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1040 Ez File

1040 ez file Publication 969 - Main Content Table of Contents Health Savings Accounts (HSAs)Qualifying for an HSA Contributions to an HSA Distributions From an HSA Balance in an HSA Death of HSA Holder Filing Form 8889 Employer Participation Medical Savings Accounts (MSAs)Archer MSAs Contributions to an MSA Distributions From an MSA Balance in an Archer MSA Death of the Archer MSA Holder Filing Form 8853 Employer Participation Medicare Advantage MSAs Flexible Spending Arrangements (FSAs)Qualifying for an FSA Contributions to an FSA Distributions From an FSA Balance in an FSA Employer Participation Health Reimbursement Arrangements (HRAs)Qualifying for an HRA Contributions to an HRA Distributions From an HRA Balance in an HRA Employer Participation How To Get Tax HelpLow Income Taxpayer Clinics Health Savings Accounts (HSAs) A health savings account (HSA) is a tax-exempt trust or custodial account you set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur. 1040 ez file You must be an eligible individual to qualify for an HSA. 1040 ez file No permission or authorization from the IRS is necessary to establish an HSA. 1040 ez file You set up an HSA with a trustee. 1040 ez file A qualified HSA trustee can be a bank, an insurance company, or anyone already approved by the IRS to be a trustee of individual retirement arrangements (IRAs) or Archer MSAs. 1040 ez file The HSA can be established through a trustee that is different from your health plan provider. 1040 ez file Your employer may already have some information on HSA trustees in your area. 1040 ez file If you have an Archer MSA, you can generally roll it over into an HSA tax free. 1040 ez file See Rollovers, later. 1040 ez file What are the benefits of an HSA?   You may enjoy several benefits from having an HSA. 1040 ez file You can claim a tax deduction for contributions you, or someone other than your employer, make to your HSA even if you do not itemize your deductions on Form 1040. 1040 ez file Contributions to your HSA made by your employer (including contributions made through a cafeteria plan) may be excluded from your gross income. 1040 ez file The contributions remain in your account until you use them. 1040 ez file The interest or other earnings on the assets in the account are tax free. 1040 ez file Distributions may be tax free if you pay qualified medical expenses. 1040 ez file See Qualified medical expenses , later. 1040 ez file An HSA is “portable. 1040 ez file ” It stays with you if you change employers or leave the work force. 1040 ez file Qualifying for an HSA To be an eligible individual and qualify for an HSA, you must meet the following requirements. 1040 ez file You must be covered under a high deductible health plan (HDHP), described later, on the first day of the month. 1040 ez file You have no other health coverage except what is permitted under Other health coverage , later. 1040 ez file You are not enrolled in Medicare. 1040 ez file You cannot be claimed as a dependent on someone else's 2013 tax return. 1040 ez file Under the last-month rule, you are considered to be an eligible individual for the entire year if you are an eligible individual on the first day of the last month of your tax year (December 1 for most taxpayers). 1040 ez file If you meet these requirements, you are an eligible individual even if your spouse has non-HDHP family coverage, provided your spouse's coverage does not cover you. 1040 ez file If another taxpayer is entitled to claim an exemption for you, you cannot claim a deduction for an HSA contribution. 1040 ez file This is true even if the other person does not actually claim your exemption. 1040 ez file Each spouse who is an eligible individual who wants an HSA must open a separate HSA. 1040 ez file You cannot have a joint HSA. 1040 ez file High deductible health plan (HDHP). 1040 ez file   An HDHP has: A higher annual deductible than typical health plans, and A maximum limit on the sum of the annual deductible and out-of-pocket medical expenses that you must pay for covered expenses. 1040 ez file Out-of-pocket expenses include copayments and other amounts, but do not include premiums. 1040 ez file   An HDHP may provide preventive care benefits without a deductible or with a deductible less than the minimum annual deductible. 1040 ez file Preventive care includes, but is not limited to, the following. 1040 ez file Periodic health evaluations, including tests and diagnostic procedures ordered in connection with routine examinations, such as annual physicals. 1040 ez file Routine prenatal and well-child care. 1040 ez file Child and adult immunizations. 1040 ez file Tobacco cessation programs. 1040 ez file Obesity weight-loss programs. 1040 ez file Screening services. 1040 ez file This includes screening services for the following: Cancer. 1040 ez file Heart and vascular diseases. 1040 ez file Infectious diseases. 1040 ez file Mental health conditions. 1040 ez file Substance abuse. 1040 ez file Metabolic, nutritional, and endocrine conditions. 1040 ez file Musculoskeletal disorders. 1040 ez file Obstetric and gynecological conditions. 1040 ez file Pediatric conditions. 1040 ez file Vision and hearing disorders. 1040 ez file For more information on screening services, see Notice 2004-23, 2004-15 I. 1040 ez file R. 1040 ez file B. 1040 ez file 725 available at www. 1040 ez file irs. 1040 ez file gov/irb/2004-15_IRB/ar10. 1040 ez file html. 1040 ez file     The following table shows the minimum annual deductible and maximum annual deductible and other out-of-pocket expenses for HDHPs for 2013. 1040 ez file      Self-only coverage Family coverage Minimum annual deductible $1,250 $2,500 Maximum annual deductible and other out-of-pocket expenses* $6,250 $12,500 * This limit does not apply to deductibles and expenses for out-of-network services if the plan uses a network of providers. 1040 ez file Instead, only deductibles and out-of-pocket expenses for services within the network should be used to figure whether the limit applies. 1040 ez file    The following table shows the minimum annual deductible and maximum annual deductible and other out-of-pocket expenses for HDHPs for 2014. 1040 ez file      Self-only coverage Family coverage Minimum annual deductible $1,250 $2,500 Maximum annual deductible and other out-of-pocket expenses* $6,350 $12,700 * This limit does not apply to deductibles and expenses for out-of-network services if the plan uses a network of providers. 1040 ez file Instead, only deductibles and out-of-pocket expenses for services within the network should be used to figure whether the limit applies. 1040 ez file   Self-only HDHP coverage is an HDHP covering only an eligible individual. 1040 ez file Family HDHP coverage is an HDHP covering an eligible individual and at least one other individual (whether or not that individual is an eligible individual). 1040 ez file Example. 1040 ez file An eligible individual and his dependent child are covered under an “employee plus one” HDHP offered by the individual's employer. 1040 ez file This is family HDHP coverage. 1040 ez file Family plans that do not meet the high deductible rules. 1040 ez file   There are some family plans that have deductibles for both the family as a whole and for individual family members. 1040 ez file Under these plans, if you meet the individual deductible for one family member, you do not have to meet the higher annual deductible amount for the family. 1040 ez file If either the deductible for the family as a whole or the deductible for an individual family member is less than the minimum annual deductible for family coverage, the plan does not qualify as an HDHP. 1040 ez file Example. 1040 ez file You have family health insurance coverage in 2013. 1040 ez file The annual deductible for the family plan is $3,500. 1040 ez file This plan also has an individual deductible of $1,500 for each family member. 1040 ez file The plan does not qualify as an HDHP because the deductible for an individual family member is less than the minimum annual deductible ($2,500) for family coverage. 1040 ez file Other health coverage. 1040 ez file   You (and your spouse, if you have family coverage) generally cannot have any other health coverage that is not an HDHP. 1040 ez file However, you can still be an eligible individual even if your spouse has non-HDHP coverage provided you are not covered by that plan. 1040 ez file    You can have additional insurance that provides benefits only for the following items. 1040 ez file Liabilities incurred under workers' compensation laws, tort liabilities, or liabilities related to ownership or use of property. 1040 ez file A specific disease or illness. 1040 ez file A fixed amount per day (or other period) of hospitalization. 1040 ez file   You can also have coverage (whether provided through insurance or otherwise) for the following items. 1040 ez file Accidents. 1040 ez file Disability. 1040 ez file Dental care. 1040 ez file Vision care. 1040 ez file Long-term care. 1040 ez file    Plans in which substantially all of the coverage is through the items listed earlier are not HDHPs. 1040 ez file For example, if your plan provides coverage substantially all of which is for a specific disease or illness, the plan is not an HDHP for purposes of establishing an HSA. 1040 ez file Prescription drug plans. 1040 ez file   You can have a prescription drug plan, either as part of your HDHP or a separate plan (or rider), and qualify as an eligible individual if the plan does not provide benefits until the minimum annual deductible of the HDHP has been met. 1040 ez file If you can receive benefits before that deductible is met, you are not an eligible individual. 1040 ez file Other employee health plans. 1040 ez file   An employee covered by an HDHP and a health FSA or an HRA that pays or reimburses qualified medical expenses generally cannot make contributions to an HSA. 1040 ez file Health FSAs and HRAs are discussed later. 1040 ez file   However, an employee can make contributions to an HSA while covered under an HDHP and one or more of the following arrangements. 1040 ez file Limited-purpose health FSA or HRA. 1040 ez file These arrangements can pay or reimburse the items listed earlier under Other health coverage except long-term care. 1040 ez file Also, these arrangements can pay or reimburse preventive care expenses because they can be paid without having to satisfy the deductible. 1040 ez file Suspended HRA. 1040 ez file Before the beginning of an HRA coverage period, you can elect to suspend the HRA. 1040 ez file The HRA does not pay or reimburse, at any time, the medical expenses incurred during the suspension period except preventive care and items listed under Other health coverage. 1040 ez file When the suspension period ends, you are no longer eligible to make contributions to an HSA. 1040 ez file Post-deductible health FSA or HRA. 1040 ez file These arrangements do not pay or reimburse any medical expenses incurred before the minimum annual deductible amount is met. 1040 ez file The deductible for these arrangements does not have to be the same as the deductible for the HDHP, but benefits may not be provided before the minimum annual deductible amount is met. 1040 ez file Retirement HRA. 1040 ez file This arrangement pays or reimburses only those medical expenses incurred after retirement. 1040 ez file After retirement you are no longer eligible to make contributions to an HSA. 1040 ez file Health FSA – grace period. 1040 ez file   Coverage during a grace period by a general purpose health FSA is allowed if the balance in the health FSA at the end of its prior year plan is zero. 1040 ez file See Flexible Spending Arrangements (FSAs) , later. 1040 ez file Contributions to an HSA Any eligible individual can contribute to an HSA. 1040 ez file For an employee's HSA, the employee, the employee's employer, or both may contribute to the employee's HSA in the same year. 1040 ez file For an HSA established by a self-employed (or unemployed) individual, the individual can contribute. 