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38 Cards in this Set

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Defintion: Deductions for AGI
Subtracted directly from Gross Income. aka Above the Line Deductions
3 types of Deductions for AGI
1. Directly related to business activities.
2. Indirectly related to business activities.
3. Deductions subsidizing specific activities.
Deductions for AGI- Directly Related to Business Activities (3)
1. Trade or Business Expenses
2. Rent and Royalty Expenses
3. Losses
*Flow through entities
Deductions for AGI- Indirectly Related to Business Activities (4)
1. Moving Expenses
2. Health Insurance Premiums
3. Self-Employment Tax
4. Penalty for early withdrawal of savings
Deductions for AGI- Deductions subsidizing specific activities (4)
1. Alimony payments
2. Contributions to retirement savings
3. Interest Expense on qualified education loans
4. Qualified Educational expenses
for AGI-Directly related- Trade or Business Expenses Requirements
- directly connected to the business activity
- must be ordinary and necessary
- claimed on Schedule C (then reported on line 12 on Form 1040)
for AGI- indirectly related- moving expenses are deductible if..., tests (2)
- expenses are deductible if individual moves and changes principal place of work
Distance Test
A business text
for AGI- Trade or Business expenses must be... (2)
1. directly connected to the business activity
2. must be ordinary and necessary
for AGI- Losses
net capital loss can deduct up to $3000 for AGI with the excess carried forward indefinitely
for AGI- Flow through Entities
any expenses and losses incurred by the entity pass through to the entity owners who typically treat them as deductions for AGI
for AGI- Moving Expenses- Distance Test
- new job site must extent existing commute by 50 miles
for AGI- Moving Expenses- Business Test
taxpayer must be employed at least 39 of 52 weeks or be self-employed for 78 of the 104 weeks after the move
for AGI- Moving Expenses- Do you have to change employers? Examples
- Do not have to change employers as long as they meet both tests
- Can qualify for moving expense deduction by:
>Starting a new job
>Starting a job after a prolonged absence from the workforce
>By changing locations with the same employer
- Reasons can be entirely personal
for AGI- Moving Expenses- What are deductible moving expenses? (2)
1. moving possessions and traveling to new residence
2. transportation and lodging
- cost of driving personal automobiles: deduct actual costs or use standard mileage rate (16.5 cents a mile)
for AGI- Moving Expenses- What are nondeductible moving expenses? (2)
1. Meals
2. Costs associated with house-hunting trips
for AGI- Moving Expenses- Employer reimbursement or allowance rules
- Taxpayers who are reimbursed EXCLUDE reimbursement from income and cannot deduct the reimbursed expenses
- Taxpayers who receive a flat amount as a moving allowance from their employers INCLUDE the allowance in income and CAN deduct their actual moving expenses
for AGI- Health Insurance Premiums paid by...
self-employed taxpayers
for AGI- Self-employment tax
is NOT a business expense
self-employed are allowed to deduct 1/2 of tax paid
for AGI- Penalty for early withdrawal of savings
- a deduction for AGI is allowed for any interest income an individual forfeits to a bank as a penalty for prematurely withdrawing a CD or similar deposit
- Reduces net interest income to the amount actually received
Deductions for AGI- Deductions subsidizing specific activities- deduction for interest on qualified education loans
- up to $2500 of interest on education loans is deductible for AGI
- deduction is phased out as AGI increases
Deductions for AGI- Deductions subsidizing specific activities- deduction for qualified education expenses
- tuition and fees required for enrollment
- up to $4000 of qualified education expenses can be deducted for AGI
- deduction is phased out as AGI increases
Deductions from AGI: Itemized deductions
- itemized deductions appear on Schedule A, line 40
- take the greater of: itemized deductions or the standard deduction
Itemized Deductions (5)
1. Medical Expenses
2. Taxes
3. Interest
4. Charitable Contributions
5. Casualty and Theft Losses on Personal Use Assets
5. Miscellaneous Itemized Deductions
from AGI: Itemized- Medical Expenses... what qualifies?
-qualified medical expenses are deductible to the extent they exceed 7.5% of AGI
> total amount of expenses is reduced by 7.5% of AGI
> this is called a floor limitation because it eliminates any deduction for amounts below the floor
- taxpayers may also deduct medical expenses of their spouses and dependents
> dependent does not have to meet the gross income test
> a child of divorced parents is considered a dependent of both parents
from AGI: Itemized- Qualifying Medical Expenses
-payments for care, prevention, diagnosis, or cure of injury, disease, or bodily function that are not reimbursed by health insurance or are not paid for through a "flexible spending account"
Common deductible medical expenses
- Prescription medication and medical aids (eyeglasses, wheel chairs)
- Payments to medical care providers
- Transportation for medical purpose
- Hospitals and long-term care facilities
- Health insurance premiums if not deducted for AGI
from AGI: itemized- taxes
- State, local, and foreign income taxes
- Real estate taxes on property held for personal or investment purposes
- Personal property taxes that are assessed on the value of the specific property
from AGI: itemized- interest (2 types)
1. Home Mortgage Interest
> interest on acquisition indebtedness of $1 million
> interest on home equity debt of $100,000

2. Investment Interest Expense
>deduction is limited to net investment income
**cannot deduct interest on personal credit card debt or on personal automobile loans
from AGI: itemized- Charitable Contributions
- must be made to a qualified charity
- amount of deduction depends on type of property contributed:
1. Money- deduct amount paid
2. Capital Gain Property- deduct FMV
3. Ordinary income property- deduct lesser of FMV or adjusted bassis
- deduction for the year is limited to 50%, excess is carried forward for 5 yrs before it expires
from AGI: itemized- def of casualty loss
-loss arising from a sudden, unexpected, or unusual event
amount of loss from any specific casualty event (including theft) is the lesser of: 1. Decline in value of the property caused by the casualty or 2. Tax basis in the damaged or stolen asset
Casualty Loss deduction floor limitations
- casualty losses must exceed 2 separate floor limitations to qualify as itemized deductions
1. $100 for each casualty event during the year
2. 10% of AGI (applies to the sun of all casualty losses for the year after applying the $100 floor)
What are Misc Itemized Deductions subject to?
miscellaneous itemized deductions are lumped together at the end of the year and are only deductible ONLY to the extent their sum EXCEEDS 2% of AGI
Misc Itemized Deductions subject to the 2% Floor (4)

Misc Itemized NOT subject to the 2% Floor (1)
1. Employee business expenses
2. Investment expenses
3. Tax preparation fees
4. Hobby losses

No Floor- 1. Gambling losses
Misc Itemized Deductions- Employee Business Expenses
- dues, uniforms, subscriptinos
- costs of education if maintains or improves skill in the business
- travel and transportation- must have a business purpose (commuting is personal)
- unreimbursed employee business expenses
Misc Itemized Deductions- Investment Expenses
- expenses associated with investment income or property
- investment advisory fees
- safety deposit box fees
- subscriptions to investment-rated publications
Misc Itemized Deductions- Hobby Losses
- hobby expenses are deductible only to extent of hobby income
- hobby: primarily for personal enjoyment
business: primarily to make a profit
- if generates a profit in 3 out of 5 consecutive interest= business
- hobby revenue included in gross income
- can DEDUCT to the extent of hobby income as misc itemized deductions subject to 2% floor
Standard Deduction for a Dependent
Standard Deduction is greater of: $950 or $300 + earned income limited to regular standard deduction (5700)
Personal and Dependency Exemption
$3,650 * number of exemptions

*personal exemptions allowed for taxpayer and spouse