McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 06 Individual Deductions.

Slides:



Advertisements
Similar presentations
Chapter 4 Managing Income Taxes. Copyright © Houghton Mifflin Company. All rights reserved.4 | 2 Explain the nature of progressive income taxes and the.
Advertisements

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 14 Tax Consequences of Home Ownership.
McGraw-Hill/Irwin ©The McGraw-Hill Companies, Inc Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without.
CHAPTER 5 Itemized Deductions & Other Incentives
©2015, College for Financial Planning, all rights reserved. Session 2 Itemized Deductions and Personal Exemptions CERTIFIED FINANCIAL PLANNER CERTIFICATION.
Chapter 05 Itemized Deductions “A person should be taxed according to his means” --The Talmud Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights.
Real Estate Investment Chapter 8 Single-Family Dwellings and Condominiums © 2011 Cengage Learning.
Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Principles of Taxation Chapter 16 Tax Consequences of Personal Activities.
McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 06 Individual Deductions.
7-1 ©2011 Pearson Education, Inc. Publishing as Prentice Hall.
Copyright Oxford University Press 2009 Chapter 12 Income Taxes.
Tax Planning and Strategies
 Click to edit Master text styles  Second level  Third level  Fourth level  Fifth level #16-1 McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies,
Individual Income Taxes Copyright ©2007 South-Western/Thomson Learning
Chapter 4 Lecture 3 Tax Planning and Strategies. Individual Income Tax Formula Total Income (everything received) - Exclusions/Tax-exempt Income_______________.
©The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin Chapter 5 Itemized Deductions “A person should be taxed according to his means.” The Talmud.
“A person should be taxed according
Income Tax Base and Rates Anderson: Income and Payroll Taxes.
©The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin Chapter 4 Adjustments for Adjusted Gross Income “Don’t tax you, don’t tax me; Tax the fellow behind.
BA 128A -Agenda 2-22 Questions from lecture Answers on the web Ch1-6, Ch7 will be posted after section Review Section - Wednesday 5-6:30? Office hours.
Concepts in Federal Taxation Chapter 8: Taxation of individuals
© OnCourse Learning. All Rights Reserved. Federal Taxation of Home Ownership Learning Objectives  Define and list examples of income tax deduction benefits.
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
7-1 ©2010 Pearson Education, Inc. Publishing as Prentice Hall.
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Tax Bases Anderson: Structure of Taxes. What is Taxed? Defining the Tax Base The tax base reflects what is taxed, and therefore what is not taxed as well.
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter 9 Forming and Operating Partnerships Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.
Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 Principles of Taxation Chapter 9 Sole Proprietorships, Partnerships, and S Corporations.
Chapter 17 Tax Consequences of Personal Activities McGraw-Hill/Irwin
3- 1 CALCPA Income Tax Strategies for Faculty Presented by Susan Barney, CPA CALCPA Income Tax Strategies for Faculty Presented by Susan Barney, CPA.
Chapter 3. Learning Objectives (part 1 of 2) Describe the basic federal tax model Distinguish between adjustments to income and itemized deductions Determine.
Copyright ©2004 Pearson Education, Inc. All rights reserved. Chapter 4 Using Tax Concepts for Planning.
Public Finance by John E. Anderson Power Point Slides to Accompany:
AC256: Federal Taxation Term 1104A Seminar: Unit 7 December 4, 2011
CHAPTER 5 Itemized Deductions & Other Incentives Income Tax Fundamentals 2013 Student Slides Gerald E. Whittenburg Martha Altus-Buller Steven Gill 2013.
Health Savings Accounts  Effective 2004  For individuals with high-deductible health plans  Tax-deductible contributions  Tax-free earnings  Tax-free.
1 - 1 ©2004 Prentice Hall, Inc. An Introduction to Taxation Chapter 1.
Chapter 6.  Deductions are not entitlements – they are a matter of legislative grace  Substantiation requirements  Taxpayer has burden of proof  Adequate.
Determination of Income Tax Liability  Gross Income  - “Above the Line Deductions”  = AGI (Adjusted Gross Income)  - Standard or Itemized Deductions.
Chapter 9 Rental Activities ©2007 CCH. All Rights Reserved West Peterson Ave. Chicago, IL CCH Essentials of Federal Income.
 Click to edit Master text styles  Second level  Third level  Fourth level  Fifth level  Click to edit Master text styles  Second level  Third.
7-1 ©2008 Prentice Hall, Inc ©2008 Prentice Hall, Inc. ITEMIZED DEDUCTIONS (1 of 2)  Medical expenses  Taxes  Interest  Charitable contributions.
© 2008 Thomson South-Western CHAPTER 3 MANAGING YOUR TAXES.
Chapter 9 Employee Expenses and Deferred Compensation.
Itemized Deductions Chapter 10 Medical Expenses Taxes Interest Expense Charitable Contributions Miscellaneous.
CHAPTER 15 The Basic Federal Income Tax Structure Chapter 15: Tax Structure1.
Chapter 7 Individual From AGI Deductions © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized.
Tax Consequences of Personal Activities 17-1 Chapter 17 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
©2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 1 CHAPTER.
McGraw-Hill/Irwin ©The McGraw-Hill Companies, Inc., 2002 Principles of Taxation Chapter 16 Tax Consequences of Personal Activities.
McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 07 Individual Income Tax Computation and Tax Credits.
Itemized Deductions Chapter 7. Identify qualified medical expenses and compute the medical expense deduction Determine the timing of a medical expense.
©2015, College for Financial Planning, all rights reserved. Session 3 Income Tax Calculation and Tax Credits CERTIFIED FINANCIAL PLANNER CERTIFICATION.
Final NJ Training TY Itemized Deductions Pub 17, Chapter 21 through 29 Pub 4012, Tab 4 Module NJ 1.20.
AC256: Federal Taxation Seminar: Unit 7 July 3, 2011 Emil Koren, CPA, MBA.
McGraw-Hill Education Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of.
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Personal Income Tax Mary B Pearson, CPA Assistant Professor of Accounting.
Chapter 6 Individual For AGI Deductions © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized.
Chapter 6 Deductions and Losses. Learning Objectives Distinguish between deductions for and from AGI Discuss the criteria for deducting business and investment.
©2007 Prentice Hall, Inc..
Forming and Operating Partnerships
Individual From AGI Deductions
Forming and Operating Partnerships
Individual Deductions
Income Tax Base and Rates
An Overview of the Tax Cuts & Jobs Act of 2017
© OnCourse Learning.
Chapter 7 Itemized Deductions 1.
Presentation transcript:

