1. 2 Welcome 2 nd of 16 Sessions –No cost to participate. Financial Support: –FINRA Foundation & United Way Worldwide Solid Finances Webpage: .

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Welcome• 2nd of 16 Sessions

– No cost to participate.

• Financial Support:

– FINRA Foundation & United Way Worldwide

• Solid Finances Webpage:

www.msuextension.org/solidfinances

Text Your Questions• Do you have a Question?

• Do you want to comment?– Type in the Q & A pod:

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Send Your Questions

Click this after typing question in Q & A Pod

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Schedule• October 13October 13thth

What’s Your Credit Score & What What’s Your Credit Score & What does it mean?does it mean?

• October 20October 20thth Saving Money by Paying Down Saving Money by Paying Down DebtDebt

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Save Money with Tax-Free Medical Savings Accounts

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Tax Favored Plans1.1. Montana Medical Care Montana Medical Care

Savings Accounts-MSAsSavings Accounts-MSAs2.2. Flexible Spending Accounts- Flexible Spending Accounts-

FSAsFSAs3.3. Health Care Savings Health Care Savings

Accounts-HSAsAccounts-HSAs

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Question A: Do you have medical bills not covered by insurance?

1. Yes

2. No

Calculating Tax Savings

• Flex Plans and HSAs save on–Federal Income Taxes

–Montana Income Taxes

• Montana MSAs help save on –Montana Income Taxes

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2011 Federal 2011 Federal Individual Income Tax RatesIndividual Income Tax Rates

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Marginal vs. Average Tax RatesJohn (Single) earns $50,000

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Question B: What tax rate should John consider when calculating savings from a Flex plan?

1. 10%2. 15%3. 17%4. 25%

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Tax Rate John should consider

• 25%

Tax Brackets & Rates Montana- 2010

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At LeastAt Least But less ThanBut less Than Then your tax is:Then your tax is:

$0$0 $2,600$2,600 1%1%

$2,600$2,600 $4,600$4,600 2%2%

$4,600$4,600 $6,900$6,900 3%3%

$6,900$6,900 $9,400$9,400 4%4%

$9,400$9,400 $12,100$12,100 5%5%

$12,100$12,100 $15,600$15,600 6%6%

$15,600 or more$15,600 or more 6.9%6.9%

www.mt.gov/revenue

Tax Saving Example

• This was reduced to 5.65% for 2011. Reducing the savings by $24.

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Question C: Are you currently enrolled in a flex plan?

1. Yes2. No3. Not sure

Terms• Section 125 Plan

• Flex Plan

• Cafeteria Plan

• Medical Reimbursement Plan

• Dependent Care Reimbursement Plan

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Two Parts of the Flex Plan

• Part 1: Medical Reimbursement–Reimburses qualified out of pocket medical expenses

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Two Parts of the Flex Plan

• Part 2: Dependent Care Reimbursement–Reimburses qualified “day care” expenses

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What are eligible medical expenses?

• Allowed as a deduction on federal income tax return

•Publication 502•www.irs.gov

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Eligible Expenses

• Health insurance premiums

• Co-payments

• Vision exams, glasses, contacts

• Dental exams, co-pays, dentures

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Eligible Expenses• Prescribed drugs• Insulin• Chiropractor’s fees• Lab fees• Hearing aids• Nursing home fees

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Ineligible Expenses• Most over the counter

medicationsThis is new for 2011

• Medical expenses reimbursed by some other type of insuranceHealth, Auto, Workers Compensation

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Question D: Are my spouse’s medical expenses eligible for reimbursement from my account?

1. Yes2. No

Family Member’s Expenses

• Spouses expenses are eligible

• Are my child’s expenses eligible?–Yes, if they are under age 27

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Medical Care Contribution Limits

• 2012: No federal maximum

• 2013: $2,500 per person maximum

• Plan imposed contribution limits are common– Minimums & Maximums

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What are eligible dependent care expenses?*

• Day care expenses

• Babysitter expenses• *Both you and your spouse

must be working, in school or looking for work

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Who is an eligible dependent?

