Ch 7 part 2 individual from agi deductions

Question 1

• Benefits of standard deduction

Answer 1

• Easy for the IRS to handle, reduces audit effort
• For taxpayer, no need to keep records/receipts for itemized deductions

Question 2

Standard Deduction if Dependent
of Another Taxpayer

Answer 2

• Individuals eligible to be claimed as a dependent
  on another return: the standard deduction is the
  greater of (1) $1,250 or (2) $400 plus earned
  income not to exceed the regular standard
  deduction amount.
• Example: Jamila, who is a dependent on her
  parents’ tax return, earned $8,000 during her
  summer internship. If she chooses to file her own
  return, her standard deduction is $8,400.

Question 3

Qualified Business Income (QBI)
Deduction

Answer 3

• Deduction of 20% of certain business income
• Eligible taxpayers: have qualified business income from a partnership, S corp, sole proprietorship, or rental income
• Salary/wages as an employee do not qualify 
• “QBI” = income from business-related activities, i.e., NOT
  investment-related activities
• Example: Ying’s business earns $500,000 from manufacturing and $3,000 in dividend income from some stocks that the company holds for investment. Only $500,000 is QBI.

Question 4

Qualified Business Income (QBI)
Deduction

Answer 4

• Amount of the deduction depends on 3 factors:
  1. Nature of business activity
  2. Total taxable income of the taxpayer
  3. Limitations! (the wages the business pays its employees, how much property it owns, and taxable income)

Question 5

1 Nature of Business

Answer 5

• Qualified trade or business = anything that’s NOT a “specified service” trade or business
• “Specified services” include fields like: health, law, consulting, accounting, actuarial science, performing arts, athletics, financial services, brokerage services, investment, dealing in securities, partnership interests, or commodities
• Covers anything where your reputation or skill is your business asset
• Architecture, engineering services, and rental activities (if a business) are OK – can take deduction

Question 6

2 Taxable Income Level

Answer 6

The phase out table with the income brackets

Question 7

Bunching Itemized Deductions

Answer 7

• Tax benefit can be gained by implementing simple timing tax-planning strategy
• Taxpayers with itemized deductions that fall just short of the standard deduction amount. These itemized deductions do not produce any tax benefit
• Rather than deduct the standard deduction every year, time your deductions (when possible) to bunch together in one year
• E.g., make all your charitable contributions this year and itemize, take the standard next year