Each year, the IRS publishes the permitted deduction amounts for health savings accounts. For single taxpayers, the 2019 limit of $3,500 is increased to $3,550 for 2020. The family health plan HSA limit grows from $7,000 in 2019 to $7,100 in 2020. For taxpayers over age 55, an additional $1,000 per year may be contributed.
U.S. employers offer several different types of health care plans. These may include a Healthcare Maintenance Organization (HMO), a Preferred Provider Organization (PPO) or a High Deduction Health Plan (HDHP). The HDHP enables participants to use a Health Savings Account (HSA).
In 2020, the HDHP must have a deductible of $1,400 or greater for individual coverage or $2,800 or greater for family coverage. The annual expense limit for deductibles, co-payments or similar amounts is $6,900 for individuals and $13,800 for family plans.
The HMO, PPO and HDHP plans each have advantages and disadvantages. We will consider the advantages and disadvantages of the HDHP and HSA plans.
HDHP and HSA Advantages
- Broad Coverage - Most HDHP plans cover a wide range of medical care. IRS Pub. 502, Medical and Dental Expenses, explains most types of the covered services.
- Pre-Tax Contributions - Employees may make pre-tax contributions to an HSA through payroll deductions. Some employers match the employee contribution. The amount of the employee and employer contributions may not exceed the annual limit.
- Tax-Free Growth and Withdrawals - An HSA will grow tax-free. Withdrawals for qualified medical expenses are also tax free. The HSA balance over time may grow to a substantial amount. It remains the property of the participant.
- Convenience - Many HSA plans offer a debit card to enable participants to pay for prescriptions and other medical expenses.
HDHP and HSA Disadvantages
- High Deductible - While the HDHP premiums are often lower than other plans, the employee may pay a higher deductible amount. The annual HSA contribution may be fully used to cover medical expenses for individuals who have a significant medical condition.
- Potential Taxes - If HSA funds are withdrawn for nonmedical purposes before age 65, a participant must pay income tax plus 20%. After age 65, the withdrawal for nonmedical purposes will trigger income tax but no penalty.
- Records - If you spend funds for medical purposes from your HSA, you will need to keep receipts to prove that these were qualified medical expenses.
Health plans are complicated. This explanation of HDHPs and HSAs is offered as a service for our readers. For advice on the best plan for your personal situation, please contact a qualified professional advisor.
$33 Million Deduction Denied - No Basis Reported
In Jeff Blau et al. v. Commissioner;
No. 17-1266 (D.C. Circuit 2019), the Court held a failure to comply with the charitable gift substantiation rules led to the loss of a $33 million charitable contribution deduction.
In October of 2000, the AT&T Corporation leased a 288,000 square foot parcel in Hawthorne, California. The lease of the property to be used for telecommunications equipment was for 15.5 years with several 5-year renewal options. The various legal agreements created a term of years (TOYS) interest and a remainder interest with a title of successor member interest (SMI). On March 22, 2002, RERI Holdings I LLC (RERI) purchased the SMI for $2.95 million. The TOYS interest holder had limited liability. If the SMI holder claimed waste or breach of any lease provision, its sole remedy was to take immediate possession of the parcel.
On August 27, 2003, RERI transferred its interest to a nonprofit. It obtained an appraisal by Howard Gelbtuch of Greenwich Realty Advisors. Gelbtuch used Sec. 7520 tables to determine a fee interest value of $55 million and an SMI value of $33 million. RERI filed IRS Form 8283 for 2003 and claimed a $33,019,000 charitable deduction. It failed to include the purchase price of $2.95 million on the "cost or other adjusted basis" line of Form 8283. The IRS issued a notice of final partnership administrative adjustment (FPAA) and reduced the deduction to $3.9 million. The nonprofit subsequently sold the SMI interest for $1.94 million.
