The tax Code allows certain personal expenses to be deducted from gross income.
Some of the expenses a taxpayer may deduct depend on his adjusted gross income. In
other words, before a taxpayer will see any tax benefits from these type of deductions,
he or she will have to cross a threshold amount. The dollar amount of the threshold is
different for every taxpayer, but the percentages (2%, 7 ½ %, and 10%) of AGI are the
same. It is not uncommon for a taxpayer to have several thousand dollars of one type of
expense, but see no tax benefit from it. Other types of deductions may be deducted
regardless of AGI. This chapter is devoted to a discussion of both types of itemized
At the conclusion of this chapter, you will be able to:
Determine when it is advantageous for a taxpayer to itemize deductions
Determine deductible medical and dental expenses and enter them on
Determine deductible taxes and enter them on Schedule A
Determine deductible interest expenses and enter them on Schedule A
Determine deductible charitable contributions and enter them on Schedule A
Identify a casualty or theft loss of personal-use or investment-use property,
compute a deductible loss of personal-use property on Form 4684, and make
the appropriate entry on Schedule A
Determine if an employee or self-employed individual may deduct
transportation expenses using the standard mileage rate and compute the
deduction using Form 2106-EZ
Determine deductible gambling losses and enter them on Schedule A
Identify other miscellaneous itemized deductions and make the appropriate
entries on Schedule A
Determine the total limited itemized deductions for certain higher-income
Look up the definitions of the following terms in the glossary:
Education expense deduction
General sales tax
Medicare part A and part B
Personal property tax
Standard mileage rate
Every taxpayer must decide whether or not to itemize deductions. Generally, taxpayers
choose to deduct the larger of their total itemized deductions or their standard
deduction. You have studied the standard deductions for various categories of
taxpayers in previous chapters. You may want to review the information that starts in
Chapter 2 of your text.
When married taxpayers both use the married filing separately status and one spouse
itemizes deductions, the standard deduction of the other spouse is $0. Such a taxpayer,
while not required to itemize, benefits from doing so-unless he has nothing to deduct,
which almost never happens. After all, even a small amount of deduction is better than
In certain states and under certain circumstances, it is advantageous for some
taxpayers to itemize deductions on the federal return even if their itemized deductions
total less than their standard deductions. The reason? Itemizing on their federal returns
allows them to itemize on their state returns, thus saving overall tax dollars. Such tax-
payers should mark the box on Schedule A, line 29. Your instructor will tell you if this is
a consideration in your state.
Schedule A is completed for taxpayers who itemize deductions. This schedule contains
the following sections:
Medical and Dental Expenses Taxes You Paid
Interest You Paid
Gifts to Charity
Casualty and Theft Losses
Job Expenses and Certain Miscellaneous Deductions
Other Miscellaneous Deductions
In this chapter, you will study each section in the order they appear on the Schedule A.
MEDICAL AND DENTAL EXPENSES
Deductible medical expenses include payments made for the diagnosis, cure,
treatment, or prevention of disease; for transportation related to medical care; and for
insurance covering medical care for the taxpayer, spouse, and dependents.
Medical expenses are deductible the year paid. If expenses are charged to a credit
card, they are considered to be paid on the date charged.
Medical expenses paid by a taxpayer for his spouse are deductible if they were married
at the time the expenses were incurred or at the time the expenses were paid. To be
able to deduct medical expenses paid for a dependent, the individual generally must
have been a dependent at the time the expenses were incurred or at the time they were
paid. However, medical expenses paid for an individual whom the taxpayer could claim
as a dependent, except that he failed the gross income or joint return test, are
A taxpayer may also deduct medical expenses paid by him for a dependent he is
claiming under a multiple support agreement. The persons who waive the exemption
may not deduct medical expenses paid for the dependent.
If divorced or separated parents who lived apart during the last six months of the year
supported a child together, each parent, whether custodial or noncustodial, is allowed to
deduct the medical expenses actually paid for the child during the year. The deduction
may be taken even if the other parent is allowed to claim the exemption for the child.
Medicine and Drugs
Unreimbursed expenses for prescription drugs and insulin are deductible. Expenses for
nonprescription medicines and vitamin and mineral supplements are not deductible.
However, certain over-the counter drugs may be paid for using tax-free dollars. See
"Cafeteria Plans," on page 6.9.
Medical Insurance Premiums
Premiums paid for medical insurance are deductible if they provide for reimbursement
for hospitalization, surgical fees, other medical or dental expenses, prescription drugs,
or lost or damaged contact lenses.
The portion of payroll tax allocated to pay for Medicare part A is not deductible. A
taxpayer who is not covered under the social security program and is not a government
employee paying Medicare tax may deduct the premiums voluntarily paid for Medicare
part A coverage.
Medicare part B premiums (the premiums paid or withheld from social security benefits
for supplemental Medicare coverage) are deductible as a medical expense.
Long- Term Care Insurance
For 2006, premiums paid for qualified long-term care insurance are deductible as a
medical expense up to these amounts:
$280 (age 40 and younger)
$530 (ages 41 through 50)
$1,060 (ages 51 through 60)
$2,830 (ages 61 through 70)
$3,530 (age 71 and older)
A long-term care contract is an insurance contract that provides only coverage for long-
term care services. The contract must be guaranteed renewable, have no cash
surrender value, and generally must not cover expenses that would be covered under
Long-term care services are services prescribed by licensed health care practitioners
for chronically ill individuals. These services must be:
Necessary diagnostic, preventative, therapeutic, curing, treating, mitigating, and
rehabilitative services, and
Maintenance or personal care services
Premiums paid for the following types of insurance policies are not deductible:
Covering loss of earnings while injured.
Policies covering loss of life, limb, or sight.
Policies paying a guaranteed amount for each day (or week) for a given period
of time while the taxpayer is hospitalized for sickness or injury. However, if the
policy also provides for medical care and the amounts for each are stated
separately, the portion of the premium allocable to medical care is deductible.
Policies paying for medical care from a portion of automobile Insurance
Medical and Dental Expenses
Deductible medical expenses include most fees paid to medical doctors, dentists,
psychologists, psychiatrists, chiropractors, and Christian Science practitioners. Most
fees paid for hospital services, therapy, nursing services, laboratory tests, and
payments for acupuncture treatments are deductible.
The cost of a smoking cessation program is deductible as a medical expense. The
deduction may include the cost of treatment and prescription drugs designed to
alleviate the effects of nicotine withdrawal. Costs for nicotine gum and patches not
requiring prescriptions are not deductible.
Weight-Loss Programs and Surgery
The government and the health care profession recognize obesity as a disease in and
of itself. If a physician has diagnosed a taxpayer as being obese, the cost of a weight-
loss program or weight-loss surgery is deductible as a medical expense.
A deduction is also allowed in cases where the weight-loss program or surgery is used
to treat other diagnosed diseases, such as arthritis, diabetes, high cholesterol, or
hypertension (high blood pressure). However, the cost of such a weight-loss program
undertaken for general health purposes or without a doctor's diagnosis of obesity is not
deductible. In no case is the cost of diet food deductible.
Example: Sandy, Roxanne, and Alice joined a well-known national weight-loss program
that sells portion-controlled packaged food to its members. Sandy had been diagnosed
as obese by her physician. Roxanne's doctor told her that losing weight would help her
lower her high blood pressure. Alice is not obese and does not suffer from any weight-
related health problems-she just wants to lose a few pounds.
Both Sandy and Roxanne may deduct the cost of the weight-loss program; Alice may
not. None of them may deduct the cost of the food.
After this attempt at weight loss failed, Sandy had obesity surgery at the
recommendation of her doctor. She may deduct the medical expenses connected with
While most legal medical services are deductible, the cost of cosmetic surgery (facelifts
and the like) generally is not. Cosmetic surgery is any procedure directed at improving
appearance and does not meaningfully promote the proper function of the body or
prevent illness or disease.
There is an exception to the non-deductibility of expenses for cosmetic surgery. If the
surgery or procedure is necessary to correct or improve a deformity arising from a
congenital abnormality, an accident or other trauma, or a disfiguring disease, the cost is
Medical Aid Items and Equipment
The costs of medical aid items and equipment, such as bandages, blood glucose
meters, eyeglasses, contact lenses, hearing aids, prosthetic devices, crutches, and
wheelchairs are deductible. The cost of related supplies, batteries, cleaning, and
maintenance of medical items and equipment is deductible.
The cost of purchasing and maintaining a service animal to assist individuals with any
kind of physical disability is deductible. The most common example of a service animal
is a seeing-eye dog.
Costs to purchase and maintain TTY/TDD (telecommunications devices for the deaf)
equipment, which allow hearing-impaired persons to communicate by text over the
telephone, are deductible. Costs to purchase Braille books and magazines for the blind
are deductible to the extent they exceed the costs of the same printed materials.
Example: Steve Henderson, a hearing-impaired individual, purchased a TDD unit for
$500. He also purchased some Braille books for his dependent daughter, who is blind.
The Books cost $350, same printed books would cost $190. Steven may deduct $660
for these items. [$500 + ($350 - $190)].
The cost of special equipment and structural improvements installed in a residence for
medical purposes is deductible as a medical expense. If the taxpayer rents the
residence, these costs are deductible in full. If the taxpayer owns the residence, the part
of the cost that exceeds any increase in the value of the property is deductible.
Example: On a doctor's advice, a taxpayer who owns his home installs central air
conditioning to alleviate his son's severe allergies. The unit cost $5,000 but increased
the value of the home by $5,300.
