DEDUCTIONS AND LOSSES: CERTAIN ITEMIZED DEDUCTIONS
SOLUTIONS TO PROBLEM MATERIALS
DISCUSSION QUESTIONS 1. (LO 1, 2) a. Yes. Fifty percent of the business entertainment expenses in this situation are deductible for
AGI, which is the base for determining the nondeductible portion of the medical expenses (i.e., 10% × AGI). A lower AGI may result in a larger medical expense deduction.
b. Yes. Any unreimbursed entertainment expenses incurred by an employee would have no effect on the determination of AGI because the amounts are deductible from AGI. Therefore, the expenses would not change the base (AGI) for determining the allowable medical expenses.
2. (LO 2) Cosmetic surgery is necessary (and therefore deductible) when it improves the effects of (1) a deformity arising from a congenital abnormality, (2) a personal injury, or (3) a disfiguring disease. Expenses incurred in connection with the restorative surgery (required as a result of the accident) are deductible because the surgery was necessary. Amounts paid for the unnecessary cosmetic surgery (reshaping the chin) are not deductible as a medical expense.
3. (LO 2, 9) The cost of care in a nursing home can be included in medical expenses if the primary reason for being in the home is to get medical care. Apparently the primary reason Jerry’s parents are in the nursing home is to get medical care, whereas medical care is not the primary reason that Ernie’s parents are in the nursing home.
4. (LO 2) Cheryl should consider the following tax issues:
• If she receives reimbursement in 2015, she must reduce her medical expense deduction by the amount of the reimbursement.
• If she receives reimbursement in 2016, she is not required to reduce her 2015 medical expense deduction by the amount of the anticipated reimbursement.
• If she receives the reimbursement in 2016 and deducted it in 2015, she must include the reimbursement in gross income to the extent she received a tax benefit from the medical expense deduction in 2015.
• She should consider her expected marginal tax rates for 2015 and 2016 and determine whether it is better to receive the reimbursement in 2015 or 2016.
5. (LO 2) David, who is self-employed, may deduct 100% of the premium of $7,500 as a deduction for AGI. Joan, who is an employee, may include the premiums of $8,000 she paid in computing her itemized deduction for medical expenses (subject to the 10% floor).
6. (LO 2) Jayden, a calendar year taxpayer, paid $16,000 in medical expenses in 2015. Even if he expects $12,000 of these expenses to be reimbursed by an insurance company in 2016, he can include all $16,000 of the expenses in determining his medical expense deduction for 2015. He is not required to consider the potential reimbursement in computing his medical expense deduction for 2015.
Casualty losses must be reduced if there is an expectation of reimbursement. Therefore, Jayden’s starting point in computing the casualty loss deduction is $6,000 ($20,000 loss − $14,000 expected reimbursement). Further reductions are required for the $100 floor and the 10%-of-AGI floor.
7. (LO 2) A Health Savings Account (HSA) plan requires that the taxpayer be covered by a high-deductible medical insurance policy, which means that the premiums on the policy will be less than those for a low-deductible policy. The contributions to the HSA are deductible for AGI, which reduces the nondeductible amount of itemized deductions subject to certain limitations, and the taxpayer does not have to itemize to obtain the deduction. The HSA distributions pay for the deductible medical expenses, and they are not included in gross income. Also, the income earned on the HSA is not included in gross income if it is used to pay medical expenses not covered by the high-deductible plan.
8. (LO 5, 9) Diane can deduct mortgage interest on her principal residence and one of the two other residences. (The yacht is considered to be a residence as long as it has sleeping accommodations, a toilet, and cooking facilities.) She should choose the second residence that will result in the highest interest deduction. Her deduction is limited to interest on up to (1) $1,000,000 of acquisition indebtedness and (2) $100,000 of home equity indebtedness. Alternatively, Diane should consider paying off the mortgage on one of the two second residences, while increasing the home equity indebtedness on the primary residence and the other second residence if this would produce a larger deductible interest expense than what is allowed currently.
9. (LO 5, 9) There are many nontax issues (financial, investment, and personal) involved in the Greggs’ decision, but this discussion will be limited to the tax issues. Interest on the home equity loan will be fully deductible, partly as home equity interest and partly as business expense (related to business use of the car). Interest on the conventional loan will be deductible only to the extent the car is used for business purposes.
The tax issue related to a possible sale of Bluebird stock concerns deductibility of the loss that will be incurred on the sale. If the Greggs have capital gains in excess of the loss, the entire loss can be offset against the gains. If they have no capital gains, they will be limited to a capital loss deduction of $3,000 in the year of sale, with excess capital losses being carried forward. It will also be necessary to determine whether the loss is long term or short term.
There will also be tax issues related to depreciation on the car, but those issues are independent of the source of funding for the purchase.
10. (LO 5) Yes. Home equity loans utilize a qualified residence of the taxpayer as security. The proceeds from these loans can be used for personal purposes such as purchasing personal use automobiles. The interest paid on the qualified residence loan is deductible (subject to a statutory ceiling) as an itemized deduction on Schedule A, whereas the interest paid on consumer loans is not deductible.
11. (LO 5) Points paid by a seller are treated as an adjustment to the selling price of the residence. The buyer is treated as having used cash to pay the points that were paid by the seller. The buyer may deduct the points if several conditions are met. These conditions are specified in Rev.Proc. 94–27.
12. (LO 6) Contributions are deductible only if made to a qualified charitable organization. The family would not qualify as a charitable organization, so Betty’s contribution will not be deductible. The church probably would be a qualified charitable organization. If so, Jack’s contribution will be deductible.
Deductions and Losses: Certain Itemized Deductions 10-3
13. (LO 6) Mike may be able to deduct a portion of the cost of the tickets. To the extent that tangible benefits are received, taxpayers are not allowed to deduct the cost of payments to charitable organizations. Mike will be required to reduce his deduction to the extent of the value of the dinner and the dance. This information will need to be provided by the public library.
14. (LO 6, 9) William should donate the $100,000 in the year he receives the $1 million won in the state lottery. Deductions for donations to a qualified public charity (his church) are limited to 50% of adjusted gross income (AGI). His AGI in the year of receipt of the lottery winnings would be ample enough for him to take the entire contribution as a deduction in that year. If he donates the $100,000 in any other tax year, his deduction will be limited to $25,000 (50% × $50,000) plus or minus 50% of other income and adjustments on page 1 of Form 1040. William would be allowed to carry forward for five years the excess contribution not taken as a deduction in the year of contribution subject to the limitations.
COMPUTATIONAL EXERCISES
15. (LO 2) Barbara may not include as medical expenses the following items that were incurred for the general improvement of her health:
• $840 dues at a health club incurred for the purpose of improving her general physical condition.
• $240 for multiple vitamins and antioxidant vitamins.
