401(k)s. Just spoke briefly about 401(k)s, so I want to pick up there and begin to look

at Page 3-21, limitations on contributions to and benefits from a qualified plan. So

limitations on the contributions that I may make to the plan, and then benefits from a

qualified plan, okay. So we want to pick up there and begin to look

at that. As I mentioned at the end of the last session that there was two plans. We

have -- or two ways we want to look at. We have what we call defined contribution plans,

okay. So we have defined contribution plans. And then we have defined benefit plans.

Okay. So those are the two we're going to look at, okay. At the bottom of Page 3-20,

I'm going to read this example and then we will go back to the notes. Heather is an employee

who earned 30,000 during the current year. So she's an employee who earned 30,000 during

the year. Her employer contributed 1200, or 4% of Heather's salary to a qualified retirement

plan. This plan is a defined contribution plan.

Okay. So back to our note, defined contribution plan, contributions not to exceed the lesser

of 46,000 or 25% of the employee's compensation. Okay. So now let's look at the top of Page

3-21. Allen works for an employer whose qualified retirement plan states that Allen will receive

a retirement benefit at age 65 equal to 40% of his last year's salary. The employer must

make adequate contributions to the plan to enable the stated retirement benefit to be

paid, meaning they need to make sure they put in enough, make sure it's a sufficient

amount so that when Allen retires, he will be able to receive 40% of his last year's

salary. Okay. This plan is the defined benefit plan. So when we go to our notes, benefit,

okay, the benefit payable amount, meaning the amount that they will benefit, is going

to be limited to the lesser of $185,000 or 100% of the average compensation for the highest

three years of employment. Okay. So as you can see, there's limitations

on those contributions. It doesn't matter if you're involved in a defined contribution

plan where they place a limit on the contribution that's going in or if you are participating

in a defined benefit plan where they're going to place a limitation on the benefits. So

defined contribution, they're going to limit your contributions to 46,000, or 25% of the

employee's salary. For a defined benefit plan, they are going to put a limit on the benefits,

and those benefits being the lesser of 185,000 or 100% of the average compensation for the

highest three years of employment. So just be aware of that. Then our 401(k) plans, basically

contributions to 401(k)s, to those, they are made pre-tax. So the income that you put into

your 401(k), it's going to be made before it's taxed, okay. And so as far as the limitation

goes on that, it's going to be limited to 150 -- I'm sorry, 15,500 of the salary, or

if you are 50 or over, so 50-plus, it's 20,500. Okay. And so it's normally a percentage of

your salary. You say I want to contribute 15% of my salary, but the situation is, is

whatever that percentage is, that amount cannot be more than 15,500 per year, or 20,500 if

you're 50 or over. So if you look on Page 3-21, we have an example there. Let's look

at that example. Carol is aged 48, participates in a 401(k) plan. Carol's salary is 30,000

per year. If she chooses to contribute 15% to the 401(k) plan, the maximum amount she

may contribute on a tax deferred basis for a 401 plan under her salary reduction agreement

is 4500. In that case, it was 15% of her 30,000, which was 4500.

Now, whatever her percent, she could have did 50% of her salary, which would have been

15,000, that still would have been okay. She could have did -- but she couldn't have done

a percentage that would have caused her amount to exceed 15,500. So it couldn't exceed the

15,500. Keep in mind there's going to be a penalty, contributions in excess of the maximum

allowed amount is subject to a 10% excise tax. So contributions in excess of that limit is going to be subject

to a 10% excise tax. Okay. And that's going to be imposed on the employer. So just be

aware that there is a limitation on that. Next we want to look at low income retirement

plan contribution credit, which is a saver's credit. They have this credit out there that

you can get if you are low income and you are contributing to a retirement plan. So

that's basically what they, you know, it's a saver's credit. And that credit is going

to be based on the taxpayer's filing status, okay, AGI, so it's based on the filing status

and the AGI. And the credit is anywhere between -- you can get a 50% credit. It may be a 20%

credit or a 10% credit of the contribution. Okay. And if we look at Page 3-22, they give

you more details of coming up with that credit, but just be aware that that credit could be

anywhere 50, 20 or 10% of the contribution. It can be any of those. 50, 20 or 10% of the

contribution. Okay. We want to look at rollovers. On Page

3-22, we're going to look at rollovers, how do we deal with rollovers. What if I want

to take, you know, my plan and my money in one plan and put it over into another plan?

