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Monday, October 16, 2017

Fool Us Once on Taxes, Shame on You, Fool Us Twice . . .  

Seven years ago, in Negotiating Tax Legislation: Lessons from Life, I opposed the attempts by those advocating tax cuts for the wealthy to extend the Bush tax cuts. Though the advocates of tax cuts for the wealthy claimed that the extension would created jobs, the track record belied their claims. In numerous commentaries, I have explained why tax cuts for the wealthy do not create jobs, why jobs are created by demand, and how demand is strengthened by boosting the economic position of the middle and lower economic classes. The only tax cuts that create the jobs that the nation needs are tax cuts for the bottom 98 percent.

Despite the failures of supply-side trickle-down voodoo economics, the current administration and some nostalgic members of Congress want to relive the failed experience of tax cuts for the wealthy. Recently, as described in this story, the chief cheerleader for making the wealthy even wealthier trotted out the disproven propaganda about enriching the rich. The plans being tossed about not only cut taxes for the wealthy, they will increase taxes for many people who are not wealthy, and not even close to being wealthy. Yet when the plan to enrich the rich is paraded in public, most of the people who show up don’t realize they are cheering for their own economic demise. One would think, and hope, that by now those who were fooled once by this nonsense would not fall again for the same trick. But as someone once told me, when I was young, if it weren’t for humans there would not be opportunities for con artists.

The hilarity of the recent tax cut rally wasn’t just the absurdity of people cheering for tax increases on themselves. It was the crass appeal to truckers, who were told that cutting taxes for the wealthy would create “more products to deliver.” First of all, as history has taught us, products are manufactured when there are people who want to purchase, and are economically in a position to purchase, those products. The wealthier wealthy have the products they need and want, and simply will stash their increased after-tax cash flow into their foreign bank accounts. Second of all, even if there were an increase in the number of manufactured products needing delivery, the impending flood of self-driving trucks, the flotilla of Amazon and other delivery drones, and the impending delivery of products by digital transmission to 3-D printers is writing on the wall for truckers nationwide. But, those who live in the past lack the ability to see, let alone understand, the future. When it comes to timing, the Future is Now always trumps Bring the Past Back Again.

It is frightening to watch people buy into claims that their taxes are going to be cut when not only is that not going to happen, their taxes are going to be increased. False promises are made because too many people are willing to bank on false promises. And when reality sets in, they seek to blame everyone except their own ignorance, their own failure to think, and their own unwillingness to grow intellectually.

Back in 2010, when I wrote Negotiating Tax Legislation: Lessons from Life, I suggested that the approach to jobs and tax cuts should be, “Give us jobs, and then we’ll give you a tax break.” As I expected, that approach didn’t find support among the wheelers and dealers who hold the nation’s purse strings and control its economy. I elaborated:
The tax-cut-extension advocates don’t like that sort of arrangement. Why? It compels them to put their money where their mouths are, so to speak. Yet that is how competent business entrepreneurs, savvy agents for athletes and other service-providers, and professional negotiators attain workable contracts.

The sort of deal-making underway in Washington resembles, not the approach of professional negotiators and seasoned business entrepreneurs, but the false promises of advantage seekers who populate not only every segment of the business world but a substantial part of personal life. Consumer complaints are replete with tales of vanishing businesses, warnings are issued regularly about the risks of dealing with fly-by-night home improvement companies and individuals, and it took the enactment of lemon laws to compel auto manufacturers to honor their contracts. Tales of woe sent to advice columnists are packed with familiar strains of the “he respected me in the morning .. not” song and the crushed hopes of those who believed what the other person said.

* * * * *

Years ago, the phrase “show me the money” entered into the vernacular. Perhaps it’s time to say, “show us the jobs.” Show us the jobs, the nation will reply in gratitude with a tax break. No jobs, no tax breaks. That’s how tax law inducement provisions work. The “no tax breaks, no jobs” threat is nothing more than bully posturing of the worst sort. There’s a reason the tax-cut-extension advocates don’t like the “show us the jobs, then get the tax break” approach. They know that they’ve created few jobs, particularly enduring jobs, in response to previous tax cuts, and that the nation will not see any sort of job surge with an extension of the tax cuts.

