How Assets Transfer at Death

Estate planning can be very tempting to ignore; the combination of tedium, taxes, and, of course, one's mortality is difficult to face.  Indeed, estate work is the epitome of the cliché "death and taxes".  However, neglecting such plans can leave your loved ones with a confusing and potentially expensive mess to sort out.  This post covers the three fundamental ways assets are transferred at death.

The first and probably most familiar is a Last Will and Testament.  Upon death, your assets make up your estate, and the transfer to your heirs is governed by the Will.  The document must go through the legal process of probate, which validates the Will and allows it to dictate the transfer of assets in the estate.  Probate can impose a burden of time and expense on the estate.  Probate can be limited or avoided by the use of trusts.

A trust is another way to transfer assets, and has the benefit of avoiding a probate.  A revocable trust, or "Living Trust", is type of trust that does not exist as a separate taxable entity from the individual while the individual is alive.  At death, the trust becomes a separate legal entity with its own EIN (employer identification number) and operates according to the trust agreement, which would specify how the assets are to be distributed.  A common error with this estate planning strategy is the failure to retitle all assets to the trust.  The title of assets to the trust is also called "funding" the trust, and any asset left outside the trust must go through the probate process.

While a trust can assist to avoid probate, the time and expense associated with creating a trust document and retitling assets can be every bit as costly as the creation of a Will—not to mention the time and expense associated with following the trust documents and distributing the assets when the time comes.  Therefore, the third way of transferring assets simplifies this process further by designating a beneficiary through each specific asset.  Bank accounts, brokerage accounts, 401(k) plans, and IRAs are all types of assets that will allow you to name a beneficiary or a transfer on death designation.

This is solely a broad overview of estate planning and should not be relied upon as either legal or tax advice.  You should consult with a legal and accounting professional for specific planning related to your situation.


Health Savings Accounts Basics

High-deductible health plans are becoming more common.  A big benefit of these plans is the use of a health savings account (HSA).  An HSA allows you to save money for medical expenses and reduce your taxable income.

To open an HSA you must be enrolled in a high-deductible health plan.  The IRS defines this as an individual plan with a minimum annual deductible of $1,300 and annual out-of-pocket maximum of $6,550 for self-only coverage.  For family coverage these amounts are $2,600 and $13,100 respectively.  These limits are applicable for 2017 and are adjusted annually for inflation.  If you are eligible for Medicare or claimed as a dependent by anyone on their tax return you are not eligible to make HSA contributions.

Many insurance companies offer HSAs, for those that do not, most financial institutions offer separate HSA accounts.  Once you have established your HSA, you can decide how much to contribute.  The maximum amount you are allowed to contribute in 2017, again determined by the IRS and adjusted annually, is $3,400 for self-only coverage and $6,750 for family coverage.  If you are over age 55 you can "catch-up" by adding $1,000 to the maximums each year.

There are a few basic tax advantages to an HSA.  First, the money you contribute is tax deductible.  If your employer offers an HSA plan, the contribution is deducted from your pay-check before taxes are calculated.  If you make contributions outside of payroll, you can deduct the HSA contributions on your tax return.  Another tax advantage is the tax free growth of your HSA.  Any interest, dividends, or capital gains in your HSA account are not included in your taxable income.

An often overlooked component to HSAs, are their investment potential.  Depending on where you hold your HSA you may be able to invest in mutual funds, ETFs, stocks, and other investment vehicles to grow your investment.

If you use the money in your HSA to pay for qualified medical expenses there are no penalties or taxes due.  Once you turn 65, you can withdraw the money for any reason and not incur a penalty – however, the amount is included in your taxable income for that year.  If you withdraw the money before age 65 for a non-qualified expense there is a 20% penalty.

What is a qualified medical expense?  The IRS makes that determination, and there are numerous resources to ascertain what qualifies.  HSA Bank publishes a convenient list that can be found here.

There are numerous situations that can alter the basics described above.  If you have additional questions about HSAs or how they may relate to your specific circumstances, please contact your tax advisor for more information.


