Itemized Deductions

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Chapter 7

• Itemized Deductions

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Learning Objectives

• Identify qualified medical expenses and compute
  the medical expense deduction
• Determine the timing of a medical expense
  deduction and the effect of a reimbursement
• Identify taxes that are deductible as itemized
  deductions
• Identify different types of interest deductions
• Compute the amount of investment interest
  deduction

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Learning Objectives

• Compute the deduction for qualified residence
  interest
• Compute the amount of a charitable contribution
  deduction and identify limitations
• Identify certain miscellaneous itemized
  deductions subject to the 2 of AGI limitation
• Compute total itemized deductions for a taxpayer
  who is subject to the itemized deduction
  phase-out

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Medical Expenses

• Qualified individuals
• Qualified medical expenses
• Amount and timing of deduction

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Qualified Individual

• Medical expenses paid for the taxpayer,
  taxpayers spouse, or dependent
• For dependents if the taxpayer could take a
  dependency deduction except for the failure to
  meet the gross income or joint return tests
• For children of divorced parents
• the parent need not be the custodial parent in
  order to take deduction for medical expenses
  paid on behalf of a person

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Qualified Medical Expenses

• Those paid for the diagnosis, cure, mitigation,
  treatment, or prevention of disease, including
  transportation, meals lodging, certain capital
  expenditures, medical insurance premiums.
• Self-employed individuals may deduct 100 of
  health insurance as a deduction for AGI.
• No cosmetic surgery unless it treats illness or
  promotes proper body function.

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Qualified Medical Expenses

• Transportation that is primarily for and
  essential to qualified medical care
• Medical insurance premiums
• Qualified long-term care insurance premiums
• Capital expenditures must meet standard

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Amount And Timing Of Deduction

• Medical expense deduction is only allowed to the
  extent qualified medical expenses exceed 7.5 of
  AGI
• During tax year - reimbursements reduce allowable
  deductions
• Subsequent tax years - reimbursements included in
  gross income under the tax benefit rule

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Statutory Definition Of A Tax

• Mandatory assessment levied under the authority
  of a political entity for the purpose of raising
  revenue to be used for public or governmental
  purposes

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Deductible Taxes

• State, local and foreign real property taxes
• State and local personal property taxes
• Foreign, state, and local income taxes
• State and local sales taxes

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Nondeductible Taxes

• Include federal income tax, employees social
  security tax, and federal estate gift tax
• Employers share of social security tax is
  deductible as business expense
• Self-employed taxpayer may also deduct 1/2 of the
  self-employment taxes paid for AGI

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State And Local Income Taxes

• Cash-basis taxpayers deduct state and/or local
  income tax paid or withheld even if the taxes are
  attributable to another tax year

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Personal Property Taxes

• In order to be deductible, tax must be an ad
  valorem tax on personal property imposed on an
  annual basis
• Any portion of the tax which is flat fee is not
  deductible

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Real Estate Taxes

• Apportionment of taxes is necessary when real
  estate is sold during the year
• Taxes assessed only against the property
  benefited are capitalize costs( i.e., Sidewalk or
  new sewer lines) not deduction

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General Sales Tax

• The 2004 Jobs Act allows individual to deduct
  state and local taxes in lieu of state and local
  income taxes

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Self-Employment Tax

• Pay tax on their self-employment income in lieu
  of the payment of Social Security tax on salary

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Definition Of Interest

• Compensation for the use or forbearance of money
• Bank service charges and certain loan acquisition
  costs are not considered interest for tax purposes

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Classification Of Interest

• Proper classification of interest expense is
  critical in determining the amount of interest
  expense deduction
• Active trade or business
• Passive activity
• Investment
• Personal
• Qualified residence and Home equity loan
• Student loan interest

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Timing Of The Interest Deduction

• Prepaid interest
• Interest paid with loan proceeds
• Discounted notes
• Interest owed to a related party by an accrual
  method taxpayer
• Imputed interest

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Charitable Contributions

• Qualifying organization
• The United States, The District of Columbia, a
  state or possession of the United States.
• A post or organization of war veterans
• A domestic fraternal society, or order, or
  association
• Public Charities
• Churches
• Educational Institutions
• Hospitals, Medical schools

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Charitable Contributions

• Type of property contributed
• Deduction limitations
• 50 for public charities
• 30 for Contributions of capital gain property
• Application of carryovers
• Special rules for contributions made by
  corporations
• See page 7-27 for summary

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Casualty And Theft Losses

• Individuals can deduct casualty or theft loss on
  personal-use property as an itemized deduction
  Schedule A of Form 1040. Subject to 100 and 10
  floor

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Miscellaneous Itemized Deductions

• Unreimbursed employee business expenses
• Expenses to produce income
• Costs of tax advice, tax return preparation, and
  any related fee

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Reduction of certain itemized deductions

• Sec. 68 provides for a reduction in the total
  amount of certain itemized deductions for
  high-income taxpayers
• Only applies to individuals with AGI in excess of
  145,950(72,975 for MFS)
• Reduction is 3 of the amount that the
  individuals AGI for the year exceeds the
  threshold amount
• Two limitations apply
• Reduction can not exceed 80 of itemized
  deduction other than medical, investment,
  casualty losses, and wagering losses
• And the 3 is applied after taking into account
  the other limitations on Itemized deductions
  (e.g. 2 of AGI on miscellaneous deductions

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Tax Planning Considerations

• Medical expense deduction
• Interest Expense Deduction
• Deduction for charitable contributions

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Compliance Procedural Considerations

• Medical expenses
• Dependent care credit vs. Medical expense
  deduction
• Compare dependent care credit rate with effective
  marginal tax rate for additional medical
  deductions

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Compliance Procedural Considerations

• Charitable contributions
• gt500 must file Form 8283
• Property gt 5000 should have appraisal
• gt250 and quid pro quo gt 75 require additional
  documentation

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Taxes

• Schedule C - related to taxpayers trade or
  business
• Schedule E - related to the production of rents
  and/or royalties, or
• Schedule A - if personal