medical expenses

Eight Tips to Determine if Your Gift is Taxable

If you gave money or property to someone as a gift, you may owe federal gift tax. Many gifts are not subject to the gift tax, but there are exceptions. Here are eight tips you can use to figure out whether your gift is taxable.

1. Most gifts are not subject to the gift tax. For example, there is usually no tax if you make a gift to your spouse or to a charity. If you make a gift to someone else, the gift tax usually does not apply until the value of the gifts you give that person exceeds the annual exclusion for the year. For 2013 the annual exclusion is $14,000 (up from $13,000 in 2012).

2. Gift tax returns do not need to be filed unless you give someone, other than your spouse, money or property worth more than the annual exclusion for that year.

3. Generally, the person who receives your gift will not have to pay any federal gift tax because of it. Also, that person will not have to pay income tax on the value of the gift received.

4. Making a gift does not ordinarily affect your federal income tax. You cannot deduct the value of gifts you make (other than deductible charitable contributions).

5. The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule. The following gifts are not taxable gifts:

Gifts that are do not exceed the annual exclusion for the calendar year,
Tuition or medical expenses you pay directly to a medical or educational institution for someone,
Gifts to your spouse,
Gifts to a political organization for its use, and
Gifts to charities.

6. You and your spouse can make a gift up to $28,000 to a third party without making a taxable gift. The gift can be considered as made one-half by you and one-half by your spouse. If you split a gift you made, you must file a gift tax return to show that you and your spouse agree to use gift splitting. You must file a Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, even if half of the split gift is less than the annual exclusion.

7. You must file a gift tax return on Form 709, if any of the following apply:

You gave gifts to at least one person (other than your spouse) that are more than the annual exclusion for the year.
You and your spouse are splitting a gift.
You gave someone (other than your spouse) a gift of a future interest that he or she cannot actually possess, enjoy, or receive income from until some time in the future.
You gave your spouse an interest in property that will terminate due to a future event.

8. You do not have to file a gift tax return to report gifts to political organizations and gifts made by paying someone’s tuition or medical expenses.

Questions about the gift tax? Call us. We have the answers.

By Leon Clinton
August 23, 2013

The Facts: Medical & Dental Expenses and Your Taxes

If you, your spouse or dependents had significant medical or dental costs in 2012, you may be able to deduct those expenses when you file your tax return. Here are eight things you should know about medical and dental expenses and other benefits.

1. You must itemize. You deduct qualifying medical and dental expenses if you itemize on Schedule A on Form 1040.

2. Deduction is limited. You can deduct total medical care expenses that exceed 7.5 percent of your adjusted gross income for the year.

3. Expenses must have been paid in 2012. You can include medical and dental expenses you paid during the year, regardless of when the services were provided. Be sure to save your receipts and keep good records to substantiate your expenses.

4. You can’t deduct reimbursed expenses. Your total medical expenses for the year must be reduced by any reimbursement. Normally, it makes no difference if you receive the reimbursement or if it is paid directly to the doctor or hospital.

5. Whose expenses qualify. You may include qualified medical expenses you pay for yourself, your spouse and your dependents. Some exceptions and special rules apply to divorced or separated parents, taxpayers with a multiple support agreement, or those with a qualifying relative who is not your child.

6. Types of expenses that qualify. You can deduct expenses primarily paid for the diagnosis, cure, mitigation, treatment or prevention of disease, or treatment affecting any structure or function of the body. For drugs, you can only deduct prescription medication and insulin. You can also include premiums for medical, dental and some long-term care insurance in your expenses. Starting in 2011, you can also include lactation supplies.

7. Transportation costs may qualify. You may deduct transportation costs primarily for and essential to medical care that qualifies as a medical expense, including fares for a taxi, bus, train, plane or ambulance as well as tolls and parking fees. If you use your car for medical transportation, you can deduct actual out-of-pocket expenses such as gas and oil, or you can deduct the standard mileage rate for medical expenses, which is 23 cents per mile for 2012.(This rate increases to 24 cents in 2013.)

8. Tax-favored saving for medical expenses. Distributions from Health Savings Accounts and withdrawals from Flexible Spending Arrangements may be tax free if used to pay qualified medical expenses including prescription medication and insulin.

Please give us a call if you need help figuring out what qualifies as a medical expense.

By Leon Clinton
March 18, 2013

Tax Changes for 2013: A Checklist

Welcome 2013! As the new year rolls around, it’s always a sure bet that there will be changes to the current tax law and 2013 is no different. From health savings accounts to retirement contributions here’s a checklist of tax changes to help you plan the year ahead.

Individuals

For 2013, the big news is the signing of the American Taxpayer Relief Act of 2012 (ATRA), which modified, made permanent or extended a number of tax provisions that expired in 2012 and 2011, for both individuals and businesses. Standard mileage, health savings account contribution limits, and foreign earned income exclusion, as well as most retirement contribution limits have been adjusted upward to reflect inflation as well.

