Please enable JavaScript.
Coggle requires JavaScript to display documents.
Exam 2 (Certain Itemized Deductions (Medical Expenses (Capital…
Exam 2
Certain Itemized Deductions
only provide a tax benefit to the extent that they exceed the standard deduction to the taxpayer
deductible from AGI as itemized
Medical Expenses
deductible
to the extent unreimbursed medical expenses (in total) exceed 7.5% of AGI
expenditures for: diagnosis, cure, mitigation, treatment of disease
purpose of affecting any structure or function of body of taxpayer, spouse, or dependent
includes prescription drugs and insulin
does not include: unnecessary cosmetic surgery, general health items, non-prescription drugs
if cosmetic surgery is deemed necessary, it is
deductible as a medical expense
when it fixes a deformity, injury, or disease
deductible
in year paid
Nursing Home Expenditures
if primary reason for being in nursing home is medical, costs (including meals and lodging) qualify
if primary purpose of placement is personal, only specific medical costs qualify (no meals of lodging)
special school expenditures
may include the expenses of a school for a mentally or physically handicapped individual
deduction
is allowed if a principal reason for sending the individual to the school is the school's special resources for alleviating infirmity
meals, lodging, tuition are
deductible
Capital Expenditures
may include a pool, AC if they do not become permanent improvements
must be a medical necessity, advised by a physician, used primarily by patient and is reasonable
full amount of cost is medical expense in year paid
maintenance of capital expenditures is also a medical expense
deductible
medical expense only to the extent that costs exceeds increase in value of home
exception: removal of structural barriers to home of handicapped are deemed to add no value to home
full amount is medical expense
appraisal costs
related to capital improvements are also
deductible
but not as a medical expense
Medical care for spouse and dependents
taxpayer may
deduct
cost of medical care for spouse and dependents
dependents do not need to meet gross income or joint return tests
medical expenses of children of divorced parents can be
deducted
by a non-custodial parent even though child is claimed as a dependent of the custodial parent
purpose
Medical Transportation and Lodging
transportation costs to and from medical care are
deductible
mileage allowance of 19cents per mile may be used instead of actual out-of-pocket automobile expenses
lodging while away from home for medical care
allowance is $50/ person/ night
if parent and/ or aide needs to accompany patient, their expenses are also
deductible
Medical Insurance Premiums
premiums paid for medical care are
deductible
medical expenses
if the employer pays all or part of taxpayer's medical insurance premiums the amount of the paid employer is
not included in gross income by employee
not deductible
by the employees as a medical expense
for self-employed, 100% of insurance premiums are
deductible for AGI
includes amount paid for taxpayer's spouse and dependents
not allowed if taxpayer is eligible to participate in a subsidized health plan maintained by any employer of taxpayer or spouse
premiums paid for qualified long-term care insurance are
deductible
medical expenses
subject to age limitations
Reimbursement by Medical Insurance
if reimbursed in the same year as expense paid
reimbursement offsets medical expense
amount
deductible
is excess of expenses over reimbursement
if reimbursed in the year after medical expenses were paid
reimbursement is income to the extent
medical deduction
decreased taxable income in the earlier year (
tax benefit rule
)
if standard deduction was taken in year expenses were paid, none of the reimbursement is included in income
Health Savings Account
used in conjunction with a highly deductible medical insurance policy
employee contributions to HSA are
deductible for AGI
and earnings on funds in account are
not deductible
deductible
contributions are limited to the sum of monthly limitations; the monthly deductible amount is limited to the lesser of (1/12 of $3350 for self-only)
withdrawals from HSA are
excludable
to the extent used for qualified medical expenses
Taxes
state, local, foreign income and real property taxes are
deductible
in the year paid
real property taxes do not include taxes assessed for local benefits
state and local personal property taxes based on value are
deductible
in the year paid
other taxes (ex. excise) are
not deductible
may be
deductible
if incurred in production of income
fees are
not deductible
as tax
real estate taxes for year property is sold must be apportioned between buyer and seller
failure to correctly appropriation requires offsetting adjustments to seller's amount realized and buyer's adjusted basis
can elect
deduct
either state and local income taxes or sales/ use taxes
for state and local,
deduct
amounts paid during year
amounts withheld
estimated tax payments
amounts paid in current year for prior year's liability
