Wooden cubes with words HSA Health Savings Account Business and HSA concept.

How Health Savings Accounts Can Supercharge Your Tax Savings

by with No Comment Tax, Advisory

In the labyrinth of financial planning and tax-saving strategies, Health Savings Accounts (HSAs) emerge as a multifaceted tool that remains underutilized and often misunderstood. An HSA is not just a way to save for medical expenses; it’s also a powerful vehicle for retirement savings, offering unique tax advantages. This article delves into who qualifies for an HSA, the tax benefits it offers, and how it can serve as a supplemental retirement plan.

Qualifying for a Health Savings Account – At the heart of HSA eligibility is enrollment in a high-deductible health plan (HDHP). As of the latest guidelines, for tax year 2024, an HDHP is defined as a plan with a minimum deductible of $1,600 for an individual or $3,200 for family coverage. The plan must also have a maximum limit on the out-of-pocket medical expenses that you must pay for covered expenses, which for 2024 is $8,050 for self only coverage and $16,100 for family coverage. But having an HDHP is just the starting point. To qualify for an HSA, individuals must meet the following criteria: 

  • Coverage Under an HDHP: You must be covered under an HDHP on the first day of the month.
  • No Other Health Coverage: You cannot be covered by any other health plan that is not an HDHP, with certain exceptions for specific types of insurance like dental, vision, and long-term care.
  • No Medicare Benefits: You cannot be enrolled in Medicare. This rule applies to periods of retroactive Medicare coverage. So, if you delay applying for Medicare and later your enrollment is backdated, any contributions to your HSA made during the period of retroactive coverage are considered excess, are not tax deductible and subject to penalty, if not withdrawn from the account.
  • Not a Dependent: You cannot be claimed as a dependent on someone else’s tax return.
  • Spouse’s Own Plan: Joint HSAs aren’t allowed; each spouse who is eligible and wants an HSA must open a separate HSA.

These criteria ensure that HSAs are accessible to those who are most likely to face high out-of-pocket medical expenses due to the nature of their health insurance plan, providing a tax-advantaged way to save for these costs.

It should also be noted that unlike IRAs, 401(k)s and other retirement plans, it is not necessary to have earned income to be eligible for an HSA. 

Tax Benefits of Health Savings Accounts – HSAs offer an unparalleled triple tax advantage that sets them apart from other savings and investment accounts:

  • Tax-Deductible Contributions: Contributions to an HSA are tax-deductible, reducing your taxable income for the year. This deduction applies whether you itemize deductions or take the standard deduction. Rather than being a tax deduction, HSA contributions made by your employer are just not included in your income.
  • Tax-Free Growth: The funds in an HSA grow tax-free, meaning you don’t pay taxes on interest, dividends, or capital gains within the account.
  • Tax-Free Withdrawals for Qualified Medical Expenses: Withdrawals from an HSA for qualified medical expenses are tax-free. This includes a wide range of costs, from doctor’s visits and prescriptions to dental and vision care, and even some over-the-counter medicine, whether or not prescribed.

The combination of these benefits makes HSAs a powerful tool for managing healthcare costs both now and in the future.

HSAs as a Supplemental Retirement Plan – While HSAs are designed with healthcare savings in mind, their structure makes them an excellent supplement to traditional retirement accounts like IRAs and 401(k)s. Here’s how:

  • No Required Minimum Distributions (RMDs): Unlike traditional retirement accounts, HSAs do not require you to start taking distributions at a certain age. This allows your account to continue growing tax-free indefinitely.
  • Flexibility for Non-Medical Expenses After Age 65: Once you reach age 65, you can make withdrawals for non-medical expenses without facing the 20% penalty that would apply to nonqualified distributions at a younger age, though these withdrawals will be taxed as income. This feature provides flexibility in how you use your HSA funds in retirement.
  • Continued Tax-Free Withdrawals for Medical Expenses: Regardless of age, withdrawals for qualified medical expenses remain tax-free. Considering healthcare costs often increase with age, having an HSA in retirement can provide significant financial relief.

