If Done Right, Tax Breaks For Health
Savings Accounts Can Really Add Up

The recently passed 2003 Health Savings Act contains important provisions that create private tax-free accounts individuals can use to save for their health costs.

These new accounts create a tax incentive to save for healthcare expenses, while at the same time shifting some health care spending decisions to the individual consumer level. These new accounts are called Health Savings Accounts (HSAs).

This will provide you with a brief overview of HSAs. If you would like to discuss how these new provisions affect your individual situation, please don't hesitate to contact my office.

HSAs are tax-advantaged savings accounts that can be used to pay for medical expenses incurred by individuals, their spouse or their dependents. However, the participant must also be enrolled in a high deductible health insurance plan. Then the tax-deductible savings account (HSA) may be opened.

These accounts are available to those who have health insurance with annual deductibles of at least $1,000 for single coverage or $2,000 for family coverage.

Participants can make tax-deductible deposits to the accounts. Up to 100% of the health plan deductible may be saved annually (limit: $2,250 for self-only coverage; $4,500 for family coverage). Individuals age 55-65 can make additional tax free catch-up contributions of up to $500 in 2004, gradually increasing to $1,000 by 2009.

Note that the deductions for contributions are deductible whether or not the taxpayer itemizes other deductions.

Employees can deduct contributions to HSAs (within the limits explained above) for employees who are eligible. HSAs can be offered under an employer's cafeteria plan.

An employee who is an eligible individual will be able to exclude amounts contributed by his employer to his HSA, and these amounts won't be subject to FICA, FUTA, or income tax withholding.

Distributions used to pay unreimbursed medical expenses are completely tax-free.

Distributions can be used to pay for retiree health insurance, Medicare expenses, long term care services and insurance, prescription drugs, surgery and other medical treatments and amounts not used to pay qualified medical expenses can be carried over from year-to-year, even if the HSA is provided under a cafeteria plan.

Money can be withdrawn from an HSA for purposes other than medical expenses after payment of income tax plus a 10% penalty. The penalty will not apply in the case of distributions made after retirement age or for distributions made due to death or disability.

HSAs are portable when an employee changes employers. Contributions and earnings belong to the accountholder, not the employer.

There are no income-related eligibility requirements for HSAs.

Assets can be passed on to the surviving spouse. Otherwise, the assets will be included in the deceased beneficiary's estate.

Employers are required to report amounts contributed to an HSA on the employee's Form W-2.

Nondiscrimination rules apply to employer contributions to HSAs.

Employers who make a contribution to an HSA for an employee during the year generally are required to make available comparable contributions to the HSAs of all comparable participating employees during the same year.

The tax benefits are scheduled to start this month.

Please keep in mind that I've described only the highlights of the new tax incentives. Give me a call at your earliest convenience for more details on how you may take advantage of this new tax legislation.

10 Steps Of A Financial Check-Up

1. Review original investment strategy for changes.
2. Determine if the client's risk tolerance has changed.
3. Review the client's investment performance in absolute dollars rather than in rates of return.
4. Review the client's current portfolio mix.
5. Explore the use of tax-deferral devices and the appropriate allocations to IRAs and qualified plans, Roth IRAs, deferred annuities, and immediate annuities.
6. Rebalance the portfolio for tax efficiency with new money, deferred accounts, by claiming tax losses and taxable accounts.
7. Review tax law changes for impact on client's investment and estate strategies.
8. Discuss changes to insurance needs such as with life insurance, long-term care and disability.
9. Discuss alternative investments and client suitability relating to hedge funds, managed futures and deeds of trusts.
10. Consider updating the financial independence analysis.

IRS UPDATE

Warnings About The 'Top Ten'
Tax Scams You'll Want To Avoid
The IRS and other agencies are aggressively pursuing and prosecuting promoters of abusive tax schemes and charging their clients with fraud and tax evasion. This can result in imprisonment, fines, and repayment of taxes owed with interest and penalties. Even innocent taxpayers involved in these schemes face a staggering amount of back interest and penalties.

