Tax final-Chapter 10 Deductions and losses certain itemized deductions
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61 terms
Terms | Definitions |
|---|---|
 Itemized deduction-general | Personal expenditures that are deductible as itemized deductions include: medial exp, certain taxes, mortgage interest, investment interest, and charitable contributions Exception: alimony, contributions to IRA are deductible for AGI |
| Medical expenses-General requirements | The medical exp deduction is limited to the amt by which such expenses exceed 7.5% of the taxpayer's AGI. Example 2 |
| Medical expenses deductible | Medical care Prescription drugs and insulin Special equipment (Wheelchairs, crutches, artificial limbs, eye glasses, hearing aids Transportation and hospital insurance premiums Long term care insurance premiums Cost of alcohol and drug rehabilitation Certain costs to stop smoking Weight reduction programs related to obesity |
| Medical expenses nondeductible | Funeral, burial or cremation exp. Nonprescription drugs Bottle water Toiletries, cosmetics Diaper service, maternity clothes Programs for the general improvement of health Unnecessary cosmetic surgery |
| Medical expenses-things to know | 1. Any costs for medical or nursing care can be included in deductible medial exp, but meals and lodging must be excluded. 2. Tuition exp of a dependent at a special school may be deductible as a medial exp. |
| Capital expenditures for medical purposes | 1. A capital improvement that ordinarily would not have a medical purpose qualifies as a medical exp if it is directly related to prescribed medical care and is deductible to the extent that "the expenditure EXCEEDS the increase in value of the property". Example 6 The full cost of certain home-related capital expenditures incurred to enable a physically handicapped individual to live independently and productively qualifies as a medical exp. These exp are subject to the 7.5% only, the increasing value is 0. |
| Medical exp-divorced persons | Noncustodial parent may claim any medical exp he or she pays even though the custodial parent claims the children as dependent. |
| Transportation for medical treatment | Transportation to and from a point of treatment for medical care are deductible as med exp, subject to 7.5% A mileage allowance of 19 cents per mile may be used instead of actual auto exp. Deduction also allowed for transportation for necessary accompany |
| Lodging exp for Medical treatment | Lodging: the deduction for lodging exp include as medical exp cannot exceed 50 per night for each person. Example 9 |
| Meal exp for Medical treatment | No deduction is allowed for the cost of meals unless they are part of medical care and are furnished at a medical facility. When allowable, such meals are NOT subject to the 50% limit applicable to business meals. |
| Amounts paid for medical insurance premiums | Med insurance premiums are included with other med exp subject to 7.5% floor. Premiums paid by the taxpayer under a group plan or an individual plan are included as med exp. If a taxpayer is self-employed, insurance premiums paid for med coverage are deductible FOR AGI. (allowed for premiums paid on behalf of the taxpayer, spouse, dependents of the taxpayer) The deduction is not allowed to any taxpayer who is eligible to participate in a subsidized health plan maintained by any employer of the taxpayer or of the taxpayer's spouse. Premiums paid for medical insurance coverage of employees are deductible as business exp. |
| Year of deduction | Med exp are deductible ONLY in the year paid.-cash basis Exception: med exp for deceased taxpayers Example 11 |
| Medical exp-reimbursement | The reimbursement reduces the amt that would other qualify for med exp deduction. Under the tax benefit rule, a taxpayer who receives an insurance reimbursement for med exp deducted in a previous year might have to include the reimbursement n gross income in the year of reporting. However, a taxpayer who did not itemize deductions in the year the exp were paid did not receive tax benefit and is not required to include a reimbursement in gross income. Example 12 |
| Health Savings Accounts | An HSA is a qualified trust or custodial account administered by a qualified HSA trustee, which can be a bank, insurance company, or other IRS approved trustee. The HSA funds are used to pay for the individual's medical exp in excess of the deductible amt under a high deductible policy. |
| High deductible policy | The high deductible policy provides coverage for extraordinary medical exp(en excess of the deductible), and exp not covered by the policy can be paid with funds withdrawn tax-free from the HSA. Example 13 |
| High deductible plans requirements | 1. The annual deductible in 2011 is not less than 1,200 for self-only coverage (2400 for family) 2. The annual limit in 2011 on total out of pocket costs (excluding premiums) under the plan does not exceed 5950 for self-only coverage (11900 for family) |
| Tax treatment of HSA contributions | 1. Contributions made by the taxpayer to an HSA are deductions FOR AGI |
| Tax treatment of HSA distributions | Earnings on HSAs are not subject to taxation unless distributed 1. Distributions from HSAs are excluded from gross income if they are used to pay for medical exp not covered by the high deductible policy 2. Distributions that are not used to pay for medical exp are included in gross income and are subject to an additional 10% penalty if made before age 65, death, or disability. |
| HSAs advantages | 1. HSA is portable 2. More people than ever before can qualify to set up an HSA. Anyone under age 65 who has a high deductible plan and is not covered by another policy that is not a high-deductible plan can establish an HSA. |
