1. Chapter 4 Business Income & Expenses Part II
Income Tax Fundamentals 2016
Student Slides
Gerald E. Whittenburg
Martha Altus-Buller
Steven Gill
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2. 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
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3. 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
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4. 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
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5. 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
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6. 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
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7. 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
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8. 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
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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 $5,500 ($6,500 if 50 or over)
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10. 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
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11. 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.