for sales/ use,
deduct
actual sales/ use tax payments
amount from IRS table
Interest Expense
deduction
of interest expense is limited to
interest on qualified student loans
investment interest
qualified residence
business interest
personal interest expense is
not deductible
classification depends on indebtedness
if related to a business or production of income activity,
interest is deductible for AGI
if incurred for personal use,
deduction is reported on Schedule A, form 1040 if itemized
interest on a student loan is
deduction for AGI
subject to limits
max deduction is $2500/ year
deduction is phased out for taxpayers with modified AGI (65,000-80,000)
not allowed for dependents or married filing separately
if taxpayer incurs debt in relation to his or her employment,
interest is considered to be personal
Qualified Residence Interest
interest on indebtedness secured by the the principal residence and one other residence
interest must be acquisition indebtedness to home equity loans
acquisition indebtedness
: amounts incurred to acquire, construct, or substantially improve qualified residence
interest paid on aggregate acquisition indebtedness of $750,000 or less is
deductible
as qualified residence interest
home equity indebtedness: loans secured by qualified residences
interest on this is
not deductible
no grandfather rules apply to equity indebtedness
includes interest on acquisition debt and one other personal residence (includes boats and mobile homes if it has sleeping, bathroom, kitchen)
interest paid on a third residence is
not deductible
unless it is used for production of income
Interest Paid for Services
"points" paid for the use or forbearance of money qualify as
deductible interest
cannot be expressed as a fee if they are to qualify as
deductible interest
; must be expressed as a % of the loan
points must be capitalized and amortized over life of loan
exception: points paid in the acquisition or improvement of principal residence
entire amount of such points are
deductible
in year paid
points paid to refinance an existing home mortgage must be capitalized and amortized over life of loan
Investment Interest
investment interest on loans whose proceeds are used to purchase investment property may
be deductible
deduction
of investment in interest expense is limited to next investment income
Other Interest Expense Limits
no deduction
is allowed for interest expense incurred to purchase tax exempt securities
Charitable Contributions
individuals and corporations may
deduct
contributions made to qualified domestic organizations
contributor must have donative intent and expect nothing in return
if contributor receives tangible benefit, the FM of such benefit reduces the amount of charitable contribution
deduction
contribution of services- no
deduction
is allowed for the contribution of services
exceptions- 1) unreimbursed expenses related to the services are
deductible
2) out of pocket transportation costs or a standard mileage rate of 14cents/ mile are
deducted
3)
deductions
are also permitted for transportation, reasonable expenses for lodging, cost of meals while away from home incurred in performing the donated services
nondeductible
items: dues, fees to country club, frats, cost of raffle, bingo, lottery tickets, cost of tuition, value of blood, donations to HOA, gifts to individuals, rental value of property used by a qualified charity
deductible amount of
noncash deductions
ordinary income property
: assets that would produce ordinary income or short-term capital gain if sold is lower of
adjusted basis
FMV
ordinary gain
: assets that would produce long-term capital gain if sold
cont. amt: FMV of asset
exceptions to FMV Deduction of Capital Gain Property
Private Nonoperating Foundations
:
deduction
for contributions to private non operating foundations must be reduced by amount of long-term capital gain
contribution deduction
: is limited to adjusted basis
Contributions of tangible personalty
:
deduction
may be limited to the adjusted basis if the asset contributed is not used in charity's function
exception: the property is not put to an unrelated use
limitations
60%
of AGI- cash, ordinary income, capital gain
30%- capital gain property , certain contributions made to private non operating foundations
taxpayer can elect to treat capital gain property as 50% assets by limiting amount of contribution to base
20%: certain contributions of capital gain property to private non operating functions
Charitbale Carryover
may be carried forward 5 years (can retain classification, FIFO basis)
delete from staff where spaceid >0;
load data local infile
'/Users/caitlinhanafee/Documents/MGMT 4205/park2staff.csv'
into table staff
fields terminated by ','
lines terminated by '\r\n'
ignore 1 lines;
Education Tax Credits
education income is
taxable
to the, but tuition dependents and credits follow dependency
tax benefit
from a tax deduction depends on the marginal tax rate of taxpayer
tax benefit
received from a
tax credit
is not affected by the taxpayers' marginal rate
Refundable
vs.
