Tax Credits

The Basics of Health Savings Account

An HAS is a kind of savings that lets the employer and the employee put aside some money as a pre-tax in order to pay for eligible medical expenses. It is important to note that an HAS can only be used if the employee has a HDHP or what is also known as the High Deductible Plan.

The HAS is also a medical savings that has a tax-advantaged made available to all taxpayers in the US. The over-all funds that are in the account may not be subjected to federal tax especially during the time of the deposit. The difference between the FSA or what is known as the Flexible Spending Account, is that the HAS can carry over and also accumulate every year if this has not been spent. The reason for this is because the HAS is owned by the employee, therefore setting it apart from the HRA or the Health Reimbursement Arrangement which is owned by the company. This is also an alternate source for tax-deductible funds. Both, however, are paired with standard health plans or the HDHPs.

HSA funds can also be used for eligible medical costs that have no liability or even penalty on federal taxes. Starting early 2011, the medications that are purchased over the counter can no longer be paid using the HSA if there is no prescription from the doctors. The withdrawals for these non-medical costs are also regarded in the same way as those of the IRA or the individual retirement accounts. This is because they can provide the tax advantages if these are taken after they retire. They can also incur penalties when these are taken earlier. These accounts are components of health care that is specifically targeted to consumers.

The HSAs and its proponents believe that these are necessary reforms that can reduce the increase in expenses regarding health care as well as the effectivity of the system. According to these proponents, the HSA can encourage people to save for their unexpected future health care as well as the expenses that go along with it. This allows patients to obtain the necessary care and there is no gatekeeper involved. Usually the gatekeepers determine what the individual can receive as benefits. Consumers are now more responsible when it comes to their own choices in their health care all because of the HDHP.

As for those who do not find the HSA necessary and are opponents of this, they believe that it makes the medical system worse. Health care in the US cannot improve through the HSA because individuals may even hold back on their expenses. They may also spend it in unnecessary circumstances simply because it has already accumulated the penalty taxes just by withdrawing it. Those who have problems in their health have annual costs that are predictable and choose to avoid the HSA so that the costs can be paid by their insurance. There is a current ongoing debate about the satisfaction of the customers who hold these plans.

These usually have lower monthly premiums than most plans that have low deductibles. Using the untaxed funds in the Health Savings Account allows the employee to pay for the medical costs even before the deductible has been reached. This also includes other deductibles such as copayments which are usually payments done from the employee’s pockets. This eventually reduces the over-all value of health care expenses.

The funds from the employee’s HSA carries or rolls over to the next year if it has not been spent in the year it was allocated. The HAS can also earn interest. It is possible for employees to open the HSA through their banks or financial institutions that they have access to.

History of the HSAs

 The Health Savings Accounts were established in compliance with the Medicare Prescription Drug, Improvement and Modernization Act. This is also the enactment of the Section 223 of Internal Revenue Code. This was signed on December 8, 2003 by President George Bush. They were also developed so that it can replace the account system for the medical savings.

Deposits of the HAS

 Deposits to the HSA fund can be made by any individual who holds the policy, as long as this also comes with a HDHP or the high deductible health plan care of the individual’s employer. If the employer makes the deposit to the plan for all his employees then everyone must be regarded equally. This is covered in the non-discrimination rules that is also stated in the act. If the contributions have been made via the plan stated in Section 125 then the rules for non-discrimination also do not apply. Employers have to treat the part time and the full time employees differently. Employers can also treat the family and individual participants n different manner. The treatment of the employees who have not been enrolled in the eligible and high deductible health plan covered by the HAS is not also considered solely for non-discrimination purposes. Employers can also contribute more than usual for the employees who have not been compensated as highly as the others.

The contributions from the employer and to the employee’s HSA can also be made on the pre-tax basis, depending on the preference of the employer. If the said option is not considered by the employer then these contributions are made on post-tax basis and also used to reduce the GTI or gross taxable income on the Form 1040 of the following year. The pre-tax contributions of the employer are also not subject to the Medicare Taxes as well as Federal Insurance Contributions Tax Act. It is important to note that the pre-tax contributions of the employee that were not made via the cafeteria plans cannot be subject to Medicare and FICA taxes. No matter what the method used or tax savings associated regarding the deposit, these can be made by persons that cover the HAS-eligible and high deductible plan that does not include coverage way beyond what is qualified and eligible for the health care coverage.

The maximum deposit on the annual HAS is also the lesser compared to the deductible or what is specified in the limitations of the Internal Revenue Service. Over time, Congress has then abolished this particular limit, basing this on the set statutory and deductible that limits the contributions to its maximum amount. Every contribution that is sent to the HAS, no matter the source, can also be included in the maximum annual amount.

The catch up and statute provision can also apply for the participants of the plan who are aged 55 and older. This allows the IRS to limit the increase. In the income tax year 2015, the limit to the contribution is $3,350 for single individuals and it is $6,650 for married individuals. There is an additional $1,000 increase for those who are older than 55.

Every deposit that is made to HSA can ultimately become the possession of the plan holder, no matter where the deposit comes from. The funds that have been deposited and are not withdrawn can be carried over to next year. Plan holders who also discontinue their qualified insurance coverage from the HSA can deposit even more funds, and the funds that are already placed in the individual’s HSA can still be used.

On December 20, 2006, the Tax Relief and Health Care Act was signed and put into law. It also added another provision that allowed the roll-over of all IRA assets for just one time so that it can equally fund up and amount to a maximum contribution for the HSA that is set for a year. However, the tax treatments on the HSA for every state varies. There are three states that do not let HAS contributions be deducted from the tax earnings or the state income taxes. These are Alabama, New Jersey and California.

Investments on the HAS

 The funds in the HSA can also be invested in the same manner as that of investments that have been done for the IRA or the individual retirement account. The investment earnings that have been sheltered from the taxation until the point that the money has been withdrawn can also be sheltered at that time.

Similar to the IRA that is self-directed, the account for health savings can also be treated as such. A usual HSA custodian offers investments like stocks, mutual funds, bonds, financial institutions and CDs. These also provide the accounts that offer alternatives on investments which can also be made through the HAS. The Section 408 of Internal Revenue Code does not prohibit the investment in collectibles and life insurance but HSAs can also be used to invest in various assets which also include precious metals, real estate notes, private and public stocks and more.

HSAs can roll over from one fund to another and HAS cannot roll into the IRA or the 401k. Funds from these investment vehicles can also be rolled into the HAS, except for the IRA transfer that is done one time as mentioned in the previous paragraph. Unlike the contributions to the 401k plan, the HAS contributions that belong to the plan holder, no matter the deposit source, is already his or her possession. An individual that is contributing to the HSA has no obligation whatsoever to contribute to the HSA that is sponsored by his or her employer. However, employers require payroll contributions be made to the HSA plan that is sponsored.

Withdrawals for HSA

 Policy holders of the HSA do not have to get the advance approval are of the trustee of the HSA or the medical insurer for them to withdraw their funds. Funds are not also subject to taxes if these are for eligible medical costs. The costs include expenses for items and services that have been covered by the plan but is also subject to the cost-sharing of the company like coinsurance, copayments and deductible. This can also over the expenses that are not included in the medical policies. These are vision, dental, chiropractic care as well as the medical equipment that should last for a long time, specifically hearing aids and eyeglasses. Transportation that is connected to medical care are also included in this health plan.

There are many ways to fund the HSA can be obtained. There are HSAs that come with a debit card. There are others that give the policy holders checks so that this can be used. Some have reimbursement processes that is close to having a medical insurance. A number of HSAs also have a number of possible methods for withdrawal of the HSA. The methods that are available vary from one HSA to another. The debits and checks cannot be made payable to provider of the health plan. The funds can also be withdrawn for this reason. Withdrawals are not documents when it is not a qualified and eligible medical costs. These are subject to taxes with a penalty of 20%. This is waived for individuals who are aged 65 and older and have unfortunately become disabled during the time when the withdrawal is done. The only tax that is paid in this situation is taken into effect when the account has already become tax-deferred, somehow similar to the IRA. Medical expenses remain to free of taxes.

The account holders are also required to retain their documentation to show the qualified medical costs. The failure to do this and to show documentation can also cause Internal Revenue to rule out the withdrawals that have not been qualified for the medical expenses along with the over-all costs and subject to the additional penalties of the taxpayer.

Self-reimbursements have no deadline for qualified medical costs that are incurred after HSA has been established. The participants can also make the most of paying for these medical costs fresh from their pockets and also retain the receipts as long as their accounts are tax-free. Money can also be withdrawn for reasons to the value of the recipients.

Self-Employed Individuals are Still Entitled to Health Insurance Deductions

Self-Employed Individuals are Still Entitled to Health Insurance Deductions

IRS makes it a point to inform individuals that there is a certain kind of tax deduction that is specifically available to those who choose to be self-employed and not work for any corporation. This deduction that the establishment speaks of is targeted to dental, medical and insurance premiums that are for the long-run. Usually, self-employed people pay for these bills themselves. They even cover those of their spouse as well as their dependents. This insurance also covers children who are under the age of 27 toward the end of the year 2016, even if said children are not dependents of the self-employed individual. Definition of a child is the daughter, son, stepchild, foster child or adopted child or the self-employed. Foster child defined is a child that has been placed with the self-employed individual by a placement agency that is authorized or by a decree, order or judgement of a court and of any competent jurisdiction.

Self-employed individuals who are entitled to this deduction meet the following requirements:

  • They have net profit that they received from their self-employment. They report and list this on Schedule C (this is the profit or the loss generated from a business), Schedule C-EZ (this is the net profit that is garnered from a business) or Schedule F (this is the profit or the loss that is obtained from farming.)
  • They have earnings from their self- employment as partners and have been reported on Form 1065 which is also Schedule K-1. This is the Partner’s Share on the income, credits, deductions and the like.
  • They figure out their net earnings and income from being self employed by using a method that is optional and this is listed on Schedule SE which is also the known as the Self-Employment Tax.
  • They have paid wages that have been reported on Form W-2 which is the Statement on wages and taxes. They are regarded as shareholders and they own more than 2% of the over-all stock of a corporation listed as a S-corporation.

There are rules that apply to how exactly this insurance plan can be established. Self-employed individuals must follow the guidelines and make sure that they qualify:

  • If they are self-employed and have filed Schedule C, Schedule C-EZ or Schedule F and the policy is possible to be listed under the individual’s name or the business’ name.
  • If they are partners of a business, the policy is listed in their name or the name of the partnership and the partners pay premiums. If the policy is in the name of the self-employed individual and he or she pays the premiums, then the partnership must reimburse said individual and include these premiums and regard them as income and list it on their Schedule K-1.
  • If they are shareholders of an S-corporation, the policy is listed in their names or the name of the S-corporation. Either the self-employed individual or the corporation pays the premiums. If the policy is under the name of the individual and he or she pays the premiums, then the S corporation reimburses the individual and also include this premium and regard is as some kind of wage income and list it on the Form W2.

