Indiv. Tax, Adj./Deductions/Credits (II) Flashcards
Interest on home equity loans up to (WHAT amount??) Are deductible?
$100,000 in principal (MFJ)
50K if Single
Miscellaneous Itemized Deduction subject to 2% Limitation?
You can deduct certain expenses as miscellaneous itemized deductions on Schedule A (Form 1040 or Form 1040NR). You can claim the amount of expenses that is more than 2% of your adjusted gross income. You figure your deduction on Schedule A by subtracting 2% of your adjusted gross income from the total amount of these expenses. Your adjusted gross income is the amount on Form 1040, line 38, or Form 1040NR, line 37.
Generally, you apply the 2% limit after you apply any other deduction limit. For example, you apply the 50% (or 80%) limit on business-related meals and entertainment (discussed later under Travel, Transportation, Meals, Entertainment, Gifts, and Local Lodging ) before you apply the 2% limit.
Deductions subject to the 2% limit are discussed in the following three categories.
- Unreimbursed employee expenses (Schedule A (Form 1040), line 21 or Schedule A (Form 1040NR), line 7).
- Tax preparation fees (Schedule A (Form 1040), line 22 or Schedule A (Form 1040NR), line 8).
•Other expenses (Schedule A (Form 1040), line 23 or Schedule A (Form 1040NR), line 9).
(See below)
Other Expenses
You can deduct certain other expenses as miscellaneous itemized deductions subject to the 2%-of-adjusted-gross-income limit. On Schedule A (Form 1040), line 23, or Schedule A (Form 1040NR), line 9, you can deduct the ordinary and necessary expenses that you pay:
- To produce or collect income that must be included in your gross income,
- To manage, conserve, or maintain property held for producing such income, or
- To determine, contest, pay, or claim a refund of any tax.
[You can deduct expenses you pay for the purposes in (1) and (2) above only if they are reasonable and closely related to these purposes. ]
These other expenses include the following items.
- Appraisal fees for a casualty loss or charitable contribution.
- Casualty and theft losses from property used in performing services as an employee.
- Clerical help and office rent in caring for investments.
- Depreciation on home computers used for investments.
- Excess deductions (including administrative expenses) allowed a beneficiary on termination of an estate or trust.
- Fees to collect interest and dividends.
- Hobby expenses, but generally not more than hobby income.
- Indirect miscellaneous deductions from pass-through entities.
- Investment fees and expenses.
- Legal fees related to producing or collecting taxable income or getting tax advice.
- Loss on deposits in an insolvent or bankrupt financial institution.
- Loss on traditional IRAs or Roth IRAs, when all amounts have been distributed to you.
- Repayments of income.
- Repayments of social security benefits.
- Safe deposit box rental, except for storing jewelry and other personal effects.
- Service charges on dividend reinvestment plans.
- Tax advice fees.
- Trustee’s fees for your IRA, if separately billed and paid.
- Net gambling losses are not subject to this 2%.
Tax Benefit Rule
IRC Section 111 provides that gross income does NOT include income attributable to the recovery (during the taxable year) of ANY amount deducted in ANY prior taxable year,, to the extent such amount did not reduce the amount of tax previously imposed.
Tax Benefit Rule
Where are unreimbursed employee business expenses deducted?
Schedule A, Itemized Deduction
Again.. this happens after factoring what your AGI is for the year.
Do schools for the handicapped count as medical expenses?
Yes
Is self-employment tax ever an itemized tax deduction?
No.
But you subtract 1/2 of it to arrive at AGI.
Rule on deducting Investment Interest Expense
The deduction for investment interest expense is limited to NET taxable investment income (EG all other investment expenses have been netted out of income already) .. remainder is what is possible to deduct as Inv. interest Expense
Adoption Credit Limitation
Total amount is $13,400
2 ways to treat taxes an individual pays to a foreign country, for tax purposes?
1) Treat as credit against federal income taxes due
2) Itemize the deduction (NO 2% restriction)
What are the refundable tax credits?
Earned income credit, and POSS. Childcare tax credit
The rest are PERSONAL credits, that cannot result in a monetary tax return to the individual.
Child and Dependent Care Credit: WHO And HOW (to calculate)
Who:
a) qualifying child under 13
b) disabled dependent of any age who is unable to care for himself … does not have to pass SUPORT or CARES, but must pass 50% support test
c) disabled spouse unable to care for themselves
HOW (To calculate):
RULE 1 - $3K for 1 dependent, $6K for 2+ dependents
RULE 2 - Claim for dependents is limited to lowest income-earning spouse (EG you could spend $6000, but if wife Mary only makes $2K, that’s your cap/threshold)
RULE 3 - Take the qualifying amount (As per above) and multiply by 20% to arrive at Child and Dependent Care Credit Claimed
Dependent and Child Care Credit - what expenses count?
Babysitter, Nursery school, daycare
NOT Grammar school
Must be undertaken for purpose of guardian to be gainfully employed (working or looking for work)
Earned Income Credit - WHO
Who:
1) Taxpayers who had USA as main home for more than half of the taxable year
2) Meet certain low-income thresholds
3) Be over 25 and less than 65 (spouses as well)
4) Joint return with spouse with certain exceptions, EG neither spouse can be a dependent
Earned Income Credit - HOW (to compute)
1) Single Taxpayer - 7.65% earned income, for max. credit of $503 (no children)
2) Taxpayer with One Qualifying Child - 34% of earned income, for max. credit of $3359
3) Taxpayer with two Qual. Children - 40% of earned income, for max. credit of $5,548
4) TP with 3+ Qual. Children - 45% of earned income, for max. credit of $6,242
SS Tax withheld at greater than maximum for a particular year?
Employee may claim the excess as a credit against income tax, IFFF that excess resulted from correct withholdings from 2 or more employers.
