TAX 3300 Chapter Notes - Chapter 6: Itemized Deduction, Standard Deduction, Tax Law

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14 Nov 2017

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It is important to classify deductible expenses as deduction for agi (above) or deduction from. Deduction for agi can be claimed whether or not taxpayer itemizes. **deduction from agi result in a tax benefit only if they exceed taxpayer"s standard deduction. If itemized deduction (from agi) are less than standard deduction, they provide no benefit. First of all, it must be determined whether the item is deductible. If the item is deductible, then it must be determined whether the deduction is classified as for agi or from agi. Section 62 is to classify various deductions as deductions for agi. (it does not provide statutory authority for taking deduction) if a deduction is not listed in section 62, it is an itemized deduction (from agi). To determine the proper authority for claiming a deduction, first determine what type of activity the expenditure relates to (investment / production of income - section 212, trade or business - section 162, or personal).

Related Questions

1. In each of the following independent cases, indicate the amount (1) deductible for AGI, (2) deductible from AGI, and (3) neither deductible for nor from AGI before considering income limitations or the standard deduction. (Leave no answer blank. Enter zero if applicable.)

a. Ted paid $15 rent on a safety deposit box at the bank. In this box he kept the few shares of stock that he owned.


Deductible for AGI	?
Deductible from AGI	?
Not deductible	?

b. Tyler paid $138 for minor repairs to the fence at a rental house he owned.


Deductible for AGI	?
Deductible from AGI	?
Not deductible	?

c. Timmy paid $470 for health insurance premiums this year (not through an exchange and not with pre-tax dollars). Timmy is employed full-time and his employer paid the remaining premiums as a qualified fringe benefit.


Deductible for AGI	?
Deductible from AGI	?
Not deductible	?

d. Tess paid $1,270 of state income taxes on her consulting income.


Deductible for AGI	?
Deductible from AGI	?
Not deductible	?

5. Doctor Bones prescribed physical therapy in a pool to treat Jackâs broken back. In response to this advice (and for no other reason), Jack built a swimming pool in his backyard and strictly limited use of the pool to physical therapy. Jack paid $25,400 to build the pool, but he wondered if this amount could be deducted as a medical expense. Determine if a capital expenditure such as the cost of a swimming pool qualifies for the medical expense deduction.

Multiple Choice

a. The entire expenditure incurred to build the pool qualifies for medical expense deduction.

b. Only part of the expenditure incurred to build the pool that does not result in any increase in the value of the residence qualifies for medical expense deduction

c. No expenditure incurred to build the pool qualifies for medical expense deduction as it permanently results in increase in value of the residence.

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Matt is single, age 25 and has salary from his job as a sports announcer in the amount of $50,000. Matt also has the following income and expenses related to an activity:

Income- $23,000

Mortgage interest- from his home office- $8,000

Property taxes- from his home office- $2,000

Depreciation- $5,000

Supplies and fees- $8,000

Telephone- $2,000

1. Briefly define an activity classified as a hobby vs. a business?

2. List 4 factors might be used to assist a taxpayer in determining whether an activity is a hobby or a business?

3. If a hobby, answer the following questions:

a. Are hobby expenses deductions FOR AGI or FROM AGI?

b. What form/schedule and line is hobby income reported on?

c. What form/schedule and line are hobby expenses reported on?

d. Calculate Matt's AGI.

e. What is the rule regarding how hobby expenses are deducted, including the ordering of expenses and all limitations?

f. Apply the rule in (e) above and prepare a detailed schedule of your calculation of deductible hobby expenses are calculated.

4. If a business, answer the following questions:

a. Are business expense deductions FOR AGI or FROM AGI?

b. What form/schedule is business income reported on?

c. What form/schedule are business expenses reported on?

d. Prepare a tax return for Matt, assuming he uses the standard deduction and has no dependents.

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Amber & Bryan (both age 45), are married and file a joing tax return. 2017 income includes:

1. Salary of $200,000

2. Amber was in a car accident and received compensatory damages of $25,000 for broken nose.

3. Amber also received punitive damages of $15,000; the person who hit her car was intoxicated

4. interest income from Disney bonds in the amount of $1,000

5. refund of 2016 NJ IncomeTaxes of $2,000 (the couple itemized their deductions in 2016; itemized deductions exceeded the standard deduction by $5,000)

Amber and Bryan also incurred and paid the following expenses during the year:

6. Medical expenses: $7,000

7. Parking tickets $300

8. Alimony (Bryan was previously married and pays Alimony to his ex-wife): $12,000

9. Legal fees associated with divorce proceedings- not tax related: $4,000

10. Charitable contributions- paid on 12/30/17: $2,000

11. Casualty loss (after $100 floor, but before any further limitations) $1,000

12. Mortgage payment on principal residence: principal only: $10,000

13. Mortgage payment on principal residence: interest expense: $14,500

14. Property taxes (real estate taxes) on personal residence: $4,200

15. Nephew, Gerardo, owns a home and could not make his property tax payment as he is unemployed. Amber paid Gerardo's property taxes (real estate taxes): $3,000

16. Federal income tax withheld: $18,000

17. Qualified Moving expenses in conjuction with a new job: $2,000

18. Contribution to a traditional IRA: $4,000

19. Cost of new roof on personal residence: $14,000

20. NJ income tax withheld: $1,300

A. Identify items 1-5 as taxable or not taxable. Identify items 6-20 as a deduction for AGI, deduction from AGI, or not deductible. Give a sentence or two explaining limitations, rules, etc for the following items: 5, 6, 10, 11, 15,19

B. Use the tax formula to provide a detailed calculation of the couple's 2017 taxable income. Be sure to compare the standard deduction amount to total itemized deductions.

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TAX 3300 Chapter Notes - Chapter 6: Itemized Deduction, Standard Deduction, Tax Law

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