Tax final-Deductions: employee and self-employed related exp

Typical qualified retirement plans

1. 401K 2. Individual Retirement Accounts (IRA) 3. plans available to self-employed individuals

Expenses subject to the 2% floor

1. All 212 exp, except exp of producing rent and royalty income 2. All unreimbursed employee exp (after 50% reduction) except moving exp 3. Professional dues and subscriptions 4. Union dues and work uniforms 5. Employment related education exp 6. Malpractice insurance premiums 7. Exp of job hunting 8. Home office exp of an employee or outside sales person 9. Legal, accounting and tax return preparation fees 10. Hobby exp (up to hobby income) 11. Investment exp 12. Custodial fees relating to income-producing property or a traditional IRA or a Keogh plan 13. Any fees paid to collect interest or dividends 14. Appraisal fees establishing a casualty loss or charitable contribution

Office in the home deduction calculation

1. Direct exp benefit only the business part of the home and are deductible in full. 2. Indirect exp are allocated based on the floor space involved-divide the business area by the total home area to arrive at the business percentage.

Entertainment and meal exp cutback-who is not covered (EXCEPTIONS)

1. Full value of meals or entertainment is included in the compensation 2. Meals and entertainment in a subsidized eating facility or where the de minimis fringe benefit rule is met. 3. Employee paid recreational activities for employees (Christmas party)

Factors indicating employee-employer relationship

1. Furnishing of tools or equipment and a place to work 2. Providing support services including the hiring of assistants to help do the work 3. Making training available to provide needed job skills 4. Allowing participation in various workplace fringe benefits 5. Paying for services based on time rather the task performed

Independent contractors

1. Have unreimbursed business exp. 2. significant investment in tools and work facilities 3. less permanency in their business relationship 4. anticipate a profit from their work 5. make their services available to the relevant marketplace 6. paid a flat fee on a per job basis

Classification of employee exp

1. If the employee exp are reimbursed by the employer under an accountable plan, they are not reported by the employee at all, as treating the exp as deductions for AGI. 2. If the exp are reimbursed under a non accountable plan or are not reimbursed at all, then they are classified as deductions from AGI and can be claimed only if the employee taxpayer itemizes. 3. Exception: moving exp and the employment related exp of a qualified performing artist are deductions for AGI

Miscellaneous itemized deductions not subject to the 2% floor

1. Impairment related work expenses of handicapped individuals 2. Gambling losses to the extent of gambling winnings 3. Certain terminated annuity payments

Maximum deduction allowed for education exp

1. Max allowed: 4000 Single: 0-65,000, Married: 0-130,000 2. Max allowed: 2000 Single: 65,001-80,000, Married: 130,001-160,000 No deduction if over the limit-fall off the cliff

moving expenses-what is not included

1. New car tags and driver's licenses 2. Loss on the sale of a residence or penalty for breaking a lease. 3. Forfeiture of security deposits and loss from disposing of club membership. 4. Pre-move house-hunting expenses 5. Temporary living expenses 6. Cost of moving servants

moving expenses-how treated

1. Qualified moving exp paid by employer: not reported a gross income of employee 2. Non-qualified moving exp paid by employer: included in the employee's gross income-not deductible 3. Qualified and non-reimbursed moving exp are deductions for AGI for self-employed.

Higher education tuition deduction

1. Qualified tuition exp include whatever is required for the enrollment at the school. Student activity fee, books, room and board are NOT included. 2. The exp need not be employment related. 3. The deduction is available for spouse, dependent who is an eligible student 4. Not available for married person who file separate returns 5. The deduction must be coordinated with other education provisions (American opportunity and lifetime learning credits). No deduction is allowed for a taxpayer who qualified as a dependent. 6. The deduction is FOR AGI classfication avoids the 2% of AGI floor.

Contributions to retirement accounts tax advantages

1. the deductibility of contributions. Individuals are not taxed on these contributions until they are distributed. 2. Income earned on the contributions is not subject to tax until distributed (thus growing at a tax free rate of return) 3. Employer contributions to and benefits payable under qualified plans generally are not subject to FICA and FUTA taxes.

Entertainment and meal expenses-80% deductible

80% of the costs is allowed as a deduction for employees: 1. Certain air transportation employees 2. Interstate truck and bus drivers 3. Certain railroad employees 4. Certain merchant mariners

A limited deduction approach

A deduction FOR AGI is allowed for qualified tuition and related exp involving higher education. The deduction is the lesser of: 1. The qualifying amt spent 2. The maximum amt allowed

Nonaccountable plans

A non-accountable plan is one in which an adequate accounting or return of excess amts, or both, is not required. All reimbursements of exp are reported in full as wages on the employee's form W-2

Deemed substantiation

A per diem allowance, a flat dollar amt per day of business travel. The amt of exp that is deemed substantiated is equal to the LESSER of the per diem allowance OR the amt of the Federal per diem rate.

