IRMAA

IRMAA: The Stealth Retirement Tax Many Affluent Retirees Miss

by with No Comment Tax, AdvisoryABLE Exclusive

For many retirees, Medicare feels like a fixed part of retirement life: you sign up, pay your premiums, and move on. But for higher-income retirees, there is often a second layer of cost that catches people off guard. It is called IRMAA, the Income-Related Monthly Adjustment Amount, and although it shows up on a Medicare bill, it is really one more example of how retirement tax decisions can ripple through an entire financial plan.

That is why IRMAA is best understood not as a standalone Medicare issue, but as a stealth retirement tax—one that is shaped by income choices, account withdrawals, investment decisions, and timing. For affluent retirees and recent retirees in particular, it is rarely enough to ask, “What will my tax return look like this year?” The better question is, “How will this decision affect my taxes, my Medicare premiums, my cash flow, and my next few years of retirement income?”

That is where thoughtful planning becomes valuable.

What IRMAA Really Is

IRMAA is an income-based surcharge added to Medicare Part B and Part D premiums for higher-income beneficiaries. In plain English, it means that Medicare costs more when your income rises.

Many retirees are surprised by this because they think of Medicare as a health insurance program, not a tax-sensitive system. But IRMAA is triggered by your reported income, which means it is closely tied to the same planning decisions that affect your tax return. It is not unusual for a retiree to make a perfectly reasonable tax move and then be surprised when that move also increases Medicare premiums later.

That is the key point: IRMAA is not just about healthcare costs. It is about income management.

Why the Two-Year Lookback Surprises So Many Retirees

One of the biggest reasons IRMAA catches people off guard is the two-year lookback rule. Medicare does not usually base premiums on your most recent tax return. Instead, it generally looks back to income from two years earlier.

That timing creates a disconnect.

A retiree may make a major financial decision today and not feel the impact until much later, when Medicare premiums adjust based on the prior year’s tax return. By then, the transaction is long finished, the portfolio move is already on the books, and the premium increase feels disconnected from the original decision.

This is why so many retirees say the same thing: “I had no idea that decision would affect my Medicare costs.”

A good planning process helps eliminate that surprise by looking beyond the current year and considering the next several years together.

IRMAA Is Really a Tax Planning Issue, Too

It is tempting to think of IRMAA as a Medicare problem. In practice, it is often a tax planning issue wearing a Medicare mask.

Why? Because the same income items that matter on a tax return can also affect Medicare premiums. That includes:

    • Retirement account withdrawals
    • Roth conversions
    • Capital gains
    • Business or consulting income
    • Pension income
    • Social Security coordination
    • Required Minimum Distributions
    • Investment income that pushes up adjusted gross income

In other words, the premium is not just a Medicare issue. It is the byproduct of a broader retirement income strategy.

This is why retirement planning should be coordinated across disciplines. Tax planning, investment planning, retirement income planning, and Medicare decisions all belong in the same conversation.

The Planning Problem: Many Decisions Work in Isolation, But Retirement Doesn’t

A common mistake is to treat each retirement decision as a separate event.

A client sells appreciated stock in one year. A client does a Roth conversion in another. A client begins Social Security at a different time. A client takes RMDs later. A client withdraws from an IRA to cover living expenses when it feels convenient.

Each decision may make sense on its own. However, when viewed together, they can create an income pattern that unnecessarily raises taxes and Medicare premiums.

That is why multi-year planning matters so much. Retirement is not one tax year at a time. It is a series of interconnected years, and decisions made today often affect several years ahead.

Common Retirement Decisions That Can Affect IRMAA

1. Roth Conversion Timing

Roth conversions can be an excellent planning tool. They can help reduce future taxable income, manage long-term tax exposure, and create more flexibility later in retirement.

But a conversion also increases current-year taxable income, which can affect Medicare premiums two years later.

That does not mean Roth conversions are a bad idea. It means the timing matters.

A well-planned conversion strategy considers questions such as:

    • Should conversions be spread across several years?
    • Are there lower-income years available for strategic conversions?
    • Will a conversion push income into a range that creates avoidable Medicare premium increases?
    • Is the long-term tax benefit worth the short-term income increase?

In many cases, the answer is yes—but the conversion should be coordinated thoughtfully, not done in isolation.

2. Capital Gains Recognition

Selling appreciated investments can be a wise move for portfolio rebalancing, liquidity, or estate planning. But recognized gains can also increase income for IRMAA purposes.

That is especially relevant for retirees who are no longer working and now have more control over the timing of gains. A large sale, a concentrated position reduction, or the sale of a business interest can all create a tax ripple effect.

The planning opportunity is not necessarily to avoid selling. It is to ask whether the sale should happen this year, next year, or in stages.

3. Required Minimum Distributions

RMDs are one of the most important income drivers in retirement. Once they begin, they can create a baseline level of taxable income that is hard to avoid.

For many retirees, RMDs are not just a tax issue—they are a cash flow and Medicare issue as well.

    • A thoughtful strategy may include:
    • Reducing future RMDs through earlier planning
    • Coordinating withdrawals before RMDs begin
    • Using Roth conversions in lower-income years
    • Balancing withdrawals against expected Social Security and investment income

The earlier these decisions are reviewed, the more flexibility a retiree usually has.

4. IRA Distribution Timing

Retirees often think of IRA withdrawals as flexible. And in many cases they are. But the timing of those withdrawals can matter just as much as the amount.

Taking a distribution to pay for a one-time expense may seem harmless. But if that distribution causes higher income in a year that later affects Medicare premiums, the true cost of the withdrawal may be higher than expected.

That does not mean you should avoid using retirement accounts. It means those withdrawals should fit into an overall plan rather than be made reactively.

5. Social Security Claiming Coordination

Social Security claiming is another area where tax and Medicare planning intersect.

The decision to begin benefits is often framed as a break-even calculation, but that is only part of the story. The real question is how Social Security interacts with other income sources:

    • Will benefits be layered on top of IRA withdrawals?
    • Will deferred claiming create a larger future income stream that affects Medicare premiums?
    • Would earlier claiming allow more controlled withdrawal planning from retirement accounts?
    • How does the decision fit with the client’s cash flow needs and tax bracket strategy?

The best claiming strategy is often the one that works across the entire retirement income picture, not just one isolated objective.

Common Misconceptions About IRMAA

“Nothing can be done about it.”

