Today I'm answering questions from readers about health care subsidies and failure to report overseas income.
Q: Edmund G. writes, "My mother, who is a U.S. citizen and lives here, is concerned about her overseas properties and income. Because she keeps it separate from her U.S. income - she never brings or transfers a substantial amount into the country - she figures she is not liable for reporting it to the IRS. Whatever income she makes in the Philippines goes toward maintaining her property there. She does pay her taxes there. Is she taking the right approach?
A: "As a U.S. citizen, your mother is required to report and pay U.S. taxes on her worldwide income, and to report her foreign accounts with $10,000," says attorney Paul DiSangro of Mayer Brown. "It is irrelevant that her property is located in the Philippines, that her income goes toward maintaining the property, and that she doesn't bring any income into the United States."
Her current approach "is textbook tax evasion. Tax evasion carries a prison term of up to five years and fines of up to $250,000 if convicted," he says.
DiSangro adds that the mother is taking big risks for little or no benefit. After deducting depreciation and other expenses related to her property, he says, "There may be little or no taxable income, and any additional U.S. tax liability may be offset by credits for the taxes she pays to the Philippines. Her additional U.S. tax liability would therefore likely be small or zero. I recommend she talk with a tax adviser."
Q: Byron H. writes, "I have a tax question no one has been able to answer. I am self-employed and take a tax deduction for self-employed health insurance on line 29 of the 1040 tax return. The deduction lowers my AGI (adjusted gross income) so I then qualify for premium assistance on the CoveredCA website. Can I take a tax deduction for health care premiums as a self-employed person as well as take the tax credit for the health premium in CoveredCA? I'm hesitating to sign up under CoveredCA until this question is answered."
A: This was a real stump-the-experts question.
Under the Affordable Care Act, if a household's modified adjusted gross income is less than four times the poverty level, it could get a tax credit (also called a premium subsidy) that reduces the cost of health insurance purchased on an exchange.
Self-employed people usually get a tax deduction for their health insurance premiums, which reduces their adjusted gross income. The act makes it clear that households can use this deduction to determine their eligibility for the premium subsidy.
For households just over four times the poverty level, the self-employed health insurance deduction could, by itself, reduce their income below that limit and make them eligible for a tax subsidy.
What's not clear is whether a household like Byron's would get to deduct its health insurance premiums before or after the tax credit.
"This becomes one of those circular calculations - if the deduction for self-employed health insurance is reduced, then modified AGI would increase, which could reduce the premium assistance credit and increase the deduction for self-employed health insurance," says Mark Luscombe, principal analyst with CCH Tax & Accounting.
The Internal Revenue Service has not specifically addressed this question, Luscombe says. The act says that "no deduction is allowed for the portion of premiums paid by the taxpayer for coverage of one or more individuals under a qualified health plan that is equal to the premium assistance credit," he adds. What's ambiguous here is whether the deduction in this sentence applies to the self-employed health insurance deduction, the medical expense deduction on Schedule A, or both.
Luscombe says the language is probably broad enough to cover both, and has read other commentators who agree that "the premium assistance credit would have to be deducted from the health insurance premium in calculating the self-employed health insurance deduction."
This would only affect people at the margins of qualifying for the credit.
Unfortunately, the tax credit for premiums paid in 2014 will ultimately be based on 2014 income, which won't be known exactly until people file their 2014 tax returns next year. Many people are getting subsidies for premiums paid in 2014 based on their previous income. If it turns out they got less or more than they were entitled to, they will get a refund or pay additional tax when they file their 2014 returns.
"The reader would have to work through the circular calculation to see if a self-employed health insurance deduction reduced by the premium assistance credit would produce a modified AGI that would still entitle the reader to a premium assistance credit," Luscombe says.
If so, then he might be entitled to a subsidy for insurance purchased from the exchange. If not, he could pay full price for insurance purchased on the exchange. If, when he files his 2014 tax return, it turns out he did qualify for a subsidy, he can claim the tax credit then.