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Social Security Planning Starts Now- Even those in their 20s should review this tip!

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Understanding Tax Terms: Health Savings Accounts (HSA)

If Benjamin Franklin were alive today, his famous quote “Nothing is certain, except death and taxes.” might include a third item — paying medical expenses. Medical expenses, in one form or another, are unavoidable. Fortunately a health savings account (HSA) is a great way to cut your spending on medical expenses.

A major tax break

If you have a high deductible health insurance plan (deductible of at least $1,350 for an individual or $2,700 for a family), you can add an HSA to pay for medical expenses with pre-tax income. Contributions to an HSA can be made via payroll deduction or directly to the account and deducted as an adjustment on your tax return. This approach effectively reduces your medical bills by as much as 37 percent!

Tips to maximize your HSA

Once your HSA is established, here are three simple ideas you can use to take full advantage of this great tax-savings vehicle:

  1. Maximize your HSA contributions every year. Set an annual goal to contribute the full amount allowable by the IRS into your HSA. Unlike other funds, HSA contributions do not have to be spent each year. Unused balances can remain in the account, giving you a great way to build up a nice emergency fund over the years. The 2019 total contribution limits are $3,500 for single taxpayers and $7,000 for a family (add $1,000 if you are 55 or older). You have until April 15 of the next year to make contributions, but when figuring out how much to contribute, remember to include contributions by your employer in your total.
  2. Pay for all medical expenses with your HSA. Typically you can pay for medical expenses directly from your HSA account via a debit card. If not, track all payments you make for medical expenses and take matching distributions from your HSA. If you don’t have enough in your HSA to cover an expense, make a contribution to your HSA first and then pay the bill. Keep ALL your medical bills and receipts to prove that the distributions are for qualified medical expenses.
  3. Prioritize HSA contributions. HSA contributions are tax-deductible and distributions are tax-free (for qualified medical expenses). Traditional IRA distributions, on the other hand, are taxable. 

Knowing you will always have medical expenses, prioritize your HSA contributions to take advantage of its additional tax benefits.

IRS Expands ID Protection Program

Unless you experience identity theft, the IRS will not provide you with access to their Identity Protection PIN program … until now. Read on to learn about the new voluntary participation in this identity theft enhancement.

Tax Breaks for Adult Students- These benefits are not just for kids!

Really? There are educational tax breaks for older taxpayers? Yes. Here is what you need to know.

Lower This Year's Tax Obligation- Action to take now!

Now is a good time to assess your current situation and address those lingering tax moves that may improve your tax picture for 2019. Here are five things to consider:

1. Check on your withholdings. Review your taxable income and the amount of tax you’ve paid to Uncle Sam so far this year. How do the numbers compare to last year? Based on your analysis, you may have to adjust your paycheck withholdings or make quarterly estimated tax payments during the balance of the year to avoid underpayment penalties or a surprising tax bill.

2. Build up your retirement accounts. Don’t neglect your retirement savings during the remainder of the year. In fact, setting aside more money for retirement can lower this year’s tax bill. For instance, if you have a 401(k) plan at work, you can defer up to $19,000 of salary in 2019, plus an extra $6,000 if you’re age 50 or older.

3. Identify potential taxable events. It’s easy to overlook one-time events that will have an impact on your 2019 tax liability. For instance, if you win a prize at a church raffle, the prize is generally taxable to you. Perhaps you changed jobs, lost a child as a dependent, or got married. Each of these events can create a change in your tax obligation. Review your records now to avoid any unpleasant tax surprises later.

4. Consider business property needs. If you acquire business property, you can often choose to write off the cost in the first year the property is placed in service under the latest tax laws. If it makes sense, consider combining the benefits of the Section 179 expensing deduction, up to a maximum of $1 million (indexed for inflation), with 100% bonus depreciation for both new and used property.

5. Account for gig taxes. Finally, workers in the gig economy (like Uber and Lyft drivers) should understand the basic tax rules. Generally, income from such jobs is fully taxable, but you may be entitled to offsetting deductions. Essentially, you’re treated like a self-employed individual. Estimated quarterly tax payments are often required for these workers.

Should you wish a review of your situation, call now. It’s better to be prepared than surprised when it comes to your tax obligation.

Leveraging Gift Rules to Your Advantage

As you or family members approach retirement years, it is important to have a basic understanding of the IRS gift giving rules. With this understanding, there are opportunities to leverage this tax law without creating a tax problem.

