Exclusions & Deductions from Gross Income

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It is important to note what items can be excluded from your gross income for taxes. These are items that you will not need to worry about paying taxes on for the year. Deductions and more specifically above the line deductions are most often things that will require you to take action on your part to reduce your taxable income.  Above the line deductions are more valuable than itemized deductions. Since the passing of the TCJA in 2017 the vast majority of taxpayers will claim the standard deduction when they are filing their taxes. However, these exclusions and above the line deductions are taken before you would need to start to consider rather to itemized or take the standard deduction for taxes.

I did a presentation last night on Incline Wealth Advisors walking through this information. You can check that out here: Facebook Live Presentation

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Items excluded from gross income

  • Municipal Bond Interest
  • Gain on sale of main home
  • Discharge of debt due to bankruptcy or insolvency
  • Discharge of qualified principal residence indebtedness
  • Price Reduction
  • Social Security Benefits – exclude a minimum of 15% from income
  • Emoloyee Achievement Awards – up to $1,600
  • Fringe benefits – certain employer-provided fringe benefits
  • Housing allowance for memeber of clergy
  • Military & government disability pensions – must not be based on years of service
  • VA benefits
  • Gifts and inheritances – Generally property received as a gift, bequest, or inheritance
  • Scholarships
  • Distributions from 529 or Coverdell Plans
  • Workers’ compensation
  • Welfare & public assistance
  • Interest of Series EE & I Savings Bonds
  • Life insurance proceeds
  • Accelerated Death Benefits
  • Casualty Insurance
  • Qualified disaster relief payments
  • Property settlements
  • Child Support
  • Foster Care
  • Reimbursements for certain employment-related expenses
  • Foreign earned income exclusion

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Here are the three most common exclusions from income:

1. Gifts & Inheritance

  • Inherited IRA and Roth IRA are not taxed when they are passed on. IRA’s are taxed to beneficiary as the money is withdrawn
  • Gifts under $15k annually and $30k for joint tax filers.

2. Education related benefits

  • Earnings from a 529 plan, when used for qualified education expenses. Up to $10,000 annually for K-12
  • Scholarships
  • Interest from education savings bonds

3. Sale of primary home

  • Must have lived in the home at least 24 months.
  • Single taxpayer can exclude $250k of the gain. Jointly filed may exclude $500k of gain.
  • Must not have excluded gain from another home w/in 2 year period.

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Items Deducted from Income

“Above the line deductions”

  • IRA contributions
  • Health Savings Account contributions
  • Student loan interest deduction
  • Moving Expenses
  • Self Employment Deductions
  • Alimony
  • Qualified Charitable Distribution
  • Educator Expenses
  • Tuition Deduction

Health Savings Accounts

  • The taxpayer receives a deduction for contributions made to their HSA plan
  • Employer contributions are excluded from income
  • Contributions can be invested
  • Money can remain in account year over year.
  • contribution deadline = April 15
  • Maximum contribution $3,000 for individuals and $7,000 for families with HDHP coverage

IRA Contributions

  • Deductible contribution and is taxed when withdrawn
  • Contribution deadline = April 15
  • Maximum contribution $6,000 under age of 50 $7,000 for those older

 

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Self Employed Retirement Plan Options

SEP IRA

  • must contribute equally for all employees
  • Contribution deadline = April 15
  • Contribution limits = $56,000 or 25% of compensation for the year

SIMPLE IRA

  • setup for companies with 100 employees or fewer
  • Employer must contibute to plan
  • Employer match = 3% matching or 2% non-elective contribution
  • must maintain for at least 2 years
  • Contribution Limit $13,500 and an additional $3,000 for those over the age of 50

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Education Related Deductions

Student loan interest deductions

  • $2,500 of loan interest is deductible
  • Phased out for individuals making $85,000 or more and couples making $170,000 or more

Educator related expenses

  • $250 of expenses and $500 if MFJ and both spouses are educators

Tuition and Fee deductions

  • $4,000 is deductible 
  • cannot deduct if taxpayer is claimed as dependent
  • MAGI is more than $80,000 or $160,000 for couples

 

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