Itemized Deductions Tax Computation

Itemized Deductions Tax Computation
Pub 4012 – Tab F Pub 4491 – Part 5 – Lessons 20 & 21 Slide 15 changed from federal sales tax calculator to irs Slide 25 added for reverse mortgages 1

Deductions May claim larger of
Standard deduction Increased if at least 65 or blind -OR- Itemized deductions If itemized deductions are entered, software will select better option Refer participants to Pub 4012 – Page F-1 for standard deduction amounts NTTC Training – TY2016

Deductions If taxpayer files MFS and spouse itemizes deductions
Taxpayer must itemize -OR- Take a standard deduction of ZERO If taxpayer files MFS with standard deduction and spouse then files MFS with itemized deduction, taxpayer must amend return Refer participants to Pub 4012 – Page F-1 for standard deduction amounts NTTC Training – TY2016

Intake/Interview Verify there is taxable income (Form 1040, Line 43) after standard deduction before itemizing Consider state return, if any 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 – TY2016

Possible Itemized Deductions
Pub 4012 F-3 Medical or dental expenses Taxes Interest Gifts to charity Casualty and theft losses – Out of Scope Miscellaneous expenses – subject to 2% Miscellaneous expenses – not subject to 2% Sch A Itemized deductions are divided into the listed categories Casualty and theft losses are out of scope for Tax-Aide Preparer should organize taxpayer's Deduction documents in this order before beginning Sch A. ASK taxpayer if there are any other expenses for each category as you organize the paperwork. Keep the taxpayer involved in what you are doing or you may miss something! You do not have to total the taxpayer 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 – TY2016

Limitations on Scope Individuals with the following should be referred to a paid preparer Investment interest expense A charitable contribution carryover from a prior year or created in the current year Noncash donations exceeding $5,000 Job expenses which were partially reimbursed by the employer Casualties or theft losses NTTC Training – TY2016

Limitations of Scope Continued
See Scope Manual for other, rare limitations Schedule A limitations NTTC Training – TY2016

Schedule A Medical allowed in excess of 10% of AGI, unless 65 or older
The 7.5 threshold expires 12/31/16 – will not affect 2017 returns. NTTC Training – TY2016

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 Also includes equipment or improvements to your home needed for medical care. See Pub 502. NTTC Training – TY2016

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; Pub 502 NTTC Training – TY2016

Medical Expenses Must be paid during tax year
Cannot be reimbursed expenses including expenses claimed for HSA Only for taxpayer, spouse, dependents or individuals that would have been dependent except for gross income or filing situation – when paid or when incurred 19¢/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 Note the medical mileage rate will decrease to 19¢ eff 1/1/2016 NTTC Training – TY2016

Medical Deduction Quiz
Deductible medical expense? Prescription sunglasses Contact lenses Dentist teeth whitening Gym fee (doctor suggested exercise) Dentist teeth cleaning Yes Yes Yes No No NTTC Training – TY2016

Taxes MUST be imposed on taxpayer MUST be paid in current tax year
If a tax is gratuitously paid by another, it is considered a gift Only the person who is liable for the tax is entitled to the deduction NTTC Training – TY2016 13

Taxes State and local taxes Income tax OR General sales tax
Real estate tax (U.S. or foreign) Personal property tax based on value Foreign income tax (if not claiming a credit) NTTC Training – TY2016 14

State and Local Taxes – Line 5
Income taxes Withheld (W-2, 1099-R, etc.) F/S Tax Paid for state estimated and prior year payments Other local income tax payments? OR General sales taxes IRS sales tax calculator at irs.gov 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 – TY2016 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 – TY2016

Sales Tax Under Itemized Deductions Select Add a sales tax deduction
Select Begin sales tax worksheet Enter state and number of days in state Enter income range Enter number of exemptions Clarify for participants if your districts will default the state code and rate NTTC Training – TY2016

Sales Tax Click to view IRS sales tax calculator
Located at left bottom of screen Follow step by step instructions Enter separately any large purchases Remember to include untaxable income (non-taxable SS, pension, interest, etc.) NTTC Training – TY2016

Deductible Taxes Line 6 – Real Estate (Property) Taxes
May be reported by mortgage company on Form 1098 Includes parcel taxes Not for business Not for Benefit to property (tending to increase value) 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 – TY2016 19

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 Form 1116 (1040 line 48) NTTC Training – TY2016 20

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 – TY2016 21

Home Mortgage Interest
Interest on loan secured by main home or second home Mortgage to buy or build home or second home (both limited) Home equity loan or line of credit (limited) Both taxpayer and lender must intend that loan be repaid NTTC Training – TY2016

Home Mortgage Interest Deductibility
Mortgages taken out before October 14, – 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 – TY2016

Home Mortgage Interest Deductibility
Mortgages 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 when taken out Is an addback for AMT on form (return is OOS if AMT applies) $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 – TY2016

Reverse Mortgage No interest is paid until the loan is paid off
When paid off, interest deduction is subject to the limitations on debt amount To buy or improve the home To buy investments, out of scope Otherwise, up to $100,000 of debt NTTC Training – TY2016

Points Paid at loan origination If to buy or build main home, deductible in full If to refinance qualified debt, spread over life of loan If underlying loan is not qualified, points are not deductible Points must be interest equivalents If to pay for appraisal or other fees, not interest and not deductible NTTC Training – TY2016

Examples Deduct points on purchase, loan #1 Refinance “A” – points on Refinance “A” are spread over life of new loan (#2) Refinance “B” – Remaining points on loan #2 can be deducted when loan #2 is paid off Points on Refinance “B” (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 – TY2016

