Chapter 5
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  • Medical expenses, including amounts paid for dental treatment, drugs and medicines, nursing care, and certain transportation and travel required for medical care, are deductible as an itemized deduction. Code Section 213. The section allows a deduction for expenses paid during the taxable year for the medical care of the taxpayer, spouse, and dependents, to the extent that the expenses exceed 7.5 percent of the taxpayer's adjusted gross income (AGI). As a result of the 7.5 percent floor, only those individuals who incur extraordinary medical expenses benefit from the deduction. The medical expense deduction is not subject to the 2 percent floor imposed on miscellaneous itemized deductions. 1 Medical expenses are not deductible to the extent the taxpayer is reimbursed by insurance or otherwise
  • Eligible individuals may claim an "above the line" deduction for contributions they make during the tax year to their health savings account (HSA). Individuals—and employees, through an employer's cafeteria plan—can establish HSAs to reimburse them for qualified medical expenses paid during the year (Code Sec. 223).64 These accounts allow taxpayers with high deductible health insurance to make contributions in 2009 of up to $3,000 for self-coverage, $5,950 for family coverage, to cover health care costs. In 2010, the contribution limits will be $3,050 for self-coverage, $6,150 for family coverage (Rev. Proc. 2008-29; Rev. Proc. 2009-29). Amounts are excluded from gross income if paid or distributed from an HSA that is used exclusively to pay the qualified medical expenses of the account beneficiary, his or her spouse or dependents (Notice 2004-2).65 Distributions not so used are subject to income tax and a 10-percent penalty, unless made after the beneficiary reaches age 65, dies or becomes disabled (Code Sec. 223(f)(4)). The 10-percent additional tax is not treated as a tax liability for purposes of the alternative minimum tax (¶1420) (Code Secs. 26(b)(2)(S) and 55(c)(1)). Qualified medical expenses are generally the same expenses that qualify for the medical expenses deduction. Premiums for long-term care and coverage during periods of unemployment, whether through COBRA or not, also qualify.
  • A charitable contribution is a voluntary contribution or gift of property to certain qualified charitable organizations. A charitable contribution must be given without present or future expectation of any monetary or economic benefit to be derived from the contribution. Under Code Section 170, individuals who itemize their deductions are entitled to deduct contributions to a qualified charitable organization. An individual's deduction for charitable contributions is included on Schedule A of Form 1040. The amount of a taxpayer's charitable deduction depends on the type and value of the property contributed to the qualified charitable organization. Generally, a taxpayer may deduct the fair market value (FMV) of property contributed to charity. Reg. Section 1.170A-1(c)(1). Thus, when a taxpayer has depreciated property, it is generally best to sell the property where feasible and then donate the proceeds, if the taxpayer is able to deduct the loss.
  • In general, a taxpayer may deduct the fair market value (FMV) of property contributed to a charity. 40 In the case of contributions of appreciated property (i.e., property with a FMV in excess of the taxpayer's basis), deducting the FMV of the contributed property is especially beneficial because the contribution ordinarily is not a recognition event, and the taxpayer does not recognize the gain inherent in the property. For example, if a taxpayer contributes to a charity publicly traded stock with a FMV of $10,000 and a basis of $1,000, a $10,000 deduction is allowed. On the other hand, if the taxpayer sold the stock for its FMV and then gave the $10,000 to the charity, the same $10,000 deduction would be allowed, but the taxpayer must recognize a $9,000 gain on the sale, leaving a net benefit of only $1,000.
  • taxpayer must reduce the amount of a charitable contribution by the amount of gain (other than long-term capital gain, not including long-term gain from certain self-created musical works under Code Section 1221(b)(3)) that would have been recognized if the property had been sold at its fair market value at the time of the contribution. Code Section 170(e)(1)(A); Reg. Section 1.170A-4(a)(1). However, this rule does not apply to certain contributions of food. See Section 42.5(c). In addition, exceptions apply for corporations contributing particular types of property. See Section 42.15(d).