Based upon values submitted by appraisers for both parties, the Tax Court determined the fair market value of the SMI was $3.46 million. Because the remedy for waste by the TOYS holder was limited to the SMI holder acquiring immediate possession of the property, the Tax Court determined that the Sec. 7520 tables were not applicable. Therefore, the fair market value was determined based on appraisals. RERI Holdings I, LLC v. Commissioner,
149 T.C. 1,4 (2017).
RERI Holdings noted the charitable deduction is based on fair market value. Therefore, the basis is not important. However, the D.C. Circuit stated, "The requirements have the broader purposes of assisting the IRS in detecting and deterring inflated valuations. Because the cost or other basis in property typically corresponds with its FMV at the time the taxpayer acquired it, an unusually large difference between the claimed deduction and the basis alerts the IRS to a potential overvaluation, particularly if the acquisition date, which must also be reported, is not much earlier than the date of the donation."
The Court concluded that "even if a taxpayer can fulfill the requirements of Reg. 1.170A-13 through substantial compliance, RERI failed substantially to comply because it did not disclose its basis in the donated property."
RERI claimed the Sec. 7520 actuarial tables must be used for valuation purposes. Because RERI used the Sec. 7520 tables to value the deduction amount with respect to the future interest, the 40% gross substantiation penalty under Sec. 6662(a) was not applicable. However, the D.C. Circuit noted that calculations assume "that the property will be adequately preserved and protected (e.g., from erosion, invasion, depletion, or damage) until the remainder or reversionary interest takes effect in possession and enjoyment."
Because the property had not been appropriately protected from diminution in value, it was not appropriate to use the Sec. 7520 valuation tables. Therefore, the 40% penalty was sustained.
Evangelist Denied Lifestyle Deductions
In Robert A. Oliveri v. Commissioner;
No. 6792-15; T.C. Memo. 2019-57 (28 May 2019), the Tax Court held an evangelist was not entitled to charitable deductions for his living expenses and various gifts.
Robert A. Oliveri served in the U.S. Air Force from 1959 to 1986. He was active in the Catholic Church during his military service. After retiring from the military, he co-founded the Brothers and Sisters of Divine Mercy (BSDM).
The BSDM corporate charter states, "The corporation will provide religious and spiritual counseling to people of need, including prison inmates and hospital patients, and provide guidance to people after release from prison or from the hospital." While BSDM claimed to be under the supervision of the Catholic Church, there was no formal relationship between that entity and the nonprofit.
Oliveri was involved in evangelization, prison ministry and counseling. He deducted mileage, aircraft rental expenses, printed material, office supplies, personal items and various gifts to individuals.
Oliveri claimed 2012 charitable deductions of $39,979. The IRS allowed a deduction of $224 expended for maintenance purposes at Saint Mary's Catholic Church in Annapolis, MD. The Tax Court noted the IRS position that Oliveri did not have a contemporaneous written acknowledgement required under Sec. 170(f)(8) for his claimed deductions. In addition, most of his claimed deductions were actually personal expenditures. Oliveri claimed all expenses were ministry-related because he was President of BSDM. He also maintained that as an officer of the charity, a contemporaneous written acknowledgement was not required for unreimbursed expenses.
The Tax Court held the $250 contemporaneous written acknowledgement requirement applied to both contributions and unreimbursed expenses. Except for the $224 maintenance expense at Saint Mary's Church, all other expenditures were personal or unsubstantiated. The gifts to various members of Catholic orders were nondeductible gifts to individuals.
Because the IRS did not correctly document supervisor approval of the Sec. 6662 penalty, that was not sustained. Oliveri was liable for taxes and interest on all of the denied charitable deductions.
Oliveri was involved in numerous charitable activities. If he had made gifts to qualified organizations and obtained substantiation, many of his deductions could have been upheld.
Applicable Federal Rate of 2.8% for June -- Rev. Rul. 2019-14; 2019-23 IRB 1 (16 May 2018)
The IRS has announced the Applicable Federal Rate (AFR) for June of 2019. The AFR under Section 7520 for the month of June is 2.8%. The rates for May of 2.8% or April of 3.0% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2019, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.