To maximize the benefits of an HSA as a retirement tool, consider paying current medical expenses out-of-pocket if possible, allowing your HSA funds to grow over time. This strategy leverages the tax-free growth of the account, potentially resulting in a substantial nest egg for healthcare costs in retirement or additional income for other expenses.

Establishing and Contributing to an HSA – Opening an HSA is straightforward. Many financial institutions offer HSA accounts, and the process is like opening a checking or savings account. An individual can acquire a Health Savings Account (HSA) through various sources, including:

  • Employers: Many employers offer HSAs as part of their benefits package, especially if they provide high-deductible health plans (HDHPs) to their employees. Enrolling through an employer might also come with the benefit of direct contributions from the employer to the HSA.
  • Banks and Financial Institutions: Many banks, credit unions, and other financial institutions offer HSA accounts. Individuals can open an HSA directly with these institutions, like opening a checking or savings account.
  • Insurance Companies: Some insurance companies that offer HDHPs also offer HSAs or have partnered with financial institutions to offer HSAs to their policyholders.
  • HSA Administrators: There are companies that specialize in administering HSAs. These administrators often provide additional services, such as investment options for HSA funds, online account management, and educational resources about using HSAs effectively.

When choosing where to open an HSA, it’s important to consider factors such as fees, investment options, ease of access to funds (e.g., through debit cards or checks), and customer service.

Once established, you can make contributions up to the annual limit, which for 2024 is $4,150 for individual coverage and $8,300 for family coverage. Individuals aged 55 and older can make an additional catch-up contribution of $1,000.

What Happens If I Later Become Ineligible – If you have an HSA and then later become ineligible to contribute to it—perhaps because you’ve enrolled in Medicare, are no longer covered by a high-deductible health plan (HDHP), or for another reason—several key points come into play regarding the status and use of your HSA:

  • Contributions Stop: Once you are no longer eligible, you cannot make new contributions to the HSA. For example, enrollment in Medicare makes you ineligible to contribute further to an HSA. However, the specific timing of when you must stop contributing can vary based on the reason for ineligibility. If you enroll in Medicare, contributions should stop the month you are enrolled.
  • Funds Remain Available: The funds that are already in your HSA remain available for use. You can continue to use these funds tax-free for qualified medical expenses at any time. This includes expenses like copays, deductibles, and other medical expenses not covered by insurance, but not insurance premiums.
  • Investment Growth: The funds in your HSA can continue to grow tax-free. Many HSAs offer investment options, allowing your account balance to potentially increase through investment earnings.
  • Use for Non-Medical Expenses: As noted previously, if you are 65 or older, you can withdraw funds from your HSA for non-medical expenses without facing the 20% penalty, though such withdrawals will be subject to income tax. This makes the HSA function similarly to a traditional IRA for individuals 65 and older, with the added benefit of tax-free withdrawals for medical expenses.
  • No Required Minimum Distributions (RMDs): Unlike traditional IRAs and 401(k)s, HSAs do not have required minimum distributions (RMDs), so you can leave the funds in your account to grow tax-free for as long as you want.

  • After Death: Upon the death of the HSA owner, the account can be transferred to a surviving spouse tax-free and used as their own HSA. If the beneficiary is not the spouse, but is the beneficiary’s estate, the account value is included in the deceased’s final income tax return, subject to taxes. If any other person is the beneficiary, the fair market value of the HSA becomes taxable to the beneficiary in the year of the HSA owner’s death.

In summary, while you can no longer contribute to an HSA after losing eligibility, the account remains a valuable tool for managing healthcare expenses and can even serve as a supplemental retirement account, especially given its tax advantages.

Health Savings Accounts stand out as a versatile financial tool that can significantly impact your tax planning and retirement preparedness. By understanding who qualifies for an HSA, leveraging its tax benefits, and recognizing its potential as a supplemental retirement plan, individuals can make informed decisions that enhance their financial well-being. 

