Below-The-Line Adjustments aka Itemized Deductions, Schedule A (Individual 1040) Flashcards
Which deduction amount do we apply towards AGI to arrive at taxable income?
Greater of the Standard Deduction or Itemized Deductions (Schedule A)
What are the major Itemized Deductions on Schedule A, Form 1040?
“My Casual OSTRICH”
M = Misc Sched A Deductions
Casual = personal Casualty/theft gains/losses
O = Out of pocket medical expenses S = self-employed unreimbursed work expenses, e.g. outside salesman paying for own office & travel expenses T = Taxes on income = state, local, or foreign R = Real estate taxes = state, local, or foregin I = Investment interest expense C = Charitable Contributions H = Home mortgage interest
What’s the limitation on deduction out of pocket medical expenses?
Qualified medical expenses deduction is limited to the excess over 10% of AGI.
EX - $100K AGI x 10% = $10K - means the first $10K of medical expenses is not deductible, but the remaining can be written off
What do we need to remember when we deduct our income or real property taxes?
For income taxes = deduct based on the amounts withheld from paychecks, estimated payments made, and payments made for the PRIOR year’s taxes
Any refund on last year’s tax does not offset against this year’s deduction b/c it is subjected to tax benefit rule (meaning if you got a refund b/c you took the itemized deduction last year - you got to include that refund in this year’s tax return)
Real property taxes = know whether prior taxes are part of the sales price or incurred with the actual ownership
Limitation on deducting investment interest expense (IIE)?
Limited to the amount of Net Investment Income
Think Deductible Investment Interest Expense as DIIE = Net Investment Income
Investment Income, e.g. royalty/rent/etc
+ Net Gain
(Investment expenses > 2% AGI)
= Net Investment Income = the amount we can deduct for IIE
What can we do with the remaining Interest investment income that we do not get to deduct?
Carry forward indefinitely and use up according to each subsequent year’s Net Investment Income (NII)
Can we count the cash that we give to a needy family as a charitable contribution and deduct from our 1040?
No, in order to qualify as a charitable contribution, it must be made to qualified charitable organizations = must have the proper tax-exempt status as a charity
What is not considered a qualified charitable organization?
Veterans’ organizations, lodges (like the Mason Lodge), fraternal organizations, and country clubs
How much do we need to donate to charity to get the deduction and what do we need to do to secure that deduction?
Must donate at least $250 or more and get written acknowledgement of the contribution from the donnee, e.g. a receipt
What kind of donations that can be deductible and by what threshold?
Donations of LTCG property, e.g. stocks held for decades = use FMV on donation day and deduct up to 30% of AGI
ex - $400K FMV stock given
($600K AGI x 30% = 180K)
Deduction is limited to $180K, excess of $220 is carried forward for next 5 years
Donations of STCG, not related to Charity, = use cost basis and deduct up to 50% of AGI
Any excess gets carried forward for 5 years and subject to the 30%/50% limitation.
EX - $100K AGI in 2013. Donated stock held for 2 years costing $10K w/ FMV of $70K on donation day.
stock is LTCG b/c held for 12+ months, LTCG is $60K and deductible up to 30% AGI ($30K). Hence, deduction is $30K.
How do we remember which foreign taxes paid that are deductible?
We yell FIRE!
Foreign Income & Real Estate taxes
What items we can deduct when we take out a mortgage on a home?
Mortgage points (discount points) for prepaid interest and mortgage interest expenses on up to $1M loan
Are mortgage points and mortgage interest expense the same thing?
Mortgage points are discount points representing prepaid interest that you pay to the lender in order to discount the interest rate to a lower rate in order to have lower mortgage payments. The perk is we get to deduct these mortgage points. Remember only points that represent prepaid interest on the purchase of a new home or improving the home is deductible.
Mortgage interest expense is the interest that you actually paid to the bank through regular mortgage payments.
Limitations on deducting mortgage interest expenses?
Mortgage loan must be used for purchasing or improving a home, not for personal use = 100% deductible on home mortgage loan worth up to $1M (the loan itself, not the interest. Who pays $1M in interest? Only fools.)
If you refi’d the house, e.g. took out a second mortgage on your house to start up a business or buy a yacht, you can only deduct the interest on the new debt up to $100K
EX - Bought a new home for $380K in 2010 with 15-year loan for $250K. You get to deduct 100% of whatever interest you incurred on that loan b/c the loan itself is below $1M threshold.
In 2014, you decided to take out a second mortgage of $120K (home equity indebtedness) to use it to buy a mini-van because you are expecting triplets. You can only deduct interest on the second loan balance up to $100K.
Formula for arriving at the deductible amount for casualty loss
“Pay” $100 of each loss you have and limit to amount over 10% of AGI then you can proceed
Lower of loss in FMV or basis of damaged property (Insurance proceeds) ($100 for each loss) (10% of AGI) = deductible amount
