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May 2019

You Can Save On Taxes and Health Care Costs Thanks to Health Savings Accounts 

When the time for retirement comes, we must be prepared to cover our everyday expenses but without the same income as we used to have. One of the biggest challenges that we face during retirement is covering our health care expenses. According to the Center for Retirement Research, the average retiree spends around $4,000 a year on health care costs. Besides, one in five retirees ends up spending half of their Social Security income on health care expenses, too. However, thanks to Health Savings Accounts, or HSAs, we can prepare to cover medical expenses when we retire while we lower our tax bill at the same time. Here’s how an HSA works. 

To begin with, we need to understand what exactly an HSA is, how it works, and how we can benefit from one in order to decide whether we should open one or not. A Health Savings Account is basically a retirement fund account that is designed to help you cover healthcare expenses. Just like traditional IRA and 401(k) accounts, contributions made to an HSA are tax deductible. Yet, one of the most convenient characteristics of HSA accounts is that the withdrawals we make that go toward medical expenses are tax deductible too.  

There are some requirements we need to meet first in order to be eligible for a Health Savings Account, and we should be aware of them, too. For example, we cannot open an HSA unless we are enrolled in a high-deductible healthcare plan. This means that, as of 2019, we need a deductible of at least $1,350 for individuals and $2,700 for families. Also, we need a maximum out-of-pocket limit of $6,750 for individuals or $13,500 for families. In addition, HSAs come with a yearly contribution limit; $3,500 for individuals or $7,000 for families. Keep in mind that you can contribute an additional $1,000 per year as long as you are age 55 or older.  

As we mentioned above, one of the advantages that come from having a Health Savings Account is that, whenever we use the funds to cover medical expenses, such costs can be tax deductible, just as our contributions. Since the vast majority of retirees will need to cover health care expenses at some point during retirement, it makes sense to have separate savings account specifically for those expenses. Yet, it is important to mention that we are not obliged to use these savings on health care only. However, if we use our withdrawals for another purpose, such withdrawals might be subject to income tax, and we would have to cover a 20% penalty fee.  

Therefore, we need to carefully consider whether an HSA would be the best option for us and take it from there. If we think this kind of retirement account will outweigh the benefits of a traditional IRA or 401(k), we should open one and start saving as soon as possible. But if we are not sure this is the best way to go, maybe a Health Savings Account isn’t the right choice for us.  

 

Standard vs. Itemized Deductions: Which Should You Choose? 

At this time of the year, forgetting about our income tax report might be tempting, leaving the stress for either the end of the year or for when the due date to file gets closer. However, we should always keep in mind our tax duties, as it will help us have a much simpler and easier tax season. One of the most common questions we get is whether taxpayers should opt for the standard or the itemized deduction, which often cause a bit of confusion among our clients. Here are some aspects to consider regarding each type of deduction and some of the advantages and disadvantages they bring.  

To begin with, we should understand what the standard deduction is and how it works. To put it simply, the standard deduction is a reduction in your adjusted gross income for a fixed amount, and without any kind of proof required. This means that, if we opt for this deduction, the only aspect that will determine the amount is the filing status we choose: 

  • Single:                                    $12,000  
  • Married, filing jointly:         $24,000 
  • Married, filing separately:  $12,000 
  • Head of household:             $18,000 

When we decide on the standard deduction, it might help us make the tax preparation process quite fast and easy, and this is why many taxpayers decide to request this deduction instead of the itemized deduction. Besides, another advantage of choosing the standard deduction is that it tends to get bigger every year or every two years, so we might want to compare the standard and the itemized deduction before we choose one.  

On the other hand, opting for an itemized deduction might be more beneficial for some people, which is why we should always calculate both, and see which one is higher. Itemized deductions are expenses that the IRS allows to be decreased from your taxable income. There are many different deductions we can add, including medical expenses, education expenses, home office expenses, and the list goes on and on. Even when not all of them might be eligible for you, we recommend consulting with your tax professional in order to understand which may be useful for you.   

One of the greatest advantages of opting to apply for the itemized deduction is that it might add up to an amount much higher than that of the standard deduction, since the more you can deduct, the less you would end up paying in taxes. Another advantage is that, as we mentioned above, there are many different deductions you can take advantage of, and with a bit of planning, you could make the majority of your expenses deductible, reducing your taxable income even more. 

If you are not sure of which deduction would work better for you, remember that a tax advisor can offer the guidance that you need in order to make the best decision. 

What You Need to Know About Deducting Your Medical Expenses 

Medical expenses can represent a significant portion of our yearly income, with the average American spending almost $10,000 a year on health care. This might sound like quite a financial burden since there aren’t many options available when we need to cover medical charges. However, medical expenses can be deducted from our income tax report, which can give us a hand when the time to file our taxes arrives. Here’s what you need to know about deducting your medical expenses.  

The very first aspect we need to understand when it comes to deducting your medical expenses is the deduction value that the IRS allows. Starting this year, taxpayers will be able to deduct the medical expenses that exceed 10% of their adjusted gross income. The AGI consists of your taxable income minus any adjustments like deductions or contributions. If your AGI equals $56,000, and you spent $9,500 in health care expenses, you’d be able to deduct the expenses that exceed $5,600, which equals $3,900 in this scenario.  

