Tax

2016 Tax Season Forecast: Doom and Gloom if You Want Help from the IRS

During the 2015 income tax filing season, increased compliance requirements combined with budget cuts to produce one of the worst tax seasons in history, at least for taxpayers who sought assistance from the IRS. More than 137 million tax returns were filed, with more than 83 million taxpayers contacting the IRS toll-free customer service line at least once seeking assistance.

Hold, Please

Out of the 80 million-plus calls initiated, a miserable 37.6 percent were actually answered by an IRS agent, with remaining callers receiving what the IRS has named “courtesy” hang-ups after extended hold times. This figure is in sharp contrast to the more than 70 percent of taxpayer calls to the taxpayer toll-free IRS call center that were handled by an agent in 2014. Wait times for all callers averaged more than 23 minutes. Taxpayers who sought in-person assistance at Taxpayer Assistance Centers also experienced lengthy waits; funding for TACs was cut by 4 percent in 2015.

With no significant increases in funding assigned to the IRS in 2015, all indicators point to the availability of assistance by telephone being just as dreadful for the 2016 tax season. A number of factors are involved, many of which are repeats from earlier years. Several examples are outlined below.

Patient Protection and Affordable Care Act

The Patient Protection and Affordable Care Act (ACA), also known as Obamacare, went into full effect for individual taxpayers in 2014. One of the most misunderstood provisions of the ACA is the individual mandate which requires a majority of individuals to purchase health insurance that fulfills federal guidelines – or face a penalty. Many individuals had the mistaken impression that the penalty was 96 dollars across the board, and only learned differently when they prepared their 2014 tax returns.

For 2016, the penalty has increased dramatically, which will come as a surprise to still more taxpayers. Increased incentives related to the ACA almost undoubtedly mean that the number of returns filed will likely hold steady or even increase. More tax returns generates the knock-on effect of more taxpayer calls to the IRS – many of them going unanswered, just as they did in 2015. In addition, businesses with at the equivalent of 50 full-time employees will be required to provide health insurance to their workers. However, that requirement does not extend to part-time workers or to the families of full-time workers, which points to the likelihood of even more confusion for taxpayers preparing their 2015 federal tax returns.

Last Minute Tax Provisions

For the past several years, there has been suspense about whether particular tax provisions will be extended by Congress. The final determination often occurs right before the end of the year, which does not allow the IRS sufficient time to prepare its forms and instructions and have them ready by the customary January 1 opening date for tax season, resulting in delays in processing tax refunds. For instance, in 2014, Congress enacted last minute tax provisions on December 16, just two weeks before the end of the calendar year. As a result, the IRS delayed the acceptance of the first tax return until January 20, 2015.

Given the present divisiveness in Congress, it should come as no surprise that 2015 has proven to be no different than 2014. Although the Senate Finance Committee passed a set of 56 temporary tax breaks in July 2015, as of early December 2015 the full House and Senate had not taken action on the package. Expectations are that Congress will act on the provisions before they leave for the year, and as of this writing, there was no announcement of a delay for filing tax returns in 2016. However, depending on what Congress finally does or does not due, the possibility remains that a delay will occur for the beginning of the 2016 federal tax filing season, with subsequent delays in processing tax returns and issuing tax refunds.

Tax Fraud

tax_fraudThe IRS takes tax fraud very seriously. Nonetheless, in May 2015, the IRS reported that they had identified more than 163,000 fraudulent or potentially fraudulent tax returns, claiming more than 900 million dollars in refunds, with 787 million dollars in fraudulent refunds actually paid. In a related incident, the IRS reported in May 2015 that approximately 100,000 taxpayer accounts had been compromised through its online “Get Transcript” service. In response, the IRS suspended the ability to order transcripts online. Taxpayers can still order transcripts by mail, which the IRS states requires five to 10 calendar days for processing.

To reduce future incidents of tax fraud and data breaches, the IRS has boosted filters and screening – which will likely translate to delays in processing income tax returns as well as issuing tax refund checks during the 2016 tax season.

