Ch 7 Flashcards
Qualified individuals for medical expenses
Taxpayers must pay expenses on behalf of themselves,
Their spouses
or their dependents (even if fail gross income Or joint return
Tests)
Medical expenses deduction
Deducted for anything over 10% AGI
7.5% for those over 65
Medical expenses divorce
Whichever divorced parent pays the medical expenses
Takes deduction
Whoever claims the Dependency exemption doesn’t matter
5 items classified as medical care expenses
1 diagnosis, cure, mitigation, treatment/prevention of disease 2 affecting the body 3 transportation 4 qualified long term care services 5 insurance
Diagnosis, cure, mitigation, treatment or prevention: taxpayers may not deduct treatment for…
Illegal substances
Taxpayers may deduct for medical services from…
Licensed or certified medical professionals including dentists
Are nonprescription medicines, vitamins and health foods deductible?
No
How can a tax payer deduct costs for schools and camps?
Taxpayer must show facility has appropriate medical
equipment and regularly engages in medical services
Deduction for transportation of medical care? Lodging
Allowed if it is done in the case of medical emergency
Or ailing health
Deduction for cost of lodging is limited to $50/night per
person
Long term care
Medical services provided to a chronically Ill individual
Person can’t perform 2 of the following tasks for 90 days:
Bathing, dressing, eating, toilet ting
Timing of medical expense deductions
Only in year pays expenses
Unless prepaid, then deduct in year prepaid
Treatment of insurance reimbursements
Medical deduction reduced
Reimbursement is include in gross income of year received
Deduction of taxes: cash-method tax payers
Deduct taxes when they pay them
Tax deductions: accrual mood tax payers
Deduct taxes in year taxes accrue
Tax
Mandatory assessment levied under the authority of
Political entity for the purpose of raising revenue
6 Services not deductible as taxes
1 vehicle registration + inspection fees 2 registration tags for pets 3 toll charges for highways and bridges 4 parking meter charges 5 utilities 6 special assessments of real estate, sidewalks, streets, lighting
Deductible taxes 6 items
1 state, local and foreign real property taxes
2 state, local property taxes based on value
3 state, local, war profits
4 state and local taxes if tax payer makes election to deduct
Taxes
5 environmental tax
6 state, local taxes incurred in trade or business
For individuals: state and local taxes are normally…
An itemized from AGI deduction
Deduction of federal taxes
Usually not deductible
Employer’s portion of social security tax is
Federal customer’s and excise tax in taxpayer’s business is
State and local sales tax
Tax payers can deduct state and local sales tax instead
Of state and local income tax
What kind of deduction is for personal property taxes? What’s the exception?
From AGI
For AGI when for business purposes
Apportionment of real estate taxes
Allocated between seller and purchaser based on amount of
time of Year each taxpayer owns the property
Self employment taxes
50% deducted as For AGI deduction
Affordable care act taxes deductions
Not deductible by individuals
Interest
Compensation for use or forbearance of money
Charge for services, bank service and finance charges
Fees for appraisals, title searches, bank service charges,
Credit card service charges, credit card interest
Not deductible unless for business
When may tax payer’s deduct interest expenses allocated for personal use?
Certain student loan interest, certain interest on personal
Residence
Passive activity rules for individuals, estates, trusts and certain corporations that incur losses
Prevent taxpayers from offsetting passive activity losses
With salary, interest and dividends
May prevent deduction of interest
Investment interest deduction
Limits current deduction for investment interest expense
To noncorporate taxpayer’s net investment income for year
Investment interest can be carried over and deducted in
Later years
Investment interest
Interest expense on indebtedness properly allocated to
Property held for investment
Interest expense incurred to hold tax exempt properties
Not deductible
Net investment income
Excess of taxpayer’s investment income over investment
Expenses
Investment expenses
Include all deductions (except interest) that are directly
Connected with production of investment income
Expenses include rental fees for safe deposit boxes,
Fees for investment counsel, subscriptions to investment
Journals
Investment expenses, when are they deductible
Under miscellaneous expenses when they exceed 2%
Of tax payer’s AGI
2 types of qualified residence interest
1 acquisition of indebtedness
2 home equity indebtedness with respect to qualified
Residence
Point on a loan
1% of loan
Qualified residence
Taxpayer’s residence
1 other residence secured by taxpayer that was used 14 days
Or 10% of rental days
Student loan interest limits on deduction
$2,500 per year
Modified AGI must be under $60,000 and $155,000 for
Individuals filing joint returns before phase out occurs
Interest paid with loan proceeds
Deductible if borrowed from 3rd party lender
Not deductible if borrowed from same lender you are
Paying interest to
Discounted note deductions: cash tax payer vs. accrual tax payer
Cash method taxpayer can deduct interest in time of
repayment
Accrual method taxpayer must deduct interest as it
Accrues over term of the loan
What is the limit on deductible interest in a home acquisition of a qualified residence?
2) interest on home equity debt deduction limit?
$1,000,000
2) $100,000
Ordinary income property
Any property that results in recognition of ordinary income
Ex. Inventory, art, manuscripts, capital assets held for
Less than 1 year
Charitable deduction limitations, 2) special limitation?
50% of AGI for the year, can carry forward anything in
excess for 5 year after
2) 30% of AGI for contributions of capital gains (of tangible
Personal property) and taxpayer elects to reduce charitable
Contribution deduction by capital gain recognized if property
Sold
Limitation on corporate charitable deductions
Corporate charitable deductions may not exceed 10% of
Their taxable income
Miscellaneous itemized deductions: Employee expenses
Unreimbursed travel expenditures, Job hunting costs,
Items of protective clothing, uniforms, union dues
3 common miscellaneous itemized deductions?
1 certain employee expenses
2 expenses to produce investment income
3 cost of tax advice
Miscellaneous itemized deductions: expenses to produce investment income
Rental and royalty income expenses = for AGI
other investment income expenses (int., dividends, capital
gains) is from AGI deduction (2% AGI)
Miscellaneous itemized deductions: cost of tax advice
Relating to business, farm income or producing rents/royalty
Income = for AGI deduction
Everything else is 2% from AGI deduction
Thresholds for reductions in deductions
AGI $300,000 for married filing joint
AGI $275,000 for head of household
AGI $250,000 for single
AGI $150,000 married filing separate
Donating an appreciated capital gain
If Tax payer donates directly to charity they can take
a deduction and don’t recognize a taxable gain
What should the tax payer do when they want to donate stock that they are down on?
Sell the stock to take the tax loss and donate the proceeds
Proper substantiation of charitable contribution made in cash
Must keep back record or receipt to charitable organization
