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  • Okay, our last session we ended up with qualified retirement plans and we're going to look at

  • 401(k)s. Just spoke briefly about 401(k)s, so I want to pick up there and begin to look

  • at Page 3-21, limitations on contributions to and benefits from a qualified plan. So

  • limitations on the contributions that I may make to the plan, and then benefits from a

  • qualified plan, okay. So we want to pick up there and begin to look

  • at that. As I mentioned at the end of the last session that there was two plans. We

  • have -- or two ways we want to look at. We have what we call defined contribution plans,

  • okay. So we have defined contribution plans. And then we have defined benefit plans.

  • Okay. So those are the two we're going to look at, okay. At the bottom of Page 3-20,

  • I'm going to read this example and then we will go back to the notes. Heather is an employee

  • who earned 30,000 during the current year. So she's an employee who earned 30,000 during

  • the year. Her employer contributed 1200, or 4% of Heather's salary to a qualified retirement

  • plan. This plan is a defined contribution plan.

  • Okay. So back to our note, defined contribution plan, contributions not to exceed the lesser

  • of 46,000 or 25% of the employee's compensation. Okay. So now let's look at the top of Page

  • 3-21. Allen works for an employer whose qualified retirement plan states that Allen will receive

  • a retirement benefit at age 65 equal to 40% of his last year's salary. The employer must

  • make adequate contributions to the plan to enable the stated retirement benefit to be

  • paid, meaning they need to make sure they put in enough, make sure it's a sufficient

  • amount so that when Allen retires, he will be able to receive 40% of his last year's

  • salary. Okay. This plan is the defined benefit plan. So when we go to our notes, benefit,

  • okay, the benefit payable amount, meaning the amount that they will benefit, is going

  • to be limited to the lesser of $185,000 or 100% of the average compensation for the highest

  • three years of employment. Okay. So as you can see, there's limitations

  • on those contributions. It doesn't matter if you're involved in a defined contribution

  • plan where they place a limit on the contribution that's going in or if you are participating

  • in a defined benefit plan where they're going to place a limitation on the benefits. So

  • defined contribution, they're going to limit your contributions to 46,000, or 25% of the

  • employee's salary. For a defined benefit plan, they are going to put a limit on the benefits,

  • and those benefits being the lesser of 185,000 or 100% of the average compensation for the

  • highest three years of employment. So just be aware of that. Then our 401(k) plans, basically

  • contributions to 401(k)s, to those, they are made pre-tax. So the income that you put into

  • your 401(k), it's going to be made before it's taxed, okay. And so as far as the limitation

  • goes on that, it's going to be limited to 150 -- I'm sorry, 15,500 of the salary, or

  • if you are 50 or over, so 50-plus, it's 20,500. Okay. And so it's normally a percentage of

  • your salary. You say I want to contribute 15% of my salary, but the situation is, is

  • whatever that percentage is, that amount cannot be more than 15,500 per year, or 20,500 if

  • you're 50 or over. So if you look on Page 3-21, we have an example there. Let's look

  • at that example. Carol is aged 48, participates in a 401(k) plan. Carol's salary is 30,000

  • per year. If she chooses to contribute 15% to the 401(k) plan, the maximum amount she

  • may contribute on a tax deferred basis for a 401 plan under her salary reduction agreement

  • is 4500. In that case, it was 15% of her 30,000, which was 4500.

  • Now, whatever her percent, she could have did 50% of her salary, which would have been

  • 15,000, that still would have been okay. She could have did -- but she couldn't have done

  • a percentage that would have caused her amount to exceed 15,500. So it couldn't exceed the

  • 15,500. Keep in mind there's going to be a penalty, contributions in excess of the maximum

  • allowed amount is subject to a 10% excise tax. So contributions in excess of that limit is going to be subject

  • to a 10% excise tax. Okay. And that's going to be imposed on the employer. So just be

  • aware that there is a limitation on that. Next we want to look at low income retirement

  • plan contribution credit, which is a saver's credit. They have this credit out there that

  • you can get if you are low income and you are contributing to a retirement plan. So

  • that's basically what they, you know, it's a saver's credit. And that credit is going

  • to be based on the taxpayer's filing status, okay, AGI, so it's based on the filing status

  • and the AGI. And the credit is anywhere between -- you can get a 50% credit. It may be a 20%

  • credit or a 10% credit of the contribution. Okay. And if we look at Page 3-22, they give

  • you more details of coming up with that credit, but just be aware that that credit could be

  • anywhere 50, 20 or 10% of the contribution. It can be any of those. 50, 20 or 10% of the

  • contribution. Okay. We want to look at rollovers. On Page

  • 3-22, we're going to look at rollovers, how do we deal with rollovers. What if I want

  • to take, you know, my plan and my money in one plan and put it over into another plan?

