29 Biggest Tax Problems For Married Couples

Preparing your annual income tax return is a chore. It’s even more complex when you’re married. You might have two sets of income, assets, debts and deductions. Further, if you were separated, widowed or divorced during the year, you might have a thorny tax situation.

A qualified accountant can advise you on the basic tax problems that married couples face. For a brief introduction, read through to see 29 of the most significant tax problems married people might encounter. Understanding these challenges can help you get more tax breaks this year.

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1. YOU’RE NOT SURE OF THE YOUR MARITAL STATUS FOR THE TAX YEAR

When preparing taxes, you first need to determine your marital status. It might seem like a straightforward task. However, life is not always so simple.

The IRS considers you to be married if you were lawfully wed on the last day of the tax year. For example, if you tied the knot at any time in the past and were still married on Dec. 31, 2016, you were married to your spouse for the entire year in the eyes of the IRS. The laws of the state where you live determine whether you were married or legally separated for the tax year.

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2. YOU’RE NOT SURE OF YOUR MARITAL STATUS IN A SAME-SEX RELATIONSHIP

Married, same-sex couples are treated the same as married, heterosexual couples for federal tax purposes. However, same-sex couples in a registered domestic partnership or civil union cannot choose to file as married couples, as state law doesn’t consider those types of couples to be married.

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3. YOU DON’T KNOW WHICH FILING STATUS TO CHOOSE

If you weren’t married on Dec. 31 of the tax year, the IRS considers you to be single, head of household or a qualified widow(er) for that year.

If you were married, there are three filing possibilities:

  • Married filing jointly
  • Married filing separately
  • Head of household

If more than one category might apply to you, the IRS permits you to pick the one that lets you pay the least amount in taxes.

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4. YOU CAN’T DECIDE WHETHER TO FILE JOINTLY OR SEPARATELY

If you’re married and don’t qualify to file as head of household, you typically have two choices: filing jointly or separately. It’s best to choose the one that allows you to pay the least amount in taxes, which all comes down to your particular circumstances.

Sometimes it makes sense to file separately, said Josh Zimmelman, owner of Westwood Tax & Consulting, a New York-based accounting firm. “A joint return means that your finances are linked, so you’re both liable for each other’s debts, penalties and liabilities,” he said. “So if either of you has some financial issues or baggage, then filing separately will better protect your spouse from your bad record, or vice versa.”

If you file jointly, you can’t later uncouple yourselves to file married filing separately. “On the other hand, if you file separate returns and then realize you should have filed jointly, you can amend your returns to file jointly, within three years,” Zimmelman said.

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5. YOU ASSUME MARRIED FILING JOINTLY IS ALWAYS THE BEST OPTION

Even if married filing jointly has been your best choice in the past, don’t assume it will always be that way. Do the calculations each year to determine whether filing singly or jointly will give you the best tax result.

Changes in your personal circumstances or new tax laws might make a new filing status more desirable. What was once a marriage tax break might turn into a reason to file separately, or vice versa.

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6. YOU’RE NOT CLEAR ABOUT HEALTHCARE REQUIREMENTS

The Patient Protection and Affordable Care Act — more commonly known as “Obamacare” — requires that you and your dependents have qualifying health care coverage throughout the year, unless you qualify for an exemption or make a shared responsibility payment.

Even if you lose your health insurance coverage because of divorce, you still need continued coverage for you and your dependents during the entire tax year.

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7. YOU CHANGED YOUR LAST NAME

If you want to change your last name after a marriage or divorce, you must officially inform the federal government. Your first stop is the Social Security Administration. Your name on your tax return must match your name in the SSA records. Otherwise, your tax refund might be delayed due to the mismatched records. Also, don’t forget to update the changed names of any dependents.

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8. YOUR SPOUSE DIED DURING THE TAX YEAR

If your spouse died during the year, you’ll need to figure out your filing status. If you didn’t marry someone else the same year, you may file with your deceased spouse as married filing jointly.

If you did remarry during that tax year, you and your new spouse may file jointly. However, in that case, you and your deceased spouse must file separately for the last tax year of the spouse’s life.

In addition, if you didn’t remarry during the tax year of your spouse’s death, you might be able to file as qualifying widow(er) with dependent child for the following two years if you meet certain conditions. This entitles you to use joint return tax rates and the highest standard deduction amount.

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9. YOU FILE JOINTLY AND YOU’RE BOTH LIABLE

If you use the status married filing jointly, each spouse is jointly and severally liable for all the tax on your combined income, said Gail Rosen, a Martinsville, N.J.-based certified public accountant. “This means that the IRS can come after either one of you to collect the full amount of the tax,” she said.

“If you are worried about your spouse and being responsible for their share of their taxes — including interest and penalties — then you might consider filing separately,’ she said.

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10. YOU FILE SEPARATELY AND LOSE TAX BENEFITS

Although filing separately might protect you from joint and several liabilities for your spouse’s mistakes, it does have some disadvantages.

For example, people who choose the married filing separately status might lose their ability to deduct student loan interest entirely. In addition, they’re not eligible to claim the Earned Income Tax Credit and they might also lose the ability to claim the Child and Dependent Care Credit or Adoption Tax Credit, said Eric Nisall, an accountant and founder of AccountLancer, which provides accounting services to freelancers.

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11. YOU DON’T MEET THE MEDICAL EXPENSE DEDUCTION THRESHOLD

To include non-reimbursed medical and dental expenses in itemized deductions, the expenses must meet a threshold of exceeding 10 percent of your adjusted gross income. However, when you file jointly — and thus report a larger combined income — it can make it more difficult for you to qualify.

A temporary exception to the 10 percent threshold for filers ages 65 or older ran through Dec. 31, 2016. Under this rule, individuals only need to exceed a lower 7.5 percent threshold before they are eligible for the deduction. The exception applies to married couples even if only one person in the marriage is 65 or older.

Starting Jan. 1, 2017, all filers must meet the 10 percent threshold for itemizing medical deductions, regardless of age.

