Archive for the ‘medical expenses’ 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.
Back to Basics Part III – More Sch. A
Filed under: Back to Basics | Tags: 1040, chiropractors, Christian Science practitioners, contacts, copays, dentists, doctors, eyeglasses, health insurance, hospital bills, medical expenses, medical mileage, Medicare, personal property taxes, prescription drugs, real estate taxes, Schedule A, SDI, state income taxes
Leave a comment Originally published in the Cedar Street Times
November 14, 2014
Two weeks ago we discussed the purpose of schedules and forms in a tax return and then began a discussion on Schedule A – Itemized Deductions. We discussed that itemizing deductions is an option if you have more than what the IRS allots as a standard deduction to everyone for things like medical expenses, taxes, charitable donations, and other miscellaneous deductions. This week we are going to look more closely at the different types of deductions that you can itemize on Schedule A and how these deductions can get a shave and a haircut and look like less than when you started.
The first section on Schedule A covers out-of-pocket medical expenses (not reimbursed by insurance). Things like doctors, dentists, chiropractors, Christian Science practitioners, hospital bills, prescription drugs (not over the counter), eyeglasses, contacts, copays, etc. all fit into this category. Health insurance is also deductible here unless it is for self-employed people, in which case it can get potentially better treatment as an adjustment to income on page one of the 1040 instead. Health insurance would include your Medicare payments which most people see deducted from their Social Security checks.
Sometimes people are surprised to learn that substantial expenditures on your home can be deductible if done to improve accessibility – such as widening doors and bathrooms, installing ramps, hand rails, etc. (there are a number of rules to be aware of, however). You can also deduct medical related miles at 23.5 cents per mile and even deduct overnight travel expenses if you must drive to a hospital that is not local, for instance. The problem with medical expense deductions is that for the vast majority of people, none of the expenses even make it towards counting as an itemized deduction.
You have to have in excess of 10 percent of your adjusted gross income (the bottom number on page one of your 1040) in medical expenses before a single dollar counts. So, if your adjusted gross income is $100,000, and you have $10,500 of out-of-pocket medical expenses, only $500 counts towards your itemized deductions. If you or your spouse are over 65 you have a 7.5 percent threshold through 2016, and then you will jump to ten percent as well. A really nice planning opportunity around this dilemma is having a health savings account in connection with a high deductible plan. It has the ability to effectively convert some or all of your nondeductible medical expenses to deductible expenses. Ask your tax preparer or insurance agent about this.
The second section on Schedule A covers deductible taxes you have paid. This includes state income taxes you paid during the year, SDI withholdings from your CA paycheck, real estate taxes on your personal residence(s), personal property taxes assessed on value such as annual vehicle taxes (license fee on your CA DMV renewal), boat, aircraft, etc. Remember, as a cash basis taxpayer, these (as with generally all income and expenses on your tax returns) count in the year you actually pay them (or charge them in the case of a credit card), so it doesn’t matter what year they are supposed to cover – just look at when they were paid. There has been an option in past years to deduct sales taxes you paid during the year if they were greater than the state income taxes you paid, but that is currently not an option for 2014, unless Congress takes action.
In two weeks we will continue our discussion regarding Schedule A.
Prior articles are republished on my website at www.tlongcpa.com/blog.
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.
Back to Basics Part II – Schedule A
Filed under: Back to Basics | Tags: 1040, 2014, charitable deductions, Forms, medical expenses, miscellaneous itemized deductions, mortgage interest, real estate taxes, Schedule A, Schedules, standard deduction, state taxes, unreimbursed employee business expenses
Leave a comment Originally published in the Cedar Street Times
October 31, 2014
Two weeks ago we discussed a general overview of the Form 1040 – a personal income tax return. The 1040 can be thought of as a two-page summary of your taxes in a nutshell. (I should mention also there are two other shorter forms that could be filed instead: a 1040A and a 1040EZ. These are for simpler returns and have income limits and other restrictions. In practice, however, anyone using tax software does not really have to decide which form to use and the software will generally optimize as appropriate. For our discussion we will focus on the 1040.)
The details for many of the items on the Form 1040 are actually determined on subsequent Schedules and Forms. Schedules are labeled with letters of the alphabet and additional forms are generally four digit numbers. Schedules are generally more major topical areas. For instance, Schedule C – Profit or Loss from Business, which is a summary of all the activity of a sole proprietorship. It may in turn have subsequent forms that support it. Forms are often more narrowly focused and would generally support other schedules or forms. For instance Form 4572 Depreciation, could support the calculation of depreciation expense for a business on Schedule C, a rental property on Schedule E, a farm on Schedule F, etc. I have not counted them all, but I have read the IRS has over 800 forms and schedules. The reality is that most people are covered by 30 or 40 of those 800!
Let’s start at the beginning of the alphabet – Schedule A. (I am sure this saddens you, but we will not be going through all 800 in this series of articles, but we will hit on a number of the most common ones!) Schedule A is for itemized deductions. You probably hear lots of people justify expenses by tossing around the phrase, “it’s deductible.” However, just because something may be deductible, does not mean it will benefit you. This is easily seen with Schedule A. Schedule A covers a host of “expenses” that most people have that our tax code has graced as good behavior and therefore allows a deduction for it. Medical expenses, state and local taxes, real estate taxes, mortgage interest, charitable deductions, unreimbursed employee business expenses, my favorite – tax preparation fees, investment expenses, etc.
