Business Income & Expenses Part II

Transcription

1 Chapter 4 Business Incme & Expenses Part II Rental and vacatin prperties Passive incme/lsses Deductins fr AGI Individual Retirement Accunts (IRAs) Other retirement plans Rllver rules 1

2 Rental Incme/Expenses Net Rental Incme/Lss is part f taxpayer s grss incme Reprt n Schedule E - Part I Vacatin Hmes If bth persnal and rental use f residence, must allcate expenses Deductins limited based n perid f time residence used fr persnal vs. rental 2

3 Hmes With Dual Use Rental and Persnal Three Categries different tax treatments Categry I: Primarily persnal use (if rented fr less than 15 days) Categry II: Primarily rental use, if Rented mre than r equal t 15 days and Persnal use des nt exceed greater f 14 days r 10% f rental days Categry III: Rental/persnal (dual use) f prperty, if Rented mre than r equal t 15 days and Persnal use exceeds greater f 14 days r 10% f rental days See fllwing screens fr tax treatment fr each scenari 3

4 Primarily Persnal Use Treated as a persnal residence Rental perid is disregarded Rental incme is nt taxable Mrtgage interest and real estate taxes reprted n Schedule A (itemized deductins) Other expenses are persnal and nndeductible 4

5 Primarily Rental Use Must allcate expenses between rental and persnal use calculated as fllws: Rental days / Ttal days used = Rental % Expenses x Rental % = Rental deductins Persnal days / Ttal days used = Persnal % If rental deductins exceed rental incme, can deduct against ther incme, subject t passive lss rules Persnal % f mrtgage interest and real estate taxes reprted n Schedule A 5

6 Rental/Persnal (Dual) Use Allcate expenses between rental and persnal based n same allcatin frmulas as prir slide Rental deductins can be taken up t amunt f rental incme nly, in rder, as fllws Taxes and interest (can take int lss situatin) Utilities/maintenance (nly up t remaining rental incme) Depreciatin (nly up t remaining rental incme) Persnal % f mrtgage interest & real estate taxes reprted n Schedule A 6

7 Example f Dual Use Rental Prperty & Slutin Example The Prebena family wns a ski cnd in Alta, UT; in the current year persnal use = 25 days and rental use = 50 days. Data pertaining t the rental fllws; what amunts will be reprted n Schedules E and A fr the current year? Rental incme 10,000 Taxes 1,500 Interest 3,000 Utilities 2,000 Insurance 1,500 Snw remval 2,500 Depreciatin 12,000 Slutin Step 1: Persnal use is > 14 days r 10% f rental (5 days); therefre, des exceed the greater number and this is dual use prperty Step 2: Taxes/interest = $4,500 x 50/75 = $3,000 deductin n E Step 3: Other expenses = $6,000 x 50/75 = $4,000 deductin n E Step 4: Depreciatin = $12,000 x 50/75 = $8,000 but limited t $3,000 (remaining incme) because dual use prperty can t create a lss Step 5: = What amunt ges t Schedule A? ($4,500 taxes/interest $3,000 rental = $1,500) Step 6: = What is the lss carry 7 frward? $8,000 3,000 = $5,000

8 Alternative Allcatin Methd IRS requires that dual use f rental prperty allcatin is based n ttal days f use U.S. Tax Curt has allwed allcatin f interest and taxes using 365 as denminatr This allws mre interest/taxes t be deducted n Schedule A, creating greater ptential t take ther expenses n the Schedule E This cntrversy between IRS and Tax Curt is still nt reslved 8

9 Categries f Incme Three classificatins f incme Active This is frm wages, salaries and selfemplyment incme Prtfli This is generated frm dividend and interest incme Passive This is frm items such as limited partnerships and rental real estate 9

