Tips for Navigating a Changing Tax Landscape

20 Jan Tips for Navigating a Changing Tax Landscape

By JAN M. ROSEN FEB. 14, 2015

What’s new this tax season? In a word: Obamacare. That’s the answer given by many tax professionals.

People who overcame the challenges of Healthcare.gov and succeeded in buying health insurance under the Affordable Care Act last year now face a new set of hurdles in the form of daunting tax forms. So do business owners who offer coverage to employees under the law’s Small Business HealthOptions Program. But the good news for both is that they may receive a tax credit that reduces taxes dollar for dollar.

Barbara Weltman, a lawyer in Vero Beach, Fla., and the author of “J.K. Lasser’s 1001 Deductions & Tax Breaks 2015,” said it could be a big credit if you qualify for it, but warned, “It is not that easy to qualify.”

For qualifying business owners the credit for 2014 is 50 percent, up from 35 percent in 2013. Individuals who bought insurance through an exchange and had household income between $11,490 and $45,960 last year may be able to claim a tax credit on the new Form 8962.

Most people estimated their income when they bought their coverage and received an advance on the credit in the form of payments directly to their insurance company. Now that the income numbers are real, taxpayers may get a refund — or may owe the government more money.

“It is extremely complicated,” Ms. Weltman said, referring to the form and the instructions for filling it out. She recommended using tax software with interview questions rather than trying to fill out the form by hand based on the official instructions.

People with incomes below $60,000 qualify for the “Free File” program, in which the Internal Revenue Service teams up with various software providers. Information is available at irs.gov/uac/Free-File:-Do-Your-Federal-Taxes-for-Free.

In addition, Intuit, the maker of TurboTax software, offers free assistance at TurboTaxHealth.com to help people determine if they are eligible for low-cost health insurance and what the tax penalty will be if they have not bought it.

Most taxpayers — those with employer-provided health insurance or Medicare or Medicaid — do not have to fill out any complicated forms. All they have to do is check a box on the Form 1040. A third group of people qualify for exemption from coverage, and they need to fill out Form 8965. More information is available at irs.gov/pub/irs-pdf/p5201.pdf.

Large employers are required to report health insurance coverage on employee W-2 forms for 2014, but that shouldn’t cause any problems. “Don’t worry,” Ms. Weltman said. “It’s not taxable” to employees.

Identity Theft

Identity theft is not limited to stealing credit card data.

Thieves also use stolen Social Security numbers to file returns and claim refunds, generally early in the filing season. And the I.R.S. said last month that trying to stop this kind of theft is a top priority. It opened 1,063 identity theft investigations last year, it said, and that led to 748 sentences imposed in criminal cases.

Julian Block, a tax lawyer in Larchmont, N.Y., said taxpayers could protect themselves from identity thieves by filing a new Form W-4 with employers and keeping close tabs on quarterly payments of estimated taxes so that they have a balance due, not a refund, when they file their tax returns.

“If you file a return claiming a refund and the I.R.S. says, ‘We’ve already received a return claiming a refund and paid it,’ they will investigate,” Mr. Block said. “Eventually you’ll get your refund, but it could be a considerable time. If you have a balance due and send in a check, if the I.R.S. has already sent a refund, they’ll have to sort that out, but you won’t have a problem.”

Tax professionals have long recommended that taxpayers limit withholding to avoid big refunds simply because too much withholding amounts to giving the Treasury an interest-free loan.

The Job Hunt

Job search expenses may provide a tax deduction for some people. After all, the nation’s unemployment rate fell to 5.6 percent at the end of last year from 9.9 percent five years earlier, and that surely reflects a lot of job searches.

Even so, many searchers may not qualify for a deduction, said Greg Rosica, a contributing author to the “EY Tax Guide 2015,” published by Wiley, and a tax partner at Ernst & Young. Mr. Rosica, who leads the firm’s southeast area private client services practice in Tampa, Fla., gave three reasons that would bar many job seekers from claiming a deduction:

■ These expenses are classified as “miscellaneous itemized deductions,” which can be taken only if the total exceeds 2 percent of adjusted gross income.

■ Online job searches these days do not generate all of the travel and printing expenses that seekers used to rack up.

■ The new job must be in the same field as one’s previous employment. Many people change fields to land a new job.

Of course job seekers who meet all the qualifications — perhaps paying for outplacement counseling, travel and other costs — may claim the deduction, even if their searches were not successful.

State Sales Taxes

State income taxes may be deducted on your federal tax forms, but Mr. Rosica said that for residents of some states, it may be worth considering whether to deduct state sales taxes instead.

