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Itemized Deductions


State, local, and foreign income taxes and real property taxes are deductible in year paid ... CG property for which the contribution amount is FMV ... – PowerPoint PPT presentation

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Title: Itemized Deductions

Chapter 7
  • Itemized Deductions

Itemized Deductions (slide 1 of 2)
  • Personal expenditures that are deductible FROM
    AGI as itemized deductions include
  • Medical
  • Taxes
  • Interest
  • Charitable Contributions
  • Casualty losses
  • Miscellaneous itemized deductions

Itemized Deductions (slide 2 of 2)
  • Itemized deductions provide a tax benefit only to
    extent that in total they exceed the standard
    deduction amount for the taxpayer

Medical Expenses (slide 1 of 7)
  • Medical expense defined
  • Expenditure for the diagnosis, cure, treatment,
    prevention, or for purpose of affecting any
    structure or function of the body of the
    taxpayer, spouse, or dependents
  • Includes prescription drugs and insulin
  • Medical expenses do not include
  • Elective cosmetic surgery
  • General health items
  • Hair transplant

Medical Expenses (slide 2 of 7)
  • When medical expenditures are deductible
  • In year paid ( payment by check or credit card)
  • Amount of medical deduction
  • Deductible to extent unreimbursed medical
    expenses in total exceed 7.5 of AGI
  • Example of medical deduction limitation
  • Amy has AGI of 10,000 and medical expenses of
  • Amys medical deduction 250
  • 1,000 - (10,000 x 7.5)

Medical Expenses (slide 3 of 7)
  • Nursing home expenditures
  • If primary purpose of placement in home is
    medical, costs (even meals and lodging) qualify
  • If primary purpose of placement in home is
    personal, only specific medical costs qualify (no
    meals or lodging)
  • Special school expenditures
  • If primary purpose of placement in school is
    medical, costs (including meals and lodging)
  • If primary purpose of placement in school is
    personal, only specific medical costs qualify (no
    meals or lodging)

Medical Expenses (slide 4 of 7)
  • Capital medical expenditures
  • Includes wheelchairs, medical beds, seeing eye
    dogs, etc.
  • Must be medical necessity, advised by a
    physician, used primarily by patient, and expense
    is reasonable
  • Full amount is medical expense in year paid
  • Maintenance on capital expenditures also medical
  • Capital improvement to home
  • Medical expense only to extent that cost of
    improvement exceeds increase in value to home

Medical Expenses (slide 5 of 7)
  • Medical care of spouse and dependents
  • Taxpayer may deduct cost of medical care for
    spouse and dependents
  • Dependents need not meet gross income or joint
    return tests
  • Children of divorced parents treated as
    dependents of both for purpose of medical
  • Medical transportation and lodging
  • Transportation to and from care is deductible
  • Mileage allowance of 12 cents per mile (2001)
  • Lodging while away from home for medical care
  • Allowable amount is 50 per person per night (for
    patient and required companion)

Medical Expenses (slide 6 of 7)
  • Health insurance premiums
  • Premiums paid for medical care insurance are
    medical expenses
  • Self-employed, up to 70 of insurance premiums
    are deductible FOR AGI (increases to 80 in 2006)
  • Reimbursement by medical insurance
  • If reimbursed in same year as expense paid,
    reimbursement offsets medical expense and only
    excess of expenses over reimbursement allowed
  • If reimbursed in the year after medical expenses
    were paid, reimbursement is income only to extent
    medical deduction was taken by taxpayer (tax
    benefit rule)

Medical Expenses (slide 7 of 7)
  • Example of medical reimbursements
  • In 2001, taxpayer paid medical expenses 1,200
  • In 2001, reimbursed by insurance 800
  • For 2001, deductible medical expense
  • if AGI 10,000 400 - (7.5 x 10,000) 0
  • Example of medical reimbursements
  • In 2000, taxpayer paid medical expenses 1,200
  • In 2001, reimbursed by insurance 800
  • For 2000, deductible medical expense
  • if AGI 10,000 1,200 - (7.5 x 10,000)450
  • For 2001, reimbursement is income to extent
    taxpayer received tax benefit in 2000, so 450

Taxes (slide 1 of 2)
  • State, local, and foreign income taxes and real
    property taxes are deductible in year paid
  • State and local personal property taxes based on
    value (ad valorem) deductible in year paid
  • Other taxes such as sales, excise, etc., are not
    deductible, except
  • Deductible if incurred in business or production
    of income activity
  • Fees are not deductible as tax (e.g. license)

