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STAFF NEWS
- We are pleased to announce that John L. Gargaro, II, CPA, has
joined our firm. He is a graduate of Christopher Newport University
with a Bachelor of Science in Accounting. His area of experience
includes small business accounting and tax preparation, individual
tax services and auditing. He is a welcome addition to our firm.
Washington Watch
- The $792,000,000,000 tax cut has passed both the House of Representatives
and the Senate. President Clinton has vetoed it. Now what? Hopefully,
there will be a strong move towards some compromise measures.
There are numerous portions of the Republican plan with which
the Democrats have no problem. Tax relief for married couples
and expanded retirement savings plans are among the areas of common
ground. The real stumbling block may very well be the fact that
neither side wants the other to claim victory in the coming election
year. Republicans don't want to give in on those items which the
Democrats will accept, and lose the chance that tax rate reductions
and additional capital gain relief won't be enacted. Democrats
are unwilling to let a major tax cut pass when good times are
upon the country because they fear that tax increases won't be
enacted later if necessary. Basically, neither side trusts the
other. While this isn't a particularly big surprise, it probably
means no significant tax relief this year.
- In other areas, the IRS is in the middle of completely revamping
the penalties charged for late filing or paying taxes. Currently,
there is a staggering amount of penalties which could theoretically
be assessed for failure to file tax returns, or failure to pay
the tax due on the return. In some cases, taxpayers cost themselves
tremendous amounts of needless penalties due to misunderstanding
how the penalties are calculated. In some cases, taxpayers wouldn't
file tax returns because they couldn't pay the tax right away.
By doing that, they increased the monthly penalty from ½ % to
5% (a 500% increase). The total penalty was ½ % per month for
paying late, and 4 ½ % for filing late. While the simplifications
would make the penalties easier to understand, the total amount
of penalties would not be reduced. For the example listed above,
the ½ % per month penalty would be replaced by a 4 month grace
period. After 4 months, the penalty would be 5%.
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Medical Savings Accounts
Medical Savings Accounts (MSAs) were introduced by the Health
Reform Act of 1996 and have been available since 1997. For individuals
who qualify, MSAs offer a tax-favorable way to set aside funds
(or have their employer do so) to meet future medical needs. The
following gives a broad overview of how MSAs work along with an
outline of the qualification requirements.
The idea behind MSAs is somewhat similar to the one behind IRAs
(Individual Retirement Accounts) except that the goal is to encourage
funding for future medical needs as opposed to retirement needs.
Here are the key tax-related elements:
Contributions you make to an MSA are deductible when made (subject
to limitations described below),
Earnings on the funds within the MSA are not taxed, and
Distributions from the MSA to cover qualified medical expenses
are not taxed. (In this regard, MSAs are more favorable than
IRAs, distributions from which are taxed.)
Who is eligible? In
order to be eligible for an MSA, you must be covered by a "high
deductible health plan" (discussed below). You must also not be
covered by a plan which (1) is not a high deductible health plan
and (2) provides coverage for any benefit covered by your high
deductible plan. (It's okay, however, to be covered by a high
deductible plan along with separate coverage, through insurance
or otherwise, for accidents, disability, or dental, vision, or
long-term care.)
For 1999, a "high deductible health plan" is a plan with an annual
deductible of at least $1,550 and not more than $2,300 (for self-only
coverage), or at least $3,050 and not more than $4,600 (for family
coverage). Additionally, annual out-of-pocket expenses required
to be paid (other than for premiums) for covered benefits cannot
exceed $3,050 for self-only coverage or $5,600 for family coverage.
A high deductible health plan does not include a plan if substantially
all of its coverage is for accidents, disability, or dental, vision,
or long-term care, insurance for a specified disease or illness,
or insurance paying a fixed amount per day (or other period) of
hospitalization.
The plan must be established and maintained by your employer
(or spouse's employer) who qualifies as a "small employer," or,
by you if you are self-employed. A small employer, generally,
is one employing 50 or fewer employees, on average.
Deduction limits. Contributions
to an MSA can be deducted for the year up to the total of your
monthly limitations for the months you were eligible. The monthly
limitation for a month is 1/12 of (1) 65% of the annual deductible
under the coverage (for an individual with self-only coverage),
or (2) 75% of the annual deductible under the coverage (for an
individual with family coverage). For example, if for the entire
year, an individual has family coverage with an annual deductible
of $4,000, the monthly limitation is 1/12 X (.75 x $4,000), or
$250. The deduction limit for the year would be 12 x $250, or
$3,000. No other limits apply except that the deduction cannot
exceed compensation. However, if an individual is entitled to
benefits under Medicare, the amount that is allowable as a deduction
for an MSA contribution is zero. (Medicare-eligible individuals
can choose either the traditional Medicare program, or a Medicare+Choice
MSA.)
