review part4.docx - HEALTH SAVINGS ACCOUNTS(FOR AGI concept...

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HEALTH SAVINGS ACCOUNTS (FOR AGI) - concept is to encourage greater insurance coverage by combining high o deductible insurance with tax-preferred accounts - can deduct contributions for AGI; must be used for medical payments or penalty if withdrawn prior to age 65 - contributions limited to deductible portion of insurance or set amount - eligibility are those not covered under a low-deductible plan TAXES (Sec. 164) Problem 9: Why does the Code allow a deduction for the types of taxes in Sec. 164? Answer: Allow when have multiple tax burden Problem 10: Do all taxpayers get this deduction? Answer: Only people who itemize - All taxes are not deductible (no federal taxes are listed in Sec. 164) - Sec. 164(a)(1) allows deduction of property taxes o on primary home and/or vacation home o must distinguish property taxes from assessments Example 1: Tom pays $800 in property taxes in current year. He also has a special assessment of $300 to pay for expanding the sewer lines in his growing subdivision. The $300 assessment is nondeductible. - Most common type of personal property tax (Sec. 164(a)(2)) in Minnesota is the motor vehicle tax o Tax is on car, NOT on licenses, fees and registration Problem 11: Shelly pays $25/year to city to register her dog. Can Shelly deduct this amount under Sec. 164? Answer: No, cannot be registration - Election to deduct sales tax INTEREST (SEC. 163) - There are more than 6 different types of interest in the Code 1) Personal Interest (Sec. 163(h)(1)) i. not deductible ii. defined by exclusion (not personal interest if falls into any of the other categories) iii. examples: personal car, household goods, and vacation loans 2) Trade/Business Interest (Sec. 162)
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i. fully deductible ii. examples: borrowing to start, expand, etc business 3) Investment Interest (Sec. 163(d)) i. only deductible to extent of net investment income ii. examples : loans to buy stocks, bonds iii. any unused interest deduction may be carried over indefinitely Problem 12: Vicki opened a margin account with her broker to invest in stocks. She paid $800 of interest this year. She earned $600 in dividends and another $100 of interest in her savings & checking accounts. What is the amount of deductible interest Vicki has this year? Answer: $700. The remaining $100 can be carried over to the next year >> dividends $600 + interest $100 = expense $700 4) Student Loan Interest (Sec. 221) i. provides for deduction for AGI ii. maximum deduction $2,500/year iii. phased out completely if income > $80,000 ($160,000 joint) iv. used to be personal interest 5) Tax-Exempt Interest (Sec. 265) i. no deduction on indebtedness to purchase tax- exempt obligations 6) Qualified Residence Interest (Sec. 163(h)(3)(a)) i. fully deductible (on up to $1 million of mortgage debt) ii. under (h)(5) can be applied to both a principal residence and to a second residence - Home Equity Loans Problem 13: Assume Wendy has a home she purchased 10 years ago with the following characteristics: Cost $200,000 FMV 300,000 Current mortgage 140,000 Wendy takes out a $35,000 home equity loan and uses the proceeds to buy a new car, some new appliances and to take a European vacation. This year, Wendy pays $1,500 in interest. How much, if any, may she deduct?
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