The cost of installation is not deductible because it did not exceed the increase in
The cost of operating and maintaining special equipment and structural improvements
is deductible for as long as there is a medical purpose for its use. Therefore, although
the cost of the air conditioner in the example above is not deductible, the increase in
utility bills from running the air conditioner and maintenance costs are deductible as
long as the taxpayer's son remains his dependent and resides in his home.
The IRS has ruled that the following capital expenditures undertaken to remove
structural barriers for handicapped individuals will not increase the value of the
residence and hence are fully deductible:
Constructing exit or entrance ramps
Widening doorways and hallways
Installing lifts, but generally not elevators
Installing railings, support bars, and other modifications in bathrooms
Lowering counters and cabinets
Adjusting electrical outlets and fixtures
Modifying fire alarms, smoke detectors, and other warning systems
Adding handrails or grab bars, whether or not in bathrooms
Modifying hardware on doors
Modifying areas in front of entrance and exit doorways
Grading of ground to ease access to the residence
Deductible transportation expenses incurred in connection with medical care include
fares for buses, taxis, planes, trains, and ambulance hire. Taxpayers using their own
cars for medical transportation may deduct out-of-pocket expenses for gas and oil. In
lieu of actual gas and oil expenses, 18\t per mile is deductible for the use of the
taxpayer's car. Regardless of which method is used to calculate medical transportation,
add to the deduction any medically related parking fees and tolls paid. The
transportation expenses of a parent who must take a child to receive medical care, or
for a nurse who must travel with a patient to get medical care, are deductible.
Transportation expenses for regular visits to see a mentally ill dependent are deductible
if the visits are recommended as a part of the treatment.
Meals and Lodging
If a person is in a hospital, nursing home, or similar institution primarily for medical care,
the cost of the meals and lodging the institution provides is a deductible medical
The cost of non-hospital lodging while away from home primarily for medical care
provided by a physician in a licensed hospital or in a medical facility that is related to or
equivalent to a licensed hospital is deductible. The deduction is limited to $50 per night
per person. Meals in this situation are not deductible.
Lodging expenses for a person accompanying the patient are deductible if the patient's
expenses are deductible and the patient is unable to travel alone. No deduction is
allowed for either the patient or the companion if the accommodations are lavish or if
there is any significant element of personal pleasure or recreation involved.
Example: Janice Rawlins accompanied her 10-year-old dependent daughter, Rachel,
to Rochester, Minnesota, for some medical tests Rachel needed to undergo at the
Mayo Clinic. While in Rochester, Janice and Rachel stayed for three nights at a motel
near the clinic while the tests were conducted. They spent $90 per night for the motel
and a total of $130 for meals. Janice may deduct $270 ($90 X3 nights) for lodging
because the mother and daughter have separate $50-per-night limits. Janice may not
deduct the $130 for meals.
Payments for special care necessitated by a physical or mental handicap or disorder
are deductible medical expenses. Such special care includes care furnished by a
special school for the physically or mentally handicapped, advance payments to an
institution for lifetime care, treatment and training of a mentally or physically
handicapped dependent, and tutoring provided for an individual who has severe
learning disabilities caused by mental or physical impairments. Alleviating the handicap
or disorder must be the primary reason for obtaining this special care in order for its
cost to be deductible.
Wages paid to individuals who provide nursing care, including meals provided and
payroll taxes paid on their behalf, may be deducted as a medical expense. The care
need not be provided by a nurse, but the services must be of a kind generally
performed by a nurse. These include caring for the patient's medical condition,
administering medications, assistance with bathing, grooming, and the like.
Certain expenses of handicapped individuals to assist them in their employment are
deductible elsewhere on Schedule A.
Some employers allow employees to defer some of their earnings before tax into a
flexible spending account, which may be drawn from to pay medical expenses after
they have been incurred. These plans also may allow employees to pay for their
medical or dental insurance with pre-tax dollars. These plans are often referred to as
cafeteria plans (or §125 plans, referring to the section of the Internal Revenue Code
that defines them) because the employee can choose from a "menu" of available
benefits, usually before taxable wages are computed.
No deduction may be taken for any medical expense that is paid for with pre-tax money.
The logic is simple: you cannot deduct from taxable income something that was never
included in the first place.
Non-prescription drugs and medicines, although non-deductible, may qualify for
reimbursement under a § 125 plan if they were used to treat a specifically diagnosed
disease or condition.
Example: Lisa Curcio had her employer deposit $10 of her salary per week into her
§125 plan. Lisa is under the care of a doctor to treat her arthritis. Her medical expenses
for the year include $300 for four doctor visits and $220 for over-the-counter pain
relievers recommended by her doctor. Lisa may receive reimbursement from her § 125
plan to cover the cost of the doctor visits and the pain relievers. If she did not have the
§ 125 plan, she could deduct the doctor bills, but not the cost of the pain relievers.
Reimbursement for Medical Expenses
Medical expenses that are reimbursed by an insurance plan or paid with pre-tax money
from a §125 plan are not deductible. Expenses that are paid directly by insurance are
not entered on the return. Reduce total medical expenses by any reimbursements
received (or expected to be received) before entering the net amount on Schedule A.
Any reimbursement received in excess of an actual expense must be used to reduce
other medical expenses.
If a taxpayer receives reimbursement in excess of medical expenses from an insurance
policy for which he paid the entire premium, the excess reimbursement is not taxable.
Page 136 of IRS Publication 17 explains the taxability of excess reimbursements if the
employer paid a portion of the insurance premium.
DETERMINING THE MEDICAL AND DENTAL EXPENSE DEDUCTION
To complete the Medical and Dental Expenses section of Schedule A, first enter total
deductible medical expenses on line 1. Medical and dental expenses are deductible to
the extent they exceed 7112% of the taxpayer's adjusted gross income (AGI). This limit
is computed on lines 2 and 3. Enter AGI (Form 1040, line 38) on line 2, multiply this
amount by 7112%, and enter the result on line 3. Subtract line 3 from line 1, and enter
the difference on line 4. This is the deductible portion of the taxpayer's medical
expenses. If line 3 is more than line 1, enter zero on line 4.
TAXES YOU PAID
In general, taxes that fall into the following categories are deductible:
State and local taxes (income or general sales)
Real property taxes (state, local, and foreign)
Personal property taxes (state and local)
Foreign income taxes
To be deductible, these taxes must be imposed on, and paid by, the taxpayer. Taxes
are generally deducted the year they are paid. Most taxes are deductible only on
Schedule A. However, the taxes incurred in the operation of a business or farm or in
producing rental or royalty income may be deducted from that income. These types of
income and related deductions are discussed in detail in later chapters.
State and Local Taxes
For 2006, taxpayers have the option of deducting either (1) state and local income
taxes paid during the year, or (2) state and local general sales taxes paid during the
year, but not both.
Deductible income taxes include all of the following:
State and local income taxes withheld from income (normally shown on Forms
W-2 and 1099)
Mandatory employee contributions to the California, New Jersey, or New York
Non-occupational Disability Benefit Fund, Rhode Island Temporary Disability
Benefit Fund, or Washington State Supplemental Workmen's Compensation
Payments of state and local estimated taxes including any portion of a prior-
year refund the taxpayer chose to have credited to his 2006 state or local
Any balances paid on a prior years' state and local returns
When considering the amount of state and local income taxes to deduct on Schedule A,
be careful to include only payments made during the tax year, regardless of the year to
which the payments apply.
Instead of state and local income taxes paid, individual taxpayers may choose to deduct
state and local general sales taxes. Sales taxes paid on items used in a trade or
business may not be deducted on Schedule A, but are included as part of the cost of
the items. Such costs generally are deducted as current expenses or depreciated over
a period of time. You learn more about this later in this course.
A general sales tax is a sales tax imposed on retail sales of a broad range of items at a
single rate. However, sales taxes imposed at different rates may also be fully or partially
deductible, as explained below.
Certain economically depressed areas impose sales taxes at rates lower than the
general sales tax rate. Also, some areas tax food, clothing, medical supplies, or motor
vehicles at reduced rates. If sales tax was imposed at a rate less than the general sales
tax rate, the actual amount of tax paid is deductible.
Sales taxes on items (generally motor vehicles) that are imposed at rates higher than
the general sales tax rate are deductible only up to the amount of tax that would have
been imposed on an item of the same cost taxed at the general rate. For this purpose,
motor vehicles include cars, trucks, vans, SUV s, recreational vehicles, motor homes,
motorcycles, and off-road vehicles. Also include any state and local general sales taxes
paid for a leased motor vehicle.
In order to deduct the actual amount of sales tax paid, the taxpayer must keep receipts
supporting his deduction amount. However, many taxpayers do not bother saving all
those receipts. Instead, Schedule-A filers may use the amount found in the optional
state sales tax tables provided by the IRS Publication 600, State and Local General
Sales Taxes. These tables are based on the taxpayer's state of residence, total
available income (defined below), and number of personal and dependent exemptions
claimed. The tables are included in the appendix to your text. An excerpt is shown in
If married taxpayers filing separately each choose to deduct state and local sales taxes
instead of income taxes, both spouses must use the same method to compute their
sales tax deductions. Thus, if one spouse uses the tables, the other spouse also must
use the tables.
Total available income is adjusted gross income plus any nontaxable income, including
Nontaxable combat pay
Nontaxable portion of social security and railroad retirement benefits
Nontaxable portions of IRA, pension, or annuity distributions (but not including
amounts rolled over)
Public assistance payments
Example: Russell Kimball lived in Florida the entire year for 2006. He is single and
claims one exemption. His adjusted gross income is $46,000. In addition, he received
$3,820 tax-exempt interest and $1,850 nontaxable social security benefits. Thus, his
total available income is $51,670. His state sales tax deduction from the Florida table is
$614. See Illustration 6.3.
