3A-Itemized Deductions Flashcards
Deductions
a. Medical expenses
b. Taxes
c. Interest expenses
d. Charitable contributions
e. Miscellaneous deductions
Deductions-Qualified medical expenses
Those costs incurred by the taxpayer, spouse, and dependents either when the service is provided
or paid AND
Deductible BUT only those amounts exceeding 7.5% of the taxpayer’s AGI. Under the Tax Relief
Act this limitation will not climb back to 10% of AGI but was made permanent (at least until
further notice)
Qualified medical expenses include the cost for:
Diagnosis, cure, treatment, or prevention of disease
Physicians, surgeons, dentists, and other medical practitioners
Long-term care services
Insurance premiums, prescription drugs and insulin, contact lenses
Over-the-counter products and medications without a prescription
Qualified medical expenses do not include expenses that are:
Merely beneficial to general health such as gym fees, vitamins, or a vacation
Cosmetic in nature
Deductions-Taxes
- Beginning in 2018, a taxpayer can claim up to $10,000 of taxes as an itemized deduction,
which include:
a. The greater of their state and local income taxes or state and local sales taxes;
b. Real estate taxes; and
c. Foreign income taxes (unless the foreign income tax credit is elected). - Taxes that are not deductible include:
a. Federal income taxes;
b. Personal fees and charges such as a driver’s license, car inspection, and parking; and
c. Taxes on one’s trade or business. (This is a business expense.)
Deductions-Charitable Contributions-Example Qualifying
- Charitable contributions to qualified organizations are deductible but may be subject to
certain ceiling limitations. - Examples of qualifying organizations include:
a. Churches, synagogues, temples, mosques, and other religious organizations
b. The Salvation Army, American Red Cross, CARE, Goodwill Industries, United Way, Boy
Scouts of America, Girl Scouts of America, Boys and Girls Clubs of America, etc.
c. War veterans’ groups
d. Expenses paid for a student living with a taxpayer and sponsored by a qualified organization
Deductions-Charitable Contributions-Example Non-Qualifying
a. Civic leagues, social and sports clubs, labor unions, and chambers of commerce
b. Homeowners’ associations
c. Political groups or candidates for public office
d. Cost of raffle, bingo, or lottery tickets
e. Dues, fees, or bills paid to country clubs, lodges, fraternal orders, or similar groups
f. Value of a volunteer’s time or services. Out‐of‐pocket expenses incurred while volunteering
(i.e., mileage) are deductible.
g. Value of blood given to a blood bank
Deductions-Charitable Contributions-other Items
a. Cash
b. Ordinary income property (lesser of fair market value (FMV) or property’s adjusted
basis)
c. Capital gain property
(1) Short‐term gain or
(2) Long‐term gain (FMV and gain is not recognized)
Deductions-Charitable Contributions-Limitations
Unlike some of the other itemized deductions that have a floor limitation, the charitable
contribution deduction has a ceiling limitation that falls into one of four categories:
a. 60% category: Cash contributions (exception: CARES Act, 100% AGI floor for qualified
cash contributions)
b. 50% category: Noncash contributions
c. 30% category: Capital gain property
d. 20% category: Certain private foundations
Deductions-Charitable Contributions-Documentations
Documentation: Cash contributions are not deductible, regardless of the amount, unless the
taxpayer keeps one of the following as a record of the contribution:
a. A bank record showing the name of the qualified organization, and the date and amount
of the contribution (such bank records include a canceled check, or a bank, credit union,
or credit card statement);
b. A receipt, letter, or other written communication from the qualified organization
containing the name of the organization, and the date and amount of the contribution;
or
c. Certain payroll deduction records
Note: A check or receipt is required for cash contributions of less than or equal to $250; and
only a receipt is acceptable for cash contributions of more than $250 and for noncash
contributions.
Deductions-Personal Interest-Allowable
- Personal interest expenses are generally not deductible for federal income tax purposes
(e.g., credit card or personal loans). But there is an exception:
- Interest expense on the acquisition and equity debts of taxpayer’s primary and secondary
residences is deductible but to a limited amount of indebtedness: Interest on the
acquisition debt of up to $750,000 ($375,000 if married filing separately) for post‐
December 15, 2017, purchases or $1 million ($500,000 if married filing separately) for
pre‐December 16, 2017, purchases. - Note: Beginning in 2018, equity debt interest on a primary or secondary home is no longer
deductible, unless the proceeds are used to buy, build, or substantially improve the home.
Deductions-Personal Interest- Non Allowable
- Another personal interest expense exception includes:
- Points (interest paid in advance on a loan) can be deducted ratably over the life of the
loan with the following exceptions:
(1) Points paid on the loan (i.e., acquisition debt) of the primary residence may be
deducted in the year paid.
(2) Points paid on a refinanced loan are deductible ratably over the life of the loan. - Mortgage insurance premiums – this type of deduction was extended through 2021
- Investment interest expense – Is expense incurred in connection to loans used for purchasing
investments, such as stock, bonds, or any other type of financial vehicle.
Deductions-Casualty and Theft Losses
- Beginning in 2018, a taxpayer can claim a personal casualty and/or theft loss if it is attributable
to a federally declared disaster. - The deductible portion of a federally declared disaster casualty or theft loss is limited to the
sustained loss that exceeds two limitations:
a. The sustained loss is the smaller of the property’s adjusted basis before the casualty or
theft and the property’s decrease in FMV resulting from the casualty or theft less any
insurance or other reimbursement received or expected to be received.
b. The deductible loss is the sustained loss less:
(1) $100 for each casualty event and
(2) The sum of all casualty losses after the $100 reduction by 10% of AGI.
Deductions- Qualifed Business (QBI)
- Applies to sole proprietorships, partnerships, S corporations, and some trusts and estates
- Has two components:
a. A deduction of up to 20% of qualified business income (QBI may be limited by the type
of trade/business, W‐2 wages paid, and the adjusted basis of qualified property immediately
after acquisition) plus
b. 20% of qualified real estate investment trust (REIT) dividends and qualified publicly
traded partnership income (PTP) – not limited by W‐2 wages and UBIA of qualified
property
Deductions- Qualifed Business (QBI)-Not included
Qualified business income does not include specified investment‐related income, deductions,
or loss
Deductions- Qualifed Business (QBI)-Taxable Income Limitations- Specified Service Trade and Business (SSTB)
If an SSTB, the taxable income limitation is:
a. $182,100 for single filers with a complete phase‐out for taxable income of $232,100
b. $364,200 for married filing jointly filers with a complete phase‐out for taxable income
of $464,200.
c. Example: An SSTB Sole proprietor filing married filing jointly with a taxable income of
$470,000, the QBI deduction would be zero.
Deductions- Qualifed Business (QBI)-Taxable Income above 232,100/464,200
a. QBI cannot exceed the greater of 50% of taxpayer’s allocable share of W‐2 wages or
25% of wages plus 2.5% of UBIA (unadjusted basis of qualified property immediately
after acquisition)
b. For self‐employed individuals, the QBI deduction is limited to the lesser of QBI component
plus the REIT/PTP component or 20% of taxable income minus net capital gain
Deductions- Qualifed Business (QBI)-Taxable Income below 182,100/364,200
For taxable income level below $182,100/$364,200, both SSTB and non‐SSTB are generally
eligible for a full 20% QBI deduction
