7-1 ©2008 Prentice Hall, Inc.. 7-2 ©2008 Prentice Hall, Inc. ITEMIZED DEDUCTIONS (1 of 2) Medical...
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Transcript of 7-1 ©2008 Prentice Hall, Inc.. 7-2 ©2008 Prentice Hall, Inc. ITEMIZED DEDUCTIONS (1 of 2) Medical...
7-1©2008 Prentice Hall, Inc.
©2008 Prentice Hall, Inc. 7-2
ITEMIZED DEDUCTIONSITEMIZED DEDUCTIONS(1 of 2)(1 of 2)
Medical expensesTaxesInterest Charitable contributionsCasualty and theft lossesMiscellaneous itemized
deductions
©2008 Prentice Hall, Inc. 7-3
ITEMIZED DEDUCTIONSITEMIZED DEDUCTIONS(2 of 2)(2 of 2)
Reduction of certain itemized deductions
Tax planning considerationsCompliance and procedural
considerations
©2008 Prentice Hall, Inc. 7-4
Medical ExpensesMedical Expenses
Qualified individualsQualified medical expensesAmount and timing of deduction
©2008 Prentice Hall, Inc. 7-5
Qualified Individuals
Medical expenses paid for taxpayer, taxpayer’s spouse, or dependentDependent qualifies even if fails
dependency test due to failure to meet gross income or joint return tests
Children of divorced parentsNot required to be custodial parent to
take deduction for medical expenses paid on behalf of a person
©2008 Prentice Hall, Inc. 7-6
Qualified Medical Expenses(1 of 2)
Diagnosis, cure, mitigation, treatment, or prevention of disease
Transportation$0.20/mile std. mileage rateIncludes meals & lodging if overnight
Capital expendituresExcess of cost over amount by which
value of home increases
©2008 Prentice Hall, Inc. 7-7
Qualified Medical Expenses(2 of 2)
Cost of living in institutionsMedical insurance premiums
Includes qualified long-term care insurance premiums
No cosmetic surgery unless it treats illness or promotes proper body function
©2008 Prentice Hall, Inc. 7-8
Amount and Timing of Deduction
Deductible in year paidAmount of qualified medical
expenses that exceed 7.5% of AGIMedical insurance reimbursements
Only unreimbursed portion deductibleSelf-employeds may deduct health
insurance as a deduction for AGI
©2008 Prentice Hall, Inc. 7-9
Taxes Taxes
Definition of a taxDeductible taxesNondeductible taxesState and local income taxesState and local sales taxesPersonal property taxesReal estate taxesSelf-employment tax
©2008 Prentice Hall, Inc. 7-10
Definition of a Tax
Mandatory assessment levied under authority of a political entity for purpose of raising revenue used for public or governmental purposes
©2008 Prentice Hall, Inc. 7-11
Deductible Taxes
State, local, & foreign real property taxesState and local personal property taxes
If based on value Foreign, state & local income, war
profits, and excess profits taxesState and local sales taxes
If an election is made instead of deducting state and local income taxes
©2008 Prentice Hall, Inc. 7-12
Nondeductible Taxes
Federal income tax, employee’s social security tax, Federal estate & gift taxEmployer’s share of social security tax
is deductible as business expenseFederal import tariffs & excise taxes
Unless for business or production of income
©2008 Prentice Hall, Inc. 7-13
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 year
©2008 Prentice Hall, Inc. 7-14
Personal Property Taxes
Tax must be an ad valorem tax on personal property imposed on an annual basis
Any portion of the tax which is flat fee is not deductible
©2008 Prentice Hall, Inc. 7-15
Real Estate Taxes
Apportionment of taxesNecessary when real estate is
sold during the yearReal property assessments only
against property benefitedCapitalized costs—not deductible
E.g., Sidewalk or new sewer lines
©2008 Prentice Hall, Inc. 7-16
Self-Employment Tax
Pay tax on self-employment income in lieu of payment of Social Security tax on salary
½ of SE tax deductible for AGI
©2008 Prentice Hall, Inc. 7-17
Interest Interest
Definition of interestClassification of interest
expenseTiming of the interest deduction
©2008 Prentice Hall, Inc. 7-18
Definition of Interest
Compensation for use or forbearance of moneyBank service charges and certain
loan acquisition costs not considered interest for tax purposes
©2008 Prentice Hall, Inc. 7-19
Classification of Interest Expense
(1 of 2)
Depends on purpose of indebtednessActive trade or business
For AGI deductionPassive activity
Subject to passive activity loss limitationUsed to compute net passive income/loss
Investment interestDeductible up to net investment income
©2008 Prentice Hall, Inc. 7-20
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 deductibleMay deduct interest on additional $100K of
home equity indebtednessStudent loan interest
Up to $2,500 deductible as for AGI deductionPhased out at higher income levels
©2008 Prentice Hall, Inc. 7-21
Timing of the Interest Deduction
(1 of 2)
Prepaid interestCapitalized and amortized over
period to which interest relatesDiscounted notes
Cash method taxpayer deducts in year loan received
