Unit 12 - Standard Deduction & Itemized Deductions Flashcards
“Peace limitation” on itemized deductions
Prevented higher income taxpayers from significantly reducing their taxable income by itemizing
Itemize deductions were subject to income limits and phased out
The TCJA (tax cuts and jobs act) Temporarily removed this through 2025
The standard deduction – what is it?
A specific dollar amount that reduces the amount of income which taxpayer is taxed
Based on a taxpayers filing status
Adjusted every year for inflation
MFS or Single standard deduction
$13,850
HOH standard deduction
$20,800
MFJ or QSS standard deduction
$27,700
Dependent standard deduction
Limited to the greater of
$1250 or
Their earned income plus $400
But the total can’t be more than the basic standard deduction for their filing status
It can be higher if 65 or older and or blind
Additional standard deduction
Available to taxpayers who, at the end of the year, are:
65 or older
And/or
Blind or partially blind
$1500 higher for MFJ, MFS, QSS
$1850 higher for single and HOH
Determining if a taxpayer is 65 or blind
Need to turn 65 by January 1
If the taxpayer is considered blind on the last day of the year, they can take the deduction
Must obtain a statement from an eye doctor stating that their vision cannot be corrected to better than 20/200 with eyeglasses
Or that their peripheral vision is limited to 20°
Calculating the standard deduction for a deceased taxpayer
If a taxpayer dies before their 65th birthday, the higher standard deduction for being 65 does not apply
If a child cannot sign a tax return, how does the parent sign?
By (parents signature), parent for minor child
Who is required to itemize deductions?
MFS filers, whose spouses itemize (only when both spouses are MFS)
Nonresident aliens
Short tax year – taxpayer files, a tax return for a period of less than 12 months due to a change in accounting methods
Where are itemized deductions reported?
On schedule a – form 1040
Nonresident aliens can claim a limited amount of itemized deductions on schedule a
Itemizing, medical and dental expenses
What types of expenses qualify?
This is NOT than self-employed health insurance premiums
The IRS defined qualifying cost as :
- Medically, necessary, equipment, supplies, and diagnostic devices.
- Dental and vision care.
- Transportation to obtain medical care.
- Qualified health insurance and long-term care insurance.
Qualified medical expenses
Which expenses can you deduct?
Who qualifies
Fees, paid to doctors, inpatient hospital, care, or nursing home services
Treatment centers for alcohol and drug addiction or smoking cessation programs
Insulin and prescription drugs – but not ones shipped from a different country
Admission, transportation to a medical conference related to a chronic disease
Vet care when it relates to the care of animals trained to assist a person
Taxpayer can only deduct medical expenses they paid during the year, regardless of when the services were provided
For taxpayer, spouse, and their dependents
Including an adopted child, even before the adoption becomes final
Itemizing, medical expenses, divorced, or separated, parents
It does not matter which parent claim the child – the medical expenses are deductible for the parent who pays them
Medical expenses paid for a dependent parent
Taxpayer can deduct medical expenses paid for a dependent parent – does not have to live with a taxpayer to qualify
Calculating the medical expense, itemized deduction
Taxpayers can deduct only the amount of unreimbursed medical expenses that exceed 7.5% of adjusted gross income
Qualifying medical expenses – medical insurance
Only insurance premiums paid with after tax dollars for medical and long-term care. Insurance can be considered as qualifying medical expense.
Cannot deduct any insurance reimbursement amounts
Qualifying medical expenses – long-term care premiums
What qualifies?
