Key changes affect the self-employed's health insurance deduction for 2010

Self-employed taxpayers and their advisers should be aware that on the 2010 return there are a number of key changes, almost all positive, that affect the Code Sec. 162(l) self-employed's health insurance deduction. This article surveys what's new for this key deduction on the 2010 return.
Background. A self-employed individual (or a partner or a more-than-2%-shareholder of an S corporation) can deduct as a business expense 100% of the amount paid during the tax year for medical insurance. (Code Sec. 162(l)(1)(B)) No deduction is allowed to the extent the deduction exceeds the individual's earned income as defined in Code Sec. 401(c) (net earnings from self-employment) derived from the trade or business for which the plan providing the coverage is established. (Code Sec. 162(l)(2)(A)) For purposes of applying the earned income limit to the deduction of a more-than-2% S corporation shareholder, that shareholder's wages from the S corporation are treated as his earned income. (Code Sec. 162(l)(5)(A))
Changes to keep in mind. The following changes affect the self-employed's health insurance deduction for the 2010 year.
• The self-employed individual's health insurance deduction is also allowed in calculating net earnings from self-employment for purposes of the self-employment tax for tax years beginning in 2010. (Code Sec. 162(l)(4), as amended by the 2010 Small Business Act, P.L. 111-240, 9/27/2010) Net earnings from self-employment are generally an individual's trade or business income, less the deductions permitted by the Code that are attributable to that trade or business, plus the individual's distributive share of partnership income or loss. For tax years beginning before 2010, a self-employed individual's health insurance costs, although deductible for income tax purposes, weren't deductible in determining net earnings from self-employment. Thus, business owners couldn't deduct the cost of health insurance for themselves and their family members for purposes of calculating their self-employment tax. This new deduction under the 2010 Small Business Act only applies for one year: it doesn't apply for tax years beginning before Jan. 1, 2010, or after Dec. 31, 2010.
• IRS has changed its position and concluded that Medicare B premiums are deductible as a Code Sec. 162(l) self-employed health insurance expense, as indicated by the Instructions to Form 1040 (2010) (Line 29, Self-Insured Health Insurance Deduction). Medicare B is supplemental medical insurance. Premiums that a taxpayer pays for Medicare B are a deductible medical expense under Code Sec. 213; thus, a taxpayer who applies for it at age 65 or after he becomes disabled can include the monthly premiums he pays in his medical expenses. In the past, IRS had argued that Medicare Part B premiums didn't qualify for a deduction because they weren't paid under a health insurance plan established by the taxpayer under a trade or business; rather Medicare Part B was a federal program available only to those who qualify under the statute. (Field Service Advice 3042) There was limited case law supporting this position. (Reynolds, (2000) TC Memo 2000-20, affirmed on another issue (2002, CA7) 90 AFTR 2d 2002-5294 ))
• The self-employed health insurance deduction, effective Mar. 30, 2010, is available for any child of the taxpayer who has not attained age 27 as of the end of the year. (Code Sec. 162(l)(1)(D), as amended by the Health Care and Education Reconciliation Act (Reconciliation Act, P.L. 111-152, 3/30/2010)) The expanded definition of children for whom the self-employed deduction for health insurance premiums may be claimed also applies to more-than-2% S corporation shareholders entitled to claim the deduction.
RIA observation: A taxpayer could claim a deduction for the cost of health insurance for a child before Mar. 30, 2010, but only if that child was the taxpayer's dependent (and the other requirements for the Code Sec. 162(l) deduction were satisfied). Under the Reconciliation Act, a self-employed taxpayer may claim a deduction for health insurance premiums paid for a child who is under age 27 as of the end of the tax year, whether or not the child is the taxpayer's dependent for tax purposes. For example, an adult child who has not turned 27 years of age need not meet the dependency tests for a qualifying child under Code Sec. 152(c)(1)—and thus the deduction is available—regardless of (a) child support thresholds, (b) the child's place of abode, or (c) the child's tax filing status.
• The limitation on a self-employed individual's deduction for health insurance premiums where there's an employer-subsidized health plan has been changed. (Code Sec. 162(l)(2)(B), as amended by the Reconciliation Act) Before Mar. 30, 2010, no individual who was eligible to participate in any subsidized health plan maintained by any employer of the individual or of the individual's spouse was entitled to the deduction. Under the Reconciliation Act, the deduction is also not available for any month in which the self-employed individual is eligible to participate in a subsidized health plan maintained by any employer of any dependent, or any child of the taxpayer who hasn't attained age 27 as of the end of the tax year.
Because this rule applies on a calendar-month basis, if a self-employed individual is eligible to participate in a subsidized plan that's maintained by an employer of the individual, his spouse, his dependent, or his under-age-27 child for, say, only one calendar month (e.g., December), the deduction is still available for premiums paid during the other months of the year. The eligibility test is applied separately to (1) plans that provide coverage for qualified long-term care services, or are qualified long-term care insurance contracts and (2) plans which don't include such coverage and aren't such contracts. (Code Sec. 162(l)(2)(B)) Thus, an individual eligible for employer-subsidized health insurance may still be able to deduct long-term care insurance premiums, so long as he isn't eligible for employer-subsidized long-term care insurance.

