Tax Notes Ch. 1-6
Content
Dependency Exemption
Qualifying child – age < 19 or fulltime student <
24. Qualifying relative – member of household,
gross income<$3,900, taxpayer supports > ½
Estimated Tax Payments
[Line 63 – 1040]
Health Insurance Premiums and
Reimbursement
NOT included in gross income
Alimony
Included [line 11 if received/31a if paid]
Child Support
NOT included
premises, i.e. oil rig. If CASH allowance, than
included in income.
Gambling Winnings – Included in “Other
Income” [Line 21]
Gambling Losses – Sch. A – Other Misc, limited
to income
Self-employment Tax
Included, Social Security tax rate of 12.4%
applies to first $113,700 of net self-employment
income, Medicare Tax rate of 2.9% applies to all
net self-employment income. HALF (50%) of the
self-employment tax is allowed as a deduction
on 1040 [Line 27] [Use form SE]
Bad debts
Deduction limited to accounts receivable or
income reported on sales that is no longer
collectible (business) (Ordinary deduction) [Line
27a]
Non-business Bad Debt
May claim $3,000 S.T. capital loss and carry
remaining forward
Capital Losses
nonbusiness bad debts. Limited to $3,000
deduction against ordinary income in current yr.
Excess unused deduction may be carried
forward. [Line 13 – 1040] [Sch. D]
Gifts
NOT included [unless in business setting]
Car Mileage
rate .565 x business miles – commuting and
nonbusiness (both nondeductible) mileage
reported in PART IV – Sch. C [Line 9 – Sch. C]
(Included in the standard car mileage rate is
gas, oil, insurance, repairs, maintenance, and
depreciation. ADD toll fees and business parking
to total after .565 x miles calculation) [Line 9]
Home Office Expenses
deductible if used on regular basis, separate
structure, business storage, or exclusive use by
clients. Deduction may NOT reduce net income
from business below 0. Unused deductions may
be carried forward. If home office is used for
business & personal expenses NO deduction
allowed. [Line 30 – Sch. C] [Form 8829]
Inheritances
NOT included
Inventories & COGS
Part III, Sch. C
Home/office allocation – sq ft. business/total
sq. ft x rent/utilities/etc.
Taxable Interest – [Line 8a] [transferred from
Sch. B]
Meals and Entertainment
Can deduct 50% (business) [Line 24b]
Municipal Bond Interest – excluded from
taxable income [line 8b]
Lodging
100% deduction [Line 24a] “Travel Expenses”
include: airfare, laundry, taxi, hotel
Net Operating Loss
Net operating loss from 1 yr. can be used as a
deduction in another yr. ONLY losses from
trade/business, casualty & theft or confiscation
losses can generate a net operating loss. [Line
12 – 1040]
Prizes & Awards
Included [Line 21] Exception: employee awards
of tangible personal property
Unemployment Compensation – included
[line 19]
Ordinary Dividends – Included, taxable in
year received [line 9a]
Qualified Dividends – or “qualified ordinary
dividends” are a category of Ordinary Dividends
—taxed at different rates. [Line 9b] Tax Bracket
15% - 0% tax rate on qualifying dividends. Tax
bracket 25-35% - 15% tax rate on qualifying
Dues & Subscriptions (Licenses)
Deductible if professional (i.e. no country club
dues) [Line 23]
Business Education – Maintaining or
improving existing skills at uni, course, or
seminar is deductible. (exception: must not lead
to new trade/skill) [Line 27a]
Clothing & Uniforms – deductible if for
business [Line 27a]
Dividend Interest – included [line 9]
Scholarships – nontaxable for tuition, fees,
books, and course required materials, TAXABLE
as room and board
Meals and Lodging – NOT included if
furnished by employer and needed for job or on
Business Gifts
may deduct $25/done (husband+wife=1
donee). NOT deductible if taxpayer’s
supervisor/higher-level. Incidentals like
giftwrapping not subject to $25 ceiling [Line
27a]
Hobby Losses
expenses are deductible. May NOT show a loss
for a hobby/personal enjoyment. Any profits
from hobbies must be included in taxable
income. [Line 21] Can deduct expenses
otherwise on Sch. A
Not a hobby 750 – (200 – 460 – 250)
= 160 loss against income
Income^ - ^depr. – ^supplies
– taxes personal property
Hobby 750 – 250 = 500 income depr. and supplies (only 500 deductible
^Automatically deductible on Sch. A
Other Income
[Line 6 – Sch. B] of business
Mortgage interest – of business
[Line 16a – Sch. C]
Rental Income
taxable and reported on [Line 3 - Sch. E] [Line
17 – 1040]. Take monthly rental income x 12,
less expenses (ie. Real estate taxes, mortgage
interest, depreciation, home owner’s dues,
utilities, etc.)
