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6 Major Categories of Itemized Deductions
- 1. Medical
- 2. State and Local Taxes
- 3. Interest
- 4. Charitable Gifts
- 5. Casualty Losses
- 6. Miscellaneous deductions, including unreimbursed employee expenses
Calculation of Deductible Medical Expenses
- Allowable Medical expenses
- - Insurance reimbursements Allowable net paid medical expenses
- - 7.5% of AGI Deductible medical expenses
A taxpayer may deduct costs for medical care, which includes the following: (4)
- 1. The diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body.
- 2. Transportation primarily for and essential to medical care.
- 3. Qualified long-term care services
- 4. Insurance for medical care or qualified long-term care services.
Taxpayers (may/may not) deduct expenditures that are merely for the benefit of the general health of an individual.
For medical capital expenditures that improve the taxpayer's property, the deduction....
- ...is available only to the extent that the medical expenditure exceeds the increase in the fair market value of the residence.
- exswimming pool= $30,000
- Increase in FMV of house= $20,000deduction= $10,000
To calculate the deduction for transportation costs for medical purposes, there are 2 ways..
- 1. the acutal cost of operating the car for medical purposes
- 2. the standard mileage allowance (16.5 cents per mile.
Qualified Long-term care services...
...are medical, maintenance, and personal care services provided to a chronically ill individual pursuant to a plan of care prescribed by a licensed healthcare practitioner
Personal Property Taxes
personal-use assets, such as the family car, are deductible on Schedule A
Personal property taxes paid on rental property are deducted on Schedule E
Personal property taxes paid on assets used in a proprietor's business are deducted on Schedule C
State or local property taxes must meet three tests to be deductible
- 1. the tax must be levied on personal property
- 2. the tax must be an ad valorem tax
- 3. the tax must be imposed, at a minimum, on an annual basis with respect to personal property
Sale of property during the tax year
Both buyer and seller receive a deduction for a portion of the real estate tax paid according to the number of days each owner held the property
Real Estate Taxes
- If the tax is paid on personal-use real estate, such as the taxpayer's principal residence, it is an itemized deduction on Schedule A.
- If i is paid on rental real estate, it is deducted on Schedule E.
- If it is paid on business real estate, such as an office building that the taxpayer owned and used as a proprietor, it is deducted on Schedule C
State and Local taxes
- In any year, an individual taxpayer can deduct the amount of state income taxes paid, whether through withholding, estimated taxes, or filing the prior year's state tax reurn.
- Tax Benefit Ruleif a taxpayer receives a federal tax benefit from an expense when the expense is paid, that taxpayer is taxed on a refund of that expense when the refund is received.
Foreign taxes paid are deductible. The taxpayer has the option of taking a credit for foreign taxes paid or deducting them on Schedule A.
- Person Interest
- Mortgage interest on personal residence
- Investment Interest
- Business Interest
- Connected with a trade or business or for the production of income
- These amounts are for AGI deductions and are deducted on the appropriate form (Scedule C, E, or F)
Qualified Residence Interst
- interest paid on acquisition indebtedness or a home equity loan secured by a qualified residence
- If Loan is not secured by a qualifed residence, the interest is not qualified residence interest.
- Acquisition indebtedness means any debt incurred to acquire, construct, or substantially imporve any qualified residence.
Taxpayers can deduct qualified residence interest on...
...their principal residence and on a second residence selected by the taxpayer.
Mortgaget interest is limited to..
