1 Individual Chapter 06 Solutions

1 Individual Chapter 06 Solutions - Chapter I:6 Deductions...

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Chapter I:6 Deductions and Losses Discussion Questions I:6-1 Deductions for AGI reduce the taxpayer's gross income by the full amount of the deduction even if the standard deduction is used. Deductions from AGI are not beneficial unless their sum exceeds the standard deduction, in which case these deductions will be included as itemized deductions. Also, many deductions from AGI are decreased by a percentage of AGI (e.g., 7.5% for medical expenses, 10% for casualty losses, and 2% for miscellaneous itemized deductions) and for taxpayers with AGI over certain threshold amounts, the total of the from AGI deductions is reduced. p. I:6-3. I:6-2 Expenses incurred in producing rental income are deductions for AGI. p. I:6-3. I:6-3 A deduction for a loss incurred on the sale of a capital asset held for investment is a deduction for AGI. p. I:6-3 I:6-4 Under Section 62, reimbursed employee business expenses are deductions for AGI. On the other hand, unreimbursed employee business expenses are miscellaneous itemized deductions that are subject to the 2% of AGI limitation. In many cases, a taxpayer's miscellaneous itemized deductions do not exceed 2% of AGI. Thus, in effect, unreimbursed employee business expenses often are not deductible. Since reimbursed employee business expenses are deductions for AGI, a taxpayer is given a full dollar of deduction for every dollar of reimbursement. In fact, as explained later in chapter nine, in most cases neither the reimbursement nor the expense needs to be reported on the tax return because they merely cancel each other. pp. I:6-3 and I:6-4. I:6-5 a. If the expenses are deductions for AGI, Mario's taxable income is: Income $55,000 Deductions for AGI ( 9,000 ) AGI $46,000 Standard deduction ( 5,350) Personal exemption ( 3,400 ) Taxable income $37,250 I:6-1
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b. If the expenses are deductions from AGI, Mario's taxable income is: Income $55,000 Deductions for AGI ( 0 ) AGI $55,000 Deductions from AGI ( 7,900) a Personal exemption ( 3,400 ) Taxable income $43,700 a $9,000 - ($55,000 x .02) = $7,900. Note that the taxpayer loses the benefit of the standard deduction if the expenses are deductions from AGI. p. I:6-4. I:6-6 a. Factors used to determine whether an activity is profit- motivated include: 1. Whether the activity is conducted in a business-like manner, 2. The expertise of the taxpayer or his advisor, 3. The time and effort expended by the taxpayer in carrying on the activity, 4. Whether the assets used are expected to appreciate in value, 5. The taxpayer's success in carrying on other similar activities, 6. The history of income or losses with respect to the activity, 7. The amount of occasional profits, 8. The financial status of the taxpayer, and 9. Any elements of personal pleasure or recreation, which the activity might involve. b. Whether an activity is profit-motivated or not depends upon the intent of the taxpayer. These factors provide an objective way of determining a taxpayer's intent. Expenses incurred in a profit-motivated activity are deductible, whereas expenses incurred in a personal activity generally are not deductible (with certain exceptions). Thus, external indications of a
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