10 Passive Lss Limitatins Passive lss rule - When taxpayer has minimal r n invlvement in an activity, generated lsses are cnsidered passive, and may nt be deducted in excess f passive gains. Hwever, Lsses can be carried frward and deducted in future years r They can be deducted when investment is sld Passive lsses generally cannt be used t ffset active r prtfli incme 10

11 Passive Lss Limitatins - Exceptin Rental prperty is specifically designated as passive, even if taxpayer actively manages Hwever, individual taxpayers May take up t $25,000 f rental lss (even thugh cnsidered passive) against rdinary incme The $25,000 lss capability is reduced by 50 fr each $1 Mdified AGI (MAGI) > $100,000* Different rules apply if married filing separately *Therefre, n deductin fr rental lsses exists when MAGI reaches $150,000 11

12 Passive Lss Limitatins If taxpayer is heavily invlved in real estate rental activities, may be cnsidered t have an active business Requirements fr this are Mre than 50% f individual s persnal service during year is perfrmed in real prperty trade and Mre than 750 hurs f service perfrmed The taxpayer may then be able t deduct entire lss n real estate business 12

13 Rental Real Estate Lss Example & Slutin Example Bbbi J is single and wns a rental duplex that shwed a lss f $20,000. Her mdified AGI, befre the lss, is $118,000. What amunt f the rental lss can be claimed? Slutin Step 1 Mdified AGI exceeds $100,000 (therefre, $25,000 ttal lss capability may be reduced) Step 2 $118,000 - $100,000 = $18,000 excess, $25,000 - ($18,000 x 50%) = $16,000 Only $16,000 f the rental lss can be deducted 13

14 Self Emplyed Health Insurance Deductin Deductin fr AGI allwed fr: Medical/dental insurance premiums paid t cver the taxpayer, spuse and dependent children Medical/dental insurance paid fr children under age f 27 wh are nt dependents Medicare premiums Lng-term care insurance premiums - within limits Limited by the fllwing Nt allwed in mnths where taxpayer is eligible t participate in emplyer-spnsred health care plan Only allwed t extent f taxpayer s net earned incme Deductible lng-term care premiums based upn taxpayer s age befre clse f the taxable year 14

15 Health Savings Accunts (HSA) Deductin fr AGI allwed fr: Amunts put int an HSA that is used t pay unreimbursed medical expenses Earnings and unused balance accumulate tax free Only available if taxpayer has high-deductible insurance High deductible health insurance defined as $2,500 (family) r $1,250 (self nly) Maximum ut f pcket requirements fr insurance plicy must be $12,500 (family) r $6,250 (self nly) Cntributin limited, based upn whether it is fr family r self nly HSA cntributin must be made by April 15 f fllwing year Additinal cntributins allwed fr taxpayer age 55 r lder Can t cntribute nce 65 and qualify fr Medicare 15

16 Health Savings Accunts (HSA) Distributins Amunts distributed ut f HSAs are tax free when used t pay fr medical expenses Nnqualified distributins are subject t a 20% penalty and incme tax Hwever, if ver 65 years ld, distributins taken fr nn-medical expenses are subject t tax and nt penalties Publicatin 969 is an IRS publicatin that prvides a gd surce f infrmatin fr HSAs 16

17 Mving Expenses Deductin fr AGI can deduct csts f mving persnal items and travel (except meals) t new lcality 2013 mileage rate is $.24/mile Mving expenses must be reasnable Qualified mving expenses reimbursed by an emplyer are nt reprted as part f grss incme 17

18 Time/Distance Tests Time/distance tests must be met t qualify fr mving expense deductin Taxpayer must change jb sites Distance f frmer residence t new jb lcatin must be at least 50 miles mre than distance frm frmer residence t frmer jb lcatin Emplyee must wrk 39 weeks f twelve mnths after mve (r if self-emplyed, 78 weeks f next 24 mnths) 18

19 Types f Individual Retirement Accunts (IRAs) Traditinal IRA Deductin fr AGI if certain cnditins met Distributins in retirement are taxable Rth IRA N current deductin Distributins in retirement are nntaxable 19

