Tax Tips

Tax Tips



Tax Tip of the Week - Mortgage Insurance (PMI)

2012 Tax Return Tip: Due to the late extension of the mortgage insurance deduction (it was not going to be deductible for 2012 until the passage of the American Taxpayer Relief Act of 2012) many 1098’s for mortgage interest paid do not contain mortgage insurance as they did in 2011. That does not mean it is not deductible. Some, but not all mortgage companies will correct the 1098’s. Be sure to deduct mortgage insurance if you meet the requirements below for 2012 and 2013. You may need to call the mortgage company for the information.

-Taxpayers can deduct mortgage insurance (subject to AGI limitations, see below) through 2013. The insurance must be for home acquisition debt and the insurance contract must have been issued after 2006.

-Prepaid mortgage insurance: VA Funding fees and Rural Housing Service guarantee fees are considered mortgage insurance and are fully deductible (subject to AGI limits) in the year paid. If you pay up-front mortgage insurance premiums (generally FHA loans) which are properly allocable for years after the year paid, the premiums are considered paid in the period to which they are allocated. The premiums must be allocated over the shorter of 84 months beginning with the month the insurance was obtained. No deduction is allowed for the unamortized balance.

-AGI Limits: The deduction for mortgage insurance begins to decrease at AGI of $100,000 ($50,000 for married filing separately). The deduction is completely eliminated at $109,000 of AGI ($54,500 for married filing separately).
IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

For More Information:

http://www.irs.gov/publications/p936/ar02.html#en_US_2012_publink1000296058




Tax Tip of the Week - Schedule ‘A’ Miscellaneous Itemized Deductions (2% of AGI Limited, Line 21, 22, and 23)

-Deductions that are subject to the 2% of AGI (Adjusted Gross Income):

Unreimbursed Employee Expenses (Line 21)
Tax Preparation Fees (part or all may be deductible on other schedules/forms) (Line 22)
Other Expenses (Line 23)

-Unreimbursed Employee Expenses are deductible in the year paid, for carrying on your trade or business of being an employee, and Ordinary and Necessary (2 very important words regarding deductions). An expense is ordinary if it is common for your trade, business, or profession. An expense is necessary if it is appropriate and helpful in your business. The expense does not have to be required to be necessary.

Employee Business Expense Examples:
-Mileage for two workplaces in the same day (one jobsite to another). Mileage to the first jobsite of the day and back home from the last is commuting and not deductible
-Business bad debt of an employee
-Business liability insurance premiums and/or malpractice insurance
-Damages paid to a former employee for breach of employment contract
-Computer your employer requires you to use for work
-Chamber of Commerce, Business Alliance, or local business networking group (www.smbn.org)
-Professional societies and associations
-Educator expenses (in excess of the $250 allowed for primary and secondary educators,
$250 can be used as an above the line deduction through 2013)
-Home office or part of your home used regularly and exclusively for work
-Job search expenses in your present occupation
-Legal fees related to your job
-License Fees
-Medical exams required by employer
-Passport for a business trip
-Research expenses of a college professor
-Journal and trade magazine’s related to your profession
-Tools and supplies
-Travel, transportation, meals (subject to limits), entertainment and local lodging related to your work
-Union dues and expenses
-Work clothes and uniforms if required and not suitable for everyday use (sorry no business suits). Protective clothing is also deductible (safety shoes, glasses, hard hats, and work gloves) Must be a condition of employment. Examples of workers who may be able to deduct the cost and upkeep of work clothes are: delivery workers, firefighters, health care workers, law enforcement officers, letter carriers, professional athletes, and transportation workers (air, rail, bus, etc.).
-Work related education

