Question about deductibility of contributions to an HSA (Health Savings Account). Would anyone who understands the 12-month "testing period" please put it into plain english for me? Here's the confusing wording from the Instructions to Form 8889:

"Last Month rule: If you are an eligible individual on the first day of the last month of your tax year (December 1 for most taxpayers), you are considered to be an eligible individual for the entire year."

I think this means that if you're "eligible" on December 1, you can contribute a full year's worth in one lump rather than the month-by-month contributions allowed under the old rule. But does that mean you can contribute at any time during the year? Or were you supposed to wait until December 1st to contribute for the months before you became eligible?

"You must remain an eligible individual during the testing period. The testing period begins with the last month of your tax year and ends on the last day of the 12th month following that month (for example, 12/1/07 - 12/31/08). If you fail to remain eligible during this period...you will have to include in income the total contributions made that would not have been made except for the last month rule."

Does that testing period only apply to the first year in which you contributed under the Last Month rule? What about subsequent years?

I thought I would contribute a full year's worth in a lump sum in January, expecting to still be eligible in December 2008. Now it sounds like I'd have to remain eligible through 2009. Can I instead contribute on a month-by-month basis during 2008 in case I lose my eligibility in 2009?

LH2004 said:There are 2 ways (that I can think of) that you accomplished that: (...) because you are treating the LLC as a "limited partnership," your wife is a "limited partner," you aren't, and she does not receive any guaranteed payment. (...) If it's the latter, then her share for SE tax purposes is the same as her share for income tax purposes, presumably notwithstanding that your joint return makes that not very relevant otherwise.Yup. That's what we rely on. Why is her share for SE tax purposes the same as her share for income tax purposes? She does not owe any SE tax at all, as far as I understand.

LH2004 said:If capital is NOT a material income-producing factor -- if the partnership is basically just a packaging of services performed entirely by you -- then her interest in the partnership may be disregarded. But I would think that that wouldn't apply if she received her partnership interest merely as community property.It is "a packaging of services performed entirely by me". Disregarded - for what purposes? And what does community property mean here?

frootmall said:SecondCor521 said:frootmall,

Thanks for the reply.

On the first issue, the husband could easily produce a canceled check and a copy of the divorce decree mandating the alimony payment. The husband is trying to debate whether or not he should remind his ex-wife to report it on her return or not. He's leaning towards not.

On the second issue, I misspoke. Where I wrote "original 2006 federal return" I meant to say "original 2006 state return". The TP originally paid the balance owing with the original 2006 state return and then ended up getting a state tax refund when he amended his returns.

Since the TP paid his 2006 state taxes in both 2006 (through withholding and estimated tax payments made during 2006) and in 2007 (through the payment made with the original state state plus any estimated payments for 2006 that were made in 2007), it gets a little more complicated.

The refund is considered to partially a refund of the taxes paid in 2006 and partially of the taxes paid in 2007. For example, let's say that the TP had $3000 withheld from his salary in 2006 and then paid $1000 when he filed his state tax return on April 15, 2007. His total tax paid for 2006 was $4000. 75% of the tax was paid during 2006 and 25% of the tax was paid during 2007. So when he filed his amended return and got a refund, 75% of the refund is considered a refund of taxes paid during 2006 and 25% of the refund is considered a refund of taxes paid during 2007.

To continue the example, let's say that he got a $400 refund. $300 of the refund is considered to be from taxes paid during 2006 and $100 is considered to be taxes paid during 2007. So the most he would have to include on line 10 of the 2007 Form 1040 as a taxable refund of previous year's taxes would be $300.

What can he deduct on Schedule A? Since he made a $1000 payment in 2007, he would ordinarily be able to deduct the $1000. But $100 of the refund is considered to be a refund of the payment he made in 2007. Since he received a refund in the same year as he paid the taxes, he should reduce his 2007 deduction by $100. In other words, he can only claim a $900 deduction for the $1000 payment made on April 15, 2007.

Since the amount that he shows as income on line 10 of his 2007 Form 1040 won't match the amount on the 1099-G, he should attach a statement to his Form 1040 showing his calculations and write "See attachment" on the line next to line 10.

See page 21 of Publciation 525.
Read the sections called "Recovery and expense in same year" and "Recovery for 2 or more years" (including the example) that begin near the bottom of the left column.

frootmall,

Thanks for the reply. That certainly looks like some hassle, but TP can deal with it.

2Cor521

roberthayden said:Two quick questions about "losses". We had a hail storm in 2006 (wonderful golf-ball-sized bastards) that seemed to do no damage to the roof. However, after the 2006-2007 winter, we discovered that it did damage the roof, causing leakage and subsequent mold issues. We worked with the insurance and they covered the repairs and remediation minus our $1000 deductible.

Do we (can we?) take the $1000 deductible as a loss or the entire payment (I presume just the uninsured part).

Second and similair. We purchased a new car in late September 2007. In December, someone hit the car in the mall parking lot and drove off. Damage was minimal (about $950 to repair) and our insurance deductible is $500. We haven't yet had the repair done but should in the next couple weeks. Annoying in general and made more-so by being a brand-new car. Assuming we can take a loss on this (and like above, I'd guess only the $500 deductible), do we take it against 2007 (when the accident occurred) or 2008 (when we'd make the repair) or does it not matter?

