Individual From AGI Deductions Chapter 7 Individual From AGI Deductions

Learning objectives Describe the different types of itemized deductions available to individuals and compute itemized deductions Explain the operation of the standard deduction, determine the deduction for personal and dependency exemptions, and compute taxable income

Itemized Deductions Medical Expenses Taxpayers may deduct medical expenses incurred to treat themselves, their spouse, and their dependents Qualifying medical expenses include unreimbursed payments for care, prevention, diagnosis or cure of injury, disease, or bodily function Taxpayers using personal automobiles for medical transportation purposes may deduct a standard mileage allowance (23 cents per mile in 2015) in lieu of actual costs

Itemized Deductions Hospitals and Long-term Care Facilities Taxpayers may deduct the costs of actual medical care whether the care is provided at hospitals or other long-term care facilities Medical Expenses Deduction Limitation It is limited to the amount of unreimbursed qualifying medical expenses paid during the year which is reduced by 10% (7.5% for a taxpayer or spouse age 65 or older) of the taxpayer’s AGI

Itemized Deductions Taxes Individuals may deduct itemized deductions payments for following taxes State, local, and foreign income taxes Real estate taxes on property held for personal or investment purposes Personal property taxes that are assessed on the value of the specific property Sales Tax deduction State and local sales taxes can be deducted in lieu of state and local income taxes (scheduled to expire after 2014)

Itemized Deductions Interest Two itemized deductions for interest expense: Deduction of investment interest is limited to a taxpayer’s net investment income Any investment interest in excess of the net investment income limitation carries forward to the subsequent year Home mortgage interest Interest on acquisition indebtedness of $1million Interest on home equity debt of $100K

Itemized Deductions Charitable Contributions Contribution of money or property must be made to a qualified charity Special rules apply to charitable contributions of property depending on the type of property: Capital gain property Ordinary income property

Itemized Deductions Charitable Contribution Deduction Limitations for property donations Apply the AGI limitations in the following sequence Step 1: Determine limitation for the 50% contributions Step 2: Apply limitation to 30% contributions, which is the lesser of (a) AGI × 30% or (b) AGI × 50% minus the contributions subject to 50% limit Step 3: Apply limitation to 20% contributions, which is the lesser of (a) AGI × 20% , (b) AGI × 30% minus the contributions subject to 30% limit, or (c) AGI x 50% minus the contributions subject to the 50% limit and the contributions subject to the 30% limit

Itemized Deductions

Itemized Deductions Casualty and theft losses on personal-use assets The amount of the tax loss from any specific casualty event (including theft) is the lesser of decline in value of the property caused by the casualty or taxpayer’s tax basis in the damaged or stolen asset

Itemized Deductions Casualty Loss Deduction Floor Limitations It must exceed two separate floor limitations to qualify as itemized deductions $100 for each casualty during the year 10 percent of AGI floor limit applied to the sum of all casualty losses for the year (after applying the $100 floor) In other words, the itemized deduction is the aggregate amount of casualty losses that exceeds 10 percent of AGI

Itemized Deductions Miscellaneous Itemized Deductions Subject to AGI Floor Employee Business Expenses Travel and transportation Employee expense reimbursements Investment Expenses Tax Preparation Fees Hobby losses Total miscellaneous itemized deductions are subject to a 2 percent of AGI floor limit

Itemized Deductions and the Standard Deduction Miscellaneous Itemized Deductions Not Subject to AGI Floor Individuals include all gambling winnings for the year in gross income and deduct gambling losses to the extent of gambling winnings for the year Standard Deductions Taxpayers generally deduct the greater of their standard deduction or their itemized deductions High income taxpayers are subject to a phase out of certain itemized deductions

The Standard Deduction Standard deduction amounts for 2015 Filing status Standard deduction Additional standard deduction (age and blindness) Married filing jointly $12,600 $1,250 Head of household 9,250 1,550 Single 6,300 Married filing separately 1,250

Standard Deductions & Exemptions Bunching Itemized Deductions Tax benefit can be gained by implementing simple timing tax-planning strategy Taxpayers with itemized deductions that fall just short of the standard deduction amount These itemized deductions do not produce any tax benefit Rather than deduct the standard deduction every year time deductions (when possible) to bunch together in one year

Standard Deductions & Exemptions Deduction for Personal and Dependency Exemptions $4,000 for the taxpayer $4,000 for the taxpayer’s spouse $4,000 for each dependent Subject to phase-out for high income taxpayers