Chapter 5 Flashcards
AGI deductions are
above the line
Standard deduction is
after AGI
Itemized deductions can be
Medical, dental, charity, interest, local taxes, casualty theft and losses
itemized vs standard
take the larger of the two
TCJA limited_____ through 2025
deductions
FSA
Flex Spending acct
HRA
Employer funded healthcare reimbursements (does not affect taxes)
MSA
medical contribution account for small business & Self employed (pre-2008)
HSa
Savings accounts for non reimbursable medical expenses on insurance plans with High deductibles
HSA
deductioble to AGI
HSA distributions are not
taxed if used for medical purposes
HSA limits
under age 65, High deductible >1350, max contribution 3500, max OOP 6750 (x2 family)
Form 8889
Reporting HSA deductions claimed
distributions for medical are
tax free
Distributions for non medical are
taxable income, and have a 20 Penalty
If over 65, non medical distributions
do not carry a penalty
distributions reported on
1099-SA code 1
IRS publication 969
all about HSAs
Self-employed taxpayers are allowed an above-the-line deduction for
he cost of providing health insurance for themselves and their families
deductible insurance
medical dental for self, spouse dependents, children under 27, medicare premiums, long term care insurance
no deduction if the taxpayer has
other health plan available
earned income limitation
The deduction for self-employed health insurance is only allowed to the extent of the taxpayer’s net self-employed earned income
Schedule C business Loss means no
deduction to AGI for self paid healthcare.
Self-employed taxpayers that receive advance premium tax credits under the ACA may deduct
nly the portion paid out of pocket, not the portion covered by the premium tax credit.
long term care insurance limits
Age 40=$420, 40-50=790, 50-60=1580, 60-70=4220, 70+=5270
IRA
individual retirement acocunts
Traditional IRA
permits a deduction for contributions and deferred taxation of earnings until withdrawals.
Roth IRA
allows nondeductible contributions. Although the contributions to a Roth IRA are not deductible, earnings accumulate tax-free, and qualified distributions are generally not included in income when received.
IRA maximum contribution
lesser of 100% of taxpayers earned income or $6000(12000 married with one earner)
IRA Catchup contribution
1000(total 7000 maximum) over age 50
Traditional IRA contributions reduced if
tax payer participates in other qualified retirement plans
Roth IRA Contributions Reduced if
Over income levels
Roth AGI Phase outs
S/HOH 122000-137000, MFJ 193000-203000
Traditional IRA Phase Outs
If a taxpayer contributes to both a traditional IRA and a Roth IRA
the combined contributions cannot exceed the normal annual limit ($6,000 or $7,000 if age 50 or older in 2019).
A nondeductible traditional IRA contribution may be made
by taxpayers with income over the phase-out ranges shown above
all income earned in the IRA account is
sheltered from tax until the earnings are withdrawn
Money removed from a traditional IRA is taxable
as ordinary income and may be subject to a 10 percent penalty for early withdrawal
traditional IIRA Age
59.5 unless
- Disabled
- Using a special level payment option
- Using the withdrawals for unreimbursed medical expenses in excess of 10 percent of their AGI
- The recipients of at least 12 weeks of unemployment compensation and to the extent they are paying medical insurance premiums for their dependents
- Paying the costs of higher education, including tuition, fees, books, and room and board for the taxpayers or their spouses, children, or grandchildren
- Withdrawing up to $10,000 for first-time home-buying expenses
- Beneficiaries due to the death of the IRA owner
- Withdrawing funds due to an IRS levy
- A qualified reservist
xpayers must start taking minimum annual distributions from their IRA
at age 70.5
A taxpayer can make tax-free withdrawals from a Roth IRA after a 5-year holding period if any of the following requirements are satisfied:
- The distribution is made on or after the date on which the participant attains age 59.5 .
- The distribution is made to a beneficiary (or the participant’s estate) on or after the participant’s death.
- The participant becomes disabled.
- The distribution is used to pay for qualified first-time home-buyer’s expenses.
The part of the distributions that represents a return of capital is
tax free
The part of the distributions that represents earnings is
taxable
Simplified Employee Pension (SEP or SEP IRA)
A retirement plan that any employer or self-employed individual can establish. SEPs are simple to set up and have flexible funding arrangements with contributions that are limited on an annual basis.
SEP are available to
all employers
5305-SEP
IRS Form to establish SEP
maximum SEP contribution made for an employee and the related deduction cannot exceed the lesser of
25 percent of the employee’s compensation or $56,000
For the self-employed business owner, the contribution maximum is
the same as for employees; however, the deduction limit considers the net self-employment income after consideration of the deduction for the contribution to the SEP.
Maximum Contribution rate for self employed is
20% earned income up to 56K
SEP Distributions
start at 59.5 with no penalty, are required after 70.5
Payroll Deduction IRA
Contributions are withheld from an employee’s pay and directed into a traditional IRA account.