Non-refundable
credits
refundable credits
paid even if the tax liability is less than amount of
credit
non-refundable
credit can only be used to offset tax liability
if
credit
>
tax liability
, excess is lost
some
non-refundable credits
have carryover provisions for excess
Two Education Tax Credits
American Opportunity Credit
Lifetime Learning Credit
both credits are available for qualifying tuition and related expenses
books and other course materials are eligible for
American Opportunity Credit
not for the
Lifetime learning credit
room and board are
ineligible credits
maximum credits
American Opportunity Cost
maximum per eligible student is $2500/ year for first 4 years of postsecondary education
100% of the first $2000 of tuition expenses + 25% of next $2000 tuition expense
Lifetime learning credit
max/ taxpayer of qualifying expenses (up to $10,000/ year in 2016)
cannot be claimed in the same year the
American Opportunity credit
is claimed for the same student or tuition deduction
(max $4000)
eligible individuals include taxpayer, spouse, and taxpayer's dependents
to be eligible for
American Opportunity Credit
student must take at 1/2 full-time course load
no such requirement for
Lifetime Learning Credit
both credits are subject to limitations
in addition, 40% of the
American Opportunity Cost
is refundable and the entire credit allowed may be used to offset AMT liability
Lifetime LC
neither refundable nor an AMT liability offset
American Opportunity Credit
is phased out, beginning when the taxpayer's modified AGI reaches $80,000 ($160,000 for MFJ)
credit is completely eliminated when modified AGI reaches $90,000 ($180,000)
Lifetime learning credit
phased out when modified AGI reaches $55,000 ($111,000 for MFJ)
taxpayers are prohibited from receiving a double tax benefit associated with qualifying educational expenses
can't claim
education credit
and
deduct
the same expenses
can't claim an education tax credit that excluded from income
may claim an education tax credit and exlcude from gross income amounts distributed from a Corerdell Education Savings Account as long as distribution is not used for some expenses for which
credit
is claimed
Amortization
claim deduction 179 intangibles
use
straight line
recovery over 15 years (180 months) beginning at month of acquistion
180 month life applies regardless of actual useful life
includes
goodwill
going-concern value
trademarks
trade names/ patents
start-up expenditures
are partly amortizable (treatment available by election)
allows taxpayer to deduct lesser of
amount of start-up expenditures
$5,000 - amount of start-up expenditures excess of $5,000
any amount not deducted may be amortized ratably over 180 months in month trade/ business begins
Employee and Self-Employed Related Expenses
all miscellaneous itemized deductions were eliminated, reimbursement for legitimate expenses continues to be an exclusion from income; unreimbursed employee business expenses are not deductible
employee
: another furnishes tools or place of work, subject to will and control of another with respect to what shall be done and how, income is based on time spent rather than task performance
self employed
: business expenses are deductible for AGI
Expenses
Transportation
commuting from home to work and back is
not deductible
additional costs to transport heavy tools are
deductible
employees with more than one job is
deductible
amount deductible
actual expenses
automatic mileage method
54 cents/ mile in 2016
adjusted to basis of auto is required for considered allowed
plus parking and tolls
if a taxpayer has an office in the home (principal place of business)
any transportation home to business is
not a commuting expense
Travel
includes transportation, lodging, meals, misc.
"away from home"
not necessarily 24 hours, longer than work day needs rest
temporary situation
"tax home": business location, post / station of taxpayer
Restrictions
Conventions
no deduction
unless it is directly related to the trade
for dependent?
expenses must be otherwise deductible and serve a real purpose
Education
not deductible
if travel as a form of education
Combined business/ pleasure travel
only actual expenses are deductible (meals, lodging, other) must be allocated between business and personal
Domestic
if primary purpose is business, then
transportation is deductible in full
if primary purpose is pleasure,
no deduction for transportation
, other expenses associated with business are
deductible
Foreign
transportation must be allocated between business and personal unless...
trip is 7 days or less
25% > was personal
taxpayer had no substantial control over arrangements for trip
travel days = business days
travel days = business days
weekends, holidays = business days if preceding and succeeding are business days
trip is primarily for pleasure;
no transportation is deductible
Education
deductible
if they are incurred
to maintain or improve existing skills
to meet express requirements imposed by law to retain employment status
not deductible
to meet minimum educational standards
to qualify taxpayer for new trade or business
includes: tuition, books , supplies , transportation, travel (lodging + 50%meals)
a
deduction
is allowed
for AGI
. for qualified tuition and related expenses involving higher education
includes whatever is required for enrollment
so student activity fees, books, room & board are not included
expenses need not be work related
no deduction
for married persons filing separately
Meals
deductible
when the business person is traveling away from home for business
deductible
when paying for another person when business is discussed
amount: 50% of meals (including tips)
there are some situations where this is eased
lunches/ dinners brought in to facilitate working
employer- paid recreational activities
meals provided in subsidized facility or de minims fringe benefit is met
full value of meals is included in income
2018: entertainment expenses are
not deductible
Office in the Home
deductibility is restricted
office must be used exclusively and on as regular basis as:
principal place of business
taxpayer conducts business here and there is no other such location
place of business used by clients, patients, customers
deduction: Regular (Actual Expense) Method
expenses categorized as direct or indirect (
in full)
