1. Personal Itemized Deductions
CCH Essentials of Federal Income Taxation
Personal Itemized Deductions
Chapter 5

2. Wisconsin Income Tax Overview

3. When to Itemize? Itemized Deductions > Standard Deduction
Single $5,350
Married/Joint $10,700
Married/Separately $5,350
Each partner must itemize or claim Standard
Head of Household $7,850
Usually applies to homeowners

4. Itemized Deductions Reported on Schedule A
Examine Schedule A—p. 5.4
Medical and Dental Expenses (line 4)
Taxes You Paid (line 9)
Interest You Paid (line 15)
Gifts to Charity (line 19)
Casualty and Theft Losses (line 20)
Job Expenses and Most Miscellaneous Deductions (line 27)
Other Miscellaneous Deductions (line 28)
Total Itemized Deductions (line 29)
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5. Three Groups of Medical Expenses
Prescription drugs and insulin
All medical and dental insurance premiums paid by the taxpayer
Other medical expenses
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6. Prescription Drugs and Insulin
Only medications and accessories purchased on the basis of written prescriptions generate deductible medical expenses. Even when prescribed, the purchase of over-the-counter medications and vitamins does not qualify. When prescribed for certain conditions, some items (e.g., distilled water, special foods) are only deductible when they cost more than regular foods of the same types. Even then, only the additional cost becomes a deduction.
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7. Medical and Dental Insurance Premiums
Medical expenses include the full amounts of insurance premiums covering medical and dental care.
Self-employed taxpayers can use 100% of the family’s total insurance premiums to reduce gross income before AGI.
Taxpayers may not use this premium cost for any month the taxpayer or spouse has eligibility under an employer’s medical plan.
Medicare premiums and long-term care insurance premiums are included
Life insurance, auto medical payments, and premiums paid through cafeteria plans are excluded
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8. Other Medical Expenses
General items—normal expenses
Special medical expenses
Nursing home care
School for the handicapped
Employee physicals (not employer required
Transportation expenses--.20 per mile
Travel expenses--$50 per night lodging
Capital expenditures—prescribed home improvements
Other—eyeglasses, hearing aids, dentures,wheelchairs
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9. MEDICAL REIMBURSEMENTS
RARE--If an employer paid insurance plan provides reimbursement for more than the actual medical cost, the excess is taxable
SOMETIMES—a taxpayer takes a deduction for medical in one tax year, but receives a reimbursement payment from insurance in the following tax year
Reimbursement is taxable income only to the effect of the tax-benefit rule

10. MEDICAL DEDUCTIBILITY AMOUNT
7.5% of AGI rule
ONLY the amount of medical costs which are over 7.5% of AGI are deductible
Most taxpayers with health insurance coverage will not have sufficient medical costs to itemize
Problems 1--5

11. Deductible Taxes State and local income taxes from W-2
Income Taxes (State, Local, or Foreign)
State and local income taxes from W-2
Estimated tax deposits paid
Taxes paid for previous years
Foreign income taxes (if not used as a tax credit)
Employee contributions to a state unemployment fund
OR General Sales Tax
see Pub. 600 for individual states
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12. Deductible Taxes--Real estate taxes
Ad Valorem tax—on property value
State and local real estate taxes
Foreign real estate taxes
Tenant’s share of real estate taxes paid by a cooperative housing corporation
Real estate taxes on condominium units
Apportioned amount at Sale
Personal property taxes
State and local personal property taxes
Usually tangible property which is taxed according to its value
May include boats, airplanes, trucks, trailers, RVs, mobile homes, cars in some states
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13. Nondeductible Taxes Federal income taxes
Social security and Medicare taxes
Federal or state, estate, gift, or inheritance taxes
State and local license fees (driver’s, marriage, fishing)
Sales, use, and excise taxes (gasoline, cigarette, alcohol)
Qualified taxes paid on behalf of other taxpayers
Fines; Penalties and interest included in tax bills
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14. Interest Paid Interest on qualified personal residence
Acquisition indebtedness
Home equity indebtedness
Points
Some mortgage insurance premiums
Investment interest expense
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15. Interest on a Qualified Personal Residence
Taxpayer’s main home
Plus one secondary residence
Vacation home, home in another city, condominium
Interest must have been actually paid by taxpayer

16. Acquisition Indebtedness Interest
Home mortgage interest
Interest on money borrowed to buy, build, or extensively remodel the residence
Applies to Principal or secondary home
Debt limited to $1 million
Or $500,000 (MFS)

17. Home Equity Interest Sometimes referred to as Second Mortgage
Interest which is secured by taxpayer’s home
Total loan debt (acquisition + home equity) cannot exceed FMV of the home
Debt limited to $100,000
No restrictions on use of the loan money
Form 1098 reports interest paid to a lender

18. Points & Mortgage Insurance premiums
Points are interest charges paid up-front, usually as part of the cost of financing
Deduct on line 10 if they are reported on 1098
Deduct on line 12 if not reported—may be amortized amounts from previous years
Mortgage Insurance premiums
for homes purchased in 2007 which are subject to mortgage insurance
AGI phaseouts begin at $100,000 or $50,000

19. Investment Interest Expense
Interest PAID to buy or keep investments
Limited to Margin Accounts, stocks, bonds, vacant land, partnerships, artwork, gems
Other investments are covered under “passive investments” or rental properties
Expense limited to net investment income (excess of income over expense)
Additional amount may be carried over

20. Gifts to Charity
Must be a recognized charity, religious organization, government, educational, scientific or qualified institution (per IRS)
Contributions by cash or check or property
$250 or more single donation must have written receipt
Must exclude anything of value received as part of the gift or contribution
Pledges are not deductible until paid
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21. Noncash Contributions
Auto expenses deductible at .14 per mile
Property usually at FMV
Tangible Personal Property such as clothing, furniture, etc. at FMV, with a statement of value from the organization
Intangible Property such as stocks and bonds at FMV. Also called Qualified Gain Property. Must be held more than 1 year.
Ordinary income property at cost basis

22. Nondeductible Contributions
Political parties or political action groups
Private individuals
Clubs and lodges and social organizations
Tuitions at private schools
Raffle tickets
Foreign organizations
The value of your time or services
Total limitation of 50% of AGI (or 30%--20%)

23. Casualty and Theft Losses
Casualty events—sudden, unexpected, or unusual event
Reduce deductible loss by
$100 per event
And 10% of AGI
Must provide proof of casualty and FMV
Only for damages to taxpayer’s property
Usually deducted in the year of casualty
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24. DEDUCTIONS LIMITATION
High income taxpayers may have their deductions limited
If AGI is in excess of $150,500 (75,250 mfs) the taxpayer may lose 2% of excess AGI
Includes Taxes, mortgage interest and points, charitable contributions, misc deductions
Not limited deductions are medical, investment interest, casualty-theft losses, gambling losses