Ch 2: Adjs and Itemized Deductions Flashcards Preview

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Flashcards in Ch 2: Adjs and Itemized Deductions Deck (27):

List the deductions for AGI

In Spring, Students Move Into Herget Dorms And Once Again School Begins

1) IRA (In)

2) *Self Employed Health Insurance (Spring)

3) Student Loan Interest Expenses (Students)

4) Moving Expenses (Move)

5) Interest Withdrawal Penalty (Into)

6) Health Savings Account (Herget)

7) Domestic Production Activities Deduction (Dorms)

8) Alimony Paid (And)

9) *One-Half Self Employment FICA (Once)

10) Attorney fees paid in certain discrimination and whistleblower cases (Again)

11) *Self Employed Retirement (School)


*Note: Those denoted above are not deducted on Schedule C



What are the 4 types of IRAs?

  • Deductible IRA
  • Nondeductible IRA
  • Roth IRA
  • Coverdell Education Savings Accounts (IRA)


What are the limits on deductible IRA deductions? 

Taxpayers may not have an IRA deduction if BOTH conditions are met:

  1. rich, and
  2. active participant in retirement plan

For IRAs, the lesser of $5,500 or individuals compensation; with a nonworking spouse, limit is $11,000 provided the combined earnings of both spouses total at least that much.

Retirement plan: The maximum deductible IRA contribution for an individual who is not an active participant, but whose spouse is, is phased out for taxpayers with modified AGI between $181,000 and $191,000. 

Note: Persons who are age 50 or over, are allowed an additional contribution adjustment of $1,000.


What are the limits on Roth IRAs?

  • Contributions are not deductible when made (i.e. they are taxed when you put them in)
  • Earnings accumulate tax-free
  • Distributions are also tax-free provided they are qualified distributions
    • principal withdraw
    • earnings accumulated
    • earnings can be withdrawn income-tax-free if you're at least 59½ and
      • have had the Roth at least five years, or
      • a beneficiary after taxpayer's death, or
      • taxpayer is disabled, or
      • first time homebuyer, $10k limit

Phase-out Income Limits:

  • Single with modified AGI from $114k to $129k
  • MFJ with modified AGI from $181k to $191k
  • MFS with modified AGI from $0 to $10k

Note: Roth IRAs are not subject to the minimum distribution rules of deductible IRAs, which apply once the individual reaches 701/2.


What are the limits on nondeductible IRAs?

The lesser of:

a) $5,500

b) Individual's compensation

c) Limit not contributed to other regular and Roth IRAs.

  • Earnings on such contributions will accumulate tax free (deferred) until withdrawn.
  • Distributions (withdrawls)
    • taxable - previously accumulated untaxed earnings
    • nontaxable - principal contributions (not deducted when contributed)



What is the time limit on Coverdell Education Savings Accounts (Education IRAs)?

Any amounts remaining when the beneficiary reaches the age of 30 must be distributed.

"Left over funds":

1) Must be distributed to a beneficiary, are taxable, and a 10% penalty is assessed, or

2) Rollover to another family member is permitted with no 10% penalty.


What are the limits on Coverdell Educations Savings Account (education IRA)?

  • contributions are not deductible, maximum contribution is $2k per beneficiary
    • contributions are not limited by any amounts contributed to other types of IRAs
  • earnings accumulate tax free
  • distributions are tax free to the extent they are used for qualified education expense of the designated beneficary
    • includes room and board


What are the limits on deductions to Keogh plans?

Keogh plans are for self employed taxpayers and their employees. A self-employed taxpayer subject to the self-employment tax is generally allowed to set up a Keogh plan.

Deductible amount is lesser of:

  • 25% of net earnings from self employment (after Keogh deduction) or
  • $52,000 (2014).

The maximum annual addition (contribution) may exceed the deductible amount for the year. It is limited to the lesser of:

  • $52,000 (2014) or
  • 100% net earnings if compensation is less than $52,000.


*Note: NOT Deductible on Schedule C


What is the adjustment limit for Student Loan Interest Expense?

  • The adjustment for student loan interest expense is limited to $2,500
  • a dependent may not claim the adjustment


What are the adjustment limits for Heath Savings Accounts (HSAs)?

  • enable works with high deductible health insurance to make pretax contributions of up to $3,300 ($6,550 for families) to cover health care costs
  • the amounts are increased by $1,000 for persons who reach age 55 during the tax year
  • no contributions are allowed once a taxpayer becomes covered by Medicare Parts A or B


What are the requirements for moving expenses to be deductible?

1) Must change job sites.

2) 50 mile move (distance from former residence to new job site must be 50 miles or more of the distance from former residence to former job site).

3) Must work in new location for 39 weeks during the 12 months following arrival (if self employed, 78 weeks during the 24 month period after arrival.

Note: Transportation expenses are deductible at: there is a per mile car allowance (23.5 cents) or actual out of pocket amounts. Tolls and parking fees can be added to mileage rate.


  • Meal costs are not deductible.
  • pre-move house hunting
  • expense of breaking a lease
  • temporary living expenses


Describe the self employed deductions ("adjustments") for AGI

Self employment tax: 50% of self employment Social Security/Medicare tax.

Self employed health insurance: 100% may be deducted for medical insurance premiums paid for the taxpayer, spouse, and dependents, provided that the plan is set up in the name of the self-employed individual or the individual's buiness.


Which is a deduction for AGI: Child support or alimony?

Deduction for (to arrive at) AGI = Alimony Paid.

  • payments must be legally required under a written divorce (or separation) decree or agreement
  • payments must be in cash (or its equivalent)
  • payments cannot extend beyond the death of the payee (wife)
  • spouses may not file MFJ

Child support is not alimony and is not deductible by the payor or taxable to the recipient.


