2024+EA+Part+1+Textbook+(4.1.24)(2).PDF

INDIVIDUALS 1242.03 SIMPLE retirement plan for small businesses: a. The Savings Incentive Match Plan for Employees (SIMPLE) simplifies complexities of retirement plans. It can be...

INDIVIDUALS 1242.03 SIMPLE retirement plan for small businesses: a. The Savings Incentive Match Plan for Employees (SIMPLE) simplifies complexities of retirement plans. It can be established by employers, including self‐employed individuals. The SIMPLE plan allows eligible employees to contribute part of their pretax compensation to the plan. 1. The amount an employee contributes from his or her salary to a SIMPLE IRA cannot exceed $15,500 for 2023. An additional $3,500 contribution is permitted for employees age 50 or over. 2. If an employee participates in any other employer plan during the year and has elective salary deductions under those plans, the total amount of the salary reduction contributions that an employee can make to all the plans he or she participates in is limited to $22,500 in 2023. 3. If permitted by the SIMPLE IRA plan, participants who are age 50 or over at the end of the calendar year can also make catch‐up contributions. The catch‐up contribution limit for SIMPLE IRA plans is $3,500 in 2023. b. SIMPLE plans can be adopted by employers having 100 or fewer employees. 1. The employee must not be part of another employer‐sponsored retirement plan. 2. All contributions are fully vested immediately. 3. Employee contributions are deductible for AGI, and taxation on accumulations is deferred until distributed. c. CAUTION: Distributions before age 59‐1/2 are subject to an additional tax of 10% (25% if taken during the two‐year period beginning on the date the individual first participated in any SIMPLE IRA plan of the employer). Exceptions include distributions for the following: © 2024 Surgent Consolidated, LLC 189 INDIVIDUALS 1. Death 2. Disability 3. Deductible medical expenses 4. Health insurance of an unemployed individual 5. Qualified higher education expenses: a. Included tuition, fees, books, supplies, equipment, and room and board for postsecondary education (includes graduate‐level courses), b. Applies to taxpayer, spouse, children, and grandchildren, and c. Expenses are reduced by scholarships and similar excludible funding. 6. First time homebuyer expenses ($10,000) limit 7. Qualified birth or adoption ($5,000 limit per individual or $10,000 limit for married couples filing a joint return) 1242.04 401(k) a. A 401(k) plan is a qualified employer‐sponsored retirement plan that eligible employees may make tax‐ deferred contributions from their salary or wages to a post‐tax and/or pre‐tax basis. Employers offering a 401(k) plan may make matching or non‐elective contributions to the plan on behalf of eligible employees and may also add a profit‐sharing feature to the plan. Earnings in a 401(k) plan accrue on a tax deferred basis. 1. The amount an employee contributes from his or her salary to a 401(k) cannot exceed $22,500 for 2023. An additional $7,500 contribution is permitted for employees age 50 or over. 2. There are two types of 401(k) plans: traditional and Roth. 190 © 2024 Surgent Consolidated, LLC  INDIVIDUALS i. A traditional 401(k) uses pre‐tax dollars and earnings are tax deferred. ii. A Roth IRA uses post‐tax dollars and earnings are tax‐exempt. b. 401(k) plans can be adopted for any size company, including self‐employed. 1. Participation is optional for all employees. 2. Employee salary deferrals are immediately 100 percent vested – that is, the money the employee has put aside through salary deferrals cannot be forfeited. When an employee leaves employment, they are entitled to those deferrals, plus an investment gains (or minus losses) on their deferrals. In a traditional 401(k) plan, the employer designs their plan to that contributions become vested over time, according to a defined vesting schedule. 3. Nondiscrimination testing: 401(k) plan tax benefits require that plan provide substantive benefits for rank‐and‐file employees, not only for business owners and managers. These requirements are referred to as nondiscrimination rules and cover the level of plan benefits for rank‐and‐file employees compared to owners/managers. Traditional 401(k) plans are subject to annual testing to assure that the amount of contributions made on behalf of rank‐and‐file employees is proportional to contributions made on behalf of owners and managers. Safe harbor 401(k) plans and SIMPLE 401(k) plans are not subject to annual nondiscrimination testing. c. Contributions can continue up until retirement. d. The taxpayer must start taking distributions by April 1 following the year in which they turn age 73 if they turn 72 after December 31, 2022, and by December 31 of later years or when the taxpayer retires, whichever comes first. © 2024 Surgent Consolidated, LLC 191 INDIVIDUALS e. Contributions limits: For 2023 the contribution limit is $22,500 ($30,000 for taxpayers age 50 or older). 1243 Health Savings Accounts 1243.01 Health savings accounts a. Within limits, employer contributions to an employee’s health savings account (HSA) are excluded from the employee’s income. b. Both employer and employee contributions are combined to determine the maximum allowable contribution. c. Contributions to an HSA are limited: 1. For 2023, the contribution limit for families is limited to $7,750 and $3,850 for singles for the year. For 2023, taxpayers age 55 and older may contribute an additional $1,000 per year. This makes the contributions limit for these families $8,750 and $4,850 for singles. 2. Employer contributions to an employee’s HSA are excluded from income. However, both employer and employee contributions are combined to determine the maximum allowable contribution. 1243.02 Health care flexible spending accounts (FSAs): a. A taxpayer’s employer’s plan can allow a $610 carryover balance to the following year for money not used for allowed purposes, or b. Allow a grace period through March 15 of the following year. c. For 2023, the dollar limit on amounts an employee may contribute through salary reduction contributions is $3,050 per year. 192 © 2024 Surgent Consolidated, LLC  INDIVIDUALS 1244 Other Adjustments to Income 1244.01 Student loan interest: Qualified student loan interest up to $2,500, made permanent by the American Taxpayer Relief Act of 2012. For taxable years beginning in 2023, the $2,500 maximum deduction begins to phase out for joint filers with modified adjusted gross income (MAGI) in excess of $155,000 and for single filers with gross income in excess of $75,000. It is completely phased out for MAGI of $185,000 for joint filers and $90,000 for single filers. 1244.02 Alimony: NOTE: The TCJA of 2017 changes the treatment of alimony and separate maintenance payments negotiated after December 31, 2018. See f. below. a. Excluding the portion that is designated for child support, qualified payments are included in the gross income of the recipient and deductible from gross income by the payor if the payments are made after: 1. Decree of divorce or separate maintenance, 2. Written separation agreement, or 3. Decree for support (this applies to periods pending finality of divorce or legal separation). b. Qualified payments are required to meet the following guidelines: 1. Payments must be in cash. 2. Payments must terminate at the death of the recipient. 