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

Posts Tagged ‘Itemized deduction’

Deciding Whether to Itemize Deductions or Use the Standard Deduction?

Posted by William Byrnes on February 17, 2016


Most people claim the standard deduction when they file their federal tax return, but you may be able to lower your tax bill if you itemize. You can find out which way saves you the most by figuring your taxes both ways. The IRS offers these six tips to help you choose:

 

Figure Your Itemized Deductions. Add up deductible expenses you paid during the year. These may include expenses such as:

  • Home mortgage interest
  • State and local income taxes or sales taxes (but not both)
  • Real estate and personal property taxes
  • Gifts to charities
  • Casualty or theft losses
  • Unreimbursed medical expenses
  • Unreimbursed employee business expenses

Special rules and limits apply to each type of itemized expense which may lead to less of a tax deduction than the actual expense.

Know Your Standard Deduction. If you don’t itemize, your basic standard deduction for 2015 depends on your filing status:

  • Single $6,300
  • Married Filing Jointly $12,600

If you’re 65 or older or blind, your standard deduction is higher than these amounts. If someone can claim you as a dependent, your deduction may be limited.

IRS YouTube Videos: Standard vs. Itemized DeductionsEnglish

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Six Tax Tips When Deciding to Itemize or Take the Standard Deduction

Posted by William Byrnes on April 1, 2014


2014_tf_on_individuals_small_businesses-m_1The IRS published Tax Tip 2014-29 with 6 helpful tips for deciding whether to itemize deductions or to rely upon the standard deduction.  The IRS stated that a taxpayer should calculate the available deduction using both methods and then choose the deduction method that produces the greater deduction (thus lower amount of tax).

1. Figure the itemized deductions.  Add up deductible expenses paid during the year. These may include expenses such as:

  • Home mortgage interest
  • State and local income taxes or sales taxes (but not both)
  • Real estate and personal property taxes
  • Gifts to charities
  • Casualty or theft losses
  • Unreimbursed medical expenses
  • Unreimbursed employee business expenses

2. Know the standard deduction.  If a taxpayer does not itemize, the basic standard deduction for 2013 depends on your filing status:

  • Single $6,100
  • Married Filing Jointly $12,200
  • Head of Household $8,950
  • Married Filing Separately $6,100
  • Qualifying Widow(er) $12,200

The standard deduction is higher for persons when 65 or older or blind.

3. Check the exceptions.  Some taxpayers do not qualify for the standard deduction and therefore should itemize.  This includes married couples who file separate returns and one spouse itemizes.

4. Use the IRS’s ITA tool: Interactive Tax Assistant tool to help determine your standard deduction.

5. File the right forms.  To itemize deductions, use Form 1040 and Schedule A, Itemized Deductions. Standard deduction is on Forms 1040, 1040A or 1040EZ.

6. File Electronically.  Some taxpayers are eligible for free, brand-name software to prepare and e-file the tax return. IRS Free File will do the work for you.

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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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Taxing Gaming Wins and Losses

Posted by William Byrnes on March 12, 2011


How does the average gambler determine wagering gains and losses for tax purposes?

Mrs. X is a casual gambler.   She uses the cash receipts and disbursements method of accounting and files her returns on a calendar year basis.  Mrs. X’s gaming practice is to commit only $100 to slot machine play on any visit to a casino.  She wagers until she loses the original $100 committed to gambling or until she stops gambling and “cashes out.”

Upon cashing out, there are three possibilities, that she have $100 (the basis of her wagers), less than $100 (a wagering loss), or more than $100 (a wagering gain).   She went to a casino to play the slot machines on ten separate occasions throughout the year.  On each visit to the casino, she exchanged $100 of cash for $100 in slot machine tokens and used the tokens to gamble.  On five occasions, the she lost her entire $100 in tokens before terminating play.  On the other five occasions, the she redeemed her remaining tokens for the following amounts of cash:  $20, $70, $150, $200 and $300.

Under the Internal Revenue Code, gross income means all income from whatever source derived, which has been determined to include wagering gains. [1]

The Code further allows a deduction for any loss sustained during the taxable year and not compensated for by insurance or otherwise. [2] In the case of losses from wagering transactions, losses are allowed only to the extent of gains from such transactions. [3]

In ordinary practice, a wagering “gain” means the amount won in excess of the amount bet (basis). [4] That is, the wagering gain is the total winnings less the amount of the wager.  The term wagering “loss” means the amount of the wager (basis) lost.