Despite warning after warning, people continue to hand over cash to home improvement con artists, and to engage in behavior they later come to regret when and because they discover they’ve been duped. Perhaps that explains why America continues to listen to, and even cave into, the siren songs of the pied pipers of tax cut grabbing.
America has been down this tax cut road at the turn of the century. It led the nation to the wrong place. Why would anyone want to do this again? Why would anyone want to be fooled yet again?

Friday, October 13, 2017

Does the Taxation of Social Security Benefits Constitute Double Taxation? 

A reader directed my attention to a Brenton Smith commentary addressing the taxation of social security benefits. Smith shared the thoughts of one of his readers, who brought to Smith’s attention a proposal to repeal the taxation of social security benefits. Smith noted that the “reader is understandably upset with the current rules, which border on the bizarre.” Smith offered several observations. First, that the taxation of social security benefits was “intended to levy fees on people with ‘substantial outside income.’” Second, that the taxation of social security benefits subject “people slightly above poverty with marginal tax rates that are among the highest in the entire tax code.” Third, that the taxation of social security benefits “represent double taxation.” Fourth, that the rules for taxing social security benefits are “unfair and also horribly complex.” Fifth, the benchmark amounts applicable under current law are not adjusted for inflation, which causes lower income taxpayers to be taxed on social security benefits that would not be taxed if the benchmark amounts were adjusted for inflation . Smith explained why repealing the taxation of social security benefits “would solve the fairness problem by making the financial problem even worse.”

I agree with Smiths’ first, second, fourth, and fifth observations. I agree that repealing the taxation of social security benefits would make the financial problem worse. I disagree with the scope of Smith’s third observation, and I disagree in part with his conclusion that repealing the taxation of social security benefits would solve the fairness problem.

My reason for disagreement rests on how the social security system works. Employees and employers make payments into the social security trust fund. Employees, when they retire or become disabled, and in certain instances their spouses, when they retire, and their dependents, if they are minors when the employee dies, receive lifetime benefits. Sometimes an employee collects less than what the employee paid into the system. One example is an unmarried employee who has no dependents who dies shortly before reaching retirement age. Far more often, though, employees, or their spouses and dependents, collect more than what the employee paid into the system.

When an employee collects more than what the employee paid into the social security system, the employee has income. It is fair to tax that income. The sensible way of doing this is to permit the employee to exclude social security benefits from gross income until the employee has received what the employee paid into the system. At that point, all of the benefits should be included in gross income. If those benefits are the retired employee’s entire gross income, the effect of the standard deduction and the personal exemption deduction would be to generate either zero tax or tax computed at the lowest rates. If the retired employee has substantial amounts of other income, the social security benefits would be taxed at higher, and perhaps the highest, rates.

Under the current system, some social security benefit recipients do not include any social security benefits in gross income, even when they receive more than they paid into the system. There is no double taxation in that situation. Others include some portion of the social security benefits in gross income, and often they live long enough so that the portion of social security benefits not included in gross income over the years is at least the amount that the person paid into the system. Again, there is no double taxation. Double taxation exists when the recipient dies before receiving back what was paid into the system, and yet includes some of the benefits in gross income. The reason for this inconsistency is that current law measure social security gross income with a bizarre formula that reflects the recipient’s adjusted gross income, certain adjustments, and varying portions of the social security benefits. Thus, some social security recipients encounter double taxation, but most do not.

The fix is easy. It is what should have been done originally. Social security recipients should include in gross income any benefits that exceed what the recipient paid into the system. When taxation of social security benefits was first enacted, I advocated what I have just proposed. The response was a claim that people don’t know what they paid into the social security system. That doesn’t matter. It doesn’t matter because the Social Security Administration knows. That information is readily available to anyone who has ever paid into the social security system. The process of starting with the “total paid into the system” number, and subtracting benefits each year until zero is reached, and then including all benefits in gross income is much easier, far less complex, and certainly far less bizarre than the current law mechanism for computing the portion of social security benefits included in gross income. Taking the approach I suggest eliminates double taxation. It eliminates the imposition of high marginal rates on social security benefits received by taxpayers with low taxable income. It eliminates the benchmark amounts, and thus eliminates the problems caused by failure to adjust those amounts for inflation.

