1. Individual From AGI Deductions
Chapter 7
Individual From AGI Deductions

2. 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

3. 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

4. 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

5. 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)

6. 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

7. 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

8. 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

9. Itemized Deductions

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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