CH. 6 - Individual Deductions Flashcards

1
Q

True or false” deductions for AGI are generally preferable over deductions from AGI because for AGI deductions reduce taxable income dollar-for-dollar.

A

True!

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2
Q

True or false: deductions from AGI sometimes play a large role in taxable income

A

False; deductions from AGI sometimes have no effect on taxable income.

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3
Q
A

Because several limitations on tax benefits for higher income taxpayers are based upon AGI, deductions for AGI often reduce these limitations, thereby increasing potential tax benefits.

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4
Q

Business activities

A

a profit-motivated activity that requires a relatively high level of involvement or effort from the taxpayer to generate income.

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5
Q

True or false: Congress does not allow taxpayers involved in business activities to deduct expenses incurred to generate business income.

A

False–congress DOES allow it!

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6
Q

Investment activities

A

a profit-seeking activity that is intermittent or occasional in frequency, including the production or collection of income or the management, conservation, or maintenance of property held for the production of income.

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7
Q

Trade or business

A

a profit-motivated activity characterized by a ­sustained, continuous, high level of individual involvement or effort.

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8
Q

What is the difference between business activities and investment activities?

A

Business activities (aka trade or business) involve a relatively high level of involvement or effort. (for example, if a student is a full time employee, they ae in the business of being an employee). On the other hand, investment activities are profit motivated activities that do not require a high degree of involvement or effort.

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9
Q

Why is the distinction between business activities and investment activities critical?

A

The distinction is important in determining whether a deduction associated with an activvity id deduction for AGI or from AGI, or even deductible at all.

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10
Q

Business expenses are deducted _________

A

for AGI (with one exception)

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11
Q

What is the lone exception to when business expenses are not deducted for AGI?

A

Unreimburseable employee business expenses, which are not deductible.

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12
Q

How many types of deductible investment expenses are there, and what are they?

A

Only two types–expenses associated with rental and royalty activities are deductible for AGI regardless of wither the activity qualifies as an investment or a business.

Investment inerest expense (the second type of deductible investment expense) is deductible from AGI (as an itemized deduction).

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13
Q

Ordinary and necessary

A

an expense that is normal or appropriate and that is helpful or conducive to the business activity.

Aka deductible expenses must be appropriate and helpful in generating a profit.

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14
Q

Taxpayers are allowed to deduct their expenses associated with general rental and royalty income ____________

A

for AGI.

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15
Q

Taxpayers disposing of business assets at a loss are allowed to deduct the losses _____ (for/from AGI)

A

for AGI

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16
Q

Define Excess business loss

A

Any business loss in excess of business income.

Aka you have 100k of net business income and 110k of rental losses, resulting in 10k excess business loss.

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17
Q

Are moving expenses deductible?

A

Generally no

(the only exception is for members of the Armed Forces (or spouses or dependents) on active duty moving unde military order)

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18
Q

Congress allows self-employed taxpayers to claim personal health insurance premiumsfor the taxpayer, the taxpayers spouse, the taxpayers dependents, and the taxpayers children under age 27 (regardless of whether the child is a depend of the taxpayer) as deductions ___________

A

For AGI, but only to the extent of the self-employment income derived from the specific trade or business.

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19
Q

True or false: self-employed taxpayers are not allowed to deduct health care insurance premiums if the taxpayer is eligible to participate in an employer-provided health plan.

A

True!

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20
Q

Traditional IRAs

A

an individually managed retirement account with ­deductible contributions and taxable distributions.

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21
Q

Deductible contributions for traditional IRAs are

A

for AGI deductions

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22
Q

Health Savings Accounts (HSAs)

A

accounts that allow individuals covered by a high-deductible plan to set aside amounts to pay for qualified medical and dental expenses for the taxpayer, spouse, and dependents.

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23
Q

Distributions from HSAs are:

A

tax-free if they paid for qualified medical expenses of the taxpayer, spouse, and dependents after the HSA was established. Otherwise, distributions are taxed as ordinary income (and subject to an additional 20% tax unless the taxpayer is disabled, ae 65 or older, or deceased).

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24
Q

Contributions to HSAs are deducted

A

for AGI

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25
Q

True or false: taxpayers are not allowed to deduct for AGI any interest income an individual forfeits to a bank as a penalty for prematurely withdrawing a certificate of deposit or similar deposit.

