Archive for the ‘beneficiary’ Tag
Back to Basics Part XXXIII – Form 8889 – Health Savings Accounts (Cont.)
Filed under: Back to Basics, Healthcare Costs | Tags: beneficiary, custodian, death, directly paid, estate, Form 8889, health savings account, HSA, itemized deductions, medical expenses, nonqualified distribution, over 65, prohibited transactions, qualified distribution, reimbursement, Schedule A, Section 4975, self-dealing, separate HSA accounts, spouses
Leave a comment Originally published in the Cedar Street Times
February 19, 2016
Two weeks ago we started a discussion on Health Savings Accounts. We discussed why they are so valuable, how you qualify for an HSA, what type of an account it is, how you contribute to it, whether or not you can fund it with an IRA transfer, and what you can spend the money on and for whom. If you would like to read the article, you can find it on my website at www.tlongcpa.com/blog .
Do Expenses Have to Be Paid Directly From the HSA?
Another important tip is that technically you do not have to pay the medical expenses directly from the HSA account. You can reimburse yourself if needed. In fact, you can reimburse yourself at any point in the future from your HSA account for qualified expenses that were incurred at any point after you first established the HSA. It could be ten years later or more, and you can still reimburse yourself as long as you keep really good records, and can prove you did not deduct those expenses somewhere else, such as on Schedule A, or pay for them out of the HSA account in the past. Then you can reimburse yourself for them in the current year and treat the reimbursement as a qualified distribution, and not be subject to any tax or penalties.
This could come in very handy if some year you have a big expense, but do not have enough money in the account to cover it all. You could pay yourself back over a period of years. Remember, by paying the expenses out of this account, you have been able to use pretax dollars to pay for or reimburse yourself for medical expenses you incurred. That said, I would recommend always paying directly from the HSA account unless it is impossible to do so.
Should Spouses Have Separate HSA Accounts?
Here is an important pointer, if you have family coverage, you should consider setting up an HSA account for each spouse. You can only make the additional contribution for your 55 plus spouse if he has his own HSA account. There are a few other advantages to having separate accounts as well. As mentioned before, people over 65 can pay their health insurance and Medicare premiums out of their HSA, unlike people under 65. They can also pay these expenses for their spouse, or dependents, if each is over 65. However, if you were under 65 and were the only HSA account holder, and your spouse or dependent was over 65, you would not be able to pay the premiums. You would need your 65+ spouse to have an HSA account and have money in it in order to pay the premiums. You also cannot transfer money from one spouse’s HSA account to another. So you need to contribute over the years to each spouse’s account in order to prepare for this.
Another advantage of each spouse having an HSA account is for the payment of long-term care insurance. It is clear that if each spouse has an HSA, they can each pay their respective long-term care insurance subject to the normal caps. Without separate accounts, the instructions to the Form 8889 seem to imply you cannot take the deduction for a spouse.
What Happens When I Pass Away?
When you pass away, your spouse can take over the account and use it like his or her own. However, if it is left to a beneficiary other than a spouse, or is undesignated and goes to your estate, then it is considered an immediate distribution, and the entire balance is included in taxable income. It is not, however, subject to the 20 percent penalty tax. Whoever is the named beneficiary and receives the HSA money, pays the tax. If an estate receives it, it is taxable income on the decedent’s final 1040. If some other person receives it, then it is taxable to that person’s 1040. If any final medical expenses are paid from the account within one year of death, those would be qualified distributions and reduce the taxable portion.
Any Pitfalls?
Be alert to prohibited transactions covered by IRC Section 4975 – these are basically self-dealing transactions where you or someone or an entity related to you receives a special benefit in some way from the account. For instance, if you could borrow money from the account, that could be self-dealing. Fortunately, the custodian buffer will prevent you from doing a lot of things that might happen otherwise, but there are still some things you could do that would be considered self-dealing that the custodian would not know about. For instance, if you named your HSA as collateral for a personal loan. That would be a prohibited transaction, and the entire balance would be deemed distributed immediately, and it would trigger taxable income and a 20 percent penalty on the entire balance.
