Tax Credits

Reasons Why Solar Tax Credit is a Big Deal in 2018

 

The Federal Solar Tax Credit is also called the Investment Tax Credit or the ITC. This lets the taxpayer deduct 30% of the federal taxes when a solar energy system has been installed. The ITC is applicable to commercial as well as residential systems. The best thing about it is that there is no cap on the value. With the ITC, the average shopper can save around $5,000 when one opts to go solar. The cost of solar and its perks and advantages have been spreading around the United States.

What does the federal solar tax credit extension mean for the solar industry?

The Federal ITC was established by the Energy Policy Act in 2005 and was supposed to expire in 2007. Fortunate, it has been extended over time and the expiration date has been pushed to the end of 2016. Experts believe that with the five-year extension added to it, it would also bring the solar industry to its complete maturity. Here are the specifics of what is called the Solar Tax Credit:

  • 2016-2019: This tax credit stays at 30% over the cost of the system. This is good for those who use solar power because this means that they can accumulate quite a big discount just for the solar panel system.
  • 2020: Owners of the commercial and residential solar can also deduct 26% of the cost of the system from the taxes.
  • 2021: Owners of the new commercial and residential solar can deduct 22% from the cost of the system from their taxes. Note that there is also no federal credit for the residential solar energy systems.
  • 2022 onwards: The owners of the new commercial solar energy systems usually deduct 10% of the total cost of the system from taxes. It is important to note that there is no federal credit for the solar energy systems of the residents.

Additionally, in previous years, the owners of the new solar energy systems cannot claim the tax credit unless the system has been operational. The legislation allows this to claim it the very minute that the construction of the very system begins. This starts operating on December 31, 2023.

Qualifications for the solar panel tax credit?

As long as the individual owns the solar energy system, then he is eligible for the solar tax credit. Even if there is not enough tax liability for the person to claim the whole credit in just a year, this can be “rolled over” to the remaining credits and can be used in the future as long as the tax credit is taking effect. Remember that if a lease is signed along with the PPA and the solar installer and the taxpayer is not the owner of the system, then a tax credit cannot be received.

Steps in Claiming the Solar Tax Credit

There is the claim that is filed when the taxpayer is filing yearly federal tax return. They must allow their accountant to know that they have gone solar in the previous year or if they file their own taxes. There are various sites that can guide taxpayers on how they can claim their solar ITC.

Three Tips for Those Who Are Considering to Go Solar:

  1. Homeowners who receive multiple quotes can save around 10% or even more.

It may be quite a big purchase but shopping for the solar panel installation requires lots of consideration and research as well as a well thorough review of the nearby companies in the area. US Department of Energy’s NREL or the National Renewable Energy Laboratory also recommended that the consumers must be compared for various solar options as possible so that paying inflated prices can be avoided and then offered by large installers in solar industry.

In order to find smaller contractors typically provide lower prices and there is a need to use the installer network such as EnergySage. Individuals can also receive free quotes from the vetted installers that are local to the individual whenever property is registered. Homeowners can also get around 3 or more quotes. They can expect savings between $5,000 to $10,000 on the solar panel installations.

  1. The biggest installers usually do not offer the best price.

The bigger is not always better is the very reason homeowners are encouraged to consider every solar option and not just the brand that is large enough to pay advertising. Recent reports conducted by the US government discovered that there are large installers around $2,000 to $5,000 that is more expensive than small solar companies. If there are offers for big installers in solar, then make sure that the bids along with the quotes are comparable from the local installers so that they are ensured that they do not overpay with the solar costs.

  1. It is important to compare all the equipment options.

The national scale installers do not just provide high options. They also have the tendency to provide few solar equipment options which can also have a significant impact on the system’s electricity productions. Collecting diverse array of solar bids, taxpayers can compare the savings and costs based on the different equipment packages that are available.

There are also multiple varieties to consider especially when seeking the best solar panels on markets. There are certain panels that can also have higher efficiency ratings than others. It also invests in the top line of the solar equipment. However, this does not always result in higher savings. The very way to find “sweet spots” for the property is to evaluate the quotes of the financing offers and the varying equipment.

Therefore, for every homeowner in early stages of shopping for the solar panel would always be a ballpark estimate of the installations. This can also offer up the long-term savings and the up-front cost based on the very locality and roof type of the solar panel.

How to Claim the Solar Tax Credit

Those who are considering to go solar most likely have heard about federal solar tax credit or ITC also known as the Investment Tax Credit. The Federal ITC makes more it more affordable for businesses and homeowners because they grant a dollar-for-dollar tax action and this is equal to around 30% of the over-all cost of the solar energy system.

30% for the shopper actually means that this is the average national cost for the individual when a solar panel is installed. This is around $18,840. For that price, the solar tax credit is reduced by $5,652. This is the federal tax for the solar panel. This is just one of the many incentives and rebates that can actually reduce the over-all cost of solar for those who own this.

There are information out there regarding the value of the residential ITC but it also figures out on how to claim the credit when it comes to file taxing. This is a whole other story whenever those who are into solar panel go through the process of filling up Forms 5695 to Form 1040 step by step.

The cost of solar is definitely dropping across the United States.

Three Steps When Claiming Solar Tax Credit

  • Taxpayers have to be determined eligible for the Federal ITC. They have to make sure that the credit for the ownership along with the federal tax liability is always in order.
  • Complete the IRS Form 5965 so that this can validate the qualification for the renewable energy credits.
  • Add the renewable energy credit information to the Form 1040.

First thing: IS the individual eligible for the solar tax credit?

An individual is eligible for Federal ITC as long as they are the owners of the solar energy system and not the one that leases it. If a lease agreement has been signed, then the third-party owner is the one that gets the solar tax-credit that is associated with the system. This is a true manifestation for the vast majority of local and state incentives for the solar system. There are also some special cases that allows the lease to grant the taxpayer the financial benefits that are associated with the sale of the SRECs or the solar renewable energy certifications. It is also eligible with the solar energy system that is not on the primary residence – as long as the property is owned, and this has been lived in part of the year. When these are all met, then the tax credit can be claimed.

If the federal tax liability is lower than the over-all total of the ITC savings, then the individual can still make the most out of this by carrying this over the credits that remain and utilize this in the following year.

How are IRS Forms 5695 for 2018 filled out?

Claiming ITC is easy. The only thing that must be completed is Form 5695. This is also referred to as “Residential Energy Credits.” This includes the final result of the form on IRS Form 1040.

How to Complete Form 5695

Form 5695 is what calculates the tax credits for various qualified residential energy improvements. Some of these are solar panels, small wind turbines, geothermal heat pumps, and fuel cells. This is used as the national average gross cost of the solar energy system as an example.

  • First, the individuals must know what the qualified solar electric property costs are. That is also the total gross cost of the solar energy system after the cash rebates. This must be added to Line 1.
  • Insert the total cost of the additional energy improvements, if these are applicable on lines 2 through 4 and then add these up on line 5.
  • On line 6, line 5 has to be multiplied by 30%. This is the total amount of the solar tax credit.
  • If the individual is not receiving tax credit for the fuel cells that have been installed on the property, then there is no need to carry forward any of the credits from previous years. The value from Line 6 will then be placed on Line 13.
  • The next step is to calculate if the individual has enough tax liability that will allow him to receive 30% credit in that year.
  • The worksheet on Page 4 of Form 5695 is then completed so that the limit on the tax credits that can be claimed is calculated. If the individual is claiming tax credits for interest on a mortgage, adoption expenses, buying a home for the first time, buying solar panel, electric vehicle or a plug-in hybrid, information must be listed down there.
  • The result is then listed on Line 14 of Form 5695. This is obtained from Line 13 and Line 14 and the smaller among the two values is written down on Line 15.
  • If the tax liability is smaller than the tax credits, then line 15 must be subtracted from line 13 and list this on Line 16. That is the amount that can be claimed on next year’s taxes.

