2015 National Income Tax Workbook Tax Benefits Limited by Income pp 137 Many benefits in the IRC are applicable only to taxpayers whose income does not exceed specific thresholds Benefits can be obtained by tax planning to minimize income and maximize deductions ID: 796780
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Slide1
Tax Benefits
Chapter 1 pp. 1-37
2015
National Income
Tax
Workbook™
Slide2Tax Benefits Limited by Income pp. 1-37
Many benefits in the I.R.C. are applicable only to taxpayers whose income does not exceed specific thresholds.Benefits can be obtained by tax planning to minimize income and maximize deductions.
Slide3Above-the-Line Deductions and Exclusions pp. 2-12
Gross Income and Adjusted Gross Income (AGI) are defined by the I.R.C. (§ 61 and § 101-140) Definition of Modified Adjusted Gross Income (MAGI) can vary depending on the benefit.
Slide4Above-the-Line Deductions and Exclusions pp. 2-12
Three income-limited items factor into AGI.Deductions for contributions to IRAsDeductions for student loan interest, The exclusion for certain interest paid on US savings bonds.
Slide5IRA Contributions pp. 2-7
Deductions for traditional IRA contributions may be limited if the taxpayer/spouse can participate in an employer provided retirement plan.To determine deductible amount when in the phaseout range:(End of phaseout range – MAGI) x contribution limit / Phaseout range = Deductible amount
Slide6IRA Contributions pp. 2-7
Contributions to Roth IRA are not deductible, but are subject to a limit which is phased out as MAGI increases.To determine contribution limit when in the phaseout range:(End of phaseout range – MAGI) x maximum contribution / Phaseout range = Contribution limit
Slide7Student Loan Interest Deductions pp. 7-9
Up to $2,500 deduction of qualified student loan interest.Not available if filing MFS, and deduction is only available to the borrower.If student loan is refinanced including additional funding used for non-education expenses, none of the subsequent interest is considered student loan interest.
Slide8US Savings Bond Interest Exclusion pp. 9-11
Interest earned on US savings bonds can be excluded provided they were used to pay qualifying educational expenses.Limited exclusion in the phaseout range is calculated by:(End of phaseout range – MAGI) x qualified savings bond interest/ Phaseout range = Exclusion
Slide9US Savings Bond Interest Exclusion pp. 9-11
Planning PointerTaxpayers may consider switching from low-rate savings bonds to a higher performing 529 plan, a tax free exchange.
Slide10Comparative Case Studies
pp. 11-12Case #1: Barbara BrownIRA deduction not limitedCase #2: Gloria GreenCalculation of nondeductible contributionCase #3: Wilma WhiteMAGI exceeds phaseout range
Slide11Below-the-Line Deductions
pp. 12-242015 standard deductionsSingle - $6,300MFJ or QW - $12,600HoH - $9,250MFS - $6,300
Slide12Below-the-Line Deductions
pp. 12-24Pease rule – itemized deductions reduced by lesser of two amounts3% of AGI in excess of thresholds to the right80% of all affected itemized deductions Filing StatusAGISingle$258,250MFJ or QW$309,900HoH$284,050MFS$154,950
Slide13Personal Exemptions Deduction
Phaseout p. 13 Personal and dependent exemption deduction can be completely phased out if AGI is substantial.Decreases by 2% for each $2,500 over threshold amounts to the right. No deduction for AGI above phaseout region.Filing StatusPhaseout BeginsPhaseout EndsSingle$258,250$380,750MFJ or QW$309,900$432,400HoH$284,050$406,550MFS
$154,950$216,200
Slide14Personal Exemptions Deduction
Phaseout p. 13 Pease limitationSee Example 1.6 – 1.8
Slide15Other Itemized Deductions
pp. 15-19Medical/dental expenses can be claimed as an itemized deduction, but deduction is reduced by 10% of AGI (7.5% of AGI if over 65 during 2013-2016).
Slide16Other Itemized Deductions
pp. 15-19Mortgage insurance through the VA or RHS are fully deductible in the year the contract is issued.FHA and private mortgage insurance must be allocated over the shorter of the term of the mortgage or 84 months.
Slide17Other Itemized Deductions
pp. 15-19Example 1.9 Limited Specific Itemized DeductionsMedical expenses and mortgage insurance deductions
Slide18Other Itemized Deductions
pp. 15-19Charitable contribution deductions are AGI limited.Generally the limit is 50% of AGI, but can be lower depending on type of property donated.Excess carries over for 5 years.
