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Health Savings Accounts: A Tax-Favored Plan Worth a Look 

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The Health Savings Account (HSA) is one of the tax favored plans available designed to offset or help with health care costs. The other tax favored plans are the Medical Savings Accounts, the Flexible Spending Arrangement and the Health Reimbursement Arrangements. We will only address the HSA here. IRS publication 969 explains all of these programs more.  

An HSA is a tax-exempt trust or custodial account you set up with a qualified HSA administrator. There are a number of qualified trustees around. Most banks, investment brokers and other institutions can help with this. Usually, most employers can help you also, and may be able to contribute to your account. You should do your research to find out which is most appropriate for you. 

An HSA helps you to pay or be reimbursed for qualified medical expenses you incur. There are certain parameters you must meet to qualify for an HSA. You do not need to get any special permission from the IRS to open one. To be eligible for an HSA you must meet the following general requirements.  

You have to be covered by a High Deductible Health Plan (HDHP). You have no other health care coverage except as permitted by existing law, or that is not a HDHP. You can have other types of additional coverage like workers compensation, coverage for a specific illness, fixed amount payments to cover injury or hospitalization, accident insurance, disability, dental or vision care, and long-term care.  

You cannot make new contributions to an HSA after you enroll in Medicare. But, after you enroll in Medicare you can take distributions from your existing HSA to cover your qualified medical expenses, which can also include reimbursements to yourself for your Medicare premiums that are paid directly out of your Social Security benefits. You have to keep a copy of your Social Security Statement for your records if you do this. You can delay Medicare enrollment when you turn age 65 only if you are covered by a current employer’s health care plan.  

HSAs can be opened as a family or an individual plan. Contributions you make to the plan are tax deductible in the year made up to certain limits even if you do not itemize deductions. This deduction is off your gross income. Contributions and the earnings from them remain in your account until you use them. Distributions may be tax free if used to pay qualified medical expenses.  

The HSA is portable, which means you take it with you if you leave a job or the workforce. The tax-deductible amount of the contribution has limits, and are usually adjusted yearly. Contributions can only be in cash. For 2018, the limits for an individual plan is $3,450, and for a family plan, it is $6,900. If you are age 55 or older, your limit is increased by $1,000 for each person age 55. These limits apply even if you have more than one HSA in your name, meaning you must aggregate them together. You can make a contribution to your HSA for 2018 until the filing deadline for this tax year, April 15, 2019.  

There are more details than can be explained here. The main point is that the HSA and the other programs can be a very good health planning tool with good tax benefits to boot, which should be considered carefully. The time and research you put into finding a good plan can be well worth the effort. QCBN 

By Ernie L Gallardo, EA 

Understanding the IRS Free File Alliance  

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The IRS Free File Alliance has existed for the last 16 years. This is a program to allow taxpayers who qualify to be able to do their tax returns themselves, and file it for free, using the portal at irs.gov/free file.  

There are about 12 free file alliance software vendor partners that work with the IRS to provide their software for use through the IRS web portal, for free. There are some restrictions as to who can use free file. A taxpayer who earns less than $66,000 per year can access one of the free file commercial software vendors by going to the irs.gov portal. Some of the software providers offer the federal and state returns, some only allow the federal for free and might charge for the state. There might be other charges involved depending on options and forms, with the different vendors.  

Care should be exercised in choosing the right software provider. In the past, some of the software vendors have tried to steer taxpayers visiting the IRS free file portal to options for their paid products that resulted in a charge.  

The IRS just recently revised the agreements it had with these software providers to require them to provide more clear options and instructions about the free filing tools, and to lessen the efforts of these companies to steer people toward some of their products that incurred a charge. In the past, the software companies participating in the free file alliance program would have things like a “value-added” button or link somewhere that would try to get people to click on it where it would take them to products for which the company could charge.  

The new IRS standards now require that these participating companies remove this type of link or button and not try to steer people so aggressively into their chargeable products. Also, previously if a taxpayer did not qualify for free file, the provider would steer him or her toward products that incurred a charge. Now, the software provider must take the taxpayer who does not qualify for free file back to the irs.gov/free file portal.  

Also, in the past, the software provider company would send out reminder emails in the current year to taxpayers who used their free file program the previous year with links to their products for which they charged, without reminding the person that he or she may still qualify for or even mention free file. Now, if emails are sent out to previous free file users, the IRS requires the email to remind the recipient that he or she may still qualify for a free file and that the first option presented to the taxpayer in the email must be Free File, and not a paid product offering.  

These changes mean that the 12 companies participating in the Free File Alliance program should be offering a better and more clearly understood process when offering their software product to the alliance. The new IRS Commissioner Charles Rettig apparently played a big part in bringing about these changes. These changes to the Free File Alliance program really should make it a more consumer-friendly offering going forward.  