–Children under age 13

–Spouse not able to care for themselves

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Dependent Care Contribution Limits

• Federal contribution limit–$5,000 maximum

• Maximum plan limits are rare

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Plan Details• Each plan has a “plan year”

– Not always a calendar year– Sign up each year

• No changing your contribution amount during the year– Unless you have a qualifying event

• Have a child, get married, divorces or have a death in the family

Flex Plan Year• Eligible expenses must be

incurred within plan year

• 90 day grace period after end of plan year to submit claims

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Money Remaining in Flex Accounts

• Money remaining in the accounts after the grace period is forfeited

IRS requirement32

Reimbursement Rules• Medical Care

–Claims reimbursed as soon as incurred

• Dependent Care–Claims reimbursed only after contributions

have been deposited

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Dependent Care Example

• Jeff contributes $200 per month–January 1st & February1st

–Total $400

• Jeff has $800 expense on February 15th

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Dependent Care Example Jeff files a claim for $800 on

February 20th –Jeff receives $400 reimbursement

• Why? He only has $400 in his account on February 20th

–Jeff must wait until March 1st for the next $200 & April 1st for the last $200

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Question E: Is the flex plan valuable for your situation?

1. Yes2. No3. Maybe

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Marsha Goetting

• Extension Family Economics Specialist• Department of Agricultural Economics & Economics

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Question F: Do you have a Montana Medical Care Savings Account?

1. Yes2. No

What is an MSA?• An account that can be An account that can be

used for paying eligible used for paying eligible medical expenses that are medical expenses that are not covered by a health not covered by a health insurance policy or flex insurance policy or flex planplan

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Who is Eligible?

• Montana Montana resident tax resident tax payers onlypayers only

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MSA Deduction• $3,000 for each $3,000 for each

taxpayer taxpayer• $6,000 married $6,000 married

couple (separate couple (separate accounts) accounts)

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Montana Taxable Income Adjusted income $ 42,000Adjusted income $ 42,000

MSA deposit MSA deposit - $6,000- $6,000

Taxable Income $36,000Taxable Income $36,000

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MSA Saves on Montana Income Taxes

• Contributions to MSA:Contributions to MSA: Taxes saved Taxes saved depend on tax depend on tax bracket bracket

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Question G: What is the amount of taxes a couple earning $40,000 would save on a $3,000 MSA deposit?

1. $5072. $4143. $2074. $126

Tax Brackets & Rates Montana- 2010

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At LeastAt Least But less ThanBut less Than Then your tax is:Then your tax is:

$0$0 $2,600$2,600 1%1%

$2,600$2,600 $4,600$4,600 2%2%

$4,600$4,600 $6,900$6,900 3%3%

$6,900$6,900 $9,400$9,400 4%4%

$9,400$9,400 $12,100$12,100 5%5%

$12,100$12,100 $15,600$15,600 6%6%

$15,600 or more$15,600 or more 6.9%6.9%

www.mt.gov/revenue

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Tax savings with MSA• 6.9% bracket (2010)

• Taxable income more than $15,600

$3,000 x .069

$207 Tax Savings from

having MSA on medical expenses you have anyway or even if you don’t use

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Regular savings account interest income• 6.9% bracket (2010)

• Taxable income more than $15,600

$3,000 x .0005 $1.50 earnings x .069 = .10

After tax earnings $1.40

Eligible Medical Care Expenses• IRS Publication IRS Publication

502 502 www.irs.govwww.irs.gov

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Save more in taxes than Interest Earnings

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MSA Deposit Tax Savings Interest Earnings 1%

$3,000 $207 $30

$2,000 $138 $20

$1,000 $ 69 $10

$ 500 $ 34.50 $ 5

Example: Barbara• January 31January 31

$3,000 deposited in MSA$3,000 deposited in MSA

• Eligible medical Eligible medical expensesexpenses$2,000 during year$2,000 during year

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Question H: By what amount is Barbara’s Montana income reduced?