3. Payments cannot be made to a payee who lives in the same household as the payor. 4. Payments cannot be specified as something other than alimony. c. Special rules apply if alimony payments in the second‐ or third‐year decrease by more than $15,000 from the payments made in the previous year. © 2024 Surgent Consolidated, LLC 193 INDIVIDUALS 1. If the change in payments exceeds statutory limits, recapture of excessive alimony payments will result. 2. All of the recapture will take place in the third year. i. The payor must include the excess amounts in gross income. ii. The payee is allowed to deduct the excess payments from gross income to arrive at adjusted gross income. d. Any amount that can be identified as child support cannot be treated as alimony. 1. Child support payments are neither deductible by the payor nor income to the recipient. 2. If both child support and alimony are provided for in the agreement, any amounts paid are first considered to be child support until that obligation is met. e. The transfer of property between divorcing spouses in exchange for release from marital obligations is nontaxable. The basis of the transferred property to the transferee will be the same as it was to the transferor. f. For any divorce or separation agreement executed after December 31, 2018 (not 2017), or executed before that date but modified after it (if the modification expressly provides that the new amendment applies), alimony and separate maintenance payments are not deductible by the payor spouse nor includible in income of the payee spouse. 1244.03 Moving expenses: The TCJA suspended the deduction for moving expenses for taxable years 2018 through 2025. However, during that suspension period, the provision retains the deduction for moving expenses (and reimbursements or allowances for these expenses) for members of the Armed Forces (or their spouse or dependents) on active duty that move pursuant to a military order and incident to a permanent change of station. The 194 © 2024 Surgent Consolidated, LLC  INDIVIDUALS suspension of the deduction for moving expenses does not apply to taxable years beginning after December 31, 2025. 1245 Self‐Employed Health Insurance 1245.01 Self‐employed taxpayers may deduct 100% of the medical and long‐term care insurance premiums paid for themselves and their families. This deduction cannot exceed the net earnings from the business. IRC Section 213(d)(10)(A) provides for limitations on the amount of eligible long‐term care insurance premium deduction allowed per person based on age at the end of the year. 1245.02 No deduction is available to those self‐employed taxpayers who are eligible to participate in an employer’s subsidized health insurance program. The employer may be the employer of the taxpayer of the spouse. © 2024 Surgent Consolidated, LLC 195 INDIVIDUALS This page intentionally left blank. 196 © 2024 Surgent Consolidated, LLC  INDIVIDUALS 1300 Deductions and Credits 1310 Itemized Deductions 1311 Medical and Dental Expenses 1311.01 The deduction for medical expenses is the amount of unreimbursed qualifying medical expenses paid during the year regardless of when the services were provided. Medical expenses are considered paid when the credit card charge is made regardless of when the credit card is paid. For calendar year 2023, medical and dental expenses in excess of 7.5% of AGI are deductible. The taxpayer calculates the amount they are allowed to deduct on Form 1040, Schedule A. 1311.02 Medical care expenses include payments for the diagnosis, cure, mitigation, treatment, or prevention of disease, or payments for treatments affecting any structure or function of the body. Medical care expenses include the insurance premiums paid for policies that cover medical care or for a qualified long‐term care insurance policy covering qualified long‐term care services. If the taxpayer is an employee, medical expenses do not include that portion of his or her premiums paid by the employer under its sponsored group accident or health policy or qualified long‐term care insurance policy. Further, medical expenses do not include the premiums that the taxpayer paid under his or her employer‐ sponsored policy under a premium conversion policy; for example, a federal employee, participating in the premium conversion program of the Federal Employee Health Benefits (FEHB) program, may not include the premiums paid for the policy as a medical expense. 1311.03 If a taxpayer is self‐employed and has a net profit for the year, he or she may be able to deduct (as an adjustment to income) the premiums he or she paid on a health insurance policy covering medical care including a qualified long‐term care insurance policy covering medical care including a qualified long‐term care insurance policy for the taxpayer himself or herself and his or her spouse and dependents. A taxpayer cannot take this deduction for any month in which he or she was eligible to participate in any subsidized health plan maintained by his or her employer, former employer, a spouse’s employer, or his or her former spouse’s © 2024 Surgent Consolidated, LLC 197 INDIVIDUALS employer. If the taxpayer does not claim 100 percent of his or her self‐employed health insurance deduction, he or she can include the remaining premiums with his or her other medical expenses as an itemized deduction on Form 1040, Schedule A. A taxpayer may not deduct insurance premiums paid by an employer‐ sponsored health insurance plan (cafeteria plan) unless the premiums are included in Box 1 of the taxpayer’s Form W‐2. 1311.04 Deductible medical expenses may include, but are not limited to: a. Payments of fees to doctors, dentists, surgeons, chiropractors, psychiatrists, psychologists, and nontraditional medical practitioners; b. Payments for in‐patient hospital care or nursing home services, including the cost of meals and lodging charged by the hospital or nursing home; c. Payments for acupuncture treatments or inpatient treatment at a center for alcohol or drug addiction, for participation in a smoking‐cessation program and for drugs to alleviate nicotine withdrawal that require a prescription; d. Payments to participate in a weight‐loss program for a specific disease or diseases, including obesity, diagnosed by a physician, but not ordinarily, payments for diet food items or the payment of health club dues; e. Payments for insulin and payments for drugs that require a prescription; f. Payments for admission and transportation to a medical conference relating to a chronic disease that the taxpayer, his or her spouse, or his or her dependents have (if the costs are primarily for and essential to medical care necessitated medical care). However, a taxpayer may not deduct the costs for meals and lodging while attending the medical conference; g. Payments for false teeth, reading or prescription eyeglasses or contact lenses, hearing aids, crutches, wheelchairs, and guide dogs for the blind or deaf; and 198 © 2024 Surgent Consolidated, LLC  INDIVIDUALS h. Payments for transportation primarily for and essential to medical care that qualify as medical expenses, such as, payments of the actual fare for a taxi, bus, train, or ambulance or for medical transportation by personal car, the amount of his or her actual out‐of‐pocket expenses such as for gas and oil, or the amount of the standard mileage rate for medical expenses, plus the cost of tolls and parking fees. 1311.05 A taxpayer may not deduct funeral or burial expenses, over‐the‐ counter medicines, toothpaste, toiletries, cosmetics, a trip or program for the general improvement of his or her health, or most cosmetic surgery. A taxpayer may not deduct amounts paid for nicotine gum and nicotine patches, which do not require a prescription. 