Deduction limits
Taxpayer may include a amount paid for qualified, long-term care, services, and insurance premiums in his medical expense deductions
The expenses generally cannot include cost that would be reimbursed under Medicare
The deductibility of premiums is limited by the age of the taxpayer
The limits are per person, not per tax return
40 or less – $480
41 to 50– $890
51 to 60– $1790
61 to 70– $4770
71 or more – $5960
Medical expenses of deceased taxpayers
Taxpayers executor can elect to treat medical expenses paid by the estate within one year after the death, as if the taxpayer had paid when the medical services were provided
Instead of when they were paid
Medical expenses – cosmetic surgery
Only deductible if it is used to correct a defect or disease
Qualified medical expenses – transportation, meals, and lodging
Standard mileage rate for medical expenses is $.22 per mile
Can deduct the cost of taxis, buses, trains, planes, or ambulances, as well as tolls and parking fees
Can deduct the cost of meals and lodging at or similar institution. If the principal reason for being there is to receive medical care.
For lodging more than $50 for each person can include lodging for a person traveling with – up to $100
Meals outside of the hospital are not deductible
Capital improvements for medical reasons
Home improvements with a main purpose to provide medical care to a taxpayer or family member
Qualifying expenses include wheelchair, ramps, lowering of kitchen cabinets, railings, and Support bars, elevators, special lift equipment
Tenants/renters can deduct the entire cost of disability related improvements – even if they are not the owners of the property
The amount that can be deducted is limited to the difference between the cost of the improvements and the corresponding rise in the homes FMV
SALT
State and local income taxes
SALT deductible taxes
In order to be deductible, a tax must have been imposed and paid by the taxpayer during the tax year
Deductible taxes include
- State, local, and foreign income taxes.
- State and local sales taxes.
- Real estate taxes – but not for foreign real estate.
- Personal property taxes – such as the portion of DMV fees based on the value of the car.
SALT deduction limits
The tax cuts and jobs act put a temporary cap on state and local taxes
This deduction is capped at $10,000 or $5000 for MFS files until 2025
The cap amount applies to the total of all state and local income, taxes, real estate, taxes, personal property, taxes, and foreign income taxes
State and local taxes – what qualifies
Taxpayers can deduct either sales/use taxes or state and local income taxes – depending on which provides the larger deduction
Cannot deduct both
Income taxes, paid include taxes, withheld from salaries and wages, amounts paid for prior years, and estimated tax payments
Real estate taxes
What is deductible?
What is not deductible?
Property taxes are deductible
Taxes paid from a mortgage escrow account – the taxpayer can deduct only the amount actually paid out of the escrow during the year
Cannot deduct taxes imposed to finance improvements of property – such as assessments for streets, sidewalks, and sewer lines
Cannot deduct homeowners association fees
Cannot deduct real estate taxes paid on foreign real property
Personal property taxes are deductible if they are
- Charged on personal property, including cars, motorcycles, and boats.
- Based on the value of the property, and.
- Charged on a yearly basis – even if collected more than once a year.
Foreign income taxes
Not subject to the SALT cap
Listed online six of schedule a, under other taxes
Example – US citizen works overseas and has wages and pays foreign income tax
Generally, taxpayer can choose between claiming the foreign tax credit or claiming an itemized deduction on schedule a for income taxes paid to a foreign country
Deductible interest
Taxpayers can deduct certain types of interest, including
Home mortgage interest
Late fees on a mortgage loan
Points on a mortgage loan
Investment interest expense
Home mortgage interest
What’s deductible?
Any limits?
Taxpayer can deduct mortgage interest related to a primary residence and a second home
Loan must be secured by the taxpayers home
Can be a mortgage, second mortgage, home equity loan, or a line of credit
Interest paid is only tax deductible. If the proceeds from the the loan were used to acquire, build, or significantly enhance the home.
Full deduction allowed if the total mortgage debt does not exceed $750,000 or $375,000 for MFS
Home mortgage interest – vacant land
A vacant piece of land is not eligible for the mortgage interest deduction
If taxpayer construct a house that meets the requirements – can deduct mortgage interest for a period of up to 24 months from when construction begins
Can treat the home under construction as a qualified home once the construction has started
Mortgage late fees, and prepayment penalties
Deductible as mortgage interest on schedule a
Mortgage insurance premiums – PMI
The itemized deduction for mortgage insurance premiums has expired – can no longer claim the deduction for 2023 and going forward
Form 1098
Mortgage interest statement
Received by the bank or financial institution showing
Mortgage interest
Property taxes paid
Points paid
PMI
Principal balance
Points and prepaid mortgage interest
Requirements to deduct
Points are interest charges. A borrower pays upfront to obtain a loan.
