On Federal Income Taxes - Week 6

Earned Income

Earned income includes pay and tips from a job plus self-employment and farming income. Of course interest, dividends, capital gains, unemployment compensation, alimony, and child support are considered unearned income. But so are royalties, income from being a landlord, and pension income. And "royalties" is the term used both for pay from creative works and for pay from extracting resources such as oil from your land.

Tax Prep Prices

Friday we just practiced entering a bunch of returns into the company software (the forms from the first few chapters). Mostly boring. But I accidentally hit the button that shows the costs when I meant to hit the adjacent button that shows the final forms. Once that happened, I started hitting the button on purpose, just to see.

Of course charges are a lot more than I would ever want to pay. But, I don't like to pay anything for stuff I can do myself, and so far I've felt that I can do my taxes (and I don't totally hate doing them), so of course I would think that.

It's tens or hundreds of dollars for the ones I'm entering (which, how hard can those be?). We'd already been told that the cost depends on the number and complexity of the forms needed.

And we'd been told that sometimes the client will save more money in tax prep fees by not claiming something than they will save in taxes by claiming something. And the prices I saw were broken down into two levels: the cost of required forms (and the resulting tax refund, which might, of course, be a negative number) and the cost of the optional forms (and resulting tax refund). In most cases (from my class, and probably in real life, too, for people who work for others), people have prepaid so much money that they do get refunds. And in most cases it's the optional forms that get you the extra money, so that's probably how they make it easy to talk the clients into feeling that it's worth the money. Although I don't know if they let you fill out all the forms first and then remove some to save the client money or if the worker has to already know without actually doing all the work.

Getting Audited

We never talk about this in class except that certain things are red flags such as owning your own business and clearly lying. Also, if the amount of taxes in question is small, you're less likely to get audited than if it is large--auditors do, after all, earn a salary, and they try to get the most bang for the buck.

However, Aunt M said never to meet with the IRS if they are auditing you. Send someone else. If you're not as rich as they are, buy audit insurance. Until they were first audited, she thought the laws were black and white, but then she found out that everything was grey--different auditors interpret things differently. Also, what makes an auditor look good to their boss will make them look bad to you, but you can sometimes work with that--her accountant got one auditor to let her move a deduction they were going to disqualify to another area rather than go to tax court over it--the former looked less bad on his record than the latter and was much better for her.

Health Insurance Update

I wrote about some issues regarding my decisions on private health insurance in Private Insurance Transition. Since then I have gotten more data. By the way, Consumer Reports is putting out a nice set of articles on the Affordable Care Act.

Prices

I've read that on average, prices will be about 16% lower in the new system.

But I now can see the prices on insurance plans that will actually be available to me.* The good news is that in my state, high-deductible insurance plans will still be available to me. So there are plans that are cheaper than the ones I found in California.

The bad news is that they will still cost 25% more than the one I'm in now (~$250/month instead of $200). The reason is that states are allowed to charge different rates for people of different ages and apparently in the new system, there are only two tiers: under fifty and fifty or more. I am fifty. If I were forty-nine, these plans would cost 33% less than my current insurance (~$150). Grr.

Of course my actual cost would also include the tax subsidy. The subsidy is based on income. If you don't know your income you can give an estimate and it will all be straightened out when you do your taxes and know your exact income.

* Updated to add this quote I just read: "Be aware of rates on healthcare.gov’s “see plans now” button. If you choose a single person, it will ask if you are under 49 or over 50. If you are under 49, it shows rates for a 27 year old. If you select that you are over 50, you will see rates for a 50 year old. Prices will be different if you are not that exact age. CBS did a story on this a couple nights ago."

Fine Print, part A

One weird part is that you are not allowed to get a subsidy if your company is offering you insurance and your insurance (for you only--not other family members) is "affordable" (<9.5% of your income). If I get a half-time job, I could get good insurance for half-price, but in the past I have chosen just to keep my private insurance.

Of course in the past they could decide not to let you have your old insurance back at the end of the job if you developed a pre-existing condition during the job, and I guess that's not true anymore. And the company insurance would probably cost around $230/month, and for that to be less than 9.5% of my income, I'd have to be making upwards of $27/hour, which has never happened, so I guess I'm safe there.

Subsidies

Subsidies are based on income and my income has gone wonky. So much so that doing my taxes will be changing drastically.

Income taxes - last year

In the past, I have itemized deductions and, unless I have a lot of side jobs, I get a refund. So my tax breaks come from paying various taxes, mortgage interest (until recently), charitable contributions, and for the last couple of years, a deduction for my Health Savings Account contributions. Plus capital gains and dividends are taxed at a lower rate than other interest.

Income taxes - this year

This year will be different. It looks like I'll have made about half as much money from jobs and unemployment compensation. It's quite likely that I won't be itemizing because although my property taxes will still be plenty high, my estimated sales tax and my charitable contributions are based on my income and will not add up enough to exceed the standard deduction. (So I may put off paying property taxes and charitable contributions until the first of next year in case I can double up.) Another change is that if I don't get any more work, my income will be low enough for me to get the Saver's Credit, which for me will be $200 for contributing at least $2000 to a retirement plan. I will get a smaller refund than last year even though I'm paying less taxes because I pre-paid less into the system.

Income taxes - next year

Next year will be different still. I expect to earn around $0, around $2500, or maybe even as much as $15,000 (if I get this one last degree audit job that's in the works and it pays well and lasts the full six months that has been requested and it doesn't start until next year). Plus there will be a trickle from interest and dividends in taxable accounts. All my other money will come from savings which have already been taxed. So I will look super poor, quite likely so poor that I won't pay any taxes at all. (If not next year, then the following year, when there will not be any degree audit jobs.)

HSA contributions and additional itemized deductions will no longer be relevant, because I won't have any owed taxes from which to subtract those things. (So I'm going to max my HSA contributions this year, even though I was planning on making less than the max this year and continuing to contribute less than the max for a few more years.)

Fake Poverty

And the creepy thing is that as a fake poor person, I would be "entitled" to some things that real poor people get. There's a good chance I will qualify for the Earned Income Credit which is refundable (a not-quite-accurate word that means you don't need to owe taxes from which to subtract it). Meaning the government pays me for not finding enough work to support myself.

Subsidy Amount

But even worse is this subsidy. I could get a federal subsidy to pay for most or all of my insurance. Kaiser's subsidy calculator shows that if I made 15K, I could get a subsidy of $3886 ($324/mo). If I had a plan that cost only $250/mo, the subsidy would be only $250/month of course ($3000). If I wanted to, I could always contribute that money back to the government to reduce the public debt, ideally after I'm getting my pension and feel rich again.

Fine Print, Part B

Even crazier: If I make only 3K, I'd get no subsidy. You only get a subsidy between 100% and 400% of the poverty level, and since 3K for a single person is below the poverty level ($11,490), you qualify for Medicaid instead except that my state has not expanded Medicaid. I'm kind of afraid of Medicaid anyway, but really I know very little about it. I'd probably rather have insurance. Since I don't feel at all confident that I will earn beyond the poverty level, it will probably be cheapest for me to stick with my current plan, which I am allowed to do until December 1, 2014.

Except I don't actually know what my current insurance company will be charging me. They say they will send out notices in the next few weeks.