| HSA deductible amount | The annual deduction for contribution to an HSA is limited to the sum of the monthly limitations. The monthly limitation is calculated for each month that the individual is an eligible individual. The monthly deduction is not allowed after the individual becomes eligible for Medicare. |
| HSA deductions -limitations | The amt of the monthly limitation for an individual who has self-only coverage in 2011 is 1/12 of 3,050, for individual who has family coverage is 1/12 of 6,150. An eligible taxpayer who has attained age 55 may make additional 1000 annual contribution to catch up. Example 14,15 |
| Deductibility as a tax-purpose | The deduction was created to relieve the burden of multiple taxes upon the same source of revenue. |
| Deductible taxes | 1. State, local, and foreign REAL property taxes 2. State and local PERSONAL property taxes 3. State and local income taxes OR sales/use taxes 4. Foreign income taxes |
| Non-deductible taxes | 1. Federal income taxes 2. FICA taxes imposed on employees 3. Employer FICA taxes paid on domestic household workers 4. Estate, inheritance, and gift taxes 5. Federal, state, and local excise taxes 7. Foreign income taxes if the taxpayer chooses the foreign tax credit option 8. Taxes on real property to the extent such taxes are to be apportioned and treated as imposed on another taxpayer. |
| Property taxes | Ad valorem Real property taxes do not include taxes assessed for local benefits such assessments tend to increase the value of the property (special assessments for streets, sidewalks, curbings) Taxpayer can not deduct the cost of a new sidewalk. Such assessment are added to the adj. basis of the taxpayer's property. |
| Apportionment of real property taxes between seller and purchaser | Real estate taxes for the entire year are apportioned between the buyer and seller on the basis of the number of days the property was held by each during the real property tax year. Example 17 If the actual real estate taxes is a part of the purchase agreement. Adjustments are required. Example 18, 19 |
| State and local income taxes and sales taxes | State and local income taxes imposed upon an individual are deductible only as itemized deductions, even if the taxpayer's sole source of income is from a business, rent or royalties. If the taxpayer overpays, the refund received is included in the gross income. Example 20 |
| Itemized deduction for sale taxes paid | Individuals can elect to deduct EITHER their state and local income taxes OR their sales/use taxes paid as an itemized deduction on Schedule A of Form 1040. |
| Interest | Personal interest is not deductible: including credit card interest, interest on car loans, any other interest that is not interest on qualified student loans, home mortgage interest, investment interest, or business interest. Student loan,s home mortgage interest, investment interest are deductible. |
| Interest on Student Loan General | Taxpayer who pay interest on a qualified student loan may be deduct the interest as a deduction FOR AGI. Max annual deduction: 2,500 Not allowed for taxpayer who are claimed as dependents or for married taxpayers filling separately |
| Interest on Student Loan phaseout | In 2011, the deduction is phased out for taxpayers with modified AGI between 60,000 to 75,000 (120,000 and 150,000 to joint returns) |
| Interest on student loan phaseout calculation | REDUCTION CALCULATION: The numerator=MAGI - phaseout floor (60000 or 120000) The denominator= phaseout range (15,000 or 30,000) Example 21 |
| Qualified Residence Interest | Qualified residence interest is the interest paid or accrued during the taxable year on indebtedness secured by any property that is qualified residence of the taxpayer. 1. Interest on acquisition indebtedness 2. Interest on home equity loans |
| Qualified residence definition | A qualified residence includes the taxpayer's principal residence and one other residence of the taxpayer or spouse. |
| Home mortgage interest deduction limitation | Although in most cases interest paid on a home mortgage is fully deductible, interest paid or accured during the tax year on aggregate acquisition indebtedness of 1 million or less (500,000) is deductible as qualified residence interest. |
| Home equity loans | These loans utilize the personal residence of the taxpayer as security. Interest deductible only on the portion of a home equity loan that does NOT exceed the LESSER of: 1. The FMK of the residence, reduced by the acquisition indebtedness OR 2. 100,000 (50,000for married persons filing seperately) Example 24 |
| Interest paid for services | Fees, also called points, expressed as a percentage of the loan amt, are paid to reduce the interest rate charged over the term of the loan. To be deductible, points must be in the nature of interest and cannot be a form of service charge or payment for specific service. |
| Points-exception | points must be capitalized and are amortized and deductible ratebly over the life of the loan. A special exception permits the purchaser of a principal residence to deduct qualifying points in the year of payment. The exception also covers pints paid to obtain funds for home improvements. |
| Mortgage insurance payments | Mortgage insurance premiums are deductible as interest if they relate to a qualified residence of the taxpayer. The deduction begins to phase out for taxpayers with AGI in excess of 100,000 (50,000 for married taxpayers filing separately) |
| Investment Interest | The deduction for investment interest exp may NOT exceed the net investment income for the year. |
| Interest paid to related party | Nothing prevents the deduction of interest paid to a related party as long as the payment actually took place and the interest meets the requirements for deductibility. |
| Tax exempt securities | No deduction is allowed for interest on debt incurred to purchase or carry tax exempt securities. |
