Unit 2 Income Tax Fundamentals & Calulations: Deductions & Credits Flashcards
How do you get to taxable income?
AGI is reduced by either the standard or itemized deduction which ever is larger.
What are the standard deductions?
Single Married Filing Jointly Married Filing separately Head Of Household Qualifying Widower (2 years after spouses death)
What are the additional Standard deductions?
You get an additional deduction if you are over 65 and another one if you are blind. So if you are 65 and blind you would be able to get both so it would double.
What schedule are itemized deductions reported on?
Schedule A
Deductible expenses must be?
ordinary and necessary
What are the 3 accounting methods used for taxes and timing of deductions?
Cash Basis - Generally deductible in the year expenses is paid.
Accrual Basis - generally deductible in year that the expense is incurred.
Deduction Clustering benefit - cash basis tax payers may choose to pay expenses in the current year or the next in order max the amount that is deductible.
What are the major itemized deductions?
Medical Expenses Taxes Interest Personal Casualty Loss Charitable Contributions
Medical Expense Deduction
Includes expenses for taxpayer, taxpayers spouse and dependents (anyone on the tax return)
Must not have reimbursed by the insurance company
The aggregate must be in excess of 7.5% of AGI to be claimed.
Taxes deduction
deduction for state, local, personal property taxes, state and local sales tax, foreign income and real-estate taxes.
capped at a total of $10,000
What are the 5 types of interest expense?
Consumer interest like credit cards (never deductible)
Qualified residence interest
Investment Interest expense
Business Interest
Passive activity interest
Mortgage Interest Deduction
limit of indebtedness is $750,000
can be an equity loan, home equity line of credit, 2nd mortgage
proceeds of the loan must be used to buy, build or improve the taxpayers home that secures the loan
Personal Casualty Losses deduction
deductible if only incurred in a federally declared disaster.
limited to the amount of the casualty loss
steps to calculation of the deduction
- take the lesser of the taxpayers adjusted tax basis in the property or the difference between the FMV of the property before the loss and the FMV after the loss.
- Subtract any insurance amounts reimbursing the taxpayer for the loss
- Subtract $100
- Subtract 10% of the AGI
- The result equals the amount of deductible casualty loss.
What are the most important misc itemized deductions?
- Federal estate tax attributable to items included in the taxpayers gross estate as income in respect of a decedent
- Gambling losses and transaction expenses to the extent of gambling winnings
- impairment-related work expenses for handicaped taxpayers
- unrecovered investment in annuity contract when annuity terminates because taxpayer died
What are the two types of reimbursed employee expenses?
Accountable plan - turn in receipts to employer to be reimbursed. does not show up in income.
non accountable plan - shows up in income
Investment interest expense deduction
deductible up to the amount of investment income
Deduction for Home office expense
Must be self employed and is a line item on schedule C
Two methods of calculating
- Regular method
a. exclusively used for bus. on regular basis
b. % of home used for business
c. actual expenses determined and records maintained
d. Home related itemized deductions apportioned between schedule A and Business Schedule
e. Depreciation deduction for portion of home used for bus.
f. Recapture of depreciation on sale of home
g. deductions cannot exceed gross income from business use of home less business expenses
h. amount in excess of gross income limitation may be carried over
I. loss carryover from use of regular method in prior year may be claimed if gross income test is met in current year - Simplified option
a. exclusively used for bus. on regular basis
b. Allowable square footage of home use for business not to exceed 300 ft
c. Standard $5 per square foot used to determine home business deduction.
d. Home related itemized deductions claimed in full on Schedule A.
e. No deprecation deduction
f. no recapture of deprecation upon sale of home
g. deductions cannot exceed gross income from business use of home less business expenses
h. amount in excess of gross income limitation may not be carried over
I. loss carryover from use of regular method in prior year may not be claimed.
Are legal and accounting fees deductible?
only when incurred in connection with a trade or business or for the production of rents and royalties.
Are worthless securities deductible?
considered a capital loss and must be completely worthless.
Are bad debts deductible
yes as an ordinary loss
Who is considered a qualifying child?
tax payers child, step child, foster child, sibling, step sibling, or a descendent of any of the previously listed.
must have lived with the tax payer for over half the year.
must pass an age test: under 19 or a full time student under 24 or is permently or totally disabled.
must not have provided 50% of own support
individual cannot claim another dependent
cannot file a joint return
must be a us citizen, us national, or resident of the us, Mexico or Canada.
Who is considered a qualifying relative?
not a qualifying child and must have a specified relationship to taxpayer
Parent, in-law, niece, nephew, aunt, uncle or is unrelated to the taxpayer but the individual resided in the taxpayers principle home during the tax year
must have provided half of there support for the year.
If the qualifying relative is a parent of the taxpayer, the parent does not have to reside in the home of the taxpayer.
What is the Marginal income tax rate?
the tax rate that is paid on the last taxable dollar
What is the effective tax rate?
it is the percentage of your income that you actually pay taxes on.
Total tax Liability / Taxable income
How do tax credits work?
They reduce the tax lability dollar for dollar. may reduce AMT liability as well
What is the difference between a refundable and non refundable tax credit?
Refundable tax credit - can exceed the tax payers liability for a refund
nonrefundable tax credit - can only reduce your tax liability to 0
American Opportunity Tax and Lifetime learning Credits?
help pay families expenses of post secondary education. Qualifying students; taxpayer taxpayers spouse taxpayers dependent children other dependents
The Child and dependent care credit
non refundable
have earned income
must be working or looking for work
keep a home for qualifying individual
child must be under 13
can be for a spouse who cannot take care of themselves or any other person that cannot mentally or physically take care of themselves
capped at $3000 for individual and $6,000 for two or more eligible
over $43000 dollars a year in income you can only claim 20% of the $3000 or $6,000
What is the Child tax credit?
Non refundable $2000 tax credit for each qualifying child under the age of 17 (max 16)
subject to certain income thresholds
What is the Adoption Credit?
Non refundable
credit up to $14,080 in 2019
taken in year adoption is final
subject to MAGI phase out limits
Foreign Tax credit
Avoids double taxation by foreign country or u.s possession and the u.s.
may use foreign tax credit or foreign earned income exclusion but not both
non refundable
Payment of taxes due formula
Regular tax lability minus nonrefundable credits add other taxes payable (i.e. tax penalty on early ira withdrawal's) subtract refundable credits and payments equals taxes owed or refund
