Alimony Paid

Scenario 1

Emma pays Noah $1,500 of alimony per month based on their divorce decree signed in 2016. Emma will continue to take a deduction of the same amount in tax year 2018 and in future tax years.

Scenario 2

Noah and Emma signed their divorce decree in 2018 and Noah was awarded alimony. Since they signed the divorce decree in 2018, Emma will get a deduction for the amount paid in 2018.

 

Note: If Noah and Emma had divorced after 2018, Emma wouldn’t get a deduction for the alimony she paid to Noah.

Alimony Received

Scenario 1

Emma pays Noah $1,500 of alimony per month based on their divorce decree signed in 2016. Noah will continue to include $18,000 in income and in future tax years.

Scenario 2

Noah and Emma signed their divorce decree in 2018 and Noah was awarded alimony. Since they signed the divorce decree in 2018, the alimony that Emma pays Noah will be included in Noah’s 2018 income.

 

Note: If Noah and Emma had divorced after 2018, Noah wouldn’t include any alimony received in income.

Business Income

Scenario 1

Jackson is self-employed and sells woodwork on an online craft platform. He conducts his woodworking, including the packaging, shipping, and related books and records in his basement. The section of his basement used for his business is separate from the section used for personal use.

Scenario 2

Jackson’s home office meets the exclusive use requirement and he must figure out the percentage of his home used for the business to allocate expenses. For his 2018 tax return, he can choose to calculate the home office deduction by using the regular method or the simplified option based on square footage. He chooses the simplified option because his home office deduction calculation and recordkeeping requirements are easier. Because the area Jackson uses for business is 150 square feet, he can deduct $750 ($5 times 150 square feet) for the deduction on Schedule C.

Scenario 3

The same as above, except that the basement area Jackson uses to woodwork is also shared with his wife’s personal craft area. He can’t claim the home office deduction at all, because the home office area is not exclusively (only) used for his business.

Capitol Gain or Loss

Scenario 1

Alabama sold a painting for $2,000 to an art dealer in 2018. She bought the painting from her friend in exchange for $1,500 cash in 2014.

 

Scenario 2

Alabama’s capital gain is $500, because she received $2,000 for the painting and her basis in the painting is $1,500. The capital gain is long-term because she held the capital asset for more than one year.

 

Charitable Contributions

Scenario 1

Daniel owns a business. In 2018, he donated the $55,000 he inherited from his grandmother to his church. Daniel plans to file a file a tax return using single filing status and he expects his AGI in 2018 to be approximately $100,000. Daniel should be able to deduct the entire cash contribution as an itemized deduction because it is less than 60 percent of his expected AGI.

Scenario 2

Same as above, but Daniel’s expected 2018 AGI is $80,000. Daniel will only be allowed to deduct as a charitable contribution $48,000 (60 percent of his AGI).

 

Child Tax Credit and Additional Child Tax Credit

Scenario 1

Joseph and Ann have three children, ages 12, 14, and 17, all of whom are claimed as dependents, have social security numbers valid for employment, and who lived with their parents all year. Joseph and Ann file a joint 2018 tax return and their MAGI is $44,000. They are eligible to take $4,000 of child tax credit. If this credit reduces their tax below zero, they can take up to $2,800 of refundable additional child tax credit.

Scenario 2

The same as above, except their 2018 MAGI is above $400,000. The amount of child tax credit they may claim is subject to a phase out based on the Child Tax Credit Worksheet found in IRS Publication 972, Child Tax Credit.

Credit for Child and Dependent Care Expenses

Scenario 1

Matthew and Avery are married, file a joint tax return, and have a three-year old daughter. To enable Avery to begin a new job on July 1st, they enrolled their daughter in a nursery school that provides preschool childcare. They paid $300 per month for the childcare. Matthew and Avery can use the full $1,800 they paid ($300 × six months) as qualified expenses because it is less than the $3,000 yearly limit. They calculate the amount of the credit by applying the applicable percentage based on their AGI.

