Lower your health care costs

Posted on July 27th, 2008 in Taxes, Retirement Planning by wayne

With inflation exceeding 5%, are you searching for ways to cut expenses and save for retirement? While often overlooked, the Health Savings Account (HSA) can significantly lower your health care costs and provide a tax-free way to save for retirement.

For you health insurance needs, you should consider the combination of a High Deductible Health Plan (HDHP) with an HSA. These health insurance plans are often undersold by insurance agents due to the lower commissions they receive. However, when compared to a traditional health insurance plan, the HDHP/HSA combination will virtually always reduce your health care costs.

The HDHP/HSA combination is often characterized as only being advantageous for the healthy and the wealthy. This assertion is wrong! As long as you contribute the maximum annual amount to your HSA, the HDHP will virtually always save you money on your health care costs, regardless of your health care expenses.

An HDHP/HSA provides three financial advantages over a traditional health insurance policy:

1) If a traditional health care plan, with a $1,500 family deductible, costs $400 per month, an HDHP, with a $4,000 family deductible, will typically cost around 25% less or $300 per month. In this example, the HDHP provides a $1200 per year savings on insurance premiums.

2) When you contribute the family maximum to your HSA, a $5,800 tax deduction is applied to both federal and Colorado income taxes. If family taxable income exceeds $65,100, all incremental income is taxed at 25% for federal income taxes and 4.63% for Colorado state income taxes. The $5,800 maximum HSA deduction provides a combined federal and state income tax savings of $1,718.50.

3) Medical expenses paid from your HSA are made with tax-free dollars. With a traditional health plan, all expenses are paid in after tax dollars. Thus, paying the traditional plan’s $1,500 family deductible will require before tax earnings of $2,132.

Let’s assume that your health care costs exceed $4,000 in 2008. On an after tax basis, the traditional health insurance plan’s deductible will save you $1,868 over the $4,000 HSA deductible. However, HDHP premiums are $1,200 less and the HSA deposit saves you $1,718.50 in federal and state income taxes. Combining both the premium and income tax savings, the HDHP/HSA plan costs $1050.50 less than a traditional health insurance plan, at the maximum HDHP deductible amount of $4,000. HDHP plans also have no co-pays and often pay 100% of all medical expenses after the deductible is met.

If your family is healthy and you only require $1,000 in medical expenses for the year, the annual after tax savings with the HDHP is $3,340. This represents the sum of the HDHP insurance premium savings, the HSA income tax savings and $421 saved by paying the $1,000 in medical expenses with HSA funds that are never taxed.

An HSA is the only savings device that combines the income tax savings of an IRA with the tax free withdrawal of a Roth IRA. Like an IRA, funds deposited into an HSA are completely deductible from your income taxes, even if you don’t itemize. Like a Roth IRA, HSA funds can be withdrawn tax free at any time, to pay for medical expenses.

If your finances will allow, use current income to pay medical expenses and save your HSA funds until retirement. The Employee Benefit Research Institute estimates that a 65 year old will require $164,000 in medical expenses if they live 20 years after retirement. With HSA funds growing tax free, you could potentially have “free” medical care throughout your retirement years.

As long as you fully fund your HSA account and are in at least the 25% federal income tax bracket, you will virtually always come out ahead with the HDHP/HSA. When it comes time to renew your health insurance coverage, consider the HDHP/HSA approach. It will save you money and it can provide an excellent savings vehicle for your retirement years.

The Tax “Rebate,” Use It or Lose It!

Posted on April 29th, 2008 in Taxes by wayne

In the next few days you may be receiving a tax “rebate.” How are you going to spend it?

While our elected officials want you to go out and spend your rebate to help “stimulate” the economy, you might want to use it to begin to recession proof your life for the present as well as future recessions. If you would like to begin approaching life from abundance instead of scarcity, here are some possible ways to “spend” your rebate.

1. Use it to pay off your credit card debt, one of the most expensive forms of debt available.

2. Begin funding your “emergency fund.” An emergency fund is a highly liquid account which provides coverage for between six months to one year of your current expenditures. This fund will allow you to survive a business downturn, job loss or short- term disability without invading your retirement accounts.

