R2: Individual Tax--Adjustments, Deductions, and Credits Flashcards
Deductible Medical Expenses Formula
Qualified Medical Expenses
=Qualified Medical Expenses “Paid”
=Deductible Medical Expenses
Types of Deductible Medical Expenses
- Medicine and drugs
- Doctors
- Medical and accident insurance
- Required surgery
- Transportation to medical facility
- Physically disabled costs
Types of Nondeductible Medical Expenses
- Elective Surgery, elective cosmetic operations, drugs that are against the law, travel, vitamins
- Life Insurance
- Capital Expenditures
- Health club memberships
- Personal hygiene
Charitable Contributions Limitation
Overall Limit = 50% AGI
- Cash–may be all 50%
- General Property–lesser of basis or FMV
- Long-term appreciated property is limited to the lesser of:
a) 30% of AGI (Compare to FMV)
b) The remaining amount to reach 50% after cash contributions.
Miscellaneous itemized Deductions (2% AGI Test)
- Unreimbursed Business Expenses
1. Travel, Meals and Lodging (overnight business travel)
2. Transportation expenses (100% deductible)
3. Meals/Entertainment Expenses (50% deductible) - Educational Expenses (those not deducted above AGI)
- Uniforms
- Business Gifts ($25/recipient per year)
- Business use of Home (used for convenience of employer)
- Expenses of Investors–Safe Deposit Box and Investment Advice
- Subscriptions to Proffessional Journals
- Tax preparation fee
- Debit card convenience fees incurred to pay income tax
- Activities not engaged in for profit (hobbies)
Other Misc Deductions (no 2% AGI test)
- Gambling Losses- fully deductible to the extent of gambling winnings
- Federal Estate tax paid on income in respect of a decedent
Regular (deductible) IRA
- Generally deductible
- It is not deductible when 2 conditions are present:
1) Excessive AGI: Single/HH $61k - 71k; Joint $98k - 118k
2) Active participation in another Qualified plan
a) Exception- individual not considered active participant in an employer-sponsored retirement plan merely because spouse is considered active participant.
b) Phase out- Max deductible IRA for individual who is not an active participant but spouse is, is phased out for modified AGI of $184k-194k.
Amount of IRA deduction
The max is the lesser of: $5,500 or Individual's compensation Married ($11k)
Nondeductible IRA contributions
- Roth IRA
- Tax-free accumulation of earnings
- Tax-free distributions
Contribution limits to all IRAs
-Single $5,500 Married $11,000 -Phase-out Income Limits 1) Single $117k-132k 2) Joint filers $184k-194k 3) Married filing Separate $0-10k
Coverdell Education Savings Account
- Maximum contribution per beneficiary is $2k annually.
- Accumulation of earnings are tax free
- Withdrawals are tax free if:
1) Qualified education expense
2) Time limitation (beneficiary age 30)
3) American Opportunity or Lifetime Learning credits can be combined with tax free withdrawals.
Moving Expenses
- New workplace is 50 miles further from old house than old work was.
- 39 week stay (must work full time in new location at least 39 weeks during the 12 months following arrival.
- Only direct moving costs are allowable:
a) travel and lodging of the taxpayer and family
b) Transporting household goods and personal effects to new location. - Employer reimbursements
Keough (Profit Sharing) Plans
- Maximum annual deduction: $53k or 25% net
- Maximum annual addition: $53k or 100% net earnings (if compensation is less than $53k)
Keough Net Earnings (from self-employment) calculation
Business Income (Business Expenses) =Net Business Income (1/2 Self emplyment tax) (Keough Deduction) =Keough Net Earnings
Casualty and theft Losses
-10% AGI test Amount of loss calculation: Smaller Loss* (Insurance Recovery) =Taxpayer's Loss ($100) =Eligible Loss (10% AGI) =Deductible Loss
*Difference b/w the market value before the casualty and market value afterwards.
