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2 Welcome 2 nd of 16 Sessions –No cost to participate. Financial Support: –FINRA Foundation & United Way Worldwide Solid Finances Webpage:

Text Your Questions Do you have a Question? Do you want to comment? –Type in the Q & A pod: 3

Send Your Questions Click this after typing question in Q & A Pod 4

5 Schedule October 13 thOctober 13 th What’s Your Credit Score & What does it mean? October 20 thOctober 20 th Saving Money by Paying Down Debt

6 Save Money with Tax-Free Medical Savings Accounts

7 Tax Favored Plans 1.Montana Medical Care Savings Accounts-MSAs 2.Flexible Spending Accounts- FSAs 3.Health Care Savings Accounts-HSAs

8 Question A: Do you have medical bills not covered by insurance? 1. Yes 2. No

Calculating Tax Savings Flex Plans and HSAs save on –Federal Income Taxes –Montana Income Taxes Montana MSAs help save on –Montana Income Taxes 9

Federal Individual Income Tax Rates

11 Marginal vs. Average Tax Rates John (Single) earns $50,000

12 Question B: What tax rate should John consider when calculating savings from a Flex plan? 1. 10% 2. 15% 3. 17% 4. 25%

13 Tax Rate John should consider 25%

Tax Brackets & Rates Montana At Least But less Than Then your tax is: $0$2,6001% $2,600$4,6002% $4,600$6,9003% $6,900$9,4004% $9,400$12,1005% $12,100$15,6006% $15,600 or more 6.9%

Tax Saving Example This was reduced to 5.65% for Reducing the savings by $24. 15

16 Question C: Are you currently enrolled in a flex plan? 1. Yes 2. No 3. Not sure

Terms Section 125 Plan Flex Plan Cafeteria Plan Medical Reimbursement Plan Dependent Care Reimbursement Plan 17

Two Parts of the Flex Plan Part 1: Medical Reimbursement –Reimburses qualified out of pocket medical expenses 18

Two Parts of the Flex Plan Part 2: Dependent Care Reimbursement –Reimburses qualified “day care” expenses 19

What are eligible medical expenses? Allowed as a deduction on federal income tax return Publication

Eligible Expenses Health insurance premiums Co-payments Vision exams, glasses, contacts Dental exams, co-pays, dentures 21

Eligible Expenses Prescribed drugs Insulin Chiropractor’s fees Lab fees Hearing aids Nursing home fees 22

Ineligible Expenses Most over the counter medications  This is new for 2011 Medical expenses reimbursed by some other type of insurance  Health, Auto, Workers Compensation 23

24 Question D: Are my spouse’s medical expenses eligible for reimbursement from my account? 1. Yes 2. No

Family Member’s Expenses Spouses expenses are eligible Are my child’s expenses eligible? –Yes, if they are under age 27 25

Medical Care Contribution Limits 2012: No federal maximum 2013: $2,500 per person maximum Plan imposed contribution limits are common –Minimums & Maximums 26

What are eligible dependent care expenses?* Day care expenses Babysitter expenses * Both you and your spouse must be working, in school or looking for work 27

Who is an eligible dependent? –Children under age 13 –Spouse not able to care for themselves 28

Dependent Care Contribution Limits Federal contribution limit –$5,000 maximum Maximum plan limits are rare 29

30 Plan Details Each plan has a “plan year” –Not always a calendar year –Sign up each year No changing your contribution amount during the year –Unless you have a qualifying event Have a child, get married, divorces or have a death in the family

Flex Plan Year Eligible expenses must be incurred within plan year 90 day grace period after end of plan year to submit claims 31

Money Remaining in Flex Accounts Money remaining in the accounts after the grace period is forfeited  IRS requirement 32

Reimbursement Rules Medical Care –Claims reimbursed as soon as incurred Dependent Care –Claims reimbursed only after contributions have been deposited 33

Dependent Care Example Jeff contributes $200 per month –January 1st & February1 st –Total $400 Jeff has $800 expense on February 15 th 34

Dependent Care Example  Jeff files a claim for $800 on February 20 th –Jeff receives $400 reimbursement Why? He only has $400 in his account on February 20th –Jeff must wait until March 1 st for the next $200 & April 1 st for the last $200 35