Other Expense Examples (Same ordinary and necessary rules apply):
-Expenses paid to produce or collect income that is included in your gross
-Expenses paid to manage, conserve, or maintain property held for producing such income
-Expenses paid to determine, contest, pay, or claim a refund of any tax
-Appraisal fees for a casualty loss or charitable contribution
-Clerical help and office rent in caring for investments
-Depreciation on home computers used for investments
-Excess deductions upon termination of an estate or trust (usually provided on form K-1 from estate or trust)
-Fees to collect interest and dividends
-Hobby expenses (not more than hobby income)
-Investment fees and expenses (after-tax accounts only)
-Legal fees related to collecting taxable income or getting tax advice
-Repayments of income
-Repayments of social security benefits (if repayment exceeds $3,000 other rules apply see publication 915)
-Safe deposit box rental (except for storing jewelry and other personal items)
-Tax advice/planning fees
-Convenience charge for paying of taxes or estimated payments with a credit card

For More Information and more detailed description of deductible items above and their specific rules see link below:

http://www.irs.gov/publications/p529/ar02.html#en_US_2012_publink100027067

Social Security Repayment:
http://www.irs.gov/pub/irs-pdf/p915.pdf

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.




Tax Tip of the Week - Higher Education Expense Credits (American Opportunity Tax Credit)

-The American Opportunity Tax Credit (formerly Hope Scholarship Credit), which was just extended through 2017 by the American Taxpayer Relief Act of 2012 allows for a tax credit (partially refundable) of up to 100% the first $2,000 of qualifying educational expenses (see below) and 25% of the next $2,000 for a total of $2,500 total. 40% up to $1,000 is refundable, which means it is used as a payment credit against not only regular income tax, but self-employment tax and early withdrawal penalties as well. The credit can be used for the first 4 years of post-secondary education.

-Qualifying expenses for purposes of the credit include tuition and required fees for enrollment or attendance at an eligible post-secondary institution (any college, university, vocational school, or other post-secondary educational institution eligible to participate in a student aid program administered by the US Department of Education), course-related books, supplies and equipment. The course-related books, supplies and equipment do not have to purchased from the institution. In most cases the student will be issued form 1098-T with either box 8 (to indicate half-time status) or 9 (for graduate student) checked. The expenses paid in a taxable year must be for an academic period that begins in the same taxable year or for an academic period which begins in the first 3 months of the following taxable year to be claimed for the credit. In order to claim the credit the expenses must be paid by the taxpayer, paid by you for an eligible student, and the eligible student is either yourself, spouse, or a dependent for whom you claim an exemption on your tax return. Qualified expenses paid by a dependent for whom you claim an exemption, by a third-party for that dependent, are considered paid by you.

-Eligible students are enrolled in a program leading to a degree, certificate or other recognized post-secondary educational credential, has not completed the first 4 years of post-secondary education as of the beginning of the taxable year, for at least 1 academic period has carried at least ½ of the full-time work load for the course of study the student is pursuing, and has not been convicted of a felony drug offense.

-As with all almost all credits and deductions, there are income limitations. A taxpayer whose modified AGI is $80,000 or less ($160,000 Married Filing Jointly) can receive the full tax credit. The credit is reduced partially until the taxpayer reaches $90,000 modified AGI ($180,000 Married Filing Jointly) at these levels the taxpayer receives zero credit.

For More Information:
http://ope.ed.gov/accreditation/
http://www.irs.gov/uac/American-Opportunity-Tax-Credit:-Questions-and-An...
http://www.irs.gov/publications/p970/ch02.html#en_US_2011_publink1000204341

Other Items of Note:

-Be sure to prepare dependent student’s tax returns with parents. Often, the student claims the credit incorrectly or the refundable portion is claimed when the taxpayer is not eligible. (See page 4 of the form 8863 instructions for more information http://www.irs.gov/pub/irs-pdf/i8863.pdf ).

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.




