Problem Set #4

Problem Set #4 - Daniel Paterson Problem Set 4 12:30 1 2...

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Daniel Paterson Problem Set 4 12:30 1. 2. Both business and investment activities are profit-motivated. However, business activities require high involvement from the taxpayer while investment activities do not require a high degree of involvement or effort. Investment activities typically involve investing in property for appreciation or for income payments. This distinction is important for calculating federal taxes as business activities typically qualify as a for AGI deduction, unless they are unreimbursed employees business expenses, while investment activities are typically itemized deductions unless they are associated with rental or royalty expenses. Whether the expense is business (for AGI) or investment (from AGI) ultimately affects the taxpayer’s total taxable income. 4. Self-employed taxpayers are allowed to claim personal health insurance premiums as for AGI deduction as this is intended to help self-employed taxpayers who must pay their own insurance premiums. However, self-employed taxpayers are not allowed to deduct health insurance premiums if the taxpayer is eligible to participate in an employer-provided health plan. This restriction applies regardless whether the health plan is sponsored by an employer of the taxpayer or the taxpayer’s spouse. Also, it is irrelevant if the taxpayer actually participates in the plan. Typically a self-employed taxpayer would prefer to claim the health insurance premiums as they qualify as a for AGI deduction and will lower their total level of taxable income. 9. Deductions for interest on qualified education loans differ from medical expenses as that the interest is considered a for AGI deduction while medical expenses are itemized deductions. However, both deductions have an income limitation attached to them. For interest on qualified education loans there is phase-out based on modified AGI and filing status. If the AGI is under $60,000 ($120,000 MFJ) there is a maximum deduction of $2,500. If the AGI is above $60,000, but below $75,000 ($120,000, but below $150,000 for MFJ) the deduction is the lesser of the amount paid or $2,500 minus the phase out amount. The phase out amount is $2,500 times the phase out percentage (Modified AGI - $60,000 ($120,000 for MFJ)/$15,000 ($30,000 MFJ)). Medical expenses also have an income restriction known as the deduction limitation. The deduction for medical expenses is limited to the amount of unreimbursed qualifying medical expenses paid during the year reduced by 7.5% of the taxpayer’s AGI. This is known as a floor limitation as it eliminates any deductions for amount below the floor in an attempt to restrict a
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Problem Set #4 - Daniel Paterson Problem Set 4 12:30 1 2...

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