A

False; they ARE allowed to deduct for AGI

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26
Q

Qualified education loans

A

loans whose proceeds are used to pay qualified education expenses.

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27
Q

Qualified education expenses

A

consist of tuition and related costs for enrolling the taxpayer, spouse, or a dependent at a postsecondary institution of higher education.

These expenses include tuition and fees, books and expenses required for enrollment, room and board, and other necessary supplies and expenses, including travel.

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28
Q

What are the key facts for interest on education loans?

A
  • Up to $2,500 of interest on education loans is deductible for AGI
    -A loan qualifies as an education loan if the proceeds are used to fund qualified education
    -The interest deduction is phased out for taxpayers with AGI exceeding $70,000 ($145,000 if married filing jointly).
29
Q

What do FROM AGI deductions consist of?

A
  1. The greater of itemized deductions or the standard deduction
  2. A limited charitable contribution deduction for taxpayers not itemizing their deductions (2021 only)
  3. The deduction for qualified business income
30
Q

Many itemized deductions (from AGI) are _________ in nature but are allowed to subsidize desirable activities such as home ownership and charitable giving

A

personal

31
Q

What are some examples of qualified medical expenses from AGI?

A

Any payment for the care, prevention, diagnosis, or cure of injury, disease, or bodily function that are not reimbursed by health insurance or not paid for through a flexible spending or HSA account.

32
Q

The deduction for medical expenses in limited to____________

A

the amount of unreimbursed qualified medical expenses paid during the year (no matter when the services were provided), reduced by 7.5% of the taxpayer’s AGI.

33
Q

Floor limitation

A

a minimum amount that an expenditure (or credit or other adjustment to taxable income) must meet before any amount is ­allowed.

34
Q

What is the purpose of a floor limitation?

A

To restrict a deduction to taxpayers with substantial qualified expenses. Because this floor limitation is set at a high percentage of AGI, unreimbursed medical expenses rarely produce tax benefits, especially for high-income taxpayers.

35
Q

True or false: taxpayers may elect to deduct state and local sales taxes instead of deducting state and local income taxes.

A

True!

36
Q

Individuals may deduct as itemized deductions the payments they made during the year for what taxes?

A

-State, local, and foreign income taxes, including state and local taxes p[aid during the year through employer withholding, estimated tax payments, and overpayments on the prior-year return that the taxpayer applies to the current year (the taxpayer asks the state to keep the overpayment rather than refund it)
-State and local real estate taxes on property held for personal or investment purposes.
-State and local personal property taxes that are assessed on the value of the specific property.

37
Q

What is the total itemized deduction for state and local taxes limited to?

A

$10,000 ($5,000 for a taxpayer filing married separate)

38
Q

True or false: the itemized deduction for foreign income taxes is subjected to a $10,000 limitation

A

False; they are not subjected to any limitations

39
Q

There are _______ itemized deductions for interest expense. They are:

A

2.

First, individuals can deduct interest paid on acquisition indebtedness secured by a qualified residence (the taxpayer’s principal residence and one other residence). Acquisition indebtedness is any debt secured by a qualified residence that is incurred in acquiring, constructing, or substantially improving the residence.

Secondly, individuals can also deduct interest paid on loans ised to purchase investment assets such as stocks, bonds, or land (investment interest expense).

40
Q

True or false: political and campaign contributions are not deductible.

A

True!

41
Q

When a taxpayer donates property to a charity, the amount the taxpayer is allowed to deduct depends on whether the property is…

A

Capital gain property or ordinary income property.

42
Q

Capital gain property

A

any asset that would have generated a long-term capital gain if the taxpayer had sold the property for its fair market value.

Iin general, taxpayers are allowed to deduct the fair market value of capital gain property on the date of donation.

43
Q

Ordinary income property

A

All assets other than capital gain property. Aka property that if sold would generate income taxed at ordinary rates.

44
Q

Taxpayers contributing ordinary income property can deduction only…

A

the lesser of:
(1) the property’s fair market value
(2) the property’s adjusted basis

45
Q

What are examples of ordinary income property?

