R1 M5 - Itemized Deduction Flashcards
How to calculate allowable medical expense deduction ?
Doctor bill $2,000
Surgery $10,000
——————–
Total $12,000
AGI floor (50,000 x 7.5%) ($3,750)
——————-
Deduction $8,250
List of itemized Deduction on Schedule A:
SIMPLE DOGMATE
S - STATE, LOCAL & FOREIGN TAXES
I - INCOME TAXES (STATE, LOCAL & FOREIGN TAXES)
M - MORTGAGE INTEREST
P - PERSONAL PROPERTY TAXES (STATE & LOCAL TAXES)
L - REAL ESTATE TAXES (STATE & LOCAL TAXES) on personal residence
E - SALES TAX (YOU HAVE TO CHOSE BTN ITEMIZING SALES TAX OR STATE & LOCAL INCOME TAXES)
D - DISASTER LOSS (CASUALTY & THEFT LOSS)
G - GIFT TO CHARITIES ( CHARITABLE CONTRIBUTION
M - MEDICAL EXPENSE
Nondeductible Taxes
The following taxes are not deductible as itemized deduction on schedule A:
FBI
Federal Taxes (incl Social security)
Business (on schedule C) and rental property taxes (on schedule E)
Inheritance taxes for states
Investment interest expense is an itemized deduction limited to net investment income. Taxable interest is included in net investment income. Rental income and tax exempt interest (municipal bond income) are not. U.S Treasury bond interest is a taxable interest.
Pat, a single taxpayer, has adjusted gross income of $30,000 in the current year. During the year, a hurricane causes $3,100 damage to Pat’s personal use car on which Pat has no insurance. Pat resides in a federally declared disaster area. Pat purchased the car for $20,000. Immediately before the hurricane, the car’s fair market value was $11,000 and immediately after the hurricane its fair market value was $6,900. What amount should Pat deduct as a casualty loss for the current year after all threshold limitations are applied?
A. $3,100
B. $100
C. $4,000
D. $0
Explanation
Choice “D” is correct. The calculation starts with the lesser of adjusted basis or decrease in FMV. That is $3,100. This amount is then reduced by $3,000 (10% of AGI) and the $100 per casualty. The result is zero ($3,100 – $3,000 – $100).
Choice “A” is incorrect. $4,100 is the starting point of the calculation. It is before the 10% of AGI and $100 reductions.
Choice “B” is incorrect. $100 is merely the amount of the reduction per casualty.
Choice “C” is incorrect. $4,000 is the amount after the $100 reduction but before the 10% of AGI reduction.
Itemized Deduction are referred to as from AGI and are reported on Schedule A of an individual taxpayer’s FORM 1040.
SIMPLE DOGMATE
S- State and Local taxes
I- Income taxes (state & local taxes)
M- Mortgage Interest
P- Personal property taxes ( State & local taxes)
L- Real estate taxes ( state & local taxes)
E- Sales Taxes
D- Disaster loss (casualty & theft loss)
G- Gifts to charities (charitable contribution)
M- Medical & Dental expenses
During the year, the Andradis, who were both under age 65, paid the following expenses:
Unreimbursed costs for prescription drugs required for their dependent daughter’s medical condition
$1,300
Mrs. Andradi’s face lift (to improve personal appearance)
$4,000
Physical therapy for their dependent son’s soccer injury
$3,000
Massage therapy fees at Mr. Andradi’s health club obtained because he enjoys massages
$500
The Andradis’ adjusted gross income for the current year was $65,000, and the current year percentage of adjusted gross income floor is 7.5 percent. What amount could be claimed on the Andradis’ current year tax return for medical expenses?
A. $4,300
B. $4,875
C. $1,300
D. $0
Choice “D” is correct. Deductible medical expenses are limited to the amount that exceeds 7.5 percent of the taxpayer’s adjusted gross income (AGI). Deductible medical expenses are those expenses that are “necessary” (such as doctors, prescriptions, required surgery, etc.). Nondeductible expenses are such things as elective surgeries, health club memberships, and unnecessary medical expenditures. The Andradis’ AGI is $65,000; 7.5 percent of that is $4,875. Qualified medical expenses are $1,300 for their daughter’s prescriptions and $3,000 for physical therapy for their son. Total allowable gross expenditures of $4,300 are less than the AGI floor of $4,875. So the answer is zero.
Choice “B” is correct. The $4,000 cash contribution to the church is deductible. Relative to the purchase of the art object at the church bazaar, only the excess paid over fair market value ($1,200 - $800 = $400) is deductible. The used clothing donation to the Salvation Army is deductible at its fair market value of $600. The total deduction is $5,000 ($4,000 + $400 + $600). The contributions are also well below the appropriate thresholds of 60 percent for the $4,400 cash contributions and 50 percent for the $600 donation of used clothing (ordinary income property).
Upon the recommendation of a physician, Mark, age 40, has an air filtration system installed in his personal residence. He suffers from severe allergy problems. In connection with this matter, Mark incurs and pays the following amounts during the current year:
Filtration system and cost of installation. 7,000
Increase in utility bills due to the system. 700
Cost of certified appraisal. 350
The system has an estimated useful life of five years. The appraisal was to determine the value of Mark’s residence with and without the system. The appraisal states that the system increased the value of Mark’s residence by $1,000. Expenses qualifying for the medical deduction in the current year total:
A. $7,350
B. $7,700
C. $6,700
D. $8,050
Choice “B” is correct. Medical expenses include physical therapy (professional medical services) and insurance premiums providing reimbursement for medical care. Prescription drugs are considered medical care. Insurance against loss of income is not payment for medical care and therefore is not deductible. Qualified medical expenses must be reduced by insurance reimbursement ($2,000 + $500 - $1,500 = $1,000).