Vacation homes
Rented<15 days: nondeductible personal
expenses (mortgage interest and real estate
taxes allowed on Sch. A itemized reductions).
Rented>14 and used for personal < 10% of
days rented, whichever is greater, deductions
NOT limited to income and may take a loss.
[Sch. E] Rented > 14 days and used for personal
> 10% days rented, or 14 days whichever is
greater, allocable rental expenses to the extent
of income. PERSONAL PORTION of interest and
taxes to personal use of property is deductible
on [Sch. A]
Passive Loss Limitations
passive losses (i.e. rental real estate income
and LLP) cannot be used to offset either active
(wages, self emp income) and portfolio income
(dividends and interest). Unused passive
losses/credits are carried over. May deduce
$25,000 of rental property losses against other
income. If AGI (before IRA and passive, or rental
losses: “modified AGI” [Line 17]) > $100,000,
the amount that exceeds 100k is multiplied by
50% and subtracted from 25,000. [f. 8582]
Real Estate Rental as Trade/Business Considered “active” if > 750hrs of service and
> 50% personal service. In this case, can
deduct a loss.
Self-employed Health Insurance Deduction
– can take deduction for medical and dental
insurance for taxpayer, spouse and dependent
children, children under 27, medicare
premiums, long-term care subject to limitations
(a table) [Line 29]
Health Savings Account – Contributions to
HSA’s are a deduction to AGI and limited to
certain $ amounts depending on age and
whether covers family or individual. Earnings
and unused contributions are not taxed. Also
carried forward. Once individuals qualify for
Medicare (age 65) not allowed to contribute to
HSA. [Line 25]
Distributions from HSA – Once taxpayer is
65, can take distributions from HSA tax-free to
cover medical expenses.
Moving Expenses – deductible [Form 3903] if
changing job sites, at least 50+miles. Mileage
rate for moving .24, traveling includes lodging
NOT meals. Qualified expenses (moving
household goods, personal effects, mileage,
lodging) covered by employer NOT reported as
part of gross income. But non-qualified
expenses covered are included in income (i.e.
employer covers meals).
IRA annual contributions – deductible [Line
32] $5,500 limit
IRA retirement distributions – taxable. ROTH
IRA not deductible/taxable. Max annual
contribution that can be made is $5,500 (plus
$5500 for spouse with no income). Age > 50
additional $1000 allowed.
Direct Transfers – retirement to another planno tax implications (excluded)
401K Plan – can contribute lesser of 20% of
salary or $17,500
Medical Expense – deductible (i.e. medical
insurance premiums, unreimbursed hospital
bills, doctor bills, hearing aids, nursing home,
prescriptions, etc.) unless unnecessary cosmetic
surgery, swimming pool, cost of travel for
general improvement. Mileage rate for
transportation is .24 [Line 1 – Sch. A]
Interest – deductible (i.e. mortgage interest,
investment interest) NOT deductible-automobile
interest, credit card interest [Line 10-15 Sch. A]
Taxes – deductible [Line 5-9 Sch. A], (i.e.
property taxes on personal residence [Line 6],
state and local taxes [Line 5b], state income tax
[5a] real estate property taxes [Line 6], sales
taxes [5b], Income tax preparation fee [Line 22
– Sch. A], taxes on personal property [Line 7]
(exise/gas NOT deductible, also foreign taxes if
payer elects a foreign tax credit) have to choose
income or sales tax
Certificate of Deposit from Bank – [Line 8a]
Charitable contributions – must be made in
cash or property. For donated property the
deduction is equal to the fair market value if
used for primary use. 50% limitation of AGI.
