Burton 304 Final Chapter 8
Terms in this set (56)
Itemized deductions only reduce taxable income if the taxpayer's itemized deductions exceed the standard deduction amount
Individual taxpayers are allowed to deduct unreimbursed medical and dental expenses paid during the year for themselves, their spouse, and their dependents.
Medical expenses recovered after being claimed as a deduction in the previous year must be included in income in the year of recovery to the extent that the deduction decreased taxable income in the year they were deducted.
An individual has an insurance policy that will pay $500 a week for 100 weeks in the event of 4. hospitalization. The premium on this policy qualiﬁes as a deductible medical expense subject to the applicable limitations.
Vitamin pills taken daily for general health are a qualiﬁed medical expense
To alleviate an obesity problem, a doctor puts a patient on a special diet. The total cost of the patient's food for the special diet is a deductible medical expense.
Fees paid to chiropractors may be a deductible medical expense.
Payments received under an accident insurance policy and designated for hospitalization or medical care will reduce the amount deductible as medical expenses.
Medical expenses may be claimed only for persons who qualify as an exemption on your return.
Premiums paid for insurance policies providing reimbursement for the accidental loss of life, limb or sight are deductible as medical expenses.
An individual is allowed a medical deduction set at a standard rate of 50 cents per mile for the use of a car for medical purposes in lieu of a deduction based on the actual operating expenses for gas, oil, etc
Estate taxes, gift taxes, and state inheritance taxes are deductible for federal income tax purposes.
A taxpayer may elect to capitalize certain annual taxes, mortgage interest, and deductible carrying charges on unimproved and unproductive real property
A taxpayer may deduct the sales tax paid on the purchase of a boat in 2013. Taxpayer's state has no income tax
Ad valorem personal property taxes are allowed as an itemized deduction
An ad valorem tax is a tax in proportion to the value of personal property
All state and local taxes are deductible for federal income tax purposes.
Federal income taxes paid are deductible as an itemized deduction on an individual's federal income tax return.
Charges, sometimes known as "points," paid by a borrower to a lender are generally deductible as interest over the life of the loan if they are compensation solely for the use or forbearance of money.
Points paid on the loan for the purchase of a new home are not deductible on an individual's tax return.
Interest on a loan, the proceeds of which are borrowed to purchase tax- exempt securities, is not deductible.
Investment interest may be deducted only to the extent of net investment income; interest that cannot be deducted because of this limitation is carried over to the next tax year and treated as having been paid in that year.
A business incurring a net operating loss in a taxable year can carry the loss back two years and forward indefinitely
Ann Jones uses a dry cleaning machine in her business, and it was completely destroyed by a fire. At the time of the fire, the adjusted basis was $20,000 and its FMV was $18,000. How much is Ann's loss?
ABC, Inc. of Jasper, Georgia suffered casualty loss of $150,000 in March 2018. The loss was caused by heavy rains that completely flooded their factory. As a result of these rains, the President declared North Carolina (including Jasper) a disaster area on March 23, 2018. In what year can ABC, Inc. elect to deduct casualty loss?
2017 or 2018
Which of the following is not a passive activity?
In excess of 7.5 % (10% after 2018) of AGI are ID. Only for medical expenses paid during the year. Must be for medical care of taxpayer, spouse or a dependent of the taxpayer. A child of divorced parents is dependent of both parents for deduction. GI requirement waived for medical expense deduction.
Medical Care—Capital Expenditures
Qualified expenditures for home improvements & additions deductible to the extent that costs exceed increase in FMV. Ex: ramps, widening doorways, swimming pool- ailment, elevator for handicap
May qualify for an immediate medical deduction (subject to 7.5% floor) if prescribed by physician. Ex: Seeing eye dogs, wheelchairs, eyeglasses, dentures
If primarily for medical care, taxpayer may choose between: standard mileage allowance of 18 cents (+ parking & tolls), or actual expenditures
NOT deductible even if transportation is primarily for the rendition of medical care
Nondiscretionary lodging during travel
Deduction allowed for lodging (but not meals) while away from home primarily for medical care. Lodging can't exceed $50/ night for each person
Discretionary lodging during travel
If a doctor prescribes medical care & taxpayer chooses, purely for personal considerations, to travel out-of-town for medical treatment, the lodging is not deductible
Cost of in-patient (overnight) hospital care (meals & lodging) is an allowable deduction. Meals consumed by patients during hospital stays are not subject to 50% reduction. All medicines & drugs except for insulin require a prescription to be deductible. Cosmetics & toiletries are not included
Medical Insurance Premiums
Deduction allowed for medical insurance premiums. Premiums for long term care insurance are allowed as deduction, subject to limitation. In 2018, maximum deduction for prepaid long term care insurance premiums ranges from $420 (age 40) or less to $5,200 (over age 70). Self-employed taxpayers are allowed to deduct 100% of medical insurance premiums "FOR" AGI.