1040 ez file Family members or any other person may also make contributions on behalf of an eligible individual. 1040 ez file Contributions to an HSA must be made in cash. 1040 ez file Contributions of stock or property are not allowed. 1040 ez file Limit on Contributions The amount you or any other person can contribute to your HSA depends on the type of HDHP coverage you have, your age, the date you become an eligible individual, and the date you cease to be an eligible individual. 1040 ez file For 2013, if you have self-only HDHP coverage, you can contribute up to $3,250. 1040 ez file If you have family HDHP coverage, you can contribute up to $6,450. 1040 ez file For 2014, if you have self-only HDHP coverage, you can contribute up to $3,300. 1040 ez file If you have family HDHP coverage you can contribute up to $6,550. 1040 ez file If you were, or were considered (under the last-month rule, discussed later), an eligible individual for the entire year and did not change your type of coverage, you can contribute the full amount based on your type of coverage. 1040 ez file However, if you were not an eligible individual for the entire year or changed your coverage during the year, your contribution limit is the greater of: The limitation shown on the Line 3 Limitation Chart and Worksheetin the Instructions for Form 8889, Health Savings Accounts (HSAs), or The maximum annual HSA contribution based on your HDHP coverage (self-only or family) on the first day of the last month of your tax year. 1040 ez file If you had family HDHP coverage on the first day of the last month of your tax year, your contribution limit for 2013 is $6,450 even if you changed coverage during the year. 1040 ez file Last-month rule. 1040 ez file   Under the last-month rule, if you are an eligible individual on the first day of the last month of your tax year (December 1 for most taxpayers), you are considered an eligible individual for the entire year. 1040 ez file You are treated as having the same HDHP coverage for the entire year as you had on the first day of the last month. 1040 ez file Testing period. 1040 ez file   If contributions were made to your HSA based on you being an eligible individual for the entire year under the last-month rule, you must remain an eligible individual during the testing period. 1040 ez file For the last-month rule, the testing period begins with the last month of your tax year and ends on the last day of the 12th month following that month. 1040 ez file For example, December 1, 2013, through December 31, 2014. 1040 ez file   If you fail to remain an eligible individual during the testing period, other than because of death or becoming disabled, you will have to include in income the total contributions made to your HSA that would not have been made except for the last-month rule. 1040 ez file You include this amount in your income in the year in which you fail to be an eligible individual. 1040 ez file This amount is also subject to a 10% additional tax. 1040 ez file The income and additional tax are shown on Form 8889, Part III. 1040 ez file Example 1. 1040 ez file Chris, age 53, becomes an eligible individual on December 1, 2013. 1040 ez file He has family HDHP coverage on that date. 1040 ez file Under the last-month rule, he contributes $6,450 to his HSA. 1040 ez file Chris fails to be an eligible individual in June 2014. 1040 ez file Because Chris did not remain an eligible individual during the testing period (December 1, 2013, through December 31, 2014), he must include in his 2014 income the contributions made in 2013 that would not have been made except for the last-month rule. 1040 ez file Chris uses the worksheet in the Form 8889 instructions to determine this amount. 1040 ez file January -0- February -0- March -0- April -0- May -0- June -0- July -0- August -0- September -0- October -0- November -0- December $6,450. 1040 ez file 00 Total for all months $6,450. 1040 ez file 00 Limitation. 1040 ez file Divide the total by 12 $537. 1040 ez file 50 Chris would include $5,912. 1040 ez file 50 ($6,450. 1040 ez file 00 – $537. 1040 ez file 50) in his gross income on his 2014 tax return. 1040 ez file Also, a 10% additional tax applies to this amount. 1040 ez file Example 2. 1040 ez file Erika, age 39, has self-only HDHP coverage on January 1, 2013. 1040 ez file Erika changes to family HDHP coverage on November 1, 2013. 1040 ez file Because Erika has family HDHP coverage on December 1, 2013, she contributes $6,450 for 2013. 1040 ez file Erika fails to be an eligible individual in March 2014. 1040 ez file Because she did not remain an eligible individual during the testing period (December 1, 2013, through December 31, 2014), she must include in income the contribution made that would not have been made except for the last-month rule. 1040 ez file Erika uses the worksheet in the Form 8889 instructions to determine this amount. 1040 ez file January $3,250. 1040 ez file 00 February $3,250. 1040 ez file 00 March $3,250. 1040 ez file 00 April $3,250. 1040 ez file 00 May $3,250. 1040 ez file 00 June $3,250. 1040 ez file 00 July $3,250. 1040 ez file 00 August $3,250. 1040 ez file 00 September $3,250. 1040 ez file 00 October $3,250. 1040 ez file 00 November $6,450. 1040 ez file 00 December $6,450. 1040 ez file 00 Total for all months $45,400. 1040 ez file 00 Limitation. 1040 ez file Divide the total by 12 $3,783. 1040 ez file 34 Erika would include $2,666. 1040 ez file 67 ($6,450 – $3,783. 1040 ez file 34) in her gross income on her 2014 tax return. 1040 ez file Also, a 10% additional tax applies to this amount. 1040 ez file Additional contribution. 1040 ez file   If you are an eligible individual who is age 55 or older at the end of your tax year, your contribution limit is increased by $1,000. 1040 ez file For example, if you have self-only coverage, you can contribute up to $4,250 (the contribution limit for self-only coverage ($3,250) plus the additional contribution of $1,000). 1040 ez file However, see Enrolled in Medicare , later. 1040 ez file If you have more than one HSA in 2013, your total contributions to all the HSAs cannot be more than the limits discussed earlier. 1040 ez file Reduction of contribution limit. 1040 ez file   You must reduce the amount that can be contributed (including any additional contribution) to your HSA by the amount of any contribution made to your Archer MSA (including employer contributions) for the year. 1040 ez file A special rule applies to married people, discussed next, if each spouse has family coverage under an HDHP. 1040 ez file Rules for married people. 1040 ez file   If either spouse has family HDHP coverage, both spouses are treated as having family HDHP coverage. 1040 ez file If each spouse has family coverage under a separate plan, the contribution limit for 2013 is $6,450. 1040 ez file You must reduce the limit on contributions, before taking into account any additional contributions, by the amount contributed to both spouses' Archer MSAs. 1040 ez file After that reduction, the contribution limit is split equally between the spouses unless you agree on a different division. 1040 ez file The rules for married people apply only if both spouses are eligible individuals. 1040 ez file If both spouses are 55 or older and not enrolled in Medicare, each spouse's contribution limit is increased by the additional contribution. 1040 ez file If both spouses meet the age requirement, the total contributions under family coverage cannot be more than $8,450. 1040 ez file Each spouse must make the additional contribution to his or her own HSA. 1040 ez file Example. 1040 ez file For 2013, Mr. 1040 ez file Auburn and his wife are both eligible individuals. 1040 ez file They each have family coverage under separate HDHPs. 1040 ez file Mr. 1040 ez file Auburn is 58 years old and Mrs. 1040 ez file Auburn is 53. 1040 ez file Mr. 1040 ez file and Mrs. 1040 ez file Auburn can split the family contribution limit ($6,450) equally or they can agree on a different division. 1040 ez file If they split it equally, Mr. 1040 ez file Auburn can contribute $4,225 to an HSA (one-half the maximum contribution for family coverage ($3,225) + $1,000 additional contribution) and Mrs. 1040 ez file Auburn can contribute $3,225 to an HSA. 1040 ez file Employer contributions. 1040 ez file   You must reduce the amount you, or any other person, can contribute to your HSA by the amount of any contributions made by your employer that are excludable from your income. 1040 ez file This includes amounts contributed to your account by your employer through a cafeteria plan. 1040 ez file Enrolled in Medicare. 1040 ez file   Beginning with the first month you are enrolled in Medicare, your contribution limit is zero. 1040 ez file Example. 1040 ez file You turned age 65 in July 2013 and enrolled in Medicare. 1040 ez file You had an HDHP with self-only coverage and are eligible for an additional contribution of $1,000. 1040 ez file Your contribution limit is $2,125 ($4,250 × 6 ÷ 12). 1040 ez file Qualified HSA funding distribution. 1040 ez file   A qualified HSA funding distribution may be made from your traditional IRA or Roth IRA to your HSA. 1040 ez file This distribution cannot be made from an ongoing SEP IRA or SIMPLE IRA. 1040 ez file For this purpose, a SEP IRA or SIMPLE IRA is ongoing if an employer contribution is made for the plan year ending with or within your tax year in which the distribution would be made. 1040 ez file   The maximum qualified HSA funding distribution depends on the HDHP coverage (self-only or family) you have on the first day of the month in which the contribution is made and your age as of the end of the tax year. 1040 ez file The distribution must be made directly by the trustee of the IRA to the trustee of the HSA. 1040 ez file The distribution is not included in your income, is not deductible, and reduces the amount that can be contributed to your HSA. 1040 ez file The qualified HSA funding distribution is shown on Form 8889 for the year in which the distribution is made. 1040 ez file   You can make only one qualified HSA funding distribution during your lifetime. 1040 ez file However, if you make a distribution during a month when you have self-only HDHP coverage, you can make another qualified HSA funding distribution in a later month in that tax year if you change to family HDHP coverage. 1040 ez file The total qualified HSA funding distribution cannot be more than the contribution limit for family HDHP coverage plus any additional contribution to which you are entitled. 1040 ez file Example. 1040 ez file In 2013, you are an eligible individual, age 57, with self-only HDHP coverage. 1040 ez file You can make a qualified HSA funding distribution of $4,250 ($3,250 plus $1,000 additional contribution). 1040 ez file Funding distribution – testing period. 1040 ez file   You must remain an eligible individual during the testing period. 1040 ez file For a qualified HSA funding distribution, the testing period begins with the month in which the qualified HSA funding distribution is contributed and ends on the last day of the 12th month following that month. 1040 ez file For example, if a qualified HSA funding distribution is contributed to your HSA on August 10, 2013, your testing period begins in August 2013, and ends on August 31, 2014. 1040 ez file   If you fail to remain an eligible individual during the testing period, other than because of death or becoming disabled, you will have to include in income the qualified HSA funding distribution. 1040 ez file You include this amount in income in the year in which you fail to be an eligible individual. 1040 ez file This amount is also subject to a 10% additional tax. 1040 ez file The income and the additional tax are shown on Form 8889, Part III. 1040 ez file   Each qualified HSA funding distribution allowed has its own testing period. 1040 ez file For example, you are an eligible individual, age 45, with self-only HDHP coverage. 