Form 8889
The Form 8889 itself is a fairly simple two page form. Part I deals with determining your current year deduction for contributing money to the HSA, and making sure you did not overcontribute. You add up the contributions from yourself, your employer, plus contributions to any MSAs which count toward the HSA cap, plus if you happen to do a once in a lifetime rollover from your IRA, that would get added in as well.
Part II deals with the distributions from the HSA. Here you essentially list the total distributions, and then subtract any rollovers to other HSA custodians, and subtract any qualified medical expenses. Anything left over would generally be a nonqualified distribution subject to the 20 percent penalty unless one of the exceptions applies – turning 65, becoming disabled, or passing away.
Part III calculates the penalty for overcontributing due to changes in your health insurance coverage status.
If you have questions about other schedules or forms in your tax returns, prior articles in our Back to Basics series on personal tax returns are republished on my website at www.tlongcpa.com/blog .
Travis H. Long, CPA, Inc. is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. Travis can be reached at 831-333-1041. This article is for educational purposes. Although believed to be accurate in most situations, it does not constitute professional advice or establish a client relationship.
New Tax Impacts for Trusts with Capital Gains – Part II
Filed under: Trusts and Estates | Tags: $11950, 1040, 3.8%, B trust, beneficiary, bypass trust, California, Capital Gains, dividends, gifting trust, income, income beneficiary, interest, irrevocable trust, IRS, lawsuit, net investment income, principal, private, remainder beneficiary, revocable living trust, revocable trust, Social Security Number, tax, Uniform Principal and Income Act, UPIA
Comments (1) Originally published in the Cedar Street Times
November 15, 2013
Two weeks ago I laid the groundwork of some of the basics on revocable and irrevocable trusts in order to start discussing new implications due to law changes in 2013. Revocable trusts such as the common revocable living trust most people use for estate planning is disregarded for tax purposes as separate from the owner – in other words all of the income generated by its assets gets reported on your personal 1040 tax return. Irrevocable trusts, such as a bypass trust commonly used in estate planning, or a gifting trust, are treated as separate tax paying entities, get their own taxpayer identification number, and file their own tax returns.
In early 2013 new laws were passed that increased the personal income tax rates from 35 percent to 39.6 percent on people in the highest tax bracket ($400,000 filing single or $450,000 married filing joint). It also raised the capital gains rate to 20 percent for these same people (up from 15 percent). In addition, a new 3.8 percent Medicare surtax is assessed on net investment income (think interest, dividends, capital gains, among others) for people making over $200,000 single or $250,000 filing joint. Most people do not make $450,000 or even $250,000 a year, so this seems innocuous to many.
However, many people making less than these thresholds do have irrevocable trusts – most commonly after a spouse has passed away. The problem with irrevocable trusts is that the thresholds to be impacted are so much lower. Once your trust has just $11,950 (2013) of income, you have hit the top bracket and will be subject to the 39.6 percent income tax rate, 20 percent capital gains rate, and the 3.8 percent Medicare surcharge! One stock sale could easily put you in the top bracket! This effectively means an 8.8 percent tax increase on capital gains and 4.6 percent to 8.4 percent increase on other types of income. That is a big hit every year, and will be something new to battle.
If you can avoid having the income taxed to the trust, and instead have it distributed out and taxed to the beneficiaries, you can probably save a chunk of taxes since it will be taxed at the lower rates on the beneficiary tax returns – assuming your individual beneficiaries are not in the top tax bracket!
Whether or not you have discretion or are required to distribute income to beneficiaries is defined in your trust document. Even the very definition of “income” itself, for trust accounting purposes, is governed by your trust document primarily and the state’s principal and income act, secondarily. The proper allocation of income and expenses to trust accounting income or principal is very important to beneficiaries (whether they realize it or not), since trust accounting income generally goes to one beneficiary, and the principal often goes to a different beneficiary down the road…so it determines the amount the beneficiaries receive. Many common irrevocable trusts are written to require the distribution of trust accounting income each year to the current beneficiaries with rights to dip into principal as needed to maintain an ascertainable standard of living. Upon death, the remaining principal goes to the remainder beneficiaries.
