Unit 3 Flashcards
IRA Deduction
-If either spouse participates in a defined benefit or contribution plan in the tax year, there’s a limit on IRA contributions.
-If neither spouse participates in such a plan, there’s no income limit, and the IRA contribution is fully deductible.
One-half of self-employment tax is what as far as determining gross income
Adjustment to gross income
Self-employed health insurance
-You can deduct 100% of your self-employed health insurance premiums.
-However, the deduction cannot exceed your self-employment income.
-Any leftover amount can be deducted as an itemized deduction.
Self-employed SEP, SIMPLE, and qualified plans
Contributions are deductible
Alimony Paid
deductible if initiated before 2019
Medical Expenses
-Medical expenses are deductible, but only those that exceed 7.5% of your Adjusted Gross Income (AGI).
-Long-term care (LTC) premiums are considered qualifying medical expenses for this deduction.
Taxes Paid
-You can deduct state, local, real estate, property, and excise taxes you’ve paid.
-If you choose not to deduct state and local income taxes, you can deduct sales tax instead.
-There’s a maximum deduction limit of $10,000 for all these taxes combined.
Mortgage/HELOC Interest Paid
- For mortgages taken out before December 15, 2017, interest paid on the first and second homes is deductible up to a maximum of $1,000,000 in loan principal.
- Interest on home equity loans (HELs) up to $100,000 is deductible if the loan was originated before December 15, 2017.
- For mortgages taken out after December 14, 2017, the maximum deductible amount is $750,000, which includes both the mortgage and home equity loan, if the proceeds were used for acquisition purposes.
-Interest expenses, like margin interest, used to generate investment income are deductible.
However, the deduction is limited to the amount of the taxpayer’s “net investment income.”
Charitable Contributions
- Charitable contributions are deductible, but there are limits based on your Adjusted Gross Income (AGI).
- Remember, you can only deduct contributions if you itemize your deductions.
Casualty Losses
- Casualty losses are deductible for each separate event.
- You value the loss based on the lower of its Fair Market Value (FMV) or its basis.
- Then, you subtract any reimbursements received, like insurance payouts.
- After that, you deduct a special $100 deductible.
- The total of all losses is then subject to a threshold of 10% of your Adjusted Gross Income (AGI).
-As of 2018, you can only include casualty losses if the casualty is part of a Federally declared disaster zone.
Miscellaneous Deductions
- There were historically two types of miscellaneous deductions:
- The first type was subject to a threshold of 2% of your Adjusted Gross Income (AGI). However, starting in 2018, these expenses are no longer deductible.
- The second type was not subject to the 2% threshold. These include:
- Gambling losses (limited to winnings),
- Impairment-related expenses for a handicapped taxpayer,
- Federal estate tax paid on income in respect of a decedent (IRD), and
- Unrecovered basis in an annuity contract due to a taxpayer’s death.
Qualified Business Income Deduction
allows eligible individuals to deduct up to 20% of their qualifying business income.
Taxable Income
- Taxable income is what you have left after subtracting either your itemized deductions (or standard deduction) and the qualified business income deduction from your Adjusted Gross Income (AGI).
- Your initial tax liability is calculated based on this taxable income.
- This tax liability is then reduced by any eligible tax credits you may qualify for.
Kiddie Tax
- The Kiddie Tax applies if specific conditions are met.
- When it applies, unearned income in a child’s name is taxed at the parent’s tax rate instead of the child’s rate.
3 Situations Where Kiddie Tax Applies
- For any child under 18, the Kiddie Tax applies if they have unearned income over $2,600.
- For the tax year when a child turns 18, the Kiddie Tax applies if they have unearned income over $2,600 and their earned income is less than half of their support cost.
- For children aged 19 to 23 who are full-time students, the Kiddie Tax applies if they have unearned income over $2,600 and their earned income is less than half of their support cost.
What is the Kiddie Tax for Any Child under 18?
- For any child under 18, the Kiddie Tax applies if they have unearned income over $2,600.
What is the kiddie tax for the year when the child turns 18?
the Kiddie Tax applies if they have unearned income over $2,500 and their earned income is less than half of their support cost.
Kiddie tax for children 19-23 who are full-time students
the Kiddie Tax applies if they have unearned income over $2,500 and their earned income is less than half of their support cost.
What do you need to calculate for Kiddie Tax?
-How much of the unearned income will be taxed at the parent’s rate?
-What is the child’s tax liability?
What you need to know for Kiddie Tax
- The child, being a dependent, doesn’t get a personal exemption.
- They can still use the standard deduction.
- Unearned income over $2,600 is taxed at the parent’s tax rate.
- Their tax liability is the total of tax calculated using both the parent’s and the child’s rates.
- If parents file separately, use the higher of their marginal tax rates.
- If parents are divorced, use the marginal tax rate of the parent with longer custody during the tax year.
Self Employment Tax Scenario 1
(less than FICA base)
- If the taxpayer’s net earnings from self-employment (SE) multiplied by 92.35% plus their W-2 wages are less than or equal to $160,200 (the FICA base), they calculate self-employment (SE) taxes.
- They calculate SE taxes by multiplying their SE earnings by 92.35% and then by 15.3%.
- The employer’s portion (7.65%) is deducted from their Adjusted Gross Income (AGI).
SE earnings × .9235 × .153 = SE Taxes due