MINIMIZE YOUR HEALTHCARE COSTS AND SAVE TAXES WITH AN HSA

by Andrew D. Schwartz, CPA

You purchase insurance to protect yourself against the catastrophic.  Paying a few hundred dollars to fix a broken window in your garage won't trigger a financial crisis for most households.  Being forced to rebuild your two-car garage after it is flattened by a fallen tree is when you look to your homeowner's insurance to come to the rescue.

Protection against the catastrophic describes long-term disability insurance as well. Miss a few days of work due to the flu, and you won't be financially devastated, even if you have already used up all of your PTO (Paid Time Off) for the year.   How financially devastating would it be if you end up missing a chunk of time at work and do not have adequate disability insurance coverage in place?

Assuming the purpose of insurance is to protect yourself against the catastrophic, please explain what happened to the health insurance industry.  Most plans pay pretty much all of your health costs each year.  Yes, you get hit with co-pays and a relatively modest annual deductible.  But that's about it for most people with traditional health insurance coverage.

When you think about it, however, there is a very good reason as to why the health insurance industry evolved into more of a payment program than a true insurance product.  Leaders of the healthcare industry realized that it would be less expensive in the long-run for insurance companies to encourage people to seek out preventative care instead of paying for costly medical care that could have been avoided with earlier detection. 

Now that consumers are better informed about preventative healthcare, let's review a strategy that helps people not only reduce their health insurance premiums but also build up money within a tax-advantaged savings account.

HSAs

Back in 2004, President Bush introduced Health Savings Accounts (HSA).  Only individuals or families covered under a high-deductible health insurance plan during the year are eligible to contribute to an HSA.  For 2009, the minimum annual deductible to qualify as a high-deductible plan is $1,150 for individuals or $2,300 for families. 

Here are four tax breaks available to you if you contribute to an HSA:

• Money contributed into an HSA is tax-deductible.  Either you contribute into an HSA on your own, or your employer contributes on your behalf.

• Money invested within the HSA is your money and grows tax-deferred.  Unlike Flexible Spending Accounts (FSA) offered to you as part of your employee benefit package where you set aside a set amount of money to pay for your family's healthcare costs with pre-tax dollars, there is no "use it or lose it" pitfall with HSAs.

• Money can be withdrawn tax-free from your HSA at any time to pay for your family's healthcare expenses.

• Any money remaining in your HSA upon your reaching the age of 65 is available to subsidize your retirement.

The Winning Combination

As health insurance costs continue to skyrocket, Health Savings Accounts (HSAs) provide you with a great opportunity.  Assuming you and your family are relatively healthy, and you won't choose to routinely forgo your annual physical to save a few hundred dollars in medical bills, start by switching to a high-deductible health insurance product.  You will immediately realize a sizeable decrease in your monthly premium - generally equivalent to the increase in your annual deductible.

Next, open up and fully fund an HSA for the year.  Don't forget to deduct your HSA contributions on your tax return that year.

Assuming you and your family have a relatively healthy year, you will end up ahead of the game, since you get to keep all the money leftover in your HSA at the end of the year. 

What happens if you incur substantial healthcare costs during the year? Yes, you will probably deplete your HSA.  But once you spend the full amount of your annual deductible, your insurance takes over like insurance is supposed to do and protects you against any further financial hardship.

Bang For Your Buck

Are your ready for some more good news about HSAs?  When these tax-advantaged healthcare savings accounts were first introduced back in 2004, the amount you could contribute into an HSA each year was a function of your annual deductible.

A few years ago, the rules were changed to make HSAs more attractive.  For families, as long as your annual deductible is at least $2,300 (in 2009), you can contribute up to $5,950 into your HSA.  Single individuals with a health insurance deductible of at least $1,100 in 2009 are eligible to deposit $3,000 into an HSA this year.  Anyone 50 or older can contribute an extra $1,000 into an HSA this year.

What this new rule means to you is that you can put away almost triple your annual deductible.  So even if you tap into your HSA to pay 100% of your deductible, you still have a decent amount of money left over growing tax-deferred to pay for future healthcare costs or to eventually help fund your retirement.

