The IRS has no heart – until they do!  Tax Breaks for Nursing Mothers & Women’s Health

Dear Clients & Friends of the Firm:

There’s a joke in the movie, Men in Black; the punchline is:

No, ma’am. We at the FBI do not have a sense of humor we’re aware of. May we come in?

The IRS, likewise, has no sense of humor or heart; all they have is the Statute, The Code!  For the IRS, good, bad, ethical and unethical is defined by the Internal Revenue Code.  If it’s not in the Code, then, to the IRS, it is not relevant.

The IRS has no sense of humor whatsoever.

On occasion, however, the Code will allow the IRS to do something that is really good – like give a tax break to breastfeeding mothers.

Nursing mothers are getting a new tax break from the IRS– which puts breast pumps and other supplies on the list of tax-deductible items.  (IRS Ann. 2011-14, 2011-9 IRB).

Breastfeeding women can spend as much as $1,000 each year on nursing supplies, thanks to pressure from the American Academy of Pediatrics and other advocates that pushed to define breast pumps and other supplies as medical devices.

The reason for the IRS’s change of heart is the many long-lasting health benefits of breast milk for mothers and their babies.

The IRS announcement read:

“The Internal Revenue Service has concluded that breast pumps and supplies that assist lactation are medical care under 213(d) of the Internal Revenue Code because, like obstetric care, they are for the purpose of affecting a structure or function of the body of the lactating woman.”

It’s about much more than breastfeeding

Obviously this is good news.  Actually this news is better than you think because it represents a major shift in tax law on the topics of wellness and women’s health maintenance.  It’s about much more than breastfeeding though breastfeeding was a major driving force in this new focus on women’s health.

The list of items that now have tax benefits are:

• Breastfeeding support, supplies, and counseling.
• Contraceptive methods and counseling, as detailed below (also known as the contraceptive mandate, see text beginning at footnote 28).
• Annual screening and counseling for interpersonal and domestic violence.
  • A recommended screening and counseling for interpersonal and domestic violence may consist of a few, brief, open-ended questions, and can be facilitated by the use of brochures, forms, or other assessment tools including chart prompts.
• Gestational diabetes screening, in pregnant women between 24 and 28 weeks of gestation and at the first prenatal visit for pregnant women identified to be at high risk for diabetes.
• Human high-risk papillomavirus  DNA testing in women with normal cytology results; screening should begin at 30 years of age and should occur no more frequently than every three years.
• Annual counseling and screening for human immune-deficiency virus (HIV) for all sexually active women. For these purposes, “screening” means actual testing for HIV.
• Annual counseling for sexually transmitted infections for all sexually active women.
• Well-woman visits, annually, unless several visits may be needed to obtain all necessary recommended preventive services, depending on a woman’s health status, health needs, and other risk factors.

The new guidelines do not promote multiple visits for separate services but nothing in the Regs requires that each service be provided in a separate visit.

This is Good News; but it’s not that good.

This is obviously good news and long-overdue; but the news is not that good.  These are treated as itemized medical deductions subject to the 10% of AGI limitation.  In effect, for most families, this deduction will be lost in the labyrinth of IRS Forms.

This News is actually better than you think.

The best way to fully realize the tax benefits of women’s wellness law in the Tax Code is to use an employer’s FSA; and FSA is a “Flexible Spending Account” offered by many employers.  The new restrictions created by the Affordable Care Act will cause a substantial future increase in FSA accounts.

I may write a future new letter on FSA; do you think I should?

Sincerely

Steve Richardson, CPA

I’m having a new “Ready-Made” grand-baby!  The Adoption Credit!

Dear Clients & Friends of the Firm:

I have good news: I going to have another grandbaby, “Ready-Made” in China.  This will be our sixth grandchild.  Our “Ready-Made” grandbaby will arrive in late March or early in April!  How wonderful!

Adoptions have Tax Implications!  This Adoption will have Double Implications!

When grand-dad and the new Dad both work at a CPA Firm, Adoptions in the middle of tax season have double implications!

For our clients: please get your tax and accounting work into our Firm as soon as possible.  We need to get a jump-start on our busy season so that we can give maximum love and attention to our new grandbaby!

Let me state the obvious:
Adoptions are Very Expensive!

This is not an ordinary adoption (though I doubt that there is any such thing as “an ordinary adoption”). Our new grandbaby is “special needs”.

All adoptions are expensive.  Adoptions of “special needs” children are even more expensive.  All tax-breaks are appreciated.  There are tax-breaks for adoption and additional tax-breaks for “special needs” adoptions.

Adoption tax-breaks are very important and much appreciated.

Adoptions have Tax Implications for every family!

Two tax benefits are available to offset the expenses of adopting a child. For 2015, adoptive parents may be able to claim a nonrefundable credit against their federal tax for up to $13,400 of “qualified adoption expenses” (see below) for each adopted child. That’s a dollar-for-dollar reduction of tax-the equivalent, for someone in the 25% marginal tax bracket, of a deduction of over $50,000. Also, adoptive parents may be able to exclude from their gross income up to $13,400 (for 2015) of qualified adoption expenses paid by an employer under an adoption assistance program. Both the credit and the exclusion are reduced (phased out) if the parents’ income exceeds certain limits, as explained below.

