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Monthly Client Newsletter | April 2010
H appy tax filing month! To celebrate the season, included in this month's issue are a few tax history questions along with a brief recap of the recently signed Health Care bill.
Contents
- What's in the New Health Care Bill?
- Federal Income Tax Fun Facts
- Adoption Credit Extended AND Increased
- IRS Audit Triggers and Red Flags
- It All Adds Up!
What's in the New Health Care Bill?
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 | Government Insurance Help. Families with incomes up to $88,000 may receive government help to pay for health insurance. | |||||||
 | You Must Have Health Insurance. Beginning in 2014, all Americans will be required to obtain health insurance or they will be penalized via an excise tax. The tax amount is subject to change, but the current proposal is to tax each uninsured individual $750 per year plus 50% of that amount for each child not covered. There will be a maximum tax per family. Most employers are also required to provide affordable health insurance to employees or face penalties as well. | |||||||
 | Higher Medicare Tax. To pay for the bill, the Medicare payroll tax is being increased 0.9% to 2.35% on wages above $200,000 for individuals and above $250,000 for those married filing jointly starting in 2013. | |||||||
 | Increase in Those Covered by Medicaid. Households with incomes up to 133% of the federal poverty level (about $29,327 for a family of four) will now be eligible for Medicaid benefits. | |||||||
 | State-run Insurance Exchanges. A new state-run insurance exchange will be created to help unemployed or newly self-employed individuals afford health insurance. | |||||||
 | Tax on High-Cost Policies. Starting in 2018, health care plans with a premium cost of $10,200 or more for singles and over $27,500 for families could face a 40% tax on the excess amounts. These amounts are pegged to inflation and will be billed to the insurance company writing the policy. | |||||||
 | New Interest, Dividend and Capital Gain Tax. Starting in 2013 a new 3.8% tax will be imposed on dividends, interest and capital gains for all individuals making more than $200,000 ($250,000 for married filing jointly). | |||||||
 | Medical Itemized Deduction Threshold Increases. Beginning in 2013 you will need medical expenses in excess of 10% (formerly 7.5%) of your income prior to using the expenses as an itemized deduction. There is an exception for those over 65 years old who may still use the 7.5% threshold. | |||||||
As stated earlier, more details are to follow, and rest assured changes in America's health care system are just beginning as everyone adjusts to this new legislation.
Federal Income Tax Fun Facts
Amaze family and friends with your tax history knowledge
As we celebrate (perhaps a better word is...acknowledge) the month our income taxes are due, here is a little quiz to see how well you know your Federal income tax history. Enjoy.
 | When was the Federal income tax introduced? | |||||||||||||||
 | 8/5/1861. During Abraham Lincoln's administration Congress passed Article 1, Section 8 of the U.S. Constitution providing Congress the power to impose and collect taxes. It was introduced to help pay for the Civil war. The tax was later dropped and then re-introduced in 1912-1913. | |||||||||||||||
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 | What was the first income tax rate? | |||||||||||||||
| 3% of all incomes over $800. | |||||||||||||||
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 | What administration imposed the highest marginal tax rate? | |||||||||||||||
| Franklin D. Roosevelt signed an executive order to impose a 100% tax on all income over $25,000! While Congress rescinded the order, the highest marginal tax rate was established during his administration. The rate? 94% in 1944 -1945 on incomes over $200,000. | |||||||||||||||
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 | Has illegal income always been taxable? | |||||||||||||||
| No, in 1916 the word "lawful" was deleted in front of the word "income" making illegally gotten gains also taxable. This change was to be the downfall of many a criminal, including the legendary gangster Al Capone. | |||||||||||||||
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 | What states contribute the most revenue per person (per capita)? | |||||||||||||||
| Note: This is as of 2007, including federal income, estate, gift, and excise taxes.
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 | When was the Form 1040 introduced? | |||||||||||||||
| 1913 | |||||||||||||||
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 | What was the tax rate on this initial 1913 Form 1040 tax return? | |||||||||||||||
| 1% on all income with a $2,500 - $4,000 exemption. There was also a "super tax" on all income over $20,000 with a maximum federal income tax rate of 6% for incomes over $500,000. | |||||||||||||||
Adoption Credit Extended AND Increased
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IRS Audit Triggers and Red Flags
Everyone wants to avoid being audited by the IRS, but this year you may have more reason to fear an audit. More Americans than ever may be subject to an audit as the government tries to increase tax collection to help offset the enormous deficit.
While the IRS does not reveal its process for flagging returns, there are some common audit triggers and red flags. Keep in mind, however, that just because something on your return might attract the IRS's attention doesn't mean it's wrong. It simply means you need to be fully prepared to defend yourself if you are audited. Common audit triggers include:
High Income: It's a fact--higher income earners are audited more often. In 2008, taxpayers earning less than $200,000 were audited .95% of the time, while those earning more than $1 million were audited at a rate of 5.57%. The point here is that audits in this income group are, more often than not, simply triggered by your income level. As long as your documentation is in place you should be fine.
Large Charitable Donations: Making a large charitable donation is another audit trigger, particularly if the donation is large in comparison to your income. More people may trigger a letter from the IRS this year as many may have made contributions earlier in the year and then lost their jobs later in the year. With recent changes in the tax code, it is more important than ever to have cancelled checks, receipts, statements and acknowledgements from the charitable organization to defend your deductions.
Foreign Bank Accounts: The government is cracking down on off-shore accounts. If you have an offshore account, be sure to report it and any interest earned in that account. Also, you must report foreign bank deposits that exceed $10,000 at any point during the year on Form 90-22.1.
Cost Basis on Stock Sales: If you sold stocks this year, you must go back and find the exact price of the stock when you purchased it so that the IRS can determine how much profit you made on the stock sale. In the future, investment companies are required to disclose your cost basis of investment purchases.
Home-office and Self-Employed Deductions: With more Americans losing their jobs, more taxpayers will be trying to claim home-office and self-employed deductions. The IRS has become increasingly skeptical of the legitimacy of home-based and cash-based businesses, which could make audits in this category more likely. To show that your home-business is legitimate, you must keep detailed and accurate records of business income and expenses and you should keep separate business and personal bank accounts.
Mismatched income: The most common IRS audit letter is generated when the IRS receives reporting that does not match the amount claimed on your tax return. Common examples are employer W-2's and 1099's for interest income, dividends, capital gains, and retirement account activity. To avoid this problem it is always best to include copies of ALL W-2s and 1099s when preparing your return, even if there were offsetting expenses or a simple "rollover" of funds.
If you receive a notice from the IRS don't panic, but don't ignore the notice either. Open the envelope and then request assistance. Often times the IRS can be satisfied via timely correspondence and substantiation of a questioned item from your tax return.
It All Adds Up!
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