Clarifying Employer Insurance Mandate and Transition Relief

In conjunction with the issuance of the new employer mandate regs, IRS has released a series of questions and answers (Q&As) on the subject. The Q&As cover a variety of topics including how to determine whether an employer is subject to the mandate, how to properly identify full-time employees, and how to calculate the shared responsibility payment.

Background. For months beginning after Dec. 31, 2013, an "applicable large employer" is liable for an annual assessable payment if any full-time employee is certified to the employer as having bought health insurance through a state exchange with respect to which a tax credit or cost-sharing reduction is allowed or paid to the employee, and either the employer:

1. Fails to offer to its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage (MEC, see below) under an eligible employer-sponsored plan (Code Sec. 4980H(a) liability); or

2. Offers its full-time employees (and their dependents) the opportunity to enroll in MEC under an eligible employer-sponsored plan that, for a full-time employee who has been certified as having enrolled in qualified health plan for which an applicable premium tax credit or cost-sharing reduction, either is unaffordable or does not provide minimum value as these terms are defined in Code Sec. 36B(c)(2)(C) (Code Sec. 4980H(b) liability).

Together, Code Sec. 4980H(a) and Code Sec. 4980H(b) are called "employer shared responsibility" provisions or the "employer mandate."

An applicable large employer for a calendar year is one that employed on average at least 50 full-time employees on business days during the preceding calendar year. For determining whether an employer is an applicable large employer, full-time equivalent employees (FTEs) are taken into account using a formula provided in Code Sec. 4980H(c)(2).

In July of 2013, IRS issued Notice 2013-45, 2013-31 IRB 116, which delayed the employer mandate until 2015 and provided transition relief for 2014 from certain related reporting requirements.

Q&A guidance. The new Q&As provide guidance on and clarify a number of issues related to the employer mandate in general and the transitional relief afforded in new final regs. Highlights follow.

Treatment of seasonal employees. Seasonal employees are taken into account in determining the number of full-time employees, subject to the following caveat: if an employer's workforce exceeds 50 full-time employees (including full-time equivalents) for 120 days or fewer during a calendar year, and the employees in excess of 50 who were employed during that period of no more than 120 days were seasonal workers, the employer is not considered an applicable large employer. Seasonal workers are workers who perform labor or services on a seasonal basis as defined by the Secretary of Labor, and retail workers employed exclusively during holiday seasons. For this purpose, employers may apply a reasonable, good faith interpretation of the term "seasonal worker." (Q&A 4)

Commonly owned or related businesses. If two or more companies have a common owner or are otherwise related, they are combined for purposes of determining whether they employ enough employees to be subject to the employer mandate. However, these rules for combining related employers do not apply for purposes of determining whether a particular company owes an employer shared responsibility payment or the amount of any payment—rather, these determinations are made separately for each related company

(Q&A 6)
Types of employers subject to the mandate. In addition to for-profit businesses, non-profit and government entity (including federal, state, local, and Indian tribe) employers are subject to the employer mandate if they are applicable large employers. (Q&As 7 - 8)

Employees exempt from individual mandate. For purposes of determining whether an employer is an applicable large employer, all employees are counted (subject to the limited exception for seasonal employees, above), regardless of whether they are exempt from the individual mandate. (Q&A 11)

Employees outside the U.S. An employer generally takes into account only work performed in the U.S. in determining whether it is an applicable large employer—so, a foreign employer with fewer than 50 full-time employees (including FTEs) in the U.S. generally won't be subject to the employer mandate. Similarly, a company that employs U.S. citizens working abroad would only be subject to the employer mandate if the company had at least 50 full-time employees (including FTEs), determined by taking into account only work performed in the U.S. (Q&As 13 -14)

"Affordable" coverage and "minimum value." To avoid paying an employer shared responsibility payment, the coverage offered must be affordable and must provide minimum value. "Affordable" means that the employee's share of the premium doesn't exceed 9.5% of his annual household income, but since employers don't have this information, they may determine affordability using the wages they pay, their employees' hourly rates, or the federal poverty level. A plan provides minimum value if it covers at least 60% of the total allowed cost of benefits that are expected to be incurred under the plan, and IRS has provided a minimum value calculator that employers can use for this purpose. (Q&As 19 - 20)

Effect of employees purchasing other coverage, etc. If an employer offers health coverage that is affordable and that provides minimum value to its full-time employees and their dependents, the fact that some of the employees (or their spouses or dependents) either purchase health insurance through a marketplace or enroll in Medicare or Medicaid, won't cause the employer to be subject to an employer shared responsibility payment. Liability for that payment is triggered by a full-time employee's receipt of a premium tax credit, and an employee who is offered affordable coverage that provides minimum value is ineligible for the credit. (Q&As 21 - 23)

2014 transition relief. No employer shared responsibility payment will apply for 2014. The employer mandate provisions generally go into effect in 2015, with additional transition relief for mid-sized employers. (Q&A 29)