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12. YOU DON’T TAKE ADVANTAGE OF THE MARRIAGE BONUS

Many people complain about the marriage tax penalty. “Married filing jointly may result in a higher tax bill for the couple versus when each spouse was filing single, especially if both spouses make roughly the same amount of income,” said Andrew Oswalt, a certified public accountant and tax analyst for TaxAct, a tax-preparation software company.

However, you might have an opportunity to pay less total tax — a marriage tax break — if one spouse earns significantly less. “When couples file jointly with largely differing income levels, this may result in a ‘marriage tax benefit,’ potentially resulting in less tax owed than when the spouses filed with a single filing status,” Oswalt said.

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13. YOU’RE DIVORCED BUT STILL NEED TO FILE A FINAL MARRIED RETURN

If your divorce became official during the tax year, you need to agree with your ex-spouse on your filing status for the prior year when you were still married. As to whether you should file your final return jointly or separately, there is no single correct answer. It partially depends on your relationship with your ex-spouse and whether you can agree on such potentially major financial decisions.

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14. YOU HAVE TO DETERMINE THE STATUS OF DEPENDENTS AFTER A DIVORCE

Tax laws about who qualifies as a dependent are quite complex. Divorcing parents might need to determine which parent gets to claim the exemption for dependent children.

Normally, the custodial parent takes the deduction, Zimmelman said. “So if your child lives with you more than half the year and you’re paying at least 50 percent of their support, then you should claim them as your dependent,” he said.

In cases of shared custody and support, you have a few options. “You might consider alternating every other year who gets to claim them,” said Zimmelman. Or if you have two children, each parent can decide to claim one child, he said.

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15. YOU DEDUCT VOLUNTARY ALIMONY PAYMENTS

If you want to deduct alimony payments you made to a former spouse, it must be in accordance with a legal divorce or separation decree. You can’t deduct payments you made on a voluntary basis.

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16. YOU DEDUCT CHILD SUPPORT PAYMENTS

Even if you don’t take the standard deduction and instead itemize your deductions, you can’t claim child support payments you paid to a custodial parent.

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17. YOU CLAIM CHILD SUPPORT PAYMENTS AS INCOME

Do not report court-ordered child support payments as part of your taxable income. You don’t need to report it anywhere on your tax return. On the other hand, you must report alimony you receive as income on line 11 of your Form 1040.

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18. YOU DON’T CLAIM ALIMONY YOU PAID AS A DEDUCTION

Unlike child support that isn’t tax deductible, you are permitted to deduct court-ordered alimony you paid to a former spouse. It’s a deduction you can take even if you don’t itemize your deductions.

Make sure you include your ex-spouse’s Social Security number or individual taxpayer identification number on line 31b of your own Form 1040. Otherwise, you might have to pay a $50 penalty and your deduction might be disallowed.

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19. YOUR SPOUSE DOESN’T WORK AND MISSES TAX SAVINGS

Saving for retirement is important. Contribute to a 401k plan and you will both save money for your golden years and lower your taxable income now. If your employer offers a 401k plan, you can contribute money on a pretax basis, subject to certain limits.

However, nonworking spouses can’t contribute to a 401k because they don’t have wages from an employer.

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20. YOU MISS QUARTERLY TAX PAYMENTS

Single or married, you might have to pay quarterly tax payments to the IRS, especially if you are self-employed. Make sure you know how to calculate estimated taxes. If you are required to make such payments but do not do so, you might have to pay an underpayment penalty, Rosen said.

All taxpayers must pay in taxes during the year equal to the lower of 90 percent of the tax owed for the current year, or 100 percent — 110 percent for higher-income taxpayers — of the tax shown on your tax return for the prior year, Rosen said. “The problem for married couples is that often they do not realize they owe more taxes due to the combining of the two incomes,” she said.

You should be proactive each year. “To avoid owing the underpayment penalty, make sure to do a projection of your potential tax for 2017 when you finish preparing your 2016 taxes,” she said, adding that you should make sure to comply with the payment rules outlined above.

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21. YOU PHASE OUT OF PASSIVE LOSSES

Crystal Stranger — a Los Angeles-based enrolled agent, president of 1st Tax and author of “The Small Business Tax Guide” — said she sees a lot of married couples who have issues with passive loss limitation rules.

“With these rules, if you have a passive loss from rental real estate or other investments, you are allowed to take up to $25,000 of passive losses against your other income,” she said. “But this amount phases out starting at $100,000 (of) adjusted gross income, and is fully lost by $150,000 (of) adjusted gross income.”

Married filers lose out, as the phaseout amount is the same for a single taxpayer as for a married couple. “This is a big marriage penalty existing in the tax code,” Stranger said. “It gets even worse if a married couple files separately. The phaseout then starts at $12,500, meaning almost no (married filing separately) filers will qualify.”

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22. YOU CLAIM A CHILD AS A DEPENDENT, BUT YOUR INCOME IS HIGH

You are not obligated to claim your kids as dependents on your own tax return. In fact, it might be beneficial not to claim them.

“High earners lose the personal exemption after crossing certain income thresholds,” said Nisall. So in some cases, it might make more sense to let working children claim the exemption for themselves on their own return, he said.

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23. YOU MISS OUT ON THE CHILD TAX CREDIT

Married couples might be able to claim the Child Tax Credit up to a limit of $1,000 for each qualifying child.

“The Child Tax Credit phases out starting at $55,000 for couples electing to use the married filing separately filing status, and (at) $110,000 for those choosing the married filing jointly status,” said Oswalt. “But married couples receive twice the standard deduction that individuals receive, so the phaseout limitations may not negatively impact a married couple’s return if they choose to file jointly.”

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24. YOU NEGLECT THE TAX BREAK FROM A HOME SALE

The IRS provides a tax break when you sell your home, subject to certain conditions. Generally, you must meet a minimum residency period by owning and living in the house for two of the five years previous to the sale.

A single person who owns a home that has increased in value can qualify to exclude up to $250,000 in gains from income, said Oswalt. However, married people can exclude up to $500,000 in gains. This rule can become tricky if one person in the couple purchased the house prior to marriage.

