The "Jock Tax"

by Dominick Stinelli 13. November 2015 12:43
When the average taxpayer travels out of state for business they do not typically file an income tax return in every state in which they travel.  Unlike the average taxpayer, however, professional athletes tend to encounter much more complex state income tax filing requirements.  Many states have realized that with minimal effort, they can generate tax revenue from visiting athletes.  Due to their high profile and corresponding high income, states have found it very easy to track and tax professional athletes who step foot in their state to play - an income tax now known as the “jock tax”. The jock tax originated in California in the early 90’s, as the state imposed the tax on professional basketball players playing in the NBA finals in Los Angeles.  Most other states have since followed suit, and as of today, there are only a handful of states without a jock tax.  As a result of the jock tax, professional athletes must now adhere to a burdensome and complex tax policy, which often results in filing dozens of state and local income tax returns.  The method of applying this tax has often been debated and, to add further complication, has not been universally accepted by the various states and localities.  Typically a professional athlete would allocate their income for the year based on the number of days they worked each year, which would inherently include their training and practice days.  In an effort to increase the allocated income to their particular state or locality, some jurisdictions assessed the tax based on the number of games an athlete played in a given year.  The City of Cleveland imposed the jock tax in such a fashion.  It also assessed the tax on athletes playing for visiting teams, who were on the roster but did not actually travel with the team and did not set foot in the city.  As a result of the city’s stance, two professional athletes filed suit against Cleveland claiming that the city was subjecting athletes playing for visiting teams to disproportionately high taxes.  Just this week, the Ohio Supreme Court ruled on behalf of the athletes, stating that Cleveland should base the tax on the number of days worked each year, as opposed to the games they played. The court also overturned previous rulings which upheld the tax levied against an athlete who was sick and did not travel with the team for a game played in Cleveland.  A big win for professional athletes is now causing Cleveland to change its stance.
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OK, it’s a tax. How will you collect it?

by Kelley Owen 10. July 2012 11:15
  In a 5-4 vote, the Supreme Court has upheld “Obamacare”.  Specifically, the court held that the individual mandate (that portion of the law that requires all Americans to purchase health insurance or pay a “penalty”) is not in reality a “penalty” but rather a tax; and, is therefore a constitutional application of Congress’ power to tax.   The court acknowledged that the mandate “is plainly designed to expand health insurance coverage,” and noted that “taxes that seek to influence conduct are nothing new” – case in point, taxing of cigarettes.  And, the court reasoned, the mandate does not make the failure to buy health insurance a violation of the law.  It merely requires a payment to the IRS for such failure.  However, the IRS may find itself hard pressed to actually collect this “tax”.  The tax has no criminal or civil penalties for failure to pay and no interest accrues.  And in essence, the only way for the IRS to actually collect the “tax” is to take it out of any refund that the taxpayer may have coming due.  So, if taxpayers manage their withholdings so there is no balance due from the IRS, the IRS has no way to enforce collection. The individual mandate is just one aspect of the Affordable Care Act.   The overall effect of the law on businesses, both large and small, on individuals, both rich and poor, must now be ferreted out and implemented before the many deadlines come due.  Stay tuned…..  
Categories: Tax

US Supreme Court Upholds Tax Provisions of the Patient Protection and Affordable Care Act