The IRS urges people to avoid these common schemes:

1. Offshore Transactions
2. Identity Theft
3. Phony Tax Payment Checks
4. African-Americans Receiving Special Tax Refund
5. No Taxes Withheld From Wages
6. Improper Home-Based Business
7. "Pay The Tax, Get The Prize"
8. Frivolous Arguments
9. Social Security Tax Scheme
10. "I Can Get You A Big Refund For A Fee"
11. it looks too good to be true, it probably is. Feel free to refer any tax schemes to me for review. If the promoter tells you that it is too complex for me to understand, tell him/her that I am always open to a new learning experience, especially if it saves on taxes.

TAX BRIEFS

The Tax Technical Corrections Act of 2003 was introduced recently by Ways and Means Chairman Bill Thomas (R-CA) and Ranking Member Charles Rangel (D-NY). A companion bill in the Senate is expected to be introduced soon by Senate Finance Chairman Chuck Grassly (R-IA) and Ranking Member Max Baucus (D-MT). According to a Ways and Means Committee spokesperson, no action on the bill is expected in 2003 to give interested parties time to submit comments to the tax committees on any further technical corrections that might be needed.
The bill contains corrections to the following laws:
Economic Growth and Tax Relief Reconciliation Act of 2001
Jobs Growth Tax Relief Reconciliation Act of 2003
Job Creation and Worker Assistance Act of 2002
Victims of Terrorism Tax Relief Act of 2001
Community Renewal Tax Relief Act of 2000
Small Business Job Protection Act of 1996
Tax Relief Act of 1997
Please note that Congress is still working at correcting legislation passed in the years 1996 and 1997.

Americans spend more money paying taxes than they spend for food, clothing and housing combined, according to a survey by the Tax Foundation. On average, the organization said, each of the 260 million men, women and children in the U. S. pays $7,927 in all types of taxes each year. By contrast, annual spending for food and housing comes to $ 2,600 per person and spending for clothing amounts to about $ 1,200 a year.

The 'Other' Death Tax Affects All

While there has been a great deal of discussion about the estate tax, there has been no discussion of the "other" tax that arises due to a death.

Clients need to be aware of and in some cases plan for the tax that affects estates of ALL sizes - the tax on income in respect of a decedent (IRD).

Income earned by a taxpayer, but not received prior to death is the definition of IRD.

The taxpayer is either the decedents estate, the person receiving the IRD, or the person inheriting the right to receive the income.

What assets generate IRD?

The ones that have the most exposure are IRA's and other qualified retirement plans.

But other assets include US savings bonds, stock options, renewal commissions of an insurance agent, payments due under an installment sale, royalty payments and final paycheck of an employee.

Tax rates depend on the tax rate of the recipient.

There are a few ways to reduce the impact of this tax. If there is enough money involved for smaller accounts, naming certain beneficiaries can extend the payout period, which can reduce the tax impact.

Tax Status During Divorce Can Be Tricky

In general, a client's filing status depends on martial status, and martial status depends on the client's status under state law.

If, as of the end of the tax year, there has been issued a final decree of divorce or the client is legally separated under a final decree of separate maintenance, then the client is no longer married and must file as a single person (except that if the client lives with one or more children and pays more than half the cost of running the household, the client may qualify for head of household filing status).

If, as of the end of the tax year, there has been no final decree of divorce, annulment or separate maintenance, then the client is still considered as married even if the client is separated from the other spouse under a separation agreement or a non-final court decree. The client therefore must file either a joint return or as married individual filing separately. However, a special rule permits an individual to be treated as unmarried for filing status if:

• The individual doesn't file a joint return for the year;
• The individual maintains as his or her home a household, which, for more than half the year, is the principal residence of a child;
• The individual furnishes more than half of the cost of maintaining that household; and
• During the last six months of the year, his or her spouse isn't a member of that household.

Caution 1: A client who is treated as married under the above rules (that is, there has been no final court decree and the client doesn't qualify under the special rule discussed above) may want to file separately. For one thing, if the client made deductible alimony payments, he or she must file a separate return in order to claim the deduction. The deduction can't be taken on a joint return. Also, both spouses are generally liable if a joint return is filed.

Caution 2: Most of my clients live in a community property state and that puts another consideration into the mix. Unless spelled out differently, income earned up to the date of divorce is community income, which would be split between the parties. This may negate the "spouse maintenance/alimony deduction".

It is usually best to have us look over the plan of the divorce before it is finalized so that both parties understand what is happening and there are no surprises.