January/February 2020 Tax Tips

Virtual currency: Handle with care

Recently, the IRS has been sending letters to taxpayers it believes owns virtual currency, such as Bitcoin, urging them to review past tax returns and, in some cases, affirm their accuracy under penalty of perjury. This puts taxpayers in a difficult position, because there are several unresolved issues regarding taxation of virtual currencies that the IRS has yet to address. As of this writing, the only IRS guidance is a five-year-old notice clarifying that virtual currency is “property” for federal tax purposes and, therefore, may generate capital gains taxes when exchanged for other property. If you own virtual currency, consult your tax advisor to ensure that you’re properly reporting it and to review your prior-year tax returns, amending them if appropriate.

Watch out for gross receipts taxes

Recently, an increasing number of cash-strapped states have enacted, or are considering, gross receipts taxes. As the name suggests, these taxes apply to gross receipts rather than net income. Typically, they’re imposed at a lower rate, with fewer deductions and exclusions. And unlike sales taxes, which apply only to the purchase of a product by the end consumer, gross receipts taxes apply at every stage of the production process. Proponents believe these taxes offer states a more stable source of tax revenues, while critics argue that they lead to higher prices, lower wages and fewer jobs. If you do business in states that have or are contemplating a gross receipts tax, talk to your tax advisor about potential strategies for mitigating their impact.

The HSA: An overlooked estate planning tool

A Health Savings Account (HSA) coupled with a high-deductible health plan can be a powerful tool for funding medical expenses on a tax-advantaged basis. For 2020, individuals with self-only coverage can make up to $3,550 in tax-deductible contributions to an HSA, while those with family coverage can contribute up to $7,100. These limits are increased by $1,000 for individuals 55 or older. Funds may be withdrawn tax-free to pay qualified medical expenses. Once you reach age 65, you can withdraw funds penalty-free for any purpose (subject to tax if not used for qualified medical expenses).

From an estate planning perspective, HSAs have an advantage over traditional IRAs and 401(k) plans: They’re not subject to required minimum distributions at age 70½. That means that, to the extent you don’t use the account for medical expenses, it can continue growing on a tax-deferred basis indefinitely, providing valuable benefits for your loved ones. If your spouse inherits the account, it will be treated as his or her own HSA. If someone else inherits it, the HSA will terminate and the recipient will be taxed on its value.

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