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REGULATION NOTES REG 2 Gross Income to AGI deductions AGI from AGI deductions taxable income

FOR AGI
1. Educator Expenses a. $250, $500 if spouse is educator too b. K1- Grade 12 worked for at least 900 hours during the year c. Ordinary and necessary 2. IRA a. Deductible IRA i. Deductible from GI to arrive at AGI. Adjustment allowed for year only is contribution is made by April 15th ii. Earning tax-free iii. Withdrawals are taxable as ordinary income iv. PHASE OUT cant deduct 1. Rich (56-66K, 89-109K) AND 2. Actively in another plan (phase-out at $177K) v. Maximum deduction is the lesser of $5,000 (over 50? $6K) or individual compensation vi. Married? $10,000 max contribution vii. Credit for IRA ($1K) to contribute to traditional or Roth IRA viii. Catch up IRA: contribute $1K. (earnings withdrawals same as traditional) b. Non-deductible IRA i. Limited to lesser of $5K, Individuals Compensation, and what is not contributed to Roth and Traditional. ii. Fall back if you dont qualify for Roth or Traditional iii. Earning tax-free UNTIL withdrawals. iv. Withdrawals principle is not taxable, but earnings are. c. Roth IRA i. NOT DEDUCTIBLE ii. Earnings tax free iii. Withdrawals (earnings and principal) tax-free iv. Limit? $5K (S) $10K (M) v. If you contribute 3K to Regular IRA, you can only do 2K to Roth (totaling $5K) vi. Phase-out higher than traditional IRA (MAGI 105K, 167K, filing Sep.? $0) vii. Nontaxable distributions made at least 5 years after contribution to Roth and made after 59.5 years old, to a beneficiary b/c payer died, payer is disabled, first time home-buyer to get resident.

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viii. Can transfer for Regular to Roth IRA. Once transferred, cant withdrawal till amount shave been in Roth for at least 5 years. ix. Credit for IRA ($1K) to contribute to traditional or Roth IRA d. Coverdell Education Savings Account (IRA) i. Grandparents grand children (under the age of 18) no limit on the # of beneficiaries ii. Non-deductible up to $2,000 contributions allowed. iii. Earnings and Withdrawals are tax-free iv. Need to use by the time beneficiary reaches 30. Taxable to beneficiary with a 10% penalty. v. Roll-over to another family member if not used no penalty. vi. Can use the Lifetime and Coverdell Credits together. vii. PHASE OUT 95K, 190K (S, MFJ) Student Loan Interest Expenses a. Limited to $2,500 b. PHASE OUT $65K and 120K c. Dependent cant claim adjustment d. Taxpayer pays for loan e. Only deductible if for school Tuition & Fee Deduction a. Expenses above $2,500 are 2% floor itemized b. Maximum $4K PHASE OUT (if AGI is < 65K, $2K is AGI is b/w 65-85K, > 85K no deduction). c. No eligible is expenses applied to Lifetime Credit or Non Taxable Education Savings Account. Health Savings Account a. $3K single, 6K married. Increased by $1,000 are over 55. b. Not allowed when covered by Medicare A and B c. Dont use for medical? 10% penalty d. Good for people in highly deductible plans. e. Out-of-pocket limit to 5K and 11K f. Archer Medical, pre-1997. People in small businesses. Limit 2K and 4K Moving Expense a. New workplace is 50 miles farther from old house b. Must have worked there for 39 weeks during the 12-month period. Selfemployed is doubled in time. c. Mileage is deductible d. NOT ALLOWED: pre-housing/temporary living/meals/expense for breaking lease Self Employment FICA Self-Employed Health Insurance a. 100% deductible not on Sch. C. b. Keogh i. Deduction the lesser of $50K or 25% net Keogh earnings. ii. Addition is the lesser of $50K or 100% net earnings iii. Gross Earnings x 20% = allowed deductions

9. Self-Employed Retirement 10. Interest Withdrawal Penalty a. From CD accounts 11. Alimony Paid a. Income to Payeer b. Adjustment to Payee c. Child Support/Property Settlement non taxable/non deductible. 12. Attorney Fees for whistle blowing/discrimination cases 13. DPAD a. Lesser of 9% QPAI or taxable income

