Chapter 6: Deductions and Losses: In General

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Differentiate between "deductions for AGI" and "deductions from AGI"

* "Deductions for AGI" can be claimed even if taxpayer does not itemize. It is important in determining the amount of certain itemized deductions.

* "Deductions from AGI," on the other hand, must exceed the standard deduction to provide any tax benefit. Also called "below the line" or itemized deductions.

What is a partial list of items included in "deduction for AGI?"

-Trade or business expenses
-Reimbursed employee business expenses
-Deductions from losses on sale or exchange of property
-Deductions from rental and royalty property
-Payment of Alimony
-One-half of self-employment tax paid
-Moving expenses

What is a partial list of items included in "deduction for AGI?" (cont)

-Contributions to pension, profit sharing, annuity plans, IRAs, etc.
-Interest on student loans
-Qualified tuition and related expenses under § 222
-Up to $250 for teacher supplies for elementary and secondary school teachers
-100% of health insurance premiums paid by a self-employed individual

What is a partial list of items included in "deduction from AGI, or itemized deductions?"

-Medical expenses (in excess of 7.5% of AGI)
-Certain state and local taxes
-Contributions to qualified charitable organizations
-Personal casualty losses (in excess of 10 % of AGI and a $100 floor per casualty)
-Certain personal interest expense (e.g., mortgage interest on a personal residence)
-Miscellaneous itemized deductions (in excess of 2% of AGI)

What expenses are deductible under Section 162(a)?

*Section 162(a) permits a deduction for all ordinary and necessary expenses paid or incurred in carrying on a trade or business including:
-Reasonable salaries paid for services
-Expenses for the use of business property
-One-half of self-employment taxes paid

What are the requirements for expenses to be deductible?

*In order for expenses to be deductible, they must be:

-Ordinary: normal, usual, or customary for others in similar business, and not capital in nature
-Necessary: prudent businessperson would incur same expense
-Reasonable: question of fact. Reasonable in amount. Excess of "reasonableness" is disallowed.
-Incurred in conduct of business

What are the 212 expenses that are deductions for AGI?

* § 212 expenses that are deductions for AGI include:
-Expenses related to rent and royalty income
-Expenses paid in connection with the determination, collection, or refund of taxes related to the income of sole proprietorships, rents and royalties, or farming operations

What are the 212 expenses that are deductions from AGI, or itemized deduction?

*All other § 212 expenses are itemized deductions (deductions from AGI)

-For example, investment-related expenses (e.g., safe deposit box rentals) are deductible as itemized deductions attributable to the production of investment income

What losses are deductible to individual taxpayers?

*Deductible losses of individual taxpayers are limited to those:
-Incurred in a trade or business,
-Incurred in a transaction entered into for profit

*Individuals may also deduct casualty losses from fire, storm, shipwreck, and theft

When are certain expenditures disallowed for deductibions?

*Deductions are disallowed for certain specific types of expenditures that are considered contrary to public policy

-Examples: penalties, fines, illegal bribes or kickbacks, two-thirds of treble damage payments for violation of anti-trust law

What is required to be able to deduct legal expense?

*To deduct legal expenses

--Must be directly related to a trade or business, an income producing activity, or the determination, collection, or refund of a tax
e.g., Corporate officer's legal fees in defending against price-fixing charges
e.g., Landlord's legal fees associated with eviction of tenant

Are expenses related to an illegal business deductible?

Yes. Usual expenses of operating an illegal business are deductible. However, deduction for fines, bribes to public officials, illegal kickbacks, and other illegal payments are disallowed

*Trafficking in controlled substances: only cost of goods sold can reduce gross income

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