Chapter 6 - Intro To Deductions Flashcards
Above the Line Deductions
are used to arrive at AGI “the line”
- Expenses incurred in the pursuit of profit activities that can be reported for self-employment, owners of rental property, owners of pass through entities.
HSA, Educator expense, student loan interest, alimony pre 2018 post 2025, IRA, Business expenses.
Below the Line Deductions
This is taken from AGI. Below the line.
This typically is the standard deduction, itemized deductions, and the QBi deductions.
People go with the greater between standard and itemized deduction.
Business or trade Expenses - Deductable
Ordinary, Necessary, Reasonable
Additional:
1/2 of self-employment taxes paid (FICA SS and Medicare)
Self-employment retirement contributions (SEP IRA)
Self- employed health insurance premiums
Business Entities
Sole Proprietorships - schedule C. Can NOT deduct medical /retirement benefits for owners.
Corporations - on corporate return. Can NOT deduct medical /retirement for owners.
Partnerships - Information return (form 1065). Can NOT deduct medical /retirement for owners.
Home Office Deductions
Expenses limited to net profit. No losses allowed.
Ordering rules apply. Mortgage interest and real estate taxes first.
Depreciation is taken on 39 year straight line basis. Method to stretch the value of an asset over extent of time it’s likely to remain useful.
Long Term Care Deductions
Allowed for businesses & self employed ppl as above the line deductions for payment of LTC. And can be discriminatory.
Employees can not deduct LTC premiums benefit will instead be paid tax free.
There is a deduction limit table.
40 or less: $430
…
71 or over: $5,430
MSA and HSA Deductions
MSA only for employers with 50 or less EE or self employed individual.
HSA for any individual.
Must be in high deductible insurance plan.
MSA - 65% of deductible or 75% for family.
HSA - $3,550 max or $7,100 for family. +$1000 catch up for 55+
Penalty = taxed as ordinary income and 20% penalty if not 65+
IRA Deduction
$6000 annual contribution of earned income
$7000 is over 50
Contribution limit share with IRA and Roth
Can make contribution till April 15
Must have sufficient earned income to contribute
IRA Deduction if Active in ER sponsored plan
Not active - no income limit
Single - AGI phase out = $65k - $75k
MFJ - AGI phase out = $104k - $124k
One spouse - Joint AGI $196 - $206k
Single - 35 - making $68k - active in ER plan
How much can they deduct from $6000 IRA contributions?
AGI - Lower phase out threshold / phase out $ range = phaseout % x Contributed amount = non deductible portion
68,000 - 65,000 / 10,000 = 30% x $6000 = $1800
6000 - 1800 = $4,200 is how much he can deduct
Roth IRA Contribution Limits
Single: $124k - $139k
MFJ: $196k - $206k
MFS: $0 - $10k
Alimony
Deductible for Payer is prior to Dec. 2018
And Payee claims it as income.
Post Dec 2018 Payee does not claim it and payer does not get deduction.
Can not be disguised as child support . Child support is not deductible.
Employee
Business Owner
Investor
EE - most deductions are below the line, and likely the standard deduction.
Owner - business expenses are above the line. Up to earnings.
Investor - Real estate expense are above the line.
While Portfolio expense are below the line.
Student Loan Interest Deduction - Above the Line
- can be deducted by tax payer who ones loan.
- $2,500 per year
MAGI Phase Out
S - $70k - $85k
MFJ - $140k - $170k
MFS - No deduction
MAGI - Lower Phaseout / Phaseout Range = Deduction Phaseout Percentage x Qualifying Interest = Non-Deductible Portion
$74,000 - $70,000 / $15,000 = 26.67% x $2,500* = $666.67 Non-Deductible Portion
Student Loan Interest Deduction Allowed = $2,500 - $667 = $1,833