Earned Income Tax Credit

EITC_grnThe Earned Income Tax Credit (EITC) provides workers with modest incomes with a refundable tax credit. It is also a popular target for attempted tax fraud. The IRS has created a due diligence checklist for the Earned Income Tax Credit that it stresses paid tax preparers to use. However, there will be additional efforts by the IRS to require individual taxpayers to use the checklist as well. This development is almost guaranteed to increase confusion among taxpayers, with the domino effect of delayed tax refunds.

Easing the Pain of Tax Filing Season

The IRS.gov website contains extensive information for individuals and business owners filing their own tax returns – or preparing documentation for paid tax preparers. News, informational articles and downloadable forms are readily available. Taxpayer related information is also available through the U.S. Treasury, Treasury Inspector General for Tax Administration and USA.gov websites.

However, taxpayers with complex income tax returns – or anyone who has questions about completing their tax returns – can’t count on receiving assistance from the IRS for the upcoming tax filing season. One alternative is to turn to the professionals at Optima Tax Relief. In addition to answering tax inquiries, they can assist you with any issue or dispute you may have with your federal or state tax returns – without a 20 minute wait to speak with an agent.

Historical Highlights of the IRS

Every taxpayer knows about the existence of the IRS, but many people do not realize that the United States only began collecting income taxes from individuals in 1862. The following timeline documents the history and intriguing development of the collection arm of the Treasury department.

The First Income Taxtax

1862 – President Lincoln issued a revenue-raising measure into law to help pay for Civil War expenses. The measure also created a Commissioner of Internal Revenue along with the nation’s first income tax. An additional 3 percent tax was levied on incomes between 600 and 10,000 dollars and a 5 percent tax on incomes of more than 10,000 dollars

1867 – Facing stiff public opposition, Congress cuts the income tax rate. As a result, from 1868 until 1913, 90 percent of all national revenue came from taxes on liquor, beer, wine and tobacco.

1872 – Income tax repealed.

Creation of the Bureau of Internal Revenue

1894 – The Wilson Tariff Act revived the income tax and created an income tax division within the Bureau of Internal Revenue.

1895 – The new tax was ruled unconstitutional by the Supreme Court on the grounds that it was a direct tax, not apportioned among the states on the basis of population. As a result, the income tax division was disbanded.

Ratification of the 16th Amendment and World War I

16th ammendment1909 – President Taft requested Congress to propose a constitutional amendment giving the government power to tax incomes directly. Congress also levied a 1 percent tax on net corporate incomes of more than 5,000 dollars.

1913 – Under the looming threat of World War I, Wyoming became the crucial 36th state to ratify the 16th Amendment. The amendment stated, “Congress shall have the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration.” Later, Congress adopted a 1 percent tax on net personal income of more than 3,000 dollars with a surtax of 6 percent on incomes of more than 500,000 dollars. Congress also repealed the 1909 corporate income tax. The first Form 1040 was introduced the same year.

1918 – The Revenue Act of 1918 raised more money to finance the World War I effort. The Act also codified all existing tax laws and imposed a progressive income tax structure, with rates up to 77 percent.

Prohibition and Taxationprohibition

1919 – The 18th Amendment was ratified, barring the manufacture, sale or transport of intoxicating beverages. Congress also passed the Volstead Act, granting the Commissioner of Internal Revenue primary responsibility for enforcement of Prohibition. The Department of Justice assumed primary prohibition enforcement duties eleven years later.

1931 – An undercover agent employed by the IRS Intelligence Unit gathered evidence against gangster Al Capone. The evidence was used to convict Capone of tax evasion. He died in prison before serving out his 11 year sentence.

1933 – Prohibition repealed. IRS resumed responsibility for alcohol taxation the following year, along with administration of the National Firearms Act. Enforcement of the tobacco tax was added later.

Individual Deductions and Employer Tax Withholding

1942 – The Revenue Act of 1942 which FDR hailed as “the greatest tax bill in American history,” passed Congress. The Act increased taxes along with the number of Americans required to pay income tax. The Act also created deductions for medical and investment expenses.

1943 – Current Tax Payment Act, which required employers to withhold taxes from employees’ wages and remit them quarterly was passed by Congress

1944 – Congress passed the Individual Income Tax Act, creating standard deductions on Form 1040.