Adoptive parents may claim both a credit and an exclusion for expenses of adopting a child. But they may not claim both a credit and an exclusion for the same expense.

Qualified adoption expenses. To qualify for the credit or the exclusion, the expenses must be “qualified adoption expenses.” These are the reasonable and necessary adoption fees, court costs, attorney fees, traveling expenses (including amounts spent for meals and lodging) while away from home, and other expenses directly related to the legal adoption of an “eligible child” (defined below).

Qualified adoption expenses don’t include expenses connected with the adoption of a child of a taxpayer’s spouse, expenses of carrying out a surrogate parenting arrangement, expenses that violate state or federal law, or expenses paid using funds received from a federal, state, or local program. Expenses that are reimbursed by an employer don’t qualify for the credit, but benefits provided by an employer under an adoption assistance program may qualify for the exclusion.

Expenses in connection with an unsuccessful attempt to adopt an eligible child before successfully finalizing the adoption of another child can qualify. Expenses connected with a foreign adoption (i.e., one in which the child isn’t a U.S. citizen or resident) qualify only if the child is actually adopted.

Taxpayers who adopt a child with special needs will be deemed to have qualified adoption expenses in the tax year in which the adoption becomes final in an amount sufficient to bring their total aggregate expenses for the adoption up to $13,400 for 2015. They can take the adoption credit or exclude employer-provided adoption assistance up to that amount, whether or not they had $13,400 of actual expenses.

Eligible child. An “eligible child” is a child under the age of 18 at the time the qualified adoption expense is paid. A child who turned 18 during the year is an eligible child for the part of the year he or she is under age 18. A person who is physically or mentally incapable of caring for himself is also eligible, regardless of age.

Special needs child. This refers to a child who the state has determined cannot or should not be returned to his parents and who can’t be reasonably placed with adoptive parents without assistance because of a specific factor or condition, e.g., ethnic background, age, membership in a minority group, medical condition, or handicap. Only a child who is a citizen or resident of the U.S. is included in this category.

When to claim the credit or take the exclusion. If the qualifying expenses are paid before the year the adoption becomes final, the credit is claimed for the year after the one in which the expenses are paid. If the expenses are paid in the year the adoption becomes final or in a later year, the credit is claimed for the year in which the expenses are paid. For example, say $3,000 was paid in 2013, $2,000 in 2014, and $4,000 in 2015, when the adoption becomes final. The taxpayer claims a $3,000 credit in 2014 (for the 2013 expenses). The $2,000 of 2014 expenses and the $4,000 of 2015 expenses are combined to be claimed in 2015.

Employer-provided adoption benefits are excludable from the employee’s gross income for the year in which the employer pays the qualified adoption expense.

In the case of a foreign adoption, or an adoption of a child with special needs, neither the credit nor the exclusion may be taken until the year in which the adoption becomes final.

Non-refundable credit. The adoption credit is not a refundable credit. So, if the sum of your refundable credits (including any adoption credit) for the year exceeds your tax liability, the excess amount is not refunded to you. In other words, the credit can be claimed only up to the amount of your tax liability.

Phase-out for high-income taxpayers. The credit allowable for 2015 is phased out for taxpayers with adjusted gross income (AGI) over $201,010 and is eliminated when AGI reaches $241,010. The 2015 credit is reduced by a percentage equal to the excess of AGI over $201,010 divided by $40,000.

For example, say taxpayers who could have otherwise claimed a $2,000 credit have AGI of $211,010 in 2015. Their $211,010 AGI minus $201,010 equals $10,000, and $10,000 divided by $40,000 is 25%. Accordingly, the taxpayers “lose” 25% of their credit ($2,000 times 25% is $500) and can only claim a credit of $1,500. (Special rules for determining AGI apply in some cases.) The phase-out rules for high-AGI taxpayers apply for the exclusion as well.

How to claim the credit or take the exclusion for qualified adoption expenses. Adoptive parents who paid qualified adoption expenses or who received employer-provided adoption benefits must use Form 8839 to compute the amount of the credit and the amount of benefits that may be excluded from their gross income. Taxpayers who are filing Form 8839 cannot file electronically, but must file a paper return. So taxpayers claiming the adoption credit or the exclusion for employer-provided adoption benefits must file paper returns. In addition to filling out Form 8839, eligible taxpayers should keep one or more adoption -related documents, detailed in IRS-issued guidance.

Child’s taxpayer identification number required for credit or exclusion. IRS can disallow the credit and the exclusion unless a valid taxpayer identification number (TIN) for the child is included on the return. Taxpayers who are in the process of adopting a child can get a temporary identification number, called an adoption taxpayer identification number (ATIN), for the child. This enables the adoptive parents to claim the credit and exclusion for qualified adoption expenses. Form W-7A is used to get an ATIN.

When the adoption becomes final, the adoptive parents must apply for a social security number for the child. Once obtained, the social security number, rather than the ATIN, must be used.

