Archive for the ‘exemption’ Tag
Back to Basics Part XXXII – Form 8889 – Health Savings Account
Filed under: Back to Basics, Healthcare Costs | Tags: 2015, COBRA insurance, contribution limit, custodial parent, dependent, disabled, distribution, divorce, earnings, exemption, health insurance, health savings account, high deductible health plan, HSA, IRA, long-term care, Medicare, penalty, rollover, Roth-IRA, Schedule A
Leave a comment Originally published in the Cedar Street Times
February 5, 2016
Why Would an HSA Be Valuable to Me?
A Health Savings Account, or HSA for short, is a fantastic vehicle to pay for out-of-pocket qualified medical expenses which insurance does not cover in-part or in-full. It effectively allows you to get a tax deduction for nearly all of your unreimbursed expenses whether or not you itemize deductions. It also works great for those who itemize, but do not have enough medical expenses to get over the 7.5 percent or 10 percent (depending on your age) of adjusted income threshold before those deductions are counted. Many people assume they are receiving a tax benefit for these expenses when they are not. Simply look at your Schedule A, line 4. If it says $0, or if you do not even have a Schedule A, you are not benefitting from your itemized medical deductions. Even if you have a number there, line three will show you how much you are getting zero benefit from due to the threshold.
How do I Qualify and What Kind of Account Is It?
In order to qualify for an HSA, you must have a “high deductible” health insurance plan. For 2015, this means you have to have a minimum annual deductible of $1,300 for self-only coverage, or $2,600 for family coverage (or approximately the cost of breathing the air in a hospital lobby). Your plan must also have a maximum annual out-of-pocket limit of $6,450 for self-only coverage or $12,900 for family coverage. If you meet these requirements, you are eligible to set up an HSA account for yourself.
An HSA account is kind of like having a checking account just for qualified medical expenses, but is shares characteristics with an IRA account. A lot of people think the accounts are married to the health insurance providers, but they are not. Lots of banks and investment companies offer them. The account is a custodial account held for your benefit, and you get to choose the company that is the custodian, and you can move the money from one custodian to another, just as you could move your IRA from Fidelity to Vanguard, for instance. You often get a checkbook and/or a debit card. The custodian follows certain rules laid out by the IRS, and reports to the IRS at the end of each year the total contributions to and distributions from your account. The custodian is not responsible, however, for verifying that your expenses are qualified medical expenses, as that responsibility falls to you.
If you have health insurance through an employer and the plan qualifies, often your employer and its health insurance representative are instrumental in getting this account established, and they will select an initial custodian. Many employers will even contribute a monthly amount to your HSA account since the high deductible aspect often saves the employer money on the premiums. But even if your employer does not set an HSA up, you can do it. And as long as your health insurance plan qualifies, you can contribute to it.
How Do I Put Money Into the HSA?
Anyone is actually allowed to contribute to your HSA account (if you should be so lucky!), but there is a total contribution limit of $3,350 per year for self-only plans, and $6,650 for family plans in 2015. And you get an above-the-line tax deduction for the amount put into the account each year. Unlike IRAs, there are not even any income phaseouts that would prevent you from getting the tax deduction if you are a high-income earner. If your employer does not contribute enough to max out the contribution limit, you can always write a check to the account for the difference. You even have until April 15 (18 this year) to make the contribution for the prior year (similar to an IRA). If you are over 55 years old (IRAs are 50), you can make an additional $1,000 contribution each year.
If you are enrolled in Medicare or are being claimed as a dependent on someone else’s return, you cannot contribute to an HSA. In years where you change from self-only coverage to family coverage, or if you get married, or go through a divorce, stop insurance, start insurance, etc. be aware that there are special rules and limitations on contributions during those years, and you could subject yourself to a penalty if handled incorrectly. If you find that you have overcontributed for any reason, you generally have until the extended due date of your tax returns to get the money out without penalty. You do have to take out any earnings it generated as well, and those would be taxable in the year you physically take the money out of the account.
Can I Transfer Money Into My HSA from an IRA?
If you are desperate to get some additional money into your HSA, you can make a once in a lifetime transfer from your Traditional or Roth IRA to the HSA via a trustee to trustee transfer. However, it is still limited to the annual contribution cap, and it would be reduced by any other contributions you made to the account during the year! So it has very limited usefulness. If you were going to do that, your first choice would almost inevitably be the traditional IRA since the Roth IRA is already a tax-free account.
What/Who Can I Spend the Money On?
All medical expenses that would normally qualify for a deduction on Schedule A, would be a qualified HSA distribution, except for insurance. Generally, you cannot pay your health, vision, dental premiums, etc. from your HSA. Exceptions to this which you could pay from your HSA include long-term care insurance for the HSA account holder (subject to normal limits on long-term care insurance deductions found in the Schedule A instructions), COBRA insurance premiums for you, your spouse, or your dependents, or health insurance paid while you, your spouse, or dependents are receiving federal or state unemployment compensation. Also, if you are 65 or older, you can pay your Medicare and other health insurance premiums (except supplemental Medicare policy premiums) from your HSA.
