Itemized Deductions - Medical, Taxes, Interests

Question 1

What is one of the itemized deduction items that apply for dependents?

Answer 1

Medical expenses - Deductible for TP, spouse, and dependents (includes those who meet all dependent test, but failed for gross income test).

Question 2

What is the general notion for determining which medical expenses are deductible?

Answer 2

Legitimate, medical expenses that are necessary.

Question 3

Examples of medical expenses that are deductible?

Answer 3

Dental, medical, and hospital care.
Prescription drugs
Equipment such as wheelchairs, crutches, eyeglasses, hearing aids, contacts
Transportation for medical care
Medical insurance premiums
Qualified long-term care expenses and insurance
Alcohol and drug rehabilitation
Weight-reduction programs if as part of medical treatment
Stop-smoking programs and prescription drugs for nicotine withdrawal.

Question 4

Examples of medical expenses that are nondeductible?

Answer 4

Funeral, burial, and cremation expenses
Nonprescription drugs (except insulin)
Bottled water
Toiletries
Cosmetics
Health spas
Unnecessary cosmetic surgery

Question 5

What is the formula to compute deductible medical expenses?

Answer 5

Qualified medical expenses - Reimbursement from insurance - 10% of AGI = Deductible Medical Expenses.

Question 6

Are real estate taxes on personal used property deductible? On business used?

Answer 6

Yes.

Yes, but it will not be on Schedule A.

Question 7

Are State, local, and foreign taxes on real property are deductible? Criteria? Federal taxes?

Answer 7

Yes only by the person legally liable for the tax (being a joint owner is ok to pay for the whole amount).
No.

Question 8

Are State, local, and foreign income taxes deductible? If partially due to business income? Federal income taxes?

Answer 8

Yes.
Yes.
No.

Question 9

Must a TP deduct sales taxes? Criteria? Can TP deduct both sales taxes and state income taxes?

Answer 9

No, but can elect to do so if sales taxes are greater than state income taxes.
No, only one.

Question 10

How can a TP determine sales tax?

Answer 10

Actual receipts can be used or IRS table can be used.

Question 11

What are input factors for IRS sales tax table?

Answer 11

Income, number of exemptions, and state residence.

Question 12

Are personal property taxes deductible?

Answer 12

Yes, if the tax is based on the value of the property (ad valorem) rather than a standard value that is applied to it for everyone.

Question 13

Are special assessment taxes deductible?

Answer 13

No.

Question 14

Are fees and licenses (dog, automobile, hunting, fishing etc) deductible?

Answer 14

No.

Question 15

Are federal, state, or local estate or gift taxes deductible?

Answer 15

No.

Question 16

Are social security and other federal employment taxes paid by employee (including self-employment taxes) deductible?

Answer 16

No.

Question 17

What are 3 types of interest expense?

Answer 17

Personal, investment, and mortgage.

Question 18

How to classify personal interest?

Answer 18

If interest expense doesn’t fall into other categories, by default, it will be personal interest expense.

Question 19

What are most common types of personal interest expense? Are they deductible?

Answer 19

Credit card interest, car loan interest, interest on income tax underpayments.
No.

Question 20

What are examples of personal interest expense that are deductible?

Answer 20

Personal interest expense is never deductible.

Question 21

Is investment interest expense deductible?

Answer 21

Yes, but only to the extent of net investment income (investment income less non interest investment expenses) and 2% rule.

Question 22

What kind of election is available for long-term capital gain and qualified dividend income?

Answer 22

TP can elect to have them taxed at preferential capital gain rate or include in investment income.

Question 23

If TP elects to include long-term capital gain and qualified dividend income in investment income, what is the tax implication? Must a TP predict which method is most beneficial during the year?

Answer 23

They are taxed as ordinary income.

No, they can wait till the year is over, compute, and elect.

Question 24

What happens to the investment interest expense that can’t be deducted because of the cap?

Answer 24

It can carry forward indefinitely.

Question 25

What is the impact of the application of the 2% phaseout rule for investment income computation?

Answer 25

Computation is done after application of the 2% phaseout rule.

Question 26

2% rule example: AGI: $100,000. Investment expense: $3,200. What is the allowed deduction?

Answer 26

$3,200 - (100,000x2%) = $1,200.

Investment expenses are deductible only to the extent they exceed 2% of AGI.

Question 27

What are 2 major categories of mortgage interest expenses?

Answer 27

Acquisition indebtedness and home equity indebtedness.

Question 28

Are acquisition indebtedness and home equity indebtedness deductible?

Answer 28

Yes.

Question 29

Acquisition indebtedness: what is it? Examples?

Answer 29

Debt incurred for the acquisition or capital improvement.

Interest paid or incurred on debt secured by a qualified residence.

Question 30

Acquisition indebtedness: what is a qualified residence?

Answer 30

Principal residence plus one other residence.

Question 31

Acquisition indebtedness: Debt limit? Is this limit per residence?

Answer 31

$1,000,000.

No, for one plus other total.

Question 32

Home equity loan: how is the deductible amount determined?

Answer 32

Lesser of;

$100,000 or the FMV of the residence less the remaining acquisition indebtedness (equity).

Question 33

Home equity loan: Must the proceeds be used for the improvement of home to qualify for deduction?

Answer 33

No. It can be used for any purposes.

Question 34

What is qualified mortgage interest?

Answer 34

Premiums for qualified mortgage insurance related to acquisition indebtedness on a qualified residence.

Question 35

Qualified mortgage interest deduction: phaseout threshold?

Answer 35

when AGI exceeds $100,000.

Question 36

Is penalty pmt for prepayment for home mortgage deductible?

Answer 36

Yes.

Question 37

Medical expenses deduction: If pmt for the service rendered in the current year is made in the next year, when can it be deducted? In the case it was paid with a borrowed fund such as CC?

Answer 37

In the year it was paid.

In the year it was charged to CC rather than when it was paid off.

Question 38

What is the classification of points paid to refinance a loan? Tax treatment?

Answer 38

Prepaid interest.

Must be amortized over the life of the loan.

Question 39

Deduction of mortgage interest: Does AGI 2% limit apply?

Answer 39

No