This is one of the most common misconceptions. While some income increases are unavoidable after they occur, many future decisions are still within your control.

You may not be able to change the past, but you can often influence the next two, three, or five years through better planning.

“It’s just a Medicare issue.”

Not really. IRMAA is driven by taxable income, which makes it part of a broader tax strategy. Medicare is simply where the cost shows up.

“There’s no planning involved.”

Actually, there is a great deal of planning involved. The challenge is that the planning is not always obvious. It may involve investment sales, account withdrawals, pension timing, Roth conversions, or Social Security coordination.

“Once the premium is determined, I’m stuck.”

Not always. Some premium adjustments may be tied to recent events, and some situations may warrant a review. Even when a current premium is already set, future income decisions can often be better structured to avoid repeating the same result.

Practical Examples of IRMAA in Real Life

The retiree doing a large Roth conversion

A couple retires early and has several lower-income years before RMDs begin. They want to convert a large portion of an IRA to a Roth account. That may be a smart move long-term, but if the conversion is too aggressive in one year, it could push them into a higher Medicare premium bracket later.

A more refined approach might spread the conversions over several years, balancing tax efficiency against premium impact.

The investor selling appreciated assets

A retiree sells a highly appreciated stock position to simplify the portfolio and reduce concentration risk. The sale creates a meaningful capital gain. That may be entirely appropriate, but it should be reviewed in the context of the retiree’s other income for that year.

If there is flexibility, the sale might be broken into stages or coordinated with a lower-income year.

The retiree beginning RMDs

A client reaches the age when RMDs begin and suddenly sees taxable income rise. That increase may also affect future Medicare premiums.

The answer is usually not to panic. It is to plan ahead for the transition, looking at whether earlier withdrawals or Roth strategies could have softened the impact.

The Social Security plus IRA withdrawal combination

A retiree starts Social Security and also takes IRA withdrawals to cover living expenses. On paper, the cash flow works well. But if the combined income creates a steep increase in future Medicare premiums, the overall retirement cost may be higher than expected.

A coordinated strategy can sometimes create the same spending power with less tax friction.

The retiree managing income after leaving work

A new retiree often has a temporary window where income is lower than it will be later. That can be a valuable planning opportunity. It may be the ideal time to review Roth conversions, portfolio rebalancing, or withdrawals before Social Security and RMDs begin to stack on top of each other.

This is exactly the kind of window that should not be wasted.

Why Multi-Year Planning Matters

Retirement tax planning is not just about minimizing this year’s tax bill. It is about managing lifetime outcomes.

A good plan considers:

    • Current-year taxable income
    • Future required withdrawals
    • Potential Roth conversion opportunities
    • Social Security timing
    • Investment realization strategy
    • Medicare premium exposure
    • Cash flow needs across multiple years

That broader view is where real planning value appears.

Sometimes the smartest move is to recognize income in a controlled way now in order to reduce future tax pressure. Other times, the smartest move is to preserve flexibility and keep income lower during a year when Medicare premiums would otherwise jump. The point is not that one strategy always wins. The point is that the decision should be intentional.

The Advisor’s Role

Clients do not need to become experts in Medicare rules. They need an advisor who understands how retirement income decisions interact.

That is why a retirement tax planning meeting can be so valuable. It allows the advisor to look at the full picture and help coordinate decisions before they are made.

A productive meeting may review:

    • Expected income for the next several years
    • Roth conversion opportunities
    • RMD timing
    • Social Security coordination
    • Capital gain realization
    • Retirement account withdrawal sequencing
    • The possible Medicare premium effect of each decision

That is a very different conversation from simply asking, “What will my tax return show?”

Final Thoughts

IRMAA is rarely just about Medicare.

It is one of many interconnected retirement planning issues that can affect taxes, retirement income, Social Security coordination, Required Minimum Distributions, cash flow, and long-term financial outcomes. For affluent retirees and recent retirees, it is often a reminder that every income decision has more than one consequence.

The good news is that this complexity creates opportunity. With proactive planning, many of these decisions can be coordinated instead of left to chance. That coordination may not eliminate every premium increase, but it can often reduce unnecessary surprises and improve the overall efficiency of a retirement plan.

Good retirement planning is not about reacting after the fact. It is about coordinating today’s decisions to avoid tomorrow’s surprises.

If you are approaching retirement, already enrolled in Medicare, or making decisions about Roth conversions, IRA withdrawals, Social Security, or investment sales, now is the time to schedule a retirement tax planning meeting. A thoughtful review today may help you avoid costly surprises later—and make your retirement income strategy far more effective.

property tax

Florida Is Rethinking Property Taxes. Other States Are Watching Closely.

by with No Comment ABLE Exclusive

For years, Florida’s tax reputation has been relatively simple:

    • No state income tax.
    • Moderate property taxes.
    • Heavy reliance on sales taxes and tourism.

Now, that formula may be changing.

In recent weeks, Florida lawmakers and Governor Ron DeSantis have advanced a series of tax proposals ranging from targeted tax breaks to one of the most ambitious property tax overhauls currently under discussion anywhere in the United States. The debate is drawing attention far beyond Florida because it raises a larger question: If one of America’s fastest-growing states can significantly reduce property taxes, could others follow?

The Tax Package That Actually Passed

Despite early discussions about cutting Florida’s gas tax, lawmakers ultimately moved in a different direction.

The final tax package approved by the Legislature includes a collection of targeted tax reductions, exemptions, and sales-tax holidays rather than a broad gas-tax cut. Among the provisions are tax relief measures for outdoor recreation purchases, hunting and fishing equipment, aviation fuel, and certain business taxes. Lawmakers also continued discussions about using tourist-development tax revenues for broader tax relief purposes.

While none of those measures are likely to transform a family’s finances overnight, they reflect a broader effort to provide tax relief without introducing an income tax or significantly increasing state debt.

The Bigger Story: Property Taxes

The real headline here isn’t the tax package, though.

It’s property taxes.

In late May and early June, Florida lawmakers approved a proposed constitutional amendment that would dramatically expand the state’s homestead exemption if voters approve it in November 2026. Under the proposal, the homestead exemption would increase from $50,000 today to $150,000 in 2027 and eventually to $250,000 in 2028. For some homeowners, that could eliminate most or all non-school property taxes.

