Month: November 2023

If you enjoy gambling, whether occasionally or frequently, it is crucial to understand how your winnings and losses can affect your tax liability.

Basic Rules

Winnings: You report your gambling winnings from casinos, lotteries, raffles, and other gambling activities as “above-the-line” taxable income.

Losses: You deduct gambling losses “below-the-line” as itemized deductions on Schedule A, but only to the extent of your winnings.

Reporting: Casinos and other gambling institutions report your winnings to the IRS on Form W-2G if they meet certain thresholds. You will also receive a copy of this form.

A Real-Life Example: The Bright Case

Jacob Bright, a casual gambler, found himself in a complicated tax situation due to extensive gambling activities. The casinos reported his large winnings on Form W-2G, totaling $110,553.

Due to poor recordkeeping and misclassification as a professional gambler, Bright incurred a tax bill of $13,898 despite his gambling losses exceeding his winnings.

Tips and Best Practices for Recreational Gamblers

Keep a gambling log: Maintain a detailed log of your gambling activities, including dates, locations, types of wagers, and amounts won or lost. This record can serve as valuable documentation in an IRS audit.

Use a player’s card: Whenever you gamble at a casino, use a player’s card to track your activities electronically.

Understand the importance of session tracking: Track your wins and losses by gambling session. The session approach allows you to offset wins and losses within the same session, potentially reducing your taxable income.

Be aware of itemizing requirements: Remember that you can only deduct gambling losses if you itemize your deductions. If you take the standard deduction, you don’t reduce your tax liability with your gambling losses.

Takeaway

Gambling has tax implications and can, for the uninformed, lead to unexpected tax bills and complications.

Keep this in mind. You could win a big jackpot on the last day of the year. Would you have the records to keep your tax bill to a minimum?

If you want to discuss the tax implications of your gambling activities, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• November 16, 2023

The Affordable Care Act (ACA) changed the landscape for small businesses that offered health benefits for their employees.

Before the ACA, many small businesses reimbursed some or all of their employees’ individually purchased health insurance.

The ACA makes that illegal and imposes a $100-a-day, per-employee penalty for such reimbursements without using one of the newer health reimbursement accounts—namely the ICHRA or the QSEHRA.

That brings us to two other choices:

1. As a small employer with fewer than 50 employees, you can offer no health benefits and face no federal law penalties.
2. You can use the health savings account (HSA) to help employees with their health benefits without facing the hurdles of the ACA.

But here’s the kicker: The one thing you need to consider when you make the HSA contributions is the discrimination rules (which are called “comparability” rules in the HSA world). If you violate these rules, the IRS forces you to pay a draconian tax of 35 percent of your total HSA contributions.

Fortunately, it’s easy to avoid discrimination—even when you favor one group of employees over another—when you follow three simple rules.

What Employers Must Know

Before we get to the three simple rules, the general rule to know as an employer is that you have to make “comparable” contributions to all employees who have a high-deductible health plan (HDHP). (Employees are not eligible for HSA contributions unless they have an HDHP.)

What if some employees have an HDHP and some don’t? You don’t have to give any benefit to the non-HDHP employees. For purposes of HSA tax law, you can simply give them nothing and ignore them.

But for your HDHP employees, you have to make comparable contributions. You do that by following the three rules below.

Rule 1—Determine the Categories of Your HDHP Employees

You have to make comparable contributions only to employees who are in the same “category.”

For two or more employees to fall into the same category, they must have identical answers to both of the following questions:

• Is the employee a full-time, part-time, or former employee?
• How many dependents are covered under the employee’s HDHP?

Full time versus part time. Part-time employees are those working fewer than 30 hours per week, and full-time employees are those working 30 hours or more per week.

Number of dependents covered. The HSA rules provide four options:

1. Self-only HDHP
2. Family HDHP covering the employee plus one dependent (“self plus one”)
3. Family HDHP covering the employee plus two dependents (“self plus two”)
4. Family HDHP covering the employee plus three or more dependents (“self plus three or more”)

Examples

Example 1. You have three full-time employees:

• Sam has a self-only plan.
• Joe has a family plan covering himself and his son.
• Kim has a family plan covering herself and her husband.

Only Joe and Kim are in the same category, because they both have self-plus-one HDHP coverage. Sam is in a different category, because he has coverage for himself only.

Example 2. In addition to the three employees above, you have a part-time employee named Barbara who has a family plan covering herself and her husband. Barbara is in a category separate from Joe and Kim. Even though she has self-plus-one coverage, she is part time, whereas Joe and Kim are full time.

Rule 2—Calculate a Comparable Amount

Contributions are comparable if you give each employee in the same category either

• the same amount of money, or
• the same percentage of the plan’s deductible.

You make this determination each month.

Example. At the beginning of the year you have two employees, and you hire a new employee who begins work on May 1. All three employees have the same HDHP.

You decide to contribute $100 per month to each employee’s HSA. For the two employees who are with you for the full year, you contribute $1,200 total to each of their HSAs. For the new employee, you contribute a total of $800, since that employee worked only eight months of the year.

Rule 3—Treat Yourself Differently

Unless you operate your business as a C corporation, tax law does not treat you as a normal employee with regard to the contributions your business makes to your personal HSA.

If you’re a sole proprietor, you simply take the deduction on your Form 1040.

If you operate as an S corporation, you treat the S corporation contribution as compensation, and then you take the deduction on your Form 1040.

Limits

For 2023, you can contribute a maximum of $3,850 to a self-only plan, $7,750 to a family plan, and an additional $1,000 for individuals over age 55.

If you want to discuss the HSA plan for you and your employees, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• November 14, 2023

Many individuals either contemplate or hold citizenship in more than one country. While dual citizenship can offer many benefits, such as enhanced travel mobility, access to social services, and the ability to work and reside in both countries, be sure you are aware of the tax responsibilities.

As a current or potential U.S. citizen, you should understand that the U.S. tax system imposes obligations on its citizens regardless of where they reside or generate income. Dual citizens could be liable for taxes in both the U.S. and the other country of their citizenship.

To ensure compliance with all necessary tax regulations and avoid potential legal and financial pitfalls, start with your tax residency status. The U.S. tax system categorizes individuals as resident or non-resident aliens, with varying tax implications for each category.

Being a resident alien means you are taxed on your worldwide income, whereas non-resident aliens are taxed only on U.S.-sourced income. The distinction between the two categories is based on factors such as length of stay in the U.S. and immigration status.

It is also worth noting that dual citizens may be subject to double taxation—being taxed by both countries on the same income. The U.S. has mechanisms to alleviate this burden, such as the foreign earned income exclusion, the housing exclusion or deduction, and the foreign tax credit. These tax breaks can significantly reduce U.S. tax liability on foreign earned and unearned income.

Additionally, the U.S. has entered into numerous double taxation treaties with other countries to prevent double taxation and promote economic cooperation.

Apart from income tax, there are also reporting requirements for foreign financial accounts and assets, with stringent penalties for non-compliance. You must know these requirements and make the necessary disclosures on time.

If you want to discuss dual citizenship or other complexities, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• November 13, 2023