July 2014 Letter

Happy Independence Day! While we look forward to the fireworks that mark the month, there could be fireworks for millions when the IRS tries to take back health care Premium Tax Credits at the end of the year. If you are using the Health Exchange for your insurance you will want to be aware of this tax risk. There is also news on two other fronts, first the newly announced Taxpayers' Bill of Rights and potential payment relief for those with student loan debt. All this and an article exploring the status of home affordability round out this month's newsletter.
As always, should you know of someone who may benefit from this information please feel free to forward this newsletter to them.

Prepare for the "Claw Back" Credit

Is a tax surprise of over $1,000 in your future?

Millions of taxpayers may see a surprising tax bill in 2014 as the Federal government asks them to repay (claw back) some or all of the new health insurance Premium Tax Credit claimed on the Affordable Care Act insurance exchanges. Could this impact you or someone you know? If so, here is what you need to know. Background A core part of the Affordable Care Act (ObamaCare) was the establishment of a Health Insurance Marketplace where the uninsured shop and sign up for health care insurance. Some states created their own online system while other states opted for the Federal website known as the Federally-facilitated Marketplace (FFM). When using the Marketplace, qualified participants could apply a new insurance Premium Tax Credit to reduce their health insurance bill. Millions of taxpayers are receiving this tax credit each month. The credit can be paid directly to health insurance companies to reduce monthly health insurance premiums.
The Insurance Premium Tax Credit Problem Per a recent report from the Department of Health and Human Services, over 85% of the eight million participants who selected health insurance in the new Marketplace tool are using the new Premium Tax Credit to help pay their monthly premium. The qualifications to receive the tax credit are based on self-reported income. The contractor hired by the government to audit this information (Serco) is reporting over 4 million discrepancies between what is claimed on the insurance enrollment to qualify for the tax credit and what can be found in government records about these individuals. The problems consist of: Mismatching income Incorrect Social Security numbers Residency and immigration problems Conflicts with other federal health programs
Action Steps If you are currently receiving your health insurance through these new exchanges and have been using the Premium Tax Credit to reduce your premium, please consider the following; File a tax return. Many taxpayers that did not need to file a tax return in prior years must now do so to correctly establish qualifications to receive the Premium Tax Credit. Confirm your health enrollment form. If you have been using the health insurance Premium Tax Credit, review your initial enrollment form. Is it still accurate? If not, please make the necessary corrections now. While it will not alleviate the need to repay some of the excess credit you received, it will help keep the tax credit repayment problem from getting any bigger over the balance of the year. Changes in your situation. If you have any change in your situation, review and update your health insurance enrollment information. This includes, at minimum, a death, birth, marriage, or divorce in your family. Plan for the claw back. You may wish to forecast your potential credit repayment risk. The recent government study shows that the current insurance Premium Tax Credits are reducing insurance premiums by 76% with a monthly tax credit of over $221. As an example, if an error is found on your application that requires a 50% repayment of the credit, you could face a federal claw back tax bill of over $1,300. The government is currently trying to work through the reported inconsistencies on enrollment forms. Should you receive notice from the government please ask for help. The financial impact of waiting could cause an unpleasant surprise at tax time.

Taxpayer Bill of Rights

In June, the IRS announced the adoption of a Taxpayer Bill of Rights. The ten rights are highlighted here for your information. These rights have been in the tax code for years, however per Nina Olson head of the IRS Taxpayer Advocate Service, "...taxpayer surveys conducted by my office have found that most taxpayers do not believe they have rights before the IRS and even fewer can name those rights." The IRS hopes that by centralizing and publicizing these rights, taxpayers will become more aware. How might this impact your experience with the IRS? That is anyone's guess as it is not covered in the IRS Bill of Rights announcement.

