By James W. Rahmlow, CPA
Inflation Adjustments for 2009 Health Savings Accounts
The increasingly popular Health Savings Account (HSA) is getting another boost due to inflation. Recently the IRS released annual limits for 2009 on deductible contributions:
Individual: $3,000 in 2009, an increase from $2,900
Family: $5,950 in 2009, an increase from $5,800
In both cases there is a catch up provision that allows for an additional contribution for individuals who are age 55 or older. The catch up contribution amount in 2008 of $900 has been increased to $1,000.
The HSA is coupled with a High-Deductible Health Plan (HDHP). This format is becoming an attractive alternative for employers to manage health care costs. Premiums for the HDHPs are typically lower than for traditional health insurance and employees gain a sense of control over the use of the health care dollars.
There are a couple of other changes in 2009 for the HDHP. Specifically, the plan must have an annual deductible of at least $1,150 for an individual and $2,300 for a family. Additionally, there is a cap on out of pocket expenses (including deductibles, copayments and certain other amounts, but not premiums). The caps are $5,800 for individual coverage and $11,600 for family coverage.
Economic Stimulus Payments and Tax Favored Accounts
In order to be eligible for an economic stimulus payment in 2008, a taxpayer had to file a 2007 federal income tax return. If that return requested direct deposit of a refund, the same instructions were followed for the economic stimulus payment. This has caused some problems in 2008, especially for taxpayers who designated their IRA (traditional or Roth) as the recipient of their refund payments. In order to deal with this unintended consequence, the IRS is allowing individuals to withdraw these economic stimulus payments from their tax-favored accounts if the taxpayers were unaware that choosing direct deposit for their entire tax refund also meant choosing to have the economic stimulus payment handled in the same way.
Taxpayers who become aware of the payment into their tax favored accounts have until the due date of their 2008 tax returns, plus extensions, to withdraw all or a portion of the economic stimulus payment from their accounts, and it will be treated as neither a withdrawal nor a distribution from the account. The IRS is presently working on guidance regarding how to report this transaction as a penalty free withdrawal from a tax favored account. It is assumed that the guidance will also address any income on earned on the economic stimulus payment for the period of time that it was in the account.
While most of the activity related to these types of transactions is expected to revolve around traditional IRAs and Roth IRAs, the IRS communication extends to other types of tax advantaged accounts which could be used for direct deposit, such as qualified tuition programs, health savings accounts, Coverdell education savings accounts and Archer medical savings accounts.
Education of Unincorporated Small Business Owners
It appears that the explosive growth of new businesses in the small business sector has caused the IRS to reevaluate the education support that it is giving to those business owners. While many small business owners file corporate or partnership tax returns, there is still a massive number of individuals who elect to be treated as self-employed unincorporated business owners and annually file the results of their business operations on Schedule C, Profit or Loss from Business. To help these filers, the IRS will be having various small business workshops and other educational events. Most importantly, the IRS has updated and hopefully improved the educational materials avail at their www.irs.gov website.
On the website, the IRS has addressed what it feels are some of the biggest problem areas for Schedule C filers, giving emphasis to the classification of workers as employees or independent contractors. Additionally, the IRS attempts to deal with the correct reporting mechanism for making federal tax deposits, both in the area of federal taxes on and withheld from payrolls, as well as quarterly estimated tax payments to cover self-employment taxes and taxes on personal income.
Fiscal Year Taxpayers Must Use Special Form to Claim Bonus Depreciation
Consistent with its previously expressed intentions, the IRS has published Form 4562‑FY, Depreciation and Amortization, to allow taxpayers to claim the additional depreciation for which they are entitled under the Economic Stimulus Act of 2008. Fiscal year taxpayers typically claim depreciation on Form 4562, Depreciation and Amortization, and there is no place on that form to claim the bonus depreciation. Using the Form 4562-FY, taxpayers should claim the bonus depreciation on Line 14.
For taxpayers electing to take the bonus depreciation, the provisions are very generous. Taxpayers are entitled to a first year bonus depreciation of fifty percent of the cost of qualified property. While exceptions exist, in general, bonus depreciation may be taken on tangible property, water utility property, off the shelf computer software and qualified leasehold improvement property.
Federal Interest Rates for May 2008 Transactions
As is their monthly custom, the IRS has released its short term, mid term and long term applicable interest rates for the month of May, 2008. Below is a summary of those monthly rates:
Short term Mid Term Long Term
Applicable Federal Rate (AFR) 1.62% 2.70% 4.13%
Adjusted Applicable Federal Rates (AFRs) 2.05% 3.13% 4.62%
June, 2008, rates will be published next month.
Small NFP Reporting Was Due May 15, 2008
Don't forget that this was the first year that Not for Profits with gross receipts of less than $25,000 annually were required to file Form 990-N with the IRS. The form is filed electronically. It is important to note that these small tax exempt organizations can lose their Not for Profit status if they do not file the Form 990-N for three consecutive years.
IRS Increasing Correspondence Audits
According to the Treasury Inspector General for Tax Administration (TIGTA), the IRS is conducting many more non face to face audit and informational requests from taxpayers, primarily in the form of letter writing. These are referred to as correspondence audits. While many taxpayers do not even realize that they are being audited, the program is designed to improve efficiency in the information gathering process, while at the same time reduce taxpayer burden and hopefully increase voluntary taxpayer compliance.
James W. Rahmlow, a certified public accountant, is a partner with Mengel, Metzger, Barr & Co. He can be contacted at jrahmlow@mmb-co.com.