Supporters argue the proposal is a logical response to rising housing costs, soaring insurance premiums, and rapid increases in property values across much of the state. Critics worry about the impact on local government budgets and the services those taxes help fund.

Florida Is Even Discussing Property Tax Elimination

If that sounds dramatic, the conversation has gone even further.

Governor DeSantis has publicly discussed long-term plans that could eventually eliminate property taxes on homestead properties altogether, positioning Florida as a state with neither a personal income tax nor meaningful property taxes on primary residences. Several legislative proposals this year explored versions of that concept, though some stalled before reaching the ballot.

Whether full elimination is politically or financially realistic remains an open question.

According to analysis from the Tax Foundation, replacing all property tax revenue would require major changes elsewhere in the tax system and could significantly increase reliance on sales taxes or other revenue sources.

Why the Rest of the Country Should Care

Florida’s debate matters because it reflects a broader national trend.

Across the country, policymakers are increasingly focused on property taxes.

Unlike income taxes, which many taxpayers only think about once a year, property taxes arrive annually and are often impossible to ignore. Rising home values have pushed tax bills higher in many markets, leading to growing pressure for relief.

We’ve already seen:

    • Property tax relief proposals in Texas
    • Expanded homestead exemptions in several states
    • New tax-credit programs aimed at homeowners
    • Growing efforts to shift local government funding away from traditional property taxes

Florida simply happens to be pursuing one of the most aggressive versions of that idea.

The Potential Tradeoffs

The challenge is that property taxes fund many local services Americans rely on every day.

Depending on the jurisdiction, property tax revenue may support:

    • Police and fire protection
    • Roads and infrastructure
    • Libraries
    • Parks
    • Local government operations
    • Public schools

Florida’s current proposals generally preserve school funding while targeting other property-tax obligations, but local officials have still expressed concerns about long-term revenue impacts.

That’s why many tax experts argue the real debate isn’t whether taxpayers want lower property taxes.

It’s what replaces the revenue if those taxes disappear.

A New Twist: New Residents May Not Get the Same Benefit

One controversial aspect of the Florida proposal is that some of the largest benefits could be reserved for existing Florida residents.

Under current discussions, homeowners who establish Florida residency before the end of 2026 could potentially qualify sooner for expanded exemptions than those who move to the state later. Critics argue that could create a two-tier system, while supporters say it rewards current residents who have absorbed years of rising housing costs.

Florida’s 2026 tax debate is no longer just about sales-tax holidays or niche tax breaks. It’s become one of the country’s most closely watched experiments in property tax reform.

Whether voters ultimately approve the proposed constitutional amendment remains to be seen. But the discussion itself reflects a growing reality nationwide: As housing costs continue to rise, property taxes are becoming one of the most politically important taxes in America.

Florida may simply be the first state trying to rewrite the rules.

 

blog photo

Unlocking Healthcare Savings: How HSAs and HDHPs Can Combat Rising Insurance Costs

by with No Comment ABLE Exclusive

In the face of escalating healthcare costs, many individuals and families are seeking innovative strategies to manage expenses effectively. One emerging alternative gaining traction is the combination of Health Savings Accounts (HSAs) and High-Deductible Health Plans (HDHPs). This dynamic duo not only empowers consumers with greater control over their healthcare spending but also offers potential tax advantages, making it an appealing option in today’s financial landscape. As traditional health insurance premiums continue to rise, understanding how HSAs coupled with HDHPs can serve as a viable solution is increasingly important. This article explores the benefits, considerations, and potential savings these plans offer, providing a comprehensive overview for those looking to take charge of their healthcare finances.

At its core, a Health Savings Account is a tax-advantaged account available to individuals enrolled in High-Deductible Health Plans (HDHPs). HSAs allow individuals to contribute funds that are not taxed when deposited, grow tax-free, and whose withdrawals for qualifying medical expenses are tax-free.

The Structure and Benefits of HSAs 

HSAs are uniquely structured to offer a triple tax benefit—a feature that sets them apart from many other savings and investment accounts:Death of an Account Owner: Upon an account owner’s death, the HSA’s outcome depends on the beneficiary. If transferred to a spouse, the HSA remains intact as a spousal account. For non-spouse beneficiaries, the account’s value becomes taxable income.

    • Tax-Deductible Contributions: Contributions to an HSA are made with pre-tax dollars, reducing an individual’s taxable income. This can lead to substantial tax savings, particularly for individuals in higher tax brackets.
    • Tax-Free Growth: Within the account, funds accumulate without being taxed on interest or investment earnings. This allows the balance to grow over time without the erosion of taxes that typically affect other types of accounts.
    • Tax-Free Withdrawals: When funds are used for qualified medical expenses, HSA withdrawals are not taxed. This provides significant financial relief by covering a wide range of healthcare-related costs without additional tax burdens.
    • Non-Medical Withdrawals: Before age 65, if withdrawn funds are not used for qualified medical expenses, they are taxable and subject to a 20% penalty.
    • Post-Age 65 Withdrawals: Once reaching age 65, distributions other than for medical purposes can be taken penalty-free, although they are taxable income (like traditional IRAs).
Use as Retirement Vehicle

Establishing and contributing to an HSA can be more than just a way for individuals to save taxes and gain control over their medical care expenditures. It can also be a retirement vehicle, especially for taxpayers who are maxed out on their other retirement plan options or who can’t contribute to an IRA because of the income limitations that apply when covered by an employer’s plan.  There is no requirement that medical expenses must be paid or reimbursed from the HSA, so a taxpayer can maximize tax-free growth in the account by using funds from other sources to pay routine medical costs.  Later, distributions can be used tax-free to pay post-retirement medical expenses.  Or, if used for non-medical purposes, an individual aged 65 or older will pay income tax but not a penalty on the distribution.  Unlike IRAs, no minimum distributions are required to be made from HSAs at any specific age.

