Schanel

Understanding Health Savings Accounts

A lot is changing in the world of health insurance, but as of right now, an increasingly popular alternative to a traditional health insurance plan is a Health Savings Account (HSA) plan.  An HSA plan starts with the purchase of a high deductible health insurance plan, which in turn makes the insured eligible to contribute to a special account known as a Health Savings Account (HSA).   An HSA is similar to an IRA in that contributions are tax deductible and earnings are tax-deferred.  However, distributions from HSAs are also considered tax free as long as the funds are used to pay for qualified medical expenses.  The HSA therefore provides a triple tax benefit - tax deductible contributions, tax free growth, and tax free withdrawals.  

As noted above, to be eligible for an HSA, you must be covered by a high deductible health plan.  For 2010, a “high deductible health plan” is a plan with an annual deductible of at least $1,200 for self-only coverage, or at least $2,400 for family coverage. For self-only coverage, the 2010 limit on deductible contributions is $3,050. For family coverage, the 2010 limit is $6,150. Additionally, annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits cannot exceed $5,950 for self-only coverage or $11,900 for family coverage.

An individual (and the individual’s covered spouse as well) who has reached age 55 before the close of the tax year (and is an eligible HSA contributor) may make additional “catch-up” contributions of up to $1,000.  Also, taxpayers who are eligible during the last month of the tax year are treated as having been eligible for the entire year for purposes of computing the annual HSA contribution.

Anyone under the age of 65 who is covered by a qualifying high deductible health plan can open an HSA.  If you are an eligible individual, and your employer contributes to your HSA, the employer’s contribution is treated as employer-provided coverage for medical expenses under an accident or health plan and is excludable from your gross income up to the deduction limitation.

In regard to distributions from the HSA, qualified medical expenses include those that would qualify for the medical expense itemized deduction. If funds are withdrawn from the HSA for other reasons, the withdrawal is taxable. Additionally, an extra 10% tax will apply to the withdrawal, unless it is made after reaching age 65, or in the event of death or disability.

Distributions from an HSA exclusively to pay for qualified medical expenses are excludable from the gross income of the account beneficiary even though the beneficiary is no longer an “eligible individual,” e.g., the individual is over age 65 and entitled to Medicare benefits, or no longer has a high deductible health plan.

To take full advantage of an HSA, it is best to maximize contributions and minimize distributions in order to build up the value of the account and get as much tax free growth as possible.  But even if someone is not in the financial position to max fund an HSA, the account is still a useful mechanism for making health care related purchases tax deductible.  In other words, the taxpayer can contribute money into an HSA and then immediately take a distribution in order to pay a health care related expense.   Because HSA contributions are an “above the line” deduction and are not subject to the “7.5% floor”, the HSA provides a highly tax efficient approach to paying for out-of-pocket medical expenses. 

If you have questions about this credit or any other tax issue, please feel free to contact our offices at 561-624-2118.

Glenn Schanel, CPA, CFP® is the President of Schanel & Associates, PA, Certified Public Accountants.  The firm provides tax, accounting, and consulting services to clients throughout South Florida and the United States. 

Schanel

First-Time Home Buyers’ Tax Credit Improved

First-Time Home Buyers’ Tax Credit Improved
by Glenn Schanel, CPA - Jupiter, Florida

In an effort to revive the real estate market, in 2008 Congress created a tax credit for “first time home buyers.”  In its original form, this “credit” of $7,500 was in reality an interest free loan that the taxpayer had to repay over a 15 year period.  It soon became evident that this credit/loan was not very “stimulative”, so in 2009 Congress created a new plan that included a true credit.

The new law created a refundable federal tax credit of up to $8,000 ($4,000 for a married taxpayer filing separately) for qualifying first- time homebuyers who purchased a home between April 8, 2008, and December 1, 2009. In order to qualify for the credit, the taxpayer must have not owned a qualifying principal residence in the U.S. during the three-year period before the purchase of the new home.  This credit was phased out for individual taxpayers whose modified adjusted gross income was between $75,000 and $95,000 (between $150,000 and $170,000 for married taxpayers filing jointly).

