Personal Deductions, Exemptions, and Credits Flashcards
(47 cards)
What does it take for a deduction to be above the line? What section is this under?
Section 62: for business expenses by employer, not employee
This year Matthew incurs 10k of medical expenses and his AGI is 100k. How much
of the medical expenses may he deduct under § 213(a)?
He can deduct any above 7.5%, so 2,500 in this case. Most people don’t though, since they take the standard deduction.
Under what section is medical expenses dealt with?
213
Is the 213 deduction above or below the line?
Below the line
What are the two main requirements for a medical expense under 213?
- Can only deduct that past 7.5% of income
- Must be for medical care; 231(d)(1)(A): for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body
What about employer-provided coverage under an accident or health plan? What section?
106: says they are not income
What was Taylor v. Commissioner?
It dealt with the issue of what constitutes as medical care under 213. Essentially, Taylor had an allergy that disabled him from mowing his law. The court held that he could not deduct the cost of paying someone to mow his lawn under 213.
What was OCHS v. Commissioner?
Following the lower court’s decision that expenses incurred by petitioner taxpayer in sending his children to day and boarding school were non-deductible family expenses pursuant to 26 U.S.C.S. § 24(a)(1), petitioner sought review. Petitioner argued that the purpose in sending the children to boarding school was to alleviate his wife’s pain and suffering in caring for the children by reason of her inability to speak above a whisper and to prevent a recurrence of cancer. Petitioner argued that these expenses were therefore medical expenses, entitling him to a deduction. The court rejected petitioner’s argument and affirmed the decision. The court held that while it had no reason to doubt the good faith and truthfulness of petitioner and his reasons for incurring the expenses, the expenses incurred in sending the children to boarding school were nevertheless not deductible as medical expenses pursuant to the provisions of 26 U.S.C.S. § 23(x). The court held that the expenses were made necessary by the loss of the wife’s services and that family expenditures could not be converted into deductible medical expenses.
What are some policy rationales for giving medical deductions under 213? (4)
(i) Amounts spent for extraordinary medical expenses do not provide consumption in the ordinary sense and therefore are simply not part of income.
(ii) Individuals who pay their own medical costs relieve the government of an expense that it would otherwise be obliged to bear.
(iii) The deduction is a proper encouragement to people to take good care of themselves; it is a useful subsidy for medical care.
(iv) In many instances, an injury or illness stems from work (e.g., a professional athlete’s bad knee) or interferes with the ability to work (e.g., a truck driver’s bad back), so the cost of medical care should be regarded as a cost of producing income.
Why is employer provided healthcare so heavily favored?
Because the income is excluded for employees (under 106) AND the employers get a deduction
How does medical expenses remind one of Benaglia?
Because there is clearly a consumption element to each of the expenses, and yet they are wholly deductible
Taxpayers A, B, and C each have AGI for the current taxable year of 100k. Taxpayer A donates 50k to charity. Taxpayer B suffers a 50k casualty loss on property with a basis of 100k. Taxpayer C incurs 50k in medical expenses. How much may each deduct?
A: 50k (up to 50% of his AIG, which is 100k, so 50k); no floor
B: 39.9k = 50k - 100 (165(h)(1)) - 10k (165(h)(2) - that exceeds 10% of AGI); a floor of 10%
C: past 7.5% of income, so 50k-7.5k = 42.5k; a floor of 7.5%
Sam donates $100 to his favorite charity and the charity sends him a shirt with a FMV of $10. Sam hates the shirt and makes his dog wear it. His dog also hates it. (It is not, after all, for a dog.) What is the amount of Sam’s charitable contribution?
His contribution is $90
Laura is at an auction for a charitable organization. All of the items in the auction were donated to the organization. Laura bids $100 for a bottle of wine, which sells at a store for $80. Laura wins the bottle. How much can Laura deduct?
$20
Is the charitable contribution under 170 above or below the line?
below the line - itemized
What are the controversial charities?
The 501(c)(4)’s like Karl Rove’s Crossroads GPS; also includes NRA, Sierra Club
501(c)(5)(27): PACs and SuperPACs
Where are the donee rules in charitable contributions?
501
What does 501(a) say?
If it fits under 501(c), then it doesn’t have to pay income tax. 501(c)(3), for example, mirrors the 170 rule, so it will include anything you get a charitable deduction for. But there are more organizations than those, listed in 501(c)(4), and (c)(5)
Can 501(c)(4) and (c)(5) organizations campaign? Why?
Yes, because the restriction only applies to (c)(3) ones, that can get deductible donations
Which is more valuable: 170 deductions or 501 exclusions?
Most people say 170 deductions, because these organizations aren’t for profit, so exclusion of income isn’t really a question since they are using all their income
What is the important exception to 501(a)? How do 501’s get around this? What about the UCLA bookstore? Revenue from PAC12 TV?
When a 501 organization practices in profit oriented stuff outside of their charitable purposes (getting unrelated business income - UBIT), that part isn’t tax exempt; often 501’s have a separate organization they can do this in, so they don’t get audited.
That stuff is nontaxable, so long as it’s for the convenience of the members of the 501; even further, revenue from TV is not included.
Not UBIT if just a minority stake. UBIT if an active manager in some not-for-convenience stake investments.
What are the limitations on the 170 deductions?
- 50% or 30% of AGI (most are 50%)
- Corporations can’t deduct more than 10% of taxable income. If a taxpayer contributed more than his/her yearly income, could carry it over.
What happened in Bob Jones v. Commissioner? What’s one problem with the decision?
It was about whether Bob Jones University served a public purpose, which is required for income exclusion under 501(c)(3). The court held that Bob Jones was not in furthering of a public purpose. Discrimination in education is contrary to public policy. Board v. Brown matters because that is about federal subsidy, which shows that the USSC is willing to talk about tax expenditure!
The IRS is suddenly in the position of determining is for and against public policy. Fortunately, they haven’t used this power much at all.
Based on the “national policy to discourage racial discrimination in education,” the IRS ruled that a private school not having a racially nondiscriminatory policy as to students was not charitable within the common law concepts reflected in §§ 170 and 501(c)(3) of the Internal Revenue Code. The application of the IRS construction of these provisions to petitioners, two private schools with racially discriminatory admissions policies, was affirmed, as private schools maintaining racially discriminatory admissions policies violated clearly declared federal policy and must be denied tax benefits flowing from qualification under § 501(c)(3). Entitlement to tax exemption depended on meeting certain common-law standards of charity. An institution seeking tax exempt status must serve a public purpose and not be contrary to established public policy. To warrant exemption under § 501(c)(3), an institution must fall within a category specified in that section and must demonstrably serve and be in harmony with the public interest. The institution’s purpose must not be so at odds with the common community conscience as to undermine any public benefit that might otherwise be conferred.
Why is the charitable contribution deduction often characterized as involving a parallel subsidy from the government?
Because if you donate $100, you are saving $35 on taxes, and spending $65 without any benefit. So you are directing $35 dollars of government spending (40-50 billion dollars a year). Further, all taxpayers are donating when you’re donating.