Eligibility for HSAs:

To participate in an HSA, an individual must meet specific criteria:

    • Enrollment in an HDHP: An individual must be covered by a High-Deductible Health Plan that meets the IRS-set minimum deductible and maximum out-of-pocket thresholds.
    • No Other First-Dollar Coverage: The individual should not have any other insurance that provides coverage before the HDHP deductible is met (with exceptions for certain types of insurance, such as dental, vision, and long-term care).
    • Not Enrolled in Medicare: Contributing to an HSA is restricted if the account holders have Medicare or VA coverage. Generally, HSA contributions aren’t allowed if you’re enrolled in Medicare, which typically begins at age 65. However, account holders can still spend down existing HSA funds.
    • Have VA Coverage: An account holder may be an eligible individual even if they receive hospital care or medical services under any law administered by the Secretary of Veterans Affairs for a service-connected disability. (IRS Pub 969 (2024)).
    • Dependency Status: The account holder cannot be claimed as a dependent on another person’s tax return.
High-Deductible Health Plan (HDHP)

An HDHP is a type of health insurance characterized by lower monthly premiums and higher annual deductibles than traditional plans. Under an HDHP, you typically pay the full cost of medical care out of pocket until you reach your deductible, after which the insurance company begins to share costs through coinsurance or copayments. 

    • 2026 IRS Requirements – For a plan to be classified as a “qualified” HDHP in 2026, it must meet specific financial thresholds set by the IRS:
      • Minimum Deductible: At least $1,700 for self-only coverage or $3,400 for family coverage.
      • Maximum Out-of-Pocket Limit: Total out-of-pocket expenses (including deductibles and coinsurance, but not premiums) cannot exceed $8,500 for self-only or $17,000 for family coverage. 

Note: Starting in 2026, all individual marketplace Bronze and Catastrophic plans are reclassified as qualifying HDHPs, even if they do not meet these standard financial limits. 

Also new beginning in 2026 is that an individual with an HDHP may also enroll in a “direct primary care arrangement” without jeopardizing their eligibility for their HSA. This is an arrangement where medical cares provided to the individual consists solely of primary care services provided by a primary care practitioner for a fixed period fee not exceeding $150 per month or $300 per month if the arrangement covers more than one individual. The dollar limits will be inflation-adjusted annually after 2026. Fees paid for a direct primary care service arrangement are treated as medical expenses (and not the payment of insurance).

    • Key Features:
      • HSA Eligibility: HDHPs are the only health plans that can be paired with a Health Savings Account (HSA), which allows you to set aside pre-tax money for medical expenses.
      • Preventive Care: Most plans cover in-network preventive services (such as vaccinations and screenings) at 100% with no deductible.
      • Telehealth: New regulations allow HDHPs to cover telehealth and remote care services before the deductible is met without losing HSA eligibility. 
Contribution Limits

Contribution limits are annually inflation-adjusted and deductible above the line, thereby reducing a taxpayer’s AGI.  The contribution limits for 2026 are:

    • Self-Only Coverage: $4,400
    • Family Coverage: $8,750
    • Age 55+ Catch-Up Contribution: $1,000  
      • Married Taxpayers: If both spouses are 55+ and eligible, each can contribute an additional $1,000 to their own separate accounts.
    • Excess Contribution Penalty: Both the employer and the employee can contribute to an HSA, with employee contributions made either via payroll deductions or direct deposit to the account. If contributions exceed the annual limit, the excess amount can be withdrawn by the tax-filing deadline, including extensions, to avoid a 6% excise tax penalty for over-contribution.
    • Tax Deduction: An account holder can deduct contributions to his HSA even if someone else (e.g., a family member) makes them. (Code Sec. 62(a)(19)) Employer contributions to an HSA are excludable from the employee’s income, so these contributions are not deducted on the employee’s tax return. Distributions for qualifying medical expenses are tax-free, but these same medical expenses can’t be used as a Schedule A medical deduction.
Qualified Medical Expenses

Are unreimbursed expenses paid by the account beneficiary, his or her spouse, or dependents for medical care as defined in Code § 213(d), i.e., generally the same definition used for itemized deduction medical expenses. Additional items specifically included are:

    • Over-the-counter drugs
    • Insulin
    • Feminine menstrual products
    • COVID-19 personal protective equipment

Qualified medical expenses encompass a wide range of health-related costs, including doctors’ fees, hospital services, and prescription medications.  

Generally, health insurance premiums are not qualified medical expenses for HSA purposes, except for the following:

    1. Qualified long-term care (LTC) insurance, but only up to the annual age-based limit that applies for deducting long-term care premiums as medical expenses,
    2. COBRA health care continuation coverage,
    3. Health care coverage while receiving unemployment compensation, and
    4. For individuals age 65 or over, premiums for Medicare Parts A, B, or D, Medicare HMO, and the employee share of premiums for employer-sponsored health insurance, including employer-sponsored retiree health insurance (but not Medigap policies).
Non-Qualified Distributions

Distributions from an HSA are permitted at any time, and if used exclusively to pay for qualified medical expenses of the account beneficiary, his or her spouse, or dependents, are excludable from gross income. Distributed amounts not used to pay for qualified medical expenses are includible in the account beneficiary’s gross income and are subject to a 20% penalty tax. However, the penalty does not apply if the distribution is made on account of the beneficiary’s:

    • Death,
    • Disability, or
    • Attaining age 65.

Amounts withdrawn from an HSA to pay for the account’s administration and maintenance fees are not treated as taxable distributions. If these fees are paid directly by the account beneficiary or employer, they will not be considered contributions to the HSA and therefore will not count toward the annual contribution maximum.

    • Correcting Non-Qualified Distributions – If an HSA distribution was mistakenly made due to a reasonable cause, the account beneficiary can repay it by April 15 of the year after they realize the mistake. In this case, the distribution isn’t included in gross income, isn’t subject to the 20% additional tax, and the repayment isn’t subject to excise tax on excess contributions.
How HSA Accounts Are Established

An HSA can be established through a qualified trustee, such as a bank, credit union, or other approved institution. Notably, there is no requirement for earned income to open an HSA. Contributions can come from the account holder, their employer, or another individual, but only cash may be contributed—not stocks or other property.

For those navigating the complexities of healthcare savings and insurance options, seeking personalized advice can make all the difference. Whether you have questions about Health Savings Accounts, High-Deductible Health Plans, or other financial strategies, we’re here to help. Contact this office to schedule a consultation, explore options, and assist you in making informed decisions that align with your healthcare and financial goals.  

 

sports

Game, Set, Tax: The Parents’ Playbook for Sports Expenses, Deductions, and NIL

by with No Comment ABLE Exclusive

A child’s and their parent’s sports expenses, from registration fees and travel to equipment and volunteer time, sit at the intersection of personal, medical, charitable and business tax rules. For tax‑minded parents the key is sorting each cost into the correct box, documenting it carefully, and understanding the limited circumstances when a deduction or credit is available. This article walks through the major categories: possible child‑care treatment, charitable contributions and volunteer out‑of‑pocket expenses, medical‑expense exceptions, and when a child’s sport activity can be treated as a business.