As a result of the continuing weakness in the real estate market, last month Congress enacted the Worker, Homeownership, and Business Assistance Act of 2009.  This Act extends the $8,000 first-time homebuyer credit for contracts to purchase entered before May 1, 2010, and closed before July 1, 2010. The new law also liberalizes the credit by making it available to higher income taxpayers, as well as to those individuals who are not first-time homebuyers.

Generally, existing homeowners who are qualifying “long-time residents” may qualify for the tax credit if they contract to purchase another principal residence before May 1, 2010, and close before July 1, 2010. The Act provides that any individual who has maintained the same principal residence for any five-consecutive-year period during the eight-year period ending on the date of the purchase of a subsequent residence be treated as a “first-time homebuyer”.

However, the maximum credit for long-time residents who qualify under the Act is the lesser of $6,500 ($3,250 for married individuals who file separate returns) or 10% of the purchase price of the principal residence.

The credit now phases out for individual taxpayers whose modified adjusted gross income is between $125,000 and $145,000 ($225,000 and $245,000 for married taxpayers filing joint returns).  In addition, for purchases after November 6, 2009, the first-time homebuyer tax credit cannot be claimed for the purchase of a principal residence if its purchase price exceeds $800,000.

If you qualify, you can claim your credit by attaching a Form 5405 to your income tax return in the year of the home purchase and a copy of your settlement statement.  You can also elect to treat any home purchased in 2009 as if it occurred on December 31, 2008 and a purchase in 2010 as if it occurred on December 31, 2009.  If you choose to do this and have already submitted your prior year’s tax return, you can claim your credit by filing an amended tax return.

So if you believe that you would qualify for either the first time home buyer or long-time resident tax credits, this could be the right time to buy a home.

Glenn Schanel, CPA, CFP® is the President of Schanel & Associates, PA, Certified Public Accountants.  The firm provides tax, CPA, accounting, and consulting services to clients throughout South Florida and the United States. Our clients are located in North Palm Beach, Port St. Lucie County, Palm Beach County, West Palm Beach.

The information contained in this communication is intended as general guidance on matters of interest only.  The application and impact of laws can vary widely based on specific facts involved.  Given the changing nature of laws, rules and regulations, and the inherent hazards of electronic communication, there may be delays, omissions, or inaccuracies in information contained in this transmission.  The information contained herein should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisors.  Pursuant to Regulations Governing Practice Before the Internal Revenue Service, any tax advice contained in this communication, unless explicitly provided otherwise, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Schanel

The Need For Buy-Sell Agreements in Small Business

THE NEED FOR A BUY-SELL AGREEMENT IN SMALL BUSINESSES
By Glenn G. Schanel, CPA

All your working life you have strived to develop a successful business. The investment you make in your business is much more than just money or capital. It includes a substan tial amount of your time and hard work.

Over the years, the small business you started will grow based on your hard work. As a reward of this growth, a business’s income will increase and be available to you. In addition, the value of the business will also increase over time.

However, following your death, the business will have to be valued and that value will be added to your estate to compute the estate taxes due. The real question at this point is how to convert this illiquid business interest into cash to pay the estate taxes and other estate administration costs.

The general solution appears to be to simply sell the business or liquidate. Liquidation is not an attractive alternative because it is unlikely the liquidation value is equivalent to the business’s full fair market value. The better alternative is for the estate is to sell the business. But who will buy a closely held business interest? What is a fair price? When will the sale be made? Where will the funds come from?

