Unit 12 - Standard Deduction & Itemized Deductions Flashcards

1
Q

“Peace limitation” on itemized deductions

A

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

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2
Q

The standard deduction – what is it?

A

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

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3
Q

MFS or Single standard deduction

A

$13,850

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4
Q

HOH standard deduction

A

$20,800

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5
Q

MFJ or QSS standard deduction

A

$27,700

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6
Q

Dependent standard deduction

A

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

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7
Q

Additional standard deduction

A

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

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8
Q

Determining if a taxpayer is 65 or blind

A

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°

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9
Q

Calculating the standard deduction for a deceased taxpayer

A

If a taxpayer dies before their 65th birthday, the higher standard deduction for being 65 does not apply

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10
Q

If a child cannot sign a tax return, how does the parent sign?

A

By (parents signature), parent for minor child

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11
Q

Who is required to itemize deductions?

A

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

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12
Q

Where are itemized deductions reported?

A

On schedule a – form 1040

Nonresident aliens can claim a limited amount of itemized deductions on schedule a

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13
Q

Itemizing, medical and dental expenses

What types of expenses qualify?

A

This is NOT than self-employed health insurance premiums

The IRS defined qualifying cost as :

  1. Medically, necessary, equipment, supplies, and diagnostic devices.
  2. Dental and vision care.
  3. Transportation to obtain medical care.
  4. Qualified health insurance and long-term care insurance.
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14
Q

Qualified medical expenses

Which expenses can you deduct?

Who qualifies

A

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

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15
Q

Itemizing, medical expenses, divorced, or separated, parents

A

It does not matter which parent claim the child – the medical expenses are deductible for the parent who pays them

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16
Q

Medical expenses paid for a dependent parent

A

Taxpayer can deduct medical expenses paid for a dependent parent – does not have to live with a taxpayer to qualify

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17
Q

Calculating the medical expense, itemized deduction

A

Taxpayers can deduct only the amount of unreimbursed medical expenses that exceed 7.5% of adjusted gross income

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18
Q

Qualifying medical expenses – medical insurance

A

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

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19
Q

Qualifying medical expenses – long-term care premiums

What qualifies?

Deduction limits

A

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

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20
Q

Medical expenses of deceased taxpayers

A

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

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21
Q

Medical expenses – cosmetic surgery

A

Only deductible if it is used to correct a defect or disease

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22
Q

Qualified medical expenses – transportation, meals, and lodging

A

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

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23
Q

Capital improvements for medical reasons

A

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

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24
Q

SALT

A

State and local income taxes

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25
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 1. State, local, and foreign income taxes. 2. State and local sales taxes. 3. Real estate taxes – but not for foreign real estate. 4. Personal property taxes – such as the portion of DMV fees based on the value of the car.
26
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
27
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
28
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
29
Personal property taxes are deductible if they are
1. Charged on personal property, including cars, motorcycles, and boats. 2. Based on the value of the property, and. 3. Charged on a yearly basis – even if collected more than once a year.
30
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
31
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
32
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
33
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
34
Mortgage late fees, and prepayment penalties
Deductible as mortgage interest on schedule a
35
Mortgage insurance premiums – PMI
The itemized deduction for mortgage insurance premiums has expired – can no longer claim the deduction for 2023 and going forward
36
Form 1098
Mortgage interest statement Received by the bank or financial institution showing Mortgage interest Property taxes paid Points paid PMI Principal balance
37
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: 1. The mortgage must be secured by the taxpayers main home and the mortgage must’ve been used to buy build or improve the home 2. The points must not be an excessive or unusual amount. 3. The points paid must not be more than the amount of un borrowed funds. 4. The points must be computed as a percentage of the loan principle – and they must be listed on the settlement statement (the HUD-1)
38
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.
39
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
40
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
41
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
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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
43
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
44
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
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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
46
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
47
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
48
Charitable contributions – non-qualifying organizations and gifts
1. Civic leagues, social and sports clubs, and chambers of commerce 2. Political groups, candidates, or political organizations. 3. Homeowners associations. 4. Donations made directly to individuals. 5. The cost of raffle, bingo, or lottery tickets. 6. Dues paid to country clubs or similar groups. 7. Dues to labor unions. 8. Blood donated to a blood bank – but mileage incurred to donate may be deductible 9. Any part of a contribution that benefits the taxpayer, such as the FMV of a meal Eaton at a charity dinner.
49
Charity deduction – charity auction
Items purchased at a charity auction – amount deductible is the price paid over its fair market value
50
Recordkeeping rules for charitable gifts
1. 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. 2. For single contributions of $250 or more, the donor must obtain a written receipt from the charity before claiming a charitable deduction.
51
Cash contributions include those paid by
Cash Check Debit card Credit card Payroll deduction
52
Cash donations of less than $250 – record requirement
Must keep a reliable written record of 1. a bank or credit card statement that shows the name of the qualified organization, the date, and the amount 2. A receipt from the qualified organization, showing its name, the date, and the amount. 3. For payroll deductions – a paystub or form W – 2+ a pledge card or other document showing the name of the qualified organization. 4. 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
53
Cash donations of $250 or more – record requirements
Donor must have a receipt or a written acknowledgment from the organization that includes: 1. Amount of cash contributed. 2. Date of the contribution. 3. Whether the qualified organization gave any goods or services as a result of the contribution. (other than certain token items, and membership benefits.) 4. 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
54
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
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Rules for non-cash donations between $250 and $500
1. Obtain a receipt from the receiving organization and keep a list of items donated. 2. Organizations written acknowledgment must definitively state whether the taxpayer received any goods or services and return. 3. The statement must also include a description and a good faith estimate of the fair market value of any such items.
56
Rules for non-cash donations over $500
1. Obtain a receipt from the receiving organization and keep a list of items donated. 2. Organizations written acknowledgment must definitively state whether the taxpayer received any goods or services and return. 3. 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
57
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
58
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
59
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
60
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.
61
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
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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
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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
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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
65
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
66
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
67
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
68
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 1. Medical expenses. Or 2. 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
69
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
70
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
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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