Chapter 6

Case Study Overview

• Taxpayers: Courtney Wilson and her mother, Dorothy "Gram" Weiss

• Family Description:

  • Courtney, age 40, divorced, has two children: Deron (10) and Ellen (20)

  • Gram, age 70, retired and lives with Courtney

• Location: Kansas City, Missouri

• Employment and Filing Status:

  • Courtney works as an architect for EWD, files as "Head of Household"

  • Gram files as a single taxpayer

• Current Situation:

  • Both are determining allowable deductions and taxable income.

Courtney's Income and Deductions

• Gross Income: Courtney must calculate her gross income before deductions.

• Expenses to Consider:

  • Consulting work and rental property expenses

  • Moving costs from Cincinnati to Kansas City (unsure about deductibility)

  • Self-employment taxes and Ellen's tuition for summer school

• Previous Tax Experience:

  • Courtney is familiar with itemized deductions, including:

    • Medical expenses for a broken wrist

    • State income taxes withheld

    • Real estate taxes paid on personal/residential property and rental properties

    • Charitable donations (cash and property)

• Gram's Situation:

  • Limited deductions this year, including:

    • Early withdrawal penalty from a certificate of deposit

    • Donations to her church

  • Plans to bunch itemized deductions next year to exceed the standard deduction.

Deductions for AGI

• Significance:

  • Deductions are categorized as "For AGI" and "From AGI".

• For AGI Deductions: More favorable because they directly reduce gross income.

  • Categories include:

    1. Directly Related to Business Activities (e.g., business expenses)

    2. Indirectly Related to Business Activities (e.g., moving expenses)

    3. Subsidizing Specific Activities (e.g., education expenses)

• Business Activities Defined:

  • Profit-motivated and distinguished from investment activities.

Understanding Business vs. Investment Activities

• Examples:

  • Investment: Courtney buys land for appreciation (not a business activity).

  • Business: Courtney develops and sells land (considered business).

• Deductibility Implications:

  • Business expenses are deductible for AGI.

  • Only certain investment expenses are deductible, while others are not.

Specific Deductions Explained

• Health Insurance for Self-Employed:

  • Deductions for health insurance premiums payable to self-employed individuals.

  • Limits if eligible for employer-sponsored plans.

• Deductions for Retirement Accounts:

  • Contributions to traditional IRAs are deductible for AGI, subject to phase-outs based on income.

  • Health Savings Accounts (HSAs): Allow deductions for contributions to cover qualified medical expenses.

• Penalties:

  • Early withdrawal penalties from savings accounts are deductible for AGI.

Itemized Deductions vs. Standard Deduction

• Standard Deductions (2023):

  • Higher for joint filers and heads of household; provides relief to lower-income taxpayers.

• Itemized Deductions: Includes medical expenses, state and local taxes, mortgage interest, and charitable contributions, subject to certain limits.

Taxable Income Calculation

• Calculating Taxable Income:

  • Total income minus the greater of itemized deductions or standard deduction.

  • Courtney's Example:

    • AGI calculation shows her deductions and taxable income context.

• Gram's Case Study:

  • Shows limits on standard deductions and itemized deductions.

Key Terms Summary

• Bunching Deductions: Strategy to maximize tax benefits by timing deductions.

• Qualified Business Income: Income eligible for deduction subject to specified criteria.

• Casualty Losses: Limited deductibility except for federally declared disasters.

Conclusion

• Courtney and Gram explore various deductions leading into calculating their taxable income, with Courtney taking advantage of qualified business income deductions, whereas Gram relies on the standard deduction.