By Christi Milligan
Senior Staff Writer
Their clients may not have been blindsided, but with some renewal premiums going up as much as 100 percent, Delaware accountants admit that the brass tacks of the Affordable Care Act (ACA) are sobering.
Funneling concerns to their most trusted insurance brokers, accountants are busy with other fine points of the ACA initiative: The new 0.9 percent Medicare surtax and the 3.8 percent tax on net investment.
Add to that Congress’ failure to extend expired tax provisions – a move that has rankled local CPAs and caused the Internal Revenue Service director to fire off a letter to Congress earlier this month.
“This is a huge hindrance in both our ability to advise our clients and taxpayers’ ability to make decisions in their businesses,” said Brian Stratton, director at Horty & Horty. “Right now is the perfect time of year to review companies’ 2014 year-to-date numbers in order to help them project their tax liabilities that they can expect in April and plan transactions prior to year-end to minimize that liability. Without certainty as to the tax law in place, planning these transactions becomes difficult.”
According to Stratton, part of that code provides for small businesses to expense certain asset acquisitions such as equipment. “In recent years, taxpayers eligible for this benefit could expense up to $500,000 per year,” he said. “Without the extender legislation being passed, this benefit is scheduled to drop down to only $25,000 for 2014.”
“An economy relies on people spending money,” reminded Donald J. Bromley, a partner at Gunnip & Company in Wilmington. “Nine months have passed in this tax year – how do you tell a client what to do?”
In an industry and an economy where careful planning is crucial, Bromley said it’s funny that Congress is responsible for what may be a colossal hiccup in tax return filings in 2015.
In his letter, IRS Commissioner John Koskinen warned of the stress on “the entire tax community, including tax professionals, software providers and tax volunteers, who are all critical to the successful operation of our nation’s tax system.”
It’s a concern shared by Bromley. Tax extenders are comprised of more than 50 expired tax laws awaiting Congressional approval. According to Bromley, they range from deductions for school teachers to IRA moneys donated to charities.
“Charities rely on this money,” said Bromley, offering an example: “Retirees can have money from their IRA given directly to charity.”
Bromley said there’s no definitive word from Congress on the tax extenders, echoing a widespread mindset that mid-term elections are to blame. “Unfortunately, it’s more of the same and people become numb and there’s apathy.”
Two other ACA provisions at the core of discussions between accountants and their clients are the Medicare surtax and Net Investment tax. Both provisions were enacted in 2010 but didn’t take effect until 2013. “Those two taxes were enacted as part of the ACA, but I do not think most taxpayers link the two together,” said Stratton.
Stratton said that his team knew the years after the 2010 passage of the Affordable Care Act (ACA) could mean radical changes employers, small business owners and individuals alike.
Aimed at higher-income earners, the 3.8 percent tax on net investment income applies to taxpayers with an adjustable gross income over $200,000 who file individually or $250,000 for married couple who file jointly, on income from interest, dividends, annuities, royalties and rents.
The net investment income tax is complicated, but Stratton said he sees a fair number of people who fit the category. “It impacts their interest, dividends, royalties, capital gains – or even if you’re invested in other businesses that you’re not actively working in,” he said. “This has always been great for taxpayers – we always thought it was a good classification, but with the new tax it’s just not so good anymore.”
Being invested in a business that you’re not actively engaged in or owning rental properties can prove expensive under the new tax provision. Stratton said clients need to meet one of seven tests so that passive income can become nonpassive.
The 0.9 percent Medicare tax on wages applies to the earnings of self-employed individuals and wages in excess of the same thresholds.
“The .9% Medicare surtax is a surprise to many dual income families,” said Bromley. “It is based on the spouses’ combined Medicare Tax wages that exceed $250,000. It needs to be planned for because when the combined wages exceed the threshold, it will end up being due on the joint federal form 1040.”
Bromley called it an unwelcomed surprise. He said that the tax is not withheld if separately they do not each exceed $200,000 because employers are not required to withhold extra amounts unless the employee’s wages exceed $200,000.
One way to plan for it? Have the employed withhold more by completing a new W-4, or by paying estimated taxes throughout the years.
“The ACA was an enormous piece of legislation and contained numerous provisions, so it became important to make sure all of our clients were educated on the various provisions,” said Stratton. “Due to the varied effective dates of the ACA provisions, we tried to tackle each year’s issues in the year prior to its effective date to allow for planning opportunities.”