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Health savings accounts, or HSA's, are individual bank accounts owned by employees or self employed individuals that allow for tax free payment or reimbursement of eligible medical expenses. 

HSA Highlights/Advantages:

• Tax Deductible Contributions
  
• Tax Free Growth on Account
  
• Tax Free Distributions for Qualified Medical Expenses
  
• Can be used as a Traditional IRA after age 65 (or Medicare Eligibility)
  

HSA's In general:
These accounts work in a manner which is very similar to an IRA account but they are for out of pocket medical expenses.  Qualifying individuals can deposit funds to the account, take a tax deduction for the funds deposited, and then withdrawal the funds tax free to pay qualified medical expenses.  You might be thinking, "wouldn't it be easier just to deduct your medial expenses instead?"  Well, yes it would but that isn't they way congress has written the laws.  As things stand now you can only deduct medical expenses that exceed 10% of your income.  For most people that means that they can't deduct any medical expenses at all. Health Savings Accounts are a good way to convert these otherwise non deductible medical expenses into deductible ones.

The Rules:
No permission or authorization from the IRS is necessary to establish an HSA. You set up an HSA with a trustee. A qualified HSA trustee can be a bank, an insurance company, or anyone already approved by the IRS to be a trustee of individual retirement arrangements (IRAs) or Archer MSAs. The HSA can be established through a trustee that is different from your health plan provider.

For tax year 2016 an individual with self-only coverage can contribute and deduct up to $3,350.  A contribution and deduction of up to $6,750 is allowed for a family coverage plan.

What's the catch?  Well, there are a couple of them.  First, to have a tax advantaged Health Savings Account you need to have a qualifying high deductible health insurance plan.  The plan must have a deductible of no less than $1,300 for self-only or $$2,600 for family coverage. Additionally, the plan must meet the maximum out of pocket rules.  The most that a plan participant can be required to pay our of pocket cannot exceed $6,550 for self coverage or $13,100 for family coverage.  Typically, qualifying high deductible plans have lower monthly premiums but higher out of pocket costs associated with them.  The Health Savings Component is mean to help you cover those higher out of pocket costs.  

To receive tax free distributions, the proceeds must be used for qualified medical expenses.  If HSA funds are used to pay for unqualified expenses the distribution will be included in income and will also be subject to a 20% penalty.  After you reach age 65 and become eligible for medicare you can take distributions from the account for non medical purposes without incurring the 20% penalty; however, the distributions will be subject to tax.  

Retirement Planning - How to Utilize Your HSA in Retirement:
Once you become medicare eligible you are no longer qualified to make contributions to your HSA. But, you can still utilize your Health Savings Account.  In fact, an HSA is a valuable asset in retirement providing useful benefits.  If you are fortunate enough to remain relatively healthy during your working years and don't incur a lot of medical expenses, you could build up a significant balance in your HSA.  You can continue to use this account balance for medical expenses as they occur. Your distributions will remain tax free to the extent that you are reimbursing medical expenses. What you don't use for medical expenses can be withdrawn just like regular IRA withdrawals with no penalty.  You will need to pay income tax on the non medical distributions, just as you would with a traditional IRA.

Two individuals who claim their tax information was stolen when hackers breached the Service’s “Get Transcript” web application filed a class action lawsuit against the agency. They say that IRS was generally aware that its computer systems were a target for criminals and failed to implement the necessary security measures or otherwise fix the weaknesses. They allege that IRS made an intentional decision not to strengthen the security of its systems, which led to the loss of taxpayer data in the Get Transcript breach.

The IRS issued a statement last month revealing that their website had been used by a "sophisticated" and well funded group attempting to steal tax forms containing personal identifying and financial information.  The thieves used the popular IRS website tool "Get Transcript" to access this information on roughly 200,000 taxpayers.  They successfully obtained  tax data on just over half.

The Get Transcript tool is an extremely handy way for taxpayers and their accountants to gain access to tax data.  This can come in handy when apply for mortgages or financial aid and is extremely useful when filing or amending returns for prior years.  The IRS has tried to safeguard the system by having the user answer a series of security questions.  The questions are often things like a prior address from a very long time ago that only the taxpayer should know.  Evidently, the security questions were not effective in this case because the crooks already had some identifying information on their target individuals.

