Chapter 9 p.557 Deductions & Credits

Transcription

1 Chapter 9 p.557 Deductions & Credits Taxation of business enterprises is on the basis of the net accrual to wealth. This necessitates enabling deductions for the cost/expenses of producing the income derived from that business activity. Taxation is not on a gross receipts basis. Such a tax would be an excise or a sales tax. 10/19/2017 (c) William P. Streng 1

2 Deductions for Individuals What availability of deductions for individuals when: (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. What about personal deductions, i.e., unrelated to generating gross income? 10/19/2017 (c) William P. Streng 2

3 Tax Computation for Individuals p.559 Gross Income (after any CGS offset) 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) the standard deduction ( 63(c)). Also, a deduction is available for personal exemption(s). 151(a)). Equals: Taxable income. 63(a). 10/19/2017 (c) William P. Streng 3

4 Adjusted Gross Income (or AGI ) p.560 Gross income - 61 Less: Business expenses (the above-the-line deductions) deducting the costs incurred for earning business income. See (for individuals) Code 62(a)(1) through (21) identifying those deductions which are available towards determining AGI. 10/19/2017 (c) William P. Streng 4

5 Personal Exemption & Standard Deduction P.563 1) Personal exemption ($4,050 for 2017) Subject to an annual inflation adjustment. Previously no phase-out of the personal exemption; but, phase-out in 2017 for highincome taxpayers. 151(d)(3). & next slide. 2) Standard deduction for 2017 ($6,350 for single person; $12,700 for a married couple). 63(c)(2). Annual inflation adjustment applies. Additional standard deduction available for aged and blind persons. 63(c). 10/19/2017 (c) William P. Streng 5

6 Personal Exemption p & Ch provides each taxpayer a personal exemption & two exemptions for a joint return if married. Amount for $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? 10/19/2017 (c) William P. Streng 6

7 Effect of the Standard Deduction The predominant portion of taxpayers claim a standard deduction and therefore avoid the necessity of itemizing income tax deductions. Reduces audit responsibilities for the IRS. The effect of the standard deduction is a zero tax rate on the amount of the income up to the available standard deduction. 10/19/2017 (c) William P. Streng 7

8 Problems p.565 1) Child has $3000 interest income from bonds received by gift. Parent claims the personal exemption & not the child. 151(d)(2). Child has limited standard deduction. 63(c)(5). And, 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. 10/19/2017 (c) William P. Streng 8

9 Itemized Deductions P.565 Itemized deductions ( 63(d)) are those deductions which are permitted for personal (i.e., not business) 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. 10/19/2017 (c) William P. Streng 9

10 Miscellaneous Itemized Deductions P.566 See 67 an additional limitation on certain deductions is imposed. These deductions are only allowable to extent exceeding 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 Is this really just an income tax rate increase accomplished outside the usual tax brackets? 10/19/2017 (c) William P. Streng 10

11 Rev. Rul 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 actual deductible expenses were substantiated. 10/19/2017 (c) William P. Streng 11

12 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 2017) is $313,800 for a joint return & $261,500 for an unmarried individual. 10/19/2017 (c) William P. Streng 12

13 Rate Schedules p.577 Code 1 - separate progressive income tax rate brackets for: 1) Married filing jointly. 2) Heads of households 3) Unmarried individuals. 4) Married filing separately. 5) Trusts and estates. Rates are indexed - 1(f)(3). Plus Obamacare tax on passive income 3.8% tax rate Code /19/2017 (c) William P. Streng 13

14 Tax 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 previously transmitted to IRS by the employer). 10/19/2017 (c) William P. Streng 14

15 Earned Income Tax Credit P.579 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). 10/19/2017 (c) William P. Streng 15

16 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 ) Hope Scholarship credit, etc. - 25A. 10/19/2017 (c) William P. Streng 16

17 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. 10/19/2017 (c) William P. Streng 17

18 Chapter 9 10/19/2017 (c) William P. Streng 18