1311.06 A taxpayer can only include the medical expenses he or she paid during the year. A taxpayer’s total deductible medical expenses for the year must be reduced by any reimbursement of deductible medical expenses. It makes no difference if a taxpayer receives the reimbursement or if it is paid directly to the doctor, hospital, or other medical provider. 1311.07 Capital expenditures qualifying as medical expenses: The IRS will not disallow amounts paid that otherwise qualify as medical expenses simply because they are capital in nature. However, if a taxpayer claims a medical capital expenditure, he or she must meet the following criteria: a. The expenditure must have as its primary purpose the medical care of the taxpayer, his spouse or his dependents; b. It must be related only to the sick person, not to the permanent improvement of property; or c. If the expenditure is for the betterment of property, only the portion that exceeds the increase in the property’s value may be claimed. Moreover, the cost of operating and maintaining the capital asset is deductible. © 2024 Surgent Consolidated, LLC 199 INDIVIDUALS 1311.08 If the initial capital expenditure qualified as a medical expense, the full cost of its operation and maintenance qualifies, regardless of how much of the original cost qualified. Put simply, if the capital expenditure itself qualified as a medical expense (yet was not deductible because, for example, its cost was less than the increase in value of the underlying property), the asset’s operating and maintenance costs are still deductible. 1311.09 A physician’s advice is not required to substantiate the medical necessity of any expenditure. However, in many cases dealing with disputed capital medical expenditures, the reason for denial was failure to show medical purpose. Therefore, a taxpayer must produce solid documentation to substantiate the deduction, including a physician’s “statement of need” for the expenditure. 1312 Various Taxes 1312.01 There are five types of deductible non‐business taxes: a. State, local, and foreign income taxes; b. State and local real estate taxes; c. State and local personal property taxes; d. State and local sales taxes; and e. Qualified motor vehicle taxes. To be deductible, the tax must be imposed on the taxpayer and must have been paid during the taxpayer’s tax year. However, tables are available to determine the taxpayer’s state and local general sales tax amount. Taxes may be claimed only as an itemized deduction on Form 1040, Schedule A. For tax years beginning after December 31, 2017, this amount will be capped at $10,000. 200 © 2024 Surgent Consolidated, LLC  INDIVIDUALS 1312.02 State and local income taxes withheld from a taxpayer’s wages during the year appear on his or her Form W‐2. The following amounts are also deductible: a. Any estimated taxes the taxpayer paid to state or local governments during the year, and b. Any prior year’s state or local income tax the taxpayer paid during the year. 1312.03 Generally, a taxpayer can take either a deduction or a tax credit for foreign income taxes imposed by a foreign country or a United States possession. As an employee, the taxpayer can deduct mandatory contributions to state benefit funds that provide protection against loss of wages. 1312.04 Deductible real estate taxes are generally any state or local taxes on real property. They must be charged uniformly against all property in the jurisdiction and must be based on the assessed value. Many states and counties also impose local benefit taxes for improvements to property, such as assessments for streets, sidewalks, and sewer lines. These taxes cannot be deducted. However, a taxpayer can increase the cost basis of his or her property by the amount of the assessment. Local benefits taxes are deductible if they are for maintenance or repair, or interest charges related to those benefits. 1312.05 If a portion of the taxpayer’s monthly mortgage payment goes into an escrow account, and periodically the lender pays his or her real estate taxes out of the account to the local government, do not deduct the amount paid into the escrow account. Only deduct the amount actually paid out of the escrow account during the year to the taxing authority. 1312.06 Deductible personal property taxes are those based only on the value of personal property such as a boat or car. The tax must be charged to the taxpayer on a yearly basis, even if it is collected more than once a year or less than once a year. © 2024 Surgent Consolidated, LLC 201 INDIVIDUALS 1312.07 Taxes and fees a taxpayer cannot deduct on Schedule A include federal income taxes, Social Security taxes, stamp taxes, or transfer taxes on the sale of property, homeowner’s association fees, estate and inheritance taxes and service charges for water, sewer, or trash collection. A taxpayer may be subject to a limit on some of his or her itemized deductions including non‐business taxes. 1312.08 Taxpayers have the option of claiming state and local sales taxes as an itemized deduction instead of claiming state and local income taxes (the taxpayer cannot claim both). If a taxpayer saved his or her receipts throughout the year, he or she can add up the total amount of sales taxes he or she actually paid and claim that amount. If a taxpayer did not save all his or her receipts, he or she can choose to claim a standard amount for state and local sales taxes. 1313 Interest Expense 1313.01 Interest is an amount a taxpayer pays for the use of borrowed money. To deduct interest paid on a debt the taxpayer must be legally liable for the debt. There must be a true debtor‐creditor relationship. Additionally, the taxpayer must itemize his or her deductions, unless the interest is on rental or business property or on a student loan. 1313.02 If a taxpayer prepays interest, he or she must allocate the interest over the tax years to which it applies. The taxpayer may deduct in each year only the interest that applies to that year. However, there is an exception that applies to points paid on a principal residence. 