Chapter 7: Business Expenses and Deferred Compensation Flashcards
1
Q
What expenses go on schedule C?
A
Expenses connected with a trade or business
2
Q
What expenses go on schedule E?
A
Expenses connected with real estate or royalties (rent)
3
Q
What expenses go on schedule F?
A
Expenses connected to farm income
4
Q
Requirements for business expenses to be deductible under tax law
A
Ordinary
Necessary
Reasonable
5
Q
Deduction of employee business expenses
A
Effective 2018 to at least 2025 employee business expenses are not deductible
6
Q
Definition of an employer- employee relationship
A
Generally exists when the employer has the right to control and direct the individual who provides the services with regard to end result and the means by which the result is accomplished
7
Q
Threshold for filing 1099-misc
A
$600 or more in payments to an individual independent contractor
8
Q
FICA Tax split
A
Total 15.3%
OASDI (social security) 12.4% on income up to $142,800 in 2021(employee split 6.2%ea)
Hospital insurance (Medicare) 2.9% on all income (employee split 1.45%ea)
9
Q
Factors considered to in determining employee vs independent contractor
A
- behavioral control (amount of instruction and training provided)
- financial control (work costs paid by worker or employer)
- relationship of the parties (what benefits are provided/ contracts adhered to)
10
Q
Travel expenses paid by an employee
A
Not deductible (2018-2025)
If reimbursed are excludable from employee’s gross income if paid under an “accountable plan” where employee must account for expenses to employer
11
Q
Travel expenses
A
Transportation, meals, lodging and other reasonable and necessary expenses incurred by a taxpayer while “away from home” in pursuit of a trade or business
12
Q
Transportation expenses
A
Local transportation expenses when taxpayer is not away from home
deductible for self employed individuals under certain conditions
13
Q
Qualifications for expenses to count as travel expense
A
- purpose of the trip must be connected with trade, business, or rental real estate activity
- taxpayer must be away from their tax home overnight (or for long enough to require sleep/rest before returning home)
- must be on a temporary, not indefinite basis
14
Q
Tax home
A
The location of a taxpayer’s principal place of business (regardless of where family residence is maintained)
15
Q
When permanent work location is a significant distance from family home
A
Transport to work probably not travel if work location is permanent.
Work location = tax home
16
Q
Indefinite work assignment
A
Work assignments of more than one year (if one year or less: depends on facts of case)
If assignment is indefinite, individual’s tax home shifts to new location and travel is not deductible
17
Q
Cost of meals on one-day business trips
A
Generally not deductible since taxpayer was not away from home overnight
18
Q
Trips with mixed business and pleasure purpose
A
If primarily pleasure: only expenses directly related to the business activity are deductible (not proportional)
If primarily business: travel to and from is fully deductable and all other expenses are allocated proportionally
19
Q
Determining between a primarily business and primarily personal trip
A
Mostly determined based on time spent on which activities but may still be able to show primary purpose was business
20
Q
Travel expenses for an accompanying family member
A
No deductions allowed unless for a bona fide business purposes
21
Q
Deductions for foreign travel
A
Disallowed unless it can be shown that a meeting is directly related to the taxpayer’s trade or business and that it was reasonable for the meeting to be held outside the US
22
Q
Travel expenses for education
A
Disallowed as a deduction
23
Q
Limit on in deduction for luxury water travel
A
limited to 2x the highest per diem amount allowable for a day of domestic travel by employees in the executive branch of the federal gov ($465/day in 2019)
24
Q
Travel to a convention, seminar, or meeting for investment activities
A
Disallowed
25
Limitation on expenses to attend meetings on a US cruise ship
$2,000 max
26
Deductibility of transportation related to trade or business
For AGI deduction
Not subject to limitations
27
Deductibility of transportation expenses related to rental real estate and royalty income
For AGI deduction
Not subject to limitations
28
Deductibility of unreimbursed employee transportation expenses
Not deductible
29
Deductibility of commuting expenses
Nondeductible personal expenses
30
Transportation expenses
For local transportation rather than travel
31
Transportation expenses incurred to go from one work location to another
Deductible for self employed individuals
Limited to milage between job 1 and job 2 even if individual goes home in between
32
Investment related Transportation expenses
Not deductible after 2017
33
Options for deduction of automobile expenses
