Form 8889 for Health Savings Accounts (HSAs)

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Health Savings Accounts (HSAs) were created in 2003 as a means of addressing increasing health care costs. HSAs give individuals enrolled in high-deductible health plans (HDHPs) tax-preferred treatment for money saved for medical expenses. In general, HSAs allow for individuals to defer taxes when money is contributed (even if a taxpayer does not itemize on Form 1040 Schedule A), and money that is eventually withdrawn and used to pay for qualified medical expenses is also usually tax-free.

In this article, we will explain the basics of Form 8889 for HSAs. This explanation is not intended to convey tax or legal advice. Please consult a tax attorney if you have further questions.

Form 8889

Form 8889 is used for all of the following purposes: to report health savings account (HSA) contributions (including those made on behalf of taxpayers, and employer contributions), to report distributions from HSAs, to calculate the correct HSA deduction amount, and to calculate the amounts that taxpayers must include in income and any additional tax that may be owed if a taxpayers fails to qualify as an eligible individual. The IRS defines an HSA as, “[A] health savings account set up exclusively for paying the qualified medical expenses of the account beneficiary or the account beneficiary’s spouse or dependents.” In general, distributions received from an HSA to pay for “qualified medical expenses” (see IRS publications for the specific definition) of an account beneficiary, a spouse, or dependents are excluded from the determination of gross income.

For the 2013 tax year, Form 8889 must be filed under any of the following circumstances: if a taxpayer (or somebody on behalf of a taxpayer, such as an employer) made contributions to an HSA in 2013, if HSA distributions were received in 2013 by a taxpayer, if a taxpayer failed to be deemed an eligible individual during the applicable testing period and certain amounts must therefore be included in the taxpayer’s income, or if an interest in an HSA was acquired due to the death of the account beneficiary. The testing period begins with the month a contribution to a qualified HSA is made, and ends on the last day of the twelfth month following that month.

Subject to certain exceptions, taxpayers who fail to remain eligible individuals must include the qualified HSA funding distribution in income in the year in which they do not meet the eligibility requirement, (and this amount is also subject to a 10% Additional Tax for Failure to Maintain HDHP Coverage).

HSA Deductions

In general, the maximum amount that one can contribute to a HSA plan is dependent upon the type of HDHP coverage that an individual has (For 2013 and 2014, HDHPs require minimum annual deductibles of at least $1,250 for individuals and $2,500 for families). For individuals who have self-coverage, the maximum contribution for 2013 is $3,250, and taxpayers with family coverage, the maximum amount that may be contributed is $6,450. (For 2014, the contribution limit is raised to $3,300 for individuals HSAs, and $6,550 for family HSAs). Individuals who are at least 55 years of age as of the end of their tax year may make an additional catch-up contribution of $1,000 (and this amount will be unchanged for 2014). The maximum HSA contribution amount, however, is reduced by any employer contributions to an HSA, and contributions made to an Archer MSA, and any qualified HSA funding distributions.

In addition, any contributions made to an HSA during the month in which a taxpayer was enrolled in Medicare will not be deductible. Further, HSA contributions are not deductible if a taxpayer can be claimed as a dependent on Form 1040 by somebody else.

Form 8960 and the Net Investment Income Tax

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The new Net Investment Income Tax imposed by Internal Revenue Code Section 1411 went into effect on January 1, 2013 for income tax returns of individuals, estates and trusts, beginning with their first taxable year starting on (or after) January 1, 2013. The Net Investment Income Tax applies at a rate of 3.8% on certain net investment income of individuals, estates and trusts that have income above statutory threshold limits.

Form 8960 is used by individuals, estates, and trusts to compute their Net Investment Income Tax. The IRS has posted a draft version of the instructions to Form 8960, and recently, it released the final version of the form itself.

