104-2 Income Tax: Deductions and Credits Flashcards
Standard deduction amounts for 2019 by filing status
1) Single: $12,200
2) MFJ: $24,400
3) MFS: $12,200
4) Head of household: $18,350
5) Qualifying widow(er): $24,400
Additional standard deduction amounts
Eligible for taxpayers who are 65 or older or blind
Double these amounts if taxpayer is both > 65 yrs old and blind and also double for 2 taxpayers Single: $1,650 MFJ: $1,300 MFS: $1,300 Head of household: $1,650 Qualifying widow(er): $1,300
Itemized deductions
Reported on Schedule A of Form 1040
The major item or activity that will permit a taxpayer to itemize deductions is the ownership of a personal residence w/ the corresponding mortgage interest deduction
Nontaxable income
(such as municipal bond income)
the expenses to generate that income are not deductible (such as the investment expenses and the investment interest expenses incurred for the municipal bonds)
Medical expenses
A deduction is available for any expense incurred w/ respect to the diagnosis, cure, treatment, or prevention of disease, as well as for transportation expenses related to this objective
Premiums paid directly by the taxpayer from after-tax income for accident and health insurance and disability insurance can also be included in deductible medical expenses
All medical expenses are subject to a 7.5% of AGI floor, which means no qualifying medical expense may be deducted until the total of all qualifying expenses exceeds 7.5% of a taxpayer’s AGI
Effectively, this eliminates the deduction for most taxpayers except for those who experience a catastrophic illness for which they do not have insurance coverage
5 types of possible interest expenses that may be incurred by a taxpayer
1) Consumer interest (never deductible)
2) qualified residence interest
3) investment interest expense
4) business interest
5) passive interest
2 types of qualified residence interest
1) Acquisition indebtedness: interest incurred in acquiring, constructing, or substantially improving a qualified residence of the taxpayer and 1 other residence, such as a vacation home
2) Home equity loan indebtedness: interest deduction is not allowed if the proceeds on the same loan are used to pay personal living expenses
Personal casualty losses
Deductible only if incurred in a federally declared disaster
The event must result in property damage and the event must be sudden, unusual, and unexpected (such as a hurricane, tornado, or wildfire)
Most important misc itemized deductions
1) federal estate tax that is attributable to items included in the taxpayer’s estate as income in respect of a decendent (IRD)
2) gambling losses and transaction expenses to the extent of gambling winnings
3) impairment-related work expenses for handicapped taxpayers
4) the unrecovered investment in an annuity contract when the annuity terminates because the taxpayer died (e.g. in a single life period annuity)
Reimbursed employee expenses: accountable plan vs. nonaccountable plan
Accountable plan: require substantiation (records)
Nonaccountable plan: expenses included as income, substantiation not required
Home Office Expenses
A self-employed individual may deduct qualifying home office expenses to reach AGI
In order to be deductible, a home office must be used regularly and exclusively as a principal place of business
Other deductions: legal & accounting fees, worthless securities, bad debts
1) Legal & accounting fees: nondeductible for personal purposes. Deductible in calculating AGI when incurred in connection w/ a trade or business
2) Worthless securities: must be completely worthless to be deductible, losses considered to be capital losses occurring on the last day of the year in which the securities become worthless
3) Bad debts: a deduction is allowed for business debts that become partially or wholly worthless if the income form the debt was previously included in the taxpayer’s income
Qualifying child
Must be the taxpayer’s child, foster child, brother, stepbrother, stepsister, or a descendant of any of the previously listed and must have lived w/ the taxpayer more than half of the tax year
Qualifying relative
An individual who is not a qualifying child and bears a specified relationship to the taxpayer such as a parent, in-law, niece, nephew, aunt, uncle, or is unrelated to the taxpayer but the individual resided in the taxpayer’s principal home during the tax year.
Taxable income calculation
Adjusted gross income
Less the greater of:
Total itemized deduction or standard deduction (including any additional standard deductions allowed to the taxpayer)
=Taxable income
Taxpayer’s marginal rate
The rate that is paid on the last taxable dollar
Effective / avg. tax rate
tax paid / taxable income
Progressive income tax system
The more taxable income a taxpayer has, the higher the tax bracket in which the last dollar is taxed
Tax credit
a dollar-for-dollar reduction against an individual’s income tax liability
Not affected by the marginal tax rate of the taxpayer
2 categories of tax credits
1) Refundable tax credits: paid to the taxpayer even if the amount exceeds the taxpayer’s tax liability
- a refundable credit can create a refund
2) Nonrefundable tax credits: cannot be used to create a refund; they will reduce a taxpayer’s tax liability to zero
- some nonrefundable credits may be carried forward
Child and dependent care credit
A nonrefundable tax credit
Permitted for a portion of dependent care expenses paid for the purpose of allowing the taxpayer to be gainfully employed
Child tax credit
In 2019, a $2,000 nonrefundable tax credit is given for each qualifying child under the age of 17
Reduced at AGI thresholds
Adoption expense credit
Nonrefundable tax credit for qualified adoption expenses in 2018 and is taken in the year the adoption becomes final
Does not include surrogate parenting arrangement or any costs incurred for adopting a spouse’s child
The max credit (in 2019) is $14,080 per child, including children w/ special needs
Any unused credit may be carried forward for up to 5 years
Foreign tax credit
A means of avoiding double taxation by granting a tax credit for taxes paid or accrued to a foreign country or U.S. possession
A taxpayer may not take advantage of both the foreign tax credit and foreign earned income exclusion permitted under U.S. tax law
Underpayment penalty
20% may be assessed for an accuracy-related penalty due to negligence or a substantial understatement of tax