3. If you are saving for a first house, use it to fund a Roth IRA. Even if you have a company retirement plan, you can contribute up to $5,000 annually to a Roth IRA, if you are single and earn less than $101,000 or earn less than $159,000 if you file taxes jointly. Once your Roth IRA has been established for five years, you pay no taxes when withdrawing up to $10,000 of Roth income plus all of your Roth contributions for a down payment on your first house.

4. If your employer provides matching funds to your company retirement plan contribution, use it to contribute up to the maximum amount that your employer matches. The matching funds are “free money” that virtually guarantee you a high rate of return.

5. If you have children that will one day go to college, use it to fund a Coverdell Education Savings Plans or a Section 529 College Savings Plans. With both plans, the invested funds will grow tax free and can be withdrawn tax free when used for educational expenses.

6. Invest it in either an IRA or Roth IRA for retirement. In future posts, I will demonstrate how you can never have too much for retirement.

You have probably heard the expression “use it or lose it.” If you spend the rebate buying another “thing” you will lose it. If you put it to work for you in one of the ways listed above, you will use it now and in the future.

Was your 2007 Tax bill too high?

Posted on April 16th, 2008 in Taxes by wayne

Yesterday was the deadline to pay your 2007 taxes. If you are like most people, you probably feel that you paid too much. If so, now is the time to identify ways to lower your 2008 taxes. Every dollar of reduced taxes can be used to help fund educational or retirement expenses.

In “Financial Abundance Guide” I devote almost 100 pages to strategies for reducing your taxes. To demonstrate that I “eat my own cooking,” I will describe the approaches to tax reduction that my wife and I used in 2007. In parentheses I will put the page of my book on which the referenced strategy can be found.

1. In spite of receiving significant long term capital gains in 2007, we reported gains of less than $1,000 on our tax return. This was accomplished by keeping most of our equity holdings in our IRA or Roth IRA retirement accounts (pages 125 -126).

2. We were able to deduct $7,250 by fully funding our Health Savings Accounts (HSAs) in 2007. Since my wife and I are both over age 55, by setting up separate HSAs, we could each deduct an additional $800 over the normal family deduction of $5,650 (pages 63-66). In 2008, we will be able to contribute (and deduct) a total of $7,600 into our HSAs.

3.  Thanks to the expenses involved in writing, publishing and marketing my book in 2007, I had virtually no earned income. However, my wife had more than adequate income to allow for me to fund my IRA as a “spousal IRA” and receive a deduction of $5,000 (page 44-45). Since our AGI was under $159,000 my wife contributed $5,000 to a Roth IRA, even though she was covered by a company sponsored retirement plan (pages 46-47).

4. Our itemized deductions included a $10,000 gift to our “Donor Advised Fund” charitable giving account (pages 81-83). This was a gift of highly appreciated stock that we bought for $4,000 in 1999. By giving the stock to our charitable fund, the $6,000 capital gain was completely tax free, saving us from paying $900 in capital gains taxes (page 80-81).

5. Our daughter, in her third year of college, had tuition bills exceeding $8,000 in 2007. Thanks to the Lifetime Learning Credit, we received a $1,600 tax credit against actual taxes owed (page 38-39).

6. After all deductions and credits, our tax bill would have been $0. Knowing this was likely, I ran a pro forma tax return in early December. I determined that we could convert a significant amount of our IRA savings into a Roth IRA, and pay very little in taxes (pages 48-50). In December 2007, we converted $55,000 of IRA funds to Roth IRA funds. The total tax bill for this conversion was $2,605 for an effective tax rate of 4.7%. These funds can grow on a tax free basis for as long as we live. If we are able to leave an inheritance for our children, inherited Roth funds can continue to grow tax free for our children (page 176-177).

“Minimize your taxes” is Step 3 of the “7 Steps to Financial Abundance.” As I have demonstrated, active tax management can substantially increase your financial abundance. The next time that you are trying to maximize you investment returns, take a few minutes to consider methods of minimizing your taxes. The time spent may provide an “investment return” that far exceeds your expectations.