In addition to the amount found in the table, taxpayers may add any local general sales
taxes plus the actual amount of state and local sales taxes paid (limited to the general
sales tax rate) on certain specified items. These items include the motor vehicles
described earlier plus any aircraft, boats, homes (including mobile and manufactured
homes) and home building materials.
A worksheet for computing the state and local general sales tax deduction is included in
IRS Publication 600 and shown in Illustration 6.2. As is our usual practice, round line 5
to four places instead of the recommended three.
Example: Russell Kimball, from the preceding example, lived in Miami (Miami-Dade
County) in 2006. The state of Florida imposes a general sales tax at 6% and Miami-
Dade County imposes an additional 1% general sales tax. AIl items are taxed at the
same general sales tax rate. The only special item he purchased in 2006 was a used
boat, costing $4,900, on which he paid $343 sales tax. Russell's state and local general
sales tax worksheet is shown in Illustration 6.2.
If the taxpayer lived in more than one state during the year, you must prorate the
amounts from the table for each state, based on the number of days lived in each state.
Also prorate any local sales taxes based on the number of days resided in each locality.
See Publication 600 for more information if you encounter this situation.
Caution: The decision whether to deduct state and local general sales taxes instead of
state and local income taxes can get a bit more complex than simply deciding which
option gives the greater Schedule-A deduction in the current year.
Real Estate Taxes
Real estate taxes are state, local, or foreign taxes levied on real property for the general
public welfare. They usually do not include local assessments for improvements that
increase the value of the assessed property. However, any portion of a local
assessment specifically allocated to repairs, maintenance, or related interest is
Real estate tax paid into an escrow account (sometimes called an impound account) is
deductible in the year the tax is paid from the account to the taxing authority, as
opposed to the year the money is paid into the account. Usually the account trustee
sends the owner a statement of taxes paid during the year.
The taxes imposed on real estate sold must be apportioned between the buyer and sell
r. The seller may deduct the taxes from the beginning of the year up to (but not
including) the date of sale. The buyer may deduct the taxes from the date of purchase
to the end of the year. This proration is usually shown on the closing statement.
Personal Property Taxes
A personal property tax is similar to a real estate tax, except that it is imposed on
personal property. Examples of personal property are clothing, jewelry, cameras, and
automobiles. The most common personal property tax is the tax certain states impose
annually on the value of automobiles and other vehicles registered in the state.
To be deductible, personal property tax must be based on the value of the property and
imposed on an annual basis, even if collected more (or less) frequently. A tax meeting
these requirements is deductible even if it is labeled as a fee. If only a portion of the fee
meets these requirements, that portion is deductible.
Example: Your State imposes an annual registration fee on motor vehicles. The fee is
equal to $25 plus 2% of the assessed value of the vehicle and $1 for every 100 pounds
of the vehicle's weight.
Your registration fee for 2006 is $175. [$25 + ($6,000 value X 2%) + (3,000 pounds 7
100 x $1) = $175] You may deduct $120 of the fee as personal property tax. [$6,000
value X 2% = $120] The remaining $55 is not deductible because it is not based on the
value of the vehicle.
You may include on Schedule A, line 8, any income taxes paid to a foreign country or
U.S. possession. These taxes may be claimed either as an itemized deduction or as a
credit. We briefly discuss the foreign tax credit, which is generally more favorable than
this deduction, in Chapter 9.
Federal taxes, including the taxpayer's federal income taxes, social security and
Medicare taxes, excise taxes, customs duties, and gift taxes, are not deductible on
Schedule A. State and local taxes that are not deductible on Schedule A include
inheritance taxes, gift taxes, taxes on utilities, gasoline, tobacco, and alcohol, and taxes
that are fines or fees for services.
Federal estate taxes attributable to taxable income received in respect of a de cedent
may be deductible as a miscellaneous expense. We discuss such deductions later in
INTEREST YOU PAID
There are several kinds of loans on which taxpayers may pay interest. Among them are
personal loans, business loans, loans to purchase investments, and home mortgage
Interest paid on personal loans such as car loans, credit card finance charges, and
installment plans is not deductible at all. Interest on business loans is deductible from
business income on the appropriate schedule. You will learn how to deduct business-
related interest later in this course. Qualified home mortgage interest and investment
loan interest are deductible on Schedule A. Both are described below. For either of
these types of interest to be deductible, the taxpayer must be legally liable for
repayment of the loan.
Qualified Home Mortgage Interest
Most interest paid on home mortgages is fully deductible, but there are exceptions. It is
important to distinguish qualified home mortgage interest from personal interest
because the former is usually deductible while the latter is not deductible.
Home mortgage interest (interest on debt secured by a principal residence or second
residence) must be categorized as interest on acquisition debt or interest on home
equity debt. Acquisition debt is debt incurred to buy, build, or improve the home. Home
equity debt is debt incurred for any purpose other than buying, building, or improving
Interest on acquisition debt is fully deductible as long as the debt does not exceed $1
million ($500,000 MFS) at any time during the tax year. Interest on home equity debt is
fully deductible as long as the debt does not exceed $100,000 ($50,000 MFS) any time
during the tax year or the difference between the fair market value of the home and the
remaining acquisition debt, whichever is less.
Example: In 2001, Mary Mahoney purchased her principal residence for $500,000. In
2005, when she owed $400,000 on the original mortgage, she borrowed $60,000
secured by the home and used the proceeds to build a sunroom and install an indoor
pool. By 2006, the home was worth $700,000, so Mary borrowed $130,000 secured by
the home and bought a sailboat. On her 2006 return, Mary may deduct as qualified
home mortgage interest the interest she pays on:
The $400,000 left on the original mortgage (acquisition debt)
The $60,000 sunroom/pool loan (acquisition debt)
of the sailboat debt (home equity debt)
The remaining $30,900 of the sailboat debt generates personal nondeductible interest.
Example: Jack Michaels purchased his home for $80,000. His debt remaining on his
original mortgage used to acquire the house is $70,000. The 2006 fair market value of
the house is $95,000. Jack used a home equity line of credit in 2005 to borrow $15,000
to purchase a new car. All of the interest paid on the original mortgage (acquisition
debt) and all of the interest paid in 2006 on the $15,000 car loan (home equity debt) are
deductible as qualified home mortgage interest.
Under the mortgage interest rules, all debt incurred before October 14, 1987, and
secured by a main or second residence is treated as acquisition debt. Such debt is not
subject to the $1 million cap, but does reduce the $1 million and $100,000 limits if any
additional debt is incurred on the residence after October 13, 1987.
In recent years, many mortgage lenders have made special offers allowing taxpayers to
take out home equity loans or lines of credit exceeding the fair market values of their
homes. They follow these offers with the caveat, "The interest is usually tax-deductible.
Ask your tax advisor." How would you advise a homeowner in this situation?
Example: Mabel Warren's principal residence is worth $3.2 million. In 2006, she had $2
million outstanding debt on the residence, all incurred prior to October 14, 1987. For
2006, she may deduct in full the interest she pays on the $2 million debt. If she now
borrows any more money, even for a home improvement, the interest is nondeductible
personal interest because she has already surpassed the $1 million acquisition debt
limit and the $100,000 home equity debt limit.
Recall that the interest paid on home equity debt is deductible up to the lesser of:
The difference between the fair market value (FMV) of the home and the
remaining acquisition debt
Consider the following example.
Example: Joe Matthews purchased his home in 2001 for $155,000, incurring $147,250
acquisition debt (his original mortgage). In January 2006, he took out a home equity
loan to consolidate his other debts at a lower interest rate. The lender, the Cash Market,
allowed him to borrow up to 110% of the fair market value of his home. His remaining
mortgage principal at the time was $138,600, and the fair market value of his home was
$165,000. [$165,000 X 110% = $181,500 limit] Joe borrowed $42,900, the maximum
amount allowed. [$181,500 limit - $138,600 existing mortgage = $42,900]
In 2006 the interest Joe paid on his home equity loan is not fully deductible. Why?
Because the home equity debt limit has been exceeded. The difference between the
FMV of the home and the remaining acquisition debt is $26,400 [$165,000 - $138,600 =
$26,400] which is less than $100,000. Joe borrowed $42,900; therefore, the interest on
$16,500 [($42,900 - $26,400 = $16,5001 of his home equity debt is not deductible.
The computation of such mortgage interest limitations can get rather involved, requiring
multiple worksheets. We do not ask you to complete the worksheets, but it is important
to be aware of the deduction limitations, because these types of home equity loans are
rather popular. If you encounter a similar situation, you may wish to consult IRS
Publication 936, Home Mortgage Interest Deduction.
Interest paid in advance (for a period extending beyond the current tax year) generally
is deductible in the tax years to which the payments apply. The taxpayer may deduct in
each year only the interest for that year.
Points (also called loan origination fees, maximum loan charges, or loan discounts) are
mortgage interest paid "up front," when the mortgage is granted. One point equals 1%
of the mortgage loan amount.
To be deductible as mortgage interest, points must be paid solely for the use of money.
Fees paid to cover services such as the lender's appraisal fee, notary fees, or the
preparation of the mortgage note are not deductible.
Because points represent interest paid in advance, they generally must be deducted
over the life of the loan. However, points incurred to finance the purchase or
improvement of the taxpayer's main home may qualify to be deducted in full in the year
they were paid.
Deducting Points in the Year Paid: Points are fully deductible in the current year if the
mortgage loan was secured by the taxpayer's residence and the charging of points is an
established business practice in the area. The deduction may not exceed the number of
points usually charged in the area. Further, funds obtained from the lender cannot be
used to pay the points. If the taxpayer is buying the home, he must provide funds at the
time of closing at least equal to the points charged. If any of these conditions is not met,
the points must be deducted over the life of the loan. The flowchart on page 145 of IRS
Publication 17 can help you determine whether points are fully deductible in the year
Note that even if a taxpayer qualifies to deduct the full amount of points when paid, a
taxpayer who does not benefit from itemizing deductions for the first year of the
mortgage may deduct the points over the life of the loan.