The IRS has temporarily disabled the Get Transcript tool.  We will likely have to resort to mailed transcripts until they can shore up their system.  Hopefully, we wont go back to 4 week wait times!

For a more complete account of the situation please read the IRS statement below.

The IRS announced today that criminals used taxpayer-specific data acquired from non-IRS sources to gain unauthorized access to information on approximately 100,000 tax accounts through IRS’ “Get Transcript” application. This data included Social Security information, date of birth and street address. These third parties gained sufficient information from an outside source before trying to access the IRS site, which allowed them to clear a multi-step authentication process, including several personal verification questions that typically are only known by the taxpayer. 

The matter is under review by the Treasury Inspector General for Tax Administration as well as the IRS’ Criminal Investigation unit, and the “Get Transcript” application has been shut down temporarily. The IRS will provide free credit monitoring services for the approximately 100,000 taxpayers whose accounts were accessed. In total, the IRS has identified 200,000 total attempts to access data and will be notifying all of these taxpayers about the incident. As always, the IRS takes the security of taxpayer data extremely seriously, and we are working aggressively to protect affected taxpayers and continue to strengthen our protocols. 

ADDITIONAL INFORMATION -
The IRS announced today it will be notifying taxpayers after third parties gained unauthorized access to information on about 100,000 accounts through the “Get Transcript” online application. 

The IRS determined late last week that unusual activity had taken place on the application, which indicates that unauthorized third parties had access to some accounts on the transcript application. Following an initial review, it appears that access was gained to more than 100,000 accounts through the Get Transcript application. 

In this sophisticated effort, third parties succeeded in clearing a multi-step authentication process that required prior personal knowledge about the taxpayer, including Social Security information, date of birth, tax filing status and street address before accessing IRS systems. The multi-layer process also requires an additional step, where applicants must correctly answer several personal identity verification questions that typically are only known by the taxpayer. The IRS temporarily shut down the Get Transcript application last week after an initial assessment identified questionable attempts were detected on the system in mid-May. The online application will remain disabled until the IRS makes modifications and further strengthens security for it. 

The matter is under continuing review by the Treasury Inspector General for Tax Administration and IRS offices, including Criminal Investigation. 

The IRS notes this issue does not involve its main computer system that handles tax filing submission; that system remains secure. 

On the Get Transcript application, a further review by the IRS identified that these attempts were quite complex in nature and appear to have started in February and ran through mid-May. In all, about 200,000 attempts were made from questionable email domains, with more than 100,000 of those attempts successfully clearing authentication hurdles. During this filing season, taxpayers successfully and safely downloaded a total of approximately 23 million transcripts. 

In addition, to disabling the Get Transcript application, the IRS has taken a number of immediate steps to protect taxpayers, including: 
1. Sending a letter to all of the approximately 200,000 taxpayers whose accounts had attempted unauthorized accesses, notifying them that third parties appear to have had access to taxpayer Social Security numbers and additional personal financial information from a non-IRS source before attempting to access the IRS transcript application. Although half of this group did not actually have their transcript account accessed because the third parties failed the authentication tests, the IRS is still taking an additional protective step to alert taxpayers. That’s because malicious actors acquired sensitive financial information from a source outside the IRS about these households that led to the attempts to access the transcript application. 
2. Offering free credit monitoring for the approximately 100,000 taxpayers whose Get Transcript accounts were accessed to ensure this information isn’t being used through other financial avenues. Taxpayers will receive specific instructions so they can sign up for the credit monitoring. 

The IRS emphasizes these outreach letters will not request any personal identification information from taxpayers. In addition, the IRS is marking the underlying taxpayer accounts on our core processing system to flag for potential identity theft to protect taxpayers going forward – both right now and in 2016. 

These letters will be mailed out starting later this week and will include additional details for taxpayers about the credit monitoring and other steps. At this time, no action is needed by taxpayers outside these affected groups. 

