Chapter 2 Section 1: Adjustments and Itemized Deductions Flashcards
How do Self-Employment FICA, Self-Employed Health Insurance, and Self-Employed Retirement factor into taxes?
Adjustments for AGI, not deducted on Schedule C
What are deductions to arrive at AGI, and what are adjustments to AGI or to arrive at taxable income?
To arrive at: adjustment
To AGI: deduction
What amount can be deducted for educator expenses?
Who is an eligible educator?
$250
K-12
What are the four types of IRA accounts?
Deductible IRA
Nondeductible IRA
Roth IRA
Coverdell Education Savings Account IRA
For deductible IRAs, what can you deduct?
The regular IRA, as an adjustment, as long as the contribution is made by April 15
Are accumulated earnings on a deductible IRA taxed?
No, it is deferred
Are withdrawals from a deductible IRA taxed?
Yes, as ordinary income
When are contributions to a deductible IRA not deductible?
What is the exception?
When you are rich AND a participant in a retirement plan
You are not considered a participant just because your spouse is, until you’re super rich. Then you are because your spouse is.
What amount contributed to a deductible IRA can be deducted?
The maximum is the lesser of:
5500 or the individual’s compensation
For a married couple, double 5500 and total their compensation
What is the surprising element included in compensation for the calculation of a deductible IRA contribution?
Alimony
What is the catch-up contribution?
Who qualifies?
An additional contribution of 1000 is allowed per year
Individuals 50 years or older
Are contributions to a Roth IRA deductible?
No
Are accumulated earnings on a Roth IRA taxed?
Not while they are still in the account
Are distributions from a Roth IRA taxed?
No, up until you’ve distributed what you contributed. Anything else is earnings, and is taxed unless it’s qualified nontaxable distributions.
What are the contribution limits for a Roth IRA?
How do they interact with other types of IRAs?
Single: 5500, married: 11000
It is combined with all the other types of IRAs
Is there a phaseout for Roth IRAs?
Yes, according to MAGI
What are the conditions for a qualified nontaxable distribution of the accumulated earnings of a Roth IRA?
Distributed after the taxpayer is 59 1/2 years old OR
To a beneficiary after the taxpayer’s death OR
Because the taxpayer is disabled OR
For use by a first time homebuyer
Are rollovers from a regular to Roth IRA taxable?
They are taxable as income, but there is no penalty for the temporary withdrawal if it is before they are old enough.
Who would use a nondeductible IRA?
It’s a last resort option - a fallback for people not eligible for a deductible or Roth.
What are the contribution limits for a nondeductible IRA?
The lesser of 5500 or the individual’s compensation.
Are accumulated earnings on a nondeductible IRA taxed?
Not until they are withdrawn.
Are distributions from a nondeductible IRA taxed?
Earnings - yes
Principal contributions - no
Who is a good example of someone who would use a Coverdell Education Savings Account?
Grandparents, for their grandkids
Are contributions to a Coverdell Education Savings Account deductible?
How many contributions can be made per year?
What is the maximum amount of a contribution?
They are nondeductible
You can make a contribution for each beneficiary, and you can have as many beneficiaries as you want
2000 per beneficiary
Are accumulated earnings on a Coverdell Education Savings Account taxed?
Not while in the account
What grades can the qualified education expenses be for when using a Coverdell account?
K-12
What is the time limitation on a Coverdell account?
What happens when it’s reached?
When the beneficiary reaches 30 years old.
Any remainder must be distributed, either to the beneficiary, or rolled over to another family member
What are the contribution requirements for a Coverdell account?
What is the maximum contribution?
The beneficiary must be under 18
The max contribution is 2000
Is there a phaseout for Coverdell accounts?
Of course.
What is the adjustment for education loan interest?
What about the excess?
Is there a phaseout?
2500
The excess is disallowed, because it is personal
Yes, there is a phaseout.
What is the tuition and fees adjustment?
What do you do with the excess?
Is there a phaseout?
The maximum is 4000
Excess is a deductible education expense, subject to 2% of AGI limit
Yes
What are health savings accounts?
They enable workers with high deductibles to make pretax contributions up to 3350 to cover health care costs
What are the qualifications for deductible moving expenses?
Move far away for work reasons
Stay for 75% of the next year
Only allow direct costs (not meals, pre-move hunting, breaking a lease, or temporary housing)
What amounts are deductible for:
Self-employment tax
Self-employment health insurance
Self-employment Keogh plans
Tax: 50%
Health Ins: 100%
Keogh: Lesser of 53000 or 25% of net Keogh earnings
How do you calculate Net Keogh Earnings?