As for Medicare premiums, these are voluntarily paid to obtain the insurance under the name qualified for a health insurance that is private and possible to be used in order to figure out the deduction. The total amount that is paid for coverage of health insurance obtained from distributions on retirement plans that are nontaxable cannot be used to calculate this deduction.

Health Insurance Deduction Worksheet for Self-Employed Individuals

Each business or trade must be listed under a separate worksheet which has been established by an insurance plan.

  1. Enter the over-all amount that has been paid for the year 2016 that is solely for coverage of health insurance that is established and listed under the business. This can also be listed under an S corporation that the individual has more than 2% in shares. The mentioned health insurance is for the self-employed individual, the spouse as well as the dependents.
  2. List any amounts for the months that the self-employed individual is eligible in participating in health plans that are subsidized by the individual or the employer or the spouse or the employer of the dependents or the child who is below 27 by the last leg of 2016.
  3. List any amounts that have been paid from distributions of the retirement plan that were considered non-taxable because the self-employed individual was a safety officer for the public and is retired.
  4. List any health insurance that is a coverage payment and is included on the Form 8885 and specifically on line 4 in order to obtain the HCTC.
  5. List any monthly payments for HCTC that were made in advance and that was received by the administrator of the health plan from IRS, as depicted on the Form 1099-H.
  6. List any qualified health insurance that is a coverage payment that were paid for coverage months that are considered eligible and the self-employed individual has received in the form of a benefit through the monthly payment in advance of the HCTC program.
  7. For coverage that is listed under long-term insurance and is a qualified contract, every person that was covered must be entered. Total payments that were made for the specific person during the whole tax year must be listed.
  8. The amount depends on the age of the person by the end of the said tax year. It is $390 for individuals who are 40 or even younger, $730 for those between the age range of 41 and 50, $1460 for those who are between the age range of 51 and 60, $3,900 for those between the age range of 61 and 70 and $4,870 for those who are between the ages of 71 and older.
  9. The payments that were made for months that were eligible but subsidized by the insurance plan of the self-employed individual’s spouse or the employer of the spouse. Remember that if there are more than one individuals that were covered, the amount should be entered separately. Then, once completed, enter the over-all amount.
  10. Add Line 1 and Line 2.
  11. Enter the net profit as well as earned income from the business or trade that the plan of the insurance was established. Do not put the payments for the program of Conservation Reserve because these payments are exempted from self-employment. If the business is listed as an S-corporation, proceed to Line Eleven.
  12. The amount of all profits that have been listed from Schedule C on Line 31 which is Form 1040, Schedule C-EZ on Line 3 which is Form 1040, Schedule F on Line 34 which is Form 1040, or Schedule K-1 on Box 14 and Code A which is Form 1065. Include any income that is allocable to the said profitable businesses. Do not include the payments made from the program of Conservation Reserve because these are already exempted from the tax of the self-employed. Check the instructions that are listed for Schedule SE which is also Form 1040. Net losses must not be included on any schedule.
  13. Divide Line 4 from Line 5.
  14. Multiply the Form 1040 or the Form 1040 NR which is found on Line 27 by the percentage amount listed on Line 6.
  15. Subtract the amount listed on Line 7 from the amount listed on Line 4.
  16. If there is any amount listed on the Form 1040 or 1040 NR which is on Line 28 that is considered to be attributable to the business or trade in which the plan for the insurance has been established, then this must be entered.
  17. Subtract the amount in Line 9 from the amount in Line 8.
  18. Enter the Medicare wages that are listed in the Form W-2 and on Box 5 from the S corporation in which the self-employed individual has more than 2% of the shares and which established the insurance plan.
  19. Enter the amount that is listed on the Form 2555 and Line 45 and the attributable amount that is listed on Line 4 or Line 11. Any amount that is listed from the Line 18 of Form 2555-EZ can also be attributed alongside the amount that has been entered above Line 11.
  20. Subtract the amount from Line 12 from the amount in either Line 10 or Line 11.
  21. Enter the smaller amount between the one in either Line 3 or the one in Line 13 along with the amount on either Form 1040 or Form 1040 NR which is on Line 29. When figuring the total of the deduction on the medical expense listed on Form 1040 or Schedule A, this must not be included.

 Sounds complicated – that is why people specialize in accounting. Please consult with your local CPA to discuss this.

How to Claim Health Insurance Deductions from Self-Employment

One of the reasons why more and more people choose to be self-employed is that they can deduct what they usually spend on premiums of health insurance which can be found on page 1 and above a line on the individual’s tax return. These self-employed individuals can also claim their medical expenses as a form of deduction, and this includes premium on health insurance. The catch is that they have to itemize the tax returns to get this done. The downside is that this is not always end up being a good deal to the individuals.

 Eligible Policies

The over-all cost of premiums that have been paid for insurance that is specifically for medical, dental and long-term purposes can be deducted in the policies that cover the individual, the individual’s spouse and the individual’s children, who are below the age of 27. If the self-employed individual pays supplemental premiums to Medicare, then these can also be deducted. Policies can be listed under the name of the business.

 Limitations to Claiming the Health Insurance Deduction

Self-employed individuals cannot deduct costs of insurance from their health benefits if they or their spouses were found eligible in participating in the subsidized health plan for groups that is obtained via the employer.

This is the case for those who work regular jobs and have their own businesses or their spouses are employed and is found eligible for the coverage that is under the health plan for the group.

The individual’s self-employment over-all income can be calculated and totaled on Schedule F and Schedule C and this must be the same amount or go beyond the amount of the deduction. Take this for an example. If the business has earned a total of $12,000 but the premiums cost $15,000 then the individual cannot claim the whole $15,000. He can claim only the $12,000 amount. If the business reports some kind of loss, then the individual will not be considered eligible for health insurance deduction. He or she can still obtain the health insurance amount that has been itemized on the medical deduction that is listed on Schedule A but the amount that is listed “above the line” and its adjustment is more advantageous to the self-employed.

Self-employment taxes are also based on the total business income minus the other expenses – this is the income that is calculated and listed on Schedule C, but this is not less than the individual’s insurance premium. That is regarded as a break in the double tax.

When claiming the deduction, the self-employed individual can enter this on Form 1040 located in Line 29. There is a worksheet that is provided in the Instruction Guide for Form 1040 and provides a step by step on how to calculate the total amount of the deduction. A more detailed practice worksheet can be located in the Publication 535 guide. These worksheets can be used for practice and can also amount to the deduction that can be obtained in health insurance for the self-employed individual. Worksheet P can also be used and is found in Premium Tax Credit which is Publication 974.

Health Care Options: Using a Flexible Spending Account or Flexible Spending Arrangement

Employees who have health plans care of their jobs can use what is called the FSA or the Flexible Spending Arrangement or Flexible Spending Account in order to cover the deductibles, copayments, drugs and health care expenses. Using the FSA reduces the taxes that they have to pay at the end of the day.

What is the FSA?

 A Flexible Spending Arrangement (also regarded as flexible spending account) is an account where anyone can put their money in so that they can use this to cover specific health care costs straight from their pockets. The FSA has no taxes. This means the individual can save a specific amount that is similar to the taxes that he or she paid on top of the money that was set aside.

To explain it further, this is a tax-advantaged account for financial purposes that is set up via what is called “cafeteria plan.” The FSA allows the employees to cast aside portions of the earnings that the policy holders pay the qualified expenses that come in the form of the plan. Money that is deducted from the pay of the employee and then to an FSA is not included in the payroll taxes. This results to substantial payroll and tax savings.

There was a disadvantage when using the FSA before the Affordable Care Act. The funds that were not used will be forfeited by the employer at the end of the year. That is why employees are encouraged to use the FSA, rather than lose it. When reading the terms that are stated under the Affordable Care Act, an employee can carry the amount of a maximum of $500 over to the next year and not have to lose the funds.

Employers can make contributions to the FSA of their employees but it is not a requirement.

Facts About the FSAs

 FSAs come with a limit of $2,600 every year for every employer. If the individual is married, then the individual’s spouse can get a maximum of $2,600 in the Flexible Spending Arrangement with the employer as well.

  • The funds in the FSA can be used to pay for specific dental and medical expenses for the individual, the individual’s spouse if married and the dependents, if there are.
  • FSA funds can be spent to pay copayments as well as deductibles but not for premiums on insurance.
  • FSA funds can also be spent on prescription drugs, along with medicines that are ordered over the counter with the prescription from a doctor. Insulin reimbursements are also allowed even without prescriptions.
  • FSAs can also be used to cover the costs of medical equipment such as bandages, crutches and diagnostic devices specifically blood sugar kits.

 

Limits, Carry Overs and Grace Periods of the FSA

 Policy holders must utilize the money obtained from an FSA within the year that it was set for. However, the employers of these individuals usually offer these two options:

  • FSA provides a specific “grace period” that can last up to 2 and ½ months in order to use as much money in the FSA.
  • The FSA also allows the policy holder to carry over a maximum of $500 every year that can be carried over to the incoming year.

Employers of policy holders can offer one of these two options. However, it is not possible that they offer both. In fact, it is not even a requirement to offer one of these.

Toward the end of the year of the grace period that is given, the policy holder can lose all the money that remains in the FSA. It is very important that the individual also plans carefully and not allocate any more money in the FSA than he or she thinks can spend within that particular year on expenses such as coinsurance, medicine, copayments and other possible health care expenses.

Another important thing to note about the FSA is that it cannot be used alongside a plan from the Marketplace. The Health Savings Account or the HSA allows the policy holder to cast aside money on pre-tax basis in order to pay health expenses if there are high deductibles in the Marketplace health insurance plans.

Types of FSA

 A number of cafeteria plans can offer two major FSAs that focus primarily on dependent and medical care costs. There are a couple of cafeteria plans that are offered to the other kinds of FSAs. It is important to note that participation in one kind of FSA cannot affect the participation in the other kinds of FSA. However, the funds in FSA can be transferred from one to another.

The most common kind of FSA is utilized to pay for the dental and medical expenses that were not covered by the insurance. These are usually the copayments, deductibles and coinsurance for the health plan of the employees.  As of the 1st of January 2011, medications that are ordered over-the-counter are only allowed when bought with a prescription from the doctor, with the exception of insulin. Medical devices that can be ordered over the counter like crutches, bandages and repair kits for the eyeglasses are also allowed.

Prior to the Affordable Care Act, the IRS has permitted the employers to enact the maximum election for the employees. Affordable Care Act has also amended what is known as Section 125 to state that FSAs cannot let the employees choose the annual election that exceeds the limit that is determined by the IRS. The yearly limit can reach to $2,500 especially for the first year. The IRS can also index the plans in the subsequent years especially for the adjustments in the cost-of-living.

Employers can also opt to limit the annual elections even further. This specific limit can be applied to every employee, even without regarding the status of the employee – if he or she is married or have children or not. The contributions that are non-elective and made by employers which are not subtracted from the wages of the employees are also not added to the limit. An employee who is employed by various and multiple unrelated companies and employers can also opt to reach the limit of each employer plan. The limit also cannot apply to the HAS as well as the health reimbursement arrangements or even the share of the employee on the cost of the sponsored health insurance care that is provided by the employer.