Effect on eligibility for premium tax credit. IRS clarified that the fact that an employer doesn't employ enough employees to be subject to the employer mandate does not affect its employees' eligibility for a premium tax credit. (Q&A 44)

Calculating the payment—failure to offer coverage to any or to sufficient percentage of employees. If an applicable large employer doesn't offer coverage, or offers coverage to fewer than 95% of its full-time employees (and their dependents), the employer shared responsibility payment equals the number of full-time employees (but not FTEs) employed for the year (minus up to 30) multiplied by $2,000, as long as at least one full-time employee receives the premium tax credit. If coverage is offered for some months but not others, the amount of the payment per month is one-twelfth of the above. However, for any calendar month in 2015 or any calendar month in 2016 that falls within an employer's non-calendar 2015 plan year, the penalty only applies for an applicable large employer with at least 100 full-time employees (including FTEs) that does not offer coverage to at least 70% of its full-time employees (and their dependents), and the payment equals the number of full-time employees the employer employed for the month (minus 80) multiplied by one-twelfth of $2,000, provided that at least one full-time employee receives a premium tax credit for that month. (Q&As 24, 38)


Calculating the payment—coverage offered, but at least one employee still gets credit. If an applicable large employer does offer coverage to at least 95% of its full-time employees (and their dependents) but has one or more full-time employees who receive a premium tax credit, then the payment is computed separately for each month and equals the number of employees who receive the credit for that month multiplied by one-twelfth of $3,000 (capped at the amount of full-time employees for the month, minus up to 30, multiplied by one-twelfth of $2,000—to make sure that the payment for an employer that offers coverage can never exceed the payment that it would owe if it didn't). However, for 2015, the penalty only applies for an applicable large employer with at least 100 full-time employees (including FTEs) that does offer coverage to at least 70% of its full-time employees but still has at least one full-time employee who receives the credit. (Q&A 25, 39)

Final Regs Cover Who is a Full-Time Employee for Purposes of Employer Insurance Mandate for 2015

We have been awaiting clarification as to the definition of Full-Time Employee for purposes of compliance with the upcoming Employer Mandate for health insurance for 2015.  As reported by Thomson Reuters, the IRS has recently issued final regs on the employer shared responsibility provisions under the Affordable Care Act (ACA). an assessable payment (i.e., employer shared responsibility payment) may in certain circumstances be imposed on an employer that employs a certain number of full-time employees and fails to provide adequate health insurance to its employees. This article provide rules on identifying who is a full-time employee under the regs.

Background. For months beginning after Dec. 31, 2014, an applicable large employer is liable for an annual assessable payment under Code Sec. 4980H if any full-time employee is certified to the employer as having bought health insurance through a state exchange with respect to which a tax credit or cost-sharing reduction is allowed or paid to the employee, and either the employer: (1) fails to offer to its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage (MEC) under an eligible employer-sponsored plan (Code Sec. 4980H(a) liability); or (2) offers its full-time employees (and their dependents) the opportunity to enroll in MEC under an eligible employer-sponsored plan that, for a full-time employee who has been certified as having enrolled in qualified health plan for which an applicable premium tax credit or cost-sharing reduction, either is unaffordable or does not provide minimum value. (Code Sec. 4980H(b) liability).

A full-time employee for any month is an employee who is employed on average at least 30 hours of service per week. (Code Sec. 4980H(c)(4)) Under Code Sec. 4980H(c)(2), an applicable large employer for a calendar year is an employer who employed an average of at least 50 full-time employees on business days during the preceding calendar year. In determining whether an employer is an applicable large employer, full-time equivalent employees (FTEs) are also taken into account. The number of FTEs is determined by dividing the aggregate number of hours of service of employees who are not full-time employees for the month by 120.

Full-time employees. The final regs provide two methods for determining full-time employee status: the monthly measurement method under Reg. § 54.4980H-3(c), and the look-back measurement method under Reg. § 54.4980H-3(d). A full-time employee is, with respect to a calendar month, one who is employed an average of at least 30 hours of service per week. (Reg. § 54.4980H-1(a)(21))

The final regs adopt a standard of 130 hours of service per calendar month for determining whether an employee is a full-time employee under both the look-back measurement method and the monthly measurement method. The 130 hours of service standard is equal to 30 hours of service per week multiplied by 52 weeks and divided by 12 calendar months. (T.D. 9655, 02/10/2014)

For employees paid on an hourly basis, an employer must calculate actual hours of service from records of hours worked and hours for which payment is made or due. (Reg. § 54.4980H-3(b)(2)) Except as otherwise provided, an employer must calculate hours of service by:

• Using actual hours of service from records of hours worked and hours for which payment is made or due;
• Using a days-worked equivalency under which the employee is credited with eight hours of service for each day for which the employee would be required to be credited with at least one hour of service; or
• Using a weeks-worked equivalency whereby the employee is credited with 40 hours of service for each week for which the employee would be required to be credited with at least one hour of service. (Reg. § 54.4980H-3(b)(3)(i))