  • It's still an IRA, it still meets those qualifications, I don't want to take it out, I just want to

  • take it from one plan to put it in another plan, okay. And those are rollovers. We have

  • two type of rollovers we want to look at. We want to look at a direct transfer, okay.

  • So we want to look at a direct transfer. And then we want to look at a distribution rollover.

  • Okay. So we want to look at those two rollovers. We want to look at a distribution rollover

  • and a direct transfer rollover. Okay. So I want to kind of just, you know, show

  • it to you visually because I'm a visual person, and so what we want to do is let's say that

  • I have my money in an ABC 401(k), maybe it's in an IRA, and maybe it's in some type of

  • retirement plan. Okay. And so then what I do is directly have it placed into CDE 401(k),

  • IRA, or some type of retirement plan. In doing this, if I do it this way, there's no penalty

  • and there's no tax. Here's -- oh. And that's the preferred way to do it. There's no penalty.

  • There's no tax. It goes from one plan to the other. I never see it. I fill out the necessary

  • papers for it. But it's direct. It goes just directly from one to the other. Directly from

  • one to the other, okay. So now we want to look at a distribution rollover. We want to

  • look at a distribution rollover. In this case, I have my money in ABC 401(k), IRA, or whatever

  • the case may be. Then I have them distribute it to me. Then I turn around and put it in

  • CDE 401(k), IRA, or whatever. Okay. So in that case, there's a situation. First

  • of all, when ABC gives it to me, they're required to withhold 20% tax. 20% is going to be withheld.

  • Okay. And then I'm going to have 60 days to get it into CDE. Now, the difference amount,

  • the difference is, is that when I got it, I only received 80% because, remember, they

  • withheld 20% and the IRA -- IRS took 20% and they withheld it. And so, but then when I

  • put it back into CDE, I have to put the entire amount in there, okay. So let's look at example.

  • Let's say that we have $100,000 in ABC. We have $100,000 in ABC. And they're going to

  • take out 20,000, and so I'm only going to end up getting a check for 80,000. Okay.

  • And then when I put the money in CDE, I'm going to have to put 100,000 in. If I don't,

  • if I only end up putting the 80 in, there's going to be a 10% penalty on an early withdrawal.

  • There's going to be a 10% penalty on an early withdrawal if I don't put the full 80, so

  • the issue with that is that I'm going to have to come back up with $20,000 because the IRS

  • took 20,000 and -- I mean I could very well get it back as long as there's no penalty

  • when I file my tax return. So I basically have allowed the IRS to hold that $20,000

  • and I'm going to have to come up with another $20,000 to put back in my plan. I'm going

  • to have to come up with another $20,000 to put in my plan.

  • Okay. So be careful with rollovers. You know, you do have 60 days. But just keep in mind

  • when they distribute it to you, there's going to be 20%, 20% that they're going to withhold

  • for taxes. Even though you may not be penalized, you end up putting it back in 60 days, but

  • just know you're going to have to make sure you put the whole amount back, and I think

  • that sometimes people may not be aware of that. So that's why direct rollovers are so

  • much better, because you don't ever have to worry about it. It's going to be direct, okay.

  • The last little thing we want to look at as we finish up this chapter is we want to look

  • at SIMPLE plans, savings incentive match plans for employees. Savings incentive match plans

  • for employees. That's what that stands for. Okay. These are qualified plans, okay. And

  • they're for small businesses. Basically we're looking at where they have -- where they don't

  • have more than employees or not more than -- I'm not stating this right. Not more than

  • 100. So let's say employers don't have more than 100 employees. That's the way I want

  • to say it, and of those employees who earned $5,000 or more in the preceding tax year.

