Monthly Archives: August 2015

Updating Beneficiary Designations & Benefits of Health Savings Accounts (HSA)

The importance of updating beneficiary designations

Health Savings AccountsMost of us have more than enough to do. We’re on the go from early in the morning until well into the evening — six or seven days a week. Thus, it’s no surprise that we may let some important things slide. We know we need to get to them, but it seems like they can just as easily wait until tomorrow, the next day, or whenever.

A U.S. Supreme Court decision reminds us that sometimes “whenever” never gets here and the results can be tragic. The case involved a $400,000 employer-sponsored retirement account, owned by William, who had named his wife, Liv, as his beneficiary in 1974 shortly after they married. The couple divorced 20 years later. As part of the divorce decree, Liv waived her rights to benefits under William’s employer-sponsored retirement plans. However, William never got around to changing his beneficiary designation form with his employer.

When William died, Liv was still listed as his beneficiary. So, the plan paid the $400,000 to Liv. William’s estate sued the plan, saying that because of Liv’s waiver in the divorce decree, the funds should have been paid to the estate. The Court disagreed, ruling that the plan documents (which called for the beneficiary to be designated and changed in a specific way) trumped the divorce decree. William’s designation of Liv as his beneficiary was done in the way the plan required; Liv’s waiver was not. Thus, the plan rightfully paid $400,000 to Liv.

The tragic outcome of this case was largely controlled by its unique facts. If the facts had been slightly different (such as the plan allowing a beneficiary to be designated on a document other than the plan’s beneficiary form), the outcome could have been quite different and much less tragic. However, it still would have taken a lot of effort and expense to get there. This leads us to a couple of important points.

If you want to change the beneficiary for a life insurance policy, retirement plan, IRA, or other benefit, use the plan’s official beneficiary form rather than depending on an indirect method, such as a will or divorce decree.

It’s important to keep your beneficiary designations up to date. Whether it is because of divorce or some other life-changing event, beneficiary designations made years ago can easily become outdated.

One final thought regarding beneficiary designations: While you’re verifying that all of your beneficiary designations are current, make sure you’ve also designated secondary beneficiaries where appropriate. This is especially important with assets such as IRAs, where naming both a primary and secondary beneficiary can potentially allow payouts from the account to be stretched out over a longer period and maximize the time available for the tax deferral benefits to accrue.

The many benefits of a Health Savings Account (HSA)

A Health Savings Account (HSA) represents an opportunity for eligible individuals to lower their out-of-pocket health care costs and federal tax bill. Since most of us would like to take advantage of every available tax break, now might be a good time to consider an HSA, if eligible.

Herman & Company CPA’s proudly serves Bedford Hills NY, Chappaqua NY, Harrison NY, Scarsdale NY, White Plains NY, Mt. Kisco NY, Pound Ridge NY, Greenwich CT and beyond.

An HSA operates somewhat like a Flexible Spending Account (FSA) that employers offer to their eligible employees. An FSA permits eligible employees to defer a portion of their pay, on a pretax basis, which is used later to reimburse out-of-pocket medical expenses. However, unlike an FSA, whatever remains in the HSA at year end can be carried over to the next year and beyond. In addition, there are no income phaseout rules, so HSAs are available to high-earners and low-earners alike.

Naturally, there are a few requirements for obtaining the benefits of an HSA. The most significant requirement is that an HSA is only available to an individual who carries health insurance coverage with a relatively high annual deductible. For 2015, the individual’s health insurance coverage must come with at least a $1,300 deductible for single coverage or $2,600 for family coverage. For many self-employed individuals, small business owners, and employees of small and large companies alike, these thresholds won’t be a problem. In addition, it’s okay if the insurance plan doesn’t impose any deductible for preventive care (such as annual checkups). Other requirements for setting up an HSA are that an individual can’t be eligible for Medicare benefits or claimed as a dependent on another person’s tax return.

