Dear Client and Friend,
I hope you are enjoying some summer fun and relaxation!
You know it is well deserved!
As we end the summer, we're finishing up mid-year
reviews for our clients. If you:
- got married
- were divorced/separated
- bought a house
- sold a house
- bought or will buy new equipment
- inherited property
- hired independent contractors
please call our office. I have blocked out time this
summer to meet with clients to review changes and implement
new strategies if necessary.
I want to share some valuable information with you at
this time, especially in regard to the Affordable Health
Care Act and how it will affect you. You can also listen to
my recorded video conference on this subject on my website,
www.monicarebellacpa.com. In knowing what to prepare
for, you can set a plan for success even in this uncertain
climate. As usual, I am also including other pertinent
information you should pay attention to in order to maximize
Let's get started...
Effects of the
Patient Protection Affordable Care Act
Now that the Supreme Court has decided to
allow the "Affordable Care Act" to go forward as a tax,
let's look at what is now in place and some of the changes
Currently in effect now:
" Small Employer Health Care Credit
" No Rescission Of Health Insurance Coverage
by Insurance Companies
" Elimination of Lifetime Limits on
Essential Healthcare Benefits
" No denial of coverage on children under 19
" Children (unmarried) under 26 can be
included in parents insurance
" Distribution out of Health Saving Account
for non-qualified medical expenses is now penalized @ 20% of
the expense cost
" No over-the-counter drug reimbursement
from Cafeteria/Flexible Spending plans
Effective in 2013:
• Starting with the 2012 W-2 Forms - the
cost of employer provided health insurance must be included
• 2.3% sales tax on purchases of
medical/dental equipment must be charged
• Employers are required to withhold
additional Medicare Surtaxes of .09% on employees where W-2
income will be over $250,000 (married) and $200,000
• Additional 3.8% tax on lower of net
investment income (interest, dividends, capital gains,
royalties, rents) or income over the $250,000 (married) and
• Cafeteria Plan/Flexible Spending accounts
reimbursement is limited to $2,500
• Employers will need to provide an 8 page
benefit notice including information on Healthcare
• Ability to deduct medical expenses as
itemized deduction for individuals must now exceed 10% of
income rather than 7.5% (65 yrs+ not until 2017)
Effective in 2014:
The IRS will be collecting the "tax" for any
individual not carrying "minimum" health insurance starting
with the 2014 tax returns
New "tax" for no insurance will be
calculated as follows:
Year 2014 - the higher of $95 per
adult (18 yrs.+) and ½ this for children in the household
uncovered - or 1.5% of income over the filing threshold
Year 2015 - the higher of $325 per
adult and ½ this for children or 2% of income over the
Year 2016 - the higher of $695 per
adult and ½ this for children or 2.5% of income over the
Example of above - 2014 income of $50,000
and filing threshold is $5,000. ($50,000 - $5,000 =$45,000 X
1.5% = $675. This is greater than $95.00, but there is a
maximum of $285.00/household) This would be a tax in 2014 of
$285, 2015 of $900, (maximum is $975.00) and 2016 of $1,125
(maximum is $2,085.00)for the household.
Insurance companies may be required to issue
1099's to the IRS to verify coverage. These will be
attached to your tax returns.
Employers with 50 plus "full-time" employees
in the prior calendar year must provide affordable "minimum
essential benefit" health insurance coverage for full time
employees or pay an excise tax. This tax on the employer is
Seasonal workforces are exempt. The tax is
$2,000 per year per employee. (Tax rate increases to $3,000
if any employee buys coverage through an exchange.)
The tax can also
be imposed if: 1) Coverage is not the "minimum essential
benefit" 2) Plan does not cover 60% of the costs 3) An
employee obtains insurance through the state insurance
exchange 4) Coverage is deemed not to be affordable or 5.
Costs to the employee is more than 9.5% of their income.
Employers will now need to collect information about their
employees total household income in order to determine if
they are eligible for Federal finance assistance (below
poverty level qualifies).
- Employers, who have less than 50 employees
and are currently offering health insurance, may come under
these rules. It is unclear at this time.
Health Insurance Exchanges will be available
to individuals with Federal assistance for those with income
under 400% of the Federal "poverty level". Right now, this
is about $55,000 for a family.
Insurance cannot be denied for individuals
with pre-existing conditions.
