TPM and HuffPo are suggesting that Matt Drudge is either stupid or a liar, for saying that he paid the ObamaCare “liberty tax” yesterday for not having health insurance in 2014. Washington Post reporter Karen Tumulty has been hyping the claims on Twitter this morning.
In this post, I am going to gently suggest that it may be more complicated than TPM or HuffPo or Tumulty suggest. The lefties’ understanding of the topic is laughable. But they may have accidentally stumbled onto the right answer, although their reasoning clearly shows they have absolutely no idea why.
TPM calls Drudge a (probable) liar:
Matt Drudge Is (Probably) Lying About Paying A Huge Obamacare ‘Liberty Tax’
It seems conservative monolith Matt Drudge is taking some pride in paying the penalty for not purchasing insurance under Obamacare. He’s even got a name for it.
There’s just one problem: Americans don’t pay a penalty for not having health insurance until they file their 2014 taxes — in 2015. So either Drudge is lying or he paid a huge penalty a year earlier than he needed to.
As I will explain, there is a third option: he’s paying estimated taxes. But I’m jumping the gun. Let’s give TPM some more rope:
As this helpful IRS explainer details, Americans who go without insurance in 2014 should “make an individual shared responsibility payment with your 2014 tax return filed in 2015.”
“You will make the payment when you file your 2014 federal income tax return in 2015,” it says. That’s in part because the penalty is based on one’s annual income.
Similarly, the cited HuffPo article says Drudge’s tweet is “a little head-scratching” because the payment “isn’t even due until more than a year from now, when people file their 2014 federal income-tax returns.”
Briefly, here’s how the individual mandate works: If you lack health insurance for more than three months in a year, you have to pay the IRS a penalty. (There are a whole slew of exemptions from this rule, however.) The penalty will be assessed on your tax return and taken out of whatever refund you’re owed. Again, that won’t happen until 2015 for people who aren’t covered this year.
Again, it’s as if these people never heard of sole proprietors who pay estimated taxes. Here’s what the IRS says about who must pay estimated taxes ahead of time:
Estimated tax is the method used to pay tax on income that is not subject to withholding. This includes income from self-employment, interest, dividends, alimony, rent, gains from the sale of assets, prizes and awards. You also may have to pay estimated tax if the amount of income tax being withheld from your salary, pension, or other income is not enough.
Estimated tax is used to pay income tax and self-employment tax, as well as other taxes and amounts reported on your tax return. If you do not pay enough through withholding or estimated tax payments, you may be charged a penalty. If you do not pay enough by the due date of each payment period you may be charged a penalty even if you are due a refund when you file your tax return.
. . . .
If you are filing as a sole proprietor, partner, S corporation shareholder, and/or a self-employed individual, you generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return.
Kinda sounds like it might apply to Drudge, huh?
Sole proprietors pay these estimated taxes quarterly, during the tax year. So if you will owe a tax based on your 2014 return, you have to pay estimated taxes during 2014, not in 2015 like other individuals.
Now. I will freely admit that I am not a tax expert like the geniuses at HuffPo or TPM. But I looked at the Form 1040-ES — Estimated Tax for Individuals (.pdf), which is the form sole proprietors like Drudge use to estimate their taxes. This form has the following under a section called “What’s New”:
Health care coverage. When you file your 2014 tax return in 2015, you will need to either (1) indicate on your return that you and your family had health care coverage throughout 2014, (2) claim an exemption from the health care coverage requirement for some or all of 2014, or (3) make a payment if you do not have coverage or an exemption(s) for all 12 months of 2014. For examples on how this payment works, go to www.IRS.gov/aca and click under the “Individuals & Families” section. You may want to consider this when figuring your “Other taxes” on Line 12 of the 2014 Estimated Tax Worksheet. For general information on these requirements, go to www.IRS.gov/aca.
Line 12 is part of what you add up to determine your estimated taxes.
This certainly seems to suggest that the ObamaCare payment factors into the calculation of estimated taxes. Now, it says only that you “may” want to consider this payment when calculating your estimated taxes. But if you’re Matt Drudge, who regularly takes on an administration known for using the IRS to target Obama’s critics, you’re going to make good and damned sure that you’re not setting yourself up for an audit.
So why did I say up front that the lefties may have accidentally stumbled onto the right answer? It turns out that the Treasury Department has issued regulations dealing with the interface between the ObamaCare “shared responsibility payment” requirement and the requirement that one estimate one’s taxes. And — while I am not a tax expert and this is not legal advice!!! — it looks to me that the regulations say that underpayment of the ObamaCare payment will not subject a sole proprietor to penalties.
Here is the set of final regulations (.pdf). Here is what I believe to be the relevant passage:
One commentator expressed concern that taxpayers would have difficulty accurately calculating the shared responsibility payment. Emphasizing the complexity of the calculation, the commentator requested that the IRS not impose accuracy-related penalties under section 6662 for underpayments caused by erroneous section 5000A computations.
