Chapter 7

Question 1

What do qualified medical expenses include?

Answer 1

Payments for prevention, care, diagnosis, or cure of injury, disease, or bodily function not reimbursed by health insurance or are not paid through a FSA. May also deduct medical expenses incurred to treat spouses and dependents.

Question 2

What do common medical expenses include?

Answer 2

Prescription medication, insulin, medical aids such as eyeglasses, contact lenses, wheelchairs. (OTCs don’t count).
Payment to medical care providers such as doctors, dentists, nurses, medical care facilities (hospitals).
Transportation for medical purposes.
Long-term care facilities.
Health insurance premiums (if not deducted for AGI by self-employed taxpayers) and insurance for long-term care services.

Question 3

How are medical expenses for cosmetic surgery treated?

Answer 3

Not deductible unless 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 a disfiguring disease.

Question 4

Transportation and Travel for Medical Purposes

Answer 4

Taxpayers traveling for the primary purpose of receiving essential and deductible medical care may deduct the cost of lodging while away from home overnight (with certain restrictions) and transportation. Taxpayers using personal automobiles for medical transportation services may deduct a standard mileage allowance in lieu of actual costs. 2018 - 18 cents/miles.

Question 5

Hospitals and Long-Term Care Facilities

Answer 5

Taxpayers may deduct cost of meals and lodging at hospitals. Cost of meals and lodging at other types of facilities such as nursing homes only deductible when principal purpose is for medical care rather than convenience.

Question 6

Medical expense deduction limitation

Answer 6

Amount of unreimbursed qualified medical expenses paid during year (no matter when services provided) reduced by 7.5% of taxpayer’s AGI for 2017 and 2018 (10% thereafter).

Question 7

What are the itemized deductions that an individual may deduct?

Answer 7

State, local and foreign income taxes, including state and local taxes paid during year through employer withholding, estimated tax payments, and overpayments on prior year return.
State and local real estate taxes on property held for personal use or investment purposes.
State and local property taxes that are assessed on the value of specific property.

Question 8

What may taxpayers do instead of deducting state and local income taxes?

Answer 8

Deduct state and local sales taxes. Advantageous for payers in states that don’t have an individual state income tax. After 2017, itemized deductions for taxes limited to $10,000.

Question 9

What are the two itemized deductions for interest expense?

Answer 9

Deductions paid on acquisition indebtedness secured by a qualified residence (taxpayer’s principal residence and one other.) Deducting interest paid on loans used to purchase investment assets such as stocks, bonds or land (investment interest expense).

Question 10

What is acquisition indebtedness?

Answer 10

Any debt secured by a qualified residence that is incurred in acquiring, constructing or substantially improving the residence.

Question 11

Home mortgage interest deduction

Answer 11

Limited by cap on acquisition indebtedness that varies based on when indebtedness originated.
After 12/15/17 - Can only deduct mortgage interest on up to $750,000 of acq. indebt. ($375,000 if MFS).
Before 12/16/17 - Limitation on acq. indebt. is $1,000,000 ($500,000 if MFS) even if debt is refinanced.
When a taxpayer has acquisitions from before and after, $750,000 limit is reduced by acquisition indebtedness incurred before 12/16/17.

Question 12

Deduction of investment interest

Answer 12

Limited to a taxpayer’s net investment income. Any investment interest in excess of net investment income limitation carries forward to subsequent year. Not allowed to deduct interest on personal credit card debt or on loans to acquire (and secured-by) personal use automobiles.

Question 13

What are qualified charitable organizations?

Answer 13

Organizations that engage in educational, religious, scientific, governmental and other public activities. (Political and campaign contributions not allowed.)

Question 14

Contributions of money

Answer 14

Cash contributions are deductible in the year paid, including donations of cash or by check, electronic funds transfers, credit card charges and payroll deductions. Also considered as making monetary contributions for transportation and travel for charitable purposes if no entertainment/pleasure in an element of travel. When they use personal vehicles, they may deduct (as cash contrib) standard mileage allowance for each mile driven. (14 cents/mile in 2018).

Question 15

Contributions of Property other than Money

Answer 15

When a taxpayer donates to charity, amount taxpayer is allowed to deduct depends on whether property is capital gain property or ordinary income property.

Question 16

Capital Gain Property

Answer 16

Generally, taxpayers allowed to deduct FMV of capital gain property on date of donation. (CGP is any appreciated asset that would have generated a LTCG if taxpayer had sold property for FMV rather than contributing asset to charity). To qualify as long-term, taxpayer must have held asset for more than a year.

Question 17

What do capital assets include?

Answer 17

Investment assets (stocks, bonds, land held for investment, paintings, etc.).
Business assets (to extent that gain on sale of business asset would not have been considered ordinary income .)
Personal-use assets.

Efficient way to make charitable contributions; taxpayer allowed to deduct FMV of property and not required to include appreciation on asset in gross income.

Question 18

Contributions of CGP that do not qualify for FMV deduction

Answer 18

Deduction for CGP that is tangible personal property is limited to adjusted basis of property if charity uses the property for a purpose unrelated to its charitable purpose. Restriction applies to CGP that is

1) Tangible
2) Personal property (not realty)
3) Unrelated to charity’s operations (doesn’t apply if taxpayer reasonably anticipates charity will put property to a related use)

Question 19

Ordinary income property

Answer 19

Taxpayers can only deduct less of property’s FMV or adjusted tax basis. Consists of all assets other than CGP. In other words, property that if sold would generate income taxed at ordinary rates. Following assets:
Assets taxpayer has held for a year or less.
Inventory taxpayer sells in trade/business.
Business assets held for more than a year to extend to which taxpayer would recognize ordinary income under the depreciation recapture rules if taxpayer had sold property.
Assets, including investment assets and personal-use assets, with value less than taxpayer’s basis in assets (assets that have decline in value.)