It doesn’t have to be Mom and Dad. The tax-free income can go to your brother or sister, or your best friend.
To make this work, you need to have a business reason to travel and stay overnight at the Mom and Dad Hotel.
Say you travel to a convention, rent your parents’ guest room for five days, and pay them $1,500 fair rent. You deduct the $1,500 as a business travel expense. Your parents have $1,500 of tax-free income.
Sound good? Great—let’s see how you can make this work for you by following three rules.
Rule 1: 14-Day Limit on Renting
Mom and Dad can rent out a room in their home or rent their entire house (tax-free) if they rent it out for no more than 14 days during the year. While the rules are generous in allowing your parents not to include this rental income as taxable income, they can’t offset that income with expenses associated with the rental.
Rule 2: More Than 14-Day Personal Use Requirement
To obtain any tax-free rent, Mom and Dad must personally use the place they rent to you for more than 14 days during the year. For a primary residence, this isn’t a problem.
But for second homes or vacation homes, your rental from Mom and Dad or your brothers and sisters creates potential trouble. Why? Because the days of your rental (at fair value or not) count as days of personal use for Mom or Dad and for your brothers or sisters.
Rule 3: Fair Market Rental Rate
When you stay at a commercial hotel, you pay an established commercial rate. So when you stay with Mom and Dad, other family, or friends, you also need to pay a commercial rate, which the IRS refers to as a fair market rental rate.
Form 1099
Tax law says that when you pay business rents that exceed $600 to an individual during a tax year, you must report the total of those business rents to the IRS. Hence, if you pay Mom and Dad more than $600 in rent during any calendar year, you have to give them (and the IRS) a Form 1099.
Mom and Dad’s Tax Return
Mom and Dad should report the rental income from the Form 1099 on their Schedule E for the year.
Then, because the amount is not taxable, they should subtract that amount in the expense section of Schedule E and add a supporting statement such as the following:
Taxpayers rented their personal residence for fewer than 15 days during the taxable year. The rental income was reported on a 1099 and is thus reported as income on Schedule E. That rent is exempt from taxation under IRC Section 280A(g) and is thus removed with the offsetting expense entry on that same Schedule E.
When you travel out of town overnight, you need to know the tax-home rule. The IRS defines your tax home, and it’s not necessarily in the same town where you have your personal residence.
If you have more than one business location, one of the locations will be your tax home. It’s generally your main place of business.
In determining your main place of business, the IRS takes into account three factors:
the length of time you spend at each location for business purposes;
the degree of business activity in each area; and
the relative financial return from each area.
Here’s a recent court case that illustrates this rule.
Akeem Soboyede, an immigration attorney, was licensed to practice law in both Minnesota and Washington, D.C., and he maintained solo law practices in both Minneapolis and Washington, D.C.
Although Mr. Soboyede’s primary personal residence was in Minneapolis, he divided his time between his office in Minneapolis and his office in Washington, D.C.
Get ready for a chuckle: in court, Mr. Soboyede admitted in his testimony that he did not keep the necessary documentation because he “did not know . . . [he] was going to get audited.”
Due to the lack of records, the IRS disallowed most of the deductions. The remaining issue for the court was the travel expenses for lodging for which Mr. Soboyede had the records.
The court noted that Mr. Soboyede’s lodging expenses were only deductible if he was “away from home” as required by Section 162(a)(2).
In deciding whether Mr. Soboyede’s tax home was in Minneapolis or Washington, D.C., the court used the following two factors:
Where did he spend more of his time?
Where did he derive a greater proportion of his income?
Answer: Washington, D.C. Think about this: He had his home in Minneapolis, but the court ruled that his “tax home” was in Washington, D.C. As a result, he lost his travel deductions.
Under this new law, you may be able to take money from your IRA and other retirement accounts, avoid early withdrawal penalties, and have generous options on repayment (or not). Additionally, you may not have to take the required minimum distribution from your IRA.
COVID-19-Related Distributions from IRAs Get Tax-Favored Treatment
If you are an IRA owner who has been adversely affected by the COVID-19 pandemic, you are probably eligible to take tax-favored distributions from your IRA(s).
For brevity, let’s call these allowable COVID-19 distributions “CVDs.” They can add up to as much as $100,000. Eligible individuals can recontribute (repay) CVD amounts back into an IRA within three years of the withdrawal date and can treat the withdrawals and later recontributions as federal-income-tax-free IRA rollover transactions.
