During the course of your career, you may have managed to build up a tidy nest egg, most likely augmented by tax-favored saving devices. For instance, you may have accumulated funds in qualified retirement plans, like 401(k) plans and pension plans, and traditional and Roth IRAs. If you don’t need all the funds to live on, your goal likely is to preserve some wealth for your heirs.

Can you keep what you want? Not exactly. Under strict tax rules, you generally must begin taking required minimum distributions (RMDs) from your retirement plans and IRAs (except Roth IRAs) after age 70½. And you must continue taking RMDs year in and year out without fail. Don’t skip this obligation for 2017, because the penalty for omission is severe.

When should you begin taking distributions?

RMD rules apply to all employer-sponsored retirement plans, including pension and profit-sharing plans, 401(k) plans, 403(b) plans for not-for-profit organizations and 457(b) plans for government entities. The rules also cover traditional IRAs and IRA-based plans such as SEPs and SIMPLE-IRAs. But you don’t have to withdraw an RMD from a qualified plan of an employer if you still work full-time for the employer and you don’t own more than 5% of the company.

The required beginning date for RMDs is April 1 of the year after the year in which you turn age 70½. For example, if your 70th birthday was June 15, 2017, you must begin taking RMDs no later than April 1, 2018. This is the only year where you’re allowed to take an RMD after the close of the year for which it applies. (Keep in mind that delaying the first RMD will result in two RMD withdrawals during that tax year.) The deadline for subsequent RMDs is December 31 of the year for which the RMD applies.

What’s the penalty for failing to take RMDs?

The penalty is equal to a staggering 50% of the amount that should have been withdrawn, reduced by any amount actually withdrawn. For example, if you’re required to withdraw $10,000 this year and take out only $2,500, the penalty is $3,750 (50% of $7,500). Plus, you still have to pay regular income tax on the distributions when taken.

Keep in mind that with the additional income there are other tax issues, such as the net investment income tax (NIIT). RMDs are not subject to the NIIT but will increase your modified adjusted gross income for purposes of this calculation and thus could trigger or increase the NIIT.

If your employees incur work-related travel expenses, you can better attract and retain the best talent by reimbursing these expenses. To secure tax-advantaged treatment for your business and your employees, it is critical to comply with IRS rules. 

Reasons to Reimburse

While unreimbursed work-related travel expenses generally are deductible on a taxpayer’s individual tax return (subject to a 50% limit for meals and entertainment) as a miscellaneous itemized deduction, many employees will not be able to benefit from the deduction. Why? 

It is likely that some employees do not itemize. And those who do may not have enough miscellaneous itemized expenses to exceed two percent of adjusted gross income; a requirement for the excess to be deducted.  

On the other hand, reimbursements can provide tax benefits to both your business and the employee. Your business can deduct the reimbursements — (also subject to a 50% limit for meals and entertainment), and they are excluded from the employee’s taxable income — provided that the expenses are legitimate business expenses and the reimbursements comply with IRS rules. Compliance can be accomplished by using either the per diem method or an accountable plan.

Per Diem Method

The per diem method is simple: Instead of tracking each individual’s actual expenses, you use IRS tables to determine reimbursements for lodging, meals and incidental expenses, or just for meals and incidental expenses. (If you don’t go with the per diem method for lodging, you’ll need receipts to substantiate those expenses.) 

The IRS per diem tables list localities here and abroad. They reflect seasonal cost variations as well as the varying costs of the locales themselves — so London’s rates will be higher than Little Rock’s. An even simpler option is to apply the “high-low” per diem method within the continental United States to reimburse employees up to $282 a day for high-cost localities and $189 for other localities.

You must be extremely careful to pay employees no more than the appropriate per diem amount. The IRS imposes heavy penalties on businesses that routinely fail to do so. 

Accountable Plan

An accountable plan is a formal arrangement to advance, reimburse or provide allowances for business expenses. To qualify as “accountable,” your plan must meet the following criteria:

If you fail to meet these conditions, the IRS will treat your plan as nonaccountable, transforming all reimbursements into wages taxable to the employee, subject to income taxes (employee) and employment taxes (employer and employee). 

“When should I apply for Social Security benefits?” is one of the most common questions baby boomers ask as they approach age 62, the age they become eligible to apply for early Social Security benefits. The answer is, “It depends.” Should you apply at age 62 and receive a reduced monthly benefit for a longer period of time? Should you wait until age 66, or even 70, and receive an increased monthly benefit for a shorter period of time?

The Social Security claiming decision is one of the most important financial decisions you will make in your lifetime. There are many variables to consider including health, life expectancy, current accumulated savings, anticipated inflation rates and lifestyle choices. Moreover, the monthly benefit amount is determined when a retiree begins claiming social security; the sooner you claim, the less you receive on a monthly basis.