Politicians for Affordable Health Care?

Posted on April 2nd, 2008 in Taxes by wayne

Politicians, both Democrat and Republican continue to talk about the need to provide affordable health care for all Americans. However, by preparing your 2007 tax return and using Schedule A to itemize deductions, you get a first hand opportunity to witness the hypocrisy of our political class.

If politicians really wanted to reduce health care costs, their first act would be to remove the 7.5% of AGI deduction penalty for health care expenses. If you are married and your combined Adjusted Gross Income (AGI) is $100,000, your first $7,500 in medical expenses is not deductible from your taxes. Assuming that you are in the 25% federal tax bracket and pay a 5% state income tax rate, this “health care penalty” will cost you $2,250 in additional taxes. Eliminating this penalty would provide a 30% reduction in health care costs.

The political hypocrisy is even more evident when you consider that all of the mortgage interest that you pay for your house is deductible, but you cannot deduct most, if not all of your health care costs. If you agree that health care costs should get as least as favorable tax treatment as home mortgage costs, join me in contacting your representative to congress and your senators.

If politicians really want more affordable health care, they could easily take the first step by eliminating the “health care penalty” in our tax code.

Reduce your 2007 taxes

Posted on March 24th, 2008 in Taxes by wayne

      While many opportunities to reduce your 2007 taxes ended on December 31, there may still be some last minute steps for lowering your taxes. If you qualify, taking the following actions by April 15 can reduce your current or future taxes.


1. Fund your IRA – If you are under 70 ½ years of age, have earned income and are not covered by a company retirement plan, you may contribute to a traditional IRA the lesser of your earned income amount or $4,000 ($5,000 if you are at least age 50). The IRA contribution is deducted from total income, which lowers your Adjusted Gross Income (AGI).

If you are in the 25% federal income tax bracket, your income tax savings (combining federal and state taxes) for a $4,000 contribution is almost $1,200. Since the after tax cost for this investment is approximately $2,800, you receive an immediate investment return of 42% on the $4,000 contribution.

Even with a company sponsored retirement plan, if Modified Adjusted Gross Income is under $52,000 ($83,000 for a joint tax filer), your IRA contribution is fully deductible.

2. Fund a Spousal IRA - Are you aware that if your spouse has no earned income, he/she can still contribute up to $4,000 ($5,000 if at least age 50) to an IRA for 2007?

With a Spousal IRA, if either spouse has earned income, both spouses may be able to fully fund a tax deductible IRA. Even if the income earner has a company sponsored retirement plan, the spouse may contribute to an IRA.

If the Modified Adjusted Gross Income (MAGI) on your joint tax return is less than $156,000, the Spousal IRA contribution is fully deductible. If you or your spouse has little or no income, be sure to fund a Spousal IRA.

All IRA contributions grow tax-free until your required withdrawals begin at age 70 ½. If you qualify, fund a traditional IRA by April 15.

3. Fund a Roth IRA – You may contribute $4,000 ($5,000 if at least age 50) to a Roth IRA for 2007, if your AGI is under $99,000 ($156,000 for a joint tax filer). However, the maximum contribution is reduced by any contribution that you make to a traditional IRA.

While funds contributed to a Roth IRA do not immediately reduce your taxes, the contributions will grow tax free and are not taxed when they are withdrawn.

If you hope to leave any assets for your kids, Roth IRAs are perfect. Your children can roll them into an inherited Roth IRA and make withdrawals based on their life expectancy. With this approach, Roth IRAs can provide decades of tax free growth.

If you are over age 70½ or you are covered by a company retirement plan and your MAGI is over $52,000 ($83,000 for a joint tax filer), you may only contribute to a Roth IRA. If you cannot fund a traditional IRA, but qualify for a Roth IRA, be sure to fund it by April 15.

4. Fund a Health Savings Account (HSA) – If you had a qualified High Deductible Health Plan (HDHP) throughout 2007, you can contribute $2,850 to an HSA for an individual health plan or $5,650 for a family plan. You may contribute an addition $800, if you are age 55 or over. For tax payers in the 25% tax bracket, the $5,650 HSA contribution costs only $3,975 after federal and state taxes, providing an immediate 42% investment return.