Basically pay at closing to obtain a lower interest rate
In order to deduct points, the following requirements must be met:
- The mortgage must be secured by the taxpayers main home and the mortgage must’ve been used to buy build or improve the home
- The points must not be an excessive or unusual amount.
- The points paid must not be more than the amount of un borrowed funds.
- The points must be computed as a percentage of the loan principle – and they must be listed on the settlement statement (the HUD-1)
How are mortgage points deducted?
Taxpayer can deduct points either in the year paid or over the life of the loan
Points paid to refinance. A mortgage are not fully deductible in the year paid – must be deducted over the life of the loan
unless the proceeds are used to improve a main home. Second vacation home would not qualify.
Investment interest expense
Any interest paid on loans used to purchase taxable investments?
Example – margin interest – investors borrow funds from brokerage houses to purchase stocks and bonds without needing to fully invest the cash amount
Deduction amount is limited to the net investment income earned in a given year
The deductible amount and any disallowed amount that will carry forward is calculated on form 4952, investment interest expense, deduction
Unused portion can be carried over to the following year
Cannot deduct interest related to passive activities or tax exempt interest income
Charity / Donations
Contribution limits
Cash contributions up to 60% of AGI
A property contribution (any non-cash donation) maybe limited to 50%, 30%, or 20% of AGI
Depending on the type of property donated in the type of organization, the donor gives it to
Charitable contributions cannot generate a net operating loss – excess maybe carried over and deducted over a five year. Period.
Carryovers are subject to the same percentage limits
Charitable contributions - 60% limit
What types of organizations?
Limit applies to cash contributions to a public charity - 501(c)3 organizations
These are called “qualified cash contributions”
Includes …
Churches, mosques, synagogues and similar religious organizations
Hospitals and most schools and colleges
State or federal government entities
Nonprofits organized, solely for charitable, religious, educational, scientific, or literary purposes or for the prevention of cruelty to children or animals
Organizations that foster youth sports or national or international amateur sports competitions
Charitable contributions - 50% limit
Applies to most non-cash contributions to public charities
Includes furniture, clothing, and housewares
Applies to gifts of inventory and depreciable property, such as machinery and vehicles
& conservation easements
Charitable contributions - 30% limit
Applies to donations of most appreciated capital gain property
Property would have resulted in a long-term gain if sold instead of donated
Can claim as a deduction
Examples include stock cryptocurrency, land, or other real estate that has appreciated and value
The 30% limit applies to organizations that include the following :
certain private non-operating foundations
Veterans organizations and fraternal benefits societies
Nonprofit cemeteries
Gifts for use by the charitable organization – donation of a vehicle
Gifts of appreciated capital gain property
Charitable contributions - 20% limit
Apply specifically to gifts of appreciated capital gain property to most private non-operating foundations and certain other non-public charities
Applies to contributions of capital gain property to organizations subject to the 30% limit
Qualified charitable gifts – deductible contributions may include these expenses
Unreimbursed expenses that relate directly to the services, the taxpayer provided for the organization
The amount of a contribution in excess of the FMV items received
Transportation expenses or a standard mileage deduction of $.14 per mile
Charitable gifts – volunteer expenses
Volunteer hours cannot be assigned and monetary value – cannot be deducted
Can deduct out-of-pocket expenses
Can deduct expenses incurred while traveling to perform services
QCD’s
Qualified charitable distributions
Donors age 70 1/2 or older made donate up to $100,000 per tax year directly from a traditional IRA
Taxpayer can choose to make a QCD in lieu of taking an annual required minimum distribution (RMD) from their IRA
The amount of the distribution will not be included in taxable income – taxpayer will not be able to claim a charitable deduction for the amounts given via the QCD
Charitable contributions – non-qualifying organizations and gifts
- Civic leagues, social and sports clubs, and chambers of commerce
- Political groups, candidates, or political organizations.
