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Answered: - What is the definition of accounting ? dfjkdfjdkfjdfj ksjdfkf jk


What is the definition of ?accounting ? dfjkdfjdkfjdfj ksjdfkf jk


ACC 331 Spring 2016

 

Class Notes

 

Chapter 10

 

Individuals: Income, Deductions, and Credits

 

1-3. Income ? Inclusions and Exclusions

 

What gets reported to the IRS?

 

Gross Income ? all (worldwide) income from whatever source derived (legal or

 

illegal) except as otherwise provided (exclusions and deferrals)?..(IRC ?61)

 


 


 

All income is considered taxable unless the tax code specifically allows for exclusion

 

for deferral to a later tax period.

 


 

Examples of Items Specifically Included in Income

 

1) Alimony versus Child Support Payments

 

Alimony is taxable income to the recipient

 

Deductible by the payer (as a For AGI deduction),

 

To be treated as alimony, the following conditions must be satisfied:

 

o Payment must be in the form of cash

 

o There isn?t a written agreement that says the payment is something

 

other than alimony (e.g., divorce agreement)

 

o The ex-spouse cannot live in the same household (i.e., not living

 

together)

 

o The payments must stop on death of recipient (payments can stop

 

before)

 


 


 

Child support (i.e., maintenance payments) is NOT considered taxable

 

income; and is not deductible by the payer

 


 


 


 

Transfer of property under a divorce agreement is considered a division of

 

property can is NOT treated as taxable income or a gift to the recipient

 

(recipient assumes carry-over basis in the property acquired)

 


 

EXAMPLE 1

 

Bob pays Midge child support payments of $80,000 per year until their daughter, Donna, turns

 

18. Once Donna turns 18, Bob will pay Midge $50,000. How much of Bob?s $80,000 should be

 

treated as child support and how much as alimony?

 

Just because he thinks of this as child support, it is not because of how it is structured.

 

Substance ? over ? form doctrine

 

1

 


 

Structure of Bob and midge payments suggest the 50,000 is alimony. Balance of 30,000 is treated

 

as child support.

 


 

2) Prizes and Awards

 

A prize or award is gross income to recipient (valued at FMV); it is not treated

 

as a gift.

 


 


 

Exceptions: a taxpayer can exclude a prize/award under the following

 

circumstances:

 

(i)

 

If the award if for literary, scientific, or charitable achievement and

 

the award is transferred/donated to a government agency or a

 

qualified charitable organization. To qualify:

 

i. Taxpayer must transfer the entire award

 

ii. Taxpayer must not have taken any action to win the award

 

(e.g., submitting a project or paper to a competition

 

disqualifies the taxpayer)

 

iii.

 

Taxpayer must not receive any future services connected

 

with making the award

 

EXAMPLE ? Nobel Prize winner transfers monetary award to MSU, then

 

award is non-taxable.

 

(ii)

 


 

Employment Achievement Awards are non-taxable if the award is:

 

i.

 

Based on length of service or safety

 

ii.

 

Paid in the form of property (i.e., non-cash)

 

And below the following amount:

 

i.

 

$400 / employee per year (non-qualified plan)

 

ii.

 

$1,600 / employee per year (qualified plan)

 

A qualified plan is a non-discriminatory award (i.e., open to all

 

employees)

 


 

EXAMPLE: A factory worker receiving a watch (FMV $350) for 30-years

 

of service to the firm

 

3) Unemployment Compensation

 

Unemployment benefits are taxable income (considered substitute income)

 

However, workman?s compensation, which is payment for injury on the job is

 

NOT taxable (considered a return of human capital)

 

4) Social Security Benefits

 

Portion of social security benefits are taxable if taxpayer has other sources of

 

income (?86). For example, single taxpayer:

 

2

 


 

o Mod AGI ? 25K => all social security benefits is non-taxable

 

o 25K < Mod AGI ? 34K => 50% of social security benefits is taxable

 

o Mod AGI > 34K => 85% of social security benefits is taxable

 

NOTE: Mod AGI is defined in the textbook.

 

Will be given Mod AGI in this class

 

Examples of Excluded (Non-Taxable) or Deferred Income

 

1) Gifts and Inheritances

 

Donates made during donor?s life (i.e., gifts); and transfers upon death of donor

 

(i.e., inheritances or bequests) are not taxable income to the recipient (?102).