Monthly measurement method. Under the monthly measurement method, an applicable large employer determines each employee's status as a full-time employee by counting the employee's hours of service for each calendar month. This rule (except with respect to the weekly rule, see below) applies for purposes of the determination of status as an applicable large employer. (Reg. § 54.4980H-3(c)(1))

New employees. Under the monthly measurement method, an employer will not be subject to a Code Sec. 4980H(a) assessable payment with respect to an employee because of a failure to offer coverage to that employee before the end of the period of three full calendar months beginning with the first full calendar month in which the employee is otherwise eligible for an offer of coverage under the employer's group health plan, if the employee is offered coverage no later than the day after the end of that three-month period. If the coverage for which the employee is otherwise eligible provides minimum value, the employer also will not be subject to a Code Sec. 4980H(b) assessable payment during that three-month period. An employee is otherwise eligible for an offer of coverage in a month if the employee meets all conditions to be offered coverage under the plan other than the completion of a waiting period, within the meaning of Reg. § 54.9801-2.

This rule applies only once per period of employment of an employee and applies with respect to each of the three full calendar months for which the employee is otherwise eligible for an offer of coverage under a group health plan of the employer. The relief is available even if the employee terminates before that date (and before coverage is offered). (Reg. § 54.4980H-3(c)(2))

Weekly rule. Under an optional method (the weekly rule), an employer is allowed to determine an employee's full-time employee status for a calendar month under the monthly measurement method based on the hours of service over successive one-week periods. Full-time employee status for certain calendar months is based on hours of service over four-week periods and for certain other calendar months on hours of service over five-week periods. In general, the period measured for the month must contain either the week that includes the first day of the month or the week that includes the last day of the month, but not both. A week for this purpose means any period of seven consecutive calendar days applied consistently by the applicable large employer for each calendar month of the year. For calendar months calculated using four week periods, an employee with at least 120 hours of service is a full-time employee, and for calendar months calculated using five week periods, an employee with at least 150 hours of service is a full-time employee. (Reg. § 54.4980H-3(c)(3))

However, for purposes of coordination with both the premium tax credit and the Code Sec. 5000A individual shared responsibility provisions—which are applied on a calendar month basis—an applicable large employer is only treated as having offered coverage under Code Sec. 4980H for a calendar month if it offers coverage to a full-time employee for the entire calendar month, regardless of whether the employer uses the weekly rule. (T.D. 9655, 02/10/2014)

Look-back measurement method. Under the look-back measurement method in the final regs, employers may determine the status of an employee as a full-time employee during a future period (i.e., the stability period), based upon the hours of service of the employee in a prior period (i.e., the measurement period). (Reg. § 54.4980H-3(d)(1)) The stability period is a period selected by an applicable large employer, that immediately follows, and is associated with, a standard measurement period or an initial measurement period (and, if elected by the employer, an administrative period of no longer than 90 days). (Reg. § 54.4980H-1(a)(45)) The standard measurement period is a period of at least three months but not more than 12 months, as determined by the employer. (Reg. § 54.4980H-1(a)(46))
The employer determines the months in which the standard measurement period starts and ends, provided that the determination is made on a uniform and consistent basis for all employees in the same category. (Reg. § 54.4980H-3(d)(1))

Illustration: If an applicable large employer chooses a standard measurement period of 12 months, the employer could choose to make it the calendar year, a non-calendar plan year, or a different 12-month period, such as one that ends shortly before the start of the plan's annual open enrollment period. (Reg. § 54.4980H-3(d)(1))

If the applicable large employer determines that an employee was employed on average at least 30 hours of service per week during the standard measurement period, then the applicable large employer must treat the employee as a full-time employee during a subsequent stability period, regardless of the employee's actual number of hours of service during the stability period, so long as he remains an employee. (Reg. § 54.4980H-3(d)(1))

The look-back measurement method for identifying full-time employees is available only for purposes of determining and computing liability under Code Sec. 4980H and not for purposes of determining status as an applicable large employer. (Reg. § 54.4980H-3(d)(1))


New employee. Under the final regs, the application of the look-back measurement method to a new employee depends on the employer's reasonable expectations with respect to the status of the new employee at his start date. If a new employee who is reasonably expected to be a full-time employee at his start date is offered coverage by the first day of the month immediately following the conclusion of the employee's initial three full calendar months of employment (and if the employee was otherwise eligible for an offer of coverage during those three months), the employer isn't subject to a Code Sec. 4980H(a) assessable payment for those initial three full calendar months of employment (or for the period prior to the initial three full calendar months of employment). To avoid liability under Code Sec. 4980H(b) for the initial three full calendar months, the coverage offered after the initial three full calendar months of employment must provide minimum value. Otherwise, with respect to a new employee who is reasonably expected to be a full-time employee at his start date, the employer may be subject to a Code Sec. 4980H assessable payment beginning with the first full calendar month in which an employee is a full-time employee.

