Health Savings Accounts!

Health Savings Accounts (HSA’s) are one of the greatest gifts lurking in the tax code.   Not only are contributions to HSA’s tax deductible for all taxpayers, but the balance grows without being taxed, and withdrawals are tax free if used to pay for medical expenses.

Don’t confuse Health Savings Accounts with flexible spending accounts where you have to “use it or lose it.”  Dollars can be accumulated within an HSA without limit.  In fact, it may be the best course to pay for regular medical expenses out of pocket and allow the HSA account balance to grow.

To qualify for a Health Savings Accounts, you must:

  • Have an HSA-qualified health plan.hsa
    • Minimum required deductibles:
      • $1,250 for individual coverage in 2013 and 2014
      • $2,500 for family coverage in 2013 and 2014
    • Maximum out-of-pocket limits:
      • $6,250 for individual coverage in 2013—$6,300 in 2014
      • $12,500 for family coverage in 2013—$12,700 in 2014
  • Have no other health coverage except what is permitted as other health coverage
  • Not be enrolled in Medicare.
  • Not be claimed as a dependent on someone else’s tax return.

You will want to keep complete and accurate records of medical expenses to support the tax-free withdrawals from the HSA.  Medical expenses paid out of pocket can be reimbursed back to the date that the HSA was established.

Health Savings Accounts are offered by several banks and investment houses.  Many make available investment options in a wide range of investment securities for long-term investors.

Truly, there is nothing in the tax code that gives a tax deduction going in, grows tax free, and is tax free coming out.  A tax hat trick if you will!  Please contact us for more information and to answer your questions.

 

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FORM 990 COST ALLOCATION

Allocating costs between program services and supporting services on the Form 990 is one major issue facing many not-for-profit organizations.

In assessing a not-for-profit organization, donors often scrutinize the ratio of supporting service expenses very carefully – as do charity rating agencies (the efficiency ratios).  Accordingly, non-profit managers feel pressure to show the best ratios possible.  Also in the mix are tax preparers with limited non-profit experience who often do not appreciate the importance of these ratios and do not always scrutinize them with great care.

So how do you do it? How do you come up with an allocation that reflects a fair distribution of costs and complies with the rules?

Our approach is to first determine what costs are management and general and what costs are fundraising.  If an expense is not one of these then it is a program expense. The instructions to Form 990 (pages 41-42) give a good list of items of cost that are management and general (administrative) and/or fundraising costs.  These rules very closely match those found in generally accepted accounting principles (GAAP).

Administrative costs include: salary and benefits of the executive director (not for time spent supervising programs), expenses for accounting staff, audit, board of director expense, investment management expenses and a share of overhead costs (e.g. rent)

Fundraising costs include: fundraising personnel salaries and benefits, grant writing, solicitations expenses and a share of overhead costs.  Please note that the direct costs of special fundraising events should be netted against special event revenue on page 9, Line 8 of Form 990.cost allocation

We frequently find obvious errors in the Form 990 cost allocation we examine. For example, accounting and audit fees are often allocated in error to program services.  If this allocation is noted it indicates that the allocation did not undergo much scrutiny – whether by the non-profit or the tax preparer – and calls into question the entire allocation itself.

The proper allocation of program and supporting service costs for a non-profit are critical to the management and fundraising efforts of the organization.  Make sure you get it done right.    

 

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FORM 1040 – Backdoor Roth IRA

rothThe Roth IRA is an incredible tax sheltering device that is seemingly only available to taxpayers earning under $188,000 (married) or $137,000 (single) per year.  But due to a change in the law that allows Roth conversions regardless of income level, many higher income taxpayers can now legally make annual Roth contributions using the “backdoor” approach – the Backdoor Roth IRA.

Here is how it works:

First, you must rid yourself of any taxable IRA accounts.  If you don’t have any, you can skip this step. If you do have any, then you should roll it (them) into your employer 401(k) plan (or equivalent).  Most plans allow this.

Now that you have no taxable IRA’s, open a regular IRA account at your bank or brokerage house and make a non-deductible contribution: up to $5,500 ($6,500 if 50 or older).  Then convert the non-deductible contribution to your Roth IRA account.

Since the contribution was not deducted in the first place – and that you had no other taxable IRA’s in place – the conversion is 100% tax free. And you and your spouse can do this every year and start building a significant Roth IRA asset.

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Small Business Health Care Tax Credit (for Non-Profits)

Health Care Tax Credit 

Non-profit organizations that qualify will receive a refundable tax credit based on the health insurance premiums paid on behalf of employees. To qualify the non-profit organization must:

  • Have fewer than 25 full time employees.
  • Cover at least 50% of the cost of single (not family) health care coverage for each of your employees.
  • Pay average wages of less than $50,000 per year. 
  • For 2013 the maximum credit available for non-profit organizations is 25% of the premiums paid.health care tax credit

Beginning in 2014, the percentage increases to 35%.  However, also beginning in 2014, the health care coverage must be obtained through a “Small Business Health Options Program (SHOP) Marketplace.”  SHOP is an exchange, either Federal or State sponsored.

Non-profit organizations must file Form 990-T to obtain the credit and can file for (up to three) prior years if the credit was missed in prior years.

Please contact us for assistance in seeing if your organization qualifies for the Small Business Health Care Tax Credit.

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Help With Form 1023

Believe it or not the IRS wants to help you get your tax exemption for your non-profit charity.  Check out the tool here http://www.stayexempt.irs.gov/StartingOut/InteractiveForm1023Application.aspx to help you complete your Form 1023 fast and easily.  Making mistakes on the Form 1023 will cause significant delays, so get it right the first time – with the IRS’s help!

No, the tool does not include instructions to leave the words “Tea Party” out of the organization’s title – but that might be advisable for the next few years. 8-))

 

 

 

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Form 990 Late Filing Penalty

Form 990 Late Filing PenaltyYou or your accountant forgot to file the required extension forms and now you have received a bill for $5,000 (or more) for the Form 990 late filing penalty.  What can you do?

If this is your first late filing, you may be in luck.  The IRS has a program known as First Time Abatement (FTA), which is a type of one-time penalty removal for a first-time penalty and based on the taxpayers compliance history.

So, if you have not been late with filing the 990 in the past three years, are up to date on all other (payroll) filings, then odds are the penalty will be abated under FTA.

If filing late is more of a regular occurrence with your organization, then you will have to argue that you had “reasonable cause” for the late filing.  Basically the case needs to be made that the cause of the late filing was NOT willful neglect. We have had some success in assisting clients in getting such penalties abated. Please contact us if you need help in this area.

 

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Top Ten Reasons to Become a CPA (In Sacramento)

10.  The tax code and regulations contain more than one million words.  Consider it a full employment act.

9.  Friends will never ask you to help them move, because they already asked you to do their taxes.

8.  You will learn that the letters “IRS” stand for more than “I’m really stupid.”

7.  Your Rotary Club will make you treasurer without doing a background check.

6.  You can get out of giving speeches because everyone presumes you’re boring (and they would be right).

5.  When people ask what you do for a living, you can say: “Ever hear of Enron?  Yeah, I did that!”

4.  When you’re in Judge Abbott’s courtroom, and Dave asks you, “What is 2 + 2,” you can say, “What do you want it to be?”

3.  Competition for the title “World’s Funniest Accountant” is weak, really weak.

2.  You can become eligible to join the world’s smallest club: CPA’s that write well.

1.  You can successfully cruise for dates in the binder aisle at Staples.

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