Adjustments to Income Flashcards
Additional tax on HSA distributions
There is an additional 20% tax on distributions not used for qualified medical expenses.
Additional tax does not apply to distributions made after the date the taxpayer is disabled, reaches age 65, or dies.
Benefits of HSA
The deadline to make contributions to an HSA for 2020 is April 15, 2021.
The taxpayer may claim a deduction for contributions even if not itemizing deductions on Form 1040.
A taxpayer may exclude employer contributions to an HSA from gross income.
The contributions remain in the HSA account from year to year until used.
The interest or other earnings on the assets in the account accumulate tax-free.
Distributions may be tax-free if used to pay for qualified medical expenses. 20% additional tax if not used for qualified medical expenses.
Health Savings Account (HSA)
For 2020, a taxpayer with a high-deductible health plan can contribute up to $3,550 ($7,100 for family coverage) to an HSA. An additional $1,000 catch-up contribution is available if age 55 or older. To qualify for an HSA, an individual must meet all the following requirements:
Must be covered under a high deductible health plan (HDHP) on the first day of the last month of the tax year (December 1 for most taxpayers).
Must not have other health coverage.
Must not be enrolled in Medicare.
Must not be claimed as dependent of another taxpayer.
Moving expenses
The TCJA suspends the deduction for moving expenses for taxable years 2018 through 2025. The deduction remains available for members of the Armed Forces (or their spouse or dependents) on active duty that move pursuant to a military order and incident to a permanent change of station.
Self-employment taxes
Self-employed taxpayers (but not S corporation shareholders) may deduct 50% of self-employment taxes reported on Schedule SE.
Retirement plan contribution limits
A defined contribution plan’s annual contributions and other additions (excluding earnings) to the account of a participant cannot exceed the lesser of 100% of compensation or $57,000 for 2020.
Employer contributions to a SEP IRA cannot exceed the lesser of 25% of compensation or $57,000 for 2020.
SIMPLE plan employees can choose to make salary reduction contributions up to $13,500 in 2020.
Self-employed retirement plan contribution amount
To calculate retirement plan contribution for self-employed taxpayer into own account: Net-earnings × .9235 × rate/(1 + rate) .9235 reduces net earnings by the owner’s equivalent portion of self-employment tax (7.65%) rate/(1 + rate) reduces the contribution rate, a necessary step to account for the fact that plan contributions are a deduction for net-earnings from self-employment.
Plan compensation for self-employed
When calculating the retirement plan contribution for himself, a self-employed taxpayer calculates compensation as net earnings from self-employment (provided that personal services are a material income-producing factor), reduced by the total of:
- The deduction for the deductible part of self-employment tax (7.65%)
- The deduction for contributions to his own account
Self-employed health insurance
A sole proprietor, partner, and greater than 2% S corp shareholder may claim an adjustment for medical, dental, and qualified long-term care insurance premiums (limited) paid on behalf of himself, his spouse, or his child under age 27.
- Plan must be considered to be established in name of business.
- Must include premiums in income ( as W-2 wages if S corp, as guaranteed payment if Partnership).
- Deduction cannot exceed earned income from the business.
- No deduction if taxpayer or spouse is eligible under other employer-subsidized plan
Child support
Child support payments are not deductible by the payer and are not taxable to the recipient. A payment is child support if it declines on the happening of a contingency relating to a child, such as becoming employed, dying, leaving the household, leaving school, married, or reaching a specified age or income level.
Alimony
Agreements prior to 2019 – Paying spouse deducts alimony. Receiving spouse includes payments in gross income.
Agreements (or modifications) starting in 2019 – No longer deductible by the payor spouse and no longer income to the recipient spouse.
Property settlements or payments of court-ordered child support are not alimony and do not qualify as income or deduction items.
Inherited IRA (Died after December 31, 2019)
Effective January 1, 2020, (with a delayed effective date for certain collectively bargained plans), the Secure Act requires the entire balance of the participant’s account be distributed within 10 years. The new 10-year rule applies regardless of whether the participant dies before, on, or after, the required beginning date (age 72).
There is an exception to the 10-year withdrawal rule for certain eligible designated beneficiaries, which include a surviving spouse, a child who has not reached the age of majority, a disabled or chronically ill person, or a person not more than ten years younger than the decedent.
Early distributions from a Roth IRA
If a distribution from the Roth IRA is not a qualified distribution, part of it may be taxable. Withdrawals are in this order:
- Regular contributions – Not included in gross income or subject to the 10% early distribution tax.
- Conversions and rollover contributions – FIFO if multiple. 10% early distribution tax applies to any amount that was included in income due to conversion or rollover. 10% penalty does not apply to nontaxable portion (basis).
- Earnings on contributions – Included in gross income and subject to10% early distribution tax.
Nondeductible contributions to Traditional IRA
A taxpayer may make a contribution (up to the general limit) to a traditional IRA even if it is not deductible.
The difference between the total permitted contributions and the IRA deduction is a nondeductible contribution.
To designate contributions as nondeductible, a taxpayer must file Form 8606.
A nondeductible contribution increases the basis of the IRA and is not taxable when withdrawn.
Each distribution is partly nontaxable (return of basis) and partly taxable until the entire basis has been distributed.
Prohibited transactions
The following are examples of prohibited transactions in an IRA:
- Borrowing money from it
- Selling property to it
- Receiving unreasonable compensation for managing it
- Using it as security for a loan
- Buying property for personal use with IRA funds.
Account stops being an IRA as of the first day of the year of a prohibited transaction and the entire account balance is considered a distribution.
