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If you’ve made contributions to or taken distributions from a health savings account (HSA), the IRS requires you to report it on your yearly taxes. That’s where Form 8889 comes in. It details contributions, distributions and potential tax deductions so you can report all HSA-related activities to remain compliant as well as optimize your tax […]

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","

If you have questions or need help managing an HSA, consider reaching out to a financial advisor.

","

What Is a Health Savings Account?

","

A health savings account is a tax-advantaged savings account designed specifically for individuals who have qualified high-deductible health plans (HDHPs). HSAs allow you to set aside pre-tax dollars and use them for qualified medical expenses.

","

HSA contributions are tax-deductible, thereby lowering your taxable income. The funds in an HSA also grow tax-free, and qualified withdrawals for medical expenses are tax-deferred, as well. This triple tax advantage helps maximize savings and minimize the financial burden of healthcare-related costs.

","

You should note that while HSA’s are only available for individuals with HDHPs, you could still keep the account and make distributions if you get different coverage, but you can’t make any more contributions.

","

How Can You Use an HSA?

","

","

The funds in an HSA can be used to cover the cost of medical expenses such as deductibles, copayments, prescription medications and other eligible expenses. And health savings accounts aren’t just for immediate expenses; they can be used for future healthcare needs. Unlike flexible spending accounts (FSAs), HSA funds roll over year to year. This allows you to build a substantial healthcare nest egg over time, and can be especially beneficial in retirement, when medical expenses often increase.

","

To maximize your HSA benefits, consider contributing the maximum allowed amount each year. For 2024, the HSA contribution limits are $4,150 for individuals and $8,300 for families. Additionally, individuals aged 55 and older can make catch-up contributions of up to $1,000 annually.

","

HSAs also offer long-term investment opportunities. Many HSA providers allow you to invest a portion of your funds in mutual funds, stocks, or bonds, similar to a retirement account. The earnings from these investments grow tax-deferred, providing another way to increase your healthcare savings over time.

","

How to File Health Savings Account Tax Form 8889

","

Part of properly managing an HSA involves understanding the health savings account tax form 8889. This form must be filed with your tax return if you’ve contributed to or taken a distribution from your HSA. Form 8889 details contributions, distributions, and the tax implications of your HSA activities. Completing this form accurately is necessary to ensure your compliance with IRS regulations. It also ensures you maximize your tax benefits.

","

On health savings account tax form 8889, you’ll report all contributions made to your health savings account, including those made by your employer. Remember, these contributions are typically tax-deductible, reducing your taxable income. The form allows the IRS to verify that contributions don’t exceed the annual limit.

","

Health savings account tax form 8889 also requires you to report any distributions taken from your HSA. Distributions used for qualified medical expenses are tax-free, while those used for non-qualified expenses are subject to income tax and an additional 20% penalty (unless you’re 65 or older). You’ll need to refer to your plan document to see what is considered a qualified medical expense.

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Bottom Line

","

","

Form 8889 is key when it comes to managing the tax implications of your health savings account. By accurately reporting contributions and distributions, and ensuring that distributions are used for HSA eligible medical expenses, you can fully leverage the tax benefits associated with your HSA while remaining compliant with IRS regulations. Whether you’re saving for current medical expenses or planning for future healthcare needs, understanding and correctly filing Form 8889 can help you maximize your HSA and safeguard your future.

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Health Savings Account Tips

","$47","

Photo credit: ©iStock.com/utah778, ©iStock.com/AsiaVision, ©iStock.com/AsiaVision

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The most common form of retirement account is tax-deferred. This refers to portfolios which allow untaxed contributions and gains during your working life, but which require you to pay income taxes on any money you withdraw in retirement. Other portfolios are known as tax exempt. But this is inaccurate, as the IRS does not offer any completely untaxed retirement accounts. These are post-tax portfolios that do not offer tax advantages on your contributions. However, you can withdraw the portfolio’s returns and principal tax-free in retirement. Here’s what you need to know.

