Ch 2 - Adj and Itemized Deductions
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(Adjustment for AGI)
- 1. if you are an eligible educator you can deduct up to 250$ of qualified expenses. If filling married joint and both are eligible educators then $500.
- 2. An eligible educator is a K-12 teacher, instructor, counselor, principal, or aide in a school for at least 900 hours during a school yr.
Deductions to arrive at AGI
- 1. Educator Expenses
- 2. IRA
- 3. Student Loan Interest Exp
- 4. Tuition & Fee deduction
- 5. Health Savings Account
- 6. Moving Exp
- 7. 1/2 Self Employment Tax
- 8. Self Employed Health Insurance
- 9. " " Retirement
- 10. Interest Withdrawl Penalty
- 11. Alimony Paid
- 12. Attorney Fees Paid in Certain Discrimination and Whistle-blower Cases
- 13. Domestic Production Activities Deduction
Traditional IRA Deductible
- 1. Earnings are tax deferred, withdrawals are fully taxable.
- 2. Not deductible if excessive aGI "rich" and active in a qualified plan
- 3. Exception; and individual is not considered active merely b/c spouse is in an active plan.
- 4. PHASE OUT for super rich***
Deductibility requirements for traditional IRA deductible.
- No Deduction if rich & have retirement plan
- 1. Single over 58k
- HofH 68k
- Joint 92-112k
When is a Traditional IRA contribution not deductible?
- When BOTH of these are met:
- 1. Rich, excessing agi
- 2. Active participation in another qualified plan.
Maximum Amount of deduction for traditional IRA?
- 1. $5000 or individual's compensation, $10,000 for married.
who is eligible for an additional catch up contribution adjustment?
Individuals over the age of 50 or older are allowed an additional contribution of $1000.
(No Tax Impact, Now or Later)
- 1. Non-deductible contributions
- 2. Tax-free accumulation of earnings.
- 3. Tax-free distributions (withdrawals) principal and earnings
- 4. Contribution limits 5k for single, 10k for married.
- 5. **Phase out, super rich**
- A.) Non-deductible contribution limitations up to the lesser of:
- 1. 5000
- 2. Individual's compensation
- 3. Limit not contributed to other (regular and Roth) IRAs
- B.) Tax Free Deferred Accum of Earnings
- C.) Distributions:
- 1. Taxable - previously accum untaxed earnings
- 2. Non Taxable - the principal contributions (not deducted when contributed)
Coverdell Education Savings Accounts (education IRA)
- *Has a PHASE OUT**
- 1. $2000 limit per benificiary
- 2. Non-deductible contributions
- 3. Tax-Free Accum of earnings
- 4. Tax Free Distributions
- 5. Qualified expenses include: tuition, fees, tutoring, books, room and board, supplies and equipment.
- 6. Must be used by age of 30 of distributed with 10% penalt or rollover to another family member.
Student loan Interest Expense
(deductions to arrive @ AGI)
Has Phase Out
- 1. limited to $2500
- 2. Phase Out**
- 3. a dependent may NOT claim the adj
- 4. taxpayer must be legally obligated to pay the loan
- 5. interest on loans incurred by taxpayer solely for qualified edu exps
- 6. any excess interest is disallowed is personal interst and NOT deductible.
Tuition and Fees Deduction
(Deduction to arrive @ AGI)
- 1. qualified expenses up to 4000 (any excess itemized deduction 2% test)
- 2. 4000 for taxpayers with AGI = or < 65,000
- 3. 2000 for taxpayers with AGI > 65,000
- 4. No Adj for taxpayers with AGI over 80,000
- 5. Not eligible to claim if expenses were applied to american opportunity credit and/or liftetime learning credit, coverdell ira.
Health Savings Account
- 1. workers with high deductible health insurance are able to make pre tax contributions of up to $3100 to cover healthcare costs.
- 2. amounts are increased for people over the age of 55
- 3. Any amounts distributed used to pay qualified medical exp are not includible in gross income.
- 4. any money not used for med exp are includbile in gross income AND subject to a 10% penalty.
(Deduction to arrive @ AGI)
- 1. New workplace must be 50 miles farther from old house than old workplace was
- 2. Must be thirty nine week stay, 75% of the yr.
- 3. Only direct moving costs: travel, lodging, transportation exp, tolls and parking fees, transporting household goods and personal effects to the new location.
- 4. NOT DEDUCTIBLE:
- meals, pre-move house hunting, exp of breaking lease, temp living exp
What are the 3 adjustments not deducted on schedule C?
- 1. Tax on Self-employment 50%
- 2. Self-Employed Health insurance 100% deductible.
- 3. Keogh (Profit Sharing) Plans
Keogh (Profit sharing) Plan
- 1. Maximum annual deductible amt: Lesser of $50,000 or 25% net (keogh/self-employed)earnings or 20% with shortcut
- 2. Maximum contribution: 50,000 or 100% of net earnings.