Tax Tip of the Week - American Taxpayer Relief Act of 2012 Fiscal Cliff Avoidance, Summary

http://www.gpo.gov/fdsys/pkg/BILLS-112hr8eas/pdf/BILLS-112hr8eas.pdf

Tax Rates

Tax Rates (Tax years after 12/31/2012)
-Makes permanent (for lack of a better word, more changes could come as early as this year) for 2013 and beyond the lower Bush-Era income tax rates for taxpayers who have taxable income below $400,000 (Single), $450,000 (Married Taxpayers) $425,000 (Head of Household), and $225,000 (Married Filing Separate). Income levels above these thresholds will be taxed at a 39.6% rate. The tax rates are progressive meaning taxable income is subject to tax rates at the Bush-Era tax rates of 10, 15, 25, 28, and 33% prior to the new 39.6% rate (formerly 35% prior to 2013 for all taxpayers).

Capital Gains/Dividends (Tax years after 12/31/2012)
-The capital gains (long-term, more than 1 year holding period) and dividend rate will increase from 15% to 20% for taxpayers who exceed the $400K/$450K threshold. Taxpayers in the 10 and 15 percent tax brackets will still enjoy a 0% tax rate. Qualified dividends will continue to be taxed at capital gains (long-term) rates. A qualifying dividend is from a domestic corporation or qualified foreign corporation on which the underlying stock is held for at least 61 days within a specified 121-day period.

Net Investment Income Surtax ($200K/$250K Married Filing Jointly/$125K Married Filing Separately) (Tax years after 12/31/2012)
-As a result of the Patient Protection and Affordable Care Act (Obamacare), taxpayers whose income exceeds $200K/$250K/$125K may be subject to a 3.8% surtax on Net Investment Income. Net investment income is the sum of gross income from interest, dividends, annuities, royalties, and rents, other than income derived in the ordinary course of a trade or business (IRC 1411(c)(2) (includes any trade or business that is a passive activity under IRC 469 and a trade or business of trading in financial instruments or commodities), plus other gross income derived from a trade or business (IRC 1411(c)(2) and net income attributable to the disposition of property held in a trade or business not described in IRC 1411(c)(2) over deductions properly allocable to such gross income or net gain. The Net Investment Income surtax will be calculated by using the lesser of net investment income for the tax year or the excess, if any of (a) the individual’s modified adjusted gross income for the tax year, over the threshold amount ($200K/$250K/$125K).

Adjustment To Income

Teachers’ Classroom Expense Deduction (Extended Through 2013)
-Up to $250 deduction for qualified out-of-pocket expenses for primary and secondary education professionals.
http://www.irs.gov/taxtopics/tc458.html

Itemized Deductions

Itemized Deduction and Personal Exemption Limitations ($250K/$275K Head of Household/$300K Married Filing Jointly/$125K Married Filing Separately) (Tax years after 12/31/2012)
-Some itemized deductions will be subject to limitations based on the taxpayer’s adjusted gross income. If the taxpayer’s AGI exceeds $250K/$275K/$300K/$150K the total amount of itemized deductions will be reduced by 3% of the amount by which the taxpayer’s AGI exceeds an applicable threshold. The amount is not reduced by more than 80 percent. Medical expenses, investment interest, and casualty, theft or wagering losses are excluded.
-Personal Exemptions are reduced by 2% of each $2,500 or portion thereof by which the taxpayer’s AGI exceeds the threshold level.

State and Local Sales Tax Deduction (Extended Through 2013)
-Taxpayers will be able to claim an itemized deduction for state and local general sales taxes in lieu of state and local income taxes.

http://www.irs.gov/uac/Schedule-A-%28Form-1040%29,-Itemized-Deductions

Mortgage Insurance Premiums (Extended Through 2013)
-The mortgage insurance premiums treated as deductible interest on schedule ‘A’ has been extended through 2013. The deduction phases out at $109,000 AGI.
http://www.irs.gov/publications/p936/ar02.html
Dependents

Child Tax Credit (Extended Permanently)
-The child tax credit is $1,000 and applies to dependent children under age 17. There are income limitation’s, the credit begins to phase-out at $110K for Married Filing Jointly, 55K for Married Filing Separately, and $75K for all other filing statuses.
http://www.irs.gov/uac/Ten-Facts-about-the-Child-Tax-Credit

