This week's question is brought to you by Chris Novak, CPA, from NATP's Tax Knowledge Center. March 4, 2010 Question: Al established a health savings account (HSA) in 2007. In 2009, he received Form 1099-SA reporting a $2,000 distribution. He used the distribution to cover $2,500 of qualified medical expenses his wife incurred in 2008. The medical expenses were not reimbursed by insurance, and they did not itemize in 2008. How is this distribution reported on their 2009 joint tax return? What are the tax consequences? Answer: The $2,000 distribution is reported in Part II of Form 8889 on Line 14a. Al's unreimbursed qualified medical expenses of $2,500 are reported on Line 15. This includes the medical expenses his wife incurred in 2008 [§223(d)(2)(A)]. The entire distribution is nontaxable because it is less than Al's unreimbursed qualified medical expenses. The 10% penalty does not apply because it only applies to the taxable portion of an HSA distribution [§223(f)(4)(A)]. Distributions from an HSA are excluded from income if made for any qualified medical expense of the account beneficiary, the account beneficiary's spouse and dependents (without regard to their status as eligible individuals). However, distributions made for expenses reimbursed by another health plan are not excludable from gross income, whether or not the other health plan is an HDHP. [Notice 2004-50, Q&A 36] In addition, a distribution from an HSA in the current year can be used to pay or reimburse expenses incurred in any prior year as long as the expenses were incurred after the HSA was established. Thus, there is no time limit on when the distribution must occur. However, to be excludable from the account beneficiary's gross income, he or she must keep records sufficient to later show that the distributions were exclusively to pay or reimburse qualified medical expenses, that the qualified medical expenses have not been previously paid or reimbursed from another source and that the medical expenses have not been taken as an itemized deduction in any prior taxable year [Notice 2004-50, Q&A 39].    This week's question is brought to you by Erik Lammert, JD, from NATP's Tax Knowledge Center. February 25, 2010 Question: Your client's employee is an alien who does not have a green card or valid social security number. The employer has requested the employee provide a social security number to use on the employee's W-2, but the employee has failed to do so. What should the employer do? Answer: Wages paid to an alien employee who has neither a social security number nor ITIN should still be reported in the normal manner on a Form W-2, without showing any TIN in the payee TIN block. Treas. Reg. §301.6109-1(c) authorizes a procedure whereby a withholding agent who cannot secure the TIN of a payee may attach an affidavit to the information returns he is filing with the IRS stating that the withholding agent has asked for the TIN of the payee (or a list of payees) and that the payee or payees have neglected or refused to provide a TIN. The attachment of such an affidavit to the information returns will be grounds for non-assertion of the penalties authorized by I.R.C. §§6721 and 6722 against the withholding agent for failure to supply a payee TIN on an information return or payee statement   January 21, 2010       Question: Your client Barb is a very charitable individual.  Every year she gives generously to the American Cancer Society, the Salvation Army, her church, and many other worthy causes and 2009 was no different. She mentions that in 2009, she gave $500 to help a child who was diagnosed with a rare form of childhood cancer.  The family did not have medical insurance so donations were collected in the community to help out the family with the child's medical bills. Barb made a donation of $500 and the family was so grateful, they sent her a heartfelt thank you note acknowledging her generous gift and its help with the medical bills.  Is Barb's $500 donation to the child with cancer deductible as a charitable contribution? Answer: Barb's donation of $500 is not deductible as a charitable contribution because it does not meet the requirements of §170(c).  The contribution was made to an individual and not a qualified organization. According to this section, contributions must be made to a qualified charitable organization. Contributions to individuals who are needy or worthy do not qualify. The prohibition on donations to individuals includes contributions to a qualified organization if the contributor indicates that the contribution is for a specific person. But contributions are deductible if made to a qualified organization that in turn helps needy or worthy individuals. IRS Publication 526, Charitable Contributions.     January 14, 2010 Question: Lucky Client won a car worth $40,000 at a casino while gambling. He explains to you that the more he gambled the more chances (tickets) he received to win the vehicle. However, Lucky was not always lucky and figured he lost $35,000 during the year at the same casino. Can Lucky take a deduction for his gambling losses?  Answer: Generally, gambling/wagering losses are deductible up to the amount of winnings. It is generally accepted, that in order for a transaction to be a "wager," three elements must be present: (1) prize, (2) chance, and (3) consideration [Technical Advice Memorandum 200417004]. However, Lucky did not directly pay for the tickets he received, so he is considered to have won the car through a drawing, not through a wager. His losses cannot offset the value of the vehicle.   December 23, 2009 Question: A salesman has told your client that the new plug-in electric drive motor vehicle he bought in 2009 for his personal use is eligible for a federal income tax credit of $5,836. However, your client has adjusted gross income of over $500,000, and is wondering whether the credit is phased out for high income taxpayers. What do you tell him? Answer: The new qualified plug-in electric drive motor vehicle credit [IRC §30D, as added by the 2008 Energy Act] is not phased out for high income taxpayers. For 2009, it is allowed to offset the taxpayer's regular tax reduced by the foreign tax credit plus AMT [IRC §26(a)(2), as amended by the 2009 Recovery Act]. However, it is a nonrefundable personal credit. That means if a taxpayer's regular tax liability is reduced to zero, or is already zero before application of the credit, any unused credit can't be carried forward or back to another tax year. The credit is claimed on Form 8936, Qualified Plug-in Electric Drive Motor Vehicle Credit. This week's question is brought to you by Erik Lammert, JD, from NATP's Tax Knowledge Center.