Chapter 8: Itemized Deductions Flashcards
1
Q
Medical expenses
A
Expenses incurred for the medical care of qualified individuals, in amounts exceeding 7.5% of the taxpayer’s AGI may be deducted. (Though not if reimbursed by insurance or otherwise)
2
Q
Who counts as a qualified individual for medical deductions?
A
Self
Spouse
Dependents (including those who could be taken as a dependent but fail to meet gross income or joint return tests)
3
Q
Medical expenses for children of divorced parents
A
Parent taking the medical expense deduction need not be the parent who claims dependency
4
Q
Qualified medical expenses for medical expense deductible deduction
A
- diagnosis, cure, mitigation, treatment, or prevention of disease
- the purpose of affecting any structure or function of the body
- transportation primarily form and essential to the two items above
- qualified long term care services
- insurance covering the items above
5
Q
Determination if an expense is a medical expense
A
With the exceptions of routine physical and dental checkups qualified expenses are confined strictly to expenses incurred primarily for the prevention or alleviation of a physical or mental defect or illness (expenses about a specific ailment)
6
Q
Medical milage deduction
A
2021: 16 cents/mile plus any tolls or parking
7
Q
Cost of meals and lodging en route to medical facility
A
Deductible, but limited
- only if trip is “long enough to warrant a stop
- only 50% of means deductable (100% of restaurant meals in 2020 and 2021)
- $50/ night for lodging per individual traveling (has to be no significant element of personal pleasure or recreation)
8
Q
Qualified long term care
A
Medical services under a prescribed plan of care
9
Q
Chronically ill individual
A
Person who for a period of at least 90 days cannot perform at least two “daily living tasks” unassisted (eating, toileting, bathing, dressing)
10
Q
Long term care services provided by spouse or realtive
A
Payments not deductable unless spouse or relative is licensed professional
Also if services are provided by a corp/partnership in which taxpayer owns 50%+ they are not deductible
11
Q
Capital expenditures incurred for personal medical purposes
A
Not depreciable or amortizable
But can be a current deduction if expenditure is made to acquire an asset primarily for the medical care of a qualified individual. Purchase must be necessary and reasonable
12
Q
Categories of deductible capital expenditures for medical care
A
- expenditures that relate only to the sick/handicapped individual, not to the permanent improvement of taxpayer’s property
- expenditures that permanently improve or better the taxpayer’s residence for the purpose of providing medical care
- expenditures to remove structural barriers in the home of a physically disabled person
13
Q
Expenditures that relate only to the sick/handicapped individual, not to the permanent improvement of taxpayer’s property
A
Fully deductable in the year paid
14
Q
Expenditures that permanently improve or better the taxpayer’s residence for the purpose of providing medical care
A
Deductible only to the extent that the amount of the expenditure exceeds the increase in FMV of the residence
15
Q
Expenditures to remove structural barriers in the home of a physically disabled person
A
Deductible in full
Increase in FMV of home considered to be 0
16
Q
Operations and maintenance of capital assets for medical care
A
Deductible as long as medical reason for capital expenditure continues to exist
17
Q
Cost of living in institutions
A
Depends on principal reason for stay. If medical (like a hospital) entire cost is deductible. If not principally medical then only specifically medical costs are deductible
18
Q
Nonrefundable advanced payments for lifetime care
A
Deductible in the year paid for situations where spouse or dependants eventual acceptance into an institution for care is dependant on the current payments.
