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.