Cafeteria 125 Medical Benefits with sample Smith Problem

Cafeteria 125 Medical Benefits with sample Smith Problem TAX-AIDE

Unreimbursed Medical Expense Deductions ● Federal return Enter on Schedule A Excess over AGI 7. 5% (65 and over) 10% (under 65) Entries made on Schedule A are carried over to NJ-1040 by TWO TAX-AIDE NTTC Training – 2013 2

Unreimbursed Medical Expense Deductions ● NJ return Threshold is just 2% of gross income So extra NJ-eligible medical deductions 2 to 7. 5% (65 and over) 2 to 10% (under 65) TAX-AIDE NTTC Training – 2013 3

Unreimbursed Medical Expense Deductions ● NJ return CAFE 125 entries are not entered on Schedule A already deducted from Federal W-2 income Enter on NJ-1040 Line 30 Medical Expenses with a scratch pad entry TAX-AIDE NTTC Training – 2013 4

What Are Cafeteria 125 Benefits? ● Section 125 of IRS regulations Allow setting aside pre-tax income for certain employer-offered benefits Saves money for employees Reduces Federal Gross Income and Social Security/Medicare Wages Reduces taxes on those amounts TAX-AIDE NTTC Training – 2013 5

What Are Cafeteria 125 Benefits? ● Cafeteria benefit options can include: Medical premiums/expenses Adoption and dependent care assistance Legal assistance 401 K contribution Group term life insurance TAX-AIDE NTTC Training – 2013 6

What Are Cafeteria 125 Benefits? ● Section 125 specifically excludes: Education assistance Medical Savings Accounts Meals and transportation benefits TAX-AIDE NTTC Training – 2013 7

New Jersey Tax Treatment ● Which Cafeteria 125 Benefits are deductible in NJ? Medical premiums/expenses only! ● Because of special tax situation Deducted from federal wages on W-2 Not deducted from NJ wages on W-2 TAX-AIDE NTTC Training – 2013 8

Cafeteria 125 W-2 Reporting ● Watch for large wage differences Are Box 1 Federal Wages (much) less than Box 16 State Wages? ● Explanation often is Cafeteria Plan: Box 14 sometimes coded as CAFE 125 But sometimes not listed in box 14 at all TAX-AIDE NTTC Training – 2013 9

Cafeteria 125 W-2 Reporting ● When you see large Box 1 & 16 wage differences: Ask taxpayer how much of this is CAFE 125 covered medical expenses? Can also be adoption, dependent care, legal, etc. - not deductible in NJ TAX-AIDE NTTC Training – 2013 10

How To Deduct Cafeteria 125 Benefits ● Already deducted from Federal Wages in W-2 Box 1 So can not enter further deduction on Schedule A ● Not deducted from NJ Wages Box 16 Must use Scratch Pad to manually enter amount on NJ line 30 Medical Expenses TAX-AIDE NTTC Training – 2013 11

How To Deduct Cafeteria 125 Benefits ● Let’s look at a sample W 2 for John Smith ● Then complete John Smith’s tax return TAX-AIDE NTTC Training – 2013 12

Smith Problem W-2 TAX-AIDE NTTC Training – 2013 13

Smith Problem W-2 TAX-AIDE NTTC Training – 2013 14

Smith Problem W-2 Gross Income -414 H Pension -Cafe 125 Med Net Amounts TAX-AIDE Fed Taxable Soc Sec Wages $37, 079 $2, 235 $817 $34, 027 $36, 262 NTTC Training – 2013 NJ Taxable $37, 079 15

Smith Cafeteria 125 Problem TAX-AIDE NTTC Training – 2013 16

Smith Cafeteria 125 Problem TAX-AIDE NTTC Training – 2013 17

Cafeteria 125 Medical Benefits Comments? Questions? TAX-AIDE NTTC Training – 2013 18

Smith Cafeteria 125 Problem Refund Monitor TY 2013 Note/Step Fed AGI Fed Refund Line 38 NJ AGI Line 38 NJ Refund NJ Med Line 56/66 Ded Line 30 After W 2 34, 027 1, 606 35, 079 96 0 6 -After Doctors/ Drugs 34, 027 1, 606 34, 721 102 358 Notes 3, 4, 5 34, 027 1, 606 34, 721 152 358 7 -After Café 125 $817 34, 027 1, 606 33, 904 166 1, 175 $817 added $14 to NJ Refund! TAX-AIDE NTTC Training – 2013 19