Transcript: Monday, February 17, 2014

ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Susie Gharib, brought to you in part by —

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TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Good evening, everyone. And welcome to a special holiday edition of NIGHTLY BUSINESS REPORT.

I`m Tyler Mathisen. Susie Gharib has the night off.

Well, today is Presidents Day and we begin with presidential trivia. Under which president, do you know, was the first peacetime income tax imposed?

Well, it was under President Grover Cleveland back in 1984. But that time, it didn`t last. But thanks, or maybe no thanks, to the 16th Amendment, the income tax is here to stay, and tax season is now under way in earnest.

So, tonight, we`ll have some tips from some experts, ways you can avoid some surprises new this year, and how to plan ahead for changes that come with the new health care law.

Well, so as the clock ticks toward April 15th, there are some changes that have gone into effect this year.

And Hampton Pearson takes a look now at filing season 2014 and what to expect.

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HAMPTON PEARSON, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): The 2014 tax filing season may have started two weeks late because of the government shutdown, but if last year is any guide, by April 15th, the Internal Revenue Service will process the neighborhood of 147 million returns, with more than 109 million taxpayers receiving refunds, averaging $2,700. On his first visit to Capitol Hill since confirmation, the new IRS commissioner, John Koskinen, said the agency needs to focus on better service to taxpayers and restoring trust, after more than a year of controversy about political targeting.

JOHN KOSKINEN, IRS COMMISSIONER: I want everyone in the United States who`s a taxpayer to understand and be confident that when they deal with the IRS, we will deal with them in a straightforward way, no matter what their political beliefs, no matter what organization they belong to, whatever church they belong to.

PEARSON: Most of the changes in tax laws will impact high-income families and individuals, including a new top marginal tax rate, 39.6 percent for singles earning $400,000 and married couples at or above $450,000, the capital gains tax rate goes to 20 percent.

But the real eye-opener, two new Medicare taxes to pay for the affordable care act. Nearly 1 percent on adjusted gross earns above $250,000 for married couples, along with an almost 4 percent tax on their investment income. Budget and tax policy experts say those Medicare taxes are this year`s tax preparation nightmare.

DOUGLAS HOLTZ-EAKIN, FORMER HEAD, CONGRESSIONAL BUDGET OFFICE: This is absolutely a tax personal employment act — the paperwork you need to document, the formulas needed to calculate, the qualifying rules, this is really a big new tax system hidden inside health care reform.

PEARSON (on camera): Another reason millionaires in particular may want to make sure that their tax returns are in order, they are much more likely to get audited, and politics, the IRS commissioner says, has nothing to do with it.

KOSKINEN: For people making more than a million a year, your chance of getting an audit letter are about 10 percent. It`s about 3 percent for everybody between $200,000 and $1 million.

PEARSON: At the same time, the IRS`s own data shows that budget cuts have led to everything from bad service on IRS hotlines with 60 percent of callers waiting 15 minutes or longer, to millions in lost revenue due to a shortage of tax collectors in the enforcement division.

For NIGHTLY BUSINESS REPORT, I`m Hampton Pearson in Washington.

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MATHISEN: Some of the new tax changes may have snuck up on you, but they`ll become crystal clear when you fill out your 2013 federal income tax return.

Sharon Epperson now explains what you need to know to avoid any big surprises this tax season.

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SHARON EPPERSON, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): No one likes a surprise at tax time, especially when it could mean a higher tax bill — 48-year-old Drew McKinnon is no exception.

DREW MCKINNON, SMALL BUSINESS OWNER: I`m always a little nervous about tax season, to try to get everything done by April 15th.

EPPERSON: McKinnon owns this bicycle shop in an affluent New Jersey suburb. He took it over from his father 15 years ago. And he applies a key business lesson he`s learned from running the store to his own financial life — get in gear before the busy season begins.

For his business, that means having the right inventory in stock. For his finances, it means making sure his investments are in the right place.

MCKINNON: One of the things that`s helped the business out and my personal finances out is rebalancing accounts and finding one of the things my adviser calls asset allocation.

EPPERSON: Setting up a tax-deferred retirement account geared toward small business owners was one of the strategies that his financial adviser Michael Gibney suggested, to help him avoid a big tax surprise this April.

(on camera): Yet many workers and investors may be blindsided by recent tax changes that could result in a significant tax hit on their 2013 returns.

MICHAEL GIBNEY, FINANCIAL ADVISOR: I think there will be a lot of people surprised.

