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New tax law puts some provisions down for a nap

Will Rogers famously said, “I don’t tell jokes. I just watch the government and report the facts.”

Accountants have learned this is a far better way of trying to get a laugh than relying on the twisted funny bone of an accountant.

The new tax law, passed in December, made sweeping changes that generally took effect Jan. 1, 2018. Moreover, many of these changes are swept away again beginning Jan. 1, 2026. At least that’s the plan until things change again.

Because our changes won’t always be changes, the law has had to leave in place many of the things that were eliminated. Definitions and provisions are still in the tax code because they are scheduled to come back to life. Parts of the law are just sleeping.

The way things tend to work, some will wake up again and others will not. Some may even arise before their scheduled time. If you saw the Chris Pratt-Jennifer Lawrence movie “Passengers,” you’ll be better prepared for the future tax laws. Other than for that purpose, I wouldn’t really recommend the film.

Maybe a better illustration is the Disney version of “Sleeping Beauty.” The handsome Prince Phillip awakens Aurora. The 2017 law is very similar, except we’ll be kissed by a member of Congress.

Let’s discuss two things – the health savings account and the dependency definition. Up to now, the most annoying thing about an HSA is the tendency of spell-check to change it to HAS. Every time I write about an HSA, I have to painstakingly catch every “corrected” spelling of the acronym.

An HSA allows someone who is covered by a high-deductible health plan to contribute to something that looks like an IRA. Contributions are tax deductible, they grow tax free, and they can be withdrawn tax-free.

So it’s like a regular IRA (tax deduction) with the ultimate result of a Roth IRA (no income when withdrawn). It’s a good deal. However, withdrawals have to be for medical costs. Otherwise, withdrawals are taxable and may be subject to a 20 percent penalty tax.

Congress, which regularly studies Shakespeare, knows one can desire too much of a good thing. To prevent this result, the annual contributions to an HSA are limited.The limit rises each year with inflation. So far, pretty simple.

In May of 2017, the IRS announced that the 2018 inflation-adjusted limit for a family HSA would be $6,900. Employers needed time to adjust their plans and to inform employees of the new limit.

In December of 2017 the new law was passed. To save money, it changed the way that inflation adjustments were made to tax numbers. In March of 2018, IRS announced that the changed inflation adjustment meant the 2018 family HSA limit was only $6,850.

Stop the presses! Plans had to be changed. Some employees had already contributed $6,900. Excess contributions can be penalized. Some people received $50 back. Others did not.

Now IRS says, jeez guys, can’t you take a joke? If you’ll stop yelling at us, we’ll let you stick with the $6,900. Just for this year.

So, if you contributed $6,900, do nothing. On the other hand, take the $50 back and we’ll be OK with that if you do it by the due date of your 2018 return. Alternatively, if they gave you $50 back, you can give it back to them – if you do it by April 15, 2019. And sorry for the confusion.

Beginning in 2018 there are no dependency exemptions. However, the confusing dependency tests remain in the law because the little buggers return in 2026. And not only that, but whether someone might have been a dependent had we not said there were no longer dependents may still affect your tax liability.

The (sleeping) dependent tests may still determine eligibility for head of household filing status. And for the expanded $2,000 child tax credit. And for the new $500 tax credit for dependents who are not under age 17.

This is like Christmas Eve. The dependents are supposed to be in bed and they’re creeping downstairs to look for goodies. But you actually want them awake so you can get the goodies.

Jim Hamill is the director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at jimhamill@rhcocpa.com.

 

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