Scenario 2

Matthew and Avery are married, file a joint tax return, and have a three-year old daughter. To enable Avery to begin a new job on July 1st, they enrolled their daughter in a nursery school that provides preschool childcare. They paid $300 per month for the childcare. Matthew and Avery can use the full $1,800 they paid ($300 × six months) as qualified expenses because it is less than the $3,000 yearly limit. They calculate the amount of the credit by applying the applicable percentage based on their AGI.

 

Credit for Other Dependents

Scenario 1

During 2018, Lisa lived with her mother, a U.S. citizen, for the entire year in Lisa’s home. Because her mother’s only source of income is Social Security benefits, Lisa provides well over 50 percent of her mother’s support. Lisa’s mother qualifies as her dependent, and Lisa can claim the full $500 nonrefundable credit for her mother if her income is no more than $200,000.

Scenario 2

Same as above, but Lisa’s mother doesn’t qualify as her dependent, because Lisa provides less than half of her mother’s support. Lisa can’t claim the $500 credit for her mother.

Dividend Income

Scenario 1

At the end of the tax year, Big Corporation declares it’ll pay a dividend of $15 per share to its stockholders. Alicia had purchased 20 shares of stock in Big Corporation at the beginning of the 2017, holding onto them for approximately two years. When Alicia is paid a dividend of $300 at the end of 2018, she’ll be taxed at the preferential long-term capital gains rate because she received qualified dividends.

 

Scenario 2

In early December 2018 before the close of the tax year, Alicia purchased 50 shares of stock in Small Corporation. Small Corporation declares it’ll issue a dividend of $8 per share to its stockholders shortly before the close of 2018. When Alicia is paid a dividend, she’ll be taxed at the ordinary income rate because she received ordinary dividends.

 

Earned Income Tax Credit (EITC)

Scenario 1

Anthony and Addison are married and plan to file separate 2018 tax returns. They both live in the same residence and fully support their children who are qualifying children. Even if their earned income falls within the range for the credit, Anthony and Addison can’t claim the EITC on their 2018 tax returns because of their married filing separate status.

Scenario 2

Same as above, except Anthony and Addison married filing joint tax return. In addition, their children are foster children who were placed in their house on March 15, 2018 and remained throughout the year. Foster children meet the relationship test for a qualifying child. Assuming the children meet all the requirements to be qualifying children, and their earned income falls with the allowable range for EITC, they’ll be eligible to claim the EITC on their 2018 joint tax return.

Education Credits (Lifetime Learning and American Opportunity Credits)

Scenario 1

Logan is enrolled in law school while working full time as a paralegal. The amount of tuition and fees he paid during 2018 is $10,500. His MAGI is $60,000. Logan can’t take the American Opportunity Credit because he is not enrolled in the first four years of college. He can claim a $2,000 Lifetime Leaning Credit (20 percent of the first 10,000 of eligible education expenses).

Scenario 2

Same as above, except Logan is enrolled in an undergraduate college program pursuing a degree in computer science. He is eligible to take the American Opportunity Credit and can take the full $2,500 credit.

Educator expenses

Scenario 1

Jacob is a full-time 6th grade homeroom and math teacher. In 2018, Jacob spent $300 on books and supplies used in the 6th grade classroom. Jacob didn’t receive reimbursement for his expenses. Jacob is married to Sophia, who is an attorney. Jacob and Sophia can only deduct $250 of educator expenses on their joint tax return.

Scenario 2

Jacobo es un maestro de salón hogar a tiempo completo de un sexto grado. En el 2018, Jacobo gastó $300 en libros y materiales que utilizó en su salón de clases de sexto grado. Jacobo no recibió reembolso para estos gastos. Jacobo está casado con Sofía, quien es una abogada. Jacobo y Sofía solo pueden deducir $250 de gastos de educador en su declaración de impuesto de casados declarando en conjunto.

Scenario 3

Same as above, but Sophia is a full-time middle school physical education teacher. In addition to Jacob’s educator expenses, Sophia spent $200, of which only $150 was for athletic supplies. Jacob and Sophia will be able to deduct educator expenses in the amount of $400 ($250 for Jacob and $150 for Sophia) on their joint tax return.

 

Note: Sophia can’t take a deduction for the $50 she spent on supplies not related to her athletics class.

etc.