1313.03 Types of interest a taxpayer can deduct as itemized deductions on Form 1040, Schedule A include investment interest (limited to net investment income) and qualified residence interest. A taxpayer cannot deduct personal interest. Personal interest includes interest paid on a loan to purchase a car for personal use. Personal interest also includes credit card and installment interest incurred for personal expenses. Items a taxpayer cannot deduct as interest include points (if taxpayer is a seller), service charges, credit investigation fees, and interest relating to tax‐exempt 202 © 2024 Surgent Consolidated, LLC  INDIVIDUALS income, such as interest to purchase or carry tax‐exempt securities. 1313.04 Home mortgage interest: Qualified residence interest is interest paid on a loan secured by the taxpayer’s main home or a second home. A taxpayer’s main home is where the taxpayer lives most of the time. It can be a house, cooperative apartment, condominium, mobile home, house trailer, or houseboat that has sleeping, cooking, and toilet facilities. Taxpayers can only deduct qualified mortgage interest on funds that were used to buy, build, or substantially improve a home. For example, if a taxpayer takes out a second mortgage to purchase a vehicle, that amount cannot be deducted. 1313.05 A second home can include any other residence the taxpayer owns and treats as a second home. The taxpayer does not have to use the home during the year. However, if the taxpayer rents it to others, he or she must also use it as a home during the year for more than the greater of 14 days or 10 percent of the number of days rented, for the interest to qualify as qualified residence interest. 1313.06 Qualified residence interest and points are generally reported to the taxpayer on Form 1098, Mortgage Interest Statement, by the financial institution to which the taxpayer made the payments. The following mortgages yield qualified residence interest and the taxpayer can deduct all of the interest on these mortgages: a. A mortgage the taxpayer took out on or before October 13, 1987 (grandfathered debt). b. A mortgage taken out after October 13, 1987, to buy, build, or improve the taxpayer’s home (called home acquisition debt) up to a total of $1 million for this debt plus any grandfathered debt. The limit is $500,000 if the taxpayer is married filing separately. c. Home equity debt other than home acquisition debt taken out after October 13, 1987, up to a total of $100,000. The limit is $50,000 if the taxpayer is married filing separately. Home equity debt other than home acquisition debt is further limited to the taxpayer’s home’s fair market value reduced by the grandfathered debt and home acquisition debt. © 2024 Surgent Consolidated, LLC 203 INDIVIDUALS d. The total amount of mortgage debt cannot exceed $1,000,000 ($500,000 for married filing separately) on mortgages taken out on or before December 15, 2017. Remaining interest on any remaining debt will be grandfathered in. Mortgage insurance premiums are treated as qualified residence interest. In certain instances, home equity interest is also deductible. e. The total amount of mortgage debt cannot exceed $750,000 ($375,000 for married filing separately) on mortgages taken out after December 15, 2017. f. You cannot combine the limits if you have multiple mortgages taken out in different years. You must reduce the limit on loans taken out after December 15, 2017 by the amount of qualifying debt subject to the $1,000,000 limit. 1313.07 Home mortgage points: The term “points” is used to describe certain charges paid to obtain a home mortgage. Points are prepaid interest and may be deductible as home mortgage interest, if the taxpayer itemizes deductions on Form 1040, Schedule A. If the taxpayer can deduct all of the interest on his or her mortgage, he or she may be able to deduct all of the points paid on the mortgage. If the taxpayer’s acquisition debt exceeds the applicable limit or the taxpayer’s home equity, he or she cannot deduct all the interest on his or her mortgage and he or she cannot deduct all of his or her points. 1313.08 A taxpayer can deduct the points in full in the year they are paid if all the following requirements are met: a. The loan is secured by the taxpayer’s main home (a taxpayer’s main home is the one he or she lives in most of the time); b. Paying points is an established business practice in taxpayer’s area; c. The points paid were not more than the amount generally charged in that area; 204 © 2024 Surgent Consolidated, LLC  INDIVIDUALS d. The taxpayer uses the cash method of accounting. This means he or she reports income in the year he or she receives it and deduct expenses in the year he or she pays them; e. The points were not paid for items that usually are separately stated on the settlement sheet such as appraisal fees, inspection fees, title fees, attorney fees, or property taxes; f. The funds the taxpayer provided at or before closing, plus any points the seller paid, were at least as much as the points charged. The taxpayer cannot have borrowed the funds from his or her lender or mortgage broker in order to pay the points; g. The taxpayer uses the loan to buy or build his or her main home; h. The points were computed as a percentage of the principal amount of the mortgage; and i. The amount is clearly shown as points on the taxpayer’s settlement statement. 1313.09 A taxpayer can also fully deduct (in the year paid) points paid on a loan to improve his or her main home if the above tests a. through f. are met. Points that do not meet these requirements may be deductible over the life of the loan. Points paid for refinancing generally can only be deducted over the life of the new mortgage. However, if a taxpayer uses part of the refinanced mortgage proceeds to improve his or her main home, and he or she meets the first six requirements stated above, the taxpayer can fully deduct the part of the points related to the improvement in the year he or she paid them with his or her own funds. A taxpayer can deduct the rest of the points over the life of the loan. Points charged for specific services, such as preparation costs for a mortgage note, appraisal fees, or notary fees are not interest and cannot be deducted. Points paid by the seller of a home cannot be deducted as interest on the seller’s return, but they are a selling expense which will reduce the amount of gain realized. Points paid by the seller may be deducted by the buyer, provided the buyer subtracts the amount from the basis or cost of © 2024 Surgent Consolidated, LLC 205 INDIVIDUALS the residence. Points paid on loans secured by a second home can be deducted only over the life of the loan. 1313.10 Investment interest expense: Investment interest is the interest expense in any amount that is paid on loan proceeds used to purchase investments or securities. Investment interest expenses include margin interest used to leverage securities in a brokerage account on a loan used to buy property held for investment. An investment interest expense is deductible within certain limitations. a. Investment interest deduction is limited to the amount of investment income received, such as dividends and interest. b. Investment interest is reported on Schedule A or Schedule E of Form 1040. 