Employer contributions.
If you are eligible and your employer contributes to your MSA,
the employer's contribution is excluded from your gross income,
up to the deduction limitation, as described above. However, employer
contributions are not excludable if made at the election of the
employee under a salary reduction arrangement that is part of
a cafeteria plan (i.e., a plan which allows you to elect to use
part of your salary towards a variety of benefits). Additionally,
the employer must offer to make comparable contributions for all
employees with comparable coverage under prescribed requirements.
Note that if an employer makes contributions to your (or your
spouse's) MSA which are excludable from gross income, you (or
your spouse) cannot deduct any amounts you or your spouse separately
contributes to the MSA.
Distributions. Distributions
from the MSA to cover your qualified medical expenses or those
of your spouse or dependents are not taxed. Qualified medical
expenses for these purposes generally mean those that would qualify
for the medical expense itemized deduction. If you withdraw funds
from the MSA for other reasons, the withdrawal is taxable. Additionally,
an extra 15% tax will apply to the withdrawal, unless it is made
after reaching age 65 or in the event of death or disability.
MSAs are an excellent alternative to the traditional health insurance
plans.
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Managing Your Money
During Retirement
If you are newly retired, your personal finances may seem more
complicated than before, especially if you are relying on savings
and investments for part of your income. Deciding how much you
can afford to spend and from which account to take the money can
be difficult.
Some retirees find it helpful to establish a separate "spending"
account. The spending account is a reserve of cash that is drawn
upon throughout the year to supplement Social Security benefits,
a pension, earnings from part-time work, or any other incoming
payments.
The initial balance in the spending account might be enough to
meet your needs for three months to a year. Then, as you receive
interest and dividend checks, these can be deposited in the account.
If these earnings won't be enough to cover your projected expenses,
you will have to sell a targeted amount of investments or other
assets to raise the extra cash you'll need for the year. Taxes,
the asset allocation you have chosen for your investment portfolio,
and prevailing market conditions are all factors you'll want to
consider when deciding which investments to sell.
If you recently retired, you need to get control of your income
and spending early in the game. Please call us to help you plan.
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Internet Fraud
Online trading accounts are hot. An estimated three million people
now have them, and observers predict huge growth. Unfortunately,
illicit investment schemes are keeping pace. The North American
Securities Administrators Association and the SEC are warning
online investors to be careful. Here are some of the suggestions:
- Be skeptical of the information you get from online newsletters,
bulletin boards, and discussion groups. These are favored forums
for people interested in manipulating a company's stock price
by spreading false information. Obscure, thinly traded stocks
are most susceptible.
- Call your state securities regulator if a touted company is
not registered or has not filed a "Form D" with the SEC.
- Do your homework before investing. "Opportunities" that sound
too good to be true probably are!
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By-passing 401k Plan Testing
Employers with 401 (k) plans are required to compare the average
contribution rates of highly compensated and nonhighly compensated
employees every year. The idea behind the testing is that the
plan should benefit everyone, not just top earners.
Nondiscrimination testing complicates plan administration and
often results in highly compensated employees not being able to
contribute fully to the plan. As a result, some employers are
deciding to adopt new safe harbor plans that eliminate the need
for testing. With a safe harbor 401 (k) plan, the employer must:
- Contribute a minimum of 3% of compensation for every eligible
nonhighly compensated employee (whether or not the employee contributes
anything to the plan) or:
- Match nonhighly compensated employees' elective deferrals 100%
up to 3% of compensation plus 50% for the next 2% of pay deferred.
Other requirements may apply. But don't guess - call us and let
us help you with the details
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Rental Property or a Second
Home
You have offered to let your newly married son and his bride
live in your second home. Should you treat the home as rental
property or as a second residence for tax purposes?
If you rent your home, charging your son market-rate rent will
allow you to deduct maintenance costs, expenses such as heat and
water, and depreciation (spread out over 27.5 years). Generally,
you may deduct up to $25,000 of losses if your adjusted gross
income (AGI) is $100,000 or less. (The deduction is phased out
as AGI ranges from $100,000 to $150,000)
To be considered a second home, the property must be used as
a residence by the taxpayer or another family member. While you
can't deduct passive losses, property taxes and qualified mortgage
interest are usually fully deductible.
Call us for help with choosing the most tax advantaged option
for you.
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