GR IRA Contributions to regular IRAs may or may not be deductible.

When you put money into your IRA the earnings are tax deferred. The accummulated earnings are not taxed (for some). When will it be taxed? When withdrawals occur. So, withdrawals are taxable transactions Non Deductible IRA: If you are rich and you are protected by a company pension plan then you don't need an IRA. But, if you both of those conditions aren't present you will be permitted an IRA. Therefore, “No deduction if Rich and Have Retirement Plan” MFJ is better than Qualifying widow with dep child because, although both have same tax rates and Std Ded, MFJ provides for extra personal exemption in the year of death for the deceased Qualifying widow with a dependent child is more advantageous than single and head of household since qualifying widow returns are entitled to a higher standard deduction and lower tax rates at similar income levels. State disability = (worker's compensation) benefits are not taxable. Funeral expenses are non-deductible on the Form 1040. Non Accountable means, you don't need to account for or explain the expenses Rule: Under a nonaccountable plan (i.e., expenses are not reported to the employer), any amounts received by an employee from the employer e.g. 400 pm must be reported by the employer as part of wages on the employee's W-2 for the year (and subject to income tax withholding requirements). The gross amount received is reported as income regardless of the expenses Rule: Any expenses taken against the gross amount received in a nonaccountable plan (e.g., the car mileage expenses and the reimbursement to the company) are considered miscellaneous itemized deductions and are subject to the 2% AGI limitation. Rule: For 50%-type charities only (which include tax-exempt educational organizations), the taxpayer has the option to deduct long-term (i.e., held longer then 12 months) capital gain appreciated property at the higher fair marker value (higher than cost basis) without paying capital gains tax on the appreciated portion. This deduction is limited to 30% of adjusted gross income (AGI). A 5-year carryforward period applies. Rule: Taxpayer's may claim either sales tax or state and local income tax, whichever is greater – but not Both The Burgs could opt to deduct either their state and local income tax or sales tax. Whichever is greater. Self-employment tax is not an itemized deduction, but 50% can be used as adjustment in arriving at AGI. Rule: The excess of investment interest paid over the “allowed” investment interest can be carried forward indefinitely Rule: Qualified Charitable contributions that could not be deductible due to 50% AGI cap can be carried forward for 5 years Rule: If AGI exceeds the threshold limits, taxpayers must reduce itemized deductions (other than Gambling Losses, Investment Interest, Medical and casualtyor theft - GIMC) by 3% of AGI in excess of that threshold. The maximum reduction is 80% of those otherwise allowable itemized deductions. There is no itemized deduction for temporary living expenses, and the direct moving expenses (such as the costs to move the goods and the costs to move the taxpayer's family from the old to the new location) are deductible before adjusted gross income, not as an itemized deduction. Premiums on disabilities policies are not deductible since payments under the policy are made to replace lost income, not to pay for medical expenses. RULE: The adjustment for education loan interest (an above-the-line deduction to arrive at AGI) is limited to the amount paid or $2,500 (whichever is lower), and all qualified education loan interest is allowed as part of the adjustment. The adjustment is phased-out for single taxpayers with modified AGI between $55,000 and $70,000. RULE: Alimony payments to a former spouse are adjustments to arrive at AGI. Child support payments are NOT alimony and are NOT deductible. Property settlements are NOT alimony and are NOT deductible. For IRAs, the adjustment is allowed for a year ONLY if the contribution is made by the due date of the tax return for individuals (April 15). The due date for filing the tax return under a filing extension is NOT allowed (i.e., filing extensions are NOT considered). Page 1