 Add the Credit to Form 1040

 The value on Line 15 is the total that will be credited to the individual’s taxes for that year. The value is entered in Line 53 on Form 1040 and Line 50 on Form 1040NR.

The steps that have been listed above all outline the need to receive 30% of the cost of the solar panel that has been credited back. If there are energy efficiency improvements that must be done to one’s home in that year, then page 2 of Form 5695 must be completed. Either way, the individual must include this in Form 5695 when taxes are submitted.

The commercial and residential solar ITC has also helped the annual solar installation increase by around 1,600 percent since this ITC has been implemented. The existence of the ITC until 2021 also provides market certainty for businesses that can develop long term investments which also drive technological innovation and competition that can also lower the costs for the consumers.

Rehabilitation Tax Credit

Rehabilitation Tax Credit

The purpose of federal and state preservation tax incentives is to encourage the private sector investment in the filed of rehabilitating and re-using historic buildings in order to promote the investment in the local enemies.

If an individual owns a historic property, then he has the chance to earn state income tax credit as long as the property is qualified for rehabilitation expenditures. Whether the tax payer is planning to rehabilitate the primary and secondary residence in the commercial property, then there are state incentives that can help.

The rehabilitation credit are the costs incurred by the individual for rehabilitation. It can also be the reconstruction of buildings. Rehabilitation means restoration, renovation and finally, reconstruction. It does not cover the enlargement or new construction of a venue.

The percentage of the costs that can be credited is:

  • 10% for the buildings that have been in service prior to 1936
  • 20% for historic structures that are certified

Definition of Rehabilitation Tax Credit

A federal tax incentive encourages the real estate developers to renovate, reconstruct and restore old buildings. This is placed in service before 1936 and are also eligible for the 10% credit as well as the certified historic structures that qualify for the 20% credit. This credit also applies to the rehabilitation costs of the building and not the cost of purchasing for the building as well as repairing sidewalks, landscaping and parking lots. The credit and total amount eventually increases slightly if the building is tehn located in a disaster area.

Things to Remember When Claiming the Rehabilitation Tax Credit

Investment Credit or Form 3468 is also used to claim various investment credits which also includes section 47 of the rehabilitation credit. For 3468 must be attached to the income tax return for every year that the individual is qualified for the rehabilitation tax credits. However, the form is not required when it is carried forward or there is back net operating losses all from the tax credit due to rehabilitation costs claimed in that tax year.

Breaking Down Rehabilitation Tax Credit

It is common knowledge that taxpayers must meet the requirements concerning the rehabilitation project as well as the timeframe and also completes it on the date when to claim the credit. The reconstruction and enlargement projects are also not eligible for the tax credit along with the tax-exempt properties that are qualified. Only the title holder of this property can claim this specific credit. States can also offer the rehabilitation tax credits that are used to encourage the development.

There are still limitations on using the low-income housing credits and its rehabilitation. The guidelines must also apply with the IRS especially when it comes to auditing the credit projects. The limitations that are included are the ones at risk and are of passive loss. Finally, when planning opportunities, taxpayers are encouraged to use the low-income housing credits as well as its rehabilitation especially the use of the credits in tandem.

Who Must File

Taxpayers that claim the rehabilitation tax credit are required to file the Form 3468. This also includes the partner, shareholder and beneficiary that claims the credit through the partnership, S corporation or the trust.

In addition to this, if the estate or the trust, partnership or the S corporation is the very owner of that historic structure, then the taxpayer must file the Form 3468. The lessor also provides that the project number from the National Park Service to the lessee.

Property or Source of Credit

If the credit was claimed simply for the rehabilitation of a historic structure and was done by the owner of the property, then the National Park Service (NPS) project number must also show the owner return. Remember to not use the state or internal identification numbers for this purpose.

If the lessee is the owner of the property, then the lessee must fill up the Part 1 of Form 3468 and also provide the project number from the National Park Service.

If the expenditures for the rehabilitation has been passed through to the S corporation, estate, partnership or trust, then the EIN or the employer identification number of the pass-through can also be shown.

Date of Certification of the Completed Work

Form 3468 also requires the date when the NPS Reviewer has signed the Form 10-168 for NPS. It is important to not use the dates listed for Part 1 or 2 as well as the application date listed on Part 3 for the NPS Form 10-168.

If the final certification has not been received around the time that the tax return has been filed for the year the credit has been claimed, then the copy of the first page of Form 10-168 of the NPS Form Historic Preservation Certification Application, which is the Part 2 of the Description of Rehabilitation. It has an indication that this was received by the Department of the Interior as well as the State Historic Preservation Officer and with that is the proof that the building is definitely a certified historic structure. Taxpayers who electronically file and submit this information along with the Form 8453. Certification information is also required to be received in that very year.

Carryforward or Carryback

Taxpayers are not encouraged to file the Form 3468 if the credit is a carryforward or carryback from previous years. What must be done instead is to report the credit on Form 3800. If required, this can also be filed on Form 8582-CR.

Tax Exempt Use Property

The rehabilitation tax credit cannot be allowed for expenditures with the property that is regarded as tax exempt. As written in the tax-exempt entity, it leases the rules listed on 168(h) and the threshold determines if this is a disqualified lease that exits and has been increased to beyond 50%.

Alternative Minimum Tax

The qualified rehabilitation credits also determined in the Internal Revenue Code listed in Section 47 is attributed to the qualified rehabilitation expense property. It also takes into account the alternative tax rules that are not applicable. Therefore, a taxpayer must use the rehabilitation tax credit as the way to offset the regular tax liability.

Place of Filing Notice

If the taxpayer has claimed the rehabilitation tax credit then the entire project cannot be completed in 30 months after the credit has been claimed and the individual has not yet received the final certification straight from the Department of Interior. If this is the case, then they must also provide a written notice to the IRS or the Internal Revenue Service. The notice that this is provided before the last day of the 30 month deadline. It is then required by the Regulation Section 1.48-12 that this be emailed to the address of the individual and must also have the consent to extend the limitations of the statute.

Qualifications for the Rehabilitation of the Historic Properties Credit

An individual is entitled to a refundable credit if the business:

  • is allowed to have a federal credit listed under the IRS and in Section 47. This is for the qualified rehabilitation expenses that are related to the rehabilitation of certified historic structures.
  • part or all of the rehabilitation project can be located within the census tract and is identified as below 10% of the state median family income and also calculated on every first day of every year by using the recent five-year estimate that came from the American Community Survey and is published by US Census Bureau.

Any new credit that has been earned for the property and is placed in the service on or even after January 1, 201 5 and is not utilized in the current tax year and treated as the overpayment or refund of the credited tax to the following year’s tax revenue. This change is also applicable to the tax years that start on or after January 1, 2015. The carry forward or credit from previous years cannot be applied toward the tax for the ongoing tax year. It has also been carried over to following years indefinitely.

 What is the total credit?

  • For the tax years between January 1, 2010 and January 1, 2020, the credit amounts to 100% of the total federal credit amount that is allowed on the historic structure.
  • The total amount of the credit cannot go beyond $5 million for every structure.

Requirements for Recordkeeping

Taxpayers have to prove that they are entitled to the tax credits. In the course of the audit, they are required to also provide documentation so that the entitlement is substantiated and based on specific facts that are claimed by the tax credit.

Eligibility Requirements for Tax Rehabilitation Credit

 There are 4 factors that help decide whether the rehabilitation project meets the basic requirements for the suggested tax credit of 20%.

  1. The historic building is listed in National Register of Historic Places or certified in contributing to the significance of what is called the “registered historic district.”

Buildings are listed individually in National Register of Historic Places or even part of the historic district. Taxpayers must also contact the local historic district commission, SHPO or the State Historic Preservation Office, or municipal planning office to find out whether the building is listed or not.

If the property is located in a certified state and local district or a National Register district, then it must be designation as a structure that also retains the historical integrity by the National Park Services. It must also contribute to the historical character of the district and qualify as what is called the “certified historic structure.” Note that not every building in the mentioned district has contributed to this. When the historic districts have been designated, then this is usually associated with particular time period or significant periods, like “mid-1800s to 1935.” In this district, the 1950 office building cannot contribute and also not qualified for the 20% rehabilitation tax credit.