EPPERSON (voice-over): Gibney says a new change that many taxpayers may not have considered is a 3.8 percent tax on net investment income.

GIBNEY: If you have a house on the shore and you rent it in the summer, and you get rental income, that will be part of this new net interest income tax.

EPPERSON: This is just one of several changes for 2013, including higher rates on capital gains and dividends for top earners. Higher taxes on many of the self-employed, and limits on medical expense deductions. And while tax changes could dent your finances, planning ahead can lessen the blow.

MELISSA LABANT, AMERICAN INST. OF CERTIFIED PUBLIC ACCOUNTANTS: The only thing worse than having a large tax bill come April 15th is being surprised about it. So if you`re going to owe money, it`s better to know about it now so you can find way to gather that cash.

EPPERSON: You can open and make contributions to certain accounts before the April 15th deadline, that can reduce your taxable income on your 2013 return. If you`re eligible, you can put up to $5,500 into a traditional IRA or $6,500 if you`re 50 or older. Small business owners and those who are self employed can contribute up to 25 percent of their compensation, up to $51,000 in what`s known as a SEP IRA, and individuals can also deposit up to $3,250 and families up to $6,450 into a health savings account.

Contributions, earnings and withdrawals are tax-free when used for qualified medical expenses. In each of these cases, the contributions will lower your taxable income dollar for dollar.

For NIGHTLY BUSINESS REPORT, I`m Sharon Epperson.

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MATHISEN: Well, our first guest tonight is here with some advice that may help you with your taxes. He`s Tim Maurer, he`s director of personal finance for the Bam Alliance, an independent network of registered investment advisers, with $22 billion under management.

Tim, welcome. Good as always to see you.

Let`s start with this new tax on net investment income. Let`s go back over it one more time. Who does it affect? What kind of income does it cover? And how does it work?

TIM MAURER, BAM ALLIANCE DIRECTOR OF PERSONAL FINANCE: Tyler, if you`re making under $250,000 of modified adjusted gross income, you won`t have to worry about it this one this year at least. But if your modified adjusted gross income is over $250,000, then there`s going to be an additional 3.8 percent tax on your net investment income.

This is passive income, like capital gains, dividends. If you do have a rental property, that could be considered passive income and subject to this tax. In some cases, there may even be annuitized income that is also subjected to this new 3.8 percent net investment income tax.

It really is a seismic shift, even though most people are going to feel it this year.

MATHISEN: If you are lucky enough to earn $250,000 in modified adjusted gross income, but unlucky enough to be subject to this tax, is there any way you can avoid it?

MAURER: Not much of a way, Tyler. I think one of the things you can do, we`re looking at these options to actually look at these different benchmarks of $250,000, for example, or $450,000 where the new tax rates apply and look to shift people, if they are right around those limits, we can do our best to possibly limit their income.

Obviously, this is not the type of thing that we`re typically in the business of doing, it`s financial planners. But it may be something that benefits our clients if they`re getting really close to one of those thresholds like $250,000.

MATHISEN: I would think it would also going forward cause people to want to be much more conscious of the tax efficiency of their investment portfolio, and maybe consider some municipal bonds for the tax-free income that they generate.

MAURER: There`s no question. If you have taxable accounts and you`re southbound t subject to this tax, municipal bond income certainly would be something that you`d be looking to do to reduce your overall taxable income. It`s also possible, some are suggesting that actively managed investment accounts are less tax efficient than passively managed investment accounts, and I think there`s some real truth to this as well.

MATHISEN: Before we get to the higher rate, higher top rate on marginal income, is there anything that`s new this year that would reduce the value or limit conventional deductions?

MAURER: Reduce the value or limit conventional deductions — well, I will tell you this, this is stacking on top of the net investment income is stacking on top of the alternative minimum tax, which is stacked on top of the tax code. So, folks are going to be having to effectively prepare their taxes three different ways if their adjusted gross income is over $250,000. That in and of itself does end up having an impact on those other deductions people might be used to taking.

MATHISEN: So really what you`re talking about here is on capital gains, for example, which used to have to have the favored treatment, still do, I guess, with 15 percent, your total rate on capital gains now could be as high at, what, 23.8 percent when you add in those higher levies?

MAURER: Absolutely, but in this case, now, we`re actually stacking the new tax law, on top of the net income investment tax. So, if you`re at $250,000, the net investment income comes into the play of 3.8 percent. If you`re over $450,000 of taxable income, your capital gains rate goes from 15 percent to 20 percent. That`s how we get all the way up to 23.8 percent, which is a pretty massive shift from the 15 percent, if you are blessed to have income over $400,000.

