Deductions: Employee and Self-Employed-Related Expenses

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Chapter 8 Deductions: Employee and Self-Employed-Related Expenses Eugene Willis, William H. Hoffman, Jr., Eugene Willis, William H. Hoffman, Jr., David M. Maloney and William A. Raabe David M. Maloney and William A. Raabe Copyright ©2004 South Copyright ©2004 South - - Western/Thomson Learning Western/Thomson Learning

Transcript of Deductions: Employee and Self-Employed-Related Expenses

Page 1: Deductions: Employee and Self-Employed-Related Expenses

Chapter 8Chapter 8

Deductions: Employee and Self-Employed-Related Expenses

Deductions: Employee and Self-Employed-Related Expenses

Eugene Willis, William H. Hoffman, Jr.,Eugene Willis, William H. Hoffman, Jr.,David M. Maloney and William A. RaabeDavid M. Maloney and William A. Raabe

Copyright ©2004 SouthCopyright ©2004 South--Western/Thomson LearningWestern/Thomson Learning

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Employee vs. Self-Employed(slide 1 of 2)

Employee vs. Self-Employed(slide 1 of 2)

• Business expenses for self-employed persons are deductible FOR AGI

• Business expenses for employees are generally deductible FROM AGI subject to 2% of AGI floor

• Business expenses for self-employed persons are deductible FOR AGI

• Business expenses for employees are generally deductible FROM AGI subject to 2% of AGI floor

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Employee vs. Self-Employed(slide 2 of 2)

Employee vs. Self-Employed(slide 2 of 2)

• Person is classified as an employee if:– Another controls details of how work is

performed– Can be discharged without creating legal

liability to another– Another furnishes tools or the place of work– Income based on time spent rather than task

performed

• Person is classified as an employee if:– Another controls details of how work is

performed– Can be discharged without creating legal

liability to another– Another furnishes tools or the place of work– Income based on time spent rather than task

performed

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Employee ExpensesEmployee Expenses

• Fall into one of the following categories:– Transportation– Travel– Moving– Education– Entertainment– Other

• Fall into one of the following categories:– Transportation– Travel– Moving– Education– Entertainment– Other

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Transportation Expenses(slide 1 of 2)

Transportation Expenses(slide 1 of 2)

• Transportation expense defined– Very limited, only from job site to job site and

commuting to temporary work place– Commuting from home to work and back is

nondeductible• Exceptions:

– Additional costs incurred to transport heavy tools– Employees with more than one job

• Transportation expense defined– Very limited, only from job site to job site and

commuting to temporary work place– Commuting from home to work and back is

nondeductible• Exceptions:

– Additional costs incurred to transport heavy tools– Employees with more than one job

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Transportation Expenses(slide 2 of 2)

Transportation Expenses(slide 2 of 2)

• Amount deductible– Actual expenses

• Must keep adequate records of all expenses and depreciation is limited, or

– Automatic mileage method• 36 cents per mile for business miles for 2003

– Adjustment to basis of auto is required for depreciation considered allowed

• Plus parking, tolls, etc.• Adequate documentation of mileage required

• Amount deductible– Actual expenses

• Must keep adequate records of all expenses and depreciation is limited, or

– Automatic mileage method• 36 cents per mile for business miles for 2003

– Adjustment to basis of auto is required for depreciation considered allowed

• Plus parking, tolls, etc.• Adequate documentation of mileage required

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Travel Expenses (slide 1 of 2)Travel Expenses (slide 1 of 2)

• Travel expense defined– Expenses while “away from tax home” on

business– Includes transportation, lodging, 50% meals,

and miscellaneous expenses

• Travel expense defined– Expenses while “away from tax home” on

business– Includes transportation, lodging, 50% meals,

and miscellaneous expenses

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Travel Expenses (slide 2 of 2)Travel Expenses (slide 2 of 2)

• “Away from home” requirement– Need not be a 24-hour period but must be

longer than ordinary work day and taxpayer will need to rest during release time

– Being “away” should be a temporary situation (not in excess of 1 year)

