What to Do with a K-1 with a Fiscal Year End

K-1Question: I received a K-1 from a partnership I’m invested in. Their fiscal year-end is September 30th.

The K-1 for the year ended September 30, 2014 shows that it’s a 2013 K-1. I received the K-1 in 2015. What year do I report this K-1?

Answer: for taxpayers receiving a Form K-1, the information is reported based on the fiscal year-end. In this example, the information would be reported on the taxpayer’s 2014 tax return because the K-1 relates to the year ended September 30, 2014.

The fact that the form says it’s a 2013 form is relevant on the partnership side (the partnership’s tax return for the FYE 9/30/14 is considered a 2013 filing on the partnership side). But this isn’t relevant for the recipient.

Send a 1099-C to a Non-Paying Customer? Updated

invoice-153413_1280
Image courtesy of user OpenClips on Pixabay.com

More than 2 years ago, I wrote a post about whether or not it was okay for a business to issue a Form 1099-C to a customer or client who failed to pay an invoice.

I researched the issue heavily at the time, and turned up almost no information. Based on what little I could find, I concluded that it was probably okay to send a 1099-C to a deadbeat customer, but that I thought it was a bad idea.

We now know a little more about the IRS’s view on this subject, at least as it relates to tax professionals sending deadbeat clients a 1099-C. The IRS addressed the issue in an alert from the Office of Professional Responsibility dated February 5, 2015.

The alert is worth reading in its entirety, but here’s the bottom line from the IRS:

It is difficult to conceive of a situation in which a tax professional, principally engaged in providing tax services will be an “applicable entity” justifying the use of Form 1099-C to attribute income to an arguably scofflaw client for the nonpayment.

This alert from the IRS specifically addresses tax pros, but I think the concept could apply to all businesses in general. As I wrote in my original post:

Personally, I wouldn’t issue a 1099-C to a deadbeat client. I realize there may be some satisfaction in threatening a deadbeat and seeing them sweat. But I think it would cause more harm than good to go down the 1099-C route …. I would just fire them, move on with my life and replace the deadbeat with a better client.

Do I Have to Have Form 1095-A Before I Can File?

Image courtesy of user stevepb on pixabay.com
Image courtesy of user stevepb on pixabay.com

Scenario: Client received insurance through a health insurance exchange and received a credit to reduce his monthly premiums. The client has not received the Form 1095-A from the exchange yet. Form 1095-A reports the amount of credits received.

The client is antsy to get his return filed and get his refund, so he calls the insurance exchange to find out when the 1095-A will be sent. The person who answered the phone at the exchange told him: 1) they’re having problems getting the forms out (this is in Iowa) and 2) “you don’t need the form before you can file; there’s a box you can check on your return.”

Question: Is item #2 correct? If you received credits through the exchange, can you file without the Form 1095-A?

Analysis: I’m not an ACA specialist, but in this case the answer is clearly “no.”

You must have the Form 1095-A before you can file because you must perform a reconciliation of the credit you received versus the credit you were entitled to.

What about the “box you can check” that the person at the insurance exchange referenced? To answer, let’s review the two ways the ACA affects individuals:

  1. The individual mandate, which requires that we all carry health insurance
  2. Premium tax credits that people might receive if they purchased insurance through an exchange.

The “checkbox” refers to a box on Line 61 of Form 1040. If you were covered by health insurance for the entire year, you can check this box to show that you met the individual mandate.

There is no such checkbox for the premium tax credit reconciliation, which is accounted for on Line 69 of Form 1040.

There are two morals:

  1. Yes, you need the Form 1095-A if you got premiums through an insurance exchange
  2. You probably won’t get good advice from the people at the exchange that you might talk to on the phone

What I’m Asking My Clients Regarding the ACA

Image courtesy of user Nemo on Pixabay.com
Image courtesy of user Nemo on Pixabay.com

The Affordable Care Act is understandably causing much angst among tax preparers. I’m one of those anguished preparers.

I’ve noticed, in looking at the stat tracking for this blog, that there are tax pros coming here in search of what questions they should be asking clients regarding the ACA. (Note: prior to this blog post, you won’t find this topic addressed in any prior posts by me, but somehow Google is directing people to my blog anyway.)

