Health Saving Plans: how many are there, what do they offer and why would you want to have one.

Health insurance, health plans and tax-favored arrangements that help to offset health care cost….

Let’s look at Health Saving Plans: how many are there, what do they offer and why would you want to have one.

Tax-favored arrangements are:

Archer Medical Savings Accounts (MSA)

Medical Advantage Medical Savings Accounts  (MSA)

Health Reimbursement Arrangements (HRA)

Flexible Spending Arrangements  (FSA)

Health Saving Accounts (HSA)

Archer MSA is a first generation of HSA. Both employer and employee can contribute to the plan, but not in the same year. Contributions made by employee is deductible on tax return. However, this plan is available only for employees of small employers and self- employed individuals.

Medicare Advantage MSA is an Archer MSA run by Medicare. Account holder has to be enrolled in Medicare and contributions done by Medicare only.

Only employer can contribute to Health Reimbursement Arrangements on behalf of employees.

Flexible Spending Arrangements are funded via a voluntary salary reduction and are considered a reimbursement for medical expenses. It’s not a health plan, but only a way to reimburse for qualified medical expenses.

Health Savings Account (HSA) is a newest medical savings plan. Employee contributions can be used as adjustment to income, contributions can be carried over from year to year until are used. HSA are portable, and they stay with a taxpayer regardless of place of employment. HSA created by enrolling in a high-deductible health plan and opening a tax-exempt trust or custodial account with a qualified HSA trustee (bank, an insurance company or anyone already approved by IRS to be a trustee of IRA or Archer MSA)

Did you have to move for a job? Is this deductible?

This year one of my clients had to move to a different city because he got a job offer, he could not resist. After excitement from landing a dream job went a way, reality of moving his household settled in. My client, let’s call him John Doe is a single taxpayer without any dependents, so he packed his suitcase, started his car and drove for a couple of days from city A to city B. New employer reimbursed him $300 for the moving expenses. Let’s just pretend transportation of his expenses cost him $100 and hotel $500. Total move was $600, of which $300 was reimbursed by the employer and reported on W2 box 12.  Mr. Doe can deduct $300 on line 26 of Form 1040. This is above the line tax deduction, which will make his taxable income $300 less. If there was no reimbursement from employer, the whole moving expense amount is deductible, i.e. $600 in this example; and of course if employer reimburse him in full for the moving expenses, Mr. Doe cannot claim this deduction.

In order to see how much is deductible, one needs to fill out form 3903 (click here to see a short video that shows how to do it) and then transfer final number from form 3903 to line 26 on form 1040.

So, did you move this year? Want to see if you can benefit from this deduction? Follow steps in the video.

But before you even start filing out form 3903 you need to satisfy a few tests:

1. Your move need to be close to the start of new job. You move has to be within one year from the date you started your job.
2. Distance from your NEW home to a new job has to be NOT longer then from FORMER home to a new job.
3. 50 miles rule. If you had 10 miles distance from your old home to your old job, your new job must be 60 miles or more from your old home. If you did not work before, your job needs to be at least 50 miles from your old home.
4. Time test. For employees: you have to be employed full time for at least 39 weeks in the 12 months period following start of your new job. For self-employed: 39 week in the first 12 months and for a total of 78 weeks in the first 24 months

 And, if you want to claim this deduction, please keep all your receipts. By the way, your meals during move are not deductible.

Can I deduct job hunting expenses on my tax return?

If you currently employed and looking for another job in your line of work, job hunting expenses such as  cost of attending career fairs and resume preparation, miles driven to and from  and  out of town expenses for the interview or career fair, also fees paid to employment agencies are deductible. If you are looking for a job in the different field or changing your career, those expenses are not deductible. Also one needs to be currently employed to deduct job hunting expenses. One cannot take a break from work to attend a college or raise a child, then start looking for a job, and deduct expenses, those are not deductible.  Job hunting expenses are subject to 2% AGI limit and one needs to itemize in order to claim these expenses.

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Can I deduct hobby expenses?

Hobby is an activity where primary motivation for engaging into activity is to have fun, not to make profit.

Hobby expenses might be deductible. If hobby producing income, then one can deduct expenses associated with a hobby up to the amount of the income; however, a taxpayer cannot carry forward  the deductions. Meaning if expenses are $5000 and income earned from hobby $1000, one can deduct $1000 in expenses, but remaining $4000 will be lost and cannot be carried over to future years. Another thing to remember, that one can deduct hobby expenses only if he/she itemizes instead of taking a standard deduction and hobby deductions are subject to 2% AGI limit.