Example: Sandy Briggs, a taxpayer filing as head of household, purchased her first
home in November 2006. She paid three points ($3,000) to acquire her 30-year
$100,000 mortgage. Her first mortgage payment was made on January 1, 2007.
For 2006, her itemized deductions, including points paid, totaled only $5,700; well less
than her $7,550 standard deduction. Sandy should choose to deduct her points over the
life of the mortgage loan. Because she will have paid a full year's worth of mortgage
interest and real estate taxes in 2007, she will be more likely to benefit from itemizing.
Deducting Points Over the Life of the Loan. Points paid to refinance a home
mortgage (often referred to as a "re-fi") or to purchase a second home must be
deducted over the life of the loan. Generally, points deducted over the life of the loan
must be amortized using the original issue discount (OlD) rules. These rules are rather
complex, and we do not cover them in this course. However, cash-method taxpayers
may use a simplified method and deduct the points ratably (equally) over the life of the
loan if all of the following tests are met:
The loan is secured by a home.
The duration of the loan is not more than 30 years. For loans of more than 10
years, the terms of the loan must be the same as other loans offered in the
taxpayer's area for the same or longer period.
Either the loan amount is $250,000 or less, or not more than four points were
paid for a loan of 15 years or less (not more than six points for a loan of more
than 15 years).
Example: Sandy Briggs, from the preceding example, may deduct $100 of her points
[$3,000 ÷ 360 monthly payments X 12 payments per year = $100] each year from 2007
Loan Ends Early: If points are being deducted over the life of a loan and the mortgage
is paid off early, any remaining points can be deducted when the loan is paid off. In
cases where the mortgage is refinanced with a new lender, the remaining points on the
original loan are deducted when the loan is paid off. However, if the mortgage is
refinanced with the same lender, the remaining points must be deducted over the life of
the new loan.
Example: Amanda Probst refinanced her original home mortgage during 2006. The
original 30-year loan, made in July 1998, was for $125,000. Amanda paid 2112 points
to obtain the loan a total of$3,125. [$125,000 X 2.5% = $3,125] Her first payment was
made on September 1, 1998. She has been deducting the points over the life of
the loan at $8.68 per month, [$3,125 -;- 360 monthly payments = $8.68] from
September 1998 through December 2005. Prior to 2006 she has deducted $764. [$8.68
per month X 88 = $764] Amanda made her last payment on the original loan on
February 1, 2006.
The re-fi loan is a 15-year, $110,000, loan made on February 20,2006, with a new
lender. Amanda paid two points to obtain this loan. [$110,000 X 2% = $2,200] The first
payment was made on April 1, 2006. She must deduct the points on the re-fi over the
life of the loan. [$2,200 -;- 180 monthly payments = $12.22 per month]
Amanda's 2006 deduction for points is $2,471. [$3,125 points on originalloan - $764
deducted prior to 2006 + ($12.22 monthly points on new loan X 9 months) = $2,471]
Hypothetical: If Amanda's original loan had been refinanced with the same lender, the
$2,344 points remaining from the original loan, [$3,125 - $764 - $8.68 for January -
$8.68 for February = $2,344] would have to be deducted over the life of the new loan.
[$2,344 remaining points -;- 180 months = $13.02 per month] Thus, her 2006 deduction
for points would have been $245. [($8.68 X 2) + ($13.02 X9) + ($12.22 X 9) = $245]
Important: Any deduction for points is in addition to the deduction for the normal
monthly interest payments she made on both loans. Seller-Paid Points. Points paid by
the seller in connection with a loan to the buyer are usually considered for tax purposes
to be paid by the buyer and are deductible by the buyer. The taxpayer must reduce the
basis ofthe home by the amount of points paid by the seller.
Reporting Home Mortgage Interest on Schedule A
Financial institutions must report to the borrower and the IRS mortgage interest of $600
or more received during the year. Form 1098, a copy of which is shown in Illustration
6.4 on page 6.17, is used for this purpose. Box 1 shows the interest received from the
payer, exclusive of deductible points. Box 2 shows points received for the purchase of
the taxpayer's main home.
Box 3 shows any refund of interest made because the taxpayer overpaid the amount
actually owed. Entries in this box are fairly rare. If you are interested, you may find more
information about taxable recoveries of previously deducted amounts in Chapter 12 of
IRS Publication 17.
Box 4 can show various information, such as the address of the property financed, or
amounts paid out of escrow, such as real estate taxes and insurance premiums.
On Schedule A, line 10, enter deductible interest and points reported on Form 1098.
Keep in mind that the amounts shown on Form 1098 mayor may not be deductible,
depending on how they fit the guidelines discussed earlier.
Deductible home mortgage interest and points paid by the taxpayer not reported to him
on Form 1098 are entered on Schedule A, lines 11 and 12, respectively. If the recipient
of the interest is an individual, enter the recipient's name, address, and identifYing
number (usually SSN) on the dotted lines below line 11.
Investment interest is interest paid on money borrowed to buy investment property such
as stocks and bonds. Investment interest is deductible only to the extent of the
taxpayer's net investment income (investment income less expenses other than interest
expense). Any amount disallowed under this rule may be carried forward to future
Example: Patrick Hamill had net investment income of $900 and investment interest
expenses of $1,000. Patrick is only allowed a current deduction of $900. The remaining
$100 is carried forward to future years and deducted when he has sufficient net
investment income to absorb it.
The deductible interest amount is computed on Form 4952, which we do not cover in
this course. However, if the taxpayer meets all of the following criteria, he may dispense
with Form 4952 and enter his deductible investment interest directly on Schedule A, line
The taxpayer's investment interest expenses are not more than his investment
income from interest and ordinary dividends (minus qualified dividends).
The taxpayer had no other deductible investment expenses.
The taxpayer has no carryover of investment interest expenses from his 2005
Example: Bertha Fielding's only investment income for the year was ordinary (non
qualified) dividends of$500. Her investment interest expense for the year was $200, she
incurred no other deductible expenses associated with her dividends, and she had no
carryover of investment interest from the previous year. Bertha should enter $200 on
Schedule A, line 13. She does not need to file Form 4952.
One final note on investment interest: To be deductible, the interest must be incurred
to purchase taxable investments. Therefore, interest on a loan used to purchase
municipal bonds, for example, is not deductible. This is true even if the loan is a home
Personal interest is not deductible. Personal interest is interest paid on loans for
personal purposes, as opposed to business, investment, passive activity, or home
mortgage purposes. Examples of personal interest are car loan interest, personal loan
interest, and credit card finance charges. Also, as mentioned in the section dealing with
investment interest, interest on loans used to purchase nontaxable investments
(municipal bonds and life insurance, for example) is not deductible.
The amount of money contributed and the value or cost of property donated to qualified
U.S. charities are deductible. Donations must be made voluntarily and without receiving
(or the expectation of receiving) anything of equal or greater value in return.
To be deductible, a charitable contribution must be made to a qualified organization.
Qualified organizations generally are nonprofit groups that are charitable, religious,
educational, scientific, or literary in purpose, or that work to prevent cruelty to children
or animals. Certain organizations that foster national or international amateur sports
competition also qualify.
Examples of qualified organizations include:
Religious organizations such as churches, mosques, temples, and synagogues
Most nonprofit charitable organizations, schools, museums, hospitals, medical
research organizations, volunteer fire companies, civil defense organizations,
and war veterans' groups
The United States government, governments of US. states and possessions
and political subdivisions thereof (counties, municipalities, etc.), the District of
Columbia, and Native American tribal governments that perform governmental
Certain nonprofit cemeteries and fraternal organizations
The chart on this page lists some of the most popular charities. Most organizations,
other than religious organizations and governments, must apply to the IRS to become
qualified organizations. If you do not know whether an organization qualifies, you can
check with the organization or with the IRS. A complete list is available online at
Contributions to fraternal lodge societies (such as Elks, Lions, Masons, and Moose) are
deductible if they are used for qualified charitable purposes. They may not be used for
sickness or burial expenses of its members. Dues paid to fraternal lodge societies are
Amounts contributed to a nonprofit cemetery are deductible if the funds are irrevocably
dedicated to the perpetual care of the cemetery as a whole and not for a particular lot or
To be deductible, contributions must actually be paid in cash or property during the
year, regardless of when pledged. A donation paid by credit card is considered to be
paid on the date the charge slip is written.
If the taxpayer contributes cash, the deduction is usually the amount of cash
contributed. However, sometimes amounts which appear at first glance to be charitable
contributions do not qualify as deductions. A few examples follow.
Amounts paid to charitable organizations primarily for personal benefit, such as
educational or club activities for the taxpayer's child, are not deductible.
Amounts paid to a charitable organization for raffie tickets or to play games of
chance such as bingo are not deductible as contributions. (However, they may
be deductible as gambling losses, discussed later in this chapter.)
Contributions made for the benefit of an individual; to Chambers of Commerce
and other business, civic, political, and social clubs or organizations; and to
foreign and international organizations (except certain Canadian, Israeli, and
Mexican organizations) are not deductible.
If the taxpayer received something in return for the contribution, his deduction is
reduced by the value of the benefit received regardless of whether the taxpayer
actually used the benefit. For example, if a taxpayer pays $5 for a box of
cookies from a qualified organization, and a similar box of cookies can be
purchased in a store for $2, the taxpayer may deduct a $3 contribution.