She may include as medical expenses the $500 cost of the smoking cessation program, but may not include the $240 cost of the nonprescription nicotine gum. While the cost of nonprescription drugs is generally not deductible, the $600 spent on insulin is deductible. Funeral expenses of $7,200 do not qualify as medical expenses.
Therefore, Barbara’s total qualified medical expenses are $1,100 ($500 + $600).
16. (LO 3) The $5,200 real estate tax Ramona pays is allocated between her and Tabitha, based on the relative number of days each owns the property during the year.
a. Therefore, $855 is allocated to Tabitha ($5,200 × 60/365) and $4,345 is allocated to Ramona
($5,200 − $855). Consequently, Tabitha may deduct $855 of real estate tax and Ramona may deduct $4,345.
b. This calculation will also impact the basis in the real estate and the amount realized from the
sale. Ramona’s basis in the real estate is $260,855 [$260,000 (purchase price) + $855 (property taxes paid by Ramona but allocated to Tabitha)]. Tabitha’s amount realized is $260,855 [$260,000 (sales price) + $855 (property taxes paid by Ramona but allocated to Tabitha)].
17. (LO 4) Cash basis taxpayers deduct state income taxes in the year paid, regardless of the year to which
the payment relates, and include refunds as income in the year received (subject to the tax benefit rule).
a. $2,830 ($1,400 + $455 + $975).
b. Pierre will have income of $630 in 2016 because the tax benefit rule applies.
18. (LO 4) The refund will not be included as income in 2016 because Derek did not receive an explicit tax benefit for the state income taxes paid in 2015 (i.e., Derek claimed the standard deduction).
19. (LO 5) Miller can deduct all of the interest on the $157,500 first mortgage because it is acquisition indebtedness. In addition, all of the interest on the $10,000 home equity loan is deductible.
Interest is deductible only on the portion of a home equity loan that does not exceed the lesser of:
• The fair market value of the residence, reduced by the acquisition indebtedness ($195,000 FMV − $157,500 acquisition indebtedness = $37,500).
• $100,000 ($50,000 for married persons filing separate returns). Therefore, all $167,500 of the debt ($157,500 + $10,000) will be treated as qualified residence indebtedness.
20. (LO 6) The deduction for a contribution of capital gain property is based on its fair market value, while the deduction for a contribution of ordinary income property is equal to the lesser of the adjusted basis or the fair market value.
a. Because Donna did not hold the stock for the long-term holding period (December 28, 2014, until September 10, 2015 is not “more than one year”), it is short-term capital gain property that is subject to the rules for ordinary income property. Therefore, her deduction is limited to $18,100.
b. The deduction for a contribution of loss property (FMV is less than adjusted basis) is limited to the fair market value on the contribution date. Therefore, Donna’s deduction is $15,000.
21. (LO 7) All of the expenditures listed are miscellaneous itemized deductions that are subject to the 2% of AGI floor.
22. (LO 8) Pedro’s itemized deductions before the overall limitation are computed as follows:
Medical expenses [$12,000 − (10% × $328,000)] $ 0 State and local income taxes 8,900 Real estate taxes 1,600 Home mortgage interest 16,000 Charitable contributions 2,200 Deductible investment interest 1,700 Total itemized deductions $30,400 Pedro’s itemized deductions in 2015 after application of the overall limitation are computed below:
Itemized deductions subject to overall limitation: State and local income taxes $ 8,900
Real estate taxes 1,600 Home mortgage interest 16,000
Charitable contributions 2,200 Total $28,700
Deductions and Losses: Certain Itemized Deductions 10-5
Reduction equals the lesser of the following: [3% × ($328,000 AGI − $258,250)] $ 2,093 80% of itemized deductions subject to limitation ($28,700 × 80%) $22,960 Amount of reduction (2,093) Deductible itemized deductions subject to overall limitation $26,607 Itemized deductions not subject to overall limitation: Investment interest 1,700 Total itemized deductions $28,307 23. (LO 9) Of the total payments associated with the home purchase during the first year of ownership, the
qualified residence interest of $22,200 is an itemized deduction. The payment of principal is not deductible. Therefore, the after-tax cost in the first year is $15,408 [interest payments $22,200 × (1 − .36) = $14,208 + principal payments $1,200].
PROBLEMS
24. (LO 2) TAX FILE MEMORANDUM
February 26, 2016
FROM: Sam Massey
SUBJECT: Emma Doyle’s medical expense deduction
Emma Doyle’s medical expense deduction is $6,450, determined as follows:
Medical insurance premiums $ 3,700 Doctor and dentist bills for Bob and April 6,800 Doctor and dentist bills for Emma 5,200 Prescription medicines for Emma 400 Nonprescription insulin for Emma 350 Total medical expenses $16,450 Less: 10% of $100,000 (AGI) (10,000) Deductible portion of medical expenses $ 6,450
Although Bob and April cannot be claimed as Emma’s dependents, they could have been had they not filed a joint return. Therefore, medical expenses incurred on their behalf qualify for the medical expense deduction. Insulin is an exception to the rule that nonprescription drugs do not qualify as medical expenses. The insurance recovery was not received until 2016. Therefore, it has no effect on the medical expense deduction for 2015.
25. (LO 2) The amount that qualifies for the medical expense deduction is $14,900 ($11,000 + $2,200 + $1,700). The room and board for Lakeside qualifies because the move was motivated by Lawrence’s need for medical care. The cable fee is a personal expense.
26. (LO 2) Only $4,000 of the cost of the dust elimination system qualifies because $6,000 of the $10,000
cost of the system increased the value of Paul’s residence. The total medical expense is $7,700 ($4,000 + $450 additional operating costs + $2,500 doctor and hospital bills + $750 prescriptions). The $300 appraisal fee is deductible as a miscellaneous itemized deduction, but not as a medical expense. Therefore, Paul’s medical expense deduction is $2,700 [$7,700 − (.10 × $50,000 AGI)].
27. (LO 2) Self-employed persons can deduct 100% of their medical insurance premiums as a deduction for AGI in 2015. Thus, Jean may deduct $7,000 as a deduction for AGI. None of the amount is deductible as an itemized deduction.
28. (LO 2) The charges for tuition, room, and board paid to Red River Academy qualify because Beth receives specialized psychiatric treatment.
Although Ed does not qualify as Susan’s dependent for purposes of claiming a dependency exemption, he qualifies as a dependent for medical expense purposes. All of the costs paid for Ed at Heartland Nursing Home are deductible because the primary reason he is there is to receive medical care.
Prescription drugs and insulin are deductible, but nonprescription drugs are not.
Only $4,300 of the filtration system qualifies because $2,200 of the $6,500 cost increased the value of Susan’s residence. The $700 increase in utility bills also is a medical expense. The appraisal fee of $360 is a miscellaneous itemized deduction, but is not deductible as a medical expense.
