In today’s world, where healthcare costs are constantly rising, finding smart and effective ways to save money is crucial. One such method that has gained popularity in recent years is the Health Savings Account (HSA). Not only does an HSA allow individuals to set aside funds for medical expenses, but it also offers significant tax advantages. In this article, we will explore the tax benefits of Health Savings Accounts and how they can help individuals save money while maintaining their health and financial wellbeing.
What is a Heath Savings Account (HSA)?
A Health Savings Account (HSA) is a tax-advantaged savings account specifically designed for individuals with high-deductible health plans (HDHPs). HDHPs generally have low monthly premiums but higher deductibles compared to traditional health insurance plans. In 2023, these plans include deductibles of at least $1,500 for individuals and at least $3,000 for families. HSAs help these individuals save money for qualified medical expenses that their health insurance provider does not cover.
HSAs allow you to carry over any unused funds from year to year. Unlike other accounts that often have a “use it or lose it” policy, HSAs offer the flexibility of accumulating funds over time. In 2023, the IRS allows you to contribute up to $3,850 to your HSA if you’re a single person. This amount increases to up to $7,750 for families. Your HSA belongs to you, even if you change jobs.This makes them an attractive choice for individuals who want to save for future medical expenses or even use the funds as a retirement savings tool.
Contributions are 100% Tax-Deductible
Any money you contribute to your HSA is tax-deductible, even if you do not itemize your deductions. So, your contributions can be deducted from your taxable income during tax time, which lowers your tax liability and can potentially push you into a lower tax bracket. In addition, if you make contributions through payroll, this money is deposited pre-tax, which also lowers your total tax liability. In other words, these contributions can be excluded from your total gross income.
Contributions and Distributions are Tax-Free
Just like a brokerage account or an IRA, you can invest through your HSA. Once you fund your account, you can choose your own investments or allow the experts to do it for you. The best part is that these contributions grow tax-free. This means that you pay no taxes on the interest the account earns. On top of that, any distributions you use to pay for qualified medical expenses are also tax-free. If you use your HSA to pay for non-medical expenses, you’ll be subject to income taxes and an additional 20% penalty. If you are 65 years old or older, non-medical expenses will not incur the 20% penalty, but the income taxes will still need to be paid. This is also true if an individual suddenly becomes disabled or if they die.
HSAs Can Be a Last-Ditch Effort to Lower Your Tax Liability During Tax Season
As tax season approaches and we start receiving our income documents, we might want last-minute ways to lower our tax liability. Contributing to an HSA is a great way to do this for several reasons. One reason is again the fact that contributions to an HSA reduces your taxable income, which in turn reduces your tax liability. Secondly, you can continue to contribute to your HSA all the way up until the April tax deadline. This means that you have an additional few months of contributions to reduce your taxable income from the prior year.
Should I open an HSA?
Health Savings Accounts provide individuals with a unique opportunity to save money on a pre-tax basis, enjoy tax-free growth, and use the funds tax-free for qualified medical expenses. That said, they are definitely worth looking into. To qualify, you must be covered by a high-deductible health plan (HDHP) and have no other health insurance, except for worker’s compensation, specific illness-related insurance, or a fixed coverage per day if you are hospitalized. You cannot be enrolled in Medicare, and you cannot be claimed as a dependent by anyone else. By leveraging the benefits of an HSA, individuals can effectively manage their healthcare costs while maximizing their tax savings.
Marriage can be a wonderful milestone in life. But in the midst of planning a wedding and a future with your significant other, you may not be thinking about how your new union will affect your tax bill. One critical tax factor to examine is the concept of marriage bonuses and marriage penalties. These terms refer to how marriage can affect a couple’s tax liability. In this post, we will look at the fundamentals of marriage bonuses and marriage penalties, as well as how they might affect a couple’s tax situation as a whole.
What is a marriage bonus?
A marriage bonus happens when a married couple’s combined tax liability is less than the sum of their individual tax liabilities if they filed as single individuals. This is most common when one spouse earns much more than the other. By combining their wages, the couple can take advantage of reduced tax brackets, tax credits, and deductions that they might not have had access to as single filers.
Here’s an example. Let’s say an unmarried couple has a combined income of $120,000, one person earning $0 and the other earning $120,000 in 2023. As single filers, the first person would have a $0 tax liability, while the second higher-earning person would have a tax bill of $18,876. If this same couple got married and filed jointly, their combined tax liability would be just $10,921 because they would be able to claim a larger standard deduction and would be taxed at a lower marginal tax rate.