  • Okay. So they briefly talk about these SIMPLE plans and there's going to be some limitations

  • on those contributions, none that we're going to really cover, but just be aware they're

  • called SIMPLE plans, they're out there, SIMPLE IRAs, and that it's really for small companies

  • or small businesses where you don't have more than 100 employees and who earn 5,000 or more

  • in preceding tax years. So you want to look at that, okay.

  • Well, that's all we have in Chapter 3. That's all we have in Chapter 3. And so we dealt

  • with rental and we dealt with bad debts and then we spent a lot of time on retirements

  • and IRAs, Roth IRAs, SEP plans, KEOGH plans, and 401(k)s, okay. So now we want to go over

  • the Chapter 5. There may be later some specific things that I want to cover in Chapter 4,

  • but for now I want to go on over to Chapter 5, which is Schedule A, Schedule A deductions.

  • Schedule A deductions are like your medical deductions, your charitable contributions

  • are Schedule A, and so those are those ones that appear on that.

  • Let's look at a Schedule A real briefly before we get started.

  • Okay. We want to look at the Schedule A. We -- it starts off with medical. We have medical

  • and dental expenses that are on the Schedule A. Let me get a little better Schedule A.

  • I kind of tore where you can see that. We start off with medical and dental expenses,

  • and then taxes that you paid. So we're going to look at taxes. And then interest is the

  • next section that's covered on Schedule A. And then we look at charity gifts, or your

  • charitable contributions. And then our casualty and theft losses are covered on Schedule A,

  • and then we have miscellaneous expenses, which are going to be job expenses and certain other

  • like safe deposit box, tax preparation fees, and then we have a section for other miscellaneous

  • deductions. And then we get our total. Now, keep in mind here at the bottom they

  • talk about if your Line 38, which is your AGI, is more than 159,000,

  • if you are single, head of household, if you're married filing separate, it's 79,975. What

  • that means is that you could be limited to some of your Schedule A. You may not get them

  • all. You're going to be limited to some of them. So we'll do that calculation. We have

  • that calculation still to do and then, remember, if you're a high income taxpayer you very

  • well could be limited on some of your exemptions. You may not get your full exemption amounts

  • as well. So just keep that in mind, a limitation also

  • applies there. Okay. Let's go ahead. You should have a handout

  • like this that you got in your packet of information. And as we go through, similar to what we did

  • in the last chapter, we will fill out and go through the notes. We start off with our

  • medical expenses. When we're talking about the medical expenses that you can take, these

  • are the ones that are paid for yourself, your spouse, and then any of your dependents.

  • Okay. And so for your spouse, yourself or any of your dependents. Now, the thing about

  • these is that there's a limit on them. They're going to be limited to 7.5% of your AGI. Okay.

  • So you're going to have AGI limitation, meaning I'm not going to get them all. I'm only going

  • to get the amount that exceeds 7.5%. I'm only going to get the amount that exceeds 7.5%.

  • So this is the way the calculation goes. We have our qualified medical expenses, all those that qualify,

  • and we're going to look at those that qualify, and then we're going to subtract from that

  • any insurance reimbursement. So if we have all these expenses and we have insurance,

  • we could very well have some insurance reimbursement that applies to those,

  • And that's going to give us just a subtotal of our potential deductible ones. And then

  • we're going to subtract from that 7.5% of your AGI. So you're going to take your adjusted

  • gross income, multiply times 7.5%, then you subtract that from your subtotal and then

  • any excess is going to equal your deductible medical.

  • It's going to equal your deductible expenses. Okay. Basically, that's your calculation.

  • When we look at qualifying expenses, and the way they state it, they say anything, we'll

  • look at anything, but basically items that account for the diagnosis, meaning I'm going

  • to go get checked out, and then the cure, mitigation, treatment, and any prevention

  • of disease, okay. And those items appear mainly on 5-2 when we begin to look at them, 5-2,

  • okay. And so they start with at the bottom of 5-1 and we go over to 5-2 on some expenses

  • and things like that. So just know they look at items for, you know, whatever, you know,

  • we're trying to cure, we're trying to treat, we're trying to prevent or whatever the case

  • may be. At the top of Page 5-2, basically, therefore,

  • amounts for all the following categories of expenditures qualifies medical. So prescription

  • medicine, fees for doctors, dentists, nurses, prescription for hospital fees, hearing aids,

