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CPA Regulation Notes - Chapter 2

CPA Regulation Notes - Chapter 2

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Published by Future CPA

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Published by: Future CPA on Jun 29, 2009
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01/14/2014

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 󰁂󰁥󰁣󰁫󰁥󰁲 󲀓 󰀲󰀰󰀰󰀹 󰁅󰁤󰁩󰁴󰁩󰁯󰁮 󰁃󰁨󰁡󰁰󰁴󰁥󰁲 󰀲 󰁐󰁡󰁧󰁥 󰀱 󰁯󰁦 󰀱󰀱
Chapter 2 – Adjustments and Itemized Deductions
Adjustments (Deductions) to Gross Income to arrive at AGI – Above the line deductions
Educator Expenses
 - Deduct up to $250 of qualified expenses paid (or $500 for married, both are educators) - Eligible: KG to 12 grade teacher, instructor, counsellor, principal, or aide in school for at least 900 hours a year - Reduce qualified expense amounts by:
o
 US series EE and I savings bond interest, non-taxable state tuition, non-taxable Coverdell Savings
Traditional Deductable IRA
- Contribution = deductible in the year contributed - Earnings = tax deferred - Distributions/Withdrawals = taxable contribution and earnings - Cannot deduct contribution if BOTH of the following are present:
o
 Excessive AGI 2008: S/HofH 53-63,000 MFJ: 85-105,000
o
 Active participation in another qualified plan - No deduction if: Rich and Have retirement plan
o
 Exception: if one spouse isn’t is not active participant, then that spouse can still deduct contributions
o
 Phase-out: if only one spouse actively contributes, then second spouse phase-out limit for contribution is MAGI: 159-169,000 - Amount of deduction: LESSER of: $5,000 or individual’s compensation (His + Hers = Theirs) - Maximum contribution for MFJ total deductable contribution: $10,000 - Compensation: salary, commissions, alimony (not incl. PALs and pension) - Catch-up contribution: Age 50 or over = contribution extra $1,000 - Retirement plan contribution credit ??? - MUST See chart on page R2-7
Roth IRA
 - Contributions = non-deductible - Earnings = tax-free - Distributions/Withdrawals = tax-free contribution and earnings - Contribution limits combined with all IRAs = $5000/person - Phase-out: S MAGI: 101-116,000 MFJ MAGI: 159-169,000 MFS MAGI: 0-10,000 - Retirement plan contribution credit ???
Non-Deductible IRA
- Contributions = non-deductible - Earnings = taxable - Distributions/Withdrawals = tax-free contributions and taxable earnings - Contribution limitations: - LESSER of: $5,000 or individual’s compensation
Coverdell Education Savings Accounts
(Education IRA) - Contributions = non-deductible, maximum limit $2,000 annually - Earnings = tax-free - Distributions/Withdrawals = tax-free contributions and earnings if used for qualified education expense (includes elementary and secondary school expenses) - Beneficiary must use by age 30, otherwise:
o
 Distribute to beneficiary = taxable and 10% penalty
o
 Rollover to family member = tax-free and no penalty - Designated beneficiary must be under age 19 - Maximum contribution per beneficiary is $2,000 annually - Phase-out for MAGI S:95-110,000 M:190-220,000 MUST SEE chart on page R2-10 – it includes the IRA Contribution and Withdrawal Summary
 
 󰁂󰁥󰁣󰁫󰁥󰁲 󲀓 󰀲󰀰󰀰󰀹 󰁅󰁤󰁩󰁴󰁩󰁯󰁮 󰁃󰁨󰁡󰁰󰁴󰁥󰁲 󰀲 󰁐󰁡󰁧󰁥 󰀲 󰁯󰁦 󰀱󰀱
Student Loan Interest Expense
 - Limited to $2,500 interest expense per year - Phase-out S: 55-70,000 M: 115-145,000 (married, must file jointly to claim), dependent may NOT claim - Taxpayer must be obligated to pay loan (interest paid by parent on child’s student loan is not deductible)
Tuition and Fees Deduction
 - Qualified higher education expenses above the line deduction applied regardless of whether the education was work-related expired on December 31, 2007. - Prior: expenses were only deductible as education expenses – itemized deductions subject to 2% AGI limitation - Maximum deduction: $4,000 - Maximum Income limit Phase-out S: 65,000 M: 130,000 - Over the phase-out limit, the maximum adjustment is $2,000 - No adjustment if AGI in excess of S: 80,000 M: 160,000
Health Savings Accounts
 - HSAs = if high-deductible health insurance, then make pre-tax contributions of $2900 in 2008 ($5800 for families) - High-deductible = $1,100 individual deductible and $2,200 family deductible
Moving Expenses
 - Must be work related - New workplace must be 50 miles FARTHER from old house than old workplace was - Must work at new job for at least 39 weeks or 75% of the year - Only direct moving costs are allowable for deduction:
o
 Travel and lodging of the taxpayer and his family (gas mileage, tolls, parking fees)
o
 Household goods and personal items from old to new house - NON-deductible: Indirect costs = meals, house hunting, expense of breaking lease, temporary living expenses
Tax on Self-Employment (Social Security 50%)
 the boss’ half of social security and Medicare tax is deductible
Self-Employment Health Insurance (100% Deductible)
 - For self-employed individuals only!
 
