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
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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