The owner of the building can also request from the National Park Service in designating the building and also listing it as “certified historic structure” and also complete and submit this as part of the Historic Preservation Certification Application.

  1. The project must also meet the “substantial rehabilitation test.”

In a nutshell, this pertains that the rehabilitation cost must be more than the building’s pre-rehabilitation cost. This is also the test that must be required within the two years or within five years of the project as soon as it is completed in multiple phases.

The over-all cost of the project also goes beyond $5,000 or the building has been adjusted on a regular basis. The formula listed below is how a project can be determined as substantial and qualified for the credit.

A – B – C + D = adjusted basis

A = this is the purchase price of the land and/or the building
B = the cost of the property when it has been purchased
C = the depreciation that is taken for the income-producing property
D = the cost of the capital improvements that were made since the purchase

Some of these expenses may not be associated with the project that is qualified for the tax credit, like the new rear addition, landscaping and new kitchen appliances.

  1. Rehabilitation work must be done as suggested by the Standards for Rehabilitation of the Secretary of the Interior.

There are ten principles that ensure the historic character of any building that has been preserved during rehabilitation. These should be followed. Standards are also applied to various projects in reasonable manners as long as these take into consideration the technical and economic feasibility.

  1. After rehabilitation, this historic building is also used for income-producing purposes all for five years. The owner-occupied residential properties are not qualified for federal rehabilitation tax credit.

 The 20% credit is only available to the properties that are rehabilitated for the income that produces purposes like industrial, rental residential, commercial, agricultural and apartment use. The credit cannot be used when rehabilitating the private residence.

However, if the portion of the personal residence is not conducted for business, for example a rental apartment or office, then there are instances that this amounts to the over-all rehabilitation costs that are spent on the portion of the residence that makes it eligible for the credit.

Solar Tax Credit

Solar Energy Tax Credits

Federal Tax Credits of Solar Energy

Tapping the sun to acquire power feels very good. Solar power does not pollute but it reduces the use of fossil fuels and other coal and also reduce the individual carbon footprint. It is also up to five times expensive as electricity that is from natural gas and the other sources.

In order to encourage the Americans to use the solar power, the Department of Energy along with the Environmental Protection Agency run the Energy Star Program which among the other projects also offer the tax credits simply for the solar-powered systems.

Credits for approved solar installations

Installing the alternative energy equipment in one’s home can also qualify them for a credit that can amount to 30% of the total cost. The credit is made available until the end of 2019. The percentage usually steps down every year and then ultimate does so at the end of 2021.

The qualifying equipment also includes the solar-powered units that can generate the heat water or electricity. The credit can be made available for improvements especially when it is to make a residence for the individual. This can also apply to a second residence.

As credit, it is possible to take the amount directly off the tax payment and not make this a deduction from the taxable income. Aside from the cost of the system, there is also no limit to the total dollar amount of the credit.

How to Claim Solar Credits for Rental Property

It is not possible to claim credit simply for installing solar power at the rental properties that the individuals own. The exception is when the taxpayer lives in the house for just some time of the year and also use it as a rental while one is away. When one is needed to reduce the credit for the vacation home, rental and otherwise, also reflect the time that this was not there. If the individual lives there for around three months per year, for example, then the individual can claim 25% from the credit. The system usually costs around $10,000 which is the 30% credit from the $3,000 and can also claim a quarter from that, which is around $750.

Filing Requirements for Solar Credits

When claiming the credit, it is necessary that the individual must file the Form 5695 as well as part of the tax return. This can be calculated on the credit of the form. This is then entered as a result on the 1040.

If the individual ends up with bigger credit than the income tax due, then they cannot use the credit in order to get the money back from Internal Revenue Services. Generally, what they can do is carry the credit over to the following year. Unfortunately, it is not yet clear whether they can carry these unused credits to the years after the solar credit expires.

Residential Renewable Energy Tax Credit

The Consolidated Appropriations Act was signed in December 2015. It also has an expiration date for solar thermal technologies and PV and introduced the gradual step down in the value of the credit for the technologies. The credit that is delegated to the other technologies also expired toward the end of 2016.

Taxpayer can claim the credit of 30% that is considered qualified expenditures for the system that has served as a dwelling unit which is located in the United States. As long as this owned and used as a residence for a taxpayer, then this is what counts. The expenditures in relation to the equipment can also be treated and made the minute the installation of these solar panels are completed and finished. When the installation is set at the new home, then the date that is placed in the service of the occupancy from the homeowner. The expenditures also include the labor costs for every on-site preparation that is in the assembly of the installation of an original system. Preparing and wiring of an interconnected system to a home can also receive deductions from the federal tax.

Solar-Electric Property

  • 30% of the systems have been placed by December 31, 2019
  • 22% of the systems have been placed in service by December 31, 2021 and before January 1, 2022
  • Systems can also be placed in service between January 1, 2006 and December 31, 2021
  • The home that is served by the system does not have to be the principal residence of the taxpayer
  • 26% for the systems that have been placed in the service between December 31, 2019 and Janaury 1, 2021
  • There is also a maximum credit for the systems that is placed in service after 2008

Solar-Water Heating Property

  • 30% for systems have been placed in service by December 31, 2019
  • 22% for the systems have been placed in the service between December 31, 2020 and January 1, 2022
  • Systems are also placed in service between January 1, 2006 and December 31, 2021
  • Half the energy that has been used to heat the dwelling’s water ideally must come from solar and the solar water-heating property expenditures to make it eligible
  • The home is served by the system and it does not have to be the principal residence of the taxpayer
  • The tax credit does not also apply to the solar water heating property for hot tubs or swimming pool
  • Equipment must be certified for performance and pass the SRCC or the Solar Rating Certification Corporation or any comparable entity that has been endorsed by the government of the corresponding state where this property has been installed
  • There is no maximum credit for the systems that have been placed in service after the year 2008.
  • 26% for systems are placed in service that are between December 31, 2019 and January 1, 2021

 Fuel cell property

 The maximum credit is $500 for every half kilowatt

  • The fuel cell can also have a nameplate capacity at least 0.5 kW of electricity that uses an electrochemical process and the electricity-only generation efficiency is more than 30%.
  • The home served by the system must also be the principal residence of the taxpayer
  • If ever it is a joint occupancy, the most maximizing costs that can be taken into account by every occupant is $1,667 for every 0.5 kW. This does not necessarily apply to the married individuals who filed as joint. The credit can also be claimed for every individual that is proportional to the over-all costs that have been paid.
  • Systems must be put in service between January 1, 2006 and December 31, 2016
  • For the systems that have been installed in 2017, these are all considered not eligible

 Small wind-energy property

  • For the systems that have been installed in 2017, these are not eligible
  • Systems can also be placed in service between January 1, 2009 and December 31, 2016
  • There is no maximum credit that is placed for the systems after the year 2008
  • The home served by the system also does not necessarily have to be the principal residence of the taxpayer

Geothermal heat pumps

  • For systems that have been installed in 2017, these are not eligible.
  • Systems must also be placed in service between January 1 2008 and December 31, 2016
  • The home that is served by the system does not necessarily have to be the principal residence of the taxpayer
  • The geothermal heat pump can also meet the Federal Energy Star criteria
  • There is also no maximum credit for the systems that have been placed in service after the year 2008

Significantly, the American Recovery and Reinvestment Act of 2009 also repealed the previous limitation on using the credit for eligible projects that are supported by the “subsidized energy financing.” For projects that have been placed in service after December 31, 2008, then the limitation no longer applies.

