Module 2: Itemized Deductions

Question 1

Standard deduction

Answer 1

$6k, $9k, $12k, if not used then use itemized

Question 2

Itemized Deductions

Answer 2

Medical Expenses: Limit to 10% AGI
Taxes and interest paid
Charity: Limit to 50% AGI
Casualty and theft: Limit to 10% AGI, $100 deduct per loss
Misc. Deductions: Limit to 2% AGI

Question 3

Itemized Deductions that get phased out vs. unlimited

Answer 3

Phased out: taxes, interest paid, gifts to charity, job expenses
Unlimited: Medical and dental expense, investment interest expense, casualty and loss, gambling losses

Question 4

Medical Expenses

Answer 4

10% AGI or 7.5% if old.
Formula:
Qualified medical expenses

=Qualified paid=
<10% AGI>
=Deductible expenses=

Qualified Expenses: required surgery “not elective”, prescription drugs, disabled costs (deduct full amount), transport to medical facility
Nonqualified: Health clubs, personal stuff, life insurance

Question 5

State, Local, Foreign Taxes

Answer 5

Qualified deductible: Estimated taxes, withheld taxes, state taxes, sales taxes
Nonqualified: Federal taxes, inheritance taxes for states, and business (schedule c) and rental property taxes (schedule E)
Note: Individuals are cash-basis and take deduction in year paid or charged

Question 6

Interest expense

Answer 6

Qualified:
-Home interest on first $1mil. of first or second house.
-Investment interest (interest and dividends, rents, royalties, long term and short term gains) but dividend income if used as limitation of interest expense is 15% tax rate
Note: Interest on bonds is not deductible, personal interest like bank account of auto loan not deductible
-Prepaid interest is taxed as incurred
Note: Education loan interest is adjustment, not itemized