- Homeowners associations.
- Donations made directly to individuals.
- The cost of raffle, bingo, or lottery tickets.
- Dues paid to country clubs or similar groups.
- Dues to labor unions.
- Blood donated to a blood bank – but mileage incurred to donate may be deductible
- Any part of a contribution that benefits the taxpayer, such as the FMV of a meal Eaton at a charity dinner.
Charity deduction – charity auction
Items purchased at a charity auction – amount deductible is the price paid over its fair market value
Recordkeeping rules for charitable gifts
- At a minimum, must have at least a bank record or a written receipt from a charity for any cash contribution before the donor can claim a charitable deduction.
- For single contributions of $250 or more, the donor must obtain a written receipt from the charity before claiming a charitable deduction.
Cash contributions include those paid by
Cash
Check
Debit card
Credit card
Payroll deduction
Cash donations of less than $250 – record requirement
Must keep a reliable written record of
- a bank or credit card statement that shows the name of the qualified organization, the date, and the amount
- A receipt from the qualified organization, showing its name, the date, and the amount.
- For payroll deductions – a paystub or form W – 2+ a pledge card or other document showing the name of the qualified organization.
- Text donations, a telephone bill, as long as it shows the name of the qualified organization, the date, and the amount given.
Nothing is attached to the tax return, but must retain copies to substantiate the contributions if ever audited
Cash donations of $250 or more – record requirements
Donor must have a receipt or a written acknowledgment from the organization that includes:
- Amount of cash contributed.
- Date of the contribution.
- Whether the qualified organization gave any goods or services as a result of the contribution. (other than certain token items, and membership benefits.)
- If applicable, a description and a good faith estimate of the value of goods or services provided by the organization as a result of the contribution.
Single annual statement from the charitable organization works. Commonly called donor acknowledgment letters.
No specific IRS form for the acknowledgment
Rules for non-cash contributions of less than $250
For each non-contribution of less than $250…
Taxpayer must obtain a receipt from the receiving organization
And keep a list of the items donated
Rules for non-cash donations between $250 and $500
- Obtain a receipt from the receiving organization and keep a list of items donated.
- Organizations written acknowledgment must definitively state whether the taxpayer received any goods or services and return.
- The statement must also include a description and a good faith estimate of the fair market value of any such items.
Rules for non-cash donations over $500
- Obtain a receipt from the receiving organization and keep a list of items donated.
- Organizations written acknowledgment must definitively state whether the taxpayer received any goods or services and return.
- The statement must also include a description and a good faith estimate of the fair market value of any such items.
Also need to keep records like other Noncash contributions less than $500
Rules for non-cash donations over $5000
A qualified appraiser is required to make a written appraisal of the donated property
Must complete form 8283, section B, and attached the form to the tax return
Don’t need to submit the appraisal, but must retain a copy for records unless…
Donating artwork valued at more than $20,000 or other property valued at more than $500,000 – the appraisal must be submitted along with the tax return
Must also comply with other record-keeping requirements and attached form 8283
Special rules for donated vehicles
What amount is deductible?
Form provided by the charitable organization
If the donor claims a deduction over $500 they can only deduct the smaller of…
Total earnings from the charities sale of the vehicle
Or
The FMV of the vehicle on the donation date
The charitable organization should provide for 1098 – C, contributions of motor vehicles, boats, and airplanes
The form shows the proceeds from the sale of the vehicle donated
If taxpayer does not attach form 1098 – C to the tax return, the maximum deduction that can be taken for the donation is $500
Donated vehicles – exceptions to the rules
If Charity keeps the vehicle for its own use
Or if charity gives the vehicle directly to a needy person
Donor can deduct FMV of the vehicle
Requires taxpayer to receive written acknowledgment that the charity kept the vehicle for its own use or gave to someone needy
Deduction is subject to a 30% of AGI limit
Still required to attach form 8283 to the return
Charitable gifts – special rules for conservation easements
Conservation easements are used for land conservation purposes by restricting the future use of the land in order to protect its conservation values
Charitable deduction limited to 50% of AGI – not 30%
Can be as high as 100% for qualified farmers or ranchers
Carry forward. For a conservation agreement is 15 years rather than the usual five years.
