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Health Savings Accounts
A closer look at the benefits
Health savings accounts (HSA) are used in conjunction with a high deductible health plan and offer four tax advantages compared to traditional savings and investment accounts:
Eligible healthcare expenses include prescription medications, prescription eyeglasses, and fees paid to health care professionals or hospitals, just to name a few. With a few exceptions, HSA distributions not spent on eligible medical expenses are taxable.
HSAs can also be used to buy over-the-counter medicines as long as your doctor gives you a prescription for it. Additionally, you can tap into your HSA to buy long-term care insurance or to pay for health insurance premiums when you are unemployed.
Despite their attractive tax advantages, health savings accounts are not for everyone. One drawback is that you’ll need to have a high-deductible health insurance plan to be eligible to open and contribute to an HSA. “High deductible” means you’ll be responsible for paying all or a significant portion of your medical expenses out of your own pocket.
Using an IRA to make charitable contributions
A tax-free way to help your favorite cause
Normally, money distributed from an Individual Retirement Account (IRA) is taxable. However, if the funds are donated directly to charity, the distribution is completely tax-free. This is a significant tax-planning opportunity for older taxpayers. To qualify for tax-free treatment, a charitable IRA distribution must meet three criteria:
You don’t get an itemized deduction for this charitable gift. Instead, the amount of the charitable IRA distribution is not included in your income for the year, but counts as your required minimum distribution. This helps keep your income (and adjusted gross income) lower than if you took the money out yourself and subsequently donated the same amount to charity.
Keeping your income low can help you avoid higher Medicare premiums, because the cost of Medicare insurance increases once your adjusted gross income for the year goes over $85,000 ($170,000 for married couples).
Don’t forget about your RMD
Older adults who reach age 70½ and are no longer working need to start drawing funds from their retirement savings accounts, making sure they meet their required minimum distribution (RMD) for the year. RMDs apply to funds saved in traditional IRA, SEP IRA, SIMPLE IRA, 401(k), 403(b), 457, and thrift savings plan accounts. The RMD rules do not apply to a Roth IRA, Roth 401(k), or Roth 403(b).
You only need to remember a few rules. First, you have a choice. You can begin taking RMDs in the year you reach age 70½. Alternatively, you can wait and take your first RMD by April 1 of the following year. Keep in mind that if you wait until April 1 of the following year, you are required to take two distributions in that year.
For example, if you turn 70½ on July 4, 2019, you’ll take your first RMD either by December 31, 2019, or by April 1, 2020. For all subsequent years, you’ll need to take your RMD by the end of the year.
If you turned 70½ on July 4, 2019, and you decide to take your first RMD by April 1, 2020, this will satisfy your first RMD. (This makes the distribution taxable in 2020.) You’ll also need to take your second RMD by December 31, 2020. This satisfies your RMD for the year 2020. In this scenario, you have two distributions taxable in 2020. Going forward, for the year 2021, you’ll take your RMD by December 31, 2021.
Finally, determine how much RMD you need to take out. Each year, we need to calculate your required minimum distribution. This is the minimum amount you’ll need to withdraw from your retirement accounts to meet the requirement.
We can help you calculate your RMDs, so you can rest assured you’re meeting the requirement. All we need are the Form 5498 documents that your retirement plan administrators send to you.
W-4 mid-year checkup
Reviewing your estimates
Making an adjustment to how much tax is withheld from your income or increasing your estimated tax payments can help you avoid an unwelcome tax bill and potential penalties at the end of the year.
With all the tax changes that went into effect in 2018, it’s important to review your tax withholding at least once a year.
Opting to not review your withholding for the year and leaving it the way it is could be a mistake. We had several clients not review their withholding and estimated tax payments for any necessary changes. Even though their income was about the same as the previous year, they ended up owing the IRS instead of getting their usual refund.
The culprit was two-fold. Not only did clients lose some deductions resulting from the tax reform changes, but also their withholding went down (even though they didn’t change anything) because the IRS changed the withholding tables and the way it’s calculated.
We can prevent problems like this by adjusting how much federal and state tax is withheld from your wages, pensions, unemployment benefits, and Social Security benefits. The goal is to pay enough tax that you avoid a balance due and still get a refund when we file your taxes for next year.
The same thought process holds true for self-employed freelancers. Self-employed persons should adjust their estimated tax payments, especially if their business income is increasing.
Signs you may need to adjust your withholding:
Getting married or divorced?
Things you need to know when changing your name or address
People change their names for any number of reasons. You might be taking your spouse’s surname after getting married, or you might be going back to your maiden name after getting divorced.
If you change your name, you must notify the Social Security Administration (SSA) and get a new Social Security card.
Do this before filing your next tax return with the IRS. Their computers check your name and Social Security number against SSA’s records. If your name doesn’t match exactly, that could cause e-file rejections or delays in processing your tax return.
Reporting your name change to SSA cannot be done online. Instead, you’ll need to fill out Form SS-5 to change information on your Social Security record. You’ll also need documents proving your legal name change, such as a court order, marriage document, or divorce decree. You can either mail in your name change request or visit a local SSA office.
After receiving your new Social Security card, use your new name on your tax returns. Be sure to tell us, too, so we can update our records with your new name.
And let us know if you are moving. By filing Form 8822, Change of Address, we can notify the IRS of your new address so any important letters or notices will reach you without getting lost in the mail.
Making home improvements?
Rules for deducting interest on home equity debt
Homeowners can deduct interest paid on home equity loans or home equity lines of credit if they use the loan proceeds for making home improvements. However, if the home equity loan is used to pay for anything else, like college tuition or a new car, the interest on that loan won’t be tax deductible.
Homeowners need to be careful when taking out a loan secured by their house. Not all home equity loans qualify for the mortgage interest tax deduction. We need to look at how you spent the loan proceeds when figuring out if your loan interest is deductible.
For tax years 2018 through 2025, homeowners can deduct interest paid on mortgages and home equity debt as long as they spend the loan proceeds to buy, to build, or to substantially improve their main home or a second home.
Here’s how to make sure your home equity loan or line of credit will be tax deductible:
From the IRS’s perspective, home improvements are “substantial” if the improvement adds value to your home, extends the useful life of your property, or adapts your home to new uses.
Examples of substantial home improvements:
Examples of what’s not a substantial improvement:
Let us know about any new or refinanced home loans. We can help you determine if the interest will be tax-deductible and can help you keep proper documentation for tax purposes.