Individual Taxation - Schedule A Flashcards
If TP is claimed as a dependent of another, standard deduction is the GREATER of:
$1,000; OR
$350 + Earned Income
*Never to exceed standard deduction
Standard deduction may increase over the “regular” standard deduction if:
(additional $1,550)
o 65 or older AND/OR
o Blind
Highest standard deduction that would be available to a TP
o MFJ; AND
o TP and Spouse are 65; AND
o TP and Spouse are Blind
General Characteristics of Itemized deductions:
o Subtracted from AGI in computing Taxable income
o Unique to each TP (not based on filing status)
o Reported on Schedule A page 2 of 1040
Itemized deduction is usually chosen if:
Itemized deduction > standard deduction
Itemized deductions = the Sum of COMMITT
\+Charitable Contributions \+Other Misc. \+Misc. Expense (2%) \+Medical Expenses \+Interest (certain types) \+Taxes \+Theft or Casualty
= Itemized deduction
Threshold defined
o “FLOOR”
o Expenses are deductible to extent they GO OVER
A stated % of AGI
A stated amount
Ceiling defined
o Expenses are deductible UP TO
A state % of AGI
A stated amount
Charitable contribution requirements
Qualified organization
Cash or Property donated exceeds
value received from the charity
Donations > $250 = written substantiation from Charity
Deductible in the year charity receives Cash or Property (in the year paid)
Not considered a Charitable contribution
not deductible
Ordinary payments to Qualified organizations for services rendered (tuition to a parochial school)
Voluntary services
(Except for “out of pocket” costs incurred in the performance of the volunteer work)
(e.g. transportation expenses between home and the site of the work – mileage and parking)
Qualified Charitable Organizations
Public (defined in Code section 501(c)(3) • Educational Institution • Religious Organizations • Hospitals • Government
Private
• Veteran Organization
• Fraternal Order
Non-Qualified Organizations
- Foreign charities
- Political Party Contributions
- Needy Individuals
- Civic Leagues
- Clubs
- Unions
- Chambers of Commerce
Deductible in the year charity receives property (in the year paid)
Deemed Paid when:
Not Deemed Paid when:
Deemed Paid:
Charged to CC (because Charity received the money; not when you pay CC)
Check is in the mail
Not Deemed Paid:
Pledge is made (must be payment in some form)
Allowable deduction (AGI ceiling) for a charitable contribution depends on:
Type of donation
• Cash
• Ordinary income (STCG) Property
• LTCG Property
AGI Ceilings for:
Cash
STCG
LTCG
Prop. Contr. Amount Pub. Priv.
Cash FMV 50% 30%
STCG Lower of AB or FMV 50% 30%
LTCG FMV *30% 20%
Other Misc. Expenses
Not subject to 2% floor
- Gambling Losses - Estate taxes on income "IRD"
*Only two items not subject to 2% floor - virtually all others are.
Gambling Losses
Deductible to the extent of winnings (no carryover)
Can’t offset Winnings with Losses
Must report full amount of Winnings as Taxable Income
Losses are Not subject to the 2% limit of AGI
Gambling Winnings – on face of 1040
Professional Gamblers can now deduct non-wagering business expenses on Schedule C
Misc. Expenses
Subject to 2% floor “BIT”
The following expenses are deductible as miscellaneous itemized deductions if and to the extent they all together exceed 2% of your adjusted gross income (AGI) (threshold) BIT
Business expense of an employee
Investment Costs
Tax Prep./Legal Advice relating to taxable income
Business Expense of Employee
Business mileage
Job Travel
AICPA and Union Dues
Uniforms (Pizza Boy) – Not a tux for waiter
Laptop
CPE/Job education (keep or maintain profession; not entering new profession)
Business Use of Home (Sch. C if SE; if home is more convenient)
Appraisal Fees for Charitable contribution
Unreimbursed employee business expense (if entitled to reimbursement, must not deduct)
Investment Costs
Safety Deposit Box
Advisory Fees (investment counsel) and Newsletters (investment Publications)
IRA custodial fees (Doesn’t include fees to buy stock)
Tax Preparation/Legal Advice relating to Taxable Income
Tax preparation advice and costs incurred to collect $ owed by others
- Hiring lawyer to collect alimony or
- Hiring appraiser to collect insurance claim
- NOT fees for Wills and Testaments, etc..
