r1-m5/6/7 Flashcards
Above the line
Adjustments to gross income
Below the line
Standard deduction
-after adjusted gross income
Single standard deduction
$13,850
Head of household standard deduction
$20,800
Married filing jointly or surviving spouse standard deduction
$27,700
Dependent of another standard deduction
The greater of
-$1250 or earned income plus $400
Schedule A
Itemized Deductions
Personal Expenses
-medical
-interest
-charity
-casualty
Schedule C
Itemized Deductions
Business Expenses
Schedule E
Itemized Deductions
Rental Expenses
Insurance Reimbursement
Amounts repaid by a hospital, health, or accident insurance must reduce allowable expenses
Calculation of deductible medical expenses
Qualified Medical expenses
- insurance reimbursement
=Qualified medical expenses paid
- 7.5% of AGI
= Deductible medical expenses
State and Local Taxes (SALT)
Itemized deductions for state and local income taxes, state and local property taxes, and sales tax are limited to $10,000 in the aggregate
Real Estate Taxes (state and local)
-Taxpayer must be legally obligated to pay in order to deduct the taxes
-Prorate taxes in year of sale/purchase
-Real estate taxes on land held for appreciation may be capitalized or deducted at the option of the taxpayer
-Real estate allocated to part of the home that is used exclusively for business may be deductible on schedule C
Personal Property Taxes (state and local)
Those assessed by state and local governments on personal property owned by the taxpayer, such as vehicles and boats. To be deductible the tax must be based on the value of the personal property and paid during the tax year
Income Taxes (State, Local, Foreign)
-Taxes withheld from paychecks during the year are deductible
-estimated taxes paid during the year are deductible
-refunds are included in gross income
Sales Tax
A taxpayer may elect to deduct either state and local income taxes or state and local general sales taxes. If they choose to deduct the sales tax, the amount is determined by either
-the total amount of actual general sales taxes paid or
-the relevant IRS table, plus any amount of sales tax paid for a motor vehicle, boat, or other IRS approved items
Tax Benefit Rule
Applies to the impact of sales tax
-If a tax payer itemizes deductions in a year and takes a deduction for state income taxes instead of a deduction for sales taxes in that year, the tax benefit rule will: calculate the taxability of the state tax refund on the extra benefit received from claiming the higher state income tax deduction
Nondeductible Taxes
Not deductible on Schedule A
-Federal taxes
-inheritance taxes
-Business (on Schedule C)
-Rental property taxes (on schedule E)
Casualty Loss (10% of AGI Floor)
Casualty losses of nonbusiness property are deductible to the extent that
-each individual loss exceeds $100 and
-the aggregate of these excess losses exceeds 10% of AGI
Amount of casualty loss
Difference between:
-the market value of the property immediately before the casualty and
-its fair market value immediately afterward
*may not exceed basis
Home Mortgage Interest
Deductions are allowed for “qualified residence interest” on a first or second home
-Interest up to $750,000 of home related indebtedness is deductible
Qualified indebtedness
Original acquisition debt or a home equity loan but must meet the following:
-incurred in buying, constructing, or substantially improving the taxpayers principal and second home
-Secured by the home
Investment Interest Expense
Deduction limited to net taxable interest income, indefinite carryforrward of unused amounts, tax-free bond investment interest never deductible
Charity
Deductible: items given to qualifying charitable organizations
Amount of deduction for ordinary income property is the lessor of:
-the property’s adjusted basis or
-fair market value at the time it is contributed
Ordinary income property includes:
-Inventory
-Short term assets
-Investment or personal use assets that have depreciated in value
-Depreciation recapture on long term, business use assets
Maximum allowable deduction for charitable contributions depends on:
-type of property contributed
-type of charity to which contribution was made
What is a private operating foundation?
-conducts charitable activities
-Distributes funds to its own charitable programs
What is a private nonoperating foundation?