Scenario 1

Josué es un contador asalariado que gana $75,000 al año. En las noches de fin de semana, Josué actúa como cantante en un restaurante local. Josué no está empleado oficialmente en el restaurante, pero ocasionalmente recibe propinas de sus clientes. Este año, Josué recibió $1,500 en propinas. Josué tiene $76,500 de ingresos para informar en la Línea 7 de su Formulario 1040 del IRS.

Scenario 2

Josué pagó $10,000 en gastos calificados de adopción para un niño elegible. Su empleador le reembolsa $4,000 de esos gastos de acuerdo con el programa de asistencia de adopción del empleador. Los $4,000 se informan en el cuadro 12 (código T) del formulario W-2 del IRS de Josué. Después de revisar las instrucciones para el Formulario 8839 del IRS, Gastos de adopción calificados, Josué determina que puede excluir todos los beneficios de adopción de los ingresos. No incluye los $4,000 en la Línea 7 de su Formulario 1040 del IRS.

 

Health Care: Individual Shared Responsibility Payment

Scenario 1

Anthony and Addison are married and file a joint tax return. In 2018, they had required health care coverage through June 30th. However, they didn’t have health care coverage from July 1st through the end of the year. Unless they qualify for a health coverage exemption for the months without coverage, they will need to calculate the amount of ISRP due for those months on the worksheets located in the instructions to IRS Form 8965, Health Coverage Exemptions.

Scenario 2

Same as above, except Anthony and Addison had coverage through October 31st and didn’t have health care coverage for the last two months of the year. They qualify for an exemption due to a short coverage gap and report this exemption on IRS Form 8965, Health Coverage Exemptions. Because they qualify for an exemption, they don’t need to report the ISRP on their 2018 tax return.

Health Savings Account (HSA) Deduction

Scenario 1

For examples about eligibility and limitations on HSA deductions, see IRS Publication 969 (2017), Health Savings Accounts and Other Tax-Favored Health Plans.

 

Income

Scenario 1

Jackson is self-employed and sells woodwork on an online craft platform. He conducts his woodworking, including the packaging, shipping, and related books and records in his basement. The section of his basement used for his business is separate from the section used for personal use.

Scenario 2

Jackson’s home office meets the exclusive use requirement and he must figure out the percentage of his home used for the business to allocate expenses. For his 2018 tax return, he can choose to calculate the home office deduction by using the regular method or the simplified option based on square footage. He chooses the simplified option because his home office deduction calculation and recordkeeping requirements are easier. Because the area Jackson uses for business is 150 square feet, he can deduct $750 ($5 times 150 square feet) for the deduction on Schedule C.

Scenario 3

The same as above, except that the basement area Jackson uses to woodwork is also shared with his wife’s personal craft area. He can’t claim the home office deduction at all, because the home office area is not exclusively (only) used for his business.

Interest Income (Taxable & Tax-Exempt Interest)

Scenario 1

Shirley opens a savings account with Money Bank and deposits $10,000. Money Bank provides its customers with an annual percentage yield (APY) of 1.5 percent.

 

At the end of the year, Shirley receives a check for $150 from Money Bank. The $150 is taxable interest income to Shirley and should be reported on line 8a of Shirley’s Form 1040 tax return.

Scenario 2

The city of Birmingham issues qualifying tax-exempt bonds to generate revenue to pay for new roads. Shirley, a resident of Birmingham, purchases five bonds for $50,000. The bonds have a coupon rate of 4.8 percent and mature in three years.

 

At the end of the first year, Shirley is paid $2,400 of tax-exempt interest, and it is reported in Box 8 on Form 1099-INT, Interest Income. Shirley must declare this as tax-exempt interest on Line 8b of her Form 1040 tax return, but she won’t be taxed on this income.

 

IRA Deductions

Scenario 1

For examples see IRS Publication 590-A, Contributions to Individual Retirement Arrangements for examples on calculating the IRA deduction.

IRA Distributions

Scenario 1

Before he retired, Austin made only before-tax contributions to his traditional IRA. After he retired at age 65, Austin received a $10,000 IRA distribution during the year. Austin should include the entire amount of his IRA distribution as taxable income on his tax return.

