Premium Tax Credit
What is the Premium Tax Credit? The Premium Tax Credit is a refundable tax credit for certain people who enroll, or whose family member enrolls, in a qualified health plan that they obtain through a health insurance Marketplace. This credit provides financial assistance to pay the premiums for a qualified plan by reducing the amount of tax the taxpayer owes. Most individuals who obtain their health insurance through a Marketplace will receive an advance of their premium tax credit. This advance (subsidy) goes directly to the insurance company and thus reduces the amount of premium they pay for their health insurance each month. The amount of the advance premium tax credit is based on income and family size from the taxpayer’s prior year income tax return. If the taxpayer received a subsidy (advance premium tax credit) the amount of subsidy they received needs to be reconciled with the premium tax credit calculated when they complete their federal tax return. The credit and the reconciliation calculation are done on Form 8962. For more information see the following on the IRS website: Premium Tax Credit Changes Under the American Rescue Plan For 2022 – 2025, taxpayers who purchased their health insurance through an Exchange (Marketplace) may see an increase in their premium tax credit. Under the American Rescue Plan Act, the amount that an individual must contribute towards paying for their health insurance based on the benchmark silver plan is reduced at every income level. This will result in an increase in the credit for most eligible individuals. The American Rescue Plan extended the credit to individuals with household income greater than 400% of the federal poverty level (FPL) by applying an applicable percentage of 8.5% of their annual household income that these individuals must contribute to their health insurance premiums for Tax Years 2021 and 2022. The Inflation Reduction Act extended these provisions for three additional years (2023 – 2025). The maximum contribution percentages by household income for the Premium Tax Credit for 2022 – 2025 are: Income as Percent of Federal Poverty Level Maximum Percent of Income 100% – 150% 0% 150% – 200% 0% – 2% 200% – 250% 2% – 4% 250% – 300% 4% – 6% 300% – 400% 6 % – 8.5% 400+% 8.5% For more details see the American Rescue Plan and Marketplace Fact Sheet on the Centers for Medicare and Medicaid Services website. ACA Marketplace Plan Under the Affordable Care Act Health Insurance Marketplaces were set up to help people find health coverage that fits their needs and budget. Every health plan in the Marketplace offers the same set of essential health benefits, including doctor visits, preventive care, hospitalizations, prescriptions and more. To be eligible to use the Health Insurance Marketplace the individual: No matter what state a taxpayer resides in they can use the Marketplace. Some states operate their own Marketplace. In other states, the Marketplace is run by the federal government. For more information see the Health Insurance Marketplace page on the IRS website. How Does PTC Work The calculation of the Premium Tax Credit is performed on the Form 8962. It is a three-step process: Form 8962 This is the form that is used to calculate the premium tax credit for taxpayers that obtained their health insurance through either the Federal or a State Marketplace and are eligible to claim the premium tax credit. In most cases, these taxpayers will have received an advance premium tax credit (subsidy) during the year that helped pay their monthly health insurance premiums. If they did receive a subsidy, then Form 8962 is also where the reconciliation of the advance premium tax credit and the calculated premium tax credit is done. Any taxpayer who received a subsidy must complete Form 8962 and reconcile the calculated premium tax credit (which is based on their actual yearly income and family size) with the total advance premium tax credit they received during the year. Also, any taxpayer who obtained their health insurance through a Marketplace will receive a Form 1095-A (Health Insurance Marketplace Statement) which they will need to complete the Form 8962. For more information, see the following on the IRS website: Excess Advance Payment of Premium Tax Credit If the result of the reconciliation of the amount of advance premium tax credit the taxpayer received during 2021 is greater than the calculated credit, the taxpayer will have to repay the excess as an additional tax on their 2021 federal tax return. If this occurs, it will be shown on the 2021 Form 8962 (Premium Tax Credit), Part III, line 29. In certain circumstances, the amount that must be repaid may be limited. In 2020, legislation was enacted that waived the requirement that taxpayers did not have to pay back any excess premium tax credit for Tax Year 2020 only. For more details on how an excess amount is calculated and when the amount may be limited, see the 2021 Form 8962 instructions beginning on page 15. Excess Premium Tax Credit Repayment If the taxpayer received an advance premium tax credit (subsidy) to help pay for their monthly health insurance premiums, a reconciliation of their total amount of advance premium tax credit with the calculated premium tax credit will be done on Form 8962. Since the amount of the advance premium tax credit is calculated based on income and family size from a prior year, the total advance received will probably not equal the calculated premium tax credit which is based on the income and family size reported on their federal tax return. If the amount of advance premium tax credit is greater than the calculated credit, then the taxpayer will have to pay back the difference. It is reported as an additional tax on Form 1040, Schedule 2 and is calculated on Form 8962, Part III. Premium Tax Credit Repayment Exceptions There is no exception to having to repay any excess premium tax credit that results from receiving more advance premium tax credit than the calculated credit Any excess premium tax credit
Why is My Tax Refund So Low
Many taxpayers may be surprised that the amount of their 2022 tax return is lower this filing season, leaving them to wonder, “Why is my tax refund so low?”