  • For contributions of cash, checks, or other monetary gifts (regardless of amount), made in taxable years beginning after August 17, 2006, no charitable deduction is allowed unless the donor maintains as a record of such contribution (1) a bank record or (2) a written communication from the donee showing the name of the donee organization, the date of the contribution, and the amount of the contribution. Code Section 170(f)(17). The recordkeeping requirements cannot be satisfied by maintaining other written records. A taxpayer making a charitable contribution of property other than cash must have a receipt from the charitable organization receiving the property. Reg. Section 1.170A-13(b)(1). In general, the receipt must include the name of the donee, the date and location of the contribution, and a description of the property in reasonably sufficient detail to identify the particular property contributed. Although the fair market value of the property is one of the circumstances to be taken into account in determining the amount of detail to be included on the receipt, value need not be stated on the receipt. 114 If it would be impracticable to obtain a receipt, the donor must maintain reliable written records regarding the contribution.
  • Beginning in 2005, contributions of vehicles are subject to rules different than other contributions of property. See Section 42.18(a) for the definition of a vehicle for this purpose. Under these rules, if the claimed value of a donated vehicle exceeds $500, the amount of the deduction is limited to the proceeds of the sale if the charitable organization sells the vehicle without any significant intervening use or material improvement. Code Section 170(f)(12)(A). COMPLIANCE TIP: Copy A of Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes, must be filed with the IRS for each contribution of a qualified vehicle that has a claimed value of more than $500. Form 1098-C, Copy B, may be used as the contemporaneous written acknowledgment for a qualified vehicle with a claimed value of more than $500. Form 1098-C (Copy C only) may be used as the contemporaneous written acknowledgment for a qualified vehicle with a claimed value of at least $250, but not more than $500. 2006 Instructions for Form 1098-C.
  • An individual is permitted to deduct losses to her property arising from "fire, storm, shipwreck, or other casualty, or from theft." The term "other casualty" has been the subject of a great deal of litigation, but is most often defined as a sudden, unexpected event that is unusual in nature and beyond the control of the taxpayer. A theft loss technically is not a casualty loss, but theft losses are aggregated with casualty losses for most purposes. The first $100 of each personal casualty or theft loss is not deductible, and personal casualty and theft losses are generally deductible only to the extent they exceed 10 percent of the taxpayer's AGI. Casualty losses are ordinarily deductible in the year the casualty occurs. A special relief provision, however, permits a taxpayer to elect to deduct casualty losses caused by certain disasters either in the year of occurrence or the immediately preceding year. Code Section 165(i). To qualify for the election, the loss must be caused by a disaster in an area designated by the President to be an area in need of federal assistance under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. Code Section 165(i)(1).
  • Talk about Hobby losses--To constitute the carrying on of a trade or business, the activity "must be carried on in good faith, with the dominant hope and intent of making a profit." 6 Profit refers to economic profit, independent of tax savings. 7 The expectation of a profit need not be reasonable, merely bona fide. 8 For a taxpayer to be engaged in a trade or business, his primary purpose for engaging in the activity must be for income and profit -- and he must be involved in the activity with continuity and regularity. Groetzinger v. United States, 480 U.S. 23 (1987). Each of the factors is discussed in the following sections:  Manner in Which the Taxpayer Carries on the Activity Expertise of the Taxpayer Time and Effort Expended by the Taxpayer Expectation of Future Profitability or that Assets Used in the Activity May Appreciate in Value; Past Success of the Taxpayer Taxpayer's History with Respect to the Activity Amount of Occasional Profits; Financial Status of the Taxpayer; Elements of Personal Pleasure or Recreation.

Chapter 5 Presentation Transcript

  • 1. Income Tax Fundamentals 2010 edition Gerald E. Whittenburg Martha Altus-Buller 2010 Cengage Learning
  • 2.
    • Deduction from AGI are itemized deductions (this chapter)
      • Subtracted after AGI is calculated
      • Six categories - itemized deductions on Schedule A
        • Two special additions to standard deductions
    • Deductions for AGI are those taken ‘above the line’ (Chapters 3-4)
      • Subtracted before AGI shown on Schedules C or E
    First part of the chapter Second part of the chapter 2010 Cengage Learning
  • 3.