20 Cntributing/Deducting - IRA Rth r traditinal IRA cntributin limited t lesser f 100% f earned incme r $5,500 Can make cntributins up thrugh April 15, 2014 fr 2013 Spuse with n earned incme will be able t cntribute up t $5,500 Fr 2013, taxpayers and spuses age 50 and lder can cntribute an additinal $1,000/year (called catch-up prvisin ) 20

21 Cntributing and Deducting t a Rth IRA Rth IRA cntributin maximum is reduced fr all taxpayers ver certain incme levels Phase-ut fr cntributin is reflected in table n page 4-19 Des nt matter whether ne spuse is an active plan participant r nt If taxpayer cntributes t bth a traditinal and Rth IRA, cmbined amunt cannt exceed $5,500 ($6,500 if 50 r ver) 21

22 Cntributing/Deducting Traditinal IRA Traditinal IRA deductin is dependent n AGI and active participatin in anther qualified retirement plan Single taxpayers see table n tp f page 4-20 MFJ taxpayers see table, phase-uts based n if ne, bth r neither spuse is an active participant Nte: if nly ne spuse is in a qualified plan, phase-ut fr the nn-active participant spuse begins when married filing jint cuple s AGI > $178,000 22

23 Rth IRA Cntributin Example & Slutin Example Owen is 42, single, and wants t cntribute the maximum t his Rth IRA. His AGI = $114,000, s his cntributin will be limited. Please calculate hw much he can cntribute t his Rth. Hw wuld that change if Owen were 62? Slutin Lk at the phase-ut chart n p The denminatr t the calculatin is the range f the phase-ut amunts* * $127,000 - $112,000 [($127,000 $114,000)/$15,000] x $5,500 = $4,767 Rth IRA cntributin If he were 62: [($127,000 $114,000)/$15,000] x $6,500 = $5,633 Rth IRA cntributin 23

24 IRA Cntributin Example & Slutin Example Liza and Mikal (bth 41) are MFJ; Liza is cvered by a 401(k) plan at wrk and earns $96,000. Mikal is nt cvered by a plan at wrk and earns $30,000. Hw much can each f them cntribute t a traditinal IRA? Slutin Their cmbined AGI = $126,000. Their AGI exceeds the tp end f the phaseut range fr MFJ fr active participant spuse, per Nte 1 in the table n page 4-20 (phase ut range is $95,000 - $115,000). Since Liza is the active plan participant and their jint incme exceeds the upper phase-ut limit, she may nt make a deductible cntributin t a traditinal IRA. She culd, hwever, make a $5,500 cntributin t a Rth IRA, since their AGI is nt in the Rth phase-ut range (see table page 4-19). Mikal can make the full $5,500 traditinal IRA cntributin since the AGI phase-ut fr the spuse that is nt in an active plan des nt kick in until $178,

25 Traditinal IRA Distributin Distributin taxed as rdinary incme Must begin taking distributins by age 70.5 There s a 10% penalty if yu take distributin befre age 59.5 Penalty-free withdrawals frm IRAs may be made by taxpayers wh are: Disabled Using special level payment ptin Purchasing a hme fr the first time (up t $10,000) Paying higher educatin expenses Paying medical expenses > 7.5% f AGI r medical insurance premiums fr dependents and n unemplyment at least 12 weeks 25

26 Rth IRA Distributin Qualified distributins are tax free as lng as Rth IRA was pen fr five years and Distributin is made n/after age 59.5 Distributin is made due t a disability Distributin is made n/after participant s death Distributin is used fr first time hmebuyer s expenses If dn t meet abve, part f distributin may be taxable. Return f capital is tax-free and earnings are taxed. 26

27 Kegh Plan Participants must meet minimum age and years f service requirements Retirement plan geared twards self-emplyed individuals (that are unincrprated) Tax free cntributins are limited t lesser f 20% f net earned incme (befre Kegh deductin) r $51,000 Net earned incme includes business prfits, if significantly generated frm taxpayer s persnal services Must reduce net earned incme by ½ self-emplyment tax fr pensin cntributin calculatin 27

