Tower Club Legal Lunch Forum

January 10, 2014

Tax Update On Selected

Topics

• Supreme Court’s Windsor Decision

• Struck down a key section of DOMA

• the United States Supreme Court held

restricting 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 Status

• Filing 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, 2013

• Registered domestic partnerships and civil

unions do not qualify

• Amended returns for previous open tax years can

be filed

• Inheritance implications

New 2013 - Capital Gains Rates

• 15% maximum capital gains tax rate increased

to 20%

• Threshold: $450,000 ($225,000)/$425,000/

$400,000

• Additional 3.8% tax on unearned income

• Threshold: $250,000($125,000)/$200,000

New 2013 Tax Rules-Net Investment Income Tax

• Net Investment Income is the sum of

1. Interest, dividends, annuities, royalties and rents

unless derived in the ordinary course of a trade or

business

2. Other passive income derived in a trade or

business

3. Net gain attributable to the disposition of property

other than property held in a trade or business

• Minus the allowable deductions allocable to the

aforementioned income

New 2013 Tax Rules – Miscellaneous

• Home Office Deduction - optional safe harbor

method• Deduction = square footage x prescribed rate

• 300 square foot maximum

• Prescribed rate is currently $5

• All other restrictions apply

Tax rules expiring in 2013

• Tax-free distributions from IRAs for charitable

purposes for those 70½ or older

• First year bonus depreciation

• Sales and Use Tax itemized deduction option

• Tax credits for energy-saving home

improvements

New 2014 tax rules

• GST tax exemption increases to $5.34 million

• Gift tax annual exclusion will remain at

$14,000

HSA’s

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 costs

Employees do not want health care choices restricted

Perceived overuse of medical care because employer pays cost

Lack 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 “empowerment”

Medicare inadequate and facing long-term funding issues, while employers have withdrawn from providing retiree medical benefits

11

•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 employer

• Accumulated contributions in account are invested on

a tax-deferred basis, just like an IRA

• Distributions 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 eligible

• The 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

amounts

• Unlike both IRC § 125 cafeteria plans and HRA’s,

partners and other self-employeds are fully eligible for

HSA’s

What Is a High Deductible Health Plan (“HDHP”) for

Purposes of HSA Eligibility?

An HDHP must meet specific deductible and out-of-

pocket limit requirements

Self-coverage:

Deductible of at least $1,250

Out-of-pocket maximum of no more than $6,350

Family coverage:

Deductible of at least $2,500

Out-of-pocket maximum of no more than

$12,700

Higher deductibles and lower out-of-pocket expense

limits are permissible

The requirement for a minimum annual deductible.

With exceptions noted below, HDHP may not cover any expenses until deductible met

Exceptions:

Preventive care

Special insurance coverages:

Workers’ Compensation

Insurance for a specified disease or illness

Insurance paying fixed amount per day for hospitalization

HDHP Must Be Only Coverage

Except 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 HDHP

E.g., employee and covered dependents cannot have coverage under spouse’s non-HDHP plan

Tax Treatment of HSA’s Contributions 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)

HSA’s 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 HSA’s Annually?

For 2014 contribution are:

Self-coverage: $3,300

Family coverage: $6,550

Additional 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 one’s 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 purchased

through 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 won’t 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 single

person or $58,875 for a family of four.