1040 ez file On June 18, 2013, you make a qualified HSA funding distribution of $3,250. 1040 ez file On July 27, 2013, you enroll in family HDHP coverage and on August 17, 2013, you make a qualified HSA funding distribution of $3,200. 1040 ez file Your testing period for the first distribution begins in June 2013 and ends on June 30, 2014. 1040 ez file Your testing period for the second distribution begins in August 2013 and ends on August 31, 2014. 1040 ez file   The testing period rule that applies under the last-month rule (discussed earlier) does not apply to amounts contributed to an HSA through a qualified HSA funding distribution. 1040 ez file If you remain an eligible individual during the entire funding distribution testing period, then no amount of that distribution is included in income and will not be subject to the additional tax for failing to meet the last-month rule testing period. 1040 ez file Rollovers A rollover contribution is not included in your income, is not deductible, and does not reduce your contribution limit. 1040 ez file Archer MSAs and other HSAs. 1040 ez file   You can roll over amounts from Archer MSAs and other HSAs into an HSA. 1040 ez file You do not have to be an eligible individual to make a rollover contribution from your existing HSA to a new HSA. 1040 ez file Rollover contributions do not need to be in cash. 1040 ez file Rollovers are not subject to the annual contribution limits. 1040 ez file   You must roll over the amount within 60 days after the date of receipt. 1040 ez file You can make only one rollover contribution to an HSA during a 1-year period. 1040 ez file Note. 1040 ez file If you instruct the trustee of your HSA to transfer funds directly to the trustee of another of your HSAs, the transfer is not considered a rollover. 1040 ez file There is no limit on the number of these transfers. 1040 ez file Do not include the amount transferred in income, deduct it as a contribution, or include it as a distribution on Form 8889. 1040 ez file When To Contribute You can make contributions to your HSA for 2013 until April 15, 2014. 1040 ez file If you fail to be an eligible individual during 2013, you can still make contributions, up until April 15, 2014, for the months you were an eligible individual. 1040 ez file Your employer can make contributions to your HSA between January 1, 2014, and April 15, 2014, that are allocated to 2013. 1040 ez file Your employer must notify you and the trustee of your HSA that the contribution is for 2013. 1040 ez file The contribution will be reported on your 2014 Form W-2. 1040 ez file Reporting Contributions on Your Return Contributions made by your employer are not included in your income. 1040 ez file Contributions to an employee's account by an employer using the amount of an employee's salary reduction through a cafeteria plan are treated as employer contributions. 1040 ez file Generally, you can claim contributions you made and contributions made by any other person, other than your employer, on your behalf, as an adjustment to income. 1040 ez file Contributions by a partnership to a bona fide partner's HSA are not contributions by an employer. 1040 ez file The contributions are treated as a distribution of money and are not included in the partner's gross income. 1040 ez file Contributions by a partnership to a partner's HSA for services rendered are treated as guaranteed payments that are deductible by the partnership and includible in the partner's gross income. 1040 ez file In both situations, the partner can deduct the contribution made to the partner's HSA. 1040 ez file Contributions by an S corporation to a 2% shareholder-employee's HSA for services rendered are treated as guaranteed payments and are deductible by the S corporation and includible in the shareholder-employee's gross income. 1040 ez file The shareholder-employee can deduct the contribution made to the shareholder-employee's HSA. 1040 ez file Form 8889. 1040 ez file   Report all contributions to your HSA on Form 8889 and file it with your Form 1040 or Form 1040NR. 1040 ez file You should include all contributions made for 2013, including those made by April 15, 2014, that are designated for 2013. 1040 ez file Contributions made by your employer and qualified HSA funding distributions are also shown on the form. 1040 ez file   You should receive Form 5498-SA, HSA, Archer MSA, or Medicare Advantage MSA Information, from the trustee showing the amount contributed to your HSA during the year. 1040 ez file Your employer's contributions also will be shown in box 12 of Form W-2, Wage and Tax Statement, with code W. 1040 ez file Follow the instructions for Form 8889. 1040 ez file Report your HSA deduction on Form 1040 or Form 1040NR. 1040 ez file Excess contributions. 1040 ez file   You will have excess contributions if the contributions to your HSA for the year are greater than the limits discussed earlier. 1040 ez file Excess contributions are not deductible. 1040 ez file Excess contributions made by your employer are included in your gross income. 1040 ez file If the excess contribution is not included in box 1 of Form W-2, you must report the excess as “Other income” on your tax return. 1040 ez file   Generally, you must pay a 6% excise tax on excess contributions. 1040 ez file See Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts, to figure the excise tax. 1040 ez file The excise tax applies to each tax year the excess contribution remains in the account. 1040 ez file   You may withdraw some or all of the excess contributions and not pay the excise tax on the amount withdrawn if you meet the following conditions. 1040 ez file You withdraw the excess contributions by the due date, including extensions, of your tax return for the year the contributions were made. 1040 ez file You withdraw any income earned on the withdrawn contributions and include the earnings in “Other income” on your tax return for the year you withdraw the contributions and earnings. 1040 ez file If you fail to remain an eligible individual during any of the testing periods, discussed earlier, the amount you have to include in income is not an excess contribution. 1040 ez file If you withdraw any of those amounts, the amount is treated the same as any other distribution from an HSA, discussed later. 1040 ez file Deducting an excess contribution in a later year. 1040 ez file   You may be able to deduct excess contributions for previous years that are still in your HSA. 1040 ez file The excess contribution you can deduct for the current year is the lesser of the following two amounts. 1040 ez file Your maximum HSA contribution limit for the year minus any amounts contributed to your HSA for the year. 1040 ez file The total excess contributions in your HSA at the beginning of the year. 1040 ez file   Amounts contributed for the year include contributions by you, your employer, and any other person. 1040 ez file They also include any qualified HSA funding distribution made to your HSA. 1040 ez file Any excess contribution remaining at the end of a tax year is subject to the excise tax. 1040 ez file See Form 5329. 1040 ez file Distributions From an HSA You will generally pay medical expenses during the year without being reimbursed by your HDHP until you reach the annual deductible for the plan. 1040 ez file When you pay medical expenses during the year that are not reimbursed by your HDHP, you can ask the trustee of your HSA to send you a distribution from your HSA. 1040 ez file You can receive tax-free distributions from your HSA to pay or be reimbursed for qualified medical expenses you incur after you establish the HSA. 1040 ez file If you receive distributions for other reasons, the amount you withdraw will be subject to income tax and may be subject to an additional 20% tax. 1040 ez file You do not have to make distributions from your HSA each year. 1040 ez file If you are no longer an eligible individual, you can still receive tax-free distributions to pay or reimburse your qualified medical expenses. 1040 ez file Generally, a distribution is money you get from your health savings account. 1040 ez file Your total distributions include amounts paid with a debit card that restricts payments to health care and amounts withdrawn from the HSA by other individuals that you have designated. 1040 ez file The trustee will report any distribution to you and the IRS on Form 1099-SA, Distributions From an HSA, Archer MSA, or Medicare Advantage MSA. 1040 ez file Qualified medical expenses. 1040 ez file   Qualified medical expenses are those expenses that would generally qualify for the medical and dental expenses deduction. 1040 ez file These are explained in Publication 502, Medical and Dental Expenses. 1040 ez file   Also, non-prescription medicines (other than insulin) are not considered qualified medical expenses for HSA purposes. 1040 ez file A medicine or drug will be a qualified medical expense for HSA purposes only if the medicine or drug: Requires a prescription, Is available without a prescription (an over-the-counter medicine or drug) and you get a prescription for it, or Is insulin. 1040 ez file   For HSA purposes, expenses incurred before you establish your HSA are not qualified medical expenses. 1040 ez file State law determines when an HSA is established. 1040 ez file An HSA that is funded by amounts rolled over from an Archer MSA or another HSA is established on the date the prior account was established. 1040 ez file   If, under the last-month rule, you are considered to be an eligible individual for the entire year for determining the contribution amount, only those expenses incurred after you actually establish your HSA are qualified medical expenses. 1040 ez file   Qualified medical expenses are those incurred by the following persons. 1040 ez file You and your spouse. 1040 ez file All dependents you claim on your tax return. 1040 ez file Any person you could have claimed as a dependent on your return except that: The person filed a joint return, The person had gross income of $3,900 or more, or You, or your spouse if filing jointly, could be claimed as a dependent on someone else's 2013 return. 1040 ez file    For this purpose, a child of parents that are divorced, separated, or living apart for the last 6 months of the calendar year is treated as the dependent of both parents whether or not the custodial parent releases the claim to the child's exemption. 1040 ez file You cannot deduct qualified medical expenses as an itemized deduction on Schedule A (Form 1040) that are equal to the tax-free distribution from your HSA. 1040 ez file Insurance premiums. 1040 ez file   You cannot treat insurance premiums as qualified medical expenses unless the premiums are for: Long-term care insurance. 1040 ez file Health care continuation coverage (such as coverage under COBRA). 1040 ez file Health care coverage while receiving unemployment compensation under federal or state law. 1040 ez file Medicare and other health care coverage if you were 65 or older (other than premiums for a Medicare supplemental policy, such as Medigap). 1040 ez file   The premiums for long-term care insurance (item (1)) that you can treat as qualified medical expenses are subject to limits based on age and are adjusted annually. 1040 ez file See Limit on long-term care premiums you can deduct in the instructions for Schedule A (Form 1040). 1040 ez file   Items (2) and (3) can be for your spouse or a dependent meeting the requirement for that type of coverage. 1040 ez file For item (4), if you, the account beneficiary, are not 65 or older, Medicare premiums for coverage of your spouse or a dependent (who is 65 or older) generally are not qualified medical expenses. 1040 ez file Health coverage tax credit. 1040 ez file   You cannot claim this credit for premiums that you pay with a tax-free distribution from your HSA. 1040 ez file See Publication 502 for more information on this credit. 