MATHISEN: Thank you for clarifying that. I was a little confused there. And, boy, there`s plenty to get confused about, Tim.

So, that last thought is you just went to it. If you were a married couple with an adjustment gross income of greater than $450,000, good for you. Bad for you is that your marginal rate now goes up to what?

MAURER: Thirty-nine-point-six percent. So, your marginal rate goes up to 39.6, and your capital gains rate for all intents and purposes is going from 15 percent to 23.8 percent.

I do realize that this is a good problem to have, but it`s a significant problem nonetheless. It`s also going to increase the costs of people`s tax preparation, because accountants are going to have to put a lot more time into these new taxes.

MATHISEN: All right. Tim, thank you very much. And happy tax filing season to you.

MAURER: Thank you very much.

MATHISEN: Tim Maurer is director of personal finance for the Bam Alliance.

Well, this year`s new health care law means change is on the way for your taxes next year. And our next guest says you better takes action now to avoid a big surprise later.

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MATHISEN: Mortgage deductions are a big item on many people`s tax returns, but since the housing crisis, mortgage debt forgiveness has been equally as big. And that has helped millions of borrowers avoid foreclosure. But now, that help may be in jeopardy if congress doesn`t step in and some people may be hit with a big tax bill.

Diana Olick has more.

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DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Since 2007, 2.8 million foreclosures averted, because banks let borrowers sell their homes for less than that they owed. Millions more borrowers saw the amount of their loans lowered, thanks to legal settlements with the federal government and state attorneys general. All that debt wiped away tax free.

SEAN NELSON, FITCH RATINGS RMBS DIRECTOR: Normally, you would have to pay taxes on that amount that`s forgiven. It`s considered income. It`s taxable.

OLICK: But in 2007, Congress passed the mortgage debt tax relief act. It expired six weeks ago. And while there are bills in Congress to extend it, they`re not moving.

MARKI LEMONS, CHICAGO REALTOR: And the client did not qualify on their income alone.

OLICK: Real estate agent Marki Lemons is watching Washington from Chicago, where she counsels other realtors on alternatives — alternatives which are suddenly shrinking.

LEMONS: All it`s going to do is prolong recovery. We know these people can afford these houses. They have to prove financial hardship. And so, if they don`t have the money to keep a roof over their head, how are they going to be able to pay the IRS?

OLICK: That`s a question Tony Janega is asking. After three years of negotiations, his bank finally approved a short sale on his condo for $125,000 less than he owes. But it was a few weeks too late for the tax break. He could now owe the IRS as much as $30,000, which he does not have.

TONY JANEGA, COMPLETED SHORT SALE IN 2013: Now with this debt relief act not being extended as of yet, I`m really nervous now. So I`m staying up late at night trying to, you know — just can`t sleep at night. It`s causing a lot of stress.

OLICK: While the foreclosure crisis has eased dramatically, there are 3.24 million delinquent loans out there, plus, 1.24 million in the foreclosure process. Add it up, 4.48 million loans that could be helped by either a short sale or principle reduction.

(on camera): While there is broad support in Congress and among state attorneys general for the tax relief, the bigger push to overall the entire tax code could leave smaller bills like this one in its wake.

If so, short sales would not longer be an option for many borrowers, and foreclosures, which had been on the decline, could begin to rise yet again.

For NIGHTLY BUSINESS REPORT, I`m Diana Olick in Washington.

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MATHISEN: Now that the health care reform law is law, just how will the Affordable Care Act affect your taxes next year?

And here to help us get a head start on the 2015 season is Brian Haile. He`s senior vice president for health policy with Jackson Hewitt Tax Service.

Mr. Haile, welcome. Good to see you.

Before we get to some of the very sort of gnarly wrinkles in the Affordable Care Act, would you clarify a major change that has been in place for years and years and years? That is that people were able to deduct health care expenses, once they exceeded 7.5 percent of their adjusted gross income.

Has that changed?

BRIAN HAILE, JACKSON HEWITT SENIOR V.P. HEALTH POLICY: It has if you`re under age 65. Going forward, you`ll only be able to deduct those expenses if they exceed 10 percent of your adjusted gross income. However, if you`re 65 or older, you still are subject to the old rules. You`re able to deduct if you`re over 7.5 percent of your income, at least for the next two or three years.