With an HSA, you may use funds to pay current medical bills or you can invest the funds for long-term, tax-free growth. By investing the HSA funds until retirement, you will have years of tax free growth and can withdraw all of the funds tax-free for medical expenses. The HSA funds could pay for most, if not all of your medical expenses during retirement.

Other savings plans that can be funded between now and April 15 include a SEP IRA, if you are self employed, and a Coverdell ESA for you children’s educational expenses. If you qualify for any of these plans, contributions by April 15 can save on taxes, either now or in the future.

The Stimulus Scam

Posted on February 19th, 2008 in Taxes by wayne

 

Congress recently approved the “economic stimulus package,” which will provide every single tax filer with adjusted gross income (AGI) of $75,000 or less with $600 and every joint filer with AGI under $150,000 with $1,200.  If you have dependent children, you get an additional $300 for each dependent child.

 The reason for this program is to get us to spend the funds to help “revive” the US economy.  From my perspective, the long term results of this program will not revive the economy, but will serve to put our country deeper in debt.

 As one pundit has stated, this should be called the China economic stimulus package.  Much of the $150 Billion of additional long term debt that this “stimulus” provides will likely be purchased by the Chinese or other foreign entities.  Thus, additional government resources (which come from you and me) will be required to service this debt.

 As an added benefit to China, if the money received is spent at WalMart, Target or other large retailer, it will be used to purchase goods that are manufactured in China, increasing our trade deficit.  Some “economic stimulus” this program turns out to be.

 OK- so our elected officials are scamming us in order to “buy” more votes – what else is new?  However, we can take this lemon and make it more palatable. 

 Here is what you might consider doing.  If you have any credit card debt, use the funds that you will receive to pay it off.  If you already pay off your credit card in full each month, take the money and use it to pay down some of your mortgage or put it in one of your savings accounts.  In 20 years, the $1,200 will be worth over $6,000, if your investments return 8% annually.

 We can never keep our elected officials from doing things harmful to our economy, but we can minimize the damage that they do.  I hope you will use this “stimulus” to increase your financial abundance.

 

 

It’s Now or Never

Posted on December 27th, 2007 in Taxes by wayne

As 2007 comes to a close, your still have time to take actions that could save you taxes either now, or in the future. Some ideas to consider include:

  1. Last minute charitable gifts. If you use a credit card to provide a gift to a charitable organization, as long as the charge is made by December 31, you may deduct the charitable gift in 2007. This allows you to take a year end tax deduction without paying for it until 2008.
  2. Roth conversions. If you have an IRA and a Roth IRA with the same brokerage house, they can usually make an immediate conversion from on account to the other. If your income was lower than usual in 2007, you may find that a Roth conversion is in your best interests. If so, this must be completed by December 31.
  3. Capital losses. If you have stocks or mutual funds that have experienced a loss since you bought them, you may want to sell them by December 31. The loss can offset realized capital gains and may be used to lower your total 2007 income by up to $3,000.
  4. If you have a large estate and are worried about paying “death taxes,” provide year end gifts of up to $12,000 ($24,000 for a couple) to your heirs. Your family members will appreciate receiving the gifts now and you will keep these gifted funds from possible future estate taxes.

If any of these ideas are appropriate for you, do them now, before the year ends and you have missed the opportunity.

Flexible Spending Accounts

Posted on December 7th, 2007 in Taxes by wayne

If your company offers a Flexible Spending Account (FSA), consider signing up for it in 2008. With an FSA, you request a “salary reduction” to fund the FSA. The FSA funds can be used to pay for qualified medical expense and/or for dependent care. Dependent care is usually used for child care expenses, but may also be used for adult day care for senior citizen dependents, such as parents, if they live with you.

The advantage of using FSA funds to pay for qualified expenses is that the amount used to fund your FSA is not subject to federal, state or payroll (FICA) taxes. If you are in the 25% federal tax bracket, with a state income tax of 5% and a payroll (FICA) tax of 7.65%, you will effectively be able to buy your health care and dependent care services at a discount of 37.65%.

