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

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Learning Objectives

• Identify different types of interest deductions
• Compute the amount of investment interest
  deduction
• Compute the deduction for qualified residence
  interest

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Learning Objectives

• 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 Individuals

• 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.
• In 2006 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

• Include state, local and foreign real property
  taxes state and local personal property taxes
  foreign, state, and local income taxes
• Personal property only based on the value of the
  personal property

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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 (e.g., proprietor,
  partner, LLC member) 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 regardless of tax
  year involved

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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 capitalized costs( e.g., Sidewalk
  or new sewer lines no deduction).

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General Sales Tax

• The deduction for general sales tax was repealed
  by the Tax Reform Act of 1986, effective for 1987
  through 2003.
• But the 2004 Tax Act has reinstated a deduction
  for personal sales taxes.
• Deduct the greater of (1) state income tax or (2)
  state sales tax as an itemized deduction on
  Schedule A.

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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
• Pay both halves (employer and employee portion)
  of social security for a total of 15.3!

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Definition Of Interest

• The charge 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 (For AGI)
• Passive activity (Generally For AGI)
• Investment (From AGI)
• Personal (not deductible)
• Qualified residence and Home equity loan (From
  AGI)
• Student loan interest (For AGI)

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Timing Of The Interest Deduction

• Prepaid interest
• Interest paid with loan proceeds
• Discounted notes
• 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

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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
  of AGI floor

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Miscellaneous Itemized Deductions

• Unreimbursed employee business expenses
• Expenses to produce income
• Costs of tax advice, investment advice, tax
  return preparation
• Bank service fee
• Safety deposit box rental
• Subscriptions to investment journals

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Tax Planning Considerations

• Medical expense deduction
• Deduction for charitable contributions

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Compliance Procedural Considerations

• Charitable contributions
• 250 cash or more donated, need receipt from
  charity
• gt500 of property must file Form 8283
• Property gt 5000 should have appraisal

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Real Estate/ Property 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