March/April 2008 |
Tax Tips HSAs: Healthy investments If you’re covered by a high-deductible health plan, consider opening a Health Savings Account (HSA). You can make tax-deductible contributions to an HSA and take tax-free withdrawals to pay for uninsured medical expenses. For 2008, a high-deductible plan is one with a deductible of $1,100 or more for individual coverage or $2,200 or more for family coverage. In addition, annual out-of-pocket expenses must not exceed $5,600 ($11,200 for family coverage). This year, you can contribute up to $2,900 to an HSA, or $5,800 if you have family coverage. If you’ll be 55 or older by the end of 2008, you can contribute an additional $900. You may also be able to transfer funds from an IRA or flexible spending account into an HSA. Contractor vs. employee In the last few years, the IRS has showed renewed interest in the independent contractor vs. employee issue. If you haven’t examined your business’s independent contractor relationships recently, now is a good time to do so. Using independent contractors can be advantageous because you aren’t required to withhold income taxes or pay employment taxes. But if the IRS reclassifies a contractor as an employee, you could be in for some significant back taxes and penalties. Whether an individual is an independent contractor or employee must be determined on a case-by-case basis. The IRS lists three main categories to distinguish between the two types:
Generally, individuals are considered employees if you control what they do and how they do it. (This would be applicable under the behavioral control category.) For example, if you set an individual’s hours and require him or her to perform the work on your premises, the IRS is more likely to label the individual as an employee. Meanwhile, individuals who furnish their own equipment and materials and perform services for other companies are more likely to be considered independent contractors (an example of financial control). If there were a written contract between the business and the individual, this would indicate contractor status (an example of a relationship between the parties). Why you may want to trade life insurance for cash Did you know that you can trade unneeded life insurance for cash? A “life settlement” allows you to sell a life insurance policy to a third party, such as an institutional investor or insurance company. The buyer takes over the premium payments and then collects the benefits when you die. In most cases, the proceeds of a life settlement are significantly higher than the policy’s cash surrender value, though lower than the death benefit. If you’re contemplating a life settlement, be sure to discuss the transaction with your tax advisor. There’s some uncertainty in the tax law about the treatment of the settlement proceeds. Many experts believe that they’re tax free up to your cost basis in the policy, that the excess of the policy’s cash value over your basis is capital gain and that any additional amounts are ordinary income. But there’s currently no assurance that the IRS will view it the same way. Do you have a contingency plan? When estate planning, many individuals assume that they’ll outlive their beneficiaries. But what if this doesn’t happen? Unless you name a contingent beneficiary — such as a charitable organization or family friend — your assets will be distributed according to state intestacy laws. And if no known heirs can be identified, your wealth could become the property of the state. Although this scenario is probably unlikely, it’s better to plan for this possibility and be safe, not sorry. • |