Okay, our last session we ended up with qualified retirement plans and we're going to look at
401(k)s.
Just spoke briefly about 401(k)s, so I want to pick up there and begin to look at Page
3-21, limitations on contributions to and benefits from a qualified plan.
So limitations on the contributions that I may make to the plan, and then benefits from
a qualified plan, okay.
So we want to pick up there and begin to look at that.
As I mentioned at the end of the last session that there was two plans.
We have -- or two ways we want to look at.
We have what we call defined contribution plans, okay.
So we have defined contribution plans.
And then we have defined benefit plans.
Okay.
So those are the two we're going to look at, okay.
At the bottom of Page 3-20, I'm going to read this example and then we will go back to the
notes.
Heather is an employee who earned 30,000 during the current year.
So she's an employee who earned 30,000 during the year.
Her employer contributed 1200, or 4% of Heather's salary to a qualified retirement plan.
This plan is a defined contribution plan.
Okay.
So back to our note, defined contribution plan, contributions not to exceed the lesser
of 46,000 or 25% of the employee's compensation.
Okay.
So now let's look at the top of Page 3-21.
Allen works for an employer whose qualified retirement plan states that Allen will receive
a retirement benefit at age 65 equal to 40% of his last year's salary.
The employer must make adequate contributions to the plan to enable the stated retirement
benefit to be paid, meaning they need to make sure they put in enough, make sure it's a
sufficient amount so that when Allen retires, he will be able to receive 40% of his last
year's salary.
Okay.
This plan is the defined benefit plan.
So when we go to our notes, benefit, okay, the benefit payable amount, meaning the amount
that they will benefit, is going to be limited to the lesser of $185,000 or 100% of the average
compensation for the highest three years of employment.
Okay.
So as you can see, there's limitations on those contributions.
It doesn't matter if you're involved in a defined contribution plan where they place
a limit on the contribution that's going in or if you are participating in a defined benefit
plan where they're going to place a limitation on the benefits.
So defined contribution, they're going to limit your contributions to 46,000, or 25%
of the employee's salary.
For a defined benefit plan, they are going to put a limit on the benefits, and those
benefits being the lesser of 185,000 or 100% of the average compensation for the highest
three years of employment.
So just be aware of that.
Then our 401(k) plans, basically contributions to 401(k)s, to those, they are made pre-tax.
So the income that you put into your 401(k), it's going to be made before it's taxed, okay.
And so as far as the limitation goes on that, it's going to be limited to 150 -- I'm sorry,
15,500 of the salary, or if you are 50 or over, so 50-plus, it's 20,500.
Okay.
And so it's normally a percentage of your salary.
You say I want to contribute 15% of my salary, but the situation is, is whatever that percentage
is, that amount cannot be more than 15,500 per year, or 20,500 if you're 50 or over.
So if you look on Page 3-21, we have an example there.
Let's look at that example.
Carol is aged 48, participates in a 401(k) plan.
Carol's salary is 30,000 per year.
If she chooses to contribute 15% to the 401(k) plan, the maximum amount she may contribute
on a tax deferred basis for a 401 plan under her salary reduction agreement is 4500.
In that case, it was 15% of her 30,000, which was 4500.
Now, whatever her percent, she could have did 50% of her salary, which would have been
15,000, that still would have been okay.
She could have did -- but she couldn't have done a percentage that would have caused her
amount to exceed 15,500.
So it couldn't exceed the 15,500.
Keep in mind there's going to be a penalty, contributions in excess of the maximum allowed
amount is subject to a 10% excise tax.
So contributions in excess of that limit is going to be subject
to a 10% excise tax.
Okay.
And that's going to be imposed on the employer.
So just be aware that there is a limitation on that.
Next we want to look at low income retirement plan contribution credit, which is a saver's
credit.
They have this credit out there that you can get if you are low income and you are contributing
to a retirement plan.
So that's basically what they, you know, it's a saver's credit.
And that credit is going to be based on the taxpayer's filing status, okay, AGI, so it's
based on the filing status and the AGI.
And the credit is anywhere between -- you can get a 50% credit.
It may be a 20% credit or a 10% credit of the contribution.
Okay.
And if we look at Page 3-22, they give you more details of coming up with that credit,
but just be aware that that credit could be anywhere 50, 20 or 10% of the contribution.
It can be any of those.
50, 20 or 10% of the contribution.
Okay.
We want to look at rollovers.
On Page 3-22, we're going to look at rollovers, how do we deal with rollovers.
What if I want to take, you know, my plan and my money in one plan and put it over into
another plan?
