income tax acct ch 6

deductions for AGI: 3 categories

• directly related to business activities

• indirectly related to business activities

• subsidizing specific activities

deductions for AGI directly related to business activities

• allowed to deduct expenses incurred to generate business income

• activities are either profit motivated or motivated by personal objectives

  • profit motivated - business activities or investment activities

trade/business activities

motivated by profit

• high involvement or effort from taxpayer

investment activities

investing in a property for appreciation or for income payments - do not require effort or high involvement

business activities deduction FOR AGI

self employed business expenses

business activities deduction FROM AGI

• qualified business income deduction

• deduction for qualified tip income

• deduction for qualified overtime compensation

investment activities deduction FOR AGI

rental and royalty expenses

investment activities deduction FROM AGI

investment interest expense

trade or business expenses

• for AGI

• deductible if directly connected to business activity

• ordinary and necessary to activity

• reasonable in amount

• claimed on Schedule C (profit/loss form) → Schedule 1, line 3 (additional income and adjustments form)→ Form 1040, line 8

rental and royalty expenses

• for AGI

• investment or trade activity dependent on facts

• reported on Schedule E (supplemental income and loss) → Schedule 1, line 5 → Form 1040, line 8

flow through entities

• expenses/losses from flow through entities reports amount on Schedule E → Schedule 1, line 5 → Form 1040, line 8

deductions for AGI losses

• disposition of trade/business assets included in deduction for AGI

• losses from investment assets (capital assets) are offset against capital gains

  • capital losses > capital assets = net capital loss

  • deduction limited to $3000, excess is carried forward

excess business deduction loss limitation

• excess business loss not allowed to be deducted

  • excess business loss over 256000 (512000 MFJ) is carried forward

health insurance deduction by self-employed taxpayers

• provides equity for self employed taxpayers with employees to get health insurance as a fringe benefit

• can claim personal health insurance premiums for themselves, their spouse, dependents, and children under 27 (to extent of self employment income)

self employed tax deduction

• for AGI

• employers deduct SSN/medicare taxes on pay of salaries

• self employed individuals pay self employment tax in replacement of SSN

• self employed allowed to deduct employer portion of self employment tax to compensate for employers deducting SSN

deductions for IRA

• deductible contributions to IRA’s are for AGI deductions - amount depends on factors

• DISTRIBUTIONS from IRA’s are taxed as ordinary income and distributions before 59.5 are subject to 10% penalty

• nondeductible contributions can be made - taxed on earnings no contributions

deductions for health savings accounts

• if covered by high deductible health plan with no other health coverage can deduct for payments of medical/dental expenses for them, spouse, and dependents

• 2026 - minimum annual deductible of $1700 self ($3400 for family)

  • maximum annual deductible cannot exceed $8500 self ($17000 for family)

  • individuals can contribute up to $4400 for self only coverage (8750 for family) to HSA and deduct for AGI

  • distributions from HSA are tax free if they pay for qualified medical expenses of taxpayer, spouse, dependents - otherwise taxed as ordinary (20% if special)

penalty for early withdrawal of savings

for AGI

reduces taxpayer’s net interest income to the amount actually received

alimony (before 2019)

deductible for AGI is paid from a divorce before 2019

deduction for interest on qualified education loans

• up to $2500 of interest on education loans deductible for AGI

• deduction is phased out for taxpayers with AGI exceeding $85000 (75000 MFJ)

• deduction eliminated for taxpayers with AGI exceeding 100000 (200000 MFJ)

interest on qualified education loans - phase out percentage

• single/HOH - (Mod. AGI - 85000) / 15000

• MFJ - (Mod. AGI - 170000) / 30000

medical expenses

• from AGI, itemized

• deduct expenses incurred to treat themselves, spouse, dependents

• qualifying medical expenses - unreimbursed payments for care, prevention, diagnosis, or cure of injury, disease, or bodily function