Survival of the Frugalist

Why not let your health insurance do it's job and protect you and your family against the catastrophic?  Then, couple this less expensive insurance with pre-tax contributions into an HSA, and you have discovered one strategy to minimize the after-tax cost of your family's healthcare costs in today's market.

For more information about HSAs (and some good bedtime reading), check out IRS Publication 969.

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A FEW ORIGINAL TAX JOKES

by Andrew D. Schwartz, CPA

I met with a new client the other day.  "I am expecting a substantial tax refund this year," she told me.  "You see, last year I spent thousands of dollars on Liposuction, and as you know, medical expenses are tax deductible."

"Medical expenses are surely tax deductible to the extent they exceed 7.5% of your income," I responded.  "Unfortunately, elective cosmetic procedures such as Liposuction do not qualify for the medical deduction."

"Well," she huffed as she got up from her chair and got ready to storm out of my office.  "Now it is YOU who is getting under my skin."

**

Looking for a solution to the overly complex tax code?

All we need to do is require that each member of Congress prepare his or her own tax return - without the help of either a tax preparer or any tax preparation software.  The IRS should then review every tax return prepared by a member of Congress to make sure that the tax calculation is 100% correct.

That should do the trick.

**

A man bought a voice enabled robot to use for his business.  And as any accountant would tell you, a robot has a useful life for tax purposes of five years.

Well, the man and the robot got along great for the five years.  Then, during January of the sixth year, the robot noticed that the man was looking at some catalogs to purchase a replacement robot.

The poor robot didn't know what to do.  Finally, one day, the robot mustered up enough courage, and went to the man and said, "You just don't depreciate me any more."

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A CASE STUDY ABOUT DEDUCTIONS

by Teri Boticelli, EA

Helen H. Haim, a single person, who resided in VA, was recently promoted to management within her company based at the employers’ Corporate Headquarters located in Portland, ME. In order to accept this position, Helen sold her primary residence in VA, which she owned 100%, searched for a new home in ME, relocated her belongings including household items, goods in storage and her sailboat, and moved via airplane. Furthermore, Thomas Feldman, a member of Helen’s household who relocated to Portland with her via automobile, incurred job search expenses prior to the move while seeking employment in ME.  

Throughout this process, Helen incurred various travel, lodging and meals expenses for herself, Tom, and her two children, who previously resided in Japan, while making two house-hunting trips to ME and moving. In addition, she compensated a moving company and a college student to transport her personal property for the actual move in November 2007. During Tom’s travel to ME, he stopped over in Pittsburgh, PA to visit family.

Upon arriving in ME, Helen and Tom were not able to occupy the new home for roughly twenty days until the construction was complete. During this time, they resided in a hotel and all personal belongings were placed in storage.

In early March 2008, Helen was reimbursed by her employer 75% of all moving costs for her personal property and the two house-hunting trips as well as 50% of the total meals and lodging expenses while in Portland, ME.

ISSUES:  Are Helen’s, Tom’s and the dependent’s travel, lodging, meals and moving expenses deductible as moving expenses on Form 3903,  given the fact that the main purpose of incurrence is business related? If so, are all of the expenses fully deductible? For what year is Helen eligible for a deduction, 2007 or 2008? Is the reimbursement from her employer includable in Helen’s income? If so, what reimbursements will constitute income and how should the income be reported on Form 1040? Are Tom’s job search expenses deductible? If so, who gets the deduction, Helen or Tom?

House-Hunting Expenses:  At some point during the 1990's, moving expenses were changed from an Itemized Deduction to an Adjustment to Income.  As part of that change, fewer types of expenses would qualify as moving expenses - including House-Hunting Expenses.  For that reason, none of the travel, lodging, meals or any other expenses associated with searching for and purchasing a new home is a qualified moving expense.  

Job Search Expenses:  § 162(a)(2) of the Code states that costs incurred by an employee in finding work in the same trade or business are deductible employee business expenses. Under this Section, Tom is eligible to deduct expenses paid by him in searching for a new job during the tax year, for carrying on his trade or business and as it is ordinary and necessary in his present occupation, even if he does not get a new job. When Tom traveled to Portland, ME, despite the fact that he gave Helen his opinion on potential new residences while Helen searched for a new home, he looked for a new job in his present occupation. For Tom’s purpose, his travel and lodging expenses were incurred primarily in searching for a new job.

