M2: Itemized Deductions

Question 1

Interest Expense

Answer 1

Hippe:

Home mortgage interest

• Acquisition Indebtedness ($1,000,000 or $500,000 MFS) is debt that is incurred in buying , constructing, or substantially improving the taxpayers principal and second home (1st and 2nd home)
• Points related to acquisition indebtedness are deductible immediately

Home equity indebtedness (100k joint/single or 50k MFS) used for anything

Personal consumer interest is NOT Deductible (hiPpe):personal note, life insurance loans, bank credit cards, personal property such as autos,tv, clothes, interest of federal, state, or local tax underpayments

Investment interest expense (hIppe) is limited to net taxable investment income (like gambling loss rules)
- included investment (taxable) income: interest & dividends, dividends, rents, royalties, and net long term and short term capital gains

Prepaid interest (hipPe): deduct when incurred & paid

Education loan interest is not deductible on itemize schedule A but to adjustment for AGI (hippE)

Question 2

Charitable contributions

Answer 2

Cash = 50 percent of AGI
FMV property = 30 percent of AGI for gifts of long-term capital gain property to public charities

Rule: contributions of long term property are generally deductible at FV. Short term property are generally deductible at the lower of cost or fair market value

Combination rule: total deductions may not exceed 50 percent of AGI

Rule: contributions not fully deductible are carried forward five years

Question 3

Casualty & Theft losses

Answer 3

Smaller loss (lesser of fmv or adj basis) - insurance recovery = taxpayers loss - 100 = eligible loss - <10 % AGI> = deductible loss

Question 4

Moving expenses

Answer 4

are an adjustment and not an itemized deduction

Question 5

Misc. Itemized deductions: 2 Percent AGI Test

Answer 5

Unreimbursed business expenses (Employee): travel, meals (50%), and lodging, transportation expenses, education expenses (must be job related) .Uniforms, business gifts ($25 per person), subscriptions to professional journals, tax preparation fee, debit card convenience fee, activities not engaged in for profit (hobbies) activities that profit 3 out 5 years = not deductible, union dues, custodial fees,

Only employee “moving expenses” are adjustments.

Question 6

Student loan interest

Answer 6

is a deduction (adjustment) to arrive at AGI

Question 7

Gambling loss

Answer 7

not subject to the 2% AGI limitation, deductible up gambling winnings

Question 8

Medical expenses

Answer 8

individuals are typically “cash bases”. To be tax deductible, the item must have been:

• incurred as an expense or
• paid or charged before year end

Qualified medical expenses - insurance reimbursement = qualified medical expense “paid” - 10 % AGI = deductible medical expense

Question 9

Taxes: Not federal income taxes

Answer 9

Real estate taxes (state, local, and foreign taxes) legally obligated to pay in order to deduct taxes. Real estate taxes do not include street, sewer, and sidewalk assessment taxes.

Personal property tax (state and local taxes): to be deductible, the tax must be based on the value of the personal property and paid during the tax year.

Income taxes (State, Local, foreign taxes): deduct in year paid, not in year applied to. Includes: estimated taxes paid during the year are deductible, withheld taxes from pay checks, & assessments paid during the year for prior years

Nondeductible taxes: FIB
Federal taxes
Inheritance taxes
Business and rental property taxes