“If you are married when you sell the house, only one of you needs to meet the ownership test for the $250,000 exclusion,” Oswalt said. “You both must meet the residency period to exclude up to the full $500,000 of gain from your income, however.”

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25. YOU DON’T CLAIM THE CHILD AND DEPENDENT CARE CREDIT

Married tax filers might be eligible for the Child and Dependent Care Credit if they paid expenses for the care of a qualifying individual so that they could work or look for work. The rules for who can be a dependent and who can be a care provider are strict. This credit is not available if you file separately.

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26. YOU CAN’T DEDUCT STUDENT LOAN INTEREST

If you’re paying back student loans, you might be looking forward to taking the student loan interest deduction. However, if you’re married, it might not be so easy to do that.

“For a single filer, the deduction begins to phase out when the taxpayer’s adjusted gross income is greater than $65,000,” said Oswalt. “This amount is doubled to $130,000 when filing jointly.”

“So if both spouses are making $65,000 or less, then their deduction will not be affected by the phaseout,” he explained. “However, if one is making $60,000 and the other $75,000, the deduction begins to phase out, which will ultimately result in a larger tax bill.”

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27. YOU INCORRECTLY ACCOUNT FOR GAMBLING WINS AND LOSSES

Imagine a married couple where both spouses like to gamble in Las Vegas. He’s not so lucky and has losses, while she has winnings. If they file a joint return, they might have to report the gambling winnings as taxable income. Meanwhile, the losses might be deductible if the couple itemizes their deductions instead of taking the standard deduction.

However, they can’t take the amount of gambling winnings, subtract the losses and claim the net amount as winnings. Instead, they must report the entire amount of gambling winnings as income, whereas the losses are reported as an itemized deduction up to the amount of the winnings. The IRS requires you to keep accurate records of your winnings and losses.

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28. YOU BECAME A VICTIM OF TAX IDENTITY THEFT

Identify theft is a financial nightmare, no matter how it happens. Tax identity theft happens when someone files a tax return using one or both of the spouse’s Social Security numbers in hopes of scooping up your legitimate refund. If this happens to you, “contact the IRS immediately and fill out an identity-theft affidavit,” said Zimmelman. “You should also file a complaint with the Federal Trade Commission, contact your banks and credit card companies, and put a fraud alert on your and your spouse’s credit reports.”

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29. YOU CAN’T GET YOUR 2015 RETURN

The IRS and state tax agencies work to develop safeguards to avoid identity theft related to tax returns. In 2017, they will be particularly concerned about the implications of taxpayers who file using tax software.

The IRS has alerted taxpayers that they might need to have their 2015 adjusted gross income handy if they are changing software products this year. This number might be required to submit your return electronically.

Getting your 2015 adjusted gross income might be difficult if you are a member of a divorced couple that is not on positive terms, or that hasn’t even been in contact the past few years.

However, you still have options. You might be able to get the information if you go to the IRS website and use the Get Transcript service.

 

 

Written By: Valerie Rind
Source: GOBankingRates

The 10 Most Commonly Googled Tax Questions — Answered

Taxes can be confusing. We’re here to help. To find out what people’s most burning questions about taxes are, MONEY asked Google for a list of its top tax-related queries—and assembled the information you need.

1. When are taxes due?

It’s April 18 this year. Usually, it’s the 15th — you can read why you get an extra three days here. (If you file for an extension, you get until Oct. 16 to file your return, because Oct. 15 is a Sunday. You must still pay what you estimate you owe by April 18, though.)

2. How to file taxes

This IRS page has links to online forms you can print as well as a locator tool where you can find an office if you prefer to pick up forms in person or don’t have access to a printer. You might also find tax forms at your local library or post office.

If you make less than $64,000, the IRS has a page where you can file your taxes electronically at no charge under the Free File program. If you plan to file with a simple form like a 1040A or 1040EZ, some tax preparation companies like TurboTax, H&R Block, Jackson Hewitt and TaxAct have their own platforms you can use to do your taxes online for free.

If you’re not sure which form you should use, the IRS spells out the differences here. Not sure how to file state taxes? This IRS page has links to all of the state governments, including tax departments.

3. When can you file taxes?

The IRS began accepting electronic returns for 2016 on Jan. 23, 2017.
You technically have until 11:59:59 p.m. on April 18 to file your taxes if you’re filing online, according to TurboTax, but waiting until the last second is a bad idea: A pokey computer could cost you big in penalties. If you’re using U.S. mail, you have to have your return and payment postmarked by April 18. Some post offices stay open late for Tax Day; you can find out which ones have extended hours here.

If you (or your accountant) file your taxes electronically, you have the option of paying online using the IRS’s Electronic Funds Withdrawal function (which is free). You can also pay via credit or debit card (which will cost you a convenience fee of a bit under $3 if you use a debit card, or around 2% of the charge if you use a credit card).

4. How to file a tax extension

If you procrastinated and April 18 is looking like a long shot, experts say you should file for an extension. This doesn’t get you out of paying any taxes you owe by the deadline, but it gives you an extra six months to file. An extension will keep you from getting hit with a late-filing penalty of 5% of the unpaid taxes for each month or part of a month you’re late, up to 25%.

That’s in addition to a late-payment penalty of 0.5% of the unpaid taxes for each month or part of a month—plus interest at a rate of the federal short-term interest rate plus 3%.
If you expect a refund, you obviously have an incentive to get your return in as soon as possible to get those dollars in your pocket. If you file for an extension thinking you’ll get a refund and instead find that you owe, you’ll have to tack on the late-payment charges.

Don’t forget about state taxes. A handful of states will automatically give you an extension if you request one through the IRS, while others require a separate request to that state’s tax department. In some cases, the rules are different depending on whether you owe money or are due a refund.

5. How much do you have to make to file taxes?

There are various thresholds, depending on your filing status, age, and the type of income you receive. For instance, if you’re single, under 65 and your income was below $10,350 last year, you generally don’t need to file federal taxes. This IRS tool can help you figure out if you need to file a tax return.

