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Adjustments and Itemized Deductions: REG - Notes Chapter 2
Adjustments and Itemized Deductions: REG - Notes Chapter 2
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Adjustments and Itemized Deductions
Adjustments – deductions to arrive at AGI, above the line deductions
Educator expenses
An eligible instructor is a K-12 teacher, instructor, counselor principal or aide in a school for at least 900
hours during a school year
An eligible educator can deduct up to $250 of qualified expenses
Traditional IRA’s
Contributions are deductible
Exceptions: If both conditions are met, deductions are disallowed
- Excessive AGI (S $60,000/ MFJ 100,000)
- Active participation in another qualified plan (an individual is not considered to be an active
participant in an employer sponsored plan merely because the individuals spouse is an active
participant)
Individuals over 50 can additionally contribute and extra $1,000
Roth IRA’s – non deductible, tax free accumulation, tax free distributions. No tax impact now or later
Non-deductible IRA’s – Tax free accumulation, withdrawal of principal tax free, accumulated earnings
taxable
Coverdell Education Savings Account (Education IRA) – non deductible, $2000 contribution max, tax free
accumulation, tax free distributions for qualified educational expenses, child beneficiary must be under 19,
there is a phaseout
Student loan interest expense – adjustment for education loan interest is limited to $2,500
Tuition and fees deduction – qualified higher education expenses are an above the line deduction (adjustment)
4,000 max deduction
Phaseout
Health Savings accounts – workers with high deductible health insurance to make pre-tax contributions (S
$2,700/ MFJ $5,450) to cover health care costs
Tax on self-employment (social security 50%) – 50% of the self employed SS/Medicare tax is deducted
(Bosses half)
Self employed health insurance (100% deductible for taxpayer, spouse and dependents)
Keogh (profit sharing) plans – self employed taxpayer is allowed to set up one of these plans
Maximum annual deductible amount is limited to the lesser of
- $44,000 indexed for inflation, or
- 20% * Gross self employment income
Penalty on early withdrawal of savings is an adjustment to AGI – when you withdraw early the fund is a CD
Alimony – is income to payee, and an adjustment to Payor as long as it’s a qualifying alimony
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REG - Notes Chapter 2
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Child support – non taxable to payee/ non-deductible to payor
Property settlements - non taxable to payee/ non-deductible to payor
State, local and Foreign taxes (not federal taxes) – are generally deductible
Cash basis taxpayers are entitled to a deduction in the year the item is paid or charged. There is no matching to
the year the tax is applicable
Educational loan interest – is an adjustment (above the line), not an itemized deduction
Charitable contributions
Charity – items given to organizations (tax deductible)
Gifts – items given individuals (non-deductible)
Political contributions – items given to candidates (non-deductible)
Maximum allowable deduction is 50% of AGI:
- Cash = may be all 50%
- General property = lesser of basis or FMV
- Long term appreciated property is limited to the lesser of
30% of AGI
The remaining amount to reach 50% after cash contributions
Can only deduct the excess amount over the FMV consideration received
- example: buy ticket to charity ball, value of ticket was $50, so can take a $150 charitable deduction
Taxpayer cannot deduct the value of time or services donated
Carryforward excess charitable contributions 5 years
Usually nobody gets a deductible here because of the high hurdles. So in a question usually the lowest # or 0 is
the correct answer
Miscellaneous itemized deductions – allowed only to the extent they exceed 2% of AGI
Unreimbursed business expenses (employee)
Travel, meals and lodging – 100% deductible, only for overnight business travel
Transportation expenses (not regular/ordinary commute expenses) are 100% deductible
Meals and entertainment expenses – 50% deductible
Uniform purchases, cleaning and repair are deductible as long as its not worn as street wear off the job
Business gifts - $25 per year is deductible
Investor expenses – safe deposit box, investment advice are deductible
Subscriptions to professional journals are deductible
Legal and accounting fees incurred for tax preparation is deductible
Other Misc items that may be fully deducted (not subject to 2% AGI test)
Gambling losses to the extent of gambling winnings
Adoption credit
Credit for qualifying expenses of adopting a child is available
- per child $10,960
All reasonable and necessary expenses, cost and fees are available for the credit
The credit is not available for adopting the child of a spouse or a surrogate parenting arrangement
There is a phase out
Work opportunity credit – available to employers who hire employees from a targeted group. Part of the
general business credit
40% of first $6,000 of first years wages
Child tax credit – taxpayers may claim a $1,000 tax credit for each qualifying child
CARES rules apply except child must be under 17 (not 19 or 24)
Earned income credit – for very poor people – it’s a refundable credit
Withholding taxes (paycheck credit) – all income taxes withheld from your paycheck are treated as a credit
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REG - Notes Chapter 2
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Individual Taxation – Other taxes
Alternative minimum tax – designed to ensure that taxpayers who take a large number of deductions pay a
minimum amount of tax on their income
Adjustments – timing differences that may increase or decrease the AMTI – PANIC TIMME
Passive activity losses
Accelerated depreciation
Net operating losses of the individual tax payer
Installment income of a dealer
Contracts - % completion vs, completed contract
Itemized deductions – always adds back to regular taxable income
Tax “deductions” – taxes reduced by taxable funds
Interest deductions – Mortgage interest not used for the home, and investment interest exp is recalculated
Medical deductions (limited to excess over 10% AGI rather than 7.5%)
Misc deductions subject to the 2% floor are not allowed
Exemptions (personal) and standard deduction
AMT Credit – certain allowable AMT paid in a taxable year may be carried forward (forever) as a credit. It
may only reduce regular tax, not future AMT
The statue of limitations on refunds – period during which the tax payer can claim and receive a refund
Later of:
- 3 years from due date of return, or
- 2 years from time tax was paid
For bad debts, worthless securities, its 7 years from the later of:
- Due date of return, or
- Date return is filed
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REG - Notes Chapter 2
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Taxpayer is required to make estimated quarterly payments if both of the following conditions are met
$1,000 or more of tax liability owed
Inadequate estimates payments – taxpayers withholdings is less then the lesser of:
- 90% of current years tax, or
- 100% of last years tax
Failure to pay estimated taxes (withholding) a penalty will be assessed