Tower Club Legal Lunch Forum
January 10, 2014
Tax Update On Selected
Topics
• Supreme Court’s Windsor Decision
• Struck down a key section of DOMA
• the United States Supreme Court held
restricting U.S. federal interpretation of
"marriage" and "spouse" to apply only to
heterosexual unions, by Section 3 of the
Defense of Marriage Act (DOMA), is
unconstitutional under the Due Process
Clause of the Fifth Amendment.
New 2013 Tax Rules – Filing Status
• Filing status of married filing jointly
(separately) mandatory for same-sex couples
regardless of their domicile state • Legally married in a state that recognizes same-
sex marriages on or before December 31, 2013
• Registered domestic partnerships and civil
unions do not qualify
• Amended returns for previous open tax years can
be filed
• Inheritance implications
New 2013 - Capital Gains Rates
• 15% maximum capital gains tax rate increased
to 20%
• Threshold: $450,000 ($225,000)/$425,000/
$400,000
• Additional 3.8% tax on unearned income
• Threshold: $250,000($125,000)/$200,000
New 2013 Tax Rules-Net Investment Income Tax
• Net Investment Income is the sum of
1. Interest, dividends, annuities, royalties and rents
unless derived in the ordinary course of a trade or
business
2. Other passive income derived in a trade or
business
3. Net gain attributable to the disposition of property
other than property held in a trade or business
• Minus the allowable deductions allocable to the
aforementioned income
New 2013 Tax Rules – Miscellaneous
• Home Office Deduction - optional safe harbor
method• Deduction = square footage x prescribed rate
• 300 square foot maximum
• Prescribed rate is currently $5
• All other restrictions apply
Tax rules expiring in 2013
• Tax-free distributions from IRAs for charitable
purposes for those 70½ or older
• First year bonus depreciation
• Sales and Use Tax itemized deduction option
• Tax credits for energy-saving home
improvements
New 2014 tax rules
• GST tax exemption increases to $5.34 million
• Gift tax annual exclusion will remain at
$14,000
HSA’s
HSAs, created by the George W. Bush
administration in December 2003, are
investment accounts similar to an IRA
or 401(k) in their tax-advantaged status.
Issues:
Employers want to reduce health plan costs
Employees do not want health care choices restricted
Perceived overuse of medical care because employer pays cost
Lack of federal income tax deduction for out-of-pocket expenses because of IRC § 213(a) 10 % “floor” under deductible expenses.
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Issues:
Employers want to provide employees with feeling of “empowerment”
Medicare inadequate and facing long-term funding issues, while employers have withdrawn from providing retiree medical benefits
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•A health savings account (HSA) is a tax-advantaged
medical savings account is available to taxpayers in the
United States who are enrolled in a high-deductible
health plan (HDHP)
•The funds contributed to an account are not income to
the account owner. However they yield a deduction.
• Unlike a flexible spending account (FSA), funds roll over
and accumulate year to year if not spent. HSAs are
owned by the individual, which differentiates them from
company-owned Health Reimbursement Arrangements.
•HSA funds may be withdrawn tax-free to pay for qualified
medical expenses at any time without federal tax liability
or penalty.
•Withdrawals for non-medical expenses are treated very
similarly to those in an individual retirement account (IRA)
in that they may provide tax advantages if taken after
retirement age, or they incur penalties if taken earlier.
•These accounts are a component of consumer-driven
health care. Proponents of HSAs believe that they are an
important reform that will help reduce the growth of health
care costs and increase the efficiency of the health care
system.
•According to proponents, HSAs encourage saving for
future health care expenses, allow the patient to receive
needed care without a gatekeeper to determine what
benefits are allowed and make consumers more
responsible for their own health care choices through the
required High-Deductible Health Plan.
