South Western Federal Taxation 2018

Individual Income Taxes 41st Edition

Hoffman Solutions Manual
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 Instructor’s Manual – McGraw-Hill’s Taxation, by Spilker et al

Chapter 6
Individual Deductions

INSTRUCTOR’S MANUAL

Learning Objectives
1. Identify the common deductions necessary for calculating adjusted gross income (AGI).
2. Describe the different types of itemized deductions available to individuals and compute itemized
deductions.
3. Explain the operation of the standard deduction, determine the deduction for personal and
dependency exemptions, and compute taxable income.

Teaching suggestions
In Chapter 5, we discussed the calculation of gross income and identified several specific types of taxable
income and exclusions. In Chapter 6, we describe the deductions allowed in the computation of taxable
income. It is important to emphasize that taxpayers are only allowed to deduct expenditures if there is a
specific tax law authorizing the deductions. Of course, Congress grants many deductions for taxpayers for
a variety of reasons, and these deductions appear in one of two places in the individual income tax
formula. Deductions “for AGI” (also called deductions “above the line”) are subtracted directly from
gross income. In contrast, deductions “from AGI” (also called deductions “below the line” or “itemized”
deductions) are subtracted from AGI.

Deductions for AGI are preferred over deductions from AGI because these deductions reduce taxable
income dollar for dollar. An indirect benefit of deductions for AGI is that these deductions reduce AGI.
Because many of the limitations on tax benefits for higher income taxpayers are based upon AGI,
deductions for AGI reduce these limitations, thereby increasing potential tax benefits. In contrast to
deductions for AGI, itemized deductions will have no effect on taxable income unless the total exceeds
the standard deduction. Students often confuse the location of the deduction with the deduction rule. So, a
good rule is to emphasize the order of the questions: first determine if the expense is deductible, then
determine the location of the deduction (for or from).

If the students have already been exposed to the calculation of taxable income for other entities (e.g.,
corporations, partnerships, etc.), it might be helpful to discuss which deductions and limitations are
specific to individuals relative to other entities. For example, the distinction between for and from AGI
deductions does not exist for corporations. If the objective of the course is a survey of tax rules (as
opposed to an in depth understanding of the specific deductions), it might be preferable to skip the details
of itemized deductions. A good approach might be to have students read the first part of the chapter and
skim the second part (itemized deductions).

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Assignment Matrix

Learning Text feature

objective

Research

Planning
Problem

Forms
Time
LO1

LO2

LO3
Difficulty

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 Instructor’s Manual – McGraw-Hill’s Taxation, by Spilker et al

20 min. Medium
DQ6-1 X
20 min. Medium
DQ6-2 X
20 min. Medium
DQ6-3 X
X
DQ6-4 20 min. Medium X
20 min. X
DQ6-5 Medium X
20 min. X
DQ6-6 Medium X
20 min. Medium X
DQ6-7 X
20 min. X
DQ6-8 Medium X
20 min. X
DQ6-9 Medium X
20 min. X
DQ6-10 Medium X
20 min. Medium X
DQ6-11 X

DQ6-12 10 min. Medium X

X
DQ6-13 10 min. Medium X
X
DQ6-14 10 min. Medium X
10 min. X
DQ6-15 Medium X
10 min. X
DQ6-16 Medium X
25 min. Hard X
DQ6-17 X
25 min. Hard X X
DQ6-18
25 min. Hard X
DQ6-19 X
20 min. Hard X
DQ6-20 X
20 min.
DQ6-21 X
20 min.
DQ6-22 X
Hard X X
DQ6-23 20 min.
20 min. Hard X
DQ6-24 X
Hard X
DQ6-25 20 min. X
20 min. Hard
DQ6-26 X

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 Instructor’s Manual – McGraw-Hill’s Taxation, by Spilker et al

Hard
DQ6-27 20 min. X
25 min. Hard X
DQ6-28 X
25 min. Hard X
DQ6-29 X
15 min. Medium
DQ6-30 X
15 min. Medium
DQ6-31 X
15 min. Medium
DQ6-32 X
15 min. Medium
DQ6-33 X
30 min. Medium
DQ6-34 X
DQ6-35 30 min. Medium
X

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 Instructor’s Manual – McGraw-Hill’s Taxation, by Spilker et al

