ch7part 1 individual from AGI deductions

Question 1

From AGI tax deductions

Answer 1

Medical
Taxes
Interest
Charitable contributions
Miscellaneous

Question 2

1 Medical Expenses

Answer 2

• Taxpayers may deduct medical expenses incurred to treat themselves, their spouse, and their dependents
• Qualifying medical expenses include
  unreimbursed payments for care, prevention,
  diagnosis, or cure of injury, disease, or bodily
  function
• E.g., prescription medicine, insulin, glasses, visiting the doctor, transportation, hospital stay, long-term care, health insurance premiums (not life insurance)

Question 3

Medical Expenses

Answer 3

• Costs of medical care are deductible whether
  the care is provided at hospitals, other long-
  term care facilities, or at home if provided by
  home care worker
• Transportation and travel costs for medical
  care are deductible
• If driving personal vehicle, may deduct a standard mileage allowance in lieu of actual costs
  Medical

Question 4

Medical Expenses Deduction
Limitation

Answer 4

• Deduction is limited to the amount of
  unreimbursed qualifying medical expenses paid
  during the year reduced by 7.5% of the
  taxpayer’s AGI
• Deduction = Qualifying expenses minus (7.5% x AGI)
• Ex: AGI is $50,000 and had medical expenses of
  $1,500. Can you take deduction?
• aka “Floor limitation”

Question 5

2 Taxes

Answer 5

• Deductible taxes paid:
• State, local, and foreign income taxes
• State and local real estate taxes on property held for personal or investment purposes
• State and local personal property taxes that are
  assessed on the value of the specific property (ad valorem)
• Sales tax deduction
• State and local sales taxes can be deducted in lieu of state and local income taxes
• Deduction limited to $10,000 ($5,000 MFS)
• Limit does not apply to foreign income taxes

Question 6

3 Interest Expense

Answer 6

• Home mortgage interest deduction
• May deduct interest on acquisition indebtedness up to $750,000 incurred after December 15, 2017
• Before 12/15/2017: $1M limit
• Applies to principal residence and one other residence (second home/vacation home)
• “Acquisition indebtedness”: debt secured by qualified residence that is incurred in acquiring, constructing, or substantially improving the residence
• May also deduct interest on home equity loan if proceeds are used on the home
• Can’t use funds for other purposes!
• In total cannot exceed $750K debt limit

Question 7

Interest Expense

Answer 7

• Investment interest expense
• Interest you pay on loans used to purchase
  investment assets (like stocks, bonds, land)
• Deduction limited to your investment income
• Carryforward any excess
• No deduction if loans used to purchase assets
  generating tax-free income!

Question 8

• No deduction if loans used to purchase assets
  generating tax-free income!

Question 9

4 Charitable Contributions

Answer 9

• Contribution of money or property must be
  made to a qualified domestic charity (not a
  political party or campaign)
• Cash: take deduction in the year you donate
• Includes cash, check, credit card, etc.
• Special rules apply to charitable contributions
  of property depending on the type of property:
• Capital gain property
• Ordinary income property

Question 10

Charitable Contributions

Answer 10

• Capital gain property: deduct FMV of property
• Appreciated property that would have generated
  LTCG if you sold it (stock, bonds, personal-use
  asset, etc.)
• Exception: tangible personal property that the
  charity doesn’t use in operations (can only
  deduct adjusted basis)
• Example: Donate painting to Habitat for Humanity
  silent auction vs. Phoenix Art Museum
• Ordinary income property: deduct lesser of
  FMV or adjusted basis
• Property that would’ve generated ordinary income if you sold it (inventory, short-term assets, assets that declined in value, etc.)
• Examples:
• Donate your used furniture to Goodwill
• You sell customized printed t-shirts and donate last season’s inventory to the Salvation Army

Question 11

5 Other Itemized Deductions

Answer 11

• Gambling losses and expenses to the extent of
  gambling income
• Casualty and theft losses on investment and
  personal-use assets
• Unrecovered cost of a life annuity at death

Question 12

tax formula

Answer 12

Economic Income
Less: Exclusions
Deferrals
Equals: Gross Income
Less: FOR AGI Deductions
Equals: Adjusted Gross Income
Less: FROM AGI Deductions
Less: Flow through deduction

Question 13

Six FROM AGI Deductions

Answer 13

1) Medical Expenses
2) Taxes
3) Interest
4) Charitable Contributions
5) Casualty and Theft Losses on Assets
6) Miscellaneous

Question 14

Medical Expenses

Answer 14

• Medical care includes amounts paid for:
• Medicine and drugs ONLY if prescribed drug
• The diagnosis, cure, mitigation, treatment, or prevention of disease
• Qualified long-term care services
• Insurance premiums for medical care
• Cost of travel for medical purposes
• Exception: §213(d)(9) Medical care does NOT include cosmetic surgery
• Exception to the exception: UNLESS the surgery or procedure is necessary to:
• Ameliorate a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma, or disfiguring disease

Question 15

Charitable Contributions

Answer 15

• Cash: deduct FMV
• Examples: Cash, credit card, check
• Capital gain property: deduct FMV of property
• Examples: stocks owned, bonds, land held for
  investment, personal property (all owned for more
  than 1 year)
• Exception: tangible personal property that the charity doesn’t use in operations (can only deduct adjusted basis)
• Exception: if you anticipate related use, then
  deduct at FMV

Question 15

Charitable Contributions Deduction
Limitations

Answer 15

• There is a limit on how much charitable
  contributions are deductible each year
• Depends on the type of donated property and
  the type of charity receiving the donation
• For example: cash donations to a public charity are only deductible up to 60% of AGI
• We won’t be calculating the limitation but be
  aware it exists!

Question 15

taxes

Answer 15

• §164(a): Allows individuals to deduct the following taxes paid during the tax year:
• (1) state and local real property taxes,
• (2) state and local personal property taxes only if they are ad valorem
• (3) state, local, and foreign taxes on income… sales tax in lieu of deducting state or local income taxes
• Apply the limitation!
• The sum of SALT taxes cannot exceed $10,000
• This means you must add up:
• SALT income OR sales
• SALT real and personal property
• Deduct the taxes in the year paid, including
  withholdings and estimated payments

Question 16

5) Casualty and Theft Losses Limitations

Answer 16

• A personal casualty loss is a loss arising from a sudden, unexpected, or unusual event in a Federally designated disaster area
• Excess loss after reimbursement by insurance is deductible
• Deductible amount from each casualty loss is the lesser of:
  1. Decline in value of property damaged by the casualty (i.e., FMV), OR
  2. Taxpayer’s basis in the damaged or stolen asset
• Limitations:
  1. $100 per event, AND
  2. Total casualty losses must exceed 10% of AGI 27

Question 17

6) Miscellaneous

Answer 17

• Gambling losses and expenses
• Unrecovered cost of a life annuity at death
• NOT deductible any more after 2017:
• Unreimbursed employee business expenses, tax
  preparation fees, investment expenses, hobby
  expenses