Even if appears you don’t have to file, experts say it’s generally a good idea to fill in the blanks on a return and see what your bottom line would be. About 70% of Americans are expected to qualify for refunds this year, according to the IRS, but many people never file to collect. The average unclaimed refund is nearly $700. Especially for lower-income Americans, a number of credits and deductions could make you eligible for a refund.

6. How long to keep tax records

The IRS says you should hang onto your tax documents for three years; if you get audited, that’s generally the look-back period they’re allowed to cover. However, if they suspect fraud or underpayment of income tax, or if you’ve written off worthless securities, they can request up to seven years’ worth of tax records. Hang onto documents like receipts that justify deductions like business expenses, charitable donations and so on.

7. When is the last day to do taxes?

Yeah, there are clearly a lot of procrastinators out there. As explained above in No. 1, the filing deadline is pushed back a few days from the usual April 15 this year to the 18th. You have until midnight local time—but if you’re going to put it off that long you should consider just filing for an extension.

8. Is Social Security taxed?

It’s possible. Depending on your income, up to 85% of Social Security benefits may be taxable. If you’re a single filer and your combined income—that is, adjusted gross income, nontaxable interest from municipal bonds and half of your Social Security benefits—is more than $25,000, you will have to pay taxes. If you’re married and file jointly, the threshold is $32,000.

9. How long does it take to get taxes back?

The answer this year might be “longer than usual.” To combat tax fraud, the IRS is taking extra time checking filers’ tax information if they claimed either the Earned Income Tax Credit or the Additional Child Tax Credit. Under a new law, the agency is holding back refunds claiming those credits until at least Feb. 15, and people aren’t likely to see those refunds until the end of February at the earliest. On top of that, “New identity theft and refund fraud safeguards put in place by the IRS and the states may mean some tax returns and refunds face additional review,” the agency warns. For everybody else, the IRS says refunds should be issued in its standard window of 21 days from the time it get your return.

10. Why do I owe taxes?

The first income tax in the U.S. was authorized by Congress in 1861 and levied the following year, to help pay for the Civil War, according to the Civil War Trust, but taxes have been around nearly as long as civilization itself. Historians have found tax records that go back to 6,000 B.C. in what is now Iraq, and the ancient Greek, Egyptian and Chinese cultures all had their own versions. In Biblical times, Roman emperor Caesar Augustus established rules around some personal and inheritance taxes that the English later used to create similar taxes centuries later, according to the Handbook on Tax Administration. Ironically, modern-day Italy has the lowest rate of income-tax compliance out of 10 major developed nations, with less than two-thirds of citizens giving the tax man his due.

And although plenty of Americans have argued in court that they shouldn’t have to pay taxes, the IRS has a helpful 71-page paper that methodically debunks these claims, The Truth About Frivolous Tax Arguments, (which might be equally helpful as a cure for tax-season-induced insomnia.)

 

 

Written By: Martha C. White
Source: MONEY

Here’s a Milestone You Don’t Reach Until Your Seventies

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Provided by LifeHack

The major milestones of older Americans are not attended with the same sense of wonder that accompanies the major milestones of younger Americans. Sure, registering for Social Security benefits and signing up for Medicare are rites of passage, but they don’t hold a candle to earning your driver’s license, receiving your first kiss, winning your first promotion, or dancing at your wedding.

If you have retirement accounts when you become a septuagenarian, then you’ll encounter a milestone the Internal Revenue Service (IRS) strongly encourages you to remember. Beginning April 1 of the year following the year in which you reach age 70½, you must begin taking required minimum distributions (RMDs) from most of your retirement accounts. Forbes offered this list:

  • Traditional IRAs
  • Rollover IRAs
  • Inherited IRAs
  • SEP IRAs
  • SIMPLE IRAs
  • 401(k), 403(b), and 457(b) plan accounts
  • Keogh plans

There currently are no RMDs for Roth IRAs, unless the accounts were inherited.

If you have more than one qualifying retirement account, then a separate RMD must be calculated for each account. If you want to withdraw a portion of each account, you can, but it may prove simpler to take the entire amount due from a single account. Once you start, you must take RMDs by December 31 every year. If you don’t, you’ll owe some hefty penalty taxes.

The IRS offers some instructions for calculating the RMD due. “The required minimum distribution for any year is the account balance as of the end of the immediately preceding calendar year divided by a distribution period from the IRS’ “Uniform Lifetime Table.” A separate table is used if the sole beneficiary is the owner’s spouse who is ten or more years younger than the owner.”

If you would prefer to have some help figuring out the correct amount when RMDs are due, contact your financial professional.

IRS Audit Red Flags for Retirees

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In 2015, the Internal Revenue Service audited only 0.84% of all individual tax returns. So the odds are generally pretty low that your return will be picked for review.

That said, your chances of being audited or otherwise hearing from the IRS escalate depending on various factors. Math errors may draw an IRS inquiry, but they’ll rarely lead to a full-blown exam. Check out these red flags that could increase the chances that the IRS will give the return of a retired taxpayer special, and probably unwelcome, attention.

MAKING A LOT OF MONEY

Although the overall individual audit rate is only about one in 119, the odds increase dramatically as your income goes up, as it might if you sell a valuable piece of property or get a big payout from a retirement plan.

IRS statistics show that people with incomes of $200,000 or higher had an audit rate of 2.71%, or one out of every 37 returns. Report $1 million or more of income? There’s a one-in-13 chance your return will be audited. The audit rate drops significantly for filers reporting less than $200,000: Only 0.78% (one out of 128) of such returns were audited, and the vast majority of these exams were conducted by mail.

We’re not saying you should try to make less money—everyone wants to be a millionaire. Just understand that the more income shown on your return, the more likely it is that you’ll be hearing from the IRS.

FAILING TO REPORT ALL TAXABLE INCOME

The IRS gets copies of all 1099s and W-2s you receive. This includes the 1099-R (reporting payouts from retirement plans, such as pensions, 401(k)s and IRAs) and 1099-SSA (reporting Social Security benefits).

Make sure you report all required income on your return. IRS computers are pretty good at matching the numbers on the forms with the income shown on your return. A mismatch sends up a red flag and causes the IRS computers to spit out a bill. If you receive a tax form showing income that isn’t yours or listing incorrect income, get the issuer to file a correct form with the IRS.