As far as tax law if the activity shows profit for 3 out of 5 years,  activity is considered to be engaged in for profit and treated a business.

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What is included into rental income and rental expenses?

If you have a place that you rent out, you have to report your income.

What is included in Rental Income? EVERYTHING!

In addition to rent payment, you have to include in the income

– any type of advance rent,

– payment to lease cancellation,

-security deposit (unless you are planning on returning it to your tenants at the end of the lease, but if you are keeping a part of the security deposit because tenants did not live up to the term of the lease, then you have to include that portion as your rent income.)

-if instead of the money you receive services or property, fair market value needs to be included as a rent income.

On a bright side, you can deduct pretty good list of expenses. Such as interest on your mortgage, real estate taxes, advertising, maintenance, utilities, insurance and homeowners dues and mileage.

You can deduct repairs that were done to keep a property in good operating condition.

If you did improvements that add value to the property such as change roof, add a pool, new fence, changed AC, etc these expenses have to be depreciated on a form 4562

And yes, if your expenses exceed your income, you can report loss up to $25,000; amount goes down for filers who AGI is above $100,000

Can I deduct my time or service working as a volunteer as charitable contribution?

One cannot deduct the value of time or services when he or she works as an unpaid volunteer, but can deduct cost of buying and cleaning uniform if  the uniform is unsuitable for normal wear.  For example nurse who is volunteering for local charity can deduct cost of buying and cleaning uniform. But if charity is asking for black bottom and white top-this is not deductible, because this type of clothes is suitable for normal wear.

If you make goods and donating them, you cannot deduct their value, only what it cost to make them. For example, if one makes cookies, deductible are only cost of cookies ingredients. If you are donating used clothes, value is calculated at 25% of the original cost, and of course you can deduct full price if your items  brand new, but not more than original price paid.

If value of donated property is overstated, IRS may assess the 20% or 40% penalty on the underpayment of the tax.

I paid to a lawyer. Can I deduct his fees?

It depends on a claim you hired attorney for. Legal fees are deductible only if they relate in some clear way to taxable income, thus fees occurred for personal claims are not deductible.  Car accidents or animal bites cases considered to be personal claims, and attorneys fees are not deductible.  However, taxpayer can deduct  legal cost involving claims of discrimination, sexual harassment, wrongful termination, etc.  Legal cost to collect alimony is also a deductible expense  since alimony is taxable income.

I am temporary working in California, but my home is in Chicago. Do I need to file California tax return?

YES.

Employee compensation (salary) need to be tax by the state where services where performed. Thus CaliforniaNon-resident tax return needs to be filled and taxes paid on income earned in California.

If you live in California, but work for a different state based company, your income is taxable by California state and you need to file California tax return for resident and include all your world-wide income.

Either way you look at it, if you earned money while in California, you need to file and pay state taxes. How much and what form to file, your tax professional will be able to determine.

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Is buying out-of-state tax-free?

Short answer is NO.

Sales tax is applied to ” tangible property”, anything you can see, touch, feel, weight, measure, etc. Californians do not pay sales tax on services.

When a consumer pays tax to a retailer- it’s a sales tax, when consumer pays tax directly to the state, sales tax becomes “use tax“. Both taxes have the same rate, which is 7.5% in California as of January 1,  2013 to December 31, 2016. One should calculate and pay use tax when tangible  items purchased from out-of-state retailers. Use tax has been in effect in California since 1935, but many people are not aware of it.

Your tax professional can help to chose which method to use when reporting use tax .

Did you know you can deduct theft losses?

Your theft loss is deductible if you are itemizing, and a subject to reduce loss by $100, and further to 10% of AGI. If you just missing property it’s not enough for deduction, theft needs to be proved!

In order to prove theft, one have to file a police report and attach it to tax return. Also police report needs to have detailed evidence of a break-in and list any witnesses.

Theft loss is deductible in the year its discovered, but not occurred, unless it all happened in the same year. If insurance is paying back for the lost items, then no deduction allowed. If taxpayer reimbursed only partially for the loss, then difference is deductible. If insurance reimburse taxpayer after theft-loss deduction is taken, taxpayer must add this payment back to the income on the tax return in a year reimbursement was received.