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A financial advisor can help you optimize your financial plan to lower your tax liability.

","

What Are Tax-Deferred Retirement Accounts?

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Tax-deferred retirement accounts are more commonly known as pre-tax retirement accounts.

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These are a form of tax-advantaged investment portfolio designed to help individuals save for retirement. Depending on the nature of the account, they can either be structured around your employment, such as a 401(k), or self-directed, such as an IRA. In all cases, a tax-deferred retirement account is subject to the rules set by Congress and enforced by the IRS.

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How Do Tax-Deferred Retirement Accounts Work?

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All tax-deferred retirement accounts share the same basic structure.

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You receive a tax deduction for the money you contributed to a tax-deferred account each year. This deduction applies up to the account’s contribution limits each year, after which you cannot put more money into that portfolio until the next tax year. For example, if you are under age 50, the 401(k) limit in 2024 caps your contribution at $23,000.

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You can only invest in a tax-deferred retirement account with what’s called “earned income.” In general, this refers to money on which you paid income and employment taxes and restricts funds that you received as an investment return.

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Once the money is in this account, you do not pay taxes for any given year’s returns, dividends, interest or other gains. Depending on your plan, the IRS may restrict what kinds of assets the portfolio can hold. It will also restrict when you can withdraw money from this portfolio. Typically, outside of special hardship circumstances and qualified loans, you cannot take money from a tax-deferred retirement account before age 59 1/2. If you do, the IRS will assess a significant tax penalty.

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You pay income taxes on all of the money you withdraw from a tax-deferred account. This makes these portfolios different from a taxed account in two critical ways: First, you pay income tax rates, not capital gains rates. Second, you pay taxes on the principal (the amounts you paid in) as well as the returns. To ensure that you pay at least some taxes eventually the IRS requires you to take minimum amounts, known as RMDs, from a tax-deferred account starting at age 73.

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The key advantage to a tax-deferred retirement account is lower upfront tax costs. The savings from not paying taxes on your contributions make it cheaper to invest in these portfolios, which in turn can help individuals invest more during their working lives.

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For example, say that you earned $100 and paid a 20% tax rate. With a tax-deferred retirement account you could pay $0 in taxes and contribute the entire $100 to your retirement account. But in retirement, say you withdraw $100 and pay a 20% income tax rate. You would pay $20 on your withdrawal and get to keep the remaining $80.

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What Are the Kinds of Tax-Deferred Retirement Accounts?

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The IRS offers several types of tax-deferred retirement accounts. The most common plans include:

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Individual Retirement Account (IRA)
401(k)
SIMPLE 401(k)
403(b)
SIMPLE Individual Retirement Account
SEP Individual Retirement Account
457(b)

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What Are Tax Exempt Retirement Accounts?

","

","

It is inaccurate to call any retirement account a tax-exempt account, as the IRS does not offer any untaxed retirement plans. The more accurate term is “post-tax retirement plan.”

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These are a form of tax-advantaged investment portfolio designed to help individuals maximize their income while in retirement. Most are self-directed, but some employers will offer post-tax accounts as well. In all cases, a post-tax retirement account is subject to rules set by the IRS.

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How Do Tax Exempt Retirement Accounts Work?

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The rules of a post-tax retirement account are designed to save you money in retirement in exchange for higher tax costs today.

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When you make contributions to a post-tax account, you do not receive a deduction or any other form of tax advantage for this money. You invest in these portfolios with funds on which you have paid income taxes. Like a tax-deferred account, you can only invest in a post-tax account using earned income, which doesn’t include funds that you received from investment returns and securities.

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The IRS limits how much you can contribute to a post-tax account each year. For example, in 2024 you can only contribute $7,000 to a Roth IRA.

","

Once you have invested this money, the IRS restricts when you can withdraw some of it. You can always withdraw your post-tax contributions without paying additional taxes or penalties. But as with a tax-deferred account, typically outside of special hardship situations and qualified loans you cannot take any earnings out of a post-tax retirement account until you turn age 59 1/2.