Whether you’re navigating high-deductible health plans or seeking additional avenues for tax-efficient savings, an HSA may be the key to unlocking substantial long-term benefits. 

Contact this office for additional information and how an HSA might benefit your circumstances.  

Gavel On a Legal Text

Tennessee Tax Legislative Update

by with No Comment Tax, Advisory

As previously shared through an earlier update, in January Governor Bill Lee announced plans to amend the Tennessee franchise tax to simplify the calculation. Under existing law, the franchise tax base is the greater of 1) the taxpayer’s net worth or 2) the net book value of the property owned, and the rental value (using a defined multiple) of property used in Tennessee. Once calculated, the franchise tax base is subjected to a tax rate which is $0.25 per $100 of the tax base. Under Governor Lee’s simplification, the franchise tax would be determined based solely on net worth, with the alternative method using net book value of assets being repealed.

Since its announcement, this planned overhaul to the state’s franchise tax law has been subject to significant debate and negotiation among lawmakers; however, in the final hours of Tennessee’s legislative session last week, both chambers approved a compromise plan. The plan is projected to send approximately $1.5 billion back to taxpayers and reduce the state’s franchise tax revenue by approximately $400 million annually. Additionally, the compromise plan provides for three years of tax refunds desired by the Senate while also providing transparency provisions desired by the House. Tax refunds will be available for returns filed after January 1, 2021, covering a tax period that ended on or after March 31, 2020. Generally speaking, for calendar year taxpayers the applicable periods are tax years 2020 through 2023.  The refund claims will be required to be filed between May 15th and November 30th of this year and taxpayers claiming refunds will be required to waive all rights to sue the state over franchise tax obligations during the affected period. Specific to transparency, the compromise plan will require refunds paid to taxpayers to be disclosed in ranges – $750 or less; $751 to $10,000; greater than $10,000; or “pending” if a final payment has not been determined. 

Governor Lee is expected to sign the legislation.

Within the next few weeks, RBG tax advisors will be contacting our impacted Tennessee taxpayers to discuss the details of anticipated refund claims and expected timing of filings. Should you have any immediate questions, feel free to contact your RBG advisor.

The 2022 Tax Guide

by with No Comment Tax, Advisory

Now is the time of year to do everything you can to minimize taxes and maximize your financial health with proper year-end planning. In this article, we’ll look at several actions to consider taking before the end of 2022.

Thoughtfully Harvest Losses and Gains Before Year-End

Tax loss harvesting by selling securities at a loss to offset capital gains is a classic year-end planning strategy. Just make sure not to violate the wash sale rules. This means you can’t buy back the same security or a substantially identical one within 30 days of the sale. 

Reinvest Capital Gains into Opportunity Zones

Another way to offset capital gains is to reinvest those gains into a qualified opportunity fund (QOF). To be eligible, you must make the investment within 180 days of the sale of the asset-bearing gains. QOF investments allow you to defer the recognition of the capital gains tax on the original investment. The details and exact rules can be tricky, so it’s best to check with your tax advisor before making this type of transaction.

Consider Installment Sales Where Applicable

When a taxpayer sells a private asset such as real estate, a business, or private equity in exchange for a series of payments over multiple years through a promissory note, this can constitute an installment sale. Installment sales are generally taxed with each payment representing a portion of the proceeds; return of basis, interest, and gain are recognized over the life of the note.

There are situations in which installment sales can be structured so that gains are not recognized until principal payments are recouped. If you are considering selling an asset via an installment sale this year-end or next, consult with your tax advisor to determine if it’s possible to structure the sale to defer gains.

Funding Retirement

If you can contribute to a retirement account, now is the time to see if you need to make additional contributions or top-up to the full amount allowable. As you review your situation, keep in mind the annual maximum contribution limits for 2022.

