New Medicare law creates tax-favored savings accounts

On December 8, 2003, President Bush signed into law a Medicare prescription drug bill that included new health savings accounts for taxpayers under age 65. Similar to IRAs, these new accounts can be used to build tax-sheltered nest eggs that can pay out-of-pocket medical expenses tax-free.

To qualify for a health savings account (HSA), a taxpayer must meet two requirements:

1. The taxpayer must have a health insurance plan with a high deductible (defined as $1,000 for an individual and $2,000 for a family).

2. The taxpayer must be under 65 when opening the account.

Each year the taxpayer can make up to $2,600 of tax-deductible contributions to the account (up to $5,150 for families). Funds in the account are invested and grow tax-free as with IRAs, and withdrawals used for medical expenses are tax-free. Unlike funds set aside for medical expenses in flexible spending accounts, unspent funds in HSAs remain in the account to grow tax-free year after year. The law imposes few restrictions on how funds in these accounts can be invested. After age 65, withdrawals can be made and used for any purpose penalty-free but not income tax-free.

Health savings accounts can be established effective January 1, 2004. If you're interested in learning more about these accounts, give us a call. You can contact us at (781)453-8700.

Deciding which records to keep and for how long can be a confusing process. A well-organized system will help you retain important paperwork and minimize the clutter. Use legal requirements and your common sense as guidelines for how long to hold on to records.

* Tax records. You should keep tax records for at least as long as it is possible for tax authorities to audit your return. Generally, the IRS has three years after the return is due or filed, whichever is later, to examine your return and assess additional tax. This is called the "statute of limitations."

If you've made a major error on your return (defined as omitting more than 25% of your gross income), the IRS has six years to examine your return. There is no statute of limitation for fraudulent filing or for returns that are not filed at all.

To be on the safe side, keep your tax records for seven years after a tax return is filed. The IRS does not require that you keep your records in any particular way. The only requirement is that your records allow you and the IRS to determine your correct tax liability. Keep checks, receipts, and other records that document the income and deductions you report on your tax return. Copies of tax returns themselves should be retained permanently.

* Home. Expenditures for your home fall into two categories: "repairs" (such as routine yard maintenance and painting) and "improvements" (usually big-ticket items such as room additions).

Discard repair receipts once the warranty period expires, but keep receipts for improvements indefinitely. Improvements add to the tax basis of your property. Despite the $250,000 capital gain exclusion amount ($500,000 for joint filers), substantial increases in market value could make you liable for capital gains tax when you sell your home. Complete records of your home's original cost plus improvements will help reduce any taxes due.

* Investment records. Investment records generally should be kept until the investment is totally liquidated, plus a period of seven years. Keep any records for taxable accounts that show reinvested dividends. You can usually toss monthly or quarterly investment statements if you receive a comprehensive annual statement.

* Investment real estate. Keep all documents relating to purchases of property, along with substantiation for improvements made to the property. Keep written appraisals and tax depreciation schedules.

* Individual retirement accounts. Keep copies of Forms 5498, 8606, and 1099R until all money has been withdrawn from your IRAs. Good records are necessary so that you aren't taxed on nontaxable withdrawals.

* Insurance. Keep your current policies and 12 months' worth of cancelled checks and statements. Ask your insurance agent about discarding expired policies. Your liability for prior years can vary.

*Estate planning documents. In your home, keep a copy of your current will, any trusts, and any special directives. Give the originals to your attorney, and consult your attorney about destroying all out-of-date documents.

* Keep it simple. In most cases, you don't need an elaborate recordkeeping system to keep your affairs in order. File tax returns separately by year, and file investment records by broker. For expenses, even an accordion file tabbed by category works wonders.

If you have any questions or need assistance in setting up a recordkeeping system, give us a call. You can contact us at (781)453-8700.

Congress ended 2003 with unfinished business

Though Congress did pass a Medicare law that provides prescription drug benefits to seniors, it adjourned for 2003 without passing several other pending bills that may be of interest to your business.

One pending bill would have extended several tax breaks that expired at the end of 2003. Among the 19 tax provisions that expired on December 31, 2003, were the welfare-to-work tax credit, Archer medical savings accounts, and the work opportunity tax credit.

It's likely that Congress will take up tax extension legislation again this year. If any of these provisions are a matter of concern for your business, stay informed about legislative action. For information and assistance with your planning, contact our office.

Congress did manage to pass anti-spam legislation just prior to adjourning. The law authorizes the Federal Trade Commission to establish a "do not e-mail" registry similar to the recently established "do not call" registry.

It's been estimated that spam, or unsolicited commercial e-mail, costs U.S. businesses billions each year in lost productivity and for the purchase of filtering software and equipment. Spam accounts for about 40 percent of all e-mails, according to one computer security company.

The new anti-spam law overrides 35 state anti-spam laws, many of which were tougher on spam than the federal law.

How's your business recordkeeping?

The tax law requires all businesses to keep records to support the gross income, deductions, and credits claimed on their income tax returns.

What records? All businesses should have a permanent set of books which summarize individual deposits, disbursements, and items of adjustment. These records should be retained indefinitely. Permanent records also include those needed to prove the basis (cost) of depreciable assets.

Supporting documents may be needed to validate the journal entries if your returns are examined by the IRS. The general rule is that supporting documents should be retained at least until the statute of limitations for a tax year has passed.

The supporting documents the IRS reviews include bank statements, cancelled checks, payroll records, invoices, and the like. You should also retain documents supporting deposits which do not reflect income, such as loan documents.

Baby boomers get bad news

Just a few years ago there were predictions that the baby boomers would inherit trillions of dollars from their well-to-do parents. Now it appears that these predictions failed to take into account such facts as today's longer life expectancies, skyrocketing health care costs, and long-term care expenses that reduce the amount parents leave to their children.

You work hard providing for your loved ones during your life. You can also provide for them when you are gone with a simple estate plan that legally conveys your desires to all your heirs. Here's a short list of some of the basic documents you should consider including in your estate plan.

* Information memo. Keep a list of your insurance policies, brokerage accounts, businesses you own, outstanding debt, credit cards, tax-related documents, and names and phone numbers of professional advisors in a single place that can be easily accessed. As time passes, review this document and update as necessary.

* A will. Your will is a written document that gives your heirs the blueprint of your wishes and intentions. In your will, you may bequeath assets to your heirs, appoint an executor to distribute your assets, and designate a guardian for your minor children.

* A durable power of attorney for finances. Designate in this document an individual or advisor to make financial decisions on your behalf if you become incapacitated. The individual can sign checks if necessary and can be given access to your checking and investment accounts.

* Medical directives. You name an individual to make health-care decisions for you in the event you become unable to make them yourself.

* Funeral instructions. Detail what you feel is best in your specific situation. Include a list of relatives, friends, and business associates to be notified by your immediate heirs.