The rules

  • You may give up to $15,000 to any individual (donee) in 2019 and avoid any gift tax filing requirements. 
  • If married you and your spouse may transfer up to $30,000 per donee. 
  • If you provide a gift to your spouse who is not a U.S. citizen, the annual exclusion amount is $155,000. 
  • Gifts in excess of this annual amount trigger the need to file a gift tax form with your individual tax return. The excess gift amounts are then added to your estate for potential estate taxation. 
  • The estate tax currently has a maximum rate of 40% and the donor of the gift (or their estate) is responsible for paying the tax.

Using the rules to your advantage

Remember, you can transfer up to $15,000 ($30,000 if married) to anyone you wish each year tax-free. Additionally, most states also adhere to this federal law. So if you wish to move assets to loved ones without the burden of future taxation, consider the following ideas.

  • Make periodic gifts. Remember the gift-giving limit is per calendar year. To take full advantage of this tax-free transfer, consider starting now and make periodic payments. Every year you miss out on this annual limit reduces the amount a couple can transfer tax-free to each individual donee by up to $30,000 per year.
  • Fund college saving. Consider donating money into 529 College Saving plans for children and grandchildren. This can be done with automated deposits into the account. The account could be established by you or your grandchild’s parent.
  • Pay medical and education bills direct. If you are concerned about exceeding the annual limit for gifts to a single person, consider paying bills directly. Examples of this strategy might be paying medical bills directly to a hospital or directly paying college bills for a loved one.
  • Donate property. Gifts can include property as well as cash. You can donate investments or other physical property. If you do this, document the fair market value of the property when you transfer it. The IRS requires this documentation to ensure the value of the property transferred is consistently valued by you and the person receiving the gift.
  • Help build a down payment. Often children burdened with college debt cannot afford to save the down payment required to own their first home. You can aid in this by helping build a down payment through gift transfers.
  • Leave a cushion. Remember the annual limit. If you provide a gift for the maximum allowable to an individual, you may not provide any other gifts to this person during the year or the event would be deemed excess gift giving and require filing a gift tax form.

Keep it in perspective

Understanding and leveraging the annual gift tax rules can create tremendous tax savings. But this strategy should be done in conjunction with understanding your personal financial needs. Providing gifts of funds that you might later need for your own retirement can be problematic. It is best to review your gift plans prior to taking action.

Municipal Bonds: An Investment with Tax Breaks!

Everybody likes getting something for free, and taxes are no different. Investing in securities like municipal bonds (munis) or municipal bond funds generates tax-free interest income. Here is what you need to know.

Advantages of municipal bonds

You pay zero federal tax on municipal bond investment income. This makes municipal bonds more attractive than many comparable taxable investments. A municipal bond paying 6 percent to an investor in the 24 percent tax bracket is actually a better investment than a taxable bond paying interest at 7.9 percent, due to the federal income tax break.

What’s more, municipal bond income isn’t counted for net investment income tax purposes. So if you are subject to this 3.8 percent surtax, municipal bonds provide an additional tax break to you. And, if the bond is issued by an authority within the state where you reside, it’s also exempt from any state income tax.

For these reasons, municipal bonds are a popular investment, especially among retirees, because they are often stable and most bonds carry a relatively low risk.

Potential tax consequences

But that doesn’t mean there are no potential downsides to municipal bonds.

  • Alternative minimum tax. If you invest in certain private activity bonds — such as some bonds used to finance projects like a stadium — the income may cause alternative minimum tax complications.
  • Capital gains tax. When you sell a municipal bond at a profit, you owe capital gains tax on the sale. For instance, if you buy a bond for $5,000 and sell it for $6,000, you’re still taxed on the $1,000 gain.
  • State tax possibility. If you invest in municipal bonds issued by another state, the interest income is taxable by the state where you reside.
  • Social Security taxes. Municipal bond income could make some of your Social Security benefits taxable. The taxation of Social Security benefits is based on a calculation that specifically includes tax-free municipal bond income. Depending on your situation, up to 85 percent of the Social Security benefits may be taxable.

Investing in municipal bonds can provide tax-free, stable income, but you need to understand how the investments fit with your situation to maximize the tax savings. 

How to Maximize Deductions for Assisted Living

It’s possible that someone in your family will need assisted living care at some point in their life. This care can be at an assisted living facility, a nursing home, or in their own home. Often, assisted living care is expensive and not fully reimbursable by typical health insurance policies. Thankfully, there is a medical expense itemized deduction when the out-of-pocket amount exceeds 10 percent of your adjusted gross income.

