1. McGraw-Hill/Irwin ©The McGraw-Hill Companies, Inc. 2010 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Chapter 4 Adjustments for Adjusted Gross Income “Don’t tax you, don’t tax me; Tax the fellow behind the tree.” Senator Russell B. Long

2. 4-2 LO #1 Student Loan Interest Only interest on a “qualified” student loan is potentially deductible. A qualified education loan is one incurred by the taxpayer solely to pay qualified education expenses incurred on behalf of the taxpayer, taxpayer’s spouse, or any dependent of the taxpayer at the time the loan was incurred. The deduction is limited to $2,500 per year.

3. 4-3 LO #1 Student Loan Interest Qualified education expenses must be paid or incurred within a reasonable period before or after the loan date Expenses must occur during the period the recipient was carrying at least half the normal full-time workload for the intended course of study. The course of study can be either at the undergraduate or graduate level.

4. 4-4 LO #1 Student Loan Interest The deductible amount of student loan interest is reduced when modified adjusted gross income reaches: – $125,000 on a joint return ($60,000 for a single return) and: – is totally eliminated when modified adjusted gross income reaches $155,000 ($75,000 for single returns).

5. 4-5 LO #2 Health Savings Account Deduction  A health savings account (HSA) is a tax-exempt savings account used for qualified medical expenses. –It can be used for the expenses of the account holder, spouse, and dependents. In general, qualified taxpayers can take a for AGI deduction for contributions to the HSA.

6. 4-6 LO #2 Health Savings Account Deduction  To be eligible for an HSA, the taxpayer must be self- employed, or an employee (or spouse) of an employer with a high deductible health plan, or an employee of a company that has no health coverage and has purchased a high-deductible policy on his or her own. –In addition, the individual must have no other health insurance coverage, except certain specified coverage. –Taxpayers cannot have other health insurance except for coverage for accidents, disability, dental care, vision care, long-term care, or workers’ compensation

7. 4-7 LO #2 Health Savings Account Deduction A High Deductible Health Plan (HDHP) is a health plan with specified minimum deductible amounts and a maximum annual deductible and out-of-pocket expense limitation. For calendar year 2013, these amounts are as follows: MinimumMaximum Deductible Deductible and Annual Out- of-pocket Individual Coverage $1,250 $ 6,250 Family Coverage $2,500 $12,500

8. 4-8 LO #2 Health Savings Account Deduction Taxpayers who contribute to or withdraw from an HSA during the year must file a Form 8889 and attach it to their Form 1040. Contributions made by a qualified individual are a for AGI deduction, assuming the limitations are met. Distributions from an HSA are tax free as long as they are used to pay for qualified medical expenses.

9. 4-9 LO #3 Moving Expenses  If a taxpayer moves due to a change in job location or to obtain a job, certain expenses related to moving may be deducted as a for AGI deduction. Moving expenses are reasonable expenses for: –Moving household goods and personal effects from the old residence to the new residence. –Traveling from the old residence to the new residence (including lodging, but excluding meals). –Moving expenses of persons other than the taxpayer are permitted if the other persons are members of the taxpayer’s household.

10. 4-10 LO #3 Moving Expenses To qualify for a moving expense deduction, taxpayers must meet two additional tests in addition to the change in employment location test. Distance test - the new job location must be at least 50 miles farther from the taxpayer’s old residence than was the old job location. –If the taxpayer had no old job (i.e., the taxpayer was unemployed), then the new job must be more than 50 miles away from his or her old residence.

11. 4-11 LO #3 Moving Expenses

12. 4-12 LO #3 Moving Expenses Moving expenses are only deductible in the year incurred. If the taxpayer elects to deduct the moving expenses prior to satisfying the time test and later does not meet the test, the moving expenses are disallowed. Must file amended return. Employers may reimburse employees for some or all of their moving expenses. –Only “net amount” is deductible

13. 4-13 LO #4 Deduction for Half of Self-Employment Tax Self-employed individuals pay self- employment, or FICA, tax equal to 15.3% of net earnings from self- employment. Net earnings are revenues minus expenses. Self-employment tax is calculated on Form SE. –The Form SE is filed with the taxpayer’s 1040.

14. 4-14 LO #5 Self-employed Health Insurance Deduction Self-employed individuals may be able to deduct 100% of self-employed health insurance payments. The amount of the deduction may be limited in two respects: –First, taxpayers cannot take a deduction for the amount in excess of net earnings from self-employment from the trade or business under which coverage is provided.

15. 4-15 LO #5 Self-employed Health Insurance Deduction The second limitation pertains to availability of other health insurance coverage. –If the taxpayer is entitled to participate in any subsidized health plan maintained by any employer of the taxpayer or of the taxpayer’s spouse, a deduction is not allowed. –Eligibility for alternative coverage is determined on a monthly basis.

16. 4-16 LO #6 - Penalty on Early Withdrawal of Savings If a taxpayer withdraws funds early from a time deposit account, like a CD, he or she may be subject to an early withdrawal penalty. The taxpayer is entitled to report the penalty as a for AGI deduction on line 30 of Form 1040. The amount of the penalty is reported on a Form 1099-INT, issued by the financial institution.

17. 4-17 LO #7 Alimony Paid  Alimony is one of three potential payments that can exist in a divorce or legal separation.  Alimony, child support, property settlement  Only alimony has a tax consequence.  If payments properly qualify as alimony, the payments are deductible by the payer as a for AGI, or an above- the-line, deduction.

18. 4-18 LO #8 Educator Expenses Eligible educators can deduct up to $250 of qualified education expenses as a for AGI deduction. –If the taxpayers’ filing status is married filing jointly and both individuals are eligible educators, the maximum deduction is $500. –but neither spouse can deduct more than $250 of his or her expenses.

19. 4-19 LO #8 Educator Expenses Qualified education expenses for the deduction are those for books, supplies, equipment (including computers and software), and other materials used in the classroom. –The expense must also be ordinary (common and accepted in the educational field) and necessary (helpful and appropriate).

20. 4-20 LO #9 Tuition and Fees Deduction Taxpayers can take a deduction for qualified tuition and related expenses paid during the year for the taxpayer, taxpayer’s spouse, or a dependent. The deduction is a maximum of $4,000 but can be smaller if the modified AGI of the taxpayer exceeds certain limits.

21. 4-21 LO #9 Tuition and Fees Deduction Payments must be to a qualified educational institution and must be for a student taking one or more courses at that institution. Only tuition and related expenses qualify. –Taxpayers cannot claim a deduction for tuition paid for elementary and secondary school education.