19
Q
Medical insurance premiums
A
Deductible if medical care insurance. If combined with insurance against loss of life/limb/ sight/income can only deduct medical portion if can get cost of each type separated out
20
Q
Medicare withholding
A
Not deductible
21
Q
Premiums for group medical insurance
A
Employed taxpayers may deduct their own payments but not their employer’s
Self-employed taxpayers can deduct 100% of insurance payments TO ARRIVE AT AGI (not subject to limitations about exceeding 7.5% AGI)
22
Q
When medical expenses are deductible
A
Generally in the year the payment is made (not necessarily care received)
Charges on credit card deemed paid on date of the charge
23
Q
Deduction for prepaid medical expenses
A
Deferred until taxpayer receives care unless there was a legal obligation to prepay or prepayment was requirement to receive care
24
Q
Medical insurance reimbursements
A
- if received in same year as deduction simply reduces allowed deduction
- if received in subsequent year reimbursement must be included in gross income to the extent the taxpayer derived a benefit from a deduction in the prior year (if no deduction no need to report as income)
25
Treatment of medical insurance reimbursements if tax deduction was taken for the expense in a prior year
Taxpayer must report as income the lesser of:
- amount of reimbursement, or
- amount that medical expenses reduced taxable income in the prior year (can determine by comparing taxable income with and without the medical deduction)
26
When can taxes be deducted as an itemized deduction
Cash-method taxpayers: year they pay for tax (even if paying for a different year)
Accrual-method taxpayer: year taxes accrue
27
What taxes are deductible
Assessments that are specifically a tax (not a fee or charge from government for providing a good or service)
28
Tax
Mandatory assessment levied under the authority of a political entity for the purpose of raising revenue to use for public or governmental services
29
Taxes that are specifically deductable
- state, local, and foreign real property taxes
- state and local personal property taxes if based on value
- the generation skipping transfer tax on income distributions
- state, local, and foreign taxes paid or incurred in trade/business/income producing activity
30
Deduction of state and local sales tax
ONLY ALLOWED if elect to deduct the sales tax Instead of state and local income tax (deduction made annually)
31
Deduction of federal taxes
Generally not allowed except:
- custom and excise taxes incurred in business/trade as ordinary and necessary expenses
- employer's portion of FICA and unemployment taxes for employees
- self-employed taxpayers may deduct half of the self employment tax imposed on self employment income (a for AGI deduction)
32
Limitation on itemized deduction for state and local taxes
Stating in 2018
Limited to $10,000 ($5,000 if married filing separately)
33
Declaring tax refunds as income
Only required if taxpayer itemized deductions in previous year and then only to the extent that the taxpayer received a benefit from the deduction
34
How to deduct state and local sales tax
If elect to deduct sales tax instead of income tax can either:
- deduct actual sales tax paid based on receipts
- deduct sales tax paid based on Treasury department tables + tax on major purchases
35
Tests for tax levy to qualify as personal property tax
- tax is ad valorem tax on personal property (property value determines tax. If only partially ad valorem, only that portion is deductable)
- tax is imposed on annual basis (even if not collected annually
36
Real property tax year
Determined by local regulation
37
Apportionment of taxes on real estate sold during the year
Apportioned between buyer and seller based on the number of days each taxpayer owns the property during the real property tax year
Sales agreement usually lists apportionment and each party can deduct their apportioned taxes even if per the agreement one party pays the entire tax owed
If only one party pays the taxes that party can claim their portion in the year paid, the other party claims their portion in the year of the sales agreement
38
Real property assessments against the property that benefits from the improval
Not deductable (capitalized as part of adjusted basis)
39
Maximum amount of wages on which social security tax is paid
In 2021
$142,800
40
Self employment tax deduction
A for AGI deduction
Half of self employment tax (= half of 2.9% on all income for Medicare and 12.4% on income up to $142,800 for social security)
41
Additional tax on wages/self- employment and investment income
Individuals with over $200,000 in income ($250,000 MFJ)
Additional 3.8% on investment income and 0.9% on wages and self employment income
Not deductable by individuals
42
Non deductible taxes
- federal income taxes
- federal estate, inheritance, legacy, succession, gift taxes
- federal import or tariff duties and excise tax (unless incurred as a business expense!)