Simply repealing the taxation of social security benefits does not solve the fairness problem. Repealing the taxation of social security benefits would provide more of a benefit to taxpayers who receive more benefits over their lifetimes, because those taxpayers would be excluding from gross income more economic gain than would taxpayers who receive fewer benefits over their lifetimes.

Six and seven years ago, I made these same points, and discussed my proposal in greater detail, in Taxation of Social Security Benefits: Inexplicable Inconsistency and Hidden Tax Increases, Getting Specific with Tax-Related Deficit Reduction Ideas: Making Section 85 Fairer and Simpler, and Retirees, Social Security, and Filing Tax Returns?. Since I wrote those commentaries, nothing has happened, or written, or said, or argued, that has changed my mind.

Wednesday, October 11, 2017

When Claiming a Dependent Has Adverse Tax Consequences: A Follow-Up 



A little more than a week ago, in When Claiming a Dependent Has Adverse Tax Consequences, I described the reasoning and outcome in Gibson v. Comr., T.C. Memo 2017-187. The taxpayers claimed their son as a dependent, and ended up having their tax increased by the advance payments of the premium assistance tax credit paid to an insurance company on behalf of their son. I then posed this question:
Would it not have been better to not claim the son as a dependent?
I then provide one answer:
If the taxpayers were entitled to claim their son as a dependent, which the facts suggest was the case, then failure to do so would not permit the son to claim the credit because the credit is denied to any individual with respect to whom a dependency exemption deduction is allowable to another taxpayer.
Then I asked a second question:
But would failure to claim the son as a dependent, even though he qualifies as a dependent, eliminate the requirement that the advance premium payments made on his behalf be added to the taxpayers’ tax?
I confessed the futility of my search for a definitive answer, and invited assistance:
I cannot find anything definitive that answers the question. If the answer is no, then failure to claim the son as a dependent, even though he qualifies, would be counterproductive. If the answer is yes, it still might not make sense to fail to claim the son as a dependent. Why? The son, not entitled to the credit because he could be claimed as a dependent, would be the one required to add the advance payments to his tax. Perhaps someone who has expertise in the intersection of tax law and health insurance law can share some insights.
And, fortunately for my readers and myself, assistance arrived. It came in the form of an email from Christine Speidel, who is the Director of the Vermont Low-Income Taxpayer Clinic, and a Staff Attorney with the Office of the Health Care Advocate of Vermont Legal Aid, Inc. Christine’s explanation takes us through the complex maze encountered where tax law meets health care law. Christine wrote:
I read your post on Gibson v. Commissioner, the recent premium tax credit case. In the post, you ask who would have the APTC repayment obligation if Mr. and Mrs. Gibson had decided not to claim their son’s dependency exemption. I believe the son would have the repayment obligation in that case. Dependents cannot qualify for a PTC, but this doesn’t mean they can’t be liable for excess APTC.

If nobody claims the personal exemption of an APTC recipient, Treasury Reg. § 1.36B-4(a)(1)(ii)(C) applies:
(C) Responsibility for advance credit payments for an individual for whom no personal exemption deduction is claimed. If advance credit payments are made for coverage of an individual for whom no taxpayer claims a personal exemption deduction, the taxpayer who attested to the Exchange to the intention to claim a personal exemption deduction for the individual as part of the advance credit payment eligibility determination for coverage of the individual must reconcile the advance credit payments.
The Treasury regulations and HHS Marketplace regulations are designed to mesh, so that somebody will always be on the hook for excess APTC. The Marketplace regulations are quite detailed about this.

Marketplaces can only award APTC to a “tax filer.” 45 CFR § 155.305(f). That term is defined to exclude tax dependents. 45 CFR § 155.300(a). Tax dependents are not allowed go out and get APTC on their own. An applicant for APTC must attest that they are a tax filer, and they also must attest to the individuals in their tax household. 45 CFR §§ 155.310(d)(2)(ii); 155.320(c)(3)(i)(A). The Marketplace must try to verify the information through the federal data hub or other electronic sources, and if that fails, it must request additional documentation from the applicant. 45 CFR § 155.320(c)(3)(i). A Marketplace must get income information from the applicant’s entire tax household, and it must verify that information before granting APTC. 45 CFR § 155.320(c).

