Chapter 6 book notes - Chapter 6 Deductions for AGI are preferred over from AGI deductions because they reduce taxable income dollar for dollar

Chapter 6 book notes - Chapter 6 Deductions for AGI are...

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Chapter 6: Deductions for AGI are preferred over from AGI deductions because they reduce taxable income dollar for dollar. Deductions from AGI have no effect on taxable income. Three categories of deductions for AGI. 1) directly related to business activities, 2) indirectly related to business activities, 3) subsidizing specific activities. Allowed to deduct expenses incurred to generate income. Profit motivates activities are classified as either business activities or investment activities. Business activities require a relatively high level of involvement or effort. Investment activities are profit motivated but don’t require a high level of involvement. Acquiring something for its appreciation potential is generally investing. With one exception, business expenses are deductible for AGI. The lone exception is unreimbursed employee business expenses which are deductible as misc itemized deductions. Investment expenses are deductible as itemized deductions with one exception. Expenses associated with rental and royalty activities are deductible for AGI regardless of whether the activity qualifies as investing or business. Activity Type: Deduction FOR Deduction FROM (itemized) Business Self-employed business expenses Unreimbursed employee business expenses. Investing Rental or royalty expenses Other investment expenses. Congress limits business deductions to expenses directly related to the business activity and those that are ordinary and necessary for the activity. Taxpayers are allowed to deduct their expenses associated with generating rental or royalty income for AGI. Taxpayers disposing of business assets at a loss are allowed to deduct the losses for AGI. Taxpayers selling investment assets at a loss are allowed to deduct the capital losses against other capital gains. Can deduct up to a 3000 capital loss in one year, any excess is carried forward indefinitely. The actual operating income or loss from the investments flows through to the taxpayer as it is earned and is treated as ordinary income or ordinary loss. Deductions indirectly related to business activities are the cost of moving expenses that meet the distance test and a business test associated with the move. New job site must extend existing commute by 50 miles. A new site is required, not necessarily the a new employer too. Taxpayer must be employed at least 39 of 52 weeks or be self-employed for 78 of the 104 weeks following the move. Allowed to deduct a mileage rate in lieu of the actual costs of driving their personal automobiles during the move. Individuals qualify for a moving expense deduction if they move and change their principal place of work. The new commute must be increased by at least 50 miles. Must be employed fulltime for 39 of the first 52 weeks after the move or be self employed for 78 of the 104 weeks after the move.

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