WHAT TO DO NOW
Check List for Employers
• Check with your insurance and payroll
companies on the method needed to report each employee's
heath insurance premium on the 2012 W-2s.
• Work with your office manager to make sure
you have information about the cost of health insurance per
• Find out how your insurance company can
help with the required 8-page notice to your employees of
• Make sure your employees are not getting
reimbursed for over-the counter-drugs through
Cafeteria/Flexible Spending Plans
• Let employees know that in 2013 the
Cafeteria/Flexible spending reimbursement amounts drop to
• If you are an employer who is not required
to provide health insurance consider:
1. Looking to high deductible plans for
HSA account and perhaps consider funding part of HSA
account for employees
2. Reimburse employees all or a
percentage of their own health insurance premium
3. Give employees a bonus for the new
"Tax" for no health insurance
My personal belief is that the Patient
Protection Affordable Care Act is going to create higher
insurance premiums and more taxes. Many insurance companies
are already pulling out of the market since they can no
longer refuse children with pre-existing conditions and in
2014 cannot refuse anyone with pre-existing conditions. If
they aren't leaving, they are increasing premiums as there
are no constraints built into the Act to reign in the upper
end of the price of insurance. Also, it is likely that more
individuals will have less benefits in their health coverage
as this Act only requires employers provide for "minimum
essential benefits". Employers may need to work with
insurance providers to offer employees options to pay for
benefits over the "minimum".
Employee versus Independent Contractor,
That is the Question!
The IRS and State of California
have raised the penalties on an employer for improperly
classifying employees as independent contractors to $5,000 a
year for every misclassification. Be sure to evaluate the
guidelines set by the IRS in maintaining the Independent
Contractor status. The following three areas are recommended
for review by the IRS as constituting an Employee status:
• Behavioral Control - if the hiring
entity has the right to direct or control the work by
instructing when and where the work is done, what tools or
equipment to use, etc. The more detailed the directions,
the more this is an employee situation.
• Financial Control - if the hiring
entity has the right to control the economic aspects of the
worker's job, this is more likely to be classified as
• Type of Relationship - this is how
both the hiring entity and worker perceive their
relationship with each other. Contracts do not necessarily
mean an independent contractor status and if the
relationship is continued indefinitely, this is most likely
Related to this issue, is the problem of the
•household employee•. If you are paying a household worker
$1,800 or more in one year, and they are under the •employee
status• then you must submit a
W-2. Much the same as above, here are some
factors the IRS looks for:
• If the worker controls how the work is
done, uses their own tools, and has a number of other
customers, they are more likely to be self-employed.
• If an agency supplies the worker or
daycare is provided in the worker's home, they are not
• If you determine they are your
employee, you must obtain an employer identification
number from the IRS and file a W-2 each year.
THE STATE OF CALIFORNIA WANTS TO KNOW!
If you inherit or want to gift any
California real estate, you should be aware of a little
known law on the books, stating that you must report the
change to the California State Board of Equalization or be
fined. Since the State is in such dire need of additional
funds, they are now cracking down and assessing significant
penalties for failing to report these changes. The only
exception is, if you are moving the property into a Family
Living Trust. Penalties are now up to 10% of the new
property tax value assessment. This means that if you have
property valued at $1,000,000 and the tax on this is
$12,000, the penalty is $1,200 plus interest for each year
the change was not reported. The State is now going back 6
years and working with the IRS on gift returns filed, that
includes California real estate with no change in ownership
reported to California. If you have inherited or gifted
real estate in California, you need to file the change using
Form 100B with the California State Board of Equalization.
Please also be aware, that if 50% or more of the ownership
in California real estate changes, California may reassess
the property value for real estate tax purposes. There are
planning opportunities. If you are, or have changed the
ownership in California real estate, give me a call and set
up an appointment.
RECORD KEEPING SHOULD EXTEND TO 7 - 10 YEARS!
One of my clients was recently audited and
was requested to produce records on equipment purchased
eight years ago. When I questioned the IRS agent as to what
code and regulations pointed to this, I was informed that it
was stated in the IRS agent manual, not necessarily in the
IRS code, however. Here is the rule; if you are still
depreciating the asset (taking a current tax deduction) then
you need to have the original purchase records. Therefore, I
recommend you keep your tax records for 10 years. If you
own real estate, stock or other long-lived assets, you need
to keep your original purchase documents until you sell.
