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Monthly Client Newsletter | December 2011

A s 2011 comes to a close, there is still time to make some last minute moves to manage your tax bill. Included here is a list of some of the more common areas to review. In addition, now is the time to finalize benefit elections for next year. One of the more popular benefits is pre-tax health care spending accounts. A recap of them is included here for your review. All this and a brief review of the "marriage penalty" and "banking fees" round out this month's newsletter.

Make Your Year-end Tax Moves
HSA, FSA, both or neither?
The Marriage Penalty...alive and well
What's New in Banking: Fees, fees and more fees?

Make Your Year-end Tax Moves

There is still time to take a look at your potential tax obligation and make moves to reduce your tax burden. Here is a checklist of ten things to consider:
	Review investments and decide whether to sell any holdings
	Consider donating appreciated stock versus writing a check to your favorite charity
	Estimate your tax liability and make any required estimated tax payments
	Make any final retirement plan contributions
	Consider making any final gifts to meet your annual gift giving limits
	Review your charitable giving and make any donations of cash and non-cash items prior to year-end
	Make sure you have taken your minimum required retirement plan distributions
	Small businesses should consider final capital decisions in light of 100% bonus depreciation and Section 179 expensing options
	Self-employed and small businesses organized as S-Corporations and LLC/LLP's should review compensation and make any last minute adjustments
	Start organizing your tax records

HSA, FSA, both or neither?

With year-end quickly approaching, employers are once again asking employees to make benefit enrollment decisions for 2012. One of the biggest decisions is whether to participate in pre-tax health care payment programs. Many employers have two such programs, the Healthcare Savings Account (HSA) and the health care flex spending account or (HCFSA). If your employer offers these options which is best for you?

The Basics

HSA: The Health Savings Account (HSA) is a special pre-tax account that sets money aside to pay for health care bills not reimbursed by your health insurance. As long as the funds are used to pay for qualified medical expenses, you do not pay federal income taxes. To participate in the program you must be enrolled in a "high deductible" health plan or HDHP. The amount of money you can contribute in the account is limited each year, but what you do not spend can be saved for future years.

HCFSA: The Health Care Flexible Spending Account (HCFSA) has been around for a number of years. Together with it's cousin the Dependent Care FSA, you can set aside some of your pay each year on a pre-tax basis and use these funds to pay for qualified expenses. Unlike the HSA option, the HCFSA includes a "use it or lose it" function. Any money set aside that is not used during the plan year is lost.

HSA vs Health Care HCFSA What's the difference?
	HSA Accounts	HCFSA Accounts
Your Contributions	Made with pre-tax income	Made with pre-tax income
2012 Contribution limits	Individual: $3,100 Family: $6,250	Up to $5,000 per covered employee in 2012 as determined by your employer.
Catch up allowed?	Yes, if age 55 or over you may contribute an additional $1,000	No
Rollover of funds to future years	Yes	No
Participation limit	Must be enrolled in a qualified high deductible health plan (HDHP)	No health insurance qualification
Funds earn interest?	Yes, you may invest your unspent contributions in investment options within the account	No earnings on deposits into the account
What expenses qualify?	Medical, dental, vision, any co-pays, and prescriptions.	Depends. As stand alone program: basically the same as HSA. Used with an HSA: dental, vision and certain preventive care expense only.
Key expenses that do not qualify	Expenses already reimbursed, over-the-counter medicines, medical supplies, cosmetic surgery, pre-retirement health insurance premiums, and long-term-care.	Expenses already reimbursed, over-the-counter medicines, medical supplies, cosmetic surgery, health insurance premiums, and long-term-care. Note: Most medical expenses are excluded if you also contribute to an HSA

Can I participate in both?

Usually you cannot participate in both an HSA and HCFSA during the same year. However, if your employer structures their plans correctly you could have the option to fund both accounts during the year. In this case only certain expenses can be used to receive reimbursement from your HCFSA. Typically the HCFSA qualified expenses are limited to dental and vision related expenses.

What you need to know

	If you have a qualified High Deductible Health Plan, seriously consider investing in an HSA. This income is never taxed as long as you spend the funds on qualified expenses.
	Check to see if your employer is willing to contribute to either program. The rules allow employers to contribute to these accounts, but they must elect to do so.
	Consider contributing to either program, but be careful. If the HCFSA is not properly structured, you may be restricted from contributing to both. So prior to funding both, check with your employer.
	Do not forget to submit your expenses for reimbursement. There are strict timing requirements for HCFSA reimbursement.

