10Itemized Deductions

							Itemized
Deductions
Not Itemized


 Personal expenses - except by legislative grace
    Normally itemized, but trend is to allow deduction
     FOR AGI
 Business expenses – deductible for AGI, unless
  unreimbursed employee business expenses (Form
  2106).
 Standard deduction – used in lieu of itemizing
Medical Expenses

  Out-of-pocket expense in excess of 7.5% of AGI,
   and not deducted elsewhere
     Medical insurance premiums
     In 2013, this floor goes to 10%, unless t/p turns 65 before
      eoy
  Deductible in year paid or charged to card
     Medical expenses of decedent may be deducted in year
      incurred
     Cannot “prepay” unless norm in industry
  If under advice of physician, generally ok on test,
   double-check in real life
     Unnecessary cosmetic surgery not deductible
Capital Expenses for
Medical
  Deducted in year expense is
   incurred
  Equals amount of
   expenditure less increase in
   value to personal residence
    Unless to eliminate structural
     barriers to home or auto or
     telephone equipment to
     accommodate a physical
     handicap: deductible in full
Children of Divorced
Parents
  Costs deductible by either parent (but not
   both)
Transportation Expenses

  Deductible, generally using standard
   mileage allotment (24¢, 2009; 19¢/23¢,
   2008) + parking & tolls
  Round trip cost to and from point of
   treatment
              Lodging Expenses

 Primary for and essential to medical care
  of licensed doctor, hospital or medical
  facility
 Not lavish, extravagant, or for personal
  pleasure or recreation
 Up to $50 per night per person including a
  traveling companion
Long-term Care Insurance

  Premiums based on
   age
  Up to $310 - $3,850
   in premiums
   (indexed) for 2008
  May pay out
   $270/day.
Subsequent
Reimbursement
  Apply tax benefit rule
Health Savings Accounts
  Are high-deductible policies (over $1,100
   deductible for self, $2,200 family in 2008)
  Payments into HSAs deductible for AGI subject
   to limitations ($5,800 family coverage; $2,900
   sole coverage for 2007 w/ $900 catch up for
   those born b4 1954).
  Distributions from HSAs not taxable if used for
   medical expenses
    Else taxable, and penalized @10% if made before
     65 unless death or disability
6. T's A.G.I. for the current year is $20,000. Her
medical expenses during the year were:



  Aspirin, cold medicine, etc.                     $ 125
  Prescription drugs                                260
  Medical insurance premiums                       1,000
  Doctors, dentists, etc.                          3,200
     Assuming she is not reimbursed for any medical expenditures
     during the current year, T's medical expense deduction is
     a. $2,700
     b. $2,960
     c. $3,085
     d. $4,460
     e. $4,585
                 Deductible Taxes


 Property taxes in year of payment
   Apportioned between buyer and seller of
    property
   Must adjust if not apportioned at closing
 Personal property ad valorem taxes
 Larger of state and local income or sales
  tax
7. Taxpayers are allowed to deduct several
  types of taxes for Federal income tax
  purposes. These include
  a. state, local, and foreign income taxes.
  b. state, local, and foreign real property taxes.
  c. state and local personal property taxes.
  d. All of the above.
  e. both a and b.
Deductible Interest
 Qualified education loans – interest deductible for
  AGI
 Investment interest, up to investment income,
  including net capital gains (Form 4952) if waiving
  lower tax rate
 Mortgage interest for acquisition of 1st or 2nd home
  loan up to $1million borrowed; home equity
  interest for loan up to $100,000 borrowed, if does
  not put home equity in a negative position
 Points: for acquisition, deductible in full; for re-
  financing, pro-rated
Non-deductible Interest

  Other personal loans
  Related party loans where arbitraging
   cash & accrual bases
  Interest for generating tax-exempt
   income.
  Interest prepayment: cash basis
   taxpayers must use accrual basis
  See Table 10-3
10. D made the following payments during 2008:
       Interest on revolving charge accounts $           400
       Interest on original $140,000 home mortgage       6,800
       Interest on bank loan (loan used to purchase state of New
       York tax-exempted bonds)                          3,100
       Interest on credit union loan (proceeds of loan were used for
       a family vacation)                                1,600

How much of the above amounts may D deduct as an itemized
  deduction for interest expense on his Federal income tax return?
  a. $6,800
  b. $7,200
  c. $8,800
  d. $9,900
  e. $11,900
TV Tax

  Sponge Bob “lives in a pineapple under
   the sea.” Under what conditions may he
   deduct the mortgage interest and
   property taxes paid on his residence?
  His friend Patrick who lives under a rock
   cannot deduct anything
Charitable Contributions
    Donative intent
    Absence of consideration
    To qualified organization
    Limited to 20%, 30% or 50% of AGI
      Depending on type of qualified organization; 50% for
       public charities; 30% ordinary income to private non-
       operating foundations.
  Ordinary income property limited to basis
  Cash or non-cash items in „good‟ or better
   condition @ FMV
  Mileage @ 14¢/mile for 2006 - 2008
  Beginning 2007, must document all cash
   donations w/cancelled check, bank record or
   receipt (no logs).
Nondeductible Charitable

  Raffle tickets
  Cost of tuition
  Gifts to individuals – but see
   Katrina/Rita provisions
  Gifts to civic leagues, certain social or
   sports clubs, labor unions, chambers
   of commerce
8. F's 2008 adjusted gross income is $42,000. F made the following
   charitable contributions in 2008:
         Cash contribution to church (w/ receipt)              $4,500
         Tickets to a public charity dinner
         (the fair market value of the two dinners was $100)   2,000
         Donation of used household goods to the Salvation Army (cost was
         $400, fair market value was $150; in good or better condition)
   What is F's 2008 charitable contribution deduction (assuming he attended
   the charity dinner and itemizes his deductions)?
   a.    $4,750
   b.    $5,000
   c.    $6,550
   d.    $6,650
   e.    $6,900
Miscellaneous Itemized
Deductions
  Subject to 2% AGI floor
  Include: employee business
   expenses, tax preparation
   fees, safety deposit box
   rentals, hobby expenses
1% Phase-out of Itemized
Deductions
  Is being phased out; repealed entirely for 2010
   only.
  Does not apply to standard deductions
  Applies to taxpayers with AGI over $166,800
   (2009, indexed)
  Applies only to taxes, non-investment interest,
   charitable and misc. itemized deductions
  Cutback cannot exceed 80% of these
   deductions