– “Tax Home” generally means business location, post, or station of the taxpayer

• “Away from home” requirement– Need not be a 24-hour period but must be

longer than ordinary work day and taxpayer will need to rest during release time

– Being “away” should be a temporary situation (not in excess of 1 year)

– “Tax Home” generally means business location, post, or station of the taxpayer

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Restrictions on Travel Expenses (slide 1 of 2)

Restrictions on Travel Expenses (slide 1 of 2)

• Convention travel expenses– No deduction for travel unless directly related

to taxpayer’s trade or business– Example: Doctor attending out-of-town seminar

on estate planning would not have deductible travel expenses

• Convention travel expenses– No deduction for travel unless directly related

to taxpayer’s trade or business– Example: Doctor attending out-of-town seminar

on estate planning would not have deductible travel expenses

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Restrictions on Travel Expenses (slide 2 of 2)

Restrictions on Travel Expenses (slide 2 of 2)

• Education travel expenses– Travel as a form of education is not deductible

• Example: Spanish language professor traveling to Spain to work on the language would not have deductible travel expenses

• Example: Spanish history professor traveling to Spain to study historical documents available only in Spanish museums would have deductible travel expenses

• Education travel expenses– Travel as a form of education is not deductible

• Example: Spanish language professor traveling to Spain to work on the language would not have deductible travel expenses

• Example: Spanish history professor traveling to Spain to study historical documents available only in Spanish museums would have deductible travel expenses

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Combined Business/Pleasure Travel(slide 1 of 4)

Combined Business/Pleasure Travel(slide 1 of 4)

• Only actual expenses for business are deductible– Meals, lodging and other expenses must be

allocated between business and personal days• Deductibility of transportation costs

depends on whether the trip is domestic or foreign

• Only actual expenses for business are deductible– Meals, lodging and other expenses must be

allocated between business and personal days• Deductibility of transportation costs

depends on whether the trip is domestic or foreign

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Combined Business/Pleasure Travel(slide 2 of 4)

Combined Business/Pleasure Travel(slide 2 of 4)

• For domestic travel– If primary purpose of trip is business,

transportation is deductible in full – If primary purpose is pleasure, no deduction for

transportation allowed, but other expenses (e.g., lodging) associated with business days are deductible

• For domestic travel– If primary purpose of trip is business,

transportation is deductible in full – If primary purpose is pleasure, no deduction for

transportation allowed, but other expenses (e.g., lodging) associated with business days are deductible

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Combined Business/Pleasure Travel(slide 3 of 4)

Combined Business/Pleasure Travel(slide 3 of 4)

• For foreign travel– Transportation expenses must be allocated

between business and personal unless:• Trip is 7 days or less,• Less than 25% of time was for personal purposes, or• Taxpayer had no substantial control over

arrangements for the trip

• For foreign travel– Transportation expenses must be allocated

between business and personal unless:• Trip is 7 days or less,• Less than 25% of time was for personal purposes, or• Taxpayer had no substantial control over

arrangements for the trip

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Combined Business/Pleasure Travel(slide 4 of 4)

Combined Business/Pleasure Travel(slide 4 of 4)

• Travel days are considered business days• Weekends, legal holidays and intervening

days are business days if both the preceding and succeeding days are business days

• If trip is primarily for pleasure, no transportation expenses are deductible

• Travel days are considered business days• Weekends, legal holidays and intervening

days are business days if both the preceding and succeeding days are business days

• If trip is primarily for pleasure, no transportation expenses are deductible

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Moving Expenses Moving Expenses

• Deductible for moves in connection with the commencement of work at a new principal place of work

• Two tests must be met for moving expenses to be deductible– Distance test – Time test

• Deductible for moves in connection with the commencement of work at a new principal place of work

• Two tests must be met for moving expenses to be deductible– Distance test – Time test

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Distance TestDistance Test

• Distance from old home to new job must be at least 50 miles farther than from old home to old job

• New home location not relevant for decision

• Distance from old home to new job must be at least 50 miles farther than from old home to old job

• New home location not relevant for decision

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Example of Distance TestExample of Distance Test

• Gail lived 20 miles from her old job

• Gail’s new job is 75 miles from her old home

• Gail meets the distance test

• Gail lived 20 miles from her old job

• Gail’s new job is 75 miles from her old home

• Gail meets the distance test

OldJob

OldJob

New Job

New Job

Old Residence

Old Residence

20 mi.