This article will explain the basics of Form 8960 and the Net Investment Income Tax. Future articles on this topic will also provide more information about this tax. The article is not intended to convey tax or legal advice. Please consult a tax attorney if you have further questions. Sherayzen Law Office, Ltd. can assist you in all of your tax and legal needs.

The Net Investment Income Tax

As mentioned above, the Net Investment Income Tax applies at a 3.8 percent to certain net investment income of individuals, estates and trusts that have income above statutory threshold limits. If individuals have Net Investment Income, they will owe the Net Investment Income Tax if they have modified adjusted gross income, for purposes of the Net Investment Income Tax (note that individuals with income from controlled foreign corporations (CFCs) and passive foreign investment companies (PFICs) may have additional adjustments to their AGI) above the following thresholds: for married filing jointly returns, the threshold is $250,000; for married filing separately returns, the threshold amount is $125,000; for single taxpayers or Head of household (with qualifying person), the threshold is $200,000; for a qualifying widow or widower with a dependent child, the threshold is $250,000.

Note also that these threshold amounts are not indexed for inflation.

According to the IRS, “In general, investment income includes, but is not limited to: interest, dividends, capital gains, rental and royalty income, non-qualified annuities, income from businesses involved in trading of financial instruments or commodities and businesses that are passive activities to the taxpayer (within the meaning of section 469). To calculate your Net Investment Income, your investment income is reduced by certain expenses properly allocable to the income.” Certain common income items, such as tax-exempt interest, Alaska Permanent Fund Dividends, and distributions from certain Qualified Plans (those described in sections 401(a), 403(a), 403(b), 408, 408A or 457(b)), are not treated as Net Investment Income.

US Persons and Nonresident Aliens

Dual-status individuals, who are US residents for a part of the year and Nonresident Aliens (NRAs) for the other part of the year, are subject to the Net Investment Income Tax only with respect to the portion of the year during which they are US residents. The threshold amounts described above, however, are not reduced or prorated for dual-status residents.

Dual-resident individuals, (see regulation §301.7701(b)-7(a)(1) for more information) who determine that they are residents of foreign countries for tax purposes pursuant to US-foreign country income tax treaties, and who claim benefits of such treaties as nonresidents of the US, are deemed to be NRAs for Net Investment Income Tax purposes.

NRAs are not subject to the Net Investment Income Tax. For married couples in which one spouse is an NRA, and the other is a U.S. citizen or resident, and the NRA has made, or is planning to make, an election to be treated as a resident alien for purposes of filing a married filing jointly return, IRS final regulations provide these couples with special rules and a respective Net Investment Income Tax IRC Section 6013(g) or (h) election.

Contact Sherayzen Law Office for Professional Tax Planning Advice

In previous articles, we covered some of the new tax changes and deduction phase-outs for 2013 tax returns to be filed in 2014 that could trigger a much higher tax liability for many taxpayers. The Net Investment Income Tax will only add to the tax liabilities many high net-worth taxpayers will face. Professional tax planning may be very important in order to help you lower your future tax liabilities. The experienced tax law firm of Sherayzen Law Office, Ltd. can assist with this goal.

FBAR Tax Attorney St Louis: Another Swiss Banker Pleads Guilty to Tax Evasion

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On March 12, 2014, the IRS and the DOJ announced that Andreas Bachmann, 56, of Switzerland, pleaded guilty to conspiring to defraud the Internal Revenue Service (IRS) in connection with his work as a banking and investment adviser for U.S. customers. It appears (at least from the perspective of an FBAR Tax Attorney St Louis) that Mr. Bachmann helped his U.S. customers conceal assets in secret Swiss Bank Accounts and other tax havens.

FBAR Tax Attorney St Louis: Background Information

In a statement of facts filed with the plea agreement, Mr. Bachmann admitted that between 1994 and 2006, while working as a relationship manager in Switzerland for a subsidiary of an international bank, he engaged in a wide-ranging conspiracy to aid and assist U.S. customers in evading their income taxes by concealing assets and income in secret Swiss bank accounts. Moreover, Mr. Bachmann traveled to the United States twice each year to provide banking services and investment advice to his U.S. customers (note from FBAR Tax Attorney St Louis: this could have been critical information for building the IRS case against Mr. Bachmann).