New record keeping requirements for 2007
You cannot deduct a cash contribution, regardless of the amount, unless you keep as a
record of the contribution a bank record (such as a canceled check, a bank copy of a
canceled check, or a bank statement containing the name of the charity, the date, and
the amount) or a written communication from the charity. The written communication
must include the name of the charity, the date, and amount of the contribution.
Contributions of $250 or more made at anyone time to a qualified charitable
organization are deductible only if the taxpayer obtains written substantiation from the
donee organization. Canceled checks do not suffice to document such donations.
Written substantiation is required for both cash and property donations. It must be
obtained from the qualified organization by the earlier of the date the ta,xpayer files his
return or the due date of the return (including extensions).
Example: Maria Cora donated $300 to the Red Cross on January 4. She must have
written substantiation of the contribution from the Red Cross in order to deduct it.
However, if Maria had given two gifts at separate times of $150 each, her canceled
checks or other written documentation would suffice to document the deduction.
For contributions of more than $75 for which the taxpayer receives goods or services,
the donee organization must specify that the contribution is only partly deductible and
must furnish the taxpayer with a good-faith estimate ofthe value of the goods or
Out-of-pocket expenses incurred in rendering volunteer services to charitable
organizations are deductible. The cost and upkeep of uniforms, equipment, and
supplies used when performing services for a charitable organization are deductible.
The cost of transportation to perform volunteer work is deductible. If the volunteer uses
his car, he may deduct the cost of parking, tolls, gas, and oil. Alternatively, the taxpayer
may deduct 14¢ per mile for miles driven in 2006, plus parking and tolls. If the taxpayer
uses public transportation, that cost may be deducted. Qualified transportation includes
going to and from home to the locations where volunteer work is performed.
A chosen representative attending a convention of a qualified organization and others
whose volunteer work takes them away from home overnight may deduct food, lodging,
and other unreimbursed expenses directly related to the volunteer services. Recent tax
law changes have attempted to eliminate deductions for "charitable" trips that are really
disguised vacations. Thus, expenses for volunteer travel are deductible only if there is
"no significant element of personal pleasure, recreation, or vacation" involved. This
does not mean that the volunteer is forbidden to enjoy himself while performing the
volunteer service, but it does mean that volunteer service must be the main motivation
for the trip.
Example: Lee Martin accompanies a group of Boy Scouts on a camping trip. During the
trip, he is on duty as a supervisor of the scouts in a real and substantive sense most of
the time. Lee may deduct his travel expenses for this excursion. The fact that he enjoys
this type of activity does not disqualify his deduction.
Knowledge base: The definition of "good used condition or better" is still under
discussion as this book goes to press. Please check the Tax Knowledge Base for the
lastest information about "good used condition or better."
Smart alert: If a taxpayer donates a car worth more than $500 to a qualified
organization after December 31, 2004, and the organization sells the car, the taxpayer's
deduction is limited to the gross proceeds of the sale or the car's FMV; whichever is
less. However, if the organization improves the car or makes significant use of it before
selling it, the taxpayer may deduct the fair market value at the time of the donation.
The value of the volunteer's time and work is not deductible.
Example: Linda Jamison is an attorney. Without charge, she drew up a trust agreement
for her church. The work took her five hours. She normally charges $200 per hour for
such work. Linda may take no charitable deduction because the value of her time is not
The cost of transportation to attend meetings of charitable organizations as a member
or observer (rather than to perform volunteer services) is not deductible. The cost of
driving one or several people to an activity is not deductible unless the driving is
volunteer service to a charitable organization and the volunteer would not otherwise
attend the activity.
A taxpayer may deduct up to $50 per school month of the actual amounts spent for the
well-being of a student who is living in his home under a written agreement with a
qualified charitable organization. The student may not be a dependent or relative of the
taxpayer and must be a full-time student in the 12th grade or lower at a school in the
United States. A school month for purposes of this deduction is 15 days or more in a
calendar month during which the student lived with the taxpayer and attended school.
This deduction is used mostly by those who take foreign exchange students into their
homes. However, the costs of a foreign student living in the taxpayer's home under a
mutual exchange program whereby the taxpayer's child lives with a family in a foreign
country are not deductible.
Contributions of Property
You cannot take a deduction for clothing or household items you donate after August
17, 2006, unless the clothing or household items are in good used condition or better.
Generally, the fair market value (FMV) of property at the time it is donated to a
charitable organization is deductible. Fair market value is the price at which property
would be sold in a transaction between a willing buyer and a willing seller, both of whom
have full knowledge of the relevant facts.
In every case in which the FMV of donated property is less than the cost of the
property, the allowable deduction is FMV A common example is a donation of clothes,
home furnishings, or automobiles made to various charitable organizations or thrift
shops operated by such organizations. The FMV of these items is generally less than
the cost; therefore, the deduction usually is the FMV
Appreciated Property. If donated property has appreciated in value (FMV is more than
cost), the allowable deduction is the FMV minus the amount of the value that would
have been ordinary income if the property were sold. In most cases, if the property
donated was owned by the donor for personal or investment purposes, this means
If the taxpayer owned the property one year or less, the deduction is the cost of
If the taxpayer owned the property for more than one year, the deduction is the
FMV of the property-there are some exceptions, so do some research in IRS
Publication 526, Charitable Contributions, if you encounter this type of
Example: In 2002, Linda Atwell purchased 100 shares of ABC stock for $1,000. In
2006, when she gave the stock to her synagogue, the stock was worth $2,000. Linda
may deduct the full $2,000 because she held the stock for more than one year.
Example: In January 2006, Jerry Cloud purchased 100 shares of XYZ stock for $1,000.
In November, when he gave the stock to his church, it was worth $2,000. Jerry may
deduct only $1,000 because he did not own the property more than one year.
When total property contributions of more than $500 are deducted, Form 8283,
Noncash Charitable Contributions, must be completed. Page 1 is used if the value of
the property totals between $501 and $5,000 as well as for certain publicly traded
securities of any value over $500. The name and address of the charitable organization,
when and how the property was acquired, and the method used to value the property
must be reported.
If a single item of donated property (or aggregate of similar items) has a value of more
than $5,000, Form 8283, page 2, must be completed. The recipient organization is
required to sign this page. The taxpayer must obtain a written appraisal (except for
nonpublicly traded stock of $10,000 or less and securities for which market quotations
are readily available). The appraisal should not generally be attached to the return. A
separate Form 8283, page 2, is required for each different type of property given and
for each separate recipient organization.
For donated art with an aggregate value of $20,000 or more, the donor must attach to
his return a complete copy of the qualified appraisal. The taxpayer must also be able to
provide upon IRS request an 8 X 10 inch color photograph or transparency of any indi-
vidual objects valued at $20,000 or more. For purposes of these rules, art includes
paintings, sculptures, watercolors, prints, drawings, ceramics, antique furniture,
decorative arts, textiles, carpets, silver, rare manuscripts, historical memorabilia, and
Note: There is no deduction allowed for a donation of the use of property.
Example: A taxpayer allows a scout camp to use his property as a parking lot, but
retains title to the land. No deduction is allowed.
The taxpayer must keep a record of each cash or property contribution he makes.
Records of property donations should include a description of the property, its cost and
fair market value, the date of the contribution, and the name and location of the charity.
There are limitations on deductions for charitable contributions. The majority of
contributions by taxpayers are given to qualified charitable organizations. Donations to
most of these organizations are deductible up to 50% of AGI. However, gifts to
veterans' organizations, fraternal societies, and nonprofit cemeteries may not exceed
30% of AGI. Gifts of certain types of property may be further limited. The majority of
taxpayers do not approach these limits. If you are interested, you may find a discussion
of these limits and carryover provisions starting on page 155 of IRS Publication 17.
CASUALTY AND THEFT LOSSES
A casualty is the complete or partial destruction of property resulting from an identifiable
event of a sudden, unexpected, or unusual nature. It must be due to an external cause,
rather than to a defect in the product itself. A theft is the unlawful taking of property.
Casualty and theft losses include, but are not limited to:
Damage from a hurricane, tornado, earthquake, tidal wave, volcanic eruption,
flood, storm, fire, or sonic boom
Damage from an accident, if it was not caused by a willful act or willful
negligence on the part of the taxpayer
A loss from vandalism or theft
Damage or loss from a terrorist attack
Losses that are not deductible include:
Paying for personal injuries or damage to property owned by
Property broken through ordinary use or by wearing out over time
Loss of trees or other plants caused by a fungus, a disease, insects, worms, or
similar pests (Note, however, that sudden destruction of trees or plants caused
by an unexpected or unusual infestation of beetles or other insects may
Termite or moth damage
Accidental loss or disappearance of property if it was not the result of damage
from a sudden, unexpected, unusual, and identifiable event
Loss caused by a defect in the product
Example: The gradual wearing out of a roof is not a casualty. On the other hand,
damage to a roof caused by a severe storm is a casualty.
Example: Damage to a car caused by the owner losing control and accidentally running
into someone else's tree is a casualty. However, the car owner cannot claim as a
casualty any damages he paid for the tree.
Loss of market value because the property is near a casualty area is not deductible.
To claim a casualty or theft loss, the taxpayer must own or be buying the damaged
property or be responsible for damages to leased property.
