Above The Line - Adjustments

Question 0

Non-accountable plan

Answer 0

Rule: 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.
Rule: 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.

Question 1

List above-the-line

Answer 1

Educator exp
Ira
Student loan
Tuition and fees
Moving exp
50% FICA
SE health insurance
SE retirement
Interest withdrawal penalty 
Alimony paid
Attorney fees - discrimination 
DPAD

Question 2

Premiums on disability insurance

Answer 2

Premiums on disabilities policies are not deductible since payments under the policy are made to replace lost income, not to pay for medical expenses

Question 3

Ad valorem taxes on personal automobile

Answer 3

for cash-basis taxpayers, deductible taxes are generally deductible in the year paid, and real estate taxes, income taxes, and personal property taxes (e.g., ad valorem taxes on personal automobile) are allowable deductions.

Question 4

Education interest expense

Answer 4

The adjustment for education loan interest (an above-the-line deduction to arrive at AGI) is limited to the amount paid or $2,500 (whichever is lower), and all qualified education loan interest is allowed as part of the adjustment. The adjustment is phased-out for single taxpayers with modified AGI between $65,000 and $80,000 (2014) and married filing jointly between $130,000 and $160,000 (2014).

Question 5

Tax benefits rule

Answer 5

Under the tax benefit rule, an itemized deduction recovered in a subsequent year is included in income in the year recovered. In this question, only $1,150 of the state income taxes was actually deducted as an itemized deduction last year. The recovery is thus limited in the amount actually deducted (and not to the entire amount of the state tax refund).

Question 6

Casualty losses

Answer 6

individual must itemize deductions and the loss must exceed 10% of AGI plus $100 per casualty.

Question 7

Investment interest expense

Answer 7

CPA-07181
An individual taxpayer earned $10,000 in investment income, $8,000 in noninterest investment expenses, and $5,000 in investment interest expense. How much is the taxpayer allowed to deduct on the current-year's tax return for investment interest expenses?
	a.	
$5,000
	b.	
$0
	c.	
$2,000
	d.	
$3,000
Explanation
Choice "c" is correct. The deduction for investment interest expenses is limited to net taxable investment income which is defined as taxable investment income minus all related investment expenses (other than investment interest expense). If the investment expense is an itemized deduction, then only those expenses exceeding 2% of AGI are considered.
Taxable investment income includes: (i) interest and dividends (if taxed at ordinary income tax rates), (ii) rents (if the activity is not a passive activity), (iii) royalties (in excess of related expenses), (iv) net short-term capital gains, and (v) net long-term capital gains if the taxpayer elects not to claim the net capital gains reduced tax rate.
Calculation:
Investment income
$ 10,000
Less: Related investment expenses other than investment interest expenses
(8,000)
Net investment income
$ 2,000
The taxpayer's deduction for investment interest expense is $2,000: the lesser of (i) $2,000 net investment income or (ii) $5,000 investment interest expense.