104-2 Income Tax: Deductions and Credits

Question 1

Standard deduction amounts for 2019 by filing status

Answer 1

1) Single: $12,200
2) MFJ: $24,400
3) MFS: $12,200
4) Head of household: $18,350
5) Qualifying widow(er): $24,400

Question 2

Additional standard deduction amounts

Answer 2

Eligible for taxpayers who are 65 or older or blind

Double these amounts if taxpayer is both > 65 yrs old and blind and also double for 2 taxpayers
Single: $1,650
MFJ: $1,300
MFS: $1,300
Head of household: $1,650
Qualifying widow(er): $1,300

Question 3

Itemized deductions

Answer 3

Reported on Schedule A of Form 1040

The major item or activity that will permit a taxpayer to itemize deductions is the ownership of a personal residence w/ the corresponding mortgage interest deduction

Question 4

Nontaxable income

Answer 4

(such as municipal bond income)
the expenses to generate that income are not deductible (such as the investment expenses and the investment interest expenses incurred for the municipal bonds)

Question 5

Medical expenses

Answer 5

A deduction is available for any expense incurred w/ respect to the diagnosis, cure, treatment, or prevention of disease, as well as for transportation expenses related to this objective

Premiums paid directly by the taxpayer from after-tax income for accident and health insurance and disability insurance can also be included in deductible medical expenses

All medical expenses are subject to a 7.5% of AGI floor, which means no qualifying medical expense may be deducted until the total of all qualifying expenses exceeds 7.5% of a taxpayer’s AGI
Effectively, this eliminates the deduction for most taxpayers except for those who experience a catastrophic illness for which they do not have insurance coverage

Question 6

5 types of possible interest expenses that may be incurred by a taxpayer

Answer 6

1) Consumer interest (never deductible)
2) qualified residence interest
3) investment interest expense
4) business interest
5) passive interest

Question 7

2 types of qualified residence interest

Answer 7

1) Acquisition indebtedness: interest incurred in acquiring, constructing, or substantially improving a qualified residence of the taxpayer and 1 other residence, such as a vacation home
2) Home equity loan indebtedness: interest deduction is not allowed if the proceeds on the same loan are used to pay personal living expenses

Question 8

Personal casualty losses

Answer 8

Deductible only if incurred in a federally declared disaster
The event must result in property damage and the event must be sudden, unusual, and unexpected (such as a hurricane, tornado, or wildfire)

Question 9

Most important misc itemized deductions

Answer 9

1) federal estate tax that is attributable to items included in the taxpayer’s estate as income in respect of a decendent (IRD)
2) gambling losses and transaction expenses to the extent of gambling winnings
3) impairment-related work expenses for handicapped taxpayers
4) the unrecovered investment in an annuity contract when the annuity terminates because the taxpayer died (e.g. in a single life period annuity)

Question 10

Reimbursed employee expenses: accountable plan vs. nonaccountable plan

Answer 10

Accountable plan: require substantiation (records)

Nonaccountable plan: expenses included as income, substantiation not required

Question 11

Home Office Expenses

Answer 11

A self-employed individual may deduct qualifying home office expenses to reach AGI
In order to be deductible, a home office must be used regularly and exclusively as a principal place of business

Question 12

Other deductions: legal & accounting fees, worthless securities, bad debts

Answer 12

1) Legal & accounting fees: nondeductible for personal purposes. Deductible in calculating AGI when incurred in connection w/ a trade or business
2) Worthless securities: must be completely worthless to be deductible, losses considered to be capital losses occurring on the last day of the year in which the securities become worthless
3) Bad debts: a deduction is allowed for business debts that become partially or wholly worthless if the income form the debt was previously included in the taxpayer’s income

Question 13

Qualifying child

Answer 13

Must be the taxpayer’s child, foster child, brother, stepbrother, stepsister, or a descendant of any of the previously listed and must have lived w/ the taxpayer more than half of the tax year

Question 14

Qualifying relative

Answer 14

An individual who is not a qualifying child and bears a specified relationship to the taxpayer such as a parent, in-law, niece, nephew, aunt, uncle, or is unrelated to the taxpayer but the individual resided in the taxpayer’s principal home during the tax year.

Question 15

Taxable income calculation

Answer 15

Adjusted gross income
Less the greater of:
Total itemized deduction or standard deduction (including any additional standard deductions allowed to the taxpayer)

=Taxable income

Question 16

Taxpayer’s marginal rate

Answer 16

The rate that is paid on the last taxable dollar

Question 17

Effective / avg. tax rate

Answer 17

tax paid / taxable income

Question 18

Progressive income tax system

Answer 18

The more taxable income a taxpayer has, the higher the tax bracket in which the last dollar is taxed

Question 19

Tax credit

Answer 19

a dollar-for-dollar reduction against an individual’s income tax liability
Not affected by the marginal tax rate of the taxpayer

Question 20

2 categories of tax credits

Answer 20

1) Refundable tax credits: paid to the taxpayer even if the amount exceeds the taxpayer’s tax liability
- a refundable credit can create a refund

2) Nonrefundable tax credits: cannot be used to create a refund; they will reduce a taxpayer’s tax liability to zero
- some nonrefundable credits may be carried forward

Question 21

Child and dependent care credit

Answer 21

A nonrefundable tax credit

Permitted for a portion of dependent care expenses paid for the purpose of allowing the taxpayer to be gainfully employed

Question 22

Child tax credit

Answer 22

In 2019, a $2,000 nonrefundable tax credit is given for each qualifying child under the age of 17

Reduced at AGI thresholds

Question 23

Adoption expense credit

Answer 23

Nonrefundable tax credit for qualified adoption expenses in 2018 and is taken in the year the adoption becomes final

Does not include surrogate parenting arrangement or any costs incurred for adopting a spouse’s child

The max credit (in 2019) is $14,080 per child, including children w/ special needs

Any unused credit may be carried forward for up to 5 years

Question 24

Foreign tax credit

Answer 24

A means of avoiding double taxation by granting a tax credit for taxes paid or accrued to a foreign country or U.S. possession

A taxpayer may not take advantage of both the foreign tax credit and foreign earned income exclusion permitted under U.S. tax law

Question 25

Underpayment penalty

Answer 25

20% may be assessed for an accuracy-related penalty due to negligence or a substantial understatement of tax