- For employed individuals, it is an itemized deduction subject to the AGI % floor limitation
 Keogh Profit Sharing Plans
 – - Who qualifies? A self-employed taxpayer subject to self-employment tax - Maximum annual deductible limited to LESSER of: 46,000 in 2008 OR 25% net (Keogh/self-employed) earnings - Maximum annual addition may exceed the deductible amount, limited to LESSER or: 46,000 in 2008 OR 100% net earnings (only if compensation is less than $46,000) - Net earnings from self-employment (after Keogh deduction and on-half of self-employment tax) Business Income <Business Expense> Net Business Income <½ self employment tax> <Keogh deduction> Keogh net earnings - 25% of self-employment after Keogh deductions is the mathematical equivalent of 20% (25%/125%) of self-employment income before the Keogh deduction
Penalty on Early Withdrawal of Savings (Interest Income): Interest Forfeited
 - The interest forfeited is deductible if it was shown as an income in the prior year
Alimony
- Alimony-spousal support = income to payee and deduction to payor
o
 Payments must be legally required under a written divorce decree or agreement
 
 󰁂󰁥󰁣󰁫󰁥󰁲 󲀓 󰀲󰀰󰀰󰀹 󰁅󰁤󰁩󰁴󰁩󰁯󰁮 󰁃󰁨󰁡󰁰󰁴󰁥󰁲 󰀲 󰁐󰁡󰁧󰁥 󰀳 󰁯󰁦 󰀱󰀱
o
 Payments must be in cash or equivalent
o
 Payments cannot extend beyond the death of the payee-spouse
o
 Cannot be made to members of same household, not be designated as anything other than alimony
o
 Spouses may NOT file joint tax return - Child support = non-taxable to payee and non-deductible to payor
o
 Payment applies first to child support - Property settlements = non-taxable/non-deductible to either parties
 “HI
D
E IT”
o
 Applies to the lump sum payment or property divorce settlement
Attorney Fees Paid in Discrimination Cases
 - Applicable only in certain cases in connection with age, sex, or racial discrimination - Deductible amount is limited to amount claimed as income from the judgement
Domestic Production Activities
 - Adjustment for a percentage (6% in 2007) of qualified production activities income or taxpayer’s taxable income without considering the deduction
 whichever is LESS Deductions from Adjusted Gross Income (AGI) – Below the line deductions - Standard deduction OR - Itemized deduction
Standard Deduction
 
 1040EZ - Non-itemize - Single 5,450 / HofH: 8,000/ MFJ: 10,900 / MFS: 5,450–same as S. Available only if BOTH spouses do not itemize - Elderly and/or Blind = Increased standard deduction (NOT additional exemption)
Itemized Deductions
 –
Limitations
- Limitation applies to itemized deductions of taxpayers with AGI exceeding $159,950 - Limitation reduces, but not by more than 80%, applicable itemized deductions (taxes, interest, contributions, and misc. Itemized deductions) by 3% of amount of AGI exceeding $159,950. - Itemized deductions NOT subject to limitation:
o
 
G –
 Gambling losses
o
 
I –
 Investment interest expense
o
 
M –
 Medical expenses
o
 
C –
 Casualty and theft losses (non-business)
Medical Expenses = 7.5% AGI
- Payments for yourself, spouse, or dependent - For dependent, there is no consideration of dependent’s gross income or joint return requirement. But all other dependency tests still apply – Dependent test:
o
 Support over 50% = Yes
o
 Under $ taxable income = No
 Waived
o
 Precluded joint return = No
 Waived
o
 Only citizens = Yes
o
 Relative (OR) = Yes
o
 Taxpayer lives with = Yes - Must be paid (cash or check) or charged on credit card during the year - Deductible expenses: prescription medicine, doctors, medical and accident insurance, required surgery, transportation to medical facility, physically handicapped costs (i.e. removal of structural barriers at home)

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