On the flip side, there is a significant benefit to delay claiming as a retiree’s monthly benefit increases eight percent per year, until age 70. A chart posted by the Social Security Administration illustrates the positive month-by-month financial impact waiting has on a retiree’s benefit amount. However, no one can state with 100% accuracy that delaying the start of benefits until age 70 is the perfect choice. If a retiree holds off on claiming benefits until age 70 and then passes away at age 69, the retiree would have missed out on seven years of monthly benefit checks. If the retiree had claimed early benefits at age 62 then lived to age 95, he may have cost himself a tidy sum by receiving a reduced monthly benefit over 33 years of retirement.        


What Happens if I Apply Early?

Under current law, baby boomers born between 1943 and 1954 are considered to be at full retirement age when they reach 66. A person who applies at age 62 will receive approximately 48 more checks than someone who waits until their full retirement age. Since the early filers will receive 48 extra monthly checks, actuaries prorate their benefit amount so that people who live to average life expectancy will receive the same dollar amount. The reduction in benefits caused by this early claiming decision is called the actuarial reduction. Under current law, actuarial reduction is set at 25%. 

For example, Joe was born on October 1, 1954 and decides to claim his Social Security benefits on his 62nd birthday. Assuming he was entitled to a monthly benefit of $2,000 at age 66 (his full retirement age), Joe will receive a prorated monthly benefit of $1,500. This is the baseline amount that may be increased annually to account for inflation. 


What Happens if I Apply After Retirement Age?

On the flip side of the early claiming decision, some retirees wait to apply for benefits until after attaining full retirement age. Those who reach full retirement age and continue to delay claiming their benefits will receive fewer checks than those who claim at full retirement age. To compensate for delaying the onset of their benefits, the retiree will receive delayed retirement credits. For baby boomers born between 1943 and 1954, this delayed credit equals 8% per year for each year benefits are delayed up to age 70. That equals a 32% return over a four-year time period. If you consider how difficult it is to get an 8% annual return on your investments in today’s financial world, you can see one of the possible compelling factors to delay the start of your Social Security benefits.

Let’s assume Joe decides to delay filing for his benefits until he reaches age 70, his decision to delay increases his monthly check to $2,640. Joe’s decision to wait eight years enhances his monthly retirement income by $1,140 ($2,640 at 70 vs. $1,500 at age 62).

It is important to keep in mind that Social Security benefits are reviewed each year to keep up with inflation through an annual cost of living adjustment. By delaying the claiming decision, the cost of living adjustment (COLA) will be computed on the larger benefit amount. In Joe’s case, instead of this inflation adjustment being added to the lower benefit amount of $1,500 (if he started claiming at 62), it will be added to the larger $2,640 benefit amount (if he started claiming at 70). The cost of living adjustments are assessed annually for the remainder of Joe’s retirement. If Joe is survived by his spouse, she will generally continue to receive Joe’s enhanced $2,640 monthly benefit, plus annual cost of living adjustments, until her death.

The financial reasons for delaying Social Security benefits can be compelling. Unless mitigating circumstances exist (e.g., poor health, short life expectancy, no spouse, high performing investment portfolios), most of us can benefit from receiving a higher monthly amount by waiting to claim benefits until age 70. Delaying benefits and drawing down other retirement income sources – or working longer – can position retirees to start collecting a larger monthly Social Security benefit and to receive better cost of living increases each subsequent year.  

Interestingly, recent studies show a pronounced decline in claiming early benefits. Even so, more than a third of all workers claim Social Security benefits at age 62, which may not be in a baby boomer’s best interest with longer life expectancies and in the case of marginally funded retirement savings. Some would say that with recent advances in health care and emphasis on making healthy lifestyle choices, it is not unreasonable for boomers to outlive the average life expectancy and realize more financial benefit by waiting until age 70 to apply for Social Security. 


What is Right for Me?

Uncertainty around the Social Security system as a whole, or fear of passing away prematurely, may drive retirees to claim benefits early. All of us have the right to file when we become eligible, but carefully calculating the options is highly recommended. Instead of being driven by the fear of the unknown, we may need to consider our health and life expectancy, finances, inflation rates and desired lifestyle to help us make a prudent choice.  

The difference between a hurried claiming decision and a more thoughtful claiming decision could amount to hundreds of thousands of dollars over a lifetime. At Stockman Kast Ryan + Co., we invest in continuous education and specialized training in Social Security nuances. To further guide clients through the complex claiming decision, we also equip our tax advisors with the latest Social Security planning technology. We look forward to assisting when you are ready to plan this significant retirement step.

In an effort to help employers subject to the Affordable Care Act’s (ACA’s) information reporting requirements meet those obligations, the IRS has extended two important deadlines. Employers now have an additional two months to provide employees Form 1095-B, “Health Coverage,” and Form 1095-C, “Employer-Provided Health Insurance Offer and Coverage.” 

