14. AGI and Taxable Income Adjustments Flashcards

Question

What are the key rules for Coverdell Education Savings Accounts (Education IRAs)?

Answer 1

Contributions are not deductible (made with after-tax dollars) 1. Annual limit: $2,000 per beneficiary (not per donor) 2. Phaseout for contributors starts at: – $95,000 AGI (single) – $190,000 AGI (MFJ) 2. Contributions must stop when the beneficiary turns 18 (unless special needs) **Common mistake**: You cannot contribute until age 21 — **age 18** is the cutoff

Answer 2

For pre-2019 divorces, alimony is deductible by the payor and taxable to the recipient — but only if it meets all IRS criteria: * Must be cash payments (not property or in-kind) * Payments must terminate upon the death of the payee spouse * Cannot be contingent on the status of children * Payor and recipient cannot live in the same household when payment is made * Payments must be required by a written divorce agreement Common mistake: Alimony cannot be paid in property — only cash qualifies Correct rule in this question: Payments must terminate on the death of the payee spouse to count as alimony

Answer 3

Student loan interest is deductible for every year the interest is paid, up to $2,500 per year. * There is no limit on the number of years * The deduction is available as long as interest is paid on a qualified loan * Deduction phases out if AGI exceeds: – $75,000 (single) – $155,000 (married filing jointly) Key takeaway: Deduction lasts for the entire duration of the loan (as long as you qualify)

Answer 4

* Mortgage interest → ✅ Deductible as a below-the-line (itemized deduction) on Schedule A * Home improvement loan interest (secured by home) → ✅ Also a Schedule A itemized deduction, treated as qualified home mortgage interest * Auto loan interest → ❌ Not deductible (personal expense) Example: * Mortgage interest: $17,000 → Deductible on Schedule A * Room construction loan interest: $1,500 → Deductible on Schedule A * Auto loan interest: $500 → Not deductible Total deductible (Schedule A itemized): $18,500

Answer 5

Use the Spousal IRA Rule: If you file jointly, and one spouse has enough earned income, both spouses can make full deductible IRA contributions — even if the other spouse has little or no earned income. Rules: * Contribution limit = $7,000 per person (under age 50 in 2024) * Only earned income counts (wages, salary, self-employment) * Interest, dividends, prizes don’t count as earned income * Spouse with income must have enough to cover both contributions Example: Fred earns $40,000 in wages; Wilma earns $1,200 → Both can deduct $7,000 → Total deductible = $14,000

Answer 6

Keogh Contribution Base ("Earned Income") = Net Self-Employment Income − ½ Self-Employment Tax − Deductible Keogh Contribution * This is a circular calculation because the Keogh contribution depends on the earned income, which itself is reduced by the contribution. * Tax software handles the math, but conceptually, both reductions must be included. * The contribution limit (e.g., 15%) applies to this adjusted earned income. Used for: * Keogh (profit-sharing) plans * Defined contribution plan limits for self-employed individuals

Answer 7

✅ Itemized Deductions: - Mortgage Interest → You can deduct interest on home loans up to $750,000 (If your loan is bigger, you can still deduct, but only the part related to the first $750,000) - Investment Interest → Only deductible up to the amount of investment income you made - Mortgage prepayment penalties ✅ Above-the-Line Deduction (AGI): Student Loan Interest → You can deduct up to $2,500 a year, but only if you don’t make too much money ❌ Not Deductible: Credit Card Interest → This is personal and never deductible

Answer 8

Deductible Taxes (SALT – State and Local Tax) Include: Real estate taxes (on your home or land) State or local income taxes OR state sales taxes (you must choose one) Personal property taxes (e.g., on your car, based on value) 🔒 SALT Limit: You can deduct up to $10,000 total of all the above combined ($5,000 if married filing separately) ❌ Not Allowed: You cannot deduct both state income and state sales taxes in the same year — you have to pick one.

Answer 9

🚫 No Deduction: Moving expenses are not deductible for most taxpayers, even if the move is job-related. 💰 Fully Taxable: If your employer reimburses your moving costs, that amount is taxable income to you. 🔒 Exception: The only exception is for active-duty military members moving under military orders — they can deduct and exclude.

Answer 10

* Max Contribution: $7,000 (under age 50) * Deductible Amount: $0 * Why: Active participant in an employer plan Income exceeds phase-out range for deduction ($87,000 for single in 2024) Key Rule: For single filers covered by a workplace plan, Traditional IRA deduction phases out from $77,000 to $87,000 (2024). Above $87,000 means no deduction, but contribution is still allowed.

Answer 11

Sol’s deduction = $0 His income is above the $143,000 phase-out limit for a covered spouse filing jointly * Julia’s deduction = $7,000 The couple’s MAGI is well below the $230,000 phase-out for noncovered spouses Total deductible amount = $7,000 Key Rule: When one spouse is covered by a plan and the other is not, the noncovered spouse can fully deduct their IRA contribution if joint income is under $230,000. The covered spouse cannot deduct their contribution if income exceeds $143,000.