(NOT incl. political party, labor unions,
international) [Line 16]
Casualty and Theft Losses
[Form 4684] deductible. reduced by insurance
proceeds. Has to be sudden and payer not
willful. Deduction in FMV not to exceed the
basis.
Job Expenses – [Line 21] Form 2106, subject to
2% AGI limitation. 50% meals/entertainment
Child Tax Credit – Is $1,000 per qualifying
child. Child must be < 17. Phase out starts
when AGI reaches $110,000 [Line 51]
Child and Dependent Care Credit– See table
for applicable % of qualified expenses.
(normally 20% of qualified expenses if AGI >
43k) Children must be < 17 yrs, and claimed as
dependent. The maximum amount of qualified
expenses is $3,000 for one dependent, and
$6,000 for two or more. Dependent must be <
13 yrs or be dependent/spouse incapable of
self-care. Qualified dependent care expenses
are limited to the lesser of either spouse’s
income (i.e. if qualified expense $5000 but
spouse’s income $2000 can only take credit on
$2000 x total AGI %.) [Line 48 - 1040] [Form
2441]
American Opportunity Credit – provides tax
relief for qualified higher education expenses.
100% of 1st $2,000 of tuition, fees, books,
course materials, and 25% of the next $2,000
for a max of $2,500 per student. (available for
first 4 yrs). If the credit exceeds tax liability, the
credit is 40% refundable ($1000= 0.4 x 2,500)
Lifetime Learning Credit
20% of tuition and fees up to $10,000. Books
not qualified expense unlike AOC. Credit is
available for courses at eligible institutions.
Students can be enrolled in just 1 course and
still get credit.
Foreign Tax Credit
Taxpayer allowed credit for income earned in
foreign country. 1st calculate total foreign taxes
paid. Then calc: net foreign income/total income
x U.S. tax liability = limitation. Foreign tax credit
= lesser of the foreign taxes paid or the
limitation, carry forward or back unused taxes.
[Line 47]
Simplified Deduction – Office Expense
The allowable square footage is the smaller of
the portion of a home used in a qualified
business use of the home, or 300 square feet.
The prescribed rate is $5.00.
Qualifying child – age < 19 or fulltime student <
24. Qualifying relative – member of household,
gross income<$3,900, taxpayer supports > ½
Estimated Tax Payments
[Line 63 – 1040]
Health Insurance Premiums and
Reimbursement
NOT included in gross income
Alimony
Included [line 11 if received/31a if paid]
Child Support
NOT included
premises, i.e. oil rig. If CASH allowance, than
included in income.
Gambling Winnings – Included in “Other
Income” [Line 21]
Gambling Losses – Sch. A – Other Misc, limited
to income
Self-employment Tax
Included, Social Security tax rate of 12.4%
applies to first $113,700 of net self-employment
income, Medicare Tax rate of 2.9% applies to all
net self-employment income. HALF (50%) of the
self-employment tax is allowed as a deduction
on 1040 [Line 27] [Use form SE]
Bad debts
Deduction limited to accounts receivable or
income reported on sales that is no longer
collectible (business) (Ordinary deduction) [Line
27a]
Non-business Bad Debt
May claim $3,000 S.T. capital loss and carry
remaining forward
Capital Losses
nonbusiness bad debts. Limited to $3,000
deduction against ordinary income in current yr.
Excess unused deduction may be carried
forward. [Line 13 – 1040] [Sch. D]
Gifts
NOT included [unless in business setting]
Car Mileage
rate .565 x business miles – commuting and
nonbusiness (both nondeductible) mileage
reported in PART IV – Sch. C [Line 9 – Sch. C]
(Included in the standard car mileage rate is
gas, oil, insurance, repairs, maintenance, and
depreciation. ADD toll fees and business parking
to total after .565 x miles calculation) [Line 9]
Home Office Expenses
deductible if used on regular basis, separate
structure, business storage, or exclusive use by
clients. Deduction may NOT reduce net income
from business below 0. Unused deductions may
be carried forward. If home office is used for
business & personal expenses NO deduction
allowed. [Line 30 – Sch. C] [Form 8829]
Inheritances
NOT included
Inventories & COGS
Part III, Sch. C
Home/office allocation – sq ft. business/total
sq. ft x rent/utilities/etc.