There are also employers who choose to just issue debt cards to employees who are qualified participants of the FSA. These participants can also use their debit cards in order to pay for the eligible expenses because they are part of the FSA. Grocery stores and pharmacies that opt to go for debit cards as mode of payments have the option to not allow transactions when the participants try to pay for the items that they buy which are not qualified under FSA. Other than that, employers should require their employees to show the itemized receipts as proof for every expense that they charged using the debit card. The IRS can also let the employers waive the requirement in the situation that an individual resorts to the debit card at the grocery store or the pharmacy and comply with the procedure that is stated above. The IRS can also let the employer waive this specific requirement when the amount that is charged using the debit card has eventually become a multiple form of co-pay for the benefit of the group insurance plan for health care of that employee. There are also cases wherein the administering firm of the FSA prefers the actual insurance. The EOBs or the Explanations of Benefits can represent the portion of the patient on the medical expenses as well as other required documentation. This is a requirement that has become less and less cumbersome especially when there are more insurers that let the patient look for the EOBs on the websites.

 

Dependent Care FSA

 

FSAs are also established to pay certain expenses in order to care for the dependents especially when the legal guardian is busy at work. This can pertain to child care, especially for children who are below the age of 13. This kind of FSA can also be used for the benefit of children, regardless of the age, who are mentally or physically incapable of taking care of themselves. This also covers adults and senior citizens who are dependent. In addition to this, the individual or individuals who use the funds on the dependent care are regarded as dependents on the federal tax return of the employee. The funds can also not be utilized for summer camps, with the exception of days camps, or for the long-term care of parents who reside somewhere else, aside from the nursing home that is covered by the insurance provider.

 

The FSA for the dependent care is capped federally at the amount of $5,000 for every year and for every household. Spouses can opt for an FSA but the combined amount that they can obtain must not go beyond $5,000. During tax time, each and every withdrawal that are over $5,000 can be taxed.

 

The difference with medical FSAs is that dependent care FSAs are also not funded early on. This means employees do not have access to receive some kind of reimbursement in the exact and full amount from the contribution that is made since day one. Employees only have the option to reimburse up to a particular amount and they can also deduct that during the entire year.

 

If the spouses are married then they can earn the income from the Dependent Care FSA. There are exceptions such as the spouse who does not work is also disabled or currently studying full time. If one spouse earns lower than $5,000 then benefit amount of the FSA is limited to the amount that the spouse earns.

Other FSAs

 There are also FSA plans for sponsored premium and non-employer reimbursements on parking as well as transit reimbursement. The individual account for premium health insurance lets the employee pay for the spouse’s insurance using pre-tax dollars, for as long as there is coverage that is sponsored by a non-employer. This is also considered as individual plan and billed directly to the individual or his or her spouse. Transit and parking accounts also let the employees cover the parking expenses along with the expenses for public transit using pre-tax dollars but only up to specific limits. It may not be as common as the other FSAs listed above but there have also been a number of employers who have opted to offer assistance in any form of adoption through the FSA. An individual cannot also have health care from the FSA if she or he does not have the HDHP or what is also known as the High Deductible Health Plan that comes with the HAS. In situations such as the employee has both the FSA as well as the HDHP along with the HAS, then he or she can be qualified for what is known the LEX or the Limited Expense FSA. This is also known as the Limited Purpose FSAs. These FSAs can be used in reimbursing vision and dental expenses, no matter the deductible stated in the plan as long as it is at the discretion of the employer and the medical expenses that were incurred are eligible and qualified as soon as the deductible has been met and also reimbursed.

Coverage Period

 The coverage of the FSA can end at the time that the plan year ends for just as single plan or when the coverage of a particular individual has also ended. Example is when there is a loss of coverage because the employee has resigned from the position where he is governed by that employer.

This means that the person who is employed by the company during a given period is only covered when he is with the company. He cannot continue his coverage beyond that.

Everything Everyone Must Know About Medicare

Medicare is the single payer and social insurance health policy program in the national setting that is administered by the federal government. This has been around since 1966. It is also currently using 30 to 50 privately owned insurance companies all over the United States and is also under contract in the administration.

The Medicare in the US is funded by payroll taxes, surtaxes, and premium from the beneficiaries as well as the general revenue. It also provides the health insurance for Americans who are also over the age of 65 and are 65 years old, as long as they have worked and paid the system through the deductions in their payroll in the form of taxes. Medicare also offers health insurance to the young generation who have disability status as long as it is determined by the SSA or the Social Security Administration. They also consider the individuals who are suffering the end stages of renal diseases as well as the end stages of amyotrophic lateral sclerosis.

On average, the health policy Medicare covers half of health care plan policies and charges for those who have been enrolled. These enrollees and participants must also cover the remaining costs using their supplemental insurance or their separate insurance. There are others who even get the payments fresh from their pockets. These costs also vary and depend on the total of the health care policy that the enrollee from the Medicare needs. There might also be costs of the services that have been uncovered. For example, for the long-term policies, these include the hearing, dental as well as vision care. These also include insurance premiums that are supplemental.

It is important to know that Medicare has four Parts. Part A covers the hospice and hospital services and costs. Part B covers the costs for the outpatient services. Part D is the portion that covers the prescription drugs that are self-administered. Part C serves as the alternative to all the other parts that are allowed to experiment with structured plans that are set up differently which also reduces the costs to the government. This lets patients decide which plans to choose and they usually opt for one that has the most benefits.

History of Medicare

 Medicare has always been known as Medicare. This was the original name given to the program that has provided medical care for different families of the people who were serving in the military. They were part of the military and members of the Dependent’s Medical Care Act. This was passed in Congress in 1956. It was President Eisenhower who held the very first White House Conference on the topic of Aging. This was in January 1961. This was also the time when the program for health care that would provide social security benefits was proposed. In July 1965, when Lyndon Johnson was the president, the Congress has enacted under the benefits of Medicare as stated in Title XVIII and stated in the Social Security Act. It also provided the health insurance coverage and policies to individuals aged 65 and even older, no matter how much they earn and their medical history. Johnson then signed the bill and it became a law on July 30, 1965. This was done at the Presidential Library named after Harry S. Truman in Independence, Missouri. The first recipients of the said program were Former President Truman along with his wife, the former First Lady named Bess Truman.

Before Medicare was created, around 60% of individuals who were over the age of 65 had access to health insurance. The coverage, unfortunately, was often unaffordable and unavailable to most, simply because the older individuals paid more than thrice as much for the younger people who had health insurance. Many of this younger group have become eligible for both Medicaid and Medicare because the law was passed and this gave them the benefit.

In 1966 Medicare combatted the racial integration of many people who were in the waiting room. They also promoted desegregation in hospital floors as well as physician practices and made sure that any race is equal whenever they made payments to their health care issuers and providers.

Medicare has been operating for almost half a century and it has gone through several changes. For example, since 1965, the provisions of Medicare have already expanded and included benefits for physical, chiropractic therapy and speech in 1972. Medicare also added the beneficiaries to opt and pay for the health maintenance in the 1980s. Through the years, Congress has already expanded the Medicare eligibility to younger individuals who have been diagnosed with permanent disabilities and also received the SSDI or the Social Security Disability Insurance payments. Those who have also been diagnosed with ESRD or the end-stage renal disease are also eligible for this.

In the 1980s, the association of Medicare with HMOs has begun and it was formalized under the presidency of Bill Clinton. It started in 1997 in the form of Part C of Medicare. In 2003, under the presidency of George W Bush, the program under Medicare that covered almost every drug was submitted to the congress and was passed as the bill. It was also taken in effect in Part D of Medicare.

In the year of 1982, the government has also added the benefits to hospice in order to assist the elder policy holders but only on a temporary basis. It became permanent in 1984. Congress has also expanded this further in 2001 to include the younger individuals with Lou Gehrig’s disease, also known as ALS or the scientific name being amyotrophic lateral sclerosis.

Administration of Medicare

 The CMS or the Centers for both Medicare as well as Medicaid Services is the component of the HHS or the Department of Health and Human Services that also administers Medicaid, Medicare, CHIP which is also the Children’s Health Insurance Program, CLIA and Clinical Laboratory Improvement Amendments and also parts of the ACA or the Affordable Care Act. Along with the Department of Treasury and Department of Labor, CMS also looks into the implementation of the insurance reform and the provisions on the Accountability Act of 1996 which is Health Insurance Portability. This is also known as HIPAA. Most aspects and parts of the PPACA or the Patient Protection and Affordable Act. The SSA and the Social Security Administration is also responsible in determining the eligibility for Medicare, payment and eligibility for Extra Help as well as the Low Income Subsidy Payments that are related to the Part D of Medicare. It also collects the payments that are premium for the program that Medicare conducts.

The Chief Actuary of the CMS is also responsible in providing the necessary cost projections and accounting information to the Trustees of the Medicare Board. It is essential in assisting them and also assessing the financial care and health of the Medicare program. The Board is also required by the law to give out annual reports regarding the financial status of the Trust Funds of the Medicare. Those reports are also required to contain the actuarial opinion statement from the Chief Actuary.

Since Medicare programs started, CMS has always been the institution that was contracted with the insurance companies that are privately owned in order to operate the intermediaries between the medical providers and the government to be responsible for administering Part B as well as Part A benefits. The processes that are contracted also include the claims and the processing payment along with clinician enrollment, call center services as well as fraud investigation. In 1997, other insurance and policy plan companies started administering Part C. In 2005, other insurance plans started administering Part D.

The RUC or the Relative Value Update Committee or what is also known as the Specialty Society Relative Value Scale Update Committee is composed of a group of physicians that are associated with the AMA or the American Medical Association. This institution advises the policy holders as well as the government regarding the pay standards for the insurance plan of Medicare as well as the procedures that patients should be performed by professionals as well as doctors under Part B of Medicare. A similar yet difference CMS system that also determines the rates that are paid for hospitals along with acute care. This also includes nursing facilities that are under Part A of Medicare.

Financing of Medicare

 Medicare has also several sources where it gets its finances. The inpatient under the portion Part A can be admitted in skilled nursing and hospital coverage and this is largely funded from 2.9% of the revenue and payroll tax. The law also provided a maximum amount when it comes to the compensation of the Medicare tax as well as its being imposed every year. The social Security tax also works in the similar way. On January 1, 1994, the government removed the compensation limit. Employees who are also self-employed are required to pay the full 2.9% on the net earnings of the self-employed individual because they are for the employer as well as the employee. They can also deduct half of the taxes from their income through calculating the income tax.

Starting 2013, the portion of Part A and its taxes from the earned income has exceeded $200,000 for every individual plan. As for married couples that filed jointly, this reached to $250,000. It also rose an additional 3.8% so that the portion of the subsidies can also be paid and mandated by the PPACA.

Parts D as well as Parts B are funded partially by the premiums that have been paid by the Medicare enrollees and these are also considered as the general revenue fund. In 2006, Medicare started adding surtax on the premium of Part B. This was targeted to seniors who earned a higher income in order to fund Part D partially. In the PPACA legislation of the income tax year 2010, Medicare added surtax to the premium portion of Part D and also targeted these to the seniors who were earning lots of income. This is also conducted so that the PPACA can be partially funded along with the beneficiaries from Part B and subject to the double surtax. There is a double amount so that it can also partially fund PPACA.