• Technically, an HSA is an account, very similar to an IRA
• Contributions are deductible if made by employee,
excludable if made by employer
• Accumulated contributions in account are invested on
a tax-deferred basis, just like an IRA
• Distributions are tax-free if spent on IRC § 213(d)
medical expenses at any age, taxable if spent on non-
medical expenses, with a 20% penalty added if
recipient not yet Medicare eligible
• The employee must be covered exclusively by a high
deductible health plan (“HDHP”)
• An HSA funded by the employer is similar to an HRA
except that the employee gains true ownership of the
contributions, while an HSA funded by employee
contributions is like an individually funded IRC § 125
“cafeteria plan” with no use it or lose it rule, tax deferred
investments, and an unlimited carryover of unused
amounts
• Unlike both IRC § 125 cafeteria plans and HRA’s,
partners and other self-employeds are fully eligible for
HSA’s
What Is a High Deductible Health Plan (“HDHP”) for
Purposes of HSA Eligibility?
An HDHP must meet specific deductible and out-of-
pocket limit requirements
Self-coverage:
Deductible of at least $1,250
Out-of-pocket maximum of no more than $6,350
Family coverage:
Deductible of at least $2,500
Out-of-pocket maximum of no more than
$12,700
Higher deductibles and lower out-of-pocket expense
limits are permissible
The requirement for a minimum annual deductible.
With exceptions noted below, HDHP may not cover any expenses until deductible met
Exceptions:
Preventive care
Special insurance coverages:
Workers’ Compensation
Insurance for a specified disease or illness
Insurance paying fixed amount per day for hospitalization
HDHP Must Be Only Coverage
Except for permitted insurance coverages explained above, employee cannot be covered by a non-HDHP health plan at same time as he or she is covered by an HDHP
E.g., employee and covered dependents cannot have coverage under spouse’s non-HDHP plan
Tax Treatment of HSA’s Contributions deductible/excludable
Investment earnings on accumulations tax-free or at least tax-deferred
Distributions of contributed amounts and earnings tax-free if used for IRC § 213(d) medical expenses of self, spouse, or dependents
Distributions not used for IRC § 213(d) medical expenses includable in gross income
20 % penalty applies to distributions not used for IRC §213(d) medical expenses if recipient not eligible for Medicare (age 65, or earlier if disabled)
HSA’s can be split tax-free in divorce
At death, HSA tax benefits continue if surviving spouse is beneficiary
If at death the beneficiary is someone other than surviving spouse, then entire account subject to federal income tax
How Much Can Be Contributed to HSA’s Annually?
For 2014 contribution are:
Self-coverage: $3,300
Family coverage: $6,550
Additional contributions may be made for individuals
who are at least age 55, similar to “catch up” 401(k)
contributions
$1,000
Affordable Care Act
•The Affordable Care Act did make some changes to
Health Savings Accounts – and how they will work:
•First, the law eliminated one’s ability to use money in
their HSA account to buy over-the-counter drugs
•The second big change is that the law increased the
penalty for withdrawing funds from your HSA before you
reach age 65. The early withdrawal penalty increased
from 10% to 20%.
An Obamacare subsidy to cut health costs?
If you earn between $11,500 and $46,000 per year for
a single person or $23,550 and $94,200 for a family
of four and do not have affordable employer-sponsored
coverage, you could receive an "advance premium tax
credit" to help with the cost of insurance purchased
through your state's exchange, or marketplace.
Q: Who determines eligibility?
A: The exchange. It will have information from an
applicant's last filed tax return. So, for example, if a person
filed taxes on time in 2012, the exchange will have the
income information from that year. There will also be other
sources of information, such as state wage databases to
which employers already report every quarter. The
application also asks people to project their income for
2014.
Q: What happens once a person is deemed eligible for a
subsidy?
A: The exchange will tell applicants the maximum credit they
are eligible for. Consumers can decide whether they want to
take the maximum or some lesser amount.
Those who think their income might increase beyond what
they projected, might consider taking less so they won’t have
to pay the government back when the year ends.
Once an eligible applicant determines how much he or she
wants, the exchange will arrange for the amount to be paid
every month directly to the insurance company
offering the plan the applicant selects. For example, if the
monthly premium is $600 and the individual is eligible for
$400 [in a subsidy] and opts for that credit, every month
the federal government will send $400 to the insurer.
The consumer would be responsible for sending the
remaining $200.
You also may qualify for help with out-of-pocket health
care costs, if you earn less than $28,725 as a single
person or $58,875 for a family of four.