The maximum funding amounts allowed by the IRS are $5,000 for medical care and $5,000 for dependent care. Assuming you are in the 25% federal tax bracket and have 5% state taxes, $10,000 total funding would yield a tax savings of $3,765, providing a 37.65% “discount” on the purchase of these services.

Be careful not to overestimate your FSA requirements. Any funds remaining in your FSA, at the end of the benefit coverage period, will be forfeited back to the company.

Save Taxes With a Roth Conversion

Posted on November 23rd, 2007 in Taxes by wayne

As 2007 comes to a close, now is the time to decide on strategies that can save on taxes, either now or in the future.

If 2007 has been a year in which your income is lower than your normal income and if you will have significant “Schedule A” income tax deductions, you may want to consider converting some of your traditional IRA funds to a Roth IRA .

Using your 2006 tax return as a guide, determine your approximate 2007 income. Reduce your income by contributions made to your Health Savings Account, IRA contributions, self employed health insurance and 1/2 of any self employment taxes paid. The remainder will be your approximate Adjusted Gross Income (AGI) for 2007.

If your AGI is over $100,000, you are not eligible to make a Roth conversion in 2007.

If your AGI is under $100,000, determine what your approximate “Schedule A” itemized tax deductions will be in 2007. Schedule A includes home mortgage payments, medical expenses, charitable gifts and state and local taxes plus any property taxes.

Your next step is calculate exemptions by multiplying your total number of claimed dependents (including yourself) by $3,400. Subtract both your approximate Schedule A deductions (or the Standard Deduction, if that is greater) and your exemptions from your estimated 2007 AGI. The remainder is your approximate 2007 taxable income.

As a single filer, subtract your taxable income from $31,850. The remainder is the approximate amount of your IRA holding that you can convert to a Roth IRA at a 15% tax rate.

As a joint tax filer, subtract your taxable income from $63,700. This is the approximate amount that you can convert to a Roth IRA at a 15% tax rate.

Once you have converted these funds, they will grow tax free until they are withdrawn. When they are withdrawn, the withdrawals will also be totally tax free. The small amount of taxes that you pay now will keep you from paying significantly more in taxes on these funds when you retire.

There is one caveat. This approach should only be used if you have adequate non-IRA savings to pay for the increased taxable amount. However, if you are able to pay for the increased taxes, your long term tax savings can be significant.

2007 Roth IRA conversions must occur before December 31, 2007. If this approach may work for you, do your homework now so the conversion can be completed before the end of the year.

Taxing Times for Your Home

Posted on October 11th, 2007 in Taxes by wayne

Congress is looking for ways to raise taxes and your homes are in their line of fire.

On September 27, the Wall Street Journal reported that the House’s Ways and Means Committee has approved a bill under which homeowners facing foreclosure will not get a tax bill, if part of their debt is forgiven by lenders. Presently, forgiven debt is treated as taxable income to the borrower.

To pay for this tax break, the committee decided to eliminate the ability to sell your second home and pay no capital gains taxes on up to $500,000 in profits, when the home is your primary residence for two out of the last five years. A full explanation of this tax break is found on page 106 of the Financial Abundance Guide.

With the proposed tax policy, the capital gains tax break for a second home would be based on the number of years that the house has been your primary residence. The longer your second home has been your primary residence, the larger will be your capital gains tax break when it is sold.

If your second home has been your primary residence for two of the past five years and you are trying to avoid capital gains taxes on its sale, sell it quickly and hope that Congress does not make this change retroactive.

The second way that your home’s tax deductions may come under congressional fire was discussed in a Wall Street Journal editorial on October 6. As part of a tax bill to reduce CO2 emissions, John Dingle, chairman of the House’s Energy and Commerce Committee, is proposing to eliminate the mortgage deduction on homes over 3,000 square feet in size.

While the probability of this measure passing is low, it portends that large, “energy wasting” homes will be a future tax “target” for Congress. If you are in the market for a new home, consider a smaller, “energy efficient” one.