Upcoming Tax Due Dates – Fall 2017

September 15th – 3rd quarter estimated tax payments are due for individuals required to pay estimated taxes.

September 15th – Partnership (1065) and S Corporation (1120S) income tax returns for 2016 that are on extension are due.

October 16th – Individual (1040) and Corporate (1120) income tax returns for 2016 that are on extension are due.


Self-Employment Taxes Explained

If you have recently started your own small business you may have heard the term "Self-Employment Tax" crop up in conversations with your advisors.  Self-employment tax is not a new additional tax that you are required to pay because you started a business, but rather the government's way to collect Social Security and Medicare taxes for self-employed individuals.

Social Security and Medicare taxes are due on wages, tips, and net earnings from certain businesses. Self-employed individuals who report earnings on Schedule C of their individual tax return or Partners in partnerships with self-employment earnings are subject to self-employment tax.  Self-employment tax is made up of the following:

  1. Social Security tax 12.4% up to $127,200 of wages, tips, or net earnings in 2017.
  2. Medicare tax 2.9%
  3. Additional Medicare tax .9% this tax is only calculated for taxpayers whose wages, tips, and net earnings (including spouses) exceed certain thresholds depending on filing status. Currently the threshold is $200,000 for Single filers and $250,000 for Married Filing Joint filers.

Net earnings under $400 are not subject to self-employment tax.

As an employee who receives a Form W-2 wage reporting statement you may have noticed that Social Security and Medicare are withheld from your wages to get to your net check and are reported on your W-2.  The amount that is deducted from your pay is only half of the total tax due, your employer pays the other half.  When you are self-employed, the entire burden resides with you.  However, there is a deduction from the total income on your individual tax return that is equal to the employer equivalent or about half of the total self-employment tax. This deduction only affects your income tax and does not affect either your net earnings from self-employment or self-employment tax.

Most self-employed individuals are required to pay estimates throughout the year to pay the self-employment and income tax due on their earnings.  For a full discussion on estimates see our article. It is important to remember self-employment tax when saving for your overall tax liability as the numbers can change dramatically if not considered.  There are different ways of limiting your self-employment tax liability based on entity structure, retirement options, and expense planning.  For guidance on how to reduce your liability based on your individual situation please contact your tax advisor.


Congratulations to Mathew and Leah Koch!

Our newest staff member has celebrated a huge life event! On Saturday January 7th 2017, Matthew tied the knot with college sweetheart Leah Miller.  BHB was very honored to be able to celebrate this occasion with the happy couple. We wish a lifetime of joy and adventure to Mr. and Mrs. Koch.


2017 Update

Welcome to 2017. The rates and phase-out ranges for tax deductions are subject to change and cost-of-living adjustments on an annual basis.  Some of the new changes to 2017 include:

Mileage Rates

Business – 53.5 cents per mile

Medical or moving – 17 cents per mile

Charitable – 14 cents per mile


HSA Contribution

Self-Only – $3,400 (plus an additional $1,000 if 55 or older)

Family – $6,750 (plus an additional $1,000 if 55 or older)


Retirement Plan Contribution Limits

Traditional IRA –  The contribution limit remains the same, $5,500 or $6,500 if 50 or older, but the phase out limits have changed.

Single and Head of Household: phase-out begins at $62,000

Married Filing Joint (both spouses covered by employer plans): phase-out begins at $99,000

Married Filing Joint (only one spouse covered by employer plan): phase-out begins at $186,000

Roth IRA – The contribution limit remains the same, $5,500 or $6,500 if 50 or older, but the phase out limits have changed.

Single and Head of Household: phase-out begins at $118,000

Married Filing Joint: phase-out begins at $186,000

 401K and 403b Plans – the contribution limit for employees that participate in these plans remains the same at $18,000 or $24,000 if 50 or older.

Defined Benefit Plans – limited to $54,000 in 2017


If you have questions about your individual tax situation, contact your tax advisor.