It's still an IRA, it still meets those qualifications, I don't want to take it out, I just want to
take it from one plan to put it in another plan, okay.
And those are rollovers.
We have two type of rollovers we want to look at.
We want to look at a direct transfer, okay.
So we want to look at a direct transfer.
And then we want to look at a distribution rollover.
Okay.
So we want to look at those two rollovers.
We want to look at a distribution rollover and a direct transfer rollover.
Okay.
So I want to kind of just, you know, show it to you visually because I'm a visual person,
and so what we want to do is let's say that I have my money in an ABC 401(k), maybe it's
in an IRA, and maybe it's in some type of retirement plan.
Okay.
And so then what I do is directly have it placed into CDE 401(k), IRA, or some type
of retirement plan.
In doing this, if I do it this way, there's no penalty and there's no tax.
Here's -- oh.
And that's the preferred way to do it.
There's no penalty.
There's no tax.
It goes from one plan to the other.
I never see it.
I fill out the necessary papers for it.
But it's direct.
It goes just directly from one to the other.
Directly from one to the other, okay.
So now we want to look at a distribution rollover.
We want to look at a distribution rollover.
In this case, I have my money in ABC 401(k), IRA, or whatever the case may be.
Then I have them distribute it to me.
Then I turn around and put it in CDE 401(k), IRA, or whatever.
Okay.
So in that case, there's a situation.
First of all, when ABC gives it to me, they're required to withhold 20% tax.
20% is going to be withheld.
Okay.
And then I'm going to have 60 days to get it into CDE.
Now, the difference amount, the difference is, is that when I got it, I only received
80% because, remember, they withheld 20% and the IRA -- IRS took 20% and they withheld
it.
And so, but then when I put it back into CDE, I have to put the entire amount in there,
okay.
So let's look at example.
Let's say that we have $100,000 in ABC.
We have $100,000 in ABC.
And they're going to take out 20,000, and so I'm only going to end up getting a check
for 80,000.
Okay.
And then when I put the money in CDE, I'm going to have to put 100,000 in.
If I don't, if I only end up putting the 80 in, there's going to be a 10% penalty on an
early withdrawal.
There's going to be a 10% penalty on an early withdrawal if I don't put the full 80, so
the issue with that is that I'm going to have to come back up with $20,000 because the IRS
took 20,000 and -- I mean I could very well get it back as long as there's no penalty
when I file my tax return.
So I basically have allowed the IRS to hold that $20,000 and I'm going to have to come
up with another $20,000 to put back in my plan.
I'm going to have to come up with another $20,000 to put in my plan.
Okay.
So be careful with rollovers.
You know, you do have 60 days.
But just keep in mind when they distribute it to you, there's going to be 20%, 20% that
they're going to withhold for taxes.
Even though you may not be penalized, you end up putting it back in 60 days, but just
know you're going to have to make sure you put the whole amount back, and I think that
sometimes people may not be aware of that.
So that's why direct rollovers are so much better, because you don't ever have to worry
about it.
It's going to be direct, okay.
The last little thing we want to look at as we finish up this chapter is we want to look
at SIMPLE plans, savings incentive match plans for employees.
Savings incentive match plans for employees.
That's what that stands for.
Okay.
These are qualified plans, okay.
And they're for small businesses.
Basically we're looking at where they have -- where they don't have more than employees
or not more than -- I'm not stating this right.
Not more than 100.
So let's say employers don't have more than 100 employees.
That's the way I want to say it, and of those employees who earned $5,000 or more in the
preceding tax year.
Okay.
So they briefly talk about these SIMPLE plans and there's going to be some limitations on
those contributions, none that we're going to really cover, but just be aware they're
called SIMPLE plans, they're out there, SIMPLE IRAs, and that it's really for small companies
or small businesses where you don't have more than 100 employees and who earn 5,000 or more
in preceding tax years.
So you want to look at that, okay.
Well, that's all we have in Chapter 3.
That's all we have in Chapter 3.
And so we dealt with rental and we dealt with bad debts and then we spent a lot of time
on retirements and IRAs, Roth IRAs, SEP plans, KEOGH plans, and 401(k)s, okay.
So now we want to go over the Chapter 5.
There may be later some specific things that I want to cover in Chapter 4, but for now
I want to go on over to Chapter 5, which is Schedule A, Schedule A deductions.
Schedule A deductions are like your medical deductions, your charitable contributions
are Schedule A, and so those are those ones that appear on that.
Let's look at a Schedule A real briefly before we get started.
Okay.
We want to look at the Schedule A.
We -- it starts off with medical.
