14 AGI and Taxable Income Adjustments

Question 1

What is the maximum contribution that can be made to a 401(k) plan to reduce an employees taxable salary?

Answer 1

Voluntary employee contributions can reduce taxable salary up to a maximum of $22,500 (2023) and $23,000 (2024).

Question 2

What is the maximum contribution an individual can make to a traditional or Roth Individual Retirement Account (IRA)?

Answer 2

Lower of $6,500 ($7,000) or earned income for 2023 (2024)

Question 3

What deductions are allowed for a Roth Individual Retirement Account (IRA)?

Answer 3

Zero. Deductions are never allowed for Roth IRA contributions.

Question 4

The donation of a long-term capital asset is valued for charitable contribution purposes at fair value (FV). Assume a taxpayer contributes inventory or a short-term capital asset to a charitable organization. What amount can be deducted?

Answer 4

If inventory or a short-term capital asset is conveyed to a charitable organization, the charitable deduction is FV on the contribution date reduced by any ordinary income or short-term capital gain that would be recognized if the asset was sold.

Question 5

Taxpayer W buys 1,000 shares of stock for $30 per share. Several years later when the stock is worth $40 per share, the stock is donated to a charitable organization. What gain does the taxpayer have to recognize? What amount of itemized deduction does the taxpayer have because of this gift?

Answer 5

When donated, long-term capital gain property is deductible at fair value (FV) and no taxable gain must be recognized. Thus, taxpayer W has no taxable (recognized) gain here but a charitable contribution of $40,000 (1,000 shares at $40 per share).

Question 6

What factors can increase a taxpayer’s standard deduction?

Answer 6

Taxpayer is blind at year-end.
Taxpayer reaches 65 by year-end.

Question 7

What is the maximum deduction for aggregate personal state and local income taxes or sales tax and property taxes?

Answer 7

Individuals can deduct no more than $10,000 of (1) state and local income taxes or sales taxes and (2) property taxes.

Question 8

What is the investment interest deduction limit?

Answer 8

It is limited to net investment income.

Question 9

Define “net investment income.”

Answer 9

Interest, dividends, ordinary gains (not long-term capital gains unless elected by taxpayer) less deductible investment expenses

Question 10

Describe what is allowable for the deduction for home mortgage interest.

Answer 10

Interest paid on debt relating to the principal residence and a second home is deductible.
Debt is generally limited to $750,000 on debt to purchase, construct, or improve a residence.
Points paid on loans can be deducted in the year of purchase or improvement; for re-financings, the points are amortized.

Question 11

What type of income taxes are deductible?

Answer 11

Personal income taxes imposed by state, local, or foreign governments are deductible.

Question 12

What type of property taxes may a taxpayer deduct as an itemized deduction?

Answer 12

Taxes imposed on real property owned by taxpayer that is used for personal purposes
Taxes on personalty if they are based on the value of the property

Question 13

How is the uninsured medical expense deduction calculated?

Answer 13

Total medical expenses for taxpayer, spouse, and dependents reduced by 7.5% of adjusted gross income

Question 14

List the qualifying medical expenses that may be included in the computation of medical expense deduction.

Answer 14

Doctors, eyeglasses, dentists, and health insurance
Cost of prescribed drugs
Medical transportation and travel up to $50/night/person
Costs of altering a home for a disabled person to the extent fair market value is not increased

Question 15

What determines whether a taxpayer should take a standard deduction or an itemized deduction?

Answer 15

The taxpayer deducts the greater of the standard deduction or itemized deductions.

Question 16

What is the limit on the student loan interest deduction?

Answer 16

Limited to $2,500 of interest on loans to finance the cost of higher education

Question 17

List the characteristics of a charitable contribution.

Answer 17

Must be made to qualifying organization (not political organizations)
Can include cash or property but not services
Written records of contribution are required
Limited based on adjusted gross income

Question 18

Describe the limits on charitable contributions for individuals.

Answer 18

50% of adjusted gross income (AGI)
60% of AGI for cash contributions
Deduction for contributions of long-term capital gain property to “A” charities limited to 30% of AGI
Deduction for contributions of long-term capital gain property to “B” charities limited to 20% of AGI
Unused deductions carry forward five years

Question 19

How is casualty loss calculated for business property?

Answer 19

Insurance proceeds less adjusted basis of damaged property

Question 20

Define “casualty.”

Answer 20

A sudden, unexpected event damaging or destroying an asset.
To be deductible, the event must be attributable to a federally declared disaster.

Question 21

What floor limits are applied to casualty losses on personal use property?

Answer 21

$100 for each occurrence
Total losses for the year are reduced by 10% of adjusted gross income

Question 22

What deductions are subject to a 2% floor?

Answer 22

None. 2% miscellaneous itemized deductions are no longer deductible.

Question 23

What entities make up public “50%” charities?

Answer 23

Government subdivisions, hospitals, churches, schools, and similar institutions operated for religious, scientific, educational, or charitable purposes

Question 24

What common deductions are allowed “above the line” to arrive at adjusted gross income (AGI)?

Answer 24

Alimony payments for divorces finalized before 2019
Trade or business
Rent or royalty expenses
Losses
50% of self-employment tax
100% of medical insurance for self-employed
IRA and Keogh contributions
Student loan interest
Classroom expenses for certain teachers

Question 25

What deductions are allowed for business travel?

Answer 25

Deductions are limited to trips with a business purpose.
The amount and purpose must be substantiated.
Meals and lodging when “away from home” overnight can be deducted, but meal costs are reduced by 50%.

Question 26

Why is a deduction for AGI typically better than a deduction from AGI?

Answer 26

Deductions for AGI are useful in several ways:
1. Lower AGI results in greater deductions in other areas on the tax return
2. Greater credits allowed
3. They are always deductible so lower taxable income
Expenses that qualify as an itemized deduction are only useful if the taxpayer has total itemized deductions that are greater than the standard deduction.

Question 27

When is jury duty pay received allowed as a deduction for AGI?

Answer 27

The fee received for jury duty is always included in gross income, but the amount is deductible for AGI if the payment is remitted to the taxpayer’s employer.

Question 28

True or False: Gambling losses are deductible as an itemized deduction to the extent of winnings

Answer 28

True. If a taxpayer does not itemize their deduction, no deduction is allowed for gambling losses.

Question 29

Is interest paid on a home equity loan deductible as an itemized deduction?

Answer 29

No, generally not deductible unless loan proceeds used for capital improvements to the home.