Washington Practices Fiscal Cliff Diving

With tax cuts galore expiring at the end of the year, and steep cuts in both defense spending and discretionary spending on the horizon, Democrats and Republicans in Washington are doing a complicated dance at the edge of the so-called fiscal cliff.

Now that the elections are finally over, there was supposed to be more clarity about exactly what is going to happen with the tax cuts so there could be more certainty for next year. But the posturing is apparently going to continue, as the post-election makeup of the administration and Congress will change remarkably little in 2013.

Yet there have been some encouraging signs. Both President Obama and Speaker of the House John Boehner, R-Ohio, went in front of the cameras last Friday and said they are ready to talk (see Obama Plans Talks with Congress to Avoid Tax Increases and Fiscal Cliff). Boehner has even urged the President to demonstrate his leadership. A meeting has been scheduled between Obama and leaders of the House and Senate from both parties on Friday. On Tuesday, Obama met with the leaders of labor unions and left-leaning advocacy groups to get feedback from them, and on Wednesday he will be meeting with a group of CEOs of major corporations.

So far, though, the two parties remain locked in their original negotiating positions from before the elections. The Obama administration and congressional Democrats largely remain united behind the concept of allowing the Bush tax cuts to expire for couples with incomes above $250,000 a year and individuals making over $200,000 a year, while pushing for an extension of tax cuts for the middle class.

Congressional Republicans contend that allowing the tax cuts to expire at the upper end would hurt small businesses and so-called job creators. Both sides agree, though, that if the tax cuts expire for everybody and aren't renewed quickly, and if the automatic spending cuts take effect, the country could plunge back into another recession. The Congressional Budget Office estimates that gross domestic product would plummet 0.5 percent next year and unemployment would hit 9.1 percent.

While neither side has any interest in seeing the economy hit the skids, both sides have some leverage in the upcoming negotiations. Obama no longer has to worry about being re-elected and he can claim to have a mandate from the American people. After all, he campaigned on a promise not to allow tax cuts to continue for the wealthy once again, as he was forced to do at the end of 2010 when the Bush tax cuts were in danger of expiring.

Nevertheless, Republicans still control the House, and they will next year too. But chastened by defeats at the polls and a shrinking presence in the Senate, they appear to be ready for some form of compromise, at least for now. That could mean a revival of the so-called “grand bargain” on deficit reduction that Boehner and Obama came close to striking the last time the debt ceiling needed to be raised, as it will need to be lifted again in the next few months. The unconsummated deal reportedly included some form of revenue raising, although Republicans still remain largely opposed to any actual tax rate increases.

What they do seem ready to agree to is limiting tax deductions for the wealthy, as Mitt Romney said he was in favor of doing during the presidential debates. There may be room for a compromise along those lines if Democrats see it as an acceptable substitute for raising tax rates at the upper end of the income scale.

Unless the Bush tax cuts are extended, the top two income tax rates of 36 and 39.6 percent that were in effect during the Clinton administration would return. The Tax Policy Center estimates that the top 1 percent of households, which earn an average of approximately $1.7 million a year, would then need to pay an extra $94,000 in taxes under the budget that Obama has proposed for next year. The Tax Policy Center has also come out with estimates of how much revenue could be raised if tax deductions were limited. The results appear to indicate that a substantial amount of revenue could be produced under different scenarios, perhaps even more than the $700 billion estimated to be gained over 10 years by restoring the top two income tax brackets.

Obama has already supported a plan to limit itemized deductions to 28 percent of gross income for taxpayers who earn over $200,000 a year, so he might be persuaded to agree to a plan for limiting tax deductions instead of raising tax rates. However, he might then face accusations from Democrats of caving in to Republicans once again, and he has vowed not to allow that to happen. It may end up being a game of chicken as both sides try to run out the clock while the time ticks away until the end of the year without a deal in sight.

Realistically, though, Congress and the Obama administration have very little time to make a deal, as the IRS is already warning that the uncertainty over tax rates and the still unpatched Alternative Minimum Tax could play havoc with next tax season (see IRS Warns AMT Could Affect 60 Million Taxpayers Unless Patched). Business leaders are also pressing their representatives in Congress to restore some certainty to the economy, as worries about a future recession are tempering their hiring plans.

Unless they can come up with a deal in the next few weeks, Congress and the administration ultimately may need to end up kicking the proverbial can down the road until sometime next year by agreeing to temporarily extend the current tax rates while assuring the public they will work on achieving some version of tax reform next year. Until that happens, both sides will be loath to give up whatever leverage they have over each other, although the prospect of an imminent deadline could finally force them to agree on a compromise.

BY MICHAEL COHN, EDITOR-IN-CHIEF, ACCOUNTINGTODAY.COM

Warning: Fiscal Cliff Ahead

Fiscal crisis looms for winner of the presidential election

Consumers, banks and businesses have been busy getting their balance sheets into better shape since the U.S. economic recovery began more than three years ago. Now, it’s the government’s turn.

