Ch6 - Chapter6 Deductions and Losses In General 6.1(1...

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Chapter6 Deductions and Losses: In General 6.1 (1) Deductions Exclusive definition of deductions Deductions are allowed based on legislative grace and defined narrowly Substantiation requirements Taxpayer has burden of proof for substantiating all expenses deducted on return Thus, adequate records of expenses must be maintained (2) Deductions for and from AGI Deductions for AGI Can be claimed even if taxpayer does not itemize Important in determining the amount of certain itemized deductions Certain itemized deductions are limited to amounts in excess of specified percentages of AGI e.g., Medial expenses (7.5% of AGI), misc. itemized deductions ( 2% of AGI) Deductions from AGI: In total, must exceed the standard deduction to provide any tax benefit Called “below the line” or itemized deductions Comparison of deductions for and from AGI (2010 tax year) Single taxpayer has gross income of $45,000 and a $6,000 deduction For AGI From AGI Gross income $45,000 $45,000 Less: for AGI ded. 6,000 0 AGI $39,000 $45,000 Less: from AGI ded. 5,700 6,000 Less: personal exempt. 3,650 3,650 Taxable income $29,650 $35,350 (3) Deductions for AGI Partial list includes: Trade or business expenses Reimbursed employee business expenses Deductions from losses on sale or exchange of property Deductions from rental and royalty property Alimony One-half of self-employment tax paid Partial list includes: --100% of health insurance premiums paid by a self-employed individual --Contributions to pension, profit sharing, annuity plans, IRAs, etc. --Penalty on premature withdrawals from time savings accounts or deposits --Moving expenses Partial list includes: Interest on student loans Qualified tuition and related expenses under § 222 Up to $250 for teacher supplies for elementary and secondary school teachers (4) Deductions from AGI Itemized deductions include: Medical expenses (in excess of 7.5% of AGI) Certain state and local taxes Contributions to qualified charitable organizations Personal casualty losses (in excess of 10 % of AGI and a $100 floor per casualty) Certain personal interest expense (e.g., mortgage interest on a personal residence) Miscellaneous itemized deductions (in excess of 2% of AGI) 1
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(5) Trade or Business Deductions Section 162(a) permits a deduction for all ordinary and necessary expenses paid or incurred in carrying on a trade or business including: Reasonable salaries paid for services Expenses for the use of business property One-half of self-employment taxes paid Such expenses are deducted for AGI In order for expenses to be deductible, they must be: Ordinary : normal, usual, or customary for others in similar business, and not capital in nature Necessary : prudent businessperson would incur same expense Reasonable : question of fact Incurred in conduct of business (6) Section 212 Expenses
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Ch6 - Chapter6 Deductions and Losses In General 6.1(1...

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