FROM AGI
1. Standard Deduction: 6K, 11K 2. 65 or Blind: additional standard deduction of $1K Itemized Deductions: - Medical Expenses: You, Spouse, Dependent (SUPORT) must be incurred as an expense paid or charged before year-end Medical Insurance = x * 7.5% = deductible Medicine and Drugs/ Doctors/ Insurance/ Required Surgery/ Transportation to facility/ Handicap costs NOT ALLOWED: cosmetic surgery/life insurance/capital expenditures, health club memberships/ personal hygiene. - Real Estate, Income (taxed paid and withheld are deductible), Property, Sales (RIPS) - NON DEDUCTIBLE TAXES: Federal Income (Soc. Sec), Inheritance, Business/Rental (FIB) - CASH BASIS DEDUCT YEAR PAID OR CHARGED -

Interest Expense: qualified residence interest. Use 14 days in the


tax year is a 2nd home. Acquisition Indebtness: $1million is deductible (improving the home) refinancing points must be amortized over the period of the loan Home Equity Indebtness: use for anything. ($100K cap) Total is the lesser of 100K and FMV of property acquisition Indebtness Interest is personal. Investment Interest Expense limited to net investment income (calculated by Sch. A dont include PAL or Rental income/loss). (Portfolio/investment/rent/royalties/net LT and ST capital gains (if you dont reduce capital gains rate). Dividends treated as investment interest income is NOT qualified and taxed at 15%

Personal/Consumer interest is not deductible. Prepaid interest allocated over the period of the loan. year received it is taxable

- Charitable Contribution: to organizations only. Gift must be in the form of Cash and FMV deduction is the less of
FMV or the Basis when gifted. Cash 50% AGI limit FMV 30% AGI Appreciated property FMV >Basis deductible at FMV if held over one year. 40% cash donated, only 10% can be donated FMV (added up to 50%) Buy ticket for 100$, value of attending is 50$ $50 is a donation Services and Time can NOT be deducted. Foreign Exchange Student? $50/month Must have acknowledgement of what was donated. Donate > $500 must have it written

- Casualty and Theft Losses (10% AGI)


Smaller Loss (lost cost/ AB or Decrease in FMV) Insurance = Loss - $100 = Eligible Loss - 10% AGI = Deductible Loss. Must be sudden or unexpected

- 2% Miscellaneous
Unreimbursed business expenses (travel, meals, lodging) Self Employed deduct on Schedule C. Transportation 100% deductible Meals/Entertainment 50% deductible. Education: only deduct if it maintains or improves skills/or for retention of job. NOT for minimum requirement, and not if you can get a new trade/business from it. Uniforms Business Gift ($25) Business use of home. Job Hunting Fees Safe Deposit/Investment Advice Subscription to Professional Journals Tax Prep Fee Debit Fees to Pay Federal Income tax

Fully Deductible (no 2%) - Gambling Losses extend of gambling winnings

Estate tax paid on descendent

Hobby (interest and taxes are deductible ONLY) is PROFIT is they have profit for a period of 5 consecutive taxable years. For Breeding? 2/7 years profit.

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(NON REFUNDABLE) Personal Tax Credits (reduce


liability to zero BUT NOT REFUND). a. Child and Dependent Care Credit i. 20-35% of eligible expenditures ii. One dependent $3K, two? $6K iii. For kids under age 13/disabled dependent of any age/disabled spouse iv. BOTH spouses must earn income to be eligible v. Lowest Earning Spouse Income + Expenditures Max Amount Allowed = x * 20-35% = allowed credit vi. POOR? 35%. Credit decreases 1% for each $2K over AGI of $15K. AGI > 43K? 20% b. Elderly and Permanently Disable Credit i. 15% ii. Pg. R2-38 iii. For Single 5,000 is the limit, MFL $7,500 (LIMIT) iv. 7.5K Single/10K MFJ (1/2 AGI limit) v. Take your total income AGI limit = x * .50 = y + Social Security Received = z. Take LIMIT Z = A * .15 = CREDIT