Employers have an additional three months to file the forms with the IRS. Reporting to the IRS is done by using Form 1094-C, “Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns,” and Form 1095-C, “Employer-Provided Health Insurance Offer and Coverage.”

Reporting requirements for ALEs

The ACA enacted Section 6056 of the Internal Revenue Code (IRC), which requires all applicable large employers (ALEs) — generally those with at least 50 full-time employees or the equivalent — to report to the IRS information about what health care coverage, if any, they offered to full-time employees. Employers generally must report this information no later than February 28 — or March 31 if filed electronically — of the year following the calendar year to which the reporting relates. 

Sec. 6056 also requires ALEs to furnish statements to employees that the employees can use to determine whether, for each month of the calendar year, they can claim a premium tax credit. The statements generally must be provided by January 31 of the calendar year following the calendar year to which the Sec. 6056 reporting relates.

ACA Deadline Table 2Because of the deadline extension, however, for the 2015 calendar year, ALEs have until May 31, 2016, to file these information returns with the IRS (until June 30, 2016, if filing electronically). And they have until March 31, 2016, to furnish the employee statements. 

Bear in mind that this reporting is required even if you don’t offer health insurance coverage. And employers with at least 50 but fewer than 100 full-time employees or the equivalent who are eligible for the transitional relief from the employer shared-responsibility provision for 2015 must still comply with the information reporting requirements.

Reporting requirements for self-insured and smaller employers

Sec. 6055 of the IRC, also enacted by the ACA, requires health care insurers, including self-insured employers, to report to the IRS about the type and period of coverage provided and to furnish this information to covered employees in statements. The IRS’s extensions also apply to these deadlines: The 2015 calendar year information now must be reported by May 31, 2016, or, if filed electronically, June 30, 2016. Employee statements must be provided by March 31, 2016. 

Every self-insured employer must report information about all employees, their spouses and dependents who enroll in coverage under the reporting requirements for insurers. This reporting is required even for self-insureds not subject to the ACA’s employer shared-responsibility provisions or the ALE reporting requirements. Self-insured ALEs must comply with the insurer requirements in addition to the Sec. 6056 requirements. 

Further, non-ALE employers must comply with the Sec. 6056 requirements if they’re members of a controlled group or treated as one employer for purposes of determining ALE status. The employers that compose such a controlled-group ALE are referred to as “ALE members,” and the reporting requirements apply separately to each member. 

Penalties for noncompliance with reporting requirements

Failure to comply with the information reporting requirements may subject you to the general reporting penalty provisions. Penalties for information returns and payee (employee) statements filed after December 31, 2015, are as follows:

Special rules apply to increase the per-statement and total penalties in the case of intentional disregard of the requirement to furnish a payee statement. Also, taxpayers with average annual gross receipts of no more than $5 million for the three preceding tax years are subject to lower maximum penalty amounts.

Don’t procrastinate!

Even with the extensions provided by the IRS, now is the time for affected employers to begin assembling the necessary information for Forms 1094 and 1095. The compliance obligation will likely require a joint effort by the payroll, HR and benefits departments to collect the relevant data.

If you have questions about complying with the ACA’s information-reporting requirements, don’t hesitate to contact us. We’d be pleased to help.


With year end right around the corner, Congress passed the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act). The act extended numerous tax breaks that had expired December 31, 2014, and the President signed it into law December 18. 

The new law is more significant than some tax “extenders” legislation in recent years because, in addition to extending relief, the PATH Act makes quite a few tax breaks permanent and also enhances some breaks. Let’s take a look at some of the breaks that may help you save tax on your individual and business returns in 2015 and beyond.

Benefits for Businesses

Section 179 expensing election

Sec. 179 of the Internal Revenue Code (IRC) allows businesses to elect to immediately deduct — or “expense” — the cost of certain tangible personal property acquired and placed in service during the tax year, instead of recovering the costs more slowly through depreciation deductions. However, the election can only offset net income; it can’t reduce it below zero dollars to create a net operating loss. 

The election is also subject to annual dollar limits. For 2014, businesses could expense up to $500,000 in qualified new or used assets, subject to a dollar-for-dollar phaseout once the cost of all qualifying property placed in service during the tax year exceeded $2 million. Without the PATH Act, the expensing limit and the phaseout amounts for 2015 would have sunk to $25,000 and $200,000, respectively. 

The new law makes the 2014 limits permanent, indexing them for inflation beginning in 2016. It also makes permanent the ability to apply Sec. 179 expensing to qualified real property, reviving the 2014 limit of $250,000 on such property for 2015 but raising it to the full Sec. 179 limit beginning in 2016. Qualified real property includes qualified leasehold-improvement, restaurant and retail-improvement property.