1. $3,0002. $2,0003. Zero

Barbara’s Montana Income• Reduced by $3,000Reduced by $3,000

Not $2,000 withdrawnNot $2,000 withdrawn

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Adjusted income $ 32,000Adjusted income $ 32,000 MSA deposit MSA deposit - $3,000- $3,000

Taxable Income $29,000Taxable Income $29,000

Interest earnings• Not subject to Montana Not subject to Montana

income taxation if:income taxation if: Left in the accountLeft in the account Withdrawn for Withdrawn for

eligible medical eligible medical care expenses care expenses

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Double dipping not allowedCan’t claim twice for Can’t claim twice for same expense: same expense:

If claimed for FSA or HSA If claimed for FSA or HSA can’t claim for MSAcan’t claim for MSA

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Question I: Which is the best place to open an MSA?

1. Bank2. Credit Union3. Trust

Company4. Mutual Fund

Company5. Brokerage

Firm

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Shopping TipsAsk aboutAsk about

Minimum Balance?Minimum Balance?Fees for close out?Fees for close out?Transaction fees?Transaction fees?Interest rate? Interest rate?

MSA Rules

• Must be separate from Must be separate from other accounts other accounts

• Joint accounts for MSAs Joint accounts for MSAs not allowed not allowed

MSA Account

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Question J: Can an MSA be opened for a child under 18?

1. Yes2. No

Minor Child• Cannot Cannot establish for establish for Minor child under Minor child under age 18 age 18

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What if I need money for non-eligible expenses?• Considered Considered non-eligible non-eligible

withdrawalwithdrawal: : Subject to 10% penaltySubject to 10% penaltyWithdrawal counted as incomeWithdrawal counted as income

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Example: Duane

• Withdraws $6,000 to buy car in November 2011

Adjusted IncomeAdjusted Income $ 30,000 MSA Withdrawal$ 30,000 MSA Withdrawal ++ 6,000 6,000 Taxable IncomeTaxable Income $36,000 $36,000

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Example: 10% penalty

Increased TaxesIncreased Taxes $ $ 414 41410% Penalty10% Penalty + + 600 600 Total Cost of Withdrawal $ 1,014(non-eligible)

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No 10% Penalty1.1. If Non-eligible withdrawal If Non-eligible withdrawal

made on last business made on last business weekday of Decemberweekday of December Amount included as Amount included as

income, however income, however

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Example: Duane• Withdraws $6,000 to buy car on last business day of

Dec.Adjusted Income $ 30,000 MSA Withdrawal + 6,000

Taxable Income $36,000• Total cost of Non-eligible withdrawal on last business day of year

(Increased taxes) $414

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No 10% Penalty2.2. Withdrawal due to Withdrawal due to

death of account death of account holderholder Amount included in decedent’s Amount included in decedent’s

income in year diedincome in year died

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3.3. Direct transfer to Direct transfer to another MSA with another MSA with different financial different financial institution institution

No 10% Penalty

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4.4. Direct transfer from one Direct transfer from one type of savings account to type of savings account to another within the financial another within the financial institution:institution:

Example: MSA savings Example: MSA savings account to MSA CDaccount to MSA CD

No 10% Penalty

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• Withdrawal for medical Withdrawal for medical expenses expenses paidpaid in prior in prior year year Must be made by Must be made by

January 15January 15

New Rule

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What happens to my MSA when I die?

• Balance passes by:Balance passes by: POD Beneficiary DesignationPOD Beneficiary Designation Written WillWritten Will Montana Intestacy Statutes Montana Intestacy Statutes

(Dying Without a Will) (Dying Without a Will)

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Income tax savings to Beneficiaries

• Spouse & LinealSpouse & Lineal Descendants Descendants

Money can pass to their Money can pass to their MSAs without being taxable MSAs without being taxable

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What if I become incapacitated?

