Individual Taxation: Adjusted Gross Income Flashcards
What are adjustments?
“Above-the-line” deductions to gross income to arrive at adjusted gross income (AGI)
Other deductions are after computing AGI, and so are “below the line”
How can self-employed persons treat expenses for medical insurance?
100% of medical insurance costs can be deducted for oneself and one’s family (spouse and dependents)
-deduction cannot exceed net self-employment earnings (gross earnings minus 50% of self-employment earnings tax)
If the taxpayer or his spouse is eligible for an employer-subsidized plan, then he is ineligible for this
How does interest on student loans count as an adjustment to GI?
It can be deducted up to $2,500, but this is phased out depending on one’s modified AGI (i.e. MAGI)
2013 MFJ phase-out: $125,000 - $155,000
Single: $60,000 - $75,000
How is one’s MAGI calculated?
AGI
+ tax-exempt income
= MAGI
Tax-exempt income = Social Security, adoption assistance, foreign income, U.S. savings bonds interest
-also passive activity losses and IRA contributions
What are further requirements upon a student loan interest deduction?
(1) is not available for MFS status
(2) permitted only if other deductions are not allowed
(3) dependents cannot claim this deduction
(4) the student must be at least a half-time student
What is an IRA?
Individual retirement account – a tax-sheltered way for individuals to invest for retirement
There are annual limits on contributions, and distributions can occur only after the individual becomes 59.5 years old
What is the most which an employee can contribute to an IRA in a given year?
For 2013, either (a) the employee’s income or (b) $5,500, whichever is lesser
This is cumulative for working spouses
How are IRA contributions affected if one spouse is nonworking?
The taxpayer can arrange a spousal IRA where the maximum contribution is the same as for an individual IRA
What is the difference between a Traditional IRA and a Roth IRA?
Traditional = contributions are tax-deferred – meaning that you don’t pay taxes on the money you put in, but you do when you take it out later
Roth = contributions are after-tax but earnings are tax-free – meaning you have to pay tax on money before you put it in, but you never have to pay any tax on it, no matter how much it might grow over the years
Roth IRAs are named after William Roth, who chiefly sponsored the bill permitted the IRAs’ existence
Can a person establish only one type of IRA?
No, although the maximum contribution limits still apply – e.g. a person cannot contribute the individual maximum to both a Traditional and a Roth IRA
Who counts as an “active participant” in an employer-sponsored retirement plan?
Anyone who is eligible to participate, whether or not his plan is actually being funded
How much can Traditional IRA contributions be deducted?
For active participants, there is a phase-out range depending on their pre-deduction AGI, but non-active participants can always deduct the full amount of the contribution
What occurs for a couple that is MFJ, if one spouse is an active participant and the other is not?
The non-participant spouse has a higher phase-out range applicable to the deductibility of her contribution
What is the 2013 phase-out range for active participants’ IRA contributions?
MFJ: $92k - $115k
MFJ, non-participant spouse: $178k - $188k
S/HH: $59k - $69k
MFS: $0 - $10k
Why would a taxpayer wish to use a Traditional IRA if his contribution cannot be deducted?
He can still have tax-deferred growth on the funds in the account, even if the contributions are after-tax
What occurs if an individual receives distributions before he reaches age 59.5?
He must pay a 10% excise tax on top of the ordinary income tax, unless the distribution meets certain criteria
What are the criteria for an early distribution not to incur a 10% penalty?
(1) large medical expenses (>7.5% of AGI)
(2) medical insurance for individuals who have received 12 weeks of unemployment comp.
(3) educational expenses
(4) $10,000 to purchase a first home, if spent within 120 days
Who is forbidden from making contributions to a Roth IRA?
Contributions are phased out for individuals with a too-high AGI
Phase-out for 2013:
MFJ: $178k - $188k
S: $112k - $127k
MFS: contributions never permitted
What is the rule governing distributions from a Roth IRA?
Distributions must be at least five years after contributions, and after the individual reaches age 59.5 (or is disabled)
Can funds be transferred between Roth and Traditional IRAs?
Yes, taxpayers with an AGI less than $100k can roll over a Traditional IRA into a Roth IRA
Distributions are not permitted until five years from the point of the rollover, however
What is a Health Savings Account (HSA)?