The IRS is continuing to conduct further reviews on those instances where the transcript application was accessed, including how many of these households filed taxes in 2015. It’s possible that some of these transcript accesses were made with an eye toward using them for identity theft for next year’s tax season. 

The IRS emphasizes this incident involves one application involving transcripts – it does not involve other IRS systems, such as our core taxpayer accounts or other applications, such as Where’s My Refund. 

The IRS will be working aggressively to protect affected taxpayers and strengthen our protocols even further going forward. 

In Mid December the Senate passed, and President Obama signed, a one-year tax extender bill extending more than 50 tax provisions through Dec. 31, 2014. The long-term fate of these on-again off-again tax breaks will have to be decided in the next Congress.  For many years (most of my career) annual tax legislation was passed in a timely manner and without much controversy.  Recent battles in congress over taxes and spending have resulted in last minute and retroactive legislation.  The result is generally a late start to tax season while the IRS responds to the changes with updated forms, instructions, and publications.  These retroactive changes also make tax planning a challenge.


With over 50 provisions impacted a complete discussion of the new law isn't practical. The majority of the provisions pertain to businesses. Some of the individual highlights include:

Deduction for teachers' expenses- This measure allows educator to deduct up to $250 for the costs of classroom supplies that they buy with their own money. 

State and local sales tax deduction- If you itemize your taxes, this measure lets you deduct the state and local sales taxes you've paid in lieu of state income taxes.

Tuition deduction- Taxpayers meeting certain income limits may deduct up to $4,000 in qualified tuition, fees and related expenses for post-secondary education, such as college and graduate school. The deduction may be taken for yourself, your spouse or your dependents.

Deduction for mortgage insurance premiums-  This tax break allows for individuals to claim the cost of mortgage insurance premiums as an itemized deduction (subject to income limitations).

Income exclusion for mortgage debt that's been forgiven-  Losing your home in foreclosure or selling your home in a short sale can frequently result in forgiveness of debt income.  The IRS treats this forgiven debt income as taxable.  This bill extends a provision to exclude this income under certain circumstances.

You can read more about this bill at congress.gov.

You may be qualified for these adjustments to income:

Educator expenses -  This deduction applies to K – 12th grade educators, and is limited to $250 of documented supplies per qualified taxpayer. Expenses exceeding $250 can be taken as a miscellaneous itemized deduction. 

A health savings account - Health savings accounts, or HSA's, are accounts set up exclusively for paying the qualified medical expenses of the account beneficiary or the beneficiary’s spouse and dependents.  Health savings accounts are designed to accompany specific insurance policies with high deductibles.  Be sure to discuss this with your return preparer to see if you qualify.

Moving expenses - If you moved more than 50 miles for employment purposes you may be entitled to deduct the cost of moving your-self and your household goods.  You may deduct qualified out-of-pocket expenses or an employer reimbursement that was included in your W-2 form. If you received a non-taxable reimbursement, you cannot deduct the expenses.

Self-employment tax - If you are a sole-proprietor, active partner or have miscellaneous income subject to self-employment tax, you can deduct half of the self-employment tax. 

Self-employed pension plans - You can deduct all qualified contributions to self-employed SEP, SIMPLE, or other qualified plan.  See related articles under "retirement plans" for limitations and details.

Self-employed health insurance deduction -  Sole proprietor's, active partners with net business income, and greater than than 2% shareholders of an S-corporation may deduct the cost of health insurance for themselves and their families.  The deduction is limited to net profit or, in the case of an S corp shareholder, Medicare wages reported on the W-2 from that S corp. Qualified long-term care insurance premiums, subject to age limitations, are also deductible.

Penalty on early withdrawal of savings - These penalties, which are typically incurred when you cash a CD prematurely, are deductible. You will find this fee on your form 1099-INT. 

Alimony - Court ordered alimony paid is deductible, subject to certain rules. Your return must include the Social Security number of the recipient.

IRA deduction -  If you have compensation or self-employment income and are not covered by an employer plan, or meet certain income limitations, you may deduct contributions to a traditional IRA. For tax year 2014 you are limited to $5500 ($6500 if you are over 50). Roth IRA contributions are not deductible but possess other tax benefits.