Still, it is good to keep in mind that a great deal of the tax returns that are done wrong and eventually end up with the IRS placing them into collection, were self-prepared returns. So, care should be exercised and professional help sought when necessary. Sometimes it is just best to seek help or just pay someone qualified to do it for you. It can pay in the long run. QCBN  

 

By Ernie Gallardo, EA 

  

Ernie L Gallardo, EA can be reached at 928-899-2434. 

 

 

Understanding Recent IRS Guidance on Meals, Entertainment Expenses

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Just a couple of weeks ago, the IRS released new guidance concerning business deductions for meals and entertainment expenses, which takes into account the new Tax Cuts and Jobs Act (TCJA) tax reform law passed by Congress and signed by President Trump last December.

The bill eliminated the deductions for all the entertainment expenses: things like concert tickets, cruises, golf passes or any other sporting event. As a result, there has been some confusion out there about the matter. Some people thought the whole deduction was lost. In truth, only part of the deduction has been lost. The purely entertainment part seems to be gone. However, the meals and beverages part remains, but only with attention to detail as to the proper records.

The IRS said that taxpayers can still deduct 50 percent of the costs of meals if they are not considered to be “lavish or extravagant” while entertaining current or potential business clients or customer contacts. What is considered to be lavish or extravagant will probably have to be worked out more as time goes by. However, the costs of food and beverages provided before, during or after an entertainment event must be accounted for separately and reflected on a separate receipt.

Prior to the new tax reform law, a taxpayer could deduct 50 percent of the cost of entertainment, meals and beverages as a business expenses. The issue of them not being too “lavish or extravagant” to qualify applied then, too.

Section 274 of the tax code changed all that and now disallows a business deduction for expenses for entertainment, recreational events and other amusement costs incurred while entertaining existing or potential clients or customers. But, does still allow a 50 percent deduction for meals and beverages when incurred while “wining and dining” clients. As the IRS said in a statement, “food and beverages that are provided during entertainment events will not be considered entertainment if purchased separately from the event.”

The Tax Cuts and Jobs Act (TCJA) passed in December did not specifically address the deductibility of expenses for business meals. Because of efforts in part by professional organizations and others to get more clarification, and the confusion in general surrounding the law, the IRS issued “Notice 2018-76,” which for now can be relied on for general guidance while they work on the proposed regulations that will clarify exactly when business meal expenses are deductible and what is considered entertainment.

As an example, a meal purchased before or after an event can still be deductible if relevant to business, and it is accounted for in a separate receipt. If a sporting or other event where tickets are purchased and this ticket price includes the meals and beverages with it, then the costs of those meals is not deductible. If after the sporting event is over, and you take a business client to a meal and drink, that would be deductible.

So again, as before, as it is with all things concerning your taxes, just remember to keep good and accurate records. Keeping detailed records is still very much the order of the day. Well documented receipts where they spell out who was there, what was discussed, the date and time, and that it was for business purposes, will still – and probably always will be – very important. QCBN

By Ernie Gallardo, EA

Ernie L Gallardo, EA is an Enrolled Agent with 15 years of tax experience in the Prescott area.

A member of the American Society of Tax Problem Solvers (ASTPS), and the National Association of Tax Professionals (NATP). Gallardo is the owner of Tycho Tax Services.  He can be reached by phone/text 24/7 at 928-899-2434, email at info@TychoTaxServices.com, or at TychoTaxServices.com, and at PO BOX 112, Kirkland, AZ 86332.

Understanding Tax Implications of Gambling

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When we decide to make a trip to the casino or to a racetrack on the spur of the moment or on a planned adventure, most people do not spend any time considering the tax implications involved if they actually win. Gambling winnings and losses include raffles, track races, sports betting, lotteries, all casino games, poker games and prizes – the tax burden of which can be significant.                                

The amount won and on what game it is won determine if the casino has to fill out a W2-G to report the amount to the IRS or not. It can withhold taxes to send into the IRS based on a percentage of the winnings. Some circumstances allow the winner to not have withholding and should be discussed with the casino on a case-by-case basis. The following amounts for each game requiring a W2-G to be filled out is as follows:

$600 or more won at a racing track

$1,200 or more if at a slot machine or bingo game

$1,500 or more if won at Keno

$5,000 or more if won at a poker tournament

The gambler will have to provide their personal information and ID to the casino for the filling out of the W2-G.      