Don't be Scammed by Fake IRS Communications

The IRS today issued their 38th tax tip for this year, in which they indicate that they receive thousands of reports each year from taxpayers who receive suspicious emails, phone calls, faxes or noices claiming to be from the IRS. Many of these scams fraudulently use the IRS Logo and name to lure taxpayers to take part in the scam. Click here to read more about the IRS Phishing scams.

Capital Gains and Losses - Ten Important Facts

This is a must read if you are preparing your own taxes this year. Do you know what the IRS considers a capital asset? No. Keep this in mind, IRS considers almost everything you own and use for personal or investment purposes is a capital asset? The IRS recently released a tax tip on capital gains and losses. Click here to read 10 important facts you need to know.

DIY 2010 Tax Tip for the Self Employed

When preparing your taxes for 2010 tax year keep in mind eligible self employed individuals can reduce their self employment tax liability by using their health insurance deduction. Eligible individuals can enter the amount of self employed health insurance utilizing the Schedule SE, instead of Form 1040, thereby reducing net earnings subject to the 15.3% social security self employment tax. Read More

Happy Valentines Day

Just in time for Valentines day we find out that the IRS is working on a major compliance initiative to sniff out tax cheats. The IRS extimates that between 60 to 90% of taxpayers who transfer real estate for little or no consideration to family members fail to file Form 709 to report the gift. So far more than 500 taxpayers have been audited, or are now under examination, and lots more are in the pipeline. The Service is serious about this. When the California Board of Equalization refused to voluntarily disclose the data, the IRS went to court to force it to comply. Even if a gift tax isn't due on the transfer, a return still has to be filed with the IRS If the amount of the gift exceeds the gift tax annual exclusion (currently $13K). According to our sources the IRS is currently checking transfer records from 15 states: Conn., Fla., Hawaii, Neb., N. H., N. J., NY, N. C., Ohio, Pa., Tenn., Texas, Va., Wash., and Wisconsin. Expect more states to provide information as the program expands!

Married men should not make a will — this is a dangerous illusion

I have just ran across an article by Christopher P. Hill
a financial planner from the east coast. I try to cover end of life planning in my webinars, but have never said it this well. I know that the articles is a tad bit aged, and that congress has worked their way through the Bush tax cuts, which affects end of life tax planning, but I encourage all of you to read this article and take it to heart. I have had a personal experience which causes me to believe that every married couple should have a Living Trust, no matter what their economic position. I truly believe that the use of a Family Living Trust is not so much about the size of the estate, but more about the ability of the survivors to go on, without having to make detailed decisions at a vulnerable time and at a time that they may or may not have all of the information necessay to make the decision. If you want more information on Living trusts, give me a call, I will be glad to share my story with you. Where Christopher has used the term Married Men, I would change it to read, "married men and women."

Married men: Do not make a will. For a married man, the security he believes a will provides is a dangerous illusion. In order to truly provide the security he desires for his survivors, he must heed the following advice, including changing the names on his accounts and house.

The will illusion
We have all heard the TV and radio ads that tell you that wills are necessary, and that you can use a computer, rather than hire an expensive lawyer, to make your will. I tell married clients that often, making a will creates an illusion of security that lulls them into a dangerous complacency. It is worse when a husband wants to make a will without his wife’s participation.

