CHECKPOINT LEARNING WEBINARS Adjustments to Income So Many and Always Better than Itemized Deductions Adjustments to Income Presented by: Tony Johnson, CPA CHECKPOINT LEARNING WEBINARS Copyright 2016 Thomson Reuters/Tax & Accounting All Rights Reserved. 2 1
Copyright 2016 Thomson Reuters All Rights Reserved This course, or parts thereof, may not be reproduced in another document or manuscript in any form without the permission of the publisher. This material is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations. The Thomson Reuters content in this webinar is copyright protected. If your certificate of attendance has been issued by anyone other than Thomson Reuters, this material has been obtained in violation of copyright law. 3 Speaker Tony Johnson, CPA Tony Johnson, CPA, attended Benedictine College and graduate school at Kansas State University. He spent 11 years with the international firms of Peat Marwick Mitchell & Co., and Coopers & Lybrand before starting his own practice in 1978. He is a sole practitioner in Lincoln, California, handling all types of tax matters. Tony received his license to practice from California. 4 2
Learning Objectives By the end of this course, you should be able to: Identify various adjustments to income Understand the rules and limitations that apply to adjustments to income Identify opportunities to treat certain expenditures as adjustments to income rather than taking them as itemized deductions Plan with clients in advance to maximize benefits resulting from adjustments to income Be aware of certain adjustments to income which were extended for 2016 5 Polling Question 1 Adjustments to income include all of the following except: a. Moving expenses b. Self employment tax c. The family vacation d. Alimony paid 6 3
Outline Educator expenses Certain expenses of reservists, performing artists and government officials Health Savings Accounts Moving expenses Deductible part of self-employment tax Self-employed health insurance Penalty on early withdrawal on savings Alimony paid IRA deduction Student loan interest Tuition and fees deduction Domestic production activities deduction 7 Adjustments to Income What s New This Year 8 4
Educator Expenses Deduct up to $250 ($500 if both husband and wife qualify) Unreimbursed expenses for: Books Supplies Computer equipment and software Other items used in the classroom Must work 900 hours per year as: Teachers Instructors Counselors Principal and Aides Available only for kindergarten through grade 12 9 Educator Expenses Previously expired after 2014 Now made retroactive to January 1, 2015 and permanent Modified as follows: After 2015 indexed for inflation After 2015 available for professional development expenses 10 5
Certain Expenses of Reservists Deduct as adjustment rather than itemized deduction cost of travel to perform reserve duty Must travel more than 100 miles from home Limited to: Federal per diem rate for lodging, meals and incidentals Standard mileage rate plus parking fees and tolls Excess deducted on Schedule A subject to 2% Applies to: Reserves in Army, Navy, Marines, Air Force, Coast Guard, Air National Guard, Reserve Corp of Public Health Service 11 Certain Performing Artists Deduct as adjustment to income rather than itemized employee business expenses Must meet all of the following: Perform services as employee for at least two employers during the year Receive at least $200 from each of any two Expenses must exceed 10% of related income AGI is not more than $16,000 before this deduction 12 6
Certain Government Officials Deduct as adjustment rather than itemized employee business expenses even if not itemizing Must be a state or local government official employed in whole or in part on a fee basis 13 Polling Question 2 Educator expenses are allowed as an adjustment to income up to: a. $250 per teacher b. $1,000 if you are over 55 c. Unlimited for very good teachers d. $250 per student 14 7
Health Savings Accounts Deduct medical expenses as an adjustment to income rather than medical expense on Sch A Deduct expenses when contributed (in advance) Interest, dividends and other earnings are tax free Distributions are tax free as long as they are used to pay for medical expenses This is better than any IRA Many taxpayers use this as a supplement to a retirement plan 15 Health Savings Accounts (Cont) To qualify for HSA: You must have a High Deductible Health Plan (HDHP) by 1 st day of last month of year No other health coverage (there are exceptions) Not enrolled in Medicare Cannot be claimed as dependent by someone else 16 8
Health Savings Accounts (Cont) Maximum contribution to HSA: Self only Family Under age 55 $3,350 $6,750 Age 55 or older $4,350 $7,750 There is no joint HSA but each spouse can have their own Contributions are reduced proportionately for less than 12 months of coverage Above numbers are for 2016. They are indexed for inflation 17 Health Savings Accounts (Cont) High Deductible Health Plan (HDHP): Self only Family Minimum deductible $1,300 $ 2,600 Maximum out-of-pocket $6,550 $13,100 Above numbers are for 2016. They are indexed for inflation 18 9
