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Unformatted text preview: Chapter 6: Deductions and Losses
In General Allowed by Grace Taxpayer has burden of proof to substantiate. FOR AGI Do not need to itemize to take Reduce AGI, and floors/ceilings for other provisions From AGI: Itemized Deductions Deductions FOR AGI Include: Trade or business deductions Rent/royalty expenses Reimbursed employee business expenses New 2008 Property tax write-off for those who don't itemize $1,000 MFJ Capital loss deduction up to $3,000 in excess of capital gains Alimony paid Pension contributions for IRA, Keogh SE tax Moving expenses Interest on education loans & education expenses, if elected as deduction Health savings accounts, medical insurance premiums if self-employed, Archer MSAs $250 teacher out-of-pocket expenses Attorneys' fees and court costs civil rights suits Certain reservist and performing artist expenses Expenses Must Be Ordinary and Necessary Reasonable (not lavish) In connection with business HIRE Act Social security tax forgiveness (6.2%) up to the social security wage base for the remainder of the year on 2010 on new hires who are currently unemployed. If workers stay on payroll for at least a year, employer gets up to $1,000 business tax credit per employee. Cannot be taken with Work Opportunity Tax Credit Claim on Form 941 Sample Question 2. Which of the following is not a deduction for A.G.I.? a. Lawnmowing expense for a rental property actively managed by the taxpayer. b. Deductible expenses related to a physician's home office. c. Employee transportation expense not reimbursed by the employer. (itemized deduc.) d. Employee transportation expense reimbursed by the employer and included in employee's income. Qualified Moving Expenses Deductible for moves in connection with work at a new location Where commute (absent move) would increase by at least 50 miles (each way) For moving yourself, family and household goods, including lodging But NOT meals, house-hunting trips Job location must change and increase commute by at least 50 miles Deductible FOR AGI, Act. or 19, 2011 Sample Question The moving expense provisions are designed to ensure that deductions are granted only when expenses arise from business concerns. Which one of the following statements most correctly describes the operation of the rules governing moving expenses? a. A deduction is denied unless the taxpayer moves more than some predetermined amount from his former residence. b. A deduction is denied unless the taxpayer's commute, absent the move, would have increased by more than some predetermined amount. c. A deduction is granted as long as a taxpayer's move is attributable to a job change. d. A deduction is granted if the taxpayer obtains either parttime or fulltime employment at the new job site. The Jeffersons TV Tax "Well we're movin' on up to the East Side. To a de-luxe apartment in the sky...." George and his wife Weezie win a large law suit, and with that and the subsequent success of his dry-cleaning business, have enough money to move out of Queens into a much better neighborhood in Manhattan. Can they deduct the moving expenses? No, the move is not attributable to a job change, nor does the move meet the 50 mile limit. Real Estate Tax Added to standard deduction If not itemized Itemized Deductions (If Not Using Standard Deduction) Medical expenses over 7.5% AGI State & local income & ad valorem taxes Sales tax, if larger than income tax ok. Mortgage & investment interest Charitable contributions (20%, 30%, or 50%) Personal casualty losses over 10% of AGI Misc. itemized deductions Not Itemized Personal expenses - except by legislative grace Normally itemized, but trend is to allow deduction FOR AGI Business expenses deductible for AGI, unless unreimbursed employee business expenses (Form 2106). Standard deduction used in lieu of itemizing Medical Expenses Out-of-pocket expense in excess of 7.5% of AGI, and not deducted elsewhere Medical insurance premiums In 2013, this floor goes to 10%, unless t/p turns 65 before eoy Medical expenses of decedent may be deducted in year incurred Cannot "prepay" unless norm in industry Deductible in year paid or charged to card If under advice of physician, generally ok on test, double-check in real life Unnecessary cosmetic surgery not deductible Capital Expenses for Medical Deducted in year expense is incurred Equals amount of expenditure less increase in value to personal residence Unless to eliminate structural barriers to home or auto or telephone equipment to accommodate a physical handicap: deductible in full Children of Divorced Parents Costs deductible by either parent (but not both) Transportation Expenses Deductible, generally using standard mileage allotment (24, 2009; 19, 2011) + parking & tolls Round trip cost to and from point of treatment Lodging Expenses Primary for and essential to medical care of licensed doctor, hospital or medical facility Not lavish, extravagant, or for personal pleasure or recreation Up to $50 per night per person including a traveling companion Long-term Care Insurance Premiums based on age Up to $310 - $3,850 in premiums (indexed) for 2008 May pay out $270/day. Subsequent Reimbursement Apply tax benefit rule Health Savings Accounts Are high-deductible policies (over $1,100 deductible for self, $2,200 family in 2008) Payments into HSAs deductible for AGI subject to limitations ($5,800 family coverage; $2,900 sole coverage for 2007 w/ $900 catch up for those born b4 1954). Distributions from HSAs not taxable if used for medical expenses Else taxable, and penalized @10% if made before 65 unless death or disability Health Care Reform Package Imposes a Hospital Insurance (HI) tax rate of 0.9% on earned income >$200,000 or $250,000MFJ. Imposes a 3.8% "unearned income Medicare contributions" tax on investment income of high-income individuals. Lesser of: net investment income or MAGI> $250,000 MFJ; $125,000 individuals 6. T's A.G.I. for the current year is $20,000. Her medical expenses during the year were: Aspirin, cold medicine, etc. $ 125 Prescription drugs 260 Medical insurance premiums 1,000 Doctors, dentists, etc. 3,200 Assuming she is not reimbursed for any medical