Accounting On Us
Weird tax stuff
The stuff that weirds out even the CPAs
Donna H. Laubscher, CPA
Taxes are just weird. I mean, they can also be interesting, and exciting, and mind-blowing. While they can also be complicated and hard to understand, there are some things that are weird even to a CPA. But you should be aware of the weirdness so that you don’t get them wrong.
Health Savings Accounts
Let’s start with Health Savings Accounts (HSA). HSA’s have a reputation of being just for the wealthy, but really, they are for everyone. An HSA is an account that lets you set aside money on a tax-free basis to use for medical expenses. As long as you have a high deductible plan, you can contribute to an HSA account. There are no age requirements for these contributions.
However, there is one anomaly you need to know. If you are on Medicare, you can no longer contribute to an HSA. You can take distributions from your HSA. But contributions can no longer be made. Weird, huh?
There is a limit to how much you can contribute to an HSA. For 2019, you can contribute up to $3,500 for a self-only plan and up to $7,000 for family coverage. These amounts are indexed for inflation, and in 2020 the self-only amount is $3,550 and the family coverage is $7,100.
Now most people probably aren’t dealing with livestock sales, but there is a lot of variety in how these sales are taxed. If the livestock sold is held for in the course of business, or they are treated as ordinary income, they are subject to normal (not capital gain) income tax rates. However, the sales on livestock that’s held for breeding, dairy, or sport, can be subject to capital gains rates that are lower than the ordinary income tax rates. These livestock sales—the ones that get the capital gain tax treatment—also aren’t subject to self-employment tax on an individual tax return.
Besides different rules, what is so weird about livestock sales? While the holding period for most capital assets is one year, plus one day, livestock must be held for a minimum of two years, plus one day. So keep that cow or horse or pig around for at least two years.
Generally, clients want to take large expenditures as a tax deduction, such as home improvements. Home improvements, however, generally add to the basis of your house, which then can reduce the potential gain when a home is sold; this means that a tax deduction is not also available.
But, and maybe you are beginning to catch on, there is an exception to this rule. If the improvements are made for medical reasons and don’t increase the market value of the house, they can be taken as a medical expense on your individual income tax return. What if it does increase the value? If it does, then you get to pro-rate expenditure between the increase in fair market value and medical expense. In order to take as a deduction, you must itemize deductions and not take the standard deduction.
You also need total medical expenses for the year to be higher than 10% of your adjusted gross income. Yes, that is correct, 10%. That 10% is not because it is home improvements, it is because the law changed from the 7.5% threshold that was the rule in both 2017 and 2018.
Home improvements that can qualify include:
- handrails or grab bars (and not just in bathrooms)
- installing elevators
- lowering kitchen cabinetry
- modifying areas in front of entrance and exit doorways
- modifying stairways
- adding handrails
- modifying hardware on doors
These are just a few of the weird tax things that can catch you unaware or possibly even boggle the minds of some CPAs. Hopefully they seem a little less confusing now. If you have any questions, don’t be spooked and reach out to your friendly Henry+Horne CPA.