c. Education Credit (Lifetime/Am Opp (40% refundable)) i. Am Opp Credit 1. $2.5K cap 2. Take the first $2K 3. And then 25% of the next $2K 4. Can use it for multiple kids but the cap is still the same. 5. Must be in school the time 6. Cant be felon 7. For 4 years of college 8. Can be for books and supplies 9. $1,000 is refundable. ii. LifeTime Credit 1. $2,000 max/year not for books 2. Undergraduate and Graduate courses, prof courses, and improve of job skills 3. PHASE OUT begin at 50K, done completely with 60K CAN USE ONE CREDIT FOR ONE KID AND ANOTHER FOR ANOTHER KID

d. Adoption i. Per Child ($12,650) and not fully refundable PHASE OUT 182220K ii. All reasonable necessary costs, expenses, and fees are available for credit iii. NO MEDICAL EXPENSE ALLOWED iv. Credit for years after payment is made till the adoption is final. Foreign kid? No credit till year it becomes final. e. Retirement Savings i. An individual may be able to take a tax credit of up to $1,000 ($2,000 if filing jointly) for making eligible contributions to an traditional or Roth IRA or employer-sponsored retirement plan (max contribution of $2K). ii. Age 18 or older; Not a full-time student; Not claimed as a dependent on another persons return; and With an adjusted gross income not more than: PHASE OUT 16/30K get 50%, 18/36K 20%, 55/27K 10%, over 27,55K, 0% f. Foreign Tax credit for foreign income taxes paid i. Credit limited to the lessor of foreign tax PAID or [Taxable Income from foreign ops / (taxable income + exemptions)]*US tax = credit limit ii. Carry back 1 year Carry over 10 years g. General Business i. Investment Credit ii. Workers Opportunity 1. Hire employee from target group 2. Credit is 40% of first $6K years wages 3. Handicap/poor/Vietnam vets/bad youth/food stamp recipients iii. Alcohol fuels iv. Increase research v. Low-income housing vi. Qualified childcare vii. Welfare-to-work viii. Employer provided child care credit ix. Alternate motor vehicle credit x. HIRE ACT xi. Cant exceed net income tax xii. Must be less of the greater of 25% regular tax liability over 25K or tentative minimum tax for the year. (over $25K, only get 75% of credit) xiii. Carry back 1 year Carry over 20 years

2. REFUNDABLE CREDITS

a. Child tax credit i. $1K tax credit for each qualified child ii. CARES rules applies BUT must be under age 17 iii. PHASE OUT by $50 for 75K/110K iv. Low-income can use to offset income taxes as well as Social Sec. taxes paid. v. REFUNABLE: lesser of: excess child tax credit over tax liability; earned income is less than $3000 * 15% b. Earned income credit i. REFUNABLE ii. Live in US and must be poor and between 25-65. Married? Must file jointly. iii. Doesnt include pension or annuity income iv. Qualifying child? CARES Credit is higher v. Cant claim is they have dividends/rent/royalty income exceeding $3,100. c. W-2 taxes i. Income taxes exceed tax liability? Refund. d. Excess Soc. Security Paid i. Withhold greater than maximum? Excess is a credit. If withheld by employer the ER must refund that amount to EE. e. People with unused minimum tax credits that are at least 3 years old can get the greater of $5,000 or 20% of unused credit against tax. Small Employer Start-Up Costs Credit - < 100 employees - Earned up to $5K credit up to $500 a year - Can use for retirement plans, deduct ordinary and necessary business expenses - Tax credit for providing healthcare coverage to employees up to 35% of the ER costs if the ER contributes ATLEAST 50% of cost of coverage - Can offset AMT but not refundable. Carried forward 20 years - Owning more than 2% and shareholders owning more 5% are excluded - No double dipping and using it as a credit and business expense Health Care Coverage Credit - Buy own insurance? Credit of 80%

AMT
Adjustments 1. Passive Activity Losses 2. Accelerated Depreciation

3. Net operating loss 4. Installment income of the dealer 5. Contracts (% completion, completed contract) ALWAYS ADD BACK TO TAXABLE INCOME 6. Tax Deduction 7. Interest deduction on home equity loans 8. Medical deductions (limited to excess over 10% AGI) 9. Miscellaneous deductions not allowed 10. Exemptions (personal) and standard deduction PANIC TIMME Tax Preference Items ALWAYS ADD BACK TO TAXABLE INCOME Private activity bond interest income Percent depletion excess over adjusted basis Pre-1987 accelerated depreciation