TAKING HIGHER-THAN-AVERAGE DEDUCTIONS

If deductions on your return are disproportionately large compared with your income, the IRS may pull your return for review. A large medical expense could send up a red flag, for example. But if you have the proper documentation for your deduction, don’t be afraid to claim it. There’s no reason to ever pay the IRS more tax than you actually owe.

CLAIMING LARGE CHARITABLE DEDUCTIONS

We all know that charitable contributions are a great write-off and help you feel all warm and fuzzy inside. However, if your charitable deductions are disproportionately large compared with your income, it raises a red flag.

That’s because the IRS knows what the average charitable donation is for folks at your income level. Also, if you don’t get an appraisal for donations of valuable property, or if you fail to file Form 8283 for noncash donations over $500, you become an even bigger audit target. And if you’ve donated a conservation or façade easement to a charity, chances are good that you’ll hear from the IRS.

Be sure to keep all your supporting documents, including receipts for cash and property contributions made during the year.

NOT TAKING REQUIRED MINIMUM DISTRIBUTIONS

The IRS wants to be sure that owners of IRAs and participants in 401(k)s and other workplace retirement plans are properly taking and reporting required minimum distributions. The agency knows that some folks age 70½ and older aren’t taking their annual RMDs, and it’s looking at this closely.

Those who fail to take the proper amount can be hit with a penalty equal to 50% of the shortfall. Also on the IRS’s radar are early retirees or others who take payouts before reaching age 59½ and who don’t qualify for an exception to the 10% penalty on these early distributions.

Individuals age 70½ and older must take RMDs from their retirement accounts by the end of each year. However, there’s a grace period for the year in which you turn 70½: You can delay the payout until April 1 of the following year. A special rule applies to those still employed at age 70½ or older: You can delay taking RMDs from your current employer’s 401(k) until after you retire (this rule doesn’t apply to IRAs). The amount you have to take each year is based on the balance in each of your accounts as of December 31 of a prior year and a life-expectancy factor found in IRS Publication 590-B.

CLAIMING RENTAL LOSSES

Claiming a large rental loss can command the IRS’s attention. Normally, the passive loss rules prevent the deduction of rental real estate losses. But there are two important exceptions. If you actively participate in the renting of your property, you can deduct up to $25,000 of loss against your other income. This $25,000 allowance phases out at higher income levels. A second exception applies to real estate professionals who spend more than 50% of their working hours and more than 750 hours each year materially participating in real estate as developers, brokers, landlords or the like. They can write off losses without limitation.

The IRS is actively scrutinizing rental real estate losses. If you’re managing properties in your retirement, you may qualify under the second exception. Or, if you sell a rental property that produced suspended passive losses, the sale opens the door for you to deduct the losses. Just be ready to explain things if a big rental loss prompts questions from the IRS.

FAILING TO REPORT GAMBLING WINNINGS OR CLAIMING BIG LOSSES

Whether you’re playing the slots or betting on the horses, one sure thing you can count on is that Uncle Sam wants his cut. Recreational gamblers must report winnings as other income on the front page of the 1040 form. Professional gamblers show their winnings on Schedule C. Failure to report gambling winnings can draw IRS attention, especially because the casino or other venue likely reported the amounts on Form W-2G.

Claiming large gambling losses can also be risky. You can deduct these only to the extent that you report gambling winnings. And the costs of lodging, meals and other gambling-related expenses can only be written off by professional gamblers. Writing off gambling losses but not reporting gambling income is sure to invite scrutiny. Also, taxpayers who report large losses from their gambling-related activity on Schedule C get an extra look from IRS examiners, who want to make sure that these folks really are gaming for a living.

WRITING OFF A LOSS FOR A HOBBY

Your chances of “winning” the audit lottery increase if you file a Schedule C with large losses from an activity that might be a hobby—dog breeding, jewelry making, coin and stamp collecting, and the like. Agents are specially trained to sniff out those who improperly deduct hobby losses. So be careful if your retirement pursuits include trying to convert a hobby into a moneymaking venture.

You must report any income from a hobby, and you can deduct expenses up to the level of that income. But the law bans writing off losses from a hobby.

To be eligible to deduct a loss, you must be running the activity in a business-like manner and have a reasonable expectation of making a profit. If your activity generates profit three out of every five years (or two out of seven years for horse breeding), the law presumes that you’re in business to make a profit, unless the IRS establishes otherwise. If you’re audited, the IRS is going to make you prove you have a legitimate business and not a hobby. Be sure to keep supporting documents for all expenses.

NEGLECTING TO REPORT A FOREIGN BANK ACCOUNT

Just because you may be travelling more in retirement, be careful about sending your money abroad. The IRS is intensely interested in people with money stashed outside the U.S., and U.S. authorities have had lots of success getting foreign banks to disclose account information. The IRS also uses voluntary compliance programs to encourage folks with undisclosed foreign accounts to come clean—in exchange for reduced penalties. The IRS has learned a lot from these amnesty programs and has been collecting a boatload of money (we’re talking billions of dollars). It’s scrutinizing information from amnesty seekers and is targeting the banks that they used to get names of even more U.S. owners of foreign accounts.

Failure to report a foreign bank account can lead to severe penalties. Make sure that if you have any such accounts, you properly report them.

Written by IRS Audit Red Flags for Retirees of Kiplinger

(Source: MSN)

 

Beware of IRS Phone Scams

The Internal Revenue Service (IRS) is seeing a growing number of tax-related phone scams. They can happen to anyone, at any time of the year —but it’s especially prevalent around the end of the year and tax time. Scammers are typically after your money and possibly your identity as well. By staying alert and knowing the warning signs, you can keep your family safe.

Scammers prepare to defraud

Man Checking phone at a coffee shop

Scammers often gather a lot of personal information about you even before they call, such as your:

  • Full name
  • Address
  • Family member names
  • Employer
  • Education
  • Last 4 digits of your Social Security number

They use this information to make themselves seem knowledgeable and official. The scammers also alter the name and phone number that appears on your Caller ID to make it look like they are calling from the IRS. Their goal is to scare you into acting immediately, before you have time to think.

