One of the topics we get the most questions on is the Affordable Care Act (Obamacare). Despite it's name, the act, which requires taxpayers to purchase health insurance or pay a penalty, has caused health costs to rise significantly.
President Trump made many promises to repeal Obamacare during his surprising run to the Oval Office, One of his first executive orders was to allow certain agencies the authority and discretion to roll back certain provisions of the ACA. While it it still unclear what that means for most agencies, we now have a clue as to how the IRS is interpreting this order.
The IRS issued a statement saying that as a result of Trump's executive order, they will not systematically reject tax returns where a taxpayer does not indicate their coverage status. What this means is that the IRS is trying to ease the burden on taxpayers during the filing of their return. It does NOT repeal Obamacare, nor does it repeal the taxpayers' requirement to maintain coverage. All it does is allow your return to be processed even if you do not indicate your coverage status. Obamacare cannot be repealed by an executive order. It must be an act of congress.
So what happens if you choose not to show your coverage on your 2016 tax return? While the IRS will accept your filing, you can expect to receive a notice asking you to verify your coverage.
In essence, the IRS's administrative change here does not relieve any real burden or provide any way to avoid the health care penalty. We still highly recommend reporting your coverage status on your return as you file. Give us a call with any questions!
A common concern at tax time is whether all possible deductions are taken to reduce taxable income. In a previous blog post we talked about having higher-than average deductions and higher-than-average charitable contributions. Some people worry that taking too many deductions is a red flag, begging for an IRS audit.
Should you reduce the deductions you claim to reduce audit concerns? NO! If you have legitimate deductions, claim them!
First, if you paid for it (deduction) or gave it away (charitable deduction), claim it! Don’t be afraid to report what actually happened.
Second, the IRS audit rates are extremely low, less than 1% for most people. The IRS tracks statistical data for returns to compare each individual return against a composite of everyone’s returns. Suppose your deductions are outside the statistical norm. Will that increase your chances for an audit? Probably. But even if your audit risk doubles, it is still extremely low.
If your income and deductions catch the attention of the IRS, then what? Most likely you will get an automated letter from the IRS asking you to substantiate the deductions you took. You respond to the letter with the documents supporting your claimed deduction. In most cases that’s the end. You’ve answered the IRS’s question, proven the deduction you claimed, and – don’t forget – got a nice little tax deduction too.
We understand the perception most people have about audits, and the drama and chaos they bring. Most of the time that is an exaggeration. We don’t want to appear cavalier about people’s concerns about an audit. But more importantly we don’t want people to give away tax dollars because of fear of taking a legitimate deduction.
If you want to know more, there is a wealth of information at the IRS Tax Statistics page and IRS SOI (Statistics of Income) page. If you have questions about that data or would like to ask us about anything else call us at 435-275-8400.
I'm sure we are all painfully aware that tax season is officially here! For most people, that means hours digging through files and waiting for things in the mail. Then you hope you got everything and hope your software or accountant checks for everything else. Oftentimes you leave the appointment wondering, did I ask the right questions? Well, wonder no more! Next time you meet with your accountant, review this list of questions with them to make sure you have all your bases covered.
It is never too late to have a professional review your tax return to help find areas for improvement. If you have any of these question unanswered, give us a call to see if we can help! 435-275-8400
Happy tax season!
Next Step Blog
Our blog is intended as a tool to keep people informed about relevant tax and accounting issues. If you have a question or an idea for a post, let us know!