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William Byrnes (Texas A&M) tax & compliance articles

Posts Tagged ‘Adjusted Gross Income’

Advanced Markets Preview: Personal and Nonbusiness Deductions

Posted by William Byrnes on March 30, 2011

Why is this Topic Important to Wealth Managers? This topic presents discussion on the individual and nonbusiness deductions offered under the Internal Revenue Code.  Since April 15th is fast approaching, it is important to review common tax positions with regards to client planning.

In addition this blogticle presents a excerpted preview of new, updated material from Advanced Markets which will be available soon (see www.advisorfx.com).   Over the coming 9 months, the entire AUS service is being revised and will be rolling out monthly.  The updating will include many new areas and a sharper focus with practical explanations and client presentation aides for current areas.  We look forward to helping you secure your next sale.

An expense of an individual may be business, nonbusiness, or personal, depending upon which of the individual’s spheres of activity gave rise to the expense.  This Blogticle discusses personal and nonbusiness expenses generally.

Personal Expenses

Personal expenses are all expenses incurred by an individual that are not business or nonbusiness expenses. These would include, for example, food and clothing for the individual and his family, repairs on the family home, and premiums paid on the individual’s personal life insurance. Generally, no deduction is permitted for personal expenses.[1] By specific statutory provision, however, deductions are allowed for some personal expenses, such as certain personal taxes, a limited amount of charitable contributions, medical expenses, certain interest on a principal residence, and alimony.

Most deductible personal expenses are “itemized deductions” and thus may be taken only if the taxpayer chooses to itemize his deductions instead of claiming the standard deduction.

Nonbusiness Expenses

A nonbusiness expense is generally an investment expense incurred in connection with the production of income, other than a trade, business or profession. Expenses of this type would include, for example, fees for tax or investment advice, and the cost of a safe deposit box used to store taxable securities. The deduction of nonbusiness expenses is governed by Code section 212. Specifically, Section 212 allows a deduction for expenses incurred in connection with: (1) the production or collection of income; (2) the management, conservation, or maintenance of property held for production of income; or (3) the determination, collection or refund of any tax.

The deductibility of nonbusiness expenses may be limited or deferred if they arise in connection with a “passive activity” or are interest expenses. Very generally, a “passive activity” is any activity which involves the conduct of a trade or business in which the taxpayer does not “materially participate.” [2] A passive activity also includes any rental activity, without regard to whether the taxpayer materially participates in the activity. Special rules apply to rental real estate activities. Aggregate losses from “passive activities” may generally be deducted in a year only to the extent they do not exceed aggregate income from passive activities in that year; credits from passive activities may be taken only against tax liability allocated to passive activities. Disallowed losses and credits may be carried over to offset passive income in later years. [3]

Once other limitations have been applied to the deductibility of nonbusiness expenses (e.g., the passive loss rule), they are generally deductible only to the extent that the aggregate of these and other “miscellaneous itemized deductions” exceeds 2% of adjusted gross income. “Miscellaneous itemized deductions” are deductions from adjusted gross income other than deductions for (1) interest, (2) taxes, (3) non-business casualty losses and gambling losses, (4) charitable contributions (including charitable remainder interests), (5) medical and dental expenses, (6) impairment-related work expenses for handicapped employees, (7) estate taxes on income in respect of a decedent, (8) certain short sale expenses, (9) certain adjustments under the Code’s claim of right provisions, (10) unrecovered investment in an annuity contract, (11) amortizable bond premium, and (12) certain expenses of cooperative housing corporations. [4]

A nonbusiness expense must also be “ordinary and necessary” to be deductible. [5] It must, therefore, be reasonable in amount and must bear a reasonable and proximate relation to (a) the production or collection of taxable income, or (b) the management, conservation, or maintenance of property held for the production of income. [6]

Tomorrow’s blogticle will discuss important planning aspects of 2011.

We invite your opinions and comments by posting them below, or by calling the Panel of Experts


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2011 Tax Rates, Credits, and Deduction Amounts

Posted by William Byrnes on February 2, 2011

Child Tax Credit—for taxable years beginning in 2011, the value used in 24(d)(1)(B)(i) to determine the amount of credit under § 24 that may be refundable is $3,000.

Hope Scholarship, American Opportunity, and Lifetime Learning Credits—for taxable years beginning in 2011, the Hope Scholarship Credit under § 25A(b)(1), as increased under § 25A(i) (the American Opportunity Tax Credit), is an amount equal to 100 percent of qualified tuition and related expenses not in excess of $2,000 plus 25 percent of those expenses in excess of $2,000, but not in excess of $4,000. Accordingly, the maximum Hope Scholarship Credit allowable under § 25A(b)(1) for taxable years beginning in 2011 is $2,500.

In addition, for taxable years beginning in 2011, a taxpayer’s modified adjusted gross income in excess of $80,000 ($160,000 for a joint return) is used to determine the reduction under § 25A(d)(2) in the amount of the Hope Scholarship Credit otherwise allowable under § 25A(a)(1). For taxable years beginning in 2011, a taxpayer’s modified adjusted gross income in excess of $51,000 ($102,000 for a joint return) is used to determine the reduction under § 25A(d)(2) in the amount of the Lifetime Learning Credit otherwise allowable under § 25A(a)(2).

Standard Deduction—In general, for taxable years beginning in 2011, the standard deduction amounts under § 63(c)(2) are as follows:  To read this article excerpted above, please access AdvisorFYI


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Year-End Tax Planning Series: Charitable Deductions

Posted by William Byrnes on December 22, 2010

Map of USA showing states with no state income...

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Why is this Topic Important to Wealth Managers? Discusses charitable contributions for individuals.  May assist wealth managers plan client contributions made to charities this year.

Generally a deduction is allowed to “individuals, corporations and certain trusts for charitable contributions made to qualified organizations, subject to percentage limitations and substantiation requirements.”

The law allows for such charitable contributions as itemized deductions, as “an incentive to encourage charitable contributions”, to certain charitable organizations.

Assuming all other factors equal, “it is usually better for the donor to make a charitable gift during life than at death, because the gift can generate an income tax charitable deduction for the donor.”

How much is the deduction?

The charitable contribution income tax deduction for an individual taxpayer can be classified as not to exceed 50 percent or not to exceed 30 percent of the taxpayer’s adjusted gross income (AGI), depending on the donee charity.

For a discussion of Adjusted Gross Income or AGI, see AdvisorFX—Deductions in Determining Adjusted Gross Income and Taxable Income (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

To read this article excerpted above, please access www.AdvisorFYI.com

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