Author: Leon Clinton

It isn’t easy to make predictions, especially about the future. But there is one prediction we’re confident in making: you will have substantial out-of-pocket expenses for health care after you retire. Personal finance experts estimate that an average retired couple age 65 will need at least $300,000 to cover health care expenses in retirement.

You may need more.

The time to save for these expenses is before you reach age 65. And the best way to do it may be to open a Health Savings Account (HSA). After several years, you could have a fat HSA balance that will help pave your way to a comfortable retirement.

Not everyone can have an HSA. But you can if you’re self-employed or your employer doesn’t provide health benefits. Some employers offer, as an employee fringe benefit, either HSAs alone or HSAs combined with high-deductible health plans.

An HSA is much like an IRA for health care. It must be paired with a high-deductible health plan with a minimum annual deductible of $1,400 for self-only coverage ($2,800 for family coverage). The maximum annual deductible must be no more than $7,050 for self-only coverage ($14,100 for family coverage).

An HSA can provide you with three tax benefits:

1. You or your employer can deduct the contributions, up to the annual limits.
2. The money in the account grows tax-free (and you can invest it in many ways).
3. Distributions are tax-free if used for medical expenses.

No other tax-advantaged account gives you all three of these benefits.

You also have complete flexibility in how to use the account. You may take distributions from your HSA at any time. But unlike with a traditional IRA or 401(k), you do not have to take to take annual required minimum distributions from the account after you turn age 72.

Indeed, you need never take any distributions at all from your HSA. If you name your spouse the designated beneficiary of your HSA, the tax code treats it as your spouse’s HSA when you die (no taxes are due).

If you maximize your contributions and take few distributions over many years, the HSA will grow to a tidy sum.

If you have any questions about HSAs, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• May 12, 2022

You have heard the horror stories about mail sent to the IRS that remains unanswered for months. Reportedly, the IRS has mountains of unanswered mail pieces in storage trailers, waiting for IRS employees to process them.

Because the understaffed IRS is having so much trouble processing all the documents it receives, you need to protect yourself when you send an important tax filing due by a specific deadline.

If you can file a document electronically, do so. The IRS deems such filings as filed on the date of the electronic postmark.

If you must file a physical document with the IRS, don’t use regular U.S. mail, Priority Mail, or Express Mail.

Why not?

When you mail a document with these methods, the IRS considers it filed on the postmark date, but only if the IRS receives it. What if the U.S. Postal Service doesn’t deliver it or the IRS loses it? You’ll have no way to prove the IRS got it—and the IRS and most courts won’t accept your testimony that it was timely mailed.

Don’t take this chance. Instead, file physical documents by certified or registered U.S. mail, or use an IRS-approved private delivery service (generally, two-day or better service from FedEx, UPS, or DHL Express). When you do this, the IRS considers the document filed on the postmark date whether or not the IRS receives it.

Make sure to keep your receipt.

If you have questions about sending any forms or documents to the IRS, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• May 5, 2022

The generally favorable partnership federal income tax rules are a common reason for choosing to operate as a partnership with multiple partners instead of as a corporation with multiple shareholders. The most important partnership tax rules can be summarized as follows:

• You get pass-through taxation.
• You can deduct partnership losses (within limits).
• You may be eligible for the Section 199A tax deduction.
• You get basis from partnership debts.
• You get basis step-up for purchased interests.
• You can make tax-free asset transfers with the partnership.
• You can make special tax allocations.

Partnership taxation is not all good stuff. There are a few important disadvantages and complications to consider:

• Exposure to self-employment tax
• Complicated Section 704(c) tax allocation rules
• Tricky disguised sale rules
• Unfavorable fringe benefit tax rules

Limited partnerships are obviously treated as partnerships for federal income tax purposes, with the generally favorable partnership taxation rules mentioned above.

Limited partners generally are not exposed to liabilities related to the partnership or its operations. So, you generally cannot lose more than what you’ve invested in a limited partnership—unless you guarantee partnership debt.

So far, so good. But you must also consider the following disadvantages for limited partners:

• Limited partners usually get no basis from partnership liabilities.
• Limited partners can lose their liability protection.
• You need a general partner.

On the plus side, limited partners have a self-employment tax advantage.

Since your partnership will have multiple partners, multiple issues can come into play. You’ll need a carefully drafted partnership agreement to handle potential issues even if you don’t expect them to arise. For instance, you may want to include

• a partnership interest buy-sell agreement to cover partner exits;
• a non-compete agreement (for obvious reasons);
• an explanation of how tax allocations will be calculated in compliance with IRS regulations;
• an explanation of how distributions will be calculated and when they will be paid (for instance, you may want to call for cash distributions to be made annually in early April to cover partners’ tax liabilities from their shares of partnership income for the previous year);
• guidelines for how the divorce, bankruptcy, or death of a partner will be handled;
• and so on.

Key point. No type of entity (including a limited partnership in which you are a limited partner) will protect your personal assets from exposure to liabilities related to your own professional malpractice or your own tortious acts.

If you would like to discuss partnerships, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• May 1, 2022