As a Child‑Care Expense: There are limited situations when sports costs will qualify. The child and dependent care credit (and associated employer‑provided dependent care benefits) is aimed at expenses that enable a parent (or parents) to work or look for work. Eligible care is generally custodial care for a qualifying individual, most commonly a child under age 13.

What Does Not Count: Tuition for lessons, private coaching, sports camps that are primarily instructional (i.e., teaching athletic skill rather than providing care), summer school and tutoring are treated as educational and therefore do not qualify. Likewise, kindergarten or private school tuition is not eligible.

What Counts: Fees for day camps and similar custodial programs generally do qualify as dependent‑care expenses if the care is primarily custodial and not mainly educational. Day camps that provide supervision during work hours often meet the test. Overnight camps are not eligible.

If a program combines athletic instruction and custodial care, only the portion of the cost allocable to custodial care is eligible. This requires reasonable allocation and substantiation in the event of a tax audit.

Example: paying for a weeklong day camp whose primary purpose is supervised childcare for working parents is likely eligible for the credit; paying for an elite week‑long skills camp where most time is instruction rather than supervision generally is not.

Charitable Contributions: Donations to youth sports nonprofits and quid pro quo payments:

    • Cash donations: parents who make true gifts of money to a qualified 501(c)(3) youth sports organization can claim an itemized charitable deduction for the donated amount (subject to the usual AGI limits and substantiation rules). If the taxpayer receives a benefit in return — e.g., a ticket to a fundraiser or a uniform — only the amount that exceeds the fair market value of the benefit is deductible (a quid pro quo contribution).
    • Payments to Participate: Fees paid to register a child for a nonprofit’s program are usually payments for services (considered program fees) rather than pure charitable gifts. If the registration is essentially a payment for admission or participation, it is not a deductible charitable contribution. Where a program has a subsidized “scholarship” option or a voluntary donation component, only bona fide voluntary gifts to the nonprofit qualify.
    • Substantiation: Get the organization’s name, EIN, the amount, and contemporaneous written acknowledgement for any single donation of $250 or more. Document any benefits received and the fair market value estimate for non-cash donations.

Volunteering Parents: Unreimbursed Out‑of‑Pocket Expenses:

  • Deductible Volunteer Expenses: While the value of donated time or services is not deductible, many out‑of‑pocket costs incurred while volunteering for a qualified charity are deductible as charitable contributions. Examples include:
    • Supplies and equipment purchased for the nonprofit (e.g., marking cones, field‑maintenance supplies) that you donate.
    • Uniforms required by the organization that are not suitable for everyday wear.
    • Travel costs incurred while performing volunteer duties (e.g., transporting equipment or players or traveling between sites). For automobile use, volunteers generally may deduct either actual out‑of‑pocket costs or charitable mileage rate set by Congress, which has been 14 cents per mile for many years.  A mileage deduction isn’t allowed if the volunteer’s own child was among those being driven  
    • Lodging and meals when the travel is away from home overnight for the charity (subject to the usual business‑vs‑personal tests and substantiation).
  • What is Not Deductible: The fair rental value of allowing a charity to use your property (see next section), and the value of your time. The costs of items purchased specifically for use by your child participating in the activity (e.g., a baseball glove or uniform) aren’t deductible.
  • Substantiation: Keep receipts, mileage logs showing date, purpose, miles driven and the charity’s name, and written acknowledgements for donated items.

Use of an Asset by a Charity: No deduction is allowed for mere use. Core rule: allowing a charity to use an asset you own (lending your field, permitting a nonprofit to use your boat, computer or home for activities) is not the same as donating the asset. The IRS generally disallows a charitable deduction for the value of the use of property.

    • Donation vs. Use:
      • Deductible: If you transfer ownership of tangible property (e.g., you donate sports equipment, you convey the field or transfer title to an asset), the value of that contributed property may be deductible (subject to normal rules about basis, fair market value, and limits), provided you itemize your deductions rather than claiming the standard deduction.
      • Not deductible: If you simply let the nonprofit use your private tennis court for tournaments for a season but retain ownership and the right to reclaim use, you cannot deduct an imputed rental value or the “use” of the court.

Example: Buying and giving new soccer goals to a nonprofit is a deductible charitable contribution (document value and transfer). Letting the club use your privately owned net and goals for a month without transferring ownership is not deductible.

Practical nuance: If you rent your property to a nonprofit at a below‑market rate, the difference between fair market rent and the amount charged could be considered a charitable contribution only in narrow circumstances and requires careful valuation and documentation; consult counsel.

Medical Expense Exception: Prescribed activities for children with special needs may meet the definition of medical expenses that are primarily for the prevention or alleviation of a physical or mental disability or illness and may be deductible to the extent they exceed the floor (7.5% of adjusted gross income). The expense must be primarily medical in nature.

    • Sports and therapy: In very specific cases a doctor’s prescription that a child undertake a particular physical activity (for example, therapeutic horseback riding, specialized swimming therapy, or adaptive sports training) may make related costs deductible as medical expenses. To meet the IRS standard:
      • There must be a written recommendation or prescription from a licensed medical professional stating the medical necessity.
      • The activity must be primarily for medical care or treatment, not merely general health or recreation.
      • Costs must be reasonable, ordinary for the treatment, and not reimbursed.
    • High bar and examples: A physician prescribing therapeutic horseback riding for a child with cerebral palsy could support deductibility of fees and certain related costs (lessons, specialized equipment) if well documented; by contrast, ordinary travel to recreational soccer practice for a child with asthma would not meet the medical necessity threshold.
    • Documentation: Keep the physician’s prescription, notes showing the medical condition and treatment plan, invoices, receipts and any program descriptions demonstrating the therapeutic nature of the activity.