Deductible/Nondeductible taxes
Deductible
- Real Estate Taxes
- Income taxes
- Personal Property Taxes
- Sales Tax
Nondeductible
- Federal taxes
- Inheritance Taxes
- Business Taxes
Adoption Credit
- Limit $13,460/child
- Phase-out $201,920 - 241,920
- Eligible expenses:
- All reasonable and necessary expenses, fees and costs are available for the credit,
- Not available for adopting child of spouse
- Medical expenses do not qualify
- Can exclude up to $13,460
Foreign Tax Credit
Taxpayer may claim foreign tax credit.
Limitation:
1) Foreign taxes paid, or
2) (TI from foreign operations/(TI+Exemptions*) x US Tax = Foreign Tax Credit Limit
*These amounts are based upon worldwide income.
Child and Dependent Care Credit
- When both parents are working and pay for child care.
- Limit is $3k for one child and $6k for two or more (further limited to lowest spousal income (ie. wife makes $2.5k/yr))
- Limitation is then multiplied by 20% to determine credit amount.
- Eligible people:
1) dependent under the age of 13
2) any disabled dependent
3) disabled spouse
Earned Income Credit (refundable cost)
Eligibility:
- Live in US more than half the year
- Meet low income threshold
- Not have more than a specified amount of disqualified income ($3,400)
- Be over 25 but under 65
- File joint return with spouse
Alternative Minimum Tax
Tax designed to ensure that taxpayers who take a large number of tax-preference deductions pay a minimum amount of tax on their income. The AMT is the excess of the tentative AMT over the regular tax.
-Certain allowable AMT paid in a taxable year may be carried forward indefinitely, but only to reduce regular tax, not future AMT.
AMT Calculation
Regular Taxable Income \+- Adjustments \+- Preferences = Alternative Minimum Taxable Income - Exemption = Alternative Minimum Tax Base x Tax Computation = Tentative AMT Tax - Tax Credits = Tentative Minimum Tax - Regular Income Tax = Alternative Minimum Tax (AMT)
AMT Adjustments
(PANIC)
- Passive Activity Losses
- Accelerated Depreciation
- Net Operating loss of the individual taxpayer
- Installment income of a dealer
- Contracts–percentage completion versus completed contract
(TIMME)
- Tax “Deductions”
- Interest deductions on some home “equity loans”
- Medical deductions (limited to excess over 10% AGI; adjustment only for taxpayers age 65 or older)
- Miscellaneous deductions not allowed
- Exemptions (personal) and standard deducton
AMT Tax Preference Items(always “add-back”)
- Private activity bond interest income (on certain binds)
- Percentage depletion the excess over adjusted basis of property
- Pre-1987 accelerated depreciation
AMT Exemtion
For 2016, the exemption amount is $53,900 less 25% (AMTI–$119,700) for single taxpayers, $83,800 less 25% (AMTI–$159,700) for joint filers, and $41,900 less 25% (AMTI–$79,850) for married filing separate.
Ex: Bob and Mary are MFJ in 2016. If there AMTI is $259,700, their exemption is:
Full Exemption= $83,800
AMTI=$259,700
Limit= (159,700)
Excess= $100,000
x 25%
(25,000)
$58,800
AMT Credits
(FACCE)
- Foreign Tax Credit
- Adoption credit
- Child tax credit
- Contributions to retirement plans credit
- Earned income credit
Statute of Limitations (Gov’t Assessments)
- General- 3 years from the later of:
a) the due date of the return; or
b) the date the return is filed (including amended returns) - 25% Understatement of Gross Income-6 years from the later of (same as above)
- Fraud and False Returns = bank robber = Forever
Statute of Limitations (Refunds for Individuals)
- Refund claim- a) 3 year later from the date the return was filed or the original due date of the return; or b) 2 years from the time the tax was paid (if not when the return was filed)
- Bad Debts, Worthless Securities= Bad luck= 7 years
Estimated Taxes–Required Minimum
Required to make estimated quarterly tax payments if both of the following are met:
- If amount of taxes owed is expected to be $1,000 or more.
- Taxpayer’s withholding is less than the lesser of:
a) 90% of current year’s tax
b) 100% of last year’s tax ( does not apply if $0 liability in prior year) *Exception: If taxpayer had AGI in excess of $150k ($75k MFS) in PY, 110% of PY tax liability is used to computer safe harbor for estimate payments.