Polling Question 3 Health Savings Accounts: a. Are obsolete since the advent of ACA b. Are only available for retirees c. Are only useful if you itemize d. Can be used as a supplement to retirement 19 Health Savings Accounts (Cont) Tax-free distributions include: Any medical and dental expense that would be deducted on Sch A Long-term care insurance premiums COBRA insurance premiums Insurance premiums while receiving unemployment Medicare and other insurance if 65 or older Following are not eligible: Expenses incurred prior to establishing HSA Health insurance premiums (other than above) 20 10
Health Savings Accounts (Cont) Balance in an HSA: There is no requirement to make distributions Distributions other than for medical are taxable An additional tax of 20% applies The additional 20% does not apply at age 65 or at death A spouse can inherit and continue an HSA For other beneficiaries the HSA balance becomes taxable at death 21 Health Savings Accounts (Cont) Other pointers: Contributions can be made by April 15 of following year There could be recapture if coverage is not maintained for 12 months Excess contributions if not withdrawn by due date of tax return are subject to 6% penalty 22 11
Moving Expenses Deductible if: Move is closely related to start of work (within 1 year) You meet the distance test You meet the time test Different rules apply to retirees, survivors and members of armed forces 23 Moving Expenses Distance Test 1. Distance from old home to old job??? 2. Distance from old home to new job??? Difference must be at least 50 miles greater Note: New home does not feature in this calculation 24 12
Moving Expenses Distance Test (Cont) 25 Polling Question 4 Moving expenses are allowed only if: a. You are a mover and shaker b. You move at least 200 miles c. You leave the kids behind d. You work at the new location 26 13
Moving Expenses Time Test Employees Must be employed 39 weeks of first year Self-employed Must be self-employed 78 weeks of first 2 years It is possible to combine employment with self-employment Exceptions apply for death, disability, transfer or loss of employment You can take the deduction before the end of the test period, but failure to pass the test will require an amended return 27 Moving Expenses Time Test (Cont) 28 14
Moving Expenses Deductible Expenses Following are deductible: Cost of moving household goods and stuff Storage expenses within 30 days Costs of connecting/disconnecting utilities Travel expenses for family (airfare, train etc.) Driving 23½ cents (19 cents for 2016) or actual out of pocket Lodging including arrival date and one day at old location 29 Moving Expenses Deductible Expenses (Cont) Following are not deductible: Meals while you move Costs of selling old home or buying new home Temporary living expenses at new location Loss on sale of old home 30 15
Moving Expenses Employer Reimbursement Accountable plan: Reimbursements of deductible items is not included as taxable income on W2 Instead it is reported in box 12, with code P Deductible expenses in excess of reimbursements are deductible on Form 3903 31 Moving Expenses Employer Reimbursement (Cont) Nonaccountable plan: Reimbursements are included as taxable wages subject to withholding Advances not returned to employer or excess reimbursements Reimbursement for nondeductible items (e.g., meals) 32 16
Moving Expenses Employer Reimbursement (Cont) 33 Polling Question 5 The following are allowed as moving expenses: a. Cost of meals while you move b. Cost of housing while on hunting trips c. Temporary housing up to 30 days d. None of the above 34 17
Self-Employment Tax Deduct as an adjustment to income the employerequivalent portion of SE tax Generally 50% of SE tax Deduction is calculated on schedule SE 35 Self-Employed Health Insurance Deduct as an adjustment to income rather than on Schedule A Premiums paid for yourself, spouse, dependents, children under 27 who are not dependents Medical insurance Dental insurance Qualified long-term care Medicare premiums 36 18
Self-Employed Health Insurance (Cont) One of following must be true: Self-employed and had a net profit on Sch C or F Partner with net SE earnings on K-1 S corp stockholder with health insurance included in W-2 wages Partnerships and S corps must either: Pay the premiums directly or Reimburse the owners who paid them Costs are deducted on 1065 or 1120S and must be included either on W-2 wages or K-1 as guaranteed payments to partner 37 Self-Employed Health Insurance (Cont) Not available for any month you, spouse or dependents were eligible for subsidized plan through employer of husband or wife No double dipping amounts claimed as an adjustment to income cannot be deducted on Schedule A 38 19
Early Savings Withdrawal Penalty Early withdrawal of CDs may result in a penalty Include total interest in income on Schedule B Deduct penalty as adjustment to income even if it exceeds the interest income Note: The interest income should be reported in box 1 on 1099-INT and penalty should be reported in Box 2 39 Alimony Alimony payments are deductible as an adjustment to income if: Required by divorce or separation instrument Parties do not file joint return Parties do not live in same household Payments must be in cash or equivalent Must end upon death of recipient Must not be designated as other than alimony Note: Must report Social Security number of payee 40 20