Section 6662 does not apply to a section 5000A shared responsibility payment. The accuracy-related penalty of section 6662(a) applies only to underpayments of tax, defined in section 6664. The section 5000A shared responsibility payment is not taken into consideration in determining whether there is an underpayment of tax under section 6664. Therefore, the shared responsibility payment is not taken into account under section 6662.
Let me, without expressing a legal opinion as a lawyer, translate that into English. The “section 5000A shared responsibility payment” is what Drudge is calling a “liberty tax” — the payment you will have to make as an individual if you do not purchase health insurance deemed acceptable by the ObamaCare law. “Section 6662” is the section that imposes penalties upon people who underpay their estimated taxes.
As long as this rather obscure regulation — which is not referenced on the 1040-ES worksheet! — remains in effect, it looks like they won’t ding you for underpaying your ObamaCare payment in your estimated taxes.
Ah, so the lefties were right all along! Er . . . not exactly. Let’s examine how they reacted when Drudge tried to explain that he was paying estimated taxes. First, TPM:
If Drudge was referring to the employer mandate, it only applies to companies with more than 50 employees. They must cover a certain percentage of their employees or pay a penalty.
But companies with less than 100 employees are exempt from any penalty until 2016. Drudge has never revealed the full extent of his staff, but the Huffington Post characterized it as “small” in a 2012 article about two new hires.
Drudge has not responded to TPM’s follow-up attempts for comment.
Um, no, he was not referring to the employer penalty. He was talking about estimating his taxes as a sole proprietor — a distinction that completely escaped TPM. Here is HuffPo:
There does, however, appear to be one possible explanation that would make Drudge’s statement truthful, albeit still curious.
If Drudge pays estimated income taxes every quarter — a common practice for someone who is self-employed or is the sole proprietor of a business — he could have guesstimated what his penalty will be and added that amount to the check he apparently cut to the IRS on Friday.
“That’s perplexing,” said Brian Haile, the senior vice president for health-care policy at Jackson Hewitt Tax Service, a tax-preparation company. The IRS has no mechanism in place yet to even accept individual mandate penalties and hasn’t even published the tables taxpayers will use to work out how much they owe. Plus, any money sent in can’t be earmarked especially for that, he explained. The IRS didn’t respond to a request for additional information about collecting mandate penalties. Drudge didn’t respond to an email asking him to elaborate on his tweet.
“For whatever reason, Matt Drudge has decided to give the government an interest-free loan,” Haile said.
Odd move for a small-government, anti-tax guy to make.
UPDATE: Drudge followed up on his earlier tweet and seems to confirm that he paid estimated taxes for the first quarter of this year on Friday. The mandate penalty nevertheless is separate from income taxes and isn’t due until 2015.
What is this nonsense about the IRS not having a “mechanism” to collect estimated taxes? If anyone thinks that Drudge’s pre-payment of the “shared responsibility payment” he estimates he will owe is going to get returned, because the IRS has “no mechanism” to accept the money, then put on a dunce cap and leave the room now. Drudge is going to owe this money, but as long as Obama and his Treasury Department folks leave the regulation quoted above in effect, he won’t be penalized.
Here’s how Tumulty handled people who tried to explain all this to her:
BZZZZZT! We’re not talking about the mandate on small businesses, Ms. Tumulty. We’re talking about the individual mandate, and the fact that sole proprietors have to pay estimated taxes. When I tried to explain this to her, I checked her Twitter feed for subsequent tweets and found this:
Thanks for being engaged, arrogant Big Media person.
Note that not a single one of the lefties correctly identified the real reason why Drudge might not have to pay now. One of them (TPM) totally mixed up the employer mandate and the responsibility of the sole proprietor to pay estimated taxes, and the other (HuffPo) absurdly stated that he could not pre-pay the ObamaCare payment because there is “no mechanism” for the IRS to accept it. It falls to a schlub blogger in the South Bay of Los Angeles to point out the reason that these people may accidentally be right.
If I were Drudge, I think I would pay it anyway. They could always repeal the regulation later, without my learning about it, and use the rule to audit and penalize me. A year’s worth of interest on $3000 (a guess as to Drudge’s estimated ObamaCare payment) is nothing compared to the peace of mind Drudge will have, knowing that he’s paying what he eventually will have to pay anyway, and that if they are going to audit him they will have to find a different excuse.
If you made it all the way to the end of this post, congratulations. The messiness of the different laws and regulations mean that it takes time to explain all this accurately. But I take pride in distinguishing myself from those in Big Media, who simply jump to conclusions based on absurd premises, and move on to discussing daffodils. If they ever read this post, their reaction will be: “See? I was right all along!”
This is the caliber of analysis you’re getting from your lefty media. Be proud. Be very proud.
UPDATE: Matt Boyle at Breitbart has half the story: he explains about the 1040-ES worksheet showing the lefties’ analysis is wrong, but does not have the regulation that shows the lefties’ conclusion is still right. There are almost 15,000 comments on his post. I bet this post does not get that many.
UPDATE x2: The TPM post’s author beclowns himself on Twitter:
Dude, stop it. You’re embarrassing yourself.