When a Child’s Sport Becomes a Business: Profit motive matters. If a child participates in a sport with a bona fide profit objective (e.g., competing for significant prize money, endorsement deals, or providing paid coaching services), the activity could be a trade or business. In which case:

    • Income (prize money, sponsorships, appearance fees, Name, Image, and Likeness (NIL) deals for college athletes) is taxable.   
    • Related ordinary and necessary business expenses are deductible against that income if the activity is carried on for profit. If the activity is classified as a hobby, expenses are not deductible.
    • Self‑Employment (SE) Tax: Net earnings from a child’s self‑employment (including independent contracting for sports appearances or coaching) are subject to self‑employment tax if above thresholds — remember this can create both income tax and SE tax obligations.
    • Kiddie Tax and Earned Income: Wages and business income earned by a child are considered earned income and generally are not subject to the “Kiddie Tax” rules that apply to unearned investment income. 
    • NIL Income for College Athletes: Payments for name, image and likeness are taxable. Whether the compensation is treated as wages received as an employee or independent contractor income depends on the arrangement. College athletes receiving NIL payments should report them and keep records; some NIL arrangements generate self‑employment tax and the need to issue/receive 1099 forms.

Recordkeeping and Practical Guidance: Be conservative and document everything. For dependent care credit claims, retain invoices and evidence the expense enabled employment. For charitable deductions, keep the nonprofit’s EIN, written acknowledgements for gifts of $250+, and receipts for out‑of‑pocket volunteer expenses and mileage logs. For medical deductions tied to prescribed activities, preserve physicians’ orders and program descriptions showing therapy focus.

    • Allocate mixed‑purpose expenses. If a program mixes custodial care and instruction, or combines medical therapy and recreation, allocate costs between deductible and nondeductible portions on a reasonable basis and document your method.
    • Beware of quid pro quo transactions. Payments that secure benefits, privileges, or services are often partially nondeductible — only the charitable portion is deductible.

The lines between childcare, charitable, medical, and business treatment can be thin and fact‑specific. Large prizes, long‑term NIL arrangements, substantial volunteer program costs or donated property with complex valuation all merit professional review. Contact this office for assistance.

covid

Surprise Refund Opportunity? Millions of Taxpayers May Be Owed COVID-Era Penalty Refunds

by with No Comment Tax, AdvisoryCovid-19ABLE Exclusive

The pandemic disrupted… well, everything.

Business operations. Filing deadlines. IRS processing. Even the way taxpayers interacted with the government changed almost overnight.

Now, years later, a federal court case is reopening a question many assumed was already settled:

Did the IRS improperly assess certain penalties and interest during the COVID era?

And if so…

Could taxpayers actually get that money back?

For millions of individuals and businesses, the answer may be yes.

Why This Matters Right Now

A recent federal court decision interpreted disaster relief rules in a way that could dramatically expand pandemic-related deadline relief for taxpayers.

The ruling centers around a provision in the tax code that automatically postpones certain tax deadlines during federally declared disasters.

Since the federal COVID disaster declaration remained in effect from January 2020 through May 2023, the court concluded that many filing and payment deadlines during that window may have been postponed much longer than previously understood.

The practical impact?

Some penalties for late filing, late payment, and even related interest charges assessed during the pandemic years may not have been legally owed in the first place.

That means taxpayers who paid those amounts could potentially qualify for refunds.

The Clock Is Already Ticking

Here’s the part taxpayers shouldn’t ignore:

For many people, the deadline to preserve refund rights may be July 10, 2026.

That deadline is tied to the statute of limitations for filing refund claims with the IRS.

And this is where things get tricky.

The legal issue is not fully resolved yet. The federal government is expected to challenge the court’s decision through the appeals process.

But waiting for the final outcome could create a problem.

If taxpayers miss the filing deadline while the case works its way through the courts, they could permanently lose the ability to claim a refund later — even if the courts ultimately rule in favor of taxpayers.

That’s why many advisors are encouraging affected taxpayers to consider filing what’s called a “protective refund claim.”

What Is a Protective Refund Claim?

Think of it like reserving your place in line.

A protective refund claim doesn’t guarantee a refund.

Instead, it preserves your right to request one later if the courts ultimately uphold the broader interpretation of the COVID-era deadline relief rules.

Without filing a claim before the statute expires, taxpayers may lose the ability to recover certain penalties and interest altogether.

Who Could Be Affected?

Potentially affected taxpayers may include:

    • Individuals who filed tax returns late during the pandemic years
    • Businesses assessed late payment penalties
    • Taxpayers who entered installment agreements after penalties accrued
    • Individuals or companies who paid significant IRS interest charges between 2020 and 2023
    • Taxpayers whose filing or payment deadlines fell during the federal COVID disaster period

This could apply across multiple tax years and multiple return types.

In some situations, the potential refunds may be relatively small.

In others — particularly for businesses or higher-income taxpayers with larger balances due — the amounts could be substantial.

There’s One Big Frustration

Ironically, the process itself may feel a little… outdated.

Current guidance indicates these refund claims generally must be submitted on paper rather than electronically.

That means taxpayers may need to prepare and mail formal documentation to the IRS to preserve their rights.

Not exactly ideal in 2026.

It’s one reason taxpayer advocates are pushing for broader systemic relief rather than requiring millions of individual paper filings.

Why This Could Become a Bigger Story

This issue highlights something many taxpayers learned during the pandemic:It is one of the largest financial decisions many families make.

Tax law gets complicated fast when emergency relief measures collide with real-world administration.

The IRS issued wave after wave of temporary guidance during COVID. Filing dates shifted. Payment deadlines changed. Enforcement priorities evolved.

Now the courts are stepping in to clarify whether some of those timelines were applied correctly.

And depending on how the appeals process unfolds, this could become one of the more significant post-pandemic taxpayer relief developments we’ve seen.

What Taxpayers Should Do Now

If you or your business paid IRS penalties or interest connected to filing or payment delays during the COVID years, this is worth reviewing sooner rather than later.

Waiting until the legal outcome is finalized may not be the safest strategy if filing deadlines expire first.

Every taxpayer situation is different, and eligibility may depend on timing, tax years involved, and the specific penalties assessed.

Questions About Whether You May Qualify?

If you believe you may have been affected by COVID-era IRS penalties or interest charges, contact our office.

We can help review your situation, determine whether filing a protective refund claim makes sense, and help you understand the potential opportunities — before important deadlines pass.