Deductible medical expenses are summarized below:
Surgery for Beth $ 4,500 Red River Academy charges for Beth: Tuition 5,100 Room, board, and other expenses 4,800 Psychiatric treatment 5,100 Doctor bills for Ed 2,200 Prescription drugs for Susan, Beth, and Ed 780 Insulin for Ed 540 Charges at Heartland Nursing Home for Ed:
Medical care 5,000 Lodging 2,700 Meals 2,650
Deductible cost for filtration system ($6,500 − $2,200) 4,300 Increase in utility bills due to the system 700 Total medical expenses (prior to the 10% floor) $38,370
29. (LO 2) The following tax issues are suggested by the facts presented:
• Can Rebecca claim Isabella as a dependent?
• Can Rebecca take a medical expense deduction for the remodeling expenditures?
• Can Rebecca take a medical expense deduction for the swimming pool expenditures?
• Can Rebecca take a medical expense deduction for the cost of Isabella’s operation?
• Can Isabella take a medical expense deduction for the specially equipped van and the costs of operating it?
• Can Rebecca take a medical expense deduction for the traveling expenses (transportation, highway tolls, meals, and lodging)?
• Can Rebecca deduct the medical expenses incurred for Isabella if Isabella does not qualify as her dependent?
Deductions and Losses: Certain Itemized Deductions 10-7
The following questions should be asked to resolve some of the issues listed above:
• Did Rebecca provide more than half of Isabella’s support? This will determine whether Rebecca can deduct Isabella’s medical expenses. In addition, Rebecca may be able to claim head-of-household filing status if Isabella lived with her for more than half the year.
• Are the remodeling expenses necessary to enable Isabella to live independently? If so, the expenses are included in medical expenses subject to the AGI limitation.
• Is the travel to Denver necessary for Isabella to receive proper medical treatment? If it is, the travel expenses are included in medical expenses subject to the AGI limitation.
• How much expense did Rebecca incur for lodging? The deduction is limited to $50 per night per person.
30. (LO 2) a. Because Roger is self-employed, he can deduct the $3,000 paid for the high-deductible policy
as a deduction for AGI. In addition, he may deduct the $2,600 paid to the HSA as a deduction for AGI. Thus, Roger may deduct $5,600 ($3,000 + $2,600) for AGI.
b. The $3,000 paid for the high-deductible policy is included with other medical expenses subject to the AGI limitation (i.e., from AGI). The $2,600 paid to the HSA is a deduction for AGI.
31. (LO 3) Rick’s basis in the residence is $297,780 [$300,000 (purchase price) − $2,220 (property taxes allocated to Rick but paid by Alicia)].
32. (LO 4) General discussion. Cash basis taxpayers deduct state income taxes in the year paid, regardless of the year to which the payment relates, and include refunds as income in the year received (subject to the tax benefit rule).
a. $9,100 ($1,000 + $7,400 + $700).
b. Norma will have income of $1,800 in 2016 because the tax benefit rule applies.
c. It will be treated as income in 2016. It’s treated as if she received the payment and then made a payment to the state.
d. $0 will be included as income in 2016 because she did not receive a tax benefit in 2015.
33. (LO 5) Interest is deductible only on the portion of a home equity loan that does not exceed the lesser of:
• The fair market value of the residence, reduced by the acquisition indebtedness ($440,000 FMV − $140,000 acquisition indebtedness = $300,000).
• $100,000 ($50,000 for married persons filing separate returns). Liam can deduct all of the interest on the first mortgage because it is acquisition indebtedness. Of the $220,000 home equity loan, interest on $100,000 is deductible as home equity interest.
34. (LO 5) a. Magpie Corporation can deduct interest expense of $1,500 in 2015 (associated with Buddy).
No interest deduction is permitted in 2015 for interest accrued to Malcolm because he is a related party (60% shareholder). Under § 267, Malcolm is regarded as related to the corporation because he owns more than 50% of Magpie. Consequently, the deductibility of
the $3,000 to him must await actual payment in 2016. So the remaining interest of $4,500 ($3,000 for Malcolm and $1,500 for Buddy) is deducted in 2016.
b. The $3,000 interest paid to Buddy is deductible by Magpie in 2015 and 2016 and is included in his gross income in 2016. Because Buddy uses the cash method of accounting, the interest income is not taxed until received in 2016. The $3,000 paid to Malcolm in 2016 is included in his gross income in 2016.
35. (LO 6) Generally, when a donor derives a tangible benefit from a contribution, he or she cannot deduct the value of the benefit. An exception to this benefit rule provides for the deduction of 80% of the amount paid for the right to purchase athletic tickets from colleges and universities.
a. Under the exception to the benefit rule, Nadia is allowed a $3,200 (80% of $4,000) charitable contribution deduction for the taxable year. None of the $400 paid for game tickets can be deducted.
b. Nadia cannot deduct the $400 portion of the $4,000 that applies to the tickets ($100 × 4). She is allowed a charitable contribution deduction of $2,880, which is equal to 80% of the $3,600 remainder.
36. (LO 6) General discussion. The deduction for a contribution of capital gain property is based on the fair market value, while the deduction for a contribution of ordinary income property is equal to the lesser of the adjusted basis or the fair market value.
a. Because Liz did not hold the stock for the long-term holding period (December 3, 2014, until July 5, 2015), it is short-term capital gain property that is subject to the rules for ordinary income property. Therefore, her deduction is limited to $10,000.
b. Liz held the stock for the long-term holding period (July 1, 2012, until July 5, 2015), so it is capital gain property. Therefore, her deduction is equal to the fair market value of the stock, $17,000.
c. The deduction for a contribution of loss property (FMV is less than adjusted basis) is limited to the fair market value. Therefore, Liz’s deduction is $7,500.
37. (LO 6) a. No reduction for the appreciation on the Seagull, Inc. stock is necessary because if sold, it
would yield a long-term capital gain. Thus, Ricardo’s potential charitable contribution deduction is $500,000 [$220,000 (cash) + $280,000 (fair market value of Seagull, Inc. stock)], but his allowable charitable contribution deduction for the year is limited to $420,000 (50% of $840,000 AGI).
Although the 30% of AGI limitation applies to capital gain property, which would result in a current deduction for the Seagull, Inc. stock of $252,000 (30% of $840,000 AGI), the overall 50% of AGI limitation applies to limit the deduction to $200,000. When the contributions for the tax year involve both 50% property (the cash of $220,000 in this case) and 30% property (the Seagull, Inc. stock), the allowable deduction comes first from the 50% property. Therefore, Ricardo’s allowable deduction of $420,000 for the current year consists of:
Cash $220,000 Seagull stock [overall limitation of $420,000 (50% of AGI) −
$220,000 (cash)] 200,000 $420,000
Deductions and Losses: Certain Itemized Deductions 10-9
b. The unused portion of the Seagull stock contribution of $80,000 [$280,000 (fair market value) − $200,000 (portion used)] may be carried over for five years. The carryover continues to be classified as 30% property in the carryover years.