36 Question E: Is the flex plan valuable for your situation? 1. Yes 2. No 3. Maybe

37 Marsha Goetting Extension Family Economics Specialist Department of Agricultural Economics & Economics

38 Question F: Do you have a Montana Medical Care Savings Account? 1. Yes 2. No

What is an MSA? An account that can be used for paying eligible medical expenses that are not covered by a health insurance policy or flex plan An account that can be used for paying eligible medical expenses that are not covered by a health insurance policy or flex plan 39

Who is Eligible? Montana resident tax payers only Montana resident tax payers only 40

MSA Deduction $3,000 for each taxpayer $3,000 for each taxpayer $6,000 married couple (separate accounts) $6,000 married couple (separate accounts) 41

Montana Taxable Income Adjusted income $ 42,000 Adjusted income $ 42,000 MSA deposit - $6,000 MSA deposit - $6,000 Taxable Income $36,000 Taxable Income $36,000 42

MSA Saves on Montana Income Taxes Contributions to MSA:Contributions to MSA:  Taxes saved depend on tax bracket 43

44 Question G: What is the amount of taxes a couple earning $40,000 would save on a $3,000 MSA deposit? 1. $ $ $ $126

Tax Brackets & Rates Montana At Least But less Than Then your tax is: $0$2,6001% $2,600$4,6002% $4,600$6,9003% $6,900$9,4004% $9,400$12,1005% $12,100$15,6006% $15,600 or more 6.9%

46 Tax savings with MSA 6.9% bracket (2010) Taxable income more than $15,600 $3,000 x.069 $207 Tax Savings from having MSA on medical expenses you have anyway or even if you don’t use

47 Regular savings account interest income 6.9% bracket (2010) Taxable income more than $15,600 $3,000 x.0005 $1.50 earnings x.069 =.10 After tax earnings $1.40

Eligible Medical Care Expenses IRS Publication IRS Publication  502  48

Save more in taxes than Interest Earnings 49 MSA DepositTax SavingsInterest Earnings 1% $3,000$207$30 $2,000$138$20 $1,000$ 69$10 $ 500$ 34.50$ 5

Example: Barbara January 31 January 31  $3,000 deposited in MSA Eligible medical expenses Eligible medical expenses  $2,000 during year 50

51 Question H: By what amount is Barbara’s Montana income reduced? 1. $3, $2, Zero

Barbara’s Montana Income Reduced by $3,000Reduced by $3,000  Not $2,000 withdrawn 52 Adjusted income $ 32,000 Adjusted income $ 32,000 MSA deposit - $3,000 MSA deposit - $3,000 Taxable Income $29,000 Taxable Income $29,000

Interest earnings Not subject to Montana income taxation if:Not subject to Montana income taxation if:  Left in the account  Withdrawn for eligible medical care expenses 53

Double dipping not allowed Can’t claim twice for same expense:  If claimed for FSA or HSA can’t claim for MSA 54

55 Question I: Which is the best place to open an MSA? 1.Bank 2.Credit Union 3.Trust Company 4.Mutual Fund Company 5.Brokerage Firm

56 Shopping Tips n Ask about u Minimum Balance? u Fees for close out? u Transaction fees? u Interest rate?

MSA Rules Must be separate from other accounts Must be separate from other accounts Joint accounts for MSAs not allowedJoint accounts for MSAs not allowed MSA Account 57

58 Question J: Can an MSA be opened for a child under 18? 1. Yes 2. No

Minor Child Cannot establish for Cannot establish for  Minor child under age 18 59

What if I need money for non-eligible expenses? Considered non-eligible withdrawal:Considered non-eligible withdrawal:  Subject to 10% penalty  Withdrawal counted as income 60

Example: Duane Adjusted Income$ 30,000 MSA Withdrawal+ 6,000 Taxable Income $36,000 Withdraws $6,000 to buy car in November 2011 Adjusted Income$ 30,000 MSA Withdrawal+ 6,000 Taxable Income $36,000 61

Example: 10% penalty Increased Taxes $ % Penalty Total Cost of Withdrawal $ 1,014 (non-eligible) 62

No 10% Penalty 1.If Non-eligible withdrawal made on last business weekday of December  Amount included as income, however 63

