Chapter 9
p.557
Deductions & Credits
Taxation of business enterprises on the net
accrual to wealth necessitates enabling
deductions for the cost/expenses of producing
the income derived from that business.
What availability of deductions for individuals:
(1) not engaged in a “trade or business,” or
(2) having an “investment” producing income?
Certain deductions are available when
attributable to generating gross income, but
what about “personal deductions”?
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Tax Computation for
Individuals
p.559
Gross Income
Less: Above the Line Deductions - §62
Equals: Adjusted Gross Income (AGI) - §62(a)
Minus: “Below the Line” Deductions (Sch. A)
(1) itemized deductions (§63(d)), or
(2) “standard deduction” (§63(c)).
Also, deduction available for personal
exemption(s). §151(a)).
Equals: Taxable income. §63(a).
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Adjusted Gross Income
p.560
Gross income - §61
Less: Business expenses (the “above-the-line”
deductions) – deducting costs for earning
business income.
See (for individuals) Code §62(a)(1) through
(21) identifying those deductions which are
available towards determine AGI.
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Personal Exemption &
Standard Deduction P.563
1) Personal exemption ($4,050 for 2016).
Subject to an annual inflation adjustment.
Previously no phase-out of the personal
deduction; but, phase-out in 2016 for highincome taxpayers. §151(d)(3). & next slide.
2) Standard deduction for 2016 ($6,300 for
single person; $12,600 for a married couple).
§63(c)(2). Annual inflation adjustment applies.
Additional standard deduction available for
aged and blind persons.
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Personal Exemption
p.563-4
& Ch. 17
§151 provides each taxpayer a “personal
exemption” & two exemptions for a joint return
if married. Amount for 2016 - $4,050.
Also, exemption for each “dependent.” §151(c).
Who is a dependent? See (1) “qualifying child”
(§152(c)) & (2) a “qualifying relative” (§152(d)).
How allocate exemptions in a divorce? §152(e).
What is the purpose of a “multiple support
agreement”? See §152(d)(3).
What about a “foster child”? Missing children?
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Problems
p.565
1) Child has bond income of $3,000 from
bonds received by gift. Parent claims the
personal exemption & not the child. §151(d)(2).
Child has limited standard deduction. §63(c)(5).
§1(g) – special rules for the “kiddie tax” – tax at
the parent’s marginal tax rate.
2) Child realizes $5,000 of summer earnings.
This income is not subject to the “kiddie tax.”
No personal exemp., but a standard deduction.
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Itemized Deductions
P.565
“Itemized” deductions (§63(d) are those
deductions permitted for personal
expenditures, including:
1) Employee business expenses.
2) Personal interest expense
3) State and local taxes
4) Charitable contributions
5) Medical expenses
6) Casualty or theft losses.
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Miscellaneous Itemized
Deductions
P.566
See §67 – an additional limitation on deductions
is imposed. These deductions are only
allowable to the extent they exceed 2% of AGI.
These deductions (§67(b)) include:
1) Unreimbursed employee business expenses
(§62(a)(1) re employee expense below the line).
Cf., reimbursed employee expense- §62(a)(2)(A)
2) Investment expenses - §212
Is this really just a tax rate increase
accomplished outside
the
usual tax brackets?
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Rev. Rul. 2012-25
p.569
A §62(c) reimbursement arrangement enables a
trade or business deduction of the employee
towards determining AGI. §62(a)(2)(A).
But are the arrangements described in this Rev.
Rul. “accountable plans” under §62(c)?
Holding: None of the described plans qualify
(except Situation 4) where reimbursement for
cleaning supply expenses occurred with separate
reimbursement arrangement and the actual
deductible expenses were substantiated.
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Section 68 – Overall Limit
on Itemized Deductions
When AGI exceeds the “applicable amount”
then deductions are reduced (under §68,
providing overall limit) by the lesser of:
(1) 3 percent of AGI, or
(2) 80 percent of itemized deductions.
“Applicable amount” (in 2016) is $311,300 for a
joint return & $259,400 for an unmarried
individual.
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Credits
p. 578
Benefit of a personal “tax credit”? Credit is an
offset against the tax liability, not against the
gross income in reaching taxable income.
I.e., a subtraction occurs against the tentative
income tax liability.
Credits can be (1) “refundable’ or (2)
“nonrefundable.” What is the difference?
E.g., §31 permits refundable credit status for
tax withholding from an employee’s wages (and
transmitted to IRS by employer).
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Earned Income Tax Credit
P.579 Also “Refundable”
File an income tax return and receive a rebate
(even if no income tax liability arises).
§32 provides for the allowance of this credit.
The tax credit amount depends upon:
(1) number of dependents, and
(2) income limitations/phaseouts.
(3) primary objective: to encourage working
for one’s support & then reward with a tax
credit to enable additional support (& relief
from Social Security
tax liability).
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Other Income Tax Credits
1) §22 – provides a tax credit for the elderly
and the disabled – up to 15% of the §22 amount.
Reduction as the §22 amount increases above
$7,500 for single persons and $10,000 for joint
returns.
2) Child tax credit - § 24 (next slide).
3) Adoption credit - § 23.
4) Hope Scholarship credit, etc. - §25A.
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Child Tax Credit - §24
Provides a taxpayer a $1,000 credit for each
qualifying child under age 17.
Subject to a phase-out when “modified adjusted
gross income” is above a “threshold amount.”
The credit is partially refundable. §24(d).
No credit unless the name of child and ID
number are included on the return. §24(e).
Subject to a “sunset” provision? Permanent
extension in 2013 tax act.
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Chapter 9
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