If Ricardo plans his charitable deductions wisely, sooner or later he will be able to deduct the full $280,000 fair market value of the stock.
38. (LO 6) a. The cash gift of $95,000 is fully deductible as a charitable contribution. However, in the
current year, Ramon’s deduction is limited to $90,000 (50% of $180,000 AGI). The remaining $5,000 ($95,000 − $90,000) can be carried forward for five years and deducted in those years, subject to the same percentage limitations.
b. Ramon’s value for the contribution is $95,000, the fair market value of the stock. The deduction for 2015 is limited to $54,000 (30% of $180,000 AGI). The remaining $41,000 ($95,000 − $54,000) can be carried forward for five years and deducted in those years, subject to the same percentage limitations.
c. In making a gift of capital gain property that also is tangible personalty, which is put to an unrelated use by the charity, the charitable contribution deduction is reduced by the amount of long-term capital gain that would have been recognized had the property been sold for its fair market value. Therefore, the contribution is valued at $60,000 ($95,000 current value less the $35,000 long-term capital gain element). The amount is fully deductible in the current year because the gift is below the applicable 50% of AGI limitation.
39. (LO 6) a. Based on these facts, Roberta can deduct $660 as a charitable contribution for 2015. The
deduction is based on the difference between the purchase price of the four tickets (4 × $200) and their fair market value (4 × $35). Giving the tickets to the minister is of no tax consequence because the minister is not a qualified charity. In addition, the $4,000 pledge to the church’s building fund is not deductible in 2015 because the amount is not actually paid until 2016.
b. The pledge to the building fund of the church yields no deduction for 2015. It makes no difference whether Roberta uses the cash or the accrual method of accounting for tax purposes. Except for limited exceptions involving accrual basis corporations and fiduciary entities, charitable donations are deductible only in the year in which they are paid. Had the check that satisfied the pledge been mailed on December 31, 2015, Roberta could have claimed a deduction for 2015. As the situation is described, however, the $4,000 deduction relates to 2016.
Ms. Eleanor Young 2622 Bayshore Drive Berkeley, CA 94709
Dear Ms. Young:
I have evaluated the proposed alternatives for your current year-end contribution to the United Way. I recommend that you sell the Gold Corporation stock and donate the proceeds to the United Way. The four alternatives are discussed below.
A donation of cash, the unimproved land, or the Gold stock will each result in a $23,000 charitable contribution deduction. Donation of the Blue Corporation stock will result in only a $3,000 charitable contribution deduction.
A direct contribution of the Gold Corporation stock will be a poor decision from a tax perspective in that the decline in value of $5,000 ($23,000 − $28,000) is not deductible and the amount of the charitable contribution would be $23,000. However, you will benefit in two ways if you sell the Gold stock and give the $23,000 in proceeds to the United Way. First, donation of the proceeds will result in a $23,000 charitable contribution deduction. In addition, sale of the stock will result in a $5,000 long-term capital loss. If you have capital gains of $2,000 or more this year, you can use the entire loss in computing your current taxable income. If you have no capital gains this year, you can deduct $3,000 of the capital loss this year and carry over the remaining $2,000 loss to future years.
You should make the donation in time for ownership to change hands before the end of the year. Therefore, I recommend that you notify your broker immediately so that there will be no problem in completing the donation on a timely basis.
Please let me know if you have any questions or would like to discuss my recommendation and the related analysis. Thank you for consulting our firm on this matter. We look forward to serving you in the future.
Mr. and Mrs. Bart Forrest 2003 Highland Drive Durham, NC 27707
Dear Mr. and Mrs. Forrest:
I have reviewed the tax information you provided and have determined that you will save $726 in Federal income tax if you file a joint return for 2015. A detailed computation that supports my conclusion is enclosed.
Please let me know if you have any question or would like to discuss my recommendation in further detail. Thank you for consulting our firm on this matter. We look forward to serving you in the future.
Sincerely,
Rodney Rodriguez, CPA Partner
Deductions and Losses: Certain Itemized Deductions 10-11
Bart and Elizabeth Forrest Comparison of Joint and Separate Tax Liabilities Tax Year 2015
Separate and joint tax liabilities for 2015 are computed below. These computations are based on all information provided by Bart and Elizabeth Forrest.
Bart Elizabeth Joint Salary $38,000 $ 38,000 Business net income $110,000 110,000 Interest income* 1,500 2,300 3,800 Gross income $39,500 $112,300 $151,800 Deductions for AGI (2,400) (14,000) (16,400) AGI $37,100 $ 98,300 $135,400 Medical expenses after 10% floor** $ 6,717 $ –0– $ 245 State income tax 800 1,800 2,600 Real estate tax 1,900 1,900 3,800 Mortgage interest 2,100 2,100 4,200 Unreimbursed employee expenses after 2% floor 458 –0– –0– Total itemized deductions or standard $11,975 $ 5,800 $ 12,600 deduction*** Exemptions 4,000 4,000 8,000 Total deductions from AGI ($15,975) ($ 9,800) ($ 20,600) Taxable income $ 21,125 $ 88,500 $114,800
*Interest income: Bart Elizabeth Bart’s interest $ 400 Elizabeth’s interest $1,200 Their joint interest 1,100 1,100
$1,500 $2,300
**Calculation of medical expense deduction: Bart Elizabeth Joint Medical expenses $10,427 $ 3,358 $13,785 Less: 10% of AGI (3,710) (9,830) (13,540) Medical expense deduction $ 6,717 $ 0 $ 245
***If Bart and Elizabeth file separately and Bart chooses to itemize his deductions, Elizabeth also must itemize her deductions. She would not qualify to claim the standard deduction. If they file jointly, they will claim the standard deduction because it exceeds the available itemized deductions.
42. (LO 2, 3, 4, 5, 6, 7, 8) Evan must reduce his medical expenses by 10% of AGI to determine the medical expense deduction. In addition, his itemized deductions are subject to the overall limit on itemized deductions because his income as a single taxpayer exceeds $258,250. The medical expense deduction is not subject to the overall limit on itemized deductions.
The medical expense deduction equals $270 [$28,000 (medical expenses) − (10% × $277,300) = $270].