1040 ez file Deemed distributions from HSAs. 1040 ez file   The following situations result in deemed taxable distributions from your HSA. 1040 ez file You engaged in any transaction prohibited by section 4975 with respect to any of your HSAs, at any time in 2013. 1040 ez file Your account ceases to be an HSA as of January 1, 2013, and you must include the fair market value of all assets in the account as of January 1, 2013, on Form 8889. 1040 ez file You used any portion of any of your HSAs as security for a loan at any time in 2013. 1040 ez file You must include the fair market value of the assets used as security for the loan as income on Form 1040 or Form 1040NR. 1040 ez file   Examples of prohibited transactions include the direct or indirect: Sale, exchange, or leasing of property between you and the HSA, Lending of money between you and the HSA, Furnishing goods, services, or facilities between you and the HSA, and Transfer to or use by you, or for your benefit, of any assets of the HSA. 1040 ez file   Any deemed distribution will not be treated as used to pay qualified medical expenses. 1040 ez file These distributions are included in your income and are subject to the additional 20% tax, discussed later. 1040 ez file Recordkeeping. 1040 ez file You must keep records sufficient to show that: The distributions were exclusively to pay or reimburse qualified medical expenses, The qualified medical expenses had not been previously paid or reimbursed from another source, and The medical expenses had not been taken as an itemized deduction in any year. 1040 ez file Do not send these records with your tax return. 1040 ez file Keep them with your tax records. 1040 ez file Reporting Distributions on Your Return How you report your distributions depends on whether or not you use the distribution for qualified medical expenses (defined earlier). 1040 ez file If you use a distribution from your HSA for qualified medical expenses, you do not pay tax on the distribution but you have to report the distribution on Form 8889. 1040 ez file However, the distribution of an excess contribution taken out after the due date, including extensions, of your return is subject to tax even if used for qualified medical expenses. 1040 ez file Follow the instructions for the form and file it with your Form 1040 or Form 1040NR. 1040 ez file If you do not use a distribution from your HSA for qualified medical expenses, you must pay tax on the distribution. 1040 ez file Report the amount on Form 8889 and file it with your Form 1040 or Form 1040NR. 1040 ez file You may have to pay an additional 20% tax on your taxable distribution. 1040 ez file HSA administration and maintenance fees withdrawn by the trustee are not reported as distributions from the HSA. 1040 ez file Additional tax. 1040 ez file   There is an additional 20% tax on the part of your distributions not used for qualified medical expenses. 1040 ez file Figure the tax on Form 8889 and file it with your Form 1040 or Form 1040NR. 1040 ez file Exceptions. 1040 ez file   There is no additional tax on distributions made after the date you are disabled, reach age 65, or die. 1040 ez file Balance in an HSA An HSA is generally exempt from tax. 1040 ez file You are permitted to take a distribution from your HSA at any time; however, only those amounts used exclusively to pay for qualified medical expenses are tax free. 1040 ez file Amounts that remain at the end of the year are generally carried over to the next year (see Excess contributions , earlier). 1040 ez file Earnings on amounts in an HSA are not included in your income while held in the HSA. 1040 ez file Death of HSA Holder You should choose a beneficiary when you set up your HSA. 1040 ez file What happens to that HSA when you die depends on whom you designate as the beneficiary. 1040 ez file Spouse is the designated beneficiary. 1040 ez file   If your spouse is the designated beneficiary of your HSA, it will be treated as your spouse's HSA after your death. 1040 ez file Spouse is not the designated beneficiary. 1040 ez file   If your spouse is not the designated beneficiary of your HSA: The account stops being an HSA, and The fair market value of the HSA becomes taxable to the beneficiary in the year in which you die. 1040 ez file If your estate is the beneficiary, the value is included on your final income tax return. 1040 ez file The amount taxable to a beneficiary other than the estate is reduced by any qualified medical expenses for the decedent that are paid by the beneficiary within 1 year after the date of death. 1040 ez file Filing Form 8889 You must file Form 8889 with your Form 1040 or Form 1040NR if you (or your spouse, if married filing a joint return) had any activity in your HSA during the year. 1040 ez file You must file the form even if only your employer or your spouse's employer made contributions to the HSA. 1040 ez file If, during the tax year, you are the beneficiary of two or more HSAs or you are a beneficiary of an HSA and you have your own HSA, you must complete a separate Form 8889 for each HSA. 1040 ez file Enter “statement” at the top of each Form 8889 and complete the form as instructed. 1040 ez file Next, complete a controlling Form 8889 combining the amounts shown on each of the statement Forms 8889. 1040 ez file Attach the statements to your tax return after the controlling Form 8889. 1040 ez file Employer Participation This section contains the rules that employers must follow if they decide to make HSAs available to their employees. 1040 ez file Unlike the previous discussions, “you” refers to the employer and not to the employee. 1040 ez file Health plan. 1040 ez file   If you want your employees to be able to have an HSA, they must have an HDHP. 1040 ez file You can provide no additional coverage other than those exceptions listed previously under Other health coverage . 1040 ez file Contributions. 1040 ez file   You can make contributions to your employees' HSAs. 1040 ez file You deduct the contributions on your business income tax return for the year in which you make the contributions. 1040 ez file If the contribution is allocated to the prior year, you still deduct it in the year in which you made the contribution. 1040 ez file   For more information on employer contributions, see Notice 2008-59, 2008-29 I. 1040 ez file R. 1040 ez file B. 1040 ez file 123, questions 23 through 27, available at www. 1040 ez file irs. 1040 ez file gov/irb/2008-29_IRB/ar11. 1040 ez file html. 1040 ez file Comparable contributions. 1040 ez file   If you decide to make contributions, you must make comparable contributions to all comparable participating employees' HSAs. 1040 ez file Your contributions are comparable if they are either: The same amount, or The same percentage of the annual deductible limit under the HDHP covering the employees. 1040 ez file The comparability rules do not apply to contributions made through a cafeteria plan. 1040 ez file Comparable participating employees. 1040 ez file   Comparable participating employees: Are covered by your HDHP and are eligible to establish an HSA, Have the same category of coverage (either self-only or family coverage), and Have the same category of employment (part-time, full-time, or former employees). 1040 ez file   To meet the comparability requirements for eligible employees who have not established an HSA by December 31 or have not notified you that they have an HSA, you must meet a notice requirement and a contribution requirement. 1040 ez file   You will meet the notice requirement if by January 15 of the following calendar year you provide a written notice to all such employees. 1040 ez file The notice must state that each eligible employee who, by the last day of February, establishes an HSA and notifies you that they have established an HSA will receive a comparable contribution to the HSA for the prior year. 1040 ez file For a sample of the notice, see Regulation 54. 1040 ez file 4980G-4 A-14(c). 1040 ez file You will meet the contribution requirement for these employees if by April 15, 2014, you contribute comparable amounts plus reasonable interest to the employee's HSA for the prior year. 1040 ez file Note. 1040 ez file For purposes of making contributions to HSAs of non-highly compensated employees, highly compensated employees shall not be treated as comparable participating employees. 1040 ez file Excise tax. 1040 ez file   If you made contributions to your employees' HSAs that were not comparable, you must pay an excise tax of 35% of the amount you contributed. 1040 ez file Employment taxes. 1040 ez file   Amounts you contribute to your employees' HSAs are generally not subject to employment taxes. 1040 ez file You must report the contributions in box 12 of the Form W-2 you file for each employee. 1040 ez file This includes the amounts the employee elected to contribute through a cafeteria plan. 1040 ez file Enter code “W” in box 12. 1040 ez file Medical Savings Accounts (MSAs) Archer MSAs were created to help self-employed individuals and employees of certain small employers meet the medical care costs of the account holder, the account holder's spouse, or the account holder's dependent(s). 1040 ez file After December 31, 2007, you cannot be treated as an eligible individual for Archer MSA purposes unless: You were an active participant for any tax year ending before January 1, 2008, or You became an active participant for a tax year ending after December 31, 2007, by reason of coverage under a high deductible health plan (HDHP) of an Archer MSA participating employer. 1040 ez file A Medicare Advantage MSA is an Archer MSA designated by Medicare to be used solely to pay the qualified medical expenses of the account holder who is eligible for Medicare. 1040 ez file Archer MSAs An Archer MSA is a tax-exempt trust or custodial account that you set up with a U. 1040 ez file S. 1040 ez file financial institution (such as a bank or an insurance company) in which you can save money exclusively for future medical expenses. 1040 ez file What are the benefits of an Archer MSA?   You may enjoy several benefits from having an Archer MSA. 1040 ez file You can claim a tax deduction for contributions you make even if you do not itemize your deductions on Form 1040 or Form 1040NR. 1040 ez file The interest or other earnings on the assets in your Archer MSA are tax free. 1040 ez file Distributions may be tax free if you pay qualified medical expenses. 1040 ez file See Qualified medical expenses , later. 1040 ez file The contributions remain in your Archer MSA from year to year until you use them. 1040 ez file An Archer MSA is “portable” so it stays with you if you change employers or leave the work force. 1040 ez file Qualifying for an Archer MSA To qualify for an Archer MSA, you must be either of the following. 1040 ez file An employee (or the spouse of an employee) of a small employer (defined later) that maintains a self-only or family HDHP for you (or your spouse). 1040 ez file A self-employed person (or the spouse of a self-employed person) who maintains a self-only or family HDHP. 1040 ez file You can have no other health or Medicare coverage except what is permitted under Other health coverage , later. 1040 ez file You must be an eligible individual on the first day of a given month to get an Archer MSA deduction for that month. 1040 ez file If another taxpayer is entitled to claim an exemption for you, you cannot claim a deduction for an Archer MSA contribution. 1040 ez file This is true even if the other person does not actually claim your exemption. 1040 ez file Small employer. 1040 ez file   A small employer is generally an employer who had an average of 50 or fewer employees during either of the last 2 calendar years. 1040 ez file The definition of small employer is modified for new employers and growing employers. 1040 ez file Growing employer. 1040 ez file   A small employer may begin HDHPs and Archer MSAs for his or her employees and then grow beyond 50 employees. 