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 06 Individual Deductions

6-2 Learning objectives 1. Identify the common deductions necessary for calculating adjusted gross income (AGI) 2. Describe the different types of itemized deductions available to individuals and compute itemized deductions 3. Explain the operation of the standard deduction, determine the deduction for personal and dependency exemptions, and compute taxable income

6-3 Deductions for AGI Three categories of deductions for AGI Directly related to business activities Indirectly related to business activities Deductions subsidizing specific activities

6-4 Deductions for AGI Directly Related to Business Activities Taxpayers are allowed to deduct expenses incurred to generate business income For tax purposes activities are either profit-motivated or motivated by personal objectives Profit-motivated activities are classified as 1. business activities (called “trade or business”) or 2. investment activities

6-5 Deductions for AGI Although both are motivated primarily by profit, business activities are distinguished from investment activities: Trade or Business activities require a relatively high involvement or effort from the taxpayer where as investment activities don’t require Investment activities involve investing in property for appreciation or for income payments

6-6 Deductions for AGI Trade or Business Expenses must be: directly connected to the business activity ordinary and necessary for the activity (e.g., appropriate and helpful for generating a profit) reasonable in amount (not extravagant) Expenses are claimed on Schedule C Revenues from the same activity are also reported on the same Schedule C The net income or loss from Schedule C is transferred to Form 1040 (page 1) on line 12

6-7 Deductions for AGI Rental & Royalty Expenses Claimed above the line (for AGI) Could either be an investment activity or a trade activity depending on facts Taxpayers report expenses and revenue on Schedule E and transfer the net income or loss from Schedule E to Form 1040 (page 1), line 17 Flow-through Entities Expenses and losses incurred by a flow-through entity pass through to the entity owners who typically report these amounts on Schedule E and Line 17

6-8 Deductions for AGI Losses Taxpayers disposing of trade or business assets at a loss are allowed to deduct the loss for AGI Losses from investment assets (called capital assets) are offset against capital gains If capital losses exceed capital gains, this is called a net capital loss A net capital loss is deducted for AGI but limited to $3,000. Losses in excess of the $3,000 limit are carried forward indefinitely to subsequent years

6-9 Deductions for AGI Deductions indirectly Related to Business Activities The cost of moving personal possessions is not a direct cost of doing business or being employed Moving Expenses are deductible for AGI if the move meets two tests 1. A distance test 2. A business test associated with a move

6-10 Deductions for AGI Distance test – the new job site must extend existing commute by 50 miles  A new job site is required, but a new employer is not essential Business test - Taxpayer must be employed at least 39 of 52 weeks or be self-employed for 78 of the 104 weeks following the move Taxpayers are allowed to deduct a mileage rate in lieu of the actual costs of driving their personal automobiles during the move (19 cents per mile in 2011)