New Small Employer Health Reimbursement Arrangement

In December of 2016 President Obama signed the 21st Century Cures Act into law.  Included in this law was a provision to allow small employers to establish health reimbursement arrangements (HRAs) for their employees.  Previously, with the passage of the Affordable Care Act, these arrangements were subject to very high penalties as they did not satisfy the minimum essential coverage requirements.  There was relief from these penalties that expired in June of 2015.  The Cures Act now makes that relief effective for all plan years beginning before the end of 2016. Moving forward, a new type of reimbursement arrangement can be implemented.

A qualified small employer health reimbursement arrangement (QSEHRA) can be established.  A few guidelines regarding QSEHRAs:

  1. The definition of a "small employer" is the same as defined in the Affordable Care Act – less than 50 full time equivalent employees
  2. The company does not offer a group health plan
  3. The plan must cover all employees with very limited exceptions
  4. There is a cap to how much each employee can be paid – $4,950 per year for single employees and $10,000 per year for family coverage. Benefits generally must be offered at the same level to all employees
  5. The reimbursement arrangement can pay for medical expenses including health insurance premiums
  6. The amounts paid are deductible by the company but not income to the employee if the employee provides annual proof of minimum essential coverage for them and their family members
  7. Companies must provide an annual notice to eligible employees. The notice states the benefit amount and informs the employee to disclose the benefit to the health insurance exchange if they are receiving advance premium tax credits.

It has been a struggle recently for small employers to offer any assistance with employee health insurance.  The passage of the 21st Century Cures Act provides a valuable option that many small businesses can use to their advantage.  It is likely that in the coming months further guidance will emerge to help with the implementation and administration of QSEHRAs.  For additional information, or to discuss how this could benefit you, please contact your trusted tax advisor.


1099 and W2 Deadline Changes

Tax season and its many deadlines are right around the corner.  The first deadline is the information-reporting forms, and beginning in 2017, there are important deadline changes.  In prior years, both forms W2 and 1099 were due to the recipient on January 31, but not due to the IRS until March 31.  Congress has enacted new legislation closing this gap; both Forms 1099 and W2 will be due to the recipient and the IRS on January 31, 2017.

The filing penalties remain largely unchanged, and can be up to $250 for each late filing both to the recipient and to the IRS.  However, the IRS's ability to assess these penalties will significantly improve in 2017.  In previous years, barring audit, a 1099 filer was unlikely to receive a penalty as long as both recipient and IRS filings were completed by March 31—regardless of when the recipient actually received the 1099.  With these deadline changes, the IRS will have the ability to assess failure to file penalties both with the recipient and with the IRS after January 31.  This penalty could be as high as $500 per 1099 whether missed, incorrect, or late.

Given the stringent requirements this year, it is important to get a head start.  Looking at your prior year filings can be a great place to start.  Additionally, let's go over the basic process for 1099s.  First, look for payments of $600 or greater made for services (not goods) throughout the tax year that were done in connection with your trade or business.  Second, determine whether the business is incorporated.  Many corporations will include the acronym ‘Inc.’ in their title if they are incorporated.  You are not typically required to send a 1099 to corporations, however, there are two major exceptions to keep in mind. Payments for attorney or medical services must be sent a 1099 regardless of corporate status.  Third, if the business is not a corporation or cannot be determined, send the business a Form W9.

For further information on the information-reporting requirements, consult your tax advisor.


2016 Year End Tax Planning

As the end of the year approaches, it is a good time to think of planning moves that will help lower your tax bill for this year and possibly the next. Factors that compound the planning challenge this year include turbulence in the stock market, overall economic uncertainty, and Congress's failure to act on a number of important tax breaks that will expire at the end of 2016.

