1. Personal Deductions

2. Costs of doing business are deductible (with some limits we will discuss soon).

3. Section 262 tell us that, unless expressly provided in the Code, there is no deduction for personal, living or family expenses.

4. All individual taxpayers get to deduct the personal exemption and either take the standard deduction or itemize deductions. See handout on Basic Computation The personal exemption varies with the number of dependents. The standard deduction varies with nature of the household. Exemptions and the standard deductions get adjusted per CPI. Exemptions and itemized deductions are phased out as AGI rises above thresholds.

5. We are about to look more closely at the categories of itemized deductions and the functions they serve.

6. Look at the below. Why do you think we allow them? If you had to eliminate one, which would it be and why. Casualty loss Medical expense Charitable contribution Mortgage interest State property taxes State income taxes

7. Business losses can be deducted; nonbusiness losses can be deducted if they are casualty losses under section 165(c)(3).

8. The government thus acts as an insurer to extent of marginal rate on loss deducted. Should the government insure those who choose to live in dangerous places?

9. Casualty losses include “fire, storm, shipwreck, or other casualty, or from theft.”

10. What is other casualty? Examples: termites – no; lost engagement ring – sometimes.

11. There a suddenness requirement for other casualty. Why?

12. Dryer v. CIR

13. Now we have two haircuts on the casualty loss deduction: $100 per occurrence and 10% of AGI per year. See handouts.

14. Chamales v. CIR

15. Blackman v. CIR

16. When a court will decide that a tax benefit is “against public policy” is uncertain.

17. Problem in handouts on casualty loss

18. Medical care deduction under sec. 213

19. Medical care deduction: Remember the floor of 7.5% of AGI. Does the medical deduction give most to the wealthiest or does it define income and help make us whole?

20. Under section 213, medical care includes Diagnosis of disease Cure of disease Mitigation of disease Treatment of disease Prevention of disease Purpose of affecting structure of function of body Certain transportation costs Certain lodging costs

21. Cosmetic surgery is excluded.

22. Taylor v. CIR

23. Henderson v. CIR

24. Ochs v. CIR

25. But for tests But for the children But for the illness

26. Examples from IRS publication 502 on Medical Expenses Acupuncture – yes Vasectomy – yes Crutches – yes Guide dog - yes Hair transplant – no Health club – no Marijuana – no Teeth whitening - no

27. What is the policy behind the medical deduction?

28. Charitable contribution deduction Contributions to qualifying organizations can be deducted if itemize. Such organizations include schools, museums, churches, social service organizations. There are limits on how much AGI can be reduced in a year.

29. What might be the policy objective of the charitable contribution deduction?