","

You pay no taxes on your withdrawals from a post-tax retirement account as long as you follow the rules. This means that the funds in your account can grow entirely tax-free. Since you pay no taxes on this money, the IRS does not require annual minimum distributions.

","

The key advantage to a post-tax retirement account is maximizing income. Since you pay taxes on the money you use to fund this portfolio, it’s more expensive to save with these accounts than with a tax-deferred account. However, since you pay no taxes on the account’s returns and your withdrawals, you can maximize your income from the portfolio more easily.

","

For example, say that you earned $100 and paid a 20% income tax rate. With a post-tax account, you would pay $20 in taxes and could invest with the remaining $80. But in retirement, say you withdraw $100 and have a 20% income tax rate. With a post-tax account, you would pay $0 in taxes and could keep the entire $100.

","

What Are the Kinds of Tax Exempt Retirement Accounts?

","

There are two main kinds of post-tax retirement accounts:

","

Roth individual retirement account (IRA)
Roth 401(k)

","

Roth IRAs are self-directed accounts, meaning that you open, fund and manage the account yourself. Roth 401(k)s are employer-directed accounts, meaning that they are only available to individuals who have an employer who will manage the account. Both portfolios operate as a post-tax account.

","

Bottom Line

","

","

Tax-deferred retirement accounts, otherwise known as pre-tax accounts, are retirement accounts which give you a tax deduction for your contributions. While the IRS does not offer any untaxed retirement accounts, post-tax accounts do not give you a deduction for your contributions but they do allow you to make entirely untaxed withdrawals (as long as you follow all the rules).

","

Tips for Tax-Deferred Accounts

","$5f","

Photo credit: ©iStockPhoto/Halfpoint, ©iStockPhoto/MilanMarkovic, ©iStockPhoto/svetikd

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The IRS expects taxpayers to keep the original documentation for capital assets, such as real estate and investments. It uses these documents, along with third-party records, bank statements and published market data, to verify the cost basis of assets. This is an issue that will come up if the IRS has reason to believe that your self-reported information is incomplete or wrong. In some extreme cases, if neither you nor the IRS can determine a satisfactory cost basis for your assets, the agency may require you to treat the cost basis as zero. Here’s what you need to know.

","

A financial advisor can help optimize your financial plan to mitigate your tax liability.

","

What Is Cost Basis?

","

Cost basis is the amount that you pay to buy an asset. In some cases it can be adjusted upward if you also spend money increasing that asset’s value.

","

The IRS uses cost basis to calculate your taxable capital gains. In general, when you sell an investment, real estate or some other asset, your capital gains are calculated as the sale price less the cost basis. This lets you pay taxes only on your profits from a sale, not the money you originally put in.

","

For example, say that you buy a share of stock for $15 and later sell it for $25. Your cost basis for this stock would be $15, the original amount you bought it for. Your taxable capital gains on this sale would be $10, the difference between what you sold it for and what you spent.

","

When you receive an asset without buying it, such as through a gift or inheritance, the IRS applies different rules to determine your cost basis. Each situation will work slightly differently based on the nature of the underlying transaction. When you inherit an asset, the cost basis is usually set to the fair market value of the property at the time of the decedent’s death. If the asset has gained value since the original owner bought it, the cost basis will be increased or “stepped up.”

","

Verifying and Determining Cost Basis

","

","

America uses a self-reporting tax code. This means that taxpayers are required to file their own taxes on which they declare the cost basis of their assets and any taxable capital transactions.

","

As part of this system, the IRS requires taxpayers to maintain the financial records necessary for any underlying assets. For capital assets, like stocks or real estate, you are required to maintain the records necessary to show their original cost basis.

","

If the IRS has reason to believe that your taxes are inaccurate or incomplete, it may conduct an audit. As part of this process it will look for documents to verify the cost basis of any assets that you have claimed on your taxes.