The California Uniform Principal and Income Act does not define capital gains as income, but as a principal transaction – basically an asset changing form – for instance from real estate to cash. I hardly ever see trusts that even mention capital gains, much less defining it as a part of income. In the absence of trust language, the principal and income act governs, therefore many trusts in California are not permitted to distribute capital gains to the beneficiaries.
It is amazing to me how many trust tax returns I have seen over the years that violate this – often because the preparer does not really understand trust taxation rules. I have even run into cases where the prior preparer has never even asked for the trust document, and thus relies on the default settings in their tax software in conjunction with “the way we’ve always done it” to govern! This would be analogous to creating a detailed shopping list and asking your neighbors to go shopping for you; in lieu of taking your list, they go on the internet and print out a list of common things people buy, and then supplement it with things they have bought for other neighbors in the past! Chances are pretty good; you will not get what you need! Enforcement of correct trust income tax preparation comes much more often by threats of lawsuit against the trustee than by IRS audit. Keep in mind the remainder beneficiary’s attorney would be happy to sue the trustee for shorting his client’s share by not following the terms of the trust.
In two weeks we will conclude our discussion.
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Health Savings Account – Your Tax Friend
Filed under: Healthcare Costs | Tags: 213(d), beneficiary, California, custodian, estate, family plan, Flexible Spending Arrangement, FSA, HDHP, health savings account, healthcare, high deductible health plan, HSA, individual plan, itemized deductions, Medicare, nonqualified expenses, ObamaCare, out-of-pocket, qualified medical expenses, RMD, spouse
Leave a comment Originally published in the Cedar Street Times
May 17, 2013
Perhaps you remember a time when you thought you would get a nice fat tax deduction because you spent thousands of dollars on health care costs that insurance did not cover, only to realize you got nothing out of the deal? The cause that lead to this depressing realization was either because you did not meet the threshold for medical expenses, based on a percentage of your adjusted gross income, or even if you did, you still did not have enough itemized deductions to get you over the standard deduction.
As of January 1, 2013, that threshold was raised even higher – now 10 percent of your adjusted gross income (7.5% for another three years for people over 65). For most people this would generally mean if you make $100,000, you get no benefit for the first $10,000 of medical expenses.
A health savings account is a fantastic option which basically allows even people taking a standard deduction to effectively get a tax deduction for much, if not all, of their out-of-pocket medical expenses. There is also no “use-it-or-lose-it” clause such as can be found in the less flexible “Flexible Spending Arrangement” (FSA). Qualified medical expenses for HSA purposes used to be a broader definition than medical expenses in IRC section 213(d) used for itemized deductions, but a few years ago it was essentially unified.
Eligibility to open a health savings account is dependent on whether your health plan qualifies as a high deductible health plan (HDHP). For 2013, an individual plan must have a minimum deductible of $1,250, and $2,500 for a family plan, among other requirements. The premiums for high deductible plans are much lower (but shop around!) since you are paying a good chunk of the first-dollar costs – just like car insurance deductibles.
You then open a checking account with a company that provides custodial health savings accounts and contribute money to this account. Any contributions to the account lower your taxable income in the year of contribution, just like contributing to an IRA. Then you in turn use that account to directly pay all your qualified medical expenses (as well as spouse or dependent expenses) with a checkbook or debit card. With the savings created by lower health insurance premiums you should already have some money to contribute to your account. For 2013 you can contribute up to $3,250 for a single plan or $6,450 for a family plan (add a thousand to those figures if you are over 55).
Whatever you do not use stays in your account for the future, and you can keep contributing each year. If you never use it, you can take it out and use it for whatever purpose you want with no penalty after age 65. It would be taxable income, however, if not used for medical purposes. If you use it before age 65 for nonqualified expenses, there is a 20 percent penalty, plus it is taxable income.