- employee portion of FICA tax
- state and local sales tax (unless election is made)
- state and local inheritance, legacy, succession, gift taxes
- foreign income tax if taxpayer elects to take the taxes as a credit
- property taxes on real estate to the extent treated as imposed on another taxpayer
- patient protection and affordable care act taxes on wages, self employment income and investment income
43
Categories of income expense
Active trade or business (business deduction)
Passive activity (follows passive income rules)
Investment (limited deductibility)
Personal (not deductible)
Qualified residence (mostly deductible)
Student loan (for AGI deduction with limitations)
44
Interest for tax ourposes
Compensation for the use of forbearance of money
Not including service charges, finance charges (those may still be deductable as a business expense)
45
How is interest expense categorized
Based on the use of the borrowed money (not on the use of any property used as collateral for the loan)
46
Borrowed fund deposited in bank
Considered investment until funds are withdrawn to use for expenses
If both borrowed and personal funds are in an account borrowed funds presumed to be used first
47
Order of allocation of repayment of debt to expenditures made with borrowed funds
(to determine which interest is still being paid)
1- personal expenditures
2- investment and passive activity expenditures (other than rental real estate)
3- passive activity expenditures in rental real estate
4- trade or business expenditures
48
Limitations on interest deductions for large businesses
If business has gross receipts of $26 million or more, can only deduct interest up to 30% of taxable income (excess is carried forward)
49
Differentiation between interest for a trade or business or a passive activity
Depends if taxpayer materially participates in the business
50
Interest expense attributable to passive activity
Used to compute net income or loss for passive activity and subject to passive activity limitations
51
Investment interest deductibility
Deduction for investment interest expense (for noncorporate taxpayer) limited to taxpayer's net investment income for the taxable year
Excess may be carried forward into the following year
52
Investment interest definition
Interest expense on indebtedness properly allocable to property held for investment (separate from other categories of interest)
All rental activities considered passive income
53
Interest incurred to purchase or hold tax exempt securities
Not deductable
54
Net investment income for purpose of investment interest limitation
Excess of taxpayer's investment income over investment expenses
Excludes qualified dividends and net long term capital gains taxed at preferential rates. THOUGH. taxpayer may elect to include these and have them taxed at regular rates
Also excluded: gains on business and personal-use property
55
Investment expenses
No longer deductable except for investment interest expense
56
Personal interest
Not deductable unless for qualified personal residence or student debt
57
Form 1098
Mortgage interest over $600 reported to IRS and homeowners
58
Qualified residence
Taxpayer principal residence and second residence
Residence secures debt
59
Acquisition indebtedness
Any debt secured by the residence and incurred in acquiring, constructing, or substantially improving qualified residence
Considered debt to acquire residence if residence acquired within 90 days before or after debt incurred
60
Acquisition debt to finance construction or substantial improvement of a residence
Debt incurred during construction/improvement to the extent that construction expenditures are made no more than 24 months before debt is incurred
Includes debt incurred within 90 days of completion date to the extent of any expenditures made with the 24 month person ending on the date debt is incurredb
61
Refinancing acquisition indebtedness
Remains acquisition indebtedness to the extent that the principal amount of refinancing does not exceed principal of acquisition debt immediately before refinancing
62
Limitation for qualified acquisition indebtedness: contracts before Dec 15, 2017
$1 million
($500,000 for mfs)
63
Limitation for qualified acquisition indebtedness: contracts after Dec 14, 2017
Limited to $750,000 ($375,000 MFS)
64
Point
1% of the loan amount
65
Prepaid interest paid in the form of points
Generally must be capitalized and amortized over life of a loan
If paid on principal residence are automatically deductable (with some requirements)
Also if paid to veteran administration or federal home administration if clearly designated as points
66
Points paid to purchase property other than a principal residence
Must be capitalized
If property used as business or investment or qualified residence points may be amortized over the life of the loan
67
Requirements for points to be currently deductable
- paid for with unborrowed funds
BUT money provided by borrower as down payments, escrow deposits, earnest money, other funds= treated as paid for the points
If borrower provides sufficient funds in these categories they are treated as having paid the points even if the seller actually paid them
68
Home mortgage insurance deduction
May deduct premiums paid or accrued on qualified residence before 2022
Phased out for taxpayers with AGI over $100,000 (less 10% of mortgage insurance premium for each $1000 or fraction thereof by which AGI exceeds 100,000
69
Definition of qualified residence
Taxpayer may have two:
- their principal residence
- one other residence selected by the taxpayer which they have personally used for more than the greater of 14 days or 10% of any rental days during the year (can select a property that has not been rented at all)
70
Student loan interest deduction
A FOR AGI deduction
Interest paid on qualified student loans up to $2,500
Phased out if taxpayer modified AGI (for 2021) over $70,000 for single filers ($15,000 phase out range) or over $140,000 for MFJ ($30,000 phase out range)
71
Reduction of student loan interest limit based on modified AGI
Maximum reduction reduced by percent determined by (excess of modified AGI over cap)/ phase out range
72
Qualified student loans
Loans taken out SOLELY to pay for qualified higher education expenses (tuition, fees, books, equipment, room and board incurred during time taxpayer, their spouse, or their dependent is enrolled in qualified higher education institution at least half time, lowered by any amounts paid by employer educational assistance program, by us savings bonds, or by any scholarship or allowance excluded from income)
73
Student interest deduction for taxpayer who may be claimed as a dependent on another's return
Not allowed
74
When can prepaid interest be deducted?