 

foreign travel

Unlocking Tax Savings: Navigating the Complex World of Foreign Travel Deductions

by with No Comment ABLE Exclusive

When engaging in business overseas, it’s crucial to understand how travel expenses are treated under U.S. tax law. Unlike domestic travel, where transportation costs are often fully deductible if the trip is “primarily” for business, foreign travel requires a more granular day-by-day calculation to account for personal time. This article provides a detailed look at what constitutes a business day versus a personal day, and how these distinctions affect the deductibility of travel expenses.

No Itemized Deductions – First, understand all deductions referenced in this material refer to expenses deducted by a business as part of a business’ tax return and not as an itemized deduction by an employee. Under TCJA and OBBBA employee business expenses are no longer allowed as an itemized deduction.   

The “All or Nothing” Exceptions – Under IRS Publication 463, an entire international transportation cost (airfare, trains, or ships) can be considered a business expense if the taxpayer meets any one of four primary exceptions:

    1. The One-Week Rule: Taxpayer is outside the United States for seven consecutive days or less. In this count, do not include the day leaving the U.S., but do include the return day.
    2. The 25% Rule: Taxpayer is away for more than a week, but less than 25% of the total time outside the U.S. is spent on personal activities. In this calculation, count both the day of departure and the day of return as business days.
    3. Lack of Control: Taxpayer who does not have “substantial control” over arranging the trip. Generally, this means they are not a managing executive or related to the employer. 
    4. Primary Motivation: Taxpayer can establish that a personal vacation was not a major consideration in the decision to make the trip.

If the taxpayer does not meet any of these exceptions, they must allocate their transportation costs based on the ratio of business days to the total number of days abroad.

Business Days – The definition of a business day for tax purposes is broader than just time spent in meetings. A day is classified as a business day if it falls into one of the following categories:

    • Transportation Days: Days spent traveling directly to or from a business destination. If a non-direct route is taken for personal reasons, only count the days it would have taken to travel a reasonably direct route.
    • Days of Presence: Any day where presence is required at a specific place for a bona fide business purpose. Even if the actual business task takes only an hour, the entire day counts as a business day.
    • Principal Activity Day: This is any day where the principal activity during normal business hours is the pursuit of a trade or business. Generally, this means more than half of normal business hours (usually more than four hours) are dedicated to work.
    • The “Sandwich” Weekend Rule: Weekends, holidays, and other standby days are treated as business days if they fall between two business days and it would not be practical to return home. For example, if there is a meeting on Friday and another on Monday, the intervening Saturday and Sunday are business days.
    • Circumstances Beyond Control: Days the individual intended to work but were prevented from doing so by unforeseen circumstances, such as weather or a strike, count as business days.

Personal Days – These are days where the main activity is personal in nature, such as sightseeing or visiting with friends and family. Days that are not spent working, and don’t bookend business activities, are generally considered personal.

Allocation of Expenses – To allocate expenses correctly, one must compute the ratio of business days to the total number of days on the trip. This ratio determines the proportion of travel costs deductible against business income.

    1. Travel Costs – Include transportation expenses such as airfare and train tickets. These costs are generally allocated based on the percentage of business days to total days.
    2. Accommodation and Meal Costs – Generally, only the portion of these expenses that correspond to the business days are deductible. However, there are exceptions, such as when staying over a weekend between business activities, where accommodation remains deductible.
    3. Incidental Expenses – Expenditures such as tips, local transportation, currency exchange fees, and calling cards—related to business—are deductible on the business days incurred.

Special Considerations for Foreign Travel – Several specific rules may impact the deductibility of travel expenses in foreign countries:

    1. Travel Primarily for Business – If the trip is primarily for business, and not merely a vacation that incidentally includes business activities, transportation costs to and from the overseas location are typically fully deductible. The trip is primarily for business if more than 50% of the days are business days.
    2. Travel Primarily for Personal Reasons – If the trip is primarily for personal reasons, no travel costs can be deducted, but expenses directly attributable to business activities during the trip (e.g., conference fees) may be.
    3. Travel Outside Continental U.S. for More Than a Week – If the trip is longer than one week and includes both business and personal activities, the taxpayer must allocate their travel expenses. However, if less than 25% of the time abroad is for non-business purposes, the IRS may allow full deductibility of transportation costs.
    4. Exceptions – Trips that include significant personal aspects but are uncontrollably lengthened due to business reasons (like attending last-minute meetings) can still result in a significant portion of their costs being deductible.

Examples – Consider the following scenarios that differentiate between primarily business, primarily personal, and mixed-use travel:

    1. Primarily Business Travel Example:
      • A business consultant based in Miami spends two weeks in Paris. The first 10 days involve business meetings, followed by a 4-day vacation. All travel costs to and from Paris are deductible because more than 50% of the trip is for business.
      • Expenses incurred directly for business (conference fees, business-related meals) are also deductible. Accommodations and meals for the full stay, considering the intermingling of business activities, are apportioned according to business days.
    2. Primarily Personal Travel Example:
      • An architect travels from Seattle to Rome for 10 days, attending a 3-day seminar. The trip is primarily for leisure, as less than 50% of the time is business-related.
      • Only the seminar fee and any directly related expenses (business meals during the seminar) are deductible.
    3. Mixed-Use Travel Example:
      • A consultant travels from the U.S. to London for 12 days: 6 for business and 6 for leisure. If they attended meetings on the first 3 and last 3 days, travel days could be counted as business days.
      • Accommodation and meal costs should be apportioned 50% as business expenses, corresponding with 6 business days out of 12.
      • The IRS might allow a more favorable split for transportation costs if work commitments influenced the travel duration.

      Recordkeeping – Meticulous documentation is crucial to substantiate travel deduction claims. Recordkeeping should include:

        • Receipts and Itineraries: For all accommodation, meals, and relevant business transaction proof.
        • Diaries or Logs: Detailed logs of daily activities distinguishing business from personal activities.
        • Correspondence and Agenda: Emails or memos confirming meetings, seminars, or work done overseas.

      Conclusion – Navigating the complexities of deducting foreign travel expenses requires careful consideration of IRS rules regarding what constitutes business days and how to allocate costs appropriately. By understanding these regulations and maintaining diligent records, you can ensure compliance while capitalizing on deductive opportunities.

      Contact this office with questions or assistance with issues related to foreign business travel.

       

       

       

       



       

       

       

       



       

       

       

       

      home title

      Keeping It in the Family: Tax Risks and Benefits of Home Title Transfers

      by with No Comment ABLE Exclusive

      A frequently encountered issue is when an elderly parent turns the title of his or her home over to an adult child or other beneficiary and continues to reside in the home, thinking that is the correct thing to do but without considering the tax repercussions. While “parent” and “child” are referenced in this analysis, these rules are equally applicable to any other relative or even to an unrelated person. 

