R2: Individual Tax--Adjustments, Deductions, and Credits

Question 1

Deductible Medical Expenses Formula

Answer 1

Qualified Medical Expenses

=Qualified Medical Expenses “Paid”

=Deductible Medical Expenses

Question 2

Types of Deductible Medical Expenses

Answer 2

• Medicine and drugs
• Doctors
• Medical and accident insurance
• Required surgery
• Transportation to medical facility
• Physically disabled costs

Question 3

Types of Nondeductible Medical Expenses

Answer 3

• Elective Surgery, elective cosmetic operations, drugs that are against the law, travel, vitamins
• Life Insurance
• Capital Expenditures
• Health club memberships
• Personal hygiene

Question 4

Charitable Contributions Limitation

Answer 4

Overall Limit = 50% AGI

1. Cash–may be all 50%
2. General Property–lesser of basis or FMV
3. Long-term appreciated property is limited to the lesser of:
   a) 30% of AGI (Compare to FMV)
   b) The remaining amount to reach 50% after cash contributions.

Question 5

Miscellaneous itemized Deductions (2% AGI Test)

Answer 5

• Unreimbursed Business Expenses
  1. Travel, Meals and Lodging (overnight business travel)
  2. Transportation expenses (100% deductible)
  3. Meals/Entertainment Expenses (50% deductible)
• Educational Expenses (those not deducted above AGI)
• Uniforms
• Business Gifts ($25/recipient per year)
• Business use of Home (used for convenience of employer)
• Expenses of Investors–Safe Deposit Box and Investment Advice
• Subscriptions to Proffessional Journals
• Tax preparation fee
• Debit card convenience fees incurred to pay income tax
• Activities not engaged in for profit (hobbies)

Question 6

Other Misc Deductions (no 2% AGI test)

Answer 6

1. Gambling Losses- fully deductible to the extent of gambling winnings
2. Federal Estate tax paid on income in respect of a decedent

Question 7

Regular (deductible) IRA

Answer 7

• Generally deductible
• It is not deductible when 2 conditions are present:
  1) Excessive AGI: Single/HH $61k - 71k; Joint $98k - 118k
  2) Active participation in another Qualified plan
  a) Exception- individual not considered active participant in an employer-sponsored retirement plan merely because spouse is considered active participant.
  b) Phase out- Max deductible IRA for individual who is not an active participant but spouse is, is phased out for modified AGI of $184k-194k.

Question 8

Amount of IRA deduction

Answer 8

The max is the lesser of:
$5,500
or
Individual's compensation
Married ($11k)

Question 9

Nondeductible IRA contributions

Answer 9

• Roth IRA
• Tax-free accumulation of earnings
• Tax-free distributions

Question 10

Contribution limits to all IRAs

Answer 10

-Single  $5,500
Married $11,000
-Phase-out Income Limits
1) Single $117k-132k
2) Joint filers $184k-194k
3) Married filing Separate $0-10k

Question 11

Coverdell Education Savings Account

Answer 11

• Maximum contribution per beneficiary is $2k annually.
• Accumulation of earnings are tax free
• Withdrawals are tax free if:
  1) Qualified education expense
  2) Time limitation (beneficiary age 30)
  3) American Opportunity or Lifetime Learning credits can be combined with tax free withdrawals.

Question 12

Moving Expenses

Answer 12

1. New workplace is 50 miles further from old house than old work was.
2. 39 week stay (must work full time in new location at least 39 weeks during the 12 months following arrival.
3. Only direct moving costs are allowable:
   a) travel and lodging of the taxpayer and family
   b) Transporting household goods and personal effects to new location.
4. Employer reimbursements

Question 13

Keough (Profit Sharing) Plans

Answer 13

• Maximum annual deduction: $53k or 25% net

- Maximum annual addition: $53k or 100% net earnings (if compensation is less than $53k)

Question 14

Keough Net Earnings (from self-employment) calculation

Answer 14

Business Income
(Business Expenses)
=Net Business Income
(1/2 Self emplyment tax)
(Keough Deduction)
=Keough Net Earnings

Question 15

Casualty and theft Losses

Answer 15

-10% AGI test
Amount of loss calculation:
Smaller Loss*
(Insurance Recovery)
=Taxpayer's Loss
($100)
=Eligible Loss
(10% AGI)
=Deductible Loss

*Difference b/w the market value before the casualty and market value afterwards.

