Monthly Archives: February 2015

Severance Pay is Taxable

When you lay off employees, severance pay is often a part of the deal. According to the United States Department of Labor, this pay is not required under any circumstances. However, many employers choose to offer severance pay in order to ease the transition into unemployment or a new job.

Unfortunately, even though severance pay is not a typical wage, the Supreme Court says it is still subject to the same payroll taxes as any other payment made to employees.

Taxability of Severance Pay
Like most other types of employee compensation, severance pay is subject to income taxes after it is received by the employee. However, because these benefits aren’t paid to employees for a specific period of hours worked or service provided, some employers have questioned whether severance pay should be subject to payroll taxes.

According to Forbes, this issue made it all the way to the Supreme Court after two cases tried in lower courts ended with conflicting decisions. In the end, the Supreme Court ruled that all severance pay is taxable under the Federal Insurance Contributions Act.

Applicable Taxes
Because of this recent ruling, employers must continue withholding payroll taxes from severance pay, as well as paying their portion of these taxes to the IRS. Payroll taxes include both Social Security taxes and Medicare taxes. According to the IRS, the current Social Security tax rate is 12.4 percent (6.2 percent from the employer and 6.2 percent from the employee). The current Medicare tax rate is 2.9 percent (1.45 percent from each party).

If you have any questions about severance pay and how it may affect you as a dental practice owner or employee, please don’t hesitate to contact us.

What to Do if Your Tax Refund Check is Stolen or Lost

Californial Dental CPAWhether your tax refund check was lost or stolen, swift action is the best course of action to handle the situation. The longer you wait, the more difficult it becomes for the IRS to track the check and get your money to you. These are the steps you need to take.

Lost Refund Checks
Lost checks are, indeed, frustrating, but it does happen. The first step you need to take is to contact the IRS by calling 800-829-1954. If your return was married filing jointly, however, you must choose to speak with an agent rather than going through the automated system to make the claim.

At this point, the IRS will issue a Taxpayer Statement Regarding Refund form (Form 3911), which will begin the replacement process.

Once the missing refund has been processed and the check cashed, you will receive a claim package including a copy of the check from the Bureau of Fiscal Services. The IRS will examine both the signature on the check and the claim before deciding whether to process an additional refund. The review process may take up to six weeks.

Stolen Refund Checks
Before you panic believing the check has been stolen in the mail, you should call 800-829-4477 to verify that your refund has, in fact, been issued and mailed to you. You will need to know your social security number and the exact amount of the expected refund.

If your check has been stolen, call the number above, and provide the information required. You must typically wait 28 days from the date the check was mailed in order to file a claim, once you do, Uncle Sam can begin the process of re-issuing your refund.

If you have questions or concerns about your options if your tax refund check has been lost or stolen, your accountant is available to walk you through the actions you should take next.

The New Form 1095-A: Reporting Health Insurance Coverage

For the first time, all taxpayers must include information about their health care coverage to the IRS on their 2014 Form 1040.  Another year, another tax form or two.

The year 2014 was the first tax year that the Individual Shared Responsibility Provision (SRP) of the Affordable Care Act (ACA) went into effect. That means all taxpayers were required by law to have had minimum essential coverage for all 12 months, which includes:
– Government-sponsored programs like Medicare
– Employer-sponsored coverage
– Individual coverage purchased through the Health Insurance Marketplace (either
– or your state’s exchange) or directly from an insurance company, or
– Grandfathered health plans (some that existed before the ACA was passed and have not changed since)

If you have such health coverage, all you have to do is check the “Yes” box on the new line 61 on the 2014 Form 1040.

Figure 1: The 2014 IRS Form 1040 now asks about your household’s health coverage.

A New Form
If you bought a plan through the Health Insurance Marketplace, you should have received an IRS Form 1095-A by January 31, 2015. If you have not received it by now, contact the marketplace where you signed up for coverage; don’t contact the IRS.

The Form 1095-A, which is issued by the marketplace, contains several types of information, including details about you, your policy, household individuals covered, your monthly premiums and any advance credit payments you received (this would have occurred during enrollment).

Premium Tax Credits
The ACA built in provisions for individuals who could not afford even a lower-tier health insurance policy – Premium Tax Credits (PTC) – to ensure that all taxpayers would be able to buy coverage. This formula involves comparing your income to the Federal Poverty Line (FPL). Your marketplace should have notified you about your PTC status.

However, if your household situation changed between the estimates made during the enrollment period and your IRS income tax preparation (due to divorce, income increase or decrease, etc.), you’ll need to see if you are still eligible. To do so, fill out a Form 8962.

Figure 2: You’ll need to complete a Form 8962 to see if you can claim the Premium Tax Credit.

Basically, the IRS is trying to calculate the amount of tax credit you should receive.

If there is a difference between any advance credit payment made and the new, calculated Premium Tax Credit, you may receive a refund – or be required to repay the excess.

Warning: The Form 8962 is a complicated new form, so there is bound to be some confusion. You may want our help with it.

Exemptions and Penalties
If you did not have health insurance in 2014, the IRS will assess what’s called an individual shared responsibility payment. In other words, a penalty. For tax year 2014, that payment would amount to whichever of these is greater:
– One percent of the household income that is above the tax return filing threshold for the taxpayer’s filing status, or
– The family’s flat dollar amount, which is $95 per adult and $47.50 per child (under age 18), limited to a family maximum of $285.

There are exceptions, though. For example, you may be granted an exemption if your household income is below the return filing threshold or if there was only a short coverage gap. If you have received an exemption, you’ll need to complete and file a Form 8965 with your 1040.

Note: The marketplace grants certain exemptions, while others are claimed on your tax returns. It depends on the exemption. If you think you are entitled to an exemption and have not been given one, please contact us right away.

Most taxpayers will simply be able to put a check in the Full-year coverage box on line 61 of the 2014 1040. But if you bought a policy through the Health Insurance Marketplace – either federal or state – for 2014, we strongly urge you to contact us.

There will undoubtedly be many taxpayers puzzling over the ramifications of this new ACA provision. You don’t have to be one of them.