The Creation of the IRS

IRS1952 – Reorganization Plan No. 1 proposed by President Truman. The Plan, designed to restore public confidence in the agency, replaced the patronage system at the IRS with a career civil service system and decentralized service to taxpayers.

1953 – Truman’s reorganization plan endorsed by President Eisenhower, who changed the name of the agency from the Bureau of Internal Revenue to the Internal Revenue Service.

Mid Century Modifications

1954 – Filing deadline for individual tax returns changed from March 15 to April 15.

1961 – The dedication of the National Computer Center at Martinsburg, W.Va. heralded the beginning of the computer age for the IRS

1965 – First toll-free telephone number instituted for the IRS.

1972 – The division of Alcohol, Tobacco and Firearms separated from the IRS to become the independent Bureau of Alcohol, Tobacco and Firearms.

1974 – Congress passed the Employee Retirement and Income Security Act, assigning the IRS regulatory responsibilities for employee benefit plans.

Electronic Filingefile

1986 – First year for limited electronic filing. President Reagan signed the Tax Reform Act, containing 300 provisions and requiring three years to implement. As the most significant piece of tax legislation in 30 years, the Act codified federal tax laws for the third time since the Revenue Act of 1918.

1992 – Taxpayers owing money to the IRS were allowed to file returns electronically.

21st Century Reform

1998 – Congress passed the IRS Restructuring and Reform Act, expanding taxpayer rights reorganizing the agency into four operating divisions aligned to address taxpayer needs.

2000 – IRS ended its geographic-based structure and instituted four major operating divisions: Wage and Investment, Small Business/Self-Employed, Large and Mid-Size Business and Tax Exempt and Government Entities. This change represented the most sweeping adjustment to the IRS since 1953.

Mid-Year Refunds Initiated

tax-refund2001 – Mid-year tax refund program to provide advance payments of a tax rate reduction administered by the IRS

2003 – A second mid-year refund program, this time providing an advance payment of an increase in the Child Tax Credit was administered by the IRS. During this same year, electronic filing reached 52.9 million tax returns, representing more than 40 percent of all individual tax returns — a new high.

General Tax Info For The Gambler

In the last thirty years, gambling has changed its image from a quasi-legal activity to a major player in the economy. The IRS has responded accordingly, now requiring gambling winnings to be reported as a source of income, with losses deductible only to the extent of winnings. Even a professional gambler cannot generate a loss with gambling losses. (IRC section 165(d).) (If you win a prize in a drawing, that does not count as  “gambling.” It is reported on 1099-MISC, and other rules apply.)

gamble

If you are fortunate enough to win $1200 in a jackpot at a slot machine, $1500 from keno, $5000 from a poker tournament, or $600 or more from “other” gambling winnings, then the casino will record your Social Security Number and the amount of the win, and write it off as an expense. Casinos offer a win-loss statement for their slot players that itemizes coin-in and coin-out, but vary in their player-tracking policies for other types of play. The casino will give you a copy of the gambling win, on Form W-2G and send a copy to the IRS. The IRS will use this gross figure as increased ordinary income unless you can indicate losses against this win. Senior citizens beware: the amount indicated on line 21 of Form W-2G will potentially make more of your Social Security benefits taxable!

The traditional place to declare gambling losses is on Schedule A under miscellaneous deductions, but there are problems with doing it this way. First, you must “qualify” to itemize deductions on Schedule A.  For Schedule A to do you any good, your deductions must be greater than what you would receive as the standard deduction.

Let us say that you are single, so your standard deduction for 2014 is $6,200. If your allowable itemized deductions total less than this amount, then filing a Schedule A won’t benefit you. However, if you have sufficient mortgage interest, real estate taxes or charitable contributions to justify itemizing your deductions, then declaring a $1200 loss on Schedule A will help to offset the $1200 win.