  • dentures, psychiatric care, acupuncture, birth control prescriptions, medical insurance premiums,

  • if I'm making those payments, all those things are considered. Also, would you believe in

  • that little section the IRS allowed the following unusual medical expenses: Long distance phone

  • calls made to psychological counselor; new siding replacing old siding on a home because

  • the taxpayer was allergic to mold growing on the old siding; a wig prescribed by a psychiatrist

  • for a taxpayer upset by her hair loss; a cell phone for a taxpayer who may need instantaneously

  • medical help; and then treatments provided by an Indian medicine man. Those were some

  • particular ones that the IRS in the past has allowed. Okay.

  • So let's look and keep going on Page -- at the bottom of Page 5-2. We look at medical

  • insurance. We want to look at medical insurance. Basically policies, we're looking at medical

  • insurance, we're looking at policies that pay a specific amount each day or week is not going to be deductible. So if you have

  • a policy, all the other ones are okay. But if you happen to have a policy that's specific

  • to each day or week, then it's not going to be considered. Okay.

  • Basically, medicine and drugs, what are not going to be allowed are over-the-counter and illegal drugs,

  • or illegally purchased. Okay. So if we're purchasing drugs from somewhere else, we're

  • not going to be able to deduct those if we're purchasing them from across -- from Canada

  • or wherever I think the popular place now is to get drugs. Now, what if I have to get

  • something done to my house? What if, you know, I can no longer walk up steps and I have to

  • get a elevator put in my house? Or what if there's just something major, a capital expenditure

  • that I need to have done? Now, I can deduct -- these capital expenditures that I need

  • are deductible to the extent the cost of me putting that in, the cost exceeds the increase

  • in the value of my home. So there's got to be an increase in the value of the home, and

  • that cost has to exceed that. So let's look at an exercise or an example on Page 5-3.

  • A taxpayer has a heart condition and installs an elevator in his home at a cost of $6,000.

  • So that's the cost of the elevator. The value of the home is increased by $4,000 as a result

  • of the improvement. The taxpayer's allowed a deduction of 2,000. So we want to take the

  • 6,000 cost of it minus the increase in value of 4. So the $2,000 would be a deduction.

  • $2,000 would be a deduction. Okay. Next is transportation and lodging.

  • If you have to travel, you know, distances for treatment, if you have to maybe stay at

  • a hotel, the transportation, you can deduct 19 cents a mile for that and the lodging is

  • going to be $50 per night, despite what you pay, but this is what you can deduct, $50

  • per night per person. $50 per night per person, and I want to say

  • they are going to limit you to two people. So you got 19 cents per mile. And then the

  • thing about it is, this is a year -- as we go over other miles, we have a splint year

  • of miles. Every now and then we run into when we're dealing with mileage, when we're dealing

  • with mileage for charitable contributions, which we'll deal with later in this chapter,

  • when we're dealing with mileage for employee business expenses, every now and then we'll

  • run into a year where we have two different amounts. So it's 19 cents a mile, okay. And

  • that is from January to July. So from January to July, it's 19 cents a mile.

  • And then 27 cents, and actually we want to say until June, because the 27 cents starts

  • on July 1st. 27 cents from June -- shoot -- July to December. So basically for six months -- it

  • depends on when you travel -- for six months it's 19 cents, for January to June, for the

  • first half of the year, and then 27 cents for the last half of the year. And we'll run

  • into that exact same thing when we deal with you have the ability to take mileage for charitable

  • contributions. So just be aware that the mileage is split.

  • So $50 per night for your lodging, no meals. So it's just the lodging that they're going

  • to allow you. Okay. Let's keep going on our medical. Okay.

  • Also, they mention -- we don't have any notes on that. But on the back, on Page 5-4 they

  • mention Health Savings Accounts, and know that those Health Savings Accounts replace

  • those medical savings accounts that used to be out there and where you can take some tax

  • deductible contributions to a medical spending account that can be used for when you have

  • high deductible medical insurance, there's some rules that apply to that. We won't cover

  • those. Just be aware of that on Page 5-4, the Health Savings Account.

  • Okay. Next we want to move to taxes. We can deduct taxes. On Page 5-5, okay, when we're

  • looking at taxes that