REG Chapter 2 Flashcards
Adjustments are also known as
Deductions to arrive at Adjusted Gross Income
Adjustment for Educator Expenses
Deduct up to $250 or $500 for MFJ
Adjustment - Individual Retirement Account (4)
Deductible IRA
Nondeductible IRA
Roth IRA
Education IRA
Adjustment - Deductible IRA
Make contribution for Y1 by 04/15 Y2
Earnings accumulate tax free
Withdrawal is ordinary income and may have penalty
Can’t take deduction if excessive AGI AND Active in another plan
Limit single $61K, MFJ $98K
Maximum deduction is $5.5 K per person
Adjustment - ROTH IRA
Contributions are not deductible when made
Earnings accumulate tax free
Distribution of tax and principal is tax free if it qualifies
Limit is $5.5K per spouse
Adjustment - Nondeductible IRA
Last Resource
Taxable - previously accumulated earnings
Nontaxable - principal contributions
Adjustment - Education IRA
Maximum of $2K per beneficiary “grandchildren”
Principal and interest distributions are tax free
Use before beneficiary is 30 years old
Adjustment - Student loan interest
Limited to $2,500
Adjustment - Tuition and Fees
$4K if AGI is less than $65K, if exceeding that then maximum is $2K
Adjustment - Health Savings Account
Up to $3,350
Adjustment - Moving Expenses
Need to stay at new job for 75% of the year and work full time
Deduct travel and lodging of tax payer and family
Forget about meals, house hunting, cost of breaking lease, and temporary living expenses
Adjustment - Tax on self-employment
Deduct 50% of self employed social security/medicare tax
Adjustment - self employed health insurance
Deduct 100% - not included on schedule C
Adjustment - Keogh profit sharing plan
Confusing
Adjustment - Penalty on early withdrawal of Savings
Forfeited interest
Adjustment - Alimony
Must be legally required under a written divorce
Must be in cash of equivalent
Cannot extend beyond the death of the payee-spouse
Itemize deduction - Medical expenses
Qualified medical expense < insurance reimbursement > = qualified medical expenses paid < 10% AGI > = Deductible Medical Expenses
Itemize deduction - state, local, and foreign taxes
Excludes federal income taxes
Deductible on year PAID not on year it applies to
Itemize deduction - Interest Expense
For first and second home
Itemize deduction - Charitable contribution
Cash or FMV of property
CASH 50% of AGI limit
PROPERTY 30% of AGI limit
Excess - carryover 5 years
Itemize deduction - Casualty and theft losses
Smaller loss - can't exceed adjusted basis < insurance recovery > = Taxpayer loss < 100 > = Eligible loss < 10% AGI > = Deductible Loss
Itemize deduction - Miscellaneous
Combination has to exceed 2 % of AGI Limit
Not reimbursed business expenses, transportation expenses, meals and entertainment, educational, uniform, business gifts (25 per person), subscription to journal, tax preparation fee
Charitable contribution of appreciated property held for short term
Deduct adjusted basis, not the FMV, just because it was held for a short period of time
Deductible qualified residence interest
Interest paid on a debt that is secured by a home mortgage
Deduct interest paid as an itemize deduction
Is insurance premium that will reimburse you for medical care allowed as a medical expense deduction?
Yes
However, premiums on disability policy are not deductible because those reimburse you for lost income
Personal Tax Credits vs Refundable Credits
Personal tax credits reduce personal tax liability to 0 but do not give you a refund
Refundable credits reduce tax liability and may give you a refund
Child and Dependent Care Credit
Credit of 20 - 35% of eligible expenditures
$3,000 per kid, up to $6,000
If AGI is $15K then gets 35%
If AGI is over $43K then gets 20%
Credit for the Elderly and/or Permanently Disabled
15% if person is 65 or older or under 65 but retired because he is permanently disabled
American opportunity credit
First 4 years of college, max is $2,500
100% of first $2K and 25% of the remainder
Phase out starts when AGI reaches $80K and gone at $90K
Lifetime Learning Credit
$2,000 max per year
Phase out starts when AGI reaches $55K and gone at $65K
Adoption Credit
Per child is $13,460
Foreign Tax Credit
Carry back 1 year or forward 10
Work opportunity credit
When employer hires from special group of people
40% of first $6,000 first year’s wages
Child Tax Credit
May claim up to $1K for each qualifying child
CARES but kid must be under 17 and resident of citizen of US
Earned Income Credit
Meet low income threshold
It is a refundable credit
Small employer pension plan start up costs
Up to $500 per year for the first 3 years
AMT - Adjustments
PANIC TIMME
Increase or Decrease AMTI P - Passive activity losses A - Accelerated depreciation N - Net operating loss I - Installment income of a dealer C - Contracts
Increase AMTI T - Tax deductions I - Interest deductions M - Medical deductions M - Misc. deductions nos allowed E - Exemptions
AMT - Adjustments
PANIC TIME
Increase or Decrease AMTI P - Passive activity losses A - Accelerated depreciation N - Net operating loss I - Installment income of a dealer C - Contracts
Increase AMTI T - Tax deductions I - Interest deductions M - Medical deductions M - Misc. deductions nos allowed E - Exemptions
AMT - Tax Preference Items
P P P
Always add backs
P - private activity bond interest income
P - percentage depletion the excess over adjusted basis property
P - pre 1987 accelerated depreciation
AMT - Credits
FACCE
Permitted as a credit to reduce AMT
F - foreign tax credit A - adoption credit C - child tax credit C - contributions for retirement E - earned income credit
Statue of Limitations
General rule is 3 years
If 25% understatement of gross income then 6 years
No statue of limitations for fraud
Statue of Limitations on Refunds
Form 1040X
Later of:
3 years from the date the return was filed
or
2 years from the date the tax was paid
Estimated Taxes - Required Minimum Payment
2 Conditions must be met
If amount of taxes owed is expected to be $1K or more
and
If withholding is less than 90% of CY tax or 100% of PY
If taxes to be paid were less than $1K then there is no penalty for not making the minimum payments
Annualized method vs Seasonal method for minimum tax payments required
Annualized is when you pay 110% of PY tax
Seasonal is when you pay 90% of the CY tax