I presume the Gibsons’ son signed up for his Marketplace plan as a non-dependent, single individual. I assume this because he was awarded APTC without his parents’ knowledge. Under the Marketplace regulations, the Gibsons’ son should have made an attestation that he would claim his personal exemption when he applied for APTC. In that case, he would be liable for APTC under the Treasury regulation above, if his parents did not claim his exemption.

The regulations are much tighter than what happens on the ground, though. It is possible that the Marketplace fell down on the job, and awarded APTC even though the Gibsons’ son did not represent himself as a “tax filer.” I do not think this would happen today, but it is possible with a 2014 plan, when the system was brand new to applicants and eligibility workers alike, and when many exchanges had operational and technological problems. On the facts we have, it’s hard to tell whether the Gibsons’ situation is entirely the son’s fault, or whether the exchange also messed up.

It is also interesting to compare the Marketplace application with the attestations required by the regulations. HHS model applications and instructions are posted online. The regular application asks for information about every person in the applicant’s tax household. However, the shorter application for a single adult doesn’t have an attestation about filing status – it’s just stated in the form instructions that tax dependents can’t use the short form. If the Gibsons’ son used a paper application, he might not have made an attestation about tax filing status. Most people apply online or over the phone, however, in which case the applicant would get initial questions about tax filing status. Presumably the IRS would try to pin the son with the repayment obligation even if he applied on paper. The short application form should probably be revised to comply with the Marketplace regulations on attestations.

Having the son reconcile his APTC might not be a bad result for the family. If the Gibsons dropped their son’s dependency exemption, and their son filed his 2014 taxes as a dependent and reconciled his APTC, at least he would get the benefit of repayment limitations based on his income. Treas. Reg. § 1.36B-4(a)(3). He would likely have to repay much less than the full amount of APTC. Repayment limitations are based on “household income.” Fortunately for taxpayers, the definition of household income only considers individuals whose personal exemptions are claimed on the tax return. Treas. Reg. § 1.36B-1(e). If the son is actually a dependent for 2014, he probably has fairly low income and would only have to repay $300. This would be a better solution for the family overall.
As horribly complex is the federal income tax law, even worse is healthcare law. Getting a handle on both is difficult, and so to Christine Speidel, on behalf of my readers and myself, I offer appreciation for her assistance in navigating this particular maze.

Monday, October 09, 2017

Making Tax-Connected Identity Theft Even Easier 

It’s bad enough the people in charge of cybersecurity at Equifax slipped up. The identifying information of almost every adult American, including social security numbers, is in the hands of people who do not have the best of intentions, and before long even more people intent on maliciousness will obtain these identifying details.

Now comes news that the IRS awarded a multi-million-dollar fraud-prevention contract to Equifax. That’s not unlike hiring an embezzler to conduct an audit. The IRS did not open the opportunity to any other company.

Reaction to the awarding of the contract has spanned the partisan gap. In this report, one can find statements made by members of Congress, all of which criticized both the IRS and Equifax. Objections were made not only to the fact that a company with insecure data protection continues to have access to tax information, but also to the process by which Equifax obtained the contract.

According to this story, the claim by the IRS that it had no choice but to award the contract to Equifax has been refuted by the Government Accountability Office. It turns out that another, unidentified, company had been awarded the contract, but Equifax protested having the contract shifted to another company. The IRS concluded that it had no choice but to allow Equifax to continue providing identify protection services for taxpayers accessing data through IRS websites, but the GAO explained that the unidentified company could have been awarded the contract pending resolution of the Equifax protest.

This is no way to run a business, to run a government agency, or to run a nation. The lack of care and the lack of accountability are diseases contributing to the overall decline of the nation’s economic health. Those who claims simplifying the tax system will reduce the risk of identity theft are wrong. It doesn’t matter whether a person’s tax return has 2 lines, 20 lines, or 200 lines, because no matter the number of lines, identifying information will be on the return.

It is time for change, throughout the private sector and government. It is time to protect Americans and hold corporations, corporate executives, government agencies, and government officials accountable for the mess that deregulation has enabled.

