EA Indviduals Review - Part 3 Flashcards
Casualty and Theft Losses
Damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual.
Losses that do not qualify:
- Damage by pets
- Progressive deterioration
- Car accident
- Arson if committed by or on behalf of taxpayer
- Accidental breakage of china
- Losses in real estate value form market fluctuations
- Loss of property, unless it is result of sudden, unexpected, and unusual event
To Deduct Casualty and Theft Losses
Must prove:
- Type of casualty loss and date of occurrence
- Taxpayer was legal owner of the property
- Whether the loss was subject to insurance reimbursement
“Single event rule”
When calculating decrease in FMV of property the following is not considered:
- Actually replacement cost
- Item’s sentimental value
- Related expenses such as cost of temporary housing or rental car
- A decline in market value or property near a casualty area
Reporting a Casualty Loss or Gain
Must complete Form 4684, can only be claimed if taxpayer itemizes deductions
Replacement period begins on the date the property was damaged, destroyed, or stolen and ends 2 yrs after the close of the 1st tax year in which any part of the gain is realized . If main home or contents is located in a federally declared disaster area, the replacement period is 4 yrs.
Nonbusiness Casualty Loss Limits
$100 Rule - Deductible only to the extent that it exceeds $100. Taxpayer has to reduce total loss for each event by $100.
10% Rule - Taxpayer can deduct the total of all loss during the year (after reduction of 100$) only to the extent the total is more than 10% of his AGI. Rule does not apply to a net disaster loss within a federally declared disaster area.
MFJ who have a loss form the same event are treated as if they are one person
1. Calculate the lesser of the FMV or adjusted basis of the item prior to the loss
2. Subtract any payments/reimbursements from insurance
3. Subtract 100$ for each event
4. Subtract 10% of taxpayer’s AGI
Insurance Reimbursements
Taxpayers can deduct qualified casualty and theft losses to their homes, household items, and vehicles. IF the property is covered by insurance, a taxpayer can’t deduct a loss unless he files a claim for reimbursement. IF the taxpayer decides not to file an insurance claim but has a deductible, he can claim the amount of the insurance deductible as his loss
Taxpayer does not have to reduce his casualty loss by insurance payments received to cover living expenses in the following situations:
- When a taxpayer loses use of main home bc of a casualty
- When gov’t authorities do not allow a taxpayer access to his main home bc of a casualty or a threat of one.
Theft Losses
Theft loss may be deducted in the year is discovered, regardless of when it actually occurred. If property is later recovered, the recovery must be reported as income in year it is recovered, but only to amount that was reduced in tax in earlier years.
Insurance Cost
Cost of insurance or other protection is not deductible as a casualty loss, but it is deductible as a business expense by business taxpayers
Miscellaneous Expenses Subject to the 2% Limit
Unreimbursed Employee Business Expenses - Certain work related expenses can be deducted as itemized deductions
- Must be paid or incurred during the tax year
- Must be for carrying on the business of being an employee
- Must be “ordinary and necessary”
Meals and Entertainment Expenses
- Main purpose of the meal or entertainment was active conduct of business
- Taxpayer conducted business during entertainment period
- Taxpayer had more than a gen3eral expectation of some other specific business benefit at a future time
Employee Travel Expenses
- Going from one work location to another in the course of business
- Visiting clients or customers
- Going to a business meeting away from the regular workplace
- Traveling from a first job to a second job in the same day
- Going from the taxpayer’s home to a temp workplace
Any amts reimbursed by employer are not deductible
Tax Home and Work Location
Travel and meal expenses are considered deductible if the taxpayer is traveling away from his tax home, determined by two factors
- Travel is away from the general area or vicinity of the taxpayers’ tax home
- The trip is long enough or far enough away that a taxpayer can’t reasonable be expected to complete the round trip without sleep or rest
Can deduct:
- Cost of getting to business destination
- Meals and Lodging (meals up to 50%)
- Taxi Fares
- Dry cleaning
- Use of car
- Computer rental fees
- Baggage charges
- Tips on eligible expenses
Special Department of Transportation Rules
Certain taxpayers subject to the Department of Transportation’s “hours of service” limits can deduct 80% of meal expenses while traveling away from their tax home.
Temporary Work Assignments
If in temporary nature, expenses can be deducted (one year or less), but if an indefinite work assignment incurs travel expenses those are not deductible.
