Health Savings Accounts

Dear Client:

The IRS has issued a notice providing both employers and employees with a set of formal questions and answers on Health Savings Accounts (HSAs). Contributions to HSAs are deductible by employees in determining adjusted gross income, which effectively allows taxpayers with high-deductible health insurance to make contributions on a pre-tax basis to cover health care costs.

The guidance includes over 40 frequently asked questions and answers, grouped into categories including eligible individual, HDHPs, HSA contributions, HSA distributions, prohibited transactions, and establishing an HSA.

[The following paragraph applies to individuals who participate in a health savings account. Delete if not applicable.]

As an individual who is eligible to participate in a health saving account or has previously reported a deduction for a HSA, you may wish to consider utilizing this tax-efficient plan for medical expenses. Please contact us at your earliest opportunity if you would like more information about health savings accounts, your eligibility to participate and how you can get the maximum tax benefit from deductible contributions.

[The following paragraph applies to employers who provide a health savings account to their employees. Delete if not applicable.]

As an employer, you are not required to make contributions to employee HSAs. However, if you make a contribution to any employee’s HSA, you must make comparable contributions to all comparable participating employee HSAs. Other rules apply as well. Please contact us if you would like additional information on this development, or if you would like us to perform an analysis to determine whether your current employee benefit plan is in compliance.

Sincerely yours,

Education Tax Credits

Education Tax Credits (Hope and Lifetime Learning Credits)

For tax years 2009 and 2010, there is a new education credit called the American opportunity tax credit (AOC).

This is a modification of the Hope Credit.

  • The maximum amount of the AOC is $2,500 per student. The credit is phased out (gradually reduced) if your modified adjusted gross income (AGI) is between $80,000 and $90,000 ($160,000 and $180,000 if you file a joint return). Exception. For 2009, if you claim a Hope credit for a student who attended a school in a Midwestern disaster area, you can choose to figure the amount of the credit using the previous rules. However, you must use the previous rules in figuring the credit for all students for which you claim the credit.
  • The credit can be claimed for the first four years of post-secondary education. Previously the credit could be claimed for only the first two years of post-secondary education.
  • Generally, 40% of the AOC is now a refundable credit for most taxpayers, which means that you can receive up to $1,000 even if you owe no taxes.
  • The term “qualified tuition and related expenses” has been expanded to include expenditures for “course materials.” For this purpose, the term “course materials” means books, supplies, and equipment needed for a course of study whether or not the materials must be purchased from the educational institution as a condition of enrollment or attendance.

Income limits for Hope and lifetime learning credit reduction increased. For 2009, the amount of your Hope or lifetime learning credit is phased out (gradually reduced) if your modified adjusted gross income (AGI) is between $50,000 and $60,000 ($100,000 and $120,000 if you file a joint return). You cannot claim a Hope or lifetime learning credit if your modified AGI is $60,000 or more ($120,000 or more if you file a joint return).

Eligibility for the Hope credit. For 2009, you can claim a Hope credit only if at least one eligible student is

attending an eligible educational institution in a Midwestern disaster area and you do not claim an American opportunity credit for any other student in the same year.