Don’t Forget Your End of Year Tax Planning!
As open enrollment season and the calendar year comes to a close, late-stage tax planning often comes into focus. Just sticking with your current employment elections may be mistake – there are several end of year tax planning options to consider. Here are a few items on the list for you to check as the year winds down.
It would be wise to keep in mind what the final parts of the Tax Cuts and Jobs Act, signed December 2017, will eventually mean for your healthcare planning. Although a few of the provisions of the act don’t apply until 2019, they are still important to consider.
The two most significant would include:
Medical expenses must exceed 10% of your adjusted gross income to be deductible starting in 2019. Previously only expenses over 7.5% were generally deductible.
Penalty payments will no longer be assessed for not purchasing health insurance meeting ACA guidelines.
Given this, it’s quite likely that health insurance costs will see a significant increase next year – particularly for those with individual rather than group policies.
What actions should you consider taking?
Brady Bunch It Up
Consider bringing some medical expenses into 2018 to exceed the lower threshold; afterwards, you can try grouping your medical expenses into one calendar year again in the future -- but at the higher hurdle rate. This late in the year, consider any discretionary medical expenses that you have been putting off such as dental or vision work.
It’s great to track these expenses using an automated system such as eMoney to streamline your process and reduce error.
By the way, the above technique, often referred to as “bunching” deductions, can also be expanded to other itemized deductions such as charitable giving. This allows you to exceed the standard deductions of $12,000 or $24,000 for individual and joint tax returns, respectively.
Use Account Options Strategically
Consider enrolling in tax advantaged medical plans or setting up your own. One of the best options would be a Health Savings Account (HSA) if you are comfortable with maintaining a high deductible health insurance plan. With it you can save up to $3,500 individually or $7,000 for family coverage, and grow the account through retirement if you wish.
If an HSA is not available, good employer plan alternatives include Medical Savings Accounts (MSAs), and Flexible Savings Accounts (FSAs). Certain small business owners should consider Health Reimbursement Arrangements (HRAs), an IRS approved reimbursement for out of pocket expenses and health premiums.
Rethink Your Other Insurance Coverages
If you are dealing with your benefits through your employer’s open enrollment program, don’t forget to look through options beyond health insurance. It’s common to overlook disability insurance and simply elect the standard $50,000 of group life insurance, but are you sure that will be enough? Consider what your life could look like over the next 12-18 months and plan accordingly. If you have any questions about this, leverage a knowledgeable financial and tax professional if you have access to one.
Busch, Fritz, and Houchens, Paul R. (2018, March 1). The individual mandate repeal: Will it matter? Milliman. Retrieved from http://www.milliman.com/insight/2018/The-individual-mandate-repeal-Will-it-matter/
Nathanson, Michael J, Nathanson, Joshua, and McKeown, Matthew. (2018, October 1). Tax Cuts Part II. Phase II, Part 3: Elimination of the Penalty for Individuals Failing to Maintain Minimum Health Insurance Coverage. Financial Advisor. Retrieved from https://www.fa-mag.com/news/tax-cuts-part-ii-41067.html?section=47&page=3