Another important aspect we need to be aware of is the types of medical expenses that can qualify as deductions, and which ones can’t. There are several expenses that the IRS allows to be deducted as medical expenses, including: 

  • Preventive care 
  • Treatment 
  • Surgeries 
  • Dental and vision care 
  • Visits to psychologists and psychiatrists 
  • Prescription medications and appliances 
  • Travel expenses for medical care 

On the other hand, there are other health-related expenses that do not qualify for deductions, such as cosmetic procedures, non-prescription drugs with exception of insulin, general health products like toothpaste and vitamins, as well as medical expenses that may be reimbursed, whether by your employer or your insurance company.  

If you want to apply for the deduction of your medical expenses for this year, you need to learn the process of claiming such deduction. To begin with, you need to choose an itemized deduction instead of a standard deduction. Keep in mind that you can only opt for an itemized deduction when it will exceed the standard deduction, so remember to consult with your tax prepared beforehand. In order to itemize your deduction, you will need to use Form 1040 and attach the Schedule A form, on which you will report the total you paid for medical expenses during the year and your adjusted gross income.  

Four Changes to Expect on Your Taxes in 2020 

When it comes to taxes, there are only a few moments of calm for taxpayers, as taking a breath of relief after filing their taxes is only the sign of the work that needs to be done to start preparing for next year’s return. Because of the tax code changes that resulted from the Tax Cuts and Jobs Act, we need to be aware of how they will affect our income tax return when the time to file next year arrives. This way, we will be able to make the most out of our 2019 tax practices, maximizing our credits, deductions, and refunds.  

One of the biggest changes that took effect this year is the shared responsibility payment, also known as the individual mandate penalty. This payment applied to those who were required to have health insurance under the Affordable Care Act but were not able to get coverage nor qualify for an exemption, either. Because of the Tax Cuts and Jobs Act, the penalty will no longer be charged, so if you don’t have health insurance this year, you won’t have to worry about covering this payment along with your taxes. 

Another relevant change that we will notice next tax season that is also a result of the Tax Cuts and Jobs Act is the rise in the medical expense deduction threshold. In order to obtain this deduction, the total of medical and dental expenses must be 10% of our adjusted gross income, when it used to be 7.5%. As a result, it will be harder to qualify for this deduction. Thus, if we were thinking about applying for it, we need to plan it a bit better this year.  

The Tax Cuts and Jobs Act also caused the elimination of a quite useful deduction, which was the alimony deduction, taking effect in 2019. This means that alimony payments will no longer be deductible for any divorce or separation agreement being made or modified this year or in the future. As a result, spouses that pay alimony will not be able to write off these expenses, and spouses that receive alimony will not have to count such payments as part of their income next year.  

To end things on a better note, there is a change to the tax code that might be helpful for those with a retirement account. This year, the contribution that you make to those accounts, including 401(k)s and IRAs could be deductible on your income tax return for next year. These are the 2019 contribution limits:  

  • 401(k) base contribution: $19,000 (up from $18,500 last year) 
  • 401(k) catch-up contribution (for taxpayers age 50 and older): additional $6,000 (unchanged) 
  • IRA base contribution: $6,000 (up from $5,500) 
  • IRA catch-up contribution (for taxpayers age 50 and older): additional $1,000 (unchanged) 

If you want to stay up to date with all the changes and updates to the tax code, don’t forget to get in touch with your tax advisor. They are the experts and can help you take advantage of all these changes and modifications.  

Following These Tax Tips Will Make Your Process Much Easier Next Year 

Everybody can use a hand when it is time to file your taxes. Luckily, we have plenty of time ahead of us, as tax season for 2018 just finished, so we’re in time to start preparing for next year’s season. In order to make the process much easier and simpler, we can start planning ahead and preparing for it in advance. This way, we’ll make sure we have everything in order, and that we are taking advantage of every single tool and resource taxpayers have available.  

Tax-advantaged accounts are a great way to maximize our deductions, and different accounts like 401(K)s, IRAs, and HSAs give us the opportunity to make tax-deductible contributions. This way, we can both enjoy the time when we reach retirement age and have significant tax savings. Before opening one of these accounts, consult with your tax advisor and make sure you understand how each of them works.  

Keeping our paperwork clean and tidy can sound like a monumental task to complete when we have the clock running against us. Therefore, we should always keep this in mind and maintain an organized and accurate document cabinet. Having all your employer forms, contracts, loan interests’ statements, and receipts in one place will make the process of filing your taxes feel like a walk in the park. Just remember to be consistent and keep a record system throughout the year.  

Luckily for taxpayers, the IRS has developed different tools and resources that can be of great help when making important tax decisions. Choosing between the standard and the itemized deduction, our filing status, and whether one of our children or even someone else qualifies as a dependent or not can get confusing. These tools and resources are planned to assist taxpayers to compare and contrast different tax-filing scenarios and then decide which would be more convenient.  

Waiting for the last moment is one of the worst decisions we can make at the time of filing our taxes. Thus, we should always take the time to get our paperwork ready, double check each form, and submit our taxes in a timely manner. The best way to make sure we don’t wait until it is too late is by hiring a tax advisor that can help you stay up to date with your paperwork and other documents. This way, your next tax season will go by smoothly and without much trouble.