      This situation raises important tax questions:

        • How is a future sale of the home treated if it is sold before the parent’s death?
        • Will the Sec 121 home sale gain exclusion apply?
        • Is a gift tax return required?
        • What is the tax result if the parent continues to reside in home?
        • What is the tax result if the parent moves out of the home?

      Parent Continues to Reside in the Home – If a parent continues to reside in their home and maintain ownership privileges without a formal written life estate deed, it typically results in an implied or de facto life estate. In this scenario, the homeowner transfers the title to another person, often an adult child, but continues to live at the property and act as if they own it without executing a formal life estate deed.

      A formal life estate is generally established through a deed explicitly reserving lifetime occupancy rights, whereas a de facto arrangement emerges based on the behavior of the involved parties.

        • Key Features:
          • Transfer of Title: The original property owner transfers legal ownership to another party, known as the “remainderman” or “remainder beneficiary.”
          • Continued Residency: The original owner remains living in the home, financially responsible for taxes, and maintaining the property as though they retain ownership.
          • Informal Agreement: Unlike a formal life estate, this arrangement might not be documented in writing; however, all parties understand that the original owner will stay for life.
          • Risks: Without formal written documentation for a de facto life estate, the original owner faces the risk that the new titleholder could sell the home and undermine their intended arrangement.
        • Tax and Legal Considerations: The IRS often classifies a de facto life estate as a retained life interest under Section 2036 of the Internal Revenue Code, leading to several implications:
          • Inclusion in Estate: At the time of the resident’s death, the full fair market value of the property is included in their estate for tax purposes, despite the prior transfer of legal title.
          • Basis Adjustment: The beneficiary benefits from a “step-up” in basis to the fair market value at the original owner’s death, potentially reducing future capital gains taxes if the property is sold.
          • Gift Tax Implications: Since the original owner keeps the right to reside in the home, the transfer is often seen as an “incomplete gift,” generally negating the need for an immediate gift tax return.
          • Medicaid Considerations: Informal property transfers might fall under scrutiny during the Medicaid “look-back” period, affecting eligibility for long-term care benefits.

      Parent No Longer Resides in the Home: If an elderly parent transfers the title but does not continue living in the home, it is considered a gift. Since no life estate is established, a gift tax return is necessary, and the child’s basis in the home would be the parent’s adjusted basis at the time of the gift. Moreover, if the child later sells the home, they will only qualify for the Section 121 home sale gain exclusion if they meet the ownership and occupancy time requirements themselves.

      Adding Child’s Name to the Title: When a parent adds a child’s name to the title but retains a partial interest, the sale of the home involves both parties. Under Section 121, the parent can exclude their share of the gain if they satisfy the eligibility criteria. A gift tax return must be filed in the year the child’s name is added to the title, and the child’s basis will be their portion of the parent’s adjusted basis. The child will qualify for the Section 121 exclusion only if they independently fulfill the necessary conditions.

      Comparison to a Formal (de jure) Life Estate: A life estate provides a structured legal framework that divides property ownership between two parties over different timeframes, like a de facto life estate but with distinct differences.

        • Formalization:
          • Life Estate: Requires a legal deed recorded in local land records, clearly defining the roles of the life tenant and remainderman.
          • De Facto Life Estate: Informal and based on behavior, lacking written documentation.
        • Key Elements:
          • Life Tenant: Has the right to live in or use the property and is responsible for its upkeep.
          • Remainderman: Holds future interest in the property and assumes ownership upon the life tenant’s death.
          • Immediate Transfer: Upon the life tenant’s death, the property transitions directly to the remainderman, bypassing probate processes, thus saving time and cost.
        • Immediate and Legal Effects:
          • Irrevocability: Once established, a traditional life estate is difficult to alter without the remainderman’s agreement, unlike the informal nature of a de facto estate.
          • Control Limitations: The life tenant cannot sell or mortgage the property without the remainderman’s consent, whereas a de facto arrangement might lack such constraints formally written.
          • Responsible for Upkeep: The life tenant must handle property taxes and maintenance.
          • Medicaid Estate Recovery involves the attempt by Medicaid programs to reclaim expenses for benefits given to specific individuals after they pass away, such as those for nursing facilities, hospitals, and prescription medications. A life estate structure can shield the home from such recovery efforts. This is because, upon the tenant’s passing, ownership of the home is transferred instantly to the remainderman, preventing its sale for recovery purposes.
        • Financial and Tax Implications:
          • Tax Basis Adjustment: Similar benefits, where the remainderman receives a “stepped-up” basis upon the life tenant’s death, reducing potential capital gains taxes.
          • Gift Tax Consideration: Both situations have gift tax implications, but a life estate results in an immediate liability upon creation.
          • Home Taxes and Mortgage Interest in a De Facto Life Estate:
            • Life Tenant Responsibility and Deduction: The individual who retains the right to live in the home (the de facto life tenant) is treated as the owner for the purposes of property and income taxes. They have the right to claim the deductions on their itemized tax return (Schedule A of Form 1040) for the property taxes and mortgage interest they actually pay.
            • Remainderman Position: The remainderman has a future interest in the property but generally no right to occupy it or responsibility for its ongoing costs during the life tenant’s lifetime. Therefore, they cannot deduct the expenses and taxes during this period.
            • Mortgage Interest Deduction: The person paying the mortgage interest can claim the deduction, even if they are not the primary person named on the mortgage note, provided they are legally obligated or responsible for the payments. 

      Risks:

        • Creditor Exposure: The remainderman’s creditors can place claims against the property.
        • Medicaid Challenges: Transfers can impact Medicaid eligibility due to look-back periods. Medicaid eligibility is determined by examining an applicant’s income and assets, along with a lookback period designed to verify that no assets were given away to meet eligibility requirements. If someone establishes a life estate and subsequently seeks Medicaid assistance, they might encounter eligibility challenges based on when the life estate was established in relation to their application.
        • Marital Claims: The property may be a marital asset in case of the remainderman’s divorce.

      As you can see, transferring a home to another person can have significant tax and financial implications.  Before undertaking such a move, it is prudent to consult with this office first.