Friday, October 06, 2017

One-Time Revenue Grabs 

Legislators who try to balance budgets are increasingly resorting to a technique that has also found followers in the business world. I call it the one-time revenue grab. To make up a shortfall between revenues and expenses, the business or legislature identifies a source of revenue that exists for only one moment in time. The flaw with this approach is that when the calendar turns and another shortfall looms, the one-time revenue grab no longer exists. Another one must be found. Eventually, there won’t be one to be found. The problem is structural. Revenue and expenses, for a business or government, must reflect continuous operations. If operating revenue consistently falls short of expenses, the business and the government will fail. It takes governments longer to fail than businesses, but failure is always around the corner.

An example of this one-time revenue grab made the news a few days ago. Though Pennsylvania legislators have been negotiating in secret, keeping their constituents and the public they are required to serve in the dark, word leaked that one proposed revenue raising provision would apply the sales tax to items purchased by businesses for sale to customers. In other words, the sales tax would be collected sooner. Items purchased this fiscal year but not yet sold would be subject to the tax. Of course, that would increase revenue this year. But what would happen next year? Because the sales tax had already been paid, when those items are sold, the revenue that would have been generated next year is reduced. It would be offset by imposing the sales tax on items purchased next year by businesses for the following year, so sales tax revenue next year would be the same as it would have been without the provision. That is why the proposal is a one-time revenue grab. Once word leaked out, opposition from businesses, unions, and others caused the legislators to set it aside.

From time to time, Pennsylvania legislators propose the sale of the state-operated liquor store system to provide revenue to offset spending. But how often can that trick be used? Once the system is sold, it’s not available for sale in the following year. Selling assets to fund operations is a signal that the entity’s finances are in trouble.

It’s not just governments that play this game. For the past several years, I have been getting a stream of postal letters from the water company, inviting me to pay a lump sum for insurance against damages to the water line from the main to the meter. The one-time payment would protect the line at least until the house is sold. Someone apparently came up with the idea of infusing the revenue stream with payments that, once made, would not be made again. So, if by some strange twist, every customer paid the lump sum premium, the company’s financial statements look good. But what happens the following year? There’s probably some other one-time revenue enhancement lurking in the wings.

The challenge, to governments and businesses, is matching revenue with expenses. Banks and other lenders, of course, encourage borrowing to make up the deficits, but that’s because the interest on those loans enhance the revenue of the banks and lenders. Borrowing works only if it is a timing or bridge assist, that is, the source of the revenue with which to repay the loan is in place. Too often, individuals, businesses, and governments borrow without having a stream of revenue available to pay the interest and principal.

It’s one thing for an individual to mess up with failing to match revenue and expenses. When a business miscalculates, its failure can cost employees their jobs, and customers their orders and service. When a government miscalculates, or more specifically, when legislators miscalculates, it can cost much more than jobs, safety, and health, as it already has in Pennsylvania while the legislative stalemate enters its fourth month. The price of legislative miscalculation can be the loss of freedom, and even national identity.

Wednesday, October 04, 2017

The Tax Policy That Worked for the Few and Not for the Many Last Time, and It Will Be a Repeat This Time 

The constant cry by the wealthy for reduction, and eventually elimination, of taxes imposed on the wealthy has swelled to a deafening roar. Branded as tax “reform,” a worthy objective if truly pursued and not used as a diversionary tactic, the effort by the wealthy to shift the economic burden of civilization onto the non-wealthy and to shift the economic benefit of civilization onto the wealthy has picked up steam as the wealthy have acquired an even stronger grip on government.

Readers of this blog know that I have no faith in the promises advanced by proponents of tax cuts for the wealthy. The claim that the increases in after-tax flows accruing to the wealthy will trickle down to everyone else has been proven, to put it nicely, erroneous. The claim that tax cuts for the wealthy create jobs flies in the face of evidence that most job creation arises from overwhelming demand by consumers who have money to spend. I have written about the flaws of supply-side economics and trickle-down theory in numerous posts, including Job Creation and Tax Reductions and The Tax Fake That Will Not Die.

