ACC330 - Test #2 Study Set 100% Pass
Deductions FOR AGI - ANSWER There are three categories of deductions FOR AGI:
- Directly related to business activities
- Indirectly related to business activities
- Subsidizing specific activities
Directly related to business actitivities - ANSWER • Taxpayers are allowed to deduct
expenses incurred togenerate business income.
• For tax purposes, activities are either profit-motivated ormotivated by personal
objectives.
• Profit-motivated activities are classified as
1. Business activities (called "trade or business")
2. Investment activities
Business activities - ANSWER Although both are motivated primarily by profit,
businessactivities are distinguished from investment activities.
• Trade or business activities require a relatively high involvement or effort from the
taxpayer, whereas investment activities do not
• Investment activities involve investing in property forappreciation or for income
payments
Trade or business expenses - ANSWER Trade or business expenses must be.
• Directly connected to the business activity.
• Ordinary and necessary for the activity (example, appropriateand 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 thesame Schedule C
.• The net income or loss from Schedule C is transferred toSchedule 1, line 3, and then
combined with other items and included on Form 1040 (page 1), line 8.
Rent and Royalty Expenses - ANSWER Rental and Royalty Expenses.
,• Claimed above the line (for AGI).
• Could either be an investment activity or a trade activity dependingon facts.
• Taxpayers report expenses and revenue on Schedule E andtransfer the net income or
loss from Schedule E to Schedule 1, line5, and then combine with other items and
include on Form 1040(page 1), line 8.
Flow-Through Entities.
• Expenses and losses incurred by a flow-through entity passthrough to the entity
owners, who typically report these amounts onSchedule E, then Schedule 1, line 5, and
then combine with other items and include on Form 1040 (page 1), line 8.
Losses - ANSWER Losses
• Taxpayers disposing of trade or business assets at a loss areallowed to deduct the loss
for AGI.
• Losses from investment assets (called capital assets) areoffset against capital gains.
• If capital losses exceed capital gains, this is called a netcapital 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.
Excess business loss limitation - ANSWER Excess Business Loss Limitation
• Excess business loss is excess of aggregate businessdeductions over the sum of
aggregate business gross incomeor gain plus $305,000 ($610,000 for taxpayers married
filingjointly).
• Excess business loss is not deductible but is carried forward.10
Health Insurance Deduction by self-employed taxpayers - ANSWER - Deduction provides
equity with employees who receive health insurance as a qualified fringe benefit.
• Self-employed taxpayers can claim personal health insurance premiums for the
taxpayer, the taxpayer's spouse, the taxpayer's dependents, and the taxpayer's children
underage 27 as deductions for AGI, but only to the extent of the self-employment income
derived from the specific trade or business.
Self-employment tax deduction - ANSWER • Employers deduct the Social Security and
Medicare taxesthey pay on employee salaries.
• Self-employed individuals are required to pay self-employment tax in lieu of Social
Security tax. This taxrepresents both the employee's and the employer's share ofthe
Social Security and Medicare taxes.
,• Self-employed taxpayers are allowed to deduct the employer portion of the
self-employment tax they pay to compensate for employers deducting their portion of
Social Security.
Deductions for individual retirement accounts - ANSWER • Deductible contributions to
traditional IRA's are for AGIdeductions. Deduction amount depends on a number
offactors.
• Distributions from traditional IRA's are taxed as ordinaryincome and early distributions
(before age 59½) aregenerally subject to a 10 percent penalty.
• Nondeductible contributions can be made. On distribution, the taxpayer is taxed on the
earnings generated by nondeductible contributions but not on the actual nondeductible
contributions.
Deductions for health savings accounts - ANSWER • Individuals covered by a high
deductible health plan with no other health coverage can set aside amounts for payment
of qualified medical and dental expenses for the taxpayer, spouse, and dependents
• For 2024, high deductible health plans have a minimum annual deductible of $1,600 for
self-only coverage ($3,200 for family coverage) and their maximum annual deductible
and other out-of-pocket expenses cannot exceed $8,050 for self-only coverage($16,100
for family coverage)
• For 2024, individuals can contribute up to $4,150 for self-only coverage ($8,300 for
family coverage) to a HSA and deduct these contributions for AGI. Individuals age 55 or
older at the end of the tax year may contribute and deduct an additional $1,000 annually.
Deductions from health savings accounts - ANSWER • Distributions from a HSA are tax
free if they pay for qualified medical expenses of the taxpayer, spouse, and dependents.
