1. Itemized Deductions Chapter 10 Medical Expenses Taxes Interest Expense Charitable Contributions Miscellaneous

2. Medical What qualifies / what does not? Nursing Home – cost is deductible if the primary reason for being in the home is to get medical care. Special school for the mentally or physically handicapped …. primary reason must be the schools special resources. Capital Expenditures – elevator. Cost is deductible to the extent cost exceeds increase to value of the house. Also, home related expenditures that allow physically handicapped to live independently ….. Deductible without any adjustment for increase in value.

3. Medical (con’t) Who qualifies – generally expenses incurred by the taxpayer, spouse or dependents are included. Of the five dependency tests, neither the gross income or joint return tests apply That means, the support test, the relationship test and the citizenship tests do apply. Medical expenditures are reduced by 7.5% of AGI in getting to the deduction.

4. Transportation – 15 cents per mile, or actual cost if taken other means of transportation. Lodging – not to exceed $50 per night. Costs include those for a child plus one parent, or a patient plus one other person if assistance is needed. No deduction for meals, unless meals are part of medical care (no 50% reduction) Medical (con’t)

5. Medical Insurance – premiums are a deductible medical expenditure. Self- employed can take a deduction FOR. Insurance Reimbursement – reimbursement reduces the medical expenses before the 7.5% reduction. If insurance is received in a later year for a prior year reduction, the tax benefit rule applies. Medical (con’t)

6. Taxes Property Taxes – real estate, autos, boats, etc. Must be the taxpayers liability. Must be apportioned between buyer and seller in the year of sale (real estate). State Income Tax - deductible on cash basis: state tax withheld estimated tax payments (state) balance due with tax return taxes paid for prior tax years (amended returns) Refunds can be taxable income (tax benefit rule).

7. Interest Expense Qualified Residence Interest – deductible. Includes principal residence and a 2 nd residence. Acquisition Indebtedness – interest deductible on up to $1MM in indebtedness Home Equity Loan – interest deductible on up to $100,000 of debt. Points – also called Loan Origination Fees. Points are considered prepaid interest. Deductible on original loan. Must be capitalized and amortized on refinancing.

8. Interest Expense (con’t) Investment Interest Expense – deductible, but only to the extent of investment income. Don’t worry about being able to calculate the investment income ……. I will give you that number. Investment interest expense is deductible up to the amount of investment income, with the balance carried forward indefinitely. Education Loans – deductible FOR AGI ……. Maximum $2,500 per year. Phased out for high income taxpayers.

9. Charitable Contributions Gift to a qualified organization 501(c)(3) No deduction to the extent benefit is received No deduction for contribution of services No deduction for gift of blood Out of pocket expenses are deductible. Substantiation (letter) required for gifts > $250 Deductible in year paid

10. Charitable Contributions (con’t) Gifts of Property (noncash) > $500 but < $5,000 ……….. file Form 8283 > $5,000 ……. must get an appraisal. Limitations – generally 50% of AGI 50% Ceiling – regular charitable gifts of cash 30% Ceiling – appreciated property to 50% charities. Also, cash gifts to private foundations. 20% Ceiling – appreciated property to private foundations. Contribution Carryforward – 5 years

11. Overall Limitation 50 % of AGI Limitation 1 st – Consider Cash Gifts (50% gifts) 2 nd – Consider Property Gifts (30% gifts) Charitable Contributions

12. Examples

17. Reductions to Itemized Deductions and Exemptions Once AGI exceeds a defined amount ($150,550 for 2005), itemized deductions are reduced by 3% of the excess amount. Example: If AGI is $250,550 the reduction would be $3,000 ($250,550 – 150,550) x 3%. Itemized deductions cannot be reduced by more than 80% of the total. Only applies to certain itemized deductions (Tax, Charitable, Mtg. Interest, Misc.) Medical & Casualty - NO Exemptions can also be reduced or eliminated – do not need to know how to calculate.

18. State Tax Deduction What is the 2006 deduction??

19. AGI / Taxable Income Items of income / exclusion Dependency Std Deduction Kiddie Tax Filing Status Cash Basis / Accrual Basis Constructive Receipt Partnerships Community Property Annuities Social Security Capital Gains / Losses Alimony / Child Support Medical Deductions Charitable Contributions 50% / 30% Rules Ordinary Income Property State Tax Deduction Property Tax Deduction Interest Expense Equity Lines Investment Interest Expense Miscellaneous Expenses Review – Chpt 3,4 & 10 Group Term Life Low Interest Loans / Gifts v Comp Reductions to Itemized Deductions