- actual expenses (repairs, gas, oil, depreciation etc) based on percentage of business miles to total miles
Or
- standard milage rate
34
Standard milage rate for 2021
$0.56/mile
35
Automobile expenses that can be deducted in addition to the standard milage rate
- parking and tolls
- interest on a car loan
- personal taxes on a car
36
Restrictions on the standard milage rate
- cannot be used for cars for hire for for 5 or more cars in simultaneous use by a taxpayer
37
Changing from using the standard milage rate to the actual expense method
- basis of car must be reduced by depreciation component of standard rate x miles
- MACRS cannot be used for computing depreciation, only straight line method under alternative depreciation system
38
When can you not change from the actual costs method to the standard mileage rate
- if car was previous depreciated under MACRS rules, or
- if an election was made under section 179 to expense part or all of the cars cost in the year of acquisition
39
Deduction of entertainment expenses
Disallowed for 2018-2025
40
Deduction for business meals
Generally 50% deductible (or 50% excluded)
41
Business meals provided by restaurants in 2021 and 2022
100% deductible
42
Substantiation requirements for business meals
- purpose of meal
- who attended the meal
- amount of meal
- date of meal
43
Requirements for a taxpayer to be able to deduct a business meal expense
- expense is ordinary and necessary expense of business
- expense is not lavish or extravagant in the circumstances
- the taxpayer or employee of the taxpayer is present at meal
- food or beverages are provided to current or potential business customer/client/consultant/business contact
- If meal is during or at an entertainment activity then it may only be deducted if paid for separately or stated separately form the cost of entertainment
44
Per diem system
A way to simplify the keeping of records regarding travel expenses
Taxpayer only needs to substantiate time, place, and business purposes of the trip and can then use IRS prepared per diem tables
45
Per diem requirements
- expenses must be reasonably expected to be incurred
- amount of expenses should be in reasonable proximity of actual expenses
46
M&IE
Meals and incidental expenses
47
Business gifts
Deductible but subject to an annual ceiling of $25 per donee
- multiple gifts are aggregate for purpose of applying ceiling
- families are treated as a single donee
- promotional materials are not gifts
- employee achievement awards for length of service or safety, under $400 are excluded
- business gifts not subject to 50% reduction
48
Moving expenses for moves in connection with job or business
NOT deductible for 2018- 2025 except for members of the armed forces on active duty moving pursuant to military order and incident to a permanent change of station
Expect to return for employees & self employed in 2026
49
Education expenses necessary in the pursuit of a trade or business
Deductible
(Vs generally education expenses considered non-deductible personal expense)
50
Education tax credits
American opportunity tax credit
Lifetime learning credit
51
Phase out for education tax credit
Modified AGI over $80,000 (single) or $160,000 (MFJ)
Phased out complete at $90,000 (single) or $180,000 (MFJ)
52
Educational assistance plan for employees
Amounts received for tuition/other people expenses are exludable from employee's gross income
53
Qualified state tuition plan withdrawals
529 plans
Withdrawals excluded from gross income if used for educational expenses
54
Requirements for education expenses to be deductible
(for an employee or self employed individual)
- expense incurred to maintain or improve skills required for trade or business
- expense incurred too meet requirements imposed by law for retention of business, rank, compensation rate
Ineligible if conditions above are met but:
- education is required to meet minimum education requirements for trade or business
- education qualifies taxpayer for a NEW trade or business
2018-2025 ONLY available as a deduction for the self employed
55
Office in home expense deduction availability
From 2018-2025 only available to the self employed
56
Requirements for taking the Office in home expense deduction
- self-employed individuals
- office exclusively used under any of the following conditions:
-- principal place of business for any trade or business of the taxpayer
-- place for meeting or dealing with patients, client or customers in the normal course of business
-- office in home is ina separate structure, not attached to the dwelling unit, used exclusively and regularly for business
57
Principal place of business
- most important or significant place of business
- where primary business services are performed
58
When does an office in home qualify as a principal place of business
- the office is used by the taxpayer for administrative or management of the taxpayer's trade or business, AND