GR Inheritance and proceeds from a lawsuit for physical injuries are NOT items of taxable gross income – Take a look at the list of items under “Non Taxable Fringe” in other income Premiums paid for insurance that covers the expenses of medical care are deductible as medical expenses, including Medicare B premium payments and any voluntary premiums for Medicare A. But NOT for “Employment Tax” for basic coverage under “Medicare A” Rules: 1. Medical expenses charged to a credit card is expensed in the year the charge is made. It does not matter when the amount charged is actually paid. 2. Expenses paid for the medical care of a decedent by the decedent's spouse are included as medical expenses in the year paid, whether they are paid before or after the decedent's death. Rule: Interest that is prepaid is deductible in the tax year to which, and to the extent that the interest is allocable - i.e., as it accrues. This allocation is required even by cash basis taxpayers. Rule: Interest received on Series EE US Savings Bonds is Tax Exempt When - it is used to pay for higher education of the tax payer, spouse or dependent - Such amount of higher education expenses must be reduced first by any tax free scholarships received (before applying the edu exps against tax fee interest) Rule: Ordinarily, a tax must be assessed within three years after a return is filed. The assessment period begins from the due date of the return if the return is filed prior to the due date or "filing date" if the return is filed later (e.g., with an extension). The assessment period is extended to six years for returns that omit more than 25% of the gross income that should have been reported. That is not the case here ($20,000 ÷ $120,000 = 16.7%). Rule: A taxpayer may file a claim for refund within three years from the time the return was filed, or two years from the time the tax was paid, whichever is later. Since no return has been filed, the refund claim must be filed within two years from the time the tax was paid. An employee who has had social security tax withheld in an amount greater than the maximum for a particular year, may claim the excess as a credit against income tax, if that excess resulted from correct withholding by two or more employers. The pension distributions from a qualified plan (e.g. 401K plan), paid for exclusively by Mr. Vick's employer, are fully taxable. Remember: contributions are fully excluded from the Gross Income but when distributed, they will be taxable in the hands of beneficiary Death benefits or proceeds from a life insurance policy on parents are not taxable. Business casualty losses are fully deductible and are not claimed as itemized deductions subject to the 10% of AGI and $100 threshold (as for personal casualty losses) An individual's losses on transactions entered into for personal purposes are deductible only if the losses qualify as casualty or theft losses. In addition, the individual must itemize deductions and the loss must exceed 10% of AGI plus $100 per casualty. The accrued vacation pay should be included on the 1994 Federal Income tax return, the year in which it was distributed NOT to the year it belongs The amount of alternative minimum tax that is attributable to "deferral adjustments and preferences" can be used to offset the regular tax liability in the future years, not the alternative minimum tax. Royalty is not business income on Sch C but goes to Sch E (Rentals and Royalties) Dividends received from mutual funds that invest in tax-free obligations are not taxable. Personal life insurance premiums are not deductible. Depreciation on a business computer is reported on Form 4562 and is deductible on Schedule C. Subscriptions to journals used for business are fully deductible on Schedule C. Subscriptions to investment publications are reported in Schedule A subject to the 2% AGI threshold. Know the difference in treatment Qualifying contributions to a simplified employee pension (SEP) plan are fully deductible to arrive at AGI. - Slight confusion on this item is – whether this is KEOGH or Pension Plan fully deductible in W2 For a SE Business man – Interest expense on an amount borrowed to finance Green's business is fully deductible on Schedule C. The fact that it is a home-equity loan does not put it on a Schedule A because it is borrowed for the business. Page 2

GR For a SE Business man – Interest expense on a loan taken to buy a Van which is 75% used for business: 75% of the interest expense on the auto is deductible on Schedule C; the other 25% is nondeductible personal interest. For a SE Business man –Loss on sale of personal residence is not deductible. Investment interest expense is deductible up to net investment income. Unused expenses can be carried forward indefinitely. Gambling losses are miscellaneous deductions (on Schedule A) and only deductible to the extent of gambling income. Also, there is no 2% AGI floor on this deduction. The most importantly, there is No carry over allowed. If in an year, there are Gambling losses but no corresponding gambling income, the net loss cannot be deducted on Sch A and cannot be carried forward Real estate taxes on all residences are deductible in full. Personal expenses (such as Premium on homeowner's insurance policy) are not deductible. However, Mortgage insurance premiums paid in connection with qualified acquisition debt are deductible as home mortgage interest Child care credits are allowable for payments made to care for children while both spouses work. Guaranteed payments from a partnership are taxable to the recipient (covered in the partnership tax lecture, later in the course). Inheritances and proceeds of life insurance are not taxable to the recipient. Receipts of stock dividends and stock splits are not taxable, unless the recipient has the option to receive cash instead or stock (which is not the case here). Union Dues are unreimbursed business expenses deductible on sch A