 


 


 

Donor is potentially subject to gift or estate tax (recall from Chapter 1)

 


 


 


 

Note however that the income generated by the gift after it is transferred into the

 

hands of the recipient is taxable (e.g., future interest income earned on a bond

 

received as a gift)

 


 


 


 

Transfers from employer to employee generally does not qualify as a gift; instead

 

it is treated as compensation income (recall Imputed Income from Chapter 4)

 


 

2) Scholarships

 

If funds are used for tuition, fees, books, supplies, and other equipment required

 

for student?s course, then scholarship funds are non-taxable.

 

o Scholarship funds used for any other activities are taxable.

 


 


 


 

Payments made in exchange for services provided by the student are considered

 

compensation, not scholarships (e.g., stipend received by research or teacher

 

assistant). Special exception made for student athletes.

 


 

3) Damages and Compensation

 

Reimbursements for expenses incurred (e.g., employee travel expenses, medical

 

expenses from accident) or property destroyed (insurance proceeds) are nontaxable unless

 

o The reimbursement exceeds expense/damage suffered, then the excess

 

is taxable income; or

 

o If the taxpayer claims the expense/damage as a deduction on her tax

 

return, then the full reimbursement has to be included as income

 


 


 


 

Compensation for personal injury or sickness is non-taxable (e.g., in a car

 

accident), however, compensation for loss of income or award of punitive

 

damages is taxable income to the recipient.

 


 

3

 


 

4) Workers Compensation

 

Employer payments for specific job-related injuries are non-taxable

 


 

5) Accident and Health Benefits

 

Proceeds/benefits collected from an accident or health insurance policy purchased

 

by the taxpayer is non-taxable

 


 


 


 

Tax rules are more complex for employer purchased policies (covered in Ch. 11,

 

not covered in this course)

 


 

6) Educational Savings Bonds

 

Interest earned on U.S. Series EE bonds are non-taxable if the proceeds of the

 

bonds are used to pay for qualified higher education expenses.

 


 


 

The proceeds can be used to pay the higher education expense of the taxpayer, her

 

spouse, or a dependent

 


 

7) Foreign-earned income

 

The first $100,800 of foreign earnings are non-taxable, provided the taxpayer:

 

(i) Is a resident of foreign country; or

 

(ii) Lives in the foreign country for 330 days in a 12- month period.

 


 


 

Otherwise include total foreign income in gross income and

 

(i) Deduct income taxes paid to foreign gov?t as a from AGI deduction, or

 

foreign tax credit

 


 

8) Other Exclusions

 

Gain on sale of personal residence

 

o Single ? exclude the first $250,000 of gain ($500,000 ? MFJ)

 

o must live in residence for 2 of last 5 years

 

Roth retirement accounts ? all earnings from Roth accounts are tax exempted.

 

.

 

9) Deferrals

 

Gain/Loss on exchange-related disposals (where-withal to pay concept)

 

o Gains/Losses on Like-kind exchanges

 

o Gains on Involuntary conversions (e.g., property seized through eminent

 

domain)

 

4

 


 

o Gains/Losses on transfer of property to separate legal entities, e.g.,

 

formation of C-Corp (?351) or Partnership (?721) (See chapters 12 & 14)

 

o Gains on Installment sales

 


 


 

Deferred compensation

 

o Contributions to qualified retirement accounts

 

o Contributions under non-qualified deferred compensation plans

 


 

5

 


 

EXAMPLE 2:

 

For each of the following independent situations, indicate the amount the taxpayer must include

 

in gross income and explain your answer:

 

a. Phil won $500 in the scratch-off state lottery. There is no state income tax.

 

The award is taxable

 

b. Ted won a compact car worth $17,000 in a TV game show. Ted plans to sell the

 

car next year for $15,000.

 

It is taxable in the year that he receives it.

 

c. Al Bore won the Nobel Peace Prize of $500,000 this year. Rather than take the

 

prize, Al designated that the entire award should go to Weatherhead Charity, a taxexempt organization.

 

No, because donated it to a tax-exempt organization

 

d. Jerry was awarded $2,500 from his employer, Acme Toons, when he was selected

 

most handsome employee for Valentine?s Day this year.

 

Its taxable because it is cash. Its not related to safety or length of service. Its over

 

the 1,600 limit. Fails all three test

 

e. Ellen won a $1,000 cash prize in a school essay contest. The school is a taxexempt entity, and Ellen plans to use the funds to pay her college education.

 

She has to report because she enters a contest. It is award. When she uses the

 

money for her education she can claim a deduction

 


 

f. Gene won $400 in the office March Madness pool.