We have medical and dental expenses that are on the Schedule A. Let me get a little better
Schedule A. I kind of tore where you can see that.
We start off with medical and dental expenses, and then taxes that you paid.
So we're going to look at taxes.
And then interest is the next section that's covered on Schedule A. And then we look at
charity gifts, or your charitable contributions.
And then our casualty and theft losses are covered on Schedule A, and then we have miscellaneous
expenses, which are going to be job expenses and certain other like safe deposit box, tax
preparation fees, and then we have a section for other miscellaneous deductions.
And then we get our total.
Now, keep in mind here at the bottom they talk about if your
Line 38, which is your AGI, is more than 159,000, if you are single, head of household, if you're
married filing separate, it's 79,975.
What that means is that you could be limited to some of your Schedule A.
You may not get them all.
You're going to be limited to some of them.
So we'll do that calculation.
We have that calculation still to do and then, remember, if you're a high income taxpayer
you very well could be limited on some of your exemptions.
You may not get your full exemption amounts as well.
So just keep that in mind, a limitation also applies there.
Okay.
Let's go ahead.
You should have a handout like this that you got in your packet of information.
And as we go through, similar to what we did in the last chapter, we will fill out and
go through the notes.
We start off with our medical expenses.
When we're talking about the medical expenses that you can take, these are the ones that
are paid for yourself, your spouse, and then any of your dependents.
Okay.
And so for your spouse, yourself or any of your dependents.
Now, the thing about these is that there's a limit on them.
They're going to be limited to 7.5% of your AGI.
Okay.
So you're going to have AGI limitation, meaning I'm not going to get them all.
I'm only going to get the amount that exceeds 7.5%.
So this is the way the calculation goes.
We have our qualified medical expenses, all those that qualify,
and we're going to look at those that qualify, and then we're going to subtract from that
any insurance reimbursement.
So if we have all these expenses and we have insurance, we could very well have some insurance
reimbursement that applies to those, And that's going to give us just a subtotal
of our potential deductible ones.
And then we're going to subtract from that 7.5% of your AGI.
So you're going to take your adjusted gross income, multiply times 7.5%, then you subtract
that from your subtotal and then any excess is going to equal your deductible medical.
It's going to equal your deductible expenses.
Okay.
Basically, that's your calculation.
When we look at qualifying expenses, and the way they state it, they say anything, we'll
look at anything, but basically items that account for the diagnosis, meaning I'm going
to go get checked out, and then the cure, mitigation, treatment, and any prevention
of disease, okay.
And those items appear mainly on 5-2 when we begin to look at them, 5-2, okay.
And so they start with at the bottom of 5-1 and we go over to 5-2 on some expenses and
things like that.
So just know they look at items for, you know, whatever, you know, we're trying to cure,
we're trying to treat, we're trying to prevent or whatever the case may be.
At the top of Page 5-2, basically, therefore, amounts for all the following categories of
expenditures qualifies medical.
So prescription medicine, fees for doctors, dentists, nurses, prescription for hospital
fees, hearing aids, dentures, psychiatric care, acupuncture, birth control prescriptions,
medical insurance premiums, if I'm making those payments, all those things are considered.
Also, would you believe in that little section the IRS allowed the following unusual medical
expenses: Long distance phone calls made to psychological counselor; new siding replacing
old siding on a home because the taxpayer was allergic to mold growing on the old siding;
a wig prescribed by a psychiatrist for a taxpayer upset by her hair loss; a cell phone for a
taxpayer who may need instantaneously medical help; and then treatments provided by an Indian
medicine man.
Those were some particular ones that the IRS in the past has allowed.
Okay.
So let's look and keep going on Page -- at the bottom of Page 5-2.
We look at medical insurance.
We want to look at medical insurance.
Basically policies, we're looking at medical insurance, we're looking at policies
that pay a specific amount each day or week is not going to be deductible.
So if you have a policy, all the other ones are okay.
But if you happen to have a policy that's specific to each day or week, then it's not
going to be considered.
Okay.
Basically, medicine and drugs, what are not going to be allowed are over-the-counter
and illegal drugs, or illegally purchased.
Okay.
So if we're purchasing drugs from somewhere else, we're not going to be able to deduct
those if we're purchasing them from across -- from Canada or wherever I think the popular
place now is to get drugs.
Now, what if I have to get something done to my house?
What if, you know, I can no longer walk up steps and I have to get a elevator put in
my house?
Or what if there's just something major, a capital expenditure that I need to have done?
