April 2007
Health Savings Accounts Explained
April 2007
Health Savings Accounts Explained
Maybe you've seen ads for health savings accounts (HSAs) or you know someone who has one. First available in 2004, HSAs may become more popular as a result of recent legislation that liberalizes some of the tax rules related to HSA funding. What exactly is an HSA, and should you consider opening one?
HSA + HDHP An HSA is a tax-favored account available only to individuals covered by a high deductible health plan (HDHP). Money set aside in an HSA, plus account earnings, may be used tax free to pay qualified medical expenses that aren't reimbursed by insurance. Although HDHP premiums can't be paid from an HSA, the account can be used to cover medical expenses incurred each year before the plan's deductible has been met. HSA withdrawals not used for qualified medical expenses are taxable and generally subject to a 10% penalty.
For 2007, an HDHP's deductible must be at least $1,100 for self-only coverage or twice that amount ($2,200) for family coverage. However, the plan can have a lower (or no) deductible fore preventive care, such as routine physical exams. Out-of-pocket expenses payable under an HDHP can't be more than $5,500 ($11,000 for family coverage). Coverage can be obtained individually or through an employer that offers it as an employee benefit.
HSA Contributions HSA contributions are tax deductible. If made by an employer, the employer gets the deduction and the employee excludes the contributions from income. An employer-sponsored plan may allow employees to make HSA contributions on a pretax basis.
In general, the maximum HSA contribution for a person with self-only HDHP coverage is $2,850 for 2007; it's $5,650 with family coverage. A person age 55 or older may make additional catch-up contributions of up to $800 (in 2007). Under the new law, contributions are no longer limited to the HDHP's deductible.
New Flexibility The new law also allows tax-free rollovers from individual retirement accounts (other than SEP and SIMPLE IRAs) to HSAs. In addition, rollovers are permitted from health flexible spending accounts and health reimbursement accounts through 2011. These rollover opportunities are generally available one time only. We can provide details.
As a business owner or professional, you probably belong to several groups. While dues paid to professional organizations, civic clubs, business leagues, and chambers of commerce are usually fully deductible as business expenses, the same can't be said for dues paid to a social or recreational club - even if you entertain customers or clients there.
Perhaps your firm pays for your club membership. If you are an employee, the firm can deduct the full cost if you report the dues as taxable compensation.
Another option for employer-provided memberships: Divide the dues expense into the portion attributable to business use of the club and the portion attributable to personal use. The business-use portion is a nontaxable working condition fringe benefit, and the personal-use portion is taxable compensation. With this method, your firm's deduction is limited to the amount treated as compensation.
The continued uncertainty regarding the fate of the federal estate tax complicates planning for anyone who might have a taxable estate. As things stand now, estates worth up to $2 million can avoid taxation, and that threshold increases to $3.5 million for 2009. While estate-tax repeal is still on the books for 2010, the tax is reinstated the very next year with a significantly lower exemption amount of $1 million.
Time to Take Action? The prospect of a continuing federal estate tax may make you uncomfortable adopting a strictly wait-and-see approach to planning. If you'd prefer doing something now to address potential estate taxes, you might consider reducing the value of your estate b making lifetime gifts that won't be subject to gift taxes, or use up any of your available gift-tax credit. (The gift tax credit offsets gift-tax liability on cumulative transfers of up to $1 million)
Annual Exclusion Gifts Each year, you can give up to $12,000 per recipient (as adjusted for inflation) without gift-tax consequences. Married couples can give up to $24,000 per recipient. Thus, a series of annual gifts could remove a substantial amount from your estate relatively quickly.
Example Craig has four children and six grandchildren. He can remove $600,000 from his estate in five years' time by giving each of them $12,000 a year. Instead of giving cash, Craig might want to give securities, real estate, or other assets that are likely to go up in value. That way, any future appreciation would also be removed from his estate.
Note that each gift recipient must have immediate possession and use of the gift. So, gifts in trust often do not qualify for the annual exclusion. Exceptions apply.
Payments of Medical Expenses and Tuition The tax law allows you to pay another person's medical expenses or school tuition on a gift-tax-free basis. To qualify for this tax-saving provision, you must pay the medical provider or the educational institution directly. There are no restrictions on the amount of expenses you can pay, and your payments will not count against the annual exclusion limit.
E-mail - gotta love it! It's fast and inexpensive and a real boon for businesses. Or is it? Sending an e-mail is so easy that everybody seems to be e-mailing everybody about everything, resulting in out-of-control inboxes that are neither efficient nor cost effective.
Inboxes Gone Wild
Look at a hypothetical middle manager who takes home $60,000 a year, or $.50 a minute. Multiply that by the number of minutes she spends reading, answering, and managing the daily glut of e-mails she receives, week in and week out. And that's just one employee.
