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Chapter 7

Chapter 7. Itemized Deductions. Learning Objectives. Identify qualified medical expenses and compute the medical expense deduction Determine the timing of a medical expense deduction and the effect of a reimbursement Identify taxes that are deductible as itemized deductions.

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Chapter 7

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  1. Chapter 7 Itemized Deductions

  2. Learning Objectives • Identify qualified medical expenses and compute the medical expense deduction • Determine the timing of a medical expense deduction and the effect of a reimbursement • Identify taxes that are deductible as itemized deductions

  3. Learning Objectives • Identify different types of interest deductions • Compute the amount of investment interest deduction • Compute the deduction for qualified residence interest

  4. Learning Objectives • Compute the amount of a charitable contribution deduction and identify limitations • Identify certain miscellaneous itemized deductions subject to the 2% of AGI limitation • Compute total itemized deductions for a taxpayer who is subject to the itemized deduction phase-out

  5. Medical Expenses • Qualified individuals • Qualified medical expenses • Amount and timing of deduction

  6. Qualified Individuals • Medical expenses paid for the taxpayer, taxpayer’s spouse, or dependent • For dependents: if the taxpayer could take a dependency deduction except for the failure to meet the gross income or joint return tests • For children of divorced parents: • the parent need not be the custodial parent in order to take deduction for medical expenses paid on behalf of a person

  7. Qualified Medical Expenses • Those paid for the diagnosis, cure, mitigation, treatment, or prevention of disease, including transportation, meals & lodging, certain capital expenditures, & medical insurance premiums. • In 2001 self-employed individuals may deduct 60 % of health insurance as a deduction for AGI. In 2002 will the percentage will increase to 70% • No cosmetic surgery unless it treats illness or promotes proper body function.

  8. Qualified Medical Expenses • Transportation that is primarily for and essential to qualified medical care • Medical insurance premiums • Qualified long-term care insurance premiums • Capital expenditures must meet standard

  9. Amount And Timing Of Deduction • Medical expense deduction is only allowed to the extent qualified medical expenses exceed 7.5% of AGI • During tax year - reimbursements reduce allowable deductions • Subsequent tax years - reimbursements included in gross income under the tax benefit rule

  10. Statutory Definition Of A Tax • Mandatory assessment levied under the authority of a political entity for the purpose of raising revenue to be used for public or governmental purposes

  11. Deductible Taxes • Include state, local and foreign real property taxes; state and local personal property taxes; foreign, state, and local income taxes • Personal property only based on the value of the personal property

  12. Nondeductible Taxes • Include federal income tax, employee’s social security tax, and federal estate & gift tax • Employer’s share of social security tax is deductible as business expense • Self-employed taxpayer may also deduct 1/2 of the self-employment taxes paid forAGI

  13. State And Local Income Taxes • Cash-basis taxpayers deduct state and/or local income tax paid or withheld regardless of tax year involved

  14. Personal Property Taxes • In order to be deductible, tax must be an ad valorem tax on personal property imposed on an annual basis • Any portion of the tax which is flat fee is not deductible

  15. Real Estate Taxes • Apportionment of taxes is necessary when real estate is sold during the year • Taxes assessed only against the property benefited are capitalize costs( i.e., Sidewalk or new sewer lines) not deduction

  16. General Sales Tax • The deduction for general sales tax was repealed by the tax reform act of 1986, effective for 1987 and later. • Instead sales tax is treated as part of purchase price of the property.

  17. Self-Employment Tax • Pay tax on their self-employment income in lieu of the payment of Social Security tax on salary

  18. Definition Of Interest • The charge for the use or forbearance of money • Bank service charges and certain loan acquisition costs are not considered interest for tax purposes

  19. Classification Of Interest • Proper classification of interest expense is critical in determining the amount of interest expense deduction • Active trade or business • Passive activity • Investment • Personal • Qualified residence and Home equity loan • Student loan interest

  20. Timing Of The Interest Deduction • Prepaid interest • Interest paid with loan proceeds • Discounted notes • Imputed interest • Interest owed to a related party by an accrual method taxpayer

  21. Charitable Contributions • Qualifying organization • The United States, The District of Columbia, a state or possession of the United States. • A post or organization of war veterans • A domestic fraternal society, or order, or association • Public Charities • Churches • Educational Institutions • Hospitals, Medical schools

  22. Charitable Contributions • Type of property contributed • Deduction limitations • 50% for public charities • 30% for Contributions of capital gain property • Application of carryovers • Special rules for contributions made by corporations

  23. Casualty And Theft Losses • Individuals can deduct casualty or theft loss on personal-use property as an itemized deduction Schedule A of Form 1040. Subject to $100 and 10 % floor

  24. Miscellaneous Itemized Deductions • Unreimbursed employee business expenses • Expenses to produce income • Costs of tax advice, tax return preparation, and any related fee • Reduction of certain itemized deductions

  25. Tax Planning Considerations • Medical expense deduction • Interest Expense Deduction • Deduction for charitable contributions

  26. Compliance & Procedural Considerations • Medical expenses • Dependent care credit vs. Medical expense deduction • Compare dependent care credit rate with effective marginal tax rate for additional medical deductions

  27. Compliance & Procedural Considerations • Charitable contributions • >$500 must file Form 8283 • Property > $5000 should have appraisal • >$250 and quid pro quo > $75 require additional documentation

  28. Taxes • Schedule C - related to taxpayer’s trade or business • Schedule E - related to the production of rents and/or royalties, or • Schedule A - if personal

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