Winnings from games such as roulette, craps, baccarat, blackjack and other table games usually do not require the filling out of the W2-G. Of course, even if the W2-G is not required, the IRS still considers all gambling winnings to be income. If you win prizes, rewards or lotteries throughout the whole year, even if you do not receive a tax document reporting it, it is still considered income by the IRS and most state taxing authorities. Gambling and all other wagering losses throughout the whole year can be used as a deduction if you itemize on your personal tax return. The new TCJA tax law did away with most of the miscellaneous deductions on the itemized deduction form, but preserved the gambling losses deduction. Since the standard deduction has almost doubled, these losses may have to be significant to matter. This article only applies to recreational gamblers. The rules for professional gamblers are beyond the scope of this article.                                                                                                           

As with everything associated with taxes and record keeping, it is always good to develop good record keeping habits. Keeping accurate logs and diaries of the amounts won and lost throughout the whole year, the name and address of the casino, the date and time, the amount wagered, games played, cancelled checks or lottery tickets, and any other receipts that show proof, can make the difference between a deduction that is allowed or not. As a member of a casino club you can get a print out of your wins and losses incurred while gambling with your card, for the whole year. When not using your club card, it is just a matter of getting into the habit of keeping the log or diary.                                                                        Since most people lose more than they win when gambling, this is usually not that much of an issue. However, for the lucky ones (or skilled?) that do win or win big, these records of losses can be very important. When it comes to how much we pay in taxes, we owe it to ourselves, and to our heirs – if any – to lessen our tax burden as much as possible. Remember, there is a difference between tax avoidance, and tax evasion. And, if you do not care about throwing money around, hey, just throw some my way while you’re at it. QCBN

By Ernie L Gallardo, EA

Ernie L Gallardo, EA is an Enrolled Agent with 15 years of tax experience in the Prescott area.

A member of the American Society of Tax Problem Solvers (ASTPS), and the National Association of Tax Professionals (NATP). Gallardo is the owner of Tycho Tax Services.  He can be reached by phone/text 24/7 at 928-899-2434, email at info@TychoTaxServices.com, or at TychoTaxServices.com, and at PO BOX 112, Kirkland, AZ 86332.

Is the Postcard Size Tax Return a Reality? 

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The amusing proposal of a tax return fitting on the size of a postcard caused me to revisit this  

idea because the IRS just released preliminary designs of the new form 1040 and the new schedules 

that go with it. The new, shorter form 1040 will essentially replace the previous forms 1040, 1040A, 

1040EZ for the next tax season. The new 1040 will utilize what they call a “building block” approach, which reduces the information that goes directly on the 1040 form itself by requiring the use of the new supplemental schedules, if necessary. These schedules are 1 through 6.  

 

Schedule 1 is additional income and adjustments. This is for reporting any additional income such as Schedule C business income, Schedule E rental property income, Schedule F farm income, partnership, and other types of income and different types of adjustments to income.  

 

Schedule 2 is where certain taxes owed will be reported.  

 

Schedule 3 reports non-refundable credits like the child and dependent care credit, the residential energy tax credit, and others.  

 

Schedule 4 is about other taxes like self-employed taxes.  

 

Schedule 5 is for other payments and refundable credits, which will report tax withholding amounts, estimated tax payments and other tax credits.  

 

Schedule 6 is simply to report a foreign address and to authorize a third party to be able to talk to the IRS about your return. 

 

The IRS is for now accepting comments on this newly proposed 1040 form and schedules. If you are so inclined to give your input, just send to WI.1040.comments@irs.gov. The IRS may revise the forms after the comment period.  

The proposed form 1040 could be the size of a large postcard, but it will be double-sided, which means it is like a one-page form. You can see the forms by going to irs.gov. This new 1040 form is fairly straightforward. And if your taxes are on the simpler side, you should find no more difficulty than you did before, and may even have a simpler process if you no longer have to do a Schedule A itemized deduction. 

However, if you have a tax situation that requires more records and complexity as with businesses and  

investments, you will probably not experience any real lessening of tax reporting complexity, and may 

experience more depending on your situation. The doubling of the standard deduction will help a great 

many taxpayers, by allowing them to not have to do a Schedule A itemized filing, unless, of course, it would benefit them to do so because of state filing issues. This would or might be beneficial in a state that allows you to file as itemized instead of the standard deduction even though you filed using the standard deduction on your federal return, like Arizona, because the particular state has or allows deductions that the federal government does not allow.  

We will still have to wait and see how each state will adjust to and plan around the new federal tax  

law. So, we can look at the idea of our tax returns fitting on the size of a postcard as true, but qualify  

that with the awareness that it is actually a double-sided post car. Overall, a lot more people 

should experience a simpler tax filing process. And some who have complex business and investments 

income, could have a more complex tax filing process. QCBN 

 

By Ernie L Gallardo, EA