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Tax Prep War Story

Medical Expenses:  

Recently, an individual (let’s refer to him as Mr. X) that has been my client for three years came in to pick up his return.  He happily handed me the remainder of my fee as he entered my office. I was soon to learn the nature of his joyous demeanor.

But first, let us back track a bit.  To date, this individual (who’s 65 years of age) has only been able to file Single status.  Mr. X’s adjusted Gross Income (or AGI) for 2013 was about $56,000.  Also pertinent to this story, is the fact that it’s the policy of W SCULLY CPA PC to send clients an engagement letter and tax organizer to aid in the efficient and effective preparation of their tax return.   

Via a telephone conversation, I was advised that $4,200 of out-of-pocket medical expenses were incurred on account of the fact that he has no medical insurance. I prudently informed Mr. X that the aforementioned expenditure may impact his refund but would be undetermined until all the facts for the tax year are brought to the fore. We spoke no further about the matter.  He dropped off his tax documents while I was out of the office. Based on information presented, the return was prepared and reviewed.  

He happily paid me because he was under the impression that he would be getting $4,200 back from the government.  I disappointingly had to inform him that he had been misled.  I further explained that his medical expenses had to exceed 7.5% of his AGI in order to be considered an itemized deduction.  And that all his itemized deductions must be substantially greater than the standard deduction for his filing status.  In Mr. X’s case, the standard deduction is $7,600.  When we talked about his other potential deductions, we realized that those only amounted to $3,000.  Therefore, he could not itemize his tax return.

Sufficed to say, Mr. X wasn’t very happy and began to complain about this country “…only takes and doesn’t give anything back…” “I am moving back to my country of birth,” he explained.  Apparently, it was his dentist that told him he would be getting the $4,200.  

Lessons learned or affirmed:
·         Insist clients complete tax organizer (some folks don’t like the paperwork even though it’s generally 9 – 11 pages long) ·         Always take time to discuss any and all issues with client ·         Don’t be afraid to give it to them straight (saves the hassle later)  

Clients should:
·         Always complete tax organizers and provide all pertinent info to the preparer ·         Always ask the preparer questions (don’t take tax advice from your dentist) ·         Be reasonable (almost nothing in the code results in a dollar-for-dollar credit or deduction)  

Need more info?  Please contact W Scully CPA PC at 718-938-0387 orwayne@wscullycpa.com.  You may visit us at www.wscullycpa.com or 366 Stuyvesant Avenue, Brooklyn, NY 11233

IRS Tax Tip 2014-10: What You Should Know about AMT

IRS Tax Tip 2014-10: What You Should Know about AMT

IRA Contributions

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Watch Out for Tax Scams as Filing Season Opening Nears

Watch Out for Tax Scams as Filing Season Opening Nears

Obama-care: love it or leave it

The Affordable Care Act

After hearing about how complicated this law is and that many were upset about its implementation, I decided to make it part of my CPE (Continuing Professional Education) requirement for 2014.

Recently, I viewed the webinar on Obama-care and I must say, it doesn't, at least in my opinion, appear to be a bad piece of legislation.  I caveat that by stating that I am not an attorney neither am I a legislator.  I was just very curious to know the tax implications especially as I anticipate getting questions about it from some clients.

At a minimum, many may ask some of the following questions: How will this benefit me, my family and my small business?  Must I take advantage of it?  If I don't take advantage, are there any consequences?  I will try to answer as many of the questions in bullet format largely because I would like to focus on the salient parts of the presentation. 

For individuals

1.  The "Pay or Play" mandate requires that every individual with household income > 138% of the Federal Poverty Line must enroll in a plan that offers "minimum essential coverage" OR pay a penalty.
2. If individual qualifies for medicare, medicaid or a "qualified" employer sponsored plan does have to meet the Pay or Play mandate.
3. The penalty for 2014 is 1% of household income > threshold or $95 whichever is greater with a maximum not to exceed 3 times the individual penalty.
4. Individuals subject to the "Pay or Play" mandate may also qualify for a premium tax credit that can be used to pay for the purchase of a qualified health plan purchased on the state health exchange.
5. The plan purchased must not exceed the individual's income by more than 9.5%.

For Businesses

1. All businesses must comply with the mandate starting January 1, 2015.
2. Only applicable large employers, which equate to businesses with employed at least 50 "full-time employees,"are subject to the law.
3. This 50 full time employees criterion does not include seasonal employees who worked for less than 120 days in a calendar year but may include part-time employees.
4. Generally, sole proprietors, partners in a partnership and 2-percentr S corporation shareholders are not considered employees for the purposes of this law.
5. Since employees compensated on a commission basis do not have set hours of work, the employer must implement a "reasonable good faith method" in determining hours worked to meet requirements of the rule.
6. When the law takes effect for employers there will be a look-back measurement period for determining which employees must be offered insurance.
7. Two penalties for employers are as following:

• Penalty for not offering a group health benefit plan coverage for all its full-time employees
• Penalty for not having an affordable (i.e., employee's share of the premium may not exceed 9.5%) OR the plan's share of covered health benefit costs (the "actuarial value") does not offer minimum value - it is less than 60%

More money in your paycheck or not?

As part of the Tax Relief Act of 2010, Social Security tax rates will be lowered by two percent. The employee-portion of Social Security taxes will be reduced from 6.2% to a temporary rate of 4.2% for 2011 only.This 2% tax break also applies to self-employed individuals. Medicare taxes are unchanged, the employer-portion of Social Security remains 6.2%, and the Social Security wage base remains $106,800 for 2011.