Medical expenses (net of 10% AGI threshold) $ 270 Interest on home mortgage 8,700 State income taxes 9,500 Real estate taxes 3,600 Charitable contributions 2,500
Total itemized deductions before overall limitation $24,570
Evan’s itemized deductions in 2015 after application of the overall limitation are computed below:
Itemized deductions subject to overall limitation: Interest on home mortgage $ 8,700 State income taxes 9,500 Real estate taxes 3,600 Charitable contributions 2,500
Total $24,300 Reduction equals the lesser of the following: [3% × ($277,300 AGI − $258,250)] $ 572 80% of itemized deductions subject to limitation 19,440 ($24,300 × 80%) Amount of reduction (572)
Deductible itemized deductions subject to overall limitation $23,728 Itemized deductions not subject to overall limitation: Medical expense 270 Total itemized deductions $23,998 43. (LO 2, 3, 4, 5, 6, 7, 8) Linda’s itemized deductions before the overall limitation are computed as
follows:
Medical expenses [$33,000 − (10% × $280,000)] $ 5,000 State and local income taxes 4,500 Real estate taxes 4,000 Home mortgage interest 5,000 Charitable contributions 7,000 Casualty loss [$34,000 − (10% × $280,000)] 6,000 Unreimbursed employee expenses [$7,600 − (2% × $280,000)] 2,000 Total itemized deductions $33,500 Even if Congress extends the option to deduct sales taxes paid rather than state and local income taxes
for 2015, Linda would deduct state and local income taxes because these taxes exceed the state sales taxes paid. The automobile loan interest and the credit card interest are not deductible.
Linda’s itemized deductions in 2015 after application of the overall limitation are computed below:
Itemized deductions subject to overall limitation: State and local income taxes $ 4,500 Real estate taxes 4,000 Home mortgage interest 5,000 Charitable contributions 7,000 Unreimbursed employee expenses [($7,600 − (2% × $280,000)] 2,000
Total $22,500
Deductions and Losses: Certain Itemized Deductions 10-13
Reduction equals the lesser of the following: [3% × ($280,000 AGI − $258,250)] $ 653 80% of itemized deductions subject to limitation 18,000 ($22,500 × 80%) Amount of reduction (653) Deductible itemized deductions subject to overall limitation $21,847 Itemized deductions not subject to overall limitation: Medical expenses 5,000 Casualty loss 6,000 Total itemized deductions $32,847 44. (LO 2, 3, 4, 5, 6, 7, 8) Stuart and Pamela’s itemized deductions before the overall limitation are
computed below:
Casualty loss [$48,600 − (10% × $350,000)] $13,600 Home mortgage interest 19,000 Property taxes on home 16,300 Charitable contributions 28,700 State income tax 18,000 Tax return preparation fees [($1,200 − (2% × $350,000)] –0– Total itemized deductions before overall limitation $95,600
Interest on credit cards is nondeductible. Tax preparation fees are not deductible because they do not exceed 2% of AGI.
Stuart and Pamela’s itemized deductions in 2015 after application of the overall limitation are computed below:
Itemized deductions subject to overall limitation: Home mortgage interest $19,000 Property taxes on home 16,300 Charitable contributions 28,700 State income tax 18,000 Tax return preparation fees [($1,200 − (2% × $350,000)] –0– Total $82,000
Reduction equals the lesser of the following: [3% × ($350,000 AGI − $309,900)] $ 1,203 80% of itemized deductions subject to limitation 65,600 ($82,000 × 80%) Amount of reduction (1,203)
Deductible itemized deductions subject to overall limitation $80,797 Itemized deductions not subject to overall limitation: Casualty loss 13,600 Total itemized deductions $94,397
Bruce’s salary $ 62,100 Alice’s salary 58,000 Interest income 2,750 Adjusted gross income $122,850 Less: Itemized deductions (Note 1) (35,465) Less: Personal and dependency exemptions (Bruce, Alice, John, and Bruce’s father) (Note 2) (15,800) Taxable income $ 71,585
Tax from Tax Table* $ 9,829 Less: Prepayments and credits Income tax withheld ($6,300 + $4,500) (10,800) Net tax payable (or refund due) for 2014 ($ 971)
*The taxpayer is not subject to the AMT. For a complete discussion of the AMT, see Chapter 12.
See the tax return solution beginning on p. 10-21 of the Solutions Manual.
Notes
(1) Itemized deductions are summarized below: Medical expenses: Medical insurance premiums $ 4,500 Doctor bill for Sam paid in 2014 for services in 2013 7,600 Operation for Sam 8,500 Prescription medicines for Sam 900 Hospital expenses for Sam 3,500 Total medical expenses $25,000 Less: Reimbursement received in 2014 (3,600) Less: 10% of $122,850 AGI (12,285) Medical expenses deductible in 2014 $ 9,115 Taxes: State income taxes ($3,100 + $2,950 + $900) $ 6,950 Property taxes on residence 5,000 11,950 Qualified interest on home mortgage 8,700 Charitable contributions: Church contribution $ 5,000 Tickets to charity dinner dance (Only the excess of the ticket price of $300 over the cost of comparable entertainment of $50 is deductible) 250 Used clothing donated (limited to fair market value) 350 5,600 Miscellaneous itemized deductions: Uniforms and laundry ($850 + $566) $ 1,416 Professional journals and dues ($400 + $741) 1,141 Total of deductible items $ 2,557 Less: 2% of $122,850 AGI (2,457) Miscellaneous itemized deductions deductible in 2014 100
Total itemized deductions $35,465
Deductions and Losses: Certain Itemized Deductions 10-15
Alice and Bruce would elect to itemize their deductions because total itemized deductions exceeds the standard deduction of $12,400 for 2014 for married persons filing a joint return.
(2) In addition to the Byrds’ son John, Bruce’s father, Sam, qualifies as a dependent. Therefore,
the total personal and dependency exemption deduction is $15,800 ($3,950 × 4). Cynthia cannot be claimed as a dependent because she is not under age 24.
Part 2— Tax Planning
Bruce’s salary $ 88,000 Interest income ($32,000 + $2,750) 34,750 Adjusted gross income $122,750 Less: Itemized deductions (Note 1) (32,994) Less: Personal and dependency exemptions (Bruce and Alice) (2 × $4,000) (8,000) Taxable income $ 81,756
Tax liability from tax rate schedule for 2015 $ 12,027
Note (1) Itemized deductions are summarized below: Medical expenses: Medical insurance premiums $ 9,769 Estimated costs for Alice ($15,400 − $6,400 reimbursement) 9,000 Less: 10% of $122,750 AGI (12,275) $ 6,494
Taxes: State income taxes ($3,100 + $4,000) $ 7,100 Property taxes on residence 5,100 12,200 Qualified interest on home mortgage 8,700 Charitable contributions 5,600 Miscellaneous itemized deductions: Professional journals and dues ($400 + $741) $ 1,141 Less: 2% of $122,750 AGI (2,455) Miscellaneous itemized deductions deductible in 2015 –0– Total itemized deductions $32,994
46. Paul’s salary $ 68,000 Donna’s salary 56,000 Dividends 750 State income tax refund 1,520 Long-term capital gain (Note 1) 7,500 Adjusted gross income $133,770 Less: Itemized deductions (Note 2) (22,520) Less: Personal and dependency exemptions (Paul, Donna, Larry, Jane, Hannah) (Note 3) (20,000) Taxable income $ 91,250 Tax (Note 5) $ 13,575 Less: Tax withheld ($6,770 + $6,630) (13,400) Net tax payable (or refund due) for 2015 $ 175
Notes (1) Sale price of 300 shares Acme Corp. stock (300 × $50) $ 15,000 Cost of stock (300 × $25) (7,500) Recognized gain on sale (LTCG) $ 7,500
(2) Itemized deductions:
Medical expenses: Doctor and hospital bills ($10,700 − $2,000) $ 8,700 Prescription drugs and medicine 640 Insurance premiums 5,904 Total medical $15,244 Less: 10% of $133,770 AGI (13,377)
Deductible medical $ 1,867 Taxes: State income taxes paid ($900 + $800) $ 1,700* Real estate taxes 3,850 5,550
Home mortgage interest 7,890 Contributions:
Church $ 1,950 Books 740 2,690 Casualty loss: Fair market value $18,000 Less: Nondeductible floor (100) Less: 10% of $133,770 AGI (13,377) 4,523 Miscellaneous itemized deductions: Airfare $ 340 Hotel 170 Meals (50% × $95) 48 Registration fee 340 Total deductible items $ 898 Less: 2% of $133,770 AGI (2,675)
Deductible miscellaneous itemized deductions –0– Total itemized deductions $22,520
*Even if Congress extends the option to deduct sales taxes paid rather than state and local income taxes for 2015, the Deckers will deduct the state income taxes paid because they exceed the sales taxes paid (per table).