P6-36 15 min. Easy X

Easy X
P6-37 15 min. X

P6-38 15 min. Easy X

P6-39 15 min. Easy X

30 min.
P6-40 Medium X X

P6-41 30 min. Medium X

P6-42 20 min. Medium X

X
P6-43 20 min. Medium X X
30 min. Medium X
P6-44 X X

P6-45 20 min. Medium X

P6-46 20 min. Medium X

20 min.
P6-47 Medium X
15 min. Easy
P6-48 X
15 min. Easy
P6-49 X
Easy X
P6-50 10 min. X X

P6-51 10 min. Medium X

P6-52 10 min. Medium X X

P6-53 20 min. Medium X

20 min.
P6-54 Medium X
15 min.
P6-55 Medium X
15 min.
P6-56 Medium X
15 min. Medium
P6-57 X
40 min.
P6-58 Hard X
Hard X
P6-59 40 min. X
30 min.
P6-60 Medium X
40 min. Hard X
P6-61 X
40 min. Hard X
P6-62 X

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 Instructor’s Manual – McGraw-Hill’s Taxation, by Spilker et al

40 min.
P6-63 Hard X

P6-64 45 min. Hard X X X X

40 min. Hard
P6-65 X
40 min.
P6-66 Hard X
45 min. X
CP6-67 Hard X X X
45 min. X X
CP6-68 Hard X X X
45 min. X
CP6-69 Hard X X
45 min. X X
CP6-70 Hard X
45 min. X
CP6-71 Hard X X

Lecture Notes
1) Deductions for AGI
a) Congress allows taxpayers to claim a variety of deductions for AGI.
b) Deductions directly related to business activities
i) Work through Example 6-1
ii) Refer to Exhibit 6-1 for Individual Business and Investment Expense Deductions for AGI and
from AGI
iii) Trade or business expenses
iv) Refer to Exhibit 6-2 Parts I and II from Schedule C Profit or Loss from Business
v) Work through Example 6-2
vi) Rental and royalty expenses
(1) Taxpayers are allowed to deduct their expenses associated with generating rental or
royalty income for AGI.
(2) Refer to Exhibit 6-3 Page 1 of Schedule E Rental or Royalty Income.
(3) Work through Example 6-3
vii) Losses
(1) Taxpayers disposing of business assets at a loss are allowed to deduct the losses as AGI
deductions.
viii)Flow-through entities
(1) Income from flow-through entities such as partnerships, LLCs, and S corporations passes
through to the owners of those entities and is reported on the tax returns of the owners.
(2) Any expenses and losses incurred by the entity pass through to the entity owners, who
typically treat them as deductions for AGI.
c) Deductions indirectly related to business activities
i) Taxpayers are allowed to deduct several expenses that are indirectly related to business
activities as deductions for AGI.
ii) Moving expenses
(1) Deductible for AGI for individuals who pass a distance test and a time test
(2) To satisfy the distance test, the distance from the taxpayer’s old residence to the new
place of work must be at least 50 miles more than the distance from the old residence to
the old place of work.

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 Instructor’s Manual – McGraw-Hill’s Taxation, by Spilker et al

(3) Taxpayer must be employed at least 39 of 52 weeks or be self-employed for 78 of the 104
weeks following the move
(4) Work through Examples 6-4 and 6-5
iii) Health insurance deduction by self-employed taxpayers
iv) Self-employment tax deduction
(1) Work through Example 6-6
v) Penalty for Early Withdrawal of Savings
(1) Allows a deduction for AGI for any interest income an individual forfeits to a bank as a
penalty for prematurely withdrawing a certificate of deposit or similar deposit
(2) Work through Example 6-7
d) Deductions subsidizing specific activities
i) Deduction for interest on qualified education loans
(1) Up to $2,500 of interest on education loans is deductible for AGI.
(2) A loan qualifies as an education loan if the proceeds are used to fund qualified education.
(3) The interest deduction is phased-out for taxpayers with AGI exceeding $65,000
($135,000 married filing jointly).
(4) Refer to Exhibit 6-4 for Summary of Limitations on Deduction of Interest on Education
Loans
(5) Work through Example 6-8
ii) Deduction for qualified education expenses (scheduled to expire after 2016)
(1) Up to $4,000 of qualified education expenses can be deducted for AGI.
(2) Qualified education expenses are limited to the tuition and fees required for enrollment at
a postsecondary institution of higher education.
(3) For purposes of the qualified education expense deduction, modified AGI is AGI after
deducting the education loan interest expense but before deducting qualified education
expenses.
(4) The deduction is reduced for taxpayers with modified AGI over $65,000 ($130,000
married filing jointly) and eliminated for taxpayers with modified AGI of $80,000
($160,000 married filing jointly) or more.
(5) Refer to Exhibit 6-5 for Summary of 2016 Limitations on Qualified Education Expenses
(6) Work through Example 6-9
(d) Summary: deductions for AGI
a. Refer to Exhibits 6-6, 6-7 & 6-8
2) Deductions from AGI: Itemized Deductions
i) Medical expenses
(1) Designed to provide relief for taxpayers whose ability to pay taxes is seriously hindered
by health-related circumstances
(2) Qualifying medical expenses include any payments for the care, prevention, diagnosis, or
cure of injury, disease, or bodily function that are not reimbursed by health insurance or
are not paid for through a “flexible spending account.”
(3) Common medical expenses include:
(a) Prescription medication and medical aids such as eyeglasses, contact lenses, and
wheel chairs
(b) Payments to medical care providers such as doctors, dentists, and nurses and medical
care facilities such as hospitals
(c) Transportation for medical purposes
(d) Hospitals and long-term care facilities
(e) Health insurance premiums (if not deducted for AGI by self-employed taxpayers) and
insurance for long-term care services
(4) Work through Example 6-10
(5) Transportation and travel for medical purposes