Taxes (slide 2 of 2)
  • Real estate taxes in year property sold must be
    apportioned between buyer and seller
  • State and local income taxes
  • Deduct amounts paid during year
  • Withheld amounts
  • Estimated tax payments
  • Amounts paid in year for prior years liability
  • Foreign income taxes deductible or claimed as

Investment Interest (slide 1 of 2)
  • Definition interest on loans whose proceeds are
    used to purchase investment property, e.g.,
    stock, bonds, land
  • Deduction of investment interest is limited to
    net investment income (Investment income less
    investment expenses)
  • Investment income
  • Gross income from interest, dividends, annuities,
    and royalties not derived from business
  • Long-term capital gains treated as investment
    income if elected (wont qualify for LTCG rate)

Investment Interest (slide 2 of 2)
  • Investment expenses
  • All expenses (other than interest) directly
    related to portfolio income that are allowed as a
  • Application of 2 AGI floor for some investment
    expenses must be considered in computing amount
    of net investment income
  • applied to non-investment expenses first
  • Investment interest not used in current year due
    to limitation is carried forward indefinitely
  • Deductibility subject to net investment income
    limitation in carryover years

Qualified Residence Interest (slide 1 of 2)
  • Interest on indebtedness secured by the principal
    residence and one other residence (qualified
  • Interest must be on acquisition or home equity
  • Acquisition indebtedness amounts incurred to
    acquire, construct, or substantially improve the
    qualified residences
  • Aggregate acquisition indebtedness for qualified
    residences cannot be greater than 1 million

Qualified Residence Interest (slide 2 of 2)
  • Home equity indebtedness loans secured by
    qualified residences
  • Aggregate home equity indebtedness for qualified
    residences is limited to 100,000
  • Home equity loans cannot exceed (FMV of home
    minus acquisition indebtedness)
  • Thus, maximum loans on qualified residences for
    qualified residence interest is 1.1 million
  • other home mortgage interest is nondeductible
    personal interest (e.g. second vacation home)

Prepaid Interest
  • Prepaid interest generally must be capitalized
    and amortized over the life of loan
  • Exception Points (prepaid interest on a
    mortgage) paid in the acquisition or improvement
    of principal residence
  • Entire amount is deductible in year paid
  • Interest paid with loan proceeds
  • if borrowed from third party generally deductible
  • if loan is with same lender, no deduction is

Student Loan Interest (Deduction For AGI)
  • Payable on loan incurred to pay qualified higher
    education expenses
  • Taken as a for AGI deduction (not itemized
  • Maximum deductible for 2001 is 2,500
  • Phased out for AGI between 40,000 to 55,000 for
    single TPs and 60,000 to 75,000 for MFJ

Student Loan Interest 2001 Tax Act
  • Repealed limit of deduction for first 60 months
    of interest payments
  • Repealed restriction that voluntary payments are
    not deductible
  • Increased income phase-out ranges
  • 50,000-65,000 for single taxpayers
  • 100,000 to 130,000 for MFJ
  • Effective for 2002 and later

Charitable Contributions (slide 1 of 7)
  • Charitable contribution defined
  • Contributor must have donative intent and expect
    nothing in return
  • If contributor receives tangible benefit, the FMV
    of such benefit must be deducted from the amount
    of the contribution
  • Charitable contribution defined
  • Contribution must be to qualified domestic
    charity or state or possession of U.S. or any
  • Most domestic charities are listed in IRS Pub.
  • No deduction for contribution of services

Charitable Contributions (slide 2 of 7)
  • Ordinary income property
  • Defined assets that would produce ordinary
    income or short-term capital gain if sold
  • Contribution amount
  • FMV of asset less ordinary income (or STCG)
    potential generally the lower of adjusted basis
    or FMV
  • Capital gain (CG)property
  • Defined assets that would produce long-term
    capital gain or Section 1231 gain if sold
  • Contribution amount
  • Generally FMV of asset

Charitable Contributions (slide 3 of 7)
  • Exception to FMV deduction of CG property
  • Private nonoperating foundations
  • Contributions to private nonoperating foundations
    must be reduced by the amount of capital gain
  • Thus, the amount is limited to the adjusted basis
  • Exception to FMV deduction of CG property
  • Tangible personalty
  • If asset contributed is not used in charitys
    exempt function, the contributions must be
    reduced by the amount of capital gain potential,
    thus, limits the amount to the adjusted basis