Since Congress realized that everyone had some of this, and it would be a pain for people to track it, they decided to allow as an option a “standard deduction” for everyone in lieu of tracking and itemizing all those deductions. The standard deduction was created to generally cover what many people would have on the average anyway. For 2014 this standard deduction is $6,200 if you file as Single or Married Filing Separate, $12,400 if you file Married Filing Jointly or Qualifying Widow(er), and $9,100 if you are filing Head of Household status. If you believe you would have more than this, then you would itemize the deductions using Schedule A.
Mortgage interest and real estate taxes are the two areas that push most Californians into the itemizing zone. In other words, if you do not own a home, there is a good chance you won’t be itemizing. This is not always true: sometimes people don’t own a home, but make a lot of money and pay a lot of deductible state income taxes which would push them over the standard deduction, or maybe they work in sales jobs where they have lots of unreimbursed employee business expenses, or have major unreimbursed medical expenditures, or are perhaps like you dear reader, and have a heart of gold giving away buckets of money to charitable organizations each year! Or it could be a combination of things – paid some income taxes, have a stingy boss that won’t reimburse, and maybe you have a heart of bronze.
Next week we will discuss more specifically the deductions on Schedule A and how they can come out looking a little thin after running the Schedule A gauntlet.
Prior articles are republished on my website at www.tlongcpa.com/blog.
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.
Back to Basics Part I – Overview of 1040
Filed under: Back to Basics | Tags: 1040, above the line, adjusted gross income, adjustments to income, Alternative Minimum Tax, AMT, basics, below the line, charitable contributions, childcare credit, credits, direct deposit, educator expenses, energy efficient upgrades, exemptions, filing status, first-time home buyer credit, health savings account contributions, Household employees, interest, itemized deductions, medical expenses, miscellaneous itemized deductions, moving expenses, other taxes, paid preparer, real estate taxes, retirement plan contributions, self-employment taxes, student loan interest, tax return, taxes, tuition and fees, understanding
Leave a comment Originally published in the Cedar Street Times
October 17, 2014
On Wednesday October 15, the 2013 personal tax filing season came to a close. Or at least it did for most timely filers. People who requested the six-month extension finally had to lay down their cards, or face increased penalties, and being branded delinquent by the taxing authorities. But I am sure you had your returns done long ago!
It is hard to believe that 2014 is rapidly drawing to a close, and soon we will start filing taxes all over again. This coming year, I would like to challenge you to spend some time looking at your tax returns and learning something new. I am a firm believer that everyone should have at least a basic understanding of the flow of a tax return. This document is a linchpin in your financial life. Let’s spend a few minutes talking about the big picture. You may wish to do this with a copy of a 1040 close at hand.
Tax returns can be hundreds of pages long with many supporting forms and schedules, but it all boils down to a two page summary whether you are John Doe or Warren Buffett…this is your Form 1040. Essentially, the first page lists your income, adjusted by a few preferential items leaving you with your all important “adjusted gross income.” “Below the line,” as it is known, is the second page, and lists your deductions and credits, calculates your tax, and determines what you owe or will get refunded.
Looking at page one in more detail, the top section captures your name, mailing address, and Social Security number. There is also a somewhat passe little box to designate three dollars of the tax you are already paying to the Presidential Election Campaign fund. If you want to learn more about this, I wrote an entire article on its history on April 18th. You can find it at www.tlongcpa.com/blog.
The first real section is where you designate your tax return “filing status” – single, married, head of household, etc. This is very important because it determines how much your standard deduction is and how quickly you will climb the tax brackets as your income increases. Your status is determined by rules, not choice. That said, married people do have the choice of the generally unfavorable Married Filing Separate status.
The next section deals with “exemptions.” This is where you list the dependents in your household – generally your children up through college (even if away at college). A parent or someone not even related can qualify, but they have to meet strict limiting rules. You get an exemption from your taxable income of $3,950 (2014 amount) for each of your dependents. Children under 17 may also qualify you for child tax credits which would go on page two.
The income section falls next. Wages from your job, interest, dividends, business income, rental income, sales of stock, money received from retirement accounts or plans, pensions, social security, etc.
After getting your total income figure, you then are allowed certain favorable “above the line” deductions for things like educator expenses, moving expenses, retirement plan contributions, health savings account contributions, student loan interest, tuition and fees, etc. After subtracting these adjustments, you arrive at your AGI (adjusted gross income). AGI is a key figure and is used in a lot of calculations which could affect your taxes in many areas. Above the line deductions are therefore preferable for that reason, but also because they will have a direct impact on taxable income. Below the line deductions such as itemized deductions are less certain and do not impact your AGI.