Proof of Loss
In order to deduct a casualty or theft loss, the taxpayer should be able to substantiate:
The nature of the casualty or theft and when it occurred or was discovered
The loss was the direct result of the casualty or theft
He was the owner of the property or responsible for damages to leased
The adjusted basis of the property (usually its cost)
The fair market value of the property before and after the loss
The amount of insurance or other compensation received or expected to be
A casualty or theft loss of property held for personal use is deductible on Schedule A,
only after completing Form 4684, Casualties and Thefts. The loss must be reduced by:
Any insurance reimbursement the taxpayer receives (or is eligible to receive,
even if a claim is not filed)
$100 per incident, and
10% of adjusted gross income after combining all casualties and thefts for the
Unreimbursed losses of investment property such as notes, bonds, or collectibles held
for potential increase in value, are deductible on Schedule A, but such losses are not
reduced by the $100 floor or 10% of AGI. An unreimbursed casualty or theft of notes or
bonds is uncommon because most would be difficult to cash and would be replaced if
stolen or destroyed.
Amount of the Casualty or Theft Loss
Before the amount of a casualty loss can be computed, we must determine the adjusted
basis of the property and the property's fair market value (FMV) before and after the
casualty or theft.
The adjusted basis of property is usually the original cost plus the cost of capital
improvements and the cost of restoring the property after any previous casualty minus
any reimbursement or deduction of previous casualty losses and depreciation taken (if
the property had ever been used for the production of income).
An appraisal fee incurred in ascertaining the amount of loss is deductible as a
miscellaneous itemized deduction subject to the 2%of-AGI floor, which you studied in
this chapter, and not as part of the casualty or theft loss.
The cost of cleaning up, repairing, or replacing the property after a casualty is not
deductible. However, it may be used as a measure of the decrease in FMV if:
The repairs are necessary to restore the property to the same condition as
before the casualty
The amount spent for repairs is not excessive . The repairs only rectify the
The value of the property does not increase beyond the FMV of the property
prior to the casualty
Amounts spent to improve the structure of the property in order to protect against future
casualties are not deductible but may be added to the basis of the property. Expenses
incidental to the casualty, such as moving expenses and rental of temporary quarters,
are not part of the casualty loss.
Real Property (such as the taxpayer's main home, vacation home, or cabin). The
amount of casualty loss is determined for the entire property as a single item. The entire
property includes the buildings, land, landscaping, and other improvements. The loss is
the lesser of the adjusted basis of the entire property or the decrease in -FMV of the
entire property, less any insurance reimbursement.
Example: Pat Land owns a cabin in the mountains. The FMV of the cabin and the land
on which it stands was $95,000 before the uninsured cabin was damaged by a small
fire. Its FMV after the fire was $87,000. The adjusted basis of the property prior to the
casualty was $81,000. Pat's casualty loss (before applying the required reductions) is
$8,000. ($95,000 - $87,000).
Personal-Type Property (such as vehicles, furnishings, jewelry, and sporting
equipment). The amount of casualty loss is determined separately for each item. The
amount of the loss is the lesser of the adjusted basis or the decrease in fair market
value of each item of personal property, reduced by any insurance reimbursement or
If multiple assets are destroyed or damaged by the same casualty, the amount of the
loss for each asset is determined as stated, then totaled and reduced by a single $100.
The $100 floor reduces the total loss from each separate casualty or theft that might
occur during the year. The 10%-of-AGI reduction applies only to the total of all casualty
losses incurred during the year. The requirement to reduce the casualty amount by the
$100 floor and 10% of AGI applies to personal-use property but not to investment
Insurance policies can vary greatly and may cover less than (or more than) the entire
loss. If the policy has a deductible clause (the policy holder pays the first specified
dollar amount of each covered loss) or otherwise covers less than the entire loss, only
the out-of-pocket expenses are deductible. It does not matter how much the asset will
cost to replace. An insurance reimbursement also may result in a taxable gain, which
we will discuss in a moment.
Example: Kathy Schmitt's car was totaled in an accident in 2006. The car was worth
$4,000 before the accident and $300 afterward. Her auto policy had $250 deductible, so
the insurance company paid her $3,450. ($3,700 loss - $250 deductible) Her deductible
loss before limitations is only $250. It does not matter how much it would cost to buy a
When to Deduct a Loss
In general, a loss is deductible only for the year the casualty occurred or the theft was
If the taxpayer expects to be reimbursed in a later year, only the part of the casualty or
theft loss for which reimbursement is not expected is deductible. If the taxpayer
recovers less than he expected, the difference may be deducted in the year in which no
more reimbursement or recovery can reasonably be expected. If reimbursement is
received for a casualty loss that was previously deducted, the reimbursement must be
included in income for the year in which it is received, to the extent the deduction
reduced the previous year's income subject to tax.
Presidentially Declared Disaster Area. A casualty loss from a disaster that occurred
in an area the President of the United States declares to warrant federal assistance
may be deducted either on the return for the year in which the casualty occurred or on
the return for the immediately preceding tax year. For example, a disaster loss in 2006
may be deducted on either the 2006 or the 2005 tax return. The purpose of this
provision is to allow taxpayers who have been victims of a disaster to receive some
money quickly by filing an amended return for the preceding year, thereby obtaining a
A taxpayer has until the due date of the return for the year of the loss to make this
election. The election to claim the deduction on a prior year's return becomes
irrevocable 90 days after being made. The choice should be based on which year the
claim will result in the greater reduction of tax and on how quickly the taxpayer needs
Example: Brenda's car was destroyed by a tornado in September 2006. Due to the
severe damage caused by several tornados, her county was declared a disaster area
by the President. She may wait until she files her 2006 return and deduct the loss in the
usual way, or she may elect to file an amended 2005 return and deduct it there. She
must make the election by April 17, 2007, the due date for 2006 returns.
If she files an amended 2005 return on October 15, 2006, she has until January 16,
2007 (90 days), to revoke the election by filing another amended return and paying
back the refund. She may then claim the loss on her 2006 return.
Net Operating Losses
Casualty or theft losses of personal-use property that exceed the taxpayer's AGI may
possibly be used to reduce income in prior or future years. If you encounter this
situation, you will need to do some research on the subject of net operating losses. IRS
Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts,
provides an excellent starting place if you need to learn more about net operating
FORM 4684-CASUAlTIES AND THEFTS
When a person suffers a casualty or theft, in most cases a loss occurs. In some
instances, however, when insurance or other reimbursement is more than the adjusted
basis of the property, a gain can result.
Example: Suppose that Kathy Schmitt (from the earlier example) had an insurance
policy that paid the replacement cost for her car. She paid $8,500 when she bought the
car in 2003, and her insurance paid $10,000 when the car was totaled. She has a
$1,500 gain from the casualty.
Form 4684, Casualties and Thefts, is used to compute taxable gain or deductible loss
from a casualty or theft. Section A is used for personal-use property and Section B is
used for business and income-producing property. In this chapter, you will complete
only Section A. Study Form 4684, Section A, in Illustration 6.6.
Example: Lisa Ogilvie's car was severely damaged in a hail storm on September 3,
2006. She was not insured against such damage. She purchased the car on March 7,
2005, for $11,500.
Immediately before the storm, the fair market value of the car was $9,750. Lisa spent
$2,820 to repair the dents and replace the broken glass. Her AGI is $21,300.
Lisa's Form 4684 is shown in Illustration 6.6. The figure on line 6 was computed by
subtracting the cost of restoring the car to its previous condition from its FMV before the
A separate Section A must be completed for each separate casualty or theft. Each item
lost, destroyed, or damaged in the same casualty or theft is listed separately on line 1.
Computations necessary for each item are done in the appropriate column A through D.
If more than four items are involved in the same casualty or theft, or if the taxpayer
suffers more than one casualty or theft during the year, some special calculations are
necessary. Those are explained in the IRS instructions for Form 4684.
When Form 4684 is completed correctly, with the line-by-line directions on the form
followed carefully, any gain to be reported on Schedule D will appear on Form 4684,
line 15. Any deductible loss to be reported on line 19 of Schedule A will appear on Form
4684, line 21. The rules concerning FMV; basis, the $100 floor per casualty or theft, and
the 10%-of-AGI reduction are all taken into account.
A special note about Form 4684, line 15, is in order here. If there is a net gain, combine
the short-term gains and losses and enter the net short-term gain or loss on Schedule
D, line 4. Combine the long-term gains and losses and enter the net long-term gain or
loss on Schedule D, line 11.
Further special provisions apply to taxpayers who realize a gain from the destruction of
their main homes or contents in a presidentially declared disaster area. You can read
about this in the IRS instructions for Form 4684, or seek assistance if you encounter a
casualty gain situation.
Miscellaneous itemized deductions generally encompass expenses necessary for the
production of income. Thus, unreimbursed ordinary and necessary employment
expenses, gambling losses to the extent of gambling winnings, hobby losses to the
extent of hobby income, tax advice and preparation fees, investment expenses, and
similar expenses are deductible as miscellaneous itemized deductions.
Recall how medical expenses are deductible only to the extent they exceed 71/2% of
adjusted gross income. The total of most, but not all, miscellaneous itemized
deductions is subject to a similar 2%-of-AGI limitation. Examine lines 20 through 26 of
Schedule A to see where deductions subject to the floor are entered.
Next, look carefully at lines 20, 21, and 22. Line 20 is for unreimbursed employee
expenses and calls for the attachment of Form 2106 or 2106-EZ in some cases. Line 21
is for tax preparation fees. Line 22 is for "other" expenses. Other expenses are
miscellaneous deductions that are not employment related; for example, fees paid for
investment advice or the rent paid for a safe deposit box in which to store stock
Form 2106 or 2106-EZ is required to report a number of employee business expenses.
These include transportation, travel, meals, and entertainment expenses, and any
reimbursements received from the employer and not included in box 1 of Form W-2. In
this chapter, you will learn to use Form 2106-EZ to report only unreimbursed
transportation expenses using the standard mileage rate. Other types of expenses
requiring the use of Form 2106 or Form 2106-EZ will be covered later in this course.