 Whoever wins the presidency will contend with a budget on a trajectory dubbed unsustainable by Federal Reserve Chairman Ben S. Bernanke. Barack Obama or Mitt Romney will have to tame a deficit that has topped $1 trillion in each of the past three years, Bloomberg Markets magazine reports in its November issue. How the new president goes about it will influence the direction of financial markets and define the economy and society for his four-year term and beyond.

 “We’ve made a lot of progress getting the private-sector balance sheet in order,” says Mark Zandi, chief economist at Moody’s Analytics in West Chester, Pennsylvania. “Where we’ve got a lot of work to do is on the public side.” Research from Harvard University economists Carmen Reinhart and Kenneth Rogoff shows why it’s necessary to do that work. Their data on sovereign indebtedness, which go back more than two centuries, demonstrate that growth has been hobbled when central government debt is more than 90 percent of annual gross domestic product five years in a row. The U.S. is now at the Reinhart-Rogoff debt threshold.

Gross federal debt has exceeded 90 percent of GDP for the past two years and is projected to remain above that level through 2017 at least, according to the White House’s Office of Management and Budget. Even publicly held debt, which excludes the special-issue securities held by the Social Security trust fund and other government agencies, reached 68 percent of GDP in 2011.

 ‘Subpar Economy’

 “It’s not about we’re going to have a financial crisis tomorrow,” Reinhart says. “We’re just going to have this subpar economy.”

 The sea of red ink is pushing business executives to get involved in the debt debate and should force political leaders to act, says David Cote, chief executive officer of Honeywell International Inc., who was a member of the debt reduction panel created by Obama and led by former Republican Senator Alan Simpson and former White House Chief of Staff Erskine Bowles, a Democrat. 

“We have more debt on a percent-of-GDP-basis today -- by a large amount -- than we did during the Reagan years, World War I, the Civil War, the Revolutionary War,” Cote said at the Bloomberg Markets 50 Most Influential Summit on Sept. 13. The only time the U.S. was deeper in debt was during World War II.“And then, we had a very good reason,” he said.

 Debt Clock 

Cote is on the steering committee of the Campaign to Fix the Debt, a group pushing for a comprehensive plan to get the federal budget on better footing.

Budget matters have permeated the presidential campaign. At their convention in Tampa, Florida, in August, Republicans displayed a running tally of the rising national debt -- 14 digits, about $16 trillion -- above the stage. A week later, at the Democratic convention in Charlotte, North Carolina, former President Bill Clinton reminisced about the budget surplus at the end of his second term in 2000.

 The costs of doing nothing are rising. Unless and until business leaders see that the gridlock in Washington can be broken, they’re going to be reluctant to make investments or hire more workers, according to Cote. The political inaction hurts growth. “What it causes you to do is sit there and say,’ I’m better off waiting right now. I shouldn’t spend my shareowners’ money until I have some sense of where things are going,’” he said.

Fiscal Cliff
Fear that politicians will be unable to reverse the long-term trend in the debt is compounded, in Cote’s view, by the possibility that they will fail to stop the huge tax increases and spending cuts scheduled to go into effect starting next year. Although leading the country off this so-called fiscal cliff would almost halve the budget deficit, economists say it’s exactly the wrong way to go about it if you want to limit harm to the economy. The abrupt austerity would likely strangle the fragile three-year-old recovery.

Maya MacGuineas, president of the Committee for a Responsible Federal Budget, based in Washington, says there’s growing support on Capitol Hill for tackling the debt in a constructive manner. She says she’s hopeful that a “grand bargain” to put the government’s finances on a sounder footing may be possible between a newly elected president and Congress, helped along by the need to deal with the fiscal cliff.

Grand Bargain

The term grand bargain is shorthand for a compromise that addresses the long-term trend of a budget that gets harder to balance as health-care costs rise and the population ages. The goal is to put a deal in place now that shows the government is committed to a plan to shrink the deficit -- without shocking the economy in the near term.

Alan Blinder, a former Fed vice chairman who’s now a professor at Princeton University, says his ideal policy would be $500 billion of stimulus up front coupled with $5 trillion in deficit cuts over the following 10 years. The former is unlikely, he says, with Republicans having made stimulus a dirty word in Washington. And the latter may not happen either, as long as interest rates stay low. Blinder says policy makers will likely tackle the debt piecemeal, with limited changes in the tax code and compromises on spending rather than an overarching agreement.

“There is more discussion about dealing with the deficit than I’ve heard in a long time,” says Howard Gleckman, resident fellow at the Urban Institute and editor of the TaxVox blog. Still, he says he remains skeptical that the talk will translate into action. Like Blinder, he says low interest rates allow policy makers to kick the can down the road.

Low Yields

Yields on Treasury securities are hovering near record lows as the U.S. benefits from its status as a safe haven for investors during a period of financial turmoil in Europe.

Politicians will be tempted to delay needed efforts to deal with the debt because borrowing costs are low, says Robert Litan, director of research for Bloomberg Government in Washington. “We have a lot more freedom to be irresponsible,” he says.

