Health Savings Accounts

I used to think that taxes were the most complicated thing in our country. That was until I tried to comprehend the bill from my recent ER visit. I had to get four stitches in my leg…simple, right? The bill was ten pages and had about 25 line items on it! I’m glad I didn’t blow my nose, because it probably would have been another $40 for a “Sterilized Nasal Discharge Receptacle”. Thankfully, I had money saved in a Health Savings Account (HSA) that covered the majority of my bill. That’s what I am going to focus on today. I can’t explain half of the healthcare laws in our country, but I can help you understand these accounts.

HSA’s are used in conjunction with High Deductible Health Plans. These plans have deductibles of at least $1,300 for individuals and $2,600 for families. The main benefit of these plans is that the premiums are lower and you can use tax-free money through your HSA to pay for medical expenses. More and more employers are switching to these plans because of the lower cost.

HSA's have two major benefits for tax purposes. First, HSA contributions are deductible in the current year from ordinary income. The deductible amount in 2017 is $3,400 for individuals and $6,750 for families with a $1,000 catch up amount for age 55 or older. If your employer contributes to your HSA, the deduction must be reduced by any amount contributed by the employer.

Example: You participate in a High Deductible Plan through work for your family. Your company contributes $500 to your HSA during the year and you contribute $3,000. You would be able to deduct $3,000 on your tax return. If you contributed the maximum of $6,750 for the year, your deduction would be limited to $6,250 because of the employer contribution.

The second benefit is that the money can be withdrawn tax free in the future if used for qualified medical expenses. Here is where the extra planning comes into play. Most HSA’s allow you to invest in stock or bond mutual funds in the account. If you invest in your HSA, it will grow tax-free as long as it is used on medical expenses when it is withdrawn. In a way, HSA's have the current tax benefit of a traditional IRA, but the future benefit of a Roth IRA if used for medical expenses. Also, you don’t have to be enrolled in a High Deductible Plan when you use the money, it only matters when you contribute to the HSA.

Example: The $3,500 that was contributed to your HSA can be invested in the account. Let’s say the money is invested for the next 20 years. The investment in the account can continue to grow tax free. The investment then grows to $15,000 in the future. You would be able to withdraw that money tax free if it is used for qualified medical expenses.

The double tax benefit that I described above is the main reason to use an HSA to supplement retirement savings. Another benefit is for individuals/couples who have 401(k) plans, or other employer sponsored retirement plans, but make too much money to contribute to a Traditional or Roth IRA. HSA's allow them to put additional retirement savings in a tax-sheltered account instead of a taxable account or non-deductible IRA.

As you can see, HSA’s can be beneficial for both tax savings and retirement planning. Six figure healthcare costs in retirement are a reality right now. HSA investments can be used to reduce the burden that you will incur later in life. Try to contribute enough each year to cover your maximum deductible. With all that being said, I always advise people not to invest in your HSA if you expect to need the money for medical expenses within the next five years. The last thing you want to do is have your investments drop in value right when you need to withdraw the money.

Healthcare is always changing so these benefits may not last forever. If you can maximize your HSA contributions, it will significantly impact your long term financial plan. If you participate in one of these plans, make sure you understand how to maximize your savings based on your current financial position. If you don’t participate in one of these plans right now, bravo for reading this entire post that has little to no impact on your life! Hopefully, you will be better informed if you switch to one of these plans in the future.

Mike Zeiter, CPA/PFS

529 Plans - Q & A

Some events happen in your life that change everything. Many of these events also have a major impact on your finances. I recently encountered one when my wife came into the room and told me that we were going to have a baby! It doesn’t get any better than that.  We were in shock for few days, but the news finally set in, and I realized that I needed to update our financial plan ASAP!

I crunched the numbers for diapers, wipes, and car seats. I poured over our HSA numbers and healthcare coverage. Yes, life with me IS as exciting as it sounds. Then I started thinking about college savings, and I knew that 529 plans were the best place to start. A few Google searches later, I already had a headache. 529 plan rules are set up by the federal government, but the plans are managed by each individual state. Anything gets confusing when you have that many politicians involved so I decided to do the research and share the information with everyone.