  • IRAs – $6,000. If you are 50 or older, it’s $7,000.
  • 401(k)s/403(b)s —  $20,500. If you are 50 or older, it’s $27,000

Also, converting assets from a traditional IRA to a Roth IRA may be a smart move if: you believe your tax rate will be higher in the future; you can afford to pay the taxes now with spare cash, and you don’t plan to leave the IRA assets to charity.

Take Your Required Minimum Distributions 

The annual deadline to take required minimum distributions (RMD) from your own or inherited retirement accounts is Dec. 31, 2022. It’s important to take RMDs because there is a 50 percent penalty on amounts not distributed. The amount needed to be taken was determined on Dec. 31, 2021, even though the value of the investment has likely fluctuated significantly since that time. RMDs are based on a calculation of age and amount of assets. There are online calculators to help you figure out the amount you need to take.

Giving to Charity

Some taxpayers believe that the deduction for charitable donations is no longer applicable to them since it can be hard to make donations large enough to exceed the standard deduction. One strategy to overcome this challenge is to cluster your donations. Instead of making equal gifts every year, consider making more substantial gifts all in one year instead.

When it comes to making donations around year-end, it’s important to understand the rules on timing and when a gift is effectively deemed given for tax purposes. Here are the basic rules for the timing of charitable donations.

  • To give to charity by check => the date the check is mailed
  • Gifts of stock certificates => when the transfer occurs, according to the issuer’s records
  • Gifts of stocks by electronic transfer => when the stock is received, according to the issuer’s records
  • Gifts by credit card => date the charge is made

Conclusion

As we enter the final part of the year, now is the time to take stock of your financial and tax situation to see if there are any moves you can make to minimize your 2022 tax liabilities and maximize your wealth.

How to Defer, Avoid Paying Capital Gains Tax on Stock Sales

by with No Comment Tax, Advisory

The markets are hitting all-time highs, so if you are thinking of selling stocks now or in the near future, there is a good chance that you will have capital gains on the sale. If you’ve held the stocks for more than a year, then they will qualify for the more favorable long-term capital gains tax (instead of being taxed as ordinary income rates for short-term sales). But the total tax due can still be enough to warrant some tax planning. Luckily, the tax laws provide for several ways to defer or even completely avoid paying taxes on your securities sales.

1. Using Tax Losses
Utilizing losses is the least attractive of all the options in this article since you obviously had to lose money on one security in order to avoid paying taxes on another. The real play here is what is often referred to as tax-loss harvesting. This is where you purposely sell shares that are at a loss position in order to offset the gains on profitable sales and then redeploy this capital somewhere else. You’ll need to carefully weigh where to put the money from the sale of the shares sold at a loss as you can’t just buy the same stocks back. This is considered a “wash sale” and invalidates the strategy.

2. The 10 Percent to 15 Percent Tax Bracket
For taxpayers in either the 10 percent or 12 percent income tax brackets, the long-term capital gains rate is 0 percent. The income caps for qualifying for the 12 percent income tax rate are $39,375 for single filers and $78,750 for joint filers in 2019 ($40,000 and $80,000, respectively in 2020). Also, keep in mind that the stock sales themselves add to this limit – so calculate carefully.

Aside from selling appreciated securities yourself, another way to take advantage of the 0 percent bracket is to gift the stock to someone else instead of selling the securities and then giving the cash. Beware, however, as trying to do this with your kids can disqualify the 0 percent treatment because the kiddie tax is triggered on gifted stock sold to children younger than 19 or under 24 if a full-time student.

3. Donate
Donating appreciated securities is where we start to get into the more beneficial strategies. This technique only makes sense if you were already planning to make charitable contributions. Say you are planning to donate $10,000 to an organization and are in the 25 percent tax bracket. In order to write a donation check for $10,000, you would have had to earn $13,333 in income to sell the same amount of stock in order to have $10,000 left after taxes to make a cash donation in that amount.

If you donate appreciated stock instead, you only need to donate securities valued at $10,000 and you get to deduct $10,000 as a charitable deduction. That avoids the capital gains tax completely. Plus, it generates a bigger tax deduction for the full market value of donated shares held more than one year – and it results in a larger donation.