A savings account with deductible contributions, so long as the account funds are used for approved medical expenses
Unapproved distributions are subject both to tax and sometimes to a 10% penalty
What is a high-deductible health plan (HDHP), and how is it related to HSAs?
A health insurance plan with higher-than-normal deductibles
To be eligible for an HSA, an individual must have a HDHP and no other medical coverage or Medicare benefits
-he must also not be a dependent
What are the maximum annual contributions for HSAs?
For 2013…
Single: $3,250
Family: $6,450
Is there a penalty for excess HSA contributions?
Yes, they may not only be taxed but also penalized 6%
If a taxpayer does not have a HDHP the entire year, can he still make a full HSA contribution?
No, the limit for contributions is decreased pro rata for each month the taxpayer did not have a HDHP
During what period can HSA contributions for a given calendar year be made?
Through tax day of the next year (April 15) – just like IRAs
What is an Archer Medical Savings Account (MSA)?
Similar to HSAs (also require HDHPs), but established for self-employed persons or employers with only a few employees
Contribution limits are percentages of the plan’s deductible (65% for single, 75% for family)
How do HSAs relate to Archer MSAs?
For individuals with HSAs, the contribution limit for HSAs applies, as one total, to all contributions for any HSAs and Archer MSAs
HSA contributions can be made from Archer MSAs and other HSAs, but not from IRAs, FSAs, or healthcare reimbursement arrangements
To deduct work-related moving expenses, how far away must the new residence be?
At least 50 miles farther from the old home than the old workplace was from the old home
To deduct work-related moving expenses, how long must the employee have worked at the new workplace?
At least 39 weeks within the 12 months after the move
Self-employed persons must also be in the new workplace at least 78 weeks within the 24 months after the move
What are deductible and nondeductible moving expenses?
Deductible: (1) cost to move goods, (2) costs to travel, and (3) lodging
Nondeductible: (1) meals, (2) costs to find houses, (3) costs to live in a temporary place, and (4) costs to buy or sell a house
If deductible expenses are reimbursed by the employer, they cannot be deducted, since they are already to be excluded from income
What is a Keogh plan?
A type of retirement plan for self-employed persons and employers with small businesses
What is the maximum deduction permitted under a Keogh plan?
The lesser of
(a) $51,000 (for 2013) or
(b) 20% of net self-employment earnings, which is ordinarily about 25% of gross self-employment earnings
What is the domestic production activities deduction (DPAD)?
A deduction for businesses whose manufacturing/production occurs largely within the U.S.
DPAD is equal to 9% of the lesser of
(a) the qualified production activities income (QPAI) or
(b) AGI
As related to the DPAD, what is qualified production activities income (QPAI)?
Domestic production gross receipts
- cost of goods sold (COGS)
- other expenses related to such receipts
= QPAI
What is the maximum for DPAD?
50% of W-2 wages paid out by the employer-taxpayer
Can a taxpayer deduct both standard and itemized deductions from AGI?
No, though he can elect to deduct the greater of the two
What are the standard deductions for the different filing statuses?
For 2013, they are as follows: SS/MFJ: $12,200 HH: $8,950 S/MFS: $6,100 MFS if the spouse elects itemized deductions: $0
Are standard deductions always the same for each filing status?
No, they can increase if the taxpayer is at least 65 years old or blind – and they double if he is both
By how much do standard deductions increase if the taxpayer is either 65 or blind?
For 2013, MFJ, MFS, and SS increase by $1,200, while S and HH increase by $1,500
How are standard deductions affected if the taxpayer is a dependent?
For 2013, a dependent’s standard deduction is the lesser of
(a) the normal deduction for his filing status or
(b) the greater of $1,000 or the dependent’s income + $350
Which form determines itemized deductions?
Schedule A
Can itemized deductions be phased out?
Yes, itemized deductions can be phased out after AGI surpasses a certain threshold, though not more than 80% can be phased out
This applies only to “unprotected” itemized deductions
Which itemized deductions qualify as “protected” deductions?
(1) medical expenses
(2) investment interest
(3) losses from casualty & theft
(4) losses from gambling
What is the minimum threshold for itemized deductions to phase out?
For 2013, the AGI threshold is... MFJ/SS: $300k HH: $275k S: $250k MFS: $150k
If the taxpayer’s AGI surpasses the relevant threshold, how does it reduce his itemized deductions?
