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5. Charitable
Contributions 6. Did You Repay
Income You Originally Thought Was Yours? 7. Did You Lose Money
in an IRA? 8. Making Gifts to
Children 9. Did Your Employer
Grant You a Stock Option? 10. How Can You Save
Money for Health Care? A
Health Savings Account (HSA) works very much like an IRA, except that the
money you contribute is used to pay health care costs. Participants enroll in
a relatively inexpensive high-deductible insurance plan, then
open a tax-deductible savings account to cover current and future medical
expenses. The money deposited, as well as the earnings, is tax-deferred.
Participants can later withdraw the money to cover qualified medical expenses
tax-free. For
2004, a high-deductible insurance plan is a health plan with a minimum
deductible of $1,000 for self-coverage and $2,000 for family coverage. The
maximum out-of-pocket expenses for allowed costs must be no more than $5,000
for self-coverage and no more than $10,000 for family coverage. Annual
contribution limits for 2004 are capped at the deductible portion of the
high-deductible insurance plan or $2,600 for an individual ($5,150 for a
family), whichever amount is less. Here’s
how it works. Obtain coverage under a qualified high-deductible health
insurance plan. Each year, deposit the money you saved on lower premiums into
the tax-favored HSA. Use the savings account to pay for your deductible
portion with tax-free dollars. Once you meet the deductible, the insurance
starts paying for your medical expenses. Everyone
(not just self-employed taxpayers or small business owners) with a qualified
high-deductible insurance plan is eligible for a tax-deductible HSA. Payments
You Receive From a Settlement Are Taxable Unless
they’re a result of personal physical injury or physical sickness Settlements
resulting from a lawsuit can arise for a number of reasons. Since Sell
It on eBay! What
most people don’t realize is that when they sell property at a profit,
the gain is taxable. Sales on eBay have skyrocketed
to over $24 billion in 2003 and millions of taxpayers are earning good money
selling items they either make or just don’t want any longer. If
you’re one of them, you need to decide if your activity is a business
or just a hobby. In any event, any profits are taxable, and you must report
them on your tax return. For
most taxpayers who sell on eBay, this is not an
issue. Often items are sold for less than what was originally paid for them.
If this is the case, losses on the sale of personal use property are not
deductible and are not required to be reported. Unfortunately, personal
losses cannot be used to offset any profits you may have. Charitable
Contributions Not
all charitable contributions are made in cash. The rules state that when noncash property is donated to a charity, you are
generally allowed to deduct the fair market value of that property.
Determining the fair market value of assets can sometimes be tricky. The
fair market value of stocks and bonds with an active market is the average
price between highest and lowest selling price on the valuation date. If you
donate your car, you may also claim the fair market value. The fair market
value takes into account many factors, including the vehicle’s
condition. The fair market value may differ substantially from the
vehicle’s “Blue Book” value. If
your contributions entitle you to merchandise, goods, or services that
include admission to a charity ball, banquet, theatrical performance, or
sporting event, you can only deduct the amount that exceeds the fair market
value of the benefit received. For
any contribution of $250 or more, you can claim a deduction only if you
obtain a written acknowledgment from the qualified organization. You must
obtain this written acknowledgement by the date you file your tax return or
the due date of the return, whichever is earlier. If you donate property valued
at more than $5,000 you must obtain a qualified written appraisal. You cannot
deduct the value of your time or services, personal expenses, appraisal fees,
or contributions to specific individuals. Did You Repay Income
You Originally Thought Was Yours? Often
taxpayers properly include wages, disability benefits, or other income on
their tax return only to find out later that they did not have an
unrestricted right to the income. If this happens to you, you’ll have
to repay the income, usually in a later year. The IRS will allow a deduction
or tax credit, depending on how much you paid back within the tax year. If
the repayment was $3,000 or less, the amount is generally deducted as a
miscellaneous itemized deduction on Schedule A, Itemized Deductions. The
total of all miscellaneous itemized deductions must exceed 2% of your total
adjusted gross income before any tax benefit is derived. If
the repayment was more than $3,000, you have two choices. You can either
deduct the total amount you repaid as a miscellaneous itemized deduction not