Otherwise, distributions are taxed as ordinary income (and subject to an additional 20%
tax unless the taxpayer is disabled, age 65 or older, or deceased).
Penalty for early withdrawal of savings
• Reduces the taxpayer's net interest income to the amount actually received
Extra examples of deductions for AGI - - ANSWER - Alimony payments are deductible for
AGI to maintain equity if paid pursuant to a divorce or separation agreement executed
before 2019
- Contributions to a qualified retirement account are deductible for AGI to encourage
savings
Deduction for interest on qualified education loans - ANSWER • Up to $2,500 of interest
on education loans is deductible for AGI
• The interest deduction is phased out for taxpayers with A GI exceeding $80,000
($165,000 filing jointly)
, • The deduction is eliminated for taxpayers with A GI exceeding $95,000 ($195,000 filing
jointly).
Phase-out percentage - ANSWER Single or head of household --> (modified AGI -
$80,000)/$15,000
Married filing jointly --> (modified AGI - $165,000)/$30,000
** married taxpayers filing separately are ineligible for the deduction
Deductions from AGI - ANSWER Now moving on to deductions FROM adjusted gross
income; itemized deductions
Medical expenses - ANSWER • Taxpayers may deduct medical expenses incurred to
treatthemselves, their spouse, and their dependents
• Qualifying medical expenses include unreimbursedpayments 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 (21 cents per mile in 2024) in lieu of actual costs
Hospitals and long-term care facilities - ANSWER Hospitals and Long-Term Care
Facilities
• Taxpayers may deduct the costs of actual medical carewhether the care is provided at
hospitals or other long-term care facilities
Medical Expense Deduction Limitation
• It is limited to the amount of unreimbursed qualified medical expenses paid during the
year (no matter when the services were provided) reduced by 7.5 percent of the
taxpayer's AGI
Taxes - ANSWER Individuals may deduct itemized deductions payments for the
followingtaxes:
• State, local, and foreign income taxes
• State and local real estate taxes on property held for personal orinvestment purposes
• State and local personal property taxes that are assessed on thevalue of the specific
property
Sales tax deduction
• State and local sales taxes can be deducted in lieu of state andlocal income taxes.
The total itemized deduction for state and local taxes is limited to$10,000 ($5,000
married filing separate). The deduction for foreignincome taxes is not subject to this
cap.
Deductions FOR AGI - ANSWER There are three categories of deductions FOR AGI:
- Directly related to business activities
- Indirectly related to business activities
- Subsidizing specific activities
Directly related to business actitivities - ANSWER • Taxpayers are allowed to deduct
expenses incurred togenerate business income.
• For tax purposes, activities are either profit-motivated ormotivated by personal
objectives.
• Profit-motivated activities are classified as
1. Business activities (called "trade or business")
2. Investment activities
Business activities - ANSWER Although both are motivated primarily by profit,
businessactivities are distinguished from investment activities.
• Trade or business activities require a relatively high involvement or effort from the
taxpayer, whereas investment activities do not
• Investment activities involve investing in property forappreciation or for income
payments
Trade or business expenses - ANSWER Trade or business expenses must be.
• Directly connected to the business activity.
• Ordinary and necessary for the activity (example, appropriateand 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 thesame Schedule C
.• The net income or loss from Schedule C is transferred toSchedule 1, line 3, and then
combined with other items and included on Form 1040 (page 1), line 8.
Rent and Royalty Expenses - ANSWER Rental and Royalty Expenses.
,• Claimed above the line (for AGI).
• Could either be an investment activity or a trade activity dependingon facts.
• Taxpayers report expenses and revenue on Schedule E andtransfer the net income or
loss from Schedule E to Schedule 1, line5, and then combine with other items and
include on Form 1040(page 1), line 8.
Flow-Through Entities.
• Expenses and losses incurred by a flow-through entity passthrough to the entity
owners, who typically report these amounts onSchedule E, then Schedule 1, line 5, and
then combine with other items and include on Form 1040 (page 1), line 8.
Losses - ANSWER Losses
• Taxpayers disposing of trade or business assets at a loss areallowed to deduct the loss
for AGI.
• Losses from investment assets (called capital assets) areoffset against capital gains.
• If capital losses exceed capital gains, this is called a netcapital 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.
Excess business loss limitation - ANSWER Excess Business Loss Limitation
• Excess business loss is excess of aggregate businessdeductions over the sum of
aggregate business gross incomeor gain plus $305,000 ($610,000 for taxpayers married
filingjointly).
