Limitations on Incurred Medical Expenses of Employees

Bay Area Tax Attorneys – Health Concerns

In order for a health FSA to be a qualified benefit under a cafeteria plan, the maximum amount available for reimbursement of incurred medical expenses of an employee, the employee’s dependents, and any other eligible beneficiaries with respect to the employee, under the health FSA for a plan year (or other 12-month coverage period) cannot exceed $2,500.

Planning for Retirement? – IRA Limits and Catch-Up Contributions

Bay Area Tax Lawyers – For those who annually contribute to their IRA account and wish they could contribute more, there is good news. The annual contribution limit is inflation adjusted each year and is slowly increasing.

Taxpayers 50 and older are allowed larger contributions through so-called “make-up” provisions (see table below).

The contribution limit for Traditional IRA Accounts for taxpayers that do not have a qualified plan with their employer is as follows.

IRA Contribution Limits

Year
2008-2012
2013
2014
Under Age 50
5,000
5,500
Inflation Adjusted
Age 50 & Over
6,000
6,500
Inflation Adjusted

However, if a taxpayer is an active participant in an employer’s pension plan or a self-employed pension plan, the deductible amount will be ratably phased out if their income for the year (AGI) is within the phase out range and not allowed at all if the AGI exceeds the phase out range (see the table below). The phase-out ranges are adjusted annually for inflation.

Phase-Out Ranges

Filing Status
2012
2013
Single & Head of Household
58,000 – 68,000
59,000 – 69,000
Married Filing Jointly
92,000 – 112,000
95,000 – 115,000
Married Filing Separately
0 – 10,000
0 – 10,000

 

Special rule for a nonactive participant spouse – The limits for deductible IRA contributions do not apply to the spouse of an active participant. Rather, the maximum deductible IRA contribution for an individual who is not an active participant but whose spouse is an active participant, is phased out for the non-active participant if their combined AGI is between the inflation adjusted limits for the year as illustrated in the table below.

Nonactive Spouse Phase-Out Ranges

Year
2012
2013
Phase-Out Range
173,000 – 173,000
178,000 – 188,000

Long-Term Medical Care Services

Ainer & Fraker – Amounts paid for long-term care services and certain premiums paid on long-term care insurance are deductible as medical expenses on Schedule A.

Costs of care provided by a relative who is not a licensed professional or by a related corporation or partnership don’t qualify. The maximum amount of long-term care insurance premiums treated as medical depends on the insured’s age and is inflation-indexed annually. The following are the deductible amounts for the past few years. If the taxpayer paid long-term care premiums and qualifies for a medical deduction on Schedule A of their tax return and did not include them in their medical deduction, the return can be amended to include the deduction. Please call this office to see if the deduction will make a difference and to have us prepare the amended returns.

Deduction Limitations
Age
2011
2012
2013
2014
40 or less
340
350
360
*
41 to 50
640
660
680
*
51 to 60
1,270
1,310
1,360
*
61 to 70
3,390
3,500
3,640
*
71 & older
4,250
4,370
4,550
*
Per Diem
300
310
320
*

 

Employees generally won’t be taxed on the value of coverage under employer-provided long-term care plans. However, the exclusion doesn’t apply if coverage is provided through a cafeteria plan. In addition, long-term care services can’t be reimbursed tax-free under a flexible spending account.

The “Long-term care contract” is an insurance contract that provides only coverage of long-term care and meets certain other requirements. Some long-term care riders to life insurance will also qualify. Benefits under a long-term care policy (other than dividends or premium refunds) are generally tax-free. For per-diem contracts that pay a flat-rate benefit without regard to actual long-term care expenses incurred, the inflation adjusted exclusion is limited to $320 a day in 2013 (up from $310 in 2012), except when long-term care costs incurred are more than the flat rate and are not otherwise compensated by some other means.

A contract isn’t treated as a qualified long-term care contract unless the determination of being chronically ill takes into account at least five activities of daily living: eating, toileting, transferring, bathing, dressing and continence.

“Long-term care services” include necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, maintenance or personal care services prescribed by a licensed practitioner for the chronically ill.

“Chronically ill person” is one who has been certified by a licensed healthcare practitioner within the previous 12 months as: (1) unable to perform at least two activities of daily living (eating, toileting, transferring, bathing, dressing, continence) without substantial assistance for a period of 90 days due to loss of functional capacity, (2) having a similar level of disability as determined in regulations, or (3) requiring substantial supervision to protect from threats to health and safety due to severe cognitive impairment. The requirement that a qualified long-term care insurance contract must base its determination of whether an individual is chronically ill by taking into account five activities of daily living applies only to (1) above (being unable to perform at least two activities of daily living). 

Health Care – Are You Covered?

Ainer & Fraker , LLP – By 2014, each state must establish an exchange to help individuals and small employers obtain coverage.  Benefit options will be in a standard format and a single enrollment form used for all policies.

