7-1 ©2010 Pearson Education, Inc. Publishing as Prentice Hall.

7-1©2010 Pearson Education, Inc. Publishing as Prentice Hall

7-2

ITEMIZED DEDUCTIONSITEMIZED DEDUCTIONS(1 of 2)(1 of 2)

Medical expensesTaxesInterest Charitable contributionsCasualty and theft lossesMiscellaneous itemized

deductions©2010 Pearson Education, Inc. Publishing as Prentice

Hall

7-3

ITEMIZED DEDUCTIONSITEMIZED DEDUCTIONS(2 of 2)(2 of 2)

Reduction of certain itemized deductions

Tax planning considerationsCompliance and procedural

considerations

©2010 Pearson Education, Inc. Publishing as Prentice Hall

7-4

Medical ExpensesMedical Expenses

Qualified individualsQualified medical expensesAmount and timing of deduction


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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


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Qualified Medical Expenses(1 of 2)

Diagnosis, cure, mitigation, treatment, or prevention of disease

Transportation$0.24/mile std. mileage rateIncludes meals & lodging if overnight

Capital expendituresExcess of cost over amount by which

value of home increases


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


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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 for deduction AGI


7-9

Taxes Taxes

Definition of a taxDeductible taxesNondeductible taxesState and local income taxesState and local sales taxesPersonal property taxesReal estate taxesSelf-employment tax


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Definition of a Tax

Mandatory assessment levied under authority of a political entity for purpose of raising revenue used for public or governmental purposes


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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 (through 2009)


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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 taxesUnless for business or production of income


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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


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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


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Real Estate Taxes(1 of 2)

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


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Real Estate Taxes(2 of 2)

Additional standard deduction for real property taxes in 2009 if taxpayer does not itemize deductionsLimited to lesser of

Amount that would be deductible as an itemized deduction, or

$500 ($1,000 if MFJ)


7-17

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


7-18

Interest Interest

Definition of interestClassification of interest

expenseTiming of the interest deduction


7-19

Definition of Interest

Compensation for use or forbearance of moneyBank service charges and certain

loan acquisition costs not considered interest for tax purposes


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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


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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


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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


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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

paidImputed interest

Applies to below-market loans


7-24

Charitable ContributionsCharitable Contributions

Qualifying organizationType of property contributedDeduction limitationsApplication of carryoversSpecial rules for charitable

contributions made by corporations


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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


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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


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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


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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


7-29

Application of Carryovers

Carried over and deducted in subsequent five yearsApply with regard to special

limitationsUse FIFO to apply carryovers


7-30

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


7-31

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 per item

plus 10 % of AGI


7-32

Miscellaneous Itemized Miscellaneous Itemized DeductionsDeductions

Certain employee expensesExpenses to produce incomeCost of tax advice


7-33

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


7-34

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


7-35

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


7-36

Reduction of Certain Reduction of Certain Itemized DeductionsItemized Deductions (1 of 2) (1 of 2)

Reduction in total of most itemized deductions for high-income taxpayersOnly applies to individuals with AGI

in excess of $166,800Reduction is 1% (in 2009) of

amount that individual’s AGI for year exceeds threshold amount


7-37

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 1% is applied after taking into account other limitations on itemized deductions

e.g. 2% of AGI on miscellaneous deductions

Reduction eliminated after 2009


7-38

Tax Planning Tax Planning ConsiderationsConsiderations

(1 of 2)(1 of 2)

Medical expense deductionBunch medical expenses into a single

year to exceed 7.5% of AGI floorInterest expense deduction

May deduct residential interest on any two residencesIf vacation home used > of 14 days or

10% of rental days personal portion qualifies as a residence


7-39

Tax Planning Tax Planning ConsiderationsConsiderations

(2 of 2)(2 of 2)

Deduction for charitable contributionsElection to reduce amount of

contributionDonation of appreciated long-

term capital gain propertySignificant substantiation

requirement


7-40

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


7-41



Charitable contributions>$500 must file Form 8283Property > $5,000 should have

appraisal>$250 and quid pro quo > $75

require additional documentation


7-42



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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