March 2014

March 2014

Significant Developments

As the March thaw begins (we're optimistic here at CALT!), Roger McEowen analyzes several key tax provisions and proposals of particular importance this month. 

Premium Tax Credit "Cliff"

Under Obamacare (the "Act") a new refundable tax credit for lower income individuals was created effective for tax years beginning after 2013 to help offset the higher cost of health insurance as a result of the Act.  This “premium assistance tax credit” is contained in I.R.C. §36B.  To claim the credit, a taxpayer must have income between 100 percent and 400 percent of the federal poverty level (FPL) and not be eligible for other qualifying coverage (e.g., Medicare or “affordable” employer-sponsored health insurance plans that provide “minimum value”).  

For purposes of computing the credit on 2014 returns, the 2013 FPL will be used.  We addressed this new credit at the tax schools last fall, and went through the amount of the credit that is available based on a taxpayer’s income.  But, it is helpful to reiterate the extreme “income cliff” that comes with the credit.  Under I.R.C. §36B(b)(3)(A)(i), a taxpayer with income between 300 percent and 400 percent of the FPL is potentially eligible for a credit that equals the excess of the premium cost that exceeds 9.5 percent of “household income.”  (Refer to your tax workbook from last fall for the definitions of these terms).  For a single person, the FPL is $11,490 for 2013.  Thus, 400 percent of that would be $45,960.  9.5 percent of that number is $4,366.20.  So, if this person’s premium cost exceeds $4,366.20 ($363.85/month), the credit will be the amount of the cost that exceeds $4,366.20.  But, if the taxpayer’s income exceeds the 400 percent threshold by any amount, the credit is completely unavailable. 

That’s a very steep cliff that could cost your clients thousands of dollars.  Plan now to minimize the potential of your client’s falling off of the cliff or the damage done if they do.  Consider accelerating deductions, deferring income and other related strategies.  But, remember, the I.R.C. §36B credit is only available for insurance purchased through an exchange (either federally-facilitated exchanges or state-based exchange) where the taxpayer cannot get other government-approved insurance. 

The I.R.C. §36B is being challenged in several courts.  The argument is that the plain language of the Act says the credit is only available to taxpayers that acquire insurance through a state-based exchange.  However, a regulation specifies that the credit is potentially available to taxpayers that acquire insurance through either a federally-funded exchange or a state-based exchange.  This issue could eventually reach the U.S. Supreme Court. 

Tax proposals 

In late February and early March tax proposal were released by the Chairman of the House Ways and Means Committee, David Camp (R-MI) and by the President as contained in the Fiscal Year 2015 budget proposal.  While neither of the proposals will go anywhere at the moment, it is instructive to keep any eye on those items that impact agriculture. 

The following items are contained in the Chairman’s proposal:

  • Three individual income tax brackets:  10%, 25% and 35% (or a 25% bracket with a 10% surtax on certain levels of income other than “qualified domestic manufacturing income”).
  • Certain deductions unavailable to taxpayers in the 35% bracket.
  • Long-term capital gains and dividends taxed at ordinary income rates, but with 40% excluded.
  • Significantly higher standard deduction.
  • Charitable deductions allowed to extent exceeding 2% of gross income and extension of deadline for making charitable donations to April 15 of the following year.
  • Permanency of conservation easement rules.
  • Repeal of the alternative minimum tax.
  • Repeal of the personal exemption.
  • Increase in child tax credit to $1,500 and application to children under age 18 and $500 credit for non-child dependents. 
  • Elimination of deduction for state and local taxes.
  • Home sale exclusion rule would require ownership and usage for five out of the prior 8 years with a dollar-for-dollar phaseout when MAGI exceeds $500,000
  • Consolidation of education credits.
  • Retooled EITC to become a credit against employment taxes paid by a taxpayer (or with respect to a taxpayer).
  • Single 25% corporate tax rate.
  • Phase out of the domestic production tax credit.
  • Repeal of the MACRS rules and replacement with depreciation lives matching the useful life of the particular asset.
  • Expense method depreciation permanently set at $250,000.
  • Cash method of accounting could be retained by farmers, but if average sales exceed $10 million, then the UNICAP method would have to be utilized for inventories.  Thus, farmers would have to  capitalize crop production expenses and deduct costs upon sale of the crop.
  • Elimination of the one-year deferral rule for crop insurance.
  • Repeal of the one-year deferral rule for excess livestock sold on account of weather-related conditions.