I have put together the main questions that people have about 529 plans with some quick and simple answers. I will highlight the main structure of these plans to show you why they are generally the best college savings option. At the end, I will explain the best way to start a plan.


What is the purpose of a 529 plan?

529 plans are tax-advantaged savings plans that can be used for college expenses. States have separate programs, but you aren’t required to use the one offered in your state. The best use for these plans is if you have a child that is young and has more than 5 years until they will attend college. The goal is to invest money that can grow tax free for higher education expenses.

What are the tax benefits?

The easiest way to describe the benefits is by looking at a simple example. Let’s say two parents contribute $10,000 to a 529 for their child on his/her first birthday. They invest the money and it grows to $40,000 by the time the child starts college at age 18. Here is the breakdown of the tax benefits.

Year 1: Parents do not receive a Federal tax benefit. They may receive a state tax deduction if they participate in a state that offers a tax deduction. In my home state of Missouri, they would receive a $10,000 deduction on their state tax return for contributions to any state’s plan.

Years 2-17: The investment grows from $10,000 to $40,000 without any tax consequences.

Year 18: The child uses the money for qualified college expenses. No federal or state tax is paid on the gain. This is the biggest benefit. You would normally pay tax on $30,000 of investment gains which would be $4,500 for most people.

Who can contribute to an account?

Anyone! The most common form is parents or grandparents contributing for a child. However, you can contribute to a plan for yourself, your nieces and nephews, or a friend’s child.

How much can I contribute to a Plan each year?

Individuals can donate up to $14,000 per beneficiary per year (in 2017), and twice that amount if they are married and choose to split the gift. There is also a special exemption that allows donors to donate up to 5 years’ worth of gifts in one year without gift tax consequences.   

What happens if my child doesn’t go to college?

If your child decides that college is for suckers, it isn’t the end of the world. The money can be transferred to a new beneficiary that doesn’t have to be your child. If there is nobody else that you can pay for to go to college, the money can be withdrawn and you would pay the taxes along with a 10% penalty on the earnings.

What investments can be set up in the Plan?

It varies by state. Most states allow you to invest in stock or bond mutual funds. Some offer prepaid tuition plans, but those are generally not as beneficial for people.

What can the money be used for?

According to the IRS, “Qualified education expenses are tuition and certain related expenses required for enrollment or attendance at an eligible educational institution.” As you can imagine, this leaves some room for interpretation. Essentially, expenses for tuition, fees, on campus room and board cost, and required classroom material are covered. Make sure to consult with a tax professional if using the funds for expenses other than tuition and fees.

What happens if they get a scholarship?

Congrats, your child receives a full ride scholarship! If you don’t want to transfer the money to another person, you are able to withdraw the money without penalties for the scholarship amount. That means that the $30,000 in our example before would be taxed like a normal investment.

How do I set up an account?

Now that you know how they work, I am sure you are dying to know how to open an account for your child! The first step would be to research the option in your own state. If your state offers a tax deduction for using their plan, it is probably the best option. Most states have 529 websites that allow you to open a plan online with your information and the beneficiary’s information.

If your state doesn’t offer a tax deduction, or you don’t like the arrangement of the plan, start researching other states. The key items to look for are plans that offer you low cost investment options and don’t charge a commission for investing. Find a plan that allows you to use the money for any school and not just that state’s schools. The most important thing is to make sure you comprehend the plan that you choose. Don’t put money into any investment that you don’t understand!


I hope this has helped you gain some knowledge of 529 plans. My last caveat about 529 plans is this…don’t sacrifice your retirement savings to pay for your child’s education. There are other ways to go to college, but not having money in retirement will put the burden right back on your children.

As always, contact me if you need any help!

Mike Zeiter, CPA/PFS

Personal Business Taxes

Millions of individuals and couples own small businesses. I love it! It’s one of the greatest things about the country we live in. Unfortunately, I have noticed that most of these small business owners don’t fully understand how they’re taxed on their business profits. I have titled this post “personal” business because I want to focus on the businesses run by a single person or a married couple. These are mostly organized as sole proprietorships or single member LLCs. Ultimately, there are three big things you need to focus on to make sure your business taxes are in order: how the IRS sees your business, the types of taxes applied, and quarterly taxes.

How does the IRS see your business?