Taxpayers who have unreimbursed employment-related expenses other than those
listed above need not file Form 2106 or Form 2106EZ. Simply enter the description of
the expense(s) and the amount(s) on Schedule A on the dotted lines to the left of line
20, and enter the total on line 20.
Expenses Subject to the 2% Limitation
The miscellaneous itemized deductions discussed in the remainder of this section are,
when totaled, subject to the 2%-of-AGI limitation. We will not be discussing all
miscellaneous deductions available in this section because sales and home-office
expenses and those that require Form 2106 are treated extensively later.
Employees (except statutory employees) who claim a deduction for using an
automobile in connection with their employment must file Form 2106 or Form 2106-EZ.
For now, we will focus exclusively on Form 2106-EZ.
People in business for themselves and statutory employees may also claim a deduction
for business transportation. While the rules you will learn in this chapter generally apply
to all taxpayers who have deductible transportation expenses, independent business
persons and statutory employees will claim their deductions on Schedule CEZ (or
Schedule C). Transportation expenses to care for rental property are deducted from
that income on Schedule E. You will learn more about these forms later in the course.
Deductible transportation expenses are those that involve the use of a motor vehicle for
business purposes (other than commuting, discussed below). Outside salespersons
and individuals who provide onsite repair, maintenance, construction, or remodeling
services will generally have transportation expenses unless the employer provides the
vehicle and pays all the expenses. Independent delivery persons and over-the-road
truck drivers will have transportation expenses.
It is possible for many different types of workers to have such expenses occasionally.
For example, an employee who works at the employer's place of business and is
required to use his car to take deposits to the bank or mail to the post office may have
transportation expenses. A taxpayer who works at two locations for the same employer
in one day may deduct the cost of getting from one place to the other. In addition,
taxpayers who work at two separate jobs in the same day may deduct the cost of
getting from one place of employment to the other.
Commuting: It is important to distinguish between deductible business mileage and
nondeductible commuting mileage. A taxpayer cannot deduct transportation expenses
for going from his home to his regular place of business (a specific building or location)
and back home. This is commuting mileage.
Example: Carl Anderson, a married taxpayer, is an insurance adjuster. His office is
located at his employer's corporate headquarters, five miles from Carl's home.
Transportation between his home and the office and back home is a nondeductible
Driving Between Work Locations: If the taxpayer must drive from the regular location
or the first business location to other business locations, that mileage is deductible. The
same is true of running errands for the employer.
Example: In the course of his work, Carl (from the preceding example) often drives his
own car from the office to various client-related locations during the workday. He drove
3,340 miles and paid $'16 in tolls while making these visits during 2006. The mileage
from the office to client locations and back to the office produces a deduction. The
related tolls are also deductible.
Temporary Work Location: An employee who works in a temporary job location for his
current employer may deduct the cost of round-trip transportation from his home to the
temporary location, even if it is within the same general area of the employee's regular
place of business.
Example: In addition to the client visits, Carl's employer required him to work in one of
the company's other offices for two weeks (10 work days). The other office is 14 miles
from his home. Even though the temporary assignment may be considered to be in the
same general area as his regular place of work, the cost of round-trip transportation
between his home and the other office generates a deductible business expense.
You will learn more about temporary assignments during the discussion of travel
expenses later in the course.
Short-Term Workers: The situation is different if a person has no regular place of
work, but rather works at different locations on a short-term basis in the area where he
lives. Such a taxpayer may not deduct the cost of transportation from home to work and
return. Such a taxpayer will, however, generate a deduction if he works at more than
one work site during the day.
Example: Rhonda Wallace is employed as a house painter. Her work takes her to
different locations within the general area in which she lives. Her transportation from her
home to her work site and return each day is a nondeductible commuting expense.
If Rhonda works at two or more locations during the same day, her transportation
between work sites is deductible. However, her commute from home to the first work
site and from the last work site back home is not deductible.
There are two methods for computing allowable transportation expenses: the regular
method (using the actual expenses incurred) and the optional method (using a standard
rate per mile of business use). In this chapter, we will discuss the optional method only.
The regular method will be covered later in the course.
Optional Method: To qualify to use the optional method with the standard mileage rate,
a taxpayer must do all of the following:
Own or lease the vehicle
Not use the vehicle for hire (for example, as a taxicab)
Not have more than four vehicles in simultaneous business use at any time
during the year
Use the optional method the first year the car or truck is placed in service
Example: In 2006, Paula Booth began her own messenger service. She used her 2004
Honda Civic to make deliveries in the metropolitan area in which she lives. She also
owns a 2000 Chevrolet Cavalier, which she uses for personal purposes. She has not
used either car for business in the past. Paula may use the standard mileage rate for
the Honda. If she decides to use the Chevy for business in a future year, she may use
the standard mileage rate for it, too.
The 2006 standard mileage rate is 44.5¢ per mile. The deductible amount is computed
by multiplying the mileage on line Sa in Part II of Form 2106-EZ by 44.5¢ then entering
the result on line 1 in Part 1.
On line 2, enter parking and tolls paid for employee business purposes and add them to
the mileage allowance on line 1 to determine the total deduction. No other actual
vehicle expenses may be added to this amount.
Any allowable personal property tax paid on an employee's vehicle is deductible as
usual on Schedule A. Finance charges (interest) paid on a loan used to finance the
vehicle are not deductible by employees. This treatment is slightly different for self-
employed taxpayers, as you will learn later.
Taxpayer records for substantiation of transportation expenses should be kept in a
timely manner as the expenses occur. A record book should contain information
showing dates, times, mileage, business purpose, and any other pertinent information.
Example: Let us go back to Carl Anderson. He started using his car for business
purposes on May 1, 2005, claiming the standard mileage rate for that year. He worked
at his regular job location 230 days during 2006. He used his trip odometer to keep
track of his business mileage and kept written records. He received no reimbursements
from his employer. Carl did not know he needed his total mileage for the year, but he
estimates 10,000 miles. His wife also owns a car.
Carl's Form 2106-EZ is shown in Illustration 6.7. His business mileage is 3,620 miles
[3,340 + (10 days X 28 miles round trip»), and his commuting mileage is 2,300 miles
(230 days X 10 miles round trip). His other (personal) mileage was computed by
subtracting these two figures from 10,000 miles.
Note: It is not crucial to have a precise figure for total annual mileage when the
standard mileage rate is used. But, complete and accurate records for all mileage is
important when actual expenses are used. You will learn more about that later.
The cost of education that maintains or improves the skills required by the taxpayer's
present job, or that meets the requirements of the law or the employer for maintaining
the taxpayer's present salary or position, is deductible as an employment expense. This
is true even if the taxpayer receives a degree through his course of study.
Expenses are not deductible if the education is required to meet the minimum
educational requirements in effect when the taxpayer first obtained the job, or if it
qualifies him for a new trade or business.
Example: Karyn Piccone, a convenience store clerk, took the H&R Block Income Tax
Course in 2006 in the hope of becoming a tax professional. Because the course would
qualify her to work in a new business, the cost of the course is not deductible.
Later, we will discuss other education tax benefits such as the lifetime learning credit
and the Hope credit. We have also discussed the tuition and fees deduction already in
Chapter 5. As you will see with the lifetime learning credit and the tuition and fees
deduction, qualified expenses include amounts paid for tuition and other course-related
fees. However, certain expenses that do not qualify for those tax breaks may be
deductible on Schedule A. For example, fees for courses taken at locations other than
qualified institutions (colleges) are deductible. Also deductible are the cost of all books
and qualified transportation expenses.
Example: Dave Wolfe, an H&R Block tax professional, took H&R Block's Disposition of
Business Assets course in 2006 to improve his job skills. Dave's tuition is deductible.
The classes were held at an H&R Block tax office. Because the tax office is not a
qualified institution for purposes of the lifetime learning credit and the tuition and fees
deduction, Dave may not claim either of those benefits for the tax course. He may,
however, take a deduction for the course on Schedule A.
Remember, the taxpayer may not claim more than one tax benefit for the same
expenses. If an expense qualifies for either a lifetime learning credit, a tuition and fees
deduction, or a Schedule A deduction, the one that provides the greatest tax benefit is
the one the taxpayer should use. Some of the factors to consider are the income
limitations, the taxpayer's marginal tax rate, and whether his deductible expenses
exceed the 2%-of-AGI floor.
Unreimbursed expenses incurred in seeking new employment in the same occupation
are deductible. Such expenses are not deductible if the taxpayer is seeking
employment for the first time or employment in a new occupation. The occupation of a
taxpayer who is unemployed is that work engaged in during the most recent
employment. An individual who has been unemployed for a long period of time before
beginning to look for a job may not deduct his expenses.
Example: Carol Tashahito was a bank teller. In 1997, she decided to stay at home and
raise her children. In 2006, Carol sought work again as a bank teller. Because Carol
had a long period of time between paid jobs, she cannot deduct her job-seeking
Deductible expenses include employment agency fees, the cost of preparing and
mailing resumes, and telephone expenses. Transportation and travel expenses incurred
in seeking qualified new employment away from the general area of the present job are
also deductible. Qualified job-seeking expenses are deducted directly on Schedule A,
line 20, or on Form 2106 (or 2106-EZ) if transportation or travel expenses are involved.
Qualified job-seeking expenses are deductible even if they do not result in securing
Other Employment-Related Deductions
The following work-related expenses are listed directly on Schedule
A, line 20, unless Form 2106 (or 2106-EZ) is otherwise used:
Subscriptions to professional or trade publications related to the taxpayer's
Union dues, initiation fees, and assessments for benefit payments to
unemployed union members are deductible. (However, assessments that
provide funds for sickness, accident, or death benefits are not deductible.)