    • First itemized deduction on Schedule A
    • Medical expenses allowed
      • For spouse, self and dependents
      • For amounts spent that exceed 7.5% of AGI
      • Must be reduced by amount of insurance reimbursement
      • See page 5-2 for list of health, dental, and optical expenditures that qualify
      • Medical insurance premiums deductible
      • Long-term care insurance premiums deductible
        • Specified limits that change each year based on taxpayer’s age
    • Note: Health insurance for self employed is deduction for AGI
    2010 Cengage Learning
  • 4.
    • Prescription medication is allowed
      • Drugs illegally purchased abroad nondeductible
      • Nonprescription drugs are not deductible
    • Special equipment purchase/dinstalled in taxpayer’s home is deductible all in one year
    • Transportation/lodging for medical care is allowed
      • 2009 deduction per mile = $.24
      • $50 per night per person lodging deduction
        • Allowed for patient and one individual accompanying patient
        • No meal deduction allowed
    2010 Cengage Learning
  • 5.
    • HSA is an instrument that allows funds to be contributed to an account similar to an IRA
      • Employee must participate in ‘high-deductible’ medical insurance plan
      • Distributions to cover medical expenses are not taxed or penalized
      • Earnings on HSA not taxed
      • Employee contributions to an HSA is a deduction for AGI
    • Medical Savings Accounts established in the past may be rolled into ‘new’ HSAs
    2010 Cengage Learning
  • 6.
    • Example
    • During the year, Frieda and José paid the following medical expenses:
      • Contact lenses $ 120
      • Face lift for cosmetic purposes 2,900
      • Doctor bills 1,600
      • Health insurance premiums 4,800
      • They also traveled 260 miles to see a cardiologist in July. Their GI = $31,200 and they were reimbursed $1,000 by their insurer. What are their deductible medical/dental expenses for the current year?
    2010 Cengage Learning
  • 7.
    • Example
      • During the year, Frieda and José paid the following medical expenses:
      • Contact lenses $ 120
      • Face lift for cosmetic purposes 2,900
      • Doctor bills 1,600
      • Health insurance premiums 4,800
      • They also traveled 260 miles to see a cardiologist in July.
      • Their AGI = $31,200 and they were reimbursed $1,000 by
      • their insurer. What are their deductible medical/dental
      • expenses for the current year?
    • Solution
    • (120 + 1,600 + 4,800 + (.24)(260)) = $6,582
    • $6,582 less $1,000 reimbursement = $5,582.
    • They may deduct these expenses in excess of (7.5% x $31,200)
    • $5,582 – $2,340 = $3,242 medical expense
    2010 Cengage Learning
  • 8.
    • Deductions for certain taxes are allowed
    • Taxes are deductible, fees are not
      • Taxes are imposed by a government to raise revenue for general public purposes
      • Fees are charges with a direct benefit to person paying
    • Examples of deductible taxes
      • State and local income taxes (deductible in year paid)
      • Sales/use tax (may use actual sales tax or from IRS-provided tables)
      • Real property taxes
      • Personal property taxes
    • Example of nondeductible taxes include estate taxes, gift taxes and excise taxes
    2010 Cengage Learning
  • 9.
    • Sales tax on new vehicles purchased in certain date range is deductible
      • Even if taxpayer elects to deduct SIT instead of sales tax
      • For purchases after 2/16/09 and before 1/1/2010
      • Can be added to standard deduction if don’t itemize
      • Deduction applies to tax on first $49,500 for each vehicle purchased
      • No limit on number of vehicles that qualify for deduction
      • Phase out after AGI > $125,000 (S) or $250,000 (M)
    • Note: File Schedule L to claim deduction
    2010 Cengage Learning
  • 10.
    • Example
    • What amount is the itemized deduction for taxes in the following scenario?