- there is no other fixed location of the trade or business where the taxpayer conducts substantial administrative or management activities of the trade or business
59
Categories of expenses for home office deductions
- expenses directly related to the office
- expenses indirectly related to the office (pro-rata share of expenses that benefit the entire house, generally based on square footage)
60
Order of home office expense deductions
- all non-office expenses must be deducted first
- then 100% of direct home office expenses and pro-rata share of indirect
BUT total home office expenses cannot create a business loss
61
Issues with depreciating a home office
Makes the home office business property
Meaning that if home is sold the sale price attributable to the business property is NOT eligible for the sale or principal residence exclusion
62
Home business office expenses excluded based on gross income limitation
Can be carried forward, but remain subject to gross income limitation and are subject to specific ordering rules (mortgage and real estate taxes 1st, the other deductions, then depreciation)
63
Safe harbor deduction for home office expenses
$5 x square feet of qualified use (up to a 300 sq ft max)
Maximum total deduction under safe harbor $1500†
Can be elected every year (subject to allowability of home office deduction)
64
Qualified pension and profit sharing plans
Deferred compensation plans that must meet strict requirements (including not discriminating in favor of highly paid employees, operating strictly for the benefit of employees) to be qualified for certain tax benefits
65
Qualified plan benefits to employers
Immediate tax deduction on contributions to qualified plans made on behalf of employees
66
Qualified plan benefits to employees
- not taxed on contributions until they are withdrawn from the plan
- income to the plan also tax free till withdrawn
67
Roth-type deferred compensation plans
Employee contributions are taxable, but on retirement can be withdrawn tax free
Any amounts rolledover into a Roth IRA are taxed
68
Types of qualified plans
- pension plans
- profit sharing plans (including 401(k)s)
- stock bonus plans (including employee stock ownership plans)
69
Distinguishing features of a qualified pension plan
- systematic and definite payments made to a pension trust, without regard to profits, based on formulas or actuarial estimations
- may provide incidental benefits like disability or medical insurance
70
Noncontributory pension plan
Contributions made solely by the employer
71
Contributory pension plan
Employee may make voluntary contributions supplementing the employer contributions
72
Defined contribution plan
Separate account established for each participant and amounts contributed based on formula. Benefits payable based on value of account at time of retirement
73
Defined benefit plan
Benefit amount on retirement is fixed. Actuarial techniques establish necessary contributions
74
Forfeitures of UNvested amounts under defined benefit plans
Must be used the reduce the employer contributions that would otherwise be made to the plan
75
Forfeitures of UNvested amounts under defined contribution plans
Maybe reallocated to other participants (in a non discriminatory manner) or used to reduce future employer contributions
76
Distinguishing feature of a defined profit sharing plab
- predetermined formula for employer contributions to individuals & for benefit payments
- annual employer contributions NOT required (substantial and recurring contributions necessary so plan is permanent)
- employees must have option to receive (taxable) current cash compensation or defer taxability by having amounts deposited to profit sharing trust (401(k) plan)
- forfeitures may be allocated to remaining participants (nondiscrimination requirements)
- may be lump sum payments to vested employees before retirement
- may provide incidental benefits
77
Stock bonus plan
Defined contribution plan where the investments of the plan are in the employer-company's stock which is allocated to the participants
78
Employee stock ownership plan
ESOP
Type of qualified stock bonus plan
Combination of employer and employee contributions
Invests primarily in employer stock
79
Employer benefits of ESOP
- dividends paid to participants are deductible (business expense) in year paid (taxable to participant)
Deduction limited to the dividends paid on employer stock acquired with an ESOP plan
80
Requirements for a deferred compensation plan to be a "qualified" plan
- plan must be for the employee's exclusive benefit
- plan may not discriminate in favor of highly compensated employees
- contributions and plan benefits must bear a uniform relationship to the compensation payments made to covered employees
- certain coverage requirements, expressed in terms of a portion of the employees covered, must be met
