Tax 1-6 Analyze a situation to calculate taxable income. Flashcards
Calculate Taxable Income
Mary, a 67-year-old single taxpayer, has AGI of $369,350 in 2016. She has $ 30,000 of itemized deductions, consisting of $2,125 of deductible medical expenses (after the 7.5% floor), $8,000 of home mortgage interest, $11,000 of taxes, $4,000 of charitable contributions, and $4,875 of investment interest expense. How much are her itemized deductions reduced by?
$259,400 threshold for a single filer in 2016
(LO 1-6, pg 41)
Itemized deductions are reduced by 3% of the excess of the AGI over the threshold amounts.
$109,950 is the excess of the AGI over the $259,400 threshold for a single filer in 2016
Mary’s itemized deductions are reduced by $3,299 (3% of $ 109,950).
She is allowed to deduct $ 26,701 of itemized deductions ($30,000 reduced by the phaseout amount of $3,299).
Calculate Taxable Income
- Janet and Bruce Robinson, both age 43, are married taxpayers filing jointly. They have itemized deductions consisting of the following:
$19,500 Home mortgage interest $8,700 State income taxes $5,200 Property taxes $6,200 Charitable contributions $895 Tax return preparation fee $18,460 Unreimbursed medical expenses
Their AGI for 2016 is $463,500. What is the amount of their allowable itemized deductions?
($311,300 threshold)
$35,034
$35,929
$54,389
$58,955
(LO 1-6)
$35,034
Possible Itemized Deductions: $19,500 Home mortgage interest \+ $8,700 State income taxes \+ $5,200 Property taxes \+ $6,200 Charitable contributions = $39,600
The total itemized deduction amount is $39,600.
The taxpayer’s otherwise allowable itemized deductions are reduced by the lesser of
(a) 3% of the excess of AGI over a specified amount or
(b) 80% of the otherwise allowable itemized deductions for the year.
$463,500 AGI for 2016 - $311,300 threshold = $152,200 amount over threshold * 3% = $4,566 reduction
Therefore:
$39,600
- $4,566
= $35,034
Possible Tier II Deductions:
$895 Tax return preparation fee
$18,460 Unreimbursed medical expenses
Note that the tax preparation fee is a Tier II miscellaneous itemized deduction; deductible only to the extent that it exceeds 2% of AGI, which it does not in this case. (2% of $463,500 = $9,270)
The medical expenses are deductible only to the extent that they exceed 10% of AGI, which they do not.
(10% of $463,500 = $46,350)
Calculate Taxable Income
- John and Jane Irwin, married taxpayers filing jointly, have two dependent children. Their AGI for 2016 is $339,850. What is the amount of personal and dependency exemptions that the Irwins may deduct?
Four exemptions at $4,050 each equals $16,200.
There is a $311,300 threshold amount (for married couples filing jointly).
$3,792
$12,312
$12,636
$16,200
(LO 1-6)
$12,312
Four exemptions at $4,050 each equals $16,200.
The deduction for personal and dependency exemptions is reduced by 2% for each $2,500 (or portion thereof) by which the AGI exceeds a $311,300 threshold amount (for married couples filing jointly).
$339,850 AGI
- $311,300 threshold
= $28,550
$28,550
/ $2,500
= 11.42 (rounded up to 12)
12
* 2
= 24%
$16,200
- 24%
= $3,888
$16,200
- $3,888
= $12,312
Calculate Taxable Income
- Kristen Wiley is a single taxpayer. She has an AGI of $100,000 for the current tax year. She paid unreimbursed employee business expenses of $1,500, investment adviser’s fees of $600, and $425 for income tax preparation during the year. What amount, if any, is allowable as an itemized deduction?
$0
$525
$2,525
(LO 1-6)
$525
$1,500 \+ $600 \+ $425 = $2,525 - $2,000 = $525
The Tier II miscellaneous itemized deductions are deductible only to the extent that they exceed 2% of AGI. All of the Tier II deductions are added together ($2,525), and then 2% of AGI is subtracted ($2,000) to leave $525 that is deductible.
Calculate Taxable Income
- For a taxpayer under 65 years of age, medical expenses are deductible as an itemized deduction to the extent that the expenses exceed ___% of AGI.
2
7.5
10
(LO 1-6)
10
For taxpayers who are under age 65 at the close of the tax year, the floor is 10% of AGI. If the taxpayer has reached age 65 before the close of the tax year, the floor for deductible medical expenses is 7.5% of AGI.