","

Among other documents, the IRS will look for:

","

Purchase Records

","

If you purchased the asset, documents from the original sale are the preferred option for verifying cost basis. This can include any brokerage statements, commission statements or other proof of purchase for securities that you purchased. It can include receipts or other proof of purchase for personal property, and it can include contracts for sale or closing statement for real estate.

","

While the details vary, the best verification of cost basis is the original documentation of the asset’s purchase.

","

Original Deeds or Records

","

If you don’t have the original document of sale, either you or the IRS will look for external records to verify the cost basis of an asset. For real estate, you can use external documents that list the sale price of the property. Depending on the jurisdiction, this can include deeds, offer letters, canceled checks or other records involved with the sale.

","

Third Party Records

","

If you don’t have necessary records, the IRS will look to third parties for confirmation of the asset’s cost basis. This can include pulling documents from banks, lenders and sellers to confirm the value of a real estate transaction or a personal property sale. It might include brokerage records to confirm the sale price of securities, or pulling bank statements to confirm your cash outflow on any given purchase.

","

The value of third party records will vary. In some cases, the IRS will accept these as effectively primary documents. For example, lenders and brokers are generally considered trusted third parties in their respective fields.

","

Market Prices and Comps

","

When you inherit assets, the step-up rule makes it more difficult to establish an asset’s new cost basis. The cost basis of your inherited assets is typically set to the fair market value at the time of the original owner’s death. (In some cases, estate management may set the cost basis to a later date, typically within six months of the decedent’s death.)

","

It is the job of the executor or administrator to establish cost basis of any inherited assets, and to provide adequate documentation to that effect. As a starting point, the value of an asset for estate tax purposes can be used for the asset’s cost basis as well. That is to say, if a bundle of stocks is valued at $10,000 for the purposes of determining estate tax eligibility, then their cost basis is also considered to be $10,000 for the purpose of inheritance.

","

The documents you will need to verify fair market value at time of death will depend on the asset. For assets with a public market, like exchange-traded stocks, you may need nothing more than the published prices for the date in question. For taxable property, you can rely on the assessed tax value. For example, most towns assess a property tax value on assets like cars and real estate, which you can use as proof of their value.

","

Finally, you can use what are known as “comps.” This is particularly useful for more illiquid assets like real estate. Comps are the published sale price for comparable assets. For example, if you inherit a three bedroom house you can look up what other three bedroom houses in the area have recently sold for. This can establish the market for your asset and help you establish its value.

","

Bottom Line

","

","

To verify the cost basis of a capital asset, you will typically need either original documents, third party evidence or published market data. The details will depend on the specific assets involved, and can get particularly complicated when you’re stepping up inherited assets. Therefore, it may be in your interest to work with a financial advisor to make sure that you have complete and accurate information, especially for securities.

","

Tips on Managing Capital Gains Taxes

","$77","

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In most cases, when selling your primary residence you can exclude $500,000 of the gain if you file as a married couple. If that’s your situation, and you meet conditions to have the gain qualify as a long-term capital gain, you likely won’t owe any tax. If you file singly while still meeting long-term capital […]

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","

However, your actual tax bill can vary widely depending on your situation and the tax-management strategies you employ. You may have to pay taxes on some, all or none of your net, depending on circumstances. If you’re evaluating tax consequences of selling your home, consider talking it over with a financial advisor.

","

Capital Gains Tax Basics

","

As a rule, any time you sell an investment for more than you paid, you owe taxes on the gain. This applies to your principal residence as well as stocks, bonds and other assets. If you owned the asset for more than a year, you’ll owe long-term capital gains taxes of 0%, 15% or 20% depending on your income. If you sold the asset after owning it for less than year, the gain is added to your ordinary income which is taxed according to the current income tax brackets.