Some of these expiring tax breaks will likely be extended, but perhaps not all, and as in the past, Congress may not decide the fate of these tax breaks until the very end of 2016 (or later). For individuals, these breaks include: the exclusion for discharge of indebtedness on a principal residence, the treatment of mortgage insurance premiums as deductible qualified residence interest, the 7.5% of adjusted gross income floor beneath medical expense deductions for taxpayers age 65 or older, and the deduction for qualified tuition and related expenses. There is also a host of expiring energy provisions, including: the non-business energy property credit, the residential energy property credit, the qualified fuel cell motor vehicle credit, the alternative fuel vehicle refueling property credit, the credit for 2-wheeled plug-in electric vehicles, the new energy efficient homes credit, and the hybrid solar lighting system property credit.

Higher-income earners have unique concerns to address when mapping out year-end plans. They must be wary of the 3.8% surtax on certain unearned income and the additional 0.9% Medicare tax.

The surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of modified adjusted gross income (MAGI) over an unindexed threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case). As year-end nears, a taxpayer's approach to minimizing or eliminating the 3.8% surtax will depend on his estimated MAGI and NII for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, others should try to see if they can reduce MAGI other than NII, and other individuals will need to consider ways to minimize both NII and other types of MAGI.

The 0.9% additional Medicare tax also may require year-end actions. It applies to individuals for whom the sum of their wages received with respect to employment and their self-employment income is in excess of an unindexed threshold amount ($250,000 for joint filers, $125,000 for married couples filing separately, and $200,000 in any other case). Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self-employed persons must take it into account in figuring estimated tax. There could be situations where an employee may need to have more withheld toward the end of the year to cover the tax. For example, if an individual earns $200,000 from one employer during the first half of the year and a like amount from another employer during the balance of the year, he would owe the additional Medicare tax, but there would be no withholding by either employer for the additional Medicare tax since wages from each employer don't exceed $200,000. Also, in determining whether they may need to make adjustments to avoid a penalty for underpayment of estimated tax, individuals also should be mindful that the additional Medicare tax may be over withheld. This could occur, for example, where only one of two married spouses works and reaches the threshold for the employer to withhold, but the couple's combined income won't be high enough to actually cause the tax to be owed.

We have compiled a checklist of additional actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you (or a family member) will likely benefit from many of them.  Please review the following list that pertains to you and contact your tax advisor at your earliest convenience so that they can advise you on which tax-saving moves to make:

Year-End Individual Planning

Year-End Business Planning


Year-End Planning: Taking Advantage of Employee Benefits

With the year-end approaching, employees can take the opportunity to revisit some of their benefits.  The following is a list explaining some of the common benefits and their potential tax ramifications.

  1. Do you have the opportunity to participate in a Health Savings Account (HSA) or a Health Flexible Spending Account (FSA)? If enrolled through your employer, you may contribute to these plans pre-tax up to certain limits annually, and spend the money on qualified healthcare expenses such as deductibles, copays, and prescriptions.  If your employer offers both an HSA and FSA, you may want to consult your tax advisor to decide which is best for you.
  2. Your employer may also offer a dependent care FSA. Similar to a Health FSA, this account permits pre-tax contributions that can be withdrawn to pay for child care.  The maximum annual contribution limit is $5,000.
  3. Have you asked about your employer's qualified transportation benefits? This permits the employer to reimburse you tax free for transportation.  This includes transit passes, parking, vanpooling, and bicycle commuting.
  4. Year end is a good time to evaluate your retirement plans, and set goals for the future. The contribution limit to a 401(k) in 2016 is $18,000.  This is tax deferred income that can grow exponentially by retirement.  If you're nearing retirement, there are options too; the IRS permitted an extra contribution of $6,000 to your 401(k) in 2016 if you are 50 or older by year-end.
  5. Finally, it may be worth taking a look at your pay stub and seeing at what rate you are withholding. If you are not withholding enough, you may be subject to interest and penalties when you file your tax return.  If you are withholding too much, you are granting the IRS an interest free loan.  These are funds you could have put towards an FSA or retirement, which could in turn generate further tax savings.  In order to change your withholding, ask your employer for a Form W-4.

If you have questions on how these benefits may impact your individual tax situation, please contact your tax advisor.