Chapter 4 Business Income & Expenses Part II Income Tax Fundamentals 2016 Student Slides Gerald E. Whittenburg Martha Altus-Buller Steven Gill ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.

Rental Income/Expenses Net Rental Income/Loss is part of taxpayer’s gross income Report on Schedule E - Part I Vacation Homes If both personal and rental use of residence, must allocate expenses Deductions limited based on period of time residence used for personal vs. rental ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.

Vacation Homes With Dual Use – Rental and Personal Three Categories – different tax treatments Category I: Primarily personal use (if rented for less than 15 days) Category II: Primarily rental use, if 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, if Personal use exceeds greater of 14 days or 10% of rental days Different tax treatment for each scenario ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.

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 ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.

Self Employed Health Insurance Deduction Deduction for AGI allowed for: Medical/dental insurance premiums paid to cover the 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 Self-employed taxpayers that receive advance premium credits under the ACA may deduct only the portion paid out of pocket ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.

Health Savings Accounts (HSA) Deduction for AGI allowed for: Earnings and unused balance accumulate tax free Only available if taxpayer has high-deductible insurance High deductible health insurance defined as $2,600 (family) or $1,300 (self only) Maximum out of pocket requirements for insurance policy must be $12,900 (family) or $6,450 (self only) Contribution limited, based upon if HSA is for family or self only HSA contribution must be made by April 15 of following year Annual amounts put into an HSA used to pay unreimbursed medical expenses (maximum $6,650 (family), $3,350 (self)) Additional contributions allowed for taxpayer age 55 or older Can’t contribute once 65 and qualify for Medicare ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.

Moving Expenses Deduction for AGI – can deduct costs of moving personal items and travel (except meals) to new locality 2015 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 ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.

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 ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.

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 $5,500 ($6,500 if 50 or over) ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.

Contributing/Deducting Traditional IRA Traditional IRA deduction is dependent on AGI and whether taxpayer (or taxpayer’s spouse, if married) is an active participation in a qualified retirement plan Single taxpayers – see table on top of page 4-20 MFJ taxpayers – see table, phase-outs based on if one, both or neither spouse is an active participant Note: if only one spouse is in a qualified plan, phase-out for the non-active participant spouse begins when married filing joint couple’s AGI > $183,000 ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.

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 $53,000 Defined benefit – annual benefit can’t exceed lesser of $200,000 or average compensation for the highest three consecutive years ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.