Chapter 6 Flashcards
What are your “FOR” AGI deductions?
- Trade/Business Expenses
- Rental & Royalty Expenses
- Flow-Through Entities
- Capital Losses
- Health Insurance Deduction by Self-Employed Taxpayers
- Penalty for Early Withdrawal of Savings
- Self-Employed Tax Deduction
- Alimony Payments
- QUALIFIED Education Loan Interest
What are Trade/Business Expenses?
- DIRECTLY connected to the business activity
- ORDINARY & NECESSARY for the activity
- REASONABLE in amount
Where are Revenues and Expenses from a sole proprietorship reported on?
Schedule C
What are rental & royalty expenses?
- usually considered INVESTMENT activities
- SCHEDULE E is used to report RENTAL INCOME & deductions related to real property
- schedule E is also used to report ROYALTY INCOME and deductions (e.g. copyrighted books)
What are Flow-through entities?
expenses and losses incurred that pass through to the entity owners who typically report these amounts on Page 2 of Schedule E
What is the max on Capital Losses?
MAX: $3,000/tax year; can be carried-forward indefinitely
- Schedule D
What are the rules to a health insurance deduction for self-employed taxpayers?
deduction on SCHEDULE 1, but ONLY to the extent of the self-employed NET INCOME
- insurance can be provided for taxpayer, spouse, &/or dependents who are NOT eligible for employer-provided health insurance (also children <27 yrs who are not claimed as dependents)
What is the deduction for Penalty for Early withdrawal of savings?
- for any INTEREST INCOME an individual forfeits to a bank as a penalty for withdrawing a COD
What is the deduction for SE Tax?
- self-employed taxpayers are allowed to deduct the EMPLOYER portion of FICA taxes
What are the criteria for Alimony payments to be deducted?
- divorce decrees finalized BEFORE 2019
-cannot include any money related to supporting a child.
What is the max amount of student loan interest that is deductible?
- MAX: $2,500
- it is subject to a phase-out
-MFS are NOT eligible for this deduction
What are the phase-out criteria for Single & HOH taxpayers?
<$80,000 –>amount paid up to $2,500
$80,000 < x <$95,000 –> (amount paid up to $2,500) * percentage allowed
>=$95,000 –> ZERO
What are the phase-out criteria for MFJ taxpayers?
<$165,000 –>amount paid up to $2,500
$165,000 < x <$195,000 –> (amount paid up to $2,500) * percentage allowed
>=$195,000 –> ZERO
How do you calculate the Phase-out percentage for S, HOH, QSS?
(Modified AGI - $80,0000 / $15,000
How do you calculate the Phase-out percentage for MFJ?
(Modified AGI - $165,0000 / $30,000
What are your “FROM” AGI deductions?
- Medical Expenses
- Taxes
- Investment Interest Expense
- Home Mortgage Interest
- Charitable Contributions
- Misc Itemized Deductions
Can taxpayers deduct medical expenses incurred to treat themselves, their spouse, and/or their dependents?
TRUE
What is the AGI floor for Medical Expenses?
7.5%
What are qualifying medical expenses?
- Medical Care
- Dental Care
- Prescription drugs/insulin
- Special Equipment (wheelchairs, glasses, contact lenses)
-Medical and Hospital insurance premiums (if it hasn’t been deducted yet)
Can taxpayers using personal automobiles for medical transportation purposes deduct a standard mileage allowance in lieu of actual costs?
TRUE
When can medical expenses for cosmetic surgery/procedures be deductible?
if its necessary to correct or alleviate a birth defect, personal injury resulting from an accident, or disfiguring disease
What is the MAX deduction for taxes?
MAX: $10,000 ($5,000 MFS)
What taxes may Individuals deduct as itemized deductions?
- State, Local, & Foreign Income taxes
-OR-
-State & Local SALES TAXES - State & Local REAL ESTATE taxes (personal & investment purposes)
- State & Local PERSONAL PROPERTY taxes
What is Investment interest expense?
Interest PAID ON LOANS used to purchase investment assets such as stocks, bonds, or land.
What is the limitation on Investment interest expense?
it is limited to a taxpayer’s NET INVESTMENT INCOME (such as interest, dividends, capital gains)
- any EXCESS can be carried forward indefinitely
What are the criteria for home mortgage interest?
-Deduction is allowed for interest paid on acquisition indebtedness secured by a qualified residence (principal residence + one other)
- is limited by a $750,000 “cap” (AFTER Dec 15, 2017)
What is acquisition indebtedness?
any debt secured by a qualified residence that is incurred in acquiring, constructing, or substantially improving the residence.
Interest related to HOME EQUITY loans and home equity lines of credit (HELOC) are NO longer deductible UNLESS they are used to buy, build, or substantially improve the home that secures the loan.
TRUE
What are the criteria for charitable contributions?
- must be made to a “Qualified charity”
- this means orgs that engage in Edu, religious, scientific, or other public activities
-NOT political & campaign contributions
Taxpayers are allowed to deduct the “value” of the services they provide for charities.
FALSE
What is the limitation to charitable contributions of cash?
60% AGI “Ceiling”
- excess can be carried-forward for 5 years, on a FIFO basis
What are example of Capital Gain property?
- PERSONAL use assets (clothes, furniture, cars, etc.)
- INVESTMENTS (stock held as investment)
What is the criteria to deduct the FMV of a capital asset?
- held the asset > 1 year
- EXCEPTION: for TANGIBLE personal property the deduction is LIMITED to the adjusted basis if the charity uses the property for a purpose that is UNRELATED to its charitable purpose
What is the Adjusted Basis?
it is usually the original cost
What is Ordinary Income Property
property that if sold would generate income taxed at ordinary rates.
What is Capital Gain Property
any asset that would have generated a long-term capital gain if the taxpayer had sold the property for its fair market value
What are the criteria for Ordinary Income Property?
- held the asset for <= 1 year
- Charitable contribution is the LESSER of:
(1) property’s FMV
(2) property’s adjusted basis
Can individuals deduct losses they realize when they sell or dispose of assets used for PERSONAL purposes
NO
Can taxpayers deduct CASUALTY losses on personal-uses assets?
NO, unless they are federally declared disaster ($100 floor)
What are some examples of Miscellaneous Itemized Deductions?
- gambling losses (to the extent of winnings for the year)
- unrecovered cost of a life annuity
Which expenses are NO longer deductible?
- unreimbursed employee business expenses
- tax preparation fees
- investment expenses
- safe deposit box rental fees
- moving expenses (only allowed for Armed forces)
The amount of standard deduction varies according to _______,_____, and _______.
filing status, age, and eyesight
Can an individual who is claimed as a dependent on another person’s tax return still file their own tax return?
YES
What is the standard deduction for someone being claimed as a dependent?
it is the GREATER of:
(1) $1,300 -or-
(2) $450 + EARNED income
(CANNOT exceed the BSD available to all taxpayers)
The deduction applies to taxpayers with qualified income from a ________, __________, or ____________.
partnership, S-corporation, sole proprietorship
What type of “Specified service trade or business” is excluded from QBI?
- is any trade or business involving the performance of services in fields of health, law, consulting, athletics, financial services, or where the principal business is the reputation or skill of one or more of its employees/owners.
- ARCHITECTURE & ENGINEERING are excluded
At what taxable income does the QBI exclusion NOT apply?
If a taxpayer’s taxable income (BEFORE the QBI deduction) is <$191,950 ($383,900 MFJ)
What is the QBI deduction formula?
20% * Schedule C NI
