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Facelift (See
Cosmetic Surgery)
Fellowships
(See Scholarships
and Fellowships)
Financial Planning
Fees
Financial planning fees are a deductible
Investment Expense, up to net
investment income, subject to the 2% floor on
Miscellaneous Itemized
Deductions.
First-Year Expensing
First-year expensing is an
alternative to Depreciation
that lets you write off the entire cost of an item the year you buy it,
rather than depreciating it over its useful life. Here's how it works:
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You can expense up to $128,000
of property in 2008. (President Bush is expected to sign legislation
increasing this amount to 4250,000 for 2008.) This should
cover most small business's capital needs. (See
Car and Truck Expenses for
special limits on cars.) You can expense the entire cost of property you
buy as late as the last day of the year.
-
If you use property for both
business and personal purposes--for example, you use a computer to keep
your business records and zap space aliens--you'll need to use it more
than 50% for business to qualify for first-year expensing.
-
Your total first-year
expensing deduction can't exceed your total income from the activity.
-
The deduction phases out by
one dollar for each dollar of adjusted gross income above $410,000.
-
If you sell property that
you've expensed, your Basis for
figuring gain or loss on the property is your actual cost, minus
first-year expensing and depreciation. Any gain on the sale is taxed as
ordinary income.
-
If you claim first-year
expensing for property you use more than 50% for business, then business
use drops below 50%, you'll owe tax on the difference
between the amount you expense and the amount you would have been able to
depreciate under straight-line rules.
Use
Form
4562 to claim first-year expensing and
Form
4797 to report sales of depreciated property.
Fixed Annuity
(See Annuity)
Flexible Spending Account
Flexible spending accounts, or
"cafeteria plans," let you set aside pre-tax dollars for a choice of
nontaxable fringe benefits that can include
Health Insurance, and
disability insurance, dependent care or adoption assistance, and even
medical expense reimbursement. You'll owe Social Security and local payroll
tax on money you put in the plan, but no federal or state income tax. This
saves you tax at your top marginal rate on whatever you contribute to the
plan. Your employer deducts your contributions from your paycheck and
deposits it into your account until you need it. Here are the rules:
-
When you enroll, you'll have
to choose exactly how much to withhold each pay period. You can't change
in the middle of the plan year unless there's a change in your family
status.
-
You can use contributions for
expenses incurred during that plan year only.
-
If you don't spend enough on
qualifying expenses by the end of the plan year, you generally forfeit your
remaining account balance. (Some employers offer a three-month grace
period to preserve your deduction.) Wait until December before you buy those
prescription sunglasses to soak up anything left.
A dependent care account is a
flexible spending arrangement for day-care costs. The goal is the same: to
pay day-care costs with pretax dollars. You can avoid tax on contributions
up to $5,000 per year or the lower-paid spouse's earnings, whichever is
less.
Contributions to a dependent
care account cut your expenses eligible for the
Dependent Care Tax Credit.
So if your employer offers this benefit, you'll have to decide whether
you're better off taking the deduction for FSA contributions, or the
credit. Generally, as your income rises, you're better off taking the
deduction rather than the credit.
For more information, see
IRS
Publication 503, "Child and Dependent Care Expenses."
Flouridation
Deductible
Medical Expense subject to the 7.5% floor.
Foreign Earned Income Exclusion
The foreign earned income
exclusion lets U.S. citizens living and working outside the U.S. exclude up to $87,600
of earned income from U.S. taxable income (2008). You can also deduct
certain foreign housing costs. To claim the exclusion and deduction, you
have to work at least 330 days out of a 12-month period or maintain a tax
home in a foreign country. However, if you claim the credit you cannot claim
business deductions, an IRA deduction, or foreign taxes attributable to the
foreign income.
Use
Form
2555 to claim these breaks.
Foreign
Taxes
Foreign taxes that don't qualify
for the Foreign Tax Credit qualify
as an Itemized Deduction
on
Schedule A.
Foreign Tax
Credit
The foreign tax credit is a credit against your
income for taxes paid to foreign governments on income you include in your
U.S. return. The purpose, obviously, is to avoid taxing you twice on that
same income.
If your foreign tax is $300 or
less ($600 for joint filers), and your only foreign income is qualified
passive income (including mutual fund income), you can claim the credit
directly on Form 1040.