Generally, gamblers may not carry over excess wagering losses to offset wagering gains in another taxable year or offset non-wagering income. [5] Nor may casual gamblers net their gains and losses from play throughout the year and report only the net amount for the year. [6]

It is accepted that fluctuating wins and losses left in play are not accessions to wealth until the taxpayer redeems her tokens and can definitively calculate the amount above or below basis (the wager) realized. [7]

Under the facts presented above, Mrs. X purchased and subsequently lost $100 worth of tokens on five separate occasions.  As a result, the taxpayer sustained $500 of wagering losses.  She also sustained losses on two other occasions, when she redeemed tokens in an amount less than the $100 (basis) of tokens originally purchased.

Therefore, on the day the taxpayer redeemed $20 worth of tokens, the taxpayer incurred an $80 wagering loss.  On the day the taxpayer redeemed $70 worth of tokens, the taxpayer incurred a $30 wagering loss.  On three occasions, the taxpayer redeemed tokens in an amount greater than the $100 of tokens originally purchased.  The amount redeemed less the $100 basis of the wager constitutes a wagering gain. [8] On the day the taxpayer redeemed $150 worth of tokens, the taxpayer had a $50 wagering gain.  On the day the taxpayer redeemed $200 worth of tokens, the taxpayer had a $100 wagering gain.  And on the day the taxpayer redeemed $300 worth of tokens, the taxpayer had a $200 wagering gain.

For the year, the taxpayer had total wagering gains of $350 ($50 + $100 + $200) and total wagering losses of $610, ($500 from losing the entire basis of $100 on five occasions + $80 and $30 from two other occasions).  Mrs. X’s wagering losses exceeded her wagering gains for the taxable year by $260 ($610 – $350).  She must report the $350 of wagering gains as gross income under IRC § 61. However, under IRC §165(d), she may deduct only $350 of the $610 wagering losses.  In this case, the taxpayer may deduct only $350 of her $610 of wagering losses as an itemized deduction.   Generally, a casual gambler who takes the standard deduction rather than electing to itemize may not deduct any wagering losses. [9]


[1] IRC Section 61; Rev. Rul. 54-339; Umstead v. Commissioner, T.C. Memo. 1982-573, 44 TCM 1294, 1295 (1982).

 

[2] IRC Section 165(a).

[3] IRC Section 165(d); Treasury Regulations Section 1.165-10.

[4] See Rev. Rul. 83-103.

[5] Skeeles v.  United States, 118 Ct. Cl. 362 (1951), cert. denied, 341 U.S. 948 (1951).

[6] See United States v. Scholl, 166 F.3d 964 (9thCir. 1999).

[7] See Commissioner v. Glenshaw Glass  Co., 348 U.S. 426 (1955).

[8] See Rev. Rul. 83-130.

[9] See Rev. Rul. 54-339.

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

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Congress Extends Deduction for State and Local Sales Taxes

Posted by William Byrnes on February 12, 2011


The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Tax Relief Act) extended the income tax deduction for state and local sales taxes through December 31, 2011.  The deduction expired on January 1, 2009, but Congress amended the provision retroactively, which will allow taxpayers to take the deduction on their 2010 taxes.  The deduction, which has been slated to expire a number of times, has been revived by Congress repeatedly since it was introduced but has not yet been made a permanent part of the Code.   Read this complete analysis of the impact at AdvisorFX (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).

For previous coverage of the Tax Relief Act of 2010 in Advisor’s Journal, see Obama Tax Compromise Provides 100 Percent Bonus Depreciation of Business Assets Through 2011 (CC 11-01), Obama’s Social Security Tax Holiday: Penny Wise and Pound Foolish? (CC 10-119), Does the New Estate Tax Make the Bypass Trust Obsolete? (CC-10-122), & 2010 Estates: To Elect or Not to Elect (CC 10-124).

For in-depth analysis of income tax deductions, see Advisor’s Main Library: B4—Business Income and Deductions.

We invite your questions and comments by posting them or by calling the Panel of Experts.