1314 Charitable Contributions 1314.01 Charitable contributions are deductible only if a taxpayer itemizes his or her deductions on Form 1040, Schedule A. To be deductible, charitable contributions must be made to qualified organizations. Payments to individuals are never deductible. If a taxpayer’s contribution entitles the taxpayer to merchandise, goods, or services, including admission to a charity ball, banquet, theatrical performance, or sporting event, the taxpayer can deduct only the amount that exceeds the fair market value of the benefit received. 1314.02 For a contribution of cash, check, or other monetary gift (regardless of amount), the taxpayer must maintain as a record of the contribution a bank record or a written communication from the qualified organization containing the name of the organization, the date of the contribution, and the amount of the contribution. In addition to deducting cash contributions, a taxpayer generally can deduct the fair market value of any other property donated to qualified organizations. The Tax Cuts and Jobs Act of 2017 (TCJA) repealed this requirement. 206 © 2024 Surgent Consolidated, LLC  INDIVIDUALS 1314.03 For a contribution of cash, check, or other monetary gift (regardless of amount), the taxpayer must maintain as a record of the contribution a bank record or a written communication from the qualified organization containing the name of the organization, the date of the contribution, and the amount of the contribution. In addition to deducting cash contributions, a taxpayer generally can deduct the fair market value of any other property donated to qualified organizations. For any contribution of $250 or more (including contributions of cash or property), the taxpayer must obtain and keep in his or her records a contemporaneous written acknowledgment from the qualified organization indicating the amount of the cash and a description of any property contributed. The acknowledgment must say whether the organization provided any goods or services in exchange for the gift and, if so, must provide a description and a good faith estimate of the value of those goods or services. One document from the qualified organization may satisfy both the written communication requirement for monetary gifts and the contemporaneous written acknowledgment requirement for all contributions of $250 or more. 1314.04 The taxpayer must fill out Form 8283, and attach it to his or her return, if the taxpayer’s deduction for a noncash contribution is more than $500. If the taxpayer claims a deduction for a contribution of noncash property worth $5,000 or less, he or she must fill out Form 8283, Section A. If the taxpayer claims a deduction for a contribution of noncash property worth more than $5,000, the taxpayer will need a qualified appraisal of the noncash property and must fill out Form 8283, Section B. If the taxpayer claims a deduction for a contribution of noncash property worth more than $500,000, he or she also will need to attach the qualified appraisal to his or her return. 1314.05 The TCJA of 2017 increased the percentage limit for contributions of cash to public charities from 50% to 60% effective for tax years beginning after December 31, 2017. 1314.06 The TJCA of 2017 provides that no charitable deduction is allowed for any payment to an institution of higher education in exchange for which the payor receives the right to purchase tickets or seating at an athletic event. © 2024 Surgent Consolidated, LLC 207 INDIVIDUALS 1314.07 In the case of volunteer work, a person is not able to deduct the value of his or her time but can deduct any out‐of‐pocket costs. For example, a volunteer can deduct the cost and upkeep of uniforms that are not suitable for everyday use and that the taxpayer must wear while performing donated services for a charitable organization. A volunteer also can deduct 14 cents per mile for travel to and from the charitable activity. 1315 Casualty and Theft Losses 1315.01 The TCJA temporarily modified the deduction for personal casualty and theft losses so that a taxpayer may claim a personal casualty loss only if such loss was attributable to a disaster declared by the President under Section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act. The provision was effective to losses incurred in taxable years beginning after December 31, 2017 but does not apply with respect to losses incurred after December 31, 2025. In such situations, the taxpayer is able to deduct the loss on the taxpayer's return or amended return for the tax year immediately preceding the tax year in which the disaster happened. If the person files an amended return, the loss is treated as having occurred in the preceding year. 1316 Travel and Entertainment Deductions 1316.01 For tax years 2018 through 2025, the treatment of certain meals and entertainment expenses changed. In general, entertainment, amusement, or recreation expenses are no longer deductible. The cost of business meals generally remains deductible, subject to the 50% limitation. A taxpayer can deduct a higher percentage of their meal expenses while traveling away from their tax home if the meals take place during or incident to any period subject to the Department of Transportation's “hours of service” limits. The percentage, in this situation, is 80%. 208 © 2024 Surgent Consolidated, LLC  INDIVIDUALS 1316.02 Generally, a taxpayer cannot deduct any expense for the use of an entertainment facility. This includes expenses for depreciation and operating costs such as rent, utilities, maintenance, and protection. An entertainment facility is any property that the taxpayer owns, rents, or uses for entertainment. Examples include a yacht, hunting lodge, fishing camp, swimming pool, tennis court, bowling alley, car, airplane, apartment, hotel suite, or home in a vacation resort. 1316.03 There are some expenses a taxpayer can deduct for business transportation when not traveling away from home. These expenses include the cost of transportation by air, rail, bus, taxi, etc., and the cost of driving and maintaining the taxpayer's car. Transportation expenses include the ordinary and necessary costs of all of the following.  Getting from one workplace to another in the course of your business or profession when you are traveling within the area of your tax home (Tax home is defined under the heading of “Travel Expenses” in Publication 463.)  Visiting clients or customers  Going to a business meeting away from your regular workplace  Getting from your home to a temporary workplace when you have one or more regular places of work (These temporary workplaces can be either within the area of the taxpayer's tax home or outside that area.) The standard mileage rate for 2023 is 65.5 cents per mile. If the taxpayer was an employee with unreimbursed business expenses, he or she cannot deduct the expenses because TJCA suspended the 2% miscellaneous deductions for 2018 through 2026. © 2024 Surgent Consolidated, LLC 209 INDIVIDUALS 1316.04 A taxpayer can no longer claim any miscellaneous itemized deductions that are subject to the 2% of adjusted gross income limitation, including unreimbursed employee expenses. However, a taxpayer may be able to deduct certain unreimbursed employee business expenses if they fall into one of the following categories of employment:  Armed Forces reservists  Qualified performing artists  Fee‐basis state or local government officials  Employees with impairment‐related work expenses 1316.05 Expense allowance If a taxpayer's allowance is more than the federal rate, the employer must include the allowance amount up to the federal rate under Code L in box 12 and the excess allowance in box 1 of the employee's W‐2:  If the employee's actual expenses are less than or equal to the federal rate, he or she does not need to complete Form 2106 because the allowance should not be included in box 1 of Form W‐2.  