Finally, the new law permanently includes off-the-shelf computer software on the list of qualified property. And, beginning in 2016, it adds air conditioning and heating units to the list.

If your business is eligible for full Sec. 179 expensing, you might obtain a greater benefit from it than from bonus depreciation (discussed below) because the expensing provision can allow you to deduct 100% of an asset acquisition’s cost. Moreover, you can use Sec. 179 expensing for both new and used property. 

Bonus depreciation 

The news is mixed on bonus depreciation, which allows businesses to recover the costs of depreciable property more quickly by claiming bonus first-year depreciation for qualified assets. It’s been extended, but only through 2019 and with declining benefits in the later years. For property placed in service during 2015, 2016 and 2017, the bonus depreciation percentage is 50%. It drops to 40% for 2018 and 30% for 2019. 

The provision continues to allow businesses to claim unused AMT credits in lieu of bonus depreciation. Beginning in 2016, the amount of unused AMT credits that may be claimed increases. 

Qualified assets include new tangible property with a recovery period of 20 years or less (such as office furniture and equipment), off-the-shelf computer software, water utility property and qualified leasehold-improvement property. Beginning in 2016, qualified improvement property doesn’t have to be leased to be eligible for bonus depreciation.
Note that, if you qualify for Sec. 179 expensing, it could provide a greater tax benefit than bonus depreciation. (See above.) But bonus depreciation could benefit more taxpayers than Sec. 179 expensing, because it isn’t subject to any asset purchase limit or net income requirement.

Accelerated depreciation of certain qualified real property

The PATH Act permanently extends the 15-year straight-line cost recovery period for qualified leasehold improvements (alterations in a building to suit the needs of a particular tenant), qualified restaurant property and qualified retail-improvement property. The provision exempts these expenditures from the normal 39-year depreciation period. 

This is especially welcome news for restaurants and retailers, which typically remodel every five to seven years. If eligible, they may first apply Sec. 179 expensing and then enjoy this accelerated depreciation on qualified expenses in excess of the applicable Sec. 179 limit.

Research credit 

The research credit (commonly referred to as the “research and development” or “research and experimentation” credit) provides an incentive for businesses to increase their investments in research. But businesses have long complained that the annual threat of extinction to the credit deterred them from pursuing critical research into new products and technologies.

The PATH Act permanently extends the credit. Additionally, beginning in 2016, businesses with $50 million or less in gross receipts can claim the credit against alternative minimum tax (AMT) liability, and certain start-ups (in general, those with less than $5 million in gross receipts) that haven’t yet incurred any income tax liability can use the credit against their payroll tax. 

While the credit is complicated to compute, the tax savings can prove significant.

Benefits for Individuals

Education breaks

The American Opportunity credit (a modified version of the Hope credit) allows eligible taxpayers to take an annual credit of up to $2,500 (vs. the Hope credit maximum of $1,800) for various tuition and related expenses for each of the first four years of postsecondary education (vs. the first two years with the Hope credit). The credit phases out based on modified adjusted gross income (MAGI) beginning at $80,000 for single filers and $160,000 for joint filers, indexed for inflation. 

The American Opportunity credit was scheduled to revert to the Hope credit after 2017, with the $1,800 and first-two-years limits and lower MAGI phaseout thresholds. The PATH Act makes the more beneficial American Opportunity credit permanent. 

The PATH Act extends through 2016 the above-the-line deduction for qualified tuition and related expenses for higher education. The deduction is capped at $4,000 for taxpayers whose adjusted gross income (AGI) doesn’t exceed $65,000 ($130,000 for joint filers) or, for those beyond those amounts, $2,000 for taxpayers whose AGI doesn’t exceed $80,000 ($160,000 for joint filers).

You can’t take the American Opportunity credit, its cousin the Lifetime Learning credit and the tuition deduction in the same year for the same student. If you’re eligible for all, the American Opportunity credit will typically be the most valuable in terms of tax savings. But in some situations, the AGI reduction from the deduction might prove more beneficial than taking the Lifetime Learning credit because the deduction ends up saving more tax than opting for the credit.  

Charitable giving 

The PATH Act makes permanent the provision that allows taxpayers who are age 70½ or older to make direct contributions from their IRA to qualified charitable organizations up to $100,000 per tax year. The taxpayers can’t claim a charitable or other deduction on the contributions, but the amounts aren’t deemed taxable income and can be used to satisfy an IRA owner’s required minimum distribution. 

To take advantage of the exclusion from income for IRA contributions to charities on your 2015 tax return, you’ll need to arrange a direct transfer by the IRA trustee to an eligible charity by December 31, 2015. Donor-advised funds and supporting organizations are not eligible recipients. 

The law makes other tax benefits related to charitable giving permanent, too, including the enhanced deduction for contributions of real property for conservation purposes.

