Health Savings Account (HSA) Benefits
A Health Savings Account (HSA) represents an opportunity for eligible individuals to lower their out-of-pocket health care costs and federal tax bill. Since most of us would like to take advantage of every available tax break, now might be a good time to consider an HSA, if eligible. An HSA operates somewhat like a flexible spending account (FSA) that employers offer to their eligible employees. An FSA permits eligible employees to defer a portion of their pay, on a pretax basis, which is used later to reimburse out-of-pocket medical expenses. However, unlike an FSA, whatever remains in the HSA at year-end can be carried over to the next year and beyond. In addition, there are no income phase-out rules.
Naturally, there are a few requirements for obtaining the benefits of an HSA. The most significant requirement is that an HSA is only available to an individual who carries health insurance coverage with a relatively high annual deductible. By that we mean the individual's health insurance coverage must come with at least a $1,200 (in 2011 and 2012) deductible for single coverage or $2,400 (in 2011 and 2012) for family coverage. However, for many self-employed individuals, small business owners, and employees of smaller companies, these thresholds won't be a problem. In addition, it's okay if the insurance plan doesn't impose any deductible for preventive care (such as annual checkups).
Other requirements for setting up an HSA are that an individual can't be eligible for Medicare benefits or claimed as a dependent on another person's tax return. Individuals who meet these requirements can make tax-deductible HSA contributions of up to $3,050 in 2011 and $3,100 in 2012 for single coverage or $6,150 in 2011 and $6,250 in 2012 for family coverage. When an employer contributes to an employee's HSA, such as in the case of a closely held business, the contributions are exempt from federal income, social security, Medicare, and unemployment taxes.
An account beneficiary who is age 55 or older by the end of the tax year for which the HSA contribution is made may make a larger deductible contribution. Specifically, the annual contribution limit is increased by $1,000 (in 2011 and 2012).
An HSA can generally be set up at a bank, insurance company, or other institution the IRS deems suitable. The HSA must be established exclusively for the purpose of paying the account beneficiary's qualified medical expenses. These include uninsured medical costs incurred for the account beneficiary, spouse, and dependents. However, for HSA purposes, health insurance premiums don't qualify.
Timing Year-end Charitable Contributions
Making a charitable donation is admirable, but the tax deduction is nice, too. A charitable contribution is generally deductible in the year the property is delivered to the charity, which is when the taxpayer parts with the ability to control it. However, a charitable payment can take many forms. Whatever the form, if the deduction is substantial, the taxpayer can avoid reporting issues by inquiring about the charity's policies and procedures for recording the date of the gift prior to making the donation. This is especially important for year-end contributions or any instance in which timing is a key factor.
A payment by check is deductible in the year the check is mailed or unconditionally delivered to the charity, if it clears the bank within a reasonable time. Therefore, a check dated and mailed on December 31 is deductible in the year it is mailed. Although not specifically stated in the federal regulations, apparently a postmark showing the date the check was mailed would suffice (as it would prove the timely filing of a tax return). If a large contribution is mailed on December 31, it is advisable to use certified mail and retain the receipt to prove the mailing date.
Update on Employer-provided Cell Phones
A Provision of the Small Business Jobs Act of 2010 (2010 Jobs Act) relaxed the onerous record-keeping requirements for business-provided cell phones. However, the 2010 Jobs Act did not alter the requirement that, in certain situations, personal use of an employer-provided phone would be treated as a taxable fringe benefit to the employee.
In response to numerous questions concerning the tax treatment for the cost of employer-provided cell phones used personally, the IRS recently issued guidance on this topic. This guidance indicated that when an employer provides an employee with a cell phone primarily for business reasons, the IRS will treat the employee's use of the cell phone for reasons related to the employer's trade or business as a working condition fringe benefit. The value of this benefit is excludable from the employee's income, and the substantiation requirements that the employee would have to meet in order to deduct the cost are deemed to be satisfied. In addition, the IRS will treat the value of any personal use of a cell phone provided by the employer primarily for business purposes as a de minimis fringe benefit excludable from the employee's income.
The goal of Shriver & Company, P.S.C. is to provide our clients with timely personal service. Since space limitations require generalizations, appropriate professional advice should be obtained before acting upon this information. Please call if you would like additional details about any of the topics discussed.
Pursuant to Treasury Regulations concerning Circular 230, please be advised that any tax advice contained in this communication was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
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