CHAPTER 5 - PowerPoint Presentation

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CHAPTER 5Itemized Deductions & Other Incentives

Income Tax Fundamentals 2013Student Slides Gerald E. Whittenburg Martha Altus-BullerSteven Gill

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Medical ExpensesFirst itemized deduction on Schedule AMedical expenses allowedFor spouse, self and dependents

For amounts spent that exceed 7.5% of AGIMust be reduced by amount of insurance reimbursementSee page 5-2 for list of health, dental, and optical expenditures that qualifyMedical insurance premiums (including Medicare)Long-term care insurance premiumsSpecified limits that change each year based on taxpayer’s ageIf deducted for AGI, excluded from Schedule A calculationsNote: Health insurance for self employed is deduction for AGI – see Chapter 4

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TaxesDeductions for certain taxes are allowedTaxes are deductible, fees are notTaxes are imposed by a government to raise revenue for general public purposes

Fees are charges with a direct benefit to person payingExamples of deductible taxesState and local income taxes (deductible in year paid)Sales/use tax May use actual sales tax or from IRS-provided tables If actual deduction, must keep receipts for all sales tax paidExpected to be extended retroactively to 2012Real property taxesPersonal property taxesExample of nondeductible taxes include estate taxes, gift taxes and excise taxes2013

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Overview of InterestInterest is amount paid for use of borrowed fundsBorrower must be legally liable for note in order to deduct the interest

Examples of deductible interest includeQualified mortgage interest and pointsMortgage interest prepayment penaltiesInvestment interest*Certain interest associated with passive activitiesConsumer (personal) interest is not deductiblePrivate mortgage insurance (PMI) related to purchase of personal residence deductible (phase-outs apply)*Nondeductible if used to generate tax-exempt income2013 Cengage LearningSlide5

ContributionsCharitable contributions are allowed as a deductionCan contribute cash or propertyOut of pocket expenses are deductible

$.14/mile for mileage deductionValue of free use of taxpayer’s property is not deductibleTo be deductible, donation must be made to a qualified recipient (see pages 5-12 and 5-13)IRS publishes online search tool called “Exempt Organizations Select Check”2013 Cengage LearningSlide6

Casualty and Theft LossesDeductions are allowed for casualty and theft lossesTo be classified as casualty loss, event needs to be sudden, unexpected or unusual

If theft, need to prove (for example, by police report)Different calculations for deduction based on what type of propertyCasualty losses are only deductible in year of occurrenceException: for federally declared disaster area losses, taxpayer can amend prior year return and deduct in that year and file for refund2013 Cengage LearningSlide7

Miscellaneous DeductionsThere are two types of miscellaneous deductions“Those not limited to amounts over 2% of AGI”

Handicapped “impairment related work expenses”Certain estate taxesAmortizable bond premiums (for bonds purchased prior to 10/23/86)Gambling losses to extent of gambling winningsTerminated annuity payments2013 Cengage LearningSlide8

Miscellaneous Deductions“Those limited to amounts over 2% AGI”Unreimbursed employee expenses (use Form 2106 or 2106-EZ)Reimbursed employee expenses made under a non-accountable plan

Union duesTax preparation feesSafety deposit boxProfessional journals/subscriptionsInvestment expensesJob-hunting fees2013 Cengage LearningSlide9

Qualified Tuition Programs (QTP)Sometimes called §529 tuition plansAllows taxpayers to meet higher education expenses byBuying in-kind tuition credits or certificates

orContributing to an established account Distributions are generally not taxed if funds used for higher education Tuition, fees, books, supplies, equipment plus reasonable amount for room and boardComputer technology primarily used for educational purposesIf not used for purposes outlined or the taxpayer withdraws early, then distributions are taxable plus 10% penalty2013 Cengage LearningSlide10

Education Savings AccountsThese accounts allow taxpayers to meet higher education expenses by contributing to an educational savings accountAnnual contributions are not deductible

Allowed until beneficiary reaches 18Limited to $2,000/year per child Can’t make in same year as contribution to QTPPhase-out when AGI exceeds $190,000 (MFJ) or $95,000 (S)2013 Cengage Learning