That’s a risky path, says MacGuineas, who has former politicians and policy officials from both the Republican and Democratic parties on her group’s board. “Playing chicken with the credit markets is a dangerous game,” she says.

A surge in borrowing costs is the likely scenario when debt gets out of hand. Rogoff, Reinhart and her husband, Vincent Reinhart, a former Fed official who’s now chief U.S. economist for Morgan Stanley, authored a paper earlier this year that examined 26 separate episodes in 22 countries in which central government obligations rose above the 90-percent-of-GDP mark.

Growth Hit

In the most common scenario, debt above that threshold led to higher interest rates that in turn created a drag on growth, the researchers found. In other instances, the economy slowed because of the need to raise taxes and cut spending, particularly on public investment. Either way, the hit to growth was inescapable.

“The long-term risks of high debt are real,” the economists wrote in their paper, published in April on the website of the National Bureau of Economic Research.

Advanced economies with debts above the 90 percent threshold grew on average 2.3 percent a year, compared with 3.5 percent growth in lower-debt periods, the research showed. The periods of elevated debt lasted an average of 23 years. In spite of the dangers, the economists said, they’re not advocating rapid reductions in government debt during times of extremely weak growth and high unemployment. 

Unemployment

Growth in the U.S. has indeed been subpar. Gross domestic product will expand 2.1 percent in 2013, not much different from the 2.2 percent growth expected for this year, according to the median forecast of economists surveyed by Bloomberg in September. Unemployment will stay high, averaging 7.9 percent for the year, economists predict. The jobless rate stood at 8.1 percent in August and had been above 8 percent for 43 straight months.

In the past, such a middling outlook would have had politicians talking about ways for the government to stimulate the economy. Not now. Instead, the focus is on how much -- and how quickly -- the government should scale back its support.

“It’s an odd situation,” says Dean Maki, chief U.S. economist at Barclays Plc in New York. “Usually, the choice is, do you do some stimulus and try to boost the economy? But now we’re talking about the extent of fiscal tightening.”

Romney’s Approach

Both President Obama and Republican nominee Romney promise deficit reduction -- although their approaches differ radically.

Romney, the former Massachusetts governor, pledges in his stump speeches and on his campaign website that he would balance the budget within a decade through deep reductions in government outlays, while devoting more resources to national defense. He wants to cut federal spending to 20 percent of GDP by 2016, from about 24 percent today. He also proposes to overhaul the tax code and federal health-care programs for the poor and elderly, while reducing income tax rates by 20 percent.

The broad outline of Romney’s plan implies a government with limited resources to maintain the social programs of the Great Society and the New Deal, although he hasn’t provided much detail on what spending he would cut and what tax deductions he would eliminate.

Obama’s Budget

Obama’s debt reduction goals are more modest. During the next 10 years, he would reduce, not eliminate, the deficit, according to the most recent White House budget proposal. He aims to stop the growth of the federal debt as a share of the economy while preserving the government’s role in aiding the needy.

The president proposes to reduce the budget gap through shallower spending cuts and higher taxes for top earners. He backs increased public investment as a way to promote economic growth.

After a decade, Romney’s proposals would be about $300 billion a year below Obama’s plan on revenue and as much as $1 trillion below it on spending.

“They do present a rather stark contrast, both in theory and in the numbers,” says Bob Bixby, executive director of the Concord Coalition, an Arlington, Virginia-based nonprofit group that advocates for deficit reduction.

Although fiscal responsibility is a perennial campaign promise, Alice Rivlin says there might be reasons to expect that debt reduction efforts will gain traction after the election on Nov. 6. Rivlin, the first director of the Congressional Budget Office back in 1975, points out that the president and the Republican speaker of the House, John Boehner, tried to negotiate a far-reaching budget pact last year as the confrontation over the debt limit roiled the capital.

‘Came Close’ 

“I believe that they came close,” Rivlin says. No one knows what will trigger action on the debt. “The last run-up to a very bitter campaign may not be the best moment to assess,” she says.“It may look better after the election.”

The crisis in the euro zone, where bond buyers have pushed up the borrowing costs for indebted countries such as Greece, Portugal and Italy, adds urgency to U.S. efforts to find a more sustainable budgetary path. 

Harvard’s Carmen Reinhart says instances of debt climbing above 90 percent of GDP in an advanced economy have been relatively rare since World War II. In the European examples, including Greece and Italy, the penalty for their fiscal irresponsibility can be seen in slower economic expansion over many years. “They’re not poster children for growth.”

‘Not Delusional’

For the U.S., Reinhart says, the debt reduction framework created by the Simpson-Bowles commission would be a good starting point for a political compromise. “It was bipartisan by people who were not delusional,” she says.

Rivlin, who was on the Simpson-Bowles commission, says the euro-area sovereign-debt crisis could be what forces action. If Europe falls apart completely, it would underscore the hazard of fiscal recklessness. If Europe begins to work through its problems, on the other hand, it would present investors with an alternative to safe-haven Treasury purchases -- and yields on U.S. government debt might start to rise. “Once Europe starts to get its act together, then we’ll be much more exposed.”