The state of Kansas has gifted the nation with a sad, but instructive, lesson in why tax cuts for the wealthy are so destructive economically and socially. In A Tax Policy Turn-Around?, I explained how the Kansas income tax cuts for the wealthy backfired, causing the rich to get richer, the economy to stagnate, public services to falter, and the majority of Kansans to end up worse than they had been. In A New Play in the Make-the-Rich-Richer Game Plan, I described how Kansas politicians have been struggling to find a way to undo the damage caused by those ill-advised tax cuts for the wealthy. In When a Tax Theory Fails: Own Up or Make Excuses?, I pointed out that the Kansas experienced removed all doubt that the theory is shameful. In Do Tax Cuts for the Wealthy Create Jobs?, I described recent data showing that the rate of job creation in Kansas was one-fifth the rate in Missouri, a state that did not subscribe to the outlandish tax cuts for the wealthy that Kansas legislators had embraced. In Kansas Trickle-Down Failures Continue to Flood the State and The Kansas Trickle-Down Tax Theory Failure Has Consequences, I described how large decreases in tax revenue, the opposite of what is promised by the supply-side theorists, triggered cuts in public education, and in turn stoked the fires of voter frustration. The voter reaction, however, did not push out of office enough supply-side supporters. In Who Pays the Price for Trickle-Down Tax Policy Failures?, I described how the governor of Kansas, who claimed that tax cuts for the wealthy would generate increased revenues, proposed to deal with the resulting revenue shortfall by cutting spending for essential services. In Kansas As a Role Model for Tax Policy?, I shared the news that the Kansas policy of cutting taxes for the wealthy with the unwarranted promise of resulting revenue increases and economic prosperity is on the verge of total collapse.

Now the effort to reduce, and eventually eliminate, taxes on the nation’s self-appointed nobility has again returned to the center of the Washington, D.C., spotlight. Proposals to repeal the estate tax offer nothing to the vast majority of Americans who are not subject to the estate tax because their economic situation does not contribute to the economic instability that the estate tax is designed to prevent. Proposals to reduce income tax rates do far more for the wealthy than they do for the rapidly shrinking middle class. Given the revenue cost of these giveaways, supporters of these foolish ideas are divided, with some willing to let federal budget deficits skyrocket and the anti-deficit segment seeking to reduce or eliminate tax provisions that chiefly benefit the middle class. Preliminary examination of different versions of the packages under consideration reveal that many middle-class individuals and families will face increases federal tax bills. Unfortunately, most of these people are unaware that they are about to be skewered by tax “reform” being peddled to them as reductions in their tax liabilities.

Though not everyone who is a taxpayer in 2017 was old enough to be filing tax returns the last time this nation fell for these false promises, most of today’s taxpayers should remember, and hopefully do remember, not only the claims made in 2002, the changes in tax law enacted that year, and the economic consequences that devastated the nation six years later after the bad plans had been given sufficient time to percolate below the surface.

If America falls yet again to these false promises, then because of the tremendously larger scale of what is being planned, what happens when the consequences show up in the early to mid 2020s will make the Great Depression pale in comparison. By then, the beneficiaries of this wealth transfer will have retreated to the safety of their private islands, protected by their private armies, and laughing at the ease with which they restored feudalism while people were so distracted by arguments over the definitions of socialism and fascism.

Monday, October 02, 2017

When Claiming a Dependent Has Adverse Tax Consequences 

Contrary to what intuition might indicate, being able to claim someone as a dependent on a federal income tax return doesn’t always offer advantageous tax consequences. It’s understandable that people would think that the reduction in taxable income generated by the dependency exemption deduction reduces taxes. Usually it does. But sometimes, strange things happen.

A cautionary example of this unexpected consequence was provided recently by the United States Tax Court in Gibson v. Comr., T.C. Memo 2017-187. The taxpayers filed a joint return for 2014. During 2014 and 2015, their adult son did not live with them. He held a job, and at some point during 2014, the son used an address in another town, an address that was not the taxpayers’ address. For 11 months during 2014, the son obtained health insurance from Human Employers Health Plan of Georgia, which the son obtained though an application with the Health Insurance Marketplace. Humana collected premiums of $4,628.80, which were paid through the mechanism of advance payments of the premium assistance tax credit under section 36B. Monthly invoices for September through December of 2014 sent to the son at his separate address showed a gross monthly premium of $420.80, an offsetting Advance Premium Tax Credit of $420.80, and a balance due of zero. In mid-January of 2015, Form 1095-A was sent to the son at his separate address, showing the advance payments of the premium assistance tax credit that had been made to Humana in 2014. On January 1, 2015, the son enrolled in a Blue Cross Blue Shield plan offered by his employer.

