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.

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.

Tax Deductions for Volunteering

According to Bay Area Family Philanthropy Lawyers, if you volunteer your time for charity, you may qualify for tax breaks!

Although no tax deduction is allowed for the value of services performed for a charity, some deductions are permitted for out-of-pocket costs incurred while performing the services. The normal deduction limits and substantiation rules also apply. The following are some examples:

  • Away-from-home travel expenses while performing services for a charity, including out-of-pocket roundtrip travel cost, taxi fares, and other costs of transportation between the airport or station and hotel, plus lodging and meals are allowed at 100%. Unlike other areas of taxes, meals are not subject to the 50% limitation. These expenses are only deductible if there is no significant element of personal pleasure associated with the travel, or if your services for a charity do not involve lobbying activities. Any “significant element of personal pleasure” negates a deduction (i.e., not even partial deduction is allowed). Significant personal pleasure is assumed if the taxpayer has only minor duties and is not required to perform any duties for the charity for major portions of the away-from-home stay.
  • The cost of entertaining others on behalf of a charity, such as wining and dining a potential large contributor are allowed at 100 % (but the cost of your own entertainment or meal is not deductible).
  • If you use your car while performing services for a charitable organization, you may deduct your actual unreimbursed expenses directly attributable to the services, such as gas and oil costs, or you may deduct a flat 14 cents per mile for the charitable use of your car. You may also deduct parking fees and tolls.
  • You can deduct the cost of the uniform you wear when doing volunteer work for the charity, as long as the uniform has no general utility. The cost of cleaning the uniform can also be deducted.

No charitable deduction is allowed for a contribution of $250 or more unless the contribution is substantiated with a written acknowledgment from the charitable organization. To verify your contribution:

  • Get written documentation from the charity about the nature of your volunteering activity and the need to pay for related expenses. For example, if you travel out-of-town as a volunteer, request a letter from the charity explaining why you’re needed at the out-of-town location.
  • Submit a statement of expenses if you are out-of-pocket for substantial amounts, and preferably, a copy of the receipts to the charity. Also, arrange for the charity to acknowledge the amount of the contribution in writing.
  • Maintain detailed records of your out-of-pocket expenses, including receipts and a written record of the time, place, amount and charitable purpose of the expense.

Tax Reforms for 2014

San Jose Tax Lawyers describe the number of proposed tax changes that will take place, specifically in regards to Business Proposals & Estate / Gift Tax Proposals, as a result of Obama Tax Reformation in 2014.

Business Proposals

  • Make permanent the $500,000 Sec. 179 deduction with a $2million phase-out threshold.
  • Enhance and make permanent the research credit and increase the simplified credit percentage to 14%.
  • Permanently extend the work opportunity tax credit (WOTC) to wages paid to qualified individuals who begin work after Dec. 31, 2013.
  • Offer a one-time, temporary, 10% tax credit for increases in company wage payments over wages paid in 2012, whether driven by new hires, increased wages or salaries, or both.
  • Require employers who have over 10 employees and do not currently offer a retirement plan to enroll their employees in a direct-deposit Individual Retirement Account (IRA) that is compatible with existing direct-deposit payroll systems. (Employees can opt out if they choose.) Employers would be entitled to a tax credit of $25 per participating employee, up to $250 per year, for six years.
  • Deny deductions for punitive damages.
  • Make the 100% exclusion permanent for qualified small business stock (QSBS) acquired after Dec. 31, 2013.
  • Permanently double the maximum amount of start-up expenditures that a taxpayer may deduct (in addition to amortized amounts) in the tax year in which a trade or business begins from $5,000 to $10,000 for tax years ending on or after the date of enactment. Reduce this maximum amount of start-up expenditures (but not to below zero) by the amount that start-up expenditures with respect to the active trade or business exceed $60,000.
  • For tax years beginning after Dec. 31, 2012, expand the group of employers who are eligible for the tax credit available to small employers providing health insurance to employees so as to include employers with up to 50 full-time (or the equivalent) employees, and begin the phase-out at of the restriction to no more than 20 full-time equivalent employees.
  • Create a new general business credit against income tax equal to 20% of the eligible expenses paid or incurred in connection with insourcing a U.S. trade or business.
  • Disallow deductions for expenses paid or incurred in connection with outsourcing a U.S. trade or business.

Estate and Gift Tax Proposals

  • Beginning in 2018, return to 2009 levels the estate, generation-skipping transfer (GST), and gift tax exemptions and rates. Thus, the highest tax rate would be 45%, and the exclusion amount would be $3.5 million for estate and GST taxes and $1 million for gift taxes.
  • Require that the basis of property in the hands of the recipient be no greater than the value of that property as determined for estate or gift tax purposes (subject to subsequent adjustments). These rules would apply to transfers on or after the enactment date.

Reference the following link for more information on Obama Tax Reformation Policies for 2014.