They will be reduced by the lesser of…
(a) 3% of the excess of AGI over the threshold
(b) 80% of his total itemized deductions
When can medical expenses be claimed as itemized deductions?
Only insofar as they exceed 10% of AGI, though this threshold is 7.5% for taxpayers are 65 (or whose spouses are 65)
This applies only to medical expenses actually paid, not to ones incurred (although credit card charges still count)
What sort of expenses qualify as medical expenses for itemized deductions?
(1) ordinary expenses related to diseases and surgery
(2) transportation essential to medical care
(3) premiums for medical care insurance
(4) lodging when seeking medical care (max $50 per night per person)
(5) school tuition, if the primary reason is the availability of medical care
(6) altering a home for a handicapped person (insofar as the costs exceed the increased value of the home from the changes)
What sort of expenses do not qualify as medical expenses for itemized deductions?
Expenses for cosmetic surgery, unless it is to treat
(1) a deformity or disfiguring disease
(2) a congenital deformity
(3) a personal injury trauma
What taxes give rise to itemized deductions?
State, local, and foreign taxes on (1) real property, (2) personal property, and (3) income
How does a different basis of accounting affect taxes’ relation to itemized deductions?
The basis determines when the taxes are deductible – e.g. they are deductible when incurred for an accrual-basis taxpayer, but deductible when paid for a cash-basis one
How do tax refunds affect itemized deductions?
If a tax refund occurs in a year after the tax was itemized as a deduction, then the refund is included in income for the year it was received
If only a portion of the refund effectively provided a deduction – i.e. if, were the refund given in the prior year, the standard deduction would have been elected – then only that much of the refund is deductible
What is an example of a tax refund that only partially must be included in income?
A single man has $6,500 in itemized deductions due to state income taxes paid, and so he elects that deduction over the $6,100 standard deduction. The next year he receives a $600 state tax refund. Only $400 of that refund must be recognized as federally taxable income because, if he received that refund the year before, he would have elected the $6,100 standard deduction, not a $5,900 itemized one (i.e. $6,500 - $600).
When can interest expenses be itemized deductions?
(1) home mortgages
(2) debt secured by home equity
(3) interest expenses on investments
Consumer interest expenses do not qualify
What kind of interest on home mortgages can be an itemized deduction?
Interest on any debt incurred to purchase or substantially improve a first or second home, with a max debt of $1,000,000, is deductible
What kind of interest on home equity debt can be an itemized deduction?
Interest on any debt that is secured by the taxpayer’s (first or second) home, with a max debt of $100,000, is deductible
How can interest expenses on investments be an itemized deduction?
Any interest incurred for property held for investment can be deducted, but only to offset investment income – with any remaining expenses carrying forward indefinitely
When computing interest expenses for itemized deductions, what is excluded from investment income (against which interest if offset)?
Net capital gains
However, the taxpayer can elect to include any amount of net capital gains in investment income, so long as he accordingly reduces the amount eligible for capital gains tax rates (which are lower than normal income tax rates)
Are charitable contributions able to be itemized deductions?
Yes, but not entirely, as the AGI can limit the amount of the deduction
Further, they can be deducted only if they are actually paid in the year (though credit card charges count too)
To which organizations can charitable contributions be given?
(1) religious, scientific, literary, charitable, and educational organizations
(2) government entities, so long as the contribution is solely for public purposes
Political contributions are NOT considered charitable
How can charitable contributions be deducted if the taxpayer receives something in exchange for the donation?
The contribution is reduced by the value of the received thing
Do charitable contributions, to be deducted, require written proof?
Yes, but only if the contribution is over $250
Can expenses related to charitable contributions be deducted too?
Yes, out-of-pocket expenses incurred in the act of donation (e.g. car mileage) can be deducted – but this does not apply to services contributed
If property is donated as a charitable contribution, how is the deduction quantified?
The property is generally valued at the lesser of basis (i.e. what the taxpayer received for it) or FMV
Property that naturally appreciates – also called “long-term capital gain” (LTCG) property – is usually valued at FMV
Are charitable contributions to individual persons deductible?
No, unless they are to a qualifying student living in one’s home, whether domestic or foreign
This allows a max deduction of $50 per month
Under what circumstances do contributions for a student residing in one’s home count as deductible?
(1) if there’s a written agreement with the relevant organization for such donations
(2) if there is not reimbursement for the taxpayer
(3) if the student is in high school or below
(4) if the student is not a dependent or relative
What are the two different kinds of organizations which limit deductions for charitable contributions?