6-11 Deductions for AGI Health Insurance deduction by Self-Employed Taxpayers Deduction provides equity with employees who receive health insurance as a qualified fringe benefit Insurance must be provided for taxpayer or dependents who are not eligible for employer- provided health insurance Penalty for early withdrawals of savings Reduces the taxpayer’s net interest income to the amount actually received

6-12 Deductions for AGI SE Tax Deduction Employer and employees each pay one-half of employee’s Social Security tax Employers deduct the portion of Social Security taxes they pay for employees Self-employed individuals are required to pay SE tax in lieu of Social Security tax Self-employed tax payers are allowed to deduct one- half of the SE tax they pay to compensate for employers deducting their portion of Social Security

6-13 Deductions for AGI Alimony payments are deductible for AGI to maintain equity Contributions to a qualified retirement account are deductible for AGI to encourage savings Interest expense on qualified educational loans Qualified educational expenses

6-14 Deductions for AGI Deduction for Interest expense on loans used to fund qualified educational expenses Up to $2,500 of interest on education loans is deductible for AGI The interest deduction is phased-out for taxpayers with AGI exceeding $60,000 ($120,000 filing joint) The deduction is eliminated for taxpayers with AGI exceeding $75,000 ($150,000 filing joint)

6-15 Deductions from AGI: Itemized Deductions Medical Expenses Taxpayers may deduct medical expenses incurred to treat themselves, their spouse, and their dependents Qualifying medical expenses include unreimbursed payments for care, prevention, diagnosis or cure of injury, disease, or bodily function Taxpayers using personal automobiles for medical transportation purposes may deduct a standard mileage allowance (19 cents per mile in 2011) in lieu of actual costs

6-16 Deductions from AGI: Itemized Deductions Hospitals and Long-term Care Facilities Taxpayers may deduct the costs of actual medical care whether the care is provided at hospitals or other long-term care facilities Medical Expenses Deduction Limitation It is limited to the amount of unreimbursed qualifying medical expenses paid during the year which is reduced by 7.5% of the taxpayers AGI

6-17 Taxes Individuals may deduct itemized deductions payments for following taxes State, local, and foreign income taxes Real estate taxes on property held for personal or investment purposes Personal property taxes that are assessed on the value of the specific property Sales Tax deduction State and local sales taxes can be deducted in lieu of state and local income taxes Deductions from AGI: Itemized Deductions

6-18 Deductions from AGI: Itemized Deductions Interest Two itemized deductions for interest expense: Deduction of investment interest is limited to a taxpayer’s net investment income Any investment interest in excess of the net investment income limitation carries forward to the subsequent year Home mortgage interest Interest on acquisition indebtedness of $1million Interest on home equity debt of $100K

6-19 Charitable Contributions Contribution of money or property must be made to a qualified charity Special rules apply to charitable contributions of property depending on the type of property: Capital gain property Ordinary income property Deductions from AGI: Itemized Deductions

6-20 Deductions from AGI: Itemized Deductions Casualty and theft losses on personal-use assets The amount of the tax loss from any specific casualty event (including theft) is the lesser of decline in value of the property caused by the casualty or taxpayer’s tax basis in the damaged or stolen asset

6-21 Deductions from AGI: Itemized Deductions Casualty Loss Deduction Floor Limitations It must exceed two separate floor limitations to qualify as itemized deductions  $100 for each casualty during the year  10 percent of AGI floor limit applied to the sum of all casualty losses for the year (after applying the $100 floor) In other words, the itemized deduction is the aggregate amount of casualty losses that exceeds 10 percent of AGI

6-22 Deductions from AGI: Itemized Deductions Miscellaneous Itemized Deductions Subject to AGI Floor Employee Business Expenses Travel and transportation Employee expense reimbursements Investment Expenses Tax Preparation Fees Hobby losses Total miscellaneous itemized deductions are subject to a 2 percent of AGI floor limit

6-23 Itemized Deductions and the Standard Deduction Miscellaneous Itemized Deductions Not Subject to AGI Floor Individuals include all gambling winnings for the year in gross income and deduct gambling losses to the extent of gambling winnings for the year Standard Deductions Taxpayers generally deduct the greater of their standard deduction or their itemized deductions

6-24 Standard Deductions & Exemptions Bunching Itemized Deductions Tax benefit can be gained by implementing simple timing tax-planning strategy Taxpayers with itemized deductions that fall just short of the standard deduction amount These itemized deductions do not produce any tax benefit Rather than deduct the standard deduction every year time deductions (when possible) to bunch together in one year