Healthcare Tax Credit for Self-employed

Certain individuals who purchase qualified health care coverage through an American Health Benefit Exchange located in their state of residence are entitled to a refundable income tax credit equal to the premium assistance credit amount.

In general, you may be eligible for the credit if you meet all of the following:

  • buy health insurance through the Marketplace;

  • are ineligible for coverage through an employer or government plan;

  • are within certain income limits;

  • do not file a Married Filing Separately tax return (unless you meet certain criteria, which allows victims of domestic abuse to claim the premium tax credit); and

  • cannot be claimed as a dependent by another person.

A self-employed individual may also be allowed a deduction for all or a portion of the premiums paid during the tax year for health insurance for the taxpayer, the taxpayer’s spouse, the taxpayer’s dependents, and any child of the taxpayer under the age of 27. This deduction is limited to the taxpayer’s earned income from the trade or business with respect to which the health insurance plan is established.

The taxpayer must know the allowable health insurance premium deduction to compute the premium tax credit because the health insurance premium deduction is allowed in computing adjusted gross income and the adjusted gross income is necessary to compute the premium tax credit. A taxpayer who is eligible for both the deduction and a premium tax credit may have difficulty in making the determinations of those items.

Therefore, the IRS has issued guidance that is intended to provide taxpayers with calculation methods that resolve the circular relationship between the deduction and the tax credit. This guidance includes a special section for taxpayers who have a premium assistance amount with coverage months for which no health insurance premium deduction is allowed.

The use of the calculations provided by the IRS is optional; a taxpayer may determine the amounts of the deduction and the tax credit using any method that satisfies the requirements of the applicable tax law and regulations. Your tax professional can help you determine how to get the greatest benefit from the deduction and credit available to you.

Work Can Affect Your Social Security Benefits

A large number of retired individuals are back in the workforce. In addition to earning a salary, these individuals may also be receiving Social Security benefits. Depending on the individual’s age, benefits may be reduced and included in the recipient’s gross income.

Taxpayers at and above full retirement age can continue to earn unlimited amounts without any reduction in Social Security benefits. Full-retirement age was 65 for many years. However, beginning with 1938 birth dates or later, that age gradually increases.

How much can you earn and still get benefits?

If you were born January 2, 1956, through January 1, 1957, then your full retirement age for retirement insurance benefits is 66 and 4 months. If you work, and are full retirement age or older, you may keep all of your benefits, no matter how much you earn. If you’re younger than full retirement age, there is a limit to how much you can earn and still receive full 2 Social Security benefits. If you’re younger than full retirement age during all of 2018, the social security administration will deduct $1 from your benefits for each $2 you earn above $17,040.

If you reach full retirement age during 2018, $1 will be deducted from your benefits for each $3 you earn above $45,360 until the month you reach full retirement age.

A portion of Social Security benefits is included in the gross income of a recipient whose total income exceeds applicable base and adjusted base amounts. The base amounts and adjusted base amounts vary with the filing status of the recipient.

Since income tax is not withheld on Social Security, you may need to pay estimated tax. Your tax professional can help you determine if you should pay individual estimated tax. Additionally, even though Social Security benefit payments are not automatically subject to withholding, a taxpayer may request to have federal income tax withheld from them.

In addition to contacting an expert, the Social Security Administration has prepared and excellent brochure on this topic. Don’t wait to ask questions. Finding out the hard way how Social Security payments have affected your tax positions, either now or in the future, can be nuisance.

Individual Income Tax

Planning to Pay Individual Estimated Tax

Some individuals have to pay estimated taxes or face a penalty in the form of interest on the amount underpaid. Self-employed persons, retirees and nonworking individuals most often must pay estimated tax to avoid the penalty. This is an issue that is not confined to just higher-income individuals. Any employee may need to pay them if the amount of tax withheld from wages is not sufficient to cover the tax on other income. The potential tax owed on investment income also may increase the need for paying estimated tax, even among wage earners. While the idea may sound daunting, paying quarterly taxes can be a good thing.

The trick with estimated taxes is to pay a sufficient amount of estimated tax to avoid a penalty but not to overpay. That’s because while the IRS will refund the overpayment when you file your return, it won’t pay you interest on it. Individual estimated tax payments are generally made in four installments. For the typical individual who uses a calendar tax year, payments generally are due on April 15, June 15, and September 15 of the tax year, and January 15 of the following year (or the following business day when it falls on a weekend or other holiday).

Generally, you must pay estimated taxes in 2018 if (1) you expect to owe at least $1,000 in tax after subtracting tax withholding (if you have any) and (2) you expect that your withholding and credits to be less than the smaller of 90 percent of your 2018 taxes or 100 percent of the tax on your 2017 return. There are special rules for higher income individuals.

Usually, there is no penalty if your estimated tax payments plus other tax payments, such as wage withholding, equal either 100 percent of your prior year’s tax liability or 90 percent of your current year’s tax liability. However, if your adjusted gross income for your prior year exceeded $150,000, you must pay either 110 percent of the prior year tax or 90 percent of the current year tax to avoid the estimated tax penalty. For married filing separately, the higher payments apply at $75,000.

Estimated tax is not limited to income tax. In figuring your installments, you must also take into account other taxes such as the alternative minimum tax, penalties for early withdrawals from an IRA or other retirement plan, and self-employment tax, which is the equivalent of social security taxes for the self-employed.

Suppose you owe only a relatively small amount of tax? There is no penalty if the tax underpayment for the year is less than $1,000. However, once an underpayment exceeds $1,000, the penalty applies to the full amount of the underpayment.

