05DeductionsforAGI

05DeductionsforAGI - DEDUCTIONS FOR ADJUSTED GROSS INCOME...

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Revised February 2007 Page 1 DEDUCTIONS FOR ADJUSTED GROSS INCOME After reviewing this chapter, you should be able to: 1. Distinguish between deductions for and from adjusted gross income (AGI) 2. Determine whether an item is allowed as a deduction for adjusted gross income 3. Recognize those items that present particular problems for individual taxpayers Reference Materials: IRS Publication 17—Your Federal Income Tax (2006) IRS Publication 521—Moving Expenses (2006) IRS Publication 535—Business Expenses (Modified Dec. 2006) IRS Publication 553—Highlights of 2005 Tax Changes (Mar. 2006) IRS Publication 970—Tax Benefits for Education (2005) The tax formula for individuals divides all allowable business, investment, and personal deductions into two categories: 9 Deductions subtracted from gross income in order to calculate adjusted gross income (for AGI deductions) 9 Deductions subtracted from AGI to arrive at the amount of taxable income (from AGI deductions) Deductions for AGI are specifically identified in IRC Sec. 62. All other deductions for individuals are deductions from AGI. The more common for AGI deductions include the following, subject to certain limitations: 9 All allowable expenses incurred in a taxpayer’s trade or business, not including business expenses of an employee (Pub. 535) 9 Employee business expenses that are reimbursed by the employer (Pub. 17, pages 176 and 177) 9 Losses from the sale or exchange of trade, business, or investment property 9 Expenses attributable to the production of rent or royalty income 9 Moving expenses (Pub. 521, Moving Expenses) 9 Contributions to certain pension, profit-sharing, or retirement plan arrangements (Pub. 560, Retirement Plans for Small Business) 9 Penalties paid to a bank or other savings institution because of the early withdrawal of funds from a certificate of deposit or time savings account (Pub. 17, page 74) 9 Alimony (Pub. 17, pages 124 to 127)
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Revised February 2007 Page 2 9 Interest paid by certain individuals on qualified educational loans (Pub. 17, page 127) 9 Heath insurance costs of self-employed individuals (Pub. 17, page 138) 9 One-half of the self-employment tax paid by the taxpayer (Pub. 17, page 142). 9 Educator expenses 9 Health Savings Accounts (Pub. 17, page 135) For individuals, the distinction between deductions for AGI and from AGI is critical for two reasons. First, the tax formula allows individuals to deduct the greater of the standard deduction or the total of the from AGI (itemized) deductions in arriving at taxable income. In cases where the sum of the from AGI deductions does not exceed the standard deduction, no benefit exists for these deductions. In addition, certain itemized deductions for taxpayers with adjusted gross income over certain levels are phased out and lost. For AGI deductions, on the other hand, reduce AGI (and consequently taxable income), even if the standard deduction is used in computing taxable income. A second reason for the proper classification of deductions is that AGI is used as a benchmark in
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05DeductionsforAGI - DEDUCTIONS FOR ADJUSTED GROSS INCOME...

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