The taxes and credits section is at the top of the second page. This is where you get to subtract all your itemized deductions listed on Schedule A- things like medical expenses, taxes paid, interest, charitable contributions, and miscellaneous other deductions (like tax preparation fees!). If you don’t have many itemized deductions you get the standard deduction instead (for example – $12,200 for married status) as determined by your filing status from the first page.
Next, the number of exemptions you claimed on the first page is multiplied by $3,950 (2014) and that is subtracted out to leave you with your taxable income. Your tax is then calculated using tax tables and other rules.
With income generally in the $100,000 to $200,000 range ore more, you may also hit alternative minimum tax (AMT). In simple terms, AMT is a parallel tax system that has a different set of rules and allows less deductions. You calculate the AMT system on every return. If the AMT tax calculation yields a larger tax bill than the regular system, you pay the incremental difference as alternative minimum tax. Real estate taxes and miscellaneous itemized deductions subject to two-percent such as unreimbursed employee business expenses are common items that get kicked out in the AMT system.
Next you get to subtract any tax credits you may have. Tax credits are a dollar-for-dollar reduction of tax owed and are therefore more valuable than deductions, which only save you a fraction on the dollar. Depending on your circumstances there are credits for education, childcare, children in general, energy efficient upgrades, etc.
The next section is “Other Taxes.” There are a handful of other taxes people might incur , such as tax on taking money out of retirement plans too early, household employee taxes, repaying a first-time home buyer credit, etc. The most common, however, is self employment taxes. Business owners must pay the employer and employee side of their Social Security and Medicare taxes. After you add these taxes and determine your total tax liability, you then look at the payments section to see was has been paid in or credited to your account, and whether you will end up owing, or getting a refund.
At the bottom of the second page, you can choose things like direct deposit, or applying the payment to the following year. You can also designate a third party such as the tax preparer to be able to discuss the return with the IRS, if the IRS wants to discuss it. At the bottom, a paid preparer also has places to sign and fill out.
In two weeks we will start examining Schedule A – Itemized Deductions.
Prior articles are republished on my website at www.tlongcpa.com/blog.
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.
American Taxpayer Relief Act of 2012
Filed under: General | Tags: $5 million, American Opportunity Tax Credit, American Taxpayer Relief Act of 2012, bypass trust, cancellation of debt, Capital Gains, child tax credit, code section 179, depreciation, estate tax exemption, itemized deduction phaseout, medical expenses, miscellaneous itemized deductions, net investment income, personal residence, Social Security
Leave a comment Originally published in the Cedar Street Times
January 11, 2013
The American Taxpayer Relief Act of 2012 was signed into law January 2, 2013. There was lots in the bill, but I am going to hit on a few that are notable and others that having meaning to a lot of people. I think making the Alternative Minimum Tax patch permanent and indexed for inflation was a huge victory for many taxpayers. That patch has been kicked down the road for years. The indexing will certainly alleviate concerns of a similar problem down the road. Many middle class people do not realize they were on the cusp of paying thousands of dollars more on their 2012 tax returns due in April without this fix.
The estate tax exemption being set permanently at $5 million and also indexed for inflation is huge, especially for Californians that own property. In a lot of ways, this simplifies estate planning for most individuals and will bring into question the need of the typical A-B split for many people that currently have it. Having a B trust, or bypass trust, would require additional tax work in the future, so the ability to eliminate it, could be worth the cost of amending your trust. Family dynamics may of course still dictate a B trust is prudent.
Various other temporary provisions we have been enjoying that were made permanent included marriage penalty relief for joint filers, better rules for student loan interest deductions and dependent care credit rules.
Quite a few things were extended but not made permanent. A big one was extending the exclusion from income of cancelled debt on personal residences for another year. This could be a lifesaver for those still struggling with mortgages that are “underwater.” Deductions for grade school teacher expenses and an above-the-line deduction for qualified tuition and related expenses were other items extended through 2013. More important than the deduction for tuition was the extension of the American opportunity tax credit through 2018 which saves taxpayers up to $2,500 each year as a result of education costs. Enhanced provisions of the child tax credit were also extended through 2018.
Small businesses have had the luxury of writing off high dollar amounts of many capital asset purchases through code section 179. This was slated to return to $25,000, but has been extended through 2013 at $500,000. Bonus depreciation and accelerated expensing of qualified leasehold, restaurant and retail improvements on a 15 year schedule instead of returning to a 39.5 year schedule was also extended.
Bush-era tax rates and capital gains rates have been retained for everyone but the wealthy. For people making over $400,000, their marginal bracket rose from 35% to 39.6%, and their capital gains tax went from 15% to 20%. There is also a new 3.8% medicare tax on investment income for people generally making over $200,000 and a new hospital insurance tax of .9% for people generally making over $200,000. Itemized deduction phaseouts have also returned for high income earners.
Everyday wage earners will be negatively impacted by the return of a 6.2% tax for Social Security rather than 4.2% tax we have had for the past two years, as they will see two percent less in their paychecks as a result. Another negative impact for people with high uninsured medical expenses, is that the threshold for medical itemized deductions has moved from 7.5% of your adjusted gross income to 10%. Individuals 65 and up will still enjoy the 7.5% rate for another three years.
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.
Travis H. Long, CPA, Inc. Blog 