R1: Adjustments, Sch. A, & Credits

adjustments to AGI

commonly referred to as “above the line” deductions or “deductions to arrive at AGI”

educator expenses

• above-the-line deduction

• eligible educators can deduct up to $300 of qualified expenses paid

• if MFJ, maximum ded. is $600

student loan interest expense

• above-the-line deduction

• for qualified education expenses only, taxpayer must be legally obligated to pay the loan

• has an AGI phase out

HSA accounts

• above-the-line deduction

• taxpayers can make pre-tax contributions of up to $4,300 in 2025 ($8,550 for MFJ)

• any amount distributed out of an HSA that’s used for medical expenses is not included in gross income

Archer MSA

• above-the-line deduction

• replaced by HSA in 2007

• $5,700 limit for single & $10,500 for MFJ

moving expenses

• above-the-line deduction

• allowed only for members of the military, their spouses, or their dependents

penalty on early withdrawal of savings

• above-the-line deduction

• penalty assessed on the early withdrawal of savings from a CD

• aka “interest forfeited”

alimony

• above-the-line deduction

• must be on or before 12/31/18

• payor can deduct the amount of alimony to arrive at AGI

• does not include child support (child support is nontaxable/nondeductible)

attorney fees paid in discrimination cases

• above-the-line deduction

• adj. allowed for attorney fees paid in connection with age, sex, racial discrimination, & whistleblower cases

SE tax for self-employed taxpayers

• above-the-line deduction

• 50% of SE tax is deducted to arrive at AGI

SE retirement plan contributions for self-employed taxpayers

• above-the-line deduction

• allowed to deduct contributions made to qualified SE non-Roth retirement plans

• deduction amount depends on the type of plan

3 types:

1. SEP IRA

2. Simple IRA

3. Solo 401(k)

SEP IRA

• a type of SE retirement plan

• maximum employer contribution is lesser of:

  • 25% of employee’s compensation

  • $70,000

• maximum contribution to a SE taxpayer’s own SEP IRA is the lesser of:

  • 20% of 92.35% of self-employment income

  • $70,000

Simple IRA

• a type of SE retirement plan

• maximum contribution to an employee’s Simple IRA is the lesser of:

  • 100% of employee’s compensation

  • $16,500

• maximum contribution to an SE taxpayer’s own Simple IRA is the lesser of:

  • 100% of SE income - ½ SE tax

  • $16,500

Solo 401(k)

• a type of SE retirement plan

• maximum contribution to an SE employee’s 401(k) is lesser of:

  • 20% of 92.35% of SE income

  • $70,000

medical expenses

• Sch. A itemized deduction

doesn’t include:

• elective surgery

• travel

• vitamins, OTC medicine

• life insurance payments

• gym memberships

formula to arrive at deductible medical expenses amount

qualified medical expenses

(insurance reimbursement)

=qualified medical expenses “paid”

(7.5% of AGI)

=deductible medical expenses

state, local, & foreign taxes

• Sch. A itemized deduction

• limited to $10,000

• includes RE tax, personal property tax, sales tax

casualty losses

• Sch. A itemized deduction

• must be a presidentially declared disaster area

Smaller loss of lost cost/adj. basis or decreased FMV

(Insurance recovery)

=taxpayer’s loss

($100 for each occurrence)

=eligible loss

(10% AGI)

=deductible loss

gambling losses

• Sch. A itemized deduction

• losses only deductible to the extent of gambling winnings

mortgage interest

• Sch. A itemized deduction

• interest on up to $750,000 MFJ of home-related indebtedness is deductible

• any amount on principal over $750k is a personal exp. & not deductible

• can be used for a 1st & 2nd home

investment interest expense

• Sch. A itemized deduction

• deduction is limited to taxable investment income

charitable contributions

• Sch. A itemized deduction

• items given to qualified charitable organizations

• gifts & political contributions not deductible

• carryovers are on a FIFO basis for 5 years

Deduction limits:

• Cash donations → 60% of AGI

• Ordinary income property → 50% of AGI

• Long-term capital gain property → 30% of AGI

long-term capital gain property

appreciated capital gain property that has been held for >1 year

nonrefundable personal tax credits

credits that may reduce personal tax liability to zero, but will not result in a refund

includes:

• child & dependent care credit

• elderly & permanently disabled credit

• lifetime learning credit

• American opportunity credit (60% nonrefundable)

• retirement savings contribution credit

• foreign tax credit

• general business credit

• adoption credit

refundable tax redits

credits that may reduce personal tax liability to below zero, in which you could get a refund

includes:

• Federal income tax withheld

• American opportunity credit (40% refundable)

• Child tax credit (refund is limited)

• Earned income credit

• Excess Social Security paid

child and dependent care credit

*nonrefundable

• 20-35% of work-related expenses to care for children

• maximum: $3,000 for 1 dependent & $6,000 for 2+

• parent(s) must be working to receive credit

• only for children under 13

American Opportunity Tax Credit (AOTC)

*60% nonrefundable, 40% refundable

• eligible for a student’s first 4 years of higher education

• maximum credit is $2,500

• qualified expenses are on a “per student” basis

Lifetime Learning Credit (LLC)

