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©2011 Pearson ©2011 Pearson

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©2011 Pearson - PPT Presentation

Education Inc Publishing as Prentice Hall ITEMIZED DEDUCTIONS 1 of 2 Medical expenses Taxes Interest Charitable contributions Casualty and theft losses Miscellaneous itemized deductions ID: 473078

pearson 2011 publishing education 2011 pearson education publishing prentice hall tax interest income agi medical itemized property taxes deduction

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Slide1

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide2

ITEMIZED DEDUCTIONS

(1 of 2)

Medical expensesTaxesInterest Charitable contributionsCasualty and theft lossesMiscellaneous itemized deductions

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide3

ITEMIZED DEDUCTIONS

(2 of 2)

Reduction of certain itemized deductionsTax planning considerationsCompliance and procedural considerations

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide4

Medical Expenses

Qualified individuals

Qualified medical expensesAmount and timing of deduction©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide5

Qualified Individuals

Medical expenses paid for taxpayer, taxpayer’s spouse, or dependent

Dependent qualifies even if fails dependency test due to failure to meet gross income or joint return testsChildren of divorced parents

Not required to be custodial parent to take deduction for medical expenses paid on behalf of a person

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide6

Qualified Medical Expenses

(1 of 2)

Diagnosis, cure, mitigation, treatment, or prevention of diseaseTransportation

$

0.165/mile

std. mileage rate

Includes meals & lodging if overnight

Capital expenditures

Excess of cost over amount by which value of home increases

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide7

Qualified Medical Expenses

(2 of 2)

Cost of living in institutionsMedical insurance premiumsIncludes qualified long-term care insurance premiums

No cosmetic surgery unless it treats illness or promotes proper body function

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide8

Amount and Timing

of

DeductionDeductible in year paid

Amount of qualified medical expenses that exceed 7.5% of AGI

Medical insurance reimbursements

Only unreimbursed portion deductible

Self-

employeds

may deduct health insurance as a

for

deduction AGI

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide9

Taxes

Definition of a tax

Deductible taxesState and local income taxes

State and local sales taxes

Personal property taxes

Real estate taxes

Self-employment tax

Nondeductible taxes

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide10

Definition of a Tax

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

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide11

Deductible Taxes

State, local, & foreign real property taxes

State and local personal property taxesIf based on value

Foreign, state & local income, war profits, and excess profits

taxes

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide12

State and Local Income Taxes

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

yearState and local sales taxesMay deduct

For

AGI in 2009 instead of deducting state and local

income taxes

May be extended

for

2010

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide13

Personal Property Taxes

Tax must be an

ad valorem tax on personal property imposed on an annual basisAny portion of the tax which is flat fee is not deductible

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide14

Real Estate

Taxes

(1 of 2)Apportionment of taxes

Necessary when real estate is sold during the year

Real property assessments only against property benefited

Capitalized costs—not deductible

E.g., Sidewalk or new sewer lines

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide15

Real Estate

Taxes

(2 of 2)

Additional standard deduction for real property taxes

if

taxpayer does not itemize

deductions

Expired in 2009, but may be extended for 2010

Limited to lesser of

Amount that would be deductible as an itemized deduction,

or $500

($1,000 if MFJ)

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide16

Self-Employment Tax

Pay tax on self-employment income in lieu of payment of Social Security

(12.4%) and Medicare taxes (2.9%) on salaryCeiling $106,800 for Social Sec. TaxNo ceiling for Medicare tax

½ of SE tax deductible

for

AGI

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide17

Nondeductible Taxes

Taxes imposed by the Federal gov’t generally not deductible

ExceptionsEmployer’s share of social security tax is deductible by employer as

business expense

Federal import tariffs & excise taxes

Unless for business or production of income

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide18

Interest

Definition of interest

Classification of interest expenseTiming of the interest deduction©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide19

Definition of Interest

Compensation for use or forbearance of money

Bank service charges and certain loan acquisition costs not considered interest for tax purposes

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide20

Classification of Interest Expense

(1 of 2)

Depends on purpose of indebtednessActive trade or business

For

AGI deduction

Passive activity

Subject to passive activity loss limitation

Used to compute net passive income/loss

Investment interest

Deductible up to net investment income

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide21

Classification of Interest Expense

(2 of 2)

Qualified residence and home equity loanInterest on up to $1M of acquisition debt

Points on acquisition indebtedness also deductible

May deduct interest on additional $100K of home equity indebtedness

Student loan interest

Up to $2,500 deductible as

for

AGI deduction

Phased out at higher income levels

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide22

Timing of the Interest Deduction

(1 of 2)

Prepaid interestCapitalized and amortized over period to which interest relatesDiscounted notes

Cash method taxpayer deducts

at time of repayment

Accrual method taxpayer amortizes over life of loan

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide23

Timing of the Interest Deduction

(2 of 2)

Interest paid on debt used to pay another creditor generally deductible

Interest owed to a related party by an accrual method taxpayer

Cannot deduct interest until interest paid

Imputed interest

Applies to below-market

loans

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide24

Charitable Contributions

Qualifying organization

Type of property contributedDeduction limitationsApplication of carryoversSpecial rules for charitable contributions made by corporations

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide25

Qualifying Organization

U.S., District of Columbia, state or possession of U.S.