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Obama Tax Cuts Alternative Minimum Tax Exemption Extensions

Posted by William Byrnes on January 15, 2011


“For more than three decades, the individual income tax has consisted of two parallel tax systems: the regular tax and an alternative tax that was originally intended to impose taxes on high-income individuals who have no liability under the regular income tax.” [1]

Current law imposes an alternative minimum tax (AMT) only on individuals.  “The stated purpose of the alternative minimum tax (AMT) is to keep taxpayers with high incomes from paying little or no income tax by taking advantage of various preferences in the tax code.” [2]

The parallel tax structure to the regular income tax law requires individuals “to recalculate their taxes under alternative rules that include certain forms of income exempt from regular tax and that do not allow specific exemptions, deductions, and other preferences.” [3]

Generally, the AMT is an amount that is the excess of the “tentative minimum tax” over the regular income tax.

Tentative minimum tax is equal to the sum of (1) 26 percent of so much of the taxable excess as does not exceed $175,000 ($87,500 in the case of a married individual filing a separate return) and (2) 28 percent of the remaining taxable excess, which is essentially an individual’s taxable income adjusted to take into account certain specified preferences and adjustments (also known as alternative minimum taxable income (“AMTI”)) minus the exemption amount.  To read this article excerpted above, please access http://www.advisorfyi.com/2010/12/obama-tax-cuts-alternative-minimum-tax-exemption-extensions/

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When may a taxpayer deduct as business expenses the costs related to the use of his residence? Part 2

Posted by William Byrnes on December 29, 2010


Seal of the Internal Revenue Service

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Why is this Topic Important to Wealth Managers? We examine the IRS requirements set out in its Publication 587 for determining when a “part” of a home is used and whether that use qualifies as “exclusively and regularly as your principal place of business”.

Yesterday we opened the discussion by what authority of the Code a taxpayer may be allowed to deduct a business expense for use of part of his home in the pursuit of a trade or business.  Today we turn to the following questions: What type of residence qualifies for this deduction? And the requirements for determining when a “part” of a home is used and whether that use qualifies as “exclusively and regularly as your principal place of business”.

What type of residence qualifies for this deduction? Many taxpayers narrowly consider that the “home office” deduction only applies for the traditional house with the white picket fence.  But the Code’s section does not use the word “home”.  Yesterday we noted that Congress chose the phrase “dwelling unit”.  So what is a dwelling unit?  The Section toward its end contains this definition: “The term ”dwelling unit” includes a house, apartment, condominium, mobile home, boat, or similar property ….”  Thus, taxpayers who are homeowners, condo-owners, renters of apartments, even a boat owner or renter, may potentially leverage this deduction.

What constitutes a “portion” of the dwelling unit? To read this article excerpted above, please access www.AdvisorFX.com

 

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Exclusions from Gross Income—Gifts

Posted by William Byrnes on December 23, 2010


Why is this Topic Important to Wealth Managers? Discusses gifts and the general income tax implications gifts have to those who are the beneficiaries.  Also discusses gifts as they relate to estate taxes.

As Christmas and Holiday time approaches, some clients who may be expecting large sums from Santa or other sources as gifts, may be interested to know the tax laws on gifts generally; today’s blogiticle present’s our “re-gifting” of an old idea, Section 102 of the Internal Revenue Code.

For those who haven’t had an opportunity to read the Code lately, (some estimate the Code and Regulations are close to 80,000 pages) there are still a few “friendly” sections that remain which serve as a reminder of a time gone by.  Side Note:  These authors have not yet evaluated the shortest Code section in terms of actual words, but if we were to, our guess is that Section 102 would be in the running at 212 words.

Section 102(a) reads: “Gross income does not include the value of property acquired by gift, bequest, devise, or inheritance.”  It is worth noting, if we go back to Section 61, and the starting point for gross income, that Section 61(a) states:  “Except as otherwise provided in this subtitle gross income means all income from whatever source derived…”   The “[e]xcept as otherwise provided” is applicable here to amounts received as a gift, bequest, devise, or inheritance, which are specifically excluded from gross income.  In other words, a taxpayer can give another taxpayer a gift of $1,000,000 and the latter will not recognize a penny of income for tax purposes, so long as it is really a gift, bequest, devise or inheritance.  To read this article excerpted above, please access www.AdvisorFX.com

For further discussion on the gift tax generally see, AdvisorFX: Nature and Background of the Federal Gift Tax (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).

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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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