Regulation Final Review SUMMARY NOTES I. Adjustments TO GROSS INCOME Adjustments are subtracted from gross income to arrive at adjusted gross income (reported on Form 1040, page 1). A. Alimony paid (alimony received is income). B. Retirement plan contributions (deductible IRA, Keogh, SEP, and SIMPLE contributions). 1. 2. Deductible Contributions to Traditional IRAs—Both of the following conditions must be met: a. 2014 AGI does not exceed $60,000–$70,000 (S) or $96,000–$116,000 (MFJ). b. The taxpayer does not actively participate in another qualified plan. (A spouse is not deemed to participate just because the other spouse participates, but this phases out with AGI between $181,000 and $191,000 for 2014.) The maximum deductible for 2014 is the lesser of $5,500 or the individual's compensation. (An individual over age 50 can make a $1,000 "catch-up contribution" in 2014.) a. Married taxpayers can contribute $11,000 ($5,500 each) provided combined earnings are greater than $11,000 (and other requirements are met). 2014 R u l es S ummary: T ra d i t i ona l I R A Earned Income Pension I R A C ontr i b ut i on an d W i t h d rawa l S ummary Traditional Deductible IRA Catch-up IRA Roth IRA Nondeductible IRA Yes Yes No No $5,500 $1,000 $5,500 $5,500 Yes Yes Yes Yes Principal Taxable Taxable Nontaxable Nontaxable Earnings Taxable Taxable Nontaxable Taxable IRA Spouse 1 Spouse 2 Spouse 1 Spouse 2 Modified AGI Yes Yes No No Unlimited Yes Yes Yes No No N/A Unlimited Yes Yes Yes No Yes N/A Under $96,000 Yes Yes Yes No Yes N/A $116,000– $181,000 No Yes Yes No Yes N/A Over $191,000 No No Spouse 1 Spouse 2 Tax "adjustment" Maximum contribution: 2014 Accumulate taxfree/deferred Withdrawals: 2-3 © DeVry/Becker Educational Development Corp. All rights reserved. Regulation Final Review 3. 4. Nondeductible contributions for 2014: a. Traditional Nondeductible IRAs—Maximum contribution is lesser of $5,500, individual's compensation, or the amount not contributed to other IRAs. b. Roth IRAs—The contribution limits are the same. For 2014, eligibility phases out for taxpayers with modified AGI between $114,000–$129,000 (S) and $181,000–$191,000 (MFJ). Keogh Plans—A self-employed taxpayer subject to the self-employment tax is generally allowed to set up a Keogh plan. The maximum contribution is limited to the lesser of: a. $52,000 (2014); or b. 25 percent of Keogh net earnings from self-employment. Business Income < Business Expenses > Net Business Income < 1/2 Self Employment Tax > < Keogh Deduction > Keogh Net Earnings C. Interest penalty on early withdrawal of funds. D. Self-employed health insurance premiums (100 percent deductible). E. Tax on self-employment income (50 percent of Social Security portion). F. Education loan interest (qualified). 1. G. H. Educational expenses (qualified higher education) [expired 12/31/13, not yet extended as of the date of this publication]: 1. $4,000 maximum: Eliminated at certain income levels. 2. Cannot be taken if expenses were claimed for American opportunity or lifetime learning credits. Educator expenses (expired 12/31/13, not yet extended as of the date of this publication): 1. I. Limit of $2,500 (2014): For 2014 income phase-out levels are $65,000–$80,000 (S) and $130,000–$160,000 (MFJ). A deduction of up to $250 per eligible educator is allowed as an adjustment for qualified teaching/ classroom expenses. Moving expenses: 1. Moving expenses incurred in connection with work as an employee or self-employed individual. 2. The distance from the old home to the new workplace must be 50 miles greater than the distance from the old home to the old workplace. 3. Employee must work at least 39 weeks during the 12-month period following arrival. 4. Only direct moving costs are allowed as an adjustment (i.e., no meals, house hunting, leasebreaking payments, or temporary living expenses). 2-4 © DeVry/Becker Educational Development Corp. All rights reserved. Regulation Final Review J. Health savings accounts (HSA) allow employees with high-deductible insurance plans to make pretax contributions to an HSA to cover health care costs. 1. For 2014, workers with high-deductible health insurance may make pretax contributions of up to $3,300 ($6,550 for families) to cover health care costs. The plan deductible must be at least $1,250 ($2,500 families), and the amount is indexed for inflation. 2. Monies grow tax-free, and there is no time limit for spending. 3. Withdrawals used to pay qualified medical expenses are excluded from gross income. II.DEDUCTIONS FROM ADJUSTED GROSS INCOME (AGI) Taxpayers may generally choose between using the standard deduction and itemizing deductions. (This usually depends upon which produces the better tax result; however, if the taxpayer is MFS and his or her spouse itemizes deductions, the taxpayer must also itemize deductions). A.Standard Deductions 2014 Single (MFS) Head of Household MFJ (or surviving spouse) $6,200 $9,100 $12,400 The additional standard deduction for being elderly or blind is $1,550 (2014) for Single or Head of Household and $1,200 (2014) for MFJ, MFS, or a surviving spouse. B. Itemized Deductions (Schedule A) 1. Medical Expenses—Medically necessary items (e.g., prescriptions, doctors, medical and accident insurance, and required surgery) are deductible on Schedule A, subject to 10 percent of AGI. Nondeductible expenses include elective/cosmetic surgery, life insurance, vitamins, etc. Qualified Medical Expenses < Insurance Reimbursement > Qualified Medical Expenses "Paid" < 10% AGI > Deductible Medical Expenses 2. State, Local, and Foreign Taxes—Real estate taxes, income taxes, and personal property taxes paid during the year are deductible. Federal taxes are not deductible. 