| Interest deductibility summaries | Page 10-18 Graph 10.1 |
| Classification of interest exp | Whether interest is deductible FOR AGI or FROM AGI depends on whether the indebtedness has a business, investment, or personal purpose. Business- FOR AGI Production of rent, royalty income-FOR AGI Personal use-FROM AGI Student loans- FOR AGI If the taxpayer is an employee who incurs debt in relation to employment, the interest is personal. If a taxpayer deposits money in a CD, the full amount of the interest must be included in income. The taxpayer will be allowed a deduction for AGI as to forfeited amount. |
| Charitable Contributions | Individuals and corporations can deduct contributiosn made to qualified DOMESTIC organizations. The charitable contribution provisions are among the most complex in the tax law. |
| Criteria for a gift | A charitable contribution is defined as a gift made to a qualified org. The major elements needed to qualify a contribution as a gift are: donative intent, the absence of consideration, and acceptance by the donee. |
| Benefit received rule | When a donor derives a tangible benefit from a contribution, he or she cannot deduct the value of benefit. Example 27 An exception for the deduction of an automatic percentage of the amount paid for the right to purchase athletic tickets from colleges. 80% qualifies as charitable contribution deduction Example 28 |
| Contribution of services | No deduction is allowed for a contribution of one's services to a qualified charitable organization. Unreimbursed exp related to the services may be deductible. Deductions are permitted for transportation, reasonable exp for lodging, and the cost of meals while away from home incurred in performing the services. The travel exp are not deductible if the travel involves significant personal pleasure. |
| Nondeductible items | 1. Dues, fees, or bills paid to country clubs, lodges, fraternal orders, or similar group 2. Cost of raffle, bingo, or lottery tickets 3. Cost of tuition 4. Value of blood given to a blood bank 5. Gifts to individuals 6. Rental value of property used by a qualified charity |
| Qualified organizations | A contribution must be made to one of the following org: 1. A state or possession of the U.S. or any subdivisions thereof 2. A corporation, trust, community chest, fund, or foundation that is situated in the U.S. and is organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes or for the prevention of cruelty to children or animals. 3. A veterans' organization 4. A fraternal organization operating under the lodge system 5. A cemetery company |
| Time of deduction | A charitable contribution generally is deducted in the year the payment is made. This applies to both cash and accrual basis individuals. A contribution is ordinarily deemed to have been made on the delivery of the property to the donee. A contribution made by check is considered delivered on the date of mailing |
| Record keeping and valuation requirements | No deduction is allowed for a charitable contribution made to a qualified organization unless the taxpayer gathers the appropriate documentation and substantiation. The required substantiation must be obtained before the earlier of: 1. the due date of the return for the year the contribution is claimed OR 2. the date the return is filed |
| Documentation and substantiation requirements for charitable contributions | Summary on Page 10-23 |
| Valuation requirement | Property donated to a charity is generally at FMV at the time the gift is made. Charitable organizations do not attest to the fair market value of the donated property. |
| Limitations on Charitable contribution deduction | The deduction is limited as follows: 1. If the qualifying contribution for the year total 20% or less of AGI, they are fully deductible 2. If the qualifying contributions are more than 20% of AGI, the deductible amt may be limited to either 20%, 30% or 50% of AGI. 3. The max charitable contribution deduction may not exceed 50% of AGI for the year. The excess contributions may be carried forward and deducted during a five year carryover period. |
| Ordinary income property | If ordinary income property is contributed, the decuction is equal to the FMV of the property LESS the amt of ordinary income that would have been reported if the property were sold. The deduction is limited to the adj. basis of the property to the donor. |
| Capital Gain Property | Capital gain property is any property that would have resulted in the recognition of long-term capital gain if the property had been sold by the donor. |
| Determining the deduction for Contributions of appreciated property by individuals | 10-26 |
| Miscellaneous itemized deductions | Some are deductible only if they EXCEED 2% of the AGI. 1. Professional dues to membership organization 2. Uniforms or other clothing that cannot be used for normal wear. 3. Fees incurred for the preparation of one's tax return or fees incurred for tax litigation before the IRS or the courts. 4. Job hunting costs 5. Fee paid for a safe deposit box used to store papers and documents relating to taxable income-producing investments 6. Investment exp that are deductible 7. Appraisal fees to determine the amt of a casualty loss ofr the FMV of donated property 8. Hobby losses up to the amt of hobby income 9. unreimbursed employee exp |
| Other miscellaneous deductions | 1. Gambling losses up to the amt of gambling winnings 2. Impairment related work exp of a handicapped person 3. Federal estate tax on income in respect of a decedent 4. Deduction for repayment of amt under a claim of right if more than 3000 5. The unrecovered investment in an annuity contract when the annuity ceases by reason of death |
| Itemized deduction example | 10-30 |
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