It's still an IRA, it still meets those qualifications, I don't want to take it out, I just want to

take it from one plan to put it in another plan, okay. And those are rollovers. We have

two type of rollovers we want to look at. We want to look at a direct transfer, okay.

So we want to look at a direct transfer. And then we want to look at a distribution rollover.

Okay. So we want to look at those two rollovers. We want to look at a distribution rollover

and a direct transfer rollover. Okay. So I want to kind of just, you know, show

it to you visually because I'm a visual person, and so what we want to do is let's say that

I have my money in an ABC 401(k), maybe it's in an IRA, and maybe it's in some type of

retirement plan. Okay. And so then what I do is directly have it placed into CDE 401(k),

IRA, or some type of retirement plan. In doing this, if I do it this way, there's no penalty

and there's no tax. Here's -- oh. And that's the preferred way to do it. There's no penalty.

There's no tax. It goes from one plan to the other. I never see it. I fill out the necessary

papers for it. But it's direct. It goes just directly from one to the other. Directly from

one to the other, okay. So now we want to look at a distribution rollover. We want to

look at a distribution rollover. In this case, I have my money in ABC 401(k), IRA, or whatever

the case may be. Then I have them distribute it to me. Then I turn around and put it in

CDE 401(k), IRA, or whatever. Okay. So in that case, there's a situation. First

of all, when ABC gives it to me, they're required to withhold 20% tax. 20% is going to be withheld.

Okay. And then I'm going to have 60 days to get it into CDE. Now, the difference amount,

the difference is, is that when I got it, I only received 80% because, remember, they

withheld 20% and the IRA -- IRS took 20% and they withheld it. And so, but then when I

put it back into CDE, I have to put the entire amount in there, okay. So let's look at example.

Let's say that we have $100,000 in ABC. We have $100,000 in ABC. And they're going to

take out 20,000, and so I'm only going to end up getting a check for 80,000. Okay.

And then when I put the money in CDE, I'm going to have to put 100,000 in. If I don't,

if I only end up putting the 80 in, there's going to be a 10% penalty on an early withdrawal.

There's going to be a 10% penalty on an early withdrawal if I don't put the full 80, so

the issue with that is that I'm going to have to come back up with $20,000 because the IRS

took 20,000 and -- I mean I could very well get it back as long as there's no penalty

when I file my tax return. So I basically have allowed the IRS to hold that $20,000

and I'm going to have to come up with another $20,000 to put back in my plan. I'm going

to have to come up with another $20,000 to put in my plan.

Okay. So be careful with rollovers. You know, you do have 60 days. But just keep in mind

when they distribute it to you, there's going to be 20%, 20% that they're going to withhold

for taxes. Even though you may not be penalized, you end up putting it back in 60 days, but

just know you're going to have to make sure you put the whole amount back, and I think

that sometimes people may not be aware of that. So that's why direct rollovers are so

much better, because you don't ever have to worry about it. It's going to be direct, okay.

The last little thing we want to look at as we finish up this chapter is we want to look

at SIMPLE plans, savings incentive match plans for employees. Savings incentive match plans

for employees. That's what that stands for. Okay. These are qualified plans, okay. And

they're for small businesses. Basically we're looking at where they have -- where they don't

have more than employees or not more than -- I'm not stating this right. Not more than

100. So let's say employers don't have more than 100 employees. That's the way I want

to say it, and of those employees who earned $5,000 or more in the preceding tax year.

Okay. So they briefly talk about these SIMPLE plans and there's going to be some limitations

on those contributions, none that we're going to really cover, but just be aware they're

called SIMPLE plans, they're out there, SIMPLE IRAs, and that it's really for small companies

or small businesses where you don't have more than 100 employees and who earn 5,000 or more

in preceding tax years. So you want to look at that, okay.