State and local sales tax deduction 

The itemized deduction for state and local sales taxes, instead of state and local income taxes, is now permanent. The deduction is especially valuable for individuals who live in states without income taxes. It can also benefit taxpayers in other states who purchase major items, such as a car or boat. 

You don’t have to keep receipts and track all the sales tax you actually pay. Your deduction can be determined by using an IRS sales tax calculator that will base the deduction on your income and the sales tax rates in your locale plus the tax you actually pay on certain major purchases.

Tax credit for nonbusiness energy property 

The PATH Act extends through 2016 the credit for purchases of residential energy property. Examples include new high-efficiency heating and air conditioning systems, insulation, energy-efficient exterior windows and doors, high-efficiency water heaters and stoves that burn biomass fuel. 

The provision allows a credit of 10% of expenditures for qualified energy improvements, up to a lifetime limit of $500. If you’ve been thinking about investing in some energy upgrades, you’ll want to do it before the end of next year.

Plan ahead

The PATH Act’s temporary and permanent extensions of numerous valuable tax breaks for individuals and businesses provide significant tax planning opportunities. We’ve only touched on some of the most popular here; the new law may include other extensions and enhancements that can benefit you. We can help you identify the ones that will minimize your taxes for 2015 and chart the best course in future years.




The federal government supports generosity by allowing you to deduct your charitable donations on your income tax return if you itemize deductions. You must, however, follow the IRS's reporting and substantiation rules to assure your charitable deduction is allowed. While all contributions must be susbstantiated, there are numberous and overlapping requirements.

General Rules

For a contribution of cash, check or other monetary gift, regardless of amount, you must maintain a bank record or a written communication from the donee organization showing its name, date and amount of the contribution. Any other type of written record, such as a log of contributions, is insufficient. 

For a contribution of property other than money, you generally must maintain a receipt from the donee organization that shows the organization's name, the date and location of the contribution, and a detailed description (but not the value) of the property. If circumstances make obtaining a receipt impracticable, you must maintain a reliable written record of the contribution. the information required in such a record depends on factors such as the type and value of property contributed.

Contributions over $250

If the contribution is worth $250 or more, stricter substantiation requirements apply. No charitable deduction is allowed for any contribution of $250 or more unless you substantiate the contribution with a written receipt from the donee organization. You must have the receipt in hand when you file your return (or by the due date, if earlier) or you won't be able to claim the deduction. If you make separate contributions of less than $250, you won't be subject to the written receipt requirement, even if the sum of the contributions to the same charity totals $250 or more in a year.

The receipt must set forth the amount of cash and a description (but not the value) of any property other than cash contributed. It must also state whether the donee provided any goods or services in return for the contribution, and, if so, must provide a good faith estimate of the value of the goods or services. If you received only "intangible religious benefits," such as attending religious services, in return for your contribution, the receipt must say so. This type of benefit is considered to have no commercial value and therefore doesn't reduce the charitable deduction available.

Contributions over $500

If the total charitable deduction you claim for noncash property is more than $500, you must attach a completed Form 8283 (Noncash Charitable Contributions) to your return or the deduction is not allowed. In general, you are required to obtain a qualified appraisal for donated property with a value of more than $5,000 and attach an appraisal summary to the tax return. A qualified appraisal, however, isn't required for publicly traded securities for which market quotations are readily available. A partially completed appraisal summary and the maintenance of certain records are required for (1) non-publicly traded stock for which the claimed deduction is greater than $5,000 and no more than $10,000, and (2) certain publicly traded securities for which market quotations are not readily available. A qualified appraisal is required for gifts of art valued at $20,000 or more. The IRS may also request that you provide a photograph.

Recent Case Provides a Note of Caution to Taxpayers Related to Documentation of Noncash Charitable Contributions

As we get closer to the end of the 2015 tax year, a review of a 2015 Tax Court Memorandum Decision (TC Memo 2015-71, Kunkel v. Commissioner) provides a reminder that the IRS and the courts take the charitable contribution rules seriously and that good tax documentation is required to support a deduction for noncash charitable contributions. Here's a summary of the take-away lessons from the Kunkel case regarding documentation of noncash charitable contributions:

Recordkeeping for Contributions for which You Receive Goods or Services

If you receive goods or services, such as a dinner or theater tickets, in return for your contribution, your deduction is limited to the excess of what you gave over the value of what you received. For example, if you gave $100 and in return received a dinner worth $30, you can deduct $70. But your contribution is fully deductible if any of the following are true.

If you made a contribution of more than $75 for which you received goods or services, the charity must give you a written statement, either when it asks for the donation or when it receives it, that tells you the value of those goods or services. Be sure to keep these statements.

Cash Contribution Made Through Payroll Deductions

You can substantiate a contribution that you make by withholding from your wages with a pay stub, Form W-2, or other document from your employer that shows the amount withheld for payment to the charity.

