Question

AGI Deductions Vs. From AGI Deductions (LO. 6)

Reba's 2019 income tax calculation is as follows:

Gross income $120,000 Deductions for adjusted gross income (3,000) Adjusted gross income $117,000 Deductions from adjusted gross income: Standard deduction (12,200) (Total itemized deductions are $2,300) Taxable income $104,800

Before filing her return, Reba finds an $8,000 deduction that she omitted from these calculations. Although the item is clearly deductible, she is unsure whether she should deduct it for or from adjusted gross income. Reba doesn't think it matters where she deducts the item, because her taxable income will decrease by $8,000 regardless of how the item is deducted.

Complete the letter below to Reba which outlines the impact of the $8,000 missed deduction.

Dear Reba, First, your assumption of a decrease in taxable income   based on the following. Individuals are always allowed to deduct qualified expenses incurred as deductions   adjusted gross income. Individuals are allowed to deduct certain personal expenditures and other specified non-personal expenditures as deductions   adjusted gross income. These deductions are commonly referred to as  . Inserting the missing $8,000 into the table below demonstrates how deductions can impact taxable income. Deduction For AGI Deduction From AGI Gross income $ $ Deductions For AGI $ $ Adjusted gross income $ $ Deduction From AGI Greater of:   Standard deduction $ $   Itemized deductions Taxable income $ $ Note that the reason a deduction   AGI does not impact taxable income is because the $8,000 addition to your   does not exceed your  . Please do not hesitate to contact me if you have any questions.

Answer 1

Solution:

	Deduction From AGI	Deduction From AGI
Gross income	$120,000	$120,000
Deductions For AGI- $3,000 + $8,000	($11,000)	($3,000)
Adjusted gross income	$109,000	$117.000
Deduction From AGI Greater of:
Standard deduction	($5,350)
Itemized deductions - $2,100 + $8,000		($10,100)
Personal exemption	($3,400)	($3,400)
Taxable income	$100,250	$103,500

Reba does not currently itemize her deductions, if the item is deductible from adjusted gross income, $3,250 of the deduction will be "lost" in taking her itemized deductions from $2,100 to the $5,350 standard deduction amount. Therefore, her taxable income will only decrease by $4,750 ($8,000 - $3,250) if the item is deductible from AGI. there is no minimum amount deductible for AGI, the entire $8,000 deduction will reduce taxable income if the deduction is for AGI.  

Note: If Reba had already been itemizing (i.e., her itemized deductions had exceeded $5,350), both deductions would have lowered her taxable income by $8,000.