3. Sales Tax—Sales taxes paid can be deducted instead of state and local income taxes (whichever is higher). The deduction is based on an IRS table or the actual substantiated sales tax. 4. Home Mortgage Interest—Qualified residence interest on a first or second home is deductible (both acquisition indebtedness and home equity indebtedness are included). a. Acquisition—Interest on up to $1,000,000 ($500,000 MFS) borrowed to construct, acquire, and improve a home. b. Home Equity—Interest on up to $100,000 ($50,000 MFS) of borrowing used for any purpose. c. Mortgage Insurance Premiums—Mortgage insurance premiums paid in connection with qualified acquisition debt are deductible in 2013 as home mortgage interest; phaseouts apply. (Expired 12/31/13, not yet extended at the date of this publication.) 2-5 © DeVry/Becker Educational Development Corp. All rights reserved. Regulation Final Review 5. Investment Interest—The deduction is limited to net (taxable) investment income. Interest incurred for tax-free investments is nondeductible. 6. Charitable Contributions—The maximum deduction for contributions to public charities is 50 percent of AGI for cash contributions (30 percent AGI for long-term capital gain property contributions). Contributions must be to qualified charities (i.e., gifts to individuals and political contributions are not deductible). 7. a. Long-term appreciated property is deductible at the property's fair market value (no capital gain applies). b. Excess contributions can be carried forward for up to five years. c. Contribution of services is nondeductible, but the out-of-pocket expenses are deductible. Casualty and Theft Losses—Applicable to nonbusiness property. Smaller Loss < Insurance Recovery > 1. Lost Cost 2. Decreased FMV Taxpayer's Loss < $100 > Eligible Loss < 10% AGI > Deductible Loss 8. 9. Miscellaneous Itemized Deductions—Certain deductions are only allowed to be deducted to the extent they exceed 2 percent of AGI: a. Employee's unreimbursed business expenses; meals and entertainment (50 percent). b. Educational expenses to maintain or improve the skills needed by the individual in his or her current trade or business, or needed to meet employer's requirements for job retention. c. Uniforms—those not normally worn as streetwear. d. Business Gifts—up to $25 per recipient per year. e. Employment agency fees. f. Safe deposit box and other investor expenses. g. Tax preparation fees. h. Professional subscriptions. i. Debit card convenience fees incurred to pay income tax. Other Miscellaneous Itemized Deductions—Not subject to 2 percent floor. a. Gambling losses are deductible to the extent of gambling winnings (reported on Form 1040, page 1). b. Federal estate tax paid on income in respect of a decedent. This is estate tax that was paid by an individual because of income received by the individual as a beneficiary of an estate. The federal estate tax paid (on Form 706) that related to the value of this income item is an allowable deduction for income tax purposes. 2-6 © DeVry/Becker Educational Development Corp. All rights reserved. Regulation Final Review III.Tax Calculation Tax = Taxable income x Tax rate (rate is generally given on exam). IV. Alternative Minimum Tax Alternative minimum tax is a parallel tax system to the regular tax system. It calculates a minimum amount of tax to be paid by certain taxpayers in any given year. The calculation begins with regular taxable income and adjusts it according to the alternative minimum tax rules. The taxpayer will have to pay "Alt Min" tax when his or her tentative minimum tax (calculated under the alternative minimum tax rules) exceeds his or her regular tax (calculated under the regular tax rules). Regular Taxable Income ± Adjustments + Preferences Exemption* $82,100 (MFJ) AMTI < $156,500 > Excess x 25% Alternative Minimum Taxable Income < Exemption > Alternative Minimum Tax Base x Tax Computation < Reduction > AMT Exemption Tentative AMT Tax < Foreign Tax Credit > Tentative Minimum Tax < Regular Income Tax > Alternative Minimum Tax * For 2014, the exemption amounts are $82,100 (MFJ), $52,800 (H of H and Single), and $41,050 (MFS). A. Adjustments represent mainly timing differences (income is recognized sooner under alternative minimum tax rules). [PANIC TIMME] 1. Passive activity losses are added back or recalculated. 2. Accelerated depreciation (post-1986 purchases) has an adjustment for the difference between tax and straight-line for real property and between tax and 150 percent declining balance for personal property. 3. Net operating loss of the individual taxpayer is recomputed. 4. Installment income of a dealer is an adjustment because the installment method is not allowed for AMT. 5. Contracts—Percentage completion versus completed contract. 6. Taxes are added back. 7. Interest: a. Mortgage interest not used to buy, build, or improve a qualified dwelling (house, apartment, condominium, or mobile home not used on a transient basis) is added back (e.g., certain home equity). b. Investment interest expense is recalculated. 8. Medical expenses must exceed 10 percent of AGI. 9. Miscellaneous itemized deductions subject to 2 percent test are added back. 10. Exemptions and standard deductions are disallowed. 2-7 © DeVry/Becker Educational Development Corp. All rights reserved. Regulation Final Review B. C. Tax preferences (always add-backs): 1. Private activity bond tax-exempt interest (with exceptions). 2. Pre-1987 accelerated depreciation on real property and leased personal property. 3. Percentage depletion deduction (excess over adjusted basis of property). AMT credit: 1. If a taxpayer pays alternative minimum tax, a credit against future regular tax is granted for the amount of alternative minimum tax paid (with some exceptions). The carryforward of this credit is indefinite. 2. Generally, each year, the greater of $5,000 or 20 percent of long-term (greater than three years) unused minimum tax credit may be refundable. 2-8 © DeVry/Becker Educational Development Corp. All rights reserved.
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