How to report qualified dividends on 1040
Q: My husband and I file a joint return and itemize deductions. He has a health savings account and I have a flexible spending account (for medical expenses, not child care). How are these reported on the U.S. and N.J. income tax returns?
A health savings account (HSA) is a trust created to pay the qualified medical expenses of an account beneficiary or the beneficiary's spouse or dependents. HSA earnings accumulate tax-free, and distributions to pay qualified medical expenses are also tax-free.
Many individuals participate in HSAs and health flexible spending accounts (FSAs) to save on federal taxes by using pre-tax dollars to pay for medical expenses.
For HSAs, you must file IRS Form 8889 with your tax return if you or your spouse, if filing jointly, had any activity in the HSA account during the year. This is true even if only your employer made the contributions. Employer contributions are reported on Form W-2 in box 12 using code "W" and should be reported on Part I of Form 8889. To the extent that you made personal contributions to the HSA plan that are deductible, the amount carries to Form 1040, line 25. Distributions will be reported to you on Form 5498-SA and you will be required to complete Part II of Form 8889, if applicable. To the extent the distributions are used to pay for qualified medical expenses, the distribution will not be additional income. If the contributions to the HSA plan exceed the prescribed limits for 2011, the additional tax will be computed on Part III.
A health flexible spending arrangement (FSA) allows employees to be reimbursed for medical expenses. FSAs
are usually funded through voluntary salary reduction agreements with your employer. No employment or federal income taxes are deducted from your contribution. The employer may also contribute.
Unlike HSAs, which must be reported on Form 8889, there are no reporting requirements for health FSAs on your personal income tax return. Your employer will exclude your contributions to the health FSA plan from your wages on Form W-2.
Since medical expenses will be pre-tax deductions, you cannot claim an additional itemized deduction on Schedule A for the income being excluded. This would afford double benefit on the same deduction, which would be in violation of the Internal Revenue Code. Additional information can be found about HSA and FSA plans in IRS publication 969 at irs.gov.
The amounts that you contribute cannot be excluded from taxable wages for New Jersey purposes. Therefore, there will be a difference between your federal and New Jersey wages on Form W-2 and the amount of interest and/or dividends may differ for New Jersey purposes. However, there is some good news. New Jersey allows a deduction from gross income for unreimbursed medical expenses that were paid during the year, if such expenses exceed 2 percent of your gross income. Typical expenses that qualify are payments for physicians, dental and other medical fees, prescription eyeglasses and contact lenses, hospital care, nursing care, medicines and drugs and prosthetic devices, among others. The eligible expenses that exceed the 2 percent threshold are then deducted on Form NJ-1040, Line 30.
Robert J. Traphagen is a certified public accountant with Traphagen Financial Group in Oradell and a past president of the New Jersey Society of Certified Public Accountants.Source: www.northjersey.com