Generally if prepaid interest extends beyond the end of the year it must be capitalized and amortized over the periods to which it relates (accrual method applied to cash method taxpayers)
Except for points representing prepaid interest which may be deducted in the year paid
75
Deducting interest paid with loan proceeds
- if second loan from 3rd party = interest deductible
If second loan from same party as first and either the purpose of the second loan is to pay the first or the borrower lacks unrestricted control of the funds then interest may not be derucredn
76
Deducting interest on discounted notes
(where interest is paid in paying back more at maturity than was loaned)
Cash method taxpayer: deduct interest at repayment
Accrual method: deduct interest as it accrues over the term of the loan
77
Rules for interest owed to a cash method lender from a RELATED Accrual method taxpayer
Interest expense to the Accrual method taxpayer must be deferred until the expense is paid and claimed as income for the tax basis lender
Relationship include family members but also corporations with same ownership
78
Imputed interest charge from IRS
IRS may authorize imputed interest charge if taxpayer charges less than an adequate rate of interest
Additional interest income to lender and expense to borrower
Deductibility depends on classification of expense
79
Timing of charitable contributions deductions
Generally in year deduction is made (even for accrual taxpayers)
80
Qualified charitable organization include:
- governmental organizations in the US
- non-governmental organizations in the US (may be public charities or private nonoperating foundations)
- post or organization of war veterans
- domestic fraternal groups.
- certain cemetery companies
81
Public charities
Qualifying nongovernmental entities including
- churches or associations of churches
- educational institutions (with restrictions
- medical care, education, research organization
- government orgs that exist to administer to property of a higher Ed org
- qualified governmental unit
- orgs that normally receive a substantial portion of support from gov or the public.
- certain private operating foundations
82
Factors determining vale of non-cash property donated
- type of property donated
- type of qualifying org to whom property is given
Does not count for deduction if less than donor's entire interest is given
83
Purchases that support charitable causes
Only the excess value of purchase price over valu of item received is considered a donation
84
Donation of long-term capital gain property
Generally just FMV
Long term capital gain property = held over one year before donation that if sold would incur capital gain
85
FMV for tax purpowes
The price at which the property would change hands between a willing buyer and willing seller, neither under any compulsion to buy or sell and both having reasonable knowledge of relevant facts
86
Private nonoperating foundation
Generally do not receive funds from the general public but rather distribute their funds to other charitable orgs
87
Deduction for long term capital gain property donated to private nonoperating foundation
Property's FMV reduced by the capital gain that would be recognized if the property were sold at it's FMv on the date of contribution
88
Unrelated use property
Capital gain property contributed to a public charity and used by that org for purposes unrelated to the orgs function
89
Charitable contribution deduction: unrelated use property
Property's FMV reduced by the capital gain that would be recognized if the property were sold at it's FMv on the date of contribution - generally the adjusted basis
Applies only to tangible personal property (not stocks or real estate)
90
Burden of proof contributed property not put to unrelated use
On the taxpayer
Met if taxpayer reasonably assumes that property will not be put to unrelated use
Immediate Sale of property is considered unrelated use
91
Donations of intangible assets to charitable orgs
Property's FMV reduced by the capital gain that would be recognized if the property were sold at it's FMv on the date of contribution
92
Charitable deduction for ordinary income property
Property's FMV reduced by any gain that would be recognized if the property were sold at its FMv on the date of contribution (usually adjusted basis)
Regardless of type of charitable org
93
Ordinary income property
Any property that would result in recognition of income taxed at ordinary rates
Includes self created works and short term capital property
94
Donation of inventory by a c corporation to charity that uses the inventory for the care of the needy, ill, or infants
Can take an enhanced charitable contributions deduction if FMV reduced by 50% of ordinary income Corp would have recognized if inventory sold (not beyond 2x basis of property)
Also donation of scientific equipment
95
Charitable contributions of services
Can only deduct the unreimbursed expenses incurred incident to rendering the services (milage at .14/mile)
Cannot deduct expenses while away from home unless there is NO element of vacation, recreation, personal pleasure
96
Charitable contribution deduction limitation
Was 50% of taxpayer's AGI
2018-2019: 60%
2020- 2021: 100%
Excess contributions may be carried forward up to 5 subsequent tax years
97
Limitation of deduction on capital gain property donated to public charity
Donation valued at FMV but limited to 30% of taxpayer's AGI
Unless:
- capital gain property donated to public charity but not put to related use (deduction of FMV- capital gain had property been sold)
- taxpayer elects to reduce the amount of the charitable contributions deduction to the capital gain they would have recognized if property sold
98
Contribution of all types of property other than capital gain property to private nonoperating foundation
Deduction limited to 30% of taxpayer's AGI
99
Contribution of capital gain property to private nonoperating foundation
Contribution may not exceed the lesser of 20% of the taxpayer's AGI or 30% of taxpayers AGI reduced by contributions of capital gain property to public charities
100
Order of applying charitable contributions deductions
Considering AGI limit.