Additionally, Tom may be eligible to deduct the costs of preparing and sending resumes, contacting potential employers via telephone, fax or other and 50% of his meals while traveling during his job search, to name a few. Nevertheless, under IRC Section 67, Tom’s job search expenses, including travel, are deductible below the line as Unreimbursed Business Expenses and subject to the 2% floor on Miscellaneous Itemized Deductions. Therefore, if Tom does not itemize his deductions, which it seems as though doing so may not benefit him (his standard deduction most likely exceeds his itemized deductions since he has no mortgage or real estate taxes) then he will receive no benefit from deducting job search expenses on Form 2106. Furthermore, if Helen paid for the aforementioned expenditures on his behalf, Tom is not eligible for a deduction at all.

Sale of Primary Residence in VA:  Per Section 121(a), “gross income shall not include gain from the sale or exchange of property if, during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer's primary residence for periods aggregating 2 years or more.” Correspondingly, Helen did not sell any other residence in the past two-year period. Therefore, as long as she used the home in Virginia Beach as her primary residence for two of the last five years and did not sell the home for a gain of greater than $250,000-, then Helen remains untaxed on any portion of gain from the sale of her home. Similarly, if the home was sold at a loss, regardless of the circumstances, Helen would not be eligible for a deduction on her personal income tax return under this or any other Section of the Code.

Moving Expenses:  Internal Revenue Code Section 217(a) states that moving expenses are a deduction to the taxpayer if “paid or incurred during the taxable year in connection with the commencement of work by the taxpayer as an employee…at a new principal place of work.” Since Helen began a full-time management position with her current employer in Maine, greater than fifty miles from the Virginia home, immediately after the move, she is eligible to deduct the cost of packing, crating and transporting household goods and personal effects for herself and the members of her household under § 217(b)(1)(A) of the Code. Tom is considered a qualified member of her household because he resided in Helen’s former home and resides in her current home per the requirements in IRC Section 217(b)(2).

IRC § 217(b)(1)(B) provides that travel and lodging in transit are deductible up to one trip per person for Helen and the members of her household to the extent that those expenses are reasonable and by the shortest, most direct route available. Therefore, if Tom’s visit to Pittsburgh, PA did not fall in the direct route of the move, then the additional expenses to “stop over” are not deductible. Notwithstanding, whether or not Pittsburgh, PA is within the direct route, additional travel expenses associated with Tom’s stay in that area are not qualified moving expenses.

In any case, to figure the eligible expenses in traveling by automobile one of two methods may be used; actual expenses or standard mileage. Actual expenses include gas and oil for the vehicle but not depreciation, insurance or general repairs and maintenance. Standard mileage calculates at a rate of $0.20 per mile. Regardless of the method chosen, parking fees and tolls are deductible to the extent in which the expenses are incurred while traveling on the direct route. Similarly, Helen’s travel costs, which includes airfare and taxi rides to and from the airport, are fully deductible. However, expenses for meals incurred by any of the parties involved are not deductible.

Furthermore, the cost of the movers and the college student to transport the goods, items in storage, the automobile and the sailboat are deductible. However, the cost of moving Helen’s goods in storage and the sailboat are limited to the amount it would have cost to transport those items from her former to present homes. In addition, she is eligible to deduct the amount compensated to the college student as well as vehicle expenses (like that of Tom’s) incurred during the move.

Lodging in VA:  Treasury Regulation §1.217-2(b)(4) affirms that “expenses of lodging incurred in the general location of the former residence within one day after the former residence is no longer suitable for occupancy…shall be considered as expenses of traveling.” Based on this Regulation, Helen can include the lodging expenses incurred for herself and Tom until Thursday, one day after the moving company removed Helen’s and Tom’s household items, while the couple is not in transit.

Temporary Living Costs in ME:  As previously mentioned, the objective of lodging expenses under IRC § 217(b)(1)(B) qualifies Helen and members of her household while traveling from the prior to the new home to deduct lodging for the one day following the transportation of household items. Conversely, the cost of temporary living expenses while waiting for completion of the new home is not a qualified moving expense. Revenue Ruling 54-429 specifically concludes that amounts received as allowances or reimbursements for meals and lodging of the employee and his/her family while awaiting permanent quarters are includible in the employee's gross income.