Scenario 2

Before he retired, Austin made after-tax contributions to his Roth IRA for more than five years. After he retired at age 65, Austin received a $10,000 Roth IRA distribution during the year. The Roth IRA distribution isn’t taxable to Austin.

Itemized Deduction: Job Expenses and Certain Miscellaneous Deductions

Scenario 1

Lisa works for an IT corporation and her employment agreement requires her have a home office. Lisa works most of her work week out of her home office. Beginning in tax year 2018, Lisa will no longer be able to take an itemized deduction for her home office expenses because the new law eliminated the deduction for unreimbursed employee business expenses.

Scenario 2

Chloe typically gets her tax returns prepared by a local tax return preparer, who is known to charge high preparation and filing fees. Because Chloe will no longer be able to include this expense as an itemized deduction (subject to two percent of her AGI), she will need to rethink her return preparation options in 2018.

Itemized Deduction: Mortgage Interest

Scenario 1

James and Madison are married and file a joint tax return. They got a mortgage totaling $900,000 in 2016 to buy their first home. They also took out a home equity loan of $50,000 in June 2017 to build a deck and do other home improvements for their home. For their 2018 tax return, they can still claim all their interest payments for both loans as itemized deductions provided both loans are secured by the home and the total loan balance doesn’t exceed the value of the home. The new $750,000 limit doesn’t apply because both loans were taken out before December 15, 2017.

Scenario 2

Same as above, but James and Madison use the proceeds of the $50,000 home equity loan to pay off their credit cards, student loans, and other personal expenses. The home equity loan is now home equity debt because the proceeds were not used to buy, build, or improve their home. The interest is not deductible on their 2018 tax return under the new law.

Scenario 3

Same as above, but James and Madison got their mortgage on December 31, 2017. They’ll only be able to deduct the interest that accrues on the first $750,000 of their mortgage on their 2018 tax return.

Itemized Deductions

Scenario 1

Elijah and Charlotte own a home in Maryland which had $10,000 in damage to their siding due to a hail storm in March 2018. Their insurance paid $5,000 of the loss. The President never declared the storm a federal disaster. Therefore, they can’t deduct any of the $5,000 loss that wasn’t compensated by their insurance company.

Itemized Deductions: Casualty and Theft Losses

Scenario 1

Elijah and Charlotte own a home in Maryland which had $10,000 in damage to their siding due to a hail storm in March 2018. Their insurance paid $5,000 of the loss. The President never declared the storm a federal disaster. Therefore, they can’t deduct any of the $5,000 loss that wasn’t compensated by their insurance company.

Scenario 2

Same as above, except the hail damage was part of a storm which the President declared a federal disaster. Elijah and Charlotte may be able to deduct the $5,000 loss that wasn’t compensated by insurance as an itemized deduction in 2017 or 2018 provided the $5,000 loss exceeds 10 percent of their AGI.

Itemized Deductions: Overall Limit

Scenario 1

Jayden and Ella are both doctors and file joint income tax returns. Their 2018 AGI is expected to be approximately $550,000 and they expect to have total itemized deductions of approximately $90,000. They’ll not need to reduce their total itemized deductions on their 2018 tax return based on their expected AGI.

Itemized Deductions: Taxes You Paid

Scenario 1

Alex and Abigail are married, file a joint tax return, and typically itemize their deductions due to the amount of state and local income and real estate taxes they pay. They expect their state and local taxes to be approximately $15,000 in tax year 2018. They expect the remainder of their itemized deductions to be approximately $12,000. They’re only allowed to claim $10,000 as a deduction for state and local taxes. Therefore, they’ll benefit by taking the standard deduction on their 2018 tax return because their total itemized deductions of $22,000 is less than the $24,000 standard deduction available to them if they file a joint tax return.

Scenario 2

The same as above, except the remainder of their itemized deductions is $16,000. In this case, their total itemized deductions of $26,000 is more than the standard deduction of $24,000 that is available to them. They’ll benefit by claiming itemized deductions rather than the standard deduction.

