Itemized Deductions Tax Computation Form 1040 Sch A Pub 4012 Tab F Pub 4491 Page 201 NTTC Training – 2013 1

Deductions May claim larger of Standard deduction Increased if > 65 or blind -OR- Itemized deductions If itemized deductions are entered, TaxWise will select better option Refer participants to Pub 4012 – Page F-1 for standard deduction amounts NTTC Training – 2013

Intake/Interview Verify there is taxable income (Form 1040, Line 43) after standard deduction before itemizing Does federal return impact state return? Normal standard deduction may take taxable income to zero – if so, no need to itemize State standard deduction may be less and itemizing might be better Taxpayers who have a standard deduction of zero should generally itemize their deductions. Taxpayers who normally fall within this category are: Married, filing a separate return, and their spouse is itemizing Filing a return for a short tax year due to a change in the annual accounting period Considered to be nonresident aliens or dual status aliens during the year (and not married to a U. S. citizen or resident at the end of the tax year) NTTC Training – 2013

Possible Itemized Deductions Pub 4012 F-3 Medical Expenses, Taxes and Interest paid by taxpayer Gifts to Charity Casualty and Theft Losses – Out of Scope Job Expenses and Other Items Miscellaneous Expenses Sch A Itemized deductions are divided into the listed categories Casualty and theft losses are out of scope for Tax-Aide Preparer should organize TP's Deduction documents in this order before beginning Sch A. ASK TP if there are any other expenses for each category as you organize the paperwork. Keep the TP involved in what you are doing or you may miss something! You do not have to total the TP expenses. In the interview, if you find this is the case, ask one of them (if a couple) to sit at a table and create a total for each section. NTTC Training – 2013

Schedule A NTTC Training – 2013

Medical Expenses Medical expenses include Diagnosis, cure, mitigation, treatment, or prevention of disease Treatments affecting any part or function of body Equipment, supplies, and diagnostic devices Premiums for insurance that covers medical care Long-term care insurance premiums (limited) Transportation/travel to get medical care NTTC Training – 2013

Medical Expenses Not all “medical expenses” qualify Examples of not qualified expenses: Cosmetic surgery Funeral or burial expenses Nonprescription drugs (except insulin) Weight loss program not prescribed Diet food Pub 17 Table 21-1 NTTC Training – 2013

Medical Expenses Must be paid by taxpayer Must be paid during tax year Cannot be reimbursed expenses including expenses claimed for HSA Must be paid during tax year Only for taxpayer, spouse, dependents or individuals that would have been dependent except for gross income or filing situation 24¢/mile for travel for medical purposes Expenses paid this year regardless of when services were provided If you and your spouse live in a noncommunity property state and file separate returns, each of you can include only the medical expenses each actually paid You can include medical expenses you paid for your spouse if you were married either at the time your spouse received the medical service or at the time you paid the medical expenses You can include medical expenses for your child even if you are the noncustodial parent Hint: use the qualifying child/relative tri-fold chart to see if medical expenses qualify NTTC Training – 2013

Medical Expenses in TaxWise Entered on A Detail worksheet under Sch A NTTC Training – 2013

TaxWise carries to Sch A Detail wkt No need to input again Emphasize Medicare insurance charges are input on Wkt 1 with social security benefits TaxWise carries to Sch A Detail wkt No need to input again Self-employed insurances (line 29 on Form 1040) are out of scope Taxpayer should prepare a summary of expenses General descriptions as shown are sufficient NTTC Training – 2013

Medical Deduction Quiz Deductible medical expense? Prescription sunglasses Contact lenses Dentist teeth whitening Gym fee (doctor suggested exercise) Dentist teeth cleaning Yes Yes No No Yes NTTC Training – 2013

Taxes MUST be imposed on taxpayer MUST be paid by taxpayer MUST be paid in current tax year NTTC Training – 2013 12

Taxes State and local taxes Real estate tax Income tax OR General sales tax Real estate tax Personal property tax based on value Foreign income tax (if not claiming a credit) NTTC Training – 2013 13

TaxWise Sch A Taxes Section NTTC Training – 2013

State and Local Taxes – Line 5 Income taxes Withheld (W-2, 1099-R, etc.) F/S Tax Paid worksheet for state estimate and prior year payments Other local income tax payments? OR General sales taxes Sales Tax worksheet in TaxWise Clarify for your state State income tax City or county or other local income tax Other items such as state disability, which in some states is an income tax withheld from paychecks If taxpayer adds up actual sales taxes paid during 2013 And amount is more than the table amount May deduct actual sales tax amount NTTC Training – 2013 15