1040 ez file The employer will continue to meet the requirement for small employers if he or she: Had 50 or fewer employees when the Archer MSAs began, Made a contribution that was excludable or deductible as an Archer MSA for the last year he or she had 50 or fewer employees, and Had an average of 200 or fewer employees each year after 1996. 1040 ez file Changing employers. 1040 ez file   If you change employers, your Archer MSA moves with you. 1040 ez file However, you may not make additional contributions unless you are otherwise eligible. 1040 ez file High deductible health plan (HDHP). 1040 ez file   To be eligible for an Archer MSA, you must be covered under an HDHP. 1040 ez file An HDHP has: A higher annual deductible than typical health plans, and A maximum limit on the annual out-of-pocket medical expenses that you must pay for covered expenses. 1040 ez file Limits. 1040 ez file   The following table shows the limits for annual deductibles and the maximum out-of-pocket expenses for HDHPs for 2013. 1040 ez file   Self-only coverage Family coverage Minimum annual deductible $2,150 $4,300 Maximum annual deductible $3,200 $6,450 Maximum annual out-of-pocket expenses $4,300 $7,850 Family plans that do not meet the high deductible rules. 1040 ez file   There are some family plans that have deductibles for both the family as a whole and for individual family members. 1040 ez file Under these plans, if you meet the individual deductible for one family member, you do not have to meet the higher annual deductible amount for the family. 1040 ez file If either the deductible for the family as a whole or the deductible for an individual family member is less than the minimum annual deductible for family coverage, the plan does not qualify as an HDHP. 1040 ez file Example. 1040 ez file You have family health insurance coverage in 2013. 1040 ez file The annual deductible for the family plan is $5,500. 1040 ez file This plan also has an individual deductible of $2,000 for each family member. 1040 ez file The plan does not qualify as an HDHP because the deductible for an individual family member is less than the minimum annual deductible ($4,300) for family coverage. 1040 ez file Other health coverage. 1040 ez file   You (and your spouse, if you have family coverage) generally cannot have any other health coverage that is not an HDHP. 1040 ez file However, you can still be an eligible individual even if your spouse has non-HDHP coverage provided you are not covered by that plan. 1040 ez file However, you can have additional insurance that provides benefits only for the following items. 1040 ez file Liabilities incurred under workers' compensation laws, torts, or ownership or use of property. 1040 ez file A specific disease or illness. 1040 ez file A fixed amount per day (or other period) of hospitalization. 1040 ez file You can also have coverage (whether provided through insurance or otherwise) for the following items. 1040 ez file Accidents. 1040 ez file Disability. 1040 ez file Dental care. 1040 ez file Vision care. 1040 ez file Long-term care. 1040 ez file Contributions to an MSA Contributions to an Archer MSA must be made in cash. 1040 ez file You cannot contribute stock or other property to an Archer MSA. 1040 ez file Who can contribute to my Archer MSA?   If you are an employee, your employer may make contributions to your Archer MSA. 1040 ez file (You do not pay tax on these contributions. 1040 ez file ) If your employer does not make contributions to your Archer MSA, or you are self-employed, you can make your own contributions to your Archer MSA. 1040 ez file Both you and your employer cannot make contributions to your Archer MSA in the same year. 1040 ez file You do not have to make contributions to your Archer MSA every year. 1040 ez file    If your spouse is covered by your HDHP and an excludable amount is contributed by your spouse's employer to an Archer MSA belonging to your spouse, you cannot make contributions to your own Archer MSA that year. 1040 ez file Limits There are two limits on the amount you or your employer can contribute to your Archer MSA: The annual deductible limit. 1040 ez file An income limit. 1040 ez file Annual deductible limit. 1040 ez file   You (or your employer) can contribute up to 75% of the annual deductible of your HDHP (65% if you have a self-only plan) to your Archer MSA. 1040 ez file You must have the HDHP all year to contribute the full amount. 1040 ez file If you do not qualify to contribute the full amount for the year, determine your annual deductible limit by using the worksheet in the Instructions for Form 8853, Archer MSAs and Long-Term Care Insurance Contracts. 1040 ez file Example 1. 1040 ez file You have an HDHP for your family all year in 2013. 1040 ez file The annual deductible is $5,000. 1040 ez file You can contribute up to $3,750 ($5,000 × 75%) to your Archer MSA for the year. 1040 ez file Example 2. 1040 ez file You have an HDHP for your family for the entire months of July through December 2013 (6 months). 1040 ez file The annual deductible is $5,000. 1040 ez file You can contribute up to $1,875 ($5,000 × 75% ÷ 12 × 6) to your Archer MSA for the year. 1040 ez file If you and your spouse each have a family plan, you are treated as having family coverage with the lower annual deductible of the two health plans. 1040 ez file The contribution limit is split equally between you unless you agree on a different division. 1040 ez file Income limit. 1040 ez file   You cannot contribute more than you earned for the year from the employer through whom you have your HDHP. 1040 ez file   If you are self-employed, you cannot contribute more than your net self-employment income. 1040 ez file This is your income from self-employment minus expenses (including the deductible part of self-employment tax). 1040 ez file Example 1. 1040 ez file Noah Paul earned $25,000 from ABC Company in 2013. 1040 ez file Through ABC, he had an HDHP for his family for the entire year. 1040 ez file The annual deductible was $5,000. 1040 ez file He can contribute up to $3,750 to his Archer MSA (75% × $5,000). 1040 ez file He can contribute the full amount because he earned more than $3,750 at ABC. 1040 ez file Example 2. 1040 ez file Westley Lawrence is self-employed. 1040 ez file He had an HDHP for his family for the entire year in 2013. 1040 ez file The annual deductible was $5,000. 1040 ez file Based on the annual deductible, the maximum contribution to his Archer MSA would have been $3,750 (75% × $5,000). 1040 ez file However, after deducting his business expenses, Joe's net self-employment income is $2,500 for the year. 1040 ez file Therefore, he is limited to a contribution of $2,500. 1040 ez file Individuals enrolled in Medicare. 1040 ez file   Beginning with the first month you are enrolled in Medicare, you cannot contribute to an Archer MSA. 1040 ez file However, you may be eligible for a Medicare Advantage MSA, discussed later. 1040 ez file When To Contribute You can make contributions to your Archer MSA for 2013 until April 15, 2014. 1040 ez file Reporting Contributions on Your Return Report all contributions to your Archer MSA on Form 8853 and file it with your Form 1040 or Form 1040NR. 1040 ez file You should include all contributions you, or your employer, made for 2013, including those made by April 15, 2014, that are designated for 2013. 1040 ez file You should receive Form 5498-SA, HSA, Archer MSA, or Medicare Advantage MSA Information, from the trustee showing the amount you (or your employer) contributed during the year. 1040 ez file Your employer's contributions should be shown in box 12 of Form W-2, Wage and Tax Statement, with code R. 1040 ez file Follow the instructions for Form 8853 and complete the worksheet in the instructions. 1040 ez file Report your Archer MSA deduction on Form 1040 or Form 1040NR. 1040 ez file Excess contributions. 1040 ez file   You will have excess contributions if the contributions to your Archer MSA for the year are greater than the limits discussed earlier. 1040 ez file Excess contributions are not deductible. 1040 ez file Excess contributions made by your employer are included in your gross income. 1040 ez file If the excess contribution is not included in box 1 of Form W-2, you must report the excess as “Other income” on your tax return. 1040 ez file   Generally, you must pay a 6% excise tax on excess contributions. 1040 ez file See Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, to figure the excise tax. 1040 ez file The excise tax applies to each tax year the excess contribution remains in the account. 1040 ez file   You may withdraw some or all of the excess contributions and not pay the excise tax on the amount withdrawn if you meet the following conditions. 1040 ez file You withdraw the excess contributions by the due date, including extensions, of your tax return. 1040 ez file You withdraw any income earned on the withdrawn contributions and include the earnings in “Other income” on your tax return for the year you withdraw the contributions and earnings. 1040 ez file Deducting an excess contribution in a later year. 1040 ez file   You may be able to deduct excess contributions for previous years that are still in your Archer MSA. 1040 ez file The excess contribution you can deduct in the current year is the lesser of the following two amounts. 1040 ez file Your maximum Archer MSA contribution limit for the year minus any amounts contributed to your Archer MSA for the year. 1040 ez file The total excess contributions in your Archer MSA at the beginning of the year. 1040 ez file   Any excess contributions remaining at the end of a tax year are subject to the excise tax. 1040 ez file See Form 5329. 1040 ez file Distributions From an MSA You will generally pay medical expenses during the year without being reimbursed by your HDHP until you reach the annual deductible for the plan. 1040 ez file When you pay medical expenses during the year that are not reimbursed by your HDHP, you can ask the trustee of your Archer MSA to send you a distribution from your Archer MSA. 1040 ez file You can receive tax-free distributions from your Archer MSA to pay for qualified medical expenses (discussed later). 1040 ez file If you receive distributions for other reasons, the amount will be subject to income tax and may be subject to an additional 20% tax as well. 1040 ez file You do not have to make withdrawals from your Archer MSA each year. 1040 ez file If you no longer qualify to make contributions, you can still receive tax-free distributions to pay or reimburse your qualified medical expenses. 1040 ez file A distribution is money you get from your Archer MSA. 1040 ez file The trustee will report any distribution to you and the IRS on Form 1099-SA, Distributions From an HSA, Archer MSA, or Medicare Advantage MSA. 1040 ez file Qualified medical expenses. 1040 ez file   Qualified medical expenses are those expenses that would generally qualify for the medical and dental expenses deduction. 1040 ez file These are explained in Publication 502. 1040 ez file   Also, non-prescription medicines (other than insulin) are not considered qualified medical expenses for MSA purposes. 1040 ez file A medicine or drug will be a qualified medical expense for MSA purposes only if the medicine or drug: Requires a prescription, Is available without a prescription (an over-the-counter medicine or drug) and you get a prescription for it, or Is insulin. 1040 ez file   Qualified medical expenses are those incurred by the following persons. 1040 ez file You and your spouse. 1040 ez file All dependents you claim on your tax return. 1040 ez file Any person you could have claimed as a dependent on your return except that: The person filed a joint return, The person had gross income of $3,900 or more, or You, or your spouse if filing jointly, could be claimed as a dependent on someone else's 2013 return. 1040 ez file    For this purpose, a child of parents that are divorced, separated, or living apart for the last 6 months of the calendar year is treated as the dependent of both parents whether or not the custodial parent releases the claim to the child's exemption. 