Job Expenses and Certain Miscellaneous Deductions

Scenario 1

Aiden started a new job as a cybersecurity analyst in 2018. He wanted to stay on top of the latest advances in his field so he paid $2,500 for training classes provided by a reputable trade association in his field. Aiden’s employer didn’t reimburse him for the training expenses. He expects to report an AGI of approximately $65,000 on his 2018 tax return. Aiden won’t be able deduct these expenses as an itemized deduction on his 2018 tax return even though they exceed two percent of his expected AGI.

Medical and Dental Expenses

Scenario 1

Michael incurs $9,000 in qualifying medical and dental expenses during tax year 2018. He files single filing status on his tax return and his AGI is $100,000. Michael plans to itemize his deductions because they exceed the new increased applicable standard deduction amount.

Scenario 2

Michael can claim a $1,500 ($9,000 minus $7,500 which is 7.5 percent of AGI) itemized deduction for medical and dental expenses in tax year 2018. He may also consider amending his tax year 2017 tax return if he incurred substantial medical and dental costs in 2017 and the new 7.5 percent floor would allow him to increase his itemized deductions.

Scenario 3

Same as above, but Michael only expects to have $10,000 total itemized deductions, including the $1,500 for medical and dental expenses. Michael would choose to take the standard deduction of $12,000 instead of itemizing his deductions. Therefore, he wouldn’t take a deduction for medical and dental expenses.

Moving Expenses

Scenario 1

Mason and Olivia moved in 2018 because Olivia started a new job in a location 100 miles farther away from home than her former job location. They incurred $5,000 in reasonable moving expenses, excluding meals, in 2018. Neither Mason nor Olivia are active members of the military. They can’t deduct their moving expenses on their 2018 tax return.

Scenario 2

Same as above, except Olivia is on active duty in the Navy and moved pursuant an order that requires her to permanently change her station to a location 40 miles farther away from home than her former station. They are permitted to deduct their reasonable moving expenses, $5,000, on their 2018 tax return.

Other gains or (losses)

Scenario 1

Dean purchased business property, which is section 1245 property, for $50,000. He made no permanent improvements to the property and claimed depreciation totaling $10,000. His adjusted basis in the property is $40,000 ($50,000 – $10,000 depreciation).

 

Scenario 2

He sold the business property on the market for $60,000. Dean reports a gain on the sale of $20,000 ($60,000-$40,000) on IRS Form 4797, Sales of Business Property, as $10,000 ordinary gain and $10,000 long-term capital gain. The ordinary gain of $10,000 is reported on IRS Form 1040, Line 14, and the long-term capital gain of $10,000 is reported on IRS Form 1040, Line 13. 

Personal Exemption

Scenario 1

Ben and Amelia file a joint tax return. They also have two children they claim as dependents. They expect their total AGI for 2018 to be approximately $120,000. While they may be entitled to claim four exemptions in 2018, each exemption is worth $0.

Premium Tax Credit

Scenario 1

Sidney and Nan are married and plan to file a joint tax return for tax year 2018. They were both enrolled in coverage through the Marketplace for all of 2018 and advance payments of the premium tax credit (APTC) were made for this coverage. They must file a 2018 tax return and attach IRS Form 8962, Premium Tax Credit, on which they will reconcile the amount of APTC received to the amount of the PTC to which they are entitled. If the amount of the PTC is less than the amount of the APTC, they must repay the difference on their 2018 tax return, subject to a repayment limit for taxpayers with household income below 400 percent of the federal poverty line for their family size. If their PTC is more than the APTC paid on their behalf, the difference reduces their tax liability or results in a refund to the extent it is more than their tax liability.

Scenario 2

Same as above, except APTC payments weren’t made for Sidney and Nan’s coverage through the Marketplace. They should file their 2018 joint tax return and attach IRS Form 8962, Premium Tax Credit, to calculate the PTC to which they are entitled to claim on their return. 

Retirement Savings Contributions Credit (Saver's Credit)

Scenario 1

During 2018, David, who is 29 years old and disabled, contributed $2,000 to his ABLE account. David’s filing status is single and his AGI $20,000. David can claim a saver’s credit of $400 (20 percent of the $2,000 contribution) on his 2018 tax return.

Scenario 2

The same as above, but David is married to Evelyn, they file a joint tax return, and their AGI is $64,000. David and Evelyn can’t claim the saver’s credit on their 2018 joint return, because their AGI is too high.

