tax-planning

With 2016’s conclusion, add health savings accounts and medical expenses to your normal year-end tax-planning checkup.

Key takeaway! In addition to the usual tax planning ideas, there are two tax nuances to understand before year-end. Beyond that, pay attention to anything the lame-duck Congress might pass before December 31.

“Who’s FICA?” That question arose the summer when my 15-year old son got his first paying job. Since then we have had an ongoing conversation about taxes, including how people are taxed on the prizes they win on game shows (“take the cash,” he now comments). But what is often forgotten is that there are ways to minimize taxes. Since I normally write a lot about this, I will deviate from the normal strategies and share two nuances that need to be considered before year-end.

Health Savings Accounts (HSAs)

I have written a lot about why I like HSAs as savings vehicles for health spending later in life. But one thing that gets missed often is how to maximize the savings. In 2016, you can contribute $3,350 for an individual, or $6,750 for a family. But if you are over age 55, you can contribute an extra $1,000 per year, per person. Note that you can contribute the full $1,000 in the calendar year that you turn 55 (this is not prorated by the number of months you were 55 that year).

The issue here is in the words “per person.” While you might have a family HSA account in the name of the spouse whose work is sponsoring the plan, the other spouse (working in or out of the home) cannot contribute to that account the extra $1,000 catchup contribution if they are over age 55. They must set up a separate account under their name to do that.

Planning opportunity: Call your HSA provider to make sure the appropriate accounts are open to contribute the maximum allowable if you/your spouse are over age 55.

Medical Expenses

In 2013 the rules around deductions for medical expenses changed. Up until 2013, you could deduct qualified unreimbursed medical expenses subject to a floor of 7.5% of adjusted gross income (AGI). In 2013 that changed to a 10% floor, with one caveat: Those over age 65 could use the old 7.5% AGI floor through the end of 2016. Thus, this is the last year this lower floor exists.

Example: Assuming you are over age 65, suppose you have AGI of $100,000. With a 7.5% floor, the first $7,500 ($100,000 x 7.5%) of medical expenses would not be deductible. Anything above that would be. Under the new rule, that floor would change to $10,000 ($100,000 x 10%), so you would lose the deduction on that extra $2,500.

Planning opportunity: Assuming you need medical care and can time when it is done, accelerate medical spending into 2016 (consult with your accountant to make sure this will be deductible). Check out IRS Publication 502 for a list of qualified medical and dental expenses. Note that Medicare will not pay for a lot of dental care, so this could be an opportunity to get that done.

Post-Election Planning

I always suggest that people plan based on what they know, not on what they think the politicians might do. But that doesn’t mean you shouldn’t use all the time possible to make decisions. Between now and the end of the year, there will be a lame-duck Congress that could pass a bill that affects your tax decisions. Thus, if you are working with your accountant or financial advisor on tax planning, keep your eyes open until December 31 since any changes that happen last minute will leave you only a short window to operate in.

Tax planning is one of the most essential steps you can take in later November and early December to help yourself. By the time you get to April 15, it is too late. This is especially true if you have anything unique going on in 2016 (like a business sale, retirement or divorce) that might present opportunities. Call your accountant and financial planner before December 1 to discuss your options.

The opinion of the author is subject to change without notice and must be considered in conjunction with relevant regulation, as well as subsequent changes in the marketplace. Any information from outside resources has been deemed to be reliable but has not necessarily been verified. Each individual has unique circumstances to which this information may or may not be relevant. Under no circumstances will this information constitute an offer to buy or sell and it does not indicate strategy suitability for any particular investor.

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