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Federal Tax

Qualified Charitable Distributions in 2015 Uncertain, but There is an Option!

Capitol Hill provided an excellent holiday gift in late-December 2014 with the Tax Extenders Package, otherwise known as The Tax Increase Prevention Act. One of the most talked about provisions of the Act was the extension of tax-free distributions from an Individual Retirement Account (IRA) for charitable purposes through December 31, 2014. This is called a Qualified Charitable Distribution (QCD) in tax terms.

A QCD is a very common tax savings strategy. Essentially, a taxpayer who is 70 ½ is subject to required minimum distribution rules and must take at least a specific and calculated distribution from their IRA each year. A QCD allows a taxpayer to satisfy the required distribution rules if they elect to donate their distribution, up to $100,000 per taxpayer, directly to a qualified charity. The benefit to the taxpayer is the amount donated to charity through the IRA distribution is not included in his or her gross income. Generally, amounts that can be excluded from gross income rather than as an itemized tax deduction on Schedule A result in a better tax benefit to the taxpayer, especially given the current environment of the Pease limitations on itemized deductions. For QCDs purposes qualified charities do not include community foundations, private foundations or other donor-advised funds.

IRS Releases New Applicable Federal Rates

Each month, the IRS provides various prescribed rates for federal income tax purposes. These rates, known as Applicable Federal Rates (AFRs), are regularly published as revenue rulings. 

The AFRs for February 2015 are as follows:

Annual Semi-Annual Quarterly Monthly
Short-Term: 1-3 years 0.48% 0.48% 0.48% 0.48%
Mid-Term: >3 & up to 9 years 1.70% 1.69% 1.69% 1.68%
Long-Term: >9 years 2.41% 2.40% 2.39% 2.39%

 

Please click here to see the complete revenue ruling.

Affordable Care Act Update: Shared Responsibility

With 2014 coming to a close, you may be hearing more buzz about the new health care tax. This year was the first year that the Shared Responsibility provision of the Affordable Care Act was in effect. Under this provision, you are required to either have qualified health care coverage or pay a penalty with your annual income tax return. This applies to you and any dependents you are eligible to claim (regardless of whether you claim them or not).

So what does it mean to have qualified health care coverage? The good news is that if you have health insurance, it is probably qualified. Qualified health care coverage, also known as minimum essential coverage, includes a wide range of insurance options from employer sponsored health insurance to government programs like Medicare. To see a full list of what qualifies as minimum essential coverage, visit Healthcare.gov’s qualified coverage page.

If you find that you do not have qualified coverage, you may owe a Shared Responsibility payment with your Federal tax return. But before you break out the calculator, confirm that you are going to owe the payment at all. There are several circumstances under which you may be exempt even if you did not have coverage. For example, if coverage is considered unaffordable or you were uninsured for less than three consecutive months, you may qualify for an exemption. For details on these and other exemptions, visit Healthcare.gov’s fee’s & exemption page.

Qualified Excludable Transportation Benefits

Retroactive Guidance for 2014

The IRS has issued Notice 2015-2, which provides employers guidance on how to deal with the retroactive (Section 103 of the Tax Increase Prevention Act of 2014 enacted 12/19/14) increase in the maximum monthly exclusion afforded employees from $130 to $250 for 2014. The increased exclusion is applicable to employer-provided transit passes and commuter highway vehicle (vanpooling) transportation benefits and puts them on par with the exclusion for qualified parking for tax year 2014. Such benefits are excluded under Section 132(f)(2)(A) of the Internal Revenue Code.


Within Notice 2015-2, the IRS has spelled out a special administrative procedure that is applicable to employers who have not filed their fourth quarter Form 941 and would like to avoid filing amended 941’s for all quarters in 2014. In order to qualify for this procedure, the employer must repay or reimburse their employees that qualify for such benefits the over-collected FICA tax on the “excess transit benefits” for the entire 2014 prior to filing the fourth quarter Form 941.

For those employers that have already filed their fourth quarter Form 941, they are precluded from this special procedure and must file an amended 941-X for each quarter that the repayment or reimbursement is applicable.

Achieving a Better Life Experience (ABLE) Act of 2014

Earlier this week, when the Senate passed the Tax Increase Prevention Act of 2014, they not only approved a number of tax extenders, but they also passed the Achieving a Better Life Experience (ABLE) ACT as well. The ABLE Act, which applies to tax years beginning after December 31, 2014, allows each state to establish a new type of tax-advantaged savings program for disabled individuals and families with disabled children. These new accounts will operate in a similar fashion as 529 college savings accounts, where contributions can be made to an account for a qualified beneficiary and the earnings and qualified distributions will not be subject to income tax.


Qualified Beneficiary

An ABLE account can only be established for a qualified disabled beneficiary. A qualified beneficiary can be determined in two ways:

  1. The individual is entitled to disability benefits under the Social Security disability insurance program or the Supplemental Security Income (SSI) program, and the individual became disabled before reaching the age of 26; or
  2. A disability certification for the individual, signed by a licensed physician, has been filed with the IRS for the tax year certifying that the individual has a medically determinable physical or mental impairment and that the disability occurred before the individual reached the age of 26. 

It is important to note that in both scenarios, an individual must have become disabled before reaching the age of 26.

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