E Is for Efficiency
No one is suggesting you eliminate e-mail. Just eliminate as much inefficiency as you can. Here are some helpful guidelines:
The annual Form 5500 filing for a qualified retirement plan generally must include audited financial statements for the plan. However, a "small" plan - generally defined as a plan with fewer than 100 participants - doesn't need an audit if it satisfies certain requirements.
Assets. At least 95% of the plan's assets are "qualifying" assets, including assets held by banks and similar regulated financial institutions, mutual fund shares, investment and annuity contracts issued by an insurance company, and certain other assets.
Bonding. Alternatively, any person who handles nonqualifying plan assets must be bonded for the assets' face value.
Summary Annual Report. The plan's summary annual report must disclose certain extra in formation.
Statements. Upon request, the plan administrator must provide participants and beneficiaries with evidence of any required fidelity bond or copies of the statements the plan receives from the regulated financial institutions holding or issuing the plan's qualifying assets.
If you're at "that age" and are starting to think about retiring, you're probably also starting to think about Social Security. When should you sign up for benefits? The answer is: It depends:
Sooner or Later . . . You can sign up for Social Security benefits as early as age 62. But you won't get your full benefit at that age. You'll get somewhere between 75% and 80%, depending on when you were born. If you delay signing up for benefits beyond your full retirement age (from 66 to 67 for those born after 1943), your benefit will be bumped up 8% a year until you reach age 70.
Example: Andy was born in 1950. He can receive full benefits at age 66. He'll get 75% of his benefit (the minimum amount) if he starts collecting at age 62. By waiting until age 67, he'll get 108% of his benefit. He'll receive 132% of his benefit (the maximum amount) if he waits until age 70.
In the Balance That's how the numbers look. But there's more to the equation. Health issues, for one, may play a role. If you're healthy and have a family history of longevity, for example, you could end up collecting more over your lifetime by waiting until your retirement age or later. On the other hand, if your health is poor, you may want to begin taking benefits as soon as you can.
Your financial situation is another important consideration. Are you married? Will you or your spouse receive a pension? Are there retirement plans or outside investments in the picture? When is your spouse planning to retire?
A Measure of Help Retirement planning is complex. And the best course of action for your brother and his wife, for example, may not be the right course for you. We can help you weigh all your options.
In spite of the popularity of online tools, newspaper ads remain a popular resource for job seekers. A recent Conference Board survey of 5,000 households found that 70.6% use newspaper ads when looking for a job, roughly the same percentage that reported using online ads.
A 2006 survey of nursing home costs by the MetLife Mature Market Institute found that the national average daily rate for a semi-private room was $183. The average rate for a private room was $206. Costs varied by region.
Some 61% of managers surveyed by executive-recruiting firm Korn/Ferry International don't expect telecommuters to advance as far in their careers as in-office workers due to a lack of office "face time" - this despite the managers' widely held belief that telecommuting employees are at least as productive as their counterparts.
A recent tax case serves as a reminder of the importance of keeping proper records to document the business use of an auto. Siding with the IRS, the Tax Court refused to allow a physician's deduction for the use of her auto for patient visits and other business activities because her records didn't pass muster.
After ten years in business, Ella is thinking of selling the children's toy store she owns and moving on. Her plan is to sell the business in about four years.
Allowing plenty of time to prepare for a sale is a very smart move on Ella's part. She'll be able to spruce up the store and put a fresh coat of paint. And she should be able to make the business more financially attractive as well.
Prospective buyers will want to see financial statements, so Ella has some time to try to improve the store's financial results. Expanding the number of hours the store is open is one change Ella can make that will potentially increase sales. She also may want to take steps to dispose of slow-moving inventory and concentrate on products with healthy profit margins that sell quickly.
Ella will also want to take a look at her vendor contracts, especially if she has any exclusive agreements. It's important that she maintain good relationships with her suppliers - without interruption - until the store is sold. The untimely loss of an exclusive line of products could quash a prospective sale.
The sale of a business involves careful consideration of many details. If you have a business you're thinking of selling, we'd be happy to help you prepare.
Question: I started receiving taxable alimony payments in January as part of a divorce settlement. How do I pay my income taxes on the money?
Answer: Taxpayers are required to send money to the IRS on a quarterly basis to pay tax on income that isn't subject to tax withholding, such as alimony, dividends, capital gains, and self-employment earnings. Quarterly tax payments are due on (or around, depending on weekends and holidays) April 15, June 15, September 15, and January 15. If you don't pay enough taxes during the year through withholding and/or estimated payments, you could get hit with an underpayment penalty.
Question: I carry a line of hand-crafted items at my store and sell them on consignment. Do I have to include the consignment items in inventory for tax purposes?
Answer: No. Unsold consignment items are the property of the seller (consignor). The retailer who receives and is selling the consignment items (consignee) does not include them as inventory and has no profit until the items are sold.