Example: Duane Withdraws $6,000 to buy car on last business day of Dec. Adjusted Income$ 30,000 MSA Withdrawal+ 6,000 Taxable Income $36,000 Total cost of Non-eligible withdrawal on last business day of year (Increased taxes) $414 64

No 10% Penalty 2. Withdrawal due to death of account holder  Amount included in decedent’s income in year died 65

3. Direct transfer to another MSA with different financial institution No 10% Penalty 66

4.Direct transfer from one type of savings account to another within the financial institution:  Example: MSA savings account to MSA CD No 10% Penalty 67

Withdrawal for medical expenses paid in prior year Withdrawal for medical expenses paid in prior year  Must be made by January 15 New Rule 68

What happens to my MSA when I die? Balance passes by:Balance passes by:  POD Beneficiary Designation  Written Will  Montana Intestacy Statutes (Dying Without a Will) 69

Income tax savings to Beneficiaries Spouse & Lineal Descendants Spouse & Lineal Descendants  Money can pass to their MSAs without being taxable 70

What if I become incapacitated? Funds can be withdrawn by:Funds can be withdrawn by:  Person holding Power of Attorney (POA)  Person named Conservator by district court 71

What happens if I move to another state? Unused MSA Funds Unused MSA Funds  Counted as Income on final Montana Income Tax Return 72

Planning Technique Track medical expenses January - December Track medical expenses January - December Deposit from savings to MSA the needed amount for the year Deposit from savings to MSA the needed amount for the year 73

Planning Technique Withdraw from MSA total amount needed for eligible medical care expenses during year Withdraw from MSA total amount needed for eligible medical care expenses during year  Make only one withdrawal Deposit back to savings Deposit back to savings 74

75 Gifting From a family health & tax perspective –Grandma gives $6,000 to married adult grand daughter

76 Total Gift Adult Married Grand Daughter = $6,000 MSA Wife MSA Husband $3,000 Total Gifts$6,000 Tax Savings $414

MSA Reporting Requirements File Form:  Annual Reporting Form for Self Administered Individual Accounts 77

Reporting Montana Individual Income Tax Return Form 2  Schedule II: Line 18 Form 2M  Line 32 78

Forms Department of Revenue 79

80 Question K: Do you intend to establish a Montana Medical Care Savings Account? 1. Yes 2. No 3. Maybe

81 Question L: What percent of Montanans have opened an MSA? 1. 83% 2. 64% 3. 23% %

Percent of Montanans with MSAs 1.4% 1.4% 82

83 Joel Schumacher Extension Economics Specialist Department of Agricultural Economics & Economics

84 Question M: Are you eligible for an HSA? 1. Yes 2. No 3. Not sure

85 Health Savings Accounts (HSAs)

HSA Eligibility Not everyone is eligible to contribute to an HSA Must meet specific requirements Refer to the HSA MontGuide 86

87 HSA Eligibility Must meet ALL four requirements: Must meet ALL four requirements: 1.Have a qualifying high deductible health plan with minimum deductibles of:  $1,200 individual  $2,400 family

88 2.Cannot have any other health insurance coverage Exceptions: Accident CoverageAccident Coverage Disability InsuranceDisability Insurance Dental InsuranceDental Insurance Vision InsuranceVision Insurance Long-term care InsuranceLong-term care Insurance HSA Eligibility

89 3.Cannot be enrolled in Medicare 4.Cannot be claimed as a dependent on another person’s tax return HSA Eligibility

90 HSA Benefits Contributions reduce an individual’s taxesContributions reduce an individual’s taxes –state & federal Earnings are income tax- freeEarnings are income tax- free –state & federal

91 HSA Benefits Unused funds can be carried over from year to yearUnused funds can be carried over from year to year Withdrawals for qualifying medical expenses areWithdrawals for qualifying medical expenses are tax free tax free

92 Question N: Are you eligible to contribute to an HSA? 1. Yes 2. No 3. Not sure

93 Evaluation Usefulness Sound Quality Knowledge gain Pace

94 Opinion Length Quality of Visuals

95 Solid Finances Web site Future Sessions Topics Future Sessions Topics solidfinances solidfinances

96 Marsha & Joel Best wishes as you consider Saving Money with Tax-Free Medical Savings Accounts and Flex Accounts Marsha & Joel