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HW This question is asking for the actual deduction and requires the candidate to determine which items are deductible charitable contributions. The $5,000 donation to the church is allowable. The artwork donated to the local art museum is deductible to its basis, $2,000. Although it is appreciated property, Smith held the property for only four months, making it short-term capital gain property. Donations of short-term capital gain property are deductible to the donor to the extent of his/her adjusted basis. The contribution to a needy family is not a deductible contribution, as it was not made to a qualifying organization The $1,500 donation is not deductible because it was made directly to the needy family rather than to a qualified organization. the artwork had been held for more than one year, the fair market value could be deducted. In this case, the $11,000 was within the taxpayer's limitation of $12,000 (30% of AGI of $40,000) for donations of appreciated property. The casualty loss is measured by the difference in the property's value before ($130,000) and after (zero) the casualty, in other words, $130,000. The casualty loss must be reduced by the $120,000 insurance recovery to $10,000. This loss is reduced by $100 per casualty to $9,900. The sum of all such casualty losses (there is only one in this case) is further reduced by 10% of the taxpayer's adjusted gross income for the year. That is 10% × $70,000 = $7,000. The amount of the casualty loss that is deductible on Frazer's tax return is $9,900 − $7,000 = $2,900. Charitable contributions are subject to the phase out of the amount of certain itemized deductions for high-income individuals. Medical costs, non-business casualty losses, and investment interest deductions are (part of GIMC) not subject to the phase out of the amount of certain itemized deductions for highincome individuals. Repair and maintenance of medical devices for a disabled dependent child ($600) are deductible medical expenses. The cost of a special school for a handicapped person in an institution primarily for the availability of medical care, when the meals and lodging are merely incident to that care ($8,000) is also a deductible medical expense. Interest paid on a debt secured by a home mortgage is classified as deductible qualified residence interest. The Browns would be able to deduct the interest paid as an itemized deduction. The limit is $100,000 of mortgage interest since the loan was not to buy, build, or improve the home. Home Equity (not Acquisition) Indebtedness as in HIPPE - Personal interest is not deductible. It is also called consumer interest. - Interest paid on debt secured by a home mortgage is deductible. - Interest paid on a debt secured by a home mortgage is not classified as investment interest. Mortgages of up to $1,000,000 to buy, build, or substantially improve a home allow for the full deduction of interest. Interest on auto loans (consumer interest) is not deductible. Medical expenses include physical therapy (professional medical services) and insurance premiums providing reimbursement for medical care. Prescription drugs are considered medical care. Insurance against loss of income is not payment for medical care and therefore is not deductible. Qualified medical expenses must be reduced by insurance reimbursement ($2,000 + $500 − $1,500 = $1,000). The $4,000 cash contribution to the church is deductible. Relative to the purchase of the art object at the church bazaar, only the excess paid over fair market value ($1,200 − $800 = $400) is deductible. The used clothing donation to the Salvation Army is deductible at its fair market value of $600. The total deduction is $5,000 ($4,000 + $400 + $600). Note that the total contributions deduction is below the 50% of adjusted gross income ceiling (50% × $60,000 = $30,000), since $5,000 is less than $30,000. A capital expenditure for the improvement of a home qualifies as a medical expense if it is directly related to the prescribed medical care. However, it is deductible to the extent that the expenditure exceeds the increase in value of the home. Thus, Drake may only deduct $75,000, the difference between the cost of improvement ($100,000) and the increase in market value ($25,000) of the home. In addition, the full cost of home-related capital expenditures to enable a physically handicapped individual to live independently and productively qualifies as a medical expense. The widening of hallways qualifies as this type of expense and, therefore, the entire $10,000 is deductible. In answering this question, we must assume that the examiners mean to ask, "What total amount of the tax expense should the Rites claim as an itemized deduction?" Obviously, the Rites have more deductions than just those tax deductions above, or they would tax advantage of the standard deduction. In any case, for cash-basis taxpayers, deductible taxes are generally deductible in the year paid, and real estate taxes, income taxes, and personal property taxes (e.g., ad valorem taxes on personal automobile) are allowable deductions. The computer-generated investment interest expense deduction will be limited to the net investment income of the taxpayer. Any excess amount will be carried forward indefinitely. For example, assume the taxpayer had $5,000 of investment interest for a year but had investment income of only $3,000. The tax preparer would enter the $5,000 paid as investment interest, and the computer would then allow only a $3,000 deduction for investment interest in the year. The remaining $2,000 of expense would be carried forward indefinitely to be applied to investment income in future years. Qualified residence interest is NOT investment interest and would not affect investment interest income in any manner.