-distributes to other charitable organizations
Substantiation requirements
regardless of the amount of the cash contribution, taxpayers must keep records that substantiate their deductions
-for contributions of more than $500 of noncash property the taxpayer must file form 8283
-a written appraisal for $5,000 or more
Qualified Business Income
Ordinary business income less ordinary business deductions earned from a sole proprietorship, S corporation, limited liability company, or partnership connected to business conducted within the US. QBI does not include any wages earned as an employee or guaranteed payments to partners
Qualified Property
Any tangible, depreciable property that is held by the business at the end of the year and is used at any point during the year in the production of QBI.
Qualified trade or business (QTB)
Any business other than a Specified Service Trade or Business (SSTB)
Specified Service Trade or Business (SSTB)
A trade or business involving direct services in the fields of: health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage, trading or dealing in securities
The basic deduction of QBI
20% * Qualified business income
SSTBs are only eligible for the deduction if…
the taxpayers taxable income before the QBI deduction is below a certain level.
When applicable the QBI deduction is limited to the greater of:
W2 Wage adn Property Limitation
1, 50% of the w-2 wages for the business or
2. 25% of w-2 wages for the business plus 2.5% of the unadjusted basis immediately after acquisition (UBIA) of all qualified property
The total QBI deduction is the lessor of:
Overall Taxable income limitation
- Combined QBI deductions for all qualifying businesses or
- 20% of the taxpayers taxable income in excess of net capital gain
Two QBI limitations
- the taxpayers total taxable income before the QBI deduction
-whether the flow through entity is a QTB or an SSTB
Category 1
Limitation based on taxable income level
Taxpayers with taxable income at or below $182,100
Category 2
Limitation based on taxable income level
Taxpayers with taxable income above $232,100
Category 3
Limitation based on taxable income level
Taxpayers with taxable income between $182,100 - $232,100
Taxpayers with income at or below $182,100
QTB - full 20% QBI deduction
SSTB - full 20% QBI deduction
Taxpayers with income at or below
How to qualify for the additional standard deduction?
Must be blind or be 65
What is the limit of charitable contributions that you may deduct for long term capital gain property?
30% of AGI
For medical expenses what is the AGI floor?
7.5%
How much is the additional standard deduction
$1,550
Are medical expenses itemized?
Yes
Are state taxes itemized?
Yes
Losses on transactions for personal purposes are deductible if
they are from casualty or theft
When computing casualty loss what is the first decision?
Deciding the lessor value:
The decrease in fair market value or Adjusted basis
What is interest on investment indebtedness is limited to
the taxpayers net investment income (investment income less investment expense)
Home equity debt is only deductible when
used to buy, build, or substantially improve the taxpayers home
Charitable contributions subject to the 60% limit that are not fully deductible in the year made may be
carried forward 5 years
Cash contributions are limited to
60% of AGI
Property contributions are limited to
30% of AGI
Is a taxpayer with income of $300,000 eligible for the QBI deduction?
No
What is a refundable tax credit?
A refundable tax credit is a credit you can get as a refund even if you don’t owe any tax. They are subtracted from income tax liability. They can result in a refund when credit exceeds tax liability owed even if no tax is withheld from wages.
What is the amount you must owe in order to pay the penalty for underpayment of tax.
over $1,000
What is the lifetime learning credit?
An education credit that can offset an individual taxpayers tax liability but does not result in a refund
How are taxes paid by an individual to a foreign country be treated?
As a credit against federal income taxes due
When calculating the child care tax credit what is the maximum eligible expense for 1 dependent and what is the expense limited by?
$3,000 is the limit and it is limited to the lowest earned income of either spouse. From there you multiply by the correct credit rate.
What is kiddie tax?
Its at tax on unearned income for a dependent child under 18 or 24 if fulltime student. Unearned income less $2,600 = income taxes at parents rate
What is the max IRA contribution that is eligible for credit?
$2000
