Category: Federal Income Tax

1.  What is a Health Savings Account (HSA?)

A Health Savings Account is a savings account which cn be used to pay medical expenses not covered by insurance.  Contributions to the plan are dedctible from an account holders’ federal income tax, and, where permitted, from state income tax.  Individuals can accumulate funds in the account from year to year.  Anyone can open an HSA that has a qualified High Deductible Health Insurance Plan.

2.  What is  High Deductible Health Insurance Plan (HDHP)?

For the purposes of an HSA, an HDHP is a medical insurance plan that requires a $1,100 minimum deductible plan with a total out-of-pocket maximum of $5,500 per individual and deductibles of a $2,200 minimum with a maximum of $11,200 out-of-pocket for families.  If an insurance plan has high deductibles, but is not an HDHP plan by IRS definitions, the policyholder does not qualify for an HSA.  

3.  What’s the difference between an HSA and a flexible spending account?

A flexible spending account is an employee benefit provided by an employer that can be used for medical expenses the employee or her family incurs during a plan year.  Funds in a flexible spending account not used by the employee resort to the employer at the end of the plan year.

Most individuals save on taxes using HSAs because of the IRS limits on deducting medical expenses.  How much will depend on your income bracket, any state taxes and whether your state allows a deduction for HSA funds.  The HSA deduction is an adjustment to Adjusted Gross Income, which is not subject to deduction phase-out rules or Alternative Minimum Tax calculations.

From:  Today’s CPA, January/February 2009.

Charitable contribution documentation requirements have increased substantially.  A taxpayer recently lost all charitable contributions when the court said, “Must have acknowledgement in hand before the return is filed.”  Securing the acknowlegement just before the audit or just before the court hearing will not make the charitable donation allowable.  

Contributions of $250 or more must be substantiated by a contemporaneous written acknowledgement from the donee.

Yes, the amount of the stimulus payment is required to calculate any additional stimulus amount for your 2008 Form 1040.  Given that the IRS may have offset a part or all of the stimulus check against outstanding tax debt, your best source for the correct amount is a copy of the IRS letter.  The amount deposited in the bank may be a net number.

In a new Notice, 2009-01, 2009-2 IRB, IRS says that for calendar year 2009 only, 529 plans may permit two changes in investment strategy, as well as upon a change in the designated beneficiary of an account. This new flexibility was prompted by concerns from 529 plan sponsors that in today’s market environment the lack of flexibility in switching investments could imperil many 529 accounts.

A person can make nondeductible cash contributions to a Code Sec. 529 plan (known colloquially as a 529 plan) on behalf of a designated beneficiary to pay for qualified higher education expenses. The earnings on the contributions build up tax-free and distributions from a 529 plan are excludable to the extent used to pay for qualified higher education expenses. A 529 plan is a tax-exempt program established and maintained by a state (including a state agency or instrumentality), or one or more eligible educational institutions (including private ones).

529 plans have proved to be an extremely popular way to save for college costs. The College Savings Plan Network estimates that accounts in these plans represent savings of over $120 billion in more than 11 million accounts nationwide.

Melissa Berman, president and CEO of Rockefeller Philanthropy Advisors,  wrote, in 2004, about giving in tough economic times.  Since the giving season of 2008 is upon us, and 2008 will be much tougher than 2004, I wanted to share the questions she gives that can help us prioritize our giving:

What internal forces drive you to give? – It’s important to recognize your motivations for giving.  Giving motives clarify what’s most important to you:  causes you grew up with, issues that represent what you stand for, or problems around which your whole family can rally.

What external issues tug at your heart? – 

• Big problems:  poverty, disease, global warming
• Specific challenges:  literacy, Parkinson’s
• Places:  Montana, Appalachia, Afghanistan
• People:  artists, children, refugees, innovators
• Institutions:  schools, museums, ballet companies

Once you have sense of the kind of issue you’re attuned to, you can explain clearly to yourself what you’re giving to.