Slide19Other Itemized Deductions
pp. 15-19Losses from theft of personal use property events are reduced by $100, and then by 10% of AGI.Losses from business and income property are not subject to these reductions.
Slide20Other Itemized Deductions
pp. 15-19Other expenses related to generating taxable income may be eligible itemized deductions, subject to a 2% of AGI floor.
Slide21Alternative Minimum Tax
pp. 19-21I.R.C. § 55 imposes the alternative minimum tax (AMT) on both corporate and noncorporate taxpayers, which limits the use of specified benefits to reduce total tax.2015 AMT rates are 26% for alternative minimum taxable income less than $185,400, and 28% otherwise.
Slide22Comparative Case Studies
pp. 23-24Case #1: Barbara BrownItemized deductions less than standard deductionCase #3: Wilma WhiteSubject to Pease Limitations and PEP
Slide23Refundable/Nonrefundable Credits pp. 24-37
Credits reduce taxes by the same amount for low-bracket taxpayers as for high-bracket tax payers.Many credits are limited or eliminated as a taxpayer’s income increases.
Slide24Earned Income Credit
pp. 24-28The EIC is applicable to those who have income from wages, salaries, tips, union strike benefits, or long-term disability benefits received prior to minimum retirement age.
Slide25Earned Income Credit
pp. 24-28The EIC increases over a range of earned income: Not Filing MFJ or MFSQualifying ChildrenCredit Rate (%)Income for Maximum CreditPhaseoutPhaseout Rate(%)Maximum CreditNone7.65$6,580 - $8,240$8,240 - $14,8207.65$503One34.00$9,880 - $18,110$18,110 - $39,131
15.98$3,359Two or more40.00$13,870 - $18,110$18,110 - $44,45421.06$5,548Three or more45.00$13,870 - $18,110$18,110 - $47,74721.06$6,242
Slide26Earned Income Credit
pp. 24-28The EIC increases over a range of earned income: Filing MFJ or MFSQualifying ChildrenCredit Rate (%)Income for Maximum CreditPhaseoutPhaseout Rate(%)Maximum CreditNone7.65$6,580 - $13,750$8,240 - $20,3307.65$503One34.00$9,880 - $23,630$23,630- $44,651
15.98$3,359Two or more40.00$13,870 - $23,630$23,630- $49,97421.06$5,548Three or more45.00$13,870 - $23,630$23,630 - $53,26721.06$6,242
Slide27Earned Income Credit
pp. 24-28Taxpayers with more than $3,400 in investment income for the year cannot claim EIC.Self-employed taxpayers with earned income in the phasein range for the EIC may be able to increase their EIC by deferring expenses from and accelerating income to that year.Taxpayers in the phaseout range of the EIC may be able to accelerate deductions and defer income to qualify for a higher EIC.
Slide28Child Tax Credit
pp. 28-30Can be as much as $1000 per qualifying child.Phases out with increasing AGI, decreases by $50 for each $1000 the AGI exceeds the limits.Filing StatusPhaseout RangeMFJ$110,000 - $129,001Single, HoH, or QW$75,000 - $94,001MFS$55,000 - $74,001
Slide29Child and Dependent Care Credit pp.
30-32Expenses for child or dependent care while the taxpayer is working can qualify for a tax credit.Qualifying expenses are limited by earned income, and as AGI increases expenses used to calculate the percentage is reduced from 35% to 20%.
Slide30Retirement Savings Contribution Credit
pp. 32-33Maximum credit is a percentage of $2,000 ($4,000 for MFJ) of qualified savings returns.Percentage is 50%, 20%, or 10%, depending on taxpayers AGI.
Slide31Education Credits
pp. 33-36American Opportunity Tax CreditExtended through Dec. 31, 2017100% of first $2000, 25% of next $2,000, for $2,500 maximum credit, 40% of which is refundable.Phased out over a range of AGI.
Slide32Education Credits
pp. 33-36Lifetime Learning CreditTaxpayers can claim 20% of the first $10,000 of qualified educational expenses.MAGI phaseouts are lower than for AOTC, $110,000 to $130,000 for MFJ, $55,000 - $65,000 for all others.
Slide33Case Studies pp. 36-37
Case #1: Barbara BrownAOTC and EITC refundable creditCase #2: Gloria GreenAOTC credit, but ineligible for other creditsCase #3: Wilma WhiteExceeds all credit phaseout ranges
Slide34Questions?
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