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HW An individual's losses on transactions entered into for personal purposes are deductible only if the losses qualify as casualty or theft losses. In addition, the individual must itemize deductions and the loss must exceed 10% of AGI plus $100 per casualty. - If the losses can be characterized as hobby losses, none of the loss is deductible. - Losses entered into for personal purposes other than casualty losses, are not deductible in any amount. - If no part of the transaction was entered into for profit, none of the related loss is deductible. casualty loss -damage caused in home by dog is controllable, and avoidable, and, thus, is not unexpected and does not qualify as a "casualty." Mrs. Vick can not file married filing jointly; this option is only available in the year of her spouse’s death. The qualifying widow filing status may be elected by a surviving spouse for two years after the death of his/her spouse; when the surviving spouse maintains a household that, for the whole entire taxable year, was the principal place of abode of a son, daughter or stepchild. Mrs. Vick maintains her residence for the entire year and it was the principal place of abode for her 11 year old daughter Joan. Qualifying widow with a dependent child is more advantageous than single and head of household since qualifying widow returns are entitled to a higher standard deduction and lower tax rates at similar income levels. State disability (worker's compensation) benefits are not taxable The cost in excess of the increase in value of the residence for the installation of a stairlift in January 1993 that related directly to the medical care of Mr. Vick is deductible on Schedule A - Itemized deductions, subject to the threshold of 7.5% of AGI. Premiums on Mr. Vick's personal life insurance policy are not deductible. If paid by Employer deductible upto $50,000/- per year and excess of 50,000 are includible in gross income as fringe Loss on the sale of the family car is a non-deductible personal loss – Not a Capital Asset for Schedule D and not a casualty loss as there is no suddenness The Vick's health insurance premiums for hospitalization coverage are deductible on Schedule A - Itemized deductions, subject to the threshold of 7.5% of AGI. If this amount is paid by the employer,then it amounts to Tax Free Fringe (R1-18/7.b)but will NOT be included in gross income for the beneficiary Amortization over the life of the loan of points paid to refinance the mortgage at a lower rate on the Vick home is deductible in full on Schedule A - Itemized deductions. - R2-22 (H of HIPPE) Real Estate property Taxes on a residential rental property in which the taxpayer actively participates. There as no personal use of the rental property. : Expenses related to rental property are deductible, subject to passive loss limitations, on Schedule E ( I was thinking they will go against Itemised Deductions (HIPPE)]

Generally, the statute of limitations on assessments is three years from the later of the due date of the return or the date the return was filed (including amended returns). The IRS has up to six years to assess additional tax if the misstatement is an understatement of 25% or more of gross income. In this case, the misstatement is $500 on $20,000 of gross income, or 2.5%. Therefore, the statute of limitations for Martinsen is the general rule. In this case, the due date of the return was April 15, Year 2. Martinson filed on March 31, Year 2. Under the general rule, the IRS has until three years from April 15, Year 2 (or, April 15, Year 5) to assess additional tax. In computing the amount of estimated payments due, an individual taxpayer may choose between the annualized method (90% of current year's tax), or the prior year method (100% of last year's tax) unless the taxpayer's adjusted gross income exceeds $150,000 then they must use 110% of last year's tax. Therefore, the taxpayer in this example can use the annualized method. The seasonal method is not permitted. An individual submits a claim for refund of erroneously paid income taxes on Form 1040X. Form 843 is used to request a refund of taxes other than income tax.

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Phaseouts General R1-15 R1-21 R1-37 R1-49 Personal and Dependency exemptions Interest Income on Series EE Bonds Passive Activity Losses: Mom & Pop Exception deduct upto $25,000 Home Owner's Exclusion The 25,000 allowance reduced by 50% of the excess of the AGI over $100,000 and completely phased out above $150,000 Capital Gains Single 159,950 MFJ 239,950 100,650 MFS 119,975

250,000

500,000

250,000

R2-5 R2-8 R2-10 R2-11 R2-11

IRA – Deductible IRA – ROTH IRA – Coverdell Student Loan Interest expense Tuition and Fee deduction

Super Rich (Exception disallowed) if the excessive AGI between $159,000 to $169,000 101 – 116,000 95 – 110,000 55 – 70,000 65 – 80,000 GIMC not subject to limitation others, 3% of excess of AGI over $159,950 Upto $15,000 = 35%, $15 to $43,000 = reduce 1% for every $2,000 Above $43,000 = minimum of 20% Base amount / 50% in excess of AGI Limit 159 – 169,000 190 – 220,000 115 – 145,000 130 – 160,000 0 – 10,000

R2-17

Itemized Deduction Limitation

R2-35 R2-36 R2-38 R2-38

Child and dependent care credit Elderly Credit Hope Credit Lifetime Credit

5,000 / 7,500 7,500 / 10,000 48 – 58,000 96 – 116,000 48 – 58,000 96 – 116,000

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IRA

Page 7

IRA

240050 7201.5

Other Notes: IRA contributions must be remitted by April 15 whether you file the return by that date or you seek an extention

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AMT AMT (Alternative Minimum Tax)
AMT Exemption Amounts for 2008 The AMT exemption amounts increased slightly for 2008. As a result, fewer taxpayers may be subject to the alternative minimum tax than in 2007. The AMT exemption amounts for 2008 are: $46,200 for single and head of household filers, $69,950 for married people filing jointly and for qualifying widows or widowers, and $34,975 for married people filing separately. AMT Tax Rates The exemption amounts mean that this amount of AMT taxable income is not subject to the AMT. Income over these amounts may be subject to AMT. Unlike the ordinary tax rates, the AMT has only two tax brackets. The AMT tax rate is assessed only on AMT income over the exemption amount. The AMT tax rates are: 26% on the first $175,000 of AMT taxable income, and 28% on the remainder of AMT taxable income For married people filing separately, the 26% bracket ends at $87,500

