Accounting

HSA study examines how much health care costs in retirement | EBA

Published

3 months ago

February 11, 2025

The goal of amassing $1 million in a health savings account by retirement will elude the vast majority of clients, but advisers could still put these optimistic projections to good use.

HSA holders would need to contribute the maximum legal amount each year, including catch-ups, for four decades, avoid any distributions until they’re 65 years old and net a healthy rate of return of 7.5%, according to a study released last month by the Employee Benefit Research Institute, an industry research organization. Those rosy assumptions won’t reflect the reality for most HSA savers. However, advisers can nevertheless nudge clients toward saving in their HSA with a wealth of statistical estimates showing their massive health care needs in retirement and the corresponding potential of the accounts as a savings vehicle, experts said.

To have a “high chance” of covering their medical expenses during their retirement, a 65-year-old couple must plan for $351,000 worth of Medicare premiums, deductibles and prescription drugs, according to the Institute’s calculations. To boost the likelihood above 90%, that savings number grows closer to $400,000, said Jake Spiegel, a research associate with the organization and co-author of a larger report from the institute and health, wealth, retirement and employee benefits firm Inspira Financial last year that crunched the overall figures.

“After 40 years, you can end up with a significant chunk of change,” Spiegel said. “HSAs could actually be pretty well positioned to help people to, one, save for retirement and, two, pay for medical expenditures in retirement which can be pretty significant.”

Those expenses can mount well before retirement, too. As advisers encourage clients to set aside the current maximum of $4,300 in 2025, take advantage of any employers’ matching contributions and tap into the pretax savings, untaxed accumulation and tax-free withdrawals for qualifying medical costs, they should also remind them of the potential challenges, said Sarin Barsoumian, founder of Burlington, Massachusetts-based SMB Financial Strategies. Those include a huge potential tax hit to non-spouse heirs receiving any leftover assets after the clients’ deaths and shortcomings in the investment menus and interest yields of many HSAs.

“Many clients use HSA funds for current medical expenses, but if they can afford to pay out-of-pocket, they should let the HSA grow tax-free for retirement. If they have a sufficient emergency fund and can cover medical costs without touching the HSA, they should consider investing the balance in a diversified portfolio,” Barsoumian said in an email. “If clients withdraw funds for non-medical expenses before age 65, they’ll owe income tax plus a 20% penalty — a much harsher penalty than early withdrawals from a traditional IRA or 401(k), which are just subject to income tax plus a 10% penalty. After age 65, non-medical withdrawals are taxed like a traditional IRA, but there’s no penalty — so it’s not as flexible as a Roth IRA for tax-free withdrawals.”

Here are some of the most interesting takeaways from the EBRI research paper:

Medicare paid for 61% of health care costs in retirement in 2021, with private insurance covering 18% and consumers paying out of their pocket for 12% of the expenses.

A 65-year-old man using a Medigap plan that adds supplemental private health insurance for costs that aren’t paid for by Medicare should expect to pay $184,000 for medical care in retirement, while a woman of the same age needs $217,000 and a couple should anticipate expenses of $351,000.

Assuming the clients save the maximum each year in their HSAs and tack on $1,000 more in the permitted “catch-up” contribution years between ages 55 and 64 without withdrawing anything from the accounts, a 7.5% annual return on their assets would yield a nest egg of $78,000 in only 10 years. A 5% rate would add up to $68,000, and a 2.5% return would amass $59,000.

With the same assumptions, the HSA balances would reach: 20-year totals of $120,000 (2.5% returns), $157,000 (5%) or $208,000 (7.5%); 30-year totals of $198,000 (2.5%), $303,000 (5%) or $476,000 (7.5%); or 40-year totals of $298,000 (2.5%), $540,000 (5%) or $1,029,000 (7.5%).

Under less optimistic calculations that still incorporate a 7.5% return but assume the client withdraws half of the deductible amount from their HSA each year, the account would still have $56,000 after 10 years, $139,000 after 20 years, $311,000 after 30 years and $665,000 after 40.

In terms of tax savings on their contribution, higher income HSA holders net $13,000 in lower payments to Uncle Sam over a decade, $24,000 over two decades, $34,000 over three and $45,000 over four. In terms of their savings on yields of 7.5%, they would avoid another $7,000 in taxes during the first 10 years, $29,000 over 20, $87,000 over 30 and $217,000 over 40.

The numbers shift significantly based on any number of factors, such as when a client opens an HSA and how long they are contributing to it, their tax bracket and the extent that they do spend the money on health costs before retirement.
“Past EBRI research has found that the longer someone has owned their HSA, the larger their balance tends to be, because the higher their contributions tend to be, and the more likely they are to invest their HSA in assets other than cash,” Spiegel and the co-author, Paul Fronstin, wrote in the report. “These strategies better position accountholders to withdraw larger sums when unexpected major health expenses occur and can leave accountholders more prepared to cover their sizable health care expenses in retirement.”

For advisers and their clients, the problem is “that does not appear to be a strategy that is widely deployed right now,” Spiegel noted, citing another finding from the institute’s research that only 13% of HSAs have invested assets in something other than cash.