For the bulk of the qualified medical expenses, you can deduct them for yourself, your spouse, your dependents, or for someone you could have claimed as a dependent except that they were disqualified simply because they filed a joint return, had gross income over $4,000, or were married filing jointly and one of the spouses could have been claimed as a dependent. If you are divorced with children, you can also pay for your children’s medical expenses whether or not you are a custodial parent or claim a dependency exemption, as long as least one of you qualifies to claim the dependency exemption.
If you take money out of the account and do not use it for medical expenses, it will be taxable income, and you will hit a 20 percent tax penalty as well. When you reach age 65, however, you can take the money out and use it for any purpose with no penalty (as opposed to 59.5 for most IRA owners). So in a lot of ways, should you never use it for medical expenses, it acts like another IRA.
Also for people that become permanently disabled, they can escape the 20 percent penalty tax even if used for nonqualified expenses.
In two weeks we will conclude the discussion on HSA accounts and discuss topics such as whether or not you have to pay qualified medical expenses directly from your HSA, strategy for large bills that exceed your HSA balance, having separate accounts for spouses, what happens to the account when you pass away, pitfalls to avoid, and a discussion of the Form 8889 itself.
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.
Unmarried with Children – Head of Household
Filed under: General | Tags: biological child, Chief Counsel Memorandum, child tax credit, children, dependent, dependent benefits, dependent care expenses, dependent exemption, earned income credit, exemption, head of household, household, income limit, living together, principal residence, qualifying child, qualifying relative, SCA 1998-041, tie-breaker rules, unmarried, unmarried with children
Leave a comment Originally published in the Cedar Street Times
March 8, 2013
Article on Unmarried People Living Together with Children
I cannot write the title of this article without thinking about the 80s and 90s sitcom, Married with Children, about a dysfunctional American family starring Ed O’Neill, Katey Sagal, David Faustino, and Christina Applegate. With all the problems the Bundy family had in its 11 years on television, one thing they did not have to deal with were tax determinations when you are unmarried with children!
When I speak of unmarried people, I am not referring to divorced individuals, but people who have never been married. Different rules apply to divorced and legally separated individuals, and I am not speaking from that perspective.
Many questions arise about who gets to claim dependency exemptions, child tax credits, head of household filing status, dependent care expenses, etc. in situations where unmarried people are living together with children. This article could not begin to scratch the surface of the issues that exist as there are so many situations that could yield different tax results. In this issue I am going to focus on the head of household filing status.
For an unmarried individual to claim head of household, he or she has to maintain a household for more than half the year that is the principal residence of an unmarried qualifying child (or qualifying relative) for dependency exemption purposes.
A qualifying child is someone who must generally be under 19 (24 if full-time student). The person must also be your child, step-child, sibling, step-sibling, or a descendant of any of these, or an adopted or foster child. The child cannot provide over half of his or her own support, and the child cannot file a joint return.
Unmarried parents often both meet the criteria to consider a shared biological child a qualifying child, and then they can decide who will claim the qualifying child for the dependency exemption. (If they cannot decide, tie-breaker rules exist.) Whoever claims the child as a dependent gets the child tax credits, credit for child and dependent care expenses, exclusion for dependent benefits, earned income credit, and the possibility of filing as head of household. You cannot split up the benefits between parents.
If there is more than one shared biological child, one parent may be able to claim one child as a dependent and the other may be able to claim a different child as a dependent. Or maybe one or both have children from prior partners that live with them and could qualify them as well. (Side note: if unmarried person A earned less than $3,800 (2012) and lived for the entire year with unmarried person B in the household maintained by B, then A could be a dependent of B as a “qualifying relative,” as well as any of A’s children that lived with A and B and are supported by B. This also qualifies B for head of household.)
Let us assume both unmarried people living together each have a qualifying child. Can they both claim head of household? If their households are maintained in separate dwellings, the answer is almost always yes. But what if they live under the same roof? Can you maintain separate households in the same house?
The answer to this depends on whether they are acting as a family unit or not. IRS Chief Counsel Memorandum SCA (Service Center Advice) 1998-041 addresses this issue and basically says that all facts and circumstances are considered, and if you are conducting your lives like a single family, then only one individual can file with the head-of-household status, and the other must file single. But if you are basically like roommates sharing dwelling costs (but not bedrooms!), and lead separate lives with your own respective children, then you could be considered as each maintaining your own household, and then both people can file as head of household. If you share a biological child as well, it will be nearly impossible for you to make this argument. But never say never!
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.
Divorce Taxation – Part III
Filed under: Divorce | Tags: abandoned spouse, alimony, capital loss, carryforwards, child support, child tax credits, custodial parent, dependent care credits, divorce, divorce decree, earned income credits, education credits, exemption, Form 8332, general business credits, head of household, health insurance, homebuyer credit, HSA, investment interest, legal separation, medical expenses, minimum tax, MSA, net operating loss, NOL, noncustodial parent, passive activity losses, tax assets, tax benefits
Leave a comment Originally published in the Pacific Grove Hometown Bulletin
July 4, 2012
Since it is July 4th, and we are discussing divorce, I suppose it would be appropriate to say, “Happy Independence Day!”
