Month: March 2020

Form 8962: Reconciling the Premium Tax Credit

Form 8962, Premium Tax Credit, reconciles 2019 advance payments of the premium tax credit and may also affect a taxpayer’s ability to get advance payments of the premium tax credit or cost-sharing reductions. Taxpayers who don’t file and reconcile their 2019 advance credit payments may not be eligible for advance payments of the premium tax credit in the future. Furthermore, filing Form 8962, with a return avoids possible delays in processing tax returns and subsequent delays in receiving tax refunds.

Background

The premium tax credit helps pay for health insurance coverage bought from the Health Insurance Marketplace. When the taxpayer or their family member applies for coverage, the marketplace estimates the amount of the premium tax credit they may be able to claim. This estimate is based on information the taxpayer provides about family size and projected household income. The taxpayer can then decide if they want to have all, some, or none of the credit paid directly to their insurance company. This option will lower their monthly payments.

Who needs to file Form 8962?

Taxpayers who have advance credit payments made on their behalf are required to file Form 8962 with their income tax return. This will reconcile the amount of advance payments with the premium tax credit they may claim based on their actual household income and family size.

Reconciling advance credit payments

Taxpayers or members of their family who enrolled in health insurance coverage for 2019 through the marketplace should receive Form 1095-A, Health Insurance Marketplace Statement. This form shows the months of coverage and amount of any Advanced Premium Tax Credit (APTC) paid to the taxpayer’s insurance company. This form also provides information needed to complete Form 8962.

Taxpayers should figure their premium tax credit and compare it to the amount of APTC on Form 8962, then file Form 8962 with their tax return.

Taxpayers who received advance credit payments must file a tax return to reconcile even if they otherwise don’t have to file.

Please call the office if you have any questions about this or any other topic affecting your tax return.

• By Leon Clinton
• March 23, 2020

Tax Treatment of State and Local Tax Refunds

The Tax Cuts and Jobs Act (TCJA), enacted in December 2017, limited the itemized deduction for state and local taxes to $5,000 for a married person filing a separate return and $10,000 for all other tax filers. The limit applies to tax years 2018 to 2025.

As in prior years, if a taxpayer chose the standard deduction then state and local tax refunds are not subject to tax. However, if a taxpayer itemizes deductions for that year on Schedule A, Itemized Deductions, part or all of the refund may be subject to tax – but only to the extent that the taxpayer received a tax benefit from the deduction.

Taxpayers who are impacted by the SALT limit may not be required to include the entire state or local tax refund in income in the following year. As a reminder, state or local tax refunds received in 2018 that were reported on 2018 tax returns are not affected.

How much to include is figured by determining the amount the taxpayer would have deducted had the taxpayer only paid the actual state and local tax liability – that is, no refund and no balance due.

Here’s an example:

A single taxpayer itemizes on Schedule A and claims deductions totaling $15,000 on their 2018 federal tax return. Of that amount, $12,000 is for state and local taxes, $7,000 of which is for state and local income taxes. The SALT deduction is limited to $10,000, however.

In 2019, the taxpayer received a refund of $750 for state income tax paid in 2018. This means that the actual state income liability for 2018 was $6,250 ($7,000 paid minus the $750 refund). As such, the taxpayer’s SALT deduction for 2018 would still have been $10,000 even if it had been figured on the actual state and local tax paid.

Because there was no tax benefit received on their 2018 tax return from the overpayment of state income tax the taxpayer is not required to include the state income tax refund received in 2019 on their 2019 tax return.

If you have any questions about the tax treatment of state and local tax refunds, help is just a phone call away.

• By Leon Clinton
• March 21, 2020

Home Equity Loan Interest Still Deductible

The Tax Cuts and Jobs Act has resulted in questions from taxpayers about many tax provisions including whether interest paid on home equity loans is still deductible. The good news is that despite newly enacted restrictions on home mortgages, taxpayers can often still deduct interest on a home equity loan, home equity line of credit (HELOC) or second mortgage, regardless of how the loan is labeled.

Background

The Tax Cuts and Jobs Act of 2017, enacted December 22, 2017, suspends the deduction for interest paid on home equity loans and lines of credit unless they are used to buy, build or substantially improve the taxpayer’s home that secures the loan. This suspension is in effect from 2018 through 2025.

Under the new law, for example, interest on a home equity loan used to build an addition to an existing home is typically deductible, while interest on the same loan used to pay personal living expenses, such as credit card debts, is not. As under prior law, the loan must be secured by the taxpayer’s main home or second home (known as a qualified residence), not exceed the cost of the home and meet other requirements.

New dollar limit on total qualified residence loan balance

For anyone considering taking out a mortgage, the new law imposes a lower dollar limit on mortgages qualifying for the home mortgage interest deduction. Beginning in 2018, taxpayers may only deduct interest on $750,000 of qualified residence loans. The limit is $375,000 for a married taxpayer filing a separate return. These are down from the prior limits of $1 million, or $500,000 for a married taxpayer filing a separate return. The limits apply to the combined amount of loans used to buy, build or substantially improve the taxpayer’s main home and second home.

For more information about deducting interest on home equity loans or the new tax law, please call.

• By Leon Clinton
• March 19, 2020