Chapter 4 Business Income & Expenses Part II

1. Chapter 4Business Income & Expenses Part II Income Tax Fundamentals 2013 Student Slides Gerald E. Whittenburg Martha Altus-Buller Steven Gill 2013 Cengage Learning

2. Homes With Dual Use – Rental and Personal • Three Categories – different tax treatment for each • Category I: Primarily personal use • Rented for less than 15 days • Category II: Primarily rental use • Rented more than or equal to 15 days and Personal use does not exceed greater of 14 days or 10% of rental days • Category III: Rental/personal (dual use) of property • Rented more than or equal to 15 days and Personal use exceeds greater of 14 days or 10% of rental days See following screens for tax treatment for each scenario 2013 Cengage Learning

3. Categories of Income • Three classifications of income • Active – This is from wages, salaries and self-employment income • Portfolio – This is generated from dividend and interest income • Passive – This is from items such as limited partnerships and rental real estate 2013 Cengage Learning

4. Self Employed Health Insurance Deduction • Deduction for AGI allowed for: • Medical/dental insurance premiums paid to cover the self-employed taxpayer, spouse and dependent children • Medical/dental insurance paid for children under age of 27 who are not dependents • Medicare premiums • Long-term care insurance premiums - within limits • Limited by the following • Not allowed in months where taxpayer is eligible to participate in employer-sponsored health care plan • Only allowed to extent of taxpayer’s net earned income • Deductible long-term care premiums based upon taxpayer’s age before close of the taxable year 2013 Cengage Learning

5. Health Savings Accounts (HSA) • Deduction for AGI allowed for: • Amounts put into an HSA that is used to pay unreimbursed medical expenses • Earnings and unused balance accumulate tax free • Only available if taxpayer has high-deductible insurance • High deductible health insurance defined as $2,400 (family) or $1,200 (self only) • Maximum out of pocket requirements for insurance policy must be $12,100 (family) or $6,050 (self only) • Contribution limited, based upon whether it is for family or self only • HSA contribution must be made by April 15 of following year • Additional contributions allowed for taxpayer age 55 or older 2013 Cengage Learning

6. Moving Expenses • Deduction for AGI – can deduct costs of moving personal items and travel (except meals) to new locality • 2012 mileage rate is $.23/mile • Moving expenses must be reasonable • Qualified moving expenses reimbursed by an employer are not reported as part of gross income • Taxpayers in military or involuntarily transferred do not need to meet time/distance test (see next slide) 2013 Cengage Learning

7. Types of Individual Retirement Accounts (IRAs) • Traditional IRA • Deduction for AGI if certain conditions met • Distributions in retirement are taxable • Roth IRA • No current deduction • Distributions in retirement are nontaxable 2013 Cengage Learning

8. Contributing/Deducting - IRA • Roth or traditional IRA contribution limited to lesser of • 100% of earned income or • $5,000 • Spouse with no earned income will be able to contribute up to $5,000 • For 2012, taxpayers and spouses age 50 and older can contribute an additional $1,000/year (called “catch-up provision”) Can make contributions up through April 15, 2013 for 2012 2013 Cengage Learning

9. Contributing and Deducting to a Roth IRA • Roth IRA contribution maximum is reduced for all taxpayers over certain income levels • Phase-out for contribution is reflected in table on page 4-19 • Does not matter whether one spouse is an active plan participant or not • If taxpayer contributes to both a traditional and Roth IRA, combined amount cannot exceed $5,000 ($6,000 if 50 or over) 2013 Cengage Learning

10. Qualified Retirement Plan • Contributions by an employer to qualified retirement plans are tax deductible, employee contributions are pre-tax and tax on earnings is deferred • To achieve qualified plan status, an employer-sponsored retirement plan must • Be for exclusive benefit of employees • Be nondiscriminatory • Have certain participation and coverage requirements • Comply with minimum vesting requirements • Meet uniform distribution rules • Limitations on contributions to/benefits from qualified plans • Defined contribution – annual addition to employee’s account can’t exceed lesser of 25% of compensation or $50,000 • Defined benefit– annual benefit can’t exceed lesser of $200,000 or average compensation for the highest three consecutive years 2013 Cengage Learning