Tax Carryforwards
When going through a divorce it is important to realize you may have valuable “tax assets” that need to be divided according to tax law or negotiated between spouses. Capital loss carryforwards (such as those generated by stock sales) are supposed to be allocated based on whose assets from the past created the losses. Net operating loss carryforwards (such as those generated by a large business loss) are supposed to be determined by recalculating what the losses would have been if you had been filing separate. Minimum tax, general business credit, and investment interest expense carryforwards can be negotiated.
Suspended passive activity losses (such as those generated by rental properties) go with the individual receiving the property, however, there are some pitfalls to avoid that could require the passive activity losses to be added to basis, rather than becoming immediately available to the spouse receiving the property. If you happen to have bought a house with the $8,000 homebuyer credit that has to be repaid, the person who takes the home becomes solely responsible for repayment.
In practice, I have not seen the IRS come down heavily on how carryforwards are divided, but it is important to know what you are entitled to, so you do not miss out on something that could save you money down the road.
Children
Children present a number of planning issues in a divorce. Tax benefits related to children include the child’s exemption, child tax credits, dependent care credits, exclusion of income related to dependent care benefits, earned income credits, education credits, and head of household filing status. The custodial parent (defined for tax purposes as the parent who lived with the child most during the year) is generally the one eligible for these benefits, although the custodial parent may release two of those (the exemption and child tax credits) to the noncustodial parent by filing Form 8332, and keep the remaining benefits. As discussed in a previous issue in this series, it is also possible for both spouses to claim head of household if the abandoned spouse rules are met. If both parents meet certain qualifying child rules, they can also each claim medical and health insurance expense deductions they pay for the child and can distribute money from HSAs, MSAs, etc. for the child’s benefit. When multiple children are involved, planning can be done to preserve the head of household status for both spouses.
Child support payments are not taxable income to the recipient parent, nor are they deductible by the parent paying the child support. Alimony on the other hand is income to the recipient, and deductible by the paying parent. Be sure your divorce decree is clear and specific on the payment of alimony and child support. Alimony is a tricky area and you must be very careful about how it is paid.
To be continued next issue…
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.
I’m Having a Baby!
Filed under: General | Tags: baby, baby modeling, child tax credit, earned income credit, exemption, HSA, medical expenses, Roth-IRA, section 529
Leave a comment Originally published in the Pacific Grove Hometown Bulletin
Decembery 7, 2011
Well, not me, technically, but my wife is. After 12 years of wedded bliss, we are entering the baby business. Like most future parents we are excited, but being a CPA takes it to a whole new level of joy! There are so many planning opportunities around children.
Planning can start well before birth or even years before conception. For example, the highly tax savvy high school senior could think, “Someday, I am going to have a family of my own. Knowing the high cost of college I am about to incur, I should really start saving for my future child’s education now to maximize tax-deferred growth! That raucous week in Cancun is really a waste of money, anyway.” Instead this high schooler opens a section 529 plan and names his older sister’s child as a beneficiary. After four years in a frat house, a year traveling after school, a few years bouncing around finding himself, falling in love, getting married, and finally having a child, this new parent then renames the beneficiary to his own child with a ten-year jump start on tax deferred education saving!
What about the expense of having the child? This natural process which has gone on quite successfully for a few million years or so at no cost, mostly outdoors in the dirt, can now be quite pricey, and sterile. It may cost $5,000 if you use a midwife or $25,000 in a hospital! You will likely go over your deductible and insurance will pick up the rest. A great option is to have a high deductible health plan going forward with a health savings account. This setup makes virtually all of your family medical expenses deductible whereas people with traditional plans are stuck itemizing with a 7.5 percent of AGI floor – meaning most people do not get any tax benefit. It also allows the deductibility of more types of expenses and alternative care.
Next, there is the additional exemption deduction to get excited about – we are talking $3,700! You are also eligible for child tax credits – up to a $1,000 per child. And if you are low income, the child may help qualify you for a larger earned income credit: up to $3,094 with one child or $5,751 with three or more! Child tax credits and earned income credits can be refundable – meaning, even if you do not pay a dime in tax, the federal government will “refund” the money to you anyway – but having children is not a great way to get rich. For advanced tax planning, you aim to have your child near the end of December and still receive the exemption and credits for the whole year. No expense, but full benefit – brilliant!
Do not forget about dependent care credits and education credits either. Dependent care credits will save you up to $1,050 for one child or $2,100 for two or more children. Education credits for college age children such as the Hope credit can save you up to $2,500 in tax.
My favorite planning opportunity which I have yet to implement with a client is baby modeling. If you can get your baby into print or TV commercials, then I feel you would have a strong case to say the baby has earned income. Maybe the “talent’s” agent, a.k.a. mom or dad, would need to be paid out a heavy agent fee since it really required a lot of work on their part – but then again, I am sure that many famous actors and actresses have to be babied by their agents too! Once your baby has earned income, you can establish a Roth-IRA for retirement! Think about 18-22 years of additional investment compounding! (Call me if you have a child in this situation – I want to put this in action!!)
So when is our baby due – LATE April…we hope!
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.