1040 ez file    You cannot deduct qualified medical expenses as an itemized deduction on Schedule A (Form 1040) that are equal to the tax-free distribution from your Archer MSA. 1040 ez file Special rules for insurance premiums. 1040 ez file   Generally, you cannot treat insurance premiums as qualified medical expenses for Archer MSAs. 1040 ez file You can, however, treat premiums for long-term care coverage, health care coverage while you receive unemployment benefits, or health care continuation coverage required under any federal law as qualified medical expenses for Archer MSAs. 1040 ez file Health coverage tax credit. 1040 ez file   You cannot claim this credit for premiums that you pay with a tax-free distribution from your Archer MSA. 1040 ez file See Publication 502 for information on this credit. 1040 ez file Deemed distributions from Archer MSAs. 1040 ez file   The following situations result in deemed taxable distributions from your Archer MSA. 1040 ez file You engaged in any transaction prohibited by section 4975 with respect to any of your Archer MSAs at any time in 2013. 1040 ez file Your account ceases to be an Archer MSA as of January 1, 2013, and you must include the fair market value of all assets in the account as of January 1, 2013, on Form 8853. 1040 ez file You used any portion of any of your Archer MSAs as security for a loan at any time in 2013. 1040 ez file You must include the fair market value of the assets used as security for the loan as income on Form 1040 or Form 1040NR. 1040 ez file   Examples of prohibited transactions include the direct or indirect: Sale, exchange, or leasing of property between you and the Archer MSA, Lending of money between you and the Archer MSA, Furnishing goods, services, or facilities between you and the Archer MSA, and Transfer to or use by you, or for your benefit, of any assets of the Archer MSA. 1040 ez file   Any deemed distribution will not be treated as used to pay qualified medical expenses. 1040 ez file These distributions are included in your income and are subject to the additional 20% tax, discussed later. 1040 ez file Recordkeeping. 1040 ez file You must keep records sufficient to show that: The distributions were exclusively to pay or reimburse qualified medical expenses, The qualified medical expenses had not been previously paid or reimbursed from another source, and The medical expenses had not been taken as an itemized deduction in any year. 1040 ez file Do not send these records with your tax return. 1040 ez file Keep them with your tax records. 1040 ez file Reporting Distributions on Your Return How you report your distributions depends on whether or not you use the distribution for qualified medical expenses (defined earlier). 1040 ez file If you use a distribution from your Archer MSA for qualified medical expenses, you do not pay tax on the distribution but you have to report the distribution on Form 8853. 1040 ez file Follow the instructions for the form and file it with your Form 1040 or Form 1040NR. 1040 ez file If you do not use a distribution from your Archer MSA for qualified medical expenses, you must pay tax on the distribution. 1040 ez file Report the amount on Form 8853 and file it with your Form 1040 or Form 1040NR. 1040 ez file You may have to pay an additional 20% tax, discussed later, on your taxable distribution. 1040 ez file If an amount (other than a rollover) is contributed to your Archer MSA this year (by you or your employer), you also must report and pay tax on a distribution you receive from your Archer MSA this year that is used to pay medical expenses of someone who is not covered by an HDHP, or is also covered by another health plan that is not an HDHP, at the time the expenses are incurred. 1040 ez file Rollovers. 1040 ez file   Generally, any distribution from an Archer MSA that you roll over into another Archer MSA or an HSA is not taxable if you complete the rollover within 60 days. 1040 ez file An Archer MSA and an HSA can only receive one rollover contribution during a 1-year period. 1040 ez file See the Form 8853 instructions for more information. 1040 ez file Additional tax. 1040 ez file   There is a 20% additional tax on the part of your distributions not used for qualified medical expenses. 1040 ez file Figure the tax on Form 8853 and file it with your Form 1040 or Form 1040NR. 1040 ez file Report the additional tax in the total on Form 1040 or Form 1040NR. 1040 ez file Exceptions. 1040 ez file   There is no additional tax on distributions made after the date you are disabled, reach age 65, or die. 1040 ez file Balance in an Archer MSA An Archer MSA is generally exempt from tax. 1040 ez file You are permitted to take a distribution from your Archer MSA at any time; however, only those amounts used exclusively to pay for qualified medical expenses are tax free. 1040 ez file Amounts that remain at the end of the year are generally carried over to the next year (see Excess contributions , earlier). 1040 ez file Earnings on amounts in an Archer MSA are not included in your income while held in the Archer MSA. 1040 ez file Death of the Archer MSA Holder You should choose a beneficiary when you set up your Archer MSA. 1040 ez file What happens to that Archer MSA when you die depends on whom you designate as the beneficiary. 1040 ez file Spouse is the designated beneficiary. 1040 ez file   If your spouse is the designated beneficiary of your Archer MSA, it will be treated as your spouse's Archer MSA after your death. 1040 ez file Spouse is not the designated beneficiary. 1040 ez file   If your spouse is not the designated beneficiary of your Archer MSA: The account stops being an Archer MSA, and The fair market value of the Archer MSA becomes taxable to the beneficiary in the year in which you die. 1040 ez file   If your estate is the beneficiary, the fair market value of the Archer MSA will be included on your final income tax return. 1040 ez file The amount taxable to a beneficiary other than the estate is reduced by any qualified medical expenses for the decedent that are paid by the beneficiary within 1 year after the date of death. 1040 ez file Filing Form 8853 You must file Form 8853 with your Form 1040 or Form 1040NR if you (or your spouse, if married filing a joint return) had any activity in your Archer MSA during the year. 1040 ez file You must file the form even if only your employer or your spouse's employer made contributions to the Archer MSA. 1040 ez file If, during the tax year, you are the beneficiary of two or more Archer MSAs or you are a beneficiary of an Archer MSA and you have your own Archer MSA, you must complete a separate Form 8853 for each MSA. 1040 ez file Enter “statement” at the top of each Form 8853 and complete the form as instructed. 1040 ez file Next, complete a controlling Form 8853 combining the amounts shown on each of the statement Forms 8853. 1040 ez file Attach the statements to your tax return after the controlling Form 8853. 1040 ez file Employer Participation This section contains the rules that employers must follow if they decide to make Archer MSAs available to their employees. 1040 ez file Unlike the previous discussions, “you” refers to the employer and not to the employee. 1040 ez file Health plan. 1040 ez file   If you want your employees to be able to have an Archer MSA, you must make an HDHP available to them. 1040 ez file You can provide no additional coverage other than those exceptions listed previously under Other health coverage . 1040 ez file Contributions. 1040 ez file   You can make contributions to your employees' Archer MSAs. 1040 ez file You deduct the contributions on the “Employee benefit programs” line of your business income tax return for the year in which you make the contributions. 1040 ez file If you are filing Form 1040, Schedule C, this is Part II, line 14. 1040 ez file Comparable contributions. 1040 ez file   If you decide to make contributions, you must make comparable contributions to all comparable participating employees' Archer MSAs. 1040 ez file Your contributions are comparable if they are either: The same amount, or The same percentage of the annual deductible limit under the HDHP covering the employees. 1040 ez file Comparable participating employees. 1040 ez file   Comparable participating employees: Are covered by your HDHP and are eligible to establish an Archer MSA, Have the same category of coverage (either self-only or family coverage), and Have the same category of employment (either part-time or full-time). 1040 ez file Excise tax. 1040 ez file   If you made contributions to your employees' Archer MSAs that were not comparable, you must pay an excise tax of 35% of the amount you contributed. 1040 ez file Employment taxes. 1040 ez file   Amounts you contribute to your employees' Archer MSAs are generally not subject to employment taxes. 1040 ez file You must report the contributions in box 12 of the Form W-2 you file for each employee. 1040 ez file Enter code “R” in box 12. 1040 ez file Medicare Advantage MSAs A Medicare Advantage MSA is an Archer MSA designated by Medicare to be used solely to pay the qualified medical expenses of the account holder. 1040 ez file To be eligible for a Medicare Advantage MSA, you must be enrolled in Medicare and have a high deductible health plan (HDHP) that meets the Medicare guidelines. 1040 ez file A Medicare Advantage MSA is a tax-exempt trust or custodial savings account that you set up with a financial institution (such as a bank or an insurance company) in which the Medicare program can deposit money for qualified medical expenses. 1040 ez file The money in your account is not taxed if it is used for qualified medical expenses, and it may earn interest or dividends. 1040 ez file An HDHP is a special health insurance policy that has a high deductible. 1040 ez file You choose the policy you want to use as part of your Medicare Advantage MSA plan. 1040 ez file However, the policy must be approved by the Medicare program. 1040 ez file Medicare Advantage MSAs are administered through the federal Medicare program. 1040 ez file You can get information by calling 1-800-Medicare (1-800-633-4227) or through the Internet at www. 1040 ez file medicare. 1040 ez file gov. 1040 ez file Note. 1040 ez file You must file Form 8853, Archer MSAs and Long-Term Care Insurance Contracts, with your tax return if you have a Medicare Advantage MSA. 1040 ez file Flexible Spending Arrangements (FSAs) A health flexible spending arrangement (FSA) allows employees to be reimbursed for medical expenses. 1040 ez file FSAs are usually funded through voluntary salary reduction agreements with your employer. 1040 ez file No employment or federal income taxes are deducted from your contribution. 1040 ez file The employer may also contribute. 1040 ez file Note. 1040 ez file Unlike HSAs or Archer MSAs which must be reported on Form 1040 or Form 1040NR, there are no reporting requirements for FSAs on your income tax return. 1040 ez file For information on the interaction between a health FSA and an HSA, see Other employee health plans under Qualifying for an HSA, earlier. 1040 ez file What are the benefits of an FSA?   You may enjoy several benefits from having an FSA. 1040 ez file Contributions made by your employer can be excluded from your gross income. 1040 ez file No employment or federal income taxes are deducted from the contributions. 1040 ez file Withdrawals may be tax free if you pay qualified medical expenses. 1040 ez file See Qualified medical expenses , later. 1040 ez file You can withdraw funds from the account to pay qualified medical expenses even if you have not yet placed the funds in the account. 1040 ez file Qualifying for an FSA Health FSAs are employer-established benefit plans. 1040 ez file These may be offered in conjunction with other employer-provided benefits as part of a cafeteria plan. 1040 ez file Employers have complete flexibility to offer various combinations of benefits in designing their plan. 1040 ez file You do not have to be covered under any other health care plan to participate. 1040 ez file Self-employed persons are not eligible for an FSA. 1040 ez file Certain limitations may apply if you are a highly compensated participant or a key employee. 1040 ez file Contributions to an FSA You contribute to your FSA by electing an amount to be voluntarily withheld from your pay by your employer. 1040 ez file This is sometimes called a salary reduction agreement. 1040 ez file The employer may also contribute to your FSA if specified in the plan. 1040 ez file You do not pay federal income tax or employment taxes on the salary you contribute or the amounts your employer contributes to the FSA. 1040 ez file However, contributions made by your employer to provide coverage for long-term care insurance must be included in income. 1040 ez file When To Contribute At the