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 Instructor’s Manual – McGraw-Hill’s Taxation, by Spilker et al

(a) Taxpayers traveling for the primary purpose of receiving essential and deductible
medical care may deduct the cost of the travel (including meals and lodging, with
certain restrictions) and transportation.
(b) Taxpayers using personal automobiles for medical transportation purposes may
deduct a standard mileage allowance in lieu of actual costs.
(c) Work through Example 6-11
(6) Hospitals and long-term care facilities
(a) Taxpayers may deduct the cost of meals and lodging at hospitals.
(b) Work through Example 6-12
(7) Medical expense deduction limitation
(a) The deduction for medical expenses is limited to the amount of unreimbursed
qualifying medical expenses paid during the year (no matter when the services were
provided) reduced by 10 percent (through 2016, 7.5 percent if the taxpayer or spouse
is 65 or older) of the taxpayer’s AGI.
(b) Work through Example 6-13.
ii) Taxes
(1) State, local, and foreign income taxes, including state and local taxes paid during the year
through employer withholding, estimated tax payments, and overpayments on the prior
year return that the taxpayer applies to the current year
(2) Real estate taxes on property held for personal or investment purposes
(3) Personal property taxes that are assessed on the value of the specific property
(4) State and local sales tax deduction in lieu of state and local income tax
(5) Work through Example 6-14
iii) Interest
(1) Individuals can deduct interest paid on loans secured by a personal residence (on
acquisition indebtedness up to $1,000,000 and home-equity indebtedness up to
$100,000).
(2) Individuals can also deduct interest paid on loans used to purchase investment assets such
as stocks, bonds, or land.
(3) Work through Example 6-15
iv) Charitable contributions
(1) Congress encourages donations to charities by allowing taxpayers to deduct contributions
of money and other property to qualified domestic charitable organizations.
(2) Qualifying charitable organizations include organizations that engage in educational,
religious, scientific, governmental, and other public activities.
(3) Work through Example 6-16
(4) Contribution of money
(a) Cash contributions are deductible in the year paid, including donations of cash or by
check, electronic funds transfers, credit card charges, and payroll deductions.
(b) Work through Example 6-17
(5) Contributions of property other than money
(a) When a taxpayer donates property to charity, the amount the taxpayer is allowed to
deduct depends on whether the property is capital gain property or ordinary income
property.
(b) Work through Example 6-18, 6-19, 6-20
(6) Charitable contribution deduction limitations
(a) The amount of a taxpayer’s charitable contribution deduction for the year is limited
to a ceiling or maximum deduction.
(b) Refer to Exhibit 6-9 for Summary of Charitable Contribution Limitation Rules
(c) Work through Example 6-21
v) Casualty and theft losses on personal-use assets

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 Instructor’s Manual – McGraw-Hill’s Taxation, by Spilker et al