In effect, the CVD privilege allows you to borrow up to $100,000 from your IRA(s) and recontribute the amount(s) at any time up to three years later with no federal income tax consequences. There are no income limits on the CVD privilege, and there are no restrictions on how you can use CVD money during the three-year recontribution period.
If you’re cash-strapped, use the money to pay bills and recontribute later when your financial situation has improved. Help your adult kids out. Pay down your HELOC. Do whatever you want with the money.
CVD Basics
Eligible individuals can take one or more CVDs, up to the $100,000 aggregate limit, and these can come from one or several IRAs. The three-year recontribution period for each CVD begins on the day after you receive it. You can make recontributions in a lump sum or make multiple recontributions. You can recontribute to one or several IRAs, and they don’t have to be the same account(s) you took the CVD(s) from in the first place.
As long as you recontribute the entire CVD amount within the three-year window, the transactions are treated as tax-free IRA rollovers. If you’re under age 59 1/2, the dreaded 10 percent penalty tax that usually applies to early IRA withdrawals does not apply to CVDs.
If your spouse owns one or more IRAs in his or her own name, your spouse is apparently eligible for the same CVD privilege if he or she qualifies (see below).
Do I Qualify for the CVD Privilege?
That’s a good question. Some IRA owners will clearly qualify, while others may have to wait for IRS guidance. For now, here’s what the CARES Act says.
A COVID-19-related distribution is a distribution of up to $100,000 from an eligible retirement plan, including an IRA, that is made onor after January 2, 2020, and before December 31, 2020, to an individual
who is diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention; or
whose spouse or dependent (generally a qualifying child or relative who receives more than half of his or her support from you) is diagnosed with COVID-19 by such a test; or
who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, or forced to reduce work hours due to COVID-19; or
who is unable to work because of a lack of childcare due to COVID-19 and experiences adverse financial consequences as a result; or
who owns or operates a business that has closed or had operating hours reduced due to COVID-19, and who has experienced adverse financial consequences as a result; or
who has experienced adverse financial consequences due to other COVID-19-related factors to be specified in future IRS guidance.
We await IRS guidance on how to interpret the last two factors. We hope and trust that the guidance will be liberally skewed in favor of IRA owners. We shall see.
What If I Don’t Recontribute a CVD within the Three-Year Window?
Another good question. You will owe income tax on the CVD amount that you don’t recontribute within the three-year window, but you don’t have to worry about owing the 10 percent early withdrawal penalty tax if you are under age 59 1/2.
If you don’t repay, you can choose to spread the taxable amount equally over three years, apparently starting with 2020.
Example. Tomorrow you withdraw $90,000 from your IRA, and you don’t recontribute it and don’t elect out of the three-year spread; you have $30,000 of taxable income in years 1, 2, and 3.
Here it gets tricky, because the three-year recontribution window won’t close until sometime in 2023. Until then, it won’t be clear that you failed to take advantage of the tax-free CVD rollover deal.
So, you may have to amend a prior-year tax return to report some additional taxable income from the three-year spread. The language in the CARES Act does not address this issue, so the IRS will have to weigh in. Of course, the IRS may not be in a big hurry to issue guidance right now, because it has three years to mull it over.
You also have the option of simply electing to report the taxable income from the CVD on your 2020 Form 1040. You won’t owe the 10 percent early withdrawal penalty tax if you are under age 59 1/2.
Can the One-IRA-Rollover-per-Year Limitation Prevent Me from Taking Advantage of the CVD Deal?
Gee, you ask a lot of good questions. The answer is no, because when you recontribute CVD money within the three-year window, it is deemed to be done via a direct trustee-to-trustee transfer that is exempt from the one-IRA-rollover-per-year rule. So, no worries there.
Can I Take a CVD from My Company’s Tax-Favored Retirement Plan?
Yes, if your company allows it. The tax rules are similar to those that apply to CVDs taken from IRAs. That said, employers and the IRS have lots of work to do to figure out the details for CVDs taken from employer-sponsored qualified retirement plans. Stay tuned for more information.
More Good News: Retirement Account Required Minimum Distribution Rules Are Suspended for 2020
In normal times, after reaching the magic age, you must start taking annual required minimum distributions (RMDs) from traditional IRAs set up in your name (including SEP-IRA and SIMPLE-IRA accounts) and from tax-favored company retirement plan accounts. The magic age is 70 1/2 if you attained that age before 2020 or 72 if you attain age 70 1/2 after 2019.
