Tax USA Assignment 3

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Week11.2_pope_phft2014_ind_pp_07.pptx

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Itemized Deductions

Chapter 7

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ITEMIZED DEDUCTIONS (1 of 2)

Medical expenses

Taxes

Interest

Charitable contributions

Casualty and theft losses

Miscellaneous itemized deductions

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ITEMIZED DEDUCTIONS (2 of 2)

Tax planning considerations

Compliance and procedural considerations

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Medical Expenses

Qualified individuals

Qualified medical expenses

Amount and timing of deduction

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Qualified Individuals

Medical exp. paid for taxpayer, taxpayer’s spouse, or dependent

Certain dependency test failures do not disqualify dependent

Failing to meet gross income limit

Failing joint return test

Noncustodial parent may claim deduction for dependent

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Qualified Medical Expenses (1 of 2)

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

Transportation

$0.24/mile std. mileage rate

If overnight, includes

Meals (50%) & lodging (≤ $50)

Cost of living in institutions

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Qualified Medical Expenses (2 of 2)

Capital expenditures

Excess of cost over amount by which value of home increases

Medical insurance premiums

Includes qualified L-T care premiums

No cosmetic surgery

Unless treats illness or promotes proper body function

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Amount and Timing of Deduction

Deductible in year paid for qualified medical exp. exceeding 10% of AGI

7.5% for taxpayers > 65 until 2016

Medical insurance reimbursements

Only unreimbursed portion deductible

Self-employeds may deduct health insurance as a for AGI deduction

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Taxes (1 of 2)

Definition of a tax

Deductible taxes

State and local income taxes

State and local sales taxes

Nondeductible taxes

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Taxes (2 of 2)

Personal property taxes

Real estate taxes

Self-employment tax

Nondeductible taxes

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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 prop. taxes

Some state and local personal prop. taxes

Foreign, state &, local income, war profits, and excess profit taxes

State & local sales tax election

Environmental tax

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State and Local Income Taxes

Deduct when paid or withheld even if the taxes are attributable to another tax year

Refund of previously deducted taxes are taxable in year of refund

May elect to deduct state & local sales taxes instead of deducting inc. taxes (expires at end of 2013)

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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 a flat fee is not deductible

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Real Estate Taxes

Apportionment of taxes

Necessary when real estate is sold during the year

Real property assessments only against property benefited

Capitalized costs—not deductible

E.g., Sidewalk or new sewer lines

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Self-Employment (SE) Tax

Tax on SE income in lieu of Social Sec. (12.4%) Medicare taxes (2.9%)

Ceiling $113,700 for Social Sec. Tax

No ceiling for Medicare tax

Individuals with inc.> $200K ($250K MFJ) pay additional 0.9% on SE inc. & wages

½ of SE tax deductible for AGI

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Nondeductible Taxes

Taxes imposed by the Federal gov’t generally not deductible

Exceptions

Employer’s share of Social Security tax

Deductible by employer as bus. expense

Federal import tariffs & excise taxes

Deductible if for business or production of income

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Interest

Definition of interest

Classification of interest expense

Timing of the interest deduction

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Definition of Interest

Compensation for use or forbearance of money

Bank service charges and certain loan acquisition costs not considered interest for tax purposes

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Classification of Interest Expense (1 of 2)

Determined by related activity

Active trade or business

For AGI deduction

Passive activity

Subject to passive activity loss limit

Used to compute net passive inc./loss

Investment interest

Deductible up to net invest. inc.