Now, I can deduct -- these capital expenditures that I need are deductible to the extent the
cost of me putting that in, the cost exceeds the increase in the value of my home.
So there's got to be an increase in the value of the home, and that cost has to exceed that.
So let's look at an exercise or an example on Page 5-3.
A taxpayer has a heart condition and installs an elevator in his home at a cost of $6,000.
So that's the cost of the elevator.
The value of the home is increased by $4,000 as a result of the improvement.
The taxpayer's allowed a deduction of 2,000.
So we want to take the 6,000 cost of it minus the increase in value of 4.
So the $2,000 would be a deduction.
$2,000 would be a deduction.
Okay.
Next is transportation and lodging.
If you have to travel, you know, distances for treatment, if you have to maybe stay at
a hotel, the transportation, you can deduct 19 cents a mile for that and the lodging is
going to be $50 per night, despite what you pay, but this is what you can deduct, $50
per night per person.
$50 per night per person, and I want to say they are going to limit you to two people.
So you got 19 cents per mile.
And then the thing about it is, this is a year -- as we go over other miles, we have
a splint year of miles.
Every now and then we run into when we're dealing with mileage, when we're dealing with
mileage for charitable contributions, which we'll deal with later in this chapter, when
we're dealing with mileage for employee business expenses, every now and then we'll run into
a year where we have two different amounts.
So it's 19 cents a mile, okay.
And that is from January to July.
So from January to July, it's 19 cents a mile.
And then 27 cents, and actually we want to say until June, because the 27 cents starts
on July 1st.
27 cents from June -- shoot -- July to December.
So basically for six months -- it depends on when you travel -- for six months it's
19 cents, for January to June, for the first half of the year, and then 27 cents for the
last half of the year.
And we'll run into that exact same thing when we deal with you have the ability to take
mileage for charitable contributions.
So just be aware that the mileage is split.
So $50 per night for your lodging, no meals.
So it's just the lodging that they're going to allow you.
Okay.
Let's keep going on our medical.
Okay.
Also, they mention -- we don't have any notes on that.
But on the back, on Page 5-4 they mention Health Savings Accounts, and know that those
Health Savings Accounts replace those medical savings accounts that used to be out there
and where you can take some tax deductible contributions to a medical spending account
that can be used for when you have high deductible medical insurance, there's some rules that
apply to that.
We won't cover those.
Just be aware of that on Page 5-4, the Health Savings Account.
Okay.
Next we want to move to taxes.
We can deduct taxes.
On Page 5-5, okay, when we're looking at taxes that we can deduct, we're looking at income
taxes or sales taxes, okay.
So it's either-or.
Either you're going to do the income taxes or you're going to take the sales tax option,
okay.
When we're talking about income tax, we're talking about state and local taxes that are
paid or withheld from your paycheck are deductible.
I think I'm spelling that right today.
Okay.
So if, for instance, if you work in Kansas City or if you live in Kansas City, they are
going to withhold Missouri state taxes and Kansas City earnings tax.
So in that case, you would have state and local taxes that are withheld from your paycheck.
Okay.
And so in that case, you can take a deduction for that on Schedule A in the year that they're
paid, or you can take the sales tax option.
You can use a table that they offer or you can take actual sales
tax.
That means that you would have to keep track of all your receipts and all that in order
to get the actual sales tax.
Other than that, you can take the actual or use a table, okay.
On Page 5-6, for taxpayers electing to deduct sales tax in 2008, the deduction may be calculated
by, as they say, either the actual or that sales tax table that they have.
Plus, when you're using the sales tax table, you want to look at, you know, specific separate
sales tax that you paid on a vehicle, a boat, airplanes, or building materials.
Not appliances and things, as they say, because that won't be calculated into the table.
The table is just going to consider your everyday normal things.
So it may be an option for someone who has low income, so therefore, they didn't have
a lot of state and local taxes withheld from their income, but for some reason you buy
a car or there's a situation that made you have high sales tax.
So in that instance, you're going to want to take the sales tax option instead of the
state and local income tax option.
So it's just an option that you have.
It's an option you have.
Okay.
So we want to move on to property taxes, which is your real estate taxes, okay.
They're deductible on your home and a second home.
So that's why when we were talking about when you had that home that was that rental, how
do I want to say, that was a split, then when we had that rental that was a rental split,
then we could take those other -- that mortgage and interest personal portion of that mortgage
taxes -- oh, let me get my words right -- mortgage taxes and interest on Schedule A because they
tell us that when we take our personal property taxes, our real estate taxes, we can deduct
taxes that's on our main home and a second home.