(1) Individuals are allowed to deduct casualty and theft losses realized on personal-use
assets.
(2) Tax loss from casualties
(a) Deductions are allowed for unreimbursed casualty and theft losses because these
losses may substantially reduce a taxpayer’s ability to pay taxes.
(b) Work through Example 6-22
(3) Casualty loss deduction floor limitations
(a) Casualty losses must exceed two separate floor limitations to qualify as itemized
deductions. The first floor is $100 for each casualty event during the year. The
second floor limitation is 10 percent of AGI and it applies to the sum of all casualty
losses for the year (after applying the $100 floor).
(b) Work through Example 6-23
vi) Miscellaneous itemized deductions subject to AGI floor
(1) Variety of deductions that address specific objectives but do not fit easily into any
category
(2) Employee business expenses
(a) Work through Examples 6-24 and 6-25
(b) Travel and transportation
(i) Work through Example 6-26
(c) Employee expense reimbursements
(i) Work through Example 6-27
(3) Investment expenses
(a) Expenses associated with investment income or property
(b) Investment advisory fees
(c) Safe-deposit box fees
(d) Subscriptions to investment-related publications
(4) Tax preparation fees
(a) Work through Example 6-28
(5) Hobby losses
(a) Factors to consider to determine hobby status
(b) If activity, revenue is included in gross income and expenses are deducted as
itemized deductions (mortgage interest, real estate taxes, miscellaneous itemized
deductions)
(c) Expenses deducted in specific order: expenses otherwise deductible are deducted 1st
(mortgage interest, real estate taxes), all other deductible expenses except
depreciation are deducted 2nd, and depreciation is deducted last
(d) Work through Example 6-29
(6) Limitation on miscellaneous itemized deductions (2 percent of AGI floor)
(a) Work through Example 6-30
vii) Miscellaneous itemized deductions not subject to AGI floor
viii) Phase-out of itemized deductions
(1) A taxpayer’s total itemized deductions other than medical expenses, casualty losses,
investment interest expense, and gambling losses is subject to a phase-out.
ix) Summary of itemized deductions
(1) Work through Example 6-31
(2) Refer to Exhibit 6-10 for Schedule A—Itemized Deductions
3) The Standard Deduction and Exemptions
a) Standard deduction
i) A flat amount that most individuals can elect to deduct instead of deducting their itemized
deductions (if any)

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 Instructor’s Manual – McGraw-Hill’s Taxation, by Spilker et al

ii) Taxpayers generally deduct the greater of their standard deduction or their itemized
deductions.
iii) The amount of the standard deduction varies according to the taxpayer’s filing status, age,
and eyesight.
iv) Basic standard deduction is greater for married taxpayers filing jointly and those supporting a
family (head of household) than it is for married taxpayers filing separately and unmarried
taxpayers not supporting a family.
v) Taxpayers who are at least 65 years of age on the last day of the year or blind are entitled to
additional standard deduction amounts above and beyond their basic standard deduction.
vi) Refer to Exhibit 6-11 for Standard Deduction Amounts
vii) Work through Example 6-32 and 6-33
viii)Bunching itemized deductions
(1) Some taxpayers may deduct the standard deduction every year because their itemized
deductions always fall just short of the standard deduction amount and thus never
produce any tax benefit.
(2) The basic strategy consists of shifting itemized deductions into one year such that the
amount of itemized deductions exceeds the standard deduction for the year, and then
deducting the standard deduction in the next year (or vice versa).
(3) Work through Example 6-34
ix) Deduction for personal and dependency exemptions
(1) Taxpayers are generally allowed to deduct $4,050 for each personal and dependency
exemption.
(2) A taxpayer’s total exemption deduction is phased out based on AGI for relatively high
income taxpayers.
(3) Refer to Exhibit 6-12 for Maximum Phase-Out Range for Personal and Dependency
Exemptions for 2017
(4) Work through Example 6-35
4) Taxable Income Summary
a) Refer to Exhibit 6-13, 6-14 & 6-15

Suggested activities
A great activity for this chapter is to compile a list of the deductions that are to be emphasized in the
chapter (business, rental/royalty, employee, education, medical, charitable, etc.) and have students prepare
a set of examples for each type of deduction. Alternatively, prepare a list of expenditures and have
students determine whether the expenditure is deductible and, if so, where the deduction is claimed.

Ethics Discussion:

From page 6-23:

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Discussion points:

• If Sabrina gets an appraisal that states the value of the clothes is $6,000, how much tax deduction
will she receive for the clothes?
• If Sabrina’s clothes are worth $6,000, is she better off getting the appraisal or reporting a
deduction of $4,900? What information would you need to answer this question?
• Does Sabrina’s reporting $4,900 violate tax law and/or ethical standards?
• Do you think the IRS has reason to be suspicious of contributions that fall just below $5,000?
Why?

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