How do you want the change to happen? – Consider how an organization tries to solve a problem, not just which problem it tries to solve.  
How do you want to get involved? – Decide how to invest your money as well as your time:

• Number of gifts:  One gift? 10? 100?
• Type of gifts:  General support? Specific projects? challenge grants?
• Level of involvement;  Anonymous giving? Work on a project?  Lend professional expertise? Fundraising? Board service?

With all of the attention on the Economic Stabilization Act, many of the “Main Street” provisions of the Housing 
Act passed in August have received less notice:

H.R. 3221, the “American Housing Rescue and Foreclosure Prevention Act of 2008”—the Housing Act—was signed into law by the President on July 30, 2008. This sweeping measure is designed to shore up the ailing housing market as well as tighten lending practices and reform financial institutions associated with that market. It also contains a number of tax changes, including tax breaks for homebuyers and homeowners, relaxed requirements for tax-exempt bonds, eased AMT rules, tax changes for businesses, as well as highly specialized changes affecting low-income housing and special investment vehicles called Real Estate Investment Trusts (REITs).

Good:

Property tax deduction for non-itemizers. For 2008 only, those who take the standard deduction instead of itemizing deductions may claim an additional standard deduction for State and local property taxes paid (but taxes written off as business deductions don’t count). The deduction is $1,000 for joint return and $500 for all other filers (or actual property tax paid, if that’s less).

Watch:

Reduced homesale exclusion for some sellers. After 2008, some homesellers who don’t use their properties as principal residences for their entire ownership period may wind up paying more of a tax bill than they would under current rules (or pay tax when none would be owed currently). The tax break affected is the homesale exclusion, which generally allows up to $250,000 of homesale profit to be tax-free if a home was owned and used by the seller as a principal residence (i.e., main home) for at least 2 of the 5 years before the sale. In general, the tax-free break can only be used once every 2 years. The tax-free profit amount is up to $500,000 for married taxpayers filing jointly for the year of sale if several conditions are met. A reduced maximum exclusion may apply to taxpayers who must sell their principal residence because of health or employment changes (or certain unforeseen circumstances) and as a result (1) fail the 2-out-of-5-year ownership and use rule, or (2) previously used the homesale exclusion within two years.

For sales after 2008, gain potentially eligible for the homesale exclusion will be reduced proportionately for the period of time a home wasn’t used as a principal residence. The prime example is a vacation home that is turned into a principal residence by its owners, but the new rule also can hit individuals who use a property as a main home for a while, rent it out for a period of time, and then move back in. There are, however, a number of exceptions. For starters, pre-2009 periods of non-principal-residence use don’t count, and neither do periods of temporary absence totaling no more than 2 years due to health or employment changes (or certain unforeseen circumstances), or up to 10 years of absence for qualifying members of the military or certain government employees. Finally, non-principal-residence use doesn’t count if it occurs (1) in the five years preceding the sale, but (2) after you permanently stop using the home as a main home.

Underground Economy:

Information reporting of merchants’ credit card transactions. After 2010, banks will be required to file an information return with the IRS reporting the total dollar amount of credit and debit card payments a merchant receives during the year, along with the merchant’s name, address, and taxpayer identification number (TIN). Similar reporting also will be required for third party network transactions (e.g., those facilitating online sales), with exceptions for certain small merchants. The new information reporting requirement is designed to boost the tax compliance rate of merchants.

Courtesy of Kiplinger’s Retirement Report, April 2008:

If your 2007 income was too high to qualify for the tax rebates, don’t despair.  Remember, the rebate is really a prepayment of a tax credit created for 2008 returns.  If your 2008 income falls below the phase-out levels–$75,000 on a single return or $150,000 on a joint one– you’ll get your tax benefit when you file your 2008 return next spring.

Should your income exceed the threshold in 2008, and you received the rebate in 2007, not to worry.  In an unusual heads-you-win/tails-the IRS-loses setup, you won’t have to pay the money back.

I want to know if my son will pay me back the $300 that I gave him since he did not qualify to receive the rebate this year as he was still my dependent in 2007?