Charitable Contributions (slide 4 of 7)
  • Example of contributions of tangible personalty
  • Taxpayer contributes painting to TSU
  • FMV 100,000 and adjusted basis 10,000
  • If TSU hangs the painting in Art Department (for
    students use), taxpayer has 100,000 contribution
  • If TSU sells painting, contribution is 10,000
  • Limitations on deductions 50 limit
  • Includes contributions of cash, ordinary income
    property, and CG property using adjusted basis
  • 50 of AGI is maximum contribution deduction

Charitable Contributions (slide 5 of 7)
  • Limitations on deductions 30 limit
  • Charity deductions for certain assets cannot
    exceed 30 of the taxpayers AGI
  • CG property for which the contribution amount is
  • Certain contributions to private nonoperating
  • Can elect to treat CG property as 50 assets by
    limiting the amount of such contributions to
    their adjusted bases
  • Limitations on deductions 20 limit
  • Certain contributions of capital gain property to
    private nonoperating foundations

Charitable Contributions (slide 6 of 7)
  • Interaction of limitations
  • When applying the yearly overall 50 limitation,
    allowable deductions come first from the 50
    assets, then from the 30 assets
  • Contribution carryover
  • Contributions that cannot be taken in current
    year due to limitations may be carried forward
    for 5 years
  • When using carryovers, current contributions are
    used first, then carryovers used on a FIFO basis

Charitable Contributions (slide 7 of 7)
  • Example of the 50 and 30 limits
  • Taxpayer, AGI 100,000, contributed 40,000 cash
    and long-term stocks with a FMV of 35,000 and a
    basis of 8,000 to a University
  • 50 limit 50,000 30 limit
  • Amount of deduction 50,000 (40,000 cash
    10,000 stock)
  • Contribution carryforward 25,000 stock (as 30

Casualty and Theft Losses
  • Individuals may deduct casualty and theft losses
    under Sec. 165
  • Subject to two floors
  • 10 AGI
  • and, 100 per event
  • Discussed in Chapter 8

Miscellaneous Itemized Deductions Subject to 2
Floor (1 of 2)
  • Certain employee expenses
  • Unreimbursed travel and transportation expenses
  • professional dues and subscriptions, uniforms,
    job hunting, union dues, etc.
  • Sec. 212 investment expenses
  • safe deposit box rental, subscriptions to
    investment journals, professional fees
  • Tax preparation or consulting fees
  • Hobby expenses

Miscellaneous Itemized Deductions Not Subject to
2 Floor (2 of 2)
  • Gambling losses (to extent of gambling income)
  • Estate tax paid on income in respect of a
  • Impairment-related work expenses

Overall Limitation on Itemized Deductions (slide
1 of 2)
  • Taxpayers with AGI in excess of the specified
    threshold will lose part of their benefits from
    certain itemized deductions
  • Threshold amount in 2001 is 132,950 (66,475 if
    married, filing separately)
  • Itemized deductions subject to reduction are
  • Taxes, residential interest, charitable
    deductions, and miscellaneous deductions
  • Medical, investment interest, and casualties
    thefts are not subject to reduction

Overall Limitation on Itemized Deductions (slide
2 of 2)
  • Amount of reduction
  • Reduction is lesser of
  • (AGI - threshold) x 3, or
  • 80 x total itemized deductions subject to
  • Example MFJ, AGI 300,000
  • Total itemized deductions 50,000
  • Mortgage interest 25,000
  • Charitable contributions 5,000
  • Reduction is lesser of
  • 300,000 - 132,950 167,050 x 3 5,012, or
  • (25,000 5,000) x 80 24,000, so 5,012
  • Allowable itemized deductions 50,000 -

Limitations of Itemized Deductions and Personal
Exemptions Repealed Under New Tax Act
  • Overall limitation of itemized deductions (AGI
    over 132,950 in 2001)
  • Reduced by 1/3 in 2006 and 2007
  • Reduced by 2/3 in 2008 and 2009
  • Eliminated in 2010 and after
  • Phase out of personal exemptions (AGI over
    132,950 in 2001)
  • Same reduction schedule as above