MATHISEN: So, I guess you would want to — for lack of a better word — bunch those expenses into a year — so, if you could — so that you would exceed that 10 percent threshold, right?

HAILE: Exactly right. Although I think one of the things we have had to keep in mind here. There are so many interesting tax efficient vehicles to help pay for health care cost, including use of health care savings accounts, and other things. So, this has become a much more complicated area of the tax code. And it`s hard to give good advice without knowing specific conditions.

But you`re exactly right, clustering those kinds of expenditures, to the extent that you got the cash to pay for them, it`s always helpful from tax —

MATHISEN: You raised it, so I asked the question, who can take advantage of those health care or health savings accounts?

HAILE: You typically have to have a high deductible health plan either, that you buy in the individual market or that your employer offers. So, if you have a high deductible health plan and then you can set up a health savings account underneath that to help pay the cost sharing there, your deductibles, typically, the coinsurance that you might incur, your copayments and the like. But it`s reserved for people who have those high deductibles health plans.

MATHISEN: And can that money, without bogging down here — can that money, without bogging down here, can that money be carried over from one year to the next?

HAILE: Absolutely. That`s one of the great benefits of the health savings account or an HSA, is that you could do port it across years and you can even port it across employers. So if you have a highly deductible health plan and an HSA, you can maintain that HSA, even if you leave that employer and change insurances. It`s not a problem at all.

MATHISEN: One of the really tricky areas, Brian, it seems to me with the Affordable Care Act are the tax subsidies that will flow to people who have incomes of, what is it, 400 percent or less of the federal poverty level? And how, then, you judge what your income is and what those subsidies are, and whether you`re going to end up having to pay that money back if for some reason you go over that income threshold?

HAILE: Well, that`s exactly right. Let`s put concrete numbers to this — 400 percent of the federal poverty for a household of four is equal to about $94,200. So, we`re talking about someone whose income is twice the median household average. That`s pretty good and again that`s just for a household of four.

The way I would describe the health premium tax credit is really with four adjectives. Number one, they`re quite large. If you have a family of five that`s making about $75,000 a year, well, that family can qualify for a credit of about $5,600. That pays more than half of the premium for the individual insurance that they buy through the new marketplaces. It`s quite a generous tax credit.

The other part about the tax credit is that it`s advance paid, so that the federal government will pay that credit to the insurance company, all throughout the year, so the person doesn`t have to put out the cash for the premium and reconcile at the end of the year. Quite the contrary, the federal government will help subsidize the premiums all throughout.

But here`s the funny thing about those credits, is they`re finicky. You only get the tax credits if you buy the health insurance that you have through the new marketplaces, that has to be a qualified health plan. So, when we look at these new very large tax credits, we also have to take into account that they`re pretty finicky.

You mention too that you have to repay them if you misestimate your income and that`s exactly right, because the federal government`s advanced payments. Those are based on your estimated income for the year. So, if you estimate your income today and your income is higher or lower — well, when you settle up when you file your taxes next year, you`ll either get a larger refund back, because the credit you get is refundable, or you may have to pay some into the federal government, because they may have overpaid in terms of your advance payments at the credit.

MATHISEN: Oh, man, Brian, you explained it incredibly clearly. But my goodness, if you don`t estimate right, you could really be stuck.

Alas, we have to leave it there. I hope none of us are stuck in that predicament come a year from now.

Brian Haile, senior vice president for health policy with Jackson Hewitt Tax Service.

HAILE: Thank you, Tyler.

MATHISEN: Thank you, Brian.

And coming up — why tax season is open season for people who want to steal your refund and your identity. That`s next.

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MATHISEN: Tax season, alas, is also high season for crooks who want to steal your identity and get their hands on your refund. Tax refund identity theft is one of America`s fastest growing crimes, and the criminals keep getting smarter.

Scott Cohn is here with the story.

Hi, Scott.

SCOTT COHN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Hi, Tyler.

It`s growing so fast, because, face it, it`s a lot easier and safer for a crook than it is to rob a bank. In theory, all it takes is a name and Social Security number to file a tax return.

So, if your name and Social Security number good get into the hands of one of these criminals, look out.

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COHN (voice-over): In San Diego, an international crime ring allegedly used 2,000 stolen identities to claim $20 million in bogus refunds.

ANTHONY ORLANDO, IRS SPECIAL AGENT IN CHARGE: I would say this is one of the most sophisticated operations we have ever seen.

COHN: So sophisticated, foot soldiers in the scheme rented apartments across Southern (NYSE:SO) California just to collect the loot.