Student loan interest - Up to $2,500 of the interest paid on a qualified student loan is deductible (subject to certain income limitations). You should receive a Form 1098-E from the entity to which you paid the student loan interest.

Tuition and fees deduction - Up to $4,000 of higher education tuition and fees can be deducted by taxpayers with an AGI under $80,000 if single, or $160,000 if married filing jointly.  It may be more advantageous for you to claim either the American opportunities credit or the lifetime learning credit.  All of these education benefits have different limitations and requirements.  .  You can find an in depth article on the credits under the education category of this blog.  Please discuss this with your tax advisor to claim the credit or deduction that is most advantageous for you

I've had calls recently from some of our clients wanting to know if the call they just received from the IRS was a real call or a phone scam.  Unfortunately, such scams have become common.   The IRS recently published the following article addressing the issue:

Five Easy Ways to Spot a Scam Phone Call

The IRS continues to warn the public to be alert for telephone scams and offers five tell-tale warning signs to tip you off if you get such a call. These callers claim to be with the IRS. The scammers often demand money to pay taxes. Some may try to con you by saying that you’re due a refund. The refund is a fake lure so you’ll give them your banking or other private financial information.

These con artists can sound convincing when they call. They may even know a lot about you. They may alter the caller ID to make it look like the IRS is calling. They use fake names and bogus IRS badge numbers. If you don’t answer, they often leave an “urgent” callback request.

The IRS respects taxpayer rights when working out payment of your taxes. So, it’s pretty easy to tell when a supposed IRS caller is a fake. Here are five things the scammers often do but the IRS will not do. Any one of these five things is a sign of a scam. The IRS will never:

1. Call you about taxes you owe without first mailing you an official notice.
2. Demand that you pay taxes without giving you the chance to question or appeal the amount they say you owe.
3. Require you to use a certain payment method for your taxes, such as a prepaid debit card.
4. Ask for credit or debit card numbers over the phone.
5. Threaten to bring in local police or other law-enforcement to have you arrested for not paying.

If you get a phone call from someone claiming to be from the IRS and asking for money, here’s what to do:

• If you know you owe taxes or think you might owe, call the IRS at 800-829-1040 to talk about payment options. You also may be able to set up a payment plan online at IRS.gov.
• If you know you don’t owe taxes or have no reason to believe that you do, report the incident to TIGTA at 1.800.366.4484 or at www.tigta.gov.
• If phone scammers target you, also contact the Federal Trade Commission at FTC.gov. Use their “FTC Complaint Assistant” to report the scam. Please add "IRS Telephone Scam" to the comments of your complaint.

Remember, the IRS currently does not use unsolicited email, text messages or any social media to discuss your personal tax issues. For more information on reporting tax scams, go to www.irs.gov and type “scam” in the search box. 

The answer to that is, it depends.  Long-term disability benefits can be a little tricky.   Sometimes it's taxable and sometimes not.  Generally, if you paid the premiums for the long term disability insurance then the benefits are not taxable.  If the company paid the premiums, or you paid them through a pre-tax plan, then the benefits will be taxable.  The IRS provides the following guidance:

• If both you and your employer have paid the premiums for the plan, only the amount you receive for your disability that is due to your employer’s payments is reported as income.
• If you pay the entire cost of a health or accident insurance plan, do not include any amounts you receive for your disability as income on your tax return.
• If you pay the premiums of a health or accident insurance plan through a cafeteria plan, and the amount of the premium was not included as taxable income to you, the premiums are considered paid by your employer, and the disability benefits are fully taxable.
• If the amounts are taxable, you can submit a Form W-4S (PDF), Request for Federal Income Tax Withholding From Sick Pay, to the insurance company, or
• Make estimated tax payments by filing Form 1040-ES (PDF), Estimated Tax for Individuals

In the event that your long term-disability payments are taxable they will be reported to you on a W-2.  You will report these payments as wages on line 7 of your tax return.  

A change in name can have an impact on your income tax filing.  The IRS matches names and social security numbers with the Social Security Administration's records.  If the name you report on your return does not match what SSA has on file it can cause your electronically filed return to reject. With a paper filed return you are likely to receive a letter from the IRS about the mismatch.  If you are expecting a refund this may delay when you receive it.

