1. Adjustments to income
Spring 2018, lamc

2. Introduction Objectives
Identify adjustments that are within our scope of services
Accurately calculate the adjustments
Taxpayers can subtract certain expenses payments, contributions, or fees from their total income.
These adjustments establish their Adjusted Gross Income (AGI).

3. Common questions to ask taxpayers taxpayers
Did taxpayer have educator expenses?
Did taxpayer receive income from self-employment?
Did taxpayer pay a penalty for early withdrawal of savings?
Did taxpayer pay alimony?
Did taxpayer make contributions to a traditional IRA?
Did taxpayer make contributions to a health savings account? (Out of scope)
Did taxpayer pay student loan interest?
Did taxpayer receive income from jury duty that was turned over to an employer?

4. Educator expenses
Eligible educators can deduct up to $250 of qualified expenses paid during the tax year ($500 if MFJ, but neither can deduct more than $250 each).
Expenses exceeding more than $250 may be treated as an itemized employment-related deduction on Schedule A.
Questions to ask:
Is taxpayer a teacher, instructor counselor, principal, or aide in school?
What grade or grades does taxpayer reach? (Must be K-12)
Is taxpayer employed for at least 900 hours during the school year? (Required minimum).
Qualified expenses
Books, supplies, equipment (including computer equipment, software, and services)
Other materials used in the classroom
Non-qualified expenses
Homeschooling, nonathletic supplies for physical education, health courses

5. Exercise
Molly is a 7th grade teacher who works full-time in a year-round school. She had hours of employment during She spent $260 on supplies for her students. Of that amount $232 was for educational software. The other $28 was for supplies for a unit she teaches on health. What is considered a qualified expense for the educator expense adjustment?
$260 for both the educational software and the supplies for the health class.
$232 for the educational software.
$28 in supplies for the health course.
None of the expenses are qualified educator expenses.

6. Educator expenses and reimbursements
Reimbursements can reduce the amount of the educator expenses.
Did taxpayer receive reimbursements not listed as income on the W-2?
Did taxpayer receive U.S. Series EE and I Savings Bonds where the interest would be tax-free?
Did taxpayer receive a nontaxable distribution from a qualified tuition program or a distribution of nontaxable earnings from a Coverdell education savings account (ESA)?
Refer to Publication 4012, Tab E, Adjustments: E-2, Educator Expenses

7. Other adjustments Self-employment tax
Self-employed taxpayers can subtract a deductible portion of their self-employment tax from their income.
The tax software will automatically calculate this deductible portion.
Penalties for early withdrawal
Taxpayers can adjust their income to deduct penalties they paid for withdrawing funds from a deferred interest account before maturity.
You can review Form 1099-INT or 1099-OID documenting the penalty.
Penalty should be entered in the interest income section if listed on the Form.
If not listed on Form, then go to Deductions section, then Adjustments, and click begin on the Penalty Withdrawal of Savings or CD line.

8. alimony
Alimony
Payment to a spouse or former spouse under a divorce or separation instrument.
Payment does not need to be made directly to an ex-spouse.
Does not include payments child support or voluntary payments outside the agreement.
Need exact amount of alimony and SSN of recipient.

9. Exercises
Marina divorced in Her divorce settlement states that she must pay her ex- husband $20,000 a year. She is also required to pay his ongoing medical expenses for a condition he acquired during their marriage. During the tax year, the medical expenses were $5,000. How much can she deduct as an adjustment to income?
$5,000
$20,000
$25,000
500
Answer: C. She can deduct the $25,000.

10. Ira contributions
An IRA is a personal savings plan that offers tax advantages that set aside money for retirement.
A traditional IRA is any IRA that is not a Roth or SIMPLE IRA (we will only discuss this).
Taxpayers may be able to deduct some or all of their IRA contributions.
Amounts in IRA are not taxed until distributed.
Contributions may be eligible for the retirement savings contributions credit.
Roth IRAs cannot be deducted (but may be eligible for retirement savings contributions credit).

11. Ira contributions Eligibility requirements
IRA Type (only traditional IRAs)
Age limit (less than 70 ½ years of age at end of tax year)
Compensation (taxable compensation from working)
Time limits (contributions must be made by due date for filing return, not including extensions)
Amount of contributions: You can deduct lesser of:
Contributions to your traditional IRA for the year, OR
General limit or the spousal IRA limit, if it applies
Refer to Publication 4012, Tab E: E-7, IRA Deduction

12. Ira contributions
For 2017, maximum IRA deduction remains at $5,500 ($6,500 if age 50 or older).
For taxpayers who are covered by a retirement plan at work, the deduction for contributions to a traditional IRA is reduced (phased out) if modified AGI is:
More than $99,000 but less than $119,000 for MFJ or qualifying widow(er) if both spouses are covered by a retirement plan.
More than $62,000 but less than $72,000 for a single individual or head of household, or;
Less than $10,000 for a married individual filing a separate return.
Contributions cannot be more than the taxpayer’s yearly compensation.

13. Exercises
Robert, a single college student working part time, earned $5,000 during He contributed $1,500 to a Roth IRA. What is the maximum he can contribute?
$1,500
$500
$1,000
$5,000
Answer: D. His IRA contributions are limited to the amount of his compensation.

14. Excess Ira contributions
Excess IRA contribution is amount contributed to traditional IRA that is more than the smaller of:
Taxable compensation for the year; or
General limit amount.
The excess amount must be withdrawn by due date of return, or taxpayer will be subject to 6% tax on the amount. This additional tax is out of our scope, and must be referred to professional tax preparer.

15. Student loan interest What interest does not qualify?
Student loan interest deduction is generally smaller of $2,500 or the interest payment paid that year on a qualified student loan (Form 1098-E).
Amount is gradually reduced or eliminated based on the taxpayer’s filing status and MAGI.
Qualified Student Loan Interest Payments
For taxpayer, spouse, or taxpayer’s dependent when loan obtained (or would have been your dependent except you were a dependent, or had gross income over the exemption amount, or filed MFJ)
For qualified higher education expenses (accredited public, nonprofit, or private post-secondary institution)
Paid within reasonable time period before or after obtaining loan
Eligible student (enrolled at least half-time in a program leading to degree, certificate, or other recognized educational credit
What interest does not qualify?
Loan was from a related person, a qualified employer plan, or if taxpayer is not legally responsible for the loan.
Cannot take deduction if filing status is MFS.

16. Student loan interest