Above the Line Deductions Flashcards
The following items are reported on Mr. and Mrs. Spice’s 2023 joint return:
Net profit on Mrs. Spice’s Schedule C of $40,000
Mr. Spice’s paid court-ordered alimony of $5,000 for a pre-2019 divorce
Self-Employment Tax of $5,650 on Mrs.
Spice’s Schedule C profit ($2,825 employer’s portion)
Compute their adjusted gross income for 2023.
For pre-2019, alimony and separate maintenance payments are gross income to the recipient and deductible by the payor.
In addition, self-employed individuals can deduct the employer’s portion of FICA taxes paid to arrive at AGI (Publication 17).
For 2023, the deduction is for Mrs. Spice. Thus, the Spices’ AGI is equal to $32,175 ($40,000 net profit – $5,000 alimony – $2,825 employer’s portion of self-employment tax).
Alimony
For pre-2019, alimony and separate maintenance payments are gross income to the recipient and deductible by the payor.
Alimony after 2018
not deductible
requirements for qualified alimony payments.
The payment must be made in cash or equivalent.
Payment must be received on behalf of a spouse under a divorce or separation agreement.
Payee spouse and payor spouse must not be members of the same household at the time of payments.
The payor spouse is not liable for any payments after the death of the payee spouse.
The spouses must not file joint returns with each other.
In addition, child support payments and any part of an alimony payment designated as child support are not deductible. Since child support payments are not deductible to the payor, these payments are not considered alimony
All of the following are requirements for a payment to be alimony (under instruments executed after 1984 but before 2019),
Payments are required by a divorce or separation instrument.
Payments are not required after death of the recipient spouse.
Payments cannot be a transfer of services.
IRA distributions only up to $10,000 used for qualified first-time homebuyer expenses are
not subject to the 10% penalty tax.
IRA Distributions made to pay medical expenses in excess
of 7.5% of AGI.
During the year, Sally Sales purchased tickets to three theater performances and two sporting events. Each event includes a meal during the event. She purchased two tickets for each event for a total of 10 tickets, each separately stating the cost of the performance/event and the meal. Sally gave these tickets away to legitimate business customers and has records to prove it. Sally did not go with these customers to the event or performance. Sally can claim
transportation between home and a temporary work location in the same trade or business may be deducted.
Thus, the transportation expenses to visit clients and the business-related seminars are all deductible.
Mileage $3,603 (5,500 miles × $.655/mile)
Airfare 300
Deductible travel costs
$3,903transportation between home and a temporary work location in the same trade or business may be deducted.
Thus, the transportation expenses to visit clients and the business-related seminars are all deductible.
Mileage $3,603 (5,500 miles × $.655/mile)
Airfare 300
Deductible travel costs
$3,903
Individuals are allowed to deduct
interest paid during the tax year on any qualified education loan.
qualified education expense for purposes of the student loan interest deduction?
amounts paid for the following items: tuition and fees; room and board; books, supplies, and equipment; and other necessary expenses, such as transportation.
Gross income exceeds the upper limit of the
phaseout range for the student loan interest deduction ($90,000).
if the Alimony payments are in services or property and not cash,
they cannot be considered alimony
Section 219(g) limits the deductions made to IRAs by individuals filing a joint tax return when one or both are covered by their employers’ retirement plans.
For the taxpayer covered by the plan, the deduction is phased out beginning when AGI exceeds $116,000 in 2023.
Mr. and Mrs. Smith are both employed and file joint federal income tax returns.
both have IRAs, and their combined modified adjusted gross income was $53,000.
Mr. Smith contributed $6,500 to his IRA, and Mrs. Smith contributed $3,500 to her IRA. What is the maximum IRA deduction each is entitled to for 2023?
Because the Smiths’ income does not exceed the phaseout limit for active participants, they may deduct the entire contribution.
Larry and Marge Strong, ages 45 and 46, are married and living together.
file joint federal income tax returns for 2023.
Larry is an active participant in his employer’s pension plan. Marge is not an active participant in any plan.
Each contributed the maximum allowed for the year of $6,500 to an individual retirement account (IRA) on February 1, 2024. Larry’s adjusted gross income is $141,000 and Marge’s is $82,000. The deductible portion of Marge’s contribution to her IRA is
Larry is an active plan participant, and his income exceeds the phaseout range ($116,000-$136,000 MFJ) for active plan participants, he is not allowed a deduction.
Marge is not an active plan participant; she may deduct her contribution as long as she does not exceed the AGI limits.
When one spouse is not an active plan participant, the IRA phaseout occurs when the couple’s AGI is between $218,000 and $228,000.
6500/(228000-218000) phaseout range) X (228000-223000(agi)= 3250
Ms. Seabreeze had the following during the current year:
Alimony received (post-2018 divorce) $ 6,500
Wages 14,000
Net loss from self-employment
(10,000)
Interest income
5,000
For the purpose of an IRA, Ms. Seabreeze had compensation for the current year of
Alimony not taxable to recipient
Self Employment net loss not included
Insterest income is not earned
Compensation =14,000
Who is eligible for an Archer MSA in 2023?
A maximum of only 750,000 individuals who have elected coverage in a high-deductible health plan and are either self-employed or employed by a small employer with no more than 50 workers when the Archer MSA is established (Publication 969).
All of the following are true about Archer MSAs
deduction for an Archer MSA is not included with other medical expenses and is not subject to the 7.5% limitation.
Archer MSAs (previously called Medical Savings Accounts)
allow individuals who are self-employed or employed by a small employer and who are covered by a high-deductible health insurance plan to make tax-deductible contributions to an Archer MSA
Funds accumulated to pay medical expenses.
An Archer MSA can be rolled into a Health Savings Account tax-free.
Jury duty
pay must be included in gross income,
but if it must be given to an employer because the employer continues to pay salary while the individual is serving on the jury, the amount of jury duty pay turned over to the employer can be deducted as an adjustment to gross income
n the current year, Ms. Smith withdrew her funds from a time-savings account before maturity and was charged a penalty of $2,000 for early withdrawal. The interest earned on the account in the current year was $1,600.
Report $1,600 interest income; deduct penalty of $2,000 as an adjustment to gross income to arrive at adjusted gross income.
Archer MSA contributions are subject to an annual limitation, which is
A percentage of the required “high deductible” health plan amount.
Family coverage is 75%
Individual coverage is 65%
What amount can Self-employed persons may deduct from gross income for health insurance
100% of amounts paid during 2023 for health insurance for themselves, their spouses, and their dependents and, normally,
100% of amounts paid during 2022.
However, the couple cannot take a deduction for 2023 since Julie was eligible for an employer health plan even though she declined to participate (Publication 17).
Rental Income is
Passive
A person who actively participates in rental real estate activity is entitled to deduct up to
$25,000 of losses from the passive activity from other-than-passive income, provided that the individual’s income does not exceed $100,000.
Single individuals and married individuals filing jointly can qualify for the $25,000 amount.
Married individuals who live together for the entire year and file separately cannot qualify. Thus, Tom may deduct $25,000 of the loss (Publication 925).
net operating losses and the at-risk limits are t
In applying at-risk limits to individuals, each item of leased Sec. 1245 equipment, farm, or oil and gas property is treated as a separate activity.
In applying at-risk limits to individuals, each item of leased Sec. 1245 equipment, farm, or oil and gas property is treated as a separate activity.
If the amounts that you borrow for use in the activity are secured by property not used in the activity, the amount considered at-risk is limited to the net fair market value (the fair market value on the date the property is pledged less any prior or superior claims to which it is subject) of your interest in the property.