Alimony Recapture If alimony payments decrease or end in the first three years there may be a recapture in Year 3 Can result from: Change in agreement Failure to make payments Reduction in ability to pay Reduction in needs of spouse Attempt to disguise property settlement as alimony 41 Alimony Recapture (Cont) Results if: Decrease of more than $15,000 in third year or Significant decrease in second year Do not consider: Decreases due to death or remarriage Payments that are tied to income from business or compensation from employment or selfemployment 42 21
Polling Question 6 Alimony is allowed as a deduction: a. Up to 50% of Adjusted Gross Income b. Only if paid in cash or equivalent c. If the divorced couple share the same home d. Only if both spouses are speaking 43 IRA Deduction The following can be deducted as an adjustment to income: Contributions to Traditional IRA Contributions to Spousal IRA Contributions to Simplified Employee Plan (SEP) Contributions to Savings Incentive Match Plan (SIMPLE) Contributions to Qualified Plans (Keogh/H.R. 10) Defined Contribution Defined Benefit 44 22
IRA Deduction (Cont) There are many rules and limitations surrounding these various plans These are beyond the scope of this webinar For further information consult with: Publication 560 retirement Plans for Small Business (SEP, SIMPLE and Qualified Plans) Publication 590 Individual Retirement Arrangements (IRA) 45 Student Loan Interest Overview Maximum deduction allowed is $2,500 The deduction is subject to phase out rules Loan must have been solely to pay for education Loan cannot be from a relative or a qualified employer plan Student must be enrolled at least half-time Qualified expenses include room, board and transportation Deduct interest any time during loan period 46 23
Student Loan Interest Interest includes: Loan origination fees Capitalized interest Interest on revolving lines of credit Interest on refinanced student loans Voluntary interest payments (before required date) 47 Student Loan Interest Who Can Deduct Interest You can deduct interest for: Yourself and spouse Someone who was a dependent at the time loan was taken out You must be legally obligated to pay interest You can deduct if someone else pays interest as long as you are legally obligated You cannot deduct interest if someone else can claim you as a dependent 48 24
Student Loan Interest Phase-out Rules The deduction is phased out ratably for taxpayers with Modified Adjusted Gross Income (MAGI) in the following ranges for 2015: Single and H of H $ 65,000 $ 80,000 Joint $130,000 $160,000 MAGI is AGI plus: Foreign earned income exclusion Foreign housing exclusion or deduction 49 Polling Question 7 Student loan interest: a. Is not deductible if your GPA was less than C+ b. Is deductible regardless of income c. Is subject to phase out for high income taxpayers d. Is not allowed if you majored in accounting or tax 50 25
Tuition and Fees Deduction Overview Expired after 2014 Now made retroactive to January 1, 2015 and extended through 2016 Deduct as an adjustment to income (above the line) Maximum amount $4,000 Phase-out rules apply Available only for post secondary school Available only for tuition and fees 51 Tuition and Fees Deduction Figuring the Deduction The maximum deduction is either $4,000, $2,000 or $0 depending on MAGI as follows: MAGI Max Allowed Single or H of H Under 65,000 $4,000 65,000 80,000 $2,000 Over 80,000 $ 0 Joint Under 130,000 $4,000 130,000 160,000 $2,000 Over 160,000 $ 0 52 26
Domestic Production Activities Deduction (DPAD) Deduct as an adjustment to income 9% of the lesser of: Qualified production activities income (QPAI) Adjusted gross income figured before DPAD DPAD cannot be more than 50% of wages paid Sole proprietors, partners and S Corporation stockholders take the deduction on 1040 C corporations take the deduction on 1120 Use Form 8903 to compute this deduction 53 Domestic Production Activities Deduction (DPAD) (Cont) What businesses qualify: Construction of real property in the U.S. Engineering and architectural fees U.S. projects Lease, rental, license, sale of following: Property manufactured grown or extracted in U.S. Qualified films produced Electricity, natural gas or potable water produced in U.S. 54 27
Domestic Production Activities Deduction (DPAD) (Cont) What businesses do not qualify: Activities not connected to trade or business Sale of food and beverage prepared at retail establishments Related party transactions Lease, rental or sale of land Transmission of electricity, natural gas or water Advertising and product placement Customer and technical support 55 Domestic Production Activities Deduction (DPAD) (Cont) Allocation of costs and expenses: It is necessary to allocate expenses between: Activities which qualify (manufacturing) Activities which do not qualify (service and repair) Exceptions: If gross receipts from non-dpgr are less than 5% treat all as DPRG You can use small business simplified method if eligible to use the cash method Farmers regardless of gross receipts Others with gross receipts of $5 million or less Simplified method allocate based on gross receipts 56 28
Polling Question 8 The Domestic Production Activities Deduction: a. Is more trouble than it is worth b. Is limited to 50% of income c. Is allowed for production and manufacturing in the US d. Is the name of the next Star Wars movie 57 Q & A We will be happy to take any additional questions at this time. 58 29
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