Below the Line Deduction Flashcards
Below-the-line deductions lower income after the adjusted gross income (AGI), referred to as the line
While not a dollar for dollar savings, these deductions are important for lowering tax liability and creating tax savings using qualified income and expenses.
Below-the-line deductions may be reported on the Schedule A, Form 8995 Qualified Business Income Deduction Simplified Computation, or on the first page of the 1040 itself.
There are two below-the-line deductions available. “Only take the larger amount”
1- Standard deduction:
Itemized deductions: goes on Schedule A.
Remember: for married taxpayers filing separately (MFS), both spouses must itemize or both spouses must take the standard deduction.
Qualified Business Income: The IRS defines QBI as the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business, including income from partnerships, S corporations, sole proprietorships, and certain trusts.
Married filing separately:
1- One spouse owes back child support or another bill that the IRS may offset the joint refund to pay.
2- One spouse uses income-based student loan repayments. This will avoid the repayment being based on combined income.
3- Both spouses are high-income earners.
4- Spouses are considering or completing a divorce.
5- One spouse will be ready to file a tax return long before the other spouse.
MFS returns do not qualify for many credits such as
Child and Dependent Care or Adoption Tax Credits. For 2021, the Earned Income Credit and Child Tax Credit can still be included on the tax return if taxpayers meet expanded criteria included in the American Rescue Plan Act (ARPA).
Higher Standard Deduction is available to:
1- Blind
2- Over 65
3- Over 65 and blind
IRS considers you 65 the day before your birthday. Therefore, you can take a higher standard deduction for 2023 if you were born before January 1, 1959.
Standard Deduction Amount for Dependent:
If a taxpayer can be claimed as a dependent by another taxpayer, their standard deduction is limited to a certain dollar amount.
Itemized Deduction:
1- Unreimbursed Medical Expenses
“Medical expenses must exceed 7.5% of a taxpayer’s AGI in order to qualify for deduction.” Schedule A
- Out-of-pocket insurance premium payments for medical care or qualified long-term care services policies. Payments made pre-tax through payroll deduction do not qualify.
2- Taxes Paid:
a) State and local income taxes: These are commonly amounts withheld on your Form W-2, boxes 17 and 19 for state and local income taxes. State and local income taxes include estimated tax payments, balance due amounts paid in the tax year, and refunds credited to the next tax year.
b) Sales taxes
A taxpayer can choose to deduct the sales tax paid in the tax year, if this would provide them with a larger benefit than state and local income taxes paid.
c) State and local real estate taxes and personal property taxes
Real estate taxes paid on your primary and additional personal homes, and is not limited to two homes like mortgage interest.
Personal property taxes based only on the value of personal property that is charged once a year can also be deducted.
3- Home mortgage interest:
Home mortgage interest and points used to buy, build, or improve your first and/or second home, as well as mortgage insurance premiums, can be deducted, but may be subject to limitations.
4- Investment interest:
When you borrow money to buy property for investment purposes, any interest you pay on that borrowed money becomes an “investment interest expense.”
Investment interest goes on Schedule A, under “interest you paid.” You may also have to file Form 4952.
5-Gifts to charity
“The deduction for cash charitable contributions is limited to 60% of the taxpayer’s AGI.”
Any contributions that are not allowed due to this limit carry over until used up for a maximum of five years.
Form 8283, Noncash Charitable Contributions, is required when the value of all donated property is more than $500. Remember that cash and non-cash donations are reported on separate lines on Schedule A.
6- Casualty and theft losses:
Only casualty losses derived from a federally declared disaster can be deducted in the year the loss occurred.
7-
a) Gambling losses.
b)
Qualified Business Deductions:
Allows an eligible entity to deduct up to 20% of their QBI on their tax return.
However, the QBI deduction is never allowed for C Corporations.
Owners of these types of entities can be eligible for the QBI deduction:
1- Sole proprietorships
2- Partnerships
3- S corporations
4- Limited liability companies (LLCs)
What these entities have in common is that the income from each is reported on an individual tax return.
Although the entity will identify the amount of qualified business income, the individual is the one who claims the QBI deduction.
Income that are not included in QBI:
1- Capital gains or losses
2- Dividends
3- Interest income
4- Non-US source earned income
To qualify for the QBI deduction, total taxable income from all sources (including wages, interest, capital gains, etc.) must be below the income threshold.
HOW TO CALCULATE QBI:
1- 20% of your qualified business income, plus 20% of your qualified REIT dividends and qualified Publicly traded Partnership (PTP) income
2- 20% of your taxable income minus your net capital gain
REIT Dividends:
Real estate investment trusts (REIT) are investment vehicles that can pay ordinary income, capital gains, or return of capital. All of these items are considered dividends for the purposes of QBI.
1- IRA = Earnings are always taxed when distributed
2- Roth account = Post-tax account where tax has already been paid, and distributions are not taxed
3- 401(k) = Pre-tax account where tax is deferred until the individual takes a distribution
NB: all accounts are taxed as ordinary income (like wages).
Required Minimum Distribution Calculation
If no distributions are taken, or if the distributions are not large enough, they may have to pay a 50% penalty on the amount that should have been taken out.
The required minimum distribution is the minimum amount an individual must withdraw from their account each year.
*
An individual can withdraw more than the RMD.
Taking out a lump sum distribution may impact a taxpayer’s income tax liability. The lump-sum amount may put an individual into a higher tax bracket, requiring them to pay more.
Public safety officers
IRS provide tax break for these officers.
Eligible retired officers can exclude the following premiums from their income:
1- Accident Insurance
2- Health Insurance
3- Long-term Care Insurance
They can exclude smaller of the cost of insurance premiums or $3,000.
Survivors like spouses or children of public safety officers are not able to use benefits, after the officer dies.
A qualified charitable distribution (QCD) is a distribution of funds from an IRA (other than a SEP or SIMPLE IRA) directly by the trustee to a qualified charitable organization.
To qualify:
1- Must be 701/2 or older to make a QCD
2- The maximum is for each spouse $100,000
3- Distribution need to take place before Dec 31
4- The charity must be a 501(c)(3) organization and be eligible to receive tax deductible contributions
1- In addition to the benefits of giving to charity, the amount of the QCD is excluded from taxable income.
2- Keeping taxable income lower may reduce the impact of certain tax credits and deductions.
Money must come directly from IRA account.
SSA (Social Security)
1- If an individual has no other income outside of SSA benefits, the benefits may not be taxable and they may not need to file a tax return.
2- If an individual has income from other sources, they may have to pay taxes on some of their benefits.
3- If a taxpayer’s dependent receives Form SSA-1099, the income will be reported on the dependent’s tax return if they have a filing requirement.
Retroactive Lump Sum Payment
1- A lump-sum payment is a one-time SSA payment that is received for prior year benefits.
2- A lump-sum election method can be selected if it lowers the taxable portion of an individual’s benefits.
3-An individual cannot amend prior tax returns to reflect the SSA benefits received in a lump sum in the current year.