      • Colleen amends her 2006 state tax return and must pay an additional $843 state income tax (SIT) in 2009
        • Breakdown of amount due is: $93 in penalties/interest + $750 SIT
        • Her SIT withholding for the current year is $660
      • She paid quarterly SIT estimates as follows
        • Paid $200 each on 4/15, 6/15, and 9/15 of current year and 1/15 of next year
        • 1/15 of current year paid 4th quarter estimate from prior year - $155
    2010 Cengage Learning
  • 11.
    • Example
    • What amount is the itemized deduction for taxes in the following scenario?
      • Colleen amends her 2006 state tax return and must pay an additional $843 state income tax (SIT) in 2009
        • Breakdown of amount due is: $93 in penalties/interest + $750 SIT
        • Her SIT withholding for the current year is $660
      • She paid quarterly SIT estimates as follows
        • Paid $200 each on 4/15, 6/15, and 9/15 of current year and 1/15 of next year
        • 1/15 of current year made 4th quarter estimate from prior year - $155
    • Solution
    • Colleen may deduct the actual amounts paid in 2008.
    • Itemized deduction for SIT = $2,165 ($750 + 660 + 200 + 200 + 200 + 155)
    • Note : If taxpayer receives refund of SIT that was deducted in prior year, that refund is taxable income in year it is received !
    2010 Cengage Learning
  • 12.
    • Property taxes on real estate are deductible
      • Even on second home
      • Rental property real estate taxes are reported on Schedule E
      • If paid into escrow, taxes are deductible when paid
    • When selling property, need to allocate real estate taxes based on number of days that each party owned
    • Even if don’t itemize, may take deduction for portion of property taxes paid in addition to standard deduction
      • $500 (S) or $1000 (M) not to exceed actual property taxes
      • Must file Schedule L
    2010 Cengage Learning
  • 13.
    • Tax on personal property
      • Amounts paid on autos, boats, trailer, etc. are an itemized deduction
      • Only amount that is based on the property’s value is deductible
        • Fees calculated on basis of weight are not deductible
    2010 Cengage Learning
  • 14.
    • Example
    • Selma has AGI of $31,300 for 2009. She itemizes her deductions and therefore deducts the allowable amount of tax. Her SIT withholding for the year is $1,500, Social Security taxes are $3,060, real estate taxes on her home are $3,300 and she pays auto registration of $210 (of that $180 is based on value of auto).
    • How much may Selma show as an itemized deduction for taxes in 2009?
    2010 Cengage Learning
  • 15.
    • Example
    • Selma has AGI of $31,300 for 2009. She itemizes her deductions and therefore deducts the allowable amount of tax. Her SIT withholding for the year is $1,500, Social Security taxes are $3,060, real estate taxes on her home are $3,300 and she pays auto registration of $210 (of that $180 is based on value of auto).
    • How much may Selma show as an itemized deduction for taxes in 2009?
    • Solution
    • Itemized deduction for taxes = $4,980 ($1,500 + 3,300 + 180)
    2010 Cengage Learning
  • 16.
    • Interest is amount paid for use of borrowed funds
      • Borrower must be legally liable for note in order to deduct the interest
    • Examples of deductible interest include
      • Qualified mortgage interest and points
      • Mortgage interest prepayment penalties
      • Amortized points on refinanced mortgage
      • Investment interest
      • Education loan interest
    • Consumer (personal) interest is not deductible
    • Investment interest nondeductible if used to generate tax-exempt income
    2010 Cengage Learning
  • 17.
    • Qualified residence interest is mortgage interest that is deductible
      • Used to secure/construct first or second residence
        • Limited to loans up to $1,000,000
      • Home equity loans
        • Limited to loans up to $100,000
        • Deductible even if proceeds used for personal purposes
    • Loan origination fees
      • Called ‘points’ because they are quoted as percentage points of principal are deductible
      • Refinancing points must be capitalized & amortized
        • Deducted over life of loan
    2010 Cengage Learning
  • 18.
    • Up to $2,500 per year
    • Deduction for AGI
    • This deduction phases out
      • AGI > $60,000 (S) or
      • AGI > $120,000 (M)
    • Loan must be used for qualified higher education expenses
    2010 Cengage Learning
  • 19.
