PowerPoint Slides for Chapter 16


Which of the following are included in gross income and which are excluded?

 Prizes and awards

 Scholarships

 Alimony received

 Child support received

 Property settlements pursuant to divorce

 Employee fringe benefits


 Imputed Income

 Below market-rate loans

 Payment of expenses by others

 Bargain purchases

Which of the following are included in gross income and which are excluded?

 Gifts and inheritances

 Life insurance proceeds

 Welfare payments

 Social Security benefits

 Medical insurance payments

Workmen’s compensation

 Compensation for injuries

 Unemployment benefits

 Punitive damages

Payment for lost wages

Deductions ‘for’ AGI

 Trade or business deductions

 Moving expenses (with limitations)

 Net Capital Losses up to $3,000

 Alimony paid (but not child support)

 50% of self-employment tax paid and 40% of a self-employed person’s medical insurance premiums

 Net operating loss deduction

 IRA contributions


 Up to $2,500 of post-secondary tuition, phased out for higher income taxpayers

Itemized Deductions

 Medical expenses

 Payments to health care practitioners, medical facilities, insurance premiums, medical aids, prescription drugs

 Only unreimbursed costs

 Deductible in excess of 7.5% of AGI


 Charitable contributions

 Cash or FMV of property contributed to a qualified tax-exempt organization

 Subject to many limitations

 deduction for gifts to public charities may not exceed 50% of AGI


Itemized Deductions continued

 Interest Deductions

 Trade or business interest deducted for AGI

 Investment interest expense

 Deduction limited to amount of net investment income

 Qualified residence interest

 Deduction limited to interest on up to $1 million of acquisition debt plus $100,000 of home equity debt

 Available for a primary and one secondary residence


Itemized Deductions continued

 Taxes

 Income taxes

 State, local, and foreign, NOT federal

 Real property taxes

 Personal property taxes based on value

 Other state, local and foreign business-related taxes deducted for AGI

 What common tax we all pay is not deductible?

Itemized Deductions continued


 Personal Casualty and Theft losses

 A casualty loss is a loss of property caused by some sudden, unusual or unexpected external force, such as a natural disaster

 Theft means an illegal taking of property, not just loss due to carelessness

 Deduction subject to a $100 per event floor and a reduction of 10% of AGI

 Casualty and theft losses of business property deductible for AGI


Itemized Deductions continued

 Miscellaneous itemized deductions

 Deductible only in excess of 2% of AGI

 Include:

 Unreimbursed business expenses

 Investment expenses

 Tax return preparation fees

 hobby expenses

 Gambling losses

 Deductible only against gambling winnings


Other Issues

 Use of property for both personal and businessrelated purposes may introduce considerable complexity into the calculation of individual taxable income

 Two common examples:

 office in the home

 vacation home


Vacation Home

 Treatment of income and expenses of a vacation home depends on extent of rental and personal use

 If rented 14 or fewer days of year and used personally the remainder of the year, the property is treated as a personal residence. Rental income is not reported and rental expenses are not deductible


Vacation Home continued

 If rented more than 14 days:

 And used personally for more than 14 days or more than 10% of the number of rental days:

 Income reported as taxable

 Allocable portion of expenses deductible, limited to rental income

 And used personally for less than 14 days or 10% or less than the number of rental days:

 Income reported as taxable

 Allocable portion of expenses deductible


Sale of Personal Residence

 Up to $250,000 ($500,000 MFJ) of gain excluded from taxation

 Dwelling must have been owned and used as taxpayer’s principal residence for 2 of last 5 years

 Exclusion applies to only one sale every 2 years

 Reduced exclusion available if sold due to change in employment, health reasons, or unforeseen circumstances

• Reduced exclusion = maximum X lesser of ownership period exclusion or time since prior sale two years

Tax Subsidies for Higher


 Tax credits

 HOPE scholarship credit

 Lifetime learning credit

 Interest rules

 Exclude from income interest earned on Series EE savings bonds used for tuition and fees

 Itemized deduction allowed for interest paid on qualified education loans


 Education savings account

 Maximum nondeductible contribution of $2,000 per year

Withdrawals nontaxable if used for beneficiary’s education expenses