Tower Club Legal Lunch Forum

January 10, 2014

Tax Update On Selected

Topics

1

Supreme Courts Windsor Decision

Struck down a key section of DOMA

the United States Supreme Court heldrestricting 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 StatusFiling 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, 2013Registered domestic partnerships and civil unions do not qualifyAmended returns for previous open tax years can be filedInheritance implications

New 2013 - Capital Gains Rates15% maximum capital gains tax rate increased to 20%Threshold: $450,000 ($225,000)/$425,000/ $400,000

Additional 3.8% tax on unearned incomeThreshold: $250,000($125,000)/$200,000

New 2013 Tax Rules-Net Investment Income Tax

Net Investment Income is the sum ofInterest, dividends, annuities, royalties and rents unless derived in the ordinary course of a trade or businessOther passive income derived in a trade or businessNet gain attributable to the disposition of property other than property held in a trade or businessMinus the allowable deductions allocable to the aforementioned income

New 2013 Tax Rules MiscellaneousHome Office Deduction - optional safe harbor methodDeduction = square footage x prescribed rate300 square foot maximumPrescribed rate is currently $5All other restrictions apply

Tax rules expiring in 2013Tax-free distributions from IRAs for charitable purposes for those 70 or olderFirst year bonus depreciation Sales and Use Tax itemized deduction optionTax credits for energy-saving home improvements

New 2014 tax rulesGST tax exemption increases to $5.34 millionGift tax annual exclusion will remain at $14,000

HSAs

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 costsEmployees do not want health care choices restrictedPerceived overuse of medical care because employer pays costLack of federal income tax deduction for out-of-pocket expenses because of IRC 213(a) 10 % floor under deductible expenses.10

Issues:Employers want to provide employees with feeling of empowermentMedicare inadequate and facing long-term funding issues, while employers have withdrawn from providing retiree medical benefits11

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 employerAccumulated contributions in account are invested on a tax-deferred basis, just like an IRADistributions 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 eligibleThe 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 amountsUnlike both IRC 125 cafeteria plans and HRAs, partners and other self-employeds are fully eligible for HSAsWhat Is a High Deductible Health Plan (HDHP) for Purposes of HSA Eligibility?An HDHP must meet specific deductible and out-of-pocket limit requirementsSelf-coverage:Deductible of at least $1,250Out-of-pocket maximum of no more than $6,350Family coverage:Deductible of at least $2,500Out-of-pocket maximum of no more than $12,700Higher deductibles and lower out-of-pocket expense limits are permissible

Some Details The requirement for a minimum annual deductible.With exceptions noted below, HDHP may not cover any expenses until deductible metExceptions:Preventive careSpecial insurance coverages:Workers CompensationInsurance for a specified disease or illnessInsurance paying fixed amount per day for hospitalization

Strasburger & Price 2004 Annual Tax SymposiumHealth Savings Accounts and Other "Consumer Driven" Health Plan Arrangements Luke Bailey19HDHP Must Be Only CoverageExcept 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 HDHPE.g., employee and covered dependents cannot have coverage under spouses non-HDHP plan

Tax Treatment of HSAsContributions 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)

HSAs 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 HSAs Annually?For 2014 contribution are:Self-coverage: $3,300Family coverage: $6,550Additional 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 ones 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 purchasedthrough 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 wont 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 singleperson or $58,875 for a family of four.