    • Investment interest is incurred on debt to purchase investment property
      • Can only deduct up to the amount of net investment income (such as interest)
        • Special rules for dividends and capital gains because of their preferential tax treatment
      • Carry forward to next year on 4952 any unused investment interest expense
    • Not allowed to deduct
      • Interest on loans to pay life insurance premiums
      • Consumer interest
      • If investment interest is tax-exempt
    2010 Cengage Learning
  • 20.
    • Charitable contributions are allowed as a deduction
    • Can contribute cash or property
      • Out of pocket expenses are deductible
      • $.11/mile for mileage deduction
      • Value of free use of taxpayer’s property is not deductible
    • To be deductible, donation must be made to a qualified recipient (see page 5-11)
    • IRS publishes Cumulative List of Organizations , Publication No. 78
    2010 Cengage Learning
  • 21.
    • Gifts of household items/clothing subject to new requirements
      • Must be in good condition
      • Items with minimal value may not be deducted
    • If contribute property, deduction is equal to fair market value (FMV) at time of donation
      • Exception occurs if property donated would have resulted in ordinary income or short-term capital gain (STCG)
        • Then, deduction is equal to fair market value less the amount of ordinary income or STCG that would’ve resulted if property had been sold
    2010 Cengage Learning
  • 22.
    • If taxpayer donates appreciated long-term capital gain (LTCG) property, such as appreciated stock, may deduct fair market value of the property, except if:
      • Donation is made to certain private nonoperating foundation (30% organization) – then can only deduct fair market value minus potential LTCG
      • or
      • Donation is a contribution of tangible personal property to an organization that uses it for a purpose unrelated to the organization’s primary purpose (such as artwork contributed to Humane Society)
    2010 Cengage Learning
  • 23.
    • Example
    • Bea donates an antique couch to a nonprofit that provides housing items to battered women. The couch cost $2,500 and is now worth $4,000. How much may Bea deduct for contributions? Would Bea’s deduction change if she had donated the couch to an environmental organization?
    2010 Cengage Learning
  • 24.
    • Example
    • Bea donates an antique couch to a nonprofit that provides housing items to battered women. The couch cost $2,500 and is now worth $4,000. How much may Bea deduct for contributions? Would Bea’s deduction change if she had donated the couch to an environmental organization?
    • Solution
    • If Bea had sold the antique, her LTCG would have been $1,500 ($4,000 – $2,500); since the couch is put to a use related to the organization’s primary purposes. Deduction = $4,000.
    • If the antique was donated to an environmental organization , the purpose is unrelated and therefore she must reduce her deduction by the amount of the LTCG that would have resulted if the item had been sold. Deduction = $2,500 ( $4,000 - $1,500 LTCG).
    2010 Cengage Learning
  • 25.
    • Generally, deduction for charitable contributions limited to 50% of taxpayer’s AGI – this applies to donations to:
      • All public charities
      • All private operating foundations
      • and
      • Private nonoperating foundations, if distribute contributions to public charities within a specified time period
    • Examples of “50% organizations” include churches and educational institutions and hospital/medical research organizations
    • Contributions limited to 30% of taxpayer’s AGI if donation made to certain private non-operating foundations, fraternal societies and veterans’ organizations
    2010 Cengage Learning
  • 26. 2010 Cengage Learning Cash 50% of AGI LTCG property (see slide #22) STCG or ordinary income property Can deduct FMV less amount of gain that would’ve been recognized (the basis), then limited to 50% of AGI
  • 27. Contributions to a 30% Organization Cash 30% of AGI LTCG property Cannot exceed 20% of AGI STCG or ordinary income property Can deduct FMV less amount of gain that would’ve been recognized (the basis), then limited to 30% of AGI 2010 Cengage Learning
  • 28. 2010 Cengage Learning Order of charitable contribution deductions 1. Deduct 50% contributions 2. Deduct 30% contributions 3. Deduct 20% contributions Total of all 3 types of deductions still limited to AGI x 50%
  • 29.