 

Taxable

 


 

6

 


 

4. Itemized Deductions

 

As discussed in Ch. 9, Congress allows for the deduction of specific expenses as a from AGI

 

deduction. Here are some examples

 

1) Medical Expenses

 

Medical expenses for care of taxpayer, spouse, and/or dependents that has not

 

been reimbursed by health insurance or other source.

 


 


 


 

Deductible medical expenses include any payments for the ? care, prevention,

 

diagnosis, cure, mitigation, treatment or prevention of disease. Including:

 

o health insurance premiums

 

o transportation and lodging for medical care

 

o nursing home care (stay must be primarily for medical care)

 

o medically necessary capital expenditure (e.g., renovating home to be

 

wheelchair accessible)

 


 


 


 

Medical expenses are subject to a 10% AGI floor (for taxpayers ? 65 years old the

 

AGI floor is reduce to 7.5%). That is, only the amount in excess of the 10% of

 

AGI is deductible on the tax return

 


 


 


 

Contributions to health savings account are a For AGI deduction;

 


 


 


 

Payments for cosmetic surgery, unless medically necessary (e.g., reconstructive

 

surgery after an accident), are generally not deductible.

 


 

2) Taxes (State, Local and Foreign)

 

To provide relieve from double-taxation, the following taxes are deductible:

 

Income taxes paid to state and/or local gov?t.

 

o Taxpayers can elect to deduct sales tax paid to the state instead of

 

income taxes (beneficial for taxpayers living in states without an

 

income tax, e.g., Florida).

 


 


 

Foreign income taxes paid (hardly done, in most cases claiming foreign

 

income taxes paid as a tax credit generates greater tax savings)

 


 


 


 

Property taxes on real property (both investment and personal-use property),

 

and ad-valorem taxes on personal property (e.g., taxes on motor vehicle)

 


 

Recall Tax benefit rule from Chapter 4 - refund of state, local and foreign taxes are

 

included as taxable income to the extent taxpayer?s taxable income would have been

 

higher had she not taken the excess deduction in the prior year(s).

 


 

7

 


 

EXAMPLE 3:

 

You paid $3,000 in Michigan state income tax in 20x1 (this is your only itemized deduction).

 

Your standard deduction in 20x1 is $6,300. On April 15, 20x2 you claim a refund of $1,800 on

 

your state income tax return for 20x1. Rather than receive a check, you decide to have the tax

 

refund applied to your 20x2 state income tax return.

 

a) How much of the refund is included as income on your 20x2 tax return?

 

Yr. 20x1

 

Itemized deduction

 

Michigan income tax

 

Or

 

Standard Deduction 6,300 (would have claimed this)

 

Therefore, tax benefit 20x1 from overpaying state income taxes. No tax benefit,

 

so none of 1,800 is treated as income in 20x2

 


 

b) In addition to the $3,000 Michigan state income tax you also have charitable

 

contributions of $4,500. How much of the refund is included as income in your 20x2 tax

 

return?

 

Yr. 20x1

 

Itemized deduction

 

Michigan income tax 3,000

 

Charitable Contributions 4,300

 

Total 7,3000 (chose this one)

 

Standard 6,300

 

Tax benefit from overpaying by 1,800. Your taxable income 7,300-6,300= 1,000

 

lower because of overpayment so 1,000 is gross income in 20x2

 

If you had not overpaid

 

Itemized deduction

 

Mich. Income tax 1,200

 

Charitable contributions 4,300

 

Total 5,5000

 

Standard 6,300

 


 

8

 


 

3) Interest Expense

 


 


 

Mortgage Interest ?

 

o Mortgage interest on qualified residence (taxpayer?s principal residence

 

plus one other residence), and interest on ?home-equity? loans

 

o Mortgage interest limited to interest on the first $1 million of mortgage

 

loan

 

o Home-equity interest limited to lesser of

 

(i) (FMV - acquisition debt) at time loan was executed; or

 

(ii) $100k

 

o To qualify as residence, the structure must have sleeping accommodations,

 

toilet and cooking facilities

 

o Mortgage proceeds must be used to acquire, construct or substantially

 

improve a qualified residence. There are no restrictions on the use of

 

home-equity loans.

 


 


 


 

Investment interest expense ? Deduction is limited to net investment income (NII)

 

NII =Investment income?Investment related Expense

 

o Excess investment interest expense is carried forward to deduct in next tax

 

year

 


 


 


 

Expenses related to Tax-Exempt Securities ? Interest expense on debt incurred to

 

purchase tax-exempted securities (e.g., interest expense on loan taken out to

 

purchase municipal bonds) are disallowed.

