Chapter 4 business income expenses part ii
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Chapter 4 Business Income & Expenses Part II. Income Tax Fundamentals 2013 Student Slides Gerald E. Whittenburg Martha Altus- Buller Steven Gill. Homes With Dual Use – Rental and Personal. Three Categories – different tax treatment for each Category I: Primarily personal use

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Chapter 4 Business Income & Expenses Part II

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Chapter 4 business income expenses part ii

Chapter 4Business Income & Expenses Part II

Income Tax Fundamentals 2013

Student Slides

Gerald E. Whittenburg

Martha Altus-Buller

Steven Gill

2013 Cengage Learning


Homes with dual use rental and personal

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


Categories of income

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


Self employed health insurance deduction

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


Health savings accounts hsa

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


Moving expenses

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


Types of individual retirement accounts iras

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


Contributing deducting ira

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


Contributing and deducting to a roth ira

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


Qualified retirement plan

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


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