If you don’t qualify for a Schedule A, or if you want to report less than what appears on line 21 of Form W-2G , then you have significantly more bookkeeping to do. All winnings, not just W-2G winnings, are reportable. Therefore, you must maintain a day-to-day diary that itemizes ALL of your winnings and losses per session, not just amounts of $1200 and over. The diary, similar to a tip diary, must be credible. It’s a good idea to back it up with bank records, ATM slips, and casino win-loss statements.

gambleIf you travel to gambling resorts once or twice a year, be prepared to keep a log of your winnings and losses per trip. As you arrive at your resort or hotel, make a dated note of your “buy in”, the amount of cash that you brought along to play with. When you check out of the hotel or resort, make a note of your “win” (or loss). This is considered the end of your gambling session.

If you live in a gambling city such as Reno or Las Vegas, then there is technically no way to delineate a gambling session, since slot machines are available in supermarkets and convenience stores 24 hours a day, as well as in bars and restaurants. If you are reporting less than the amount of winnings reported on Forms W-2G, be prepared for an IRS letter or an audit, and have all of the records required for a day-to-day record of wins and losses.  You should also be aware of various state laws that may vary from federal requirements. In such cases, it’s a smart strategy to have a tax professional assist you with the reportable figure. This option will require conforming to the situation in the court case Shollenberger v. Commissioner T.C. memo 2009-306, as referenced in The Tax Book, by Tax Materials , Inc.

Don’t expect casinos to proactively withhold any portion of your winnings for tax purposes unless state law requires it. Most state laws do not. Exceptions include foreign winners or other special circumstances.

There are two obvious reasons casinos won’t voluntarily place tax withholdings on your gambling winnings:

  1.      Withholding creates added administration paperwork
  2.      Withholding disrupts the flow of business (if the money is withheld, then you won’t lose it back)

You can request that money be withheld from your winnings (perhaps based on your marginal tax rate or higher) at the time of the payoff. But you should not request withholding if your winnings come from the casino where you work. (Some states and casinos allow casino workers to gamble where they work; others do not.) However you go about doing so, having tax withholdings from gambling winnings can potentially save you hundreds or even thousands of dollars at tax time.

Charitable Giving

As taxpayers are aware, charitable donations are deductible. Information concerning charitable giving has been provided directly from the Internal Revenue Service (IRS) and is included below.

Rules for Giving

A full discussion of the rules for charitable contributions is contained in Publication 526, which is available on the IRS website. It’s a good idea to read this information before making year-end charitable deductions and prior to claiming deductions for charitable giving on your 2014 federal income tax return. It’s especially important to understand the rules concerning cash and non-cash donations, including calculating the value of your gift.

For tax filers completing their own returns, it’s essential to read  Publication 561 to learn how to determine valuation for non-cash gifts, preferably before you have made the gift.  The IRS has provided several tips to making charitable donations.

A Few Tipsgiving

These are a few guidelines the IRS is providing before you fill out Schedule A and the section for charitable donations:

* Not all charities are created equal! Both qualified and unqualified charities exist. A list of qualified charities is available on the IRS website. The IRS cautions taxpayers that  “sounding like” a viable charity does not qualify a charity.

* You can deduct contributions to churches, synagogues, temples, mosques and government agencies even if they do not appear on the list of qualified charities.

* Cash donations and gifts are those paid in cash, but also by check, fund transfer, payroll deduction and credit card. The bank record or letter from the recipient provides sufficient documentation to fulfill the IRS requirement for maintaining records for claiming charitable cash deductions on your federal income tax return.

* Donations of household items (furniture, electronics, appliances, linens, window treatments, draperies, area rugs, etc) are deductible ONLY if they are in reasonably good shape. Non-cash donations valued at  more than $500, must be verified with a qualified appraisal retained with your tax records.

* Receiving charities should provide a thank-you letter for each contribution (money or property) of $250 or more. If the charity does not voluntarily supply such a letter, request one.

* Donations of airplanes, boats and cars are subject to specific rules. Check the IRS website for details  (www.irs.gov) and additional pertinent information.

It’s unlikely that the IRS would challenge your return solely on the basis of charitable deductions totaling less than four figures. Nonetheless, following these tips will help to keep you on the right side of filing guidelines — regardless of the size(s) of your donation(s).