You can substantiate a single contribution of $250 or more with a pledge card or other document prepared by the charity that includes a statement that it doesn't provide goods or services in return for contributions made by payroll deduction.

The deduction from each wage payment is treated as a separate contribution for purposes of the $250 threshold in case each individual contribution is less than the $250 threshold.

Substantiating Contributions of Services

Although you can't deduct the value of services you perform for a charitable organization, some deductions are permitted for out-of-pocket costs you incur while performing the services. You should keep track of your expenses, the services you performed, when you performed them and the organization for which you performed the services. Keep receipts, canceled checks and other reliable written records relating to the services and expenses.

As discussed earlier, a written receipt is required for contributions of $250 or more. This presents a problem for out-of-pocket expenses incurred in the course of providing charitable services, since the charity doesn't know how much those expenses were. You can, however, satisfy the written receipt requirement if you have adequate records to substantiate the amount of your expenditures, and get a statement from the charity that contains a description of the services you provided, the date the services were provided, a statement of whether the organization provided any goods or services in return and a description and good faith estimate of the value of those goods or services.

Please call us if you have any questions about these rules. Together, we can make sure that you'll get all the deductions to which you are entitled when we prepare your 2015 tax returns.

With open enrollment for employer benefits coming up, now is the perfect time to consider opening a Health Savings Account (HSA). An HSA is a great opportunity for eligible individuals to lower their out-of-pocket health care expenses and federal tax bill. But before you sign-up, there are a few things you should know about this option.

Am I eligible to open an HSA?

There are a few requirements for obtaining the benefits of an HSA:

Where can I open an HSA?

An HSA can generally be set up at a bank, an insurance company, or other institution the IRS deems suitable as long as it’s established exclusively for the purpose of paying the account beneficiary’s qualified medical expenses

How much can I contribute to an HSA?

Eligible individuals under age 55 can make tax-deductible HSA contributions in 2015 of up to $3,350 for single coverage or $6,650 for family coverage. Individuals age 55 or older by the end of the tax year for which the HSA contribution is made can contribute up to $1,000 more. The contribution for a particular tax year can be made as late as April 15 of the following year.

Are my employer’s contributions to my HSA also tax exempt?

Employer contributions to an employee’s HSA are exempt from federal income, Social Security, Medicare, and unemployment taxes.

What can I pay for with my HSA?

HSA funds can be used to cover qualified medical expenses for the account beneficiary, their spouse, and dependents not covered by health or dental insurance such as co pays for doctor’s visits, prescriptions, and laboratory fees. However, health insurance premiums don’t qualify. (Click here for more examples).

Can I withdraw my HSA funds for non-qualified expenses?

HSA distributions that are not used for qualified medical expenses are included in your gross income and subjected to an additional 20% penalty tax.

What happens to my HSA funds if I don’t use them all in a year?

If you make contributions to your HSA account and do not need to spend the entire amount contributed during the year on your qualified medical expenses, the balance in the HSA at year end can be carried over to the next year and beyond. In addition, there are no income phase-out rules, so HSAs are available to high-earners and low-earners alike.

How can I deduct my HSA contributions on my taxes?

The deduction for your contributions to an HSA can be claimed on Page 1 of your tax return after completing IRS Form 8889, Health Savings Accounts (HSAs). The deduction is claimed in arriving at adjusted gross income; thus, eligible individuals can claim the benefit whether they itemize or not. Unfortunately, however, the deduction doesn’t reduce a self-employed person’s self-employment tax bill.

Tax-related identity theft occurs when someone uses your Social Security number to file a tax return in order to claim a fraudulent refund. Generally, the identity thief will file the fraudulent tax return early in the filing season, typically during January. You will most likely be unaware you have even been victimized until you file your tax return and learn that someone has already filed using your Social Security number.

Know the Warning Signs

You should be on alert for possible identity theft when:

When our firm suspects an identity theft issue with your tax return (typically due to an e-file rejection by the IRS), we will contact you to inform you of the occurrence.There will then need to be follow-up with the IRS to determine if they have already issued Letter 5071C (Identity Verification Letter). This letter will inform you of two methods of providing verification of your identity. This can be accomplished by calling the Identity Verification line (1-800-830-5084) or by using the online IRS Identity Verification Service. The online service is the quickest method and will ask you multiple-choice questions to verify whether or not the return flagged for further scrutiny was filed by you or someone else.  Please bear in mind that the IRS will only send Letter 5071C by mail. The IRS will never request that you verify your identity by contacting you by phone or email. If you receive such calls or emails, they are likely a scam

If Letter 5071C has not been issued, we will likely need to prepare Form 14039 Identity Theft Affidavit for you to submit to the IRS on a paper filed tax return. Form 14039 alerts the IRS that someone has accessed your personal information and it has affected your tax account since they have filed a return using your identifying information.  As an attachment to Form 14039, you will need to provide a copy of your Social Security card, driver’s license, U.S. Passport, military ID, or other government-issued ID card in order to prove your identity. Unfortunately, the filing of Form 14039 will delay the processing of your tax return as the normal processing time for an identity theft return can run 120 days or longer.      

