R1 Individuals- M5 - Itemized Deductions Flashcards
1 Standard Deductions 2 Itemized Deductions: Medical Expenses 3 Itemized Deductions: Taxes and Losses 4 Itemized Deductions: Interest Expense 5 Itemized Deductions: Charitable Contributions 6 Reviewing Discrepancies Identified by Diagnostics
Standard Deductions
S and MFS- $ 14,600
MFJ- $ 29,200
HH- $ 21,900 (75% of MFJ)
Addtl deduction for 65 y.o and older or LEGALLY Blind by the END OF THE TAX YEAR - $ 1,550 per tax payer
Medical expenses as Itemized deductions
Subject to AGI Floor of 7.5%, any excess over this rate is allowable itemized deduction.
Deductions can be
- Claimed for Medicare insurance Parts B Premium payments
- Allowed for payments made in the current year for medical services received in earlier years.
- It can also be for the benefits of family not the TP, for son, wife
- Expenses paid for the medical care of a decedent by the decedent’s spouse are included as medical expenses in the year paid, whether they are paid before or after the decedent’s death.
- For credit card, when the charge was made regardless of when it was paid to the CC Company
- For prescription drugs only
- PREMIUMS Paid for Health Insurance
NOT ALLOWED FOR THE FF:
- Social Security taxes that entitle a taxpayer to basic Medicare Part A coverage do not qualify as deductible medical insurance premiums.
- Not allowed for Vitamins and supplements
- Insurance against loss of income is not payment for medical care and therefore is not deductible. Life Insurance not allowed
Charitable contributions as Itemized deductions
Cash- actual or 60% of AGI , whichever is lower. Any excess amount can be Carried forward for 5 years!
The comparison of whichever is lower between 60% of AGI, is compared to cumulative total contribution not only to the Current year contribution.. so CY cash contribution+ Carryover from last year= X. X is used to compare with 60% of AGI Limit.
Property/ Stock- held for > 1 year is a Capital Gain Property
FMV or 30% of AGI , whichever is lower. 30%
Property/ Stock- held for < 1 year is an Ordinary Income Property
Adjusted basis or FMV at the time of Donation, whichever is LOWER
Then vs. 50% of AGI whichever is LOWER
Personal use asset that has depreciated in value, is considered Ordinary Income Property and is subject to above rule.
Always check donee if qualified charity
Qualified charitable organizations include charities, philanthropic groups, certain religious and educational organizations, nonprofit veterans’ organizations, fraternal lodge groups, and cemetery and burial companies. Certain legal corporations can also qualify.
LOCAL ART MUSEUM and State Universities are qualified charitable organization
Made to Political party or Foreign Charity not DEDUCTIBLE
State and Local Taxes as Itemized deduction
Max deduction- $ 10,000
Deductible on the year it was PAID.
For
1. Property
2. Income- amount withheld from Paycheck
3. Sales
4. Even Personal property tax for Personal automobile
State and local income taxes withheld from a cash-basis taxpayer are DEDUCTIBLE IN THE YEAR WITHHELD
This includes estimated income taxes paid by the end of the year
Not Deductible
F- ederal
I- nheritance
B- usiness and rental property taxes because they are ordinary expense deducted from ordinary income which is part of Gross Income
WHEN are LOSSES on transactions entered into for PERSONAL purposes are deductible only?
When they qualify as Casualty or Theft Losses which happen on Federally Declared Disaster Area
CASUALTY LOSSES
Adjusted Basis before casualty- Value after casualty- Insurance recovery- $ 100/ casualty - 10% of AGI = Casualty loss
LESSER OF DECREASE IN FMV or NEW ADJUSTED BASIS
Your adjusted basis is generally your cost in acquiring your home plus the cost of any capital improvements you made, less casualty loss amounts and other decreases.J
Loss should not exceed the Adjusted Basis of the Property
SAMPLE MCQ:
During the current year, Wood’s residence had an adjusted basis of $150,000 and it was destroyed by a tornado. The location was a federally declared disaster area. An appraiser valued the decline in market value at $175,000. Later in the current year, Wood received $130,000 from his insurance company for the property loss and did not elect to deduct the casualty loss in an earlier year. Wood’s current year adjusted gross income was $60,000 and he did not have any casualty gains.