...principals of $1,100,000
- $100,000 must be classified as Home Equity Indebtedness
- Points are amounts that borrowwers pay to obtain a mortgage. (loan orgination fees)
- Each point equals 1% of the loan principal
- exampleJo pays 2 points on a $100,000 morgage loan. The points equal $2,000 (.01 x 2 x $100,000)
In order for morgage points to be deductible by a cash basis taxpayer as mortgage interest, they must meet the following "safe harbor" criteria
- 1. Uniform Settlement Statement must clearly designate the amounts as loan origination fees, loan discount, discount points, or points payable
- 2. Amount must be computed as a % of the state principal amount of the indebtedness incurred by the taxpayer
- 3. amount paid must conform to an established business practice of charging points for loans for the acquisition of principal residences in the geographical area
- 4. amounts must be paid in connection with the acquisition of the taxpayer's principal residence, and that residence must secure the loan
- 5. amounts must be paid directly by the taxpayers
Mortgage Insurance Premium Deduction (PMI)
- For 2010, the taxpayer may take an itemized deduction for the amount of the premium paid in 2010 on on Schedule A.
- The deductible amount is reduced by 10% for every $1,000 by which AGI exceeds $100,000. Thus the deduction is not allowed when AGI exceeds $110,000
any interest that is paid or accrued on indebtedness properly allocable to property held for investment.
The deduction of investment interest expense is limited to the net investment income for the year and is deductible as an itemized deduction on Schedule A.
Net investment income is gross investment income less deductible investment expenses. If interest expense exceeds the taxpayer's net investment income, he can carry forward the excess expense to future tax years when net investment income is available.
- ExampleGale borrows $20,000 to buy land and signed a 7%, 15 year note.
- Gale's only investment income is interest of $1,000, she could deduct the interest on the lending institution loan up to a maximum of $1,000 in the current year.
- Any remaining amount of interest would carry forward to future years and would be deducted when additional net investment income becomes available.
Typical items that qualify as investment income are...
- 1. interest income
- 2. ordinary dividends
- 3. short-term capital gains
Deductible Gifts to Charity
- To be deductible, the donation must be cash or other property of value.
- A taxpayer receives no deduction for services rendered to a charitable organization
- A taxpayer who travels away from home overnight to attend a convention as a representative of the org. may deduct related transportation and travel expenses. (meals and lodging)
Generally, if capital gain property is donated to a public charity, the deductible donation amount is...
...the property's FMV
Percentage limitations of charitable donations
- 50%all charitable contributinos to public charities are limted to 50% of the individual taxpayer's AGI. A contribution in excess of the limitation is carried forward for the next five tax years, subject to the overall 50% limitation in those years.
- 30%applies to contributions of long-term tangible capital gain property.
- EXCEPTION: if taxpayer elects to reduce the FMV of the property by the amount of long-term capital gain that would have been recognized if the property had been sold at its FMV, the 50% limitation applies
- 20%donation of capital gain property to a private foundation
*****donations to schools that give taxpayer preferential seating at athletic events are limited to 80% of the payment******
What is a causlty
an identifiable event of a sudden, unespected, or unusual nature
Calculation of Deductible Casualty Loss
- FMV (before casualty)
- - FMV (after casualty)
- = A: Decline if FMV
- or (choose the smaller
- = B: Adjusted basis of the property
- - insurance recovery = Allowable loss
- - $100 per event = eligible loss
- - 10% of AGI = Deductible casualty loss
- Loss Due to casualty theft
- - Insurance Recovery = Uninsured loss
- In general, casualty loss is the lower of the following:
- 1. The FMV immediately before the casualty reduced by the FMV imeediately after the casualty
- 2. The amount of the adjusted basis for determining the loss from the sale or other disposition of the property involved.
Miscellaneous Itemized Deductions
Typically, miscellaneous itemized deductions are subject, in aggregate, to a 2% AGI floor.
Common miscellanous deductions
- 1. unreimbursed employee business expenses
- 2. union or professional dues and subscriptions
- 3. expenses related to investment income or property
- 4. investment counsel and advisory fees.