4. Qualified Opportunity Zones
This is the newest and most complicated (as well as controversial) way to defer or avoid capital gains taxes. Opportunity Zones were created via the Tax Cuts and Jobs Act to encourage investment in low-income and distressed communities. Qualified Opportunity Zones can defer or eliminate capital gains tax by utilizing three mechanisms through Opportunity Funds – the investment vehicle that invests in Opportunity Zones.

First, they offer a temporary deferral of taxes on previously earned capital gains if investors place existing assets into Opportunity Funds. These capital gains defer taxation until the end of 2026 or whenever the asset is disposed of – whichever is first.

Second, capital gains placed in Opportunity Funds for a minimum of five years receive a step-up in basis of 10 percent – and if held for at least seven years, 15 percent.

Third, they offer an opportunity to permanently avoid taxation on new capital gains. If the opportunity fund is held for at least 10 years, the investor will pay no tax on capital gains earned through the Opportunity Fund.

Again, the caveat here is that the details of Opportunity Zone investments can be extremely complicated, so it’s best not to attempt this one on your own. Consult with your tax advisor.

5. Die with Appreciated Stock
Unfortunately, while probably the least popular method for readers, this is certainly the most effective. When a person passes away, the cost basis of their securities receives a step-up in basis to the fair market value to the date of their death. As an example, if you purchased Amazon stock for $50 per share and when you pass away it is worth $1,700 per share, your heir’s basis in the inherited stock is $1,700. This means if they sell it at $1,700, they pay no tax at all.

Conclusion
None of the above methods are loopholes or tax dodges; they are all completely legitimate. However, your ability to take advantage of these techniques will depend on your income level, personal goals and even your age. As a result, it’s best to consult with your tax advisor to see what makes sense for your personal situation.

Explaining Deductions for Small Business Owners

by with No Comment Tax, Advisory

Explaining Deductions for Small Business Owners

New details have emerged from the IRS that explain how small business owners may be able to obtain different tax breaks.

This article discusses the different rules the IRS has proposed, and what this means for small business owners in the United States.

To view this article, click the following link to access the original content.

https://abcnews.go.com/Busines…

Everyone’s an Owner

by with No Comment Tax, Advisory

Some experts are predicting that the recent tax legislation will create a ton of new business creation and activity—just not the kind that lawmakers originally intended. These people are predicting a surge in efforts for reclassification and the organization of cover companies by employees so they can have their salaries recognized as business income, significantly lowering their tax burden as a result.

A central tenet of the Republican bill is that it reduces both corporate and pass-through business tax rates. Corporate profits are now taxed at only 21 percent, and owners of pass-through companies will get to take a 20 percent deduction. While these same experts predict it will take some time to adapt, they believe that as lawyers and accountants delve into the new rules, they will find ways to minimize taxes for their clients using the new tax structure.

A group of tax law professors and lawyers wrote a paper on various ways imaginative and wealthy individuals can use the preferential business tax treatment to reduce their taxes. This academic paper is entitled “The Games They Will Play: Tax Games, Roadblocks, and Glitches Under the New Legislation” (available for download via SSRN), and it chronicles how they believe individuals in various fields and scenarios will create or turn themselves into small businesses to take advantage of the new tax structure.

Below is a brief synopsis of the different strategies. As always, remember that each situation is unique and you should consult your tax professional before implementing any of these strategies—this is definitely not a DIY type of situation.

Partnership Game Changers
Some of the paper’s authors believe that people will transform themselves into self-employed contractors or partnerships, thus turning their wages into pass-through profits and entitling them to the 20 percent deduction.

The IRS lays out pretty strict guidelines on who can be classified as an independent contractor, with a bias toward workers being treated as W-2 employees—so this isn’t a simple path. The most likely candidates are individuals in certain professions, such as law firms. One example given is that associates (partners would already receive the pass-through treatment) could create an LLC and then be hired by the firm. There are provisions that prevent guaranteed payments from qualifying for the deduction; however, many feel these regulations are weakly written and might only apply to S corporations.