In Alabama, federal agents busted a U.S. postal carrier, later convicted for his role in another scheme, evidence including cash and checks was right there in his delivery van.

EVA VELASQUEZ: This is the world we liver in.

COHN: An identity theft minefield, according to the identity theft resource center, the IRS paid $3.6 billion in potential bog us tax refunds in 2012, according to government estimates. More than 1.5 million taxpayers were victims.

That`s actually an improvement, as the IRS adopts new measures to detect fraud. The Justice Department`s tax division has made identity theft one of its top priorities, focusing on paid preparers, who handle nearly half of all individual returns. That means they have access to half of all taxpayers` identities.

In the past year, authorities have shut down more than 60 firms that were trafficking in stolen information, but as the government gets smarter, so do the crooks.

VELASQUEZ: We are so far behind the thieves, we never know how they`re going to monetize the personal information.

COHN: Or how they`ll cover their tracks, like the thieves in Alabama who teamed up with a cable TV installer, stealing people`s identifies and their Internet access, to make it looked like the legitimate taxpayer filed the return.

VELASQUEZ: We always encourage people to guard their personal information like they would any other valuable.

COHN: That means don`t let your Social Security number get into the hands of anyone you don`t trust. Easier said than done, though, when thieves are stealing identities from financial institutions, hospitals, even the IRS itself.

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COHN: Now, the instances of IRS employees getting involved in this are thankfully very rare, but it points to the issue in the fine lines there are in trying to rein in this kind of fraud. For example, the Justice Department, as you heard, is trying to rein in these paid preparers, and the IRS wanted to regulate them. But a federal appeals court has just struck that down.

There`s also the balance between trying to get your information and your refund quickly versus keeping your information private. And that`s the balance that the IRS is trying to strike.

VELASQUEZ: So, is the typical scheme as simple and nefarious as a crook, perpetrator gets your name, your address, your Social Security number, and files a return, and then what? Do they have the return — the refund sent to them?

COHN: They have the refund sent to them. They have to put it on a prepaid debit card, makes it even harder to trace and they`re even more nefarious types of schemes, whereas you heard they`re actually stealing people`s Internet access. And it`s not — you don`t need an address. They need the name and the Social Security number, and theoretically, unless the IRS catches it, they collect a refund, then you go to collect your refund, but they say —

MATHISEN: They say we`ve already paid your refund.

COHN: Exactly.

MATHISEN: And then untangling that must be a real troubling situation.

COHN: On average, it`s still taking about a year for the IRS to untangle it for the taxpayer. It`s a nightmare, particularly for people who are counting on this money.

MATHISEN: Oh my goodness. A whole year to do that.

OK. So, in the case of a tax preparer who is crooked here, are they then doing the same thing? They`ll fill out a tax return in your name and have that money deposited to a card, as you say? Or the check sent into their address?

COHN: There are all kinds of variations of that, but yes, they have access to all of that information, so they can have checks sent, they can scheme from refunds. There have been instances like that. And it is a very big problem.

MATHISEN: This seems like something that you wouldn`t know was happening. I was going to ask, are there any telltales here and I can only imagine that there aren`t many and that you find out about it after you`ve been victimized.

COHN: That`s right. But if you are a victim of identity theft — a lot of people don`t think to call the IRS. Doesn`t matter what time or year, report it to the IRS, they will give you a special PIN code so that when you file your taxes, there`s a little extra measure of protection.

MATHISEN: Scott Cohn, thank you very much. That`s shocking stuff. All right. Thank you very much, Scott.

All right. Finally tonight, our athletes may be going for the gold over in Sochi and representing our country in Russia, but U.S. Olympians still don`t get a free pass from Uncle Sam. The U.S. Olympic Committee awards cash prices to the athletes, 25 grand for a gold, $15,000 for a silver, and $10,000 for bronze, but the IRS considers that taxable income. Yes, they do. Some lawyers are trying to change that.

Well, that`s it for this special holiday edition of NIGHTLY BUSINESS REPORT. I`m Tyler Mathisen. Thanks so much for watching. We`ll see you back here tomorrow night.

END

Nightly Business Report transcripts and video are available on-line post broadcast at http://nbr.com. The program is transcribed by CQRC Transcriptions, LLC. Updates may be posted at a later date. The views of our guests and commentators are their own and do not necessarily represent the views of Nightly Business Report, or CNBC, Inc. Information presented on Nightly Business Report is not and should not be considered as investment advice. (c) 2014 CNBC, Inc.

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