• Excess business loss is not deductible but is carried forward.10
Health Insurance Deduction by self-employed taxpayers - ANSWER - Deduction provides
equity with employees who receive health insurance as a qualified fringe benefit.
• Self-employed taxpayers can claim personal health insurance premiums for the
taxpayer, the taxpayer's spouse, the taxpayer's dependents, and the taxpayer's children
underage 27 as deductions for AGI, but only to the extent of the self-employment income
derived from the specific trade or business.
Self-employment tax deduction - ANSWER • Employers deduct the Social Security and
Medicare taxesthey pay on employee salaries.
• Self-employed individuals are required to pay self-employment tax in lieu of Social
Security tax. This taxrepresents both the employee's and the employer's share ofthe
Social Security and Medicare taxes.
,• Self-employed taxpayers are allowed to deduct the employer portion of the
self-employment tax they pay to compensate for employers deducting their portion of
Social Security.
Deductions for individual retirement accounts - ANSWER • Deductible contributions to
traditional IRA's are for AGIdeductions. Deduction amount depends on a number
offactors.
• Distributions from traditional IRA's are taxed as ordinaryincome and early distributions
(before age 59½) aregenerally subject to a 10 percent penalty.
• Nondeductible contributions can be made. On distribution, the taxpayer is taxed on the
earnings generated by nondeductible contributions but not on the actual nondeductible
contributions.
Deductions for health savings accounts - ANSWER • Individuals covered by a high
deductible health plan with no other health coverage can set aside amounts for payment
of qualified medical and dental expenses for the taxpayer, spouse, and dependents
• For 2024, high deductible health plans have a minimum annual deductible of $1,600 for
self-only coverage ($3,200 for family coverage) and their maximum annual deductible
and other out-of-pocket expenses cannot exceed $8,050 for self-only coverage($16,100
for family coverage)
• For 2024, individuals can contribute up to $4,150 for self-only coverage ($8,300 for
family coverage) to a HSA and deduct these contributions for AGI. Individuals age 55 or
older at the end of the tax year may contribute and deduct an additional $1,000 annually.
Deductions from health savings accounts - ANSWER • Distributions from a HSA are tax
free if they pay for qualified medical expenses of the taxpayer, spouse, and dependents.
Otherwise, distributions are taxed as ordinary income (and subject to an additional 20%
tax unless the taxpayer is disabled, age 65 or older, or deceased).
Penalty for early withdrawal of savings
• Reduces the taxpayer's net interest income to the amount actually received
Extra examples of deductions for AGI - - ANSWER - Alimony payments are deductible for
AGI to maintain equity if paid pursuant to a divorce or separation agreement executed
before 2019
- Contributions to a qualified retirement account are deductible for AGI to encourage
savings
Deduction for interest on qualified education loans - ANSWER • Up to $2,500 of interest
on education loans is deductible for AGI
• The interest deduction is phased out for taxpayers with A GI exceeding $80,000
($165,000 filing jointly)
, • The deduction is eliminated for taxpayers with A GI exceeding $95,000 ($195,000 filing
jointly).
Phase-out percentage - ANSWER Single or head of household --> (modified AGI -
$80,000)/$15,000
Married filing jointly --> (modified AGI - $165,000)/$30,000
** married taxpayers filing separately are ineligible for the deduction
Deductions from AGI - ANSWER Now moving on to deductions FROM adjusted gross
income; itemized deductions
Medical expenses - ANSWER • Taxpayers may deduct medical expenses incurred to
treatthemselves, their spouse, and their dependents
• Qualifying medical expenses include unreimbursedpayments 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 (21 cents per mile in 2024) in lieu of actual costs
Hospitals and long-term care facilities - ANSWER Hospitals and Long-Term Care
Facilities
• Taxpayers may deduct the costs of actual medical carewhether the care is provided at
hospitals or other long-term care facilities
Medical Expense Deduction Limitation
• It is limited to the amount of unreimbursed qualified medical expenses paid during the
year (no matter when the services were provided) reduced by 7.5 percent of the
taxpayer's AGI
Taxes - ANSWER Individuals may deduct itemized deductions payments for the
followingtaxes:
• State, local, and foreign income taxes
• State and local real estate taxes on property held for personal orinvestment purposes
• State and local personal property taxes that are assessed on thevalue of the specific
property
Sales tax deduction
• State and local sales taxes can be deducted in lieu of state andlocal income taxes.
The total itemized deduction for state and local taxes is limited to$10,000 ($5,000
married filing separate). The deduction for foreignincome taxes is not subject to this
cap.
