A Brief Note On Financial Deductions And Returns

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61. Salary (Note 1) $ 84,000
Expense allowance (Note 2) 25,000
Contribution to § 401(k) retirement plan (Note 3) (10,000)
Interest income (Note 4) 400
Treasure trove (Note 5) 5,000
Property transactions (Note 6): Loss on sale of lot ($4,000) Gain on boat 500 (3,000)
Adjusted gross income $101,400

Itemized deductions not subject to the 2%-of-AGI limitation:
Medical (Note 7) $2,795 Sales tax (Note 8) 3,200 Charitable contribution (Note 9) 4,800 Campaign contribution (Note 10) –0– Premium on life insurance (Note 11) –0– Contribution to Coverdell (Note 12) –0– (10,795)

Itemized deductions subject to the 2%-of-AGI limitation: Office in the home (Note 13) $ 6,750 Business use of auto (Note 14) 7,733 Employee expense—trip to Japan (Note 15) 4,535 Other employee expenses (Note 16) 10,880 Tax return preparation fee 400 Less: limitation ($101,400 × 2%) (2,028) (28,270) Personal and dependency exemptions (Note 17) (11,700) Taxable income ($ 50,635)

Tax liability on taxable income of $50,635 using the Tax Rate Schedule for Head of Household is $7,161 [$6,652.50 + 25% $ 7,161 ($50,635 – $48,600)] Less: Withholding $5,600 Overpayment from 2012 800 (6,400) Net tax due (or refund) for 2013 $ 761
Notes
(1) Gross income does not include the achievement award of $10,000 because it was not received in 2013. As a cash basis taxpayer, Addison does not recognize income until the year of its receipt. (2) The expense allowance is treated as additional income—Addison does not render an accounting to her employer. (3) Most often these contributions are netted out from salary on the Form W-2 submitted by the employer [i.e., salary will be shown at $73,000 ($82,000 – $9,000)]. (4) The $400 interest on the City of Tacoma bonds is not subject to tax. (5) The $5,000 in cash that Addison found (i.e., treasure trove) is income. See Exhibit 3.2 in Chapter 3 of the text. (6) As gain on the sale of personal use property is taxed, Addison has a long-term capital gain of $500. When offset against a long-term capital loss of $4,000, the result is a net long-term capital loss of $3,500. Because only $3,000 of excess capital losses can be deducted against ordinary income, the unused $500 long-term loss carries over to 2014. (7) Medical expenses paid $ 7,200
Medical insurance premiums 3,200
Total medical expenses $10,400
Less limitation [7.5% × $101,400 (AGI)] (7,605)
Medical expense after limitation $ 2,795

(8) The IRS sales tax tables did not have to be used because Addison could justify a larger amount.

(9) Charitable contributions are deductible in the year paid. In this regard, it does not matter for which year they were pledged.
(10) Political contributions are not deductible—to allow a deduction would violate public policy (see Chapter 6).
(11) Premiums on personal life insurance policies are nondeductible. See Chapter 3, p. 3-7.
(12) Contributions to Coverdell Education Savings Accounts are nondeductible. However, distributions from CESAs are nontaxable exclusions from gross income. See Chapter 9, Concept Summary 9.1.
(13) Office in the home business use percentage is 25% (450 sq. ft. ÷ 1,800 sq. ft.).
Indirect expenses are: $16,000
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