Question 16

Deductible/Nondeductible taxes

Answer 16

Deductible

• Real Estate Taxes
• Income taxes
• Personal Property Taxes
• Sales Tax

Nondeductible

• Federal taxes
• Inheritance Taxes
• Business Taxes

Question 17

Adoption Credit

Answer 17

1. Limit $13,460/child
2. Phase-out $201,920 - 241,920
3. Eligible expenses:
   - All reasonable and necessary expenses, fees and costs are available for the credit,
   - Not available for adopting child of spouse
   - Medical expenses do not qualify
   - Can exclude up to $13,460

Question 18

Foreign Tax Credit

Answer 18

Taxpayer may claim foreign tax credit.
Limitation:
1) Foreign taxes paid, or
2) (TI from foreign operations/(TI+Exemptions*) x US Tax = Foreign Tax Credit Limit
*These amounts are based upon worldwide income.

Question 19

Child and Dependent Care Credit

Answer 19

• When both parents are working and pay for child care.
• Limit is $3k for one child and $6k for two or more (further limited to lowest spousal income (ie. wife makes $2.5k/yr))
• Limitation is then multiplied by 20% to determine credit amount.
• Eligible people:
  1) dependent under the age of 13
  2) any disabled dependent
  3) disabled spouse

Question 20

Earned Income Credit (refundable cost)

Answer 20

Eligibility:

• Live in US more than half the year
• Meet low income threshold
• Not have more than a specified amount of disqualified income ($3,400)
• Be over 25 but under 65
• File joint return with spouse

Question 21

Alternative Minimum Tax

Answer 21

Tax designed to ensure that taxpayers who take a large number of tax-preference deductions pay a minimum amount of tax on their income. The AMT is the excess of the tentative AMT over the regular tax.
-Certain allowable AMT paid in a taxable year may be carried forward indefinitely, but only to reduce regular tax, not future AMT.

Question 22

AMT Calculation

Answer 22

Regular Taxable Income
\+- Adjustments
\+- Preferences
= Alternative Minimum Taxable Income
- Exemption
= Alternative Minimum Tax Base
x Tax Computation
= Tentative AMT Tax
- Tax Credits
= Tentative Minimum Tax
- Regular Income Tax
= Alternative Minimum Tax (AMT)

Question 23

AMT Adjustments

Answer 23

(PANIC)

1. Passive Activity Losses
2. Accelerated Depreciation
3. Net Operating loss of the individual taxpayer
4. Installment income of a dealer
5. Contracts–percentage completion versus completed contract

(TIMME)

6. Tax “Deductions”
7. Interest deductions on some home “equity loans”
8. Medical deductions (limited to excess over 10% AGI; adjustment only for taxpayers age 65 or older)
9. Miscellaneous deductions not allowed
10. Exemptions (personal) and standard deducton

Question 24

AMT Tax Preference Items(always “add-back”)

Answer 24

1. Private activity bond interest income (on certain binds)
2. Percentage depletion the excess over adjusted basis of property
3. Pre-1987 accelerated depreciation

Question 25

AMT Exemtion

Answer 25

For 2016, the exemption amount is $53,900 less 25% (AMTI--$119,700) for single taxpayers, $83,800 less 25% (AMTI--$159,700) for joint filers, and $41,900 less 25% (AMTI--$79,850) for married filing separate. Ex: Bob and Mary are MFJ in 2016. If there AMTI is $259,700, their exemption is: Full Exemption= $83,800 AMTI=$259,700 Limit= (159,700) Excess= $100,000 x 25% (25,000) $58,800

Question 26

AMT Credits

Answer 26

(FACCE) 1. Foreign Tax Credit 2. Adoption credit 3. Child tax credit 4. Contributions to retirement plans credit 5. Earned income credit

Question 27

Statute of Limitations (Gov't Assessments)

Answer 27

1. General- 3 years from the later of: a) the due date of the return; or b) the date the return is filed (including amended returns) 2. 25% Understatement of Gross Income-6 years from the later of (same as above) 3. Fraud and False Returns = bank robber = Forever

Question 28

Statute of Limitations (Refunds for Individuals)

Answer 28

1. Refund claim- a) 3 year later from the date the return was filed or the original due date of the return; or b) 2 years from the time the tax was paid (if not when the return was filed) 2. Bad Debts, Worthless Securities= Bad luck= 7 years

Question 29

Estimated Taxes--Required Minimum

Answer 29

Required to make estimated quarterly tax payments if both of the following are met: 1. If amount of taxes owed is expected to be $1,000 or more. 2. Taxpayer's withholding is less than the lesser of: a) 90% of current year's tax b) 100% of last year's tax ( does not apply if $0 liability in prior year) *Exception: If taxpayer had AGI in excess of $150k ($75k MFS) in PY, 110% of PY tax liability is used to computer safe harbor for estimate payments.