Interview If Sales Tax is an option – any large purchases? Motor vehicle (car, motorcycle, motor home, off-road vehicle, etc.) Boat or airplane Home, home addition or renovation Sales tax must have been separately stated and paid by taxpayer (not the contractor) Sch A instructions list all the large purchase items Sales tax on large purchases may be added to the sales table amount NTTC Training – 2013

Sales Tax Worksheet For Sales Tax worksheet: Part 1 automatically calculated by TW Part 2 – enter State abbreviation and check next boxes as applicable Part 2, Line 8 – enter sales tax paid for any specified (large) purchases Clarify for participants if your districts will default the state code and rate NTTC Training – 2013

TaxWise does automatically NTTC Training – 2013

Sales Tax Worksheet Add general sales tax on large purchases on line 8 NTTC Training – 2013

Deductible Taxes Line 6 – Real Estate (Property) Taxes May be reported by mortgage company on Form 1098 Not for business Not for Benefit to property Itemized charges for services (such as trash pickup or sewer fees) Transfer taxes (or stamp taxes) Rent increases due to higher real estate taxes Homeowners' association charges Taxes for local benefits Tend to improve the property and increase its value Often, “special assessments” for streets, sidewalks, lights or curbs Taxes for the maintenance, repair, or interest charges related to those local benefits are deductible real estate taxes Must be able to show the amount of that part to claim the deduction Increase the basis of the property by the amount of the assessment If you cannot determine what part of the tax is for maintenance, repair, or interest, none of it is deductible Foreign real property taxes are also deductible NTTC Training – 2013 20

Other Deductible Taxes Line 7 – Personal Property Taxes based on value of personal property only If based on weight and value, only value portion is deductible (boat, vehicles, RVs, etc.) Line 8 – Other Taxes Foreign income taxes, if credit not claimed on 1040 line 47 NTTC Training – 2013 21

Deductible Taxes Main home Other realty e.g. car Foreign income tax Emphasize Don’t use the other real estate lines (out of scope) Don’t use business vehicle worksheet NTTC Training – 2013

Non-Deductible Taxes Federal income and excise taxes Pub 17, Table 22-1 Federal income and excise taxes Social Security, Medicare Federal Unemployment (FUTA) Railroad retirement taxes (RRTA) Customs duties Federal estate and gift taxes Per capita tax NTTC Training – 2013 23

Home Mortgage Interest Interest on loan secured by main home or second home Mortgage to buy or build home or second mortgage (both limited) Home equity loan or line of credit (limited) Both taxpayer and lender must intend that loan be repaid NTTC Training – 2013

Home Mortgage Interest Deductibility Mortgages taken out before October 14, 1987 – fully deductible, no limit Mortgages after October 13, 1987, to buy, build, or improve home Limited to $1,000,000 total debt (this plus pre-10/14/87 ) ($500,000 MFS) Note: lender late charges are deductible as interest if interest on underlying loan is qualified NTTC Training – 2013

Home Mortgage Interest Deductibility Post October 13, 1987, not to buy, build, or improve home limited to Debt of $100,000 ($50,000 MFS) and Total debt on home does not exceed fair market value of home $1,000,000 and $100,000 limits apply to combined mortgages on main home and second home Emphasize Only main and second homes Not third homes Can select a different second home each year Main home is always the principal residence NTTC Training – 2013

Home Mortgage Interest Points Paid at loan origination If to buy or build main home, deductible in full Otherwise, spread over life of loan Points must be interest equivalents If to pay for appraisal or other fees, not interest and not deductible NTTC Training – 2013

Home Mortgage Interest Examples Deduct points on purchase, loan #1 Refinance #1 – points are spread over life of new loan (#2) Refinance #2 – remaining points on loan #2 can be deducted when loan #2 is paid off; points on Refinance #2 (loan #3) are spread over life of loan #3 Points must be interest equivalents If to pay for appraisal or other fees, not interest and not deductible NTTC Training – 2013

Home Mortgage Interest Qualified home mortgage insurance premium (called PMI) Must relate to home acquisition debt Insurance contract issued after 2006 Sometimes not reported on Form 1098 Emphasize Need to ask probing questions Look at prior year’s return NTTC Training – 2013

Interest Home Mortgage Line 14 – Investment interest – out of scope Pub 17 fig 23A & 23B Home Mortgage Line 10 – Interest/Points from Form 1098 Line 11 – Interest if not on Form 1098 Line 12 – Points not on Form 1098 Line 13 – Qualified mortgage Insurance premium Line 14 – Investment interest – out of scope NTTC Training – 2013 30