Public charities, i.e. 50% organizations, and private charities, i.e. 30% organizations
What organizations are deemed public charities and private charities?
Public = churches; literary, religious, educational, etc. organizations; hospitals; gov’t entities; private operating foundations; and organizations holding property for colleges and universities
Private = everything else, e.g. fraternal orders and veterans organizations
What are the rules limiting deductions for charitable contributions?
(1) Donations to public charities cannot be deducted for more than 50% of AGI
(2) Donations to private charities cannot be deducted for more than 30% of AGI
(3) The total deduction cannot be more than 50% of AGI
(4) Leftover contributions (i.e. which aren’t deducted in the current year) can be carried forward for five years
What is an example of a deduction for a charitable contribution?
A couple with an AGI of $80k made donations of $25k to a church, $12k to a hospital, and $10k to a veterans organization.
The total amount to public charities ($25k + $12k = $37k) is less than 50% of the AGI ($40k), so there is no limitation there. The $10k to the veterans organization is less than 30% of the AGI ($24k), so no limitation there either. But the total ($47k) is greater than 50% of the AGI, so only $40k can be deducted this tax year. There will be $7,000 in contributions to carry forward over the next five years.
How does long-term capital gain (LTCG) property provide a complication when calculating deductions for charitable contributions?
If the taxpayer values the LTCG property at FMV when giving to a public charity, then the normal 50% rule changes to 30% (i.e. he can only deduct 30% of his contribution) – but if he values the property at its basis, then the 50% rule remains
If the taxpayer donates the LTCG property to a private charity, then the rule changes from 30% to 20% no matter how he values it
What is an example of a deduction for a charitable contribution with a LTCG property donation?
A couple with an AGI of $140k donated to a church LTCG property with a basis of $30k and a FMV of $40k. They also donated $20k to a hospital.
If valued at FMV, the total donation to public charities would be $60k, which would surpass the 30% AGI limit (30% x $140k = $42k). The couple could deduct only $42k and carry forward $18k over five years.
If valued at basis, the total donation would be $50k, which would be less than the 50% AGI limit ($70k). The couple could deduct $50k, but could not carry forward any amount.
How do losses from casualty and theft relate to itemized deductions?
Casualty losses due to sudden (not gradual) events in the year are deductible, as are losses from theft in the year the theft is discovered
This deduction has limits, however
What limits are there to deductions from losses for casualty and theft?
The losses must exceed 10% of AGI, and the first $100 on each loss is not deductible
How does insurance relate to the deductibility of losses from casualty and theft?
Losses are deductible only if the taxpayer filed an insurance claim promptly, and in such a case the insurance reduces the deductible amount of the loss
Moreover, all losses are offset by gains from these events – which usually are insurance proceeds
How is property lost from casualty or theft valuated?
At the lesser of the property’s basis or its decrease in FMV from the event
Theft causes an item to have $0 FMV
What is an example of a deduction due to casualty and theft?
A couple has an AGI of $25k. During the year…
(1) electronics with a FMV of $3k and a basis of $4k were stolen,
(2) a library with a basis of $2.5k had a fire, burning many books and reducing their overall FMV from $3k to $1k, and
(3) a car with a FMV of $8k and basis of $9k was destroyed in a flood, though they collected insurance on that for $10k.
Loss on electronics = $3k - $100 = $2,900
Loss on library = ($3k - $1k) - $100 = $1,900
Gain on car = $10k - ($8k - $100) = $2,100
Total loss = $2,900 + $1,900 - $2,100 = $2,700
Deductible amount = $2,700 - $2,500 [10% of AGI] = $200
What are the different kinds of miscellaneous itemized deductions?
First-tier and second-tier
First-tier can be deducted completely, but second-tier can be deducted only inasmuch as they, in total, surpass 2% of the taxpayer’s AGI
What are some examples of first-tier miscellaneous deductions?
(1) estate tax for IRD (income in respect of a decedent)
(2) work expenses related to handicapped employees’ handicaps
(3) gambling losses
What are some examples of second-tier miscellaneous deductions?
(1) fees for preparing a tax return
(2) appraisal fees when determining casualty losses
(3) legal fees to attain alimony
(4) home office expenses
(5) certain unreimbursed employee business expenses