Qualified home mortgage insurance premium (called PMI) Must relate to home acquisition debt Insurance contract issued after 2006 Sometimes not reported on Form 1098 State treatment may differ Emphasize Need to ask probing questions Look at prior year’s return NTTC Training – TY2016

Interest Home Mortgage Line 10 – Interest/Points from Form 1098
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 Note: Line 13 Qualified mortgage insurance premiums The deduction is reduced if AGI > $100,000 ($50,000 MFS) NTTC Training – TY2016 29

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 If an item relates to a business, it may be deductible as a business expense, e.g. on Sch C NTTC Training – TY2016

Schedule A (cont.) Out of scope
Includes small tools and supplies needed for job Pursuant to IRS notice, employee business assets of $500 or less can be immediately expensed; form 4562 is not required Refer to the business income lesson for the required election statement NTTC Training – TY2016

Gifts to Charity Qualified charity
Churches, governments, schools, etc. Approved by IRS U.S. charity irs.gov/charities for list Limited to % of AGI Public charity: <50% of AGI Private foundations: <20% or 30% of AGI Donations to individuals (e.g. homeless) are not deductible Caution – Some foreign charities may not be qualified by the IRS NTTC Training – TY2016 32

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 – TY2016 33

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 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 – TY2016 34

Gifts to Charity Housing foreign exchange student
Pub 17, Chapter 24 Housing foreign exchange student May deduct up to $50 per month Foster child unreimbursed expenses NTTC Training – TY2016

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 Any motor vehicle, 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 Motor vehicles includes any motor vehicle manufactured primarily for use on public streets, roads, and highways; a boat; or an airplane. NTTC Training – TY2016

Gifts to Charity Out-of-pocket expenses are also deductible
14¢/mi 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 Cannot deduct “value” of time spent as a volunteer NTTC Training – TY2016 37

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 – TY2016 38

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 – TY2016

Non-Cash Contributions (cont)
More than $500 TaxSlayer brings up Form 8283 Complete 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 – TY2016

Non-Cash Deductions (cont)
Generally report by donation date, specify date Taxpayer provides fair market value and other needed information 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 – TY2016

Form 8283 Complete the following data on part 1 of the form
(a) name and address of donee organization (b) donated vehicle – Out of Scope (c) description of donated property NTTC Training – TY2016

Form 8283 Continued Follow the line instructions under the Note and enter the required data on lines (d) through (i) NTTC Training – TY2016

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 – TY2016

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 – TY2016

Miscellaneous Deductions
Pub 17 Chapter 26 Subject to 2% of AGI threshold Line 21 – Unreimbursed employee expenses Uniforms, job hunting, union dues, etc. Use Form 2106 for mileage at standard rate or travel Military certification if Form required for any other reason Clarify Unreimbursed employee expenses are: Ordinary and necessary expenses attributable to your job Common and accepted in your field of trade, business, or profession Helpful and appropriate for your business An expense does not have to be required to be considered necessary Example: work related education Perhaps not eligible for Lifetime Learning credit Form 2106 for unreimbursed Mileage or travel Entertainment If unreimbursed employee expenses are other than these, don’t need 2106 and can input on Line 21 Special rules apply for performing artists – out of scope Form 2106 out of scope (unless certified in Military and preparing military return) if: You get reimbursed by your employer for any expenses (amounts your employer included in box 1 of your Form W-2 are not considered reimbursements for this purpose) If you are claiming vehicle expense, you are NOT using the standard mileage rate for 2016 Caution: You can use the standard mileage rate for 2016 only if: (a) you owned the vehicle and used the standard mileage rate for the first year you placed the vehicle in service, or (b) you leased the vehicle and used the standard mileage rate for the portion of the lease period after 1997. 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 Repayments of <$3,000 E.g. unemployment benefits NTTC Training – TY2016 46

Miscellaneous Deductions (cont)
Pub 17 Chapter 26 Subject to 2% of AGI threshold (cont) Line 22 – Tax preparation fees Line 23 – Other expenses, examples Investment fees Safe deposit box (if holds investments) IRA trustee fee (if paid from outside funds) Repayments of previously claimed income Cost to produce or collect taxable income Clarify Tax preparation fees include – Line 22: To determine, contest, pay or claim a refund of any tax Credit card service fee when paying tax by credit card Other miscellaneous expenses – Line 23 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 Repayments of <$3,000 E.g. unemployment benefits NTTC Training – TY2016 47

Miscellaneous Deductions (cont)
Cost to product or collect taxable income, example: legal fees to obtain social security benefits (e.g. survivor benefits) Deductible to the extent the income is taxable If 85% of SS benefit is taxable, 85% of legal fee is deductible If none of SS benefit is taxable, none of the legal fee is deductible Clarify Tax preparation fees include – Line 22: To determine, contest, pay or claim a refund of any tax Credit card service fee when paying tax by credit card Other miscellaneous expenses – Line 23 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 Repayments of <$3,000 E.g. unemployment benefits NTTC Training – TY2016 48

Miscellaneous Not Subject to 2%
Gambling wages and tickets to extent of winnings Unrecovered investment in annuity Certain work-related expenses for disabled Repayments of income >$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 – TY2016 49

Deductions – Special Rule
Married filing separately If one spouse itemizes deductions The other spouse MUST itemize Standard deduction not allowed Does not matter who files first Does not apply if eligible for Head of Household status NTTC Training – TY2016

Phase-outs Itemized deductions and exemption deductions are reduced if AGI is more than $155,650 NTTC Training – TY2016

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 – TY2016

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 – TY2016

Itemized Deductions Questions? Comments? NTTC Training – TY2016 54

Itemized Deductions Tax Computation

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