If the employee's actual expenses are greater than the federal rate and they are eligible to file Form 2106, he or she needs to complete Form 2106 to deduct the excess expenses. However, the employee must report on Form 2106 their reimbursements up to the federal rate (as shown under code L in box 12 of your Form W‐2) and all their expenses. The employee should be able to prove these amounts to the IRS.  If the employee's actual expenses are greater than the federal rate and they are NOT eligible to file Form 2106, he or she cannot deduct the unreimbursed employee expenses. Example: Joe lives and works in Austin. In May, his employer sent him to San Diego for 4 days and paid the hotel directly for Joe's hotel bill. The employer reimbursed Joe $75 a day for his meals and incidental expenses. The federal rate for San Diego is $71 a day. 210 © 2024 Surgent Consolidated, LLC  INDIVIDUALS Joe can prove that his actual non‐entertainment‐related meal expenses totaled $380. His employer's accountable plan won’t pay more than $75 a day for travel to San Diego, so Joe doesn’t give his employer the records that prove that he actually spent $380. However, he does account for the time, place, and business purpose of the trip. This is Joe's only business trip this year. Joe was reimbursed $300 ($75 × 4 days), which is $16 more than the federal rate of $284 ($71 × 4 days). His employer includes the $16 as income on Joe's Form W‐2 in box 1. His employer also enters $284 under code L in box 12 of Joe's Form W‐2. Assuming Joe is eligible, he can file Form 2106 to figure his deductible expenses. He enters the total of his actual expenses for the year ($380) on Form 2106. He also enters the reimbursements that weren’t included in his income ($284). His total deductible expense, before the 50% limit, is $96. After he figures the 50% limit on his unreimbursed meals, he will include the balance, $48, on Schedule 1 (Form 1040 or 1040‐SR), line 11. 1317 Allowed Itemized Deductions for Form 1040‐NR 1317.01 You can claim the same itemized deductions as U.S. citizens using Schedule A of Form 1040. If you do not itemize your deductions, you can claim the standard deduction for your particular filing status. © 2024 Surgent Consolidated, LLC 211 INDIVIDUALS 1320 Credits 1320.01 Child and dependent care credit Taxpayers are permitted a nonrefundable tax credit for expenses incurred in caring for dependents so that the taxpayer(s) may be gainfully employed. a. The credit is available on a three‐tiered basis as follows: (1) Taxpayers with an adjusted gross income of $15,000 or less will be entitled to a credit of 35% of dependent care expenses. (2) The credit will be reduced by one percentage point for each $2,000 of adjusted gross income, or fraction thereof, above $15,000. (3) For taxpayers with an adjusted gross income over $43,000, the credit will be 20%. b. The maximum amount of dependent care expenses that may be considered for the credit is $3,000 if there is one qualifying child or dependent and $6,000 if there are two or more qualifying dependents. c. Expenditures for dependent care cannot exceed the earned income of the low‐income parent. Special provisions apply where one of the spouses is a full‐ time student or is incapacitated, and the other spouse works. In this situation, the nonworking spouse is considered to have earned at least $250 per month, where one dependent requires care and $500 per month, where more than one dependent requires care. d. The dependent must be: (1) a child under age 13 or (2) an incapacitated dependent or spouse. e. Married taxpayers must file a joint return unless they live apart for the last six months of the year. 212 © 2024 Surgent Consolidated, LLC  INDIVIDUALS (1) For divorced or separated parents, the credit is available to the parent having custody of the child for the longer period. (2) A custodial parent may claim the credit even though the child may not qualify as a dependent. However, two taxpayers filing separate returns cannot claim separate credits for the same child. f. Expenditures that qualify for the credit include amounts paid for both in‐the‐home care and out‐of‐the‐home care. (1) In‐the‐home care may include expenditures for household services if they were partly for the well‐ being and protection of a qualifying individual. (2) Expenditures for out‐of‐the‐home care are eligible for the credit only if incurred for: (a) a dependent under age 13 or (b) any other qualifying person who regularly spends at least eight hours each day in the taxpayer’s household. g. Expenditures do not qualify for the credit if they were made to: (1) a relative who is a dependent of the taxpayer or (2) the taxpayer’s child who is under age 19. 1320.02 Child tax credit and credit for other dependents The Child Tax Credit under the TCJA (Tax Cuts and Jobs Act of 2017) tax reform is worth up to $2,000 per qualifying child. The age cutoff remains at 17. (The child must be under 17 at the end of the year for taxpayers to claim the credit.) a. Child dependent: For 2023, the refundable portion of the credit is limited to $1,600. The beginning credit phaseout for the child tax credit in 2023 is $200,000 ($400,000 for joint filers). The child must have a valid Social Security number (SSN) to qualify for the $2,000 child tax credit. © 2024 Surgent Consolidated, LLC 213 INDIVIDUALS b. Other dependents: This new credit, created under the TCJA, allows for a credit worth $500 for each qualifying dependent who does not qualify for the child credit discussed in (a) above; the credit is nonrefundable. For 2023, the phaseout begins for taxpayers with AGI of $200,000 ($400,000 for joint filers). This phaseout applies in combination with the new child tax credit. Unlike the child tax credit, the dependent does not require a valid SSN for the taxpayer to claim the credit for other dependents; an ITIN (Individual Taxpayer Identification Number) or ATIN (Adoption Taxpayer Identification Number) will suffice. 