Travel Expenses

An ITEMIZED DEDUCTION is allowed for unreimbursed travel expenses related to a taxpayer's employment. Travel exp include transportation exp and meals and lodging while away from home in the pursuit of a trade or business. A deduction for travel exp is available only if the taxpayer is away from home. Travel exp also include reasonable laundry and incidental exp.

Accountable Plans-in general

An accountable plan requires the employee to satisfy two requirements: 1. Adequately account for the exp. An employee renders an adequate accounting by submitting a record, with receipts and other substantiation, to the employer. 2. Return any excess reimbursement or allowance. An "excess reimbursement or allowance" is any amt that the employee does not adequately account for as an ordinary and necessary business exp.

Education Expenses-General requirement

An employee can deduct exp incurred for education (edu exp) as ordinary and necessary business exp provided the exp are incurred for either of two reasons: 1. To maintain or improve exsiting skills required in the present job. 2. To meet the express requirements of the employer or the requirements imposed by law to retain his or her employment status.

Transportation Expenses

An employee may deduct unreimbursed employment-related transportation exp as an itemized deduction from AGI. Transportation exp include ONLY the cost of transporting the employee from one place to another in the course of employment when the employee is NOT away from home in travel status. (taxi fares, automobile exp, tolls, parking)

Time test

An employee must be employed on a full time basis at the new location for 39 weeks in the 12 month period following the move. If self-employed, s/he must work in the new location for 78 weeks during the next 2 years. The first 39 weeks must be in the first 12 months.

Limitations on business meals

Any business meal is deductible only if the following are true: 1. The meal is directly related to or associated with the active conduct of a trade of business 2. The exp is not lavish or extravagant under the circumstance 3. The taxpayer is present at the meal A business meal with a business associate or customer is not deductible unless business is discussed before, during, or after the meal. Example 37

Office in the home deduction carry forward

Any disallowed home office exp are carried forward and used in future years subject to the same limitations

Miscellaneous itemized deductions

Certain miscellaneous itemized deductions, including most unreimbursed employee business, are aggregated and then reduced by 2% of AGI.

Commuting expenses

Commuting between home and one's place of employment is personal, nondeductable exp.

Education of specific items

Education exp include books, tuition, typing, and transportation (from office to night school) and travel (meals and lodging while away from home at summer school)

Office in the home limitations

Employees and self-employed individuals are not allowed a deduction for office in the home exp unless a portion of the residence is used exclusively on a regular basis as either of the following: 1. The principal place of business for any trade of business of the taxpayer 2. A place of business used by clients, patients, or customers Employees must meet an additional test: The use must be for the convenience of the employer rather than merely being "appropriate and helpful"

Individual Retirement Accounts (IRAs)

Employees not covered by another qualified plan can establish their own tax deductible IRAs. In 2011, the contribution ceiling is the smaller of 5,000(or 10,000 for spousal IRAs) or 100% of compensation. An individual who attains the age of 50 by the end of the tax year can make additional catch up IRA contributions of 1,000 for years after 2005.

Commuting expenses-exceptions

Exceptions: 1. An employee who uses an automobile to transport heavy tools to work and who otherwise would not drive to work is allowed a deduction, but only for the additional costs incurred to transport the work implements 2. Employee who has a second job. The exp of getting from one job to another are deductible. The deduction is based on the distance between jobs. Example 5

Principal place of business

Follow requirements: 1. The office is used by the taxpayer to conduct administrative or management activities of a trade or business 2. There is no other fixed location of the trade or business where the taxpayer conducts these activities

Restrictions on travel exp

For travel exp to be deductible, a convention must be directly related to the taxpayer's trade or business. This requirement allows deductions for costs (other than travel, meals and entertainment) of renting or using videotaped material related to business. Example 18 The accompaniment by spouse or dependent must serve a bona fide business purpose, and the exp must be otherwise deductible. Travel as a form of education is not deductible. However, if qualifies as a education deduction, the travel involved is allowed.

Combined business and pleasure travel-Domestic

If the business/pleasure trip is from one point in the U.S. to another point in the U.S., the transportation exp are deductible only if the trip is primarily business. If the trip is primarily for pleasure, no transportation exp qualify as a deduction. Meals lodging and other exp are allocated between business and personal days. Example 22

Education Expenses-NOT deductible

If the education is for either of the following purpose 1. To meet the minimum education standards for qualification in the taxpayer's existing job 2. To qualify the taxpayer for a new trade of business CPA, professional qualification exams are not deductible.

