K. W. “Hutch” Hutchinson, CPA, CFP®

Providing solutions to your taxing problems

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New Law “Cures” Small Employer Health Insurance Dilemma

The 21st Century Cure Act has passed Congress and the President has just approved and signed. The legislation provides for an exception from group health plan requirements for qualified small employer health reimbursement arrangements. Beginning in 2017, a small employer may again reimburse employees for individual health insurance premiums without fear of the onerous $100 per day per employee penalty assessed for violation of health care reform.

Plan requirements. To qualify as “a qualified small employer health reimbursement arrangement,” the plan must meet certain requirements.

  1. The plan must be provided on the same terms to all employees. Some employees may be excluded from the plan:
    • employees who have not completed 90 days of service,
    • employees who have not attained age 25,
    • part-time (less than 30 hours a week) or seasonal employees,
    • employees subject to collective bargaining.
  2. The plan must be funded solely by the employer and no salary reduction contributions may be made under the arrangement.
  3. The plan must provide, after the employee provides proof of minimum essential coverage, for the payment of, or the reimbursement of, medical expenses (as defined in §213(d)) of an eligible employee or the employee’s eligible family members.
  4. The plan must provide that payments and reimbursements for any year be no more than $4,950 for an eligible employee and $10,000 if the arrangement provides payment or reimbursement for family members.
    • In the case of an individual who is not covered for the entire year, the limitations are prorated. For example, an employee who is covered for nine months of the plan year may have payments and reimbursements of no more than $3,712.50 (9/12 of $4,950).

Small employer. An eligible employer is one that is not an applicable large employer under §4980H(c)(2). Thus, the employer may offer a qualified small employer health reimbursement arrangement if it has less than 50 full-time and full-time equivalent employees. An eligible employer may not offer a group health plan to any of its employees.

Tax-free fringe benefit. A qualified small employer health reimbursement arrangement payment or reimbursement is not excluded from gross income if, for the month in which such medical care is provided, the individual does not have minimum essential health coverage.

Premium tax credit. For an employee who is provided a qualified small employer health reimbursement arrangement for any coverage month, the premium tax credit for that month will be reduced.

Other rules.

  • The eligible employee must receive proper and timely notice of the plan availability (see §9831(d)(4)(A) for details).
  • The total amount of the permitted benefit must be reported on the employee’s Form W-2.
  • The transition relief provided in Notice 2015-17 is extended for any plan year beginning on or before Dec. 31, 2016.

Example. Sharon has three full-time employees working in her tax practice. She does not provide a group health plan. With proper notice to her employees, Sharon establishes a qualified small employer health reimbursement arrangement effective Jan. 1, 2017 to reimburse up to $4,950 (or a lesser amount if she wishes) of §213(d) medical expenses.

Action item. Small business clients should be advised that Congress, in a rare bipartisan effort, has granted relief to the small business that wants to help employees with insurance premiums and out-of-pocket medical expenses without going through the trouble or expense of adopting a group health plan.

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Timeshare Scam Alert

If you’re thinking of selling a timeshare, the FTC cautions you to question resellers — real estate brokers and agents who specialize in reselling timeshares. They may claim that the market in your area is “hot” and that they’re overwhelmed with buyer requests. Some may even say that they have buyers ready to purchase your timeshare, or promise to sell your timeshare within a specific time. All they need is an upfront fee to get the ball rolling. Well, hold onto your money and read on.

Today, the FTC is charging the operators of a timeshare reselling scheme with bilking at least $15 million from timeshare owners by charging upfront fees of as much as $2,500 — or more — with promises they would rent or sell the properties. As time passed, the defendants would ask owners for more money, claiming the sale was about to take place and even characterizing the additional fees as closing costs. When the promises weren’t kept, consumer requests for refunds were routinely denied or ignored. Not anymore. At the FTC’s request, a federal court has temporarily halted the operation while the FTC seeks to permanently stop the illegal practices and get money back for consumers.

If you own a timeshare, question any offers to help you resell it. Be skeptical of companies that:

  • claim the market in your area is “hot” and that they’re “overwhelmed” with buyer requests
  • say they have buyers ready to purchase your timeshare — or promise to sell your timeshare within a specific time
  • guarantee you’ll get big returns on your resale
  • require you to pay fees upfront — even if there’s the promise of a “money-back guarantee”
  • don’t provide a contract — or provide a contract that doesn’t accurately reflect conversations you had

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5 End-of-Year Tax Planning Tips

As the adage says, it’s never over until the fat lady sings. The same concept applies to tax planning this time of the year. Until Dec. 31, there are quite a few tax strategies that can be implemented to reduce your bottom line tax liability. Here are five year-end tax tips most taxpayers can benefit from for tax year 2016:

#1: Pay January 2017 Mortgage Payment in December

For just about every mortgage loan, mortgage payments are due on the 1st of each month. Often, we are accustomed to making the payment after the 1st, and ordinarily that works well for most budgets. However, at year-end, it’s advisable to make the January mortgage payment in the last week of December so that the lender can credit the January interest paid on the 2016 mortgage interest statement. Sometimes, that extra mortgage interest can mean the difference between having enough itemized deductions to lower a client’s tax liability versus having to claim the standard deduction. Other times, it helps increase the itemized deductions, which effectively reduces the bottom line tax liability.

#2: Donate to Charity

December is the time of the year when most of us become more philanthropic and donate to our favorite charities. Cash and non-cash donations may be tax deductible if a taxpayer has enough itemized deductions to exceed the standard deduction. Generally, taxpayers without other itemized deductions probably won’t donate enough to make a difference on their tax return. However, when there is mortgage interest, property taxes and donations, there may be enough to claim itemized deductions and have an impact on the tax liability.

#3: Closing on a Home Loan

As interest rates get ready to increase and you are house shopping, it may be a good strategy to close on a mortgage loan before the end of the year. Loan origination fees from a home purchase are tax deductible as mortgage interest. For example, a 1 percent loan origination fee on a $200,000 loan would provide a tax deduction of $2,000 as mortgage interest in the year the loan was closed. Therefore, if you have enough to itemize or are very close to the limit, it may be beneficial to get the loan completed prior to Dec. 31.

#4: Pay Estimated State Taxes

It’s quite easy for taxpayers to forget about making their fourth quarter estimated tax. Most of us hate paying taxes, let alone making a tax payment sooner than necessary. The fourth quarter state estimated tax payments coincide with the federal estimated deadline of Jan. 15. However, if you make the state estimated tax payment in December instead of January, you will receive credit toward state taxes paid in the current year, which is an itemized deduction. For those who are self-employed and expect to owe tax, or anyone who is under-withheld on their paychecks, making an estimated tax payment in December may prove to be beneficial tax planning when you lump the state taxes paid with all the other itemized deductions.

#5: Contribute to Your Retirement Plan

Contributing to your 401(k) to max it out prior to year-end, or contributing to another retirement account such as an IRA or SEP, can create some tax savings. It’s always wise to review retirement accounts in early December so that you have enough time to increase your contributions, particularly if you have a 401(k) through your employer. Contributions to a ROTH IRA or traditional IRA can be made, and allocated, toward 2016, even after the year ends, so it’s a bit easier to do tax planning with these types of retirement accounts versus an employer-sponsored 401(k). The 2016 limit for contributing to a 401(k) is $18,000.

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2017 Standard Mileage Rates for Business, Medical and Moving Announced

Beginning on January 1, 2017, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

53.5 cents per mile for business miles driven, down from 54 cents;

17 cents per mile driven for medical or moving purposes, down from 19 cents; and

14 cents per mile driven in service of charitable organizations.