Post or organization of war veteransDomestic fraternal society, or order, or associationPublic Charities

Churches, educational Institutions, hospitals, medical schools

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide26

Type of Property Contributed

(1 of 2)

Contribution of long-term capital gain propertyGenerally FMV

Use adjusted basis if

Contributed to private nonoperating foundation

Unrelated use by charitable organization

Certain intangibles

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide27

Type of Property Contributed

(2 of 2)

Contribution of ordinary income propValue generally adjusted basis

Exception for corp donation of inventory

Contribution of services

Only out-of-pocket and transportation expenses deductible

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide28

Deduction Limitations

50% of AGI overall limitation

Applies to public charitiesSum of all contributions limited to 50%30% of AGI limitation

Contributions of capital gain property

20% of AGI limitation

Capital gain property contributed to private nonoperating foundations

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide29

Application of Carryovers

Carried over and deducted in subsequent five years

Apply with regard to special limitationsUse FIFO to apply carryovers

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide30

Special Rules for Contributions Made by Corporations

Pledges made by accrual method corporations

Deductible in year pledged if paid by 15th day of 3rd month after year endLimitation applicable to corporations

Cannot exceed 10% of corporation’s taxable income

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide31

Casualty and Theft Losses

Individuals can deduct casualty or theft loss on personal-use property as an itemized deduction

Subject to floor of $100 per item plus 10 % of AGI

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide32

Miscellaneous Itemized Deductions

Certain employee expenses

Expenses to produce incomeCost of tax advice©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide33

Certain Employee Expenses

Unreimbursed employee business expenses

Include travel, transportation, dues to professional organizations, cost of job huntingGenerally miscellaneous itemized deductions subject to a 2% of AGI floor

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide34

Expenses to Produce Income

Expenses to produce investment income other than rents or royalties

Miscellaneous itemized deductions subject to 2% of AGI floorInvestment interest NOT subject to the 2% of AGI floor

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide35

Cost of Tax Advice

Includes

Tax return preparation feesAppraisal fees in determining amount of casualty lossAccountant fees for representation in a tax auditMiscellaneous itemized deductions subject to 2% of AGI floor

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide36

Reduction of Certain Itemized Deductions

(1 of 2)

Reduction in total of most itemized deductions for high-income taxpayersExpired in 2009Reduction will resume in 2011 unless Congress passes a law to temporarily or permanently eliminate

the reduction

3% of

amount that individual’s AGI for year exceeds threshold

amount

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide37

Reduction of Certain Itemized Deductions

(2 of 2)

Two limitations apply Reduction can not exceed 80% of itemized deduction other than medical, investment, casualty losses, and wagering losses ANDThe 3%

is applied after taking into account other limitations on itemized deductions

e.g. 2% of AGI on miscellaneous

deductions

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide38

Tax Planning

Considerations

(1 of 2)Medical expense deduction

Bunch medical expenses into a single year to exceed 7.5% of AGI floor

Interest expense

deduction

May deduct residential interest on

any

two residences

If vacation home used > of 14 days or 10% of rental days personal portion qualifies as a residence

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide39

Tax Planning

Considerations

(2 of 2)Deduction for charitable contributions

Election to reduce amount of contribution

Donation of appreciated long-term capital gain property

Significant substantiation requirement

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide40

Compliance and Procedural Considerations

(1 of 3)

Medical expensesDependent care credit vs. medical expense deductionCompare dependent care credit rate with effective marginal tax rate for additional medical deductions

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide41

Compliance and Procedural Considerations

(2 of 3)

Charitable contributions>$500 must file Form 8283Property > $5,000 should have appraisal>$250 and quid pro quo > $75 require additional documentation

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide42

Compliance and Procedural Considerations

(3 of 3)

TaxesSchedule C - related to taxpayer’s trade or businessSchedule E - related to the production of rents and/or royaltiesSchedule A - if personal

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide43

©2011 Pearson

Education, Inc. Publishing as Prentice Hall