It’s time for the first of a new weekly series called Q & A Fridays with Jason!
DISCLAIMER: The answers to questions in this segment are intended to be general in nature and do NOT constitute tax advice. Please contact a tax advisor to discuss your unique situation.
Q: Is it true that my employer-provided health insurance will be taxed?
A: NO! This rumor has been going around, usually in the form of a “please-forward-to-everyone-you-know” chain e-mail. It is true that your W-2 will show the value of employer-provided health insurance. But it’s just there for reporting purposes — you are not taxed on this amount. Reporting is optional for 2011 and becomes mandatory in 2012.
Some of the confusion comes from the implementation, in 2018, of a so-called “Cadillac Tax” on employer-provided health insurance that exceeds $27,500/year. But that tax is going to be assessed against the insurance company, not against you. Click here for a Dinesen Tax Times article that goes into more detail on the topic of W-2 reporting of health insurance and whether it will be taxable.
Q: How long should I keep my tax records?
A: In general, I recommend that you keep supporting documents for your tax returns for at least 6 years. The tax returns themselves, and your copy of your W-2, should be kept forever. The IRS has 3 years to assess additional taxes, unless your income was underreported by more than 25%, in which case they have 6 years. Even though most people report all of their income properly, I still recommend keeping records for at least 6 years just in case the IRS computers get confused and spit out a notice.
Q: Can the IRS take funds from my retirement account if I owe back taxes?
A: Yes but they don’t usually do it. While retirement accounts are protected from creditors, such as credit card companies, this protection does NOT apply to the IRS. That being said, the IRS usually tries to exhaust other means of collection before going after retirement accounts. This article from the National Association of Enrolled Agents goes into greater detail about the matter.