And you must pay income tax on the taxable portion of your RMDs. Thankfully, the CARES Act suspends all RMDs that you would otherwise have to take in 2020.
The suspension applies equally to your initial RMD if you turned 70 1/2 last year and did not take that initial RMD last year (the initial RMD is actually for calendar year 2019). Before the CARES Act, the deadline for taking that initial RMD was April 1, 2020. Now, thanks to the CARES Act, you can put off any and all RMDs that you otherwise would have had to take this year. Good!
For 2021 and beyond, the RMD rules will be applied as if 2020 never happened. In other words, all the RMD deadlines will be pushed back by one year, and any deadlines that otherwise would have applied for 2020 will simply be ignored.
Takeaways
The CVD privilege can be a very helpful and very flexible tax-favored financial arrangement for eligible IRA owners.
You can get needed cash into your hands right now without incurring the early withdrawal penalties.
You can then recontribute the CVD amount anytime within the three-year window that will close sometime in 2023—depending on the date you take the CVD—to avoid any federal income tax hit.
The suspension of RMDs for this year helps your 2020 tax situation, because you avoid the tax hit on RMDs that you otherwise would have had to withdraw and include as taxable income this year.
After the terrorist attacks on September 11, 2001, Congress added a little-known tax provision to the tax law. This little-known tax code provision exempts certain payments from taxation during a disaster or terrorist attack.
President Donald Trump’s national emergency declaration triggered the disaster provisions of the tax law, including this one—where both you and your employees can reap benefits during this COVID-19 pandemic.
How This Works
Because of the pandemic, the tax code makes the following tax-free to your employees:
Payments they receive from you for necessary personal, family, living, or funeral expenses incurred as a result of COVID-19
Payments they receive from you for reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence, or for the repair or replacement of its contents, to the extent that the need for such repair, rehabilitation, or replacement is attributable to COVID-19
The qualified COVID-19 disaster relief payments are free of income tax, payroll taxes, and self-employment tax. Not only are the payments tax-free to your employee, but they are deductible to you as a business expense, regardless of whether or not the payment ends up being tax-free to the employee.
Payments That Do Not Work
The exclusion from income does not apply to payments in the nature of income replacement, such as payments to individuals for lost wages, unemployment compensation, or payments in the nature of business income replacement.
Payments to business entities don’t qualify, either. Qualified disaster relief payments do not include payments for any expenses compensated by insurance or otherwise.
Payments You Can Make
Here’s an example: the IRS ruled that grants received by employees under an employer program to pay or reimburse reasonable and necessary medical, temporary housing, or transportation expenses incurred as a result of a flood qualify for this benefit.
With respect to the COVID-19 pandemic, you could reimburse or pay for the following employee expenses under this guidance:
Out-of-pocket medical costs not covered by health insurance
Teleworking costs, such as a computer, office equipment, telephone, and supplies
Funeral costs for an employee or an employee’s family member
Childcare costs so that your employees can continue to work while children are home from school
Planning note. Because of the Tax Cuts and Jobs Act, employees may not deduct employee business expenses during tax years 2018-2025, so your reimbursement of such expenses under the disaster rules is extra valuable.
Documentation
Here’s a surprise: Congress doesn’t think taxpayers can account for their actual expenses because they are going through a disaster, so taxpayers are in the clear provided the payments received and treated as tax-free are reasonably expected to be commensurate with the expenses they incurred.
Even if the IRS is generous with documentation requirements, we recommend you implement a formal, written plan with
starting and ending dates of the program;
a listing of the expenses you will pay or reimburse;
the maximum payment per employee;
maximum total payments through the plan; and
a procedure the employee will use to request funds.
You should also track the names and amounts provided to each employee under the program terms.
Example
During the COVID-19 pandemic, you establish a plan to help employees with telework expenses, allowing each employee to get a $1,500 grant for equipment, supplies, and use of home utilities.
Your employees Sam and Helen each apply, and each estimate they will spend $1,500 on a form you provide. Sam and Helen each spend approximately $1,500 on telework equipment and supplies.
In
December 2017, Congress enacted the Tax Cuts and Jobs Act (TCJA) and changed
how your children calculate their tax on their investment-type income. The TCJA
changes led to much higher tax bills for many children.
