ACC 321 Chapters 6 &13 - Deductions for AGI ("Above the Line" Deductions)

2018 Contribution limit is either

the lesser of $5,500 or earned income.

Taxpayers over age 50 may contribute either

the lesser of $6500 or earned income for 2018.

1. Deduction for Interest on Qualified Education Loans (Student Loans)

a. Deduction is for interest incurred on loans, the proceeds of which are spent on Qualified Education Expenses b. Tuition and fees, books and expenses required for enrollment, room and board, other necessary supplies, other expenses such as travel for taxpayer, taxpayer's spouse, taxpayer's dependent. c. Applies for expenses incurred to attend postsecondary institution of higher education.(College) d. Deduction for up to $2,500. e. Deduction is phased out depending upon filing status and modified AGI (see page 6-9). f. Deduction not allowed at all for Married filling separately.

Flow Through Entities (Partnerships, S Corporations)

a. Losses and expenses from flow through entities pass through to the entity owners. b. Usually treated as deductions for AGI. c. Limitations may apply.

Losses from Sales of Business or Investment Assets

a. Losses from sale of business assets may be deducted for AGI. b. Capital losses from sale of investment (capital) assets may be deducted against capital gains. c. Remember that net capital losses may only be deducted up to $3,000. + The excess is carried forward to future tax years. + Same limitation applies each year until the loss is finally fully deducted.

Other factors which may affect deductibility:

a. Participation in employer sponsored retirement plan b. Filing status (MFS) c. Amount of earned income d. AGI

1. Business activity - Also called trade or business. Profit Motivated activity.

a. Requires relatively high level of taxpayer's involvement or effort. b. Business expenses are deducted for AGI. c. Under the Tax Cuts and Jobs Act of 2017 unreimbursed employee expenses are no longer deducted as miscellaneous itemized deductions on Schedule A.

Self-Employment Tax Deduction

a. Self-employment tax represents both employers' & employees portion of Social Security and Medicare tax. b. Self-employed taxpayers may deduct employers' portion of self-employment tax.

Penalty for Early Withdrawal of Savings

a. Taxpayers may deduct amount forfeited interest income for early withdrawal of CD or comparable deposit.

1. Deductions for IRA contributions are 6. Nondeductible contributions a. Earned income limitations apply (same as deductible contributions). b. __________________________________________. Taxpayer pays tax on earnings at time of distribution, but not on nondeductible contributions. c. Nontaxable portion of distribution = Nondeductible contributions/Total account balance at time of distribution d. Contributions may be made ___________________________________ of subsequent year 7. Distributions - taxed as ordinary income. 8. 10% additional penalty may apply when taxpayers __________________________ take distributions. IRA rules exempt certain distributions from the penalty. Exceptions include: a. Proceeds in form of a life annuity b. Proceeds used for qualifying medical expenses c. Proceeds used to pay health insurance proceeds for the owner d. Proceeds used to pay qualified higher education expenses e. Proceeds used to pay first-time home purchases (up to $10,000) 9. Roth IRAs a. Contributions are not deductible and qualifying distributions are not taxable b. See contribution limitation phase out on page 13-23 c. Same annual contribution limits and same spousal IRA rules apply Roth IRA contributions d. Contribution limitation is same whether they participate in employer sponsored retirement plan e. For distributions to be nontaxable, they must be from funds or earnings in a Roth IRA if the distribution is _______________________________________ the account was opened and it meets one of other requirements listed on page 13-24. f. Taxpayers may contribute to a Roth IRA at any age. g. _________________________________ - earnings are taxable as ordinary income and subject to the 10% penalty. h. Unlike traditional IRA, taxpayers are not required to take minimum distributions from Roth IRA. i. Rollover - Traditional IRA funds may be rolled over into Roth IRA accounts. Taxed at ordinary rates, but not subject to 10% penalty if full amount is rolled over within 60 days of withdrawal.

"Above the line" or for AGI deductions.

Deductions Directly Related to Business Activities

1. Business activity - Also called trade or business. Profit Motivated activity 2. Directly Related, ordinary & necessary 3. Business expenses are reported on Schedule C 4. Rental & Royalty Expenses

Directly Related, ordinary & necessary

- Deductible expenses must be directly related to the business and appropriate and helpful in generating a profit.

Health Insurance Deduction by Self-Employed Taxpayers

- Deduction allowed for taxpayer, spouse, dependents, and taxpayer's children under age 27 to extent of self-employment income from specific trade or business. a. Deduction not allowed if taxpayer eligible to participate in employer sponsored health plan. May be employer of taxpayer or taxpayer's spouse. b. Irrelevant whether taxpayer chooses to participate.

Business expenses are reported on

- Schedule C. + Revenues less the expenses result in net income or loss which is transferred to Form 1040 line 12.

Moving Expenses

- Under the Tax Cuts and Jobs Act, may be only be deducted by taxpayer who is an active member of the military, and who moves pursuant to a military order for permanent change of station.

Deductions Indirectly Related to Business Activities

1. Moving Expenses 2. Health Insurance Deduction by Self-Employed Taxpayers 3. Self-Employment Tax Deduction 4. Penalty for Early Withdrawal of Savings

Rental and royalty expenses are reported on Schedule E and netted against revenue.

Net income or loss is then transferred to Form 1040, line 17.

Deductibility of rental losses is

Subject to limitations

Rental & Royalty Expenses -

Taxpayers may deduct these expenses whether the activity qualifies as an investment or business activity. + Other investment expenses may be deductible as itemized deductions. + Usually considered an investment activity.

Taxpayers at age 70 1/2 years at year end:

may not take a deduction for contributions to an IRA, and cannot contribute to an IRA.