Business Income -Business Expenses =Net Business Income - 1/2 S/E tax - Keogh Deduction = Keogh Net Earnings (x25% = deduction)
What is the alternative way to get deductible amount for Keogh plans?
Net business income
- 1/2 S/E tax
= Gross S/E Income
x 20%
Explain the penalty on Early Withdrawal of Savings
The interest is forfeited, do not net against net interest income
Are alimony payments deductible?
Is child support?
Are property settlements?
Alimony: yes
Child Support: no
Property: no
What is the key condition for the standard deduction when married filing separately?
Both need to take the standard
What impact does being elderly or blind make?
You get a larger standard deduction
NOT an additional exemption
Are there phaseouts on itemized deductions?
What is the maximum amount of itemized deductions to be disallowed?
Yes
20% - so you are guaranteed 80%
Do veterinarian expenses qualify as medical?
No. We don’t care about pets.
When do you deduct medical expenses?
When paid or charged - no matching
What is the formula for deductible medical expenses?
Qualified medical expenses - Insurance reimbursements = Qualified medical expense paid - 10% of AGI = Deductible medical expenses
What do you do with insurance reimbursements that exceed medical costs?
Include the excess as taxable income
What state, local and foreign taxes are deductible?
Real estate
Income
Personal property
Sales
What is the relationship between income and sales tax for deductions?
You choose one or the other
How do you handle real estate taxes in the year of sale?
Prorate them
What taxes are nondeductible?
Federal taxes (including social security) Inheritance taxes (for estates) Business and rental property taxes (scheds C and E)
Is home mortgage interest deductible?
Yes, to buy your first or second home
Also, home equity indebtedness interest is deductible up to 100000 or the equity in the home
Is investment interest expense deductible?
Only up to net taxable investment income
Is personal (consumer) interest deductible?
No
When is prepaid interest deductible?
When incurred and paid
Is educational loan interest deductible?
It’s an adjustment, not a deduction
How do you define charity?
Items given to organizations - not individuals or political campaigns
What is the maximum deduction for charity?
50% of AGI for cash
30% of AGI for capital property
What do you do with consideration received for a charitable contribution?
You subtract the value of the consideration received from the donation, and deduct the remainder.
Can you deduct the value of time or services donated?
No
What do you do with charitable contributions above the 50% limit?
Carry forward for up to 5 years
Are casualty and theft losses deductible?
They are, when:
Individual events are over $100
The total of the events exceeds 10% of AGI
They are sudden and unexpected
Are unreimbursed business expenses deductible?
Yes, as long as the combination of miscellaneous itemized deductions exceeds 2% of AGI
What transportation expenses qualify as unreimbursed business expenses?
Anything other than your normal commute
What do you do with insurance reimbursements that exceed medical costs?
Include the excess as taxable income
What state, local and foreign taxes are deductible?
Real estate
Income
Personal property
Sales
What is the relationship between income and sales tax for deductions?
You choose one or the other
How do you handle real estate taxes in the year of sale?
Prorate them
What taxes are nondeductible?
Federal taxes (including social security) Inheritance taxes (for estates) Business and rental property taxes (scheds C and E)
Is home mortgage interest deductible?
Yes, to buy your first or second home
Also, home equity indebtedness interest is deductible up to 100000 or the equity in the home
Is investment interest expense deductible?
Only up to net taxable investment income
Is personal (consumer) interest deductible?
No
When is prepaid interest deductible?
When incurred and paid
Is educational loan interest deductible?
It’s an adjustment, not a deduction
How do you define charity?
Items given to organizations - not individuals or political campaigns
What is the maximum deduction for charity?
50% of AGI for cash
30% of AGI for capital property
What do you do with consideration received for a charitable contribution?
You subtract the value of the consideration received from the donation, and deduct the remainder.
Can you deduct the value of time or services donated?
No
What do you do with charitable contributions above the 50% limit?
Carry forward for up to 5 years
Are casualty and theft losses deductible?
They are, when:
Individual events are over $100
The total of the events exceeds 10% of AGI
They are sudden and unexpected
Are unreimbursed business expenses deductible?
Yes, as long as the combination of miscellaneous itemized deductions exceeds 2% of AGI
What transportation expenses qualify as unreimbursed business expenses?
Anything other than your normal commute
Are business meals and entertainment deductible?
50% is
Are education expenses deductible?
Yes, as long as they are job related and are needed to keep your job.
What is the deduction for business gifts?
$25 per person per year
Are expenses for hobbies deductible?
no
Are gambling losses deductible?
Only up to the amount of gambling winnings