SIMPLE IRA is available to
any employer with 100 or fewer employees
5304-SIMPLE or 5305-SIMPLE
IRS Forms to Establish Simple IRA
employee and the employer are
eligible to contribute
Simple IRA Contribution limit
13000 (16000 over 50)
Section 401(k) plan
a qualified retirement plan which grants employee participants a deferral of income for employer contributions to the plan.
401K allows
taxpayers to elect to receive compensation or to have the employer make a contribution to the retirement plan.
401K Contributions limited
- to 19k /year (25k over 50)
- 25% of compensation up to 56K(62k over 50)
Any matching amount contributed to the plan by the employer on behalf of the employee is
excluded from the employee’s gross income.
solo 401(k)
designed for self-employed individuals with no employees (spouse is permitted).
traditional 401(k) plan can be used by
any type of company but is generally thought to be more appropriate for business with at least 20 employees due to the cost to establish and maintain the plan.
Form 5500
required form annual reporting of the plan assets
annual maximums are reduced dollar for dolalr as a result of
the employee’s participation in other salary reduction plans of any employer.
Contributions in excess of the maximum allowed may be subject to a
10 percent excise tax imposed on the employer.
if the excess contributions are not withdrawn within a specified time period
the plan will lose its status as a qualified arrangement.
The amount deferred must be
100 percent vested(full availble for disbursement)
401K distributed only upon
etirement, death, disability, or other separation from service, attainment of age 59.5 , or hardship.
a safe harbor 401(k) plan operates
like other 401(k) plans with one important distinction: it must provide for employer contributions that are fully vested when made.
Roth 401(k)s
contributions non deductible (after tax income)
educator expenses deducted against AGI up to
250 (500 2 MFJ Teachers)
Performing artists may deduct employee business expenses as a for AGI deduction if they meet the following qualifications:
- The taxpayer was paid for providing performing arts as an employee for at least two employers.
- The taxpayer received at least $200 each from any two of these employers.
- The related performing-arts business expenses are more than 10 percent of gross income from the performance of those services, and
- AGI is not more than $16,000 before deducting these business expenses.
Members of a reserve component of the Armed Forces of the United States that travel more than 100 miles away from home in connection with services in the reserves can deduct
travel expenses limited to the regular federal per diem rate (for lodging, meals, and incidental expenses) and the standard mileage rate (for car expenses) plus any parking fees, ferry fees, and tolls
Fee-basis officials
are persons who are employed by a state or local government and who are paid in whole or in part on a fee basis.
Certain fee-basis officials can claim their
employee business expenses
Unreimbursed business expenses that are deductible are claimed on
Unreimbursed business expenses that are deductible are claimed on
Moving Expense Deduction
Suspended by TCJA through 2025 EXCEPT Active duty Military
reimbursements to an employee from an employer for qualified moving costs
are no longer excluded from the employee’s income.
Medical expenses are the
first itemized deduction listed on Schedule A.
Unreimbursed medical expenses can only be deducted to the extent that they exceed
10 percent of the taxpayer’s AGI
Insurance policies that pay a specific amount each day or week the taxpayer is hospitalized are
not considered medical insurance and the premiums are not deductible.
Payments for capital improvements purchased and installed in the taxpayer’s home for medical reasons
may also be deductible
Unlike other capital expenditures, allowable amounts
are deducted fully in the year the item is purchased
If the expenditure is for an improvement that increases the value of the taxpayer’s property, the deduction is limited to
the amount by which the expenditure exceeds the increase in the value of the property.
If the value of the property does not increase as a result of the expenditure,
the entire cost is deductible.
Medical Transport is deductible including costs related to
- fares
- gas/oil
- ambulances
- flight for life
Taxpayers may deduct the cost of lodging for medical care
up to $50 per night, per person(patient and accompanying person), on a trip primarily for and essential to medical care provided by a physician or a licensed hospital.
The purpose of the deduction for taxes
is to relieve the burden of multiple taxation of the same income
A tax
is imposed by a government to raise revenue for general public purposes,
taxes are___fess are____
deductible/nondeductible
Pre-TCJA, tax law provided for an itemized deduction for the following taxes:
- State, local, and foreign income taxes
- Sales taxes (in lieu of state and local income taxes)
- State, local, and foreign real property taxes
- State, local, and foreign personal property taxes
foreign property taxes are only deductible if
incurred in carrying on a business or for the production of income
aggregate tax deduction for taxes limited to
10k(5K MFS)
aggregate limit tax deduction for taxes does not apply to
- foreign income tax
- state local and foreign real property tax
- state and local property tax
if the taces are paid or accrued in carrying on a business for income(Schedule C/E/F)
following taxes are not deductible
- Federal income taxes
- Employee portion of Social Security taxes
- Estate, inheritance, and gift taxes (except in unusual situations not discussed here)
- Excise taxes and gasoline taxes (except when business-related)
- Foreign income taxes if the taxpayer elects a foreign tax credit
For taxpayers electing to deduct sales taxes, the deduction is calculated by using either
(a) actual sales taxes paid or (b) estimated sales taxes from IRS tables.
actual sales taxes paid method requires a taxpayer to
maintain extensive records to substantiate the sales and use taxes paid during the year.