Computer fraud such as bank fraud, credit card theft, the “Nigerian” email scams, cyberextortion and ransomware, reimbursed monetary losses may be deductible as well.

Pokemon Go – augmented reality, medical expenses- real tax deduction

According to The Washington Post “People are really getting into Pokemon Go, a new mobile take on the classic franchise. In fact, they’re maybe getting a little too into it.The game, made by Niantic and the Pokemon Company, was released late on July 6, and allows players to capture Pokemon in real-world locations. It also quickly led to an unexpected side effect: a number of reported Pokemon-related injuries.”

Gaming is great , but lets talk about medical expenses and whats deductible on your tax return. To start you need to itemize and medical expenses are subject to 10% of AGI. So basically if your adjusted gross income is $50,000 and your medical expenses were $7,500 . If you itemizing you can deduct $2,500 ($7,500-10% of $50,000( $5,000-$2,500). What is deductible: (IRS Topic 502 – Medical and Dental Expenses)

• Fees to doctors, dentists, surgeons, chiropractors, psychiatrists, psychologists, and nontraditional medical practitioners
• Payments for acupuncture treatments
• Payments for a center for alcohol or drug addiction
• Payments to participate in a weight-loss program for a specific disease or diseases diagnosed by a physician
• Payments for insulin and payments for drugs that require a prescription
• Payments for false teeth, reading or prescription eyeglasses or contact lenses, hearing aids, crutches, wheelchairs, and for guide dogs for the blind or deaf.
• Payments for transportation primarily for and essential to medical care that qualify as medical expenses, such as payments of the actual fare for a taxi, bus, train, ambulance, or for transportation by personal car, the amount of your actual out-of-pocket expenses such as for gas and oil, or the amount of the standard mileage rate for medical expenses, plus the cost of tolls and parking

If medical expenses paid with a credit card, taxpayer must claim deduction in the year charge occurred, and not when payment made to the card.

If medical care provided in one year, but paid in the next year, taxpayer should claim expenses in the year payment is made, not year serves was provided.

Can I deduct mortgage interest on my second home?

Mortgage interest is deductible on a tax return if you are itemizing. How much is deductible  depends on when  loan was originated,  what was the amount and how proceeds were used.

In most cases, you can deduct all of your home mortgage interest for your primary residence. But what about that  vacation home? Can one deduct mortgage interest on a second home?

Yes, but there are certain conditions that needs to be met:

1.If you have a property that is not your primary residence, and it’s not rented out or hold for resale during a year, this property qualifies as a second home, and mortgage interest might be deductible. Beauty of it, that taxpayer does not need to use a home during a year.

2.If you rent out part of the year, you also must use it during same year. Owner  must use the property more than 10% of days rented   or 14 days, whichever is longer. For example:  if the house is rented for 20 days, 10% more than rented days is 3 day, which is less than 14, so taxpayer needs to use a house for 14 days, in order to be able to get deduction.

3.If you have more than 1 second house, you have to chose which one will be your second home.

Is workers’ compensation taxable?

So you are at work. Working your day away, and unexpected happens: you get injured. You file workers comp (don’t forget to call Victor Sargazy, ESQ), and receive compensation. Do you need to pay tax on this income?

In most cases worker’s compensation payments are not taxable on your tax return, benefits become taxable if person receives disability payment or supplemental social security. When filling tax return don’t forget to bring summary all your payment you receive during a year to your tax professional , so correct amount of taxable income calculated.

Entertainment expenses deductible at 50%, 80% or 100%?

If you had substantial business discussion or went to a convention with a purpose to further your business,  you can deduct 50% of your business related meals and entertainment expenses.

However, there are taxpayers who can deduct 80% and some that are not subject to 50% limit at all.

You can deduct 100% if:

* you are distributing food to a general public in order to promote goodwill in the community

or

* you paid for tickets to a qualified charitable sport event, where main purpose of the event was to benefit charitable organization, all the proceeds went to the charity, and the even uses volunteers to perform substantial amount of work.

You can deduct 80% if:

You are  air transportation workers under FAA regulations, Interstate truck operators and bus drivers under Department of Transportation regulation, railroad employees under Federal Railroad Administration regulation and merchant marines who are under Coast Guard regulation. These taxpayers  can deduct 80% of meal expenses while traveling away from their tax home if the meal falls under Department of Transportation’s “hours of service” limits.