Calculate Taxable Income
- Which one of the following miscellaneous itemized deductions is a Tier II miscellaneous itemized deduction?
a. impairment-related work expense of a handicapped individual
b. gambling losses to the extent of gambling winnings
c. deduction for unrecovered basis in a commercial annuity
d. appraisal fee for a charitable contribution
(LO 1-6)
d. appraisal fee for a charitable contribution
The appraisal fee to determine the value of a piece of artwork being donated to charity is a Tier II miscellaneous itemized deduction—an expense related to the determination of, or collection of, a tax liability. Impairment-related work expenses of a handicapped individual, gambling losses to the extent of gambling winnings, and the deduction for unrecovered basis in a commercial annuity are miscellaneous itemized deductions, but are NOT subject to a 2% of AGI limitation.
Calculate Taxable Income
- Beth Franklin is an unmarried taxpayer with three dependent children, so she files using head of household filing status. Her AGI for 2016 is $382,900. Personal exemptions are $4,050 each, and the phaseout begins at $285,350. What is the amount of personal and dependency exemptions that Beth may deduct?
$285,350 threshold amount (for heads of household)
Four exemptions at $4,050 each equals $16,200.
$3,240
$3,520
$12,480
$16,200
(LO 1-6)
The deduction for personal and dependency exemptions is reduced by 2% for each $2,500 (or portion thereof) by which the AGI exceeds a $285,350 threshold amount (for heads of household).
$382,900 AGI
- $285,350 threshold amount
= $97,550
$97,550
/ $2,500
= 39.02 (rounded up to 40)
40
* 2% =
.80 or 80%
Therefore, 80% of the deduction is phased out.
Four exemptions at $4,050 each equals $16,200.
$16,200
* 80%
= 12,960
$16,200
- 12,960
= $3,240
Allowed deduction = $3,240
Calculate Taxable Income
- Janice and Julian Davis, both age 66, are married taxpayers filing jointly. They have itemized deductions consisting of the following:
$21,200 Home mortgage interest $9,800 State income taxes $6,300 Property taxes $7,700 Charitable contributions $770 Tax return preparation fee $14,630 Unreimbursed medical expenses
Their AGI for 2016 is $411,300. The itemized deduction phaseout begins at $311,300 for a married couple filing jointly. What is the amount of their allowable itemized deductions?
$42,000
$45,000
$45,700
$60,330
(LO 1-6)
$42,000
Separate the regular itemized deductions from the Tier II deductions and determine if the Tier II deductions qualify:
a. Tax Preparation Fee is deductible only to the extent that it exceeds 2% of AGI, which it does not in this case. ($411,300 * 2% = $8,226)
b. Medical Expenses are deductible only to the extent that they exceed 7.5% of AGI (taxpayer is age 65 or older), which they do not. ($411,300 * 7.5% = $30,748)
That leaves: $21,200 Home mortgage interest \+ $9,800 State income taxes \+ $6,300 Property taxes \+ $7,700 Charitable contributions = $45,000
These are reduced by the lesser of:
(a) 3% of the excess of AGI over a specified amount
or
(b) 80% of the otherwise allowable itemized deductions for the year.
$411,300
- $311,300
= $100,000
$100,000
* 3%
= $3,000
$45,000
- $3,000
= $42,000
As a practical matter, it is almost impossible to bump up against the 80% limitation.
Filing Status
To qualify as a ________, an individual must
(1) be a U.S. citizen or resident for the entire taxable year;
(2) be unmarried or considered unmarried at the close of the taxable year; and
(3) provide more than half of the cost of maintaining a household that is the principal place of residence of a qualifying child or an individual for whom a dependency exemption is allowed.
(LO 1-6)
head of household
Calculate Taxable Income
Example. During 2016, John and Mary, married taxpayers filing jointly, purchase a principal residence and pay $1,600 for qualified mortgage insurance. For 2016, they have an AGI of $103,650. Therefore, John and Mary’s deduction for qualified mortgage insurance is?
(LO 1-6)
As a result, their deduction is reduced by 40% of the otherwise deductible amount—10% for each of the four $1,000 (or fraction thereof) amounts by which their AGI exceeds $100,000.
40% of $1,600 = $640
Deduction = $1,600 - $640
Deduction = $960
There is a phaseout of the deductibility based on the AGI of the taxpayer. For single and married taxpayers filing jointly, the deduction is reduced by 10% of the amount of qualified mortgage insurance for each $1,000 (or fraction thereof) that the taxpayers’ adjusted gross income (AGI) exceeds $100,000. For married taxpayers filing separate returns, the reduction equals 10% of the amount of qualified mortgage insurance for each $500 (or fraction thereof) that the taxpayers’ AGI exceeds $50,000.
Calculate Taxable Income
The following are examples of what:
expenses related to the determination of, or collection of, a tax liability, such as tax return preparation fees, legal fees to defend oneself during an audit, and appraisal expenses for certain charitable contributions;
unreimbursed employee business expenses, such as union and professional dues, home office expense for an employee, unreimbursed travel expenses, certain education expenses, uniforms or special clothing, etc.; and
expenses related to the “production of income,” such as investment counsel or investment adviser fees, certain legal fees, etc.