What is a marriage penalty?
Conversely, a marriage penalty arises when a couple’s combined tax liability as a married couple is higher than their total tax liability if they were still filing as single individuals. Because merging incomes in joint filing can drive both spouses into higher tax brackets, couples with similar incomes are more likely to pay marriage penalties than couples with one spouse earning the majority of the income.
Another factor to consider when calculating the marriage penalty for high-income earners is the net 3.8% investment income tax. This tax is levied on single filers with an adjusted gross income of $200,000 or more, as well as married filers with an adjusted gross income of $250,000. In addition, these same taxpayers will also be subject to an additional Medicare tax of 0.9% on earnings over $200,000 for single filers, and over $250,000 for married couples filing jointly.
Beyond federal marriage penalties, some states also impose their own marriage penalties, including California, Georgia, Maryland, Minnesota, New Mexico, New Jersey, North Dakota, Ohio, Oklahoma, Rhode Island, South Carolina, Vermont, Virginia, and Wisconsin.
How can I avoid a marriage penalty?
Understanding your tax situation as a married couple is essential for efficient tax planning. For example, you can always calculate different scenarios to estimate your tax liability before filing. Filing separately rarely results in a more advantageous outcome for couples, but you may find yourself under these special circumstances. You should also explore all eligible deductions and credits to reduce your overall tax liability. Married couples who file jointly have access to several tax credits, including the Earned Income Tax Credit, education credits, and the Child and Dependent Care Tax Credit. Be aware of phase-out limits that might affect your eligibility. If you’re still unsure how to navigate marriage penalties and bonuses, consider consulting a tax professional. Doing so can provide valuable insights tailored to your specific situation. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers just like you.
Optima CEO David King and Lead Tax Attorney Philip Hwang are back from their trip to Washington D.C., where they met with members of Congress and the IRS’s new leadership to discuss what’s new in the tax world. Here is Phil and David’s recap of Optima’s visit with the IRS, including the IRS’s Strategic Operating Plan, 5,000 new customer service agents, the changes the agency’s new commissioner has already implemented and what you as a taxpayer can expect moving forward.
Selling a home can be a huge financial decision with numerous factors to consider. One of the most important factors might be the tax implications. While most might be eager to make a huge profit from selling their home, it is critical to understand the tax rules and regulations that apply to this transaction in order to be prepared and make informed decisions. In this post, we will look at the primary tax implications of selling a house. This will include potential capital gains taxes and exemptions, as well as crucial homeowner concerns.
What are capital gains taxes?
Some may be shocked to learn that not every home sale needs to be reported to the IRS. That said, if you’re not exempt from reporting your home sale to the IRS, the potential capital gains tax is one of the most important tax implications of selling a house to worry about. Capital gains taxes are taxes paid on the profit made when an investment is sold. These investments can include stocks, bonds, NFTs, jewelry, and of course real estate. Capital gains taxes are extremely complex. Therefore, here we will only be focusing on the capital gains taxes paid after the sale of a home.
Do I have to pay taxes on the profit I made from a home sale?
Whether you’ll have to pay taxes on the profit you earned from the sale will depend on two factors. These are how much profit you earned and how long you owned and lived in the home before the sale.
If you owned and lived in the home for at least two of five years before its sale, you may exclude up to $250,000 of the profit from your taxable income. This amount increases to $500,000 if you are married filing jointly. If your profit exceeds the limit ($250,000 or $500,000 for married couples filing jointly), then the excess will be subject to capital gains taxes reported on Schedule D.
There are some important things to note when determining your eligibility for this tax break. First, you do need to live in the home for two years out of five before its sale. However, those two years do not need to be consecutive. Therefore, the home must‘ve been your primary residence for two out of the five yearsbefore selling it. Finally, you can only exclude this profit from your taxable income if you have not excluded the gain on the sale of another home within two years before this sale.
How does capital gains tax work in the sale of real estate?
Let’s look at a few scenarios on how to calculate capital gains tax. Assume you as a single filer purchased a townhome for $350,000 and used it as your primary residence for five years. After five years, you decided to sell the home for $450,000. No capital gains tax would be due because the profit of $100,000 does not exceed the single filer’s exempt amount of $150,000.
Here’s another example. Assume you are a single filer who purchased a home for $400,000. After living in the home for two years, you decide to rent it out. Three years pass and you decide to sell the house for $550,000. Because you lived in the home for two of the previous five years and because the profit earned on the house does not exceed the $150,000 exempt amount, no capital gains tax is owed.