Accrual method taxpayer amortizes over life of loan
©2008 Prentice Hall, Inc. 7-22
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 taxpayerCannot deduct interest until interest paid
Imputed interestApplies to below-market loansSee Chapter I11
©2008 Prentice Hall, Inc. 7-23
Charitable ContributionsCharitable Contributions
Qualifying organizationType of property contributedDeduction limitationsApplication of carryoversSpecial rules for charitable
contributions made by corporations
©2008 Prentice Hall, Inc. 7-24
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
©2008 Prentice Hall, Inc. 7-25
Type of Property Contributed
(1 of 2)
Contribution of long-term capital gain propertyGenerally FMV
Use adjusted basis if Contributed to private nonoperating
foundationUnrelated use by charitable organization Certain intangibles
©2008 Prentice Hall, Inc. 7-26
Type of Property Contributed
(2 of 2)
Contribution of ordinary income propValue generally adjusted basisException for corp donation of
inventoryContribution of services
Only out-of-pocket and transportation expenses deductible
©2008 Prentice Hall, Inc. 7-27
Deduction Limitations
50% of AGI overall limitationApplies to public charitiesSum of all contributions limited to 50%
30% of AGI limitationContributions of capital gain property
20% of AGI limitationCapital gain property contributed to
private nonoperating foundations
©2008 Prentice Hall, Inc. 7-28
Application of Carryovers
Carried over and deducted in subsequent five yearsApply with regard to special
limitations
©2008 Prentice Hall, Inc. 7-29
Special Rules for Contributions Made by
Corporations
Pledges made by accrual method corporationsDeductible in year pledged if paid by
15th day of 3rd month after year endLimitation applicable to
corporationsCannot exceed 10% of corporation’s
taxable income
©2008 Prentice Hall, Inc. 7-30
Casualty and Theft Casualty and Theft LossesLosses
Individuals can deduct casualty or theft loss on personal-use property as an itemized deduction Subject to floor of $100 plus 10 %
of AGI
©2008 Prentice Hall, Inc. 7-31
Miscellaneous Itemized Miscellaneous Itemized DeductionsDeductions
Certain employee expensesExpenses to produce incomeCost of tax advice
©2008 Prentice Hall, Inc. 7-32
Certain Employee Expenses
Unreimbursed employee business expensesInclude travel, transportation, dues
to professional organizations, cost of job hunting
Generally miscellaneous itemized deductions subject to a 2% of AGI floor
©2008 Prentice Hall, Inc. 7-33
Expenses to Produce Income
Expenses to produce investment income other than rents or royalties
Miscellaneous itemized deductions subject to 2% of AGI floor
©2008 Prentice Hall, Inc. 7-34
Cost of Tax Advice
IncludesTax 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
©2008 Prentice Hall, Inc. 7-35
Reduction of Certain Reduction of Certain Itemized DeductionsItemized Deductions (1 of 2) (1 of 2)
Reduction in total amount of most itemized deductions for high-income taxpayersOnly applies to individuals with AGI
in excess of $156,400Reduction is 3% of amount that
individual’s AGI for year exceeds threshold amount
©2008 Prentice Hall, Inc. 7-36
Reduction of Certain Reduction of Certain Itemized DeductionsItemized Deductions (2 of 2) (2 of 2)
Two limitations apply Reduction can not exceed 80% of
itemized deduction other than medical, investment, casualty losses, and wagering losses AND
The 3% is applied after taking into account other limitations on itemized deductions
e.g. 2% of AGI on miscellaneous deductions
©2008 Prentice Hall, Inc. 7-37
Tax Planning Tax Planning ConsiderationsConsiderations
Medical expense deductionBunch medical expenses into a single year
to exceed 7.5% of AGI floorInterest expense deductionDeduction for charitable contributions
Election to reduce amount of contributionDonation of appreciated long-term capital
gain propertySignificant substantiation requirement
©2008 Prentice Hall, Inc. 7-38
Compliance and Compliance and Procedural Procedural
ConsiderationsConsiderations (1 of 3) (1 of 3)
Medical expensesDependent care credit vs. medical expense deduction
Compare dependent care credit rate with effective marginal tax rate for additional medical deductions
©2008 Prentice Hall, Inc. 7-39
Compliance and Compliance and Procedural Procedural
ConsiderationsConsiderations (2 of 3) (2 of 3)
Charitable contributions>$500 must file Form 8283Property > $5000 should have
appraisal>$250 and quid pro quo > $75
require additional documentation
©2008 Prentice Hall, Inc. 7-40
Compliance and Compliance and Procedural Procedural
ConsiderationsConsiderations (3 of 3) (3 of 3)
TaxesSchedule C - related to taxpayer’s
trade or businessSchedule E - related to the
production of rents and/or royalties
Schedule A - if personal
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7-41©2008 Prentice Hall, Inc.