Parts A, B and D all use trust funds that are separate from one another so that there can be a reimbursement of both the receipt and disbursement of the funds that are mentioned. Part C utilizes all these trusts funds in proportion to one another so that it can be determined by the CMS and reflect that all the beneficiaries of Part C are complete in the full parts of Part A and Part B. Medicare as well as the medical needs for each capita are regarded as fee for service or what is also known as FFS.

Medicare and its spending amounted to 15% of the whole federal spending of the United States. Research all show that this can even exceed 17% by the year 2020.

The retirement of individuals who are called the Baby Boom generation is expected to increase its enrollment by 2030 and reached up to 80 million because that was how the number of workers who are enrolled in the program has declined. The figures dropped from 3.7 and to a low of 2.4. There are the rising and total health care costs that also pose the financial challenges that are substantial to the program. Medicare spending is also projected to even get higher and reach $1 trillion by the year 2020.

It is important to note that for every three dollars, one dollar is spent on Medicare as part of the cost-reduction program. The cost reduction is also influenced by the various factors that include the reduction in unnecessary and inappropriate care through the evidence-based practices of evaluation along with reducing the total amount of duplicative health care. The cost reduction can also be affected by the medical errors that are done when administrative agency increases and the development of clinical guidelines reach the quality standards

Continuing Care Facilities and the Benefits Received from These

Continuing care facilities or what is also known as continuing care retirement communities, CCRCs for short, provide the residents the lifetime care that they need. They also assure that the care that the recipient receives is provided in the best way possible which also includes nursing assistance, especially when this is needed. This kind of living arrangement can also be useful specifically to couples who are financially stable and in need of different kinds of care and prefer to maintain their togetherness, even if the usual CCRC resident is a financially and physically independent, highly educated, single 80-year-old female.

Although the CCRCs have already gained a negative reputation during the 1980s due to some closed financial difficulty, the total number of the CCRCs available in the US has reached a high of 1,200 and it even continues to increase every year. There are around 350,000 residents residing in the not-for-profit as well as the for-profit facilities This number is predicted to increase because more and more people are expected to qualify and meet the requirements that are set for the CCRCs. The entrance restrictions do specify a specific minimum age, along with a certain statute of finances and health. CCRCs also look for the candidate who:

  • Has an annual earning of 1.5 to 2 times the monthly fee that they usually charge.
  • Will not cost more financially in their contributions especially when they become a resident.

Entrance lists for the qualified beneficiaries are for years and sometimes months. These are long-term residents in the facilities, therefore, it is suggested that individuals begin looking at care facilities that are long term and continue especially for their loved ones.

Levels of Continuing Care

 Most of the CCRCs offer three different levels of continuing care: these are the ILUs or the independent living units, the skilled nursing care and the assisted living. There are cases wherein the individual progresses through all these levels of care. For example, they require little care at the beginning and then as the days progress, they require more and more attention. There are also cases when the residents need additional care for a certain period and then they return to assisted or independent living over time.

  • At the beginning of these levels, especially the independent living units, the resident can choose to reside in his or her own place or residential unit. There are occupancy units that are for married individuals. The majority of this kind of care are for single individuals so they come in the form of single units like a studio apartment, a one-bedroom. For the residents who are married, two bedroom and larger units are also offered. During their stay, the residential services that the patient can acquire include laundry services, meals, and housekeeping. There’s the acute treatment through physical therapy and skilled nursing and the professionals nearby are there to assist them with their personal needs when needed. Most facilities include gardening areas, recreational facilities, swimming pools, walking trails, tennis courts, golf courses and craft rooms which must be taken advantage of especially when residents will stay there for the long run.
  • The assisted living is also a kind of intermediate level of care for residents that prefer to experience the balance between skilled nursing care along with independent living. It is during this period when residents who have been diagnosed with chronic illnesses and require assistance are attended medically and assisted in their personal tasks such as dressing, eating, and bathing.
  • Finally, the skilled nursing care set-up is offered in most CCRCs through short-term and long-term rehabilitative services and nursing care. These mentioned services are offered on the site and there are some facilities that are near these nursing homes, just in case they do not have this specific kind within the vicinity.

Under almost every circumstance mentioned, the individual that is a resident must reasonably independent and also healthy in order to be admitted to continuing care facilities. The levels of care that the resident requires is assessed initially and there is a process that must be explained in the contract. Usually, a group assesses the individual and also checks in with the family members and medical advisers of the individual. The residents are also re-assessed regularly – especially when their circumstances require them to change their level of continuing care over a period of time.

Here are some services that continuing care facilities:

  • Educational programs
  • Gardening space
  • Laundry services
  • On-site health care and nursing
  • Personal conveniences such as banks, haircutters and library)
  • Security Systems
  • Transportation
  • Processing of Medicare as well as insurance reimbursement forms
  • Organized social and recreational activities
  • Meal services
  • Housekeeping
  • Exercise classes
  • Craft and woodworking activities

 Fees and Payment of Continuing Care Services

 The activities mentioned in the previous part of this article are the reasons why there are continuing care facilities that are more expensive than the rest. All fees indicated must be detailed and clear even if it is just the initial contract for an individual who will be residing in the facility. Before the individual or a loved one, on behalf of the future resident, signs the contract, he or she should seek the advice of his or her financial advisor to check the finances so that it is possible to meet all the terms as stated in the contract through the years, since this is a continuing care facility. Additionally, financial advisors should check the finances of the continuing care facilities as well in order to decide whether it is a practical financial investment to make in the future.

There are three kinds of payments that exist for the continuing care facilities. This also include the plan with the monthly and entry fee as well as plan with the rental fee and the plan that is based on the equity of the

  • The monthly and entry fee plans are widely used the most. It is under this coverage that the resident is required to pay an expensive entry fee upfront and most of the time, this is non-refundable. If it is, then it is refundable but it decreases over time. It can also be partially refundable or completely refundable. The policies that concern most residents are the initial fee for entry because it really varies between the different continuing care facilities out there. It is strongly advised that individuals check the contract so that they can go for the specific facility that they feel worth paying for. On average, the entrance fees for these CCRCs range from $60,000 to as much as $120,000. Therefore, the monthly fees can be as much as $1,000 to $1,6000 and these are also charged in order to cover the expenses that are associated with the units that the residentials live in, the assistance services and the medical care.
  • Rental plans as stated on the contract resort to the monthly fee that comes in the form of rental to cover the services as well as the housing that the residents receive. There are times when health care is not included in these services so it is better to check carefully especially when looking at the said plans.
  • The equity based plans allow the individuals to buy their own residential areas. When they do this, the individuals can gain money all for their appreciation of the resident that they are living in. They can also resell the unit when they are deemed qualified to do so. When this is the case, then the owner’s association is the institution that governs the health care and the residential services, which the residents can purchase aside from the living area that they already are in.

No matter what kind of payment plan that the residents opted for the costs actually vary depending on the age, marital status, gender and location of the facility. Individuals must expect their loved one to pay even more than the average rate if he or she is:

  • Young and secure on the financial aspect and capable of consistently paying the monthly rate for a long period of time.
  • Female because it is believed that they live longer
  • Married because there is a higher possibility that the spouse will eventually become ill and both of them will move to a smaller unit, therefore increase the turnover in the residential area of the resident.
  • Looking for units in the West, South, Northeast regions of the United States.

Individuals are also greatly encouraged to have their lawyers review the contract of the CCRCs before signing this. The document because it is a contract legally binds the resident to the CCRCs for the remainder of his or her life.

The payment contracts of continuing care facilities are prepared in one of these three ways:

  • These are contracts that are quite comprehensive and completely cover the residential services, long-term nursing care, amenities and shelter and not increase the monthly payments that the resident has already signed up for. There is an excepti0on though and that is for the inflation adjustments if the situation calls for it. The set-up of this kind of contract spreads the risk in health on the residents in order for no resident would experience any form of financial ruin. A majority of the CCRCs offer this kind of agreement.

 Modified contract covers the residential services, shelter, and amenities of a specific amount of nursing care. After the period when the stated kind of nursing care has been utilized, then the resident pays for the required services on a monthly or even a daily basis.

 The fee-for-service kind of contract covers residential services, shelter, and amenities, as well as short-term nursing care and emergencies. Residents must then pay these fees in the long run but at a number of daily rates.

The overall fees for each kind of contract decrease for every kind of service provided and it decreases as well. It is very crucial to note the resident that a number of CCRCs are also participants of Medicaid and Medicare and sometimes even both of these programs.

Finding the Right Continuing Care Facility

 Since no federal regulations for the CCRCs get in the way, it is possible for everyone to look for their local or state guidelines. It is also crucial that they check which facilities are accredited by the CCAC or what is called the Continuing Care Accreditation Commission. This is an accrediting body that is independent and is also sponsored by what is called the Association for the Home and Services of Aging Individuals. The accreditation of the CCAC is required to submit all the financial statements that were incurred yearly and must also be renewed every fifth year of the resident in that said facility.

The same with all the residential communities, the loved ones should also sign the continuing care community facility once they have already checked the facilities. When interviewing prospective facilities, it is very important to have a long list of questions to ask. Here are examples of questions that can be asked especially when a loved one is investing in continuing care. These questions must be asked along with the basic questions regarding the facility.

  • Is it accredited by CCAC?
  • What kinds of recreational activities can residents engage in? How often are the activities conducted?
  • Can the residents have pets?
  • How much is the upfront entry fee? Is it refundable?
  • How do you calculate the monthly fees?
  • What kind of health care do you provide to the residents when they are in your facility? How often are the residents reassessed?
  • Do you provide long term or short-term health care?
  • Are there limits on the fees?
  • Will there be changes on the monthly rates? If so, why?

Once the individual has found the right facility for their loved ones and these fit the needs that they require then it is a good investment to let their beloved elderly stay there and be assured that the latter will be taken care of and looked after in the best way possible.

Medical Expenses Deduction – What you can and can not do?

Medical bills can sure burn a hole on your wallet especially if there are emergencies that come out of nowhere and are not completely covered by one’s insurance. This being said, the IRS allows the taxpayers some relieve, making these expenses somehow tax-deductible. In order for anyone to make the most out of the tax deduction, they must know what is regarded as medical bills and the steps to claim deduction from these.

Deduction from medical bills

The IRS lets tax payers to subtract medical expenses that are qualified and also exceed 10% AGI. The AGI or the adjusted gross income is taxable income and also deducts any adjustments such as contributions and deductions to the traditional interest from student loan and IRA.

Take this for example, a modified AGI that totals $45,000 that has medical costs of $5,475 can be calculated by $45,000 and 0.10 to find out the 10 percent which means $4,500 is deducted to the amount. This then leaves the tax payer a deduction on his medical expenses that amounts to $975. This was calculated by deducting $4,500 from $5,475.

Which medical bills can be deducted?

