Form 1099-MISC is utilized to report a variety of payments from a business to the recipient of such payments. Most commonly, Form 1099-MISC is used to report payments made to independent contractors for services rendered. The requirement to file a 1099-MISC was expanded twice through legislation enacted during 2010. Those expanded reporting requirements for Form 1099-MISC are now repealed.
Congress voted in favor of HR 4, the Comprehensive 1099 Taxpayer Protection and Replacement of Exchange Subsidy Overpayments Act of 2011. (Senate voting record and House voting record from the Washington Post.) Update: President Obama signed HR 4 into law on April 14, 2011.
HR 4 has four key provisions:
- Repeals the requirement for rental property owners to issue Form 1099-MISC;
- Repeals the requirement for any business to issue Form 1099-MISC for payments of goods or property;
- Repeals the requirement for any business to issue Form 1099-MISC for payments made to corporations;
- Increases the amount of tax credits that needs to be paid back by very low-income persons receiving federal subsidies to purchase health insurance coverage.
The expansion of the 1099-MISC reporting requirements occurred in two phases. First, as part of the health care reform bill called the Patient Protection and Affordable Care Act, 1099 reporting was expanded to encompass not just payments for services but also for goods and property, and not just to independent contractors but also corporations. This expanded reporting requirement would have taken effect starting in 2012, and would have included any payments totaling at least $600 made in the course of business for practically any type of service or product that was purchased. Second, as part of the Small Business Jobs Act, 1099 reporting was expanded to require rental property owners to issue 1099s starting in 2011. These two expanded 1099-MISC reporting requirements are repealed under HR 4. The repeal will be retroactive for rental property owners.
The Small Business Jobs Act also increased the fines for issuing 1099-MISC forms late. Most of the penalties were doubled. The penalty increase has not been repealed, and the higher penalty amounts are already effective for 2011.
Repealing these expanded 1099-MISC reporting requirements will result in the Treasury forgoing about $24.716 billion in lost tax revenue, according to 10-year estimates released by the Joint Committee on Taxation (JCX-12-11). That forgone tax revenue will be offset by a $24.882 billion increase in the amount of health insurance subsidies that will need to be paid back to the Treasury by Americans living at or near the poverty line. Over ten years, the Treasury stands to gain about $166 million in additional tax revenue as a result of HR 4, if the Joint Committee on Taxation's estimates prove accurate.
Which leads me to the fourth provision in HR 4. One of the tax-related provisions of the Patient Protection and Affordable Care Act is to provide refundable tax credits to lower-income Americans so they can purchase health insurance for themselves and their families on the individual market. Persons earning between 133% and 400% of the federal poverty level will be eligible for tax credits to subsidize the cost of health insurance coverage. The credits will in effect cap the cost of health insurance premiums between 2% and 9.5% of total household income. This particular tax credit does not go into effect until the year 2014.
Eligible persons will receive a subsidy in advance from the Treasury, with the subsidy paid directly to the health insurance provider, thereby enabling eligible persons to pay a reduced cost for their health insurance coverage upfront. Persons will pre-qualify for a certain amount of health insurance subsidy based on their previous year's income. If it turns out that they make more money during the year, the subsidy recipients will have to pay back some of the subsidy that they received. And that repayment will occur as a recapture or additional tax amount on their federal income tax return.
The Patient Protection and Affordable Care Act, however, limited the recapture amount "to a maximum $400 (or $250 for unmarried taxpayers) for individuals with family income below 400 percent of the [federal poverty line] for the family size involved," notes CCH in their Tax Briefing. This recapture formula has been changed by HR 4. The new recapture amounts are capped at a maximum of:
- $600 for persons with household income less than 200% of the federal poverty line,
- $1,500 for persons with household income from 200% to less than 300% of the federal poverty line, or
- $2,500 for persons with household income from 300% to less than 400% of the federal poverty line.
Currently, the federal poverty line for 2011 for a single person household in the continental United States is $10,890.
If we follow the money, the IRS will pre-qualify low-income Americans for a subsidy, which will be paid directly to health insurance plans and used entirely to provide coverage for the individual and his or her family. Later, when the person files his or her tax return, they might find they had higher income than when they prequalified -- perhaps due to a raise, or a bonus, or working a second job, or getting married. And then such persons will have to pay some of the subsidy back to the IRS. If the Joint Committee on Taxation's estimates prove accurate, the IRS will overpay $24.882 billion, with the money sent directly to health insurers, and recapture that overpayment directly from lower-income Americans.
This particular tax credit adds tremendous administrative and mathematical complexity to America's already complicated tax system -- and all the more so since this tax credit hasn't even started yet.