Established by the Energy Policy Act of 2005, the FTC or federal tax credit for the reoprty ‘s residential energy initially started to work with solar-electric systems, fuel cells and solar water heating systems. The Energy Improvement and Extension Act of 2008 also extended the tax credit of the small wind-energy systems along with the geothermal heat pumps. This was made effective January 1, 2008. Other key revisions include the eight-year extension of credit until December 31, 2016. The ability to take advantage of the credit and set this alongside the alternative minimum tax. This also includes the removal of the $2,000 credit limit that is targeted solely for the solar-electric systems that started in 2009. The credit has also been further enhanced in February 2009 as conducted by the American Recovery and Reinvestment Act of 2009. This removed the maximum credit amount all on eligible technologies with the exception of fuel cells that have been placed pretty much in service after 2008.

Guide on How to Receive the 30% Credit from Solar Energy

The Solar Tax Credit is the Law that has been extended by legislature in December 2015 and it lets the taxpayer take the 30% credit, as long as it is a qualified expenditure for the solar system. This is considered qualified if it serves as a dwelling unit that is located in the US and is owned and also used as a home by the active taxpayer.

The expenditures in relation to the equipment are made when the installation has been completed. The eligible expenditure also covers the labor costs for preparation made on site, piping and wiring the interconnection of the system to the home and the installation of the original system. In a nutshell, this means that the entire value of the quote from this solar company can install the solar panels that are eligible for the tax credit.

To claim the 30% tax credit from solar energy, individuals must complete the Form 5695 and then add the results to the main tax return.

Here are steps on how to complete the Form 5695:

Form 5695 calculates the tax credits for various qualified residential energy improvements. You just need to worry about Line 1 for solar electricity. Also insert the total cost for the solar panel systems that include the installation listed into Line 1.

Assuming that the taxpayer is not receiving the tax credit for the fuel cells that have been installed on the property, then they do not carry forward the credits that have been accumulated form last year. If this is the case, the value from Line 6 is then put on Line 13.

The next step is to calculate if the taxpayer has enough tax liability to acquire the whole 30% credit that can be received for the year.

The worksheet on Page 4 of Form 5695 must then be calculated to come up with the limit on the tax credits that can be claimed. If they are claiming tax credits for interest on mortgage, buying a plug-in hybrid or electric vehicle, buying the home for the first time or adoption expenses, then there should be more information at hand.

  1. Enter the amount on Line 47 from Form 1040 or Line 45 from Form 1040.
    2. Enter the overall amount, if there are, of the credits from Lines 48 until 51 on Form 1040 and Line 22 on Schedule 4 or Lines 46 to 48 from Form 1040NR.
    3. Enter the amount om Line 40 from Form 5694.
    4. Enter the amount on Line 11 or Line 12 if the individual is claiming child tax credit.
    5. Enter the amount on Line 9 from Form 8396.
    6. Enter the amount on Line 16 from Form 8396.
    7. Enter the amount on Line 3 from Form 8859.
    8. Enter the amount on Line 15 from Form 8910.
    9. Enter the amount on Line 23 from Form 8936.
    10. Add the lines 2 to 9.
    11. Subtract Line 10 from Line 1. Enter the amount on Line 14 from Form 5695 as well. If it is zero or less, then just enter 0 on Lines 14 and 15 of Form 5695.
    12. Enter the result on Line 14 from Form 5695 and then review Lines 13 and 14 and put the smaller one among the two on Line 15.
    13. Add the Lines 6, 11 an 12.

This is hwo you come up with the Federal Tax Credit for Solar Energy.

Why are we still talking about the 2018 Tax Reform Bill?

Congress has gone on to go against the will of the majority and pushed a tax framework that a multitude of Americans are opposed to. Therefore, it is important to note that there are various leading tax academics, analysts and practitioners that believe various tax games as well as roadblocks and glitches when it comes to the field of tax legislation.

The complex rules have proposed that the Senate and the House bills let the new tax games along with the planning opportunities directed to tax payers who have been advised will lead to consequences and costs that were not anticipated. These costs are not fully shown and reflected at the moment because the official estimates indicate that the bills are now an overall total of $1 trillion to the deficit and will continue in the coming years. There are other proposed changes that are expected to encounter roadblocks and can later on jeopardize the critical elements on legislation. In other words, there are still cases that have technical glitches connected to legislation and are improperly and haphazardly penalized on the benefit of the corporate along with the individual taxpayers.

These are the various problems that the bill can imposed in the respective areas:

* Corporations as Tax Shelters – once the tax rate in the corporate level is reduced because of the absence of anti-abuse measures that are effective, the taxpayers are then able to transform the corporations to a savings vehicle that is tax-sheltered and adept in various strategies.

* Eligibility Games of the Pass-Through – the taxpayers can circumvent the limitations when eligible for the tax treatment that is passed through the businesses.

* Restructuring Local and State Taxes in order to Maintain the Deductibility – by denying the reduction on the local and state taxes, jurisdictions are then incentivized so that it can be restructured to the form that the revenue collection is trying to avoid the change. This results to an undercut of one of the largest raisers of revenue in the entire bill.

* International Games, Roadblocks and Glitches – the complex rules set for the tax reform are meant to make an exemption to the foreign income of the domestic corporations that are derived from the US taxation and is present to various avoidance and tax planning opportunities.

* Money Loophole Machines – the various tax rates that are imposed on the different forms of business income through the years are also invited to come up with the arbitrage strategies whereby the taxpayers are then achieved in an economic benefit that is based solely on the assignment and timing of the income as well as the deductions.

The studies and reports conducted ended with a serious warning. These analysts claim that there will be more problems with the bills. These are likely to emerge. For example, the tax games will eventually reduce the tax revenues and increase the over-all cost of legislation. This results to legislation becoming more regressive than it actually is. In addition, the tax complexities are also necessary so that the policy of new rules can take effect and also prevent the abuses. This ensures that the legislation will also move taxpayers further away from their goals. Before, this was simple, more efficient and more equitable. The IRS and the Treasury may also be overwhelmed when it comes to the efforts in the policy-making of maniputable and new rules especially during a period when funding is reduced and there are constraints in the budget.

Members of the House and the Senate should reassess the process of tax reform as well as the result of the legislative proposals that they create. This is to undertake an approach that is more deliberate and can reach far in terms of legislation. This will definitely affect the economy in a significant behavior which will also benefit the taxpayer.

With that illustration, it shows that the Republican tax-cut bill showers the rich with billions of dollars and not even giving a noticeable boost to the economy. The plan is actually worse than what most Americans think because there are estimates that taxpayers did not even put into account. These are the games, planning and cheating that some of the taxes impose on the bill that was hastily written but quickly encouraged.

In its current form, analysts show that the bill costs more than $1 trillion dollars for the Treasury. This can range to 10 years. A majority of the extra money can also go the wealthiest Americans as well as the most successful and largest multinational corporations.

With this tax reform, instead of the capitalism and unleashing of the productive side, the business planning would be revolving around mining favors from tax code as opposed to creating the economic value. The final legislation can also deliver large benefits to the best advisers than even the current estimates may also suggest. Analyst and the practitioners have also combed through legislation that has been passed by the House and Senate than can uncover the glitches and the loopholes that allow the tax games as well as the aggressive tax planning.

Eventually, the riches 1% of the Americans can hire lawyers and accountants and these people will be busy in mining the bill for potential benefit. Then they also would receive a windfall that averages $48,000 annually.

The US treasure also receives hundreds of billions in revenue. It ratchets the pressure on Congress and also slashes the federal spending on Medicare and Social Security including education and infrastructure.

This new law creates lower tax rates for pass-through businesses and corporations like sole proprietorships and partnerships. It gives individuals large incentives to shift their income as much as possible into the business. The upside to this though is that taxpayers would pay less in taxes.

There is also the proliferation of avoiding the opportunities that leads to the diversion of resources are from productive activity that leads to the tax planning. Instead of unleashing capitalism’s productive side, it unleashes that this side is parasitical. Business planning also revolves the mining favors of the tax code. It creates economic value.

Three Huge Opportunities to Beat the Tax Bill

Individuals and companies must follow these four tax planning opportunities in order to work around the new tax cuts and budgets from the bill.

