Personal Deductions

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Personal Deductions Credits
2
Provisions Relating to Deductions

• Overlying provisions
• 62 above-the-line deductions
• 63 standard deduction/itemized deductions
• 67 2 floor for miscellaneous itemized
  deductions
• 68 overall limitation on itemized deductions

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62 Above-the-Line Deductions

• Above-the-line deductions are subtracted from
  gross income to produce adjusted gross income
• Above-the-line deductions include the following
• Trade or business deductions (including certain
  trade or business deductions of employees)
• Losses from the sale or exchange of property
• Deductions attributable to rents and royalties
• Alimony
• Moving expenses
• Interest on educational loans

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63 Taxable income

• Section 63 gives a taxpayer two alternatives in
  getting from adjusted gross income to taxable
  income
• Taking the standard deduction, or
• Electing to itemize deductions.
• Whether a taxpayer takes the standard deduction
  or elects to itemize, the taxpayer is also
  entitled to the personal exemption in
  calculating taxable income.

5
The 2007 Standard Deduction

• Married taxpayers filing jointly 10,700
• Unmarried individuals 5,350
• Married taxpayers filing separately 5,350
• Head of household 7,850
• Note that the personal exemption was 3,400 in
  2007

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67 Miscellaneous Itemized Deductions

• Miscellaneous itemized deductions are all
  itemized deductions other than those listed in
  67(b).
• Miscellaneous itemized deductions are only
  allowable to the extent that they exceed 2 of
  adjusted gross income.

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67 Example

• A makes 80,000 per year, is unmarried, and has
  no above-the-line deductions. A incurs 5,500 in
  unreimbursed expenses related to his employment.
• What is As adjusted gross income?
• 80,000 (no above-the-line deductions)
• What is 2 of As adjusted gross income?
• 1,600 (80,000 x 2)
• What is the allowable deduction?
• 3,900 (5,500 - 1,600)
• If this is As only itemized deduction, should A
  itemize or take the standard deduction?

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68 Overall Limitation

• If an individuals adjusted gross income exceeds
  the applicable amount (generally 156,400 in
  2007),
• Then the amount of the taxpayers otherwise
  allowable itemized deductions will be reduced by
  the lesser of
• 3 of the excess of adjusted gross income over
  the applicable amount, or
• 80 of the amount of the itemized deductions
  otherwise allowable for the taxable year.
• Does not apply to deduction for medical
  expenses, investment interest, or certain losses.

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68 Example

• B has 250,000 of gross income
• B has the following expenses
• 5,000 in moving expenses
• 10,000 in home mortgage interest
• 8,000 in real estate taxes
• 5,000 in charitable contribution deductions

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68 Example

• What is Bs adjusted gross income?
• 245,000 (250,000 - 5,000 moving expenses)
• What is the sum of otherwise allowable itemized
  deductions?
• 23,000 (10,000 8,000 5,000)
• How much is the reduction?
• The lesser of
• 2,658 (3 x (245,000 - 156,400)) or
• 18,400 (80 x 23,000)
• In 2007, the reduction is 2/3 of this amount, or
  1,773.
• B deducts only 21,227 of these itemized
  deductions (23,000 - 1,773).

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EITC Problem

• Part (a)

• Part (b)

• Joes
• Income tax liability (5,626)
• Payroll tax liability 1,530
• Marys
• Income tax liability (95)
• Payroll tax liability 765
• Joe Marys
• Net tax liability (3,426)

• Joe Marys
• Income tax liability (3,872)
• Payroll tax liability 2,295
• Net tax liability (1,575)

Difference 1,851
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EITC Problem

• Part (a)

• Part (c)

• Joe Marys
• Income tax liability (3,872)
• Payroll tax liability 2,295
• Net tax liability (1,575)

• Joe and Marys
• Income tax liability (6,236)
• Payroll tax liability 1,530
• Net tax liability (4,706)

Difference 3,131