 


 


 


 

Interest on Qualified Student Loans - Taxpayers may be able to deduct up to

 

$2,500 of student loan interest as a For AGI deduction.)

 


 

9

 


 

EXAMPLE 4:

 

This year Randy paid $28,000 of mortgage interest (Randy borrowed $450,000 to buy his

 

residence, and it is currently worth $500,000). Randy also paid $2,500 of interest on his car loan

 

and $4,200 of margin interest to his stockbroker (investment interest expense). How much of

 

this interest expense can Randy deduct as an itemized deduction under the following

 

circumstances?

 

a) Randy received $2,200 of interest income this year and had no other investment income

 

or expenses. His AGI is $75,000.

 

Mortgage interest 28,000 (loan <1M, the interest expense is fully deductible)

 

Car loan interest 2,500 (non-deductible, personal use asset)

 

Investment int expense 4,200 (can only deduct 2,200, cannot exceed investment income.

 

2,000 is carried forward?. Does not expire)

 


 

b) Randy had no investment income this year, and his AGI is $75,000.

 

Investment int expense deduction is now 0

 


 

10

 


 

4) Charitable Contributions

 

Donations (cash, ordinary income property or capital gain property) made to a

 

qualified domestic charity (?170) are deductible.

 

o If the donor receives any tangible benefits in return for the donation, then

 

the donation is not considered a charitable contribution (e.g., purchase of

 

raffle or bingo ticket is not deductible as a charitable contribution)

 

o Currently contribution of services/time does not qualify as a charitable

 

contribution (unable to accurately measure FMV of service/time)

 


 


 

Individual taxpayers are limited on how much charitable contributions can be

 

deducted in any one tax year. The limit depends on the type of charity and the

 

form of the contribution:

 

Summary of Charitable Contribution Limitation Rules

 

Public Charity/

 

Non-operating

 

Form of Contribution

 

Operating Foundation

 

Foundation

 

Cash/Ordinary Income property

 

Amount

 

Lesser of Basis or FMV Lesser of Basis or FMV

 

AGI Limit

 

50%

 

30%

 

Capital gain property

 

Amount

 

FMV*

 

Basis**

 

AGI Limit

 

30%

 

20%

 

* If public charity puts the donated property to non-charity use then the amount

 

deducted is limited to basis in property

 

** If donation is a publicly-traded stock the donor can deduct at FMV.

 


 


 


 

Excess charitable contributions are carried forward for 5 years.

 


 

11

 


 

EXAMPLE 5:

 

Warren is contemplating making a charitable contribution of $20,000 cash to either a public

 

charity or a private non-operating foundation. Warren?s tax rate in 20x1 is 32% and in 20x2 it

 

will be 35%. The market rate of interest is 10%, Warren?s AGI is $50,000 each year and Warren

 

also has $18,000 in mortgage interest expense in both 20x1 and 20x2.

 

Should Warren make the donation to the public charity or the private non-operating foundation?

 


 

5) Casualty losses ? losses from a sudden, unexpected or unusual event (e.g., house fire,

 

theft of jewelry) of personal-use assets are deductible (losses from normal wear and

 

tear are not). Deduction for casualty losses are computed as follows:

 

o For each incident, loss is equal to the lesser of the decline in FMV or the

 

tax basis of asset

 

o The loss is reduced by any reimbursement received (e.g., insurance

 

proceeds)

 

o Amount deductible subject to two floors:

 

(i) First, reduce losses by $100 per incident (i.e., the first $100 of

 

losses is not deductible), and

 

(ii) Second, sum the remaining casualty losses for the year and reduce

 

by 10% of AGI (i.e., only the amount in excess of the 10% of AGI

 

is deductible)

 


 

12

 


 

6) Miscellaneous Itemized Deductions

 

There are two types of miscellaneous itemized deductions:

 

(i) Miscellaneous items subject to 2% AGI Floor - Miscellaneous items are

 

aggregated and the total is then subjected to the 2% AGI Floor, common examples

 

are:

 

o Unreimbursed employee business expenses

 

o Hobby expenses (deduction cannot exceed income from hobby)

 

o Tax preparer fees

 

o Investment expenses (e.g., safe deposit box fees, subscriptions, advisory

 

fees)

 

o Professional dues, cost of uniforms (not suitable for normal wear),

 

o Job hunting expenses

 

(ii) Other Miscellaneous items NOT subject to 2% AGI Floor:

 

o Gambling losses, deduction cannot exceed amount of gambling winnings

 

reported

 

o Casualty and theft losses on investment property

 

o Unrecovered capital invested in life-time annuity

 

o Impairment-related work expenses of a handicapped person

 


 

Phase-out of Itemized Deductions

 

(iii)

 

Some itemized deductions are subject to phase-out for high income

 

taxpayers.