The IRS lets the tax payer subtract preventative care, vision and dental care and treatment surgeries as medical expenses that qualify. Consultations with psychiatrists and psychologists are also deducted. Appliance like contacts, glasses, hearing aids and false teeth as well as prescription medications are also considered as deductibles.

The IRS allows the tax payer to subtract the expenses for travel when the purpose is medical care. This includes bus fare, parking fees and mileage on cars.

What cannot be deducted?

Medical expenses that is reimbursed, like from the payer’s employer or insurance, is not deductible. This also includes the fact that IRS usually does not allow expenses for cosmetics. The cost for drugs that were not prescribed, with the exception of insulin, as well as purchases primarily for the purpose of general health, like health club bills, toothpaste , diet food or vitamins, nicotine products that are non-prescription or medical bills that were paid for in a previous year cannot be deducted.

How to claim the deduction for medical expenses

To claim the deduction from medical expenses, this must be itemized. Itemizing medical expenses requires the taxpayer does not follow the deduction that is already considered as standard but only the expenses deduction in the situation that it is greater than the former.

Those who choose to itemize must use the Form 1040 when filing their taxes and then attach this to Schedule A. Here, they can also document the total of their medical expenses that they paid for that year on Line 1. The AGI income can be found in Line 2.

Then the 10% of the AGI is placed in Line 3.

Difference between the expenses as well as 10% of the AGI is in Line 4.

The total amount that is listed in Line 4 will then be subtracted to the AGI to reduce the income that is taxable for that year.

If the amount obtained, along with the standard deductions claimed, is lower than the standard deduction, then this should not be itemized.

Maximizing Medical Expense Deduction

If taxpayers spent loads of their hard-earned cash on medical bills, they can write those off but the first requirement is that it should exceed a hefty amount before it is regarded as a deduction.

  • The IRS allows the taxpayer to subtract the costs of medical bills on their tax returns if it is beyond 10% of the AGI. Only the costs that go beyond this amount is deducted.
  • Taxpayers aged 65 and older can use 7.5% from the previous year when claiming the medical expenses that have been itemized.

Which Medical Deductions Are Covered?

The taxpayer’s bills from medical and dental expenses along with his or her spouse and dependents are listed on the tax return. Therefore, these are allowed deductibles. However, medical expenses for parents are not considered due to exemption purposes. Another deductible is that of a dependent that has passed away during the year that they were covered.

Medical Deductions That Are Often-Overlooked:

  1. Travel expenses when going to and returning from locations for medical treatments. The IRS considers this as a deductible and also evaluates the allowance through a standard rate of cents-per-mile. For this income tax year, the rate per mile is 17 cents.
  2. Insurance payments income that has already been taxed. This also covers insurance cost for long-term care, which has certain limits depending on the age of the claimant.
  3. Medical treatments that are uninsured, like eyeglasses, contact lenses, hearing aids, false teeth and even artificial limbs.
  4. Cost of treatment for drug and alcohol abuse.
  5. The cost for corrective vision surgery through laser. This is also tax-deductible. This is often-overlooked and such a shame because taxpayers can have lots of tax deductible from this.
  6. Medical costs as prescribed by physicians. For example, if a doctor prescribes installing a humidifier into the home’s air-conditioning and heating to relieve problems concerning chronic breathing, the device along with the extra costs on electricity for it to operate are partially deductible.
  7. Costs for medical conferences. Expenses on admission and transportation to any medical conference of a chronic illness that is suffered by the tax payer, his or her spouse or dependents can be covered. Lodging costs and meals incurred during the seminar cannot be reduced.
  8. Weight-loss programs. There are some instances that may count as deductible, just like the programs to stop smoking. However, diet programs are also medically necessary. Take this for example, a doctor can recommend a particular regimen to decrease the risks of obesity and hypertension in one’s health.

One can also get a tax break with a flexible account for medical spending. Taxpayers can check for plans they can participate in to increase pay that they can take home.

Special medical needs

The cost for special medical needs can also be written off. These are wheelchair, equipment that lets the deaf person use a phone, devices that produce television captioning and crutches. Service animals specially there for the hearing impaired and the blind and the costs in retrofitting cars with hand controls and spaces to hold wheelchairs can also be written off.

Other Aging-in-place remodels in the home that can be written off:

  • Ramp installation
  • Widening hallways and doors as well as lowering cabinets and counters
  • Adjusting fixtures and electrical outlets
  • Exterior landscaping that can ease the house access

There are home remodeling that can be prescriptions for tax breaks, in the situation that the IRS rules and doctors’ orders are followed.  If needed, adding chairlift can also be used to ascend and descend the stairs all for medical condition. Therefore, this is also considered an expense that is legitimate.

Changes to one’s home in order to make this specially accessible for any handicapped resident are also tax-deductible. Taxpayers must remember that they won’t be able to be considered as deductions from the over-all costs of the tax return. Once there is an improvement, it increases the property’s value, then the amount is deducted from the cost of the project. The difference, then, can count as medical expenses.

Elevators are not deductible. IRS regards this as structural changes that add more to the value of the home and therefore does not necessarily require a medical deduction.

Medical yet not tax-deductible

Cosmetic surgery and health club payments or bills from weight-loss programs are not deductible because these are not medically necessary. Operations for hair transplant and electrolysis treatments are also not deductible. For these procedures, taxpayers can consider financing surgeries that are not medical related and has credit card cash-back.

6 Medical Deductions That Can Be Deducted Without the Taxpayer Itemizing

Calculating medical expenses for deduction is difficult due to the Adjusted Gross Income floor of 10%. If the tax payer is below 65 years of age, it is 7.5%. There are medical expenses that are considered to be deductible despite one not qualifying for deducting the medical expenses in the form of itemized deduction. Deducting expenses can also lower the taxable income and also cut the taxpayer’s taxes. Filing status as well as the number of dependents usually does not affect the deductions.

Listed are the medical deductions that the IRS considers, even without itemizing:

  1. Account Contributions from Health Savings. If the taxpayer contributes any amount to the HSS or the Health Savings Account, then it serves as deduction from the taxable income of the taxpayer. The maximum that is allowed can reach to a maximum of $3,350 for the individual. For families, it is $6,650 per year. If the taxpayer is beyond 55, he or she can contribute an additional $1,000 every year. If the employer contributes to the HSA, this can either be deducted or not deducted in the contributions.
  2. Account Contributions from Flexible Spending. Like the HSAs, when there is an employee-sponsored that can be spent in a flexible manner, which is also known as the FSA, the taxpayer is contributing his income before tax and therefore, reducing his income that is taxable. For income tax year of 2016, the rate was $2,550 for every spouse.
  3. Health Insurance for the Self-Employed. If one is self-employed, he or she can deduct the premiums from the insurance for himself or herself, his or her dependents. The premiums for LTC or long-term care insurance can also be paid for the year.
  4. Work Experiences That Are Related for the Impaired. If the taxpayer is physically as well as mentally disabled and requires services or equipment in order to perform a job, then this can be deducted. Expenses can also include readers, personal assistants and pieces of equipment that are required and necessary for the job. There are expenses that are paid by the taxpayer’s employer and are also considered as reasonable accommodation as it is stated under the ADA or Americans with Disabilities Act.

Personal Physical Injury Damages

If the taxpayer is reimbursed for physical injuries as well as expenses from a legal action, then the tax payer can deduct this amount from the taxes. If they are receiving a settlement and the reimbursement,  there is a tax on the settlements but there are no reimbursements. The taxpayers cannot reduce medical costs that have been covered by reimbursement.

Tax Credit on Health Coverage

The HCTC or the Health Coverage Tax Credit covers the monthly health insurance premium for as much as 72.%%. These are premiums that are paid by taxpayers who are regarded as eligible. These are the requirements for those who wish to claim HCTC:

  • TAA or Trade Adjustment Assistance recipient
  • Recipient of the Reemployment TAA
  • Alternative TAA recipient
  • PBGC or Pension Benefit Guaranty Corporation pension. This is for the payer who covers his own health insurance.
  • Any qualifying members that are listed of the individuals above.

Here is a rundown of the medical expenses you can deduct:

  • Fees to doctors, dentists, psychiatrists, surgeons, chiropractors and other medical professionals.
  • Medical insurance premiums that are beyond the portion of what the employer pays
  • Long term care insurance premiums that are up to certain limits
  • Long term care
  • Inpatient drug treatment and alcohol programs
  • Dentures
  • Ambulance service
  • Modifications to the tax payer’s home for medical care, like wheelchair ramps
  • Weight loss programs for specific diseases that have been diagnosed by a certain physician
  • Fertility treatments like sterilization and pregnancy test kits
  • Nursing supplies like breast pumps
  • Prescription drugs as well as insulin
  • Glasses, hearing aids, contacts and crutches
  • Guide dogs for the deaf or the blind
  • Cosmetic surgery required because of a disease or an accident
  • Removing lead based paint from surfaces that are in poor repair and is within the reach of any child
  • Admission and transportation going to a conference about a chronic condition of the taxpayer or any of the dependents
  • Stop smoking programs, but excluding non-prescriptions drugs such as patches and nicotine gum
  • Psychiatric care

For a complete list of deductible medical expenses, anyone can just check the IRS Publication 502. These deductions are then used when filing out Form 1040 or Schedule A. Writing off medical expenses as deductions can make for a healthier bottom line on anyone’s tax return. Taxpayers should make sure that the only appropriate expenses are included because auditing IRS can be stressful. It is also possible to ask for the assistance of experts so there are no mistakes made in taxation and the appropriate deductibles.

Child Support and Taxes: Non-Custodial and Custodial Parent FAQs

Child custody arrangements and income are two factors that are very important when determining child support and income tax return. Generally, the non-custodial parent of the child (the parent who takes care of the child for less than half) pays child support to the custodial parent (the one who primarily cares for the child every day.) Custody, child support and income are connected, therefore the responsibilities due to child support also affect the tax returns of the non-custodial parent.

Income affects Child Support orders

When a child support order is established, a judge follows specific guidelines from the state. Those guidelines are “income driven.” This means that the support amount is determined by the income of both parties involved. Income also goes beyond salary and wages. Nonetheless, it is also important for parents to comprehend the funds that are defined us “income” when talking about the guidelines of child support. Take this for example, the new spouse’s income, if the income is deducted from the expenses of the custodial parent, then it is regarded as the income for child support.

The IRS does not consider child support as income

According to the IRS, payments from child support cannot be considered as income that is taxable. This means that child support payments will not be deducted by the noncustodial parent (the payer) and not taxable to the custodial parent (payee). When calculating for the gross income to check if the payer and payee are qualified for filing of tax return, one must not include the payments received from child support.

 Form 8332 affects the Child Tax Credit

Certain individuals can claim tax credit for their children, as long as they have been claimed as dependent. Only the tax paying parent can use the dependency tax exemption when claiming the Child Tax Credit. A parent who is custodial can use Form 8332 and release the exemption for the parent who is non-custodial. Based on the circumstance, the latter can qualify for the dependency exemption and the Child Tax Credit. For explanation on the qualification for Child Tax Credit and its calculation, there are Instructions for Form 1040 as well as Instructions for Form 1040 index for Child Tax Credit.