  1. Using corporations as tax shelters

 

The conference bill taxes of the C corporations were at 21% in the beginning of the year. This results to tax payers still having the ability to use the corporations and set this on a savings vehicle that is tax preferred. With no protection that comes to the bill, C-corps can then use this to shelter the income from the ordinary income tax rate.

 

The use of corporations in the form of tax results lead to the labor income taxed at the preferred rate of 21%. This also eliminates the entire second layer of the taxes when the individual revives the dividend and then sells this in the corporate stock form. The incentives of using corporations as tax shelters is reduced under this bill because it is relative to the previous various. This also results to the higher corporate rate. It is from 20% that increases to 21%. The lower top individual rate is also 39.6% that has decreased to 37%. According to reports, these tax savings are regarded as considerable.

 

The pre-existing safeguards that avoid the consequences are inadequate and can also be in the lighter side of the incentives planning that the rate differential establishes.

 

  1. Pass through-games

The new bill from the Congress grants a 20% reduction from specific qualified business income. This reduces the tax rate that starts from 37% down to 29.6%. This also provides an incentive for taxpayers to consider their income into the category that is qualified. However, there are complex rules that come with these gaming opportunities. There is also no clear and specific logic to determine who fits into the categories because the game is often played within haphazard lines. As a matter of fact, the conference bill makes the matters more worse. It allows the owners of the firms who earn no wages and specific kinds of property to make the most of the lower rate.

 

This change also expands the available deduction for the pass-through and greatly encourages businesses to follow the rules and increase the ownership and turn these into qualifying properties. This can also possibly replace the workers in the process.

 

Service providers can follow the number of steps that qualify to the pass-through deduction. For example, a married employee that has taxable income lower than $315,000 can gain the incentive of being an independent contractor or even a partner, as opposed to being an employee. At the same time, they can still receive the full benefit. Another example is that the higher-income doctors, law partners and other professionals will most likely be able to take part on strategies that access the special rates like buying buildings and also owning these as separate entities.

Another important loophole of the pass-throughs is that they can largely surpass the limits on the expense of the interests. Public corporations can also pass through the subsidiaries and expect these to do the same.

 

  1. Restructuring State and Local Taxes (SALT) to maintain deductibility

The conference bill caps that the deduction on the SALT amounts to $10,000 and also permits that there is a combination of the taxes required to reach the cap. IN various parts of the country, taxpayers have to pay both the local and the state taxes as well as the excess of $10,000. The states that are affected have the ample incentive of responding creatively to the changes that are in the federal tax law.

Listed under the conference bill, there are three possible responses from the municipalities and the states to restructure the collections of the revenue and to also preserve the SALT deduction.

These strategies rely on replacing the state taxes that are not deducted on the cap with the other taxes along with the sources of revenue like charitable donations, franchise taxes and employer-side payroll.

Taxes imposed on the business can be deducted. States can shift from the non-deductible over the cap state income taxes so that the employer-side payroll taxes remain as such. This new law also permits that there be a shift on the sue of the non-deductibles along with the state income taxes. When this is done, then there is the deductible and charitable contributions for the local and state governments.

As for the franchise taxes, the report also states that the local and state taxes must stay deductible for the pass-through businesses. As long as these are imposed on entities and the individuals.

Conclusion

It is obvious that the tax bill is horribly flawed and also riddled with errors. It must not be assumed that the result is unintentional. The bill does more than its ultimate aims of the Republican gaining leadership in the Congress. It also rewards the wealthy by starving the beasts. This has always been the twin goals of the fiscal policy of the Republicans for decades.

This tax bill also weakens the economy, encourages companies and individuals spend more, and increase the deficit on trade whenever the tax code is complied. The budget can also affect the mortgage rates as well as educational budget after a decade. Taxpayers may be paying less but there is a catch to this. They may not receive the benefits that they expect to get by the time they decide to retire and earn their hard-earned cash that they worked for years to receive.

Almost everything that Republican representatives discuss about the tax bill is a myth. It is not for middle class and it does not pay for itself based on its growth. It does not influence and convince companies to make an investment in America. In other words, it does not make the tax code any simple.

Live Seminar – Prepare Yourself To Take Advantage Of 2018 Tax Reform

Meet with Sanjiv Gupta CPA @ Live Seminar

Come and interact with Sanjiv Gupta CPA on Feb 25th, Sunday ( 10 am to 2:30 pm).  Lunch will be served.  Small business owners and individuals will greatly benefit from this event.

Sanjiv ji will focus on educating the audience on the 2018 tax reform.   You will understand how to structure your income and expenses to take advantage of recent tax law changes.  Majority of the time will be spent to discuss tax saving tips and interacting with the audience.

You can expect us to go over 50+ changes that are going to take effect this year and how you can position yourself to talk advantage of these changes.

See you at the event – Registration is only $15 (Includes Lunch).

Location: UlavacharU – 685 East El Camino Real – Sunnyvale, CA 94087

 

 

What To Expect @ the Seminar: We talked about these subject briefly in our last webinar. Sanjiv Ji will discuss all sort of tips to help you maximize your bottom line in 2018.

1.) How individuals and business owners will be impacted by the 2018 Tax Reform

2.) How 2018 Tax Reform will impact Real Estate Owners & Investors –

3.) How setting up a company in 2018 can be really helpful for everyone –

Archer MSA – Tax-Exempt Custodial Account or Trust

 Archer MSA is the tax-exempt custodial account or trust that is set up with financial institutions like the insurance companies or the banks. Contributions that are made into this account can also be used as payment for healthcare costs that are not under the health insurance policy coverage.

Benefits from the Archer MSA

  •  Insurance costs can be lowered
  • Contributions as well as any interest or earnings on these contributions can grow free of tax until it I withdrawn. This is like the contributions that are tax free when it is used to cover the expenses for qualified medical costs.
  • It is possible to deduct the individual’s contributions atop the income tax return even if this is not itemized.

 Who can have Archer Medical Savings Account?

 There are two rules to determine whether the person qualifies for the Archer MSA or not:

  1. The individual must be working for a small business or a small employer. The definition of a small employer is an entrepreneur who has an average of 50 or even fewer employees in the course of two years.
  2. The individual must have an HDHP or the high deductible health plan. The HDHP has higher deductible than a number of health plans out there and also has maximum limits when set alongside the amount that must be paid for out of pocket costs.

The premiums for the High Deductible Heath Plan are usually 20 to 50% lower than the health plans that has lower deductions. If the individual is self-employed, then these are also tax-deductible.

The HDHP must also meet specific IRS requirements so that the individual can qualify and get his or her own Archer Medical Savings Account. The basis are types of coverage, the minimum annual and the maximum annual.

Who Would This Work For?

 The individual can only obtain an Archer MSA if he or she is enrolled in a high deductible health plan that is eligible and qualified. The kind of plan that is ideal for a young individual who is in good condition and single is the Archer MSA because for others, this can be quite a big and serious gamble financially due to the high deductibles as well as the requirements that must be met to be qualified for the insurance coverage.

If the Archer MSA is the only kind of insurance that is possible to get, then it is better the individual saves and has enough money in order to meet the deductions from the MSA. In doing so, this ensures that he or she is saving money that is tax free instead of paying the amount right there and then, fresh from the person’s checking account, even after it has already been taxed.

Archer MSA must be paired with HDHP

 Usually, the Archer MSA is paired with HDHP or what is called the High Deductible Health Plan. This is because the HDHP has higher deductibles compared to most health plan coverage. It also has a limit on the total amount that the individual must pay to cover the expenses that he or she first shelled out cash for. The premiums for HDHP must also meet the certain requirements set by the IRS so that it can be used with the Archer Medical Savings Account.

Requirements for Archer Medical Savings Accounts

 The legislation that provides Archer MSAs expired toward the end of 2007. Taxpayers, as well as their employers, cannot establish Archer Medical Savings Accounts any longer. However, if they have existing accounts prior to 2007 then they can use and contribute to this.