1. Avoid any gift tax
filing by not exceeding the maximum annual limit of giving
$13,000 to any individual. If you are married, this
maximum limit can be $26,000 per individual. No limits
apply if you make payments directly to a provider on behalf
of the individual, such as payment to medical providers or
educational institutions for tuition.
2. Do not assume that any IRS or California
notice is automatically correct. Many have received
incorrect notices stating they owe more tax. Recently, a
client received a notice from California that they owed more
tax due to a difference in their H.S.A. contribution.
California does not allow a deduction for an H.S.A.;
therefore there cannot be any additional tax due. Open any
notice immediately, review carefully and respond timely or
send it to us. Any responses to the IRS and California
should be sent by certified mail to provide proof. Never
assume ignoring the problem will make it go away.
3. Need to draw funds from your Traditional
IRA prior to retirement? Here are some instances where
you can, without the 10% penalty for early withdrawal.
a. Pay medical insurance premiums for
you and your family if you have been on unemployment for
12 weeks or more.
b. Pay for college tuition, books, fees
supplies and equipment for you or members of your
c. Pay for medical expenses in excess of
7.5% of your AGI.
d. Up to $10,000 for first-time home
e. Amounts withdrawn while on active
duty for more than 179 days.
f. You can take out money for up to 60
days and then replace the money, without penalty or tax.
Remember, you still must pay income tax on
4. In order to deduct travel expenses on a
business trip the IRS applies the "overnight" rule. If
you are away from home for business purposes and you stay
overnight you can deduct airfare, ground transportation,
meals and lodging. If you do not stay overnight, only
airfare and ground transportation is deductible. Food is
only deductible at 50%, but all else is 100%. It is a
business day, if you are in the pursuit of business for at
least 50% of the business day (4 hours).
5. Own your own building as an individual, S
corp or single-member LLC and rent it to your business,
whether it is a proprietorship, S corp, or single-member
LLC. Federal tax law allows you to treat both the
rental and the building as one under what is known as
"grouping". This will allow tax deductions for your rental
property losses. You must be an owner of each with the same
proportionate ownership interest. If you own the building
100 percent and your practice 100 percent, you pass the
"appropriate-economic-unit" test. If you are husband and
wife, with separate ownership in each and you are filing a
joint return, you are once again allowed to "group" the two.
For example, a business which has $300,000 in net income
can use the rental property's loss of $100,000 to reduce the
taxable income to $200,000. You must make a formal election
to the IRS for this. If you are interested in forming a
"grouping" contact our office for assistance.
6. Still thinking of retiring early? Here
are some items to consider to assist you in planning :
• Maximize tax advantaged retirement
accounts like traditional IRAs and 401(k)s, profit sharing,
• Use the "catch -up" provisions if you are
50 yrs. plus. Maximum contribution amounts increase by up
to $5,500 depending on your plan
• Consider adding Roth IRAs or Roth 401(k)s
if you expect tax rates to increase during your retirement
• Set up Health Savings Accounts to take
advantage of the •catch-up• provisions. You must be in a
qualified high deductible, medical insurance plan to be
eligible, but unused funds can be invested and carried
forward to future retirement years.
• Plan where you want to live in your
retirement. Some states have no income tax and others have
plans for higher taxes. Research is needed before you move.
Consider converting your Traditional IRA to
a Roth IRA now! Why? Taxes that you pay on the conversion
will be less now as rates are set to increase in 2013. The
amount in the Roth IRA will not be taxed further, at a later
date when taken as a distribution, which means the lesser
rate to pay is right now! Remember, you do need to pay the
tax on the converted amount with 2012 rates, but we are
guaranteed the rate will increase in 2013. Why wait to pay
more? Get the lowest tax rate now!
A DIFFERENT INSURANCE NEED
Although the new tax
rules are about Health Insurance, I want to share my
thoughts and experience with what I consider to be a very
important need in planning for your future and that of your
family. The need is of Life and Disability Insurance.