 

o The following items are not subject to phase-out: medical expenses,

 

investment interest expense, gambling losses, non-business casualty and

 

theft losses

 

(iv) Taxpayers with AGI that exceeds $258,250 ($309,900 for MFJ) - itemized

 

deductions are reduced by the lesser of:

 

o 3% * (AGI - $258,250) for single taxpayers; 3% * (AGI - $309,900) for

 

MFJ, or

 

o 80% of the itemized deductions subject to phase-out.

 


 

13

 


 

5. Individual Tax Credits

 

Unlike tax deductions which reduce taxable income, tax credits reduce tax liability.

 

o A dollar of tax credit reduces tax liability by a dollar

 

o A dollar of deduction reduces tax liability by $1 * Marginal Tax Rate

 

Therefore a dollar of tax credit is more valuable than a dollar of tax deduction.

 

There are major types of tax credits:

 

1) Non-refundable tax credits ? These credits reduce tax liability to zero, but cannot

 

result in a tax refund. Any excess credit is either lost or carried forward to use in the

 

next tax year.

 

2) Refundable tax credits ? Unlike non-refundable tax credits, these tax credits result in

 

a tax refund if the tax credit is greater than the tax liability.

 

Examples of tax credits available to individuals:

 

Adoption Expenses Credit ? Provide tax relief/subsidy for the initial cost of adoption (e.g.

 

adoption fees, attorney fees, court costs, social service review costs, and transportation

 

costs). To qualify:

 

o Adopted child must be < 18 years old, or physically/mentally disable

 

o For 2015, the maximum credit is $13,400 per child; the credit is reduced for

 

taxpayers with AGI> $201,010.

 

o The credit is non-refundable, however excess credit can be carried forward up to

 

five years.

 

Child Tax Credit ? maximum of $1,000 per qualifying child

 

o Child must be < 17 years old, a U.S. citizen, and claimed as a dependent on the

 

taxpayer?s tax return

 

o The credit is phased-out by $50 for each $1,000 the taxpayer?s AGI exceeds

 

$75,000 ($110,000 for MFJ)

 

o The child tax credit is non-refundable and cannot be carried forward

 


 

14

 


 

Dependent Care Credit ? Provide tax subsidy/relief for working taxpayers with young

 

children. The credit encourages both parents to seek work outside of the home.

 

o Dependent must be < 13 years old; or

 

o Dependent/spouse who is physically or mentally incapable of caring for self and

 

lives with taxpayer for more than ? year

 

o Tax credit is a percentage (based on taxpayer?s AGI) of eligible care expenses

 

1 child ? max. eligible expenses $3,000

 

2 or more children ? max. eligible expenses $6,000

 

If MFJ, eligible expenses cannot exceed earned income of the taxpayer

 

with the lowest earned income

 

o Child care payments made to relatives < 19 years old are disallowed (e.g., cannot

 

claim amounts paid to your 15 yr. old niece for babysitting)

 

Education Tax Credits ? subsidize the cost of higher education and continuous learning.

 

Two types of educations tax credits:

 

1) American Opportunity Credit (AOC)

 

Available for the first four years of postsecondary education

 

Available per eligible student (taxpayer, spouse or dependent); student

 

must be at least half-time for one term/semester

 

Covers tuition, books and related course material

 

Tax credit is 100% of first $2,000 spent and then 25% of next $2,000

 

(i.e., maximum credit of $2,500 in 2015)

 

Subject to phase-out:

 

Phaseout =

 


 


 


 

( ModAGI ?160 K )

 

( ModAGI ?80 K )

 

MFJ ;

 

other

 

20,000

 

10,000

 


 

40% of allowable AOC is refundable

 


 

2) Lifetime Learning Credit

 

Covers postsecondary education or any course that acquires or

 

improves a taxpayer?s job skills (much broader than AOC).

 

Available per taxpayer unit (i.e., one credit for all members of

 

household)

 

20% of the first $10,000 of qualifying expenses (tuition)

 

Subject to phase-out:

 

( ModAGI ?110 K )

 

( ModAGI?55 K )

 

Phaseout =

 

MFJ ;

 

other ;

 


 

20,000

 

10,000

 

o Taxpayer has to choose between claiming the education expense as a tax credit or

 

a for AGI deduction, not both.