expenditures during the current year, T's medical expense deduction is a. $2,700 b. $2,960 (260+1000+3200-7.5%*20000) c. $3,085 d. $4,460 e. $4,585 Deductible Taxes Property taxes in year of payment Apportioned between buyer and seller of property Must adjust if not apportioned at closing Personal property ad valorem taxes Larger of state and local income or sales tax 7. Taxpayers are allowed to deduct several types of taxes for Federal income tax purposes. These include a. state, local, and foreign income taxes. b. state, local, and foreign real property taxes. c. state and local personal property taxes. d. All of the above. e. both a and b. Deductible Interest Qualified education loans interest deductible for AGI Investment interest, up to investment income, including net capital gains (Form 4952) if waiving lower tax rate Mortgage interest for acquisition of 1st or 2nd home loan up to $1million borrowed; home equity interest for loan up to $100,000 borrowed, if does not put home equity in a negative position Points: for acquisition, deductible in full; for refinancing, pro-rated Non-deductible Interest Other personal loans Related party loans where arbitraging cash & accrual bases Interest for generating tax-exempt income. Interest prepayment: cash basis taxpayers must use accrual basis 10. D made the following payments during 2008: Interest on revolving charge accounts $ 400 Interest on original $140,000 home mortgage 6,800 Interest on bank loan (loan used to purchase state of New York taxexempted bonds) 3,100 Interest on credit union loan (proceeds of loan were used for a family vacation) 1,600 How much of the above amounts may D deduct as an itemized deduction for interest expense on his Federal income tax return? a. $6,800 b. $7,200 c. $8,800 d. $9,900 e. $11,900 Charitable Contributions Donative intent Absence of consideration To qualified organization Limited to 20%, 30% or 50% of AGI Depending on type of qualified organization; 50% for public charities; 30% ordinary income to private nonoperating foundations. Ordinary income property limited to basis Cash or non-cash items in `good' or better condition @ FMV Mileage @ 14/mile for 2010-2011 Beginning 2007, must document all cash donations w/cancelled check, bank record or receipt (no logs). Nondeductible Charitable Raffle tickets Cost of tuition Gifts to individuals but see Katrina/Rita provisions Gifts to civic leagues, certain social or sports clubs, labor unions, chambers of commerce 8. F's 2008 adjusted gross income is $42,000. F made the following charitable contributions in 2008: Cash contribution to church (w/ receipt) $4,500 Tickets to a public charity dinner (the fair market value of the two dinners was $100) 2,000 Donation of used household goods to the Salvation Army (cost was $400, fair market value was $150; in good or better condition) What is F's 2008 charitable contribution deduction (assuming he attended the charity dinner and itemizes his deductions)? a. $4,750 b. $5,000 c. $6,550 (4500 + 1900 + 150) d. $6,650 e. $6,900 Miscellaneous Itemized Deductions Subject to 2% AGI floor Include: employee business expenses, tax preparation fees, safety deposit box rentals, hobby expenses NOT Deductible Illegal bribes Treble damage payments Fines & Penalties to governmental agencies Expenses (except CGS) on selling illegal drugs Lavish expenses Political contributions (except local lobbying) Personal expenses Expenses related to tax-exempt income Other people's expenses (not counting medical , sometimes). Fining Dale Dale Earnhardt Jr. allegedly had an illegal modification to his car. Tony Eury, the crew chief for the racing team is fined $100,000 by NASCAR for this infraction. Dale Earnhardt, Inc., the race team is appealing the fine. Is the fine deductible? Yes, if Tony or the corporation is the payor. Fine is not a governmental fine. Specific Triggers Excessive compensation not based on performance (>$1,000,000) Disguised dividends Sample Question Z is a tenpercent (10%) shareholder of H, Inc. H, Inc. has distributable net income of $100,000 this year and no accumulated earnings and profits. Z was paid $15,000 by the company for his expertise as a pilot, but he did not fly this year. How is the IRS likely to view the $15,000? a. $15,000 salary to Z. b. $15,000 dividend. c. $10,000 dividend, $5,000 salary or return of capital. d. $7,500 salary, $7,500 dividend. May Be Deductible, Maybe Not... Investigation of a Business Hobby losses up to hobby income; income in 3 of 5 years rule; subject to 2% floor Costs of vacation homes If rented less than 15 days/yr, no income/exp. If personal use > 14 days or 10% of rental days, allocate between personal & rental; no losses allowed If primarily business, allocate expenses to personal days, then treat like business; losses allowed V owns a small beachfront cottage (her second home), which she rented out during the past year. She is actively involved in this rental activity, which is her only venture of this type. She rented the cottage for 200 days during the year for $10,000. She also used it personally for 18 days. During the year, expenses allocable to the rental activity were, interest $5,000, taxes $4,000, maintenance and insurance $1,000, and depreciation expenses allocable to the cottage of $4,000. For the year, her adjusted gross income was $80,000. With respect to the expenses attributable to the rental, V may a. deduct expenses of $10,000. b. deduct expenses of $10,000 and the balance of any remaining expenses to the extent of any passive income that she may have. c. deduct $14,000 of expenses. (5000+4000+1000+4000) d. deduct none of the expenses. e. deduct none of the above. Self-constructed Assets Dm, dl, voh, AND foh capitalized until building is ready for use. Then depreciated using MACRS tables. Related Party Transactions Losses disallowed, higher basis given to donee. Related parties: members of family, majority owner in corp., 2 corps. In same controlled group, grantor & fiduciary, etc. ...
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This note was uploaded on 03/27/2012 for the course ACCT 3321 taught by Professor Chambers during the Spring '09 term at Texas A&M University, Corpus Christi.
- Spring '09