The Marriage Penalty...alive and well

The Marriage Penalty...alive and well Although not discussed much in the news lately, the tax code has quietly perpetuated a large federal tax benefit for not being married. This penalty tends to increase the higher your income becomes and tends to impact dual income families more than single earner families. So what exactly is meant by the marriage penalty and why should you care?

The Marriage Penalty Defined
The classic "marriage penalty" occurs when you take two single people and calculate their federal income tax burden and then calculate the tax as if these same two people filed their taxes as "married filing joint". The higher tax burden for the married couple is commonly referred to as the "marriage penalty". And while it is also possible to have a marriage tax benefit, when it is a dual income household a higher tax for married couples is most common.

How did this happen?
In the late 1940's the married filing joint status and separate single filing status did not exist, so single taxpayers were significantly penalized versus married couples who were allowed to split their income with their non-working spouse. This is because of the progressive nature of tax rates. To solve this problem, in the late 1960s, a new tax schedule for single taxpayers was created to differentiate their tax liability. While this new filing status did not change the married filing status obligation at the time, it did create the tax burden differentiation.

Where's the Penalty?
Anywhere in the tax code where the tax benefit for two people is less than twice the benefit given to one person, the potential exists for this built-in penalty. The marriage penalty is typically associated with tax rates, but it also exists within income phase-outs and contribution limits. The most common are:

	Tax Rates: While recent tax laws addressed the inequity in lower income tax brackets, the potential marriage penalty is as much as $15,000 in additional federal income tax for a married couple based on the tax tables. The amount gets even higher if either of the taxpayers qualifies to file as Head of Household.
	Standard Deduction: While the inequity in standard deductions between single taxpayers and couples is temporarily eliminated, the penalty exists when one of the individuals can claim Head of Household filing status. The difference is $2,750 in 2011. The penalty also exists for taxpayers who are blind or 65 and older.
	Income Phase-outs: Benefits phase out more quickly for married tax filers than two single tax filers in many areas of the tax code. Some of the more common are within the Child Tax Credit, Elderly/Disabled Credit, and the Earned Income Tax Credit.
	Social Security Benefits: Even single Social Security beneficiaries have a tax advantage over their married counterparts. This is because excess earnings that trigger taxing Social Security benefits is $25,000 for a single taxpayer and only $32,000 for a married couple.

What this means to you

	If either you or a potential spouse is currently filing Head of Household, make sure you understand your future tax liability prior to getting married.
	If your incomes are fairly similar, you may wish to conduct the marriage penalty cost calculation as well.
	If you or your spouse do not work, the "marriage tax penalty" may actually be a "marriage tax surplus" for you

But perhaps more importantly, the marriage penalty appears to be having a social cost as dual income couples decide against getting married after conducting their "tax math" prior to getting married. Is this really what we want our tax code to be influencing?

What's New in Banking: Fees, fees and more fees?

Whats New in Banking Bank of America made national headlines with their proposed fee for debit card transactions. The consumer backlash was so swift that the bank quickly abandoned their plan. So what gives?

Why the new fees?As a backlash to the 2008 bank bailout, numerous laws have been passed to curtail bank practices that were deemed onerous. This included limiting what banks can charge for debit card swipe fees and overdraft protection. When you add the impact of these lost revenues with the lower interest rates, banks have a large revenue gap from where they were operating just a few years ago. The result? Banks are getting more creative in introducing new revenue sources.

What do you need to look for?
If you want to make sure your banking cost is not catching you by surprise, here is a checklist of common fees and changes being implemented by major banks. The list is not all-inclusive as a recent PEW research study identified 49 different fees charged by banks.

	Replacement card fees	example: B of A $5 lost debit card fee
	Remote deposit fees	example: US Bancorp's new mobile phone deposit fees
	Monthly account fees	example: Citigroup basic checking $10/mo
	ATM fees	example: $2.00 - $4.00 for a non-network atm to obtain cash
	Dormant Account fees	example: $5 per month per account at a local bank
	Teller deposit fees	example: bank charges you to make a deposit with a teller
	Higher NSF fees	check your bank's fees here
	Higher check costs	check your bank's fees here

The introduction of new fees and the practice of quietly increasing current fees is also hitting small businesses. In the past, checking account fees were applied against a calculated credit for carrying large deposit account balances. But now, since the value of these balances is so much lower, many of these fees are being "hard charged" to customer accounts. It is not uncommon for a business who paid no monthly fees to suddenly see $200 to $400 per month in checking account charges.

Should your cost of banking get too high, shop around. While most major banks tend to copy each other's fees, there are typically lower cost alternatives with respected online banks, small regional banks, and credit unions.

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