How MSAs Work

 Archer MSAs are custodial accounts that come with insurance providers and financial institutions. These are accounts that are tax-deductible and can be used to qualify for the medical expenses. Similar to HSA or what is also known as health savings accounts, the Archer Medical Savings Account function in similar manner like the IRA or the individual retirement accounts. The employee or the employer can also contribute to Archer Medical Savings Account. The individual can deduct from the contributions in the taxes, these are also subject to a couple of rules. Archer Medical Savings Account have an interest that can be tax-free and even tax-deferred. The withdrawals for these medical expenses may often be free from tax withdrawals for the non-medical reasons of it being taxable. If that is the case, then the penalties apply.

Archer Medical Savings Accounts Are Not Substitutes for Health Insurance

 It is important to note that the MSAs are not substitutes for health insurance plans. It may be eligible for health care costs that are not included in the insurance. The individual must then cover the high-deductible health care insurance during the time that this has been established in Medical Savings Account.

Qualifying Medical Expenses

 There are tax-free contribution and distributions from the Archer Medical Savings Account that can also be brought into consideration all for the purposes of following the medical costs. These are:

  • Emergency treatment
  • Dental Care
  • Hospitalization
  • Prescription drugs, which also includes insulin and medications that can be ordered over the counter as long as these are prescribed by physicians
  • Acupuncture
  • COBRA continuation coverage
  • Premiums from the health insurance and policy plan if the individual is unemployed
  • Ambulance service
  • Chiropractic Care
  • Lab work
  • Vision care
  • Doctor’s visits

If the individual withdraws money from his account for other purposes, then the funds are regarded as taxable and considered as regular income.

There is a 20% tax penalty that is applied to the amount of the withdrawal unless the individual is aged 65 or older and disabled. This increase in penalty ranges from 15% in 2011. When the individual is older than 65, then he or she can withdraw the unused portion of the Archer Medical Savings Account in order to supplement the costs of retirement.

The distributions and contributions that have been made must be reported especially when these are eligible medical expenses.

Tax Deductible Contributions

 The contributions that are limited based on the amount of the individual’s health plan policies are also deductible. If there is a family healthcare plan, then it is possible to deduct 75% on the annual premium. Other than that, 65% can also be deducted.

Both the employee and the employer can contribute to the Archer Medical Savings Account of the former. The only difference is this contribution is done on different dates. The health insurance policy of the employee cannot have lapses at any given time of that year. The contributions of the employer cannot also exceed the annual earnings.

Taxable Contributions

 If the employer is the one responsible to make contributions to the account then it also exceeds the maximum that is allowed by the health plan of the employee. As mentioned previously, the employee must pay 6% tax atop the amount.

Making Contributions to the Archer MSA

 The tax deductible on the contributions to the Archer Medical Savings Account is made by either the employee or the employer but not by both in similar year. The employee must also be covered by the HDHP that whole year in order for the full amount to be deducted. The contributions of the employer are also nontaxable to the individual.

There are limitations to the total amount that is contributed to the Archer Medical Savings Account. The maximum of this is 75% on the annual plan deductible on the health care costs. This is for the family plan. It is 65% if it is a family plan. An example of this calculation of this is that a family plan has a deductible of $4,800 and it is possible for the individual to contribute $3,600 every year. If it is, on the other hand, an individual plan, then it has a $2,400 deductible. The most that the individual can contribute is a total of $1,560.

Any contributions that go beyond the maximum cannot be deducted from tax and the individual will also pay 6% for the excise task on the amount. Another limitation is contributions cannot exceed what the individual earned for the whole year.

Withdrawing Money from Archer MSA

 It is possible for the policy holders to withdraw funds from their Archer Medical Savings Account in order to cover for the medical expenses that have not been reimbursed. There are some trustees that furnish the checks for the individual to write himself or herself. Then there are others who give them debit cards so that it can provide instant access to the Medical Savings Account of the Archer funds.

The individual and the trustee must report the distributions. However, the individual is not required to pay the income tax as long as this was used for an eligible medical cost like ambulance service, dental expenses, emergency treatment, hospitalization, prescription drugs, chiropractic and acupuncture, wellness and preventive programs, vision care that includes glasses, lab services, health insurance premiums while unemployed, doctor’s office visits and COBRA continuation coverage.

If any portion of the contribution was regarded as a non-qualified medical costs, like the premiums for the HDHP, then the individual must pay the income tax including the penalty tax of 15% on the amount. However, there is also no penalty if the individual is disabled, aged 65 and older or passed away in that said year.

Archer Medical Savings Accounts are portable and will stay with the policy holder even if there is a change in employers. Any money that was not used for that year primarily for medical reasons can continue to grow and even be tax-deferred and remain in the account. The option to invest is still a choice and it will affect the return rate. Just like any investment, the individual must make sure that there are risks when they do choose to sign up.

What Happens to the Money from Archer MSA?

 If the person does not use the money by the end of the year, then it rolls over. If the individual dries to access the allotted money for other expenses aside from medical reasons, this will be taxed. It is possible to control how little or how much money can be deposited so policy holders are advised to plan wisely.

Deciding Between the HSA and the Archer MSA

 When the individual has the Archer Medical Savings Account, it is only necessary that he or she also checks the same kind of savings, specifically the HSA or the health savings account. The latter was created as a significant part of the Medicare Prescription Drug, Modernization and Improvement Act in 2003 to expand the benefits that were offered by the MSA Funds from the Archer Medical Savings Account and that can then be carried over to the HSA, therefore making it easier and simpler for the individual to just go to one kind and then to another. However, before the individual can do this, he or she should understand the major differences between the HAS and the Archer MSA.

  • An eligible individual below the age of 65 who is under a health insurance that qualifies for HDHP can have an HAS; on the other hand, an individual who is self-employer or a small business employee who his covered by an HDHP that qualifies can also start having an Archer MSA.
  • The minimum amount that is deducted can also be applied to the individual’s HDHP and also used alongside the HAS that has $1,200 for the individual as well as $2,400 for plans that cover family. It is also lower than the usual minimum annual deductions that are applied to the HDHP when put alongside the Archer Medical Savings Account.
  • Both the employee and the employer (if there are) can contribute to the HAS in the same year. The Archer MSA does not let the contributions from the employee and the employer be processed in the similar year.
  • The individual can contribute more every year to the HSA than he can contribute to the Archer Medical Savings Account. The annual contributions to the HSA can be limited to the amount $3,050 for individual plans and $6,150 for family plans.
  • If the individual reaches the age 55 by the end of the year, then they can also catch up in terms of contributions to their HSA. It can even amount to $1,000. There are no more catch up contributions that can also be made to the Archer Medical Savings Account.

What are Health Reimbursement Arrangements and How Do These Work?

An HAS or what is also commonly known as Health Reimbursement Arrangement has been approved by the IRS and is funded by employers. It is a tax-advantaged health benefit insurance for the employees which allow them to be reimbursed for the medical expenses that they had to spend for from out of their pockets. This is also a health insurance policy that is premium. It is important to know that HRA is not considered to be health insurance. The HRA lets the employer contribute to the account of the employee and also provide the reimbursement for expenses that are eligible. An HRA insurance plan is also a smart and efficient way to provide the health insurance benefits and let the employees pay for a varied range of medical costs that are not covered by their insurance policies.

The primary requirements for the HRA are 1) the plan can be funded primarily by just the employer and can also not be sponsored by deducting the salary of the employee and 2) the plan can provide the benefits especially for medical expenses that are substantiated.

In other words, the HRA is regarded as a copay or a deductible. Employees can partner up with their employers on any health plan that they choose. This works by the employer setting aside the allocated budget to the employee’s HRA. This is for an annual basis. The difference between the other health spending accounts is that only the employer can put the money into the HRA. The money is also available to the employee when the year starts.

HRAs can be designed however way the employer wants to fashion it. It should just suit the particular needs of both the employer as well as the employee. Interestingly, the HRA is the most flexible types, if not one of, among all the benefits plans for the employee. This is the very reason why it appeals to a number of employers.

