SUMMARY NOTES - Becker Professional Education

Regulation Final Review
SUMMARY NOTES
I.
Adjustments TO GROSS INCOME
Adjustments are subtracted from gross income to arrive at adjusted gross income (reported on Form 1040,
page 1).
A.
Alimony paid (alimony received is income).
B.
Retirement plan contributions (deductible IRA, Keogh, SEP, and SIMPLE contributions).
1.
2.
Deductible Contributions to Traditional IRAs—Both of the following conditions must be met:
a.
2014 AGI does not exceed $60,000–$70,000 (S) or $96,000–$116,000 (MFJ).
b.
The taxpayer does not actively participate in another qualified plan. (A spouse is not deemed
to participate just because the other spouse participates, but this phases out with AGI
between $181,000 and $191,000 for 2014.)
The maximum deductible for 2014 is the lesser of $5,500 or the individual's compensation. (An
individual over age 50 can make a $1,000 "catch-up contribution" in 2014.)
a.
Married taxpayers can contribute $11,000 ($5,500 each) provided combined earnings are
greater than $11,000 (and other requirements are met).
2014 R u l es S ummary: T ra d i t i ona l I R A
Earned Income
Pension
I R A C ontr i b ut i on an d W i t h d rawa l S ummary
Traditional
Deductible
IRA
Catch-up
IRA
Roth IRA
Nondeductible
IRA
Yes
Yes
No
No
$5,500
$1,000
$5,500
$5,500
Yes
Yes
Yes
Yes
Principal
Taxable
Taxable
Nontaxable
Nontaxable
Earnings
Taxable
Taxable
Nontaxable
Taxable
IRA
Spouse 1
Spouse 2
Spouse 1
Spouse 2
Modified
AGI
Yes
Yes
No
No
Unlimited
Yes
Yes
Yes
No
No
N/A
Unlimited
Yes
Yes
Yes
No
Yes
N/A
Under
$96,000
Yes
Yes
Yes
No
Yes
N/A
$116,000–
$181,000
No
Yes
Yes
No
Yes
N/A
Over
$191,000
No
No
Spouse 1
Spouse 2
Tax "adjustment"
Maximum contribution:
2014
Accumulate taxfree/deferred
Withdrawals:
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Regulation Final Review
3.
4.
Nondeductible contributions for 2014:
a.
Traditional Nondeductible IRAs—Maximum contribution is lesser of $5,500, individual's
compensation, or the amount not contributed to other IRAs.
b.
Roth IRAs—The contribution limits are the same. For 2014, eligibility phases out for
taxpayers with modified AGI between $114,000–$129,000 (S) and $181,000–$191,000 (MFJ).
Keogh Plans—A self-employed taxpayer subject to the self-employment tax is generally allowed to
set up a Keogh plan. The maximum contribution is limited to the lesser of:
a.
$52,000 (2014); or
b.
25 percent of Keogh net earnings from self-employment.
Business Income
< Business Expenses >
Net Business Income
<
1/2 Self
Employment Tax >
< Keogh Deduction >
Keogh Net Earnings
C.
Interest penalty on early withdrawal of funds.
D.
Self-employed health insurance premiums (100 percent deductible).
E.
Tax on self-employment income (50 percent of Social Security portion).
F.
Education loan interest (qualified).
1.
G.
H.
Educational expenses (qualified higher education) [expired 12/31/13, not yet extended as of the date of
this publication]:
1.
$4,000 maximum: Eliminated at certain income levels.
2.
Cannot be taken if expenses were claimed for American opportunity or lifetime learning credits.
Educator expenses (expired 12/31/13, not yet extended as of the date of this publication):
1.
I.
Limit of $2,500 (2014): For 2014 income phase-out levels are $65,000–$80,000 (S) and
$130,000–$160,000 (MFJ).
A deduction of up to $250 per eligible educator is allowed as an adjustment for qualified teaching/
classroom expenses.
