Itemized Deductions - Medical, Taxes, Interests Flashcards
What is one of the itemized deduction items that apply for dependents?
Medical expenses - Deductible for TP, spouse, and dependents (includes those who meet all dependent test, but failed for gross income test).
What is the general notion for determining which medical expenses are deductible?
Legitimate, medical expenses that are necessary.
Examples of medical expenses that are deductible?
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.
Examples of medical expenses that are nondeductible?
Funeral, burial, and cremation expenses Nonprescription drugs (except insulin) Bottled water Toiletries Cosmetics Health spas Unnecessary cosmetic surgery
What is the formula to compute deductible medical expenses?
Qualified medical expenses - Reimbursement from insurance - 10% of AGI = Deductible Medical Expenses.
Are real estate taxes on personal used property deductible? On business used?
Yes.
Yes, but it will not be on Schedule A.
Are State, local, and foreign taxes on real property are deductible? Criteria? Federal taxes?
Yes only by the person legally liable for the tax (being a joint owner is ok to pay for the whole amount).
No.
Are State, local, and foreign income taxes deductible? If partially due to business income? Federal income taxes?
Yes.
Yes.
No.
Must a TP deduct sales taxes? Criteria? Can TP deduct both sales taxes and state income taxes?
No, but can elect to do so if sales taxes are greater than state income taxes.
No, only one.
How can a TP determine sales tax?
Actual receipts can be used or IRS table can be used.
What are input factors for IRS sales tax table?
Income, number of exemptions, and state residence.
Are personal property taxes deductible?
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.
Are special assessment taxes deductible?
No.
Are fees and licenses (dog, automobile, hunting, fishing etc) deductible?
No.
Are federal, state, or local estate or gift taxes deductible?
No.
Are social security and other federal employment taxes paid by employee (including self-employment taxes) deductible?
No.
What are 3 types of interest expense?
Personal, investment, and mortgage.
How to classify personal interest?
If interest expense doesn’t fall into other categories, by default, it will be personal interest expense.
What are most common types of personal interest expense? Are they deductible?
Credit card interest, car loan interest, interest on income tax underpayments.
No.
What are examples of personal interest expense that are deductible?
Personal interest expense is never deductible.
Is investment interest expense deductible?
Yes, but only to the extent of net investment income (investment income less non interest investment expenses) and 2% rule.
What kind of election is available for long-term capital gain and qualified dividend income?
TP can elect to have them taxed at preferential capital gain rate or include in investment income.
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?
They are taxed as ordinary income.
No, they can wait till the year is over, compute, and elect.
What happens to the investment interest expense that can’t be deducted because of the cap?
It can carry forward indefinitely.
What is the impact of the application of the 2% phaseout rule for investment income computation?
Computation is done after application of the 2% phaseout rule.
2% rule example: AGI: $100,000. Investment expense: $3,200. What is the allowed deduction?
$3,200 - (100,000x2%) = $1,200.
Investment expenses are deductible only to the extent they exceed 2% of AGI.
What are 2 major categories of mortgage interest expenses?
Acquisition indebtedness and home equity indebtedness.
Are acquisition indebtedness and home equity indebtedness deductible?
Yes.
Acquisition indebtedness: what is it? Examples?
Debt incurred for the acquisition or capital improvement.
Interest paid or incurred on debt secured by a qualified residence.
Acquisition indebtedness: what is a qualified residence?
Principal residence plus one other residence.
Acquisition indebtedness: Debt limit? Is this limit per residence?
$1,000,000.
No, for one plus other total.
Home equity loan: how is the deductible amount determined?
Lesser of;
$100,000 or the FMV of the residence less the remaining acquisition indebtedness (equity).
Home equity loan: Must the proceeds be used for the improvement of home to qualify for deduction?
No. It can be used for any purposes.
What is qualified mortgage interest?
Premiums for qualified mortgage insurance related to acquisition indebtedness on a qualified residence.
Qualified mortgage interest deduction: phaseout threshold?
when AGI exceeds $100,000.
Is penalty pmt for prepayment for home mortgage deductible?
Yes.
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?
In the year it was paid.
In the year it was charged to CC rather than when it was paid off.
What is the classification of points paid to refinance a loan? Tax treatment?
Prepaid interest.
Must be amortized over the life of the loan.
Deduction of mortgage interest: Does AGI 2% limit apply?
No