Taxable Interest – [Line 8a] [transferred from
Sch. B]
Meals and Entertainment
Can deduct 50% (business) [Line 24b]
Municipal Bond Interest – excluded from
taxable income [line 8b]
Lodging
100% deduction [Line 24a] “Travel Expenses”
include: airfare, laundry, taxi, hotel
Net Operating Loss
Net operating loss from 1 yr. can be used as a
deduction in another yr. ONLY losses from
trade/business, casualty & theft or confiscation
losses can generate a net operating loss. [Line
12 – 1040]
Prizes & Awards
Included [Line 21] Exception: employee awards
of tangible personal property
Unemployment Compensation – included
[line 19]
Ordinary Dividends – Included, taxable in
year received [line 9a]
Qualified Dividends – or “qualified ordinary
dividends” are a category of Ordinary Dividends
—taxed at different rates. [Line 9b] Tax Bracket
15% - 0% tax rate on qualifying dividends. Tax
bracket 25-35% - 15% tax rate on qualifying
Dues & Subscriptions (Licenses)
Deductible if professional (i.e. no country club
dues) [Line 23]
Business Education – Maintaining or
improving existing skills at uni, course, or
seminar is deductible. (exception: must not lead
to new trade/skill) [Line 27a]
Clothing & Uniforms – deductible if for
business [Line 27a]
Dividend Interest – included [line 9]
Scholarships – nontaxable for tuition, fees,
books, and course required materials, TAXABLE
as room and board
Meals and Lodging – NOT included if
furnished by employer and needed for job or on
Business Gifts
may deduct $25/done (husband+wife=1
donee). NOT deductible if taxpayer’s
supervisor/higher-level. Incidentals like
giftwrapping not subject to $25 ceiling [Line
27a]
Hobby Losses
expenses are deductible. May NOT show a loss
for a hobby/personal enjoyment. Any profits
from hobbies must be included in taxable
income. [Line 21] Can deduct expenses
otherwise on Sch. A
Not a hobby 750 – (200 – 460 – 250)
= 160 loss against income
Income^ - ^depr. – ^supplies
– taxes personal property
Hobby 750 – 250 = 500 income depr. and supplies (only 500 deductible
^Automatically deductible on Sch. A
Other Income
[Line 6 – Sch. B] of business
Mortgage interest – of business
[Line 16a – Sch. C]
Rental Income
taxable and reported on [Line 3 - Sch. E] [Line
17 – 1040]. Take monthly rental income x 12,
less expenses (ie. Real estate taxes, mortgage
interest, depreciation, home owner’s dues,
utilities, etc.)
Vacation homes
Rented<15 days: nondeductible personal
expenses (mortgage interest and real estate
taxes allowed on Sch. A itemized reductions).
Rented>14 and used for personal < 10% of
days rented, whichever is greater, deductions
NOT limited to income and may take a loss.
[Sch. E] Rented > 14 days and used for personal
> 10% days rented, or 14 days whichever is
greater, allocable rental expenses to the extent
of income. PERSONAL PORTION of interest and
taxes to personal use of property is deductible
on [Sch. A]
Passive Loss Limitations
passive losses (i.e. rental real estate income
and LLP) cannot be used to offset either active
(wages, self emp income) and portfolio income
(dividends and interest). Unused passive
losses/credits are carried over. May deduce
$25,000 of rental property losses against other
income. If AGI (before IRA and passive, or rental
losses: “modified AGI” [Line 17]) > $100,000,
the amount that exceeds 100k is multiplied by
50% and subtracted from 25,000. [f. 8582]
Real Estate Rental as Trade/Business Considered “active” if > 750hrs of service and
> 50% personal service. In this case, can
deduct a loss.
Self-employed Health Insurance Deduction
– can take deduction for medical and dental
insurance for taxpayer, spouse and dependent
children, children under 27, medicare
premiums, long-term care subject to limitations
(a table) [Line 29]
Health Savings Account – Contributions to
HSA’s are a deduction to AGI and limited to
certain $ amounts depending on age and
whether covers family or individual. Earnings
and unused contributions are not taxed. Also
carried forward. Once individuals qualify for
Medicare (age 65) not allowed to contribute to
HSA. [Line 25]
Distributions from HSA – Once taxpayer is
65, can take distributions from HSA tax-free to
cover medical expenses.