- an employee's right to receive benefits from the employer's contributions must vest after a certain period or number of years of employment (ensuring a significant percentage of employees must receive benefits)
81
Highly compensated employees
Employees that meet either of two tests:
1) own more than 5% of the corporation's stock in either the current or prior year
2) receive compensation of greater than $130,000 in the prior year
82
Qualified plan vesting requirements
Employer-contributed benefits must be 100% vested after 5 years of service
Employee contributions to the plan must vest immediately
83
tax treatment of qualified plan contributions by the employer
- immediately deductible to the employer
- earnings on pension fund investments tax exempt to the plan itself
84
tax treatment of qualified plan contributions by the employee
Taxable when pension payments received
Employee may elect to have contributions made pre-tax (taxable earnings reduced by amount) or after-tax (eventual withdrawal at requirement is NOT taxable: considered return of basis)
85
Tax treatment of employee retirement payments: noncontributory plan
All retirement payments taxable
86
Tax treatment of employee retirement payments: contributory plan, all contributions pre tax
All payments taxable
87
Tax treatment of employee retirement payments: contributory plan, contributions made after-tax
PART of each payment treated as tax free return of contributions. Remainder is taxable.
88
Amount of retirement payments excluded from gross income when after-tax contributions were made
Determined by the ratio of the employee's investment in the contract to the expected return under the contract
Excluded amount limited to employee's contributions to the plan
(If dies before full amount is recovered the unrecovered amount = itemized deduction in year of death )
89
Qualified distributions from a Roth-type plan
- have been invested in the plan for at least 5 years
- distributed to an employee over 59.5
90
2021 maximum contribution to retirement plan
$19,500
+$6,500 catch up contribution for those over 50
(Will adjust every year)
91
2021 maximum contribution to retirement plan
$19,500
+$6,500 catch up contribution for those over 50
92
2021 Limitations on employer contributions to qualified pension/profit sharing/stock bonus defined contribution plan
the lesser of $58,000 or 100% of the employee's compensation
If multiple plans exist are all treated as one for purpose of limitation
93
2021 Limitations on employer contributions to qualified pension/profit sharing/stock bonus defined benefit plan
Annual benefit to employee limited to the lesser of $230,000 or 100% of the participant's average compensation for their highest three years
94
Maximum annual employer deduction for contributions to qualified pension/profit sharing/stock bonus plans
Defined contribution, stock bonus, profit sharing plans: 25% of compensation paid or accrued to all plan participants
25% is max total deduction even if employer has multiple plans
95
Nonqualified deferred compensation plans
- do not have the same restrictions and benefits of qualified plans
- used for executive compensation planning
- often impose restrictions on outright transfer of the plan's benefits to the employee (avoids taxation under constructive receipt)
- taxed to employee/deductible to employer when these restrictions lapse and compensation is available to the employee
96
Unfunded deferred compensation plañs
- used to compensate highly compensated employees who desire to defer income recognition till a later period
Deferred compensation amounts accrued in an escrow account (may earn investment income)
Taxed/deductible when employee has access to funds
97
Requirements for nonqualified deferred compensation plans
- apply to plans where executive employees may defer receipt and taxability of compensation to a future period
- if deferred amounts fail to satisfy requirements they will be taxed on the compensation AND interest AND an additional 20% excise tax
- distributions subject to strict rules
- offshore trusts cannot be used!/
98
Distributions from unfunded deferred compensation plans
Deferrals may be distributed to participants no earlier than the time of separation of service (with some rare exceptions)
Accelerated payment amounts highly curtailed
99
Restricted property plans
- executives obtain an ownership interest in the company
- receipt of restricted property in exchange for services rendered is not taxable if the property is non-transferable and subject to a substantial risk of forfeiture
100
When is restricted property compensation taxable
The earlier of the time when the property is no longer subject to a substantial risk of forfeiture or when it is transferrable
Amount taxable = FMV less any amount paid by employee
Employer can take deduction when employee is taxed
101
Election to be taxed immediately
Employee may make an election within 30 days after receipt of restricted property to recognize the income immediately.