by Steven Sodini 9. July 2012 09:35
In a landmark 5 to 4 decision on June 28, 2012, the US Supreme Court upheld President Obama’s signature healthcare laws, the Patient Protection and Affordable Care Act (PPACA) and the Health Care and Education Reconciliation Act (HCERA).  Included in these controversial healthcare reform packages are a number of individual and business tax provisions, which have also been upheld by this decision. On the individual side, the PPACA increased the threshold to claim itemized deductions for unreimbursed medical expenses from 7.5% of adjusted gross income (AGI) to 10% of AGI for tax years beginning after December 31, 2012.  However, the Act provided an exception from the increased threshold for individuals who are age 65 and older before the close of the tax year.  The Act also increased the additional tax on distributions made after December 31, 2010 from health savings accounts (HSA’s) not used for qualified medical expenses from 10% to 20%. In addition, for tax years beginning after December 31, 2012, an additional .9% medicare tax is imposed on earned income (ie, wages and self-employment income) of individuals with earnings more than $200,000 (married couples filing jointly with earnings more than $250,000 and married couples filing separately with earnings more than $125,000).  Furthermore, the PPACA also imposes a 3.8% medicare contribution tax on unearned income for tax years beginning after December 31, 2012, which is imposed on the lesser of an individual’s net investment income for the tax year or their modified AGI in excess of $200,000 ($250,000 for married joint filers and $125,000 for married separate filers) (note that this additional tax is completely separate from any rate increase in the dividend tax rate that could result from the expiration of the Bush-era tax cuts on December 31, 2012).  Net investment income is defined by the PPACA as the excess of the sum of gross income less any otherwise allocable deductions from interest, dividends, annuities, royalties, and rents (unless any of these are derived in the ordinary course of a trade or business), income from any passive trade or business, and capital gains.  However, there are also important some important exceptions to the net investment income definition, including municipal bond interest, withdrawals from certain types of retirement plans, certain types of life-insurance proceeds, and income from an active trade or business.  Modified AGI (MAGI) is similar to AGI for most individuals, but can include addbacks for several above-the-line deductions, as well as withdrawals from certain types of retirement plans.  Thus, be aware that withdrawals from certain types of retirement plans can be simultaneously excluded from the definition of net investment income and added back as part of the MAGI calculation.   In addition, in the case of a gain on a home sale, which is normally excluded from taxation for most taxpayers, the gain itself could still result in a increase in the taxpayer’s MAGI, which could also end up triggering the additional 3.8% tax.  Finally, the PPACA included some miscellaneous tax provisions applicable to individuals.  The adoption credit became refundable for 2010 and 2011 (and the limit was increased to $13,360 for 2011).  The Act also subjected amounts paid for indoor tanning services after June 30, 2010 to a 10% excise tax.  In addition, Internal Revenue Code (IRC) Section 105(b) was amended to extend the exclusion from gross income for medical care reimbursements under an employer-provided accident or health plan to any employee’s child who has not reached age 27 by the end of the tax year.  The definition of child for this purpose also includes adopted children, step children, and foster children. On the business side, the PPACA created temporary IRC Section 45R, for the small employer health insurance tax credit for the tax years from 2010 through 2013, which is capped at 35% of health insurance premiums paid by small business employers (25% for small tax-exempt employers).  This credit increases to 50% for small business employers (35% for small tax-exempt employers) by 2013, but for 2014 and 2015, an employer must participate in an insurance exchange (outlined separately in the PPACA) in order to claim the credit, and the credit is scheduled to expire after 2015.  Note that other modifications and restrictions on the credit may also apply in a given tax year as well which are not discussed here. In addition, for tax years beginning after December 31, 2012, the PPACA limits contributions to health flexible spending accounts (FSA’s) to $2,500, which will be adjusted annually for inflation going forward.  The definition of medical expenses under health FSA’s was also modified after December 31, 2010 to included only prescription medications and insulin.  On June 7, 2012, the US House of Representatives approved the Health Care Cost Reduction Act of 2012, which among other things would re-expand the definition to include over-the-counter medications and would also modify the current “use it or lose it” rules for FSA’s to allow reimbursements of up to $500 of unused balances (which would then be included as income in the year of receipt).  However, it is unclear at this time whether the US Senate will take action on this legislation. Finally, the PPACA included some miscellaneous tax provisions applicable to businesses.  The PPACA allows for the establishment of a simple cafeteria plan for small businesses that meet certain criteria.  It also provides a 28% subsidy of covered prescription drug costs to employers that sponsor group health plans with drug benefits to retirees.  In addition, the HCERA also codified the “economic substance doctrine”, so that a transaction after March 30, 2010, is treated as having economic substance only if the transaction changes in a meaningful way, the taxpayer’s economic position and the taxpayer has a substantial business purpose for the transaction.  This includes a 20% penalty on most transactions that do not meet this test and a 40% penalty on all undisclosed transactions.  Furthermore, employer-sponsored healthcare coverage that exceeds a threshold amount ($10,200) is scheduled to be subject to a 40% excise tax, beginning in 2018.  Finally, for tax years beginning on or after January 1, 2011, the PPACA requires employers to report the aggregate cost of applicable employer-sponsored healthcare coverage on an employee’s Form W-2.  This reporting was optional for 2011, but although it is no longer optional for 2012, there are exceptions for small business filers.
Categories: Tax