(LO 1-6)
Tier II miscellaneous itemized deductions
Calculate Taxable Income
_____ are deductible only to the extent that the cumulative total exceeds 2% of adjusted gross income.
(LO 1-6)
Tier II miscellaneous itemized deductions
The Tier II miscellaneous itemized deductions are added together, and then 2% of AGI is subtracted. Only the amount, if any, in excess of 2% of AGI, is deducted. Any amounts not deducted due to the 2% of AGI limitation are lost; there is no carry-forward of the disallowed amounts.
Exemptions
The following are required to be considered a Qualifying _____
meets the relationship test,
has the same principal place of abode as the taxpayer for more than one-half of the tax year,
meets the age test, and
has not provided more than one-half of his or her own support for the tax year.
(LO 1-6, pg 43)
Qualifying Child
Exemptions
The following are required to be considered a Qualifying _____
bears a specified relationship to the taxpayer or whose principal place of abode is the taxpayer’s home and is a member of the taxpayer’s household,
has gross income for the tax year that is less than the exemption amount,
has over half of his or her support provided by the taxpayer, and
isn’t a qualifying child of that taxpayer or any other taxpayer.
(LO 1-6, pg 44)
Qualifying Relative
Calculate Taxable Income
The deduction for personal exemptions is reduced by _% for each $2,500 (or portion thereof) by which the AGI exceeds a threshold amount.
(LO 1-6, pg 46)
2% for each
Calculate Taxable Income
Example. John and Kathy are joint filers with two dependent children. Their AGI for 2016 is $334,000. Without a phaseout, they would be entitled to a $16,200 exemption deduction (four exemptions at $4,050 each). However, because their AGI exceeds the threshold amount of $311,300, they are required to reduce the $16,200 by the calculated phaseout amount. What is their allowed deduction?
(LO 1-6, pg 46)
The phaseout is 2% for each $2,500 (or portion thereof) by which their AGI exceeds the threshold amount.
They exceed the threshold by $22,700.
$22,700
/ $2,500
= 9.08 (rounded up to 10)
10
* 2% = 20%
Allowed Deduction = $16,200 - 20%
Allowed Deduction = $16,200 - $3,240
Allowed Deduction = $12,960
Standard Deduction
For married taxpayers who choose to file separate returns, if one spouse itemizes deductions, the other spouse must also _____.
(LO 1-6, pg 32)
itemize deductions
Filing Status
A _____ is one who is, at the end of the tax year, not married, divorced, or legally separated. Also included are individuals who satisfy the “certain married individuals living apart,” or “abandoned spouse” test.
(LO 1-6, pg 32)
single person
Filing Status
Taxpayers who want to be considered as certain married individuals living apart, which is sometimes known as the _____ spouse doctrine, must satisfy the following test. Taxpayers are entitled to use the tax schedules applicable to single taxpayers or, if they qualify, the head of household rates, if they:
(1) file a separate return;
(2) maintain as their home a household that is a child’s or stepchild’s principal place of residence for more than half of the tax year;
(3) are entitled to a dependency deduction for such child;
(4) provide more than half of the cost of maintaining the household; and
(5) do not live with their spouse for any period during the last six months of the tax year.
The other spouse generally would file as _____.
(LO 1-6, pg 33)
abandoned
married filing separately
Filing Status
Qualifying _____ are also entitled to use the married filing jointly tax rates. To qualify, they must
(1) be unmarried at year-end;
(2) have children for whom he or she is entitled to a dependency exemption;
(3) furnish more than half the cost of maintaining a household that is the principal place of residence for such children; and
(4) have been entitled to file a joint return with the deceased spouse for the year of death.
(LO 1-6, pg 34)
widows or widowers
Filing Status
Many tax benefits, such as the child care credit and the Hope or Lifetime Learning credits are generally not available to what filing status?
(LO 1-6, pg 34)
married taxpayers filing separately
Filing Status
Where one spouse has significant amounts of potential deductions that are subject to a limitation based on AGI, such as medical expenses, casualty losses,
or Tier II miscellaneous itemized deductions, there is a potential for regular tax savings from filing as _____.
(LO 1-6, pg 34)
married taxpayers filing separately
Calculate Taxable Income
Unlike Adjustments, Itemized deductions are deductions “_____ adjusted gross income” and are allowed for certain expenditures that are primarily personal in nature.
(LO 1-6, pg 35)
“from adjusted gross income”
Calculate Taxable Income
A taxpayer may deduct the state and local income taxes that were paid during the year. Or, instead of taking a deduction for state and local income taxes paid, a taxpayer may elect to deduct _____.
(LO 1-6, pg 36)
state and local general sales taxes and use taxes
This deduction was designed primarily to help taxpayers in those states without an income tax—Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Taxpayers may either keep their own records, or use the IRS-published tables (based on income, dependents, filing status, etc.) and add sales taxes on major purchases such as automobiles and boats.
