employer for the calendar year. Caleb, Elena's spouse, receives $300,000 in wages from his employer for the same calendar year. Elena's wages are not in excess of $200,000, so her employer does not withhold Additional Medicare Tax. Caleb's employer is required to collect Additional Medicare Tax only with respect to wages it pays which are in excess of the $200,000 threshold (that is, $100,000) for the calendar year.
Planning considerations
Taxpayers who believe they may be liable for the Additional Medicare Tax in 2013 and beyond should carefully plan ahead. The IRS has cautioned that an individual may owe more than the amount withheld by the employer, depending on the individual's filing status, wages, compensation, and self-employment income. All these factors come into play in planning for the Additional Medicare Tax.
One strategy may be to make estimated tax payments and/or request additional income tax withholding. Our office can help you determine which strategy would work best for you.
Employers
There is no employer match for the Additional Medicare Tax. However, the Affordable Care Act and the IRS proposed reliance regulations require employers to withhold Additional Medicare Tax on wages it pays to an employee in excess of $200,000 in a calendar year, beginning January 1, 2013. If an employer fails to withhold, the IRS may impose penalties on the employer and the employee would be liable for the tax.
Reliance regulations
The regulations issued by the IRS in December 2012 are proposed reliance regulations. The IRS explained that it intends to finalize the proposed regulations in 2013. Taxpayers may rely on the proposed regulations for tax period beginning before the date that the regulations are finalized.
If you have any questions about the Additional Medicare Tax, please contact our office.
Beginning with 2012 Forms W-2, large employers must report the aggregate cost of employer-sponsored health insurance provided to employees. 2012 Form W-2s must be furnished to employees by January 31, 2013.
Beginning with 2012 Forms W-2, large employers must report the aggregate cost of employer-sponsored health insurance provided to employees. 2012 Form W-2s must be furnished to employees by January 31, 2013.
For tax years beginning on or after January 1, 2011, the Patient Protection and Affordable Care Act (PPACA) required that employers report the aggregate cost of employer-sponsored health insurance provided on Form W-2, Wage and Tax Statement. The IRS then exempted all employers from the requirement for 2011, making 2011 reporting optional.
Reporting took effect in early 2012, but only for large employers filing 250 or more Forms W-2 for the preceding calendar year (2011). Small employers are exempt from reporting for 2012 and beyond, until the IRS issues further guidance. An employer does not have to report the cost if it is not required to issue a Form W-2. This would be the case for a retiree or other former employee who does not receive compensation.
The aggregate reportable cost should be shown on Form W-2, Box 12, using Code DD. The IRS has reiterated that reporting is for informational purposes only, and that the cost of health insurance generally remains excludable from income.
Reporting applies to applicable coverage under any group health plan provided by an employer or employee organization, if the coverage is excludable from the employee's income or would have been excludable if provided by the employer. Costs for self-insured plans and plans of self-employed persons are covered, unless the only coverage provided by the employer is a self-insured plan that is not subject to COBRA continuation coverage requirements (e.g. a self-insured church plan). Coverage does not include long-term care; accident or disability coverage; coverage for treatment of the mouth; and coverage only for a specified illness or disease.
Reportable costs include both employer costs and employee costs for the health insurance, even if the employee paid his or her share through pre-tax or salary reduction contributions. The aggregate cost includes the cost of coverage included in the employee's income, such as the cost of coverage for a person who is not a dependent or a child under age 27.
However, costs do not include amounts contributed to an Archer Medical Savings Account, health savings account, or health reimbursement arrangement, and salary reduction contributions made to a flexible spending arrangement.
Reporting is required of most employers, including federal, state, and local governments, and churches and other religious organizations.
Please contact this office if you would like further information on how these new reporting obligations may apply to your business.