Chapter 4 Business 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  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  Three classifications of income o Active – This is from wages, salaries and self- employment income o Portfolio – This is generated from dividend and interest income o Passive – This is from items such as limited partnerships and rental real estate 2013 Cengage Learning

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

Health Savings Accounts (HSA) 2013 Cengage Learning  Deduction for AGI allowed for: o Amounts put into an HSA that is used to pay unreimbursed medical expenses o Earnings and unused balance accumulate tax free o 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 o HSA contribution must be made by April 15 of following year o Additional 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 locality o 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)  Traditional IRA o Deduction for AGI if certain conditions met o Distributions in retirement are taxable  Roth IRA o No current deduction o Distributions in retirement are nontaxable 2013 Cengage Learning

Contributing/Deducting - IRA  Roth or traditional IRA contribution limited to lesser of o 100% of earned income or o $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”) 2013 Cengage Learning Can make contributions up through April 15, 2013 for 2012

Contributing and Deducting to a Roth IRA  Roth IRA contribution maximum is reduced for all taxpayers over certain income levels o Phase-out for contribution is reflected in table on page 4-19 o 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  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