Travel for Children:  Roman Q. Paguio, TC Memo 1981-2 reveals that a moving expense deduction was denied to parents for transporting their children from the Philippines to the U.S. The children’s principal place of abode was not the same as the parents’ before the move. Therefore, the parents are not entitled to deduct the cost of transporting such children to the U.S. Similarly, the travel costs for Helens dependents to move into the ME home are not deductible because the children resided in Japan. 

Storage of Items in ME:  The cost of storing and insuring any goods in transit within any period of 30 consecutive days after the day of the move until they are delivered to the new home, to the new residence is deductible per Treasury Regulation §1.217-2(b)(3). Under this Regulation, Helen may deduct the cost of storing household items until Helen and Tom moved into their new residence.

Employee Fringe Benefit – Reimbursement:  The contention of Section 1329(a)(6), (g) of the Code provides that gross income shall not include any fringe benefit under an accountable plan as a qualified moving expense reimbursement. For purposes of this section, the term “qualified moving expense reimbursement” means any amount received by an individual from an employer as reimbursement of expenses which would be deductible as moving expenses under § 217 of the Code if directly paid or incurred by the individual.

Per Revenue Ruling 2005-52, if the arrangement meets the three requirements of having a business connection, substantiation and returning amounts in excess of expenses, then all amounts paid under the arrangement are treated as paid under an accountable plan. Helen had a business connection as she paid expenses while performing services as an employee and she adequately accounted to her employer for the move and travel expenses within 60 days after she paid for them. Therefore, the reimbursement for the costs of moving the household items and her vehicle as well as the first night’s stay in VA is not taxable to Helen and will be reported on Form W-2, Box 12, Code P for the year ending December 31, 2008, the year of the reimbursement.

In contrast, Helen also had reimbursements of nondeductible expenses when she was reimbursed for the two house-hunting trips, all other hotel stays and meal costs. Therefore, per Section 132(g) of the Code these expenses are classified under a non-accountable plan and included in Helens income. In addition, the employer should have withheld social security, Medicare and federal taxes from this portion of the reimbursement. The reimbursement for Helen’s non-accountable plan expenses will be included on Form W-2, Box 1 for the year ending December 31, 2008, the year of the reimbursement.

Since Helen was reimbursed for her expenses as a cash method taxpayer, she has the option to deduct the qualified moving expenses in either the year she paid them or the year she received the reimbursement per Treasury Regulation §1.217-2(a)(2). If she deducts the moving costs in 2007, the year she paid them, then she must file Form 3903, reporting the qualified moving expenses. In 2008, the year of reimbursement, Helen must include the accountable and non-accountable plan reimbursements as Other Income on Form 1040, Line 21, and as Compensation on Form 1040, line 7, respectively.

Alternatively, if Helen waits to deduct the moving expenses in 2008, the year of reimbursement, then no additional filing is required in 2007. In 2008, Helen will include the non-accountable plan reimbursement as Compensation on Form 1040, Line 7 and file Form 3903, claiming the deduction for moving expenses paid in 2007 and reporting the accountable plan reimbursement.

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2008 & 2009 TAX FACTS

• For 2008, the standard deduction for a single individual is $5,450 and for a married couple is $10,900. A person will benefit by itemizing once allowable deductions exceed the applicable standard deduction. Itemized deductions include state and local income taxes (or sales taxes), real estate taxes, mortgage interest, charitable contributions, and unreimbursed employee business expenses.
• For 2008, the personal exemption is $3,500. Individuals will claim a personal deduction for themselves, their spouse, and their dependents. 
  
• The maximum earnings subject to social security taxes is $106,800 for 2009, up from $102,000 for 2008.
  
• The standard mileage rate is $.55 per business mile as of January 1, 2009, down from $.585 per mile as of December 31, 2008.
  
• The maximum annual contribution into a 401(k) plan or a 403(b) plan is $16,500 in 2009.  And if you'll be 50 or older by December 31st, you can contribute an extra $5,500 into your 401(k) or 403(b) account this year.
• The maximum annual contribution to your IRA is $5,000 for 2008 and 2009.  And if you turn 50 by December 31st, you can contribute an extra $1,000 that year.  You have until April 15, 2009 to make your 2008 IRA contributions. 

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