Rivlin and others point to the fiscal cliff as another possible trigger to get politicians moving -- or it could be an economic disaster. More than $600 billion of tax increases and spending cuts are slated to take effect in 2013 if Congress and the president can’t compromise and alter the statutes in place today. The tax cuts for income, dividends and capital gains enacted during George W. Bush’s tenure in the White House would expire. A payroll tax cut and extended unemployment benefits are also due to lapse. And some $65 billion in automatic cuts in government outlays -- half of them from defense -- would take effect as a result of last year’s deal to raise the debt limit.

Tax Increase

That would be deficit reduction on steroids, cutting the budget gap almost in half, to $641 billion. If lawmakers do nothing, 83 percent of all U.S. households would face tax increases, averaging $3,701, according to the Tax Policy Center, a nonpartisan research group in Washington. The Congressional Budget Office forecasts that it would tip the U.S. into recession.

“If the debt ceiling debate was playing with fire, this is playing with nitroglycerin,” Honeywell’s Cote said at the Bloomberg Markets conference. “There’s the opportunity for our government to spark a global recession with how they handle this fiscal cliff.”

Neel Kashkari, head of global equities at Pacific Investment Management Co., expects that Washington will avoid the full impact of the scheduled tax and spending changes by acting after the November election and before the next presidential term begins in January.

Lame Duck Session

“There will likely be a deal during the lame duck session,”Kashkari said, also at the conference. He predicts a compromise that will limit the effect to about $250 billion in 2013. “We are going to avoid recession, but it will be a meaningful drag on the economy.”

Cote also sees a chance that the fiscal cliff will spur Congress and the presidential winner to action -- along with the business community.

Corporate leaders failed to speak up forcefully when debate over the debt ceiling threatened to push the country to default on its debt in the summer of 2011. “We thought it was the normal political baloney that those guys go through.” Those in the executive suite know better this time, according to Cote, and the pressure will grow after the election on Congress and the White House to put the country on a real and reasonable fiscal path.

Source: Bloomberg

Tax credit for hiring "Returning Heroes and Wounded Warriors"

As part of the President's "Jobs" bill endeavor, last week congress passed and the President signed into law the "Returning Heroes Tax Credit" and the "Wounded Warriors Tax Credit". These new tax credits will assist employers that hire "qualified" veterans with a tax break between $2,400 and $9,600 for each qualified veteran hired. The amount of the credit depends, in part, on how long the veteran has been unemployed, and the credit increases to the maximum if the veteran has a qualified service related disability. A tax credit is much better for the employer than a tax deduction. A tax credit reduces your taxes dollar for dollar, whereas a tax deduction only reduces your taxable income.

The goal of the jobs bill is to incent employers to hire the thousands of veterans that have or will be returning from the war. It would be great if the bill reduces the number of veterans on the unemployment line. I'd love to see all veterans gainfully employed after serving our country. Hopefully the next bill will assist other citizens that have been searching for employment as well.

Now for the details of the new tax law.

Employers that hire veterans who have been looking for employment for more than six months may be eligible for a Returning Heroes Tax Credit of up to $5,600 per employee; employers that hire veterans who have been looking for employment for less than six months may be eligible for a credit of up to $2,400 per employee.

Employers that hire veterans with service-connected disabilities who have been looking for employment for more than six months may be eligible for a Wounded Warriors Tax Credit of up to
$9,600 per employee.

Of course both tax credits have strings attached.

1-In addition to the above criteria, the individual must begin after the date the law was passed, November 21, 2011.
2-State workforce agencies must certify that an individual is qualified for the credit.
3-Employers must complete Form 8850 Pre-Screening Notice and Certification no later than 28 days after the date of hire.
4-Other requirements must also be met to qualify for the credit.

This new tax law is meant to be tax neutral, as a number of other laws were changed to increase revenue.

1-Veterans Administration(VA) mortgage applications contain an application fee. These fees were scheduled to be reduced, but the new tax law delays the mortgage application fee.
2-After the year 2013, it will be more difficult to qualify for a health insurance premium assistance tax credit. Health insurance exchange options are scheduled to be available under the Patient Protection and Affordable Care Act.upcoming premium assistance tax credit for qualified individual who obtain health insurance through a heals insurance exchange after 2013

New IRS Inflation Adjustments could help or hurt your cash flow

The IRS recently announced inflation adjustments in the tax code for 2012. IRS statistics report inflation increased just over 3.8%. Obviously, this doesn't take into consideration the rising cost of food and gasoline, as these items have increased much more than that!

For some, the IRS inflation adjustments will result in lower tax burden for 2012. For others, their paycheck will be a little lower than in the past with an increase to the Social Security Wage base.

First the bad news.

Employees and self-employed individuals pay social security taxes on the wages, or profit for self-employed individuals. The maximum wage base subject to this tax increases for 2012 to $110,100 from $106,800. This is the first increase in the wage base since 2009.

