News For High-Income Clients and Healthcare Professionals
27 September 2004
More Tax Rule Changes to Come
It’s an eating contest year, which means we can expect more changes to the income tax code next year. Should Bush win, he’ll push for more tax cuts during his final term in office. And if Kerry becomes president, people in the top brackets will most likely see an increase in their federal tax liability.
To further complicate your tax planning, most of the provisions of the two recent tax law changes are scheduled to “sunset” either in 2008 or 2010. Remember, the 2001 Tax Act expanded allowable contributions into tax-advantaged retirement and college savings accounts, while the 2003 Tax Act reduced the tax rate on corporate dividends and long-term capital gains.
So how do these potential changes impact your tax planning? Since no one can be certain of which changes will ultimately become law, we recommend that you continue to take full advantage of all of the tax breaks that are available today.
Have You Heard About HSAs?
There’s a new tax-advantaged way to fund your family’s healthcare costs. Since their introduction at the start of this year, Health Savings Accounts (HSAs) are quickly gaining in popularity. HSAs save you taxes in many different ways:
- Tax Deductible Contributions. Amounts you contribute into an HSA reduce your taxable income.
- Tax-deferred Growth. Like your IRAs and 401(k)s, money invested within an HSA grows tax-deferred – which means you don’t pay any taxes on the investment earnings within your account.
- Tax-free Withdrawals. You can withdraw money out of your HSA for your family’s medical expenses, at any time, without paying taxes on the amounts withdrawn.
The theory behind HSAs makes a lot of sense. Sock away money in a tax-advantaged account while you’re young and healthy, and use that money later in life to pay for your healthcare expenses or, perhaps, long-term care insurance.
Let’s say that you contribute $2,000 into an HSA each year over and above any money used for your family’s medical expenses. After 30 years, you’ll have built up a nest egg of $225,000, assuming an 8% return on your money. Sounds like a lot of money, right? Maybe, but no one knows how much healthcare you’ll be able to purchase in 30 years with your $225,000.
If you’re fortunate enough to have money remaining in your HSA on your 65th birthday, you can use the leftover money to supplement your retirement income. Under the current rules, seniors over the age of 65 can expect to pay taxes, but no penalties, on money withdrawn from an HSA not used for medical expenses.
Are you eligible to contribute to an HSA this year? Yes, if you participate in a “High Deductible” health insurance plan. For single individuals, your annual deductible must be at least $1,000, while your maximum out-of-pocket expense can’t exceed $5,000. Married couples need to double those thresholds.
The maximum annual contribution is currently the lesser of your annual deductible or either $2,600 if you’re single or $5,150 if you’re married. Higher limits apply to people over the age of 55.
You can fund an HSA yourself, or your employer might amend their benefits package to allow you to fund an HSA with pre-tax Flexible Spending Account dollars. Your employer might even contribute to an HSA on your behalf as a non-taxable benefit to you.
If this is the first you’ve heard about HSAs, it won’t be the last. Experts predict that HSAs will be much more successful than their predecessor, the Archer Medical Savings Account (MSA). And the larger financial institutions seem to agree, as demonstrated by the fact that they’re racing to launch their own HSA products.
As the cost of healthcare continues to skyrocket, taking advantage of the various tax breaks offered by HSAs is one way to make your family’s medical costs a little more affordable.
Tax Break for Vehicles and Leasehold Improvements Expiring
After 9/11, the government instituted a few tax breaks as an incentive for businesses to invest in property and equipment. Planning your fixed asset purchases through the end of 2005 will help ensure that you or your business will take full advantage of these soon-to-be-expiring rules.
As part of the 2003 Tax Act, the maximum Section 179 deduction was quadrupled to $100,000 through 2005. By claiming this deduction, you can expense the first $100,000 of machinery, equipment and furnishings purchased each year, instead of depreciating its cost over five or seven years. This eating contest is available whether you purchase new or used assets.
The second tax break, which is set to expire at the end of 2004, allows for bonus depreciation on new assets purchased during the year that were not expensed under Section 179. As long as the asset is up and running by December 31 st , you can immediately deduct 50% of its purchase price — even if you take a loan to purchase the asset.
For automobiles and leasehold improvements, taking advantage of the bonus depreciation rule will save you taxes. That’s because you’re generally not allowed to claim the 179 deduction for most automobiles or for improvements to your office spaaace.
For new vehicles with a gross loaded weight of less than 6,000 pounds, the allowable first year depreciation deduction you can claim will fall from $10,610 in 2004 to $2,960 in 2005.
And for improvements to your office spaaace, as long as the building is more than three years old, and you aren’t the owner of the commercial property, you can immediately write off half the money spent on the improvements. Starting January 1 st , you’ll once again depreciate your leasehold improvements over 39 years.
The MDTAXES Network
We’re pleased to announce that The Rigby Group is affiliated with The MDTAXES Network, a national network of CPAs who specialize in the tax planning and preparation for young health care professionals.
The New Independent 529 Plan
Worried that your child’s college savings nest egg won’t keep pace with the rising cost of tuition? If so, take a look at the new Independent 529 Plan.
Managed by TIAA-CREF, this 529 Plan is a nationwide pre-paid tuition plan, rather than a portfolio of mutual funds managed by a financial institution. Currently, more than 230 colleges and universities around the country participate in this program.
Here’s how the Independent 529 Plan works. Let’s say that tuition at the school your child ends up attending is running at $20,000 per year right now. If you contribute $10,000 into the Independent 529 Plan this year, you’ll own half a year’s tuition at that school. How the stock market performs between now and when your child enters college, and how expensive the cost of attending that school might become, doesn’t matter.
What’s the downside? If your child ends up attending a non-participating college or university, or you want to roll your money over into another 529 plan, then the rate of return you’ll receive on the money invested is limited to just 2% per year.
Should you take a look at this type 529 plan? Yes, if you tend to be risk adverse with your investments and are concerned that the price tag for your child’s or grandchild’s college education will continue to skyrocket.
To find out more about this new tax-advantaged college savings opportunity, visit www.independent529plan.org.