The phone scam

A scammer will call you and identify himself as an IRS agent, complete with a fake name and a bogus badge number.

  • He’ll say you owe delinquent taxes and demand immediate payment.
  • The scammer will convincingly try to force you to give your bank account or credit card information, or he might instruct you to get a prepaid debit card to make your IRS payment.

If the call goes to an answering machine, the scammer will leave a message with a dire warning, demanding that you call back as soon as possible or risk arrest.

A slightly different phone scam

An alternative ploy is for the scammer to tell you that the IRS discovered it owes you a large refund and wants to pay you immediately. The scammer will then ask for your Social Security number and bank information so the IRS can transfer the money directly to your account.

How to spot an IRS phone scam

Scammers frequently say things the IRS would never say over the phone. Knowing what the IRS won’t say can help you quickly spot an IRS phone scam. The IRS will never:

  • Call about money owed without first mailing you a bill
  • Demand immediate payment by phone
  • Demand payment without allowing you to question or appeal the amount
  • Ask for your bank account or credit card information
  • Require that you pay taxes in a certain manner, like with a prepaid debit card
  • Threaten to send the police to arrest you

What if I get one of these calls?

If you get a phone call by someone claiming to be from the IRS:

  • Don’t talk to the caller or give out any information
  • Hang up immediately
  • Report the call to the Treasury Inspector General for Tax Administration, either online at IRS Impersonation Scam Reporting or by phone at 800-366-4484
  • Report the call to the Federal Trade Commission using the FTC Complaint Assistant

What if I do owe the IRS money?

Even if you owe money to the IRS:

  • Hang up and do not talk to the caller
  • Do not give out any information
  • Call the IRS at 800-829-1040 to sort out what you owe

Written by Intuit Turbo Tax

(Source: Intuit)

IRS: Electronic Tax Scams Surge 400%

File photo taken in 2014 shows the Internal Revenue Service (IRS) headquarters in Washington, D.C.
J. David Ake, AP

Email and texting scams designed to trick U.S. taxpayers into providing personal data have surged 400% so far this year, the IRS warned Thursday in a renewed consumer alert.

The schemes involve so-called phishing messages designed to trick taxpayers into believing the emails and texts represent official communications from the IRS, tax software companies or others in the tax industry.

The messages typically ask for data related to tax refunds, filing status, or seek confirmation of personal information, including ordering IRS transcripts or verification of IRS Personal Identification Numbers, the tax agency said.

When consumers click on the email links, they are sent to what appear to be government websites that ask for Social Security numbers and other personal information that identity thieves can use to file false tax returns and collect refunds, the IRS said. The sites may also contain malware that infect taxpayers’ computers and enable cyberthieves to gain access to files or track consumers’ keystrokes to get personal data.

“This dramatic jump in these scams comes at the busiest time of tax season, IRS Commissioner John Koskinen warned. “Watch out for fraudsters slipping these official-looking emails into inboxes, trying to confuse people at the very time they work on their taxes. We urge people not to click on these emails.”

Summarizing scams reported across the U.S., the IRS said:

  • January featured 1,026 phishing and malware incidents, up from 254 during the same month last year.
  • The trend continued in February, with 363 incidents reported through Tuesday. The total topped the 201 full-month total in 2015.
  • The 1,389 incidents reported to date represent more than half the 2,748 total for all of last year.

Additionally, tax professionals have reported being targeted by similar phishing scams that seek their online credentials to IRS services.

The IRS said it is working with state revenue departments, tax preparation companies and others the tax industry to address the scams.

“We continue to work cooperatively with our partners on this issue, and we have taken steps to strengthen our processing systems and fraud filters to watch for scam artists trying to use stolen information to file bogus tax returns,” said Koskinen.

Written by Kevin McCoy of USA Today

(Source: MSN)

The Taxability of Oscars Gift Bags

The Associated Press: Nominees who don't want any negative tax consequences on their consolation prize can donate to a chosen charity in advance.
The Associated Press

When Oscar night arrives later this month, winners will take home bragging rights and the famous gold-plated statuette. For 21 of the nominees who don’t win, their consolation prize is a gift bag worth over six figures – along with an accompanying tax bill.

In recent years, the IRS has launched an outreach campaign to the entertainment industry about the taxability of gift bags and promotional items. That’s right: In the eyes of the IRS, so-called gift bags aren’t actually gifts because they’re given with the expectation of publicity or other benefits.

Celebs who take home lavish gift bags and freebies from appearing at awards shows and other gatherings are subject to taxes on the value of the items they receive. Similarly, the Super Bowl MVP who receives a vehicle each year also owes taxes on that vehicle (a precedent that goes back to the 1960s, when NFL Hall of Famer Paul Hornung argued unsuccessfully that his Corvette should not be taxable). Winning money or goods on a TV game show would also generate taxable income.

“One might think that it’s a gift out of generosity from all these [brands] providing these goodies in these gift bags, so I‘m sure a number of recipients are very surprised when they get a 1099 in the mail,” says Robert Charron, partner-in-charge of the tax department of accounting firm Friedman LLP.

“For any gift [from a business] that’s valued at $600 or more, you’re supposed to get a 1099-MISC,” says Len Hayduchok, president of advisory firm Dedicated Financial Services. “If you have a gift that’s valued at $100,000 and you’re in a 33 percent tax bracket, that’s costing you $33,000. If it’s worth $33,000 to you, then you’d keep it.”

Last year’s Oscar gift bag was the most valuable collection of items yet, with the contents valued at over $168,000, according to Vanity Fair and other media outlets. Stars received swag including a $20,000 astrology reading, $25,000 worth of custom furniture and a nine-night Italian vacation package valued at $11,500.

However, these gift bags and promotional items don’t generate self-employment tax, according to Tim Speiss, partner-in-charge of accounting firm EisnerAmper’s Personal Wealth Advisors Group. Self-employment tax is the portion of Social Security and Medicare deductions normally covered by the employer (12.4 and 2.9 percent, respectively) that self-employed peoplemust pay themselves in addition to regular income taxes.

