Tax

Eligible employees should begin planning now to take full advantage of their employer’s health flexible spending arrangement (FSA) during 2016.

FSAs provide employees a way to use tax-free dollars to pay medical expenses not covered by other health plans. Because eligible employees need to decide how much to contribute through payroll deductions before the plan year begins, many employers this fall are offering their employees the option to participate during the 2016 plan year.

Interested employees wishing to contribute during the new year must make this choice again for 2016, even if they contributed in 2015. Self-employed individuals are not eligible. Also, employers are not required to offer FSAs. Accordingly, interested employees should check with their employer to see if they offer an FSA.

An employee who chooses to participate can contribute up to $2,550 during the 2016 plan year. Amounts contributed are not subject to federal income tax, Social Security tax or Medicare tax. If the plan allows, the employer may also contribute to an employee’s FSA.

Throughout the year, employees can then use funds to pay qualified medical expenses not covered by their health plan, including co-pays, deductibles and a variety of medical products and services ranging from dental and vision care to eyeglasses and hearing aids. Interested employees should check with their employer for details on eligible expenses and claim procedures.

Under the use or lose provision, participating employees often must incur eligible expenses by the end of the plan year, or forfeit any unspent amounts. But under a special rule, employers may, if they choose, offer participating employees more time through either the carryover option or the grace period option.

Under the carryover option, an employee can carry over up to $500 of unused funds to the following plan year–for example, an employee with $500 of unspent funds at the end of 2016 would still have those funds available to use in 2017. Under the grace period option, an employee has until 2 1/2 months after the end of the plan year to incur eligible expenses–for example, March 15, 2017, for a plan year ending on Dec. 31, 2016. Employers can offer either option, but not both, or none at all.

For more information about FSAs please call.

• By Leon Clinton
• December 25, 2015

Taxpayers born before July 1, 1945, generally must receive payments from their individual retirement arrangements (IRAs) and workplace retirement plans by Dec. 31.

Known as required minimum distributions (RMDs), typically these distributions must be made by the end of the tax year, in this case, 2015. The required distribution rules apply to owners of traditional, Simplified Employee Pension (SEP) and Savings Incentive Match Plans for Employees (SIMPLE) IRAs but not Roth IRAs while the original owner is alive. They also apply to participants in various workplace retirement plans, including 401(k), 403(b) and 457(b) plans.

An IRA trustee must either report the amount of the RMD to the IRA owner or offer to calculate it for the owner. Often, the trustee shows the RMD amount on Form 5498 in Box 12b. For a 2015 RMD, this amount is on the 2014 Form 5498 normally issued to the owner during January 2015.

A special rule allows first-year recipients of these payments, those who reached age 70 1/2 during 2015, to wait until as late as April 1, 2016, to receive their first RMDs. What this means that those born after June 30, 1944, and before July 1, 1945, are eligible. The advantage of this special rule is that although payments made to these taxpayers in early 2016 can be counted toward their 2015 RMD, they are taxable in 2016.

The special April 1 deadline only applies to the RMD for the first year. For all subsequent years, the RMD must be made by Dec. 31. So, for example, a taxpayer who turned 70 1/2 in 2014 (born after June 30, 1943, and before July 1, 1944) and received the first RMD (for 2014) on April 1, 2015, must still receive a second RMD (for 2015) by Dec. 31, 2015.

The RMD for 2015 is based on the taxpayer’s life expectancy on Dec. 31, 2015, and their account balance on Dec. 31, 2014. The trustee reports the year-end account value to the IRA owner on Form 5498 in Box 5. For most taxpayers, the RMD is based on Table III (Uniform Lifetime Table) in IRS Publication 590-B. For a taxpayer who turned 72 in 2015, the required distribution would be based on a life expectancy of 25.6 years. A separate table, Table II, applies to a taxpayer whose spouse is more than ten years younger and is the taxpayer’s only beneficiary. If you need assistance with this, don’t hesitate to call.

Though the RMD rules are mandatory for all owners of traditional, SEP and SIMPLE IRAs and participants in workplace retirement plans, some people in workplace plans can wait longer to receive their RMDs. Usually, employees who are still working can, if their plan allows, wait until April 1 of the year after they retire to start receiving these distributions; however, there may be a tax on excess accumulations. Employees of public schools and certain tax-exempt organizations with 403(b) plan accruals before 1987 should check with their employer, plan administrator or provider to see how to treat these accruals.

For more information on RMDs, please call.

• By Leon Clinton
• December 23, 2015

If you’re thinking about making a charitable donation during the holiday season this year and want to claim a tax deduction for your gifts, you must itemize your deductions. This is just one of several tax rules that you should know about before you give. Here’s what else you need to know:

1. Qualified charities. You can only deduct gifts you give to qualified charities. Call the office if you’re not sure if the group you give to is a qualified organization. Remember that you can deduct donations you give to churches, synagogues, temples, mosques and government agencies.

2. Monetary donations. Gifts of money include those made in cash or by check, electronic funds transfer, credit card and payroll deduction. You must have a bank record or a written statement from the charity to deduct any gift of money on your tax return. This is true regardless of the amount of the gift. The statement must show the name of the charity and the date and amount of the contribution. Bank records include canceled checks, or bank, credit union, and credit card statements.

If you donate through payroll deductions, you should retain a pay stub, a Form W-2 wage statement or another document from your employer. It must show the total amount withheld for charity, along with the pledge card showing the name of the charity.

3. Household goods. Household items include furniture, furnishings, electronics, appliances and linens. If you donate clothing and household items to charity they generally must be in at least good used condition to claim a tax deduction. If you claim a deduction of over $500 for an item it doesn’t have to meet this standard if you include a qualified appraisal of the item with your tax return.

4. Records required. You must get an acknowledgment from a charity for each deductible donation (either money or property) of $250 or more. Additional rules apply to the statement for gifts of that amount. This statement is in addition to the records required for deducting cash gifts. However, one statement with all of the required information may meet both requirements.

5. Year-end gifts. You can deduct contributions in the year you make them. If you charge your gift to a credit card before the end of the year it will count for 2015. This is true even if you don’t pay the credit card bill until 2016. Also, a check will count for 2015 as long as you mail it in 2015.

6. Special rules. Special rules apply if you give a car, boat or airplane to charity. For more information about this and other questions about charitable giving, please contact the office.

• By Leon Clinton
• December 21, 2015