According to the IRS, Mr. Bachmann also engaged in cash transactions while traveling in the United States. In the course of arranging meetings with U.S. customers, some clients would request that Mr. Bachmann either provide them with cash as withdrawals from their undeclared accounts or take cash from them as a deposit to their undeclared accounts. As part of that process, Mr. Bachmann agreed to receive cash from U.S. customers and used that cash to pay withdrawals to other U.S. clients.

The IRS describes how, in one instance, Mr. Bachmann received $50,000 in cash from one U.S. customer in New York City and intended to deliver the money to another U.S. client in Southern Florida. Airport officials in New York discovered the cash but let Mr. Bachmann keep the money after questioning him (note from FBAR Tax Attorney St Louis: by that time, the IRS was probably already taking interest in Mr. Bachmann). The client in Florida refused to take the money after the client learned about the questioning by New York airport officials, and Mr. Bachmann returned to Switzerland with the $50,000 in cash in his checked baggage. Mr. Bachmann advised the executive management of the subsidiary about the incident with the cash.

The IRS further alleges that Mr. Bachmann also understood that a number of his U.S. customers concealed their ownership and control of foreign financial accounts by holding those accounts in the names of nominee tax haven entities, or structures, which were frequently created in the form of foreign partnerships, trusts, corporations or foundations.

FBAR Tax Attorney St Louis: IRS is Pleased

The IRS and the DOJ seem to be pleased with the result of their investigation. “Today’s plea is just the latest step in our wide-ranging investigations into Swiss banking activities and demonstrates the Department of Justice’s commitment to global enforcement against those that facilitate offshore tax evasion,” said Deputy Attorney General Cole. “We fully expect additional developments over the course of the coming months.”

Mr. Bachmann was charged in a one-count superseding indictment on July 21, 2011, and faces a maximum penalty of five years in prison when he is sentenced on August 8, 2014.

FBAR Tax Attorney St Louis: IRS and DOJ Are Stepping Up Criminal Enforcement of FBARs and International Tax Laws of the United States

As I predicted earlier, the IRS and the DOJ are in high gear of criminal enforcement of FBARs and international tax laws of the United States. As they work through the mountains of information that they received from the U.S. taxpayers participating in the Offshore Voluntary Disclosure Program (now closed) and the defendants, like Mr. Bachmann, I fully expect the enforcement efforts to increase in the near future.

Moreover, with the new information disclosed by the Swiss banks as part of the U.S. Department of Justice (“DOJ”) The Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks (the “Program”), the IRS will get an unprecedented new fountain of information that will allow it to reach ever further.

FBAR Tax Attorney St Louis: U.S. Taxpayers with Undisclosed Bank Accounts Should Consider Their Voluntary Disclosure Options As Soon As Possible

Given the fact that a large number of Swiss banks that participate in the Program will disclose all of their U.S.-held bank accounts by April 30, 2014 (assuming they have not already disclosed them), U.S. taxpayers with undisclosed accounts in Switzerland must act as soon as possible and consider their voluntary disclosure options. Failure to do so may result in the imposition of willful civil and even criminal penalties.

Contact Sherayzen Law Office for Help With Undisclosed Swiss Accounts

Sherayzen Law Office can help you with the voluntary disclosure of your Swiss accounts. Owner and attorney Eugene Sherayzen is an international tax expert in this field. He will thoroughly analyze the facts of your case and explain to you the available voluntary disclosure options. After you choose the voluntary disclosure option, our firm can prepare all legal documents and tax forms required for your voluntary disclosure, fully implement the ethically available strategies and rigorously defend your position against the IRS.

Contact Us to Schedule a Confidential Consultation NOW!