Why have a will?
Most married men who sign a will want to accomplish the following objectives: Make sure their property goes to their spouse and children; designate who will be the guardian of their children; make sure things go smoothly when they die; and protect the inheritance of their children. For the typical married man, none of these objectives are likely to be accomplished through the creation of a will, as can be seen in the following scenarios.

Ensure property goes to spouse
Seventy percent of married men own their house, bank and brokerage accounts, and household goods jointly with their wives. The number is higher for those in their first marriage. These men also usually designate their wives as the sole beneficiary of their retirement accounts and life insurance policies. They then sign a will, thinking they have protected their wives and children.

Most men die before their wives. When the man dies, everything goes to his wife, because their property is owned jointly, and the will has no effect on the beneficiary designations on their insurance or retirement accounts. There is no protection of his wife of against her creditors, and her disability and estate taxes will be higher. This is because the title to property overrides any provision of the will. If the man named his parents as the beneficiaries on his insurance or retirement accounts and did not change the beneficiary designations when he got married, then these accounts go to his parents if they survive him, or to a probate estate if they do not. Beneficiary designations override the provisions of a will.

Protect his children
Often, the married men I advise want to make sure that after taking care of their wives and that their property goes to their children, and they want their will to reflect that. But, if the wife survives the husband, everything goes directly to her, either by title or because the will says so. If the wife remarries, then there is no protection for the children. The share of the property will go to the next husband and his children if the next husband survives his wife or, in the case of a divorce, one half of the first husband's share will go to the second husband. I have talked to many children who were unintentionally disinherited this way.

Guardians for his children
A husband dies first, survived by his wife. The wife is now the guardian of the children, and the wife now decides who will be the guardian of his children if she then dies. The husband’s will is irrelevant at this point. Also, if the children are minors or disabled and if the wife does not have a will, in most states, the court will appoint the guardian and supervise the finances of the children until they are 18, depending upon the legal age for children in their state.

The problem of probate
Many people I have advised think that a will avoids probate. Not so. The will’s purpose is to direct the probate process. Instead, any property passing under a will must be probated. Probate is the state legal process requiring that the will and a detailed list of assets are filed on the public record. Someday soon, your neighbor may be able to go online and see to whom you left your property. There are notice and accounting requirements which vary from state to state, and in some states, they are quite onerous and expensive to comply with. Probating a will is like filing a lawsuit against yourself, with a notice for everyone who has a claim to join in the lawsuit without the need to hire an attorney or file their own case.

Solutions that do not work
The solution is not to make sure the wife dies first. Even if a husband and wife make identical wills and the husband dies first, none of the above is really changed, because the wife has a will. Non-married couples come out ahead if they do not own their property jointly, because the non-married man’s will determines who inherits his separately owned property. Some married couples go so far as to get rid of jointly owned property, thereby requiring a probate when the husband dies, and then again when the wife dies. This enables probate lawyers to collect a lot of fees.

Solutions that work
To accomplish his goals, the married man needs to set up a living trust and put the name of the trust on his accounts and real estate. He then must name his trust as the death beneficiary of his insurance and retirement accounts. To have an estate plan which accomplishes your goals, I strongly suggest you sit down with a seasoned estate planning attorney. If you need help finding one, I can help direct you to some great places to start.