Special rules for Military Members
Members of the armed forces on a permanent duty assignment overseas are not considered to be traveling away from home, and can’t deduct travel expenses for meals and lodging while on duty
Convention Travel
A taxpayer can deduct the cost of travel and attendance to conventions in the US or North America. For cruises their is a 2K annual cap on deductions or 4K if both spouses went on qualifying cruise ship conventions they must file MFJ
Home Office
If portion of house is used for business this may be deducted
Deduction is calculated based on percentage of the home that is used for business
- Divide the sq footage of the home used for business by the total sq footage of the home
- Divide the number of rooms used for business by the total number of rooms in the home (if all rooms are same size
Simplified Option:
- A deduction of 5$ per sq foot for the space in home that is used for business with allowable st footage of 300sq feet (max deduction of 1500)
- No depreciation deduction or recapture of depreciation upon sale of the home
- Home - related itemized deductions, such as for mortgage interest and real estate taxes, may be claimed in full on Sch A, without allocation of portions to the home office space
Can choose between methods each year
Job Search Expenses
Can deduct job searches for same occupation.
Not acceptable
- Job search expenses for a new occupation
- Living expenses incurred during a period of unemployment between the end of a job and the nest period of employment
- Job search expenses incurred by a taxpayer looking for a job for the first time
Job-Related Education
The cost of courses designed to maintain or improve for a present job required by employer or law can be deducted
- Round trip to school can be deducted
Gifts to Clients
Can deduct no more than 25$ for business gifts, if in the case of both spouses giving a gift they are treated as one
Investment Expenses
investment expenses directly connected with the production of investment income are deductible.
Hobby Expenses
Only deductible up to amount of hobby income
Legal Fees
Most are not deductible, but are if they are incurred when attempting to produce or collect taxable income, such as legal advice related to collecting alimony or earning investments
Tax Preparation Fees
Deductible
Misc Deductions not Subject to 2% Limit
- Gambling Losses to Extent of Gambling Winnings
- Work Related expenses for those with a disability
- Amortizable premium on taxable bonds - Excess of bond premiums (amount paid for bond is greater than stated principal amt)
- Casualty or theft losses from income-producing property (stocks, bonds, etc)
- Estate tax on income in respect of a decedent
- Deductions for nonresident Aliens
Misc Deductions not Subject to 2% Limit Cont.
Bad Debts
Bad Debt Deductions
If taxpayer can’t collect money owed to him, must have a basis in it, meaning already included amount in income or has already loaned out the cash
Business bad Debts: A loss from the worthlessness of a debt that either was created or acquired in operating a trade or business or was closely related to the business when it became partly or totally worthless. IF unable to collect it is a bad debt, but business can take a deduction on debt if amt was included in gross income for the year or was claimed in prior year
Non Business Bad Debts:
- Be totally Worthless - partly can’t be counted
- Be genuine - considered a gift if money is lent to a friend or a relative
- Have basis to taxpayer - Must have been included in income or loaned out in cash
- Be claimed only in year the debt becomes worthless
Subject to capital loss limit of 3K per year, or 1500 if MFS
Nondeductible Expenses
- Lunch with coworkers or meals while working late
- Club dues
- Residential telephone lines and home securities systems
- Home repairs, insurance and rents
- Losses form sale of a home, furniture, etc
- Broker’s commissions
- Burial or funeral expenses
- Fees and licenses
- Fines and penalties for breaking the law
- Life and disability insurance premiums
- Campaign expense
- Check writing fees
- Investment related seminars
- Lost of misplaced cash
- Political contributions
- Value of wages never received or lost vacation time
- Expenses of attending stockholder’s meetings
- voluntary unemployment benefit fund contributions
- Voluntary unemployment benefit fund contributions
- Adoption expenses
- Travel expenses for another individual
- Interest on a personal credit card
- Expense of earnign or colectgion tax exempt income
Tax Credits
Directly reduces a taxpayer’s liability on a dollar-for-dollar basis, which means it is usually more valuable than a tax deduction for the same dollar amount that only reduces the amount of taxable income
Nonrefundable Tax Credits
Reduces liability for the year to zero but not beyond that, so any remaining credit is not refunded to the taxpayer
- Foreign Tax Credit
- Credit for Child and Dependent Care Expenses
- Child Tax Credit
- Adoption Credit
- American Opportunity Credit
- Lifetime Learning Credit
- Retirement Savings Contributions Credit
- Residential Energy Credits
Refundable Tax Credits