Alternative Minimum Tax (AMT)
Exemption amounts for the AMT are now permanent and indexed for inflation and allow the use of nonrefundable personal credits against the AMT. Retroactive to January 1, 2012, exemption amounts are $50,600 (individuals) and $78,750 (married filing jointly). These amounts are indexed for inflation in 2013.

“Kiddie Tax”
For taxable years beginning in 2013, the amount that can be used to reduce the net unearned income reported on the child’s return that is subject to the “kiddie tax,” is $1,000 (up from $950 in 2012). The same $1,000 amount is used to determine whether a parent may elect to include a child’s gross income in the parent’s gross income and to calculate the “kiddie tax”. For example, one of the requirements for the parental election is that a child’s gross income for 2013 must be more than $1,000 but less than $10,000.

For 2013, the net unearned income for a child under the age of 19 (or a full-time student under the age of 24) that is not subject to “kiddie tax” is $2,000.

Health Savings Accounts (HSAs)
Contributions to a Health Savings Account (HSA) are used to pay current or future medical expenses of the account owner, his or her spouse, and any qualified dependent. Medical expenses must not be reimbursable by insurance or other sources and do not qualify for the medical expense deduction on a federal income tax return.

A qualified individual must be covered by a High Deductible Health Plan (HDHP) and not be covered by other health insurance with the exception of insurance for accidents, disability, dental care, vision care, or long-term care.

For calendar year 2013, a qualifying HDHP must have a deductible of at least $1,250 (up $50 from 2012) for self-only coverage or $2,500 (up $100 from 2012) for family coverage (unchanged from 2011) and must limit annual out-of-pocket expenses of the beneficiary to $6,250 for self-only coverage (up $200 from 2012) and $12,500 for family coverage (up $400 from 2012).

Medical Savings Accounts (MSAs)
There are two types of Medical Savings Accounts (MSAs): the Archer MSA created to help self-employed individuals and employees of certain small employers, and the Medicare Advantage MSA, which is also an Archer MSA, and is designated by Medicare to be used solely to pay the qualified medical expenses of the account holder. To be eligible for a Medicare Advantage MSA, you must be enrolled in Medicare. Both MSAs require that you are enrolled in a high deductible health plan (HDHP).

Self-only coverage. For taxable years beginning in 2013, the term “high deductible health plan” means, for self-only coverage, a health plan that has an annual deductible that is not less than $2,150 (up $50 from 2012) and not more than $3,200 (up $50 from 2012), and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $4,300 (up $100 from 2012).

Family coverage. For taxable years beginning in 2013, the term “high deductible health plan” means, for family coverage, a health plan that has an annual deductible that is not less than $4,300 (up $100 from 2012) and not more than $6,450 (up $150 from 2012), and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $7,850 (up $200 from 2012).

Increased AGI Limit for Deductible Medical Expenses
In 2013, the amount individuals can deduct for medical expenses increases to 10 percent of AGI. The 7.5 percent threshold continues through 2016 for taxpayers aged 65 and older, including those turning 65 by December 31, 2016.

Eligible Long-Term Care Premiums
Premiums for long-term care are treated the same as health care premiums and are deductible on your taxes subject to certain limitations. For individuals age 40 or less at the end of 2013, the limitation is $360. Persons over 40 but less than 50 can deduct $680. Those over age 50 but not more than 60 can deduct $1,360, while individuals over age 60 but younger than 70 can deduct $3,640. The maximum deduction $4,550 and applies to anyone over the age of 70.

Medicare Taxes
Starting in 2013, there will be an additional 0.9 percent Medicare tax on wages above $200,000 for individuals ($250,000 married filing jointly). Also starting in 2013, there is a new Medicare tax of 3.8 percent on investment (unearned) income for single taxpayers with modified adjusted gross income (MAGI) over $200,000 ($250,00 joint filers). Investment income includes dividends, interest, rents, royalties, gains from the disposition of property, and certain passive activity income. Estates, trusts and self-employed individuals are all liable for the new tax.

Foreign Earned Income Exclusion
For taxable years beginning in 2012, the foreign earned income exclusion amount is $97,600, up from $95,100 in 2012.

Long-Term Capital Gains and Dividends
In 2013 tax rates on capital gains and dividends for taxpayers whose income is at or below $400,000 ($450,000 married filing jointly) remain the same as 2012 rates. As such, for taxpayers in the lower tax brackets (10% and 15%), the rate remains 0%. For taxpayers in the middle tax brackets, the rate is 15%. An individual taxpayer whose income is at or above $400,000 ($450,000 married filing jointly), the rate for both capital gains and dividends is capped at 20% (up from 15% in 2012).

Pease and PEP (Personal Exemption Phaseout)
Pease (limitations on itemized deductions) is permanently extended for taxable years beginning after December 31, 2012 for taxpayers with income at or below $250,000 for single filers) and $300,000 for married filing jointly. The PEP (personal exemption phase-out) limitations was also reinstated, but with higher thresholds of $250,000 for single filers and $300,000 for married taxpayers filing joint tax returns.