75 mi.

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Time Test (slide 1 of 2)Time Test (slide 1 of 2)

• Taxpayer must be full-time employee for 39 of the 52 weeks following the move, or

• Self-employed must work in new location for 78 of the 104 weeks following the move– 39 of the weeks must be in the first 12 months

• Test waived if die, disabled, discharged, or transferred

• Taxpayer must be full-time employee for 39 of the 52 weeks following the move, or

• Self-employed must work in new location for 78 of the 104 weeks following the move– 39 of the weeks must be in the first 12 months

• Test waived if die, disabled, discharged, or transferred

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Time Test (slide 2 of 2)Time Test (slide 2 of 2)

• If time test not met during taxable year, two alternatives:– Take the deduction in year moved. If test is not

met in following year, either:• Include the amount deducted in gross income in the

following year, or• File amended return for year of move

– Alternatively, wait until time test is met and then file amended return for year of move

• If time test not met during taxable year, two alternatives:– Take the deduction in year moved. If test is not

met in following year, either:• Include the amount deducted in gross income in the

following year, or• File amended return for year of move

– Alternatively, wait until time test is met and then file amended return for year of move

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Deductible Moving ExpensesDeductible Moving Expenses

• Expenses of moving household goods and personal effects to new location

• Expenses of travel for family to new location– Actual auto costs (not depreciation) or mileage

rate of $.12 per mile– Meals are not deductible as moving expense

• Expenses of moving household goods and personal effects to new location

• Expenses of travel for family to new location– Actual auto costs (not depreciation) or mileage

rate of $.12 per mile– Meals are not deductible as moving expense

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Tax Treatment of Moving Expenses Tax Treatment of Moving Expenses

• Unreimbursed moving expenses are deductible For AGI

• Reimbursement or payment by employer:– For qualified moving expenses, amount is

excluded from gross income, but no deduction for related expenses

– For nonqualified moving expenses, amount is included in gross income and no deduction is allowed

• Unreimbursed moving expenses are deductible For AGI

• Reimbursement or payment by employer:– For qualified moving expenses, amount is

excluded from gross income, but no deduction for related expenses

– For nonqualified moving expenses, amount is included in gross income and no deduction is allowed

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Education Expenses (slide 1 of 3)Education Expenses (slide 1 of 3)

• Education expenses are deductible if they are incurred:– To maintain or improve existing skills, or– To meet the requirements of the employer,

profession, licensing, or state law

• Education expenses are deductible if they are incurred:– To maintain or improve existing skills, or– To meet the requirements of the employer,

profession, licensing, or state law

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Education Expenses (slide 2 of 3)Education Expenses (slide 2 of 3)

• Education expenses are not deductible if they are incurred:– To meet minimum educational standards for

existing job, or– To qualify taxpayer for new trade or business

• Education expenses are not deductible if they are incurred:– To meet minimum educational standards for

existing job, or– To qualify taxpayer for new trade or business

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Education Expenses (slide 3 of 3)Education Expenses (slide 3 of 3)

• Education expenses include:– Tuition– Books– Supplies– Transportation– Travel (including lodging and 50% meals)

• Education expenses include:– Tuition– Books– Supplies– Transportation– Travel (including lodging and 50% meals)

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Deduction For Qualified Tuition and Related Expenses (slide 1 of 2)

Deduction For Qualified Tuition and Related Expenses (slide 1 of 2)

• Starting in 2002, a deduction is allowed for qualified tuition and related expenses

• For 2003, maximum deduction allowed is $3,000

• No deduction is allowed if AGI exceeds:Single $ 65,000 Married $130,000

• Starting in 2002, a deduction is allowed for qualified tuition and related expenses