Plans offered through an exchange must provide essential health benefits, limit cost sharing, and provide specified accrual benefits (i.e., the percentage amount paid the insurer).  Out-of-pocket deductibles are limited to caps for Health Savings Accounts and further limited to $2,000 ($4,000 for families) in the small group market.

Plans in the individual and small group markets use a metallic designation for the accrual benefits provided:

  • Bronze 60%
  • Silver 70%
  • Gold 80%
  • Platinum 90%

Home Computer for Business

Ainer & Fraker, LLP – If a taxpayer purchases a home computer for use in their work as an employee, they can claim a depreciation deduction if:

1. Use of the home computer is for the convenience of the employer (that is, the taxpayer is required to use a computer on the job and the taxpayer’s employer does not provide the employee with a computer)

2. Use of the home computer is required as a condition of the taxpayer’s employment. To satisfy this requirement, there must be a clear showing that the employee cannot perform properly the duties of employment without it.

50% Rule – If the taxpayer meets the two tests above and also use their home computer more than 50% in their work, they can claim an accelerated depreciation deduction and can utilize the Section 179 deduction to write off the computer in the year of purchase. On the other hand, if they do not use the home computer more than 50% in their work, they must depreciate the computer using the straight-line method and cannot take a Section 179 expense deduction.

Computer used in home office – The 50% rule does not apply to the taxpayer’s computer if part of the taxpayer’s home is treated as a regular business establishment and the taxpayer uses the computer exclusively in that part.

Nonemployee use of a home computer – A taxpayer can deduct depreciation on the home computer to the extent it is used to produce income (for example, managing investments that produce taxable income). However, the time the computer is used to manage investments does not count as business-use time for purposes of the 50% rule and the determination of the depreciation method.

Reporting and Recordkeeping – The IRS requires that you maintain records to prove your percentage of business use.

Sales Tax Deductions on Business Purchases

Saratoga Tax Lawyers – Deducting Sales Tax On Business Purchases

When taxpayers buy new equipment for businesses purposes, the following question arises: “Can they separate the sales tax from the purchase price and deduct that separately as a currently deductible tax expense?”

Unfortunately, you are required to include all the costs of acquiring the equipment into the depreciable basis, including the sales tax.

Whenever property is purchased for business use in a business and that property has a useful life of more than one year, its cost must be deducted over its useful life. This accounting procedure is referred to as depreciation. The number of years the property must be depreciated is largely dependent upon the type of property it is. However, there are exceptions to the depreciation requirement:

  • Tax regulations include a rule allowing you to disregard the depreciation requirements for property for which the cost is less than $100. This may seem very low, but while many other tax values are periodically adjusted for inflation, this value has not changed for well over 20 years.
  • The tax code contains a special provision that allows certain types of property to be expensed (deducted in year of purchase) rather than being depreciated. This provision is commonly referred to as Section 179 expensing and is limited to a maximum annual amount is inflation adjusted annually.  The Section 179 deduction only applies to tangible personal property such as tools, office equipment, machinery, etc. and does not apply to real estate. There are some other restrictions as well, so be sure to contact this office for additional details.

Sometimes, even repairs may have to be depreciated. If a repair or replacement increases the value of the property, makes it more useful, or lengthens its life, then it must depreciated. If not, it can be deducted like any other business expense.

Why Notify the IRS of Your Address Change?

You might say to yourself, “Why would I want to inform the IRS of my change of address, since they will find out when I file my next year’s income tax?”

According to Ainer & Fraker, LLP, the following are important reasons for promptly notifying the IRS of your address change.

You may have a refund coming and failure to file the change of address could delay that refund from reaching you.

The IRS may send you correspondence which requires a timely response. By mailing that correspondence to your last known address, the IRS fulfills their legal notification requirements and any repercussions as a result of your lack of response becomes your responsibility, even if you never received the notice. Therefore, it is always good practice to promptly notify the IRS of an address change by filing Form 8822. Click here to access an online form fill and print version of IRS Form 8822.

If this change also affects the mailing address for your children who filed income tax returns, complete and file a separate Form 8822 for each child.

Prior Name(s) – If you or your spouse changed your name because of marriage, divorce, etc., complete line 5. Also, be sure to notify the Social Security Administration of your new name, so that it has the same name in its records as what you have on your tax return. This prevents delays in processing your return and issuing refunds. It also safeguards your future social security benefits.

P.O. Box – If your post office does not deliver mail to your street address, show your P.O. box number instead of your street address.

Foreign Address – If your address is outside the United States or its possessions/territories, enter the information in the following order: city, province or state, and country. Follow the country’s practice for entering the postal code. Please do not abbreviate the country name.

Tax Central: Change of Address

Bay Area Tax Lawyers – Change of Address Notifications? If your entire family is moving to the same address and each member has the same last name, you need to fill out only one Change of Address Order form.