Individuals who meet these requirements can make tax-deductible HSA contributions in 2015 of up to $3,350 for single coverage or $6,650 for family coverage. The contribution for a particular tax year can be made as late as April 15 of the following year. The deduction is claimed in arriving at adjusted gross income (the number at the bottom of page 1 on your return). Thus, eligible individuals can benefit whether they itemize or not. Unfortunately, however, the deduction doesn’t reduce a self-employed person’s self-employment tax bill.

When an employer contributes to an employee’s HSA, the contributions are exempt from federal income, Social Security, Medicare, and unemployment taxes.

An account beneficiary who is age 55 or older by the end of the tax year for which the HSA contribution is made may make a larger deductible (or excludible) contribution. Specifically, the annual tax-deductible contribution limit is increased by $1,000.

An HSA can generally be set up at a bank, insurance company, or other institution the IRS deems suitable. The HSA must be established exclusively for the purpose of paying the account beneficiary’s qualified medical expenses. These include uninsured medical costs incurred for the account beneficiary, spouse, and dependents. However, for HSA purposes, health insurance premiums don’t qualify.

Travel Taxes Can Add Up Quickly

taxes-blog-travel-taxes-quickly-add-upIf you’re planning to sneak in one more trip before the kids go back to school, you’d better budget for taxes.

The combination of taxes on lodging, rental cars and airfare is a traveler’s trifecta, with the payoff going straight to state and local government treasuries, according to the National Center for Policy Analysis, or NCPA. In popular destinations such as New York or Chicago, NCPA says travelers could face tax burdens amounting to 30% higher than costs in other cities.

But even if you’re heading to a more out-of-the-way spot, the Dallas-based conservative think tank warns that travel taxes can quickly add up.

Taxable accommodations

As of July 2012, the most recent year for which complete data are available, an NCPA study found that around 22 states levy a specific tax on lodging.

The per-night tax ranges from a low of 3% to a high of 13%. And don’t forget about local taxes, which are added on in many cities and counties, especially larger ones. For example, if you’re seeing the sights in Southern California, look out for the 14% local lodging tax Los Angeles collects.

The increasingly popular option of renting a private residence might not save you any taxes either. Popular short-term rentals of homes are taxable in many cities.

Getting there is taxed, too

You have to deal with taxes before you arrive at your destination. The NCPA study cites increasing taxes on rental cars and airline tickets.

As many as 38 states levied a car rental tax as of 2006, the NCPA says. That tax is often higher when you pick up the vehicle at an airport, where a surcharge is added by the local airport authority. Car rentals are also subject to sales and use taxes, which can amount to as much as 10%.

Speaking of airports, you pay a variety of taxes to squeeze into your air carrier’s seats. Many of the taxes on air travel are flat fees, meaning that it costs you the same, regardless of how short your flight is.

There’s the 7.5% federal tax assessed every ticket, a segment fee of $3.70 for each takeoff and landing, and a security fee that doubled in 2014 from $2.50 to $5.60 per each leg of your flight. Don’t forget the passenger facility charge that’s levied by local airport authorities; this can be as much as $4.50 per takeoff and landing.

These four fees are just a portion of the 17 taxes and fees currently collected on flights, the NCPA says. “Taken together, these airline taxes can amount to a 30% surcharge on some domestic flights,” says the think tank.

Alternate arrangements

So what’s a cost-conscious vacationer to do?

Road trip!

AAA’s Aug. 4 fuel report found that for the first time in more than 4 months, the national average price for unleaded gasoline has dropped below $3.50 per gallon. This is the lowest national average for early August since 2010.

So even given the gas taxes levied by the various states, getting behind the wheel for your late-summer trip looks like an economical move.

And if you’re visiting relatives who are literally accommodating, stay in their guest room instead of a nearby motel. Sure, you’ll have to listen to your brother-in-law’s same stories over again, but at least those tales aren’t taxed.

Herman & Company CPA’s proudly serves Bedford Hills NY, Chappaqua NY, Harrison NY, Scarsdale NY, White Plains NY, Mt. Kisco NY, Pound Ridge NY, Greenwich CT and beyond.

Any U.S. tax advice contained in the body of this website is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.