(3) Because Donna is the custodial parent, the Deckers qualify for the dependency deduction for both Larry and Jane. Because they provide over 50% of the support of Hannah, they also qualify for a dependency deduction for her. Thus, the personal and dependency exemptions are $20,000 ($4,000 × 5).
(4) Consumer interest is not deductible. Therefore, neither the interest on the auto loan of $1,660 nor the credit card interest of $620 is deductible.
1. a. Section 213 contains no ceiling limit on the amount of medical expenses.
b. A capital expenditure will qualify as a medical expense if its primary purpose is the medical care of the taxpayer, the taxpayer’s spouse, or the taxpayer’s dependent. However, the capital expenditure qualifies as a medical expense only to the extent the expenditure exceeds the increase in value of the related property (if the expenditure is directly related to medical care). Reg. § 1.213–1(e)(1)(iii).
c. The facts in the research problem are similar to those in Collins H. Ferris, 36 TCM 765, T.C.
Memo. 1977–186, where the IRS argued that the medical expense deduction should be limited to the cost necessary to produce a functionally adequate facility. The Tax Court held that the deduction did not have to be based on the cost of the least expensive pool that could have been built. The Tax Court said that there was no case law limiting a medical expense to the cheapest form of treatment. However, this Tax Court decision was reversed by the Seventh Circuit Court of Appeals, which held for the IRS [78–2 USTC ¶ 9646, 42 AFTR 2d 78–5674, 582 F.2d 1112 (CA–7, 1978)]. The Seventh Circuit held that the deductible amount should have been the minimum cost of a functionally adequate pool and housing structure. The court reasoned that the disallowed expenditures were personal expenditures incurred to ensure architectural and aesthetic compatibility with the related property—and not expenses for medical care—and, therefore, not deductible.
2. Tax deductions are provided to taxpayers by Congress as a matter of “legislative grace.” That is, an
expenditure is deductible only if Congress enacts a provision allowing the expenditure to be deducted against income. Further, the burden of substantiating the amount of the deduction rests with the taxpayer and such substantiation involves providing evidence and records (e.g., canceled checks, bank statements, receipts from third parties) as required by the IRS in support of the amounts claimed. Self-serving or unverified testimony is not considered an adequate means of support. In the Bloughs’ situation, they have claimed deductions for expenditures that, at least theoretically, are deductible, but only if they can provide the required support. However, the Bloughs state that the amount of their deductions is based on averages calculated by the IRS and without regard to their actual experience.
In Cheryl L. de Werff (T.C. Summary Opinion, 2011–29), the taxpayer claimed itemized deductions for amounts well in excess of what she could support. The Tax Court supported the IRS’s assertion that the taxpayer had not properly documented the deductions claimed. Consequently, the taxpayer was only allowed deductions for qualifying amounts for which adequate substantiation was provided. In addition, the taxpayer was subject to an accuracy-related penalty for the underpayment of taxes that resulted.
The Bloughs should be encouraged to cooperate fully with the IRS’s request and to gather whatever records and support from their files that will support what has been claimed. If the amount of itemized deductions they can support is less than the standard deduction amount, they should claim the standard deduction amount for the year under review. Finally, they should also be prepared for the IRS to assess an accuracy-related penalty for their understated tax payment.
March 22, 2016 Ms. Marcia Meyer 1311 Santos Court San Bruno, CA 94066 Dear Ms. Meyer: You asked me to advise you concerning the amount of the deduction you may take for your contribution of stock to a charitable organization. You deducted $95,000 (the fair market value of the stock) on your tax return, and the IRS has reduced your deduction to $10,000 (the basis of the stock). For a contribution of property other than publicly traded securities, the Regulations require a taxpayer to obtain a qualified appraisal and attach a summary of the appraisal to the return on which the contribution is deducted. The Tax Court upheld this requirement in a recent case very similar to yours.
Both the Regulations and the decision by the Tax Court support the IRS position in this matter. You must file an amended return and pay additional taxes and interest resulting from the disallowance of $85,000 of the charitable deduction you claimed. I will be pleased to assist you in filing this amended return. Thank you for consulting our firm on this problem. In the future, I urge you to seek professional tax advice before completing significant transactions that could have major tax implications. Please contact me if you wish to discuss this or any other tax matter. Sincerely, Joann Hanson, CPA References: Reg. § 1.170A−13(c)(2). John Hewitt, 109 T.C. 258 (1997), affirmed in Hewitt v. Comm., 98−2 USTC 50,880, 82 AFTR2d 98−7164, 166 F.3d. 332, (CA−4, 1998).
Research Problems 4 and 5 The Internet Activity research problems require that students utilize online resources to research and answer the questions. As a result, solutions may vary among students and courses. You should determine the skill and experience levels of the students before assigning these problems, coaching where necessary. Encourage students to explore all parts of the Web in this research process, including tax research databases, as well as the websites of the IRS, newspapers, magazines, businesses, tax professionals, other government agencies, and political outlets. Students should also work with resources such as blogs, Twitter feeds, and other interest-oriented technologies to research their answers.
Deductions and Losses: Certain Itemized Deductions 10-19
$260,855. 17.a. $2,830. 17.b. $630. 18. $0. 19. $167,500. 20.a. $18,100. 20.b. $15,000. 21. $832. 22. $28,307. 23. $15,408. 24. $6,450. 25. $14,900. 26. $2,700. 27. $7,000 for AGI; $0 from AGI. 28. $38,370. 30.a. $5,600 for AGI ($3,000 + $2,600). 30.b. $3,000 from AGI; $2,600 for AGI. 31. $297,780 basis. 32.a. $9,100. 32.b. $1,800 income in 2016. 32.c. Income in 2016.