Payment Alternatives When You Owe the IRS

If you cannot pay the full amount of taxes you owe, don’t panic. You should file your 2014 tax return on time and pay as much as possible. This will help reduce the penalties and interest that may result from a late tax payment. If you can’t afford to pay what you owe in full, there are available alternatives.

IRSPayment Plans

A payment plan may be an option. You can request a short-term payment plan up to 120-days. There is no user fee for a short-payment plan.

You can also request a longer term monthly payment agreement. A one-time $120 user fee applies to monthly payment plans; the fee is reduced to $52 if you make your payments by direct debit.

Individual taxpayers who owe more than $50,000 and businesses that owe more than $25,000 are required to submit a financial statement with their request for a payment plan.

Offer in Compromisetaxes

An Offer in Compromise is an agreement between you and the IRS to settle your tax debt for less than the full amount you owe. The offer program provides eligible taxpayers with a path toward paying off their tax debt and getting a “fresh start.” Not everyone will qualify for an offer. Use the IRS Offer in Compromise Pre-Qualifier Tool to see if the Offer program is right for you.

Other Options

If you do not find an option that works for you, other alternatives, including a temporary suspension of IRS collection efforts, may be available. Contact the IRS immediately to discuss these other options.

IRS-Tax-DebtRegardless of which option you choose, it is important to know that the IRS has a minimum of 10 years to collect your taxes from the date they were assessed. Many people don’t know that there are ways this time period can be suspended. For example, by law, the time to collect may be suspended while the IRS is considering your request for an Installment Agreement or Offer in Compromise. If your request is rejected, they will suspend collection for another 30 days, as well as during any period the Appeals Office is considering your appeal request.

If you live outside the U.S. continuously for at least 6 months collection will be suspended while you’re outside the country. Should you be in the middle of a bankruptcy, there is an automatic suspension for a time period because of the automatic stay plus 6 months. Also, if you request a Collection Due Process hearing, collection will be suspended from the date of your request until a Notice of Determination is issued or the Tax Court’s decision is final.

Beginner’s Guide To General Tax Info For Married Couples

So you’re newly married and looking for general tax info, but you’re not sure of how to start. Look no further. We’ve prepared a beginner’s guide for filing tax returns for married couples.

Married couples may file either jointly or separately. Advantages and disadvantages vary for each filing status according to your joint debt load, your income and other factors.  Most married couples benefit financially by filing jointly These benefits include the following:

  • The unemployed spouse can have a fully-funded, tax free traditional Individual Retirement Account
  • A legally recognized marriage can protect the estate
  • Married couples are entitled to higher charitable contribution deductions.

In addition, there are several drawbacks to married couples filing separately, including:

  • The Alternative Minimum Tax exemption for married couples filing separately is half the amount allowed for married couples filing jointly.
  • Adoption credits and exclusions are usually not allowed.
  • The capital loss deduction limit is $1,500 for married couples filing separately, versus  $3,000 for married couples filing jointly.

Married couples living in community property states must divide expenses for state taxes. Mandatory community property states are  Arizona, California, Idaho, Louisiana, Nevada, Mexico, Texas, Washington, and Wisconsin. Alaska is an opt-in community property state.

Tax filing requirements vary for same-sex married couples. They may file joint federal tax returns due to the defeat of the Defense of Marriage Act. However, they may or may not be entitled to file joint state tax returns. Joint returns are allowed in states that recognize same-sex marriage. For same sex married couples who live in states that do not recognize their marriages as legal, states may require one of three possible scenarios:

  • File separate returns by allocating income according to a schedule.
  • Complete pro forma federal returns and use that information.
  • Allocate income based on a ratio.(Alabama only)

If you are unsure of what to do, test the waters by enlisting the aid of a tax professional.

 

General Tax Info To Help Take Some Of The Stress Out Of Next Tax Season

It is important for small businesses to understand that the federal government is cracking down on business owners who try to evade reporting requirements.

At one time, it was possible for small business owners to increase their income by operating small, cash-only enterprises. They skirted the IRS reporting requirement for large bank deposits by making frequent deposits of less than $10,000 each.  No longer.