On
December 19, 2019, Congress passed a bill that the president signed into law on
December 20, 2019 (Pub. L. 116-94). The new law repeals the kiddie tax changes
from the TCJA and takes you back to the old kiddie tax rules, even
retroactively if you so desire.
Kiddie Tax Basics
When
your children are subject to the kiddie tax, it forces them to pay taxes at a
higher rate than the rate they would usually pay.
Here’s
the key: the kiddie tax does not apply to all of a child’s income, only to his
or her “unearned” income, which means income from
dividends,
rent,
capital
gains,
interest,
S
corporation distributions, and
any
type of income other than compensation for work.
For
2019, your child pays the kiddie tax only on unearned income above $2,100. For
example, if your child has $3,000 of unearned income, only $900 is subject to
the extra taxes.
Who Pays the
Kiddie Tax?
The
kiddie tax applies to children with more than $2,100 of unearned income when
the children
have
to file a tax return,
do
not file a joint tax return,
have
at least one living parent at the end of the year,
are
under age 18 at the end of the year,
are
age 18 at the end of the year and did not have earned income that was more than
half of their support, or
are
full-time students over age 18 and under age 24 at the end of the year who did
not have earned income that was more than half of their support.
Calculating the
Kiddie Tax
Under
the TCJA, now valid only for tax years 2018 and 2019, any income subject to the
kiddie tax is taxed at estate and trust tax rates, which reach a monstrous 37
percent with only $12,070 of income in tax year 2019.
Under
the old rules before the TCJA, your child paid tax at your tax rate on income
subject to the kiddie tax.
Kiddie Tax Choices
The
SECURE Act, which the president signed into law on December 20, 2019, repeals
the TCJA kiddie tax rules for tax years 2020 and forward and returns the tax
calculation to the pre-TCJA calculation that uses your tax rate.
The
new law also gives you the option to calculate the kiddie tax using your tax
rate for tax years 2018, 2019, or both—it is your choice.
As
has become usual practice, Congress passed some meaningful tax legislation as
it recessed for the holidays. In one of the new meaningful laws, enacted on
December 20, you will find the Setting Every Community Up for Retirement
Enhancement Act of 2019 (SECURE Act).
The
SECURE Act made many changes to how you save money for your retirement, how you
use your money in retirement, and how you can better use your Section 529
plans. Whether you are age 35 or age 75, these changes affect you.
If your business has a 401(k) plan or a SIMPLE
(Savings Incentive Match Plan for Employees) plan that covers 100 or fewer
employees and it implements an automatic contribution arrangement for
employees, either you or it qualifies for a $500 tax credit each year for three
years, beginning with the first year of such automatic contribution.
This change is effective for tax years beginning
after December 31, 2019.
Tax tip. This credit can apply to both newly created and existing retirement
plans.
2. IRA
Contributions for Graduate and Postdoctoral Students
Before the SECURE Act, certain taxable stipends and
non-tuition fellowship payments received by graduate and postdoctoral students
were included in taxable income but not treated as compensation for IRA
purposes. Thus, the monies received did not count as compensation that would
enable IRA contributions.
The SECURE Act removed the “compensation” obstacle.
The new law states: “The term ‘compensation’ shall include any amount which is
included in the individual’s gross income and paid to the individual to aid the
individual in the pursuit of graduate or postdoctoral study.”
The change enables these students to begin saving
for retirement and accumulating tax-favored retirement savings, if they have
any funds available (remember, these are students). This change applies to tax
years beginning after December 31, 2019.
Tax tip. If your child pays no income tax or pays tax at the 10 or 12 percent
rate, consider contributing to a Roth IRA instead of a traditional IRA.
3. No Age Limit on
Traditional IRA Contributions
Prior law stopped you from contributing funds to a
traditional IRA if you were age 70 1/2 or older. Now you can make a traditional
IRA contribution at any age, just as you could and still can with a Roth IRA.
This change applies to contributions made for tax
years beginning after December 31, 2019.
4. No 10 Percent Penalty
for Birth/Adoption Withdrawals
You pay no 10 percent early withdrawal penalty on
IRA or qualified retirement plan distributions if the distribution is a
“qualified birth or adoption distribution.” The maximum penalty-free
distribution is $5,000 per individual per birth or adoption. For this purpose,
a qualified plan does not include a defined benefit plan.
This change applies to distributions made after
December 31, 2019.