Dues paid to a professional society by a lawyer, teacher, account ant, doctor, or
Business liability insurance.
Cost of a physical examination required by an employer. (This may be
deducted instead as a medical expense if that is more advantageous.)
Cost of small tools, supplies, and licenses required in the taxpayer's
teaching aids, supplies, and equipment. (Include only amounts in excess of
those deducted as an adjustment to income, discussed in Chapter 5.)
safety equipment and protective clothing, such as safety glasses or shoes, hard
hats, and other items to protect the worker's physical well-being.
of specialized clothes and uniforms is deductible if such clothing is specifically
required by an employer and is not adaptable to general wear. (Both
qualifications must be met.) The cost of cleaning and maintaining qualified
clothing is also deductible. Qualified clothes include the special apparel and
equipment required of ballplayers, firefighters, police officers, letter carriers,
and nurses. The cost of theatrical costumes and accessories worn by
musicians and other entertainers is deductible if the items are not suitable for
equipment) that are expected to be used in the taxpayer's employment for more
than one year must be depreciated-that is, the cost is deducted over a period of
time. (Computation of depreciation is covered later.)
Tax Preparation Fees
If the taxpayer paid someone to prepare and/or electronically file his income tax
return(s), the fees are deductible. These amounts are entered on Schedule A, line 21.
Also include the cost of tax preparation software and publications. Bank fees or finance
charges paid to financial institutions in connection with applying for or obtaining refund
anticipation loans or similar products are not deductible.
If the taxpayer is self-employed or owns rental property, the portion of tax preparation
fees directly associated with the business or rental property should be deducted on the
appropriate form (Schedule C, E, F, or Form 4835), and the remainder deducted on
Schedule A, line 21. We will discuss this issue again later in the course.
The fees are deducted in the year paid. Thus, the amount entered on the 2006 return
will usually reflect the preparation of the 2005 return(s).
Investment expenses, which are deductible only as itemized deductions on Schedule A,
line 22, include:
Amounts paid to a broker or similar agent to collect income
Legal expenses necessary to produce or collect taxable income*
Appraisal fees to determine the value of property donated to a charity or to establish the
amount of a casualty loss
Fees paid for investment advice
Safe-deposit box rental fee if the box is used to keep potentially taxable
investment-related papers and documents such as stocks or bonds
Custodial fees in connection with property held for the production of
Amounts actually paid for clerical help or renting an office used in taking care of
investments (but no deduction can be claimed for the value of the taxpayer's
time, other unpaid help, or space in the taxpayer's home)
The taxpayer's share of investment expenses of a regulated investment
Certain losses on non-federally insured deposits in an insolvent or bankrupt
Deduction for repayment of amounts under a claim of right if $3,000 or less
* Certain attorney fees and court costs incurred after October 22, 2004, for cases
involving unlawful discrimination may be deducted as an adjustment to income.
Expenses to attend shareholders' meetings are usually not deductible. Neither are
expenses to produce nontaxable income such as municipal bond interest.
Note: Casualty and theft losses from property used in performing services as an
employee are also deducted on Schedule A, line 22. These amounts are carried from
Form 4684, Section B, which is beyond the scope of this course.
A hobby, for tax purposes, is an activity not entered into for profit.
Example: George Conway collects stamps for his own enjoyment. Occasionally, he
sells a stamp when he has a duplicate. George has a hobby, not a business.
Hobby expenses are deductible up to the amount of income from the hobby that is
reported on the tax return. The following expenses attributable to hobby income are
deductible, in this order:
1. State and local property taxes and casualty losses (that is, deductions that are
allowable as personal itemized deductions) are fully deductible.
2. All other expenses of the hobby, such as craft supplies and sales expenses, may be
deducted only to the extent gross income from the activity exceeds the deductions
described in 1 above.
3. Depreciation may be deducted only to the extent gross income from the activity
exceeds the expenses described in 1 and 2 above. (Equipment with a useful life of
more than one year that is used to produce hobby income is a depreciable asset.
That is, the cost is divided and a portion is deducted each year for a number of
years, instead of deducting the entire cost in the year of purchase. Depreciation is
The hobby expenses in items 2 and 3 above may be deducted only as itemized
deductions on Schedule A, line 22. Hobby income is reported on the return as other
income on Form 1040, line 21.
Some examples of nondeductible expenses include:
Repairs and improvements to a personal residence
The cost of personal-use property (vehicles, furniture, and appliances, for
Homeowner's or renter's insurance
Non-business license fees (driver, pet, hunting, and fishing, for example)
Fines and penalties (for traffic violations, for example)
Personal legal expenses, except those paid to obtain taxable Income
Example: Betty Dawson paid her lawyer the following amounts during 2006:
$5,000 Representation during her divorce
650 Preparation of a new will
2,200 Assistance in obtaining alimony
Betty may deduct the $2,200 because she spent it attempting to secure taxable income.
The remaining expenses are not deductible.
OTHER MISCELLANEOUS DEDUCTIONS
Two kinds of miscellaneous deductions are available on Schedule A. Let us look first at
those miscellaneous itemized deductions not subject to the 2%-of-AGI floor. (The
concept of an AGI "floor" is discussed in the next chapter.) Expenses that fall into this
Gambling losses to the extent of winnings included on Form 1040, line 21.
Gambling losses include amounts paid to charitable organizations for lottery
and raffle tickets, bingo, and other games of chance, as well as amounts
lost in other forms of gambling.
Impairment-related work expenses for handicapped individuals.
Federal estate tax on income in respect of a decedent. . Unrecovered cost of a
decedent's pension or annuity.
Repayments of certain types of income more than $3,000 under a claim of
Casualty and theft losses from income-producing property from Form 4684,
Amortizable bond premiums on bonds acquired prior to October 23, 1986.
Miscellaneous itemized deductions not subject to the 2%-of-AGI floor are identified and
entered on Schedule A, line 27. In this course, only gambling losses are discussed. If
you encounter any of the others, you will need to do additional research.
Gambling losses to the Extent of Winnings
Taxpayers who deduct gambling losses should be advised to keep an accurate diary or
similar record of their losses and winnings. The diary should contain at least the
The date and type of wagering activity
The name and address or location of the gambling establishment
The names of other persons present with the tax-payer at the gambling
The amounts the taxpayer won and lost
In addition to a diary, the taxpayer should also have other documentation. The taxpayer
can generally prove his winnings and losses through Forms W-2G, wagering tickets,
canceled checks, credit records, bank withdrawals, and statements of actual winnings
or payment slips provided by the gambling establishment.
The taxpayer need not present all of this documentation to his tax professional to prove
his deductions; but as a tax professional, you should inform the taxpayer that the IRS
requires extensive documentation for gambling losses.
ITEMIZED DEDUCTION LIMITATION
If a taxpayer's AGI exceeds $150,500 ($75,250 if married filing separately), his itemized
deductions may be limited. In such a case, total itemized deductions are reduced by 3%
of the amount by which his AGI exceeds $150,500 ($75,250). Itemized deductions will
never be reduced by more than 80% of the amount by which they exceed the taxpayer's
medical expenses, investment interest, non-business casualty and theft losses,
gambling losses, and certain charitable contributions.
Schedule A is prepared as usual for a taxpayer with an AGI exceeding these levels,
except for the total line (line 28). To complete Schedule A, first check the yes box to the
left of line 28 and complete the Itemized Deductions Worksheet-Line 28. See Illustration
Example: Melanie and Frank Garcia are married and filing a joint return. Their AGI is
$175,000. They have $20,000 of itemized deductions this year. The $20,000 of itemized
deductions came solely from home mortgage interest and taxes they paid. Their
itemized deductions are limited to $19,265. [20,000 - ((175,000 - 150,500) X .03)].
In this chapter, you learned:
Most medical and dental expenses are deductible to the extent they exceed
7%% of the taxpayer's adjusted gross income.
Transportation for medical purposes is deductible. An 18¢ per mile rate is
available in lieu of actual gas and oil expenses.
Generally, taxpayers may deduct the larger of their total itemized deductions or
their standard deduction.
A taxpayer may deduct the following taxes:
State and local taxes (income or general sales) . Real property tax
Personal property tax
Foreign income taxes
A taxpayer may deduct interest paid on qualified home mortgages and on
money borrowed to buy investment property. However, personal interest is not
Cash and property donated to qualified U.S. charities is deductible. A taxpayer
must voluntarily make the donation and not receive anything of equal or greater
value in return.
Unreimbursed casualty and theft losses on personal-use property are
deductible, subject to reductions of $100 per incident and 10% of AGI for all
losses during the year. Form 4684 is used to report casualty and theft losses.
Miscellaneous itemized deductions subject to the 2%-of-AGI limitation include
most employee business expenses (which will be covered in detail later), fees
for financial and tax advice, preparation, and electronic filing, investment
expenses, safe-deposit box fees if the box contains items held for investment,
and qualified job-seeking expenses.
Work-related transportation expenses may be deducted using Form 2106 (or
2106-EZ). Qualified taxpayers may use the standard mileage rate of 44.5 per
The cost of education that maintains or improves the skills required by the
taxpayer's present job or meets the requirements of the law or the employer for
maintaining the taxpayer's present salary or position is deductible.
Job-seeking expenses are deductible if they were incurred while attempting to
obtain a new job in the taxpayer's current occupation.
Gambling losses to the extent of gambling winnings are deductible.
Taxpayers with adjusted gross incomes exceeding $150,500 ($75,250 MFS)
face a phase-out of their total itemized deductions. The deductible total for such
taxpayers is computed on the Itemized Deductions Worksheet-Line 28.
For further information on the topics discussed in this chapter, you may wish to read
Chapters 21-26 and 28 in IRS Publication 17.