28 Simplified Emplyee Pensin (SEP) Same dllar limits as Kegh plans, but cntributins made int SEP-IRAs IRA accunt with higher funding limits Participants must meet minimum age and years f service requirements Pay early withdrawal penalty if receive distributins prir t age 59.5 Must start drawing by age

29 Qualified Retirement Plan Cntributins by an emplyer t qualified retirement plans are tax deductible, emplyee cntributins are pre-tax and tax n earnings is deferred T achieve qualified plan status, an emplyer-spnsred retirement plan must Be fr exclusive benefit f emplyees Be nndiscriminatry Have certain participatin and cverage requirements Cmply with minimum vesting requirements Meet unifrm distributin rules Limitatins n cntributins t/benefits frm qualified plans Defined cntributin annual additin t emplyee s accunt can t exceed lesser f 25% f cmpensatin r $51,000 Defined benefit annual benefit can t exceed lesser f $200,000 r average cmpensatin fr the highest three cnsecutive years 29

30 Sectin 401(k) Plans 401(k) Emplyee chses t defer sme cmpensatin int plan Defer means t freg current cmpensatin - the reductin ges int a qualified retirement plan Each emplyee chses % f wages t cntribute t plan Amunt can t exceed $17,500/year fr all salary reductin plans Or caps at $23,000/year if 50 r lder An emplyer may match t encurage participatin; this match is excludable frm incme When distributins ccur, cntributins and earnings are taxable 30

31 Rth 401(k) Beginning in 2006, emplyers allwed t set up Rth 401(k) plan Emplyees may defer same annual amunt as traditinal 401(k), but with n reductin in current taxable incme Withdrawals/earnings generally tax free upn distributin Expected t be ppular with high incme taxpayers, because n AGI phase-ut and much higher annual cntributin than a Rth IRA 31

32 Lw Incme Retirement Plan Cntributin Credit Credit t encurage lw-incme taxpayer participatin in retirement savings Als called Saver s Credit Tax credit fr percentage f retirement plan cntributin based upn AGI Credit equal t 50%, 20% r 10% f cntributin See chart n page 4-26 Credit is direct deductin frm incme taxes payable 32

33 Direct Transfer f Retirement Plan Funds Plan 1 Plan 2 Taxpayer Taxpayer instructs trustee f plan t directly transfer assets t trustee f anther plan N backup tax withhlding necessary, because $ ges right frm ne plan t anther Unlimited number f direct transfers per year 33

34 Distributin Rllver f Retirement Plan Funds 80% f $ Plan 1 Taxpayer Plan 2 Taxpayer receives assets frm fund, and then has 60 days t get 100% f the $ frm ne plan t anther, in rder t avid penalties Or 120 days if first-time hmebuyer, waived in certain situatins 20% federal backup tax withhlding is mandatry S taxpayer must make up the 20% withhlding, and then wait until 34 year-end t get refund!! Als, if under 59.5 years ld, prtin f plan distributin nt transferred subject t 10% penalty!

35 Retirement Plan Distributin Rllver Example & Slutin Example The is 54 and instructs her emplyer, Ectrek LLP, t distribute $250,000 f her nn IRA retirement accunt t her. Hw much must the trustee f the fund withhld and what must The d t avid taxes and penalties n the distributin in the current year? Slutin The trustee must withhld 20%; therefre, The will receive $200,000 ($250,000 less withhlding f $50,000). T avid taxes, she must cntribute $250,000 t a new fund within 60 days. If The des nt have the extra $50,000 t cntribute, that prtin f the distributin will be included in her taxable incme and she will be subject t a 10% penalty. If she can cntribute the full $250,000; the amunt withheld will be 35 accunted fr n her annual tax return.