Tax tip. A birth or adoption in 2019 can signal the start of the one year, allowing
qualified birth and adoption distributions as soon as January 1, 2020.
5. RMDs Start at
Age 72
Before the SECURE Act, you generally had to start
taking required minimum distributions (RMDs) from your traditional IRA or
qualified retirement plan in the tax year you turned age 70 1/2. Now you can
wait until the tax year you turn age 72.
This change applies to RMDs after December 31, 2019,
if you turn age 70 1/2 after December 31, 2019.
6. Open a
Retirement Plan Later
Under the SECURE Act, if you adopt a stock bonus,
pension, profit-sharing, or annuity plan after the close of a tax year but
before your tax return due date plus extensions, you can elect to treat the
plan as if you adopted it on the last day of the tax year.
Under prior law, you had to establish the plan
before the end of the tax year to make contributions for that tax year. This
change applies to plans adopted for tax years beginning after December 31,
2019.
How it works. You can establish and fund, for example, an individual 401(k) for a
Schedule C business as late as October 15, 2021, and have the 401(k) in place
for 2020.
7. Expanded
Tax-Free Section 529 Plan Distributions
Distributions from your child’s Section 529 college
savings plan are non-taxable if the amounts distributed are
investments into the plan (your basis), or
used for qualified higher education expenses.
Qualified higher-education expenses now include
fees, books, supplies, and equipment required for
the designated beneficiary’s participation in an apprenticeship program
registered and certified with the Secretary of Labor under Section 1 of the
National Apprenticeship Act, and
principal or interest payments on any qualified
education loan of the designated beneficiary or his or her siblings.
If you rely on the student loan provision to make
tax-free Section 529 plan distributions,
there is a $10,000 maximum per individual loan
holder, and
the loan holder reduces his or her student loan
interest deduction by the distributions, but not below $0.
This change applies to distributions made after
December 31, 2018 (not a typo—see below).
Tax tip. Did you notice the 2018 above? Good news. You can use the new qualified
expense categories to identify tax-free Section 529 distributions that are
retroactive to 2019.
8. RMDs on
Inherited Accounts
Under the old rules for inherited retirement
accounts, you could “stretch” out the account and take RMDs each year to
deplete the account over many years.
Now, if you inherit a defined contribution plan or
an IRA, you must fully distribute the balances of these plans by the end of the
10th calendar year following the year of death. There is no longer a
requirement to take out a certain amount each year.
The current stretch rules, and not the new 10-year
period, continue to apply to a designated beneficiary who is
a surviving spouse,
a child who has not reached the age of majority,
disabled as defined in Code Section 72(m)(7),
a chronically ill individual as defined in Code
Section 7702B(e)(2) with modification, or
not more than 10 years younger than the deceased.
This change applies to distributions for plan owners
who die after December 31, 2019.
Congress
let many tax provisions expire on December 31, 2017, making them dead for your
already-filed 2018 tax returns.
In
what has become a much too common practice, Congress resurrected the dead
provisions retroactively to January 1, 2018. That’s good news. The bad news is
that if you have any of these deductions, we have to amend your tax returns to
make this work for you.
And
you can relax when filing your 2019 and 2020 tax returns because lawmakers
extended the “extender” tax laws for both years. Thus, no worries until
2021—and even longer for a few extenders that received special treatment.
Back from the Dead
The big five tax breaks that most likely impact your
Form 1040 are as follows:
Exclusion from income for cancellation of acquisition debt on your
principal residence (up to $2 million)
Deduction for mortgage insurance premiums as residence interest
7.5 percent floor to deduct medical expenses (instead of 10 percent)
Above-the-line tuition and fees deduction
Non-business energy property credit for energy-efficient improvements to
your residence
Congress extended these five tax breaks
retroactively to January 1, 2018. They now expire on December 31, 2020, so
you’re good for both 2019 and 2020.
Other Provisions
Revived
Congress also extended the following tax breaks
retroactively to January 1, 2018, and they now expire on December 31, 2020
(unless otherwise noted):
If
you are self-employed, you have much to think about as you enter your senior
years, and that includes retirement savings and Medicare. Here a few thoughts
that will help.
Keep
Making Retirement Account Contributions, and Make Extra “Catch-up”
Contributions Too
Self-employed
individuals who are age 50 and older as of the applicable year-end can make
additional elective deferral catch-up contributions to certain types of
tax-advantaged retirement accounts.