Moving Expenses – deductible [Form 3903] if
changing job sites, at least 50+miles. Mileage
rate for moving .24, traveling includes lodging
NOT meals. Qualified expenses (moving
household goods, personal effects, mileage,
lodging) covered by employer NOT reported as
part of gross income. But non-qualified
expenses covered are included in income (i.e.
employer covers meals).
IRA annual contributions – deductible [Line
32] $5,500 limit
IRA retirement distributions – taxable. ROTH
IRA not deductible/taxable. Max annual
contribution that can be made is $5,500 (plus
$5500 for spouse with no income). Age > 50
additional $1000 allowed.
Direct Transfers – retirement to another planno tax implications (excluded)
401K Plan – can contribute lesser of 20% of
salary or $17,500
Medical Expense – deductible (i.e. medical
insurance premiums, unreimbursed hospital
bills, doctor bills, hearing aids, nursing home,
prescriptions, etc.) unless unnecessary cosmetic
surgery, swimming pool, cost of travel for
general improvement. Mileage rate for
transportation is .24 [Line 1 – Sch. A]
Interest – deductible (i.e. mortgage interest,
investment interest) NOT deductible-automobile
interest, credit card interest [Line 10-15 Sch. A]
Taxes – deductible [Line 5-9 Sch. A], (i.e.
property taxes on personal residence [Line 6],
state and local taxes [Line 5b], state income tax
[5a] real estate property taxes [Line 6], sales
taxes [5b], Income tax preparation fee [Line 22
– Sch. A], taxes on personal property [Line 7]
(exise/gas NOT deductible, also foreign taxes if
payer elects a foreign tax credit) have to choose
income or sales tax
Certificate of Deposit from Bank – [Line 8a]
Charitable contributions – must be made in
cash or property. For donated property the
deduction is equal to the fair market value if
used for primary use. 50% limitation of AGI.
(NOT incl. political party, labor unions,
international) [Line 16]
Casualty and Theft Losses
[Form 4684] deductible. reduced by insurance
proceeds. Has to be sudden and payer not
willful. Deduction in FMV not to exceed the
basis.
Job Expenses – [Line 21] Form 2106, subject to
2% AGI limitation. 50% meals/entertainment
Child Tax Credit – Is $1,000 per qualifying
child. Child must be < 17. Phase out starts
when AGI reaches $110,000 [Line 51]
Child and Dependent Care Credit– See table
for applicable % of qualified expenses.
(normally 20% of qualified expenses if AGI >
43k) Children must be < 17 yrs, and claimed as
dependent. The maximum amount of qualified
expenses is $3,000 for one dependent, and
$6,000 for two or more. Dependent must be <
13 yrs or be dependent/spouse incapable of
self-care. Qualified dependent care expenses
are limited to the lesser of either spouse’s
income (i.e. if qualified expense $5000 but
spouse’s income $2000 can only take credit on
$2000 x total AGI %.) [Line 48 - 1040] [Form
2441]
American Opportunity Credit – provides tax
relief for qualified higher education expenses.
100% of 1st $2,000 of tuition, fees, books,
course materials, and 25% of the next $2,000
for a max of $2,500 per student. (available for
first 4 yrs). If the credit exceeds tax liability, the
credit is 40% refundable ($1000= 0.4 x 2,500)
Lifetime Learning Credit
20% of tuition and fees up to $10,000. Books
not qualified expense unlike AOC. Credit is
available for courses at eligible institutions.
Students can be enrolled in just 1 course and
still get credit.
Foreign Tax Credit
Taxpayer allowed credit for income earned in
foreign country. 1st calculate total foreign taxes
paid. Then calc: net foreign income/total income
x U.S. tax liability = limitation. Foreign tax credit
= lesser of the foreign taxes paid or the
limitation, carry forward or back unused taxes.
[Line 47]
Simplified Deduction – Office Expense
The allowable square footage is the smaller of
the portion of a home used in a qualified
business use of the home, or 300 square feet.
The prescribed rate is $5.00.
