Month: May 2023

When your S corporation covers or reimburses your more-than-2-percent-shareholder-employee health insurance expenses, it classifies the payments as box 1 W-2 wages but not box 3 or box 5 wages.

When calculating the amount eligible for the Form 1040 self-employed health insurance deduction, you must use your Medicare wages (listed in box 5 of Form W-2) as your “earned income” rather than the amount reported in box 1.

Here are two examples that show you the impact of this rule:

• Ted’s S corporation pays him $0 in cash wages and reimburses him $18,000 for health insurance. His W-2 shows $18,000 as box 1 wages and $0 as box 3 and box 5 wages. Although Ted has $18,000 in taxable wage income from the corporation’s reimbursement of his health insurance, his Form 1040 self-employed health insurance deduction is $0 due to his lack of Medicare wages.
• Janet’s corporation pays her $107,000 in cash wages and reimburses her $22,000 for health insurance. Janet’s W-2 from her S corporation shows box 1 wages of $129,000, box 3 wages of $107,000, and box 5 wages of $107,000. The IRS allows her Form 1040 self-employed health insurance deduction of $22,000 because her Medicare wages exceed the insurance cost.

To avoid unfavorable tax outcomes, ensure that your S corporation reports Medicare wages (box 5) equal to or greater than the health insurance costs paid or reimbursed.

Please call me on my direct line at 408-778-9651 if you have questions or need additional clarification on this rule and how it may affect your tax situation.

• By Leon Clinton
• May 12, 2023

Did you buy, sell, donate, or receive an NFT during the tax year? If so, you must answer “yes” to the digital assets question on page one of the IRS Form 1040. Additionally, if you have sold an NFT, you could be liable for tax or eligible for a deductible loss.

If you are unsure what an NFT is, it stands for non-fungible token, meaning each NFT is unique. NFTs differ from Bitcoin and other forms of cryptocurrency in that they are non-interchangeable with other crypto or real currency. They are digital certificates of ownership for virtual or physical assets, such as digital art, collectibles, music, virtual real estate, etc.

In Notice 2023-27, the IRS said, for the time being, it will treat NFTs that are tax-law-defined collectibles as collectibles for tax purposes. This is important for the following reasons:

• If you sell a collectible held for more than one year, your maximum capital gains tax rate is 28 percent, whereas other assets have a maximum of 20 percent.
• If you have your individual retirement account (IRA) or stock bonus, pension, or profit-sharing plan buy a collectible, you are deemed to have taken a taxable distribution that is subject to ordinary income taxes and early withdrawal penalties.

The tax code defines a collectible as any work of art, rug or antique, metal or gem, stamp or coin, or any alcoholic beverage.

You buy and sell NFTs online. You typically buy NFTs using cryptocurrency, namely Ethereum. When you exchange Ethereum for an NFT, you recognize a capital gain or loss. Your later sales of NFTs also trigger capital gains or losses.

NFTs are considered non-capital assets in the hands of their creators, and hence, when sold, creators receive ordinary income. Donations of NFTs to charity result in a charitable deduction for the purchaser, but donations by NFT creators hold little value.

Additionally, personal gifts of NFTs to your relatives and others are not taxable events to the recipients.

If you realize a capital gain or loss from buying or selling an NFT, you report the transaction on IRS Form 8949, Sales and Other Dispositions of Capital Assets. The totals from this form transfer to your Form 1040, Schedule D.

You must track your NFT transactions to report them on your tax return correctly.

If you have questions about NFTs, please don’t hesitate to contact me at 408-778-9651.

• By Leon Clinton
• May 8, 2023

Health Savings Accounts (HSAs) are designed for use alongside high-deductible health plans, assisting you in covering your medical expenses. They can also function as an incredible retirement account due to their triple tax benefit:

• You can deduct contributions from your taxes.
• Your account balance grows without being taxed.
• Withdrawals for medical expenses are tax-free.

And after age 65, you can use the monies for non-medical purposes, the same as you can with a traditional IRA, and pay taxes at ordinary income rates but without penalties.

We recommend that you fully fund your HSA each year until you enroll in Medicare and ideally minimize distributions. By doing so, even if you start at age 50, you could accumulate $200,000 or more by the time you reach age 65.

To assist in funding your HSA, there is a special, lesser-known rule: You can roll over funds from your IRA to your HSA once in your lifetime through a qualified HSA funding distribution.

The rollover amount is limited to your HSA contribution limit for the year. In 2023, this amounts to $3,850 for individual coverage and $7,750 for family coverage. If you are over age 55, you can add a $1,000 catch-up contribution.

The rollover amount doesn’t count as income, isn’t deductible, and reduces the amount you can contribute to your HSA for the year. The big benefit is that you turn this otherwise taxable money into tax-free money when you use it for medical expenses.

If you would like to discuss your HSA, please call me on my direct line at 408.778.9651.

• By Leon Clinton
• May 3, 2023