Itemized Deductions Chapter 7

Identify qualified medical expenses and compute the medical expense deduction Determine the timing of a medical expense deduction and the effect of a reimbursement Identify taxes that are deductible as itemized deductions Identify different types of interest deductions Compute the amount of investment interest deduction Learning Objectives

Compute the deduction for qualified residence interest Compute the amount of a charitable contribution deduction and identify limitations Identify certain miscellaneous itemized deductions subject to the 2% of AGI limitation Compute total itemized deductions for a taxpayer who is subject to the itemized deduction phase-out Learning Objectives

Qualified individuals Qualified medical expenses Amount and timing of deduction Medical Expenses

Medical expenses paid for the taxpayer, taxpayer’s spouse, or dependent For dependents: if the taxpayer could take a dependency deduction except for the failure to meet the gross income or joint return tests For children of divorced parents: –the parent need not be the custodial parent in order to take deduction for medical expenses paid on behalf of a person Qualified Individual

Those paid for the diagnosis, cure, mitigation, treatment, or prevention of disease, including transportation, meals & lodging, certain capital expenditures, & medical insurance premiums. Self-employed individuals may deduct 100 % of health insurance as a deduction for AGI. No cosmetic surgery unless it treats illness or promotes proper body function. Qualified Medical Expenses

Transportation that is primarily for and essential to qualified medical care Medical insurance premiums Qualified long-term care insurance premiums Capital expenditures must meet standard

Medical expense deduction is only allowed to the extent qualified medical expenses exceed 7.5% of AGI During tax year - reimbursements reduce allowable deductions Subsequent tax years - reimbursements included in gross income under the tax benefit rule Amount And Timing Of Deduction

Mandatory assessment levied under the authority of a political entity for the purpose of raising revenue to be used for public or governmental purposes Statutory Definition Of A Tax

State, local and foreign real property taxes; State and local personal property taxes; Foreign, state, and local income taxes State and local sales taxes Deductible Taxes

Include federal income tax, employee’s social security tax, and federal estate & gift tax Employer’s share of social security tax is deductible as business expense Self-employed taxpayer may also deduct 1/2 of the self-employment taxes paid for AGI Nondeductible Taxes

Cash-basis taxpayers deduct state and/or local income tax paid or withheld even if the taxes are attributable to another tax year State And Local Income Taxes

In order to be deductible, tax must be an ad valorem tax on personal property imposed on an annual basis Any portion of the tax which is flat fee is not deductible Personal Property Taxes

Apportionment of taxes is necessary when real estate is sold during the year Taxes assessed only against the property benefited are capitalize costs( i.e., Sidewalk or new sewer lines) not deduction Real Estate Taxes

The 2004 Jobs Act allows individual to deduct state and local taxes in lieu of state and local income taxes General Sales Tax

Self-Employment Tax Pay tax on their self-employment income in lieu of the payment of Social Security tax on salary

Compensation for the use or forbearance of money –Bank service charges and certain loan acquisition costs are not considered interest for tax purposes Definition Of Interest

Proper classification of interest expense is critical in determining the amount of interest expense deduction –Active trade or business –Passive activity –Investment –Personal –Qualified residence and Home equity loan –Student loan interest Classification Of Interest

Prepaid interest Interest paid with loan proceeds Discounted notes Interest owed to a related party by an accrual method taxpayer Imputed interest Timing Of The Interest Deduction

Qualifying organization –The United States, The District of Columbia, a state or possession of the United States. –A post or organization of war veterans –A domestic fraternal society, or order, or association Public Charities –Churches –Educational Institutions –Hospitals, Medical schools Charitable Contributions

Type of property contributed Deduction limitations 50% for public charities 30% for Contributions of capital gain property Application of carryovers Special rules for contributions made by corporations See page 7-27 for summary

Individuals can deduct casualty or theft loss on personal-use property as an itemized deduction Schedule A of Form Subject to $100 and 10 % floor Casualty And Theft Losses

Unreimbursed employee business expenses Expenses to produce income Costs of tax advice, tax return preparation, and any related fee Miscellaneous Itemized Deductions

Reduction of certain itemized deductions Sec. 68 provides for a reduction in the total amount of certain itemized deductions for high-income taxpayers –Only applies to individuals with AGI in excess of $145,950($72,975 for MFS) –Reduction is 3% of the amount that the individual’s AGI for the year exceeds the threshold amount –Two limitations apply Reduction can not exceed 80% of itemized deduction other than medical, investment, casualty losses, and wagering losses And the 3% is applied after taking into account the other limitations on Itemized deductions (e.g. 2% of AGI on miscellaneous deductions

Medical expense deduction Interest Expense Deduction Deduction for charitable contributions Tax Planning Considerations

Medical expenses Dependent care credit vs. Medical expense deduction Compare dependent care credit rate with effective marginal tax rate for additional medical deductions Compliance & Procedural Considerations

Charitable contributions –>$500 must file Form 8283 –Property > $5000 should have appraisal –>$250 and quid pro quo > $75 require additional documentation Compliance & Procedural Considerations

Schedule C - related to taxpayer’s trade or business Schedule E - related to the production of rents and/or royalties, or Schedule A - if personal Taxes