Is a Tax Refund Really That Great?

The automatic response to that question is usually, "YES!  It's extra money!"  But is it really extra money?  Below are some pros and cons of receiving a tax "refund".

For many W-2 employees, withholding taxes is the most efficient way to meet their yearly tax obligation. Oftentimes, new employees complete Form W-4, the form that the human resource or payroll department utilizes in order to determine how much to withhold from each paycheck, on the first day of work.  The information you enter on Form W-4 may lead to withholding too much tax, which usually results in a tax refund.  Great! Right?  Well, the money that is "refunded" was yours.  The "refund" money is money you are "refunded" without any interest, essentially giving the government an interest free loan for a year.  In the meantime, you could have used the money to pay down debt, save for emergencies or retirement.

Alternatively, and what most people fear, is that taxes may be owed on April 15th.  Taxes will be due on April 15th if you do not withhold enough or make sufficient tax payments during the year to satisfy the tax due.  There may also be penalties and interest for not withholding enough.  However, you enjoy a higher paycheck each week.  During the year, you may have set aside the amount of additional tax that would be due in April in an interest bearing checking account or CD, earning interest that would not have happened had you had too much withheld.  While interest rates are currently low, that may not always be the case.

How do you know what amount to withhold?  The first step is to take a look at your prior year tax return to see what has changed.  Did you get married?  Did you have a child?  Did you buy or sell a house?  Once you have determined what is the same or different, take a look at your actual tax liability.  The tax liability is not the refund or amount owed, but the calculated total tax.  You will need to withhold at least 100% of the prior year tax liability (you may have to withhold more if your adjusted gross income is above a certain threshold).  To check if you are withholding enough, divide your estimated current year tax liability by the number of paychecks in the year. 

Not paying anything at tax time and not receiving a refund is true victory. Let me help you reach this victory!

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Yeni Anaya is a Certified Public Accountant at Nasif, Hicks, Harris & Co., LLP.  Yeni can be reached via phone at (805) 979-9381 or e-mail at yanaya@nhhco.com.

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The material appearing in this communication is for informational purposes only and should not be construed as an opinion or legal, accounting, or tax advice provided by Nasif, Hicks, Harris & Co., LLP. This information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client relationship. Although these materials have been prepared by professionals, the user should not substitute these materials for professional services and should seek advice from an independent advisor before acting on any information presented. Nasif, Hicks, Harris & Co., LLP assumes no obligations to provide notification of changes in tax laws or other factors that could affect the information provided. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, expressed or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose. The user assumes all responsibility for the use of such information. Any written tax advice contained herein was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code or any taxing authority.

Getting the Most Out of Your HSA and FSA Accounts

A Health Savings Account (HSA) and Sec 125 Flexible Spending Account (FSA) can work together and maximize your out of pocket medical, dental and vision expenses with tax-free dollars for you, a legal spouse, and/or dependent(s).  However, you must be aware of how these two tax-free funds work together so that you do not “double dip” or inadvertently use the FSA or HSA for ineligible expenses.  This can result in significant tax penalties.

Elective contributions to an FSA plans are determined annually at the beginning of the year.  If you do not use all of the money contributed during the year on eligible medical expenses incurred during the year, you forfeit the balance in the account.  It is “use it or lose it” and unlike an HSA, the excess funds cannot be rolled over year by year.   Careful planning can result in the highest pre-tax dollars available under the current IRS rules.

Using HSA and FSA to the MAX!

Your HSA account must be used for the first $1,200 (single coverage) or $2,400 (family coverage) of out of pocket medical expenses, such as co-pays, deductibles, and prescriptions, regardless of what your HSA health plan has as its deductible.  This limit is adjusted annually and can be found in IRC section 223 (c)(2)(A)(i).  In addition, you can pay your long-term care insurance premiums from your HSA account.

If you want to use FSA money for out of pocket medical expenses, such as co-pays, deductibles, prescriptions, there are some guidelines you must meet.  Every year the IRS sets a HSA statutory deductible limit for HSA health plans.  This statutory deductible limit is used to determine WHEN you can be paid for MEDICAL expenses from your FSA account.  This year the IRS set the deductible limit as follows:

1. SINGLE coverage: it is $1,200 REGARDLESS of what your HSA health plan has as its deductible.
2. FAMILY coverage: it is $2,400 REGARDLESS of your HSA health plan has as its deductible.

Your HSA account should be funded to the maximum each year.  Your contribution to your FSA Plan will take careful planning and should be funded for all anticipated expenses.  

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Marianne Bloom is a Certified Public Accountant at Nasif, Hicks, Harris & Co., LLP.  Marianne can be reached via phone at (805) 963-5101 or e-mail at mbloom@nhhco.com.

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The material appearing in this communication is for informational purposes only and should not be construed as an opinion or legal, accounting, or tax advice provided by Nasif, Hicks, Harris & Co., LLP. This information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client relationship. Although these materials have been prepared by professionals, the user should not substitute these materials for professional services and should seek advice from an independent advisor before acting on any information presented. Nasif, Hicks, Harris & Co., LLP assumes no obligations to provide notification of changes in tax laws or other factors that could affect the information provided. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, expressed or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose. The user assumes all responsibility for the use of such information. Any written tax advice contained herein was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code or any taxing authority.