A

-Assets that taxpayers held for a year or less
-Inventory the taxpayer sells in a trade or business
-Business assets held for more than a year to the extent the taxpayer would recognize ordinary income under the depreciation recapture rules if the taxpayer had sold the property
-Assets, including investment assets and personal use assets, with a value of less than the taxpayers basis in assets (assets that have declined in value)

46
Q

Ceiling (for charitable contributions

A

limitation that is the maximum amount for adjustments to ­taxable income (or credits). The amounts in excess of the ceiling are ­either lost or carried to another tax year.

47
Q

Private Operating Foundations

A

privately sponsored foundations that actually fund and conduct charitable activities. Subject to less stringent restrictions than other charities

48
Q

Cash donations to public charities and private operating foundations are limited to…

A

60% of the taxpayers AGI

49
Q

Property donations to public charities and private operating foundations are limited to…

A

50% of the taxpayers AGI

50
Q

Deductions for contributions of capital gain property to public charities and private operating foundations are generally limited to…

A

30% of the taxpayers AGI

51
Q

Private nonoperating foundations

A

privately sponsored foundations that disburse funds to other charities. Ex: the Bill and Malinda Gates Foundation

52
Q

Deductions for cash and property contributions to private nonoperating foundations are limited to…

A

30% of the taxpayers AGI

53
Q

Deductions for contributions of capital gain property to private nonoperating foundations are limited to…

A

20% of the taxpayers AGI

54
Q

What happens when a taxpayers charitable contributions exceed the AGI ceiling limitation for the year?

A

The excess contribution is treated as though it were made in the subsequent tax year and is subject to the same AGI limitations the year year. The excess limitations can be carried forward 5 years before it expires.

55
Q

Standard deduction

A

a fixed deduction offered in lieu of itemized deductions. The amount of the standard deduction depends on the taxpayer’s filing status.

56
Q

Taxpayers generally deduct the ________ of their standard deduction or their itemized deduction

A

Greater of

57
Q

Bunching itemized deductions

A

a common planning strategy in which a taxpayer pays two years’ worth of itemized expenses in one year to ­exceed the standard deduction in that year.

58
Q

Deduction for qualified business income

A

Subject to limitations, equal to 20 percent of the taxpayer’s qualified business income.

59
Q

Qualified business income is a _______ deduction

A

from AGI

60
Q

True or false: Qualified business income is included as a from AGI deduction with either the itemized or standard deduction.

A

False; it is a from AGI deduction, but it is in addition the standard deduction or itemized deduction.

61
Q

Qualified business income applies to taxpayers with qualified business income from a:

A

partnership
S corporation
Sole proprietorship

62
Q

In terms of QBI, a taxpayer may deduct the _______ of __________

A

lesser;

  1. 20% of the QBI from a qualified trade of business (after application of the wage limit), + 20% of the taxpayers qualified real estate investment trust dividends and qualified publicly traded parternship income, if any, and
  2. 20% of the excess, if any, of taxable income over the taxpayers net capital gains (including qualified dividends)
63
Q

Qualified Business Income (QBI)

A

net business income from a qualified trade or business conducted in the United States. This is the tax base for the deduction for qualified business income.

64
Q

Qualified trade or business

A

for purposes of the deduction for qualified business income, any trade or business other than a specified trade or business.

65
Q

Specified service trade or business

A

any trade or business involving the performance of services in the fields of health, law, consulting, ­athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners, or which involves the performance of services that consist of investing and investment management trading, or dealing in securities, partnership interests, or commodities. Architecture and engineering services (their services build things) are specifically excluded from the definition of specified service trade or business.

66
Q

True or false: QBI does not include specified investment-related income, deductions, or losses (ie capital gains or losses, dividends, interest income not allocable to a trade or business, etc)

A

True!

67
Q

The deduction for QBI cannot exceed the greater of:

A
  1. 50% of the wages paid with respect to the qualified trade or business
  2. The sum of 25% of the wages with respect to the qualified trade or business + 2.5% of the unadjusted basis, immediately after acquisition, of all qualified property in the qualified trade or business.
68
Q

True or false: taxpayers are allowed to deduct excess business loss for the year.

A

False; they are not. Rather, excess business losses are carried forwarded to subsequent years.