tax benefits chapter 1 pp. 1-37 2015 national income tax workbook™

Tax BenefitsChapter 1 pp. 1-37

2015 National IncomeTax Workbook™

Tax Benefits Limited by In-come 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.

Above-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.

Above-the-Line Deductions and Exclusions pp. 2-12

Three income-limited items factor into AGI.▪ Deductions for contributions to IRAs▪ Deductions for student loan interest, ▪ The exclusion for certain interest

paid on US savings bonds.

IRA Contributions pp. 2-7

Deductions for traditional IRA contributions may be limited if the taxpayer/spouse can participate in an employer provided retire-ment plan.

To determine deductible amount when in the phaseout range:

(End of phaseout range – MAGI) x contribu-tion limit / Phaseout range = Deductible amount

IRA 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

Student Loan Interest Deduc-tions pp. 7-9

Up to $2,500 deduction of qualified student loan interest.

Not available if filing MFS, and deduc-tion is only available to the borrower.

If student loan is refinanced including additional funding used for non-edu-cation expenses, none of the subse-quent interest is considered student loan interest.

US Savings Bond Interest Ex-clusion 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 phase-out range is calculated by:

(End of phaseout range – MAGI) x qualified sav-ings bond interest/ Phaseout range = Exclusion

US Savings Bond Interest Ex-clusion pp. 9-11

Planning Pointer▪ Taxpayers may consider

switching from low-rate sav-ings bonds to a higher per-forming 529 plan, a tax free exchange.

Comparative Case Studiespp. 11-12

Case #1: Barbara Brown▪ IRA deduction not limited

Case #2: Gloria Green▪ Calculation of nondeductible

contribution Case #3: Wilma White▪ MAGI exceeds phaseout range

Below-the-Line Deductions pp. 12-24

2015 standard deductions▪ Single - $6,300▪MFJ or QW - $12,600▪HoH - $9,250▪MFS - $6,300

Below-the-Line Deductions pp. 12-24

Pease rule – itemized deductions reduced by lesser of two amounts▪ 3% of AGI in ex-

cess of thresholds to the right▪ 80% of all affected

itemized deductions

Filing Status

AGI

Single $258,250MFJ or QW

$309,900

HoH $284,050MFS $154,950

Personal Exemptions Deduc-tion Phaseout p. 13

Personal and de-pendent exemption deduction can be completely phased out if AGI is sub-stantial.

Decreases by 2% for each $2,500 over threshold amounts to the right. No deduction for AGI above phaseout region.

Filing Status

Phaseout Begins

Phaseout Ends

Single $258,250 $380,750

MFJ or QW

$309,900 $432,400

HoH $284,050 $406,550

MFS $154,950 $216,200

Personal Exemptions Deduc-tion Phaseout p. 13

Pease limitation▪ See Example 1.6 – 1.8

Other Itemized Deductionspp. 15-19

Medical/dental expenses can be claimed as an itemized de-duction, but deduction is re-duced by 10% of AGI (7.5% of AGI if over 65 during 2013-2016).


Mortgage insurance through the VA or RHS are fully deductible in the year the contract is is-sued.

FHA and private mortgage in-surance must be allocated over the shorter of the term of the mortgage or 84 months.


Example 1.9 Limited Specific Itemized Deductions▪Medical expenses and mort-

gage insurance deductions


Charitable contribution deduc-tions are AGI limited.▪Generally the limit is 50% of

AGI, but can be lower depend-ing on type of property do-nated.▪ Excess carries over for 5

years.


Losses from theft of personal use property events are re-duced by $100, and then by 10% of AGI.

Losses from business and in-come property are not subject to these reductions.


Other expenses related to gen-erating taxable income may be eligible itemized deductions, subject to a 2% of AGI floor.

Alternative Minimum Taxpp. 19-21

I.R.C. § 55 imposes the alternative minimum tax (AMT) on both corpo-rate and noncorporate taxpayers, which limits the use of specified benefits to reduce total tax.

2015 AMT rates are 26% for alter-native minimum taxable income less than $185,400, and 28% oth-erwise.

Comparative Case Studiespp. 23-24

Case #1: Barbara Brown▪ Itemized deductions less than

standard deduction Case #3: Wilma White▪ Subject to Pease Limitations

and PEP

Refundable/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 elim-inated as a taxpayer’s income increases.

Earned Income Creditpp. 24-28

The EIC is applicable to those who have income from wages, salaries, tips, union strike bene-fits, or long-term disability bene-fits received prior to minimum retirement age.


The EIC increases over a range of earned income: Not Filing MFJ or MFS

Qualifying Children

Credit Rate (%)

Income for Maximum Credit

Phaseout Phaseout Rate(%)

Maximum Credit

None 7.65 $6,580 - $8,240 $8,240 - $14,820

7.65 $503

One 34.00 $9,880 - $18,110 $18,110 - $39,131

15.98 $3,359

Two or more 40.00 $13,870 - $18,110 $18,110 - $44,454

21.06 $5,548

Three or more 45.00 $13,870 - $18,110 $18,110 - $47,747

21.06 $6,242


The EIC increases over a range of earned income: Filing MFJ or MFS

Qualifying Children

Credit Rate (%)

Income for Maximum Credit

Phaseout Phaseout Rate(%)

Maximum Credit

None 7.65 $6,580 - $13,750 $8,240 - $20,330

7.65 $503

One 34.00 $9,880 - $23,630 $23,630- $44,651

15.98 $3,359

Two or more 40.00 $13,870 - $23,630 $23,630- $49,974

21.06 $5,548

Three or more 45.00 $13,870 - $23,630 $23,630 - $53,267

21.06 $6,242


Taxpayers with more than $3,400 in invest-ment income for the year cannot claim EIC.

Self-employed taxpayers with earned in-come 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.

Child Tax Creditpp. 28-30

Can be as much as $1000 per qual-ifying child.

Phases out with increasing AGI, decreases by $50 for each $1000 the AGI exceeds the limits.

Filing Status

Phaseout Range

MFJ $110,000 - $129,001

Single, HoH, or QW

$75,000 - $94,001

MFS $55,000 - $74,001

Child and Dependent Care Credit pp. 30-32

Expenses for child or dependent care while the taxpayer is work-ing can qualify for a tax credit.

Qualifying expenses are limited by earned income, and as AGI increases expenses used to cal-culate the percentage is reduced from 35% to 20%.

Retirement Savings Contribu-tion Credit pp. 32-33

Maximum 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.

Education Creditspp. 33-36

American Opportunity Tax Credit▪ Extended through Dec. 31, 2017▪ 100% 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.

Education Creditspp. 33-36

Lifetime Learning Credit▪ Taxpayers 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.

Case Studies pp. 36-37

Case #1: Barbara Brown▪ AOTC and EITC refundable credit

Case #2: Gloria Green▪ AOTC credit, but ineligible for

other credits Case #3: Wilma White▪ Exceeds all credit phaseout

ranges

Questions?

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tax benefits chapter 1 pp. 1-37 2015 national income tax workbook™

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