The non-custodial parent cannot be eligible for EIC even if he or she has received permission from the custodial parent to claim the tax return.

The Earned Income Credit is tax credit for who work and earn income that is less than a specific amount. There are rules that individuals must meet in order to qualify for an EIC. There are some parents who can receive EIC if their child is considered to be a qualifying child. Generally, non-custodial parents have no claim for the EIC because the children do not live with them. This means they do not qualify and pass the residency test. Since the custodial parents meet the requirements, then he or she can claim the EIC.

Child Support is not Tax Deductible

The person paying for child support cannot deduct payments on the tax return. Neither is child support included in the income of the person in charge of making those payments.  IRS states that Child Support payments are not deducted from the payer and not taxable for the payee. Furthermore, when calculating the gross income, child support payments that have been received are not included. The reason behind this is that two tax laws work together in determining the tax for child support. On one hand, it can be said that child support is taxable because of the rule that gross income is all income from the source. However, there is an important qualifier. This is ruled that if it is stated in the subtitle, gross income pertains to any source. Therefore, this includes amounts that have been received as separate maintenance payments or alimony.

But there is also a general rule for exceptions for child support.  Any payment, in terms of divorce or separation as a sum can be considered as payable for Child Support of the payor’s spouse.  In other words, Child Support cannot be regarded as gross income of the recipient of the funds.

The person paying can deduct amounts that qualify as alimony. However, because child support is not regarded as alimony, then the person who is paying child support cannot reduce the payments as part of any tax deduction or alimony. In order to qualify as child support, there are payments that must be designated as such in a separation agreement or divorce.

Child Support in Arrears

The Treasury Department re-directs federal tax refunds from those who have not been paying their child supports.  As mentioned in Treasury Offset Program, the government pays the tax refund money to the child support agency of the state and they then get the funds to the child. There are a number of single parents who are not sure how child support can impact their tax bill. This also holds true to parents who have been receiving the child support for their children as if they were the ones who were paying it monthly.

Child Support is Not Taxable

The parents who are receiving child support must know that money does not affect the taxes that they need to pay. The commonly asked questions are “Will I owe more taxes this year? And “Is child support taxable?” These are nagging questions and the US government does not regard child support as taxable income in whatever form.

While individuals regard child support as part of their income because these checks arrive monthly, the government does not see this the same way. Here’s the truth: people pay income tax on their income. On the other hand, child support is the money that is received for the kids. For the government, it is not income so there are no taxes. Therefore, for single parents, these make it easier for them.

For those who are on the receiving end, this is what they can take away from it: Any money that has been received as child support for the income tax year is not regarded as taxable income and they won’t pay federal or state taxes from it. They will not pay for it today, nor will they pay for it tomorrow.

As mentioned earlier, child support is not deductible. It is actually two fold. The payments from child support cannot be deducted. A lot of parents ask this because they do not miss a single payment of child support. There are tax breaks for single parents but this is not counted as one. If parents pay child support to their children, they cannot reduce this from their total income so that they can adjust their taxable income. However, they must not forget that providing financial support to their children is a contribution to the well-being of their lives and therefore is a meaningful act. They must keep doing it even if they will not receive any deduction in doing so.

Another upside is that parents who pay child support can declare their children as dependents, and this in turn, provides them with the tax benefits that they are requesting for. If the children are living with them for more than six months, then they can file the income taxes as Head of Household status and also regard them as dependents. The money for child care can then be qualified for Child and Dependent Care Tax Credit.

If kids haven’t been living with the tax payer for more than six months, they should consider that in some cases there are parents who have a right to claim the children as their dependents but opt not to do so. If this is the case and it is alright with the ex-spouse, then the tax payer can pay a Form 8332 with the IRS or the Internal Revenue Service, then they can claim their children as their dependents in their place. If this is the case, the ex-spouse should be the one to file the form first because the children cannot be claimed as the dependent of both parents. This might make the taxpayer vulnerable to an audit conducted by the IRS.

The IRS treats the payment as child support when the child is still a minor. It may come in amounts in the form of fluctuating income and childcare needs. These qualifying childcare expenses and specific healthcare costs for minors, school expenses, and college tuition can have deductions but these are not often discussed. Tuition and Fees Deduction and the American Opportunity Tax Credit can allow that payers to deduct a total of $8,500 from these.

The Tuition and Fees Deduction can also reduce payments that the tax payers made for the tuition and fees of their dependents. Total deduction is $4,000 annually and this is for a single filer with income that amounts to as much as $65,000. It reaches up to $130,000 for those who filed jointly. It’s $2,000 for a single filer who earns between $65,000 and $80,000 (It’s between $130,000 and $160,000 for those who filed jointly.)

The American Opportunity Tax Credit is also regarded as refundable credit for those who qualify for graduate expenses like tuition, school supplies and books. These are pretty much for the tax payers who earn more than $80,000. If they file jointly, it’s $160,000. The payor can also claim his or her own expenses of that of the dependents, like the child’s.

The credit is $1,000 for the first $2,000 from the expenses that have been paid and what follows is an additional 25% from the $2,000 that follows, therefore generating a potential of $2,500 credit. 40% of the whole $4,000 is also refundable so that is more than $1,000 that will come back to the tax payer.

Paying child support for dependent children who do not live with the tax payers mean the taxpayer cannot claim the children as their dependents.

As mentioned previously, there is no child support tax deduction that is available in this setup. Also, for the child to be qualified as dependent, he or she must not be providing for his or her own child support for the income tax year. The child must have also been residing with the tax payer for more than six months. So, for the child of separated or divorced parents, the qualifying child is declared of the parent who is living with the child. According to the tax law, this person is regarded as the custodial parent.

For the non-custodial parent, the child can be a qualifying child if these requirements are met:

  • One or both parents have provided for more than half of the total support of the child for the year.
  • One or both parents have the custody of the child for more than six months.
  • The parents are legally separated or divorced and have been living apart the whole time for the past six months.

If this is the case, then the noncustodial parent takes the dependency exemption:

The custodial parent has given up the exemption and signed the Form 8332 which is Release Revocation of Release of Claim to Exemption for Child by Custodial Parent. The noncustodial parent then attaches this specific form to his income tax return.

The noncustodial parent also attaches that the agreement has taken effect. He must declare:

  1. That the noncustodial parent claims the child without any condition, specifically payment of support
  2. The years that the noncustodial parent is eligible to claim the child
  3. That the custodial parent will not claim the child during mentioned years

In a nutshell, child support does not affect taxes as much as alimony does:

  • If the taxpayer pas child support, this cannot be deducted. The tax payer just has to report their actual income and not decrease the amount of the payments they make for child support.
  • If they receive child support, then they should not include that in taxable income. They also cannot regard this as earned income for them to qualify for an EIC.

child care tax credit

The Ins and Outs of Dependent Care Credit

At a glance, dependent care credit is the credit for the over-all costs of care for qualified individuals that allow the taxpayers to work or go out and look for jobs. The limit is the amount of the over-all expenses that the taxpayer can spare, which is $3,000 per qualifying individual and $6,000 for more than one qualifying individual. The credit amount is within the range of 20 to 35% of the expenses allowed. Percentage use depends on the total amount of the taxpayer’s adjusted gross income.

Taxpayers could claim the dependent care credit if they paid the expenses for the care of this qualifying child. They cannot take this if their filing status is married but filing separately. The expenses paid for the over-all care of the qualifying taxpayer are also eligible expenses if the intention of paying this expenses is to make sure that the child of the taxpayer is well taken care of and protected. If taxpayers receive the dependent care benefits, then the taxpayer receives a deduction from his or her income as well as a decrease of benefits that apply.

Qualifying Individuals for the Dependency Care Credit are the following:

 

  • The dependent qualifying child is below the age of 13 or 13 years old when the Dependency Care was filed.
  • The spouse of the taxpayer doing the filing is mentally or physically incapable of self-care and has also lived with the taxpayer for more than six months.
  • The taxpayer is mentally or physically incapable of self-care and has lived in the residence that is filed in the form for more than six months. The taxpayer also has a gross income that equates or even exceeds the amount for exemptions and has filed a joint return that could have been claimed by the qualifying child as a declaration of the latter being the dependent.
  • Qualifying children are also the individuals who are mentally or physically unable to take care of themselves. If the person cannot take care of himself or herself due to mental or physical defect, cannot care for his or her nutritional needs and hygiene, then the full-time attention of another person is required to ensure the safety and protection of said individual.
  • Qualifying children are also the child or children of parents who are separated or divorced parents living apart. Noncustodial taxpayers who are parents of the child and is claiming the latter as their dependent should read ‘Child of divorced or separated parents or parents living apart’ which is filed in Publication 503 which is Child and Dependent Care Expenses. This is because the child is regarded as the qualifying individual of the taxpayer who serves as the custodial parent of the former and the dependent care credit is claimed by the noncustodial parent as well.

Note that if an individual qualifies for a mere portion of the income tax year, the expenses that have been paid for by the taxpayer during that time is the only amount included when calculating the credit. It is also important to provide the Taxpayer Identification Number or the TIN along with the Social Security Number or SSN of each that qualifies for Dependency Care.

Care of a Qualifying Individual

The care is provided inside or outside the household. Note that this does not include amounts that are not for the individual’s well-being. Taxpayers divide the total expenses between the amount that is allotted for the primary care of the individual getting the dependency care and the amount that is not solely for care purposes. This is then deducted from the primary expenses of the care costs of the individual with a number of the dependency care benefits from the employer of the taxpayer that can also be excluded from the total gross income. In other words, taxpayers can be excluded up to the amount of $5,000 for dependency care benefits that they receive. Also, the expenses that are claimed by the individuals should not go beyond the smaller earned income of the taxpayer or his or her spouse. Special rules apply if the spouse of the taxpayer is incapable of taking care of himself or herself or is a full-time student.

Care Providers

Taxpayers must also identify all individuals or the specific organizations that will provide the dependency care for the qualifying child or the dependent. They must report the information such as name, TIN, SSN, address of the care provider on the form. If the care provider is an organization that is tax-exempt, the taxpayer needs only one report containing the information of this organization. They can use the Form W-10 which is the ‘Dependent Care Provider’s Identification and Certification’ and request the information from the care provider as well. If this information cannot be provided, the taxpayer can still be eligible for the dependency credit once they show that they exercise the due diligence to provide the information required. If the taxpayers pay providers to care for the spouse or the dependent in their homes, then they can be the household employer. Taxpayers who are household employers withhold and also pay the Medicare taxes and social security also pay federal unemployment tax.

As for payments to dependents or relatives, the provider of the dependency care cannot be the spouse, child below the age of 19, parent of the qualified individual or dependent that the taxpayer or the spouse claim as the dependent of their exemption.

When reporting on tax returns, the taxpayer must qualify for the appropriate credit as well as complete Form 2441 which is the Child and Dependent Care Expenses along with the Form 1040A and Form 1040 which is the US Individual Income Tax Return. If they are non-resident aliens, they should get the 1040NR which is the Nonresident Alien Income Tax Return. If the taxpayer receives the dependent care benefits from the employers as indicated in the Form W2 as well as Wage and Tax Statement, then the Part III of Form 2441 must be completed. Taxpayers cannot claim the dependency child care credit if they use Income Tax return for Single and Joint Filers with No Dependents, which is the Form 1040EZ.