This may be done on Schedule A, and for people in states like Florida and Texas that do not have a state income tax, deducting sales taxes makes a great deal of sense. It may also be the right thing to do for people in other states who have bought a big-ticket item like a car in the past year.

It may also make sense for retirees because many states give tax breaks for Social Security, retirement account distributions and pensions, thus lowering adjusted gross income.

Extra Medical Expenses

The Affordable Care Act hasn’t changed one reality: Health insurance doesn’t take care of all medical expenses.

Mr. Block pointed out that such unreimbursed expenses are still deductible — but only when they exceed certain thresholds. For most people, it is 10 percent of adjusted gross income — but it is 7.5 percent for people 65 or older.

The cost of hearing aids and dental care, private-duty nursing, travel to and from medical appointments, including tolls and parking, are frequently not reimbursed and are eligible for inclusion as deductions.

Volunteers, in a hospital or as a delegate to a religious convention for example, may also incur deductible expenses for travel, meals and other out-of-pocket costs, he said.

Keeping Good Records

Mileage deductions vary, depending on your reason for getting on the road. The I.R.S. allows 56 cents a mile for unreimbursed business miles last year, 23.5 cents a mile for medical or moving purposes and 14 cents a mile for charitable use.

Keeping good records is the key to being able to claim deductions of many sorts.

One way to help is to use a designated credit card for any outlay that may be deductible, Mr. Rosica said, and then go online to get an end-of-year report from the card issuer.

Brittney Saks, the United States personal financial services leader for PricewaterhouseCoopers, pointed out that most deductions need third-party documentation, like a Form 1098 from a bank reporting mortgage interest, or a receipt from a charity for contributions above $250, but the travel and out-of-pocket charitable expenses depend on personal records.

Many people overlook these deductions because of the bother of having to always carry a journal to jot them down. But most of us carry a smartphone, which can be used to take notes.

There is no specific requirement for how to keep records, Ms. Saks said. The important thing is to note the expenses as they are incurred.

Another area where record-keeping is important, she said, is investments. When a holding is sold, for example, both the cost basis and the sale price and the date of each must be reported to determine whether the taxpayer has a gain or loss.

Your brokerage firm or fund company may provide that information, but you may need to go over your own records to be sure the data is accurate, she said.

Under current rules, if the asset sold is an inherited one, Mr. Block said, its basis is not the original owner’s cost but its value on that owner’s day of death. If the inheritance is a publicly traded stock, the day-of-death value is easily obtained. The value of other assets — collectibles, real estate, artwork — may be more difficult to determine, but determining that value could bring big tax savings.

Say a man inherited a family home in 2014 from a parent who died in 2013. It may have cost $50,000 in 1970 and risen to 10 or 12 times that much by 2013, then risen just a few thousand more by 2014, when the son sold it. The son is liable for taxes on the relatively small gain in value after he inherited the house, not on the big gains that occurred in previous years.

Family matters can be important for current returns and for future tax planning. Sidney Kess, a certified public accountant and lawyer with Kostelanetz & Fink in New York, gave several examples.

In one, a widower who lived alone filed as single, but in late 2013 his daughter’s marriage broke up, and she and her three children moved in with him. It was intended as a temporary move but lasted all last year.

He can file as head of household and claim them as dependents because he provided more than half their support. That will substantially reduce his taxes.

Mr. Kess also pointed out that alimony is deductible by the payer, who must report the recipient’s name and Social Security number. The recipient must report alimony received as income, and a recipient who fails to do so is inviting trouble from the I.R.S., Mr. Kess said.

Many affluent people help adult children or grandchildren financially. Rather than writing a check, they should consider giving appreciated or dividend-paying stocks, Mr. Kess suggests.

That can help the recipients because long-term capital gains and dividends are tax-free for people in the 10 percent and 15 percent tax brackets. Any individual can give up to $14,000 each (that is $28,000 for a couple) to as many people as they like with no gift tax consequences.

Such gifts can also be a big tax saver for owners of incorporated small businesses, who can give shares in it to family members and set the size of any dividends they pay. They may use the gifts as a long-term estate-planning strategy to transfer assets to adult children. That is a complicated matter that needs individual tax advice from an expert in trusts and estates.

Correction: February 22, 2015

An article in the special Your Taxes section last Sunday about tips to avoid pitfalls in preparing 2014 tax returns misstated the downside of excess withholding. It amounts to an interest-free loan to the Treasury, not a tax-free loan.

A version of this article appears in print on February 15, 2015, on page BU8 of the New York edition with the headline: Tips for Navigating a Changing Tax Landscape. Order Reprints| Today’s Paper|Subscribe

Source: http://www.nytimes.com/2015/02/15/business/yourtaxes/tips-for-filing-taxes.html?ref=topics