• For 2003, maximum deduction allowed is $3,000

• No deduction is allowed if AGI exceeds:Single $ 65,000 Married $130,000

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Deduction For Qualified Tuition and Related Expenses (slide 2 of 2)

Deduction For Qualified Tuition and Related Expenses (slide 2 of 2)

• Qualified tuition and related expenses include whatever is required for enrollment– Usually, student activity fees, books, room and

board are not included• Expenses need not be work related• Deduction is not available for married

persons filing separately

• Qualified tuition and related expenses include whatever is required for enrollment– Usually, student activity fees, books, room and

board are not included• Expenses need not be work related• Deduction is not available for married

persons filing separately

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Entertainment Expenses(slide 1 of 2)

Entertainment Expenses(slide 1 of 2)

• Deductions are very restricted due to abuse possibilities– Amount allowed

• 50% meals and entertainment• 100% of transportation costs• Amounts cannot be lavish or extravagant

– Beginning in 1998, the 50% cutback for meals is eased for certain, very limited, types of employees

• Deductions are very restricted due to abuse possibilities– Amount allowed

• 50% meals and entertainment• 100% of transportation costs• Amounts cannot be lavish or extravagant

– Beginning in 1998, the 50% cutback for meals is eased for certain, very limited, types of employees

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Entertainment Expenses(slide 2 of 2)

Entertainment Expenses(slide 2 of 2)

• Entertainment expenses are classified as either:– Directly related to business

• Actual business meeting or discussion occurs during meal or entertainment

– Associated with business• Meal or entertainment that directly precedes or

follows business meeting or discussion

• Entertainment expenses are classified as either:– Directly related to business

• Actual business meeting or discussion occurs during meal or entertainment

– Associated with business• Meal or entertainment that directly precedes or

follows business meeting or discussion

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Restrictions on Entertainment Expenses (slide 1 of 3)

Restrictions on Entertainment Expenses (slide 1 of 3)

• Club dues– Generally not deductible

• Exception: Clubs formed for public services and community volunteerism (e.g., Kiwanis, Rotary)

– Business entertainment expenses incurred at club are still deductible (50%)

• Club dues– Generally not deductible

• Exception: Clubs formed for public services and community volunteerism (e.g., Kiwanis, Rotary)

– Business entertainment expenses incurred at club are still deductible (50%)

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Restrictions on Entertainment Expenses (slide 2 of 3)

Restrictions on Entertainment Expenses (slide 2 of 3)

• Ticket purchases for entertainment– Amounts paid in excess of face value of ticket

are not deductible– Limitation on deductibility of luxury skybox

expenditures

• Ticket purchases for entertainment– Amounts paid in excess of face value of ticket

are not deductible– Limitation on deductibility of luxury skybox

expenditures

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Restrictions on Entertainment Expenses (slide 3 of 3)

Restrictions on Entertainment Expenses (slide 3 of 3)

• Business gifts– Business gifts of tangible personalty with a

value of $25 or less per person per year are deductible

– If the value is $4 or less (e.g., pen with company name) then not subject to $25 limit

• Gifts to employers or superiors are not deductible

• Business gifts– Business gifts of tangible personalty with a

value of $25 or less per person per year are deductible

– If the value is $4 or less (e.g., pen with company name) then not subject to $25 limit

• Gifts to employers or superiors are not deductible

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Office in the Home(slide 1 of 3)

Office in the Home(slide 1 of 3)

• Deductibility is very restricted due to abuse possibilities– Office must be used exclusively and on a

regular basis as:• The principal place of business, or• A place of business used by clients, patients, or

customers– For employees, office must also be for the

convenience of the employer

• Deductibility is very restricted due to abuse possibilities– Office must be used exclusively and on a

regular basis as:• The principal place of business, or• A place of business used by clients, patients, or

customers– For employees, office must also be for the

convenience of the employer

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Office in the Home(slide 2 of 3)

Office in the Home(slide 2 of 3)