Earned Income Tax Credit (Extended Through 2017)
-The enhancements to the EIC from the Bush-Era tax cuts and subsequent legislation have been extended through 2017. Relationship test rules, tie-breaker rules, etc.
http://www.irs.gov/Individuals/EITC-Home-Page--It%E2%80%99s-easier-than-...
Child and Dependent Care Credit (Extended Permanently)
-The current 35 percent credit rate (lower income taxpayers) along with the $3,000 cap on expenses for one qualifying individual and $6,000 for 2 or more.
http://www.irs.gov/uac/Ten-Things-to-Know-About-the-Child-and-Dependent-...

American Opportunity Tax Credit (Extended Through 2017)
-This credit applies to the first 4 years of a student’s post-secondary education. The credit is 100% of the first $2,000 of qualified tuition and related expenses and 25% of the next $2,000.
http://www.irs.gov/uac/American-Opportunity-Tax-Credit

Other Items of Note

-The exclusion of cancellation of indebtedness on principal residence has been extended through 2013. This allows a taxpayer to exclude from income cancellation of mortgage debt on a principal residence up to $2 Million ($1 Million Married Filing Separately).
http://www.irs.gov/Individuals/The-Mortgage-Forgiveness-Debt-Relief-Act-...
-The Section 179 small business expensing amounts have also been extended through 2013. For 2012 and 2013 the allowable amount for section 179 is $500,000 with a $2 Million investment limit. 50% bonus depreciation has also been extended through 2013. To use bonus depreciation the property must have a MACRS recovery period of less than 20 years. Many states including Maryland and Virginia have opted not to allow the higher depreciation thresholds.
-All taxpayer’s taxes increased 2% in 2013. The payroll tax holiday (6.2% FICA rate was 4.2% 2011/2012) was allowed to expire. Taxpayers will see a 2% decrease in pay and 2% increase in Self-Employment Taxes in 2013.

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Date Posted on Facebook 1/13/2013




Tax Tip of the Week - Purchase of a principal residence

When purchasing a home as your principal residence, be sure to check the HUD-1 (Settlement Statement) documents thoroughly for potential tax deductions. For the purchase of a principal residence you may have deductible points (often lines 801-803, page 2), The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points
(per IRS pub 936 http://www.irs.gov/publications/p936/ar02.html#en_US_2011_publink1000229944).
points are also deductible by the buyer even if paid by the seller. (points are not always indicated on form 1098)
In Maryland real estate taxes are paid in advance, you may have deductible real estate taxes (often lines 106, 107). You may have to pay in advance for 6 months, these real estate taxes may be located on the bottom of page 2 of the HUD-1. In Virginia real estate taxes are paid in arrears, you may have to account for the reimbursed property taxes by subtracting the amount from your real estate tax deduction (schedule 'A').

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Date posted on Facebook 11/24/2012




Tax Tip of the Week - Non-Cash Charitable Donations under $5,000

If your non-cash charitable donations exceed $500 during a calendar year, in order to claim them on your taxes (schedule ‘A’) you will need to file form ‘8283’ with the appropriate information which includes date of contribution, date acquired by donor, how acquired by donor, donor’s cost or adjusted basis, fair market value, and the method used to determine the FMV. The fair market value of Clothing and household items is the most relevant to the majority of taxpayers. For more information on FMV of other items (Intellectual property, Easements on buildings in historic districts, and ordinary income property) follow the link to the IRS form ‘8283’ instructions.
http://www.irs.gov/pub/irs-pdf/i8283.pdf

A good way to value your items donated is to use the prices charged for items at thrift stores and consignment shops. Reviewing classified ads and using Craig’s list is another way to determine FMV. The condition of the items donated must be in good used condition or better. You can claim a deduction for an item that is not in good used condition or better if you deduct more than $500 for it and include a qualified appraisal with your return. Most vehicle donations are handled with form 1098-C which will include the amount the charity received for the vehicle at the time they sold the vehicle. That will be the allowed amount to deduct and the form must be submitted to IRS with your tax return.