“That number has been trending up every year that we’ve done our analyses,” he said. “It’s still nowhere near what you might expect it to be, given the enormous tax advantages that HSAs offer and the really unique position they offer as a triple-tax-advantaged vehicle.”

Accounting

Strategies to optimize real estate tax savings

Published

25 minutes ago

May 21, 2025

Business Finance News

Tax deductions — including those derived from depreciation — are a critical part of most companies’ financial strategies. However, this year’s uncertainty in Washington is resulting in a particularly unclear tax landscape, especially as it pertains to deductions from real estate holdings and capital expenditures. Will Congress extend 100% bonus depreciation? Will capital gains rates and corporate tax rates change?

Waiting for legislative decisions to shape your capitalization strategy could prove costly. Delays in planning may lead to missed opportunities, potentially costing your business millions in tax savings.

The solution? Start preparing for the alternatives, including the possibility of no bonus depreciation, now.

By exploring strategies to increase your tax deductions through your real estate holdings and capital expenditures, you can position your business for a predictable tax situation in 2025, no matter what happens in Congress.

Here’s how to get started:

Revisit the tangible property regulations and devise a long-term strategy for capital expenditures

The final tangible property regulations made waves when they were introduced in 2014, offering businesses a structured framework for distinguishing between capital expenditures and deductible repairs. But by 2018, many tax departments shifted their focus to 100% bonus depreciation, which seemed like a simpler alternative to the complexities of TPR.

This shift made sense at the time, especially since Qualified Improvement Property — a bonus-eligible asset classification for most interior building improvements — largely overlapped with expenditures that could otherwise be classified as repairs.

However, as bonus depreciation phases out, TPR is regaining relevance as a powerful tool for expensing long-lived expenditures. Through repairs studies, businesses can still achieve comparable (or even superior) deductions for QIP and other capital expenditures.

While a quality repairs study requires a detailed analysis by an experienced provider, the effort is worth the investment. Certain capital expenditures, including roofing work, exterior painting, HVAC overhauls and elevator work, can qualify as a repair despite their exclusion from QIP and bonus depreciation eligibility. Depreciation recapture is not an issue with repairs expensing, simplifying the accounting process.

And finally, don’t forget to revisit your De Minimis Safe Harbor Election when evaluating your portfolio. This can add up to big numbers depending on your types of capital spend.

Identify and quantify missed prior year opportunities

It’s not uncommon for historical tax fixed assets to be depreciated over unnecessarily long lives. Many of these assets could have been classified into shorter tax lives, allowing for accelerated deductions that went unclaimed. The good news? It’s not too late to take advantage of those missed opportunities and use them on your current year tax return.

Lookback studies enable businesses to retroactively reclassify assets and capture deductions they missed in prior years. Cost segregation studies, repairs studies, tenant improvement allowance studies and direct reclassifications are all good candidates for potential lookback deductions.

Implementing these retroactive changes is straightforward. By filing Form 3115, businesses can claim the full benefit of missed deductions in their current tax year without having to reopen prior-year tax returns. Accounting method changes related to these types of adjustments are typically “automatic,” making the process even simpler.

Lookback studies offer several key advantages. From a strategic standpoint, taxpayers can leverage favorable tax provisions from prior years, such as bonus depreciation, depending on when the analyzed expenditures were incurred. Correcting simple errors, such as reclassifying nonresidential real property to QIP, can yield meaningful value with minimal effort. Additionally, taking a one-time catch-up adjustment for missed prior year accumulated depreciation often results in millions of dollars in immediate tax savings.

Proactively identifying these opportunities and having an implementation plan in place can ensure that businesses don’t leave money on the table.

Don’t underestimate the value of a traditional cost segregation study

A cost segregation study remains one of the most effective tools for accelerating tax deductions, even as bonus depreciation phases out. By reclassifying newly constructed or acquired long-lived assets into shorter-lived property categories (such as five- or seven-year property), businesses can unlock substantial tax benefits.

Nearly every property type, from small-scale residential to major commercial venues and arenas, can yield valuable accelerated tax deductions through a cost segregation study.

And while investing in a cost segregation for tax purposes, make sure to align the final deliverable with your intended long-term goals. This could include segregating assets for financial reporting purposes, assigning physical locations, building system, and quantities to assets for future disposition purposes, and evaluating the expenditures for additional tax credit potential. Making that extra effort now means cleaner, more organized fixed asset records that simplify future accounting processes. And who doesn’t love clean fixed assets?

Be sure to talk about other peripheral impacts of a cost segregation study, including potential benefits to property tax bills.

Devise a custom strategy

Whether your goal is to maximize deductions this year, create a multi-year tax plan, or evaluate opportunities within your existing real estate portfolio, the time to act is now. You can develop a tailored strategy that aligns with your overall tax planning goals — regardless of what Congress decides.

The tax landscape may be uncertain, but businesses that plan can stay ahead. By revisiting tangible property regulations, exploring retroactive opportunities and leveraging cost segregation studies, you can optimize your tax position and unlock millions in savings.