Student Loan Interest Deduction and 2014 Phase-outs

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With the costs of higher education increasing each year, the deductibility of interest paid on student loans is an important tax topic for many younger individuals. However, taxpayers are sometimes surprised to learn that there is a phase-out for various applicable income levels for this deduction, and above certain income levels, the deduction is completely eliminated.

This article will briefly explain the basics of the deduction for interest paid on student loans, as well as the deduction phase-outs. This explanation is not intended to convey tax or legal advice.

Student Loan Interest

Under IRS tax rules, interest paid for personal loans is typically not deductible for taxpayers; however, there is an exception to this general rule for interest paid on higher-education student loans (also referred to as education loans). Because this deduction is taken as an adjustment to income, qualifying taxpayers may claim this deduction even though that may not itemize their deductions on Form 1040 Schedule A.

In order to qualify, a student loan is required to have been taken out solely to pay qualified education expenses, and the loan must not be from a related person or made under a qualified employer plan. Also, students claiming the deduction must either be the taxpayers themselves, their spouses, or their dependents, and students must be enrolled at least half-time in a degree program (see applicable IRS publications for more specific definitions).

For 2013, qualifying taxpayers may reduce the amount of their income subject to taxation by the lesser of $2,500 or the amount of interest actually paid with this deduction. Taxpayers may claim the deduction if all of the following requirements are met: (1) they file under any status except married filing separately, (2) the exemption for the taxpayer is not being claimed by somebody else, (3) the taxpayer is under a legal obligation to pay interest on a qualified student loan, and (4) interest was actually paid on a qualifying student loan.

Student Loan Interest Deduction Phase-outs

The amount that a taxpayer may deduct for student loan interest paid is subject to phase-outs based upon their filing status and their Modified adjusted gross income (MAGI). For most taxpayers, MAGI will be their adjusted gross income (AGI) as determined on Form 1040 before the deduction for student loan interest is subtracted.

For taxpayers filing as single, head of household, or qualifying widow(er), and making not more than $60,000 MAGI, there is no reduction of the deduction. For taxpayers in those categories making more than $60,000 MAGI but less than $75,000, the phase-out will apply, and for taxpayers making more than $75,000 MAGI, the deduction will be completely eliminated.

For taxpayers filing as married filing jointly, and making not more than $125,000 MAGI, there is no reduction of the deduction. For taxpayers in those categories making more than $125,000 MAGI but less than $155,000, the phase-out will apply, and for taxpayers making more than $155,000 MAGI, the deduction will be completely eliminated.

The phase-out itself is usually determined by the following calculation: a taxpayer’s interest deduction (before the phase-out) is multiplied by a fraction. The numerator is the taxpayer’s MAGI minus $60,000 (or $125,000 for married filing jointly), and the denominator is $15,000 ($30,000 for married filing jointly). The result is then subtracted from the original interest deduction (before the phase-out), and this amount is what the taxpayer may actually deduct.

Form 5472 Basics

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Form 5472 (“Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business”) occupies a place of special importance for an international tax attorney. The chief reason is because, unlike most other international tax forms familiar to an international corporate tax attorney, Form 5472 deals with corporate activities directly in the United States. In particular, the Form is used to provide the IRS with required information (under Internal Revenue Code (IRC) Sections 6038A and 6038C) when a reporting corporation had reportable transactions with a foreign or domestic related party.

Form 5472 is also a form that is often overlooked by the taxpayers; this is why an international corporate tax attorney must be especially vigilant when it comes to U.S. corporations which are partially or fully owned by foreign persons. This is especially important for an international corporate tax attorney, because failure to file Form 5472 can lead to substantial penalties and the IRS has not been shy about imposing these penalties.

In this article, we will explain the basics of Form 5472, and the various penalties that may be imposed on corporations that fail to file the form or do not comply with other requirements. This article is not intended to convey tax or legal advice. U.S. international tax compliance and planning frequently involve many complex areas, and you are advised to consult an experienced tax attorney in these matters. Sherayzen Law Office, Ltd. can assist you in all of your tax and legal needs.