Means employer may take corresponding deduction immediately
Often made if FV expected to significantly increase in future
Still will forfeit property if leave before restrictions lapse and no deduction will be taken (and employer will have to take any amount previously deducted as incomek
102
How do restricted property plans avoid immediate taxation?
By being both nonforfeitable (non-transferable?) and subject to substantial risk of forfeiture
103
When are incentive stock option plans preferred?
When long term capital gain rates are low compared to ordinary income rates (current tax situation)
104
Why might an employer choose a nonqualified stock option instead of an incentive stock option
Nonqualified stock option: employer receives a tax deduction for compensation (not received under incentive stock option plan)
105
Incentive stock option plan/ employer requirements
(ISO)
- option price must be ≥ stock's FMV on the option's grant date
- option must be granted within 10 years of the date the plan was adopted (and must be exercised within 10 years of grant date)
- option exercisable only by employee and non-transferable except on death
- employee cannot own more than 10% of voting power of the corporations stock before the grant date
- any excess of FMV of stock options over $100,000 that is exercisable to an employee in any year is nonqualified options
106
Incentive stock option plan employee requirements
- employee must not dispose of stock within two years of options grant date or within one year after the exercise date
- employee must be employed by issuing company on the grant date and continue such employment until within three months before the exercise date
107
Tax treatment of incentive stock option plans
Only if all requirements met
- no tax consequences on grant or exercise date (inc. no deduction for employer)
- eventual sale of stock = LT capital gain or loss and basis is option price
- any DMV over the option price on the exercise date is an adjustment for purposes of the alternative minimum tax
If requirements are not met stock option = nonqualified stock ootion
108
Nonqualified stock option plans
Stock options that do not meet the incentive stock option requirements
Tax treatment depends if there is a readily ascertainable FMV or not
109
Tax treatment of Nonqualified stock option with readily ascertainable FMV
Employee recognizes ordinary income on the grant date = difference between FMV of option and amount paid for property (if any)
Employer gets deduction for sake amount
No tax consequences on date of exercise
Capital gain or loss on disposition
110
Tax treatment of Nonqualified stock option with NO readily ascertainable FMV
No tax consequences on grant date
Exercise date:
Employee ordinary income = difference between option price and FMV of stock (basis = option price + amount reported on income)
Employer deduction= same amount
111
Principal retirement plans for self employed individuals
H.R. 10 plan (Keogh plan)
SEP IRA
SIMPLE plan
Solo 401(k) plan
112
Solo 401(k) plan
For solo business owners with no other employees
Provide for a $19500 deferral for the business owner plus a 25% salary match by the company (total 2021 limit $58,000)
113
HR 10 plan
Keogh plan
Not used much now due to annual paperwork requirements. Similar to SEP IRA
If a self-employed person establishes a Keogh plan they must include any full time employees in the plan
May be defined benefit or defined contribution
114
SEP IRA limitations for self-employed individuals
2021 contribution limited to the smaller of $58,000 or 25% of earned income from self employment
Earned income = net earnings REDUCED by the 50% deduction for self employment taxes AND the SEP IRA contribution (effectively makes contribution 20% earned income)
Max of $290,00 of earned income taken into account for any one individual
(Same restrictions for defined contribution HR 10 plans)
115
Deadline for establishing an HR 10 plan
Must be established before end of tax year
Contributions may be made up to due date for tax return including extensions
116
Deadline for establishing SEP IRA plans
Dare of return including extensions
117
Where are contributions to SEP IRAs and HR 10 plans deducted
Contributions for the self employed individual deducted on page 1 of form 1040
(Any deductions for employees on schedule C)
118
SEP IRA
Basically employer makes contributions to the individual IRAs of it's employees
- contributions are treated as being made on the last date of the tax year if made by due date of return (include extensions)
- employer contributions must be nondiscriminatory