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The 1040 Ez File

1040 ez file 5. 1040 ez file   Soil and Water Conservation Expenses Table of Contents Introduction Topics - This chapter discusses: Business of Farming Plan Certification Conservation ExpensesWater well. 1040 ez file Assessment by Conservation DistrictAssessment for Depreciable Property 25% Limit on DeductionNet operating loss. 1040 ez file When to Deduct or Capitalize Sale of a Farm Introduction If you are in the business of farming, you can choose to deduct certain expenses for: Soil or water conservation, Prevention of erosion of land used in farming, or Endangered species recovery. 1040 ez file Otherwise, these are capital expenses that must be added to the basis of the land. 1040 ez file (See chapter 6 for information on determining basis. 1040 ez file ) Conservation expenses for land in a foreign country do not qualify for this special treatment. 1040 ez file The deduction for conservation expenses cannot be more than 25% of your gross income from farming. 1040 ez file See 25% Limit on Deduction , later. 1040 ez file Although some expenses are not deductible as soil and water conservation expenses, they may be deductible as ordinary and necessary farm expenses. 1040 ez file These include interest and taxes, the cost of periodically clearing brush from productive land, the regular removal of sediment from a drainage ditch, and expenses paid or incurred primarily to produce an agricultural crop that may also conserve soil. 1040 ez file You must include in income most government payments for approved conservation practices. 1040 ez file However, you can exclude some payments you receive under certain cost-sharing conservation programs. 1040 ez file For more information, see Agricultural Program Payments in chapter 3. 1040 ez file To get the full deduction to which you are entitled, you should maintain your records to clearly distinguish between your ordinary and necessary farm business expenses and your soil and water conservation expenses. 1040 ez file Topics - This chapter discusses: Business of farming Plan certification Conservation expenses Assessment by conservation district 25% limit on deduction When to deduct or capitalize Sale of a farm Business of Farming For purposes of soil and water conservation expenses, you are in the business of farming if you cultivate, operate, or manage a farm for profit, either as an owner or a tenant. 1040 ez file You are not in the business of farming if you cultivate or operate a farm for recreation or pleasure, rather than for profit. 1040 ez file You are not farming if you are engaged only in forestry or the growing of timber. 1040 ez file Farm defined. 1040 ez file   A farm includes livestock, dairy, poultry, fish, fruit, and truck farms. 1040 ez file It also includes plantations, ranches, ranges, and orchards. 1040 ez file A fish farm is an area where fish and other marine animals are grown or raised and artificially fed, protected, etc. 1040 ez file It does not include an area where they are merely caught or harvested. 1040 ez file A plant nursery is a farm for purposes of deducting soil and water conservation expenses. 1040 ez file Farm rental. 1040 ez file   If you own a farm and receive farm rental payments based on farm production, either in cash or crop shares, you are in the business of farming. 1040 ez file If you get cash rental for a farm you own that is not used in farm production, you cannot deduct soil and water conservation expenses for that farm. 1040 ez file   If you receive a fixed rental payment that is not based on farm production, you are in the business of farming only if you materially participate in operating or managing the farm. 1040 ez file Example. 1040 ez file You own a farm in Iowa and live in California. 1040 ez file You rent the farm for $175 in cash per acre and do not materially participate in producing or managing production of the crops grown on the farm. 1040 ez file You cannot deduct your soil conservation expenses for this farm. 1040 ez file You must capitalize the expenses and add them to the basis of the land. 1040 ez file     For more information, see Material participation for landlords under Landlord Participation in Farming in chapter 12. 1040 ez file Plan Certification You can deduct soil and water conservation expenses only if they are consistent with a plan approved by the Natural Resources Conservation Service (NRCS) of the Department of Agriculture. 1040 ez file If no such plan exists, the expenses must be consistent with a soil conservation plan of a comparable state agency. 1040 ez file Keep a copy of the plan with your books and records to support your deductions. 1040 ez file Conservation plan. 1040 ez file   A conservation plan includes the farming conservation practices approved for the area where your farmland is located. 1040 ez file There are three types of approved plans. 1040 ez file NRCS individual site plans. 1040 ez file These plans are issued individually to farmers who request assistance from NRCS to develop a conservation plan designed specifically for their farmland. 1040 ez file NRCS county plans. 1040 ez file These plans include a listing of farm conservation practices approved for the county where the farmland is located. 1040 ez file You can deduct expenses for conservation practices not included on the NRCS county plans only if the practice is a part of an individual site plan. 1040 ez file Comparable state agency plans. 1040 ez file These plans are approved by state agencies and can be approved individual site plans or county plans. 1040 ez file   A list of NRCS conservation programs is available at www. 1040 ez file nrcs. 1040 ez file usda. 1040 ez file gov/programs. 1040 ez file Individual site plans can be obtained from NRCS offices and the comparable state agencies. 1040 ez file Conservation Expenses You can deduct conservation expenses only for land you or your tenant are using, or have used in the past, for farming. 1040 ez file These expenses include, but are not limited to, the following. 1040 ez file The treatment or movement of earth, such as: Leveling, Conditioning, Grading, Terracing, Contour furrowing, and Restoration of soil fertility. 1040 ez file The construction, control, and protection of: Diversion channels, Drainage ditches, Irrigation ditches, Earthen dams, and Watercourses, outlets, and ponds. 1040 ez file The eradication of brush. 1040 ez file The planting of windbreaks. 1040 ez file You cannot deduct expenses to drain or fill wetlands, or to prepare land for center pivot irrigation systems, as soil and water conservation expenses. 1040 ez file These expenses are added to the basis of the land. 1040 ez file If you choose to deduct soil and water conservation expenses, you cannot exclude from gross income any cost-sharing payments you receive for those expenses. 1040 ez file See chapter 3 for information about payments eligible for the cost-sharing exclusion. 1040 ez file New farm or farmland. 1040 ez file   If you acquire a new farm or new farmland from someone who was using it in farming immediately before you acquired the land, soil and water conservation expenses you incur on it will be treated as made on land used in farming at the time the expenses were paid or incurred. 1040 ez file You can deduct soil and water conservation expenses for this land if your use of it is substantially a continuation of its use in farming. 1040 ez file The new farming activity does not have to be the same as the old farming activity. 1040 ez file For example, if you buy land that was used for grazing cattle and then prepare it for use as an apple orchard, you can deduct your conservation expenses. 1040 ez file Land not used for farming. 1040 ez file   If your conservation expenses benefit both land that does not qualify as land used for farming and land that does qualify, you must allocate the expenses between the two types of land. 1040 ez file For example, if the expenses benefit 200 acres of your land, but only 120 acres of this land are used for farming, then you can deduct 60% (120 ÷ 200) of the expenses. 1040 ez file You can use another method to allocate these expenses if you can clearly show that your method is more reasonable. 1040 ez file Depreciable conservation assets. 1040 ez file   You generally cannot deduct your expenses for depreciable conservation assets. 1040 ez file However, you can deduct certain amounts you pay or incur for an assessment for depreciable property that a soil and water conservation or drainage district levies against your farm. 1040 ez file See Assessment for Depreciable Property , later. 1040 ez file   You must capitalize expenses to buy, build, install, or improve depreciable structures or facilities. 1040 ez file These expenses include those for materials, supplies, wages, fuel, hauling, and moving dirt when making structures such as tanks, reservoirs, pipes, culverts, canals, dams, wells, or pumps composed of masonry, concrete, tile, metal, or wood. 1040 ez file You recover your capital investment through annual allowances for depreciation. 1040 ez file   You can deduct soil and water conservation expenses for nondepreciable earthen items. 1040 ez file Nondepreciable earthen items include certain dams, ponds, and terraces described under Property Having a Determinable Useful Life in chapter 7. 1040 ez file Water well. 1040 ez file   You cannot deduct the cost of drilling a water well for irrigation and other agricultural purposes as a soil and water conservation expense. 1040 ez file It is a capital expense. 1040 ez file You recover your cost through depreciation. 1040 ez file You also must capitalize your cost for drilling a test hole. 1040 ez file If the test hole produces no water and you continue drilling, the cost of the test hole is added to the cost of the producing well. 1040 ez file You can recover the total cost through depreciation deductions. 1040 ez file   If a test hole, dry hole, or dried-up well (resulting from prolonged lack of rain, for instance) is abandoned, you can deduct your unrecovered cost in the year of abandonment. 1040 ez file Abandonment means that all economic benefits from the well are terminated. 1040 ez file For example, filling or sealing a well excavation or casing so that all economic benefits from the well are terminated constitutes an abandonment. 1040 ez file Endangered species recovery expenses. 1040 ez file   If you are in the business of farming and meet other specific requirements, you can choose to deduct the conservation expenses discussed earlier as endangered species recovery expenses. 1040 ez file Otherwise, these are capital expenses that must be added to the basis of the land. 1040 ez file   The expenses must be paid or incurred for the purpose of achieving site-specific management actions recommended in a recovery plan approved under section 4(f) of the Endangered Species Act of 1973. 1040 ez file See Internal Revenue Code section 175 for more information. 1040 ez file Assessment by Conservation District In some localities, a soil or water conservation or drainage district incurs expenses for soil or water conservation and levies an assessment against the farmers who benefit from the expenses. 