Reporting Corporation

Defining the “reporting corporation” is the first step in the analysis of an international corporate tax attorney. In general, for the purposes of Form 5472, a corporation is defined as “reporting corporation” if it is either: (1) a 25% foreign-owned U.S. corporation, or (2) a foreign corporation engaged in a trade or business within the U.S.

As an international corporate tax attorney, I can tell you that this is not where the issue ends. In addition to direct ownership, the IRC constructive ownership provisions will apply for determining Form 5471 ownership percentages. According to the IRS, a related party is defined to be, “Any direct or indirect 25% foreign shareholder of the reporting corporation, any person who is related (within the meaning of section 267(b) or 707(b)(1)) to the reporting corporation, any person who is related (within the meaning of section 267(b) or 707(b)(1)) to a 25% foreign shareholder of the reporting corporation, or any other person who is related to the reporting corporation within the meaning of section 482 and the related regulations.” However, a related party does not include any corporation that is filing a consolidated tax return with the reporting corporation.

An international corporate tax attorney should be consulted in determining whether your corporation is a “reportable corporation” for Form 5472 purposes.

Reportable Transactions

As noted above, reporting corporations must file Form 5472 if they had a reportable transaction with a foreign or domestic related party. In general, a reportable transaction may cover a wide array of possible transactions.

First, reportable transactions include any type of transactions listed in Part IV of Form 5472 for which monetary consideration was the only consideration paid or received during the reporting corporation’s tax year for any of the following items: sales of stock in trade (inventory); rents or royalties received (for other than intangible property rights); sales, leases, licenses, etc., of intangible property rights; interest received; commissions received, and other categories.

Second, a reportable transaction also includes any type of transaction (or group of transactions) listed in Part V, if any part of the consideration paid or received was not monetary consideration, or in cases where less than full consideration was paid or received.

Whether you have a reportable transaction is a very complex topic; this is why you need to consult an international corporate tax attorney to deal with this issue. I strongly advise against a “do it yourself” attitude in this matter.

Form 5472 Penalties

Several penalties may be imposed for failure to meet various requirements for Form 5472. First, the IRS may assess a failure to file penalty of $10,000 on any reporting corporation that fails to file Form 5472 when due and under the proper compliance requirements (this is the most common penalty that an international corporate tax attorney is likely to see). Note, filing a substantially incomplete Form 5472 will also constitute a failure to file Form 5472 for the purposes of the penalty.

Furthermore, failure by a reporting corporation to maintain records (as required under IRS Regulations section 1.6038A-3), will be deemed to be a failure to file. As an international corporate tax attorney, I often see this penalty imposed in conjunction with other Form 5472 penalties.

There is a further complication: each member of a group of corporations filing a consolidated information return is treated as a separate reporting corporation subject to a separate $10,000 penalty, and each member is jointly and severally liable for such penalty.

Third, if a reporting corporation fails to file Form 5472 for more than 90 days after notification by the IRS, an additional penalty of $10,000 will apply. According to the IRS, “This penalty applies with respect to each related party for which a failure occurs for each 30-day period (or part of a 30-day period) during which the failure continues after the 90-day period ends.”

Finally, in addition to the civil penalties, criminal penalties under IRC sections 7203 (“Willful failure to file return, supply information, or pay tax”), 7206 (“Fraud and false statements”), and 7207 (“Fraudulent returns, statements, or other documents”), may also apply if the reporting corporation fails to submit required information or files false or fraudulent information.

Contact Sherayzen Law Office for Professional Help With Forms 5472

As you can see, filing Form 5472 is not a trivial matter and requires the expertise of an international corporate tax attorney. If you are required to file Form 5472, contact the experienced international corporate tax law firm of Sherayzen Law Office.

Contact Us to Schedule a Confidential Consultation Today!