    • Taxpayers should document charitable contributions
      • Cannot claim deduction of $250 or more unless taxpayer has written acknowledgment from organization
      • Need bank record or cancelled check even if contribution is less than $250
        • Even amounts put in plate at church, for example, should be in form of a check
    • If property contributed exceeds $500, must attach Form 8283
    • If property contributed exceeds $5,000, formal appraisal must be submitted
    2010 Cengage Learning
  • 30.
    • Deduction for a donated vehicle limited to the amount for which the charity sells the vehicle
      • Same rule applies to boats and planes
    • Charitable organization sends a Form 1098C to taxpayer showing resale information
      • Or certifies that no resale amount may be provided as vehicle donated to needy individual
      • Taxpayer must attach 1098C to tax return
      • Taxpayer may claim estimated value if charity uses donated auto rather than selling it
    2010 Cengage Learning
  • 31.
    • Example
    • During the current year, Clem donates $1,260 to his synagogue’s youth group, allows the church youth group to use his lake cabin (valued at $500), drives 1000 miles on behalf of the YWCA and donates a vehicle (valued at $950) to the United Way. United Way sells the auto for $750 and issues a 1098C to Clem. What is Clem’s charitable contribution deduction if his AGI = $33,200?
    2010 Cengage Learning
  • 32.
    • Example
    • During the current year, Clem donate $1,260 to his synagogue’s youth group, allows the church youth group to use his lake cabin (valued at $500), drives 1000 miles on behalf of the YWCA and donates a vehicle (valued at $950) to the United Way. United Way sells the auto for $750 and issues a 1098C to Clem. What is Clem’s charitable contribution deduction if his AGI = $33,200?
    • Solution
    • Clem cannot deduct the value of his lake cabin; therefore his contribution deduction = $2,150
    • ($1,260 + (1000 miles x .14) + 750)
    2010 Cengage Learning
  • 33.
    • Deductions are allowed for casualty and theft losses
    • To be classified as casualty loss, event needs to be sudden, unexpected or unusual
      • If theft, need to prove (for example, by police report)
      • Different calculations for deduction based on what type of property
    • Casualty losses are deductible in year of occurrence
      • Exception for disaster area losses (can amend prior year return and deduction in that year and file for refund)
    • Limit to personal casualty loss calculated as follows Loss - $500 floor and only in excess of 10% of AGI
    2010 Cengage Learning
  • 34.
    • There are two types of miscellaneous deductions
    • “ Those not limited to amounts over 2% of AGI”
      • Handicapped “impairment related work expenses”
      • Certain estate taxes
      • Amortizable bond premiums purchased prior to 10/23/86
      • Gambling losses to extent of gambling winnings
      • Terminated annuity payments
    2010 Cengage Learning
  • 35.
    • “ Those limited to amounts over 2% AGI”
      • Unreimbursed employee expenses
      • Reimbursed employee expenses made under a non-accountable plan
      • Union dues
      • Tax preparation fees
      • Safety deposit box
      • Professional journals/subscriptions
      • Investment expenses
      • Job hunting fees
    2010 Cengage Learning
  • 36.
    • Investment expenses
      • Deduction allowed if directly related to taxable income
      • No deduction allowed for investment expenses related to tax-exempt income
      • Fees paid to broker to acquire stocks/bonds are not deductible
        • Added to cost basis of stocks/bonds
      • Custodian fees are deductible
    2010 Cengage Learning
  • 37.
    • Ability to deduct total itemized deductions is phased- out for high-income taxpayers
      • 1% x (AGI - threshold amount)
        • Threshold amount
          • $83,400 for MFS or
          • $166,800 (all other filing types)
    • Phase-out calculation is (AGI – Threshold Amount) x 1% but limited to
      • 26-2/3% x all itemized deductions except medical, investment interest expense, casualty losses and wagering losses
    2010 Cengage Learning
  • 38.
    • Example
    • Zoe and Josef have AGI = $173,560 and file MFJ. Their itemized deductions = $20,000 (mortgage interest and real estate taxes only); what are their allowable itemized deductions?