Reminder: IRS Identity Protection PIN (IP PIN) is Available to All Taxpayers
As part of its wider effort to increase security, the IRS is reminding taxpayers that the IRS Identity Protection PIN (IP PIN) Opt-In Program is available to all taxpayers who can verify their identity.
Reporting Digital Assets on a Tax Return
The IRS has changed the virtual currency question of Form 1040 to now refer to digital assets.
Critical State Income Tax Changes for 2022
Most states have passed tax legislation in 2022 that will affect their 2022 income tax returns. This article provides a brief description of the 2022 state income tax changes for each State.
Critical State Income Tax Changes for 2023
Most states have passed tax legislation in 2023 that will affect their 2023 income tax returns. This article provides a brief description of the 2023 state income tax changes for each State.
Top Refundable Credits in the Inflation Reduction Act
The Inflation Reduction Act became law on August 16, 2022 and included many new tax provisions. This article highlights the provisions and refundable credits that impact individual taxpayers.
Key Takeaways from the 2022 Summer IRS Security Summit
2022 IRS Security Summit The Internal Revenue Service and the Security Summit partners continue their efforts to remind tax preparers that identity thieves are increasingly targeting tax professionals. It is imperative that tax preparers take basic steps to protect themselves and their offices from data theft. It is not just individual identity thieves that are targeting tax professionals. Criminal syndicates are well funded, have the technical ability, but also use extensive tax knowledge in their attempts to trick or hack their way into a tax professional’s computer system. These syndicates and thieves are attempting to access tax clients’ data through tax professionals’ preparation software, and to steal the tax preparer’s information such as their EFIN and PTIN. This year, the 2022 summer IRS Security Summit Awareness campaign is focusing on reminders for tax preparers to concentrate on security fundamentals and to bring awareness of the emerging vulnerabilities that the IRS is seeing for those practitioners using cloud-based tax services. 5 Tips for Avoiding Tax Related Identity Theft The IRS Security Summit is emphasizing the following steps that tax professionals should do to help prevent identity thieves from stealing their clients’ data and their clients’ from becoming a victim of identity theft. Sign up clients for Identity Protection PINs (IP PIN) The IP PIN serves as a critical defense against identity thieves. Now that anyone can opt to get an IP PIN, tax preparers should inform their clients about the IRS Identity Theft Protection PIN Opt-In Program and encourage their clients to sign up for one. See IRS News Release I.R. 2022-140 (Identity Protection PINS provide an important defense against tax-related identity theft) for how individuals can sign up and the benefits for having an IP PIN. Email Spear Phishing Scams The Security Summit partners continue to see instances where tax preparers have been vulnerable to identity theft phishing emails that pose as potential clients. The identity thieves use these emails to trick the preparer into opening email links or attachments that allow them to infect their computer systems and potentially steal client information. The Security Summit also warns tax preparers using cloud-based systems to prepare and store tax returns to make sure that they are using multi-factor authentication that use options such as phone, text, or tokens. See IRS News Release I.R. 2022-143 (Security Summit warns tax pros of evolving email and cloud-based schemes to steal taxpayer data) on the IRS website for more information on the latest spear phishing schemes and the advantages of using multi-factor authentication. Know the Tell-tale Signs of Identity Theft A common concern that the IRS hears from tax preparers is that they did not immediately recognize the signs of data theft. Security Summit partners urge tax preparers to learn the signs of data theft so that they can react quickly to protect their clients and themselves. Here are critical signs that data theft may have occurred: A client’s tax return is rejected because their SSN was already used on another return IRS records show more e-File acknowledgements received than the tax preparer has filed A client has responded to an email from the tax preparer that the tax preparer did not send Slow or unexpected computer and/or network issues See IRS News Release I.R. 2022-144 (Tell-Tale signs of identity theft tax pros should watch for) on the IRS website for more information on additional warning signs that data theft might have occurred and what tax preparers should do if they become a victim of data theft. Create a Security Plan The Security Summit partners have created a new sample security plan designed to help tax professionals, especially those with smaller practices, protect their data and information. As a reminder, federal law requires all tax preparers to create and implement a data security plan. The Security Summit (a private public partnership between the IRS, states, and tax industry) has noticed that a number of tax professionals are struggling to develop a written security plan. The new sample security plan, Creating a Written Information Security Plan for Your Tax & Accounting Practice, is a 29-page document that is designed to help tax preparers of all sizes to create a written security plan. See IRS News Release I.R. 2022-147 (Security Summit releases new data security plan to help tax professionals) for more information on this new sample security plan and additional resources available to help tax preparers with securing their computer systems in their office. Protection for Remote Workers With many people working from home, the IRS and Security Summit partners urge individuals to use a virtual private network (VPN) to securely conduct business. See IRS News Release I.R. 2022-151 (Tax pros can help clients battle identity theft risk) for what individuals should consider when conducting business online. Additional Security Summit Resources See the following on the IRS website for more information on the IRS Security Summit and this summer’s Protect Your Clients; Protect Yourself – Summer 2022 awareness campaign: Security Summit page Protect Your Clients; Protect Yourself – Summer 2022 page IRS Publication 4557 – Safeguarding Taxpayer Data Data Theft Information for Tax Professionals CrossLink Professional Tax Software CrossLink is the industry’s leading professional tax software solution for high-volume tax businesses. Built based on the needs of busy tax offices that specialize in providing their taxpayer clients with fast and accurate tax returns, CrossLink has been a trusted software solution since 1989. CrossLink’s in-depth tax calculations allow you to prepare the most complicated tax returns with confidence and ease.