Keogh Net Earnings Calculation
- 3. Net Earnings Calculation:
- Business Income
- <Business Exps>
- Net Business Income
- <1/2 Self Employment Tax>
- <Keogh deduction>
- Keogh Net Earnings
Penalty on Early withdrawal of Savings (interest income) - Interest Forefeited
Deduction to Arrive @ AGI
do not net against interest income
Deduction to Arrive @ AGI
- 1. can be duducted by the contributing spouse
- 2. child support deductible. dead beat dad payments are first applied to child support then alimony.
Below the Line
- 1. Medical Expenses
- 2. Taxes State, Local, Foreign
- 3. Interest
- 4. Charity
- 5. Casualty Theft Loss
- 6. Job Expenses
- 7. Misc other
(7.5% of AGI Test)
- 1. Payments for yourself, spouse, dependent, SXXORT Test, like exemption no U or P.
- 2. Deducted in year paid or charged on CC.
Deductible Medical Exp Formula
7.5% of AGI test
- Qualified Medical Exp
- <Insurance Reimb>
- Qualified Medical Exp "paid"
- <7.5% of AGI>
- Deductible Medical Exp
Types of Deductible Medical Expenses
7.5 of AGI Test
- 1. medice, drugs prescribed
- 2. doctors
- 3. required surgery
- 4. transportation to medical facility
- 5. expenses incurred for removal of structures for easy access in homes.
- NOT allowed:
- elective surgery, life insurance, health club memberships,
State, Local, and Foreign Taxes
- 1. Real Estate Taxes
- 2. Income Taxes
- 3. Property Taxes (state and foreign)
- 4. Sales Tax (state and local)
- NON Deductible:
- 1. Fedral Taxes
- 2. Inheritance taxes for sales
- 3. Business and Rental property taxes
- 1. Home Mortgage Interest
- 2. Home Equity Indebtedness
- 3. Investment Interest Exp
- 4. Personal Interest NOT DEDUCTIBLE
- 5. Prepaid Interest (allocate to proper period)
- 6. Educational Loan Interest ADJUSTMENT TO ARRIVE at AGI NOT Itemized.
REal Estate Taxes (state, local, foreign)
- 1. prorate taxes in year of sale/purchase
- 2. taxes paid under protest are deductible, subsequent recovery is includible in income.
- 3. do not include street, sewer and sidewalk assessment taxes.
- 1. estimated taxes paid during yr are deductible
- 2. witheld taxes from paychecks during the yr are deductible
- 3. Assessments paid during the yr for the prior yrs tax are deductible.
- 1. Interest up to 1,000,000 (500,000 MFS) is deductible as qualified residence interest.
- 2. Incurred in buying, constructing, improving principal and 2nd home.
- 3. Secured by home
- 4. Points related to acquisition indebtedness is deductable
- 5. Refinancing points must be amortized over the period of the loan.
Investment Interest Exp
- 1. Like Gambling Loss Rules
- 2. Includes: interest and dividens, rents, royalties, long and short term capital gains.
What are the rules for property donated?
Individual taxpayers may deduct the FMV of property donated to charity
What are charitable contributions?
- 1. Charity items giving to orginzations (tax deductible)
- 2. Cash or FMV of Property
- 3. Maximum allowable deduction 50% of AGI, 30% FMV of property.
What are NOT charitable contributions?
- 1. Gifts to individuals, Needy families,
- 2. Political Contributions.
Who is charitable appreciated property treated?
- 1. Deduct at FMV
- 2. 30% of AGI, total 50% of AGI
Consideration for Contribution?
1. taxpayer may only deduct the excess contribution over the consideration rec'd.
i.e. - Charity ticket costs $200, actual value to attend charity 50$, only $150 is deductible.
Time for Deduction of charitable contributions?
- 1. Cash or check - when actually paid
- 2. Credit Card - When Charged.
How is excess charitable contribution treated?
1. carryover for 5 years applied in a first-in, first-out basis after current year contributions are deducted.
Casualty Theft Losses (10% AGI test)
- Smaller Loss (1.Lost Cost/Adj Basis or 2. Decreased FMV)
- <Insurance Recovery>
- Taxpayer's loss
- Eligible Loss
- <10 % AGI>
- Deductible loss
(Itemized Deduction subject to 2% AGI Test)
- 1. Must be job related and:
- A. Maintain or improve the skills needed by the individual in his or her trade or business
- B. Meet the express req of the indv employer for retention of this job.
**Not to be consfused with educational interst loan exp, adj to arrive at agi**
How are business exp reimbursements treated in a nonaccountable plan?
Under a nonaccountable plan (i.e., expenses are not reported to the employer), any amounts received by an employee from the employer must be reported by the employer as part of wages on the employee's W-2 for the year (and subject to income tax withholding requirements). The gross amount received is reported as income.
Any expenses taken against the gross amount received in a nonaccountable plan (e.g., the car mileage expenses and the reimbursement to the company) are considered miscellaneous itemized deductions and are subject to the 2% AGI limitation.
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