For all other cases, each individual moving must fill out a separate form. Click here to enter the USPS Website online Change of Address Order Form where you can fill-in and submit your change of address through the Internet.

When To Submit Change of Address Form – Submit the change of address at least 15 days before you move, or as soon as you know your new address and the date of your move. The post office will forward your mail to the new address beginning on the “Start Date” you specified on the Change of Address Order form. Once the Change of Address is submitted, the Postal Service will send a confirmation letter to your old address, regardless of the date of your move.

If you file your change of address form timely, you should begin receiving forwarded mail at your new address within three to five days from the indicated “Start Date”.

Duration of Forwarding Order – All mail including First-Class, Priority, and Express Mail will be forwarded for 12 months at no charge, except for mail marked “Do Not Forward.” Periodicals (second-class) will be forwarded for 60 days at no charge. This includes newspapers and magazines. Generally third-class mail such as circulars, books, catalogs, and advertising mail will not be forwarded. Parcel Post Packages will be forwarded locally for 12 months at no charge. Forwarding charges will be assessed if forwarded outside the local area. This includes packages weighing 16 ounces or more not mailed as Priority Mail.

Magazine & Publisher Notification – You should let all publishers and other business mailers know at least four to six weeks before you move. Follow the publisher’s change of address instructions and those noted on billing statements you receive.

Notification Postcards – At least 30 days before you move, notify everyone of your new address and the date of your move. Many bills and statements have an area for making an address change notification. You can obtain free Notification Postcards (Form 3576) from your post office.

Mail with an Endorsement “Do Not Forward” – For permanent moves, mail marked “Do Not Forward” is returned to the sender along with your new address information. However, if your move is only “temporary” (you’ll be returning home in less than 12 months), this mail is returned to the sender without your new address information. Therefore, temporary movers need to notify their mailers directly to inform them of their new address.

IRS Form 8594 for Business

Saratoga Tax Lawyers – Most businesses are made up of different types of assets, and those assets get different treatment for tax purposes. How those items are identified at the time of the sale/purchase can have a significant tax impact on both the buyer and the seller.

A seller will, of course, want to designate items into classes that will yield a long-term capital gain on sale and thus provide the best tax result from the sale, whereas the buyer will generally want to designate the purchased items into classes that provide the biggest up-front write-offs.

The IRS generally does not care how the class allocations are made so long as both the buyer and the seller use consistent treatment. That is where IRS Form 8594 comes in. The form allocates the entire purchase/sale price of the business into the various classes of assets; both the buyer and the seller are required to file the form with their tax returns. It is also very important that allocations be spelled out in the sale/purchase agreement and that the treatment between the buyer and seller is consistent.

Generally, assets are divided into the seven categories very briefly described below:

Class I – Cash and Bank Deposits
Class II – Actively Traded Personal Property & Certificates of Deposit
Class III – Debt Instruments Class IV – Stock in Trade (Inventory)
Class V – Furniture, Fixtures, Vehicles, etc. Class VI – Intangibles (Including Covenant Not to Compete)
Class VII – Goodwill of a Going Concern

A seller would prefer to designate the major portion of the sales price to goodwill and minimize any allocation to furnishings and equipment. Why, you ask? Because goodwill is a capital asset, the sale of which for federal purposes will be taxed at a maximum rate of 20% in 2013, while furnishings and equipment can be taxed as high as 39.6 percent. On the other hand, the buyer would prefer to have as much as possible designated as furnishings and equipment, since they can be expensed or written off over a short period of time (usually 5 or 7 years) as opposed to a 15-year amortized write-off of the goodwill.

Whether you are the buyer or the seller, don’t leave the asset allocations to chance. Negotiate the allocation as part of the sales agreement. If you don’t, you could easily end up with inconsistent treatment and potential adjustments by the IRS.

Eldercare as a Medical Deduction?

Ainer & Fraker, LLP: Eldercare Can Be a Medical Deduction

With people living longer, many find themselves becoming the care provider for elderly parents, spouses and others who can no longer live independently. When this happens, questions always come up regarding the tax ramifications associated with the cost of nursing homes or in-home care.

The entire cost of nursing homes, homes for the aged, and assisted living facilities are deductible as a medical expense, if the primary reason for the individual being there is for medical care or the individual is incapable of self-care. This would include the entire cost of meals and lodging at the facility. On the other hand, if the individual is in the facility primarily for personal reasons, then only the expenses directly related to medical care would be deductible and the meals and lodging would not be a deductible medical expense.

As an alternative to nursing homes, many care providers are hiring day help or live-in employees to provide the needed care at home. When this is the case, the services provided by the employees must be allocated between household chores and deductible nursing services. To be deductible, the nursing services need not be provided by a nurse so long as the services are the same services that would normally be provided by a nurse such as administering medication, bathing, feeding, dressing etc. If the employee also provides general housekeeping services, then the portion of employee’s pay attributable to household chores would not be a deductible medical expense.