The tactic is called structuring and it is strictly illegal, and the the government has a powerful new weapon to prevent it. The law now allows the government to seize bank accounts merely on suspicion of wrongdoing — and frequent, small deposits arouse scrutiny. Family-owned businesses and even individuals saving for their children’s college education can be targeted.

An October 2014 article in The New York Times includes several points concerning the new law that all citizens — not just business owners — should be aware of:

  • Making small bank deposits, even frequently, is perfectly legal.  It is the attempt to skirt tax reporting requirements that is against the law. However, it is up to the individual to prove that he or she has done nothing wrong.
  • A bank statement is all that is needed for banks to file suspicious activity reports. Last year banks filed more than 700,000 such reports.
  • Fighting bank account seizure in the courts can require individuals to accrue legal costs of $20,000 or more. Many middle class individuals simply cannot afford that sum — and simply give up, even when they are totally innocent.

It is still important to use bank accounts to obtain FDIC protection. However, to avoid being caught by an accusation of structuring, middle income earners should adhere strictly to the law:

  • Always make deposits of at least $10,000 so that the bank will have to file the necessary reporting paperwork with the IRS.
  • Collect smaller amounts of money in a safety deposit box until you have accumulated enough cash to make a deposit that will trigger the reporting requirement
  • By adhering to the law, you may be saving your business or your financial future.

The IRS recently reported that it is scaling back on future seizures, focusing on cases where there seems to be a clear indication of illegal structuring rather than on ordinary individuals. Nonetheless, it’s better to play it safe. Avoiding even the appearance of structuring is well worth the increased taxes you pay on large bank deposits.

Budget Cuts Could Delay Tax Returns

The budget cuts felt by the IRS could trickle down to taxpayers in the form of delayed tax returns, warn insiders and experts.

BudgetCutSignificant Cuts

According to IRS Commissioner John Koskinen, the IRS suffered budget cuts in excess of 300 million dollars this year, which has led to short staffing and difficulties when working through returns. As a result, taxpayers are likely to experience much longer wait times to speak with IRS customer service representatives.

As the filing deadline draws closer, experts warn that longer and longer wait times will be the norm. There simply is not enough staff available to handle all of the calls that come in during prime tax season.

Longer Waits

waiting

In addition, taxpayers expecting refunds will also have to wait longer, especially if they file paper returns. Paper returns require manual review, and there are simply fewer employees available to handle such reviews. Experts anticipate the stack of returns will grow larger and larger as tax season progresses, leading to significant backlog. There are also serious concerns among experts concerning the quality of return processing by IRS workers. With fewer hands on deck, employees are more likely to experience burnout that could lead to errors or missed fraudulent returns resulting from identity theft or attempts at tax fraud or evasion.

whatyoucandoWhat You Can Do

While taxpayers chomping at the bit for tax refunds will have to exercise patience, there are things that tax filers can do expedite the process, according to the IRS commissioner,

  • Electronic filing is much faster and more efficient than filing paper returns. And the majority of taxpayers qualify to e-file their federal returns for no charge.
  • Utilizing the services of a professional accountant or tax attorney can reduce errors and help taxpayers avoid IRS inquiries for further information. The money spent to pay a professional to prepare your tax returns could be money well spent this year.
  • Complete your returns sooner rather than later if you’re expecting a refund. Waiting until the April 15 deadline increases the likelihood that your paperwork will be buried in the onslaught of returns filed during the IRS’ busiest season.

The bottom line is simple:  the IRS is short-staffed, and the general public must remain patient and work with the IRS as tax returns are generated and mailed or e-filed.

Health Coverage Exemptions: What Are They, Who Is Eligible, And How To Claim Them

The Internal Revenue Service reminds taxpayers that they will see some new things on their 2014 tax return involving the new health care law, also known as the Affordable Care Act or ACA.

healthcare_reformWhat Is It?

Under the ACA Individual Shared Responsibility Provision, taxpayers are required to obtain and pay for qualifying health care coverage throughout the year. If the taxpayer does not obtain this coverage or fails to pay the monthly premiums, they will be required to pay a tax penalty when they file their tax returns.

