Health Savings Account (HSA)

Health Savings Accounts have been getting more attention lately as Congress and the Trump administration work to replace Obamacare.  These accounts allow you to set aside tax-free contributions to pay for qualified medical expenses.  In some cases your employer will also contribute to the account.  You should consult with your employer to see if they make these contributions.

Many people have no idea when to use these tax-advantaged accounts – and that could hurt their retirement.  Nearly half of HSA users didn’t know they can invest the money in their own account.  Additionally, many holders didn’t know that HSAs offer triple tax advantages.

First, contributions are tax deductible.  Second, those contributions can be invested and grow tax-free.  Third, withdrawals aren’t taxed as long as you use them for qualified medical expenses, such as doctor’s visits, prescription drugs and dental care.  The main requirement with an HSA is that you must have  high-deductible health plan.  Such a plan means you’ll have to pay a deductible of at least $1,300 for individual coverage and $2,600 for families this year.  The maximum 2017 out-of-pocket costs for these plans are $6,550 for individuals and $13,100 for families.  But, not every high-deductible plan makes people eligible for an HSA.  The confusion about high-deductible plans can make it harder for people to embrace HSAs.

HSAs can be a powerful retirement savings vehicle.  Estimates show that a 65-year old couple retiring in 2016 would need roughly $260,000 to cover health-care costs during retirement.  If you have 20 years of retirement, that’s roughly $1,083 per month.  Contributing early and up to the limits, an HSA could cover that cost completely tax-free.

Additionally, if you’re healthy enough to not have many health care costs in retirement, you can withdraw money from your HSA without penalty and use it for anything you want when you are age 65 or older.  However, you will pay income taxes on withdrawals if you don’t use it for health care.

Exceptions To The 10% IRA Early Withdrawal Penalty

Withdrawals from Individual Retirement Accounts (IRA) prior to age 59 ½ trigger a 10% early withdrawal penalty.  However, there are several exceptions if you meet certain circumstances or spend the funds on specific purchases.  These exceptions only apply to the 10% penalty.  All distributions are subject to ordinary taxes.

• Medical Expenses

IRA distributions used to pay medical expenses that are not reimbursed by health insurance and exceed 10% of your adjusted gross income.

• College Costs

Distributions to pay tuition, related fees and room & board for at least half time students will qualify for exemption from the 10% penalty.

• First Home Purchase

You can withdraw up to $10,000 ($20,000 for couples) to buy or build a first home without penalty.

• Disability

People with severe physical or mental disabilities who are no longer able to work can take IRA distributions without penalty if their physician signs off on the severity of the condition.

• Military Service

Members of the military reserves who take IRA distributions during a period of active duty of more than 179 days are exempt from the 10% penalty.

• Health Insurance

If you lose your job and collect unemployment benefits for 12 consecutive weeks, you can take penalty free distributions to pay for health insurance for yourself and your family.

Tax Reform Update

Despite efforts by White House officials to overhaul tax laws with ambitious reform, a comprehensive bill is unlikely to be enacted before year end.  Other initiatives such as a replacement of the Affordable Care Act (ACA) seemingly will be tackled before any focus is turned toward tax reform.  Some elements contained in the ACA repeal/replace/overhaul efforts could have direct effects on tax law.  Any legislative proposals will encounter strong opposition.  Temporary tax cuts seem much more plausible at this point than complete tax law reform.  I hope to be able to give clearer direction as we move towards year end.

Tax Tune-Up

2017 is more than half gone.  This is a good time to ask yourself, “How am I doing?”  Are you safe to presume things will be similar to 2016?  There is still plenty of time left in the tax year to enact plans which will affect your overall tax situation.  Starting or increasing contributions to a variety of retirement plans or health benefit plans can dramatically reduce your tax burden.  Charitable donations and many available tax credits could also save you significant money when we file your tax return early in 2018.

Is It A Business?  Or Is It a Hobby?

You think you have a business, but what does the IRS say?  Why is it even an issue?

With a hobby, you can deduct your hobby expenses, but you can’t deduct more than you earned.  You can’t claim a hobby loss on your tax return.  That’s the hobby loss rule – and the rule is, there’s no such things as a hobby loss, at least on your tax return.

You can have negative business income though, which can offset other taxable income.  So it can be tempting to try to pass a hobby off as a business.  That’s why the IRS looks carefully at whether you have a true business or only a hobby.

So How Does The IRS Determine If The Hobby Could Be A Business?

The IRS has a list of factors for determining whether your pastime is more business than hobby.  Here are the most common factors:

• Do you carry on the activity in a businesslike manner?
• Do the time and effort you put into the activity indicated that you intend to make it profitable?
• Do you depend on the income from the activity for your livelihood?
• Are your losses due to circumstances beyond your control, or are they normal in the startup phase of your type of business?
• Do you change your methods of operation in an attempt to improve profitability?
• Do you, or your advisors, have the knowledge needed to carry on the activity as a successful business?
• Were you successful in making a profit in similar activities in the past?
• Does the activity make a profit in some years?  If so, how much?
• Can you expect to make a future profit from the appreciation of the assets used in the activity?

The IRS assumes that an activity is for-profit if it makes a profit in at least three of the last five tax years, including the current year.  (If you’re breeding, showing, training or racing horses, that ranges if two of the last seven years.)

Form 1040 – Tax Rules by Age

Age 13…..Cannot claim child care credit for children age 13 or older.

Age 17…..Cannot claim $1,000 child tax credit for children age 17 or older.

Age 19…..Exemption for dependent children who are not full time students expires.  (Certain income levels still qualify)

Age 24…..Exemption for children who are full-time students expires.

Age 25…..Taxpayers with no children qualify for the Earned Income Credit.

Age 50…..Eligible for catch-up contributions to IRAs, Simple-IRAs, 401(k), 403(b) and 457 plans.

Age 55…..Eligible for penalty-free withdrawal from employer plan (but not an IRA) if separated from service.

Age 59½..Penalty for early withdrawal from retirement accounts expires.

Age 65…..Taxpayers with no children no longer qualify for Earned Income Credit.

Age 65…..Eligible for Credit for the Elderly.

Age 70½..Contributions no longer allowed to traditional IRAs.

Age 70 ½..Required Minimum Distributions (RMDs) from retirement plans (other than Roth IRAs) must begin.

Social Security Beneficiaries May Get Biggest Increase in 6 Years

Social Security beneficiaries are projected to receive a 2.2% cost-of-living increase next year, the most since 2011.   That would be about $30 a month for the average retired worker.  This is a relative bonanza compared to the 0.3% adjustment for this year and the unchanged benefits in 2016.  The cost of living adjustments have been low because of unusually weak inflation in recent years.

Social Security officials will release the official cost-of-living increase for Social Security recipients in October.

Ask Me About…

• Do you travel for your job?  Does your employer reimburse you?
• Are you thinking of taking a distribution from an IRA or 401K?  Are you older than 59 ½?
• Do you have stocks or mutual funds that you are planning to sell that