Here’s what you can do to increase the chances for you or a loved one to maximize their tax deduction. 

  • Know the chronically ill definition. To qualify, care expenses must be incurred for rehabilitative, maintenance or personal care services of a chronically ill person under a plan of care created by a licensed health care practitioner. For tax purposes, a chronically ill individual is generally someone who is unable to perform at least two of the five activities of daily living which include eating, toiletry, transferring, bathing, dressing and continence. The chronically ill definition also includes the need of supervision due to a cognitive impairment such as Alzheimer’s.
  • Obtain a breakdown. Don’t assume that every expense is a medical deduction. It is always best to get a breakdown of the cost of care. You’ll also need to track which expenses have been reimbursed by insurance as those reimbursed costs are not deductible.
  • Track premium costs. If you have long-term care insurance and pay for health insurance keep track of these costs as some or all of the premiums may be deductible.
  • Keep a travel log. Be aware that travel expenses incurred for medical care of the family member may also be deducted. For example, if the resident must be transported to a doctor’s office, dentist’s office or hospital, the cost can be added to the deductible amount.
  • Record in-house expenses. Finally, remember that expenses for medical care at the facility are deductible, regardless of whether you can deduct monthly living expenses. For instance, if you’re charged separately for a visiting dentist, the cost is added to the deductible total.

If you have questions regarding your specific situation, please call.

The Marriage Penalty is Alive and Well

Despite what you may think, the marriage penalty is still alive and well. Whether you’re changing your filing status in 2019 because of marriage, divorce or another event (or it’s staying the same), you should review this information and plan accordingly.

What is the marriage penalty?

The marriage penalty occurs when the dollar ranges for married taxpayers (joint filers) are not exactly double the dollar ranges for single taxpayers. It results from the way the graduated tax rate system works, based on your tax filing status and other tax return items. Married taxpayers are often taxed more than they’d be as two single filers.

Situations subject to the marriage penalty

  • High-income. A disparity for the dollar ranges still exists for the two top tax brackets of 35 percent and 37 percent. That means that the marriage penalty often applies to high-income couples. Wealthy couples may save money by avoiding a marriage certificate!
  • Income disparity between spouses. For example, Riley makes $30,000 per year and Avery makes $150,000. Before getting married, Riley has a marginal tax rate of 12 percent and Avery has a marginal tax rate of 24 percent. Once they marry, their income is combined and Riley’s tax rate is now taxed at Avery’s marginal tax rate of 24 percent.
  • Local taxes over $10,000. Legislation also limits the annual deduction for state and local tax (SALT) payments to $10,000. This limit is the same for a married couple as a single taxpayer. For instance, assume that a couple pays $25,000 in property taxes in 2019. As joint filers, their deduction is limited to $10,000, whereas they could write off a total of $20,000 if they were both single filers.

Tax-planning opportunity

While no one is saying you should get married or divorced because of the marriage penalty, factoring it into your tax planning can make a big difference. Please call if you wish to review your situation.

A Smarter College Housing Option

Does your child, grandchild, or someone else you know need a place to live while attending college? Instead of renting a dorm or apartment, buying a condo or small house might make more sense. This can save money and provide tax breaks, but you need to do the math and be aware of the risks.

The benefits of buying

  • Lower monthly costs. The benefits can vary based on the location of the school and demand for off-campus housing. But purchasing a place can save on monthly rent and utilities. It can be especially attractive if the school’s meal plan is overpriced.
  • More tax breaks. Home owners can write off mortgage interest and property taxes, subject to certain limits. And by renting out your home to other students, you may depreciate the property and deduct other expenses as part of the rental activity.
  • Create income potential. Speaking of renting out the home, this can turn an expense (dorm cost) into a steady source of income on a monthly basis.
  • Cash in on market appreciation. Although there are no guarantees, the value of real estate generally goes up. So, the condo or house you buy while your student is attending school may be worth a lot more when it is time to sell.
  • Lower tuition costs. Your home or condo purchase may allow your student to establish residency in the college’s state. This residency status can lead to a lower tuition rate. Residency laws vary by location and can be very specific, so thorough research is required.

Risks to consider

Of course, buying real estate also comes with inherent risks.

  • The home could decrease in value.
  • Landlords are subject to limits and special passive activity rules.
  • Expenses like upkeep and closing costs on the sale must be handled.
  • Dealing with college students as tenants can be a hassle.

Look before you leap into a deal to see if it makes sense for your family. Call today for assistance.