1. The Right to Be Informed Taxpayers have the right to know what they need to do to comply with the tax laws. They are entitled to clear explanations of the laws and IRS procedures in all tax forms, instructions, publications, notices, and correspondence. They have the right to be informed of IRS decisions about their tax accounts and to receive clear explanations of the outcomes. 2. The Right to Quality Service Taxpayers have the right to receive prompt, courteous, and professional assistance in their dealings with the IRS, to be spoken to in a way they can easily understand, to receive clear and easily understandable communications from the IRS, and to speak to a supervisor about inadequate service. 3. The Right to Pay No More than the Correct Amount of Tax Taxpayers have the right to pay only the amount of tax legally due, including interest and penalties, and to have the IRS apply all tax payments properly. 4. The Right to Challenge the IRS's Position and Be Heard Taxpayers have the right to raise objections and provide additional documentation in response to formal IRS actions or proposed actions, to expect that the IRS will consider their timely objections and documentation promptly and fairly, and to receive a response if the IRS does not agree with their position. 5. The Right to Appeal an IRS Decision in an Independent Forum Taxpayers are entitled to a fair and impartial administrative appeal of most IRS decisions, including many penalties, and have the right to receive a written response regarding the Office of Appeals' decision. Taxpayers generally have the right to take their cases to court.   6. The Right to Finality Taxpayers have the right to know the maximum amount of time they have to challenge the IRS's position as well as the maximum amount of time the IRS has to audit a particular tax year or collect a tax debt. Taxpayers have the right to know when the IRS has finished an audit. 7. The Right to Privacy Taxpayers have the right to expect that any IRS inquiry, examination, or enforcement action will comply with the law and be no more intrusive than necessary, and will respect all due process rights, including search and seizure protections and will provide, where applicable, a collection due process hearing. 8. The Right to Confidentiality Taxpayers have the right to expect that any information they provide to the IRS will not be disclosed unless authorized by the taxpayer or by law. Taxpayers have the right to expect appropriate action will be taken against employees, return preparers, and others who wrongfully use or disclose taxpayer return information. 9. The Right to Retain Representation Taxpayers have the right to retain an authorized representative of their choice to represent them in their dealings with the IRS. Taxpayers have the right to seek assistance from a Low Income Taxpayer Clinic if they cannot afford representation. 10. The Right to a Fair and Just Tax System Taxpayers have the right to expect the tax system to consider facts and circumstances that might affect their underlying liabilities, ability to pay, or ability to provide information timely. Taxpayers have the right to receive assistance from the Taxpayer Advocate Service if they are experiencing financial difficulty or if the IRS has not resolved their tax issues properly and timely through its normal channels.

In the News. Student Loan Interest Relief? With student debt loads now over $1 trillion and rising, any relief is a welcome one for students. Especially since over 71% of students leave college with some debt. In a recent presidential executive order, qualified student borrowers of Federal Direct Loans can cap their monthly loan payments to 10 percent of discretionary income. The goal is to make this repayment option available by December 2015. The government is also going to focus on improving communication to holders of student loan debt to better outline the many available repayment options. Remember, those with student loans can also reduce their taxable income in 2014 by up to $2,500 in qualified student loan interest payments.

Ideas to Make Homeownership Affordable

Much is being written about how it is becoming harder to purchase a first home. Is home ownership out of reach?

The problem For years the values of homes kept going up with no visible ceiling in sight. Then came the 2008 recession and housing market collapse. While housing prices adjusted downward, the ability to obtain financing became much more difficult. Added to this problem was the increased difficulty of potential young home-buyers to make ends meet while carrying significant debt loads from college. While the housing market has now rebounded and interest rates are low, the median household income has not risen much to help take advantage of the home buying opportunity.

Ideas to make home ownership more affordable Given the difficulty to own your first home, here are some ideas to consider to make your dream a reality. Location. One strategy is to buy a more affordable, less expensive house in a great location. Over time this smaller starter home will more likely increase in value providing some equity for your next purchase. Start small. Consider making a condo in a high demand area your first home. As long as you do not over pay for the condo, you will be building equity for your next purchase. Save money. Start saving money for a down payment now. Ten percent is a good target, with twenty percent being ideal. Remember, new regulations make it more difficult to take gifts as a down payment for a home. If you have someone willing to support your home purchase, try to receive the down payment gift long before you need it. Check out low down payment lending programs. There are a number of options to reduce the amount of down payment required on your first home. The most common is FHA, but the fees can be high. The Veteran's Administration has a no down payment option. But also check out local banks that have small down-payment requirements when you purchase mortgage premium insurance. Get pre-approved. Shop banks and financial institutions prior to looking for a home. They can walk you through the financing process, check your credit, and give you an estimate of what you can afford. Have the bank provide a pre-approved letter to help in your negotiations with the seller. Use "handy" to make it affordable. If you are handy with tools and making repairs, consider targeting a well built home that just needs a face-lift. This do-it-yourself attitude can save you money on the purchase price of a home that needs some work. Use tax breaks. Forecast your taxes with the benefit of home mortgage interest and property taxes as itemized deductions. Remember you can also use up to $10,000 in traditional IRA funds penalty-free to help pay for your first home. You will still owe income tax on the withdrawal, but can avoid the 10% early withdrawal penalty. Buy direct. Consider alternatives to the traditional home buying experience. Talk to friends and family to network into target neighborhoods and find homes not yet listed. Perhaps you can even find a seller willing to take a contract for deed for your home purchase to save on financing fees. Control the offer. Offer only what you believe you can afford, not necessarily the seller's asking price. You may get pressure to offer more, but resist the temptation. You are the one that will need to make the mortgage payments in the years to come.

As always, should you have any questions or concerns regarding your situation please feel free to call.