Personal casualty and theft losses
What is deductible and how do you claim the deduction?
The TC JA, suspended itemized deductions for most non-business casualty and theft losses through tax year 2025
Only personal losses from federally declared disaster areas are deductible
Taxpayer can deduct their losses for the year in which the losses occurred or if elected in the year prior to the year of the loss – allowing them to recoup cost immediately and not have to wait for tax year to be up
IRS deems the disaster year to be the year when certain the reimbursement amount of insurance company
Calculating the casualty loss deduction
The lesser of
The decrease in the fair market value of the property – before and after the casualty event
Or
The taxpayers adjusted basis in the property at the time of the casualty event
Casualty losses of investment property are treated differently
The amortizable premium on taxable bonds
If the amount of taxpayer pays for a bond is greater than its stated principle amount – the excess is called a bond premium
Annual amortization of the premium is treated as a miscellaneous itemized deduction
Casualty or theft losses from investment property or income producing property
Taxpayer can deduct the loss as a miscellaneous itemized deduction if the damaged or stolen property was income producing property
Meaning property held for investment such as gold coins, silver coins, artwork, and vacant lots
Taxpayer must report the loss on 4684, casualties and theft, section B
Losses from Ponzi investment schemes
Victims of fraudulent investment schemes can claim a theft loss deduction if certain conditions apply
Can deduct Ponzi losses as a theft loss, instead of a capital loss from an investment
Not limited to the $3000 annual limit that applies to other capital losses
Ponzi scheme losses may be offset against ordinary income with no limit
Losses are deducted, section, theft, loss, deduction for Ponzi type investment scheme
Federal estate tax on income in respect of a decedent (IRD)
Income in respect of a decedent (IRD) - is money owed to a decedent at the time of death
If a decedents estate paid federal estate taxes on IRD assets – beneficiary may be able to claim an IRD tax deduction
Gambling losses
Gambling losses are deducted on schedule a – up to the total amount of gambling winnings
Must keep a written record of losses
Gambling losses in excess of winnings are not deductible and cannot carry forward
Impairment related work expenses for disabled workers
Expenses that enable a disabled person to work
Disabled taxpayer would be able to deduct these expenses either as
- Medical expenses.
Or
- Miscellaneous itemized deductions.
Taxpayer can choose the method that will give them the best tax result
Fully deductible without income limitations as a miscellaneous itemized deduction
Repayments of more than $3000 under a claim of right
Claim of right occurs when a taxpayer reports income in one year, but then must repay that income back in a future tax year
Example – taxpayer has to repay unemployment, benefits, or wages. They received an a prior year.
If amount of repayment is more than $3000 – taxpayer can elect to take a deduction or credit in the year the amounts are repaid
If less than $3000 - does not apply
Excess deductions of an estate or trust
If, and it’s final tax year, and estate or trust has more deductions than gross income – the beneficiary can claim the excess deductions on their individual tax return
Depending on the type of deduction
The excess deductions are listed on the schedule K-1 form used to report the deductions on their personal form 1040
The character of the deductions remains unchanged, and they are reported as adjustments to gross income on schedule, one or itemized deductions on schedule a
Non-resident aliens, itemized deductions
Nonresident aliens cannot take the standard deduction and they are limited on what they can itemize
The following itemized deductions are allowed:
State and local income taxes
Qualifying charitable contributions to US nonprofit organizations
Casualty and theft losses in a presidentially declared disaster area
Some miscellaneous itemized deductions