Keep a detailed list of items donated prior to the actual donation and take pictures to document the condition of items donated.

A side note: On his 1986 return, Bill Clinton deducted $6 for three pairs of underwear and $75 for a suit with ripped pants given to the Salvation Army. Bill Clinton may be the cause for the good used condition or better phrase in the instructions.

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Date posted on Facebook 12/1/2012




Tax Tip of the week - Health Savings Accounts

Health Savings Accounts are IRA’s on steroids. You can contribute to H.S.A’s on an annual basis, subject to contribution limitations, up to April 15th of the following year (like an IRA). The contribution limits for 2012 are $3,100 ($3,250, 2013) for individuals and $6,250 (6,450, 2013) for a family. The total contribution limit for married taxpayers is $6,250 (2012). Taxpayers 55 or over can contribute an additional $1,000 per year. The contributions are tax-deductible. You are allowed a once-in-a-lifetime IRA (traditional or Roth) (http://www.irs.gov/irb/2008-25_IRB/ar09.html ) rollover contribution to your H.S.A. as well.

You can receive tax-free distributions from your H.S.A. to pay or be reimbursed for qualified medical expenses (See IRS publication 502 http://www.irs.gov/publications/p502/index.html) you incur after you establish the H.S.A. Earnings within the H.S.A. are accumulated tax free. Distributions from H.S.A’s are not required annually. The contributions can accumulate in the account over the years. No ‘use it or lose it’ as with Flexible Spending Accounts (FSA). If you use the account to pay for anything other than qualified medical expenses the withdrawals will be subject to a 20% penalty. However, the list of qualifying medical expenses is pretty extensive.

To be eligible for a Health Savings Account (H.S.A’s) you must have a High Deductible Health Insurance Plan (HDHP), not be enrolled in Medicare, have no other health coverage other than allowed for H.S.A.’s, and cannot be claimed on another’s tax return as a dependent. If you meet the eligibility requirements as of the last month (December 1) of the year you are considered eligible to contribute to an H.S.A. for the entire year. However, you must remain eligible for 12 months to retain the full contribution benefits.

For more information:

IRS Publication 969
http://www.irs.gov/publications/p969/ar02.html#en_US_2011_publink1000204094

Tips on choosing H.S.A. accounts:
http://www.bankrate.com/finance/savings/how-to-choose-a-health-savings-a...

Options
http://www.depositaccounts.com/savings/health-savings-accounts.html

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Date posted on Facebook 12/15/2012




Tax Tip of the Week - Medical Expenses Schedule ‘A’

In order to deduct medical expenses as an itemized deduction on schedule ‘A’ for 2012, your unreimbursed medical expenses (See IRS Publication 502 for a comprehensive list of deductible expenses) must exceed 7.5% of your AGI (Adjusted Gross Income). As a result of the Affordable Care Act (AKA Obamacare), unreimbursed medical expenses must exceed 10% of AGI for tax years 2013 and beyond (Section 9013). However, if you or your spouse are 65 or older by the end of 2013 you will be able to deduct your unreimbursed medical expenses that exceed 7.5% of your AGI through 2016. You can deduct medical expenses for yourself, spouse, and your dependents (See pub 502 for more rules on dependents).

Items of note: most health insurance premiums are paid with pre-tax dollars (if you are an employee receiving a W-2 and have health insurance through your employer) the premiums are not deductible as a medical expense. Don’t forget to deduct long-term care premiums (subject to age limitations, be aware of state tax breaks for premiums as well), eyeglasses, medical mileage (23 cents per mile for 2012 or gas and oil), co-pays (both prescription and physician), long-term care, laser eye surgery, etc. This is only a partial list of deductible expenses, see pub 502 for a more extensive list.

