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Minimum Tax Causing Taxpayer Headaches
Officials Say Minimum Tax Will Cause Maximum Headaches for Taxpayers
The Associated Press
WASHINGTON Jan. 14 — The government's advocate for taxpayers predicts the alternative minimum tax will be one of the biggest problems many Americans will have while filling out their returns.
In her annual report to Congress detailing the difficulties confronting taxpayers, Taxpayer Advocate Nina Olson called the alternative minimum tax "a time bomb on a short fuse." Originally intended to stop the wealthy from sheltering their income from taxes, the alternative minimum tax now catches more middle-income families.
Millions of taxpayers will fall into the parallel tax system this year. The problem stands ready to explode in 2005, when 65 percent of married couples with two children and a combined income between $75,000 and $100,000 will pay the alternative minimum tax.
"It is a tax that will take people unawares. There is no way to plan for it," Olson said in an interview.
Congress developed the alternative minimum tax, or AMT, after discovering in 1969 that a handful of very wealthy individuals had hidden all of their income from taxation. Since then, the tax has steadily seeped down to less affluent families.
Families with many children, families that live in high-tax states and some people who exercise incentive stock options can get caught in its trap. The tax takes away most of the advantages built into the standard tax system, such as exemptions for children, deductions for state and local taxes and deductions for employee business expenses or legal fees.
If higher taxes weren't punishment enough, the paperwork adds another burden. Taxpayers who might face the AMT do their taxes twice once under the regular system and a second time under the AMT.
A taxpayer fills out a 12-line worksheet to find out if the AMT might apply. If the results show it's possible the taxpayer might owe the alternative minimum tax, the taxpayer turns to an 65-line form to compute the taxes owed. Some taxpayers go through all of this to find out they don't owe the extra tax after all.
And the tax takes people by surprise. Between October 2002 and August 2003, the taxpayer advocate's office accepted 500 cases in which taxpayers faced serious hardships because they got stuck paying the alternative minimum tax.
Olson recommends that Congress repeal the tax, but the high cost has kept Congress from eliminating it altogether. Short of repealing it, Olson recommends that Congress exempt everyone under a certain income from paying it.
While the alternative minimum tax tops the list, the report shows taxpayers face serious problems in other dealings with tax laws and the Internal Revenue Service:
Taxpayers cannot always trust tax preparers, who aren't regulated by any licensing agency or subject to minimum competency requirements.
The IRS hasn't solved many of the problems surrounding the earned income tax credit. The agency is only now starting local outreach and education campaigns to make people aware they might qualify for the credit. Credit recipients who get examined by the IRS face lengthy audits.
The IRS is considering shrinking its community taxpayer assistance centers by closing offices, limiting hours of operation or restricting who can ask for help. Treasury Department investigators have found taxpayers sometimes get inaccurate assistance from the centers. In a recent audit, IRS employees made errors on 83 percent of tax returns they prepared for auditors. The investigators have found the centers have been gradually improving their accuracy when answering questions about tax laws.
Taxpayers and tax preparers can find it extremely difficult to find the correct IRS employee or department to resolve a tax problem.
IRS letters identifying math errors in a taxpayer's return are confusing and offer an inadequate explanations. Taxpayers are often unsure how to respond or challenge them.
IRS criminal investigators who suspect fraud in a tax return can withhold a refund and don't have to notify the taxpayer that the return is under investigation until it's over.
Taxpayers face long delays in the Office of Appeals, which is supposed to help resolve tax disputes without litigation.
Tax-Free Accounts Help Pay Medical Costs
Government Offers New Tax-Free Health Savings Account to Help Pay Medical Costs
The Associated Press
NEW YORK Jan. 14 — As medical insurance premiums skyrocket, more companies are looking for ways to pass on costs to their workers. At the same time, self-employed people and other individuals who don't have corporate plans are seeking health care policies that are affordable.
Enter the government, with a new tax-free Health Savings Account aimed at doing for health care what Individual Retirement Accounts have done for retirement savings.
The HSAs, part of the Medicare reform bill passed by Congress last month, can be set up starting this year.
The advantage is that they will allow Americans to set aside pretax money to cover medical expenses, including copays and prescription drug costs that are not covered by their insurance policies. The disadvantage is that they must be linked to high-deductible policies a minimum $1,000 a year for singles and $2,000 for families.
A handful of insurance companies already have announced that they will be selling policies that can be linked to the HSAs, including Golden Rule Insurance, Fortis and the American Medical Security Group.
How popular they become remains to be seen, said Dallas Salisbury, chief executive of the nonprofit Employee Benefit Research Institute in Washington, D.C.
"Some think this will revolutionize the health market," Salisbury said. "That sounds to me like a bit of marketing hype. It will be some time before we know, until we have some solid data."
That's because it is still unclear whether putting more of the burden on workers for paying for medical care will result in consumers making money-saving decisions such as waiting until Monday to see a doctor rather than visiting an emergency room on Sunday that ultimately will help contain overall health care costs.
With that goal in mind, the government has tried to make the new HSAs attractive for workers.
They can be funded with pretax income of up to $2,600 for an individual and $5,150 for a family, and the money can be withdrawn tax-free for medical care as well as prescription and nonprescription drugs. Employers can contribute to the HSAs on behalf of their workers, too.
And unlike the flexible spending accounts that require employees to forfeit unused money at year's end, any unused balances in HSAs can be carried over from year to year. Surpluses can even be carried into retirement and used to pay for long-term care insurance, some Medicaid expenses and other approved medical costs.
If funds are withdrawn before age 65 for non-medical purposes, the saver must pay a 10 percent penalty as well as taxes on the money.
Robert Fahlman, a senior vice president at eHealthInsurance Inc. in Sunnyvale, Calif., said he expects the new accounts to be most popular with individuals who must buy their own health insurance policies and small businesses that can't afford high-priced insurance plans for their workers.
That's because high-deductible policies generally cost less than those with more-comprehensive coverage, and the HSAs will be attractive because of the tax break.
"Some high-income individuals want to self-insure, and this is a tax-savvy way to do it," he added.
The company studied some 56,000 of the policies it has sold and found that more than one-third of the policies for individuals and one-quarter of those for families have deductible levels high enough to qualify for linked HSAs.
Fahlman said that eHealthInsurance in a few weeks will be offering an HSA for use with high-deductible plans.
Ed Pudlowski, a senior manager for health and welfare programs at Ernst & Young in Dallas, said high-deductible policies and HSAs "will give employers another option" in providing affordable health care coverage, especially for those companies moving toward consumer-driven plans.
Such plans some of which give workers a health care "budget" that they spend as they choose now are available to less than 5 percent of workers, he estimated.
"Consumer-driven plans seem to have a real effect on utilization," he said. "Companies are seeing reduced visits to physicians offices and changes in patterns, like using generics over brand names in drugs."
In cases where companies fund the HSAs, he said, "the hope is that employees would look at that $1,000 in their account ... and manage it as if it was their own money."
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