Some people even view an HSA as another way to stuff a few more dollars into a “retirement plan,” but without the requirement to have earned income, plus the benefit of not having to take minimum distributions by age 70 1/2. If you are enrolled in Medicare, however, you can no longer contribute. Some custodians also allow you to link the account to an investment firm and then invest the money in stocks, bonds, mutual funds, etc.
If you pass away and your spouse is named as the beneficiary, your spouse steps into your shoes and becomes the new HSA owner. If it passes to your estate, it becomes taxable income included on your final 1040 tax return. If it passes to any other beneficiary, the HSA becomes taxable income to the recipient except for medical expenses paid within one year after death. One other tidbit of information – the State of California does not conform to Federal legislation regarding HSAs, so you receive no deduction for contributing to an HSA account and any income generated by the funds is taxable for California purposes.
Many companies have been switching to these plans over the past five or six years due to the savings in premiums, and many of the companies pass some of the savings back to the employees by contributing to the HSA account.
At this point, it looks like HSAs will still exist under ObamaCare, and could conceivably become even more popular if ObamaCare does not pan out and insurance rates keep rising. HSA plans have been found to lower the consumption of healthcare services since they do place an economic incentive for consumers to find lower cost options since the consumers pay for 100 percent of the care up to the deductible. Plans that shelter the consumer from any cost at all do not provide this incentive.
However long they stay around, HSAs certainly are a great option for many people today.
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Ask Your Husband if He is Still Married to Someone Else!
Filed under: Divorce, Retirement Assets, Trusts and Estates | Tags: beneficiary, designation, ERISA, IBEW Pacific Coast Pension Fund v. Lee, pension benefits, U.S. Court of Appeals, Wayne Lee
Leave a comment Originally published in the Cedar Street Times
December 14, 2012
As professionals dealing with trust and estate issues, CPAs and attorneys talk a lot about making sure your beneficiary designations are up-to-date on any kind of retirement assets you may own, as they generally trump your estate plan. There are many sad stories of widows or widowers losing assets to their deceased spouse’s ex-wife or ex-husband simply because they did not update the beneficiary designation forms. But sometimes, even that is not enough.
At a tax seminar I attended last week, we discussed an interesting court case which makes you think you can never be too careful. The case goes something like this: Wayne and Cleta Lee were married in the state of Washington in 1979. In the early 1990s, Wayne moved to Mississippi. They never got a divorce, but they went their separate ways. In 1995, Wayne decided to marry a woman in Mississippi named Lois, but he did not bother to divorce Cleta.
Wayne was an electrical worker and was entitled to a pension when he retired in 1997. On the pension application he listed himself as married and Lois as his wife. He designated her specifically as the beneficiary and even attached a copy of the marriage certificate. They both signed the application and he started receiving his pension. In January 2007 Wayne passed away and Lois started receiving pension benefits in February. Later that month, his first wife from Washington applied for pension benefits from the company as well!
The case eventually went to court and the district court ruled in favor of Lois since she was specifically identified in the pension application as the beneficiary for spousal benefits. Cleta appealed and the case went to the U.S. Court of Appeals. The U.S. Court of Appeals cited Employee Retirement Income Security Act (ERISA) rules and state laws and said the district court made its decision on the wrong basis. They overturned the ruling and have now sent it back to the district court to determine the legal spouse. They said the benefits go to the legal spouse at the time of his passing regardless of who was specifically named as the spouse. If the district court determines Cleta to be the legal spouse, which the U.S. Court of Appeals hinted at quite heavily, Lois will lose out on her pension benefits. (IBEW Pacific Coast Pension Fund v. Lee (2012) U.S. Court of Appeals for the Sixth Circuit, Case No. 10-6433)
So for all of you with spouses that have multiple wives or husbands, you may want to have a little chat! Obviously the scary situation would be if you never knew your spouse was not officially divorced from a prior marriage, or worse, never knew they were married before.
Does this mean we will be advising clients in the future to have background checks done before picking out a ring? I sure hope not.
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Travis H. Long, CPA, Inc. Blog 