For More Information:

Patient Protection and Affordable Care Act
http://www.gpo.gov/fdsys/pkg/BILLS-111hr3590enr/pdf/BILLS-111hr3590enr.pdf

IRS Publication 502 (medical expense deductions)
http://www.irs.gov/publications/p502/index.html

State tax breaks for Long-term care premiums (old list, I will try to find more updated)
http://www.ltcconsultants.com/pdfdocs/taxincentivesbystate020508.pdf

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Date posted on Facebook 12/15/2012




Tax Tip of the Week - Self-Employed Health Insurance, Line 29 form 1040 page 1

Deductible health insurance often overlooked (For 2010 only self-employed health insurance was deductible for self-employment tax purposes):

Medicare part B premiums (http://www.journalofaccountancy.com/news/20126051.htm )
Long-term care premiums (subject to limitations)
2012 Limits
-Age 40 or less $350
-Age 40 but not older than 50 $660
-Age 50 but not older than 60 $1,310
-Age 60 but not older than 70 $3,500
-Older than age 70 $4,370
*many states offer tax credits and/or annual deductions for Long-term care premiums
After-tax health insurance paid through pension plans
(See next tax tip of the week for Public Safety Officers)

Deduction Qualifications:
If you are one of the following you may be able to deduct premiums paid for medical and dental insurance and qualified long-term care insurance paid for you, your spouse and your dependents:

-A self-employed individual with net-profit from a schedule ‘C’ and ‘C-EZ’ (net profit from business), or schedule ‘F’ (profit from farming).
-A partner with net-earnings from self-employment from form K-1 (Line 14A).
-A shareholder owning more than 2% of an S-corporation and has wages paid on form W-2 filed by the S-corporation.

The insurance plan must be established through your business.

With exceptions:
-If you have net profit from a schedule ‘C’ or ‘F’ the insurance can be either under the business or individuals name.
-For partners the policy can be either under the business or individuals name. If the partnership pays the premiums, the amount paid must be included in guaranteed payments of the partnership and reported on the K-1 as such. If the policy is in the individual’s name the individual can pay the premiums and be reimbursed by the partnership, however the reimbursement must also be included in guaranteed payments and reported on the K-1.
-For more than 2% shareholder of an S-corporation the policy can be either under the business or individuals name. If the S-corporation pays the premiums, they are to be reported in box 1 of form W-2 as wages. If the policy is in the individual’s name the S-corporation can reimburse for the premiums, but the reimbursement must be reported in box 1 of form W-2 as wages.

http://www.irs.gov/uac/Health-Insurance-Tax-Breaks-for-the-Self-Employed-1

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Date posted on Facebook 12/31/2012




Tax Tip of the Week - Insurance premiums for retired public safety officers

-A public safety officer for the purposes of the deduction are retired law enforcement officers, firefighters, chaplain, or former members of a rescue squad or ambulance crew.

-If you meet the eligibility requirements above you can elect to exclude from income up to $3,000 of distributions made from your eligible retirement plan (a qualified trust, section 403(a) plan, section 403(b) annuity, and section 457(b) plan) that are used to pay premiums for accident or health insurance or long-term care insurance. The coverage can be for you, your spouse, or your dependents. The distribution must be made directly from the plan to the insurance provider. The excludable amount is the smaller amount of $3,000 or the premiums paid. The amount excluded cannot also be deducted as a medical expense on schedule ‘A’. The amount reported in box 2A of form 1099-R will not reflect the insurance premiums. An adjustment must be made to taxable income on the tax return to reflect the amounts paid. Enter ‘PSO’ next to the appropriate form ‘1040’ reporting line.

See Insurance Premiums for Retired Public Safety Officers:
http://www.irs.gov/publications/p575/ar02.html#en_US_2011_publink1000226714

More specific definition of public safety officer:
http://www.law.cornell.edu/uscode/text/42/3796b

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Date posted on Facebook 12/31/2012