Let’s assume that you’re a nominee and you’d rather not pay income taxes on items you don’t plan to use. “One thing that a person can do is refuse to accept it and therefore not be faced with paying taxes on some of the bizarre things that are in the bag,” Charron says. “There’s things in there that people may have very little interest in.”

Rather than refusing the bag, you could donate it to charity. George Clooney reportedly donated his 2006 Oscar gift bag to the United Way, and it sold at auction for $45,100. “Presuming that the charity is a proper exempt organization, they can get a tax deduction, and the deduction would be eligible against the value of the property received,” Speiss says. “Generally speaking, it’s a dollar-for-dollar write-off.”

However, the donation strategy isn’t foolproof either, because you’re generally limited to deducting donations of up to 50 percent of your adjusted gross income. And if you need to hire a professional appraiser to assess the value of the items, that cost is not tax-deductible.

Rather than accepting the bag and having it appraised, Charron says you could plan a donation to your chosen charity in advance. “If the person signs a proscribed form and assigns it to a recognized charity before they actually receive a bag, that will work to provide no negative tax consequences,” he says.

It gets messier when you want some – but not all – items from the bag. In that case, you might keep some items and sell or donate others. “If the net price you get from [selling] them is higher than your tax hit, then you’re ahead of the game,” Hayduchok says. “If you’re a celebrity and you get some stuff you don’t want, I would think some people might be willing to pay something for that on eBay.”

Stars who make millions on one film or endorsement deal may not flinch at paying a little extra in taxes, but it’s smart to consider the implications of supposed freebies and remember that the IRS may view these items as taxable income.

Copyright 2015 U.S. News & World Report

Written by Susan Johnston Taylor of U.S. News & World Report

(Source: U.S News & World Report)

For-Profit Colleges Transform into Nonprofits to Evade Rules, Report Suggests

BRENDAN SMIALOWSKI/AFP/Getty Images

For-profit colleges may have found a loophole to evade the Obama administration’s crackdown on the industry: Transform into nonprofit institutions.

Four college chains, which account for a total of about 50 campuses nationwide, converted to nonprofit entities over the last several years, but still act in many ways like profit-seeking enterprises, a new report suggests.

The schools engage in behaviors that aren’t typical of nonprofits, such as paying lease payments on property to the former owners of the for-profit company and allowing the former owners to have a larger say in the governing of the new nonprofit instead of leaving it up to a group of independent trustees not out for financial gain, according to a review of government documents by Robert Shireman, a senior fellow at the Century Foundation, a progressive think tank based in New York that focuses on education and economic issues.

“I didn’t expect to see such a consistent pattern,” said Shireman, who has also served as an undersecretary in the Department of Education.

These choices raise questions as to whether the schools should be allowed the tax-exempt status that comes with being a nonprofit and whether the Internal Revenue Service is looking closely enough at the schools that request it, the report notes. They also raise concerns that the colleges are looking to evade scrutiny as regulators set their sights on the for-profit college industry.

Once one of the largest for-profit college chains in the country, Corinthian Colleges collapsed earlier this year, after the Department of Education delayed dispersing the school’s financial aid funding amid accusations the company was luring students into taking on loans with inflated career and job placement rates. Federal and state law-enforcement officials have also filed suits against other for-profit chains.

As part of this push to better regulate for-profit colleges, the Obama administration recently strengthened a rule that requires career colleges to prove they’re preparing students for “gainful employment,” or a job in their field, to receive financial aid funding. For-profit colleges are also required to receive no more than 90% of their funding from federal coffers—an attempt to prevent companies from relying entirely on taxpayer dollars for their profits. Nonprofits are exempt from this regulation, and typically they have little trouble finding funding from a variety of sources, Shireman said.“But because for-profits basically prey on people who are eligible for the max financial aid—low income adults—they bump up against that rule pretty frequently,” Shireman said. He’s concerned that the four schools named in the report—Herzing University, Remington Colleges, Everglades University and Center for Excellence in Higher Education—converted their formerly for-profit campuses to nonprofits to avoid having to comply with those rules.

The report calls into question the Salt Lake City-based Center for Excellence in Higher Education’s petition to the IRS to be considered a tax-exempt educational institution, instead of a tax-exempt charity after the organization acquired a suite of for-profit college campuses in 2012. But Eric Juhlin, Chief Executive of the Center for Excellence in Higher Education, disputed the report.

“He’s trying to say that this was a scam and it was a sham” and that the Carl B. Barney, the owner of the for-profit campuses sold them to Center for Excellence “to continue to prosper and benefit from the colleges” while using the nonprofit status to avoid regulations targeting for-profit schools, Juhlin said. “In our case that couldn’t be further from the truth. It had absolutely nothing to do with regulatory avoidance, tax avoidance or trying to play some game with respect to the organizational structure.” Rather, he said Barney decided to sell the campuses to the nonprofit institution as part of “an estate planning decision” that would allow the schools to continue “in perpetuity” even in his absence.

Kelli Lane, a spokesperson for Everglades University, also disputed the report’s findings in a statement, noting that the school began its transition to nonprofit status in 1998 “well before” the current regulatory environment.

“An independent Board of Trustees continues to ensure students are receiving a quality and accountable education,” she said.

Renee Herzing, the president of Wisconsin-based Herzing University, which began the process of changing its status in 2009, said the school is in “solid compliance” with federal and state laws. “Herzing University agrees that becoming nonprofit is a serious commitment to the public good, which is why we decided to pursue that status for our 50-year-old, family-founded institution,” she wrote.

(A representative from Heathrow, Florida-based Remington Colleges, which was approved as a nonprofit in 2010, didn’t immediately respond to a request for comment from MarketWatch.)

Shireman said he’s concerned the trend may go beyond these four chains of schools, noting that he’s looked into a couple of other possible cases. “There could well be more,” he said.

The Department of Education is keeping an eye on this phenomenon and as a result hasn’t yet approved requests from other for-profit schools to turn into nonprofit entities, Dorie Nolt, a Department spokeswoman, wrote in a statement. In the meantime, those schools have to abide by the restrictions placed on for-profit colleges, she added. “The Department shares the concern that some for-profit school owners may adopt the trappings of nonprofit status to avoid certain federal regulations while continuing to make money from the schools,” she wrote.

