Chapter 2 - Deductions/Adjustments (to get to AGI)

Question 1

Adjustment for AGI (these are often referred to as “above the line” deductions), sometimes the examiners will refer to them as “deductions to arrive AT adjusted gross income, list them (13)?

Answer 1

1) Educator Expenses
2) IRA
3) Student Loan Interest Expense
4) Tuition and Fee Deduction
5) Health Savings Account
6) Moving Expenses
* *7) One-Half Self-Employment FICA (NOT deducted on Schedule C)
* *8) Self-Employed Health Insurance (NOT deducted on Schedule C)
* *9) Self-Employed Retirement (NOT deducted on Schedule C)
10) Interest Withdrawal Penalty
11) Alimony PAID
12) Attorney fees paid in certain discrimination/whistle blower cases
13) Domestic production activities deduction

Question 2

Educator Expenses:

Answer 2

• Eligible educators can deduct up to $250/person of qualified expenses paid (educator spouses filing jointly can do $500)
• K1-12 teachers, counselors, instructor, principal, or aide works 900 hours is eligible

Question 3

What are the four different types of individual retirement accounts (IRAs)?

Answer 3

1) Deductible IRA
2) Nondeductible IRA
3) Roth IRA
4) Coverdell Education Savings Account (IRA)

Question 4

A regular, deductible IRA?

Answer 4

• Earnings accumulate TAX FREE

- Withdrawals from deductible IRAs are taxable as ordinary income (may be subject to penalties)

Question 5

When will a taxpayer NOT be permitted to deduct a contribution to an IRA (2 conditions both MUST be present)?

Answer 5

1) Excess AGI (you a rich b$tch)
2) If you are an active participant in another qualified plan (exp. 401K, note that being active in spouses plan does not count UNLESS they are super super rich)

Question 6

What is the maximum deduction of regular IRA contribution?

Answer 6

The lesser of either 5,500 or the individuals compensation (for married couples it is 11,000)

*note: if over 50 years of age get an extra 1,000

Question 7

A Roth IRA?

Answer 7

• Contributions to a Roth IRA are NOT deductible when made
• Earnings accumulate tax free
• Tax FREE distribution/withdrawal (principle and interest)
  (remeber HIM DEAD thing for this one)

Question 8

What is the maximum deduction of Roth IRA?

Answer 8

First, note that you can only deduct this AFTER you have taken into account any amount you have contributed to a Regular, Deductible IRA

5,500 for single (11,000 for couples)

Question 9

A NONdeductible IRA (note that this one is the FINAL option and is the fallback when not eligible for a deductible or roth IRA cuz you so rich?

Answer 9

-Nondeductible limitations to the lesser of
5,500 for 2016
Individuals compensation
Limit not contributed to other (regular and Roth) IRA
-Tax free deferred accumulation of earnings UNTIL withdrawn
- Distributions from a nondeductible IRA will be taxed as follows:
Taxable - previously accumulated untaxed earnings
Nontaxable - the principle contributions

No phase out on this one only

Question 10

Coverdell Education Savings Account IRA?

Answer 10

• contributions are NONdeductible max per benficiary is 2,000 annually
• Tax free accululation of earnings
• Tax free distribtions/withdrawals
• Note that this has to be used on tuition, books, supplies, etc.
• Only good until beneficiary reaches age 30

Not limited by any amounts contributed to other IRAs, also there is a phase out

Question 11

Student loan interest expense?

Answer 11

• The adjustment for education loan interest is limited to 2,500 (any excess or disallowed is “personal interest” and is NOT deductible)
• There is a phase out for AGI

Question 12

Tuition and feed deduction (qualified higher education expenses above the line deduction (adjustment) what is the maximum amount?

Answer 12

4,000

Note that this is only for taxpayers who have AGI equal to or less than 65,000 (130,000 for joint)

Question 13

Health Savings Account?

Answer 13

Enable workers w/ high deductible health insurance to make pretax contributions up to 3,350 (6,650 for family) and get extra 1,000 for being over 55
Note that no contributions are allowed once taxpayer is covered by Medicare (parts a or b)

Question 14

Moving expense (has to be work related)?

Answer 14

• This doesn’t work for self employed people you have to be an employee of a company
• New workplace (50 miles further from old house than old workplace was)
• Thirty nine week stay (or 75% of next year have to stay)
• Only DIRECT moving costs allowed:
  Travel/lodging for taxpayer and family
  Transporting household goods and personal effects

Question 15

What are NON deductible moving expenses (NOT ALLOWED!)?

Answer 15

• meals
• premoving house hunting
• expense of breaking a lease
• temporary living expense

Question 16

Self employment tax is?

Answer 16

one/half deductible from gross income in arriving at adjusted gross income