IRAs Phaseout

If the taxpayer is an active participant in a qualified plan, the traditional IRA deduction limitation is phased out proportionately between certain AGI ranges. Single and head of H, phaseout begin: 56,000, ends, 66,000 Example 49

Commuting expenses-things to remember

If the taxpayer is required to incur a transportation exp to travel between work stations, that exp is deductible Example 6 Likewise, the commuting costs from home to a temporary work station and from the temporary work station to home are deductible. Reasonable travel cost between general working area and a temporary station outside that area is deductible. Example 7 customarily works on several temporary assignments: localized area may become regular place of employment that the commuting exp is not deductible. If a taxpayer has an office in the home that qualifies as a principal place of business, the transportation between home and various work locations is not a commuting exp.

Moving expenses

Moving exp are deductible for moves in connection with the commencement of work at new principal place of work. Two bests test: distance and time

Entertainment and meal expenses

Only 50% of meal and entertainment exp are allowed as a deduction. Applies to both self-employed and employee, applies to the one who really pays for the meals and entertainment. Example 32

Treatment of moving expenses-what is included

Qualified moving expenses include reasonable exp of: 1. Moving household goods and personal effects 2. Traveling from the former residence to the new place of residence Traveling includes lodging, but NOT meals, for the taxpayer and members of the household. Can elect to use automatic mileage method or actual auto exp. In this case, moving exp mileage is limited in 2011 to 19 cents per mile for each car. Example 27 The moving exp deductions is also allowed if an individual is unemployed before obtaining employment in a new area.

Self employee Versus employed

Self employed persons do not have to be included in various fringe benefit programs and retirement plans. FICA and FUTA payroll costs are avoided. Exp of self-employed taxpayers are classified as deductions for AGI, and are reported on Schedule C (profit or loss from business) of Form 1040. With the exception of reimbursement under an accountable plan. Exp for employees are deductions from AGI, reported on Form 2106. When one taxpayer holds multiple jobs, it is possible to have dual status as both an employee and an independent contractor

Temporary assignment

The employee must be away from home for a temporary period. Temporary indicates that the assignment's termination is expected within a reasonably short period of time. Example 12,13 A taxpayer shall not be treated as temporarily away from home during any period of employment if such period exceeds 1 year

Office in the home deduction ceiling

The home office exp cannot exceed: The gross income from the business LESS all other business exp attributable to the activity. * The home office exp that are allowed as itemized deductions anyway (mortgage interest and real estate taxes) must be deducted first. All home office exp of an employee are miscellaneous itemized deduction, except those that qualify as other personal itemized deductions. Home office exp for self-employed is FOR AGI Example 44

Accountable plans-substantiation

The records should contain the following information: 1. The amt of the exp. 2. The time and place of travel or entertainment. 3. The business purpose of the exp 4. The business relationship of the taxpayer to the person entertained (or receiving the gift) What, When, Where, Why, How Documentary evidence is required to support any expenditure for lodging while traveling away from home and for any other exp of 75 or more.

Determining the tax home

The tax home is the area in which the taxpayer derives his or her source of income. Example 14 When has more than 1 place of business or work, The main one is considered to be the tax home. This is determined by considering the time spent, the level of activity involved, and the income earned at each job. Example 15

Distance test

The taxpayer's new job must be at least 50 miles farther from the taxpayer's old residence than the old residence was from the former place of employment. Example 26

IRAs floors

There is a 200 floor on the IRA deduction limitation for individuals whose AGI is not above the phaseout range Most homemakers may take a full 5,000 deduction regardless of the participation status of their spouse, unless the couple has AGI above 169,000. If their AGI is above 169000, the phaseout of the deduction begins at 169000 and ends at 179000.

Employee expenses-in general

Transportation Travel Moving Education Entertainment Other Not limited to employee

Entertainment and meal exp-who is covered

Transportation exp are not affected by the cutback rule Example 33 The cutback only applies to taxes and tips relating to meals and entertainment. Cover charges, parking fees at an entertainment location, and room rental fees for a meal or cocktail party are also subject to the 50% cutback.

Combined business and pleasure travel- Foreign Travel

Transportation exp must be allocated between business and personal unless: 1. the taxpayer is away from home for 7 days or less OR 2. less than 25% of the time was for personal purpose Example 24, 25

Nonaccountable plans-unreimbursed employee exp

Unreimbursed employee exp are treated in a straight forward manner: Meals and entertainment exp are subject to the 50% Total unreimbursed employee business exp are usually reported as miscellaneous itemized deduction subject to the 2% of AGI floor.

Away from home requirement

Whether the employee is away from home overnight. Overnight need not be a 24 hour period, but it must be a period substantially longer than an ordinary day's work and must require rest. A one-day business trip is not travel status, and meals and lodging are not deductible.

Exclusive use

that part of the home must be used solely for business purpose. An exception allows mixed use (both business and personal) of the home if a licensed day-care business is involved

Statutory employees

treated as employees: certain drivers, life insurance sales agents, home workers, other sales persons.. These employees are allowed to claim their business related exp as deductions for AGI by using schedule C.