What if you realize you have miscalculated before the year ends? An employee may be able to avoid the penalty by getting the employer to increase withholding in an amount needed to cover the shortfall. The IRS will treat the withheld tax as being paid proportionately over the course of the year, even though a greater amount was withheld at year-end. The proportionate treatment could prevent penalties on installments paid earlier in the year.

What else can you do? If you receive income unevenly over the course of the year, you may benefit from using the annualized income installment method of paying estimated tax. You should also contact your tax professional who will be up-to-date with the latest rules on this topic and help to make sure you stay in the clear.

deductibles checklist

Checklist of Commonly Missed Business Deductions

Many business taxpayers fail to deduct otherwise eligible business expenses or fail to fully deduct qualifying business expenses. As a result, millions of dollars are overpaid to the Internal Revenue Service every year.

While tax reporting season still seems far off, it’s a good idea to start identify and gathering receipts now in preparation for April. This can be a pain-free way to make sure you get the most money back on your taxes.

Some business owners swear by apps like Evernote Scannable or Expensify which keep track of your receipts. Using the camera on your mobile device you take a picture of the receipt, and you can save it to the Cloud or application that works the best for you.

Below is a listing of commonly missed deductions or deductions that you may not be fully utilizing. You may wish to carefully examine your records to determine if you may be missing any of these deductions. Remember though, according to the Business Expenses document put out by the IRS (Publication 535), your business expenses must be ordinary and necessary in order to be deducted from your taxes.

  • Home Office Deduction: If you use part of your home as a home office, you may be entitled to deduct expenses related to the home office based on the percentage of square footage the home office occupies. Related expenses include mortgage interest, property taxes, utilities, and repairs, etc.
  • General Business Expenses: If you use your personal funds for business expenses such as office supplies, these are qualifying business expenses, which you may deduct. Some travel expenses are also deductible, if you meet the burden of proof.
  • Imputed Interest on Shareholder Loans: If you have loaned money to your business, you are required to charge interest on the loan or interest will be imputed to you. While you are required to report the interest as income on your personal return, your business is permitted a deduction for the interest paid. If any of the interest amount is improperly characterized as wage income to you, your business may be overstating its employment tax liability. By recharacterizing these amounts as interest expense, your business may be able to reduce its employment taxes and possibly obtain a refund.
  • Meal Expenses: Business meal expenses that you pay with your personal funds  may qualify as a business deduction, subject to limitations.
  • Personal Assets Converted to Business Use: If you have contributed personal assets, such as a computer, the fair market value of these assets qualify as a business deduction, subject to depreciation limitations, beginning with the date of conversion.
  • Self-Employed Health Insurance: As a self-employed taxpayer, you may deduct 100 percent of health insurance premiums for you, your spouse and your children. The deduction may also include eligible long-term care premiums for a long-term care insurance contract.
  • Communications Expenses: Expenses related to the business use of your personal telephones, cellular phones, and internet connections may be deducted.
  • Automobile Expenses: Mileage and other related automobile expenses may be deducted when your personal vehicle is used for business purposes.

If after examining your records you feel that you have missed some qualifying business deductions or if you have any questions about your business deductions or whether certain expenses qualify as business deductions, please be sure to work with your tax professional, they’ll be able to guide you in the right direction.

Valuing Your Employee’s Personal Use of Business Auto

Whether your company supplies business autos to employees primarily as “perks” or as necessary tools to help them get their work done, their personal use of the auto has tax implications for them and for you. That’s because an employee’s personal use of a company auto generally must be treated as non-cash taxable fringe benefit that is also subject to social security taxes. Fortunately, the tax rules give you some flexibility in valuing personal usage of the company car.

Just as there is many leading car brands to chose from, based on your business situation, you can choose from among four valuation methods:

  1. The general fair market value method, which is based on what a person would pay locally to lease a comparable auto for a period of time comparable to the period of time the employee has use of the car;

  2. The lease value method, which assigns an IRS-determined annual lease value to the auto depending on its value when first provided for the employee’s personal use;

  3. The mileage rate method, which values each personal-use mile at a standard business mileage rate designated by the IRS for the year (54.5 cents per mile for 2018); or

  4. The $1.50 per one-way commuting method.

You cannot use the mileage rate method for an automobile (any four-wheeled vehicle, such as a car, pickup truck, or van) if its value when you first make it available to any employee for personal use is more than an amount determined by the IRS as the maximum automobile value for the year. For example, you cannot use the cents-per-mile rule for an automobile that you first made available to an employee in 2017 if its value at that time exceeded $27,300 for a passenger automobile or $31,000 for a truck or van.

You can only use the commuting method if all the following requirements are met.

  • You provide the vehicle to an employee for use in your trade or business and, for bona fide non-compensatory business reasons, you require the employee to commute in the vehicle. You will be treated as if you had met this requirement if the vehicle is generally used each workday to carry at least three employees to and from work in an employer sponsored commuting pool.

  • You establish a written policy under which you do not allow the employee to use the vehicle for personal purposes other than for commuting or de minimis personal use (such as a stop for a personal errand on the way between a business delivery and the employee’s home). Personal use of a vehicle is all use that is not for your trade or business.

  • The employee does not use the vehicle for personal purposes other than commuting and de minimis personal use.

  • If this vehicle is an automobile (any four-wheeled vehicle, such as a car, pickup truck, or van), the employee who uses it for commuting is not a director or highly compensated employee.

The best method for your situation will depend on factors such as the number of annual personal miles driven, value of the car, and the ratio of personal miles to total miles. Sorting through the maze of these rules is not easy. To ensure you find your way through be sure to contact a tax professional who will guide you and also show you how to minimize associated paperwork.

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