Written by Jillian Berman of MarketWatch

(Source: MarketWatch)

Wealthy Couple Sentenced To Jail For Obstructing IRS At Audit

© Getty Images
© Getty Images

“You’re two people who have great talent, who’ve been very successful in life, who I am going to send to prison,” Manhattan Federal Court Judge Denise Cote advised Dr. Jeffrey Stein and his wife, Marla Stein, shortly before handing down their sentence.

Both will spend time in federal prison for their respective roles in cheating the Internal Revenue Service (IRS). Dr. Jeffrey Stein, a vascular surgeon, was sentenced to 18 months while Marla Stein, a personal injury lawyer, was sentenced to a year plus one day (by way of explanation, crimes deemed a felony, by sentencing guidelines, are generally punishable by more than one year in prison and may then be eligible for early release). Both had hoped to avoid jail time with Marla Stein asking to serve her sentence at home in order to take care of her minor son.

Instead, the judge opted to have the couple stagger their jail terms, Giudice-style.

The Steins were also ordered to pay restitution to the IRS in the aggregate amount of $344,989.

The sentencing followed charges and a guilty plea filed earlier this year. The couple pleaded guilty to a scheme to lower their tax burden by providing “false and fictitious information” to their accountant. That information involved generating fake deductions to offset actual business income from their respective practices. When their returns were flagged by IRS for audit, the two became even more creative: they made up documentation to support their lies.

The documentation that the Steins created didn’t simply rely on fake names and identities. Rather, Jeffrey Stein used the names of four disabled military veterans including two former patients whose identities Stein obtained through his work for the V.A. Hospital. Stein created bogus invoices to make it appear that those patients had worked for him in such positions as “ultrasound technologist” and “vascular technologist.” Not only was all of it a lie, one of the vets whose name appeared on the invoice was not even alive in the year Stein submitted the invoice.

Not to be outdone, Marla Stein also used names and tax ID numbers of other people to substantiate fake deductions. Stein created fake invoices to prove that a household employee and a family doctor had actually performed work for her law firm when they did not. Additionally, she altered invoices for photos and videos of family religious celebrations to look like they were attributable to her law practice.

Noting that the couple had doubled down on their fraud after they had been caught, IRS Special Agent-in-Charge Shantelle P. Kitchen said earlier this year that the investigation against the couple, “also reinforces the message that falsifying books and records ‘after the fact,’ in preparation for a tax audit, is also a criminal offense and will be dealt with accordingly.”

In addition to jail time and fines, pursuant to New York Law, Marla Stein will likely lose her license to practice law. Stein had already lost her job as a result of the scheme. Similarly, Jeffrey Stein could face suspension of his medical license; in the meantime, Stein, who was previously identified on the Mt. Sinai Hospital website as an Assistant Clinical Professor of Vascular Surgery is no longer listed as active.

Written by Kelly Phillips Erb of Forbes

(Source: Forbes)

What the Obamacare Court Ruling Means for Consumers

© webphotographeer/Getty Images
© webphotographeer/Getty Images

Millions of Americans just got to keep their health insurance, as the Supreme Court ruled earlier today in a 6-3 decision for the government in the  King v. Burwell Obamacare case.

The case considered the highly anticipated challenge to whether the IRS can issue insurance subsidies for individuals enrolled on the Affordable Care Act federal exchange. In doing so, the Court upheld President Obama’s signature achievement for the second time, allowing the law to escape what many viewed as a potential disaster.

In the words of Tim Westmoreland, a law professor at Georgetown, the latest challenge to the Affordable Care Act has ended in one big case of “never mind.”

The lawsuit focused on specific language from the Affordable Care Act’s Definitions section, which says that subsidies shall be made available to individuals who enroll in exchanges “established by the state.” Under the plaintiff’s plain-meaning argument, this word choice should preclude subsidies for anyone except those enrolled on state-based insurance exchanges, specifically the federal exchange Healthcare.gov.

The Court rejected this interpretation, along with the plaintiff’s argument that this language was built into the law intentionally to coerce states into setting up their own exchanges at the risk of losing access to federal subsidies.

The coercion argument, Westmoreland said, was particularly weak.

“Other than some highly rhetorical comments by Johnathan Gruber, I know of nothing that would suggest that Congress intended to do that,” he said. “The idea that they would put a gun to the states heads on page 113 in the Definitions section is just nuts… It’s in the definition of the term ‘coverage month.’ Who would ever look there to find the doomsday machine?”

According to research by the Kaiser Foundation, at stake in this decision were subsidies for more than 6.3 million people across the 34 states that haven’t set up their own exchanges. Many health care experts, wuch as the Urban Institute’s Matt Buettgens, predicted nightmare scenarios for the insurance marketplace at large in the wake of an adverse ruling. He suggested that the fallout from such a decision would have left more than 8 million people uninsured.

“We could see drastically decreased enrollment, and those remaining enrolled could see a much higher cost than average,” he said, speaking before today’s ruling on a possible adverse decision. “We could see large increases in costs of premiums, and because we would see many more people uninsured we would also then see much more uncompensated care that federal and state governments would end up paying for.”

“There are examples of premium death spirals that have actually occurred,” Buettgens added. “This would be an accelerated version of that because most of the enrollees would be hit immediately with increases once their tax subsidies go away, so that would jump start the process.”

Today’s ruling for the government will leave the system more or less in place, allowing subsidies to continue uninterrupted for enrollees on the federal exchange.

For the time being, it looks as though this may end the significant legal challenges to Obamacare, said Westmoreland of Georgetown. The only outstanding issue is a case challenging the constitutionality of the Independent Payment Advisory Board, which is unlikely to proceed due to the fact that the Board has not yet made any decisions.

Westmoreland cautioned about over-confidence on the part of the Obama Administration, however, pointing out that few in the legal community foresaw the potential significance of King either.

Written by Eric Reed of The Street

(Source: The Street)