Detailed Breakdown of How Taxes Work
How Taxes Work The U.S. tax system is extremely complex. This article is meant to help you understand what taxes are, how taxes work, the different tax forms that exist, and how to file them. What are Taxes? Income taxes are a type of tax that the federal and most state governments impose on an individual’s or business’ income. All individuals and businesses must file an income tax return annually. The U.S. tax system imposes a progressive tax in which the tax rates increase with income. It is also a voluntary system in the sense that taxpayers report all of their earnings by filing an annual income tax return and compute their tax themselves. However, paying and filing their income tax is required by law. For individuals, there is a personal income tax that is imposed on their wages, salaries, and other types of income. Business’ such as corporations, S corporations, partnerships, and self-employed individuals are taxed on their taxable business income. For S corporations and partnerships, the net business income is passed thru to the shareholders and partners who then report it on their personal income tax return. Self-employed individuals report their business income and expenses on their personal income tax on Schedule C. Direct Taxes Direct tax is a tax paid directly to the government agency or authority that is imposing the tax. Examples of a direct tax are: Individual and Corporate income tax Capital Gains Tax Estate Tax Property taxes Indirect Taxes Indirect taxes are imposed only when a taxable transaction occurs. Examples of indirect taxes are sales tax, excise taxes, consumption taxes, or value added taxes. An indirect tax is collected by an intermediary when the taxable transaction takes place, such as purchasing an item at a retail store. The retail store will then forward the tax on to the applicable government agency when they file a return during the year. Income Types For tax purposes, the types of taxable income for individuals are: Employee compensation – Includes salaries/wages, commissions, tips, fringe benefits, and stock options Rental Income – Income received from renting real estate Net Business Income – from a sole proprietorship Investment Income – Includes interest, dividends, royalties, and capital gains and losses Unearned Income – Income not received through work or business activities Earned Income – Income received from employment, work, or through business activities Passive Income – Earnings that are received from rental property, a limited partnership, or other business activity in which the individual is not actively involved Pass-thru Income from Partnerships and S Corporations – reported to individual on a K-1 Employment Taxes Employment taxes (usually referred to as payroll taxes) are taxes that employees and employers pay based on the wages and salaries paid by employers and tips earned by the employee. The employee pays their portion of these taxes through a deduction from their wages, and the employer pays their portion directly to the IRS when they file their payroll tax returns during the year. Examples of payroll taxes are: The Federal income tax that each employee must have withheld from their wages Social Security and Medicare taxes, which the employee pays half and the employer pays half Federal Unemployment Tax, which the employer pays each year Capital Gain A capital gain is the profit that an individual has from the sale of property or an investment. For tax purposes, the sale of property or stock is reported on Schedule D and if the taxpayer realizes a gain on the sale, it is either short-term (property held less than one year) or long-term (property held for longer than one year). A short-term capital gain is taxed as ordinary income and a long-term gain is taxed at the capital gains rate of 0%, 15%, or 20% depending on the taxpayer’s taxable income. Dividend A dividend is a distribution of cash, stock, or other property to a publicly listed company to its eligible shareholders. These distributions are made out of a company’s profits as a reward to investors for purchasing stock in the company. Dividends are taxable to the individual in the year they receive it. Interest Interest is the cost an entity, such as a bank, charges for loaning money to individuals and businesses. It also is the amount that an entity, such as a bank, will pay to individuals or businesses that deposit their money at the entity. Interest income is the earnings generated from interest-yielding investments such as savings accounts, Certificate of Deposits (CDs), and other investments that pay some form of interest. Interest income is taxable to the individual in the year they receive it. How to File Taxes For federal purposes, every individual who has total taxable income over a certain threshold (more than $12,550 or $25,100 if filing Married Filing Joint for 2021) must file a federal income tax return each year. Tax Forms To file a federal income tax return, individuals need to file, at a minimum, the following tax forms: 1040 (U.S. Individual Income Tax Return) Form 1040 is the main form that an individual uses to file their annual federal income tax return. The individual enters their taxable income, claims deductions and credits, enters their tax withheld from their wages, and any other payments they have made during the year, and with this information determines whether they will receive a refund or owe additional tax. Form 1040 generally must be filed by April 15 each year, however if an individual needs more time to gather their information, the IRS grants taxpayers an automatic six-month extension until October 15 to file their federal income tax return. If the individual believes they will owe additional tax, they must pay that tax by April 15 or they will owe penalty and interest for not paying their tax on time. The Form 1040 includes the most common income deductions and credits. If the individual needs to report additional income items or claim additional deductions or credits, they may need to use the following: Schedule
How To eFile Taxes Like a Professional
Learn how to efile taxes as well as what e-filing is, how it works, and the advantages of e-filing your taxes in this detailed article.