You cannot deduct expenses for entertaining your spouse or  a customer’s spouse. However, if you can prove that you had a clear business purpose that led to some sort of business outcome, than you can deduct those expenses at 50%

Can I deduct my acting classes and headshots?

Ever thought of becoming an actor or even better have you child be a star?!

And here you go: pay for acting classes and camera coaches, taking headshots, getting and paying manager and agent fees. All those expenses are deductible if you are aggressively pursuing acting career.

Regardless of how aggressive you are pursuing your dream of becoming a star, union dues are always deductible, but only if you itemize.

Aspiring actor can deduct costume purchases, unless clothes for the costume can be worn as everyday wear. This type of purchase is not deductible. Don’t forget to keep your receipts.

And no, you cannot deduct tickets to a movie theater or a subscription to Netflix, unless you really did a research and documented in details what was the purpose of watching this specific piece and what did it do for you and your career.

Bottom line what expenses can be deductible depends on how IRS looks at activity and classification of it as a activity for profit or a hobby.

How to decided between entertainment expense and gift?

Generally, if an item can be considered gift or entertainment,  claim it as entertainment.

Packaged food, beverages, flowers, etc you give to a customer to use later, treated as gift expense.

Tickets to the event, that you attended together must be treated as entertainment expense.

However, if you did not go, you have a choice to pick gift or entertainment expense, whichever is more advantageous to you.

When you make your selection remember gift expense is limited to $25 per gift and entertainment expenses deductible at 50%.

Give a call to your tax professional  and he or she will be able to help you make a right choice.

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Can I deduct money that I paid for gifts to my clients and customers?

by Viktoriya Khusit | Sep 13, 2016 

Very often  clients come in and want to deduct expenses for gifts they send to their clients, partners or employees.  But how much is really deductible?

Rule is that you can deduct $25 per gift you gave a tax year . Meaning if you spent $45 for flowers for the gift to your client, you can deduct only $25 of the price you paid. If you sent flowers four times during a year $40*4=$160, you can deduct $25*4=$100 of your gift expenses.

If you have to pay for delivery of the gift, usually this “incidental cost” does not included into $25 gift expense calculation.

Any item priced  at $4 or less and

– have your name on it (such as pen, plastic bags, magnet calendars, desk sets, etc)

or

-signs, display racks and any other promotional items to be used on the recipient premises

ARE NOT considered gifts. (Those are promotional items and will be discussed in another blog post).

Can I deduct my coffee?

‘I want to deduct all my meals, oh and please don’t forget coffee “.  All tax professionals hear this way too often. But truth is: NO, you cannot deduct your coffee or lunch or dinner. Generally, tho cost of meals considered a personal expense and are not deductible, unless substantial amount of business discussion happened before, during or after a meal, or you expect to receive a business benefit by providing a meal.

According to IRS Publication 463, these tests have to met in order to take a deduction:

• The main purpose of the combined business and entertainment was the active conduct of business,
• You did engage in business with the person during the entertainment period,
• You had more than a general expectation of getting income or some other specific business benefit at some future time, and
• Meal can happen directly before or after a substantial business discussion

In general, meals are deductible at 50%, by both employees and independent contractors. Pilots, flight crews, interstate truck drivers, railroad employees, merchant mariners, and other transportation industry workers can deduct 80% of the unreimbursed meal expenses.

Employers can deduct some meals at 100% such as employer sponsored holiday party or a lunch for employees

However there are some meals that are not deductible at all- lavish and extravagant, as they are not ordinary, necessary and reasonable .

Can I deduct travel expenses for my spouse?

Travel expenses are expenses that occurred while taxpayer was traveling away from their ” tax home”.  “Tax home” is the place where taxpayer conducts business on regularly basis regardless of where he/she lives, but for majority taxpayers “tax home” is place where they live. Deductible travel expenses might include cost of transportation, meals, tips, and  hotel cost.  If your trip was personal in nature  none of the expenses are deductible even if you engaged in some business activity during a trip.

Cost of bringing your spouse or  child is considered personal expense  and is not deductible, unless it is a partner or an employee.

If you travel for convention in North America and its related to your business any transportation and lodging expenses deductible at 100% and meals are at 50%.