","

When it comes making a profit by selling your primary residence, special rules apply. The main ones are the $250,000 exclusion for single filers and the $500,000 exclusion for married joint filers. The exclusion means you can deduct this amount from the net gain on the sale. You’re only taxed on what is left afterward and, if there’s nothing left, you’ll owe no tax.

","

Speak with a financial advisor to navigate the nuances of taxes in your own situation.

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Capital Gains Tax in Action

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Much depends on individual circumstances when it comes to taxes on sale of a residence. Here’s what could happen in four different simplified scenarios:

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Scenario One: You are married filing jointly, owned and lived in the home for two of previous five years and haven’t used the exclusion in the last two years. In this case, all of the $480,00 gain would be covered by your $500,000 exclusion. You’d owe no taxes on the sale.

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Scenario Two: You are single filing jointly, owned and lived in home for two of the previous five years and haven’t used the exclusion in previous two years. You can exclude $250,000 of the net, but you’ll owe long-term capital gains at the rate of 15% on $230,000 of the gain. The tax bill would be $34,500.

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Scenario Three: You have owned the home for at least a year but you haven’t lived there for two of the previous five years or you have used the exclusion in the previous two years. You can’t exclude any of the gain and you’ll likely owe capital gains tax of 20% of the $480,000, or $96,000.

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Scenario Four: You haven’t owned the home for at least a year. In this case, the entire $480,000 gain will be added to your ordinary income and be taxed according to the current income tax rates. Your rate will depend on your other income and your filing status. However, the added income is likely to push you into the 35% bracket at least.

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A financial advisor can help you integrate your retirement and tax objectives. Get matched to a fiduciary advisor for free.

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Other Strategies

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If you find yourself owing taxes on sale of your primary home, there are some moves you can make to reduce the bill. The first is to make sure you have accurately calculated the adjusted cost basis when figuring your net. To do this, add the home’s initial purchase price to agent commissions and legal fees paid in connection with the transaction. Also add money you’ve spent for remodeling, additions or improvements. Now subtract this total from the sale price. This is your taxable net gain.

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For instance, say as a single filer you bought the home for $300,000 15 years ago. You sold it recently for $780,000 and you’re using that to calculate your $480,000 net gain. As the seller you paid a 6% real estate agent commission of $46,800, plus $5,000 in eligible legal fees. You put in a $40,000 pool a few years ago, and replaced the roof for $15,000 a while back. These sums amounting to $106,800 can be added to the $300,000 purchase price to generate an adjusted cost basis of $406,800. Now your instead of owing taxes on $230,000, you’ll owe taxes on just $123,200.

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If you’re an investor, you may be able to use offsetting capital losses to lower your taxable gain. For instance, if you lost $50,000 on a stock trade that was realized during the current tax year, you may be able to reduce your capital gain on the home sale by a similar amount. Some conditions apply, such as that you use short-term capital losses to offset short-term capital gains first and the same for long-term capital gains. However, you may be able to cut your tax bill if you have other capital losses.

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Rules on taxing gains from sale of your primary home change from time to time. For instance, at one time you could defer gains. However, that option no longer exists since it was replaced by the current system of exclusions. Another gain-deferral strategy, using like-kind exchanges, only applies to investment properties.

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You may be able to qualify for partial exclusion of the gain if you meet specific requirements, such as you or your spouse being transferred to a workplace at least 50 miles further away than your previous workplace. Health conditions, divorce and unemployment may also open the door to a partial exclusion.

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Consider speaking with a fiduciary financial advisor if you have questions about your personal circumstances.

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Bottom Line

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You can avoid paying any taxes on the gain if you’re married and have lived in the home for at least two of the previous five years and haven’t used the $500,000 principal residence capital gains exclusion in at least two years. If you’re single, you’ll likely pay taxes on at least some of the gain. However, a number of factors other than marital status, length of time in the home and previous exclusion use also may come into play. Depending on the details, you could owe from zero to many thousands of dollars.

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Tips

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