32.d. $0 income in 2016. 33. $100,000. 34.a. $1,500 in 2015; $4,500 in 2016. 34.b. $3,000 each in 2016. 35.a. $3,200. 35.b. $2,880. 36.a. $10,000. 36.b. $17,000. 36.c. $7,500. 37.a. $420,000. 37.b. Carryover for five years as 30% property. 38.a. $90,000. 38.b. $54,000. 38.c. $60,000. 39.a. $660. 39.b. No. 40. Sell Gold Corporation stock and
contribute the sales proceeds. 41. Tax savings filing a joint return $726. 42. $23,998. 43. $32,847. 44. $94,397. 45. Refund due for 2014, $971. 46. Tax due for 2015, $175.
An Indirect Route to a Contribution Deduction (p. 10-21). If the committee had no knowledge that Rebecca was Chloe’s sister and was not influenced by the relationship, Chloe probably is justified in deducting any amount the church awarded to Rebecca. However, if the committee did know of the relationship and was influenced by Chloe’s suggestion, she should not deduct the $15,000 awarded to Rebecca. In that case, the $35,000 ($50,000 − $15,000) balance of the contribution is deductible.
SOLUTIONS TO ROGER CPA REVIEW QUESTIONS
Detailed answer feedback for Roger CPA Review questions is available on the instructor companion site (www.cengage.com/login).
1. c
2. a
3. b
4. c
Deductions and Losses: Certain Itemized Deductions 10-21
Married filing jointly (even if only one had income)
Married filing separately. Enter spouse's SSN above and full name here.
Qualifying widow(er) with dependent child
If more than fourdependents, see instructions andcheck here
6a
bc
Yourself. If someone can claim you as a dependent, do not check box 6a . . . . . . .
Dependents:(1) First name
Apt. no.
City, town or post office, state, and ZIP code. If you have a foreign address, also complete spaces below (see instructions). Presidential Election Campaign
Filing Status
Check only one box.
1
2
3
4
5
1040 2014Your first name and initial Last name Your social security number
If a joint return, spouse's first name and initial Last name Spouse's social security number
Home address (number and street). If you have a P.O. box, see instructions.
Form
28
IRS Use Only—Do not write or staple in this space.
KIA For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see separate instructions.
AdjustedGrossIncome
Last name(3) Dependent's
relationship to you
d Total number of exemptions claimed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dependents on 6cnot entered above
Add numbers onlines above
Income
For the year Jan. 1–Dec. 31, 2014, or other tax year beginning , 2014, ending ,20
Exemptions
Attach Form(s)W-2 here. Alsoattach FormsW-2G and 1099-R if taxwas withheld.
b Taxable amount . . . . . . . .
22 Combine the amounts in the far right column for lines 7 through 21. This is your total income21 Other income. List type and amount _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
37 Subtract line 36 from line 22. This is your adjusted gross income . . . . . . . . . . . . . . . .
Department of the Treasury—Internal Revenue Service (99)
• lived with you
• did not live withyou due to divorceor separation(see instructions)
55 Add lines 48 through 54. These are your total credits . . . . . . . . . . . . . . . . . . . . . . .56 Subtract line 55 from line 47. If line 55 is more than line 47, enter -0- . . . . . . . . . . . . . .
73 Credits from Form:
58 Unreported social security and Medicare tax from Form:
6059 Additional tax on IRAs, other qualified retirement plans, etc. Attach Form 5329 if required . . . . .
Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge.
Department of the TreasuryInternal Revenue Service Attach to Form 1040.
Itemized DeductionsInformation about Schedule A and its separate instructions is at www.irs.gov/schedulea.
OMB No. 1545-0074
2014AttachmentSequence No. 07
Your social security numberName(s) shown on Form 1040
MedicalandDentalExpenses
Caution. Do not include expenses reimbursed or paid by others.1 Medical and dental expenses (see instructions) . . . . . . . . . .2 Enter amount from Form 1040, line 38 . . .3 Multiply line 2 by 10% (.10). But if either you or your spouse was born before January 2, 1950, multiply line 2 by 7.5% (.075) instead
4 Subtract line 3 from line 1. If line 3 is more than line 1, enter -0- . . . . . . . . . . . . .
10 Home mortgage interest and points reported to you on Form 1098 . . . . . . . . . . .
11 Home mortgage interest not reported to you on Form 1098. If paid to the person from whom you bought the home, see instructionsand show that person's name, identifying no., and address
12 Points not reported to you on Form 1098. See instructions forspecial rules . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30 If you elect to itemize deductions even though they are less than your standard deduction, check here . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
No. Your deduction is not limited. Add the amounts in the far right columnfor lines 4 through 28. Also, enter this amount on Form 1040, line 40. . . . . . . .Yes. Your deduction may be limited. See the Itemized DeductionsWorksheet in the instructions to figure the amount to enter.
b If you are required to file FinCEN Form 114, enter the name of the foreign country where the financial account is located _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
6 Add the amounts on line 5. Enter the total here and on Form 1040A, or Form1040, line 9a . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note: If youreceived a Form1099-INT, Form1099-OID, orsubstitutestatement froma brokerage firm,list the firm'sname as thepayer and enterthe total interestshown on thatform.
1 List name of payer. If any interest is from a seller-financed mortgage and thebuyer used the property as a personal residence, see instructions and list this interest first. Also, show that buyer's social security number and address
Amount
Amount
2
3
4
5
1
Part II
OrdinaryDividends
Note: If youreceived a Form1099-DIV orsubstitutestatement froma brokerage firm, list the firm'sname as the payer and enterthe ordinarydividends shown on that form.
Part IIIForeignAccountsand Trusts
7a At any time during 2014, did you have a financial interest in or signature authority over a financialaccount (such as a bank account, securities account, or brokerage account) located in a foreigncountry? See instructions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Yes No
KIA For Paperwork Reduction Act Notice, see your tax return instructions. Schedule B (Form 1040A or 1040) 2014
You must complete this part if you (a) had over $1,500 of taxable interest or ordinary dividends; (b) had aforeign account; or (c) received a distribution from, or were a grantor of, or a transferor to, a foreign trust.
5 List name of payer ______________________________________________
Note: If line 4 is over $1,500, you must complete Part III.
3 Excludable interest on series EE and I U.S. savings bonds issued after 1989.Attach Form 8815 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4 Subtract line 3 from line 2. Enter the result here and on Form 1040A, or Form1040, line 8a . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8 During 2014, did you receive a distribution from, or were you the grantor of, or transferor to, aforeign trust? If "Yes," you may have to file Form 3520. See instructions. . . . . . . . . . . . . . . . . . . . .
