THE TAX ATTIC with Jerry Coon

Increases in benefits

Jerry Coon

Last week, the Department of Health and Human Services announced how much Medicare premiums would increase for 2012. It was previously announced by the Social Security Administration that Social Security recipients would enjoy a 3.6% increase in benefits beginning in January 2012. Exactly how much of that 3.6% the recipients would get to keep would be dependent upon how much Medicare premiums would also increase.

It is interesting to know how the Social Security benefits and Medicare premiums interact. There is a provision in Social Security law, a hold-harmless provision that says a recipient’s Social Security check cannot be decreased due to an increase in Medicare premiums.

As you remember, for the last two years Social Security checks have not increased. This means that although Medicare premiums have actually increased from $96.40 in 2009 to $99.90 in 2010 to $115.40 in 2011, none of these increases were applied to the approximately 73% of all recipients who were already receiving benefits in 2009. Their premiums stayed at $96.40 because their Social Security benefit could not be decreased. Those who signed up for Social Security in 2010 and 2011 paid the higher premium amount.

One of the biggest surprises to come out of Washington lately has the 2012 Medicare premium decreasing from the $115.40 2011 amount down to $99.90—a 13.43% decrease. Since the states seem to be saying their Medicare costs are increasing exponentially, I fail to see how Medicare premiums could go down by 13.43%. I’m not holding my breath for my health insurance premiums to go down by 13.43%. In fact, I would be happy to see them only go up 13.43% next year.

It almost makes one wonder if there is some funny government accounting going on here. The decrease down to $99.90 still means that Social Security benefits will be decreased by $3.50 per month. Recipients were paying $96.40 and now will be paying $99.90—the $3.50 increase. So, the overall decrease in Medicare premiums still results in an increase, but that’s a whole lot better than what it could have been. People who signed up for Medicare in 2010 and 2011 will also be paying the reduced amount of $99.90 in 2012.

Another group of taxpayers will also receive an increase in benefits. That group is taxpayers who qualify for the Earned Income Tax Credit (EITC). Married-filing-joint taxpayers with three or more children with earned income in the range of $12,780 to $21,770 could qualify for up to $5,751 of EITC. Single taxpayers with three or more children qualify for up to $5,751 in the earned income range of $12,780 to $16,690.

EITC is one of the only fully refundable credits available in our tax system. Because it is fully refundable and there are a number of variables that must be met in order to qualify for the credit, there seems to be a temptation to bend the variables to obtain the credit.

According to the Internal Revenue Service, only 75% of all EITC returns are prepared correctly. That means 25% of all EITC forms are prepared incorrectly. That is terrible. Since 63% of all EITC forms are prepared by tax professionals, in my mind that means there are either a whole lot of incompetent tax professionals out there or there is a fair amount of deliberate bending of the rules going on. In reality, there is probably some of each, but it still adds up to that 25% incorrect figure.

In any event, as of January 1, 2012, the IRS is proposing that paid tax professionals will have to submit to the IRS a Form 8867, Paid Preparer’s Earned Income Credit Checklist, along with all EITC e-filed tax returns.

Form 8867 has been in existence for quite a few years now. It is used to help preparers accurately compile taxpayer information and to accurately determine if a taxpayer qualifies for the EITC. Paid preparers are currently required to fill out and keep a copy of the form in their file. The taxpayers and the tax professional must sign the form to show that both parties understand the EITC that is being calculated.

Form 8867 is subject to audit by the IRS. Through these audits, evidently the IRS is either finding that Form 8867 is not being completed or it is not being completed correctly. Perhaps, since it wasn’t required to be sent in with the return, tax professionals were not taking the time to accurately prepare the form. I believe that may change when the form has to be sent in with the return. The proof will be when the IRS studies next year’s returns and hopefully determines that less than 25% of the EITC returns are incorrectly prepared.

Let’s be clear: there are billions of dollars given out in fraudulent EITC claims. Cleaning up the EITC system is good for all taxpayers. This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent.
He owns Action Tax Service.
Contact Jerry at

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