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Transcript of Tax Presentation
Tower Club Legal Lunch Forum
January 10, 2014
Tax Update On Selected
Topics
• Supreme Court’s Windsor Decision
• Struck down a key section of DOMA
• the United States Supreme Court held
restricting U.S. federal interpretation of "marriage" and "spouse" to apply only to heterosexual unions, by Section 3 of the Defense of Marriage Act (DOMA), is unconstitutional under the Due Process Clause of the Fifth Amendment.
New 2013 Tax Rules – Filing Status• Filing status of married filing jointly
(separately) mandatory for same-sex couples regardless of their domicile state • Legally married in a state that recognizes
same-sex marriages on or before December 31, 2013• Registered domestic partnerships and
civil unions do not qualify• Amended returns for previous open tax
years can be filed• Inheritance implications
New 2013 - Capital Gains Rates• 15% maximum capital gains tax rate
increased to 20%• Threshold: $450,000
($225,000)/$425,000/ $400,000
• Additional 3.8% tax on unearned income• Threshold: $250,000($125,000)/$200,000
New 2013 Tax Rules-Net Investment Income Tax
• Net Investment Income is the sum of1. Interest, dividends, annuities, royalties and
rents unless derived in the ordinary course of a trade or business
2. Other passive income derived in a trade or business
3. Net gain attributable to the disposition of property other than property held in a trade or business
• Minus the allowable deductions allocable to the aforementioned income
New 2013 Tax Rules – Miscellaneous• Home Office Deduction - optional safe
harbor method• Deduction = square footage x prescribed
rate• 300 square foot maximum• Prescribed rate is currently $5
• All other restrictions apply
Tax rules expiring in 2013• Tax-free distributions from IRAs for
charitable purposes for those 70½ or older• First year bonus depreciation • Sales and Use Tax itemized deduction
option• Tax credits for energy-saving home
improvements
New 2014 tax rules• GST tax exemption increases to $5.34
million• Gift tax annual exclusion will remain
at $14,000
HSA’s
HSAs, created by the George W. Bush administration in December 2003, are investment accounts
similar to an IRA or 401(k) in their tax-advantaged status.
Issues:Employers want to reduce health plan
costsEmployees do not want health care
choices restrictedPerceived overuse of medical care
because employer pays costLack of federal income tax deduction for
out-of-pocket expenses because of IRC § 213(a) 10 % “floor” under deductible expenses. 10
Issues:Employers want to provide employees
with feeling of “empowerment”Medicare inadequate and facing long-
term funding issues, while employers have withdrawn from providing retiree medical benefits
11
• A health savings account (HSA) is a tax-advantaged medical savings account is available
to taxpayers in the United States who are enrolled in a high-deductible health plan (HDHP)
• The funds contributed to an account are not income to the account owner. However they yield
a deduction.
• Unlike a flexible spending account (FSA), funds roll over and accumulate year to year if not spent.
HSAs are owned by the individual, which differentiates them from company-owned Health
Reimbursement Arrangements.
•HSA funds may be withdrawn tax-free to pay for qualified medical expenses at any time without federal tax liability or penalty.
• Withdrawals for non-medical expenses are treated very similarly to those in an individual
retirement account (IRA) in that they may provide tax advantages if taken after retirement age, or
they incur penalties if taken earlier.
• These accounts are a component of consumer-driven health care. Proponents of HSAs believe that they are an important reform that will help
reduce the growth of health care costs and increase the efficiency of the health care system.
• According to proponents, HSAs encourage saving for future health care expenses, allow the patient to receive needed care without a gatekeeper to determine what benefits are allowed and make
consumers more responsible for their own health care choices through the required High-Deductible
Health Plan.