Split the Difference
Another strategy professional service pass-throughs can use is to split their companies into parts. One part would perform the services portion of the business, while the other would own the real estate and/or any productized revenue streams. Separating the service portion of the business would allow the other segments to qualify for profit deductions where they would not otherwise if they were comingled.

Self-Incorporation
Initially, many believed the easiest way to arbitrage the new tax rate structure would be to organize a corporation. 
Currently, however, most entrepreneurs avoid forming corporations due to double taxation (profits are taxed at both the corporate level and then again as dividend distributions). The reduced corporate rate of 21 percent combined with the top dividend rate of 20 percent means that even taxpayers in the top brackets will do better not incorporating; however, opportunities for interest earning investments are still available.

Conclusion
Change often means opportunity when it comes to tax law. The new tax law substantially shakes up business taxation, and as professionals sort through the finer details, new strategies will emerge for some taxpayers.

Let Us Help You Leverage What You Can Learn from Your Tax Return

by with No Comment Tax, Advisory

What does your tax return say about your financial situation? The fact is, the paperwork you file each year offers excellent information about how you are managing your money—and about areas where it might be wise to make changes in your financial habits. If you have questions about your financial situation, remember that we can help. Our firm is made up of highly qualified and educated professionals who work with clients like you all year long, serving as trusted business advisors.

 So whether you are concerned about budgeting; saving for college, retirement or another goal; understanding your investments; cutting your tax bite; starting a business; or managing your debt, you can turn to us for objective answers to all your tax and financial questions.

1099 Trouble? We can help

by with No Comment Tax, Advisory

It’s not unusual for taxpayers to be surprised—and perhaps more than a little confused—by some of the correspondence that is received from the IRS. Here’s a case in point: Many taxpayers have been puzzled by notices they have received related to 1099 forms. For example, problems have arisen in the past surrounding notices related to Forms 1099-K (Payment Card and Third Party Network Transactions) and 1099-C (Cancellation of Debt). Those who received the notices were frequently uncertain what they meant and how they were expected to respond.

If you have received one of these notices—or any other letter—from the IRS, be sure to contact us. The Service may simply need more information, have additional tax liability or are due a refund. No matter what the situation, we can help you understand the problem and work with you to resolve it.

Stamp Out Tax Season Stress!

by with No Comment Tax, Advisory

Are you ready for tax time? There are a couple of steps you can take now to alleviate some of the stress of filing your return. Plan to get organized early. Begin by putting together a tax folder with W-2s from your employer, 1099s for other income you may have earned, bank and other financial statements and receipts for things like medical bills and charitable donations.

Once you’ve gathered all your important paperwork, this is a good time to meet with your CPA to talk about changes in your financial situation or in tax laws that may have an effect on your return.  Having this discussion early is key to avoiding surprises at tax time and a great time to get started on planning that can potentially minimize your tax bite and strengthen your financial situation. Call us today!

What Do Last Minute Tax Deductions Mean For You?

by with No Comment Tax, Advisory

There’s good news for taxpayers: A number of popular tax provisions that expired at the end of 2013 have been extended into 2014, thanks to a new tax law passed by Congress in December. That means qualified individuals will be able to claim deductions for the state and local sales taxes and some higher education costs and exclude from income any mortgage debt cancellation for 2014. Businesses will benefit from one more year of bonus depreciation and Section 179 expensing and from a research tax credit for some qualified expenses.

These are just a few examples of the provisions extended by the Tax Increase Prevention Act of 2014. If you’d like more information, or if you’re concerned that you may miss out on some these last-minute extenders, be sure to call our office today. We can help you claim all the proper credits and deductions and offer advice on minimizing your taxes going forward. Keep in mind, too, that the yearend legislation has had no effect on the Internal Revenue Service’s schedule. As a result, we’re ready to get started today on all your tax planning needs.