- distributions subject to IRA rules (including penalty for early withdrawal)
119
Deduction limitations for employer contributions to SEP IRA plans
Annual deductible contributions limited to the lesser of 25% of participant's compensation (up to $290,000) or the dollar limitation for defined contribution plans (max for 2021= $58,000
120
SIMPLE retirement plans
Savings Incentive Match PLan for Employees
- can be adopted by employers with 100 or fewer employees who received at least $5k in compensation from employer in preceding two years
- can be set up as IRA for each employee or as part of a qualified cash or deferred arrangement (401(k))
121
Employee contribution limit for SIMPLE plans
$13,500 per year elective contributions
Employer required to match
122
Unique features of SIMPLE plans
- elective contributions by employees must be match by employer (or employer may make nonelective contributions)
- all contributions to employee's account must be fully vested
-NOT subject to nondiscrimination rules for qualified plans, simply all employees who had $5k in compensation in the previous year and are expected to have $5k in the current year must be eligible to participate
123
Types of IRAs
- traditional
- Roth
- coverdell educational savings account
124
Traditional IRA
- amount contributed to IRA (2021 max $6,000) is deductable on taxpayers return (+$1000 catch up amount if over 50)
-income earned on investments not subject to taxation until withdrawn
(Nondeductible amounts are not deducted from current return but also not taxed when withdrawn)
125
Requirements to make a deductible contribution to a traditional IRA
- individual must have compensation(earned income) = the lesser of $6,000 or the amount of the contribution and either:
- individual is not an active participant in an employer -sponsored requirement plan
Or
- have AGI below $66,000 single, $105,000 MFJ, $0 MFS (2021 limits)
126
Phase out for deductible traditional IRA contribution
For 2021:
Single $66,000-$76,000 (range = $10,000)
MFJ $105,000-$125,000 (range =20,000)
(Pro rata phase out: deductible contribution reduced by percentage determined by: excess over phase out start/ phase out range)
127
Contribution to traditional IRA if AGI above phase out limit
May make a nondeductible contribution of up to $6000 (investment earnings remain tax free)
Max nondeductible contribution = $6000 less any amount allows as a deduction
Also taxpayer to elect to have all contributions be nondeductible even if eligible
128
Spousal IRA
if one spouse is working & eligible to make IRA contributions the nonworking spouse can contribute up to $6,000/year to an IRA for a total deductible amount of $12,000 for the couple
Working spouse must make at least $12,000 in earned income for the couple to contribute $12,000
129
When one spouse is covered by a qualified retirement plan and the other is not
Non-covered spouse may contribute to a traditional deductable IRA
Phased out at AGI between $198,000 and $208,000
130
If traditional IRA is established and contributed to between year end
May be established between the end of the tax year and the due date for the return (not including extensions) and any contributions made during that time are treated as deductions for the prior year
Basically contributions to IRA (both deductible and not) may be made by the tax return due date of the following year
131
Additional traditional IRA ontribution amount for taxpayers over 50
Catch up contributions
Allowed an extra $1000/year (so limitation increase to $7000 in 2021)
132
SECURE act
Eliminate the age CAP for making contributions to IRA (previously could not make contributions if over 70.5)
133
Taxation of traditional IRA distributions
Normally fully taxable
If nondeductible contributions were made must calculate exclusion ratio for an annuity using the nondeductible contributions as the investment
134
Penalty on excess contributions
6%
Nondeductible
135
Penalty on early withdrawal
Withdrawals by participant before they reach 59.5 are includable in income AND subject to nondeductible 10% penalty tax
136
Latest age for traditional IRA withdrawals to start
No later than April 1st of the year following the end of the tax year in which the individual turns 72
137
Roth IRA
"backloaded IRA"
- contributions are nondeductible
- distributions (including earnings) nontaxable
- max yearly contribution of the lesser of $6,000 or 100% compensation
- still subject to AGI phase out
138
Contribution limitation for taxpayers eligible for both a Roth and traditional IRA
$6,000 total (2021)
139
Roth IRA contribution phase out
Single: AGI between $125,000 and $140,000
