IRS To Recognize Same-Sex Marriages

Today the IRS issued a press release indicating that they will be recognizing same-sex marriages that were legally married in jurisdictions that recognize their marriages. This was expected following the US Supreme Court setting aside a portion of DOMA back on June 26th.

This means that for 2013 these couples must file their federal tax return using either the filing status of married filing joint or married filing separate. Of course that means they will be subject to the various marriage penalties currently in our tax code.

Of particular interest is the clarification that the IRS will recognize these couples as married regardless of whether or not the current jurisdiction (e.g., state) where they live allows same-sex marriages.

It is worth noting that this does not apply to the following:

• registered domestic partnerships, 
• civil unions, or 
• similar formal relationships recognized under state law.

Taxpayers may but are not required to file amended returns for all currently open years (generally 2010-2012).

Affordable Care Act Update - Individual Insurance Issues

Today Treasury (IRS) released final Regulations related to the ACA and minimal essential health insurance coverage for individuals. (The full 75 pages are available here for those wishing to read more.) Key items:

• Individual coverage is measured month-by-month. This relates to whether individuals will have to pay tax penalties for failing to have coverage. Against recommendations, the IRS determined that a month's coverage is determined by the single-day rule. That is, if an individual is covered for any day in the month then they have coverage for the month. (The recommendation was to use a majority of days. But the IRS decided that the math is too difficult, in spite of the requirement that the insurance company will make the determination and send an information return to the individual. Go figure!)
• A taxpayer is responsible for insurance coverage for every person who qualifies to be a dependent, not for those who are actually claimed as a dependent. This includes "qualifying relative" who could be a parent or a roommate.
• There is no ability to shift the responsibility for insurance coverage to a non-custodial parent even if the divorce documents require that parent to provide the insurance.
• When adopting a child, the taxpayer is not responsible for coverage for the month of adoption or any month prior to that month. Conversely when giving up a child for adoption, a taxpayer is not responsible for coverage for the month the child was actually adopted or any month thereafter.
• Household income (used to calculate the tax penalty for non-compliance) includes the income for all those of the household required to pay taxes. 
• Household income must be increased by the amount required to be paid by the taxpayer as the employee portion of the insurance premium for employer-sponsored insurance. (This amount is generally a salary reduction through a "cafeteria" plan and the employee's gross income, as reported on the W-2, is reduced by this amount. Thus it is simply added back on.) Note: This information is not generally reported to an employee but is available from the pay-stubs. Thus the taxpayer will need to maintain these records effective January 1, 2014.
• Pregnancy-related Medicaid is not considered essential medical insurance, and therefore will not enable a taxpayer to escape the non-compliance penalty. (However, the IRS intends to issue guidance to exclude this penalty for 2014 only for those who have pregnancy-related Medicaid. The reasoning is insufficient time to learn that this coverage is insufficient.)
• A self-insured group health plan is an eligible employer-sponsored plan.
• Retiree coverage under a group health plan is minimum essential coverage. However, an individual who is eligible for retiree coverage but does not enroll disregards that eligibility in determining qualification for the lack of affordable coverage exemption. 
• Employer plans include those offered by a third party on behalf of the employer.
• Individuals who are members of a recognized religious sect or division of the sect who are adherents of the established tenets or teachings of the sect or division are eligible to receive a religious conscience exemption certification from an Exchange.
• An individual is exempt for a month for which the individual is incarcerated (other than incarceration pending the disposition of charges).

Obviously the above is far short of 75 pages, which included both commentary and the new Regulations. Not commented on here are many references to taxpayers applying for hardship exemptions. Those are covered by the Department of Health and Human Services (HHS) rather than the Department of Treasury.

The calculations for the tax penalties for non-compliance are, as you might guess, rather complex. I'll save that discussion for another day.

IRS Misleading (Casualty Losses)

I have no idea how many people are signed up for and get regular email blasts from the IRS. (The IRS does not use email to contact individuals about their tax situation. If you get such an email message you can anticipate that it is phishing - do not respond.) Today I received a regular email blast message. I think it is misleading.

The IRS email blasts are generally helpful information although not often that helpful for tax professionals. Still, there are always opportunities to learn, so I receive and skim them for valuable nuggets.

Today's email blast deals with miscellaneous deductions, which is one area where we can itemize deductions to potentially reduce our tax liability. Other areas include medical expenses, state and local taxes paid, interest related to a mortgage on our personal residence or investments, charitable contributions, and casualty losses. Miscellaneous itemized deductions are separated into two groups - those subject to a limitation to the amount that exceeds 2% of our Adjusted Gross Income (AGI), and those that do not suffer this "hurdle" or "haircut."

Why do itemized deductions only potentially reduce our taxes? The laws created by Congress allow for a "standard deduction." Essentially we can deduct that amount without bothering to itemize and detail those deductions for the IRS. Only if we have a larger amount when itemized is it advantageous to "itemized deductions" on our tax return. (At one time this was referred to as the "long form.")

Enough background. What was misleading? When listing items that may be deducted as a miscellaneous deduction not subject to the 2% rule, they included casualty losses. Really?

Casualty losses are separately listed unrelated to the miscellaneous area. But we do not receive the benefit of the full loss. First, each separate loss from the year receives a $100 "haircut." So if your loss is $3,700, it is first reduced to $3,600. A second loss in the year of, for example, $4,200, is reduced to $4,100. So far so good.

But then the total of all losses are reduced by 10% of your AGI. So in our example the $3,600 and $4,100 is combined to equal $7,700. If your AGI is $40,000, then 10% is $4,000. So the $7,700 is reduced to $3,700. This is the amount that is figured into your itemized deductions.

So why do I see the email blast as misleading? The author of the email blast was focused on the miscellaneous deductions. In offering examples of those items that escape the 2% rule, they included casualty losses. While it is technically true that casualty losses escape the 2% rule, they have their own 10% rule! That is considerably less advantageous.

The "mistake" was in considering casualty loss to be a miscellaneous deduction; it is not - casualty losses are listed elsewhere on Schedule A Itemized Deductions. I doubt this will send too many taxpayers running too far in the wrong direction, but I think it best to at least start taxpayers going the correct way. But please, there is no reason to think the error was malicious; I think it was simply an error the author made while focused on the area of miscellaneous deductions.