Moving expenses:
1.
Moving expenses incurred in connection with work as an employee or self-employed individual.
2.
The distance from the old home to the new workplace must be 50 miles greater than the distance
from the old home to the old workplace.
3.
Employee must work at least 39 weeks during the 12-month period following arrival.
4.
Only direct moving costs are allowed as an adjustment (i.e., no meals, house hunting, leasebreaking payments, or temporary living expenses).
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Regulation Final Review
J.
Health savings accounts (HSA) allow employees with high-deductible insurance plans to make pretax
contributions to an HSA to cover health care costs.
1.
For 2014, workers with high-deductible health insurance may make pretax contributions of up
to $3,300 ($6,550 for families) to cover health care costs. The plan deductible must be at least
$1,250 ($2,500 families), and the amount is indexed for inflation.
2.
Monies grow tax-free, and there is no time limit for spending.
3.
Withdrawals used to pay qualified medical expenses are excluded from gross income.
II.DEDUCTIONS FROM ADJUSTED GROSS INCOME (AGI)
Taxpayers may generally choose between using the standard deduction and itemizing deductions. (This
usually depends upon which produces the better tax result; however, if the taxpayer is MFS and his or her
spouse itemizes deductions, the taxpayer must also itemize deductions).
A.Standard Deductions
2014
Single (MFS)
Head of Household
MFJ (or surviving spouse)
$6,200
$9,100
$12,400
The additional standard deduction for being elderly or blind is $1,550 (2014) for Single or Head of
Household and $1,200 (2014) for MFJ, MFS, or a surviving spouse.
B.
Itemized Deductions (Schedule A)
1.
Medical Expenses—Medically necessary items (e.g., prescriptions, doctors, medical and accident
insurance, and required surgery) are deductible on Schedule A, subject to 10 percent of AGI.
Nondeductible expenses include elective/cosmetic surgery, life insurance, vitamins, etc.
Qualified Medical Expenses
< Insurance Reimbursement >
Qualified Medical Expenses
"Paid"
< 10% AGI >
Deductible Medical Expenses
2.
State, Local, and Foreign Taxes—Real estate taxes, income taxes, and personal property taxes
paid during the year are deductible. Federal taxes are not deductible.
3.
Sales Tax—Sales taxes paid can be deducted instead of state and local income taxes (whichever
is higher). The deduction is based on an IRS table or the actual substantiated sales tax.
4.
Home Mortgage Interest—Qualified residence interest on a first or second home is deductible
(both acquisition indebtedness and home equity indebtedness are included).
a.
Acquisition—Interest on up to $1,000,000 ($500,000 MFS) borrowed to construct, acquire,
and improve a home.
b.
Home Equity—Interest on up to $100,000 ($50,000 MFS) of borrowing used for any purpose.
c.
Mortgage Insurance Premiums—Mortgage insurance premiums paid in connection with
qualified acquisition debt are deductible in 2013 as home mortgage interest; phaseouts apply. (Expired 12/31/13, not yet extended at the date of this publication.)
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Regulation Final Review
5.
Investment Interest—The deduction is limited to net (taxable) investment income. Interest incurred
for tax-free investments is nondeductible.
6.
Charitable Contributions—The maximum deduction for contributions to public charities is
50 percent of AGI for cash contributions (30 percent AGI for long-term capital gain property
contributions). Contributions must be to qualified charities (i.e., gifts to individuals and political
contributions are not deductible).
7.
a.
Long-term appreciated property is deductible at the property's fair market value (no capital
gain applies).
b.
Excess contributions can be carried forward for up to five years.
c.
Contribution of services is nondeductible, but the out-of-pocket expenses are deductible.
Casualty and Theft Losses—Applicable to nonbusiness property.
Smaller Loss
< Insurance Recovery >
1. Lost Cost
2. Decreased FMV
Taxpayer's Loss
< $100 >
Eligible Loss
< 10% AGI >
Deductible Loss
8.