Social Security Benefits

Scenario 1

Bob received $5,800 in social security benefits during 2018. Social security was the only source of Bob’s income this year. Bob is single, so his base amount is $25,000. His social security benefits aren’t taxable because one-half of his benefits is less than his base amount of $25,000.

 

Scenario 2

Bob and Ivy filed a joint return in 2018. Bob is retired and received $6,000 in social security benefits and a fully taxable pension of $16,000. Ivy received $3,000 in social security benefits and $25,000 in wages.

 

One-half of Bob and Ivy’s benefits plus their other income equals $45,500 (one-half of $9,000 plus $41,000 other income), which is more than the base amount of $32,000. Bob and Ivy must therefore pay taxes on some of their social security benefits.

 

Using the IRS interactive online test, they determined that $5,775 or approximately 64.17 percent of their $9,000 social security benefits should be reported as taxable income.

 

Standard deduction

Scenario 1

In tax year 2017, Ethan and Mia filed a joint tax return and claimed a total of $20,000 in itemized deductions on Schedule A. They expect to have even less itemized deductions in 2018 due to the new limitation on state taxes. They would benefit from taking a standard deduction of $24,000 on their tax year 2018 tax return. Neither qualify for the additional amounts for the blind and elderly.

Scenario 2

Same as above, but both Ethan and Mia are blind and both were born in 1950. They would both qualify for two additional amounts. Therefore, their 2018 standard deduction amount would increase by $5,200 (four additional amounts of $1,300) to a total of $29,200.

Student Loan Interest Deduction

Scenario 1

In 2018, Isabella paid $3,000 in student loan interest. Isabella is legally obligated to make the student loan payments. She used the loan to pay for tuition, room and board, and supplies to attend college full time between the years 2013 and 2017. She graduated with a bachelor’s degree in economics in 2017. Isabella is married and files a joint tax return with her spouse. Their joint MAGI for 2018 is $130,000. Isabella can deduct $2,500 for student loan interest on her 2018 joint tax return.

 

For examples of phasing out the deduction based on MAGI, see IRS Publication 970, Tax Benefits for Education.

Taxable refunds credits or offsets of state and local income taxes

Scenario 1

In 2017, Yang overpaid his state income taxes. Yang receives a refund check from the state of Maryland in 2018. Yang itemized deductions and didn’t elect to deduct state and local general sales taxes instead of state and local income taxes. Yang will be taxed on the amount refunded in the 2018 tax year.

 

Scenario 2

In 2017, Yang overpaid his state income taxes. Yang chose to apply the overpaid amount of his 2017 taxes to his 2018 state income tax liability. Yang itemized deductions and didn’t elect to deduct state and local general sales taxes instead of state and local income taxes. Yang will be taxed on the amount credited in the 2018 tax year.

 

Tuition and Fees Deduction

Scenario 1

Ava claimed a $4,000 deduction for the college tuition she paid during the year on her tax year 2017 tax return. Unless Congress extends the provision to tax year 2018, she won’t be allowed to take this deduction on her tax year 2018 tax return.

Unemployment Compensation

Scenario 1

In 2018, Wendell received $10,480 in unemployment compensation from the State of Texas. He reports the full amount as income on his tax return.

 

Wages Salaries Tips etc.

Scenario 1

Scott is a salaried accountant who makes $75,000 a year. On weekend nights, Scott performs as a country singer at a local restaurant.  Scott isn’t officially employed by the local restaurant, but is occasionally given tips by its patrons.  This year, Scott received $1,500 in tips.  Scott has $76,500 income to report on Line 7 of his IRS Form 1040.

Scenario 2

Scott paid $10,000 in qualified adoption expenses for an eligible child. His employer reimburses him for $4,000 of those expenses pursuant to the employer’s adoption assistance program.  The $4,000 is reported in Box 12 (Code T) of Scott’s IRS Form W-2.  After reviewing the instructions for IRS Form 8839, Qualified Adoption Expenses, Scott determines he can exclude all the adoption benefits from income. He doesn’t include the $4,000 on Line 7 of his IRS Form 1040.