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Chapter 4 Business Income & Expenses Part I - Cengage

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Chapter 4Business Income & Expenses Part II
Income Tax Fundamentals 2013Student SlidesGerald E. WhittenburgMartha Altus-BullerSteven Gill
2013 Cengage Learning
Homes With Dual Use –Rental and Personal
Three Categories – different tax treatment for eachCategory I:Primarily personal useRented for less than 15 daysCategory II:Primarily rental useRented more than or equal to 15 daysandPersonal usedoes notexceed greater of 14 days or 10% of rental daysCategory III:Rental/personal (dual use) of propertyRented more than or equal to 15 daysandPersonal use exceeds greater of 14 days or 10% of rental daysSee following screens for tax treatment for each scenario
2013 Cengage Learning
Categories of Income
Three classifications of incomeActive – This is from wages, salaries and self-employment incomePortfolio – This is generated from dividend and interest incomePassive – This is from items such as limited partnerships and rental real estate
2013 Cengage Learning
Self Employed Health Insurance Deduction
2013 Cengage Learning
DeductionforAGI allowed for:Medical/dental insurance premiums paid to coverthe self-employed taxpayer, spouse and dependent childrenMedical/dental insurancepaidforchildren under age of27 who are not dependentsMedicare premiumsLong-term care insurance premiums - within limitsLimited by the followingNot allowed in months where taxpayer is eligible to participate in employer-sponsored health care planOnly allowed to extent of taxpayer’s net earned incomeDeductible long-term care premiums based upon taxpayer’s age before close of the taxable year
Health Savings Accounts (HSA)
2013 Cengage Learning
DeductionforAGI allowed for:Amounts put into an HSA that is used to pay unreimbursed medical expensesEarnings and unused balance accumulate tax freeOnly available if taxpayer has high-deductible insuranceHigh 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 onlyHSA contribution must be made by April 15 of following yearAdditional contributions allowed for taxpayer age 55 or older
Moving Expenses
Deduction for AGI – can deduct costs of moving personal items and travel (except meals) to new locality2012 mileage rate is $.23/mileMoving expenses must be reasonableQualified moving expenses reimbursed by an employer are not reported as part of gross incomeTaxpayers 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)
Traditional IRADeductionforAGI if certain conditions metDistributions in retirement are taxableRoth IRANo current deductionDistributions in retirement are nontaxable
2013 Cengage Learning
Contributing/Deducting - IRA
Roth or traditional IRA contribution limited to lesser of100% of earned incomeor$5,000Spouse with no earned income will be able to contribute up to $5,000For 2012, taxpayers and spouses age 50 and older can contribute an additional $1,000/year (called “catch-up provision”)
2013 Cengage Learning

Can make contributions up through April 15, 2013 for 2012
Contributing andDeducting to a Roth IRA
Roth IRA contribution maximum is reduced for all taxpayers over certain income levelsPhase-out for contribution is reflected in table on page 4-19Does not matter whether one spouse is an active plan participant or notIf 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
Contributions by an employer to qualified retirement plans are tax deductible,employee contributions are pre-tax and tax on earnings is deferredTo achieve qualified plan status, an employer-sponsored retirement plan mustBe forexclusive benefitof employeesBenondiscriminatoryHave certainparticipation and coverage requirementsComply withminimum vestingrequirementsMeetuniform distributionrulesLimitations on contributions to/benefits from qualified plansDefined contribution– annual addition to employee’s account can’t exceed lesser of 25% of compensation or $50,000Defined 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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Chapter 4 Business Income & Expenses Part I - Cengage