*nonrefundable

• available for an unlimited # of years for qualified tuition

• maximum credit is $2,000

• qualified expenses are on a “per taxpayer” basis

Coverdell education savings accounts

• contributions are nondeductible; maximum contribution per beneficiary per year is $2,000

• earnings accumulate tax-free while in the account

• any amount remaining when beneficiary reaches 30 years old must be distributed

Section 529 qualified tuition programs (QTP)

• set up by the state or higher learning institution

• distributions can be excluded from gross income to the extent the distributions are used to pay for higher education expenses

credit for the elderly and/or permanently disabled

*nonrefundable

• available to people who are 65 & older or under age 65 & retired due to permanent disability

Formula

eligible income

(social security)

(1/2 AGI exceeding limit)

=balance

x 15%

=credit amount

AGI Limits

• single: $7,500

• MFJ: $10,000

• MFS: $5,000

adoption credit

*nonrefundable

• maximum credit amount for 2025 is $17,280

• any credit can be carried forward 5 years

• has AGI phase-out limits

• doesn’t include medical expenses

retirement savings contributions credit (saver’s credit)

*nonrefundable

• for low-and-moderate-income taxpayers for contributions to a qualified employer-sponsored retirement plan or IRA

• maximum credit: $2,000

• no carryover

• % of credit based on AGI

requirements:

• 18 years of age

• not a full-time student

• not a dependent of another

foreign tax credit

*nonrefundable

• credit for foreign taxes paid

• no limit, but limited to the lesser of:

  • foreign taxes paid

  • (taxable income from all foreign operations)/(total taxable worldwide income) x US tax

general business credit

*nonrefundable

combination of:

• investment credit

• work opportunity tax credit

• alternative fuels credit

• increased research credit

• low-income housing credit

• qualified child care expenditures

• welfare-to-work credit

• employer-provided child care credit

• small employer retirement plan start-up costs credit

• alternative motor vehicle credit

• other infrequent (on exam) credits

work opportunity credit

• available to employers who hire employees from targeted groups:

  • disabled

  • 18-24 yrs. old from disadvantaged families

  • Vietnam veterans from disadvantaged areas

  • certain food stamp recipients

• credit amount: 40% of first $6,000 of 1st year’s wages

small employer retirement plan start-up costs credit

*nonrefundable

• available for first 3 years for the start-up costs of establishing a new qualified retirement plan

Eligible Employers

• no more than 100 employees who received at least $5,000 compensation in the preceding year and

• at least 1 plan participant is a non-highly compensated employee

Credit Amount

Credit is the greater of:

• 100% of the first $1,000 of eligible start-up costs

• The lesser of:

  • $250 for each employee

  • $5,000

small business health care tax credit

*nonrefundable

• credit of up to 50% of the employer’s costs of the plan premiums

• employer must contribute at least 50% of the costs of health coverage on behalf of the employee

residential clean energy credit

*nonrefundable

• credit of 30% of installation costs for qualifying solar, wind, & geothermal energy-generating systems

• 2022-2032

energy efficient home improvement credit

*nonrefundable

• credit of 30% of costs of qualified energy efficiency improvements placed in service after 12/31/22

• maximum: $1,200

clean vehicle credit

*nonrefundable

• credit of up to $7,500 for new electric vehicle ($4,000 limit for used cars)

• subject to AGI limits

alternative fuel refueling property credit

*nonrefundable

• credit of 30% of the installation costs of “qualified alternative fuel vehicle refueling property” installed at the home

• maximum credit of $1,000

child tax credit

*limited refundability

• $2,000 tax credit per qualifying child

• 2018-2025

• due diligence requirements for paid preparers

earned income credit

*refundable

Requirements

1. live in the U.S. for more than ½ the year

2. meet certain low-income thresholds

3. not have more than a specified amount of disqualified income

4. if no qualifying children, be over age 25 and under age 65

5. file a joint return if married

taxes withheld from W-2

*refundable

• all income taxes withheld on a W-2 are treated as a credit against the taxpayer’s tax liability

excess FICA withheld (Social Security)

*refundable

• 2+ employers → an employee who has had SS tax withheld in an amount greater than the maximum may claim the excess as a credit

• 1 employer → employer must refund the excess to the employee, no credit allowed

net investment income tax

applies a rate of 3.8% to certain net investment income of people who have income above certain AGI amounts

• $250,000 for MFJ

• $200,000 for single or HOH

  • 3.8% imposed on the lesser of net investment income or the excess AGI over the threshold amount

kiddie tax

• net unearned income of a dependent (under 18) who doesn’t provide ½ of their own support is taxed @ the parent’s rate

estimated taxes (required minimum)

taxpayer is required to make quarterly payments if:

• $1,000 or more tax liability

• if taxpayer’s withholding is less than the lesser of:

  • 90% of the current year’s tax

  • 100% of last year’s tax

  • exception; if a taxpayer has AGI > $150,000 in the prior year, 100% of the prior year’s tax liability is used to compute the safe harbor for estimate payments