• using personal car for medical transport - deduct standard mileage allowance (21 cents per mile)

hospitals and long term health care facilities

• from AGI, itemized

• deduct cost of actual medical care whether care is provided at hospitals or long term care facilities

medical expense deduction limitation

• from AGI, itemized

• limited to amount of unreimbursed qualified medical expenses paid during year (no matter when services were provided) REDUCED by 7.5% of taxpayer’s AGI

taxes - state/local taxes

• from AGI, itemized

• deduct payments from taxes:

  • state, local, foreign income taxes

  • state and local real estate taxes on property held for personal/investment purposes

  • state and local personal property taxes assessed on value of specific property

  • sales tax deduction - can be deducted in lieu of state and local income taxes

• One Big Beautiful Bill - limits to 40400 (20200 for married separate)

  • reduced by 30% of excess of mod. AGI over phase out threshold

• everyone gets at least a 10,000 deduction

interest

two itemized deductions for interest expense

• deduction of investment interest limited to their net investment income

• any investment interest in excess of net investment income limitation is carried forward

home mortgage interest

• from AGI, itemized

• can deduct if interest is on acquisition indebtedness of 1 mill if incurred before Dec 16 2017 OR 750k incurred after Dec 15 2017

charitable contributions

• from AGI, itemized

• contributions of money to qualified domestic charity are deductible

• special rules apply to contributions of certain types of property

  • capital gain property

  • ordinary income property

charitable contribution deduction limitations

1. Determine limitation for 60% contributions, if applicable

2. apply limitation to 50% contributions (AGI * 50% minus contributions subject to 60% limit)

3. apply limitation to 30% contributions : lesser of

   1. AGI * 20%

   2. AGI * 30% minus contributions subject to 30% limit

   3. AGI * 50% minus contributions subject to 50% limit, 60% limit, and 30% limit

other itemized deductions

• non deductible - unreimbursed employee business expenses, tax prep fees, investment expenses, and hobby expenses

• deductible - gambling losses and expenses to extent of gambling income, casualty and theft losses on investment property, and unrecovered cost of a life annuity at death

standard deduction

• for individuals claimed as a dependent on another return, standard deduction is greater of

  • 1350

  • 450 plus earned income not to exceed the standard deduction amount of those who are not dependents

bunching itemized deductions

• tax benefit gained from simple timing tax planning strat

  • for taxpayers with itemized deductions that fall just short of standard deduction amount and do not produce any tax benefit

• shifting itemized deductions into one year so that the itemized deduction exceeds standard deductions

deduction for qualified business income

• other deduction from AGI

• limited to qualified trade/business

• excludes specified service trade/business

• deduction subject to wage limitation and taxable income limitation

deduction for qualified tip income

• other deduction from AGI

• enacted with one big beautiful bill act

• deduct up to 25000 of qualified tips

• phase out for taxpayers with mod agi above 150k (300k mfj)

deduction for qualified overtime comp

• other deductions from AGI

• from OBBA

• deduct up to 12500 (25000 mfj)

• phase out for mod agi above 150k /300k mfj

deduction for qualified car loan interest

• other deductions from AGI

• OBBA

• deduct up to 10,000

• phase out with mod agi above 100k / 200k mfj

deduction for seniors

• other deductions from AGI

• OBBA

• 65+ can deduct 6000 and another 6000 for spouse of 65+

• phase out for mod agi above 75000 / 150000 mfj

for AGI deductions:

• trade/business expenses

• rental/royalty expenses

• flow through entities

• losses

• excess business loss limitation

• health insurance deduction by self employed taxpayers

• self-employment tax deduction

• IRAs

• health savings accounts

• penalty for early withdrawal of savings

• alimony (before 2019)

• interest on qualified education loans

from AGI - itemized deductions:

• medical expenses

• hospitals + long term care facilities

• taxes

• interest

• home mortgage interest

• charitable contributions

other deductions from AGI

• qualified business income

• tip income

• overtime compensation

• car loan interest

• senior deduction