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What are the 10 common deductions to arrive at AGI (adjustments)?
- Educator expenses
- IRA deduction
- Student loan interest deduction
- Health savings account deduction
- Moving expenses
- Deductible part of self-employment tax
- Self-employed health insurance deduction
- Deduction for contributions to self-employed retirement plans (Keogh)
- Penalty on early withdrawal of savings
- Alimony paid
Who may use the educator expenses deduction? Is there a limit? Is there a phase-out? If so, how much?
- Kinder – 12th grade educator may deduct up to $250 per person (total of $500 for a couple) of qualified expenses
- Qualified expenses include books, supplies, computer equip & software, materials, professional development
- Does NOT include expenses for home schooling or for nonathletic supplies in health or physical education.
- No phase-out
Who may use the IRA deduction? Is there a limit? Is there a phase-out? If so, how much?
- The deduction is the lesser of $5,500 per person plus an extra $1,000 for taxpayers >50 y.o. OR the individual’s compensation (earned income only; passive income does not count)
- The deduction is available unless BOTH of the following two conditions apply
- ++ Excessive AGI: AGI above Single $62,000, MFJ $99,000 AND
- ++ Active participation in another qualified retirement/pension plan (the husband & wife are considered separately) OR
- ++++ Both spouses are phased out if Active Participation by one spouse, but AGI is >$186,000
True / False: Contributions to a Roth IRA are tax deductible?
- Only contributions to a traditional IRA (with limitations)
A husband and wife contribute $14,000 combined to a traditional IRA during the year. Are there any tax consequences of this contribution?
- If they meet certain limitations, they may be able to deduct $5,500 each as an adjustment ($11,000 total).
- If both spouses are over the age of 50, they may deduct an additional $1,000 each ($13,000 total deduction)
- The extra $1,000 would be considered an excessive contribution and would incur a 6% penalty.
A taxpayer has contributed to a Roth IRA for the past 4 years. He has now reached age 59-1/2 and plans to take distributions. How are these distributions taxed?
- Because the distributions are occurring prior to the 5 year time limit (based on the date of first contribution)
- The initial distributions up to the amount of all contributions are a tax-free return of contributions.
- Distributions after that amount are taxed at ordinary income rates UNLESS
- The taxpayer waits for the 5 year time limit then all distributions are tax-free
True / False: A taxpayer participates in an employer-sponsored 401k plan and his AGI is >$62,000. He also makes contributions of $4,000 annually to a traditional IRA. The contribution to the traditional IRA will be penalized as an excessive contribution.
- The contribution is NOT tax deductible, but will not be penalized unless it exceeds the $5,500 limit (plus the extra $1,000 if over age 50).
Who may use a Coverdell Education Savings Account? Is the contribution tax-deductible? What are the contribution limits? Is there a phase-out?
- For qualified education expenses (including books and room and board) for a beneficiary <30 yo
- Contribution limited to $2,000 per year
- Phase-out if AGI: Single $95,000; married $190,000
Who may use the Student Loan Interest deduction? Is there a limit? Is there a phase-out? If so, how much?
- All student loan interest qualifies, but can only be taken by the one obligated to pay the loan.
- Dependents may not deduct the student loan interest, even if obligated to pay
- Parents may not deduct the student loan interest if not obligated to pay, even if paid on behalf of a dependent
- Limited to $2,500 annually, any more is lost as personal interest (non-deductible)
- Phase out begins: Single 65,000; MFJ $135,000
Who may use the Moving Expenses deduction? Is there a limit? Is there a phase-out? If so, how much?
- The new place of business and the taxpayer’s old house must be at least 50 miles farther away than the taxpayer’s old place of business to the old house.
- The employee must stay at the new place of employment at least 39 weeks during the 12-month period after moving. He can deduct the expenses as if staying, but if employment changes before that time, he must include the expenses in income the following year.
- The deduction is limited to qualified expenses (separate flashcard)
- There is no phase out
What costs are included in qualified Moving Expenses? Which costs are specifically excluded?
- Transportation (mileage, tolls, parking) and lodging of the family during the move
- Paying a mover to pack and move the household goods
- NOT INCLUDED
- Pre-move house hunting
- Expense of breaking the lease
- Temporary living expenses
Describe the tax on self-employment deduction.
- 50% of the self-employed Social Security plus Medicare tax is deducted.
- Income tax is not included
- To calculate:
- self-employed income x 92.35% = net self-employed income subject to SE tax
- net self-employed income subject to tax x 15.3% = total SE tax
- ½ total SE tax = deduction
Describe the self-employed health insurance deduction.
- Self-employed individuals may deduct all medical insurance premiums for
- ++ taxpayer
- ++ spouse
- ++ dependents
- IF the plan is in the name of the self-employed individual or the individual’s business
Who may use the Keogh deduction? Is there a limit? Is there a phase-out? If so, how much?
- The maximum annual deductible amount is the lesser of
- ++ $54,000 OR
- ++ 25% of Keogh net earnings (another way to calculate is 20% of self-employment income)
- The maximum annual contribution may be up to 100% of earnings, but only the above amount is deductible
Describe the early withdrawal of savings deduction.
Any penalty assessed on early withdrawal of savings (such as withdrawal of CD before maturity) is deductible
Describe the alimony deduction.
- Payment must be
- ++ legally required under a written divorce decree or separation agreement
- ++ in cash or cash equivalent (can’t be property transfer or services in kind, but could be payment of a credit card bill)
- ++ must be designated as alimony (cannot be child support)
- ++ payments that are both child support and alimony = the paid amount is first allocated to child support and the remainder to alimony