The IRS considers you and your business as one in the same. Everything your business does is tracked on Schedule C (Profit and Loss from Business Activity) and attached to your personal tax return. Since the IRS views your business as ‘you’, all bank accounts are treated as one. Essentially, it doesn’t matter if you use your business or personal card to pay for something, you are still allowed to take deductions if you paid for an actual business expense with your personal accounts. Most people separate business accounts in order to track income and expenses throughout the year.

What taxes are applied to small businesses?

Your business income is calculated and taxed at 15.3% (self-employment tax for Social Security and Medicare). The income/loss is then added or subtracted from your gross income on the front page of your tax return. This results in your income being taxed at your personal rate as well. You can deduct half of the self-employment taxes paid if you had business income. I stress the self-employment tax topic because most people don’t realize they pay that additional tax on top of the personal tax rate. That is why I suggest setting aside 25% of your net income to pay taxes.

How do you prepare for quarterly taxes?

Don’t forget about quarterly taxes! Everyone must pay estimated taxes. Most people have them come out of each paycheck - small business owners are different and are generally required to pay them quarterly. If you work a regular job along with a side business, you may be able to increase your paycheck withholding to cover your estimated taxes. It is important to make estimated payments so that you can avoid penalties when you file your tax return.

Now that you know what you need and the working parts that apply to small business taxes, find a way to DOCUMENT EVERYTHING. Business miles, expenses, and meals all need to be tracked. I always tell clients to save everything you have just in case. There are a variety of expense trackers you can use that allow you to attach receipts, or it can be as simple as throwing all your receipts in a shoebox and hand it over to your accountant at the end of the year. In the event of an IRS audit, you will need to provide support for any expenses you took for the business.

Good luck with your business endeavors! You probably spend so much time building up your business, but don’t forget to spend some time on taxes. I hear stories about people having to shut down their business because they have to pay 5 years’ worth of back taxes. Don’t let that happen to you!

And as always, if you’re feeling a little lost or unsure of what to do next with your personal or business finances, contact me!

Mike Zeiter, CPA/PFS

Tax Deductions

I get this request all the time. “Hey Mike, I need to find more tax deductions so I don’t have to pay as much.” Depending on the person (and my mood), my  response is usually a sarcastic, “You can give half of your income to charity.” Obviously, people generally don’t want to give away half their income just to save on taxes. They are looking for deductions that allow them to reduce their taxes AND keep their money. I am going to simplify the tax code for now and just look at two different types of deductions. The first group are deductions that give you a benefit in the current year and allow you to keep your money. The second group of deductions give you a tax benefit, but you lose the money.

Keep your money and save on taxes - Traditional Individual Retirement Account (IRA), Employee Retirement Plan (401k, 403b, etc.), and Health Savings Accounts.

These are your first choices when looking to save more on taxes. Retirement plan contributions will grow in your account and you will pay tax on them in the future, but hopefully at a lower tax rate. Money that you put into a health savings account can be used for medical expenses in the future and you never pay tax on it.

Spend money to save on taxes – Mortgage interest, property taxes, charitable contributions, business expenses, etc.

This group essentially covers all other tax deductions. The amount you save from these is equal to the expense times your tax rate. These deductions are items that you need to make sure you include on your tax return if you incur them, but don’t create them for the sole purpose of reducing your taxes.

Here's why...

Example: You pay $5,000 in mortgage interest this year and your family makes $100,000 which puts you in the 25% tax bracket. You will receive a tax benefit of 25% of the $5,000 which is $1,250.

Would you trade me $5,000 for $1,250? Probably not. That’s why you shouldn’t do things just to get a tax deduction. It doesn’t mean that you are better off financially. However, some people would rather give $10,000 to a charity of their choice than $2,500 to the federal government. To each his own.

Remember to always think about the true savings when it comes to taxes. Don’t let a deduction tempt you into spending more money than you need to. And next time you hear Joe Cool in the break room talking about how he doesn’t want to pay off his mortgage early because of the tax benefits, you can explain the true financial cost of that decision.

-Mike Zeiter, CPA/PFS

P.S. – I have overly simplified this to discuss the general calculations. The tax rules are much more complicated so please consult with a professional about your specific options around tax planning.