Now let’s assume you and your spouse file jointly. You purchase a home for $300,000 and many years later you decide to downsize. You sell your home for $1 million, earning a profit of $700,000. Since this amount exceeds the exempt amount of $500,000 for married couples filing jointly, you and your spouse will owe capital gains tax on the excess amount of $200,000 ($700,000 – $500,000).
2023 Capital Gains Tax Rates
Your capital gains rate will depend on your taxable income in the year the home is sold. In 2023, these rates are:
Filing Status
0% Tax Rate
15% Tax Rate
20% Tax Rate
Single
Up to $44,625 in taxable income
$44,626 to $492,300 in taxable income
Over $492,300 in taxable income
Head of Household
Up to $59,750
$59,751 to $523,050
Over $523,050
Married Filing Jointly andSurviving Spouses
Up to $89,250
$89,251 to $553,850
Over $553,850
Married Filing Separately
Up to $44,625
$44,626 to $276,900
Over $276,900
Let’s assume that same couple had a combined income of $300,000 in 2023, the year their house was sold. This would subject them to the 15% capital gains tax rate. This would then result in $30,000 in capital gains tax due (15% of $200,000 profit).
How do I figure out my actual gain or loss on a home sale?
While the above scenarios are helpful in understanding how capital gains tax works, these really are the simplest of examples. Finding out the actual cost of your home and actual gain or loss can quickly become a complex task. Determining your actual cost involves calculating the amount invested into the home through capital investments, like a new roof, updated HVAC, or a remodeled bathroom. Adding these expenses, along with any special tax assessments paid or expenses paid to restore damage after a disaster, to your purchase price will give you what’s called your adjusted basis. Your adjusted basis will help you decrease the amount of gain on the sale since it can increase the cost of your home.
From there, you will need to subtract credits received from your home. These can include:
After factoring in all these costs and credits, you’ll be able to figure out the adjusted basis that can be subtracted from your sale price to find your actual gain or loss.
Tax Help for Homeowners
It goes without saying that selling a home can be a very complex process, especially when factoring in the tax implications that can follow. If you are not familiar with the tax implications of selling a home, especially at a large profit, it is highly advisable to reach out to a qualified tax professional. Taking a chance and handling things on your own can quickly result in costly errors on your tax return and unwanted encounters with the IRS. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
IRS Notice CP14 is sent to taxpayers to inform them of an outstanding balance on their federal tax account. It serves as a bill for unpaid taxes. It includes details such as the amount owed, accrued interest, and any penalties incurred. While receiving this notice might not be a shock for many, some taxpayers impacted by a declared disaster area may be surprised to see a CP14 in their mailbox despite IRS promises of tax relief. If you are one of these taxpayers who mistakenly received IRS Notice CP14 despite being in a disaster area, don’t panic. Many erroneous CP14s have been issued by the IRS. Here is what you need to know.
Which disaster areas qualify for automatic tax extensions?
The IRS has continued to issue automatic tax extensions to those impacted by natural disasters. These areas have included impacted counties of the following 12 states:
California
Florida
Oklahoma
Indiana
Tennessee
Arkansas
Mississippi
New York
Georgia
Alabama
It also includes the impacted areas of Guam and the Mariana Islands. A full list of impacted qualified disaster areas can be found at https://www.irs.gov/newsroom/tax-relief-in-disaster-situations. All taxpayers in impacted areas were automatically given an extension of time to file. They might’ve also received an extension to pay until October 16, 2023, or another form of tax relief.
Why did I receive a CP14 if I’m in a disaster area?
IRS Notice CP14s have been sent out because the IRS is legally required to if a balance is due. However, many Californian taxpayers living or working in disaster areas have received this notice which demands payment to the IRS within 21 days. Unfortunately for Californians impacted by disaster, this sends mixed messages. The IRS has issued guidance to let these taxpayers know that they do indeed have until October 16, 2023 to file and pay their 2022 taxes.
What should I do if I received a CP14 if I’m in a disaster area?
If you received IRS Notice CP14 but you have been given an automatic tax extension due to disaster relief, you do not need to worry about submitting payment within 21 days as the notice instructs. In fact, these letters should also include a specific insert stating that the payment date indicated in the letter does not apply to anyone covered by a disaster declaration, and that the disaster dates still apply.
While it may seem counter-intuitive, affected taxpayers do not need to call the IRS for confirmation. Doing so may result in extremely long wait times. The IRS has issued an apology for the confusion this has caused. At Optima, we understand how intimidating an IRS notice can be.