• Funds can be withdrawn by:Funds can be withdrawn by: Person holding Power of Person holding Power of

Attorney (POA) Attorney (POA)Person named Conservator by Person named Conservator by

district courtdistrict court71

What happens if I move to another state?

• Unused MSA FundsUnused MSA Funds Counted as Income on Counted as Income on

final Montana Income Tax final Montana Income Tax ReturnReturn

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Planning Technique • Track medical expenses Track medical expenses

January - DecemberJanuary - December• Deposit from savings to MSA Deposit from savings to MSA

the needed amount for the the needed amount for the yearyear

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Planning Technique • Withdraw from MSA total Withdraw from MSA total

amount needed for eligible amount needed for eligible medical care expenses during medical care expenses during year year Make only one withdrawalMake only one withdrawal

• Deposit back to savingsDeposit back to savings74

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Gifting •From a family health & tax perspective–Grandma gives $6,000 to married adult grand daughter

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Total Gift Adult Married Grand Daughter = $6,000

MSA WifeMSA Husband

$3,000$3,000

Total Gifts $6,000Tax

Savings $414

MSA Reporting Requirements• File Form:

Annual Reporting Form for Self Administered Individual Accounts

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ReportingMontana Individual Income Tax Return

• Form 2Schedule II: Line 18

• Form 2MLine 32

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FormsDepartment of Revenue

www.revenue.mt.gov

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Question K: Do you intend to establish a Montana Medical Care Savings Account?

1. Yes2. No3. Maybe

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Question L: What percent of Montanans have opened an MSA?

1. 83%2. 64%3. 23%4. 1.4%

Percent of Montanans with MSAs

• 1.4%1.4%82

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Joel Schumacher

• Extension Economics Specialist• Department of Agricultural Economics & Economics

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Question M: Are you eligible for an HSA?

1. Yes2. No3. Not sure

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Health Savings Accounts (HSAs)

HSA Eligibility

• Not everyone is eligible to contribute to an HSA

• Must meet specific requirements

• Refer to the HSA MontGuide

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HSA EligibilityHSA Eligibility Must meet Must meet ALLALL four requirements: four requirements:

1.1. Have a qualifying high deductible Have a qualifying high deductible health plan with minimum health plan with minimum deductibles of: deductibles of: $1,200 individual$1,200 individual $2,400 family$2,400 family

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2.2. Cannot have any other health Cannot have any other health insurance coverageinsurance coverage

Exceptions:Exceptions:• Accident CoverageAccident Coverage• Disability InsuranceDisability Insurance• Dental InsuranceDental Insurance• Vision InsuranceVision Insurance• Long-term care InsuranceLong-term care Insurance

HSA EligibilityHSA Eligibility

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3.3. Cannot be enrolled in MedicareCannot be enrolled in Medicare

4.4. Cannot be claimed as a dependent Cannot be claimed as a dependent on another person’s tax returnon another person’s tax return

HSA EligibilityHSA Eligibility

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HSA BenefitsHSA Benefits• ContributionsContributions reduce an reduce an

individual’s taxesindividual’s taxes–state & federalstate & federal

• Earnings Earnings are income tax-are income tax-free free –state & federalstate & federal

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HSA Benefits • Unused funds can be Unused funds can be

carried over from year to carried over from year to yearyear

• Withdrawals for Withdrawals for qualifying qualifying medical expensesmedical expenses are are

tax freetax free

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Question N: Are you eligible to contribute to an HSA?

1. Yes2. No3. Not sure

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Evaluation • Usefulness• Sound Quality• Knowledge gain• Pace

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Opinion • Length• Quality of Visuals

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Solid FinancesSolid FinancesWeb siteWeb site

• Future Sessions TopicsFuture Sessions Topics• www.msuextension.org/www.msuextension.org/ solidfinances solidfinances

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Best wishes as you consider Saving Money with Tax-Free Medical Savings Accounts and Flex Accounts

Marsha & JoelMarsha & Joel