Those subject only to highest limit (generally 50% but currently 100% applied first) then those subject to the 30% limit.
Figure actually deduction based on smallest of
: Remaining allowable AGI
: % of AGI allowable
: Actual deduction
101
Charitable contribution carryovers
May be deducted in 5 subsequent years, provided the contributions in those years do not cover all allowable deductions
Carryovers used in chronological ordert
102
Pledges made by accrual method corporations
Accrual method corps maybe elect to claim the contribution in the pledge year AS LONG AS the actual contribution is made by the fifteenth day of the third month following the year the pledge is made AND the board authorizes the pledge
103
Limitation on corporate charitable deductions
Generally 10% of taxable income (25% for cash contributions in 2020 and 2021)
Can be carried forward 5 years (also in chronological order and only if that years deductions are below limitation)
104
Casualty and theft losses
Generally not deductible if loss on personal use property
May be deducted as a schedule A itemized deduction if loss is attributed to federally declared disaster
105
Casualty losses on business and investment property held for production of rents and royalties
Deductions to arrive at AGI
106
Qualified business income deduction
Reduction of taxable income (from AGI)
Can be taken whether or not taxpayer itemizes
Taken at Shareholder level for pass through entities (to reduce business income closer to c corp labels)
107
QBI deduction calculation
The lesser of:
- 20% of qualified business income, or
- the greater of: 50% of W-2 wages allocable to the taxpayer by the business OR 25% of allocable W2 wages + 2.5% of allocable share of unadjusted basis qualified property immediately after it has been acqured
108
Restricts on QBI deduction
Must be income from U.S. trade or business
NOT in service business of law, accounting, healthcare, and consulting
109
When can a taxpayer take a deduction for prepayment of future medical expenses?
If there is a legal obligation for the prepayment or the prepayment is a requirement for the receipt of medical care
110
Who may claim deductions for medical expenses for a dependent under a multiple support agreement?
The person who is allowed by the agreement to claim the supported person as their dependent can deduct medical expenses they pay for the supported person. If other people supporting that person pay for medical expenses they cannot be deducted
111
When does the taxpayer elect which property to take as second qualified residence?
Choice made annually
112
Election to reduce the amount of a charitable contributions
Annual election to reduce contribution of capital gain property to public charities by the long-term capital gain they would recognize if they sold the property
Applies to all capital gain property donated to charity that year
Increasing deduction limitation from 30 to 50%
113
Tax considerations for donation of appreciated capital gain property
Best to donate the property directly rather than sell the property and donate the cash since it avoids any possible tax on capital gains
114
Tax considerations for donation capital gain property that has decreased in value
Better to sell the property, take the loss, and donate the proceeds
115
Expenses that qualify as medical care expenses and dependant care expenses
May close which to take it as (medical expenses deduction or dependent care credit) but then cannot be used as the other
116
Substantiation required for charitable contributions
Cash contributions: bank record or receipt from org
Non-cash property: name and address of charity, date and location of contribution, description of property, FMV and method of determining FMV. Appraisal report if used
Cash contributions over $250: contemporaneous, written acknowledgement by donee specifying amount of cash /description of perry received and whether any goods or services were provided in return
117
Donations of similar items to various charities
Treated as donation of one property for purposes of determining FMV documentation required