Adopted child may qualify for dependency deduction, other tax benefits. Your legally adopted child will qualify as your dependent if the other dependency tests are met, e.g., you provide more than half of the child’s support. Even if the adoption isn’t yet final, the child will be your dependent if he or she was placed with you for legal adoption by an authorized placement agency and was a member of your household for at least part of the year. Special requirements apply to adoptions of foreign children who aren’t U.S. citizens or residents.

Once the child is your dependent, you will qualify for the dependency deduction and for other tax benefits, such as the child tax credit.

I can help you to make sure that you get the full benefit of the substantial tax savings available to adoptive parents. Please call if you have any questions. I look forward to discussing these tax benefits with you.

Sincerely

Steve Richardson, CPA

Newsletter from
Steve Richardson & Company, Certified Public Accountants

Dear Friends:

I have recently (hopefully) completed my involvement as an expert witness in a substantial divorce action.  It was brutal for me; I can only imagine how terribly difficult it was for the people most affected by this legal action.

It’s legal; I can talk about the people involved and the specifics of the case.  A divorce action is a public record; but, to me, it’s not ethical.  At the very least it’s not polite to talk about other people’s business in any event.  So, I’m not going to do that at all.

This letter is about the financial ramifications of divorce from my perspective as a CPA.

The Rules:

The first three rules for divorce are as follows:

Rule #1: Don’t Get Divorced

Rule #2: Avoid Divorce at All Costs

Rule #3: Do whatever is necessary to Stay Married

I’m not being funny here; this is a very serious discussion.  Divorce is a financial disaster.  This family that is suffering through this divorce is (was) very wealthy, not any more.

Rule #4: Stay Married – The best research on the subject is compelling.  If you manage to get to the other side of a marital crisis, your marriage will be happier and healthier than it was before the crisis.  To summarize Rule #4: Practice the arts of forgiveness and reconciliation.

The marital estate is being split between two people.  This is an extremely continuous division of assets involving many lawyers (too many by half) and at least five CPAs.  The legal fees and CPAs fees are horrific!  I worked so hard on this case, hour after hour; my fee is ginormous.  I worked hard; I earned the money; I did a really good job.  The job that I did was an invaluable help to my client.  All these CPAs and lawyers are expensive!  This divorce is so expensive that the marital estate has been substantially reduced merely by the costs of litigation.  Contested divorce actions are brutally expensive.

Rule #5: Do not go through a contested divorce.

By all means, hire a lawyer; a good one.  I know several and I can make a referral if necessary.  But, negotiate a settlement to your divorce.  Hear me very clearly: Negotiate a Settlement!  Negotiate a Settlement before you go to trial!

Rule #5 has an important subsidiary rule; I’ll call it Rule #5(a).

Rule #5(a): Tell the Truth.

You cannot beat the system.  If you do not tell the truth you will not get a negotiated settlement.  If you fail to get a negotiated settlement you will go to court.  If you go to court you will be (100% guaranteed) extremely unhappy with your settlement.  There are no exceptions to this rule!

If you do not tell the truth the CPAs and the lawyers will help sort out the truth as best they can.  When CPAs and lawyers are allowed to sort out contentious issues their fees are ridiculously expensive.  There are no exceptions to this rule either.

When a “willful misrepresentation of the truth” (a lie) is presented in a divorce action everything slows to a crawl.  When legal machinery slows to a crawl it is far more than merely expensive.  The family issues, particularly with children involved become more unstable.  The potential for emotional, even physical abuse rises.  A lie creates a no-win scenario for either party.  A lie hurts the person who perpetrated the lie, the other party to the divorce and certainly the children.  Rule #5(a) is very important: Tell the Truth!

Rule #6: If you lie once you will do it again.

Lies perpetuate lies; it’s a cycle that, once started, is hard to stop.  In point of fact it often doesn’t stop.  Years after the divorce action a lie will cause the parties to be back in court again over child support, custody rights, alimony and other adjustments to the initial court order.  The lawyers and CPAs will continue to bleed you dry if you tell a lie.  Sorry; the rhyme is accidental.

Rule #7: No one wins a divorce (except for the accountants and the lawyers).

A divorce has no winners, only losers. Everybody loses.  The tax and financial implications of divorce are complex and very unfair. You will need a CPA for years after a divorce merely to keep up with tax rules that are crystal clear to non-divorced taxpayers.

Rule #8: Do not deliberately compromise the marital estate by incurring substantial debt or starting up new high-risk business ventures.  A basic financial planning rule applies to this situation; when you are in a high risk economic environment be careful; be conservative; avoid additional debts.  The wisdom on this should be obvious. Running up super large credit cards or mortgages is counterproductive.  It helps no one and it hurts everyone involved.

Rule #9: Beg, cry, plead, get counseling, pray, pray some more, do any and everything possible to avoid divorce.

Rule #10: If a divorce becomes unavoidable, call me! Get professional advice early in the process.  Even an uncontested divorce requires professional advice before you do anything!

Divorce is absolutely, and I mean, absolutely the last resort.

Again, thank you for allowing us to be of service.

Sincerely,

Steve Richardson, CPA