Deductible Interest Expense Interest and points on 1098 Interest not on 1098 Points not on 1098 PMI If home mortgage interest is paid to an individual, need to show payee’s information including their SSN or ITIN Do not use the first two items in #10 – out of scope NTTC Training – 2013

Non-Deductible Personal interest Service charges Annual fees for credit cards Loan fees Credit investigation fees Interest to purchase or carry tax-exempt securities Fines and penalties paid to a government for violations of law NTTC Training – 2013

Schedule A (cont) Out of scope NTTC Training – 2013

Gifts to Charity Qualified charity Churches, governments, schools, etc. Approved by IRS U.S. charity irs.gov/charities for list Public charity [501(c)(3)] – 50% limit Private foundations – 20% or 30% limit Donations to individuals (e.g. homeless) are not deductible Caution – Some foreign charities may not be qualified by the IRS NTTC Training – 2013 34

Gifts to Charity Monetary contribution less than $250 Bank record (check, credit card or bank statement) or receipt -OR- Written acknowledgement from charity If payment is >$75, charity must state value of goods/services provided, if any Taxpayer should have a receipt/evidence for all donations “Cash” contributions not allowable without a receipt Documentation requirements are provided for training Can rely on taxpayer’s representations if in line with due diligence, e.g. good faith reliance NTTC Training – 2013 35

Gifts to Charity Monetary contribution $250 or more Written acknowledgement from charity Must state value of goods or services provided in exchange for contribution, if any e.g., fundraising dinner – value of dinner must be deducted from ticket price paid; only net amount is deductible Charities must report the value of goods or services whenever any are provided and the “donation” is $75 or more Charity may disregard value of token items, e.g. coffee mug, pen NTTC Training – 2013 36

Gifts to Charity Housing foreign exchange student May deduct up to $50 per month Foster child unreimbursed expenses Pub 17, Chapter 24 NTTC Training – 2013

Gifts to Charity Donations of clothing or household items Deduct fair market value Usually thrift store value Good used condition or better Capital gain or business property donations – out of scope Car, boat, or plane donations – out of scope Capital gain property If the gain on sale would be a capital gain A.k.a. appreciated property Business property If ever depreciated, donation is out of scope NTTC Training – 2013

Gifts to Charity Out-of-pocket expenses are also deductible Mileage @ 14¢ Tolls and parking Out of pocket expenses when serving as volunteer for qualified charity (e.g., hospital volunteer uniform) Need written acknowledgement from charity if any single item is >$250 Informational Mileage rate is set in the law, IRS cannot adjust it Large item example Buy airplane ticket to attend charity’s event as guest speaker Charity should give written acknowledgement of speaker’s participation at the event and that they provided their own airfare NTTC Training – 2013 39

Gifts to Charity – Limits Total may not exceed 50% of AGI Sort by cash (monetary) or other-than- cash If total is over 20% of AGI, sort by organization limit (see Pub 526) If exceed any limit, refer to paid preparer Note: gifts of property that increased in value – out of scope Most charities Tax-Aide sees are 501(c)(3) charities All 501(c)(3) charities are 50% charities If any limit is reached, return is out of scope NTTC Training – 2013 40

Gifts to Charity – Limits 5-year carryover of amounts in excess of limit Review prior year’s return Input on Sch A line 18 Most charities Tax-Aide sees are 501(c)(3) charities All 501(c)(3) charities are 50% charities NTTC Training – 2013 41

Sch A – A Detail Worksheet – Monetary Gift NTTC Training – 2013 42

Other Than Cash – A Detail Worksheet If need Form 8283, either link from A Detail worksheet or “Add” the form NTTC Training – 2013

Non-Cash Contributions Need receipt for all non-cash contributions Single non-cash gifts $250 or more Written acknowledgement from charity Enter on A Detail worksheet If the value of any one item is over $500, must provide additional information Date acquired How acquired Donor’s cost or basis NTTC Training – 2013

Non-Cash Contributions (cont) More than $500 Complete Form 8283 – Section A, Part 1 only In-Scope up to $5,000 total More than $5,000 – Out-of-Scope Taxpayer should always keep detailed list of items donated (pictures can help) If the value of any one item is over $500, must provide additional information Date acquired How acquired Donor’s cost or basis NTTC Training – 2013

Non-Cash Deductions (cont) Generally report by donation date, specify date Taxpayer provides fair market value and other needed information Preparer completes form Emphasize Donations of appreciated property are out of scope Example: securities, artwork If depreciated, then taxpayer should sell, take the capital loss and donate the proceeds NTTC Training – 2013

Form 8283, Page 1, Section A Form 1098-C is Out of Scope Note – must properly fill in complete address to avoid diagnostic error NTTC Training – 2013 47 47