Well, that's all we have in Chapter 3. That's all we have in Chapter 3. And so we dealt

with rental and we dealt with bad debts and then we spent a lot of time on retirements

and IRAs, Roth IRAs, SEP plans, KEOGH plans, and 401(k)s, okay. So now we want to go over

the Chapter 5. There may be later some specific things that I want to cover in Chapter 4,

but for now I want to go on over to Chapter 5, which is Schedule A, Schedule A deductions.

Schedule A deductions are like your medical deductions, your charitable contributions

are Schedule A, and so those are those ones that appear on that.

Let's look at a Schedule A real briefly before we get started.

Okay. We want to look at the Schedule A. We -- it starts off with medical. We have medical

and dental expenses that are on the Schedule A. Let me get a little better Schedule A.

I kind of tore where you can see that. We start off with medical and dental expenses,

and then taxes that you paid. So we're going to look at taxes. And then interest is the

next section that's covered on Schedule A. And then we look at charity gifts, or your

charitable contributions. And then our casualty and theft losses are covered on Schedule A,

and then we have miscellaneous expenses, which are going to be job expenses and certain other

like safe deposit box, tax preparation fees, and then we have a section for other miscellaneous

deductions. And then we get our total. Now, keep in mind here at the bottom they

talk about if your Line 38, which is your AGI, is more than 159,000,

if you are single, head of household, if you're married filing separate, it's 79,975. What

that means is that you could be limited to some of your Schedule A. You may not get them

all. You're going to be limited to some of them. So we'll do that calculation. We have

that calculation still to do and then, remember, if you're a high income taxpayer you very

well could be limited on some of your exemptions. You may not get your full exemption amounts

as well. So just keep that in mind, a limitation also

applies there. Okay. Let's go ahead. You should have a handout

like this that you got in your packet of information. And as we go through, similar to what we did

in the last chapter, we will fill out and go through the notes. We start off with our

medical expenses. When we're talking about the medical expenses that you can take, these

are the ones that are paid for yourself, your spouse, and then any of your dependents.

Okay. And so for your spouse, yourself or any of your dependents. Now, the thing about

these is that there's a limit on them. They're going to be limited to 7.5% of your AGI. Okay.

So you're going to have AGI limitation, meaning I'm not going to get them all. I'm only going

to get the amount that exceeds 7.5%. I'm only going to get the amount that exceeds 7.5%.

So this is the way the calculation goes. We have our qualified medical expenses, all those that qualify,

and we're going to look at those that qualify, and then we're going to subtract from that

any insurance reimbursement. So if we have all these expenses and we have insurance,

we could very well have some insurance reimbursement that applies to those,

And that's going to give us just a subtotal of our potential deductible ones. And then

we're going to subtract from that 7.5% of your AGI. So you're going to take your adjusted

gross income, multiply times 7.5%, then you subtract that from your subtotal and then

any excess is going to equal your deductible medical.

It's going to equal your deductible expenses. Okay. Basically, that's your calculation.

When we look at qualifying expenses, and the way they state it, they say anything, we'll

look at anything, but basically items that account for the diagnosis, meaning I'm going

to go get checked out, and then the cure, mitigation, treatment, and any prevention

of disease, okay. And those items appear mainly on 5-2 when we begin to look at them, 5-2,

okay. And so they start with at the bottom of 5-1 and we go over to 5-2 on some expenses

and things like that. So just know they look at items for, you know, whatever, you know,

we're trying to cure, we're trying to treat, we're trying to prevent or whatever the case

may be. At the top of Page 5-2, basically, therefore,

amounts for all the following categories of expenditures qualifies medical. So prescription

medicine, fees for doctors, dentists, nurses, prescription for hospital fees, hearing aids,

dentures, psychiatric care, acupuncture, birth control prescriptions, medical insurance premiums,

if I'm making those payments, all those things are considered. Also, would you believe in

that little section the IRS allowed the following unusual medical expenses: Long distance phone

calls made to psychological counselor; new siding replacing old siding on a home because

the taxpayer was allergic to mold growing on the old siding; a wig prescribed by a psychiatrist