R2 - 1. adjustments and itemized deductions

Question 1

Major topics under 1. adjustments and itemized deductions

Answer 1

Core Formula: 
Gross income 
- adjustments 
= Adjusted Gross income
- deductions (choose either itemized or standard)
- exemptions 
= taxable income 

1. Adjustments (major topics) - 13 adjustments
   - educator expenses
   - IRA expenses (traditional deductible IRA, catch-up IRA, Roth IRA, nondeductible IRA, and Coverdell education)
   - Student loan Interest expenses
   - Tuition and fees expenses
   - health Saving accounts
   - moving expenses
   - tax on self-employment
   - self employed health insurance
   - Keogh (Profit sharing) plans
   - Penalty on early withdrawal of savings
   - alimony
   - attorney fees paid in discrimination cases
   - domestic production activities
2. Deductions (major topics)
   standard deduction - amount based on filing status
   itemized deductions (6) - medical expenses, State/Local/Foreign Tax, Interest expenses, Charity, Casualty, and Miscs

Question 2

Itemized Deduction - Charity

charity deduction = this is the only place to deduct.

1. definition
2. valuation (cash, property, appreciated property)
3. limitations (30, 50)
4. timing
5. donate service
6. full time student living in taxpayer home ($50 deduct, if living 15+ days)
7. must keep supportive evidence (bank records)
8. large non cash contributions (form 8283)
9. carryover

Answer 2

重点在limitation (找AGI) and valuation

Definitions

1) Charity - to an organization = tax deduction
2) Gifts - to an individual/needy family = n/a
3) Political contribution - to candidates = n/a

Valuation
Cash or Property.
* for property - lessor of the property basis or its FMV at time making contribution

Maximum deductible
if 捐的是Cash = 50% of AGI
if 捐的是general property = 30% of AGI
if 卷的是appreciated property -> special rules

• *拥有未来升值空间的 appreciated property -> special rules
  1. deducted at the appreciated property’s fair value if it was held over one year.
  2. 30%/50% rule -> appreciated property max deduction = 30% of AGI or overall not above 50% of AGI (cash contribution)

**always remember that the ultimate overall limitation is 50% of AGI!!!

捐的比实际的消费要多: taxpayer may only deduct the excess contribution over the consideration received. if contribution over $75, charitable organization must provide the donor with a written statement of the value of deductible portion. ($200 dollars contribution for a $50 service, deductible amount = 150)

Time for deduction
cash / check = deduct when paid
credit card = deduct when you pay your credit card

Contribution of service
parking - yes
gas - yes
service (value of time) - no

carryover of excess charitable contribution = 5 years

Question 3

Itemized deduction - Miscellaneous - Employee Unreimbursed Business expenses - unreimbursed business expenses (1. travel, meal, lodging; 2. transportation; 3. meal/entertainment)

• employee moving expenses = adjustment
• employee other expenses (unreimbursed) = here

Answer 3

1. difference between reimbursed and unreimbursed
   an employee may always deduct reimbursed expenses incurred on behalf of his employer. Note that the reimbursements must be included in his gross income.
2. moving expenses = adjustment

other unreimbursed expenses = itemized deductions

1. travel, meals and lodge (must be over night)
   - overnight rule “away from home” = away from home over night
   - if away for months, IRS would argue.
2. transportation expenses (100%)
   all business transporation are deductible EXCEPT day-to-day commute.
3. meals and entertainment (50% deductible)
   must be “directly relate” or “associate with” business; only 50% deductible.

Question 4

Itemized deduction - Miscellaneous - Employee Unreimbursed Business expenses - unreimbursed business expenses (1. travel, meal, lodging; 2. transportation; 3. meal/entertainment)

“under a non accountable plan” = everything is income.

Answer 4

under a nonaccountable plan (expenses are notreported to the employer), any amounts received by an employee from the employer must be report by the employer as part of wage’s on the employee’s W-2 for the year. The Gross amount received is reported as INCOME!

Question 5

Itemized deduction - Miscellaneous - 2% AGI test

Answer 5

the deduction of misc. is allowed only to the extent that those miscellaneous deductions combined exceed 2% of AGI.

Question 6

Itemized deduction - Casualty and theft losses - $100 floor and 10% of AGI test

Answer 6

to become an itemized deduction ->

1. each individual loss exceeds $100
2. combined exceeds 10% of AGI

Question 7

Itemized deduction - Casualty and theft losses (non business) - core formula

*always the smallest one

Answer 7

Smaller loss of (1. lost cost/adjusted basis or 2.decreased FMV) 
- ( insurance recovery) 
= taxpayer's loss
- ($100) 
- (10% of AGI)
= deductible loss 

** must be suddenness or unexpected

Question 8

Adjustments (13) - Moving expenses

Answer 8

moving expenses (unreimbursed)

1. 50 miles farther
2. stay there 75% of the year

Only direct moving costs are deductible (adjustments)

a. travel and lodging of the taxpayer and his family (including tolls and parking)
b. transporting household goods and personal effects to the new location

NOT included

• meals
• pre-move house hunting
• expenses of breaking a lease
• temporary living expenses

Moving expenses by employees are parts of the adjustment (above the line). Business expenses -> itemized deductions.

Question 9

Itemized Deduction - State, Local, and Foreign Taxes

Answer 9

two types of taxpayers

1. cash method = deductible when tax is paid
2. accrual method = deductible when tax accrued.

Deductible taxes

1. Real Estate Taxes
2. Income taxes
3. Personal property taxes
4. sales tax

NOT Deductible taxes (FIB)
federal taxes (including social security)
Inheritance taxes for states
Business and rental property taxes

Question 10

Adjustments - tax on self-employment

Adjustments - self-employed health insurance

Answer 10

self-employed taxpayers pays two taxes: income tax and Social Security tax.

Social security tax = 50% deductible on adjustments

Health Insurance = 100% deductible (deduct all of the medical insurance premiums paid for the taxpayer, spouse, and dependents, provided that the plan is set up in the name of the self-employed individual.

Question 11

Adjustments - IRA

Answer 11

four types and Only Traditional IRA is deductible.

1. Traditional IRA (Deductible IRA)
2. Roth IRA
3. Nondeductible IRA
4. Coverdell eduction

Question 12

Adjustments - IRA

Answer 12

1. Traditional IRA
   a. amount of deduction: lesser of $5,500 or individual compensation
   OR $11,000 (married Filled joint) or combined compensation.

b. compensation include ->
salaries, wages, commissions, bonuses, and Alimony

Compensation does not include ->
interests, dividends, annuity income, pension

c. NOT permitted to deduct a contribution to an IRA when the following two conditions are BOTH present:
c-1. (Rich) Excessive AGI
c-2. Active participation in another qualified plan (married filled joint, spouse dont combine the plan)