indirect expenses are for maintaining and operating income
allocate between business and personal
allowable home office cannot create a loss
allowed as itemized deductions must be deducted first
any disallowed amounts are carried forward and used in future years subject to same limitations
home office expenses of a
self-employed
individual are trade and business expenses are are
deductible for AGI
deduction: Simplified Method
home office expense deduction of $5/ soft
no more than 300 sqft, max $1500
no deduction
for depreciation or other expenses of the home
no carryover
of unused amounts
Other expenses (through 2017): special clothing, union dues, professional expenses, job hunting in same field, educator expenses (
*deductible for AGI, limited to $200/ year
)
Contributions to Retirement Accounts
For Employees
allowed an
exclusion from income
OR allowed a
deduction for AGI
the max is $5500 in 2016 and $6500 in 2017
Roth IRA
: can contribute here instead of a traditional;
no deduction
in year of contribution
Self-Employed
called
Keogh (HR 10
follow
deduction approach
of traditional IRAS
amounts contributed under plan are
deductible for AGI
Other Options
Solo or 401K, simplified employee pension
savings incentive match plans
Substantiation for Expenditures
no deduction
allowed for an expense if the taxpayer does not have adequate records
Nature of Assets
Realty
land and buildings permanently affixed to land
Personalty
any asset that is not realty; furntiture, machinery, equipment
Personal Use
held for personal use; no cost recovery deductions
Cost Recovery
Cost Recovery/ Depreciation
General Considerations
basis in asset is reduced by the amount of cost recovery allowed and by not less than allowable amount
allowed cost recovery
: recovery actually taken
allowable cost recovery
: amount that could have been taken under applicable cost recovery method
No cost recovery claimed
basis of property must still be reduced by the amount that should have been deducted
if personal use assets are converted to business or income-producing use assets
losses that occurred prior to conversion cannot be recognized for tax purposes via tax recovery
basis for cost recovery is lower of
adjusted basis
fair market value of value at conversion
MACRS Applications
assets used in trade or business/ for production of income
assets subject to wear & tear
assets with determinable useful life of decline in value
assets that are tangible personalty or realty
Half Year Convention
for personalty
assets treated as if they are placed in service (or disposed of) in the middle of the taxable year regardless of when it was placed in service
Mid Quarter Convention
when 40% < of personalty is placed in service during the last quarter of the year
assets treated as if they were placed in service in the middle of the quarter they were actually placed in service
Residential Rental Real Estate
property with 80% < of gross rental revenues are from non-transient dwelling units
follow the
Mid Month Convention
property placed in service at the middle
Optional
Straight-Line
Election
Depreciation Rules
in addition to MACRS
Additional first-year depreciation
an additional 50% of cost recovery in year asset is placed in service
qualified property: most types of new property other than buildings
includes property used in trade or business and property used for production of income
after September 27th, 2017: taxpayers may expense 100% of the cost of qualified property
eliminates requirement that the original use of qualified property must begin with taxpayer
Election to Expense Asset
may elect to immediately expense $510,000 of tangible personalty placed in service
does not apply to real estate improvements that would not qualify for bonus depreciation
Section 179
amount expensed reduces depreciable basis
any elected Section 179 expense is taken before additional first-year depreciation is computed
standard MACRS = net of 179 expense + additional first year depreciation
limitations
expense $510,000 is reduced by 179 property placed in service in excess of $2,030,000
election to expense cannot exceed taxable income (before 179) of taxpayers' trade or business
any amounts expensed under 179 over taxable income limitation may be carried to subsequent years
amount carried over reduces basis currently
changes- $510,000 --> $1,000,000
changes $2,030,000 --> $2,500,000
Listed Property
substantial limits on cost recovery
includes;
passenger automobile
other property for transportation
property used for entertainment, recreation, amusement
computers
cell phones
must be primarily used for business; exceeds 50%
if 50% < is met
use statutory percentage of cost recovery with limitations
if 50% is not met
use straight-line method
if business use falls to 50% or lower after year property is placed in service, must recapture excess cost recovery
use of asset for production of income is not considered
both business and production use percentages are used to compute cost recovery
Passenger Auto Cost Recovery Limits
year 1: $3160, year 2: $5100, year 3: $3050, nX until recovered: $1875
if this also qualifies for additional first year depreciation; first year recovery limitation increased by $8000
2018: luxury auto limits: increase by $10,000 year one, $16000 year two; removes computer as being listed property
limits are for 100% business use
must receive limits by % of personal use
limit in first year includes any amount the taxpayer elects to expense with section 179
limit on 179: $25,000 (
2018: will be indexed for inflation)
if listed property fails 50% < test in year it is placed in service, it must use straight-line method
if listed property fails 50% < test in year after it is placed in service, straight line method must be used for remainder of life; still subject to annual limits
changes from predominantly business use
fails 50% < after year it is placed in service; subject to
cost recovery recapture
amount recaptured as ordinary income is
excess cost recovery
excess of the cost recovery deductions taken in prior years using
statutory % method
over amount that would have been used with
straight line method
leased autos
subject to the
inclusion amount rule
taxpayer has gross income = each lease year's inclusion amount
purpose: prevent avoidance of cost recovery dollar limits applicable to purchased autos by leasing autos
Depletion