- 5. Tax return preparation fees
- 6. safe deposit box fees
- 7. gambling losses to extent of gambling income
In general, high-income taxpayers' itemized deductions were reduced by the lesser of the following:
- 1. 3% of the excess of AGI over the applicalbe amount
- 2. 80% of the itemized deductions otherwise allowable for the tax year
Modified Adjusted Gross Income
- Adjusted Gross Income
- + Interest on U.S. Savings bonds
- + Most tax-exempt interest
- + Employer-provided adoption benefits
- + Excluded foreign income
- + Deducted educational loan interest
- + Deducted tuition and fees
- + 50% of social security benefits
Disallowed Student Loan Interest Deduction
Student Loan Interest
- MAGI - 120,000 or 60,000 30,000 or 15,000
- 120,000 & 30,000 if MFJ
- 60,000 & 15,000 if Single
Medical Expenses must be more than
7.5% of AGI
Miscellaneous Expenses must be more than
2% of AGI
When the marginal rate is less than 25%, the tax rate on qualified dividends is 0%
when the marginal rate is 25% or more, the tax rate on qualified dividends is 15%
- Can exclude $2400 from gross income
An individual mus recognize income on his or her tax return if the transaction meets three conditions:
- 1. There must be an Economic Benefit
- 2. A transaction must actually have reached a conclusion (occur and complete)
- 3. The income cannot be tax-exempt
- 1. Jury Duty Pay (report $0 if required to remit to employer)
- 2. Prizes and awards
- 3. Forgiveness of debt
- 4. Certain Insurance Proceeds: must report proceeds in excess of the property insured as taxable income
Nontaxable Employee Fringe Benefits
- 1. No-additional-cost services: unsold hotel rooms or airline seats
- 2. Discounts: products cannot exceed gross profit percentage and maximum discount is 20% for services
- 3. Working condition fringe benefits: professional organization dues paid by an employer or the use of an employer-provided vehicle for business purposes
- 4. Qualified transportation fringe benefits: transit passes, parking near the employer's business or near a mass transit location, and use of an employer-provided vanpool that holds six or more people and is used 80% or more for commuting. Parking benefits cannot exceed $230 per month
- 5. Moving expense reimbursements: an employee can exclude from income any moving reimbursements paid by his or her employer to the extent that the employee does not deduct moving expenses
- 6. De minimis benefits: one whose value is so small that keeping track of which employees received the benefit is impractical (turkey, company picnics, flowers or fruit sent when an employee is sick)
Highest rate you pay for the next dollar of income
- Gross Income
- - Deductions
- = AGI
- - Standard Deductions or itemized
- - Exemptions
- = Taxable Income
- x Appropriate rates
- = Tax Liability
- - Credits
- + Other taxes
- - Tax payments
- = Tax refund or tax due
Qualifying Child must meet the following 5 test
- 1. Relationship test: child or descendant of child, stepchild, eligible foster child, (brother, half-brother, stepbrother, or descendant of them
- 2. Age Test: must be under age of 19, under age of 24 and full time student, totally and permanently disabled
- 3. Residency Test: must live with taxpayer for more than half the year (except if due to education, vacation, illness, or military)
- 4. Support Test: The cild must not provide more than half of his support.
- 5. Special test for qualifying child of more than one taxpayer: if two people meet the four tests, IRS lets you decide who claims the exemption
Qualifying relative must meet the following 4 tests
- 1. Not a qualifying child tests
- 2. Relationship or member of household test: must be member of household for the entire year or be related (child, stepchild, eligible foster child, brother, half-brother, step-brother, father or mother, brother or sister of parents, son-in-law, father-in-law, mother-in-law, brother-in-law)
- 3. Gross Income Test: Dependent must not have gross income equal to or greater than the amount of the exemption
- 4. Support Test: taxpayer must provide over 50% of the dependent's support
Health Savings Account Deduction
- Qualified taxpayers can take a for AGI deduction for contributions to the HSA. Contributions grow taxfree, and distributions are not taxable if used for qualified medical expenses.
- The maximum an individual can make to an HSA is $3,050 ($6,150 is family coverage)
- If between the ages of 55 and 60, can contribute an additional $1,000
- Cannot deduct amount contributed by employer
- Distributions from HSAs are tax-free if they are used to pay for qualified medical expenses.