Can reduce taxpayer’s liability to zero and also generate a payment to the taxpayer for the amount by which the credit exceeds the amount of tax he would otherwise owe
- Additional Child Tax Credit
- Earned Income Credit
- Premium Tax Credit
Credit for Child and Dependent Care Expenses
Ranges from 20%-35%, Limit on qualifying expense is 3K and 6K for two or more children
- Qualifying Person Test
- Earned Income Test - Not available for MFS
- Work Related Expense Test - Must be looking for work
For Education, Care outside home, transportation, fees and deposits paid to preschool, household services
Do not apply for Tuition and costs of Kinder and above, Summer school/tutoring, cost of sending child to overnight camp (day camps qualify), cost of transportation not provided by a care provider, forfeited deposit to day care center. Don’t apply for food, clothing, education or entertainment
- Joint Return Test: Must file MFJ
- Provider Identification Test: Provide info of care provider
Child Tax Credit
Taxpayers below certain thresholds can claim credit for child under age 17. Up to 1K per child, and if tax liability is zero credit cant be taken bc there is no tax to reduce
- Dependent of taxpayer
- Meets relationship test
- Meets age criterion
- Does not provide own support
- Lived with taxpayer for 6 mo of yr
- Is a US citizen
Additional Child Tax Credit
Available for certain individuals who do not qualify for the full amount of nonrefundable Child Tax Credit. Must be able to qualify for Child Tax Credit even though he does not meet full amount
Allows for up to 1K for each child after subtracting amount of Child Tax Credit, and with earned income of over 3K credit is based on lesser of:
- 15% of taxable earned income that is more than 3K
- Amount of unused Child Tax Credit
Adoption Credit
Expenses directly related to adoption of a child
- Special Needs Child:
- Unsuccessful Adoptions: Can’t take credit for foreign children until adoption is final
- Timing of Payment
Education Credits
- American Opportunity Credit Degree Requirement Workload No felony drug conviction Four yrs undergrad education - Lifetime Learning Credit No workload requirement Non-degree courses eligible All levels of post-secondary education Unlimited number of yrs Can still reduce taxable income by 4K if they do not qualify for either education credit
Earned Income Credit
EIC is a fully refundable federal income tax credit for lower income people who work and have earned income and AGI is under certain thresholds
- Qualifying Income for the EIC
- Qualifying Children
- Relationship Test
- Age Test
- Joint Return Test
- Residency Test
- EIC Income Limits
- EIC Fraud and Penalties
- **Read pgs 240-243
Retirement Savings Contributions Credit
Allowed a nonrefundable credit of up to 1K (2K if MFJ) for eligible contributions to an IRA or employer-sponsored retirement plan,. Amount of the credit is the eligible contribution multiplied by the applicable credit rate, which is based on filing status and AGI
Must be at least 18 yrs old and not a full time student or a dependent.
AGI can’t be more than
- 60K for MFJ
- 45K for HOH
- 30K for S, MFS, or QW
To figure credit, subtract amount of distributions received from his retirement plans received in the 2 yrs before yr credit is claimed, year credit is claimed, and period after end of credit year but fore due date for filing return for credit yr
Residential Energy Credits
Taxpayer who purchases certain qualified energy-efficient improvements for home can qualify for a nonrefundable tax credit.
- Residential Energy Efficient Property Credit (30%)
- Non-Business Energy Property Credit (10%) - Existing homes only, total amount claimed is 500$, with only 200$ of limit for windows
- Plug-In Electricity Motorcycles and 3 Wheeled Vehicles
- Qualified Fuel Cell Vehicle Credit
- Alternative Fuel Vehicle Property
Affordable Care Act Tax Provisions
Each individual must have qualifying health care coverage, known as minimum essential coverage, for each month of the year. Requirement applies to all ages.
- Employer-sponsored coverage, including self-insured plans, COBRA, and retiree coverage
- Coverage purchased in either the federal “marketplace” or a state health insurance marketplace, which are also called exchanges
- Medicare Part A and Medicare Advantage plans
- Most Medicaid coverage
Certain types of veterans health coverage
- Most types of TRICARE coverage
Coverage that provides only limited benefits does not qualify as minimum essential coverage.
Exemptions
More than 30 exemptions that excuse an individual from the requirements to have minimum essential coverage. If exemption is approved, taxpayer will receive an exemption certificate number (ECN)
Exemptions:
- Affordability Based on Projected Income: don’t have access to coverage based on income
- General Hardship: Suffered a hardship that makes them unable to obtain a coverage
- Religious Conscience: Religious beliefs opposed to coverage
- Ineligibility for Medicaid
- Policy Cancellation
- Incarceration
- Health Care Sharing Ministry
- Indian Tribes
- Income below the filing threshold
- Unaffordable Coverage
- No Expansion of Medicaid
- Short Coverage Gap
- Citizens Living Abroad/Some Noncitizens - 330 days outside US during a yr, US citizens who are residents of a foreign country