The following items are in the FY 2015 budget proposal:

  • Mandate the employers that have been in business at least two years, starting in 2016, must offer an automatic IRA option to employees.
  • Expense method depreciation set at $500,000.
  • Electronic filing for corporations and partnerships with $10 million or more in assets
  • Increase in the FUTA wage base, beginning in 2017, to $15,000 per worker.
  • Repeal of LIFO accounting rules.
  • Denial of deductions for punitive damages, effective beginning in 2016.
  • Limit on deferral of gain from like-kind exchanges to $1 million per taxpayer/year.
  • Expansion of small business tax credit to offset increased cost of health insurance.
  • Tax carried interest income at ordinary rates rather than capital gain rates.
  • Permanency of the credit for renewable energy and make the credit refundable.
  • Permanency and refundability of renewable electricity production tax credit.
  • Repeal of credit for oil and gas produced from marginal wells and elimination of expensing of intangible drilling costs.
  • Elimination of the exception to the passive loss rules for working interests in oil and natural gas properties.
  • Elimination of percentage depletion for oil and gas wells.
  • Elimination of the DPAD for oil and gas production.
  • Reduction of deductions for taxpayers in tax brackets above the 28% rate.
  • 30% minimum tax for taxpayers with gross income in excess of $1 million.
  • Permanency of the EITC and increase the amount of the credit with no reform to deal with fraud.
  • Permanency of the AOTC.
  • Permanency of the increased refundability of the child tax credit.
  • Excludibility of Pell Grants from income.
  • Increase in the federal estate tax top rate to 45% and reduction of the applicable exclusion to $3.5 million for estate tax purposes and $1 million for gift tax purposes.
  • Minimum 10-year term for GRATs.
  • 90-year limitation on dynasty trusts created after date of enactment.
  • Regulatory authority for IRS over all paid tax return preparers.
  • Increase in IRS funding.
  • Beginning in 2016, a new fee on certain liabilities of the largest financial sector firms.
  • Permanent extension of the FUTA surtax.

CRP Self-Employment Tax Case on Appeal

Last June, the U.S. Tax Court held that CRP income is subject to self-employment tax in all situations except where the taxpayer is covered by the 2008 Farm Bill provision (i.e., receiving Social Security).  The outcome of the case is particularly bad for retired farm landlords and investors, and could lead to reduced acres being bid into the CRP.  The court also agreed with the absurd IRS proposition that because the taxpayer entered into the CRP with a profit intent that was also a reason that self-employment tax should apply to the CRP rents that the taxpayer received.  That point of law has implications well beyond the CRP if it is allowed to stick.  The case is presently on appeal with the United States Circuit Court of Appeals for the 8th Circuit, with oral argument likely to occur later this year.  While the dollars at stake in the case are relatively small, the implications of the case are of national importance.  In recognition of the case’s importance and the cost of appealing the Tax Court’s decision, Pheasants Forever has established a fund to accept tax deductible contributions to financially assist the appeal for the taxpayer, Rollin Morehouse.  The fundraising goal is $40,000. 

Contributions in support of the appeal can be sent to the following:

CRP Defense Fund

c/o Pheasants Forever

1783 Buerkle Circle

St. Paul, MN 55110


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CALT does not provide legal advice. Any information provided on this website is not intended to be a substitute for legal services from a competent professional. CALT's work is supported by fee-based seminars and generous private gifts. Any opinions, findings, conclusions or recommendations expressed in the material contained on this website do not necessarily reflect the views of Iowa State University.

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