Don’t wait for Congress to make a decision — start preparing today.

Accounting

Tax bill set to bring forward Medicaid work requirements to 2026

Published

58 minutes ago

May 21, 2025

Business Finance News

House Republican leaders are planning to accelerate new Medicaid work requirements to December 2026 in a deal with ultra-conservatives on the giant tax bill, according to a lawmaker familiar with the discussions.

The revised version of President Donald Trump’s economic package — slated to be released publicly Wednesday — calls to move up work requirements to December 2026 from 2029, the lawmaker said, who requested anonymity to discuss private talks.

Work requirements have been a sticking point in reaching agreement on Trump’s tax bill, as Speaker Mike Johnson attempts to navigate a narrow and fractious majority.

The December 2026 deadline could also become an issue in the midterm elections, just one month earlier with Democrats eager to criticize Republicans for restricting health benefits for low-income households.

The lawmaker said there will be a waiver process for states unable to quickly comply with the deadline. The person also said that changes to the federal match for Medicaid enrollees won’t be in the bill and talks continue on changes to Medicaid provider taxes.

The debate over Medicaid has pinned lawmakers from high-tax states against hardliners. But the new Medicaid work requirement date could alienate several moderates concerned about cuts to the health care program for low-income people and those with disabilities.

Johnson can only lose a handful of votes and still pass the bill, which is the centerpiece of Trump’s legislative agenda.

The new date is also likely to provoke a backlash in the Senate.

It will be very difficult for states to implement the work requirements in a year and a half, said Matt Salo, a consultant who advises health care companies and formerly worked for the National Association of Medicaid Directors.

Squeezing the process of creating work requirements in every state into a compressed time frame is “almost a guarantee it won’t work” and will result in people who qualify for health coverage getting kicked out of the program, Salo said.

“Trying to speed run this into a much tighter time frame to hit an arbitrary budget target is not a recipe for success,” Salo said.

Accounting

Mike Johnson says deal reached on raising SALT cap to $40K

Published

1 hour ago

May 21, 2025

Business Finance News

House Speaker Mike Johnson said Republicans have reached an agreement to increase the state and local tax deduction to $40,000, suggesting a resolution to one of the final issues holding up President Donald Trump’s economic bill.

“That is the agreement we came to,” Johnson told CNN Wednesday, in response to a question about raising the deduction cap to $40,000 from $10,000 for a decade.

“I think the SALT caucus, as they call themselves, it’s not everything they wanted, but I think they know what a huge improvement that is for their constituents and it gives them a lot to go home and talk about,” Johnson said.

The $40,000 SALT limit will phase out for annual incomes greater than $500,000, according to a person familiar with the matter. The income phaseout threshold would grow 1% a year over a decade, they said.

The cap is the same for both individual taxpayers and married couples filing jointly, the person added.

Several lawmakers — New York’s Mike Lawler, Nick LaLota, Andrew Garbarino and Elise Stefanik; New Jersey’s Tom Kean, and Young Kim of California — have threatened to reject any tax package that does not raise the SALT cap sufficiently.

It’s not clear that all those lawmakers have signed off on the deal.

Some SALT advocates have pushed for income limits as high as $750,000 and a 2% annual phaseout increase, according to another person familiar with the negotiations, who requested anonymity to discuss private talks.

Lawler told NPR in an interview Wednesday morning that lawmakers are still working through some “finer points,” but that he’s hopeful to reach a deal later in the day.

The current write-off is capped at $10,000, a limit imposed in Trump’s first-term tax cut bill. Previously, there was no limit on the SALT deduction and the deduction would again be uncapped if Trump’s first-term tax law is allowed to expire at the end of this year.

Johnson’s plan expands upon the $30,000 cap for individuals and couples included in the initial version of the tax bill released last week. That draft called for phasing down the deduction for those earning $400,000 or more. That plan was quickly rejected by several lawmakers from high-tax districts who called the plan insultingly low.

SALT has been among the thorniest issues for House leaders who are navigating the political realities of pushing an expensive tax bill through with their narrow and fractious majority. Trump has grown frustrated over the SALT demands and urged lawmakers on Tuesday to not let their parochial interests sink the bill.

Still, the agreement is also already causing a backlash from conservatives who are pushing for more spending cuts to offset the tax reductions in Trump’s economic package.

Representative Andy Harris, who chairs the conservative House Freedom Caucus, told Newsmax he thinks Republicans are “actually further away from the deal, because that SALT cap increase, I think, upset a lot of conservatives again.”

The House Rules Committee debated Trump’s bill for hours early Wednesday, beginning at 1 a.m. Washington time, in order to meet Johnson’s self-imposed Thursday deadline to pass the legislation out of the House. Republicans are expected to soon release a revised version of the legislation that will address SALT and other unresolved issues.

Republicans are also sparring over spending reductions in the bill, including weighing cuts to Medicaid health coverage and food assistance for low-income households.

House Republicans leaders are planning to accelerate new Medicaid work requirements to December 2026 from 2029 in a deal with ultra-conservatives to cut additional health spending.