A federal legislation was passed way back December 2016 and because if this, there is an HRA that is available specifically for small businesses. These are covered by new provisions by the HRA that are targeted solely for small businesses.

How to Use the HRA

 When the policy holder goes to the hospital or sees a doctor, the money that is in his or her HRA is already qualified to cover the medical costs. A number of the members with HRAs have a payment process that is regarded as seamless. The doctors bill the employers and the employers use the funds from the employee’s HRA to pay the costs. This processed payment will then be recorded on the benefits and the explanation or what is also known as the EOB. The individual can also check the online account.

If the individual uses up all the amount that is in HRA even before the year ends, then he or she is required to pay what is owed out of his or her own pocket. If there is still money left toward the end of the year, there is a possibility that the employer may roll it over so that it can be used the next year. However, there are some employers that won’t do this so it is better to use it than lose it.

What Can It Be Spent On?

 The employer decides which medical costs are eligible to be reimbursed. Usually, the HRAs cover:

  • Deductibles
  • Copays (for PPO only)
  • Coinsurance

The HRA cannot be used to pay the monthly premiums of any health insurance.

Advantages of the Health Reimbursement Arrangements

 The HRA allows both the employer and the employee to save on the healthcare expenses.

These HRAs have benefits that help the policy holders save more especially when it comes to health care expenses.

  • Affordability: The premiums for the health care coverage plans that are offered with HRAs are pretty much lower every month than any other plans out there.
  • Employer contributions: The employer can fully fund the HRA even without any contribution from the employee.

Enrolling in the HRA can also provide major advantages, especially to employees. These are reduced health insurance premium that result from the Health Plan that is High Deductible and the availability of sponsored funds from the employer to pay the medical costs that are incurred previously to the point when the deductible of the insurance has been met.

Expenses can be reimbursed from HRA depending on the design of the plan. This covers co-payments, prescription medications, dental expenses, vision expenses, co-insurance and deductibles. This also includes other heath related expenses that were first paid by the employee from their pockets.

HRA funds are also contributed to the employees but on a pre-tax setting. The funds, therefore, aren’t taxable, especially to the employee. Hat being the case, employees do not have to claim that there is a deduction in their income tax for the expense that was reimbursed because of the HRA.

How the HRA Benefits the Employer

 HRAs are commonly offered in relation with the Health Plan that is High Deductible. There is a rule that the High Deductible Plan results in a premium cost that has been reduced can create real savings for the healthcare costs which benefits the employer. HRA contributions can also be funded through the savings that are gained from the premium costs on the lower statute. By funding the HRA, the company’s employer can effectively bridge the gap that separates the higher deductibles from the expenditure amounts. This is where the insurance coverage gets a kick for the employees.

Above all, the contributions of the employer to the health reimbursement arrangements are completely tax deductible. It is also tax free for the employee.

Employers can establish the costs of the HRA funds – this includes every health-related qualified expense. Since these are also flexible, the HRA coverage allows the employers to control the costs especially when providing the benefits from the healthcare policy and at the same time provide benefits to the valued employee.

With the HRA< the healthcare expenditures of the employee are clear and visible for both the employer and the employee. This fosters a more open communication pathway as well as a bigger understanding on the over-all costs of the healthcare. On top of this, employees can also control and monitor the total healthcare costs and the upside to this is that they become more intelligent and more conscientious when consuming anything related to healthcare.

Definition of Terms

 Deductible, Co-insurance and Co-pay: Every medical expense that applies to the health plan as deductibles, co-pay amount and coinsurance total can all qualify and be eligible for reimbursement. These qualified expenses are incurred by employees as well as the family of the employees. The EOB or the statement on the Explanation of the Benefits that show the evidence of expenses. It applies to the deductible on the insurance and is also required for subtracting the requests for reimbursement.

 Deductible: The total medical costs that apply to the deductible amount of the health plan can all qualify for reimbursement. This plan is the design that also does not include co-insurance or co-pay amounts. The qualified and eligible expenses that have been incurred by both the employee as well as the employee’s family are also considered as deductible. The EOB statement is required in order to substantiate requests for reimbursements.

All Medical Expenses That Are Uninsured: All medical expenses that were paid from the pockets of the employees or what is also regarded as uninsured costs are qualified and eligible. This also includes co-pays, dental, prescription, vision, coinsurance , nd deductibles. These expenses can also be incurred via the employee or the family of the employee. Proof includes the EOB statement, the receipt the bill that identifies the specific date of service, the total amount of rendered service and the official name of the business of the service that provided this to the employee. These are the usual paperwork that are required to substantiate the reimbursement requests.

Specific Expenses: There are plans that are designed to just cover one limited service such as just dental, just vision, just orthodontia, just prescription medical and more. Copies of the receipt or copies of the bill that also identify the date when the service was rendered, total cost of the service and the provider of the service can be used to request for reimbursement.

More Facts About Heath Reimbursement Arrangements

 One thing that should be known about the HRA is that these are merely notional arrangements. There are no funds that must be considered as expenses, not until the reimbursements have been paid. Through the Health Reimbursement Arrangements, employers can reimburse the employees directly, but this is only after the medical expenses that were incurred by the employee have been approved.

There are Annual Limits for some Health Reimbursement Arrangements

 Like that of the HSA or the health savings account, there are limits to the over-all amount of cash that any employer contributes to specific HRAs. There are annual contributions of the employer for HRAs of small businesses and reach a cap that amounts to $4,950. This is for single employees. If the employee has a family, then the cap is $10,000.

As for the other HRAs, like the one-person HRA that is Stand-Alone and the Integrated HRA, the contributions on a yearly basis are limitless.

Eligible Expenses of Health Reimbursement Arrangement

 An HRA can be reimbursed at any expense and is also regarded as an eligible medical cost as stated under Section 213 of the IRS code. This includes the premiums for the health insurance coverage care of policies. It is also under the IRS guidelines that employers can restrict what can be reimbursed in whatever way the opt to especially since it is their health reimbursement arrangement plan.

HRAs Can Roll Over

 The HRA can also roll forward to the next month or even to the next year. It depends on the Health Reimbursement Arrangement Plan as chosen by the employer. The small businesses that have HRA can also roll forward to another month. The difference is that they cannot roll onward to the next year.

As for the Stand-Alone HRAs for a single individual or the Integrated HRAs, there are employers that let the balances accrue from one specific year and then onward to the next year. They can also design these programs in such a way that makes it not possible for the HRA to rollover annually.

Employers can let the employees access their HRA accounts when they retire.

Reporting Features of the Administration of the HRA

 The reporting features of the HRA administration require monitoring on real time. The liabilities, utilization and reimbursements have to be meticulously looked at. Employers can also change the plans and the benefits any time they want or they can cancel it altogether, as long as the HRAs of the Small Businesses are supplied to the employees and they are also informed ahead of time.

Discrimination Testing Along with the HIPAA

 The HIPAA is also known as the Act for the Accountability and Portability of Health Insurance. Plans should avoid discrimination especially concerning the employees. This includes looking into the plan’s parameters and the allocation of the funds. It must ensure all employees can have similar access to this particular funded account.

HRA is also for Retired Employees

 There are HRA plans that cover employees who are already retired, as well as their spouses and their tax dependents. Employers consider the HRA as the alternative to the traditional healthcare in a retirement home, which is actually more expensive.

What Happens to the Health Reimbursement Arrangements When Employee Resigns?

 Since the employer owns the account of the employee and the latter decides to leave the job that he gets from the employer, he may only be able to keep using it, once the employer decides to let him or the costs are qualified. If not, then the benefits end once the employee resigns and it’s only fair that it does.

If the individual is unsure whether the company and the employer offers HRA, the way to find out is to directly speak with the Human Resources Department and find out.

Understanding Long Term Care Coverage

A long-term care coverage may be expensive but there are possible steps that can be taken so that it would become more flexible and affordable. “Long-term care” is the help people who have chronic illnesses or disabilities or conditions require every day and over extended periods of time. The kind of help that is needed can also vary from assisting simple activities like bathing, eating and dressing to expert care that only nurses and other professionals such as therapists can provide.