For
the 2019 tax year, you can take advantage of this opportunity if you will be 50
or older as of December 31, 2019.
You
can make elective deferral catch-up contributions to your self-employed 401(k)
plan or to a SIMPLE IRA.
You
can also make catch-up contributions to a traditional or Roth IRA.
The
maximum catch-up contributions for 2019 are as follows:
401(k) Plan
SIMPLE IRA
Traditional or
Roth IRA
$6,000
$3,000
$1,000
Catch-up
contributions are above and beyond
the
“regular” 2019 elective deferral contribution limit of $19,000 that otherwise
applies to a 401(k) plan.
the
“regular” 2019 elective deferral contribution limit of $13,000 that otherwise
applies to a SIMPLE IRA.
the
“regular” 2019 contribution limit of $6,000 that otherwise applies to a
traditional or Roth IRA.
How
Much Can Those Catch-up Contributions Be Worth?
Good
question.You might dismiss catch-up contributions as relatively
inconsequential unless we can prove otherwise. Fair enough. Here’s your proof:
401(k)
catch-up contributions. Say you turned 50 during 2019 and contributed on
January 1, 2019, an extra $6,000 for this year to your self-employed 401(k)
account and then did the same for the following 15 years, up to age 65. Here’s
how much extra you could accumulate in your 401(k) account by the end of the
year you reach age 65, assuming the indicated annual rates of return below:
4% Return
6% Return
8% Return
$136,185
$163,277
$196,501
Is
There an Upper Age Limit for Regular and Catch-up Contributions?
Another
good question.
While
you must begin taking annual required minimum distributions (RMDs) from a
401(k), SIMPLE IRA, or traditional IRA account after reaching age 70 1/2, you
can continue to contribute to your 401(k), SIMPLE IRA, or Roth IRA account
after reaching that age, as long as you have self-employment income (subject to
the income limit for annual Roth contribution eligibility).
But
you may not contribute to a traditional IRA after reaching age 70 1/2.
Claim a
Self-Employed Health Insurance Deduction for Medicare and Long-Term
Care Insurance Premiums
If
you are self-employed as a sole proprietor, an LLC member treated as a sole
proprietor for tax purposes, a partner, an LLC member treated as a partner for
tax purposes, or an S corporation shareholder-employee, you can generally claim
an above-the-line deduction for health insurance premiums, including Medicare
health insurance premiums, paid for you or your spouse.
Key
point.
You don’t need to itemize deductions to get the tax-saving benefit from this
above-the-line self-employed health insurance deduction.
Medicare Part A
Premiums
Medicare
Part A coverage is commonly called Medicare
hospital insurance. It covers inpatient hospital care, skilled nursing
facility care, and some home health care services. You don’t have to pay
premiums for Part A coverage if you paid Medicare taxes for 40 or more quarters
during your working years. That’s because you’re considered to have paid your
Part A premiums via Medicare taxes on wages and/or self-employment income.
But
some individuals did not pay Medicare taxes for enough months while working and
must pay premiums for Part A coverage.
If
you paid Medicare taxes for 30-39 quarters, the 2019 Part A premium is $240
per month ($2,880 if premiums are paid for the full year).
If
you paid Medicare taxes for less than 30 quarters, the 2019 Part A
premium is $437 ($5,244 for the full year).
Your
spouse is charged the same Part A premiums if he or she paid Medicare taxes for
less than 40 quarters while working.
Medicare Part B
Premiums
Medicare
Part B coverage is commonly called Medicare
medical insurance or Original Medicare. Part B mainly covers doctors and
outpatient services, and Medicare-eligible individuals must pay monthly
premiums for this benefit.
Your
monthly premium for the current year depends on your modified adjusted gross
income (MAGI) as reported on Form 1040 for two years earlier. For example, your
2019 premiums depend on your 2017 MAGI.
MAGI
is defined as “regular” AGI from your Form 1040 plus any tax-exempt interest
income.
Base premiums. For 2019, most folks pay the base premium of $135.60
per month ($1,627 for the full year).
Surcharges for higher-income individuals. Higher-income
individuals must pay surcharges in addition to the base premium for Part B
coverage.
For
2019, the Part B surcharges depend on the MAGI amount from your 2017 Form 1040.
Surcharges apply to unmarried individuals with 2017 MAGI in excess of $85,000
and married individuals who filed joint 2017 returns with MAGI in excess of
$170,000.