Who Is Eligible?

Some taxpayers may qualify for an exemption from this requirement if they fall into one or more of the approved exemption categories. These exemptions may be made for a variety of reasons including when affordable coverage is not available, when a taxpayer had a coverage gap of less than three calendar months, or if they are low income and their state did not expand Medicaid.

To complicate matters further, some taxpayers may have coverage or qualify an exemption during some months, and owe a payment for other months.

If you were without qualifying health coverage for any period of time during 2014, you should determine if you qualify for a health coverage exemption. If you qualify for an exemption, you will not have to make the individual shared responsibility payment for that month.

An exemption tool is available at HealthCare.gov to help determine if you qualify.

The following is a list of the most common health coverage exemptions currently in place:connection

Unaffordable Coverage: You may qualify for this exemption if your available health care coverage is considered unaffordable. Coverage is considered unaffordable if the lowest amount you would have paid for available employer-sponsored coverage or for coverage through the Marketplace is more than eight percent of your household income for the year.

Short Coverage Gap: You may qualify for this exemption if you went without coverage for less than three consecutive months during the year.

General Hardship: You may qualify for this exemption if you experienced circumstances that prevented you from obtaining coverage under a qualified health plan, including, but not limited to, homelessness, eviction, foreclosure, domestic violence, death of a close family member, or unpaid medical bills.

Income Below The Return Filing Threshold: You may qualify for this exemption if your household income or gross income is below your minimum threshold for filing a tax return.

Resident Of A State That Did Not Expand Medicaid: You may qualify for this exemption If you are determined ineligible for Medicaid solely because the State in which you live does not participate in Medicaid expansion under the Affordable Care Act. Also, if your household income is below 138 percent of the federal poverty line for your family size and at any time in 2014 you lived in a state that does not participate in Medicaid expansion, you may be eligible for this exemption.

Certain Non-citizens: Individuals who are not U.S. citizens or nationals and are not lawfully present in the United States are exempt from the individual shared responsibility provision. For this purpose, an immigrant with Deferred Action for Childhood Arrivals (DACA) status is considered not lawfully present and therefore is eligible for this exemption. An individual may qualify for this exemption even if he or she has a social security number (SSN).

Members Of Indian Tribes: You may qualify for this exemption If you are a member of a federally-recognized Indian tribe, including an Alaska Native Claims Settlement Act Corporation Shareholder, or if you were otherwise eligible for services through an Indian health care provider or the Indian Health Service.

How To Claim An Exemption

While you can claim most exemptions on your tax return, some exemptions require you to apply for the exemption through the Health Insurance Marketplace. No matter where an exemption is obtained, it will be reported or claimed on Form 8965, Health Coverage Exemptions.

Tax Filing Help: What Is My Filing Status?

According to the Pew Research Center, 74% of online adults use social networking sites. A common feature of these sites is the ability to publish one’s current “relationship status.” Facebook, for example, has ten possible relationship options including “married,” “single,” and probably applicable to all of us at some time: “it’s complicated.”

Although many people opt out of these personal declarations, taxpayers are required to choose an appropriate filing status on their Federal Income Tax Returns each year. And, similar to Facebook, choosing a filing status can be complicated.

The following is a brief discussion of the different filing statuses and how they may apply to you.

singleFiling Single

A person may file “single” if the taxpayer is unmarried or legally separated on the last day of the tax year.

The tax code is not kind to taxpayers who file single. For example, individuals who file single have a comparatively small standard deduction, and their income is taxed quicker and at higher tax brackets. Also, for deductions and credits with phase-out features (such as student loan interest deduction), these phase-outs take effect at the lowest levels of income.

Despite the bleak tax terrain, a taxpayer who files single does have access to numerous deductions and credits, such as tuition and fees deduction and the earned income credit, which might otherwise be unavailable if he or she is married but files separately.

For taxpayers who are married, but separated, there may be the option to file single. However, this exception applies only where the taxpayer is legally separated and the couple has lived separately for the last six months of year.