subject to 2%, or you may choose a tax credit for the year of repayment equal
to the difference in the tax you paid on the income and the amount you would
have paid if the income was not included on your tax return in the prior
year. Did You Lose Money in
an IRA? Investors
have been losing money in the stock market and other investments for the past
several years. What recourse do you have if the money you’ve invested
for your retirement evaporates? The IRS may allow a loss on your tax return. To
qualify for the deduction, you must have basis in your IRA. Your basis is
equal to the nondeductible contributions to your Traditional IRA, or the
contributions you have made to your Roth IRA. The loss is only deductible if
you withdraw all your IRA accounts and the amount you receive is less than
your basis. Traditional IRAs and Roth IRAs are treated separately. This means
that you must withdraw the funds from all of your Traditional IRAs before any
loss on your Traditional IRAs is allowed. The same is true for your Roth
IRAs. The
loss is deducted on Schedule A, Itemized Deductions, as a miscellaneous
deduction. Before you derive any tax benefit, the total of all your
miscellaneous itemized deductions must exceed 2% of your total adjusted gross
income. Making Gifts to
Children Parents
give their children gifts all the time. Did you ever consider the tax
consequences of a gift prior to giving it? In most cases, there are none.
However, if income-producing property is given as a gift, the tax burden
shifts to the donee. If the donee
is a child under the age of 14 and has unearned or investment income of more
than $1,500, special rules apply. What
is commonly referred to as the “kiddie tax
rules” make an under-14 child’s unearned or investment income
taxable at the parent’s highest marginal rate, not at the child’s
tax rate. The unearned income of a child includes
income produced by property given as a gift to the child, including gifts
given by grandparents or any other person and gifts made under the Uniform
Gifts to Minors Act (UGMA) or under the Uniform Transfer to Minors Act
(UTMA), whether or not that income is distributed to the child. In most
cases, the income from these gifts is in the form of interest and is taxable
to the child at the parent’s higher rate. Types
of gifts that a child might receive that generate investment income
potentially subject to the kiddie tax are U.S.
savings bonds, cash (if placed in, for instance, a savings account bearing
taxable interest), and shares of stock. Did Your Employer
Grant You a Stock Option? A
common method of compensating employees is to grant them an option to
purchase stock in the company at a price lower than fair market value. While
this seems like a great bargain, it may bring unexpected tax consequences. Generally,
no income results upon grant or exercise of an incentive stock option (ISO)
or an option granted under an employee stock purchase plan (ESPP). However,
once the stock is purchased under an ISO, the taxpayer may be subject to
alternative minimum tax (AMT). This is because the IRS requires taxpayers to
include the difference between the exercise price and the fair market value
of the stock in the computation of AMT. This is what often produces
unexpected results. If the stock is purchased through the exercise and sold
in the same tax year, AMT is not an issue; however, the fair market value of
the stock, less the option price, is included in the employee’s W-2. |
Archives
Quik Tips 1. Convert nondeductible interest expense on credit cards and automobile
loans into deductible home mortgage interest. A deduction for the interest on
a home equity loan or line of credit is allowed if you itemized your
deductions. The interest on a home equity loan is deductible no matter how
the loan money is used provided the loan is not over $100,000. Interest on a
home equity loan in excess of $100,000 is not deductible. 2. If you receive a notice from the IRS, don’t
assume that it is correct and automatically pay the amount shown on the
notice. Many IRS notices just require you to give the IRS additional
information to show why you do not owe the additional taxes or penalties.
Always consult your tax preparer when you receive
notices from the IRS. 3. If you receive a lump-sum
payment of social security benefits for the current year and prior years in
one payment, you may be able to reduce the taxable amount of social security.
This is done by making a special election that allows you to determine the
amount of the social security that would have been taxable in that prior year
instead of all in the current year. 4. Deduct the loan interest on your RV, camper, or
even your boat. You are allowed to deduct mortgage interest on your primary
residence and one other residence. The definition of what constitutes a
residence is very broad and includes RV’s, campers, and boats as long
as they have cooking, toilet, and sleeping facilities. |
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