Estate and Gift Taxes
For an estate of any decedent during calendar year 2013, the basic exclusion amount is $5,120,000 (indexed for inflation–same as 2012). The maximum tax rate rises to 40% (up from 35% in 2012). The annual exclusion for gifts increases to $14,000 (up from $13,000 in 2012).

Individuals – Tax Credits

Adoption Credit
In 2013, a non-refundable (only those individuals with tax liability will benefit) credit of up to $10,000 is available for qualified adoption expenses for each eligible child.

Earned Income Tax Credit
For tax year 2013, the maximum earned income tax credit (EITC) for low and moderate income workers and working families rises to $5,981, up from $5,891 in 2012. The credit varies by family size, filing status and other factors, with the maximum credit going to joint filers with three or more qualifying children.

Child Tax Credit
For tax year 2013, the child tax credit is $1,000 per child.

Child and Dependent Care Credit
The child and dependent care tax credit was permanently extended for taxable years beginning in 2013. If you pay someone to take care of your dependent (defined as being under the age of 13 at the end of the tax year or incapable of self-care) in order to work or look for work, you may qualify for a credit of up to $1,050 or 35 percent of $3,000 of eligible expenses. For two or more qualifying dependents, you can claim up to 35 percent of $6,000 (or $2,100) of eligible expenses. For higher income earners the credit percentage is reduced, but not below 20 percent, regardless of the amount of adjusted gross income.

Individuals – Education

American Opportunity Tax Credit and Lifetime Learning Credits
The American Opportunity Tax Credit (formerly Hope Scholarship Credit) is extended to the end of 2017. The maximum credit is $2,500 per student. The Lifetime Learning Credit remains at $2,000.

Interest on Educational Loans
Starting in 2013, the $2,500 maximum deduction for interest paid on student loans is repealed and no longer limited to interest paid during the first 60 months of repayment. The deduction is phased out for higher-income taxpayers.

Tuition and Related Expenses Deduction
In 2013, there is once again an above-the-line deduction of up to $4,000 for qualified tuition expenses. This means that qualified tuition payments can directly reduce the amount of taxable income, and you don’t have to itemize to claim this deduction. However, this option can’t be used with other education tax breaks, such as the American Opportunity Tax Credit, and the amount available is phased out for higher-income taxpayers.

Individuals – Retirement

Contribution Limits
The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $17,000 to $17,500. Contribution limits for SIMPLE plans increase from $11,500 to $12,000. The maximum compensation used to determine contributions increases to $255,000 (up $5,000 from 2012 levels).

Income Phase-out Ranges
The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by an employer-sponsored retirement plan and have modified adjusted gross income (AGI) between $59,000 and $69,000, up from $58,000 and $68,000 in 2012.

For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by an employer-sponsored retirement plan, the phase-out range is $95,000 to $115,000, up from $92,000 to $112,000. For an IRA contributor who is not covered by an employer-sponsored retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s modified AGI is between $178,000 and $188,000, up from $173,000 and $183,000.

The modified AGI phase-out range for taxpayers making contributions to a Roth IRA is $178,000 to $188,000 for married couples filing jointly, up from $173,000 to $183,000 in 2012. For singles and heads of household, the income phase-out range is $112,000 to $127,000, up from $110,000 to $125,000. For a married individual filing a separate return who is covered by a retirement plan, the phase-out range remains $0 to $10,000.

Saver’s Credit
The AGI limit for the saver’s credit (also known as the retirement savings contribution credit) for low and moderate income workers is $59,000 for married couples filing jointly, up from $57,500 in 2012; $44,250 for heads of household, up from $43,125; and $29,500 for married individuals filing separately and for singles, up from $28,750.

Businesses

Standard Mileage Rates
The rate for business miles driven is 56.5 cents per mile for 2013, up from 55.5 cents per mile in 2012.

Section 179 Expensing
For 2013 the maximum Section 179 expense deduction for equipment purchases increases to $500,000 of the first $2,000,000 of business property placed in service during 2013. The bonus depreciation of 50% is also extended through 2013.

Work Opportunity Tax Credit (WOTC)
The WOTC is extended through 2013 (retroactive to 2012) and includes a one-year extension of the enhanced credit for hiring certain veterans. When a business hires a person from one of several specific economically disadvantaged groups it may claim a Work Opportunity Tax Credit, generally equal to 40 percent of the first $6,000 in wages paid to a new hire.

Transportation Fringe Benefits
If you provide transportation fringe benefits to your employees, for tax years beginning in 2013 (through 2017) the maximum monthly limitation for transportation in a commuter highway vehicle as well as any transit pass is $240. The monthly limitation for qualified parking is also $240.

While this checklist outlines important tax changes for 2013, additional changes in tax law are more than likely to arise during the year ahead.

Don’t hesitate to call us if you want to get an early start on tax planning for 2013. We’re here to help!

By Leon Clinton
January 8, 2013