I know many people don't want to think about
the inevitable, and want to take the gamble of
self-insuring, but in this instance, it can cost greatly in
the end. I recently lost a client to a sudden diagnosis
and rapid end of life. During his decline, he had to sell
his business with very little planning time. In planning
for the future of his wife, several years younger than he,
we found that since he saw little need for Life and
Disability insurance as he got older and the family was
grown, he had canceled the insurance to reinvest the
premiums in other forms of investment strategies. Sadly, he
couldn't make it to that end. Retirement was many years off
for him. Prior to his passing he was able to receive state
and federal disability, but these did not transfer to the
wife after his death. There was still a mortgage on the
home but without life insurance the mortgage could not be
paid off or go into a reverse mortgage to stay in the home.
Needless to say, I was surprised and
saddened by the loss of my client and the situation it put
his family in. I know that was never his intention. So, I
just want to caution all of you that there are situations in
life in which we need to have a plan to cover; taxes,
health, retirement, disability and death. Where there is
one, perhaps there are more, and I would hate to have this
happen to any of my clients again.
Therefore, with the uncertainty about health
insurance coverage by employers for employees, cost of
health insurance, as well as life and disability insurance,
I recommend contacting an insurance agent that I know, who
really takes care of my clients, Bart Korsak with New York
Life at 951-264-0963. Take care!
Planning ahead for tax season is very
important so you can reduce taxes and maximize your income.
Know the deadlines and tips to planning. Here are some of
1. Your child or grandchild has a summer
job: Consider setting up a Roth IRA for them
• You can put in up to $5,000 (but, no more
than their earnings). This amount counts toward the annual
gift tax exclusions ($13,000 individual/$26,000 spouses).
• Growth benefits: contribute $5,000 to a
Roth IRA , for your 16 year old. It earns 7% each year and
grows to $138,000 by age 65 and $193,000 by 70.
• Additional advantages: all withdrawals
made after age 59½ are tax free. Also your child can take
out the contributions (not earnings) free of tax at any
time. Certainly useful for a down payment on house, college
2. You inherited an IRA last year: beware
of tax deadline
• Beneficiaries for IRAs are set on Sept. 30
in the year following the death of the IRA owner.
• If just one beneficiary is not an
individual (i.e. charity or college), the IRA must be
cleaned out within five years for all, instead of an
individual beneficiary taking distributions over their
• Remedy: Redeem the non-individual's IRA
interest by Sept. 30 and the remaining individuals can enjoy
the distributions over their lifetime, creating more tax
free buildup of the IRA.
STUDY GROUP CE AND VACATION
Many of my clients who are in professions
that require continuing education have questioned whether
their study group's trips are tax deductible or not. Here
are some key points to keep in mind.
• A study group is putting on the trip for
the purpose of educating and has evidence of the programs
and material covered that can clearly establish the purpose.
• Activity of trip is to promote extra time
for business discussions within the group and makes it more
practical for all to participate in the business discussion.
• Location must be in the tax-defined North
• If you automatically qualify for CE credit
this is a bona fide benefit to your business.
• To qualify a day as a •business• day, you
need to have at least 4 hours out of 6 hours of scheduled CE
activity. So go for four hours and one minute or more.
• Courses should take place in an
•educational• setting, such as a meeting room in a
restaurant or lodge.
• Assume that this is for 4 day, 3 night
trips. The 1st and 4th day are travel days, day 2 & 3 are
"trip" days. You are now away for the required 3 nights.
• Here's what you get: Tax-deductible
lodging for three nights; tax-deductible travel costs to
and from location; tax-deductible meals, drinks and other
costs of sustaining life
• Any extra entertainment costs that brought
the group together i.e. sailing, fishing, golfing is
deductible at 50% of the cost. Lodging is 100% deductible
if it is incurred for CE purposes.
Business Miles and Home Office
Congress has clarified and relaxed the rules regarding home
office. If you have no other office, you should establish
an office in your home. If you have another office, you can
still have an office in your home for administration. By
establishing a home office, every mile from your home office
to your first business stop each day is deductible mileage.
If you do not establish an office in your home, you will
lose deductible business miles.
I hope you have found this information useful to you for
planning out your year end strategies for your dental
practice and/or personal life. I am always available to
assist you further in your tax or financial needs.
feel free to call the office at
714-619-0667 or visit
my website at www.mydentalcpa.com where you will find
additional information and many tools for you to use for
your tax needs.
Remember, your success is our business!
Monica Rebella, CPA/IAR