Accounting methods: unsophisticated taxpayers use accrual accounting A.
Accrual Method: unearned income: received service income: provided advance payments: can be deferred accrued expenses: claimed when liability becomes certain B.
Health Savings Accounts – Annual contributions are limited to ,900 for singles, and ,850 for families.
Distributions must be used qualified medical expenses (health insurance premiums are not qualified) – must only be covered under a high-deductible health plan and may not be entitled to benefits under Medicare.
Cash Method: Prepaid expenses are prorated for cash basis taxpayers if recognition of the total expense in the current year would distort taxable income. Hybrid Method: required for taxpayers where sales of inventory constitute a substantial source of income taxable bonds: amortize and deduct tax exempt bonds: amortize, but no deduction Interest is accrued on bonds purchased between interest dates, and the portion earned prior to the purchase is treated as a return of capital. Bond Discounts: Cash basis taxpayers can defer the original issue discount on US savings bonds (series EE bonds — not series H) until maturity Individuals can elect to amortize discounts on bonds purchased in the secondary market (straight-line method is allowed). the owner of the bond is at least 24 years old The interest is excluded in proportion to the educational expenses of the taxpayer, spouse, or dependent phased-out for 2008 when modified AGI exceeds ,100 (0,650) for single (filing joint) status VI.
Roth 401(k) Plans: Beginning in 2007, after-tax dollars are contributed, all distributions are tax-exempt E.Deductible for taxpayer, spouse, and dependent (gross income and joint return tests do not apply for this purpose) Medical expenses is the only deduction allowed for payments made on behalf of someone other than the taxpayer * Uninsured expenses above 7.5% of AGI is deductible * Deductible items include dental, medical, and hospital care; prescription drugs; equipment such as wheelchairs, crutches, eyeglasses, hearing aids, contacts; transportation for medical care; medical insurance premiums (for insurance covering the costs of prescription drugs are deductible; for insurance against loss of earnings, limbs, sight, hearing and disability are not deductible); qualified long-term care expenses and insurance; alcohol and drug rehabilitation; weight-reduction programs if as part of medical treatment.* Non-deductable: funeral, burial, and cremation expenses; nonprescription drugs (except insulin); bottled water; toiletries; cosmetics; health spas; stop-smoking clinics; unnecessary cosmetic surgery.Excess contributions are subject to a 6% excise tax each year until withdrawn – Deduction phased out proportionately over a ,000 range (,000 if married filing joint) based on AGI.– Combined contributions to all IRAs cannot exceed limits – Phase-out with AGI over 9,000 for married-joint (a ,000 range) or 1,000 for single taxpayers (a ,000 range) C.