• What constitutes “principal place of business”?– Home office qualifies as a principal place of

business if:• Taxpayer conducts admin. and mgmt. activities in

the home office, and• There is no other fixed location where taxpayer

conducts these activities• Effective for tax years beginning after 12-31-98

• What constitutes “principal place of business”?– Home office qualifies as a principal place of

business if:• Taxpayer conducts admin. and mgmt. activities in

the home office, and• There is no other fixed location where taxpayer

conducts these activities• Effective for tax years beginning after 12-31-98

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Office in the Home(slide 3 of 3)

Office in the Home(slide 3 of 3)

• Office in the home expenses cannot cause net loss from the business activity– Office in home deduction limited to business

gross income in excess of other business expenses (ordering rules apply)

– Excess is carried forward (subject to limit)– Form 8829 is used to report office in home

expenses

• Office in the home expenses cannot cause net loss from the business activity– Office in home deduction limited to business

gross income in excess of other business expenses (ordering rules apply)

– Excess is carried forward (subject to limit)– Form 8829 is used to report office in home

expenses

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Other Employee ExpensesOther Employee Expenses

• A partial list of other employee expenses that are deductible includes:– Special clothing (uniforms)– Union dues– Professional expenses– Job hunting in same profession

• A partial list of other employee expenses that are deductible includes:– Special clothing (uniforms)– Union dues– Professional expenses– Job hunting in same profession

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Classification of Employee Expenses (slide 1 of 2)

Classification of Employee Expenses (slide 1 of 2)

• Depends on whether they are reimbursed and, if reimbursed, under what type of plan

• Depends on whether they are reimbursed and, if reimbursed, under what type of plan

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Classification of Employee Expenses (slide 2 of 2)

Classification of Employee Expenses (slide 2 of 2)

• Employers can have three types of reimbursement plans– Accountable– Nonaccountable– No reimbursement is given

• Employers can have three types of reimbursement plans– Accountable– Nonaccountable– No reimbursement is given

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Accountable Plan (slide 1 of 2)Accountable Plan (slide 1 of 2)

• Plan must require adequate accounting to the employer for expense reimbursed, and

• Any excess reimbursements must be returned to the employer

• Plan must require adequate accounting to the employer for expense reimbursed, and

• Any excess reimbursements must be returned to the employer

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Accountable Plan (slide 2 of 2)Accountable Plan (slide 2 of 2)

• Adequate accounting is– Submitting a record, with receipts, to the

employer, or– Using a per diem allowance that is not more

than the Federal per diem rate• Employee reports no income and takes no

deduction to the extent of the reimbursed expenses

• Adequate accounting is– Submitting a record, with receipts, to the

employer, or– Using a per diem allowance that is not more

than the Federal per diem rate• Employee reports no income and takes no

deduction to the extent of the reimbursed expenses

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Substantiation for Expenditures (slide 1 of 2)

Substantiation for Expenditures (slide 1 of 2)

• No deduction allowed for an expense if the taxpayer does not have adequate records for the expense– Therefore, taxpayers need to have good records

for employee or self-employed expenses• In some cases, use of per diem allowance will be

deemed substantiation

• No deduction allowed for an expense if the taxpayer does not have adequate records for the expense– Therefore, taxpayers need to have good records

for employee or self-employed expenses• In some cases, use of per diem allowance will be

deemed substantiation

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Substantiation for Expenditures (slide 2 of 2)

Substantiation for Expenditures (slide 2 of 2)

• Records should include:– Business relationship with other persons

involved (who)– Type of expense (what)– Time of expense (when)– Place of expense (where)– Purpose of expense (why)– Amount of expense (how much)

• Records should include:– Business relationship with other persons

involved (who)– Type of expense (what)– Time of expense (when)– Place of expense (where)– Purpose of expense (why)– Amount of expense (how much)

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Nonaccountable PlanNonaccountable Plan

• Plan that does not require adequate accounting or return of excess reimbursement or both– Reimbursed amounts received under this plan

are included in gross income– Expenses are deductible FROM AGI as

miscellaneous itemized deductions subject to the 2% AGI limitation

• Plan that does not require adequate accounting or return of excess reimbursement or both– Reimbursed amounts received under this plan

are included in gross income– Expenses are deductible FROM AGI as

miscellaneous itemized deductions subject to the 2% AGI limitation

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Unreimbursed Employee Expenses