    2010 Cengage Learning
  • 39.
    • Solution
    • 173,560 AGI
    • ( 166,800 ) Threshold
    • 6,760 x .01 = Phase out amount of $68
    • $20,000 - $68 = $19,932 allowable itemized deductions
    2010 Cengage Learning Example Zoe and Josef have AGI = $173,560 and file MFJ. Their itemized deductions = $20,000 (mortgage interest and real estate taxes only); what are their allowable itemized deductions?
  • 40.
    • Personal exemption reduces income for taxpayer and each dependent by $3,650 per person
      • Phased out for high income taxpayers
        • 1/3 of 2% per $2,500 ($1,250 if MFS) over threshold
        • There are limits based on filing status
      • Phase-out limited to 2/3 of exemption amount ($2,433)
      • Note: phase-out thresholds are different for itemized deductions and personal exemptions
    2010 Cengage Learning
  • 41.
    • Example
    • Sammie and Lolita file MFJ with AGI of $288,000 and 2 dependents - what’s their allowable exemption after the phase-out?
    2010 Cengage Learning
  • 42.
    • Solution
    • $288,000 – $250,200 = $37,800
    • $37,800 / $2,500 = 15.1 (round up to 16)
    • 2% x 16 = 32%
    • The original exemption amount of 4 x $3,650 = $14,600 is reduced by 1/3 of 32%.
    • $14,600 - (10.7% x 14,600) = $13,038 allowable personal/dependency exemptions
    2010 Cengage Learning Example Sammie and Lolita file MFJ with AGI of $288,000 and 2 dependents - what’s their allowable exemption after the phase-out?
  • 43.
    • Sometimes called Section 529 tuition plans
    • Allows taxpayers to meet higher education expenses by
      • Buying in-kind tuition credits or certificates
      • or
      • Contributing to an established account
    • Distributions are generally not taxed if funds used for higher education
      • Tuition, fees, books, supplies, equipment plus reasonable amount for room and board
      • Computer technology primarily used for educational purposes
      • If not used for purposes outlined or the taxpayer withdraws early, then distributions are taxable plus 10% penalty
    2010 Cengage Learning
  • 44.
    • Annual contribution amounts vary
      • Contribution is not deductible
      • High limits in most states
      • Contributions are gifts, susceptible to gift tax rules
    • May claim American Opportunity Education or Lifetime Learning Credit in same year as distribution taken from a QTP
      • As long as distribution is not used for the same expenses for which the credit was claimed
      • Must also reduce qualified higher education expenses exclusion by scholarships, veterans’ benefits, etc.
      • Note: plans vary by state – check out www.collegesavings.org or savingforcollege.com for overview
    2010 Cengage Learning
  • 45.
    • Allows taxpayers to meet higher education expenses by contributing to an educational savings account
    • Annual contributions are not deductible
      • Allowed until beneficiary reaches 18
      • Limited to $2,000/year per child
      • Can’t make in same year as contribution to QTP
      • Phase-out when AGI exceeds $190,000 (MFJ) or $95,000 (S)
    2010 Cengage Learning
  • 46.
    • Distributions are tax free if funds used for higher education or private elementary/secondary education
      • Tuition, fees, books, supplies, equipment
      • Room and board if at least ½ time student
    • May claim educational credit in same year as distribution taken from an education savings account,
      • As long as distribution is not used for the same expenses for which the credit was claimed
    • If distributions > qualified education expenses, part of distribution will be taxable income
    2010 Cengage Learning
  • 47.
    • Up to $4,000 above-the-line deduction for qualified tuition and related expenses with certain AGI limits (modified AGI < $65,000 (S) or < $130,000 (MFJ)
        • or
    • Up to $2000 deduction (modified AGI $65,000-$80,000 (S) or between $130,000-$160,000 (MFJ))
    • Reduce deduction amount by
      • Excludible interest from higher education savings bonds
      • Excludible distributions from QTPs
      • Excludible distributions from Education Savings Accounts
    2010 Cengage Learning
  • 48. 2010 Cengage Learning