1320.03 Education credits Two tax credits available for students pursuing postsecondary college or vocational education are the American Opportunity Tax Credit and the Lifetime Learning Credit. These credits are available for qualified educational expenditures of the taxpayer, spouse, and dependents. If both the Lifetime Learning Credit and the American Opportunity Tax Credit can be claimed for the same student in the same year, only one can be used, not both. Both credits must be supported by an IRS Form 1098‐T from the college or other postsecondary institution showing the amount of qualified expenses that were paid during the tax year. a. American Opportunity Tax Credit (AOTC): The AOTC makes the Hope Credit available to a broader range of taxpayers, including many with higher incomes and those who owe no tax. It also adds required course materials to the list of qualifying expenses and allows the credit to be claimed for four postsecondary education years instead of two. (1) The credit is equal to 100% of the first $2,000 and 25% of the next $2,000, not to exceed $4,000. Therefore, the maximum Hope Scholarship Credit allowance is $2,500. (2) Students must be enrolled no less than half‐time during at least one semester during the year. 214 © 2024 Surgent Consolidated, LLC  INDIVIDUALS (3) The taxpayer claiming the full credit (not necessarily the student) must have modified adjusted gross income (MAGI) of $80,000 or less for a single taxpayer or $160,000 or less if filing jointly. A partial credit may be available up to MAGI of $90,000 and $180,000, respectively. (4) A taxpayer can claim the credit for each qualifying student for whom qualifying expenses are paid. b. Lifetime Learning Credit: This nonrefundable credit is equal to 20% of up to $10,000 of tuition expenses paid each year by the taxpayer. Expenses for which the American Opportunity Tax Credit is claimed do not qualify for this credit. In contrast to the American Opportunity Tax Credit, this credit: (1) does not vary with the number of students in the household, (2) is available for an unlimited number of years, (3) applies to undergraduate, graduate, and professional degree expenses, (4) applies to any course at an eligible institution that helps individuals acquire or improve their job skills, and (5) does not require half‐time enrollment for one semester. (Thus, CPE credit courses and professional seminars provided by eligible educational institutions may qualify for the credit.) For tax year 2023, a taxpayer’s modified adjusted gross income in excess of $80,000 ($160,000 for a joint return) is used to determine the reduction in the amount of the Lifetime Learning Credit otherwise allowable. c. Other limitations: (1) Married taxpayers must file jointly to receive these credits. (2) In a given tax year, only one of the following benefits may be claimed with respect to each © 2024 Surgent Consolidated, LLC 215 INDIVIDUALS student: (a) the American Opportunity Tax Credit or (b) the Lifetime Learning Credit. However, the American Opportunity Tax or Lifetime Learning credit can be claimed in the same year as distributions from a Coverdell Education IRA, provided that the proceeds from the distribution are not used to pay for the education costs used in claiming the American Opportunity or Lifetime Learning credit. (3) The credits are not available if the cost of the course may be deducted by the taxpayer as a business expense. 1320.04 Foreign tax credit A taxpayer may apply income taxes paid to a foreign country or U.S. possession as a credit against United States income tax liability, or he or she may use such taxes as an itemized deduction. This credit is claimed on IRS Form 1116 for an individual and on IRS Form 1118 for a corporation. a. This treatment is available for taxes paid to a foreign country on income that is taxable in the United States when no foreign income exclusion is taken. b. The election to use the credit or the deduction is made annually. c. The taxpayer cannot split foreign taxes between a credit and a deduction. d. The overall limit for the credit on taxes paid to all foreign countries is restricted to that portion of the U.S. income tax which relates to the taxable income from all foreign countries. e. Excess credits may be carried back 1 year and forward 10 years. 216 © 2024 Surgent Consolidated, LLC  INDIVIDUALS 1320.05 Earned income tax credit (e.g., paid preparer's earned income credit checklist, eligibility and disallowance) A special refundable tax credit may be available for low‐income workers who have a principal residence in the United States. It represents a form of negative income tax—workers may receive money from the government even though they do not have a tax liability. This credit is claimed by filing Schedule EIC of IRS Form 1040 with the taxpayer’s return. a. The earned income credit (EIC) is equal to a percentage of a limited amount of earned income. Taxpayers with qualifying children receive greater benefits—a greater amount of income is eligible for a higher credit percentage. b. When the taxpayer’s adjusted gross income (or earned income, if greater) exceeds a threshold amount, the EIC is phased out. (1) “Earned income” includes only taxable compensation; it does not include nontaxable employee compensation. (2) Threshold and phaseout amounts for 2023 are given in the following table. The tax year 2023 earned income and adjusted gross income (AGI) must each be less than: Maximum AGI Maximum AGI Children or (Filing as Single, Head of (Filing as Relatives Household, Surviving Spouse, Married Filing Claimed or Married Filing Separately*) Jointly) Zero $17,640 $24,210 One $46,560 $53,120 Two $52,918 $59,478 Three $56,838 $63,398 Investment income limit: $11,000 or less Maximum credit amounts: The maximum amount of credit you can claim  No qualifying children: $600 © 2024 Surgent Consolidated, LLC 217 INDIVIDUALS  1 qualifying child: $3,995  2 qualifying children: $6,604  3 or more qualifying children: $7,430 c. IRC Section 32(d) provides that a married taxpayer who does not file a joint return is not entitled to an EIC. In Action on Decision (AOD) 2017‐05, the IRS gave notice it would not follow a Tax Court decision that the taxpayer’s filing status was married filing separately and that the taxpayer had qualifying children, and therefore the taxpayer was entitled to the EIC. However, there is no mention of IRC Section 32(d) in the court’s opinion; therefore, it appears that the Tax Court overlooked the prohibition disallowing the EIC to married taxpayers filing separately. Accordingly, the IRS stated that it will not follow the court’s opinion in allowing an EIC to a married taxpayer filing separately. d. Qualifying children: To be eligible for the earned income credit, parents must have children that can meet the following tests: (1) Relationship: The child must be a “qualifying child.” The child may, however, provide over half of his or her own support. (2) Residency: The child must live in the taxpayer’s residence over half of the year; foster children for the entire tax year. (3) Age: The child must be: (a) under age 19, (b) a full‐time student under age 24, or (c) permanently and totally disabled. e. Individuals without qualifying children may be eligible for this credit if: (1) they (or their spouse) are at least 25 years old, but not more than 64 years old, at the end of the year and 218 © 2024 Surgent Consolidated, LLC  INDIVIDUALS (2) they cannot be claimed as a dependent by another taxpayer. 