After Form 14039 has been processed by the IRS, they will generally issue you a six-digit Identity Protection pin number for you to use in filing your tax returns going forward. The IRS has stated that they will issue a new pin number each year, in December. If working with the IRS has not brought a satisfactory resolution or you do not receive your six-digit pin number, you should contact the IRS Identity Protection Specialized Unit at 1-800-908-4490.            

Steps to Take in the Event of an Identity Theft Issue

When someone has enough of your personal information to file a fraudulent tax return, they can use your identity to commit other crimes. In addition to alerting the IRS as described above, you should also take the following steps:

7 Easy Steps to Reduce Your Risk

  1. Do not carry your Social Security card or any document with your Social Security number on it.
  2. Do not give a business your Social Security number just because they ask for it. Only provide this information when absolutely necessary.
  3. Protect your personal financial information at home and on your computers.
  4. Check your credit reports annually.
  5. Check your credit card statements and bank account activity regularly.
  6. Review your Social Security Administration earnings statement annually.
  7. Do not give out your personal information over the phone, through the mail, or the internet unless you have initiated the contact or are sure you know who is asking. 

In Conclusion

Identity theft is one of the fastest growing crimes in the United States and around the world. It is a persistent and evolving threat and the harm it causes victims cannot be overstated. Today’s thieves are a formidable enemy. They are an adaptive adversary, constantly learning and changing their tactics to circumvent the safeguards put in place to stop them. Tax-related identity theft is no longer random individuals stealing personal information. We are dealing more and more with organized crime syndicates here and around the world. 

IRS Commissioner John Koskinen recently stated that no priority is higher for the IRS than making sure the tax system is secure and that they are continuing to do everything within their power to safeguard taxpayers and their personal information.   

If you have any questions or concerns regarding identity theft don’t hesitate to contact us!       

Confused  ManYou may not need or even desire to take money out of your Individual Retirement Account (IRA) or your employer-sponsored retirement plan, but at some point you will be required to take withdrawals from these accounts. They are retirement accounts after all and they were not created to hold our money forever. This mandatory withdrawal amount is called your required minimum distribution (RMD). You can always take more than your RMD amount but you can’t take less. If you errantly withdraw less than the required amount, the shortfall is potentially subject to a 50% penalty (ouch!).

When do you need to start taking required minimum distributions?

In general, RMDs begin in the year we turn 70 ½. If your birthday is from January 1 – June 30, your first RMD will be attributed to the year you turn 70 since you will turn 70 ½ during the year you celebrate your 70th birthday. If your birthday is from July 1 – December 31, your first RMD will be attributed to the year you turn 71 since you will turn 70 ½ during the year you celebrate your 71st birthday. No one is quite sure where our Congressional leaders came up with the 70 ½ year figure although some have speculated they hatched this idea in a Washington, DC watering hole. Regardless of the rationale, it is the law at present.        

How are they calculated?

RMDs are calculated by dividing your retirement account balance at the end of the previous year by a life expectancy factor based on your age.

For example, Biff has an IRA account with a value of $1,000,000 on 12/31/14 and he turns 70 ½ on September 1, 2015.  Since Biff celebrates his 70th birthday in the same year he turns 70 ½, the IRS Uniform Lifetime Table tells us to use a life expectancy factor (divisor) attributable to a 70 year old which equals 27.4. We divide 27.4 into the $1,000,000 to arrive at his RMD of $36,496 for the 2015 tax year.


When must they be taken?

Your RMD for a particular year must usually be taken by December 31 of that year. The only exception to this rule is for the first year you are required to take an RMD. For this first year only, you are permitted to wait up to April 1 of the following year to take your RMD without penalty. Please keep in mind that delaying this first RMD until April 1 of the following year will mean you will be required to take two separate distributions during that year as all RMDs (other than the first year RMD) are required to be paid out by December 31 each year.

The date you are required to take your first mandatory distribution is generally referred to as your required beginning date (RBD). For those who have a 401(k) or other employer-sponsored retirement plan, the RBD is the same April 1 date, unless they are still working for the company where they have the retirement plan. If the plan participant does not own more than 5% of the company and if the plan document permits, they can delay their RBD until April 1 of the year following the year they finally retire. This is sometimes called the “still working” exception but it only applies to required distributions from employer-sponsored retirement plans. It does not apply to IRA accounts. Additionally, it will not apply if the participant is not currently working for that company.