On their 2014 joint income tax return, the taxpayers claimed their son as a dependent. The IRS did not dispute the son’s status as a dependent. The taxpayers claimed a refund of $6,880 on the return, reflecting the excess of the tax withheld from their reported income over the tax reported due. They did not report the advance payments of the premium assistance tax credit on their return. When they filed their return they were not aware that the son had obtained the Humana policy or that the advance payments had been made to Humana in 2014 for the son’s policy.

The IRS determined that the taxpayers tax should be increased to reflect the advance payments of the premium assistance tax credit to Humana on the son’s behalf during 2014. This caused a deficiency of tax that reduced the taxpayers’ claimed refund by $4,628.80.

As the Tax Court explained, section 36B permits eligible taxpayers, those with household incomes between 100 percent and 400 percent of the Federal poverty line, to claim the premium assistance tax credit for health insurance covering dependents, and dependents may not claim the credit on their own returns. Though advance payments of the premium assistance tax credit are made directly to the insurer during the taxable year, advance payments of the premium assistance tax credit made on behalf of a taxpayer or members of the taxpayer’s household, including dependent children, must be reported on the taxpayer’s federal income tax return. If the advance payments exceed the premium assistance tax credit to which the taxpayer is entitled, the excess increases the tax owed by the taxpayer and reduces any refund otherwise payable.

Because their income exceeded 400 percent of the federal poverty line, the taxpayers were not entitled to any amount of premium assistance tax credit. The entire amount of the advance payments of the premium assistance tax credit on their son’s behalf paid to Humana by the Health Insurance Marketplace during 2014 increased the taxpayers’ tax owed and reduced their claimed refund. It was on this basis that the IRS determined a deficiency and reduced the claimed refund.

The taxpayers did not deny that their reported income level made them ineligible for the premium assistance tax credit. They disagreed that their son received insurance from Humana, and therefore they disagreed whether any advance payments of the premium assistance tax credit were made to Humana on their son’s behalf. The son, unable to testify at the trial, provided a signed affidavit in which he claimed that he had only employer-provided Blue Cross insurance and that he did not receive a Form 1095-A showing advance payments of the premium assistance tax credit on his behalf to Humana. The Tax Court, however, pointed out that the reliable evidence presented to it established that the son’s recollection about his insurance coverage was “mistaken.” That evidence included business records from the son’s employer, from Humana, and from the Health Insurance Marketplace. It established that the son’s Blue Cross coverage did not begin until 2015, that he was covered by the Humana policy in 2014, and that Humana received advance payments of premium assistance tax credits to offset the son’s insurance premiums.

The court pointed out that it did not doubt the taxpayers’ testimony that they believed that their son did not have an insurance policy from Humana. The fact that their son did not live with the taxpayers led the court to conclude that it believed their testimony that they were unaware of the insurance coverage and any confirming information that was mailed to him. Thus, because the taxpayers did not dispute that their reported income level made them ineligible for the premium assistance tax credit, their tax was increased, and their refund reduced, by the amounts prepaid to Humana on their son’s behalf during 2014.

The dependency exemption deduction for 2014 was $3,950. Although the taxpayers’ adjusted gross income and taxable income was not provided by the opinion, at best it saved them roughly $1,600 in tax liability. The price that they paid was $4,628.80. Would it not have been better to not claim the son as a dependent? If the taxpayers were entitled to claim their son as a dependent, which the facts suggest was the case, then failure to do so would not permit the son to claim the credit because the credit is denied to any individual with respect to whom a dependency exemption deduction is allowable to another taxpayer. But would failure to claim the son as a dependent, even though he qualifies as a dependent, eliminate the requirement that the advance premium payments made on his behalf be added to the taxpayers’ tax? I cannot find anything definitive that answers the question. If the answer is no, then failure to claim the son as a dependent, even though he qualifies, would be counterproductive. If the answer is yes, it still might not make sense to fail to claim the son as a dependent. Why? The son, not entitled to the credit because he could be claimed as a dependent, would be the one required to add the advance payments to his tax. Perhaps someone who has expertise in the intersection of tax law and health insurance law can share some insights.

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