Head of Householdhead of household

A person may file “Head of Household” if the following requirements are met:

  1. A taxpayer is considered unmarried on the last day of the tax year,
  2. The taxpayer pays more than half of the home expenses, and
  3. The taxpayer’s home was the primary residence of a “qualifying child” or a “qualifying relative.”

Taxpayers who file as head of household have a definitive tax advantage over taxpayers who file as single. Not only is the standard deduction higher, but the tax brackets accelerate at a slower rate, not to mention the increased number of exemptions, depending on the household size.

Similar to the exception for filing single, the head of household status also has a few caveats. For example, a married taxpayer may file head of household if the criteria above is met, so long as the couple was separated for the last six months of the year. Unlike filing as single, this does not require a “legal” or formal separation.

Also, for unmarried taxpayers who jointly support a dependent child, the head of household status may be a way for both parents to share tax benefits associated with the child. This happens when a custodial parent agrees to “release the exemption” by completing Form 8332 and having the non-custodial parent file this form along with his/her return. Although the custodial parent releases the exemption, he/she may still file Head of Household and gain other tax benefits from claiming the child.

Married Filing Jointly married

A taxpayer may file jointly if he/she has:

  1. Married and lived with his/her spouse throughout the tax year, or
  2. Married and not lived with his/her spouse, but has not been divorced or had a legal separation agreement.

In most circumstances, a married taxpayer who files jointly will enjoy a lower tax liability than with any other category. This is because the tax brackets accelerate slower, many tax benefits are doubled (such as the standard deduction or the primary exclusion for sale of a principle residence), and phase outs of certain tax benefits occur at much higher levels of income. Filing jointly also does not restrict access to credits and deductions that might be disallowed if filing separately.

Joint filers should realize, however, that in the event of an audit or underpayment of estimated taxes by one spouse, both signers will be fully responsible for correcting any issues with the return or deficiencies in taxes paid.

Married Filing Separatelyseparate

A taxpayer who is entitled to file married filing jointly, also has the option of filing “married filing separately”. There is a long list of disadvantages for filing separately, including the disallowance of numerous tax credits and deductions, as well as disadvantageous changes in how certain types of income are taxed, such as social security benefits. There are, however, some very important reasons why you may consider filing separately:

Separate liabilities – If either you or your spouse plans to file an aggressive tax return or if you anticipate an unpaid tax liability, filing separately can protect the other spouse from being jointly liable. Filing separately can also protect the refund of a non-liable spouse if the other taxpayer has prior debt for which their tax refund may be seized. In either situation, filing separately protects a married taxpayer from potential liabilities incurred by their spouse.

Preferential Tax Treatment – In some situations, filing separately will actually result in a lower individual tax liability. For example, if significant medical expenses are incurred during the year, the 10% AGI limit with the joint income may be too high to claim any benefit. However, by filing separately, the 10% AGI threshold could be much lower, allowing the taxpayer to deduct more of the medical expenses when filing separately. It is important to note however, that if one spouse files separately, the other spouse is also required to file separately. Therefore, taxpayers should review their separate returns together and compare those results to a joint return to determine the net benefit.

widowerQualifying Widow(er)

A taxpayer will qualify as a “qualifying widow(er)” if:

  1. The taxpayer’s spouse died in 2012 or 2013
  2. The taxpayer did not remarry before Jan 1, 2015
  3. The taxpayer paid more than half the costs of maintaining the home
  4. The home was the primary home for a dependent child during the tax year

Generally, in the year the taxpayer’s spouse has died, the taxpayer can file a joint return with the deceased spouse. The tax benefits of filing jointly is carried forward two additional years with the qualifying widow filing status, which provides greater tax benefits than filing as head of household. Effectively, the qualifying widow status allows the surviving spouse the same standard deduction and tax bracket as a joint-filer. This status, however, is only available to surviving spouses who have a dependent child in the household.

In conclusion, a taxpayer’s life and “status” may change from year to year, often making it a complicated process when trying to file their tax returns. While updating your filing status with the IRS may seem about as daunting as choosing your relationship status on social media sites, being aware of how the IRS defines each filing status will make that decision much easier and ultimately more beneficial for you.