R2 Flashcards
How do we treat a personal residence that is not used for Rental Purpose
No deduction is allowed for Utilities costs or Insurance.
Mortgage Interest and Property taxes, can be deducted
Charitable Contributions
Contributions to charitable entities (including churches) are deductible.
When the contribution is charged to a credit card, the contribution is deductible in the year the charge is made, even if payment to the credit card issuer is made in a later year.
Cash Contributions are 60% of AGI and carry over from the prior year can also be utilized.
what is not a charitable contribution
- Political contributions
- All charitable contributions must be
substantiated (e.g., by a canceled check, receipt, etc.). A contribution that is not substantiated is not deductible. - Contributions to foreign charities
IRA Contributions
In 2023, taxpayers can contribute and deduct up to $6,500 per year to a traditional IRA.
Alimony paid pursuant to divorce or separation agreements executed before December 31, 2018, is considered earned income for IRA purposes.
For couples filing a joint return where at least one spouse is an active participant in a retirement plan, the deductible portion of the contribution is phased out.
For a spouse who is an active participant, the phase-out range in 2023 begins at AGI of $116,000 andis complete at $136,000.
For a spouse who is not an active participant, but is married to someone who is, the phase-out range begins at $218,000 and is complete at $228,000(2023).
Which credits can result in a refund even if the individual had no income tax liability?
The earned income credit is refundable.
The lifetime learning credit, elderly and/or permanently disabled credit, and retirement savings contribution are not refundable credits.
Which requirements must be met in order for a single individual to qualify for the additional standard deduction?
An individual must be age 65 or older or blind by the end of the tax year.
Net Investment Income Tax- who is subject to and how much? And on what?
An individual who is a U.S. resident may be subject to the 3.8 percent net investment income tax on net investment income above statutory AGI threshold amounts.
The noninterest investment expenses are not deductible.
The interests from Municipal bonds are not taxable.
Investment Interest
Investment interest expense deduction is an itemized deduction limited to net investment income. Taxable interest is included in net investment income.
Wood’s residence had an adjusted basis of $150,000 and it was destroyed by a tornado. The location was a federally declared disaster area. An appraiser valued the decline in market value at $175,000. Later in the current year, Wood received $130,000 from his insurance company for the property loss and did not elect to deduct the casualty loss in an earlier year. Wood’s current year adjusted gross income was $60,000 and he did not have any casualty gains.
What total amount can Wood deduct as a current year itemized deduction for casualty loss, after the application of the threshold limitations?
Casualty losses are deductible as an itemized deduction if located in a presidentially declared disaster area.
Step 1 :
Casualty losses are generally computed as the decline in fair market value, except that the fair market value is limited to the property’s basis, here $150,000.
Step 2:
Casualty losses are reduced by the amount of any insurance recovery, reducing this loss to $20,000.
$150,000 - $130,000 = $20,000;
Step 3:
Next, each individual loss is reduced by $100, bringing this loss to $19,900.
$20,000 - $100 = 19,900
Step 4:
Finally, the remaining total amount of all casualty losses (here there is only one) are deductible only to the extent that the amount exceeds 10% of AGI, or $6,000 here.
19,900 -$6,000 = $13,900
Repair of glass vase accidentally broken in home by dog; vase cost $500 5 years ago; fair value $600 before accident and $200 after accident. what amount can we deduct for the casualty loss in their itemized deductions on Schedule A for the current year?
$0 casualty loss deduction on Schedule A because damage caused in home by dog is controllable, and avoidable, and, thus, is not unexpected and does not qualify as a “casualty.” In addition, a casualty loss is only deductible if it is in a nationally declared disaster area.
An individual starts paying student loan interest in the current year. How many years may the individual deduct a portion of the student loan interest?
Duration of the time that the interest is paid
Taxpayers may deduct student loan interest (above-the-line for AGI) paid on qualified education loans up to a maximum of $2,500 for the tax year.
There is a phase-out for the deduction and other minor restrictions, such as a married couple being required to file joint returns to take the deduction.
Stock Option related Statements
- The employer may recognize a deductible expense for a nonqualified stock option in the same year that the employee will recognize ordinary income
- Employee stock purchase plans are a type of qualified stock option plan.
- For an incentive stock option, once exercised, the stock must be held at least two years after the grant date and at least one year after the exercise date.
- Generally there is no recognition of compensation expense with an incentive stock option.
SEP IRA Plan - how is the Earned Income defined as?
Earned Income is defined as Net self-employment earnings reduced by one -half of the self employment taxes.
Net self-employment earnings -50%of SE Taxes
Pat’s divorce decree, finalized in 2016, requires Pat to make the following transfers toPat’s former spouse during the current year:
Alimony payments of $9,000 to be reduced to $7,000 when their child attains theage of 18.
Property division of stock with a basis of $2,000 and a fair market value of $3,500.
What is the amount of Pat’s alimony deduction for the current year?
Any amount of “alimony” that is dependent on a child reaching the age of 18, will be considered child support (which is not deductible) for tax purposes.
7000 is the amount because out of 9000 if the question says that it be reduced to 7k when their child attains the age of 18, the 2k is going to the child support which is not deductible and therefore remaining 7k is treated as Alimony.
what is claimable to an employee who has had Social Security tax withheld in an amount greater than the maximum for a particular year ?
The excess as a credit against income tax, if that excess resulted from correct withholding by two or more employers.