6
(See instructions forSchedule B, and theinstructions for Form 1040A, orForm 1040,line 8a.)
(See instructionsfor Schedule B, and theinstructions forForm 1040A, orForm 1040,line 9a.)
Note. If line 6 is over $1,500, you must complete Part III.
(Seeinstructions.)
SCHEDULE B(Form 1040A or 1040)
Department of the TreasuryInternal Revenue Service
Attach to Form 1040A or 1040.
Interest and Ordinary Dividends
Information about Schedule B and its instructions is a www.irs.gov/scheduleb.
OMB No. 1545-0074
2014AttachmentSequence No. 08(99)
Name(s) shown on return Your social security number
If “Yes,” are you required to file FinCEN Form 114, Report of Foreign Bank and FinancialAccounts (FBAR), to report that financial interest or signature authority? See FinCEN Form 114and its instructions for filing requirements and exceptions to those requirements . . . . . . . . . . . . . . . .
BRUCE M BYRD 111-11-1111
SECOND NATIONAL BANK 2,750
2,750
2,750
0
X
X
Deductions and Losses: Certain Itemized Deductions 10-25
Form 2106Department of the TreasuryInternal Revenue Service
Step 1 Enter Your Expenses
Employee Business Expenses OMB No. 1545-0074
2014AttachmentSequence No.
Column AOther Than Mealsand Entertainment
Column BMeals and
Entertainment
1
2
3
4
5
1 Vehicle expense from line 22 or line 29. (Rural mail carriers: Seeinstructions.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2 Parking fees, tolls, and transportation, including train, bus, etc., thatdid not involve overnight travel or commuting to and from work . . .
3 Travel expense while away from home overnight, including lodging,airplane, car rental, etc. Do not include meals and entertainment . . .
4 Business expenses not included on lines 1 through 3. Do not includemeals and entertainment . . . . . . . . . . . . . . . . . . . . . . . .
5 Meals and entertainment expenses (see instructions) . . . . . . . . .6 Total expenses. In Column A, add lines 1 through 4 and enter the
result. In Column B, enter the amount from line 5 . . . . . . . . . . .
KIA For Paperwork Reduction Act Notice, see your tax return instructions.
7
8
9
10
Attach to Form 1040 or Form 1040NR.Information about Form 2106 and its separate instructions is available at www.irs.gov/form2106.
Part I Employee Business Expenses and Reimbursements
9 In Column A, enter the amount from line 8. In Column B, multiply line 8 by 50% (.50). (Employees subject to Department of Transportation (DOT) hours of service limits: Multiply meal expenses incurred whileaway from home on business by 80% (.80) instead of 50%. For details, see instructions.) . . . . . . . . . . . . . . . . . . . . . . . .
Note If both columns of line 8 are zero, you cannot deductemployee business expenses. Stop here and attach Form 2106 toyour return.
10 Add the amounts on line 9 of both columns and enter the total here. Also, enter the total onSchedule A (Form 1040), line 21 (or on Schedule A (Form 1040NR), line 7). (Armed Forcesreservists, qualified performing artists, fee-basis state or local government officials, and individuals with disabilities: See the instructions for special rules on where to enter the total.) . . . . . . . .
8 Subtract line 7 from line 6. If zero or less, enter -0-. However, if line 7 is greater than line 6 in Column A, report the excess as income on Form 1040, line 7 (or on Form 1040NR, line 8) . . . . . . . . . . . . .
Form 2106 (2014)
6
Step 3 Figure Expenses To Deduct on Schedule A (Form 1040 or Form 1040NR)
Step 2 Enter Reimbursements Received From Your Employer for Expenses Listed in Step 1
7 Enter reimbursements received from your employer that were notreported to you in box 1 of Form W-2. Include any reimbursementsreported under code "L" in box 12 of your Form W-2 (seeinstructions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note If you were not reimbursed for any expenses in Step 1, skip line 7 and enter the amount from line 6 on line 8.
Your name Social security numberOccupation in which you incurred expenses
Form 2106Department of the TreasuryInternal Revenue Service
Step 1 Enter Your Expenses
Employee Business Expenses OMB No. 1545-0074
2014AttachmentSequence No.
Column AOther Than Mealsand Entertainment
Column BMeals and
Entertainment
1
2
3
4
5
1 Vehicle expense from line 22 or line 29. (Rural mail carriers: Seeinstructions.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2 Parking fees, tolls, and transportation, including train, bus, etc., thatdid not involve overnight travel or commuting to and from work . . .
3 Travel expense while away from home overnight, including lodging,airplane, car rental, etc. Do not include meals and entertainment . . .
4 Business expenses not included on lines 1 through 3. Do not includemeals and entertainment . . . . . . . . . . . . . . . . . . . . . . . .
5 Meals and entertainment expenses (see instructions) . . . . . . . . .6 Total expenses. In Column A, add lines 1 through 4 and enter the
result. In Column B, enter the amount from line 5 . . . . . . . . . . .
KIA For Paperwork Reduction Act Notice, see your tax return instructions.
7
8
9
10
Attach to Form 1040 or Form 1040NR.Information about Form 2106 and its separate instructions is available at www.irs.gov/form2106.
Part I Employee Business Expenses and Reimbursements
9 In Column A, enter the amount from line 8. In Column B, multiply line 8 by 50% (.50). (Employees subject to Department of Transportation (DOT) hours of service limits: Multiply meal expenses incurred whileaway from home on business by 80% (.80) instead of 50%. For details, see instructions.) . . . . . . . . . . . . . . . . . . . . . . . .
Note If both columns of line 8 are zero, you cannot deductemployee business expenses. Stop here and attach Form 2106 toyour return.
10 Add the amounts on line 9 of both columns and enter the total here. Also, enter the total onSchedule A (Form 1040), line 21 (or on Schedule A (Form 1040NR), line 7). (Armed Forcesreservists, qualified performing artists, fee-basis state or local government officials, and individuals with disabilities: See the instructions for special rules on where to enter the total.) . . . . . . . .
8 Subtract line 7 from line 6. If zero or less, enter -0-. However, if line 7 is greater than line 6 in Column A, report the excess as income on Form 1040, line 7 (or on Form 1040NR, line 8) . . . . . . . . . . . . .
Form 2106 (2014)
6
Step 3 Figure Expenses To Deduct on Schedule A (Form 1040 or Form 1040NR)
Step 2 Enter Reimbursements Received From Your Employer for Expenses Listed in Step 1
7 Enter reimbursements received from your employer that were notreported to you in box 1 of Form W-2. Include any reimbursementsreported under code "L" in box 12 of your Form W-2 (seeinstructions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note If you were not reimbursed for any expenses in Step 1, skip line 7 and enter the amount from line 6 on line 8.
Your name Social security numberOccupation in which you incurred expenses
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