 

15

 


 

o Expenses paid with tax-exempt income cannot be claimed (e.g., tuitions paid by

 

scholarships) or reimbursed by your employer.

 

o Cannot claim both AOC and Lifetime credits for the same expense/student

 

EXAMPLE 6:

 

Tim and Mandy file married filing jointly and have a modified AGI of $116,000. They have

 

two children, Liz and Peter. Liz is a university sophomore and incurs $8,000 for tuition and

 

$500 for books for 2015. Peter is a senior at the university but is in his fifth year because he

 

changed majors. Peter?s expenses are $5,000 for tuition and $600 for books. Both children

 

live at home and are qualifying children on Tim and Mandy?s tax return.

 

What is Tim and Mandy?s education tax credit for 2015?

 


 

Earned Income Credit ? designed to help offset the effect of employment taxes (social

 

security and medicare) on the earned income of low-income taxpayers and encourage the

 

poor to seek employment.

 

o Qualifying individuals:

 

A taxpayer with at least one qualifying child; or

 

Taxpayer ? 25 but < 65, and not claimed as a dependent on someone else tax

 

return

 

o Taxpayers with investment income > $3,400 are not eligible

 

o Maximum earned income credit for 2015 (subject to phase-out)

 

Qualifyin

 

g

 

Children

 

0

 

1

 

2

 


 

Earned Income

 

(lower limit to get

 

max. credit)

 

$6,580

 

9,880

 

13,870

 


 

Credit

 


 

Maximum

 

Credit

 


 

7.65%

 

34%

 

40%

 


 

$503

 

3,359

 

5,548

 

16

 


 

3+

 


 

13,870

 


 

45%

 


 

6,242

 


 

Foreign Tax Credit (FTC) ? U.S. Citizens working abroad owe taxes abroad and at home

 

o Taxpayer can claim income taxes paid to foreign government as a tax credit (subject

 

to limitations)

 

o Taxpayer cannot claim credit if income is excluded

 

Live in country 330 days of year

 

Exclude up to $100,800 of income

 

o Taxpayer can choose to deduct foreign taxes paid as itemized (if foreign income is

 

included in gross income)

 

o FTC may only reduce taxpayer?s tax liability to zero. Excess FTC can be carried

 

back one year or forward up to 10 years.

 


 

Affordable Care Act (ACA) Provisions

 


 


 

ACA?s ?individual mandate? - requires all taxpayers to have health insurance,

 

otherwise taxpayer required to pay a tax penalty for each month they do not have

 

health insurance.

 

o Tax Penalty - Individual Share Responsibility Payment (ISRP) for 2015 is

 

the greater of:

 

1) $325 per adult plus $162.50 per child up to a maximum of $975; or

 

2) 2% of household income (measured as AGI ? standard deduction ?

 

personal exemptions)

 

o Taxpayers can apply for exemption from the ISRP on a variety of grounds

 

including financial hardship, religious objections, incarceration (see page

 

10-34 of text for list of factors).

 


 


 


 

Premium Tax Credit ? low-income taxpayers can receive a federal subsidy to

 

secure health insurance on the Health Insurance Marketplace.

 

o Household income must be between 100% - 400% of the federal poverty

 

level

 

o Tax credit ranges between 2.01% to 9.56% of household income

 

o Tax credit can be claimed in advance at the start of the year or claim as a

 

refund when filing tax return for the year (file on IRS Form 8962)

 


 

17

 


 

Additional Problems

 

EXAMPLE 1A:

 

Aaron, age 45, had AGI of $40,000 for 2015. He was injured in a skiing accident and paid

 

$3,600 for hospital expenses and $1,400 for doctor bills. Aaron also incurred medical expenses

 

of $1,200 for his child, who lives with his former wife and is claimed as a dependent by her. In

 

2016, Aaron was reimbursed $1,300 by his insurance company for the medical expenses

 

attributable to the skiing accident.

 

a) Compute Aaron?s deduction for medical expenses in 2015.

 


 

b) Assume that Aaron would have elected to itemize his deductions even if he had no

 

medical expenses in 2015. How much, if any, of the $1,300 reimbursement must be

 

included in gross income in 2016?

 


 

c) Assume that Aaron?s other itemized deductions in 2015 were $8,000 and that he filed as a

 

head of household. How much of the $1,300 reimbursement must he include in gross

 

income in 2016?

 


 

18

 


 

EXAMPLE 2A:

 

Ross, who is single, purchased a personal resid...

 


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