1320.06 Retirement contribution credit A nonrefundable tax credit is available for contributions, or deferrals, to retirement savings plans. The credit is claimed by completing and attaching IRS Form 8880, Credit for Qualified Retirement Savings Contributions, to the taxpayer’s return. a. The credit applies to traditional and Roth IRAs and other qualified retirement plans such as 401(k) plans, 403(b) annuities, 457 plans, SIMPLE plans, and SEP plans. b. For tax year 2023, an eligible lower‐income taxpayer can claim a nonrefundable tax credit for the applicable percentage (50%, 20%, or 10%, depending on filing status and AGI) of up to $2,000 of their qualified retirement savings contributions. In other words, the absolute most the credit could be is $1,000. c. The credit is in addition to any deduction or exclusion relating to the retirement plan contribution. d. Joint filers with AGI in excess of $73,000 receive no credit. For heads of households, the amount is $54,750, and for all others it is $36,500. e. The contribution eligible for the credit must be reduced by any distributions received from qualified retirement plans. (1) Such distributions include those paid out during (a) the current year, (b) the two preceding tax years, and (c) the period before the due date (including extensions) of the current return. (2) Distributions received by a spouse are considered as distributions to the taxpayer if a joint return is filed. f. Qualifying taxpayers must be at least 18 years old. g. Dependents and full‐time students are not eligible for the credit. © 2024 Surgent Consolidated, LLC 219 INDIVIDUALS 1320.07 Adoption credits (e.g., carryovers, limitations, special needs) For taxable years beginning in 2023, the credit allowed for an adoption of a child with special needs is $15,950. For taxable years beginning in 2023, the maximum credit allowed for other adoptions is the amount of qualified adoption expenses up to $15,950. The available adoption credit begins to phase out for taxpayers with modified adjusted gross income in excess of $239,230 and is completely phased out for taxpayers with modified adjusted gross income of $279,230 or more. 1320.08 Other credits (refundable and nonrefundable) (e.g., health coverage tax credit, general business credits FICA tax credit on tips: Proprietors of food and beverage establishments may claim a tax credit for a portion of the employer’s share of FICA taxes. The credit is limited to those FICA taxes attributable to reported tips in excess of those treated as wages under the federal minimum wage laws. No deduction is permitted for any of the FICA expense claimed as a credit. The credit is claimed by filing IRS Form 8846, Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips, with the business tax return. Investment credit (ITC): This general business credit is based on the amount invested in qualified business properties during the tax year. While there are five separate credits currently included in the calculation of the ITC, only the rehabilitation credit will be discussed. The investment credit is claimed by filing IRS Form 3468, Investment Credit, with the taxpayer’s return. a. A rehabilitation credit will be allowed to taxpayers for expenditures incurred to rehabilitate old commercial and industrial buildings and certified historic structures. No credit is allowed for personal‐use property. b. The credit is 20% of the expenditures incurred to rehabilitate buildings that were placed in service after 1936. c. The taxpayer is required to depreciate rehabilitated property using the straight‐line method. d. The basis of rehabilitated buildings must be reduced by 100% of the rehabilitation credit taken. 220 © 2024 Surgent Consolidated, LLC  INDIVIDUALS e. The rehabilitation credit is subject to recapture provisions if the building is disposed of prematurely or ceases to be qualified property. f. The Tax Cuts and Jobs Act (TCJA), signed December 22, 2017, affects the rehabilitation tax credit for amounts that taxpayers pay or incur for qualified expenditures after December 31, 2017. The credit is a percentage of expenditures for the rehabilitation of qualifying buildings in the year the property is placed in service. The legislation: (1) requires taxpayers take the 20% credit ratably over five years instead of in the year they placed the building into service. (2) eliminates the 10% rehabilitation credit for the pre‐ 1936 buildings. g. A transition rule provides relief to owners of either a certified historic structure or a pre‐1936 building by allowing owners to use the prior law if the project meets these conditions: (1) The taxpayer owns or leases the building on January 1, 2018, and at all times thereafter. (2) The 24‐ or 60‐month period selected for the substantial rehabilitation test begins by June 20, 2018. 1320.09 Work opportunity credit (a general business credit): Employers hiring employees from 1 of 10 selected high unemployment groups are allowed a special credit. After completing and filing IRS Form 8850, Pre‐Screening Notice and Certification Request for the Work Opportunity Credit, the work opportunity credit is claimed by completing and attaching IRS Form 5884, Work Opportunity Credit, to the tax return. a. The credit is equal to 40% of the qualified first‐year wages paid or accrued to each qualified employee who is hired during the year. That first‐year wage amount can be as much as $24,000 for certain qualified veterans. © 2024 Surgent Consolidated, LLC 221 INDIVIDUALS (1) To qualify for the 40% rate, an employee must complete 400 or more hours of service. (2) Employees completing less than 400 hours of service, but at least 120 hours, qualify for a rate of only 25%. b. The work opportunity tax credit is elective. If taken, the employer’s deduction for wages must be reduced by the amount of the credit. 1320.10 Research activities credit (a general business credit): To encourage technical research and development (R&D), a tax credit is available for qualified R&D expenditures. The credit is based on two research components. The research credit is claimed by completing and attaching IRS Form 6765, Credit for Increasing Research Activities, to the tax return. There is a regular credit in Section A and an Alternative Simplified Credit in Section B. In 2023, a payroll tax election for up to $500,000 credit against the employer portion of Social Security and Medicare taxes is allowed for qualified small businesses with gross receipts less than $5 million. It is an annual election. a. Amount of credit. The alternative simplified research credit is the sum of (1) 20% of the excess of qualified research expenses for the current year over a base period amount, (2) 20% of the basic research payments made to a qualified research organization, and (3) 20% of the amounts paid to an energy research consortium. b. Base amount. The base amount is determined by a special formula, but it may not be less than 50% of the qualified research expenses for the current year. c. The research activities credit may be claimed if the taxpayer expenses research expenditures or capitalizes them. However, the deduction for research expenditures must be reduced by the credit taken. d. This credit expired at the end of 2014; it was then permanently extended, effective January 1, 2015, under the PATH Act. Eligible small businesses may use the credit to offset both regular tax and AMT liabilities, as well as payroll taxes. 222 © 2024 Surgent Consolidated, LLC