I do itemize.
You may be able to deduct any amount in excess of insurance reimbursement, but you must have filed a timely insurance claim. Also, note that casualty loss is subject to the 10% AGI floor. Check out Form 4684 to determine if you'll be able to deduct anything.

MikeR397 said: The only way gift tax can possibily come into play possibly (which I'm still not sure it applies) is if I make over $12,000 from any single person on the funds they let me borrow, then the tax applies to the excess funds over $12,000.
I can tell you that this is not a true statement. Even if it is determined a gift has been and it is in excess of the current year limitation, that does not mean your parents would be subject to gift tax. They would have to exceed their lifetime limitation for that to occur. They would simply need to report the excess gift. Anyway, based on what you posted, it does not appear to be a gift.


Can anyone advise on the gift tax or market rate loan issues? What else needs to be brought to my attention? Thanks!
If your parents are truly loaning you money, then, yes, they should be charging you interest - for tax purposes, the minimum rate generally being one of the AFRs (applicable federal rates), though you can certainly set your own market rate if higher. Naturally, that would mean that your parents would have taxable interest income to report. Then you might be able to deduct the interest paid as an investment expense if the funds are used for investment purposes.

Tavernous12 said:Here is a new topic that hopefully someone can help with.
My employer informed me early this week that my job is no longer needed.
Nice of him to stiff me the entire month of December and inform me in Jan.
For 2007, I was paid as a 1099 indep contractor. I am currently owed my last month's salary for December, reimbursement expenses for Oct/Nov and
commission for the ENTIRE year that he did not pay. Commission totals roughly $10K alone.

My question now is, I realize I was lied to the entire time but looking at it now I believe he wanted to pay me as a 1099 vs employee so he could get out of paying taxes. If I dispute the fact that I was a independant contractor and argue I should have been a employee with the IRS - Who is responsible for taxes?
I know I owe some taxes no matter what & have paid quarterly taxes.
Whether you are an independent contractor or an employee is a question of fact. It sounds like you both intended you to be an independent contractor; is there not a contract reflecting such? Unless his actions dictate that you were actually an employee, my guess is that you were an independent contractor. You can read up HERE to see how the IRS trains its employees to determine status and decide if you have an argument for actually being an employee. If you were an employee, then the employer will have responsibility for it's share of SS/Medicare taxes and could be subject to penalties for not properly withholding and reporting.

MikeR397 said:frootmall said:bogalusa said:Schedule C or just Form 1040, Line 21, "Other income?"

I did an AOR in 2007, in which I received several business cards. In applying for them, I declared my business to be a sole proprietorship with 0 years in business and $0 income.

Since biz credit is reported, and since I want to develop some kind of track record with respect to the sole proprietorship, I want to file a Schedule C and declare any AOR-related income (interest earned, bank bonuses, card bonuses thru CardSelection.com, etc.). Except for my full-time job, I have no other income except thru the AOR.

Is there any problem with filing a Schedule C for this income, or does it have to be on Form 1040 under "other income?"
Just because you talked some bank into issuing you a credit card that they call a business card does not make your investment activities a business.

Would you really want to pay Self-Employment taxes on your interest earned?

All of your interest payments belong on Schedule B. You will receive copies of Form 1099-INT from the banks.

All you are doing is borrowing money from banks and investing it. That is not a business.I tend to agree with this statement. For myself, the interest earned is solely for personal use (ie not reinvested in my "business" (1.5k in eBay sales in 2006) in any way). This seems the most direct way to keep the paper trail straight. I have no desire to complicate things, nor pay addittional taxes (such as double social security), and would like to keep all my income on my personal side (as it is personal anyway), becuase I have tuition and student loan deductions I can take advantage of.

Furthermore, there is no way I'm planning on attempting to deduct any "business expenses" (such as the $1,500 or so of BT transfer fees from the 80 cards I'm managing) from any of my income. Doing such would require Schedule C, and would only raise more flags for an audit, for a very small reward given the low tax bracket I'm in anyway as a student.

Critiques?Frootmail and MikeR397, thanks for the input.

I certainly have no desire to make things complicated. I am merely concerned about being consistent between a) the sole proprietorship I have declared on biz CC apps and b) any and all tax filing, not only WRT my situation in 2007 , but in 2008 and onward.

As long as I find no reason to do otherwise, I plan to keep things simple and skip Schedule C for all 2007 activities. Perhaps things are fairly simple due to the sole proprietorship.

kingofms said:I donated some house hold items on Dec 23rd 07(for which TurboTax calulated the FMV to be around $600).

I am not itemizing the deductions for tax yr 2007, but I know I will be for 2008.

Can I chose to not claim the deduction for 2007 and instead use it for 2008?

thx.
No, other than carryover situations like % of income limitations, you can only deduct in the year contributed.

so i have a full time job, a 401k, also in the army reserves....

I also own a company under my name w/ a valid state tax id number (sole proprietor (sp)) for Illinois

I rent an office, but I have not made any money this year, so all i'm paying for is the rent.

How do I write off the rent ($750/month) on my taxes? Is there a special form i need?

Thanks in advance for the help!

wdsaltman95 said:However, if you are so inclined, you could consider taking a position that the [BT] fees are investment expenses (assuming the income you are earnings is not tax-exempt) and attempt to claim as a miscellaneous deduction subject to the 2% floor. I won't be surprised if "others" here disagree, though.I say they're interest and so fully deductible as long as the proceeds are traceable to the acquisition of taxable investments.