Last year's big tax stories have become this year's big tax traps.
2014 was a big year for new developments for taxpayers. We had the expected clash over tax extenders near the end of the year, a turnover in Congress and a number of new filing requirements related to health care coverage.
Though advisers and clients may have heard about those developments throughout the year, it's time to think about what they'll mean in 2015.
Those tax traps were the focal point of “Top 10 Tax Stories of 2014 That Could Affect Your Clients,” a Tuesday morning session at the American Institute of Certified Public Accountants' Personal Financial Planning conference.
“We are in a second straight year with uncertainty on key issues,” noted Jonathan Horn, a New York City-based CPA and host of the session. “Many people last year made automatic [charitable] distributions out of their IRAs. They got lucky.”
Expect the qualified charitable distribution — a break that permits taxpayers to transfer a portion of their IRA to a qualifying charity free of tax and in adherence to required minimum distribution rules — to remain for 2015.
That's the good news for this year. The bad news, however, is that plenty of paperwork and pain await taxpayers and their accountants.
NET INVESTMENT INCOME TAX
Advisers geared up for the 3.8% net investment income tax, which was part of the American Taxpayer Relief Act of 2012. Make sure clients don't forget that the levels at which that levy applies are not inflation adjusted: Taxpayers with a modified adjusted gross income over $200,000 for singles and $250,000 for married-filing-jointly.
Last year was a busy one for more states recognizing gay marriage, so it's time for advisers to check in with those clients. Thirty-five states and Washington, D.C., recognize same sex marriage and nine states have pending court decisions.
“By June, there will be a definitive answer,” said Mr. Horn. “Read the tea leaves. Most likely the Supreme court will rule again that same-sex marriage is a constitutionally protected right and finally resolve the tax issues.”
What's most important is for advisers to check these couples' estate planning documents. Many have set up trusts and wills as an extra step when their marriage wasn't recognized. Those documents may not work anymore or may have a different effect if those clients' marriages are now recognized, said Mr. Horn.
The groundbreaking Bobrow tax court case was resolved last year, leading to the IRS enforcing a rule that permits only one IRA rollover every 12 months, applicable to all of a client's IRAs. Clients should do a trustee-to-trustee transfer so they can stop worrying about the one-per-year IRA rule. Still, don't forget that clients have a fresh start now that we are in the New Year, said Mr. Horn.
Finally, bear in mind the Clark v. Rameker Supreme Court decision from last year. That decision means that money held in inherited IRAs aren't considered retirement funds and thus aren't protected from creditors in bankruptcy, warned Mr. Horn.
HEALTH CARE PENALTIES
Advisers and accountants need to be aware of the steep fines that could be awaiting employers who failed to provide health care coverage to their workers. “There will be onerous penalties if you're not providing affordable minimally-essential coverage,” said Mr. Horn.
Individual filers for the first time will have to report to the IRS whether they were insured, as well as whether they received tax credits to help cover the cost of coverage. Some will have to repay subsidies they had received.
Going back to employers, health reimbursement accounts are subject to the regulations of the Affordable Care Act. In Mr. Horn's words, “they're basically dead.” Under the ACA, they are acceptable in two situations: where an employer has less than two employees and in a plan that's exclusively covering early retirees, noted Mr. Horn.
Excise tax penalties against employers for HRAs in an arrangement that doesn't meet ACA requirements are steep: $100 per day for each employee.