If convention happens on a cruise ship, it must to be directly related to your business, and it has to be on board of US flag ship and all the ports of calls must be in the US.   $2000 worth of expenses for the cruise convention  can be deducted.

If you have to travel outside of the US, to maintain or acquire new business, travel expenses can be partially or fully deductible. As long as a trip lasts one week or less, taxpayer can deduct  100% of transportation cost.

For trips more than one week, there is  25% rule, which states that taxpayer can deduct 100% of transportation cost if he/she spent less than 25% of the total days vacationing.

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You can deduct medical expenses payments that you made for your ex-spouse.

Medical expenses are subject to 10% of AGI and are deductible on schedule A.

But did you know you can deduct payments that you made for medical expenses for your ex-spouse? Even if couple is not filling joint return, one partner who paid for another one’s medical expenses can deduct those on his/her tax return.  Remember, couple had to be married, while payment occurred for medical expenses or when medical treatment was received.

Deduction is taken in the year payment is made, even though treatment might have happened in the different year. If a payment for medical expenses made with a credit card, deduction is claimed in a year charge was made, not a credit card statement was paid.

Also to be able to deduct medical expenses paid for someone else, this “someone else person” needs to be either qualifying child (age 19 and under, or until 24 if a child full time student, or any age if child is disabled) or a qualified relative- someone who is closely related to you.

Per IRS publication 502, deductible medical expenses may include but are not limited to the following:

• Payments of fees to doctors, dentists, surgeons, chiropractors, psychiatrists, psychologists, and nontraditional medical practitioners
• Payments for acupuncture treatments or inpatient treatment at a center for alcohol or drug addiction, for participation in a smoking-cessation program and for drugs to alleviate nicotine withdrawal that require a prescription
• Payments to participate in a weight-loss program for a specific disease or diseases diagnosed by a physician, including obesity, but not ordinarily payments for diet food items or the payment of health club dues
• Payments for insulin and payments for drugs that require a prescription
• Payments for false teeth, reading or prescription eyeglasses or contact lenses, hearing aids, crutches, wheelchairs, and for guide dogs for the blind or deaf

Don’t forget to get tax ID from your child summer camp! Fees are deductible

Did you know that cost of summer camp your child attended this summer is deductible?

Day or summer camp fees are deductible, even if it’s a sport camp, as long as care was provided while parents were at work. Check with your camp, because if overnight care or tutoring provided, those camp fees are not deductible.

Per IRS  Publication 503 “the credit can be up to 35 percent of your qualifying expenses, depending on your income and you may use up to $3,000 of the reimbursed expenses paid in a year for one qualifying individual or $6,000 for two or more qualifying individuals to figure the credit”.

This credit directly reduces your tax liability thus increasing amount of your refund.

There are a few points that needs to be met in order to deduct summer camp fees:

• You (and your spouse, if you are married filing jointly) must have earned income for the tax year, meaning – parents need to have a paycheck. If one parent is not working, this credit is not allowed
• The child or dependent care service (summer camp )  must have been used so that you could work or look for employment.
• Your filing status must be anything but married filing separately.
• Your child or dependent must be under 13 or must be disabled and physically or mentally incapable of caring for herself.
• The childcare provider cannot be your spouse or dependent or the child’s parent.

And don’t forget to ask for the name, address and tax ID of the facility, your tax professional will need it in order to claim this summer camp fees credit.

Tax deductions for teachers

You are a teacher; you constantly buy supplies for your classroom. Can you deduct any of the expenses?

Yes, if you are an eligible educator who is:

•  a kindergarten through grade 12:
  • Teacher
  • Instructor
  • Counselor
  • Principal, or
  • Aide, and
• You work at least 900 hours a school year in a school that provides elementary or secondary education as determined under state law.

Unfortunately starting 2015, a lot of teachers lost educator (teacher) expenses deduction, as it becomes above the line itemized deduction subject to 2% AGI.

For example, your AGI is $30,000, your 2% is 30,000*2%= $600. If you spent less than $600, there is nothing you can deduct, if you spent $850, than you can deduct $250 only . $875-600=$275, but IRS limits you only to $250. $500 if couple filled married filing jointly and both spouses are eligible educators.

So to summarize, before 2015, you could have deducted $250, granted you spent $250 or more.

Starting 2015, you need to spent 2% of your AGI plus $250. This deduction is taken now on Schedule A, Itemized deductions. See a video that shows where it goes.