Including
the surcharges (which go up as 2017 MAGI goes up), the 2019 Part B monthly
premiums for each covered person can be $189.60 ($2,275 for the full year), $270.90
($3,251 for the full year), $352.20 ($4,226 for the full year), $433.40 ($5,201
for the full year), or $460.50 ($5,526 for the full year).
The
maximum $460.50 monthly premium applies to unmarried individuals with 2017 MAGI
in excess of $500,000 and married individuals who filed 2017 joint returns with
MAGI in excess of $750,000.
Medicare Part D
Premiums
Medicare
Part D is private prescription drug coverage. Premiums vary depending on the
plan you select. Higher-income individuals must pay a surcharge in addition to
the base premium.
Surcharges for higher-income individuals. For 2019, the Part
D surcharges depend on your 2017 MAGI, and they go up using the same scale as
the Part B surcharges.
The
2019 monthly surcharge amounts for each covered person can be $12.40, $31.90,
$51.40, $70.90, or $77.40. The maximum $77.40 surcharge applies to unmarried
individuals with 2017 MAGI in excess of $500,000 and married individuals who
filed 2017 joint returns with MAGI in excess of $750,000.
Medigap Supplemental
Coverage Premiums
Medicare
Parts A and B do not pay for all health care services and supplies. Coverage
gaps include copayments, coinsurance, and deductibles.
You
can buy a so-called Medigap policy, which is private supplemental
insurance that’s intended to cover some or all of the gaps. Premiums vary
depending on the plan you select.
Medicare Advantage
Premiums
You
can get your Medicare benefits from the government through Part A and Part B
coverage or through a so-called Medicare
Advantage plan offered by a private insurance company. Medicare Advantage
plans are sometimes called Medicare Part C.
Medicare
pays the Medicare Advantage insurance company to cover Medicare Part A and Part
B benefits. The insurance company then pays your claims. Your Medicare
Advantage plan may also include prescription drug coverage (like Medicare Part
D), and it may cover dental and vision care expenses that are not covered by
Medicare Part B.
When
you enroll in a Medicare Advantage plan, you continue to pay Medicare Part A
and B premiums to the government. You may pay a separate additional monthly
premium to the insurance company for the Medicare Advantage plan, but some
Medicare Advantage plans do not charge any additional premium. The additional
premium, if any, depends on the plan that you select.
Key point. Medigap policies
do not work with Medicare Advantage plans. So if you join a Medicare Advantage
plan, you should drop any Medigap coverage.
Premiums for Qualified Long-Term Care Insurance
These
premiums also count as medical expenses for purposes of the above-the-line
self-employed health insurance premium deduction, subject to the age-based
limits shown below. For each covered person, count the lesser of premiums paid
in 2019 or the applicable age-based limit.
Your
age as of December 31, 2019, determines your maximum self-employed health insurance
tax deduction for your long-term care insurance as follows:
If you frown at the high cost of a college education, this tax strategy is for you. You can put your child on the payroll of your practice for performing office chores and other business-related tasks. The most common way to utilize young children in your small business is for them to provide cleaning services, or routine copying, filing, and typing.
In 2018, a child can earn up to $12,000 and pay no federal income taxes on the earnings because of the standard deduction. Your business can deduct wages paid to your child provided the amount is reasonable and for bona fide work. Bottom line: You’ll escape federal income taxes of up to $12,000 of your business income, and if you are a sole proprietorship, you will eliminate self-employment tax on the income as well.
Any income your child earns over and above the $12,000 standard deduction is taxable at your child’s rate. Since the 10% tax bracket extends to $9,525 for a single filer, your child could earn an additional $9,525 and owe just $952.50 of federal income tax on the money. Because your marginal tax rate is likely much higher, the extra money your child earns may result in family tax savings.
Tell us a little about yourself and we’ll get back to you very soon.
One way to save on taxes for you and your employees is to compensate them by increasing your contribution to their health insurance costs instead of giving them the same amount in terms of a salary increase. You could give everyone a $500 a month raise but then your employees would have to pay income tax, FICA & Medicare tax on those wages. Also, you have to pay your employer’s portion of FICA, Medicare Tax and may have to pay additional federal and state unemployment taxes as well. If you pay $500 more for medical insurance, you eliminate the income tax, FICA, Medicare, and unemployment taxes. This is a Win-Win for both you and your employees.
Tell us a little about yourself and we’ll get back to you very soon.