AMT Calculation – Individuals Regular Income Tax +/- Adjustments Passive activity losses Accelerated Depreciation (post 1986) NOL of the individuals Installment income of a dealer Contracts-%POC vs CC Tax “deductions” Interest deductions on some home “equity loans” Medical deductions (lim to excess over 10% AGI) Miscellaneous deductions not allowed Exemptions (personal) and Std Deduction + Preferences (Always add back) Private activity bond interest income Percentage depletion (excess over adj basis) Pre-1987 accelerated depreciation

Corporations are subject to a minimum tax of 20% on AMT AMT Calculation – Corporations Regular Taxable Income + / - Adjustments Long term contracts Excesss depreciation (post 1986) Installment sale dealer

- Home equity OK - not 7.5%

+ Preferences (Always add back) Private activity – issued post '86 Percetage depletion Pre-1987 accelerated depreciation + / - ACE (Adjusted Current Earnings) Muni interest income (Tax exempt int income) Increase CSV life insurance Non S/L depreciation (after 1989 excess over alt) DRD (Under 20% ownership) <A.M.T. NOL DEDUCTION>

Alternative Minimum Taxable Income <Exemption> Alternative Minimum Tax Base X Tax Computation Tentative AMT Tax <Tax Credits> Tentative Minimum Tax <Regular Income Tax> Alternative Minimum Tax

Minimum Taxable Income
($40,000 less 25% MTI over 150,000/-)

<AMT Exemption> AMT X 20%

Gross Alternative Minimum Tax <Foreign Tax Credit> Tentative Minimum Tax <Regular Tax Liability> Alternative Minimum Tax

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AMT

If you take “Regular Taxable Income” (that means, AFTER deducting “Itemized deductions” from AGI). Now, you need to ADDBACK the itemized deductions that are NOT Allowed to arrive at AMTI Medical expenses less than 10% AGI (add back only 2.5% of AGI here as 7.5% already deducted from AGI as part of Sch A) Taxes (all RIPS : Real estate, Income tax, Personal property taxes and Sales tax) Mortgage interest NOT USED to buy, build or improve your home (Home Equity Indebtedness – Ferrari) Miscellaneous Itemized Deductions that EXCEED to 2% AGI Floor Exemptions both personal and standard deductions are not allowed M

If you take “Adjusted Gross Income” (BEFORE deducting “Itemized deductions” from AGI), then you just need to consider the following ALLOWABLE “Itemized Deductions” to arrive at AMTI Medical and dental expenses must EXCEED 10% of AGI “Eligible Mortgage Interest” used to buy, build or improve your home (Acquisition Indebtedness) Charitable contributions Casualty and theft losses Miscellaneous deductions not subject to the 2% floor.

T I

C C M

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AMT

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Tables Business Income Rental Income Capital Gain/Loss

KROGH Plan

Medical Expenses

Casualty Loss

AMT

Elderly CREDIT

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Tables

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Itm 1. Lost cost/Adj basis 2. Decreased FMV

M
Medical Expenses Qualified Medical Expenses <Insurance Reimbursement> ----------------------------------------------Qualified Medical Expenses “Paid” <7.5% AGI> ----------------------------------------------Deductible Medical Expenses Taxes (RIPS) Deductible

T

I
Interest (HIPPE) Charity

C

C
Casualty Loss

M
Misc Itm Ded Subject to 2% AGI

Home Mortgage IntOverall = 50% Smaller Loss Real Estate Taxes Investment (like gambling) Short Term = <Insurance Recovery> Income Taxes Personal (consumer)Lesser of Basis or FMV -------------------------------------Int Personal Property Taxes Prepaid Int Long Term Appreciated @ FMV Taxpayer's Loss Sales Tax Education Loan Int 30% AGI <$100> Remaining amt to reach 50% Non Deductible -------------------------------------Federal Income Tax Eligible Loss Business & Rental Property <10% AGI> Inheritance Tax -------------------------------------Deductible Medical Expenses

Un reimbursed bus exp Travel, meals & lodging Transport exps Meals/Ent exp (50%) Edu exp (job related) Uniforms Business gifts Safe deposit box Subs to periodicals Tax prep fee Hobbies
NOT Subject to 2% AGI

Gambling losses Federal Estate Tax paid

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Itm

sed bus exp als & lodging

exp (50%) b related)

odicals

ate Tax paid

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