This “dispositio n dilemma” is easily resolved when a buy-sell agreement is established. This agreement provides that:

• someone (e.g., the business entity, the surviving owners, or a key employee) will purchase a deceased owner’s interest, minimizing the possibility that the business might fall into the hands of outsiders
• at an agreed -upon price, minimizing the possibil ity that the parties involved will not be able to agree on a proper value for the business, and
• the deceased owner’s estate is obligated to sell the interest at that price, minimizing the chances that the parties may not live up to their agreement.

A properly drafted buy-sell agreement also minimizes the possibility that funds will be unavailable to make the purchase, and provides a deceased owner’s estate with needed liquidity by converting an illiquid asset into cash. It’s easy to see why a buy-sell agreement is so valuable. It helps assure business continuity for the surviving owners and fair treatment of the deceased owner’s heir(s).

The advantages of implementing a Buy-Sell plan are somewhat obvious: continuity of management; to create a ready market for the business interest; to provide a fair and reasonable price; and to peg the value of the business interest for federal estate tax purposes.
There are several types of Buy-Sell Agreements. Which one to use depends on several factors,including the number of business owners, the relative ages and health status of the owners,concern about the Alternative Minimum Tax, and whether a step-up in cost basis is desired by the surviving owners. Some of the most common types of Buy-Sell Agreements are the Entity or
Stock Redemption, Cross Purchase, Wait-and-See, Mixmaster, and the One Way Buyout.

Once the type of plan is chosen, it is very important to decide how the liability for the purchase price will be funded. Several possibilities exist:

• Surplus, which consists of an existing fund of the purchaser
• Sinking Fund, also known as a savings account or savings plan
• Borrowing, obtaining financing from a third party, such as a bank
• Installment Sale, financing from the seller
• Life Insurance, which may provide a death benefit and a sinking fund

Each of these funding options has advantages and disadvantages. However, the disadvantages generally outweigh the advantages in all of them except for the use of life insurance, which by its nature provides the cash, in the amount needed, at exactly the time it’s needed, usually without taxation. For this reason, life insurance is most often the preferred funding vehicle in buy-sell planning. The annual premium provides an ascertainable cost and the policy provides a benefit no other plan accomplishes — guaranteed funds in the event of a premature death. The policy, if a whole life policy, may also act as a savings or sinking fun since the cash value in the policy is accumulated on a tax deferred basis. And the death benefit is income tax free!

In sum, life insurance meets the client’s objectives. First, it not only has an ascertainable cost, but it also is the least expensive. Second, the availability of the funds is certain in the case of a premature death. It may also act as a sinking fund.

Lastly, the use of the insurance allows the surviving owner to continue the business free and clear. It also allows the deceased owner’s family to receive the cash for the decedent’s interest, since they are paid in full and there is no installment sale, borrowing, or a shortfall of funds.

Glenn G Schanel, CPA and Associates, PA

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Glenn G. Schanel of Glenn G Schanel, CPA and Associates, PA represents American General Life Insurance Company (AGL), with securities offered through American General Securitie s Incorporated (AGSI), 2727 Allen Parkway, Houston, Texas, 77019. Member NASD and SIPC. AGL and AGSI are member companies of American International Group, Inc. (AIG). Glenn G Schanel, CPA and Associates, PA is a separate entity from any member of AIG. Mr. Schanel can be reached by calling (561) 624-2118.

The U.S. Chamber of Commerce has endorsed for its members the products and services of member companies of American International Group, Inc. (AIG), the leading U.S.-based international insurance and financial services organization. American General Life Insurance Company, a member company of AIG, provides a broad portfolio of top-tier financial products for businesses, families and individuals.

The comments in this article are those of the presenter and not necessarily those of AIG American General. Neither AIG American General nor its agents provide legal or tax advice. You should always consult with your tax and legal advisors about the appropriateness of this concept to your business, and ask your life insurance representative for the best product with which to fund this plan.

AIG American General is the marketing name for the life insurance companies and affiliates of American International Group, Inc. (AIG), that comprise AIG’s Domestic Life Operations, including American General Life Insurance Company.