Report Name Change before You File Taxes

Did you change your name last year? Did your dependent have a name change? If the answer to either question is yes, be sure to notify the Social Security Administration before you file your tax return with the IRS.

Be sure to contact SSA if:

• You got married or divorced and you changed your name.
• A dependent you claim had a name change. For example, this would apply if you adopted a child and that child’s last name changed.

File Form SS-5, Application for a Social Security Card, with the SSA to let them know about a name change. You can get the form on SSA.gov by calling800-772-1213 or at an SSA office.

Many people hire a professional when it’s time to file their tax return. If you pay someone to prepare your federal income tax return, the IRS urges you to choose that person wisely. Even if you don’t prepare your own return, you’re still legally responsible for what is on it.

Here are ten tips to keep in mind when choosing a tax preparer:

1. Check the preparer’s qualifications.  All paid tax preparers are required to have a Preparer Tax Identification Number or PTIN. In addition to making sure they have a PTIN, ask the preparer if they belong to a professional organization and attend continuing education classes. 

2. Check the preparer’s history.  Check with the Better Business Bureau to see if the preparer has a questionable history. Check for disciplinary actions and for the status of their licenses. For certified public accountants, check with the state board of accountancy. For attorneys, check with the state bar association. For enrolled agents, check with the IRS Office of Enrollment.

3. Ask about service fees.  Avoid preparers who base their fee on a percentage of your refund or those who say they can get larger refunds than others can. Always make sure any refund due is sent to you or deposited into your bank account. Taxpayers should not deposit their refund into a preparer’s bank account.

4. Ask to e-file your return.  Make sure your preparer offers IRS e-file. Any paid preparer who prepares and files more than 10 returns for clients generally must file the returns electronically. IRS has safely processed more than 1.2 billion e-filed tax returns.

5. Make sure the preparer is available.  Make sure you’ll be able to contact the tax preparer after you file your return - even after the April 15due date. This may be helpful in the event questions come up about your tax return.

6. Provide records and receipts.  Good preparers will ask to see your records and receipts. They’ll ask you questions to determine your total income, deductions, tax credits and other items. Do not use a preparer who is willing to e-file your return using your last pay stub instead of your Form W-2. This is against IRS e-file rules.

7. Never sign a blank return.  Don’t use a tax preparer that asks you to sign a blank tax form.

8. Review your return before signing.  Before you sign your tax return, review it and ask questions if something is not clear. Make sure you’re comfortable with the accuracy of the return before you sign it.

9. Ensure the preparer signs and includes their PTIN.  Paid preparers must sign returns and include their PTIN as required by law. The preparer must also give you a copy of the return.

10. Report abusive tax preparers to the IRS.  You can report abusive tax preparers and suspected tax fraud to the IRS. Use Form 14157, Complaint: Tax Return Preparer. If you suspect a return preparer filed or changed the return without your consent, you should also file Form 14157-A, Return Preparer Fraud or Misconduct Affidavit. You can get these forms at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Keeping good records after you file your taxes is more than just a good idea.  Maintaining adequate documentation will help you with substantiation if the IRS or the state selects your return for an audit. Here are five tips from the IRS about keeping good records:

1. Tax records should be kept for a minimum of three years. (I recommend five.)
2. Some documents — such as records relating to a home purchase or sale, stock transactions, IRA and business or rental property —     should be kept longer.  For example, records relating to the purchase of business assets must be kept for the full depreciable life of that asset plus three years.
3. In most cases, the IRS does not require you to keep records in any special manner. Generally speaking, however, you should keep any and all documents that may have an impact on your federal or state tax return.
4. Records you should keep include bills, credit card and other receipts, invoices, mileage logs, canceled, imaged or substitute checks, proofs of payment, and any other records to support deductions or credits you claim on your return.
5. For more information on what kinds of records to keep, see IRS Publication 552, Recordkeeping for Individuals, which is available on the IRS website at www.irs.gov or by calling 800-TAX-FORM (800-829-3676).