State, local or foreign real & personal property taxes are allowed as ID. Deduction for state & local property or income taxes is limited to $10,000 after 2017. If real property is sold during the year, tax deduction must be allocated between buyer & seller based on the # of days each party held the property
Personal Property Taxes
Must be ad valorem (based on the value of the property) in order to be deductible
State or local income taxes are deductible in the year they are paid. May deduct state & local income taxes withheld from their salary. If receive a refund of income taxes in a later year, refund may need to be included in income. If income taxes are not deducted, sales taxes may be, whichever is greater
NOT deductible. Interest on consumer debt (car loans & credit card debt) is not deductible
Qualified Education Loan Interest
Interest of up to $2,500 may be deducted FOR AGI. The deduction is phased out for single taxpayers with AGI of $65k ($135k for married taxpayers).
Qualified Residence Interest
Interest on home loans secured by a 1st or 2nd home is allowed as an ID. Home must be qualified residence: principal residence or any 2nd residence for personal use.
A deduction is allowed on up to $750k of debt ($1 mil for debt incurred before 12/15/17) to acquire, construct or improve a qualified residence. Interest on the remainder is not deductible
Interest on investment property (stocks, bonds, raw land). Deductible only up to net investment income—Investment income (interest, royalties, short-term capital gains) minus investment expenses
Including "points"—allocated over the period to which it applies. Exception: points on a mortgage on a principal residence
Subject to limitations based on AGI. 20%, 30%, 50% or 60% of AGI depending on type of property donated & type of charity receiving the donated property. Overall deduction is limited to 50% of AGI. (Does not apply to 60% contributions, but 60% contributions reduce the 50% overall limit.) Unused charitable contributions may be C/F up to 5 years, subject to the original %-of-AGI limitation in all future years.
Ordinary Income Property
Includes property held by the donor primarily for sale to customers in ordinary course of the donor's business & works of art created by the donor. The deduction for ordinary income property is limited to the basis of the property
Capital Gains Property
Appreciated property that, if sold at FMV, would result in a long-term capital gain. Depreciable property & land used in a trade or business is considered capital gains property for charitable contribution purposes. Deduction for capital gains property is either the property's basis, FMV, or a reduced amount in the case of depreciable property
Qualified charitable organizations are divided into 2 categories: public charities & private charities
Churches & hospitals, educational organizations, organizations supported by govt, private operating foundations, private non-operating foundations that distribute all of their contributions to public charities
Private non-operating foundations that do not distribute all of their contributions to public charities
Personal Casualty Loss
Associated with a Presidentially declared disaster (federal casualty losses) are allowed as ID. Business casualty & theft losses are deductible FOR AGI. The amount of loss is computed as the lesser of: adjusted basis or decline in FMV. The loss must be reduced by insurance reimbursements received (or reasonably expected to be received)
Netting Personal-Use Casualty Gains & Losses
Each federal personal casualty loss must be reduced by $100 per event. Next, combine all casualty gains & federal casualty losses. If the result is a net loss, the net amount is treated as an ordinary ID & is further reduced by the 10% of AGI floor. If the result is a net gain, both gains & losses are capital gains & capital losses. The losses are NOT reduced by the 10% of AGI floor
Special Disaster Election
In a Presidentially declared disaster area, taxpayers may elect to deduct the loss in the tax year immediately preceding the year in which the disaster occurred. Taxpayers will never have to recognize gain on the receipt of insurance proceeds for personal property contained in personal residences
The itemized deduction for state and local taxes is limited to $10,000 after 2017
All interest payments in the following category are not deductible for tax purposes:
IS NOT: Personal credit card interest
IS: Qualified residence interest, Investment interest, Trade or business interest
Estate taxes, gift taxes, and state inheritance taxes are deductible for federal income tax purposes.
Which one of the following is not deductible when itemizing?
IS NOT: Cigarette tax
IS: State income tax, Real property tax
Mark Miller, 52, paid the following medical expenses during 2018 (all in excess of reimbursement):
Hospital/ doctor bills (for self and wife, 50) $840
Medicine/ drugs (for self and wife) $730
Hospitalization insurance premiums $6,200
Medicine/ drugs (for dependent mother, age 71) $1,060
Assuming the Millers' AGI was $60,000, how much of a medical expense deduction may the Millers claim on their joint return?