Now some good news.
RETIREMENT PLANS
401Ks The maximum amount an individual can contribute tax-free to a 401(k) plan increased to $17,000. If you are 50 years old or more, you can contribute an extra $5,500 to you retirement plan.

Traditional IRAs.. The deduction for taxpayers making contributions to a traditional IRA is phased out for single individuals and heads of households who are covered by a workplace retirement plan and whose modified adjusted gross incomes fall within certain ranges. For 2012, the income phaseout range starts at $58,000 and ends at $68,000, up from $56,000 and $66,000, respectively, for 2011. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phaseout range for 2012 starts at $92,000 and ends at $112,000, up from $90,000 and $110,000, respectively, for 2011. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out for 2012 if the couple’s income is between $173,000 and $183,000, up from $169,000 and $179,000, respectively, for 2011.

Roth IRAs. are subject to similar rules. The AGI limit for maximum Roth IRA contributions for a married couple filing a joint return for 2012 is $173,000, an increase of $4,000 from 2011. The AGI limitation for all other taxpayers (other than married taxpayers filing separate returns) increases from $107,000 for 2011 to $110,000 for 2012.

Individual income tax brackets
Although tax rates have not gone down, inflation also impacts the individual income tax rate brackets (which are 10, 15, 25, 28, 33, and 35 percent, respectively, for 2011 and 2012). Indexing of the income tax rate brackets effectively lowers tax bills by including more of an individual’s income in lower brackets.

Standard deduction. Taxpayers who elect not to itemize deductions use the standard deduction amount. The standard deduction increases by $500 for married couples filing a joint return from $11,400 for 2011 to $11,900 for 2012. The standard deduction for single individuals increases from $5,700 for 2011 to $5,950 for 2012.

Personal exemption. Taxpayers may claim a personal exemption deduction (and an exemption deduction for each person they claim as a dependent). The amount of the personal exemption and the dependency exemption increases from $3,700 for 2011 to $3,800 for 2012. The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (2010 Tax Relief Act) repealed the personal exemption phaseout for higher income taxpayers for 2011 and 2012.

Estate tax. The 2010 Tax Relief Act provided that the basic exclusion amount for determining the amount of the unified credit against estate tax for estates of decedents dying after December 31, 2009 is $5 million. The $5 million amount is adjusted for inflation for tax years beginning after December 31, 2011. For 2012, the inflation-adjusted amount is $5,120,000.

Gift tax exclusion. For 2012, you can give up to $13,000 to any person without incurring gift tax. Married couples can gift up to $26,000 tax-free to any person. There is no limit on the number of individuals you can make the $13,000 ($26,000) gift. The $13,000 and $26,000 amounts are unchanged from 2011.

So you have a little ebay business? Do you need to report the income?

On a recent family road trip to visit my brother-in-law in Louisville, KY, my 14 year old daughter was anxiously awaiting payment confirmation for her largest sale-to-date for her ebay business.  Correction, her ebay hobby....

She's been busy generating cash for vacation....  I was a bit amazed that she was able to sell her old camera for $60, plus shipping.  I was even more surprised the buyer paid her extra money to ship it express mail so he would have it in time for his vacation, in Florida of course!

Always the skeptic, I suggested she not mail the camera to the buyer until she had confirmation that his payment was received in her paypal account.  She assured me the buyer had only positive comments in his transaction history, so I figured he was probably legit, but still......About halfway to Louisville, she received confirmation payment was received, so her business transaction went well!

However, it was time for this father to have another uncomfortable conversation with his 14 year old daughter.....this time about taxes.  You see, in order to help narrow the "tax gap" caused by unreported income, the IRS is enforcing a new tax regulation meant to ensure all taxable income is reported.  The new Form 1099-K reports the recipient and amount of credit card sales processed by third party settlement organization, like Visa, Mastercard, American Express and yes, Paypal.  This is sure to trip up many home-based ebay and internet businesses that may not have reported taxable income in the past.

The good news for my daughter is that she will fall under two exeptions from tax reporting requirements.

#1 Since there is no way she will ever sell her "inventory" for more than she(I) paid for it, there will never be any profit from the business.  Unless of course there is ever a resurgence of polularity of beannie babbies, in which case I'll gladdly bring up her tax reporting requirements!  A business in which there will never be profit is considered a hobby in the eyes of the IRS.  Income may need to be reported in certain circumstances, but expenses can never exceed income in order to generate a tax loss.  Disclaimer....other reporting requirments may be required.

#2 The new 1099-K is not required if credit card volume is under $20,000 and 200 transactions during the calendar year.  If she sold all of the "inventory" during the year, she would still be under these thresholds. (wanna buy a beannie babby?)

The hight of Louisville today was a predawn tour of Churchill Downs by my brother-in-law Kevin.  He is an exercise jockey and trained last years Derby winner Supersaver ridden by Calvin Borel.  Saw Calvin breeze by on a new horse this morning. Could be another Derby winner!