Chapter 6: Individual Deductions Overview

Above the Line Deductions

Deductions taken before calculating AGI.

Below the Line Deductions

Deductions taken after calculating AGI.

Standard Deduction

Fixed deduction amount reducing taxable income.

Qualified Business Income Deduction

Deduction for income from pass-through entities.

Gross Income

Total income from all sources before deductions.

Taxable Income

Gross income minus allowed deductions.

Profit Motive

Intent to earn profit from an activity.

Investment Activity

Involves less taxpayer effort for income.

Business Activity

Requires high involvement for profit generation.

Trade or Business Expenses

Ordinary and necessary costs for business operations.

Rental Expenses

Costs associated with property rental activities.

Royalty Expenses

Costs related to earning royalties from assets.

Investment Interest Expense

Interest paid on loans for investment purposes.

Itemized Deductions

Specific expenses deducted instead of standard deduction.

Schedule C

Form for reporting self-employed income and expenses.

Schedule E

Form for reporting rental income and expenses.

Schedule A

Form for itemized deductions on tax return.

Unreimbursed Employee Expenses

Costs incurred by employees not reimbursed by employers.

Capital Assets

Property held for investment or appreciation.

Ordinary Assets

Assets used in business operations.

Losses from Disposition of Capital Assets

Losses from selling capital assets.

Three-Legged Stool of Deductions

Framework for understanding different deduction categories.

Personal property

Movable assets not fixed to land.

Schedule E

Reports income/expenses from rental activities.

Net capital loss

Loss exceeding capital gains, limited to $3,000.

Investment assets

Capital assets used for investment purposes.

Schedule D

Reports net capital gain or loss on taxes.

Moving expenses

Expenses for active-duty Armed Forces members relocation.

Self-employed health insurance deduction

Deduction for health insurance premiums by self-employed.

Self-employed tax deduction

Deduction for employer portion of self-employment tax.

Individual Retirement Accounts (IRAs)

Tax-advantaged accounts for retirement savings.

SE Health Insurance Deduction

Equitable treatment for self-employed health insurance costs.

Qualified fringe benefit

Non-taxable benefits provided by employers.

FICA

Federal Insurance Contributions Act for payroll taxes.

Social Security Tax

6.2% tax for basic pensions and disability.

Medicare Tax

1.45% tax for medical expenses of retirees.

Employee tax withholding

7.65% total withheld from employee's paycheck.

Employer payroll tax expense

Employer matches employee's FICA withholding.

Wage expense

Total salary paid to employees before deductions.

Federal income tax withholding

Prepaid federal taxes deducted from wages.

State income tax withholding

Prepaid state taxes deducted from wages.

FICA taxes (EE withholding)

Employee's share of FICA not deductible on 1040.

Net paycheck

Amount received by employee after deductions.

Payroll tax expense

Deductible expense for employer's payroll taxes.

Self-employment tax

15.3% tax for self-employed individuals.

Employer portion of SE tax

7.65% deductible portion for self-employed taxes.

Employee portion of SE tax

Not deductible by employee or employer.

Federal/state income tax withholding liability

Liability for withheld income taxes to government.

FICA taxes liability

Total liability for employee and employer FICA taxes.

Alimony

Payment to ex-spouses for financial support.

Education-Related Deductions

Encourages pursuit of higher education through tax benefits.

TCJA 2017

Tax Cuts and Jobs Act impacting alimony deductions.

Grandfather Rule

Payments after 2018 treated like pre-2019 payments.

Qualified Educational Loans

Loans for post-secondary education expenses.

Deduction for AGI

Adjustable Gross Income deduction for certain expenses.

Interest Expense Deduction

Up to $2,500 deductible for education loan interest.

Modified AGI Phase-Out

Reduces deduction eligibility based on income level.

Scholarships

Ignored for dependent support test in tax calculations.

Employer Educational Assistance

Exclusion from gross income for employer-provided education.

American Opportunity Credit

Tax credit for qualified education expenses.

Lifetime Learning Credit

Tax credit for post-secondary education expenses.

Double Dipping

Prohibition against claiming multiple benefits for same expense.

Itemized Deductions

Deductions for personal expenses not related to business.

Investment Expenses

Costs associated with managing investments.

Medical Expenses

Costs for taxpayer, spouse, and dependents' healthcare.

Casualty Losses

Losses from theft or natural disasters.

Charitable Contributions

Donations to qualifying organizations for tax deduction.

Schedule A

Form used for itemizing deductions on tax returns.

Qualified Education Expenses

Tuition, fees, books, and supplies for education.

Medical Providers

Professionals providing healthcare services.

Long-term care facilities

Provide only medical care services.

Transportation allowance

21 cents per mile in 2024.

Lodging expenses

Overnight stay costs limited to $50.

Cosmetic surgery

Not deductible unless correcting a deformity.

Health insurance premiums

Employee-paid premiums are not deductible.

Out-of-pocket expenses

Costs not reimbursed by insurance.

Long-term care premiums

Subsidized to encourage insurance coverage.

Employer-paid premiums

Excluded from taxable income as fringe benefits.

AGI floor limitation

7.5% of AGI for medical expense deductions.

Married filing separately

One spouse's expenses may benefit the other.

Taxes deduction limit

$10,000 for MFJ; $5,000 for MFS.

Personal property taxes

Assessed on specific personal property value.

Qualified student loan interest

Deductible for adjusted gross income.

Home mortgage interest

Interest on loans secured by residence.

Investment interest expense

Limited to net investment income deduction.

Casualty loss deduction

Allowed for federally declared disaster losses.

Gambling expenses

Deductible only up to gambling winnings.

Charitable contributions

Encouraged by Congress for qualified organizations.

Qualified charitable organizations

Must be domestic, not foreign entities.

Contribution documentation

Must be substantiated with proper records.

Non-deductible contributions

Political donations and gifts to individuals.

Deductible Contributions

Eligible donations deducted in the year paid.

Cash Contribution

Direct monetary donation to a charity.

Check Contribution

Donation made via written bank instrument.

Electronic Funds Transfer

Digital transfer of funds to a charity.

Credit Card Contribution

Donation charged to a credit card account.

Payroll Deduction

Automatic donation from employee's paycheck.

Title Transfer Date

Date ownership of property is transferred.

Transportation & Travel

Expenses incurred while traveling for charitable work.

Deductible Travel Expenses

14 cents per mile driven for charity.