For example, Brian has an IRA account with the local bank and a 401(k) plan with his employer and he is still working for the company sponsoring the 401(k) plan. Additionally, let’s assume Brian does not own more than 5% of the company he works for. When Brian reaches age 70 ½, he can delay taking distributions from his 401(k) account until April 1 of the year following the year he retires, regardless of his age. However, this “still working” exception does not apply to his IRA account. Brian will be required to take his RMD from the IRA account by no later than April 1 of the year following the year he turns 70 ½ years old.


How do distributions affect the earnings in my retirement account?

RMDs begin at less than 4% of the fair market value of your account and steadily increase each year  For example, the life expectancy factor for a 70 year old IRA owner taken from the IRS Uniform Lifetime Table is 27.4.  When we divide this factor into 100, we come up with 3.65 which represents the percentage of the account balance that must be withdrawn.  Continuing on, the life expectancy factor for a 71 year old IRA owner is 26.5.  When we divide 26.5 into 100, we get a distribution percentage of 3.78% (rounded up).  Each year will produce a slight increase in this percentage.   

As long as your earnings are more than 4% in your IRA during the initial, early years after reaching age 70 ½, and you are withdrawing only your RMD, your account value will continue to increase. Although the withdrawal percentage increases each year, this does not mean that your actual RMD, in dollars, will always be greater than the prior year. This will be determined by the actual investment performance of your account.


The Required Minimum Distribution rules can be quite confusing and there are different twists for different types of retirement accounts. We are very knowledgeable in this area and invite you to call us should you need any assistance with ensuring you stay compliant with these rules.      


IRS-letter-to-useIndividual taxpayers generally have until April 15th each year to file their tax returns and pay any income tax owed for the year. In most cases, you will not be liable for any penalties as long as you file your tax return and pay any tax due by this April 15th due date.  If you fail to meet this deadline, however, or you did not pay enough taxes during the year through Federal withholding or estimated tax payments, you may be liable for IRS underpayment of estimated tax, late payment, and/or late filing penalties in addition to any tax you owe. 

Underpayment of Estimated Tax Penalty

Probably the most common type of penalty for most taxpayers is the underpayment of estimated tax penalty.  This can affect any taxpayer but most often impacts taxpayers who are not W-2 wage earners.  Because income taxes are not directly withdrawn and remitted to the IRS during the year (unlike W-2 compensated wage earners), the burden falls on the taxpayer to make estimated tax payments through the year.  These estimates must be paid in four quarterly installments which are due on April 15, June 15, September 15, and January 15.  
The IRS has provided a safe harbor to help taxpayers avoid these penalties.  Individuals are subject to an underpayment penalty unless total withholding and estimated tax payments equal the smaller of:
The underpayment penalty consists of the interest on the underpaid amount for the number of days the payment is late.  Interest is charged at the Federal rate for underpayments which is currently set at 3%.
This underpayment penalty will generally not apply if the tax due, after subtracting any tax withheld, is less than $1,000 or the taxpayer had no tax liability for the prior year return that covered 12 months.

Late Payment Penalty

If you do not pay the tax you owe by the April 15 filing deadline, you will most likely face a failure-to-pay penalty of .5% (½ of 1%) of the unpaid tax.  The failure-to-pay penalty applies for each month or part of a month after the due date and starts accruing the day after the filing due date.  The penalty increases by .5% every month the taxes remain unpaid and is capped at a maximum of 25% of the tax due. 
If you timely requested an extension of time to file your individual income tax return and paid at least 90% of the taxes owed with the extension request, you may not face a failure-to-pay penalty.  However, you must pay any remaining tax due by the extended due date (generally October 15).         

Late Filing Penalty

One of the most punishing penalties individual taxpayers will ever encounter is for failing to file your tax return on time when you owe tax.  The failure-to-file penalty starts at 5% of your unpaid taxes for each month or part of the month the return is late.  The penalty is capped at 25% of the unpaid balance due.  There will be no penalty imposed if there is no tax due with the tax return filing.  In addition, if both the 5% failure-to-file penalty and the .5% failure-to-pay penalty apply in any month, the maximum penalty you will pay for the month will be 5%.   
The silver lining with the late filing penalty is that there is no reason to ever incur a late filing penalty.  As long as you file an extension by the April 15th due date, you automatically get an additional 6 months to file the tax return.

Grace for Reasonable Cause

Penalties for late payment and late filing will not be imposed if the taxpayer can show that the failure was due to reasonable cause, rather than to willful neglect.  Some of the reasonable cause requests that have been approved in the past include death or serious illness of the taxpayer or an immediate family member, unavoidable absence of the taxpayer on the filing due date, and the destruction of the taxpayer’s residence or business.  
At Stockman Kast Ryan + Co, we are very familiar with the nuances of each of these penalties and can guide you in navigating these waters should the need arise.  Please call us at (719) 630-1186 with any questions related to these or any other tax and accounting matters.