B1 Intermediate US 80 Folder Collection
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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 we can deduct, we're looking at income taxes or sales taxes, okay.
So it's either-or. Either you're going to do the income taxes or you're going to take
the sales tax option, okay. When we're talking about income tax, we're talking about state
and local taxes that are paid or withheld from your paycheck are deductible.
I think I'm spelling that right today. Okay. So if, for instance, if you work in Kansas
City or if you live in Kansas City, they are going to withhold Missouri state taxes and
Kansas City earnings tax. So in that case, you would have state and local taxes that
are withheld from your paycheck. Okay. And so in that case, you can take a deduction
for that on Schedule A in the year that they're paid, or you can take the sales tax option.
You can use a table that they offer or you can take actual sales tax. That means that you would have to keep
track of all your receipts and all that in order to get the actual sales tax. Other than
that, you can take the actual or use a table, okay. On Page 5-6, for taxpayers electing
to deduct sales tax in 2008, the deduction may be calculated by, as they say, either
the actual or that sales tax table that they have. Plus, when you're using the sales tax
table, you want to look at, you know, specific separate sales tax that you paid on a vehicle,
a boat, airplanes, or building materials. Not appliances and things, as they say, because
that won't be calculated into the table. The table is just going to consider your everyday
normal things. So it may be an option for someone who has
low income, so therefore, they didn't have a lot of state and local taxes withheld from
their income, but for some reason you buy a car or there's a situation that made you
have high sales tax. So in that instance, you're going to want to take the sales tax
option instead of the state and local income tax option. So it's just an option that you
have. It's an option you have. Okay. So we want to move on to property taxes, which
is your real estate taxes, okay. They're deductible on your home and a second home. So that's
why when we were talking about when you had that home that was that rental, how do I want
to say, that was a split, then when we had that rental that was a rental split, then
we could take those other -- that mortgage and interest personal portion of that mortgage
taxes -- oh, let me get my words right -- mortgage taxes and interest on Schedule A because they
tell us that when we take our personal property taxes, our real estate taxes, we can deduct
taxes that's on our main home and a second home.
So if I have rental property that's considered to be a rental personal split, then, therefore,
that half that's personal can be treated as my second home and, therefore, I can take
it. Okay. I can take it. You can take that deduction on that, even
if it's paid through escrow. Some of us pay our real estate taxes through escrow, and
so that will come in on your statement when you get your year-end statement and it will
be there. When you sell a home, be aware that there
needs to be a split of taxes between the buyer and the seller. Between the buyer and the
seller. So just be aware that there's a split. Personal property taxes that we can take,
you can take separate personal property on autos, boats, trailers, things like that,
that you have to pay a personal property tax on, just as long as this is going to -- long
as it's based on property values. So in order for it to be deductible, it has to be based
on the value, on property values. So make sure that is the case. So that is
our taxes. The other thing that's not mentioned here is that you can also take -- let's say
April 15th of 2008 I filed my state income tax return and I owe $500. So when I filed
my 2007 tax return on April of 2008 and I paid that, those were taxes that I paid in
2008. So, therefore, when I do my 2008 tax return, they're going to be deductible.
So let's move on to interest. Interest is going to be deductible in the year that you
pay it. And that's the same with taxes as well. They're going to be deductible in the
year that it's paid, okay. So we can take interest deduction on our residence, which
is going to be mortgage, okay, and so basically, once again, we'll get to do it on a second
home, our main home and then our second home as well. So you can take it on two homes.
And it's going to be on the debt that you used to buy or secure your home or construct
it. So maybe I built it. Okay. And that particular amount, those loans
on the securing or construction of a home is going to be loans up to $1 million. So
if you build a $1.5 million house and you borrow, you can only deduct the interest on
up to $1 million of that home. So even though I got the $1 million home -- $1.5 million
home, the interest that I'm going to be able to deduct is going to be only up to a million.
Home equity loans. As you know, they talk about home equity loans that we get, that
interest is deductible as well, and it's deductible only on loans up to $100,000. Only on loans
up to $100,000. And then they talk about points as well. Points are going to be deductible.
And if it's the points through a refinancing, those particular points are going to have
to be capitalized and amortized. So we can't deduct those if it's on a refinancing.
Okay. So those are our interest on your -- on your home. So just be aware that there's a
situation that if you have a very high or very expensive home, you may not get all of
that. Let's look at an example regarding that. Vicky's residence -- I'm on Page 5-9. Vicky's
residence has a fair market value of 300,000. The first mortgage used to buy the house 10
years ago, 125,000. So that meets the limitation. This year she borrows 115,000 on a second
mortgage. So that's her home equity loan, secured by the house, to send her children
to college. The interest paid for the first -- paid on the first mortgage is fully deductible.
But interest on only 100,000 of the second mortgage is going to be deductible.
And so what she's going to have to do is only take a portion of that. She's going to take
100,000, which is the allowed amount, divided by the 115,000, which is her loan amount,
and then multiply it times the $7,000 worth of interest attributable to that. So in that
case she wouldn't get the full $7,000. Also, no consumer interest is allowed. So
your interest that you have on auto loans, credit cards, all that particular interest
is not allowed. You cannot deduct that. Okay. Next is on education loan. We pay interest
on our education loans, and that interest, education loan is deductible. That is deductible.
It's deductible up to $2,500 per year. Now, it's going to phase out for high income, it's
going to be phased out for high income taxpayers. Okay. And so on this particular loan, education
loan, it has to be a loan that was used for qualified expenses. And those qualified expenses
are tuition, room and board, and then any other related education expenses.
So any other related expenses. So keep in mind that there's a phase-out and on the top
of Page 5-10 they list our phase-out amounts for taxpayers who are single, their modified
AGI 55,000 to 70, and for married taxpayers, a modified AGI of 115,000 to 145. So if you
are within those ranges, it's going to be phased out. And if you exceed those ranges,
you cannot get a deduction for that. You cannot get a deduction for that. Okay.
So that's your education loan interest deduction that you can take. So I want to stop there
and what we need to do is you need to make sure you read through Chapter 5, and as you
read through Chapter 5 begin to answer those questions. Like I said, these deals with itemized
deductions, and so next time we're going to pick up with the investment interest and look
at that calculation, and we probably will get a chance to -- I believe to finish the
chapter. So make sure that you read through Chapter 5 and look at Schedule A. We'll do
a couple little exercises and problems for Schedule A.
So we will stop there at education loan interest, and we finished Chapter 3, so I'm expecting
some multiple choice questions shortly on that, and that's it.
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Basic Income Tax - Part 7

80 Folder Collection
王惟惟 published on August 10, 2017
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