Here’s what I’m asking on the organizer I give to clients:

  1. Where did you obtain insurance: Employer; Insurance Exchange; Medicare/Medicaid; Private policy; I do not have insurance. (I also include in bold that they should be prepared to provide me a copy of their insurance card.
  2. If you were covered by insurance, were you covered all 12 months of 2014? If not, how many months were you uninsured?
  3. If you are married, was your spouse covered by insurance, and if so, where did they obtain coverage?
  4. Are your children or other dependents covered by insurance, and if so, where did they obtain coverage?
  5. If you are not covered by insurance, did you apply for a hardship exemption?
  6. If you receive a subsidy from an insurance exchange, please provide the Form 1095-A.
  7. If you happened to receive any other type of Form 1094 or 1095, please provide it.

Sometimes it feels like I should be asking more. But I honestly don’t know what those additional questions would be.

It’s been a slow start to the season for me, as I have only worked on 4 tax returns so far. All 4 taxpayers have insurance, and only one got insurance through an exchange. That taxpayer is waiting on the Form 1095-A before we can proceed. I don’t anticipate any ACA issues with that one or the other 3.

Almost all of my clients have insurance through employers, so I’m hoping — knock on wood — that the ACA might be just a nuisance and not a nasty part of tax season for me. But it’s still extremely early!

A Brief History of Marriage in the Tax Code, Part 2: Taxes in 1913

wedding-rings-150300_1280This post is part of a long-term project I’ve been working on regarding the history of marriage in the tax code.

As I finish sections of the research paper I’m working on, I’ll post them here. This is a big project, one that will likely take years, literally, to finish, so I can’t guarantee when the next post on this topic will appear.

—–

In Part 1, I talked briefly about how taxes worked back in 1913. In this part, I want to dive a little deeper.

The tax brackets were broad from 1913 through 1916. For example, a tax rate of 1% applied to taxable income of $0-$20,000. Adjusted for inflation, a taxpayer could have income of nearly $465,000 and still be in the 1% range of the tax bracket.

The rate increased to 2% on income between $20,001-$50,000. The top rate was 7% and applied to taxpayers with taxable income of more than $500,000 (the modern-day equivalent of $11.6 million).

Dual-income married couples had little reason to file separately, because the vast majority of them fell in the 1% range of the tax bracket.

Example 1:

John and Jane are a married couple. John has taxable income of $10,000; Jane has taxable income of $5,000. In 1913, their tax-filing options were: file a joint return showing $15,000 of taxable income, or file separate returns. Either way, they would arrive at the same amount of tax owed:

  •         $10,000 x .01 =$100 tax; $5,000 x .01 = $50 tax; Total tax $150

OR

  •         $15,000 x .01 = $150 total tax

In 1913, 97.6% of married couples filed joint returns (out of 278,835 tax returns filed by married couples in 1913, 272,153 were joint returns [or returns of one-income couples]; 6,682 were separate returns). Source: a study by a certain “Miss Coyle” in a Treasury Department staff memo. Ms. Coyle’s complete memo can be found at this link: http://taxhistory.tax.org/Civilization/Documents/marriage/hst28695/28695-1.htm

Exemption Amounts

Not only were the tax brackets broad, but many Americans were exempt from owing taxes because of generous exemption amounts. The exemption amounts were $3,000 for a single person or $4,000 for married couples (the equivalent of about $70,000 and $93,000 in modern-day dollars). A person with income below those amounts owed no tax and did not need to file a tax return.

Big Changes on the Horizon

America entered World War I in 1917. Wars take money. Congress changed the tax code with the Revenue Act of 1917.

Exemption amounts were slashed. The simple tax bracket of 1913 was replaced with a more progressive bracket with 21 marginal rates (yes, 21!) ranging from 2% to 67%.

Millions of people were drawn into the tax code, and taxes became more of a burden.

This ties into our discussion of marriage in the tax code.

We’ll dive deeper into the 1917 changes in Part 3.