If payments fall short and the divorce settlement is for alimony and child support, then the payments first apply to child support, then alimony.


Property settlement: if the divorce settlement provides for a lump sum payment or property settlement by a spouse, that spouse gets no deduction for payments made, and the payments are not includible in gross income of the spouse receiving the payment.


What are the standard deductions for different filing statuses?

  • Single $6,200
  • Head of Household $9,100
  • MFJ or Surviving Spouse $12,400
  • MFS* $6,200

*Available only if both taxpayer and spouse do not itemize.


What is the additional deduction for elderly and or blind?

If 65 or older OR blind, add $1,550 (single or HOH), or $1,200 (MFJ or MFS or QW).

If blind add same amounts as above.

If both are over 65 and blind, amounts are $3,100 and $2,400 respectively.

If MFJ, and both are over 65 and/or blind, then double amounts.


What taxpayers are not eligible to use the standard deduction?

1) One spouse itemizes deductions on a separate return.

2) Taxpayer is a dual status or nonresidential alien.

3) Taxpayer has a short tax year. The standard deduction is limited if taxpayer can be claimed on another persons return (greater of $1,000 or earned income of dependent plus $350 up to basic standard deduction amount).


Identify the major classes of itemized deductions.

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1) Medical and dental expenses

2) Taxes paid

3) Interest paid

4) Gifts to charity

5) Casualty and theft losses

6) Misc deductions subjecto the 2% floor (job expenses, investment expenses, tax preparation)

7) Other misc deductions not subject to the 2% floor (gambling losses to extent of winnings)


What are the limitations on medical expenses?

1) Medical expenses are deductible to the extent they exceed 10% of AGI. (7.5% for taxpayers age 65 or older)

2) Cost of surgery for elective cosmetic reasons is not deductible. Vitamins, funerals, and insurance against loss of earnings due to sickness or accident, life insurance, health club memberships for general health care, and personal hygiene are not deductible.

3) Self employed individuals may deduct 100% of medical insurance premiums from gross income.

4) A dependent for medical expenses must meet only the support, relationship, and residency tests.


Deductible Medical Expenses Formula

Qualified medical expenses

(Insurance Reimbursement)

Qualified Medical Expense Paid

(10% of AGI or 7.5% if age 65 or older)

Deductible Medical Expenses


Identify the taxes that are deductible as itemized deductions.

NOT  federal income taxes!

Deductible taxes include:

1) Real estate taxes

  • prorated in yr of sale/purchase
  • do not include street, sewer, and sidewalk assessment taxes

2) Personal property taxes (state and local taxes)

3) Income taxes (state, local, and foreign taxes)

  • deduct in year paid, not in year it applies to



Identify the taxes that are non-deductible as itemized deductions.


  1. Federal Income taxes (including Social Security)
  2. Inheritance taxes for states (aka federal estate pickup tax)
  3. Business (on Schedule C) and rental property taxes (on Schedule E)


Identify the types of interest that are deductible and nondeductible.


1) Home Mortgage Interest: Qualified residence interest on principal and second residence is subdivided into:

  A) Acquisition indebtedness ($1,000,000 limitation).

  • debt that is incurred in buying, constructing, or substantially improving the taxpayer's principal and second home

  B) Home equity indebtedness (lesser of $100,000 or FMV limitation).

  • debt that is secured by the taxpayer's principal or second residence, but is not "Acquisition indebtness"

  C) Points paid on a principal residence mortgage loan are fully deductible.

  D) Points paid to refinance a home (or for home equity loan) must be capitalized and deduction spread out over the life of loan. 

2) Investment Interest Expense: Interest on loans for investment purposes, limited to net investment income, can be carried forward.

3) Personal (Consumer) Interest: is NOT deductible!

4) Prepaid interest (use accrual basis for determining deductible amount).

  • must be allocated over the period of the loan (for the taxpayer making the payments) even for the cash basis taxpayer

5) Educational loan interest is an adjustment and not an itemized deduction.



What are the limitations on charitable contribution deductions? 

1) Overall limit = 50% of AGI. Cash may be all 50%.

Long term capital gain property (deduct FMV) is limited to the lesser of:

  A) 30% of AGI

  B) The remaining amount to reach 50% after cash contributions.

2) Excess contributions can be carried forward five years.

3) Cash contributions must be substantiated by a bank record or a written communication by the charitable organization.

4) Taxpayers who do not itemize deductions may not deduct charitable contributions.


What is the limit on nonbusiness casualty and theft losses?

If partial loss: Deduction is based on decrease in FMV not to exceed adjusted basis.

If total loss: Deduction is adjusted basis.

Aggregate losses are reduced by:

  A) Insurance recovery

  B) $100 per casualty/theft event

  C) 10% of AGI


Give formula for nonbusiness Casulty and Theft losses for itemized deductions

Smaller Loss (Lost Cost/Adj Basis or Decreased FMV)

(Insurance Recovery)

Taxpayer's Loss


Eligible Loss

(10% AGI)

Deductible Loss


Identify some misc deductions subject to the 2% of AGI floor.

1) Unreimbursed business expenses

2) Educational expenses not deducted above AGI

3) Uniforms

4) Business gifts ($25 limit per recipient per year)

5) Business use of home

6) Employment agency fees (job hunting expenses)

7) Expenses of investors 

8) Subscriptions to professional journals

9) Tax prepartion fee

10) Debit card convenience fees incurred to pay income tax


Identify some misc deductions NOT subject to the 2% of AGI floor.

These are fully deductible

1) Gambling losses

  • only to the extent of gambling winnings

2) Federal estate tax paid on income in respect of a decedent