Ins and Outs of Dependent Care

The benefits of the dependent care credit are primarily targeted as a tax break for people who work. Everyone knows how expensive child care is. Having this as a benefit for taxpayers who have to work and leave their children at home make it easier for them to do so because they do not have to stress over their budget and the bills.

Two Major Benefits of Dependent Care Credit:

  1. This is a tax credit and not a tax deduction. The latter deducts the amount of total income that the taxpayer must pay. A deduction of $1,000 can reduce the tax bill for a mere $150 or $200. Whereas with the former, it directly deducts the taxes – dollar for dollar – which means the tax credit deducts a $1,000 off the tax bill.
  2. Taxpayers can claim the credit no matter how much their income is. Some tax breaks may have income limits, but these are not available to individuals whose incomes are above the limit. The qualifying child who receives the dependent care credit may receive it in a smaller amount when the taxpayer has a high income.

Dependent Care Credit that Taxpayers Can Claim

For the taxpayers to qualify for the dependent care claim, they must be already paying someone to care for the following:

  • A child that is 12 years old or younger at the end of the income tax year when the mentioned child is declared as a dependent on the tax payer’s tax return.
  • The taxpayer’s spouse is not able to take care of himself or herself and has been with the tax payer for more than six months.
  • Any dependent who is listed in the taxpayer’s form, as long as he or she is not able to take care of himself or herself and has been residing with the tax payer in the same home for more than six months.

There are limitations on who can provide the dependency care:

Taxpayers can claim the credit for the cash that they paid for as long as the beneficiary is not the following:

  • Spouse of the taxpayer
  • Parent of the child that is being taken care of. To elaborate, the taxpayer cannot claim the dependent care credit if they are paying their ex-wife or their ex-husband to take care of the child that they have together. There is no credit here because as a parent, it is the obligation and duty of one to take care of the child.
  • Anyone listed as the dependent on the tax return.
  • The child of the tax payer who is 18 years old or younger, whether or not he or she is a declared dependent on the tax return. To elaborate, the tax payer cannot pay his or her 17-year-old teenager to look after the younger sibling to receive the dependency care credit, because, like the example mentioned above, it is a family obligation for the older siblings to take care of the younger ones when the parents are away.

Other Requirements for the Dependency Care Credit

  • The taxpayer and the spouse, if married, must have a total of earned income from their jobs. Investment profits or money from non-work income do not count.
  • The taxpayer pays for the care so that he or she can look for work. Other situations that are regarded as looking for work is when the taxpayer is a full-time student or a parent that is unable to take care of himself or herself.
  • Taxpayers who are married must file together and in a joint tax return.
  • Taxpayers must provide the information required, such as name, address, and TIN or Taxpayer Identification Number of the person taking care of the qualifying child. The TIN may be an Employer Identification Number or a Social Security Number.

Calculating Dependency Care Credit

The total amount of the dependency care credit is calculated based on the total expenses of the child and the dependent care alongside the taxpayer’s income. TurboTax guides taxpayers on how to go through the process of calculating the credit and properly filling up the form.  This is how it is calculated in general.

  • Sum up a number of the care expenses that are qualified for the dependent care credit. The taxpayer can amount to as much as $3,000 per person and $6,000 for more than one.
  • If the taxpayer’s employer gives enough money for the child care and the money is withheld from the salary of the taxpayer on a pre-tax agreement, then this must be deducted from the money received in the form of allowable expenses.
  • Compare the claimed expenses with the earned income. If the taxpayers are married, then the spouse’s earned income can be taken in smallest amounts and counted as “allowable expenses.”
  • The credit is the percentage of the taxpayer’s allowable expenses. This ranges between 20% to 35%. The higher the income of the taxpayer, the smaller the percentage is, and the dependent care credit is smaller. There is also no upper limit when it comes to the income of the taxpayer whenever the dependent care credit is claimed.

Juggling work and parenthood is not an easy feat and can be quite a challenge especially when the kids are at home and school’s out because it’s summer. Good thing the IRS understands this and provides taxpayers with as much benefit as they can dip their hands into, therefore making parenting an easier task – financially. As long as they meet the requirements and they qualify for the dependent care credit, there surely will be deductions on their tax returns that will allow them to have more money allotted for child care.

Discussion About EITC or Earned Income Credit

The EITC or EIC, also known as the Earned Income Tax Credit is what working people with low up to moderate income acquire as a benefit. However, there are qualifications to get this. They must meet specific requirements and also file their tax return. EITC also deducts the amount of tax that the taxpayers owe and can give them a refund.

The amount of the benefit from the EITC depends on the taxpayer’s income as well as the total number of children. For the individual to claim one or more EITC per qualifying child, there must be requirements like a relationship, shared residency and age, and these three must be met. Taxpayers with no child and earn income below the standard that is stated by the IRS receive a small amount of EITC benefit. The US tax forms 1040A, 1040 and 1040EX are used to claim EITC for those who do not have qualifying children as their dependents. Taxpayers with qualifying children can claim their credit by filling up forms 1040 and 1040A.

EIC phases slowly and has a medium-length plateau. After this, it phases slower than before because it constantly phases in. For example, if the credit phases at 21% for taxpayers that have more than one qualifying child, it has 16% of taxpayers who have one qualifying child. Therefore, taxpayers must always choose one more dollar of their actual wages or salary and increase this by fifty-dollar increments. It is also preferred to allot extra fifty-dollar increment per wages and salary by considering just the EITC. However, if the EITC is combined with other tested programs such as Temporary Assistance for Needy Families or Medicaid, the Marginal Tax Rate exceeds 100% in some circumstances. It depends on the state of residence of the tax payer. Under these circumstances, net income rises faster than the increase in the taxpayer’s wage due to the phasing in of the EITC.

History of the EITC

The EITC was enacted in 1975. It was created with the intention that it expanded by the tax legislation on certain occasions, which included the publicized Tax Reform Act of 1986. It was then expanded in the years 1990, 1993, 2001 and finally 2009, even though the act raised taxes in general (specifically 1990 and 1993) and lowered the taxes in 2001. It also eliminated the other credits and deductions in 1986. Nowadays, EITC is one of the largest anti-poverty tools that Americans turn to. However, it is important to note that most income measures that also includes the poverty rate, do not account this credit.

A qualifying child, when defined, can be the taxpayer’s son, daughter, adopted child, stepchild or foster child or even any descendent. It can also be the taxpayer’s sister, brother, half-brother, half-sister, stepsister, stepbrother or other descendants like nephew, niece, great nephew, great niece. A qualifying child can also be an adopted child provided that he or she has been placed lawfully in the home of the taxpayer.

When the taxpayer is claiming for the EIC from a qualifying child, he or she must be older than the latter. The only exception for this is if the qualifying child is classified as totally and permanently disabled for that specific income tax year. A qualifying child can be as old as 18. A qualifying child is also a full-time student who can be as old as 24. A qualifying child with no age limitation are individuals who are disabled. Taxpayers who are parents claim their child or children as their dependents unless they are also waiving the credit for that year to another family member who is an extended relative with a higher AGI. It is also important to note that there is no support test for Extra Income Credit. There is just the six month plus one day shared residency test.

When Are Refunds Expected?

If the taxpayer claims the EITC as well as the ACTC (which is additional tax credit) on the tax return that they filed, the IRS must hold onto the refund of the taxpayer – even if the portion does not have anything to do with the ACTC or the EITC.

Qualifications for Earned Income Credit

To qualify for the EITC, the taxpayer must have income because he has worked or he is running his firm or business and can meet the standard rules.

How to Claim EITC

Taxpayers must have filed a tax return before they can claim EITC. They need to submit the required documents and be on the lookout for the common errors that are made on filling up the forms. They should also be aware of the consequences when they file an EITC return, and an error was discovered. They should also be knowledgeable on how they can get help preparing for their return as well as what they should do just in case the EITC was denied. Most importantly, they need to know how they can claim the credit for previous tax years.

Why did I receive a letter from IRS regarding EITC?

IRS sends letters out regarding EITC because they are suggesting the taxpayer to claim their EITC because, upon careful review of their taxes, they qualify for this. They also ask the taxpayers to follow up on the additional information and send these to the IRS so that their claim can be verified. IRS also calls to gather more information about the claim.

Who claims the credit and how to get the EITC

The taxpayer or his or her spouse (if a joint return was filed) and others listed as the dependents must all have SSNs that are valid and required for their employment and issued before the due date of the return. This is one of the requirements to claim the credit and also qualify for an ETIC. The taxpayers must also have enough earned income by working for a company or a business or running or owning his own.

If married, the IRS should not be filed separately. The taxpayer must also be a US citizen or a resident alien.  It is very important that the taxpayer is not a qualified dependent (whether qualified child or qualified relative) of another taxpayer.  He or she must also have met the earned income, investment income limits and AGI for the specific tax year.

If these requirements are all met, then the taxpayer is qualified for EITC. The next step is to file the tax returns with the IRS even if the taxpayer owes no tax or not required to file in the first place.

If IRS denied the taxpayer an EITC last year and he or she is qualified in the current income tax year, the taxpayer must attach the completed Form 8862 or what is also known as the Information to Claim Earned Income Credit After Disallowance to claim EITC. Taxpayers need not file Form 8862 if the IRS has decided to reduce or not allow the taxpayer to receive an EITC  due to intentional disregard or recklessness concerning EITC rules.

Earned income also includes wages and taxable income that the taxpayer obtains from working for a company or running or owning his firm or business.

Taxable earned income covers the following:

  • Salaries, wages, tips
  • Benefits from union strikes
  • Disability benefits that the taxpayer receives before reaching the minimum age for retirement
  • Net earnings from self-employment

Combat Pay

Taxpayers can choose to include their nontaxable combat pay in their earned income that is taxable to get the EITC. They either have to include it or not include it at all. If they choose to do this, then they have to check if they can include this whenever the taxable increases the refund or deducts the amount of tax that is owed. If the spouse of the taxpayer is also eligible for nontaxable combat pay, then both of them can opt for one that is best. The amount of the nontaxable combat pay is shown on the Form W2 in box 12 with the code Q.

How is credit calculated?

After the taxpayer determines that he or she does qualify for EITC, there are two choices to calculate the credit:

  1. Let the IRS do the work. Follow the instructions stated on Line 64 on Form 1040. It is found on Line 38a on the Form 1040 as well as on Line8a on Form 1040EZ.
  2. They can calculate the credit themselves. They must use the EIC Worksheet and follow the instructions stated in the booklet for Forms 1040, 1040A and 1040EZ as well as the EIC Table. They can also use online tools such as the EITC Assistant Tool which is available in both the English and Spanish language.

If taxpayers are prohibited to claim their EITC for years and the year after that due to an error from reckless or intentional disregard of the rules for EITC, then the taxpayer is prohibited to claim EITC for two years. If the error was because of fraud, they could not claim EITC for the next decade. The date that IRS denies the EITC of the taxpayer and the date on which the taxpayer files the return affects the next time frame of 2 to 10 years, then they will be barred from ever claiming their EITC.