Unreimbursed Employee Expenses

• Expenses are deductible FROM AGI as miscellaneous itemized deductions subject to the 2% AGI limitation

• Expenses are deductible FROM AGI as miscellaneous itemized deductions subject to the 2% AGI limitation

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Miscellaneous DeductionsMiscellaneous Deductions

• Miscellaneous itemized deductions subject to the 2% AGI limitation– Certain miscellaneous expenses must be added

together and the amount in excess of 2% of taxpayer’s AGI is deductible FROM AGI (i.e., itemized deduction reported on Sch. A)

• Miscellaneous itemized deductions subject to the 2% AGI limitation– Certain miscellaneous expenses must be added

together and the amount in excess of 2% of taxpayer’s AGI is deductible FROM AGI (i.e., itemized deduction reported on Sch. A)

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Examples of Miscellaneous Deductions Subject to 2% Floor

Examples of Miscellaneous Deductions Subject to 2% Floor

• Most reimbursed expenses under a nonaccountable plan

• Unreimbursed employee expenses• Section 212 expenses not related to rents and

royalties• Tax return preparation fee• Hobby expenses• Investment expenses (except interest and taxes)

• Most reimbursed expenses under a nonaccountable plan

• Unreimbursed employee expenses• Section 212 expenses not related to rents and

royalties• Tax return preparation fee• Hobby expenses• Investment expenses (except interest and taxes)

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Computing 2% of AGI Limitation (slide 1 of 4)

Computing 2% of AGI Limitation (slide 1 of 4)

• Example 1Taxpayer, a single individual, provides the following information for 2003:

$30,000 AGI$ 3,500 deductible interest expense and taxes paid$ 1,500 employee business expenses, and$ 500 tax return preparation fee

• Example 1Taxpayer, a single individual, provides the following information for 2003:

$30,000 AGI$ 3,500 deductible interest expense and taxes paid$ 1,500 employee business expenses, and$ 500 tax return preparation fee

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Computing 2% of AGI Limitation (slide 2 of 4)

Computing 2% of AGI Limitation (slide 2 of 4)

• Example 1 (cont’d)Interest and taxes $3,500

Misc. expenses:Employee bus. exp. $1,500Tax return prep. 500Total $2,000Less 2% AGI 600 1,400

Itemized deductions $4,900

• Example 1 (cont’d)Interest and taxes $3,500

Misc. expenses:Employee bus. exp. $1,500Tax return prep. 500Total $2,000Less 2% AGI 600 1,400

Itemized deductions $4,900

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Computing 2% of AGI Limitation (slide 3 of 4)

Computing 2% of AGI Limitation (slide 3 of 4)

• Example 2Assume the same facts as in Example 1, except that the taxpayer has only $200 of employee business expenses

• Example 2Assume the same facts as in Example 1, except that the taxpayer has only $200 of employee business expenses

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Computing 2% of AGI Limitation (slide 4 of 4)

Computing 2% of AGI Limitation (slide 4 of 4)

• Example 2 (cont’d)Interest and taxes $ 3,500

Misc. expenses:

Employee bus. exp. $200Tax return prep. 500Total $700Less 2% AGI 600 100

Itemized deductions $ 3,600

Take standard deduction $ 4,750

• Example 2 (cont’d)Interest and taxes $ 3,500

Misc. expenses:

Employee bus. exp. $200Tax return prep. 500Total $700Less 2% AGI 600 100

Itemized deductions $ 3,600

Take standard deduction $ 4,750

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If you have any comments or suggestions concerning this PowerPoint Presentation for West's Federal Taxation, please contact:

Dr. Donald R. Trippeer, CPA [email protected]

Colorado State University-Pueblo

If you have any comments or suggestions concerning this PowerPoint Presentation for West's Federal Taxation, please contact:

Dr. Donald R. Trippeer, CPA [email protected]

Colorado State University-Pueblo