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Classification of Interest Expense (2 of 2)

Qualified residence & home equity loans

Interest on up to $1M of acquisition debt

Also deduct points on acquisition indebtedness

May deduct interest on additional $100K of home equity indebtedness

Limited deduction for pmt. of mtg. insurance

Student loan interest

Up to $2,500 deductible for AGI

Phased out at higher income levels

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Timing of the Interest Deduction (1 of 2)

Prepaid interest

Capitalized and amortized over period to which interest relates

Discounted 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 taxpayer

Cannot deduct interest until paid

Imputed interest

Applies to below-market loans

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Charitable Contributions

Qualifying organizations

Type of property contributed

Deduction limitations

Application of carryovers

Special rules for charitable contributions made by corporations

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Qualifying Organizations

U.S., D.C., state, or U.S. possession

A post or organization of war vets

Domestic fraternal society, or order, or association

Public Charities

Churches, educational Institutions, hospitals, medical schools

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Type of Property Contributed (1 of 2)

Contribution of long-term capital gain property

Generally FMV

Use adjusted basis if

Contributed to private nonoperating foundation

Unrelated use by charitable organization

Certain intangibles

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Type of Property Contributed (2 of 2)

Contribution of ordinary inc. prop.

Value generally adjusted basis

Exception for C corp donation of certain inventory

FMV – (50% x [ordinary inc. if sold])

Contribution of services

Only out-of-pocket and transportation expenses deductible

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Deduction Limitations (1 of 2)

50% of AGI limitation

Applies to public charities

30% of AGI limitation

Contributions of capital gain property

20% of AGI limitation

Capital gain property contributed to private nonoperating foundations

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Deduction Limitations (2 of 2)

Order of deductions

50% property

30% property

20% property

Combined contributions cannot exceed 50% of AGI

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Application of Carryovers

Current year contributions must be used before applying carryovers

Carried over and deducted in subsequent five years

Apply with regard to special limits

Contributions retain their % limitation

Use FIFO to apply carryovers

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Special Rules for Contributions Made by Corporations

Pledges made by accrual method corporations

Deductible in year pledged if paid by 15th day of 3rd month after year end

Limitation applicable to corps

Cannot exceed 10% of corporation’s taxable income

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Casualty and Theft Losses

Individuals can deduct casualty or theft loss on personal-use property as an itemized deduction

See Chapter 8

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Miscellaneous Itemized Deductions

Certain employee expenses

Expenses to produce investment income

Cost of tax advice

See Chapter 9

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Certain Employee Expenses

Unreimbursed employee business expenses

Include travel, transportation, dues to professional organizations, cost of job hunting

Generally misc. itemized deductions subject to a 2% of AGI floor

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Expenses to Produce Investment Income

Expenses to produce investment income other than rents or royalties

Miscellaneous itemized deductions subject to 2% of AGI floor

Investment interest NOT subject to the 2% of AGI floor

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Cost of Tax Advice

Includes

Tax return preparation fees

Appraisal fees in determining amount of casualty loss

Accountant fees for representation in a tax audit

Miscellaneous itemized deduction subject to 2% of AGI floor

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Reduction of Certain Itemized Deductions (1 of 2)

Overall reduction for high-income taxpayers

$300K MFJ, $250K single, $275K HoH, $150K MFS

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Reduction of Certain Itemized Deductions (2 of 2)

Reduction is lesser of

80% of itemized deduction other than medical, investment, casualty losses, and wagering losses OR

3% of excess over threshold amount

The 3% is applied after taking into account other limitations on itemized deductions

e.g. 2% of AGI on misc. deductions

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Tax Planning Considerations (1 of 2)

Medical expense deduction

Bunch medical expenses into a single year to exceed 10% of AGI floor

Interest expense deduction

May deduct residential interest on any two residences

If vacation home used > of 14 days or 10% of rental days personal portion qualifies as a residence

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Tax Planning Considerations (2 of 2)

Deduction for charitable contributions

Election to reduce amount of contribution

Donation of appreciated long-term capital gain property

Significant substantiation requirement

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Medical expenses

Dependent care credit vs. medical expense deduction

Compare dependent care credit rate with effective marginal tax rate for additional medical deductions

Compliance & Procedural Considerations (1 of 3)

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Charitable contributions

>$500 must file Form 8283

Property > $5,000 should have appraisal

>$250 require additional documentation

Compliance & Procedural Considerations (2 of 3)

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Taxes

Schedule C - related to taxpayer’s trade or business

Schedule E - related to the production of rents and/or royalties

Schedule A - if personal

Compliance & Procedural Considerations (3 of 3)

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END Chapter 7

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