If real estate is sold during the year
taxes must be allocated between the buyer and the seller, and the division must be made according to the number of days in the year that each taxpayer held the property.
To be deductible as an itemized deduction, personal property taxes must be levied
the value of the propert
Interest is
an amount paid for the use of borrowed funds
Interest on loans for business, rent, and royalty activities is
deducted for adjusted gross income
The following types of personal interest are deductible:
- Qualified residence interest (mortgage interest)
- Mortgage interest prepayment penalties
- Investment interest
- Certain interest associated with a passive activity
private mortgage insurance (PMI)
Mortgage insurance is an additional expense charged to a borrower that is often required when the borrower makes only a small investment (down payment) on their home at time of purchase.
non deductible
To deduct interest on a debt, the taxpayer must
be legally liable for the debt
prepaid interest for cash basis taxpayers
Cash basis taxpayers are required to use the accrual basis for deducting prepaid interest.
Prepaid interest must be
Prepaid interest must be
Qualified residence interest
is a type of personal interest specifically allowed as a deduction.
qualified residence acquisition debt
debt secured by the taxpayer’s principal or second residence in acquiring, constructing, or substantially improving that residence
Qualified residence acquisition debt can include the
original mortgage, home equity debt, or refinanced debt. Refinanced debt is treated as acquisition debt only to the extent it does not exceed the principal amount of acquisition debt immediately before the refinancing.
limit on the amount of qulaified iresidence interest
- interest deduction pre-TCJA has been available to qualified mortgage debt up to $1 million ($500,000 married filing separately) before 12/15/17
- Through 2025, the TCJA has lowered the amount of qualified mortgage debt to $750,000.
In order to take a home mortgage interest deduction, debt must be secured by
a qualified home (primary residence or second home)
eudcation loan interest deduction
- for AGI limited to 2500of interest expense
- AGI Phase out 70-85k Single, 140-170k Married
The investment interest deduction is limited
to the taxpayer’s net investment income
Net investment income is
income such as dividends and interest, less investment expenses other than interest.
to be deductible charitable contributions must
be made in cash or property
qualified charitable donations must be made to
- the United States, a state, or political subdivision thereof, if the donation is made for exclusively public purposes (such as a contribution to pay down the federal debt);
- domestic organizations formed and operated exclusively for charitable, religious, educational, scientific, or literary purposes, or for the prevention of cruelty to children or animals;
- church, synagogue, or other religious organizations;
- war veterans’ organizations;
- civil defense organizations;
- fraternal societies operating under the lodge system, but only if the contribution is used for one or more of the charitable purposes listed in (2) above; and
- certain nonprofit cemetery companies.
non deductible charibal contribuitions
- Gifts to nonqualified recipients, for example, needy individuals, social clubs, labor unions, international organizations, and political parties;
- Contributions of time, service, the use of property, or blood;
- Contributions where benefit is received from the contribution, for example, tuition at a parochial school; and
- Wagering losses, such as church bingo and raffle tickets.
or donated property other than cash, the general rule is that the deduction is equal to
he fair market value of the property at the time of the donation.
capital gains on donations
short term gain= FMV less gain
long term gain= FMV less gain UNLESS the property is not used for it’s primary purpose (painting to nmuseum = FMV, Painting to Hospital = FMV less gain (og basis)
a taxpayer may not deduct total contributions in excess of
50 percent of the taxpayer’s adjusted gross income
50 percent limitation applies to
donations to all public charities, all private operating foundations, and private nonoperating foundations if they distribute their contributions to public charities within a specified time period.
Gifts to other qualified organizations are limited to
30% AGI
any contributions not allowed due to the adjusted gross income limitations
may be carried forward for 5 years
All deductions must be
substantiated
Form 8283
substantiates donation
Taxpayers donating used vehicles to charity
cannot claim a deduction greater than the amount for which the charity actually sells the vehicle.
Casualty losses
acts of god
theft losses
must be substantiated
Casualkty losses are deductible
in the year of the casualty or the prior year(if a federal disaster area)
theft losses are decutible only in the year
the theft is discovered
measuring loss
Rule A (partial destruction(—The deduction is based on the decrease in fair market value of the property, not to exceed the adjusted basis of the property.
Rule B(full destruction)—The deduction is based on the adjusted basis of the property.
casualty loss deductible amounts
minimum $100 max 10% AGI
Federal disasters min $500 no 10% AGI limit
A casualty or theft loss is reported on
Form 4684