9.
Miscellaneous Itemized Deductions—Certain deductions are only allowed to be deducted to the
extent they exceed 2 percent of AGI:
a.
Employee's unreimbursed business expenses; meals and entertainment (50 percent).
b.
Educational expenses to maintain or improve the skills needed by the individual in his or her
current trade or business, or needed to meet employer's requirements for job retention.
c.
Uniforms—those not normally worn as streetwear.
d.
Business Gifts—up to $25 per recipient per year.
e.
Employment agency fees.
f.
Safe deposit box and other investor expenses.
g.
Tax preparation fees.
h.
Professional subscriptions.
i.
Debit card convenience fees incurred to pay income tax.
Other Miscellaneous Itemized Deductions—Not subject to 2 percent floor.
a.
Gambling losses are deductible to the extent of gambling winnings (reported on Form 1040,
page 1).
b.
Federal estate tax paid on income in respect of a decedent.
This is estate tax that was paid by an individual because of income received by the individual
as a beneficiary of an estate. The federal estate tax paid (on Form 706) that related to the
value of this income item is an allowable deduction for income tax purposes.
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Regulation Final Review
III.Tax Calculation
Tax = Taxable income x Tax rate (rate is generally given on exam).
IV. Alternative Minimum Tax
Alternative minimum tax is a parallel tax system to the regular tax system. It calculates a minimum amount of
tax to be paid by certain taxpayers in any given year. The calculation begins with regular taxable income and
adjusts it according to the alternative minimum tax rules. The taxpayer will have to pay "Alt Min" tax when his
or her tentative minimum tax (calculated under the alternative minimum tax rules) exceeds his or her regular
tax (calculated under the regular tax rules).
Regular Taxable Income
± Adjustments
+ Preferences
Exemption*
$82,100 (MFJ)
AMTI
< $156,500 >
Excess
x 25%
Alternative Minimum Taxable Income
< Exemption >
Alternative Minimum Tax Base
x Tax Computation
< Reduction >
AMT Exemption
Tentative AMT Tax
< Foreign Tax Credit >
Tentative Minimum Tax
< Regular Income Tax >
Alternative Minimum Tax
* For 2014, the exemption amounts are $82,100 (MFJ), $52,800 (H of H and Single), and $41,050 (MFS).
A.
Adjustments represent mainly timing differences (income is recognized sooner under alternative
minimum tax rules). [PANIC TIMME]
1.
Passive activity losses are added back or recalculated.
2.
Accelerated depreciation (post-1986 purchases) has an adjustment for the difference between
tax and straight-line for real property and between tax and 150 percent declining balance for
personal property.
3.
Net operating loss of the individual taxpayer is recomputed.
4.
Installment income of a dealer is an adjustment because the installment method is not allowed
for AMT.
5.
Contracts—Percentage completion versus completed contract.
6.
Taxes are added back.
7.
Interest:
a.
Mortgage interest not used to buy, build, or improve a qualified dwelling (house, apartment,
condominium, or mobile home not used on a transient basis) is added back (e.g., certain
home equity).
b.
Investment interest expense is recalculated.
8.
Medical expenses must exceed 10 percent of AGI.
9.
Miscellaneous itemized deductions subject to 2 percent test are added back.
10. Exemptions and standard deductions are disallowed.
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Regulation Final Review
B.
C.
Tax preferences (always add-backs):
1.
Private activity bond tax-exempt interest (with exceptions).
2.
Pre-1987 accelerated depreciation on real property and leased personal property.
3.
Percentage depletion deduction (excess over adjusted basis of property).
AMT credit:
1.
If a taxpayer pays alternative minimum tax, a credit against future regular tax is granted for the
amount of alternative minimum tax paid (with some exceptions). The carryforward of this credit
is indefinite.
2.
Generally, each year, the greater of $5,000 or 20 percent of long-term (greater than three years)
unused minimum tax credit may be refundable.
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