nd Special Voluntary Disclosure Initiative Opens

WASHINGTON — The Internal Revenue Service announced today a special voluntary disclosure initiative designed to bring offshore money back into the U.S. tax system and help people with undisclosed income from hidden offshore accounts get current with their taxes. The new voluntary disclosure initiative will be available through Aug. 31, 2011.
“As we continue to amass more information and pursue more people internationally, the risk to individuals hiding assets offshore is increasing,” said IRS Commissioner Doug Shulman. “This new effort gives those hiding money in foreign accounts a tough, fair way to resolve their tax problems once and for all. And it gives people a chance to come in before we find them.”
The IRS decision to open a second special disclosure initiative follows continuing interest from taxpayers with foreign accounts. The first special voluntary disclosure program closed with 15,000 voluntary disclosures on Oct. 15, 2009. Since that time, more than 3,000 taxpayers have come forward to the IRS with bank accounts from around the world. These taxpayers will also be eligible to take advantage of the special provisions of the new initiative.
“As I’ve said all along, the goal is to get people back into the U.S. tax system,” Shulman said. “Combating international tax evasion is a top priority for the IRS. We have additional cases and banks under review. The situation will just get worse in the months ahead for those hiding assets and income offshore. This new disclosure initiative is the last, best chance for people to get back into the system.”
The new initiative announced today – called the 2011 Offshore Voluntary Disclosure Initiative (OVDI) -- includes several changes from the 2009 Offshore Voluntary Disclosure Program (OVDP). The overall penalty structure for 2011 is higher, meaning that people who did not come in through the 2009 voluntary disclosure program will not be rewarded for waiting. However, the 2011 initiative does add new features.
For the 2011 initiative, there is a new penalty framework that requires individuals to pay a penalty of 25 percent of the amount in the foreign bank accounts in the year with the highest aggregate account balance covering the 2003 to 2010 time period. Some taxpayers will be eligible for 5 or 12.5 percent penalties. Participants also must pay back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties.
Taxpayers participating in the new initiative must file all original and amended tax returns and include payment for taxes, interest and accuracy-related penalties by the Aug. 31 deadline.
The IRS is also making other modifications to the 2011 disclosure initiative.
Participants face a 25 percent penalty, but taxpayers in limited situations can qualify for a 5 percent penalty.
The IRS also created a new penalty category of 12.5 percent for treating smaller offshore accounts. People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the 2011 initiative will qualify for this lower rate.
The 2011 initiative offers clear benefits to encourage taxpayers to come in now rather than risk IRS detection. Taxpayers hiding assets offshore who do not come forward will face far higher penalty scenarios as well as the possibility of criminal prosecution.
“This is a fair offer for people with offshore accounts who want to get right with the nation’s taxpayers,” Shulman said. “This initiative offers them the chance to get certainty about how their case will be handled. Just as importantly, those who truly come in voluntarily can avoid criminal prosecution as well.”
The IRS is handling processing of the voluntary disclosures in centralized units to more efficiently process the applications.
The IRS will also launch a new section on www.IRS.gov that includes the full terms and conditions on the 2011 Offshore Voluntary Disclosure Initiative, including an extensive set of questions and answers to help taxpayers and tax professionals. The web site also includes details on how people can make a voluntary disclosure.
In the first voluntary disclosure program in 2009, taxpayers faced up to a 20 percent penalty covering up to a six-year period. Taxpayers came forward with about 15,000 voluntary disclosures in that effort covering banks in more than 60 countries.
Shulman said IRS efforts in the international arena will only increase as time goes on.
“Tax secrecy continues to erode,” Shulman said. “We are not letting up on international tax issues, and more is in the works. For those hiding cash or assets offshore, the time to come in is now. The risk of being caught will only increase.”

Are Your Social Security Benefits Taxable?

The Social Security benefits you received in 2010 may be taxable. You should receive a Form SSA1099 which will show the total amount of your benefits. The information provided on this statement along with the following seven facts from the IRS will help you determine whether or not your benefits are taxable.

1. How much – if any – of your Social Security benefits are taxable depends on your total income and marital status.

2. Generally, if Social Security benefits were your only income for 2010, your benefits are not taxable and you probably do not need to file a federal income tax return.

3. If you received income from other sources, your benefits will not be taxed unless your modified adjusted gross income is more than the base amount for your filing status.

4. Your taxable benefits and modified adjusted gross income are figured on a worksheet in the Form 1040A or Form 1040 Instruction booklet.

5. You can do the following quick computation to determine whether some of your benefits may be taxable:

· First, add one-half of the total Social Security benefits you received to all your other income, including any tax exempt interest and other exclusions from income.

· Then, compare this total to the base amount for your filing status. If the total is more than your base amount, some of your benefits may be taxable.

6. The 2010 base amounts are:

· $32,000 for married couples filing jointly.

· $25,000 for single, head of household, qualifying widow/widower with a dependent child, or married individuals filing separately who did not live with their spouses at any time during the year.

· $0 for married persons filing separately who lived together during the year.

For additional information on the taxability of Social Security benefits, see IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits.