r1-m3/4 Flashcards
Where is net income from self employment computed?
Schedule C
-net income from sole proprietorship is then transferred to Form 1040 as one amount
Gross Income
Schedule C
-cash = amount recieved
-property = fair market value
-cancellation of debt
Expenses
Schedule C
- Cost of goods
- salaries and commissions paid to others
- state and local business taxes paid
- office expenses
- actual automobile expenses
- business meal expenses at 50%
- Deprectiation of assets
- Employee benefits
The business interest expense deduction is limited to the sum of:
-business interest income
-30% of the adjusted taxable income (ATI)
-floor plan financing interest expense
What are some nondeductible expenses on a Schedule C?
*salaries paid to the sole proprietor
*federal income tax
*personal portion of: automobile, travel, meal expenses, interest expense
*bad debt expense of a cash basis taxpayer
*charitable contributions: report as itemized deduction on Schedule A
What is adjusted taxable income?
Taxable business income for the year excluding all interest income and interest expense.
What are the two federal taxes on net business income?
- income tax
- self employment (SE) tax
Self employment tax
-92.35% of self employment income
-15,3% of ^
What is the formula for rental income or loss?
Gross rental income
+prepaid rental income
+rent cancellation payment
+improvement in lieu of rent
-rental expenses
=Net income or loss
*Reported on schedule E
What if the residence is rented for fewer than 15 days per year?
it is treated as a personal residence.
-rental income is excluded from income
-mortgage interest and real estate taxes are allowed as itemized deductions
-depreciation, utilities, repairs are not deductible
How is rental property income treated?
Includes income recieved from property in gross income and deducts all expenses allocated to the rental property on schedule E form 1040.
What are some common separately stated items?
Flow Through
-rental real estate income (loss)
-interest income
-dividend income
-royalties
-net short term capital gain (loss)
-charitable contributions
Guaranteed Payments to Partners
Compensation paid to a partner, either for services rendered or for the use of capital, that are determined without regard to the partnerships income.
-payments are a business expense that reduces partnership ordinary income
-they flow through as a separately stated item of income on the recipient partners schedule k-1
Are guaranteed payments subject to a self employment tax?
flow through
Yes, and therfore subject to a self employment (social security and medicare) tax in addition to income tax
Adjustments for AGI include:
-Educator expenses
-Traditional IRA contribution deduction
-Student loan interest deduction
-Health savings account deduction
-moving expenses
-deductible part of self employment tax
-self employment health insurance deduction
etc
How much can an eligible educator deduct?
$300 qualified expenses paid
$600 if filing jointly and spouse in an educator
Qualified expenses must be reduced by the following:
Educator expenses
-excludable US series EE and Savings Bonds interest from Form 8815
-Non taxable qualified state tuition program earnings
-nontaxable earnings from Coverdell education savings accounts
-any reimbursements received for these expenses that were not reported on for W-2
The three types of individual retirement accounts (IRA) are:
-deductible traditional IRA
-Roth IRA
-nondeductible traditional IRA
The annual maximum contribution to IRAs is limited to the lesser of:
Unmarried
Under 50: $6500 or earned income
Over 50: $7500 or earned income
The annual maximum contribution to IRAs is limited to the lesser of:
Marries
Under 50: $1300 or earned income
Over 50: $1500 or earned income
Earned income includes:
-salary and wages
-commissions
-alimony
-net earnings from self employment
-non tuition fellowship and stipend payments treated as taxable compensation
Earned income does not include:
-interest and dividends
-Annuity income
-Pensions
-Alimony
The adjustment for education loan interest is limited to
$2500
-all interest payments qualify for the adjustment
-deduction is completely phased out at AGI equal to or more than 90k
What do health savings accounts do?
Health savings accounts (HSAs) enable workers with high deductible health insurance plans to make pretax contributions of up to $3,850 to cover health care costs. (PRETAX)
Excludable withdrawals (distributions)
HSA
any amount paid or distributed out of an HSA that is used exclusively to pay the qualified medical expenses of any account beneficiary is not includable in gross income.
A high deductible plan has at least
$1500 annual deductible for self only coverage and $3000 annual deductible for family coverage
Out of pocket limitation
Annual out of pocket expenses paid under the plan must be limited to:
$7500 for self only converge plans and $15000 for family
Archer medical savings account (MSA) contributions
-similar to IRAs but used for health care
-used if HSA is unavailable
-no new accounts after 2007
-must be used in connection with a high deductible plan
-max out of pocket is $5300/$9650
What are the two conditions that would cause you not to have a deductible IRA?
- you are rich
- already in a pension plan
How are earnings taxed?
Deductible Traditional IRA
Taxed when withdrawn
How are distributions taxed?
Deductible Traditional IRA
taxable as ordinay income
How is a Roth IRA taxed?
-contributions are not deductible when made
-earnings accumulated tax free
-no deduction is allowed, so distributions of principa is tax free (withrdrawn)
Why would someone use the Nondeductible traditional IRA?
They fail to qualify for the others by making too much money or already in a 401k
-want to save money for retirement and have it accumulate tax free
-non deductible
How are distributions from a nondeductible traditional IRA taxed?
Taxable: earnings as ordinary income
Nontaxable: Principal contributions (because not deducted when contributed)
What are the adjustments to AGI when self employed?
-deductible part of self employment tax
-self-employment health insurance deduction
-deduction for contributions to certain self employed retirement plans
What are the two taxes for a self employed taxpayer with that has net business income?
income tax and self employment (social security and Medicare) tax
**50% of self employment tax is deducted to arrive at AGI
How much can self employed individuals deduct for health insurance premiums?
All of the health insurance premiums paid for the taxpayer, spouse, and dependents
Most common self employment retirement plans are:
-Simplified employee pension SEP IRAs
-Savings incentive match plan for employees (SIMPLE) IRA
-Solo 401k
SEP IRA
Allowed to deduct the LESSOR of
-20% of self employment net income reduced by one half of self employment tax deduction or
-$66,000
Simple IRA
Allowed to deduct the LESSOR of
-100% of self employment net income reduced by one half of self employment tax deduction or
-$1550
Solo 401k
Allowed to deduct the LESSOR of
- 20% of self employment income reduced by one half of self employment tax deduction or
-$66,000
What are things generally not deductible on the Schedule C?
Personal expenses
Business meals are deductible up to
Schedule C
50%
Self employment tax is
Schedule C
one half deductible from gross income as an adjustment
SEP IRA deduction is the lessor of:
$69,000
or
20% of net earnings
What is the max amount of AGI that would preclude you from deducting student loan expense?
$110,000
Can a taxpayer be a dependent and still deduct student loan interest expense?
No