MFJ: AGI between $198,000 and $208,000
MFS: AGI of $0
Allowable contribution reduced by (excess over lower threshold)/(spread)
140
Holding period requirement for Roth IRA distributions
Distributions may not be made before the end of the five-tax-year period beginning with the first tax year for which contributions were made to a Roth IRA (begins at beginning of tax year even if contribution of was made later in the year)
141
Additional requirements for qualifying Roth IRA distributions
Distribution must meet 5 year holding period plus at least one of the following
- made on or after date on which individual attains age of 59.5
- made to beneficiary (or estate) on or after the individual's death
- attributable to the individual being disabled
- distribution for first time homebuyer expenses (max $10,000)
142
Taxability of non-qualifying Roth IRA distributions
- distributions treated as being from contribution first. Nontaxable up to amount of contributions
- after that all taxable and subject to a 10% penalty if withdrawn before age 59.5
143
Rollover from traditional IRA to Roth IRA
Since taxpayer already received a deduction for the amount contributed to a traditional IRA they must include that amount in gross income in the year of the rollover (no 10% penalty)
Desirability depends on anticipated future marginal tax rate & ability to pay tax on the rollover
144
Deadline for establishing Roth IRA
Due date of tax return not including extensions (same deadline for contributions)
145
Additional tax treatment notes on Roth IRA
- contributions never deductible
- contributions are subjected to modified AGI limitations
- catch-up contributions still apply
146
Age limit for contributions to Roth IRA
None
147
Age for required Roth r
IRA distribution
None
148
Coverdell education savings account
"education IRA" or CESA
Purpose to assist low and middle income taxpayers with higher education expenses
149
Maximum annual contribution to coverdell IRA
$2000
Multiple people can contribute but total contributions to the account for the year max at $2000
150
What expenses can CESAs be used for?
Elementary, secondary, and higher education expenses
151
Can CESAs be used with education tax credits
Yes
- hope scholarship credit
- lifetime learning credit
Can both be taken while still excluding CESA distributions
152
How CESAs work
- contributions (up to $2000/ year/beneficiary) are nondeductible
- beneficiary need not be related, but must be under 18 (except in certain special needs cases)
- distributions to beneficiary are excluded from gross income provided they do not exceed qualified education expenses for the year
153
Qualified education expenses for CESAs
Direct education expenses PLUS room and board
Elementary and secondary expenses may include academic tutoring and internet access fees
154
CESA distributions in excess of qualified education expenses
Included in gross income of beneficiary and subject to a 10% penalty
155
Claiming tax credits and using CESA distributions for educational expenses
Education expenses used for the tax credits must reduce the qualified expenses considered for the CSEA distribution exclusion
156
CESA contributor phase out
MFJ $190,000 - $220,000
Others $95,000 - $110,000
Exclusion calculated by excess over lower limit / spread
157
Health savings accounts
HSA
Allow individuals to set aside money tax free to pay for qualified medical expenses
158
Tax treatment of HSAs
- funds contributed may be taken as a FOR AGI deduction
- distributions used for qualified medical expenses (NOT including health insurance premiums) are excludable from gross income
159
Who are HSAs available to
Individuals:
- covered under a high deductible health plan (HDHP)
- does not have additional covered from a non-HDHP
- not entitled to Medicare benefits (generally under 65)
- is not claimed as a dependent on another person's tax return
160
HSA distribution not used to pay for qualified medical expenses
Must be include in gross income
Subject to an additional 10% penalty (penalty waived if beneficiary/taxpayer is over 65)
161
Definition of a high-deductible health plan
Plan for an individual with (2021) annual deductible of at least $1,400 and annual out of pocket expenses (not including premiums) required to be paid not exceeding $7,000
For family coverage: $2,800 and $14,000
162
Determining annual contributions to an HSA
Determined separately for each month the plan is in effect
The lesser of:
100% of the annual HDHP deductible (minimum $1,400), or
$3,500
(Family coverage = $2,800 or $7,200)
Plus catch up contributions for ages 55 to 64