• Technically, an HSA is an account, very similar to an IRA • Contributions are deductible if made by
employee, excludable if made by employer• Accumulated contributions in account are
invested on a tax-deferred basis, just like an IRA• Distributions are tax-free if spent on IRC §
213(d) medical expenses at any age, taxable if spent on non-medical expenses, with a 20% penalty added if recipient not yet Medicare eligible
• The employee must be covered exclusively by a high deductible health plan (“HDHP”)
• An HSA funded by the employer is similar to an HRA except that the employee gains true ownership of the contributions, while an HSA funded by employee contributions is like an individually funded IRC § 125 “cafeteria plan” with no use it or lose it rule, tax deferred investments, and an unlimited carryover of unused amounts
• Unlike both IRC § 125 cafeteria plans and HRA’s, partners and other self-employeds are fully eligible for HSA’s
What Is a High Deductible Health Plan (“HDHP”) for Purposes of HSA Eligibility?
An HDHP must meet specific deductible and out-of-pocket limit requirementsSelf-coverage:
Deductible of at least $1,250Out-of-pocket maximum of no more than
$6,350Family coverage:
Deductible of at least $2,500Out-of-pocket maximum of no more than
$12,700Higher deductibles and lower out-of-pocket
expense limits are permissible
Some Details The requirement for a minimum annual
deductible.With exceptions noted below, HDHP may not
cover any expenses until deductible metExceptions:
Preventive careSpecial insurance coverages:
Workers’ CompensationInsurance for a specified disease or illnessInsurance paying fixed amount per day for
hospitalization
HDHP Must Be Only CoverageExcept for permitted insurance coverages
explained above, employee cannot be covered by a non-HDHP health plan at same time as he or she is covered by an HDHPE.g., employee and covered dependents
cannot have coverage under spouse’s non-HDHP plan
Tax Treatment of HSA’sContributions deductible/excludable
Investment earnings on accumulations tax-free or at least tax-deferred
Distributions of contributed amounts and earnings tax-free if used for IRC § 213(d) medical expenses of self, spouse, or dependents
Distributions not used for IRC § 213(d) medical expenses includable in gross income
20 % penalty applies to distributions not used for IRC § 213(d) medical expenses if recipient not eligible for Medicare (age 65, or earlier if disabled)
HSA’s can be split tax-free in divorce
At death, HSA tax benefits continue if surviving spouse is beneficiary
If at death the beneficiary is someone other than surviving spouse, then entire account subject to federal income tax
How Much Can Be Contributed to HSA’s Annually?
For 2014 contribution are:Self-coverage: $3,300Family coverage: $6,550
Additional contributions may be made for individuals who are at least age 55, similar to “catch up” 401(k) contributions$1,000
Affordable Care Act
•The Affordable Care Act did make some changes to Health Savings Accounts – and how they will work:
•First, the law eliminated one’s ability to use money in their HSA account to buy over-the-counter drugs
•The second big change is that the law increased the penalty for withdrawing funds from your HSA before you reach age 65. The early withdrawal penalty increased from 10% to 20%.
An Obamacare subsidy to cut health costs?
If you earn between $11,500 and $46,000 per year for a single person or $23,550 and $94,200 for a family of four and do not have affordable employer-sponsored coverage, you could receive an "advance premium tax credit" to help with the cost of insurance purchasedthrough your state's exchange, or marketplace.
Q: Who determines eligibility?
A: The exchange. It will have information from an applicant's last filed tax return. So, for example, if a person filed taxes on time in 2012, the exchange will have the income information from that year. There will also be other sources of information, such as state wage databases to which employers already report every quarter. The application also asks people to project their income for 2014.
Q: What happens once a person is deemed eligible for a subsidy?
A: The exchange will tell applicants the maximum credit they are eligible for. Consumers can decide whether they want to take the maximum or some lesser amount.Those who think their income might increase beyond what they projected, might consider taking less so they won’t have to pay the government back when the year ends. Once an eligible applicant determines how much he or she wants, the exchange will arrange for the amount to be paid every month directly to the insurance company
offering the plan the applicant selects. For example, if the monthly premium is $600 and the individual is eligible for $400 [in a subsidy] and opts for that credit, every month the federal government will send $400 to the insurer. The consumer would be responsible for sending the remaining $200.
You also may qualify for help with out-of-pocket health care costs, if you earn less than $28,725 as a singleperson or $58,875 for a family of four.