Other Requirements for EITC

  • The investment income cannot be more than what is stated in the income tax year.
  • The taxpayer must be a US citizen or a resident alien. If he or she is married and is filing jointly and one is a citizen, and one is not, then the taxpaying couple must regard the non-resident partner as a resident who then concludes that their entire income would be subject to taxes. Only then will they be able to qualify for EIC.
  • Files with or without children that are qualified should have lived in the 50 states or District of Columbia for more than six months and one day. The Northern Mariana Islands, American Samoa and Puerto Rico are not included. However, a taxpayer who is on an extended military duty is still considered to have met the requirement of the duration of his stay even if he or she is serving time away.
  • Taxpayers who do not have a qualifying child must be 25 to 64 years old. Married couples without a qualifying child must only have one spouse within that age range. A single individual with a qualifying child has no age requirement, aside from the fact that he is not the qualifying child or dependent of another taxpayer. A married couple with one qualifying child is classified as claimable by a qualifying relative, and the couple must also have earned income before once can qualify for an EIC.
  • All taxpayers and qualifying children must have valid social security numbers. This includes the SSN cards that have “Valid for work only with DHS authorization” and “Valid for work only with INS authorization.”
  • For Single, Qualifying Widows, Qualifying Widowers, Heads of Households and Married but Filing Jointly taxpayers, they must have valid filing status for the EIC. It still depends on the total income of both the husband and the wife. Married couples who file jointly can have a better advantage depending on the phase out. A legally married couple can also file jointly despite that act that they have lived apart for the entire income tax year and even if they do not have any expenses or revenues that they share throughout the income tax year. As long as both the husband and wife agree to file together, then they can do so.

Finally, another important note to look at is that it phases out by the adjusted gross income or the greater of the total earned income. For example, a married couple whose overall income amounts to $21,500 but has $3,100 investment income is eligible for the maximum credit, depending on the number of their qualifying child. That investment income cannot get any greater than $3,100. They also receive zero EIC. There are some incomes that range beyond this, depending on the increase of dollar investment as well as the result of the losses after dollars that have been taxed.

Understanding Adoption Costs and the Deduction Taxpayers Can Claim

An adoption tax credit is the credit or tax deduction that adoptive parents receive which encourage adoption. It is stated in Section 36C of the Internal Revenue Code of the United States, and it provides credit for “qualified adoption expenses.” These are incurred or paid by taxpayers.

According to IRS, adoption costs and tax credit include qualified adoption expenses to pay for the adoption of an eligible child which also serves as an exclusion for the employer to provide adoption assistance.

Tax Year to Claim Adoption Costs

Domestic adoption expenses can be claimed for the tax credit of the given income tax year as long as both have been paid. Domestic and foreign adoption costs can be claimed in the given tax year when the adoption process is finalized. Domestic adoption expenses are also accepted even during the adoption process. The accumulated adoption expenses for every child are credited on the previous year as long as it has been evaluated and determined fit and suitable for the maximum tax credit.

Qualified Adoption Expenses

As stated in the US tax law regarding adoption costs, the qualified expenses cover fees such as the adoption costs, attorney fees, court costs, traveling expenses (which also includes the cost of meals and lodging while on the road) and other miscellaneous expenses that are related to the taxpayer legally adopting a child that is deemed eligible. The adoption tax credit per child is doubled when two children are adopted in the same year. It is very important to note that this is credit and not deduction. This means there is a higher deduction considering it is the latter. To elaborate more,  the tax credit is a dollar for dollar reduction which means that the deduction from the credit is the total amount per dollar, which makes it a bigger deduction that what would have been subtracted if it were a mere deduction.

If the adopted child is one with special needs, the parents can claim full credit even without documenting the expenses. There are specific factors that determine the qualifications and the benefits of the child with the special needs and they vary from state to state. A qualifying child that has special needs because of a condition or factor may involve any of these:

  • Racial background or ethnicity
  • Age
  • Emotional, physical or medical disabilities
  • Risk of emotional, mental and physical disability due to birth family history
  • A condition that makes it difficult for the child to find a family that can adopt him or her

There are broader and more elaborate definitions of “special needs, ” and these can be used to determine if the child is qualified for the financial assistance from the Federal Government regarding the adoption of youth and children within the US foster care system.  There’s no single definition of what special needs are, but according to the Social Security Act, under Title IV-E, the child or the youth that has special needs must meet both requirements to be qualified for Federal Adoption Assistance:

  1. The child or the youth can no longer be returned to his or her biological parents, for any reason.
  2. It is the best interest of the child or the youth to be placed in a caring environment.

The adoptive parents must document the child with special needs every paper work that they get their hands onto. The documentation includes assistance for the adoption, the subsidy agreement concerning the adoption, and the letter from the state or county that the child welfare agency is situated.

Taxpayers should document all the financial records including the written adoption paperwork, home study paper work, and legal agreements. Most audits concerning adoption tax credit can be completed by correspondence through an audit. The taxpayer and the accountant can communicate with the IRS via fax or mail. Tax audits also occur every three years so records that are concerning adoption expenses should be kept and retained.

Internal adoptions also require more paperwork as well as registration when the child from abroad has been adopted and then starts living in the US. Social Security Numbers and Social Security Cards, as well as passports and birth certificates along with US readoption,  are also required.  Additional documents that are needed for a child to permanently reside in the US are of great importance, and taxpayers must keep this. Readoption is also a means of documenting the child-parent relationship as stated in US law.

Adoption Credit and Adoption Assistance Programs

Tax benefits for adoption can also include the tax credit for a qualified adoption cost that will be paid by the qualified child, as well as the exclusion from the income of the employer that provides the adoption assistance. The adoption costs are non-refundable which means that it is limited to the taxpayer’s liability for that income tax year. The credit in excess of the liability can be carried to the next five years.

Qualified adoption expenses

Expenses for qualified adoption an also include the home study if the child is physically or mentally incapable of attending a traditional school.

Qualified adoption expenses include the costs that are paid by the registered domestic partner of the taxpayer who lives in the same state for same-sex second parent or co-parents. Adoption of same-sex couples has already been defined so that the child they adopt is covered by adoption costs expenses and can, therefore, qualify for the credit.

Income and Dollar Limitations

There are limitations for credit and exclusion per child. The income limit on the adoption cost depends on the MAGI or the modified adjusted gross income. If that amount falls between the specific limit, then the credit of the taxpayer is excluded to the phaseout, whether it be eliminated or reduced.

The dollar limit for the specific income tax year must be reduced based on the amount of the qualified adoption expenses. These are then claimed in the previous years for the adoption effort. When computing for the dollar limitation, the adoption costs that are paid and claimed about the unsuccessful adoption effort should be combined with the qualified adoption costs that are paid in subsequent attempts, whether the adoption was successful or not.

The dollar limitation also applies to both the exclusion as well as the credit that the taxpayer can claim both of these for the adoption costs. However, if the taxpayer can claim the exclusion that is allowed before claiming any credit, then the expenses used for the exclusion that will be reduced from the amount of the adoption costs will be available for the credit. This results to the taxpayer not being able to claim both the credit as well as the exclusion from the adoption tax credit.

When can the Adoption Costs Credit be claimed?

The tax year for which the taxpayer can claim the credit depends on these:

  • Whenever all expenses are paid.
  • Whether the adoption is domestic or foreign.
  • Once the adoption has finalized.

The adoption costs that are allowed for domestic or foreign adoption depends on the timing rules that claim the credit, whether or not these are qualified. It depends entirely on the kind of adoption.

  • Domestic adoption is when the child is a US citizen (whether he is a natural citizen or a resident of the US during the adoption process) is eligible for the process, and all the expenses are paid even before the income tax year ends, and the papers have been finalized. The credit for the income tax year follows the coming years for the payment.
  • Foreign adoption is the adoption of a child that is qualified who is not yet a citizen, nor the resident of the United States. Qualified adoption costs that are paid before and even during the income tax year are allowed and considered as credit for the income tax year when the adoption is finalized.

Once the adoption is finalized and subject to the limitation, the adoption costs that are qualified are paid during and sometimes after the year as credit for the payment, whether the adoption is domestic or foreign.

Adoption of US children who have special needs

If the taxpayer adopts a child that is declared to have special needs by the state, then the taxpayer is eligible for the maximum amount of credit.  The maximum amount is then reduced by qualified adoption expenses for the qualified child in the previous years. The limitation regarding MAGI also applies.

If the taxpayer adopts a child whom the state has determined with special needs, then the employer of the taxpayer has written and qualified adoption assistance. This also makes the taxpayer eligible for the exclusion, even if the taxpayer and the employer have no records of adoption costs.

A child is considered to have special needs, as defined by the adoption costs, if:

  1. The child is a US citizen, or a resident of US during the adoption process started.
  2. A state has already determined that the child should not and cannot be returned to his or her biological parents.
  3. A state has already determined that the child should be put into someone else’s care.
  4. A common mistake is confusing “children with special needs” along with the whole point of having an adoption credit. Foreign children are not considered eligible to benefit from what is regarded as the special needs, simply for the purposes of claiming adoption credit. Even American children who are disabled cannot have special needs so that they can get deductions for the adoption costs. Special needs pertain to the children who are mentally, physically and emotionally disabled.

State Adoption Tax Credits

There are various states that offer additional tax credits regarding adoption to benefit their residents. If taxpayers live in such a state, then they are offered with a state-level adoption tax deduction and credit. Taxpayers can add their tax experts if they are eligible for these.

Adoption Disruption Still Applies for Tax Credit Benefits

Families who have gone through situations wherein an adoption process has been disrupted can still benefit from the tax credit. Families that qualify for these can also deduct the qualifying adoption expenses on the disrupted adoption. Nonetheless, these families have to wait for a whole year to go by even before they can file for the credit. The maximum credit also applies no matter how many adoptions, whether these pushed through or were disrupted, that the family has experienced for that income tax year.

Dependency Tax Exemption

Adoptive parents can also take the similar dependency exemption that is stated on their income taxes that can greatly benefit the adopted children, including children who are placed under their care, even if the adoption is not yet finalized. The exemption also deducts the taxable income. Families must then provide half of the child’s support to make the exemption costs.

Adoption Tax Credit Before Finalized

Each year, adoptive families inquire whether they can still file their taxes and not have their child’s SSN. This is not possible because the SSN is received once the child has been successfully adopted. The adoption attorney of the taxpayer should then apply for the child’s SSN along with the birth certificate that has been amended. This is very crucial for the court hearing especially when it is being finalized. Taxpayers who do not have these just yet must turn to their accountant, tax representatives, or tax experts so that they can apply for a TIN that is temporary which the child needs. Taxpayers can also file for the taxes using that number.

Filing Tax Returns with Adoption Tax Credit

Due to documentation and the increase in requirements, the Affordable Care Act is introduced, and it helps taxpayers claim the necessary Adoption Tax Credit that can be filed under the income tax year and with the help of a professional accountant.