1040 ez file You can deduct as a conservation expense amounts you pay or incur for the part of an assessment that: Covers expenses you could deduct if you had paid them directly, or Covers expenses for depreciable property used in the district's business. 1040 ez file Assessment for Depreciable Property You generally can deduct as a conservation expense amounts you pay or incur for the part of a conservation or drainage district assessment that covers expenses for depreciable property. 1040 ez file This includes items such as pumps, locks, concrete structures (including dams and weir gates), draglines, and similar equipment. 1040 ez file The depreciable property must be used in the district's soil and water conservation activities. 1040 ez file However, the following limits apply to these assessments. 1040 ez file The total assessment limit. 1040 ez file The yearly assessment limit. 1040 ez file After you apply these limits, the amount you can deduct is added to your other conservation expenses for the year. 1040 ez file The total for these expenses is then subject to the 25% of gross income from farming limit on the deduction, discussed later. 1040 ez file See Table 5-1 for a brief summary of these limits. 1040 ez file Table 5-1. 1040 ez file Limits on Deducting an Assessment by a Conservation District for Depreciable Property Total Limit on Deduction for Assessment for Depreciable Property Yearly Limit on Deduction for Assessment for Depreciable Property Yearly Limit for All Conservation Expenses 10% of: $500 + 10% of: 25% of: Total assessment against all members of the district for the property. 1040 ez file Your deductible share of the cost to the district for the property. 1040 ez file Your gross income from farming. 1040 ez file No one taxpayer can deduct more than 10% of the total assessment. 1040 ez file Any amount over 10% is a capital expense and is added to the basis of your land. 1040 ez file If an assessment is paid in installments, each payment must be prorated between the conservation expense and the capital expense. 1040 ez file If the amount you pay or incur for any year is more than the limit, you can deduct for that year only 10% of your deductible share of the cost. 1040 ez file You can deduct the remainder in equal amounts over the next 9 tax years. 1040 ez file Limit for all conservation expenses, including assessments for depreciable property. 1040 ez file Amounts greater than 25% can be carried to the following year and added to that year's expenses. 1040 ez file The total is then subject to the 25% of gross income from farming limit in that year. 1040 ez file To ensure your deduction is within the deduction limits, keep records to show the following. 1040 ez file The total assessment against all members of the district for the depreciable property. 1040 ez file Your deductible share of the cost to the district for the depreciable property. 1040 ez file Your gross income from farming. 1040 ez file Total assessment limit. 1040 ez file   You cannot deduct more than 10% of the total amount assessed to all members of the conservation or drainage district for the depreciable property. 1040 ez file This applies whether you pay the assessment in one payment or in installments. 1040 ez file If your assessment is more than 10% of the total amount assessed, both the following rules apply. 1040 ez file The amount over 10% is a capital expense and is added to the basis of your land. 1040 ez file If the assessment is paid in installments, each payment must be prorated between the conservation expense and the capital expense. 1040 ez file Yearly assessment limit. 1040 ez file   The maximum amount you can deduct in any one year is the total of 10% of your deductible share of the cost as explained earlier, plus $500. 1040 ez file If the amount you pay or incur is equal to or less than the maximum amount, you can deduct it in the year it is paid or incurred. 1040 ez file If the amount you pay or incur is more, you can deduct in that year only 10% of your deductible share of the cost. 1040 ez file You can deduct the remainder in equal amounts over the next 9 tax years. 1040 ez file Your total conservation expense deduction for each year is also subject to the 25% of gross income from farming limit on the deduction, discussed later. 1040 ez file Example 1. 1040 ez file This year, the soil conservation district levies and you pay an assessment of $2,400 against your farm. 1040 ez file Of the assessment, $1,500 is for digging drainage ditches. 1040 ez file You can deduct this part as a soil or conservation expense as if you had paid it directly. 1040 ez file The remaining $900 is for depreciable equipment to be used in the district's irrigation activities. 1040 ez file The total amount assessed by the district against all its members for the depreciable equipment is $7,000. 1040 ez file The total amount you can deduct for the depreciable equipment is limited to 10% of the total amount assessed by the district against all its members for depreciable equipment, or $700. 1040 ez file The $200 excess ($900 − $700) is a capital expense you must add to the basis of your farm. 1040 ez file To figure the maximum amount you can deduct for the depreciable equipment this year, multiply your deductible share of the total assessment ($700) by 10%. 1040 ez file Add $500 to the result for a total of $570. 1040 ez file Your deductible share, $700, is greater than the maximum amount deductible in one year, so you can deduct only $70 of the amount you paid or incurred for depreciable property this year (10% of $700). 1040 ez file You can deduct the balance at the rate of $70 a year over the next 9 years. 1040 ez file You add $70 to the $1,500 portion of the assessment for drainage ditches. 1040 ez file You can deduct $1,570 of the $2,400 assessment as a soil and water conservation expense this year, subject to the 25% of gross income from farming limit on the deduction, discussed later. 1040 ez file Example 2. 1040 ez file Assume the same facts in Example 1 except that $1,850 of the $2,400 assessment is for digging drainage ditches and $550 is for depreciable equipment. 1040 ez file The total amount assessed by the district against all its members for depreciable equipment is $5,500. 1040 ez file The total amount you can deduct for the depreciable equipment is limited to 10% of this amount, or $550. 1040 ez file The maximum amount you can deduct this year for the depreciable equipment is $555 (10% of your deductible share of the total assessment, $55, plus $500). 1040 ez file Since your deductible share is less than the maximum amount deductible in one year, you can deduct the entire $550 this year. 1040 ez file You can deduct the entire assessment, $2,400, as a soil and water conservation expense this year, subject to the 25% of gross income from farming limit on the deduction, discussed below. 1040 ez file Sale or other disposal of land during 9-year period. 1040 ez file   If you dispose of the land during the 9-year period for deducting conservation expenses subject to the yearly limit, any amounts you have not yet deducted because of this limit are added to the basis of the property. 1040 ez file Death of farmer during 9-year period. 1040 ez file   If a farmer dies during the 9-year period, any remaining amounts not yet deducted are deducted in the year of death. 1040 ez file 25% Limit on Deduction The total deduction for conservation expenses in any tax year is limited to 25% of your gross income from farming for the year. 1040 ez file Gross income from farming. 1040 ez file   Gross income from farming is the income you derive in the business of farming from the production of crops, fish, fruits, other agricultural products, or livestock. 1040 ez file Gains from sales of draft, breeding, or dairy livestock are included. 1040 ez file Gains from sales of assets such as farm machinery, or from the disposition of land, are not included. 1040 ez file Carryover of deduction. 1040 ez file   If your deductible conservation expenses in any year are more than 25% of your gross income from farming for that year, you can carry the unused deduction over to later years. 1040 ez file However, the deduction in any later year is limited to 25% of the gross income from farming for that year as well. 1040 ez file Example. 1040 ez file In 2012, you have gross income of $32,000 from two farms. 1040 ez file During the year, you incurred $10,000 of deductible soil and water conservation expenses for one of the farms. 1040 ez file However, your deduction is limited to 25% of $32,000, or $8,000. 1040 ez file The $2,000 excess ($10,000 − $8,000) is carried over to 2013 and added to deductible soil and water conservation expenses made in that year. 1040 ez file The total of the 2012 carryover plus 2013 expenses is deductible in 2013, subject to the limit of 25% of your gross income from farming in 2013. 1040 ez file Any expenses over the limit in that year are carried to 2014 and later years. 1040 ez file Net operating loss. 1040 ez file   The deduction for soil and water conservation expenses, after applying the 25% limit, is included when figuring a net operating loss (NOL) for the year. 1040 ez file If the NOL is carried to another year, the soil and water conservation deduction included in the NOL is not subject to the 25% limit in the year to which it is carried. 1040 ez file When to Deduct or Capitalize If you choose to deduct soil and water conservation expenses, you must deduct the total allowable amount on your tax return for the first year you pay or incur these expenses. 1040 ez file If you do not choose to deduct the expenses, you must capitalize them. 1040 ez file Change of method. 1040 ez file   If you want to change your method for the treatment of soil and water conservation expenses, or you want to treat the expenses for a particular project or a single farm in a different manner, you must get the approval of the IRS. 1040 ez file To get this approval, submit a written request by the due date of your return for the first tax year you want the new method to apply. 1040 ez file You or your authorized representative must sign the request. 1040 ez file   The request must include the following information. 1040 ez file Your name and address. 1040 ez file The first tax year the method or change of method is to apply. 1040 ez file Whether the method or change of method applies to all your soil and water conservation expenses or only to those for a particular project or farm. 1040 ez file If the method or change of method does not apply to all your expenses, identify the project or farm to which the expenses apply. 1040 ez file The total expenses you paid or incurred in the first tax year the method or change of method is to apply. 1040 ez file A statement that you will account separately in your books for the expenses to which this method or change of method relates. 1040 ez file Send your request to the following  address. 1040 ez file  Department of the Treasury Internal Revenue Service Center Cincinnati, OH 45999  For more information, see Change in  Accounting Method in chapter 2. 1040 ez file Sale of a Farm If you sell your farm, you cannot adjust the basis of the land at the time of the sale for any unused carryover of soil and water conservation expenses (except for deductions of assessments for depreciable property, discussed earlier). 1040 ez file However, if you acquire another farm and return to the business of farming, you can start taking deductions again for the unused carryovers. 1040 ez file Gain on sale of farmland. 1040 ez file   If you held the land 5 years or less before you sold it, gain on the sale of the land is treated as ordinary income up to the amount you previously deducted for soil and water conservation expenses. 1040 ez file If you held the land less than 10 but more than 5 years, the gain is treated as ordinary income up to a specified percentage of the previous deductions. 1040 ez file See Section 1252 property under Other Gains in chapter 9. 1040 ez file Prev  Up  Next   Home   More Online Publications