Answer 12

* It is not netted against the Year 9 interest income * It is not an itemized deduction * It is deductible above the line in Year 10 * This reduces adjusted gross income (AGI) on the Year 10 return Key Rule: Early withdrawal penalties from savings (e.g., CDs) are deductible above the line under IRC §62(a)(9), even if the interest was earned in a prior year. Deduct it in the year paid.

Answer 13

* Doctor and hospital visits * Health insurance premiums (if paid with after-tax dollars) * Prescription drugs and insulin (including nonprescription insulin) * Medical equipment (e.g., wheelchairs, crutches, oxygen tanks) * Laboratory fees and diagnostic tests * Dental treatment (e.g., exams, fillings, braces) * Vision care (e.g., glasses, contacts, exams) * Hearing aids and exams * Travel for medical care (mileage, tolls, parking) Key Rule: To be deductible, the expense must be for diagnosis, treatment, mitigation, or prevention of disease, and must be unreimbursed. Subject to the 7.5% of AGI floor unless otherwise noted.

Answer 14

* Social Security (12.4%) — Applies only up to the annual limit (e.g., $160,200) and is reduced by any W-2 wages earned; for example, if you earned $100,000 in wages, only $60,200 of SE income is taxed for Social Security. * Medicare (2.9%) — Applies to all self-employment income with no cap and is not reduced by wages. * An additional 0.9% Medicare tax applies at high income levels (e.g., $200,000+ for single). Key Rule: Social Security = capped + reduced by wages Medicare = unlimited + not reduced by wages

Answer 15

Start with the total qualified medical expenses you paid during the year. Subtract any reimbursements (e.g., insurance payouts). Then subtract 7.5% of your AGI — only the amount above that floor is deductible. Formula: Deductible = (Qualified expenses − Reimbursements) − (AGI × 7.5%) Example: If AGI = $35,000 and total medical expenses = $4,125 with a $500 reimbursement: * Net expenses = $3,625 * 7.5% of AGI = $2,625 * Deductible = $1,000 Key Rule: You only get a deduction for the portion of your medical expenses that exceeds 7.5% of AGI — and only for qualified expenses that weren’t reimbursed.

Answer 16

* Medical expenses: Not deductible — 7.5% of AGI = $24,375, which exceeds $6,800 paid * SALT deduction (State and Local Taxes): Choose higher of income or sales tax → use $6,400 Add property tax: $6,400 + $7,500 = $13,900 SALT cap = $10,000 → only $10,000 is deductible * Charitable contributions: Fully deductible up to 60% of AGI → $12,000 allowed Total allowable itemized deductions = $0 (medical) + $10,000 (SALT) + $12,000 (charity) = $22,000 Key Rule: * Medical expenses only count if they exceed 7.5% of AGI * SALT deduction is capped at $10,000 total (state + local + property taxes) * Charitable gifts are deductible up to 60% of AGI if made in cash to qualified charities Correct answer: $22,000

Answer 17

Only the amounts actually paid during the tax year are deductible, regardless of what was owed. * Do not include any amounts paid in the next year (even if for the current year’s liability) * Do not deduct overpayments or future payments Example: If $2,000 was withheld and $900 was paid in estimated taxes during the year, but $300 was paid the following January, only $2,900 is deductible on Schedule A. Key Rule: Cash-basis = deduct when paid. Not when incurred or owed.

Answer 18

QBI share = 50% × $400,000 = $200,000 Tentative 20% QBI deduction = $200,000 × 20% = $40,000 Wage/property limits (50% share): 50% of W-2 wages = $60,000 × 50% = $30,000 25% of W-2 wages + 2.5% of property = $15,000 + $3,750 = $18,750 Use the greater: $30,000 Phase-in percentage = ($230,000 − $191,950) ÷ $50,000 = 0.761 = 76.1% Excess over limit = $40,000 − $30,000 = $10,000 Reduction = $10,000 × 76.1% = $7,610 Final QBI deduction = $40,000 − $7,610 = $32,390 Key Rule: When your income is in the QBI phase-in zone, your 20% deduction is reduced by the amount that exceeds the wage/property limit, multiplied by your phase-in percentage — which is how far your income is into the $50,000 phase-in range.

Answer 19

Medical expenses are deductible in the year they are either: * Paid directly by the taxpayer, or * Charged to a credit card — even if the bill is paid later Expenses for a dependent or deceased spouse are still deductible as long as the taxpayer paid them. In this case, Jay may deduct: * $5,000 charged to a credit card for his daughter’s care * $3,200 paid for his deceased wife’s medical treatment Total deduction = $8,200 Key Rule: Medical expenses are deductible when paid or charged, not when reimbursed or filed. A deceased spouse’s medical costs are deductible if paid by the surviving spouse.

Answer 20

A tax deficiency is the total the IRS says you owe after finding an underpayment. It includes: * Extra tax * Penalties (late filing, negligence, etc.) * Interest on unpaid tax Example: $1,120 bill = $900 tax + $60 penalty + $90 penalty + $70 interest Key Rule: None of it is deductible — not tax, not penalties, not interest

14. AGI and Taxable Income Adjustments Flashcards

(45 cards)