A, B, C, D are charitable organizations listed on Part I of this page Form 8283, Page 1 (cont) A, B, C, D are charitable organizations listed on Part I of this page NTTC Training – 2013 48 48

Non-Deductible Contributions Contributions to following types of organizations: Business organizations such as Chamber of Commerce Civic leagues and associations Political organizations and candidates Social clubs Foreign organizations Homeowners’ associations Communist organizations Contributions to Chamber of Commerce not deductible, but dues may be a business expense NTTC Training – 2013

Non-Deductible Contributions Cost of raffle, bingo, or lottery tickets Tuition Value of person’s time or service Donated blood Direct contributions to an individual Part of contribution that benefits taxpayer NTTC Training – 2013

Miscellaneous Deductions Pub 17 Chapter 26 Subject to 2% of AGI threshold Line 21 – Unreimbursed employee expenses Uniforms, union dues, repayment of wages <$3,000, etc. Military certification if Form 2106 required Line 22 – Tax preparation fees Line 23 – Other expenses e.g., investment fees, safe deposit box (if holds investments), IRA trustee fee (if paid from outside funds), other repayments of income <$3,000 Clarify Form 2106 is required for unreimbursed Mileage or travel Entertainment Business gifts Special rules apply for performing artists – out of scope Other expenses To produce or collect income Investments management fees Investment training – but not on cruise ships Manage or maintain income-producing property Safe deposit box holding securities IRA trustee fee when paid outside of IRA – if paid within IRA, not deductible To determine, contest, pay or claim a refund of any tax Credit card service fee when paying tax by credit card Work related education Perhaps not eligible for Lifetime Learning credit Repayments of <$3,000 E.g. unemployment benefits NTTC Training – 2013 51

Misc Business Expenses Link from Line 21 to new Business Exp Line 21 schedule if need to list NTTC Training – 2013

Miscellaneous Other Link from Line 23 to new Misc Deducts Line 23 schedule if need to list NTTC Training – 2013

Miscellaneous Not Subject to 2% Gambling losses to extent of winnings Unrecovered investment in annuity Certain work-related expenses for disabled Repayments >$3,000 under claim of right Certain Ponzi scheme losses Certain casualties – out of scope Informational To claim gambling losses Need to keep a diary of winnings and losses Generally, use a “per session” determination of whether a gain or loss (not “per bet”) Example of work-related expenses for a disabled person Attendant enabling employment of disabled Repayments would be of prior year included income that believed was theirs Such as unemployment benefits or wages Repayments of <$3,000 are subject to the 2% haircut NTTC Training – 2013 54

Misc Deductions Not Subject to 2% Link from Line 28 to new Other Deducts Line 28 schedule if need to list Reminder For gambling losses, easier to enter on any W-2G If manually entering on Line 28, need to limit to the extent of winnings NTTC Training – 2013 55

Deductions – Special Rule Married filing separately If one spouse itemized deductions The other spouse MUST itemize Standard deduction not allowed Does not apply if eligible for Head of Household status NTTC Training – 2013

Deductible Expense? Merrill Lynch management fee Yes For taxable portfolio For IRA portfolio, deducted from IRA Steel toed shoes for construction worker “Nice” office clothes Cost of losing church bingo cards Yes No Yes Investment management fees Must be paid by the taxpayer (not the IRA trust) Work tools or specialized clothing can be deducted Must not be “street” clothes – generally usable The price paid is deemed equal to the value received for charity raffles, bingo, or other games of chance No net deduction No No NTTC Training – 2013

Quality Review Review with taxpayer to ensure all deductions considered Review taxpayer’s documents to ensure all deductions are entered in TaxWise Compare to prior year’s deductions Review Schedule A – as expected? Any state adjustments needed? NTTC Training – 2013

Summary with Taxpayer Explain why itemizing does or does not help Explain thresholds Medical expense 10% versus old 7.5% Misc expenses 2% Remind of need to keep records and receipts NTTC Training – 2013

Tax Calculation Adjusted Gross Income (AGI) minus (Standard or Itemized) Deduction minus Exemptions EQUALS Taxable Income Tax liability determined by: Tax tables using income and filing status, Sch D Tax Worksheet or other special methods with certain types of income TaxWise calculates all automatically NTTC Training – 2013

Form 1040 – Page 2 NTTC Training – 2013

Itemized Deductions Questions? Comments? NTTC Training – 2013 62

Let’s Practice Under guidance of your Instructor Reopen Kent/Bryant return Enter Itemized Deductions from Pub 4491W Page 68 Verify refund monitor NTTC Training – 2013 63