Employer-based coverage of health insurance does not cover the daily and extended services for long-term care. Medicare can only cover short stays in nursing homes or limited time at home care but only under extremely strict conditions. In order to cover the potential expenses in long-term coverage for health care, some people opt to buy the long-term insurance.

Policies provide a wide range of coverage options to choose from. Since it is hard to predict the future and how long-term care necessities will be, individuals are strongly advised to buy policies with flexible options. It depends on the policy options that are selected. Long term insurance for medical care can also assist in paying for the ideal care that is necessary, whether the patient is staying at home or in a nursing home or a facility that is assisted-living. The insurance also covers the expenses for care coordination as well as day care of and other extra services. There are even policies that can also assist in paying the costs that are associated to modifying homes in order for the elderly to live safely in it.

Factors to consider

 Health and age. Insurance policies are inexpensive when purchased at a younger age and the individual is of good health. If the individual is older and has already been diagnosed with health conditions that are serious, there is the high possibility of them not getting coverage. If they do, then they are expected to spend more.

 The premiums. The individual must always check whether he or she can pay the premium of the policy – today and tomorrow – without having to go broke. Premiums have the tendency to increase over a long period of time and when the individual’s income unexpectedly goes down, it may be a challenge. There are individuals who find themselves unable to pay the premiums. They should be careful when making this decision because it is possible to lose all hard-earned money that was invested in policies.

 The income. If the individual has difficulty paying the bills and are concerned regarding paying this for the coming years, then spending thousands for a year just for long-term care policies will not make sense. If the income of the individual is low and there are few assets that are needed for the health policies, then they can qualify immediately for Medicaid. Medicaid covers the care in nursing home. In a number of states, it also covers at-home care but a limited amount. The downside is that for individuals to qualify, they must exhaust all of their resources first and meet the requirements for eligibility that Medicaid have posted.

 The support system. The individual can surround himself with friends and family that can offer long-term care especially if he needs it. However, they should think about the possibility of these people’s abilities to help them and how they can help them. Sometimes, some friends and family cannot help as much as the individual would like them to which only results to disappointment.

 Savings and investments. Financial advisers and lawyers specialize in estate planning or elder law and they can advise elderly individuals on ways to save and invest for long-term expenses in care for the future. They can also list the cons and pros and show these to their clients so the latter is knowledgeable before completely purchasing or investing in a care insurance that is long-term.

 The Taxes. The benefits that were paid through the policy of a long-term care are generally not regarded as taxed in the form of income. There are also many policies that are sold today that are considered to be “tax-qualified” when set in federal standards. Therefore, if the individual itemizes the deductions and also have medical costs that exceed 7.5% of the adjusted gross income, then he or she can also deduct the final value of all the premiums obtained from the federal income as well as the taxes. The total amount of the deduction from the federal taxes depends heavily on the age of the individual. A number of states offer tax deductions and credits but limited.

 The Policy Sources for Long-Term Care

 Individual Plans. A number of people opt for long-term care health insurance policies via their insurance agents or their brokers. When they choose to do this, they have to make sure that the person they are working to get this policy has had training when it comes to insurance for long-term health care, as there are many states that require this. They should also check with the insurance departments of their states for the credibility of the person they are dealing with to see if this particular agent or broker has the license to sell health care policies within that state in the first place.

Plans from Employers. There are employers that offer long-term health insurance policies or make these policies available for every individual through group rates that have discounts. There are also group plans that do not have underwriting. This means that these policy holders do not have to meet the medical requirements in order to qualify, at least in the beginning. There are also benefits that are available to various family members who need to pay premiums and also have to pass the medical screenings. There are also cases wherein when the individual leaves the employer or the latter has stopped providing benefits to the former, then the individual can retain the health insurance policy and also receive something similar if they choose to continue paying the premiums.

Plans That Organizations Offer. Professional as well as service organizations that the individual belongs to offer group-rate insurance policies for long term health care to every member. Similar with coverage that are sponsored by employers, individuals must study their options so that they know the possible scenarios if they choose to have their coverage terminated or they choose to leave these organizations that they belong to.

Partnership Programs from the State. If the individual chooses to invest in long-term health care insurance policies that qualify for the partnership programs from the state, he or she can keep a specific amount of the over-all assets and still be regarded eligible for Medicaid. These states also have partnership programs. The individuals have to make sure to check with their insurance agents whether the health policies that they are considering are qualified under these partnership programs of the particular state, if it is associated with Medicaid and how and when they could qualify for this. If they have additional questions re: Medicaid and the State Partnership Program, then they should check with the Health Insurance Policies Assistance Program of their state.

Joint Policies. There are plans that let the individual by single policies to cover more than an individual. The policy is also used by husbands and wives, partners, or a couple of adults that are related to one another. There are usually maximum benefits that apply to every individual that is insured with that particular policy. For example, if a husband and wife has a health care policy that has $100,000 benefit maximum and one of them uses $40,000, then the other would still have $60,000 remaining for him or her. The downside to this is that there is a possibility that one person will deplete the funds that the other one would eventually need in the future.

Long Term Health Care Insurance Coverage and Its Pre-Existing Conditions

 Insurance providers turn down the applicants for pre-existing conditions that they already have. If a company sells health care policies to individuals who already have conditions, the insurers can withhold payment for the healthcare that are related to these specific conditions for some time after the insurance has been sold. Therefore, the individual then has to make sure that the time that the payments have been withheld are reasonable for him or her. If they fail to inform the company of this pre-existing condition, then the insurer may not even pay for the care that is related to the specific condition in the first place.

Covered Services

 There are insurance companies that require their policy holders to turn to services from home care agencies or licensed professionals that are certified. There are others that allow the latter to hire non-licensed and independent providers or even family members. There are some companies that put certain qualifications like licensure if this is available within the state or restrictions on the programs and the facilities that are used. Policy holders must then make sure that they buy policies that cover these facilities, services and programs and these are also available in their locations. Moving to a different location may also make differences in the coverage as well as the kinds of services that are available.

Health care insurance coverage has the following arrangements on long-term care:

Nursing home. These are facilities that provide full-range health care, personal care, rehabilitation care and daily activities 24 hours a day and 7 days a week. It is necessary that individuals cover find out if this policy does not just cover lodging.

Assisted living. This is a resident that is like an apartment. It has units and there are individualized services and personal care available whenever necessary. An example of this is that the patients can have their meals delivered right into their apartment.

 Day Care Services for Adults. This is a program that is not included in the home and it provides social, health and support services for adults in a supervised setting. These are ideal for those who need some help during their stay.

 Home Care. This is an individual or an agency that performs personalized services like grooming, bathing and assistance in housework and chores.

 Home Modification. These are adaptations and renovations done in the home, like installing grab bars or ramps, to make it more livable and accessible.

 Care Coordination. These are services from licensed and trained professionals who assist in locating services, determining needs and arranging the care for policy holders. This policy also includes monitoring the care providers.

 Service Options for Future. If there is a new kind of long-term health care services that has been developed after purchasing the insurance, then there are also some policies that are flexible enough to cover these services as well. This option can be available once the policy has specific language regarding alternative options.

 Amounts and Limits of the Policy Coverage

 Long-term health care coverage also pays for various services (for example, $50 for home care as well as $100 for nursing home care). They can also pay a particular rate for a specific service. Most health care policies have limits to these amounts for the benefits that they receive, like specific total years or the over-all dollar amount. Therefore, when purchasing a health care insurance policy, the individual must select the specific benefit amount as well as the duration that is right to fit the budget as well as the anticipated needs.

In order to figure out how useful policies are to the individual, he or she must compare the total value of the policy and its daily benefits alongside the average cost and value of the health care within the area. They also have to remember that they have to cover the difference. Price of long term health care can increase over a period of time. These benefits can also begin to erode especially if the policy holder does not choose one that protects it from the inflation in that particular policy.

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.