So if I have rental property that's considered to be a rental personal split, then, therefore,
that half that's personal can be treated as my second home and, therefore, I can take
it.
Okay.
I can take it.
You can take that deduction on that, even if it's paid through escrow.
Some of us pay our real estate taxes through escrow, and so that will come in on your statement
when you get your year-end statement and it will be there.
When you sell a home, be aware that there needs to be a split of taxes between the buyer
and the seller.
Between the buyer and the seller.
So just be aware that there's a split.
Personal property taxes that we can take, you can take separate personal property on
autos, boats, trailers, things like that, that you have to pay a personal property tax
on, just as long as this is going to -- long as it's based on property values.
So in order for it to be deductible, it has to be based on the value, on property values.
So make sure that is the case.
So that is our taxes.
The other thing that's not mentioned here is that you can also take -- let's say April
15th of 2008 I filed my state income tax return and I owe $500.
So when I filed my 2007 tax return on April of 2008 and I paid that, those were taxes
that I paid in 2008.
So, therefore, when I do my 2008 tax return, they're going to be deductible.
So let's move on to interest.
Interest is going to be deductible in the year that you pay it.
And that's the same with taxes as well.
They're going to be deductible in the year that it's paid, okay.
So we can take interest deduction on our residence, which is going to be mortgage, okay, and so
basically, once again, we'll get to do it on a second home, our main home and then our
second home as well.
So you can take it on two homes.
And it's going to be on the debt that you used to buy or secure your home or construct
it.
So maybe I built it.
Okay.
And that particular amount, those loans on the securing or construction of a home is
going to be loans up to $1 million.
So if you build a $1.5 million house and you borrow, you can only deduct the interest on
up to $1 million of that home.
So even though I got the $1 million home -- $1.5 million home, the interest that I'm going
to be able to deduct is going to be only up to a million.
Home equity loans.
As you know, they talk about home equity loans that we get, that interest is deductible as
well, and it's deductible only on loans up to $100,000.
Only on loans up to $100,000.
And then they talk about points as well.
Points are going to be deductible.
And if it's the points through a refinancing, those particular points are going to have
to be capitalized and amortized.
So we can't deduct those if it's on a refinancing.
Okay.
So those are our interest on your -- on your home.
So just be aware that there's a situation that if you have a very high or very expensive
home, you may not get all of that.
Let's look at an example regarding that.
Vicky's residence -- I'm on Page 5-9.
Vicky's residence has a fair market value of 300,000.
The first mortgage used to buy the house 10 years ago, 125,000.
So that meets the limitation.
This year she borrows 115,000 on a second mortgage.
So that's her home equity loan, secured by the house, to send her children to college.
The interest paid for the first -- paid on the first mortgage is fully deductible.
But interest on only 100,000 of the second mortgage is going to be deductible.
And so what she's going to have to do is only take a portion of that.
She's going to take 100,000, which is the allowed amount, divided by the 115,000, which
is her loan amount, and then multiply it times the $7,000 worth of interest attributable
to that.
So in that case she wouldn't get the full $7,000.
Also, no consumer interest is allowed.
So your interest that you have on auto loans, credit cards, all that particular interest
is not allowed.
You cannot deduct that.
Okay.
Next is on education loan.
We pay interest on our education loans, and that interest, education loan is deductible.
That is deductible.
It's deductible up to $2,500 per year.
Now, it's going to phase out for high income, it's going to be phased out for high income
taxpayers.
Okay.
And so on this particular loan, education loan, it has to be a loan that was used for
qualified expenses.
And those qualified expenses are tuition, room and board, and then any other related
education expenses.
So any other related expenses.
So keep in mind that there's a phase-out and on the top of Page 5-10 they list our phase-out
amounts for taxpayers who are single, their modified AGI 55,000 to 70, and for married
taxpayers, a modified AGI of 115,000 to 145.
So if you are within those ranges, it's going to be phased out.
And if you exceed those ranges, you cannot get a deduction for that.
You cannot get a deduction for that.
Okay.
So that's your education loan interest deduction that you can take.
So I want to stop there and what we need to do is you need to make sure you read through
Chapter 5, and as you read through Chapter 5 begin to answer those questions.
Like I said, these deals with itemized deductions, and so next time we're going to pick up with
the investment interest and look at that calculation, and we probably will get a chance to -- I
believe to finish the chapter.
So make sure that you read through Chapter 5 and look at Schedule A.
We'll do a couple little exercises and problems for Schedule A.
So we will stop there at education loan interest, and we finished Chapter 3, so I'm expecting
some multiple choice questions shortly on that, and that's it.
(Music).