Gambling Losses- is it an Adjustment to GI or Itemized deduction?
Gambling losses are miscellaneous itemized deductions. The deduction for gambling losses are, however, limited to gambling winnings.
Interest Expense as Itemized deductions
- Home Mortgage- max of $ 750k mortgage 1st and 2nd home which does not include commercial rental property
- Investment Interest expense- limited to NET Taxable INVESTMENT income, Indefinite carryforward until the investment is disposed)
Noninterest investment expenses are not deductible
Tax free bond investment interest never deductible
- Personal Interest- Credit card interest for personal expenses
- Prepaid Interest- allocated over the period of incurrence
- Educational loan interest- adjustment to AGI not Itemized deduction
Investment Interest expense EXAMPLE
An individual taxpayer reports the following information:
U.S. Treasury bond income $100
Municipal bond income $200
Rental income from apartment building $500
Investment interest expense $1,000
What amount of investment interest can the taxpayer deduct in the current year?
A. $1,000 B. $100 C. $300 D. $800
$ 100 ONLY THE US TREASURY BOND INCOME
Municipal Bond income is Non Taxable. Reportable but excludable as adjustment
Rental income goes to Schedule E
Only Taxable Interest income is included in Net Taxable Income
Qualified Residence Interest as itemized deduction
Qualified residence interest is
- Interest incurred from buying, building, or improving your qualified residence
- Home equity loans on that residence
Acquisition indebtedness is debt that’s incurred to acquire, build or substantially improve a qualified residence, and is secured by that residence.
Home equity indebtedness is debt that’s incurred for any other purpose (such as buying a boat or paying off credit cards) and is secured by a qualified residence.
If it is home equity indebtedness, the proceeds of the loan must be used to substantially improve the home and are subject to an overall loan amount of $750,000 including any acquisition indebtedness.
You can deduct interest from up to two qualified residences: your primary home and one other vacation home or similar property.
Charitable Contributions example for Property held less than a year
Jimet, an unmarried taxpayer, qualified to itemize deductions. Jimet’s adjusted gross income was $30,000 and he made a $2,000 cash donation directly to a needy family. During the year, Jimet also donated stock, valued at $3,000, to his church. Jimet had purchased the stock four months earlier for $1,500. What was the maximum amount of the charitable contribution allowable as an itemized deduction of Jimet’s current year income tax return?
A. $5,000 B. $0 C. $1,500 D. $2,000
Choice “C” is correct. $1,500. The stock is ordinary income property because it was held for one year or less, so the amount of the deduction for the stock is the lesser of the adjusted basis ($1,500) or the fair market value at the time it was contributed ($3,000), which is $1,500.
The contribution of ordinary income property to public charities is limited to 50% of AGI ($30,000 AGI × 50% = $15,000). The $1,500 deduction is less than the $15,000 AGI limitation, so the deduction is not limited.
Charitable contributions Nuance
A charitable contribution is NOT ALLOWED for the value of services rendered to a charity. WHY BECAUSE ITS HARD TO QUANTIFY IT!
Allowed for charitable transportation when a taxpayer uses his or her own PERSONAL VEHICLE and charge mileage
A contemporaneous written acknowledgement is required for donations of $250 or more.
A qualified appraisal for real property donations is REQUIRED to be attached to the tax return WHEN the property value is more than $ 5,000
Taxation of Social Security benefits
The maximum amount of taxable Social Security benefits is 85% of Social Security benefits received.
Depending on a taxpayer’s level of modified AGI (AGI plus tax-exempt interest plus 50% of Social Security benefits), a taxpayer may include 0% to 85% of Social Security benefits received in gross income.
Taxpayers must include in income the lesser of 50% (or 85%, depending on income) of Social Security received or 50% (or 85%, depending on income) of the excess modified AGI over a threshold amount.
85% of Social Security benefits received is the maximum amount that is includable in gross income.
