Question

In: Accounting

In 2019, Larry and Susan each invest $10,000 in separate investment activities.

In 2019, Larry and Susan each invest $10,000 in separate investment activities. They each incur deductible expenses of $800 associated with their respective investments. Explain why Larry’s expenses might not be deductible and Susan’s expenses might be appropriately classified as deductions for AGI.

 

 

Solutions

Expert Solution

Deduction ‘For’ AGI and deduction ‘From’ AGI:

Deduction ‘For’ adjusted gross income or AGI means the deduction allowed to a taxpayer whether he is taking itemized deduction or not. It is deduction from gross income to arrive at the amount of adjusted gross income. On the other hand, deduction ‘from’ AGI is given to a taxpayer as either standard deduction or itemised deduction. Greater of standard deduction and collective itemised deduction is allowed ‘From’ the AGI to arrive at taxable income.

 

Taxable Income:

It is defined as gross income less allowed deductions where gross income means income from all sources. It mainly includes income from sale of goods, rendering of services and ancillary income such as rental income, etc. Deductions are allowed based on certain criteria where generally all business-related expenses are allowed, and other expenses are allowed depending upon nature of the transaction.


Discussion and analysis:

 Deduction for expenses related to investment can be deducted either for AGI or from AGI, depending upon the type of investment. For example, where the investment is made in real estate, S corporation, etc. expenses incurred are deductible for AGI. For other investments the deduction is available from AGI. L’s expenses may not be deductible for AGI as the investment made by him may not fall in the relevant type of investment.


Deduction ‘For’ AGI and deduction ‘From’ AGI:

Deduction ‘For’ adjusted gross income or AGI means the deduction allowed to a taxpayer whether he is taking itemized deduction or not.

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