Subject to 2% threshold meaning:
o First 2% Not Deductible
o Anything Above 2% Deductible
Medical Expenses
Deductible once 10% AGI threshold is reached
(Example: If AGI is $100,000, your first $10,000 of medical expenses are not deductible)
o 65 and older 7.5% (soon to be 10% for everyone, however)
o Under 65, 10%
o AMT Medical Expenses are 10% for everyone
o Accident/Disability insurance is not deductible
Qualified Medical Expenses
o Insurance Premiums for Medical or dental care
o In-patient care (in hospital or nursing home)
o Prescription drugs and insulin (minus insurance reimbursement)
o Medical aids (glasses and hearing aids)
o Travel costs and lodging (costs of going to clinic)
o Modification to accommodate handicap
Capital costs deductible to extent of excess of increase in value of home
o Automobile adaptive devices
Non-Qualified Medical Expenses
o Premiums on Life Insurance Policies to cover loss of earnings from injuries and illnesses
o Items for general nutrition and health (vitamins, health club, etc..)
o Nonprescription drugs
o Most cosmetic surgery (except illness, injury, birth defect surgery)
o Medicare portion of SS and SE taxes
Medical Expenses paid on behalf of another:
Dependent Rules + QR Rules JGRorRS
Medical Expense deduction must be taken when:
In year paid, regardless of when medical services are rendered
*Exception- CC expenses are deducted in year charged to the card (not in year TP pays CC balance)
Insurance Reimbursement for Medical Expenses
reduce the deductible amount
Medical Expenses Paid for deceased spouse or dependent are deductible when:
Are deductible in year paid, regardless if they were paid before or after death. (CC exception)
(Must be for Qualified expenses for a spouse or qualified dependent at time of expenses was incurred or payment was made)
Two Types of Deductible Interest on Schedule A:
Mortgage Loan Interest
- Acquisition Debt - Home Equity Debt - Mortgage Points
Investment Interest
Interest that is deductible, but NOT on Sch. A
Business Activity interest (Sch. C) Rental Activity Interest (Sch. E) Educational Interest (page 1 of 1040 - I EMBRACED HEF
Mortgage Loan Interest
“Acquisition Debt”
Acquisition Debt –
o Periodic interest payments for acquisition debt
o Up to $1,000,000
o Secured by Primary or Secondary Residence
o Used to Buy, Build, or Remodel/Improve a home
Must use proceeds to:
Buy, Build, or Remodel/Improve
(not to pay consumer debt; e.g. pay of CC)
Mortgage Loan Interest
“Home Equity Debt”
o Periodic interest payments on Home Equity Loans
o Up to $100k
o Secured by Primary or Secondary Residence
o Not necessarily used to Buy or Remodel a home
Can use proceeds for ANY PURPOSE:
Personal use
Business use (must deduct on Schedule C, NOT Schedule A
o Only up to 100% of Net Equity (FMV less acquisition debt)
Mortgage Loan Interest
“Points”
Prepaid Interest on Buying new home = Deductible
Prepaid Interest on Improving home = Deductible
Refinancing Points are amortized over the life of the mortgage
“Interest paid in Advance Not Deductible in the period paid… Even by cash basis TP (allocation over tax year is required)”
Investment Interest
Refers to borrowings for personal investments
• Marketable Securities; Margin loans purchasing stock; paying taxable income
Deductible to the extent of reported “Net Investment Income” on tax return
Investment Interest Expense Formula
Gross Investment Income
(-) Investment Expense in excess of 2% of AGI
= Net Investment Income
If Investment Produces Non-taxable income (e.g., state and local bonds), Interest is
Not Deductible
interest must be related to taxable investment income
Interest on Consumer related debt
Not Deductible
o Interest on personal property for personal use
o Interest on tax deficiencies
Taxes that can be deducted
Personal Property
RE tax
State and Local Income or Sales tax (choose one)
Certain Foreign taxes paid
Foreign Taxes Paid
Foreign Taxes Paid
- Foreign Income Tax – Deductible
- Foreign Real Estate Tax – Deductible
- Foreign Personal Property Taxes – Not Deductible
- Foreign Tax Assessments – Not Deductible
- Add to Basis
“Foreign taxes may be claimed as credit instead (can’t have both)”
Taxes that can’t be deducted
Fees, Fines, Federal, FICA, FORGET IT!!!!
Taxes paid to Federal Government
Taxes for Gas or Excise
Fees charged by State or Local Governments Generally Not deducted UNLESS:
• Taxes are based on Income; OR
• Taxes are based on Property Values
Casualty Loss defined
Casualty Loss defined –
o Sudden unexpected unusual in nature event
o Causing TP to lose an Asset; OR
o Causing TP’s Asset value to decline over a time period (not exceeding 30 days)
(Expense incurred for repairs are not deductible. Must be permanent.)
What is not a Casualty event:
Accidental breakage of items in the home by family
Progressive deterioration (termite, moth, drought)
Deductible amount for Casualty Loss formula:
Lower of Decrease in FMV of Prop. “OR” Tax Basis
(-)Insurance proceeds
(-)$100 *note this was $500 in 2009 tax year…
(10% of AGI)
=Deductible amount
Theft is not “mere misplacement”
(it is a criminal act)
Deduction timing
o Casualty
o Theft
o Casualty 1 year casualty occurred
o Theft 1 year theft is discovered
Deductions not Subject to AGI Phase-out COMMITT
o Medical
o Casualty
o Gambling
o Investment Interest Expense
Story line You get sick (medical); you die (casualty); children get inheritance. One gambles, the other invests.
