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