Vickie - Chapt 2: Individual Income - Adjustments from AGI Flashcards
Do you take the larger or smaller of standard deduction or itemized deductions from AGI, to determine your taxable income?
you choose the larger deduction so that you can pay less taxes.
What is the form if standard deduction is elected?
1040EZ
When do you get an additional deduction in addition to the standard deduction?
If elderly and/or blind.
NO additional dependency exemption.
List out the possible itemized deductions.
Medical expenses
State, local, foreign taxes paid.
Interest expense - home (acquisition indebtedness & home equity), investment interest expense.
Charitable contributions
Casualty & theft
Misc Itemized deductions (unreimbursed business expenses, etc)
Other Misc Items
What are qualified and non qualified medical expenses?
QUALIFIED:
Prescription medicine & drugs Doctors Medical & accident insurance premiums Required surgery transportation to medical facility physical handicap costs med and hospital insurance premiums
NON QUALIFIED
elective surgery life insurance premiums health membership personal hygiene personal disability insurance premiums
RMBR: capital expenditure (expense) deductible only after deducting FMV increase from the capital expenditure
How do you calculate the allowable medical deduction?
qualified med expense
= qualified medical expense (paid)
= deductible med expense.
EXCESS OVER 10% AGI is deductible.
7.5% AGI used fror 65 & older.
What is included in state, local, and foreign taxes paid? And what is NOT included?
These are real estate taxes, personal property taxes, and income STATE AND LOCAL taxes.
Deduct in year paid, not in year it applies to (cash basis)
NONDEDUCTIBLE (FIB)
Federal taxes paid
Inheritance taxes
Business (schedule c) & rental tax (schedule e)
What is included in interest expense as an adjustment from AGI?
1) Home mortgage - allowed for “qualified residence interest on 1st and 2nd home”
Acquisition indebtedness - up to $1M allowable deduction on original purchase of home.
Home equity indebtedness - up to $100K allowable deduction. Deduction limited to difference between FMV and ORIGINAL debt.
** Note: interest paid on debt SECURED BY HOME MORTGAGE qualifies as qualified residence interest.
2) Investment interest expense
- investment interest expense limited to NET TAXABLE INVESTMENT INCOME.
- Only deduct investment expenses that would be included as part of expenses subject to 2% AGI floor (do NOT include interest expense). These expenses are used to calculate the net taxable investment income aka the deduction limit in this calculation.
- expenses include: investment advice fees, safe deposit box rentals, etc. NO interest expense to determine passive activity, rental real estate which TP does not actively participate in.
- think like gambling loss. can only deduct if there are wins (can only deduct interest expense if there is interest income from that).
- thus, NONDEDUCTIBLE interest expense used to purchase tax-exempt bonds (because these bonds are not taxable)
Are personal interest expenses allowed as adjustment from AGI? What is included?
No they are not. Personal interest expenses derive from: - purchase of personal property - life insurance loans - interest on fed, state, local tax underpayments.
What are allowed and not allowed deductions for charitable contributions?
ALLOWED: Charity (cash, FMV property)
NOT allowed: needy people, gifts, political.
What are the AGI limits for charitable contributions?
for CASH, up to 50% AGI is allowable deduction.
for ST PROPERTY, take the lower of basis or FMV of property when contribution is made. subject to 50% AGI.
for LT CAPITAL GAIN property, up to 30% AGI.
Remember that the OVERALL AGI limit is 50% of AGI. So if there is both cash and appreciated property, first take 50% AGI – this is your overall limit. Then deduct cash, then the remaining amount is limited to the lesser of 30% of appreciated property contributed or remaining amount to reach 50% of overall AGI.
- Can only deduct the EXCESS contribution over consideration received. (ex: bought charity tickets for $200, but they actually worth $50. the deduction amount is $150)
- no deduction for services
- timing of deduction (same as med expenses - cash/check (actually paid) and credit card when charged)
- excess contribution carryforward 5 years
- out of pocket expenses incurred in performance of donated services to qualified charity are deductible 50% AGI
How is casualty & theft deductions calculated?
Smaller Loss (basis of property or change in FMV)
= Remaining loss
= Excess over 10% AGI is deductible loss
must be sudden or unexpected.
no loss deducted for lost, misplaced, broken property.
What is included in miscellaneous itemized deductions subject to the 2% AGI floor?
Unreimbursed business expenses
Educational expenses (those not deducted above AGI) - to maintain and improve skills of employee. (NOT educational interest expense)
Uniforms
Business Gifts - $25/person/year
Job hunting expenses - in same profession
Investment advice & Safe deposit box
Subscriptions to professional journals
tax prep fee
Activities not engaged for profit (HOBBIES) - usually not allowed with some exceptions
Under miscellaneous itemized deductions 2%, what is included in unreimbursed business expenses?
Have to include the REIMBURSED portion as part of employee gross income.
take total expenses = unreimbursed business expenses.
These do not include moving expenses because they were expenses taken above AGI line.
included:
1) Travels, meals, lodging (while away for home overnight)
2) transportation
3) m&e: 50%
Under misc itemized deductions 2%, what are the allowable deductions / exceptions for HOBBIES?
Hobbies are activities not engaged for profit. the expenses associated are usually not deductible UNLESS:
- deductions such as interest and taxes that would be allowed regardless of whether or not such activity was engaged in for profit
- engaged in for profit if shows profit for three or more taxable years during a period of 5 consecutive taxable years ending with year in question
- no losses allowed - deductions up to extent gross income derived from activity exceeds deductions.