If your share of the fund's
foreign tax is higher than those amounts, figure the credit on
Form
1116. This isn't an easy form to tackle--you'll need to figure
different ratios for different kinds of foreign income. There's even a
separate form if you're subject to
Alternative Minimum Tax. But it beats
paying the same tax twice. For more information, see
IRS
Publication 514, "Foreign Tax Credit for Individuals."
You can also deduct foreign
taxes as an Itemized Deduction on
Schedule A.
Foster Children
If you're caring for foster
children
placed with you by an authorized placement agency, they qualify like any
other dependent children for
Personal Exemptions, Earned
Income Tax Credit, and the
Child Tax Credit so long
as they live with you for 12 months during the year.
401(k) Plan Contributions
A 401(k) plan is a
profit-sharing plan that lets you defer part of your income with tax
advantages for retirement. The basic concept is
401(k) contributions you make are generally
tax-deductible up to 100% of your earned income or $15,500, whichever is
less (2008). If you're age 50 or older by the end of the year, you can
contribute up to $5,000 more in "catchup" contributions. (If you're a
"highly compensated employee," with income over $105,000, your contribution
may be limited if your plan fails certain nondiscrimination tests.) Your
contributions are "vested" immediately, which means the money is yours even
if you leave your job.
Your employer may match part
or all of your contribution, make profit-sharing contributions, or make
qualified nonelective contributions to your account. These are nontaxable
going in and grow tax-deferred along with your own contributions. Your
employer may impose a "vesting" schedule that requires you to stay up to
seven years or forfeit those funds if you leave your job.
401(k) withdrawals are
generally taxed
as ordinary income. There may be a 10% penalty for withdrawals before age
59½. For more information, see
Qualified Plan
Withdrawals.
Your plan may permit "Roth"
401(k) contributions. Like Roth IRA
contributions, there's no deduction for your contribution. However,
earnings come out tax-free. As with choosing whether to contribute to a
regular Roth IRA, the decision turns on what you do with the tax savings
from the deductible 401(k) contribution and where you expect your tax
bracket to be today relative to where you expect it to be when you take
the money out.
There's no need to account for
plan contributions yourself; your employer will deduct them from your
income reported on Form W-2.
403(b)
Plan Contributions
A 403(b) plan is a retirement
plan established for employees of schools and other nonprofit organizations.
403(b) contributions you make are generally
tax-deductible up to 100% of your earned income or $15,500, whichever is
less (2008). If you're age 50 or older by the end of the year, you can
contribute up to $5,000 more in "catchup" contributions. (If you're a
"highly compensated employee," with income over $105,000, your contribution
may be limited if your plan fails certain nondiscrimination tests.) Your
contributions are "vested" immediately, which means the money is yours even
if you leave your job.
Your employer may match part
or all of your contribution or make "profit-sharing contributions" equal
to a percentage of your salary. These are nontaxable going in and grow
tax-deferred along with your own contributions. Your employer may impose a
"vesting" schedule that requires you to stay up to seven years or forfeit
those funds if you leave your job.
403(b) withdrawals are
generally taxed
as ordinary income. There may be a 10% penalty for withdrawals before age
59½. For more information, see
Qualified Plan
Withdrawals.
There's no need to account for
plan contributions yourself; your employer will deduct them from your income
reported on Form W-2.
412(i) Plan
(See Qualified Plan)
457 Plan Contributions
457 plan contributions you make
to your employer's plan are generally tax-deductible up to 100% of your
earned income or $15,500, whichever is less (2008).
457 plan rollovers you make
from one plan to another are nontaxable.
457 plan withdrawals are taxed
as ordinary income. There may be a 10% penalty for withdrawals before age
59½.
Futures
Futures
contracts are agreements to buy or sell an asset now for future delivery.
Futures, unlike options, require you to accept or tender delivery.
(You can always sell the contract before expiration to avoid actual pork
bellies from showing up at your door.)
You can use futures to lock in
today's price for assets you'll need tomorrow. Or you can use them to
speculate on prices. Commodity producers buy and sell futures to hedge their
exposure to changing prices. Speculators who shout themselves hoarse in New
York and Chicago pits use them to make an old-fashioned killing.
Most individual investors have
no business buying individual contracts. If you really want to play this
game, find an advisor you can trust or a managed futures program. These
are essentially mutual funds for futures, with experienced managers and
institutional clout. And many brokers sell principal protection programs
which invest a majority of your investments in low-risk Treasuries to
guarantee return of your original investment, then use the rest for
speculation.
If you'd like to track markets
more closely than you can with traditional index funds, but with less
leverage than futures, consider
Exchange-Traded Funds.
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