VITA: 01/17/09 Lesson 19: Itemized Deductions

1. VITA: 01/17/09Lesson 19: Itemized Deductions Winter 2008 Kristina Shroyer

2. Lesson 20: Itemized Deductions • What is an Itemized Deduction? • Most taxpayers have a choice between taking the standard deduction or itemized deductions whichever is better for them • Itemized Deductions are also subtracted from a taxpayers AGI. • However, itemized deductions are based on specific personal expenses of the taxpayer • will be different for each taxpayer based on a number of factors • taxpayer must keep records of these personal expenses • To determine if a taxpayer MUST Itemize • use the Interview tips in Tab F (Page F-1) of your Volunteer Resource Guide (we talked about this in the last lesson) • Read the tip on page 20-2 • If you think a taxpayer may benefit from itemizing • Enter the qualified expense in the TaxWise software • Taxwise will automatically select the larger of the standard deduction and the itemized deduction for the taxpayer's return • You can also use the interview tips on Page F-2 and F-3 of your Volunteer Resource Guide • How are Itemized Deductions Determined/Reported? • Using Schedule A (Page 219 in Appendix C of Pub 4491-W) • Once the Itemized Deductions are calculated (if greater than the standard deduction) they go on line 40 of Form 1040

3. Lesson 20: Itemized Deductions • What expenses to Itemized Deductions Include? • Medical and Dental Expenses • Certain Taxes Paid • Mortgage Interest and certain Investment Interest • Gifts to Charity • Other Miscellaneous Deductions • Medical and Dental Expenses (Sch A lines 1-4) • Taxpayers can deduct on Schedule A only the amount of deductible medical and dental expenses that EXCEED 7.5% of their AGI • So multiply the taxpayer's AGI by .075 and only medical expenses in excess of this are deductible • Let's say a taxpayer had AGI of $100,000 and medical expenses of $5000 - None would be deductible • Which Medical Expenses are Deductible? • Whose Expenses are covered? • Expenses paid by the taxpayer for: the taxpayer, the taxpayer's spouse, and any dependents claimed at the time the medical services were provided or paid for • Look at the second tip • What type of Expenses are covered? • Unreimbursed medical and dental expenses and eligible Long Term care premiums • the expenses can NOT be paid with pre-tax dollars or reimbursed by an insurance company • See Publication 17 Page 143 for a general checklist • Look at Exercise page 20-3

4. Lesson 20: Itemized Deductions • Taxes that May be Deductible • Look at page146 of Publication 17 for more info on these • Real Estate Taxes (line 6) • state foreign or local based on the assessed value of the taxpayer's real property • To claim real estate taxes, the taxpayer must be legally liable for the taxes and must pay them during the year • These are either reported on Form 1098 or can be found on a taxpayers yearly property tax assessment • Make sure the taxpayer has a record of what they actually PAID during the year, just because the taxes were assessed doesn't mean they were paid • State and Local Income Taxes (line 5) • We'll talk about Sales Taxes when we go over the supplement • The taxes that can be deducted for this are state and local tax withheld on a W-2 (CA State W/H and CA SDI), other state or local tax withheld, estimated state or local tax payments and state tax paid this year for an earlier year • The key it is it is state and local taxes paid this year

5. Lesson 20: Itemized Deductions • Taxes that May be Deductible (continued) • General Sales Taxes instead of State and Local Income Taxes • This material is in the publication 4991-X Supplement we handed out • We were just talking about deducting State and Local Income taxes on line 5 • In 2008 a taxpayer can elect to deduct state and local general SALES taxes instead of state and local income taxes • This would only be done if state and local sales taxes results in a higher deduction for the taxpayer than state and local income taxes • If the taxpayer makes this election • Check box b on line 5 of Schedule A • Get the amount of state and local sales taxes to enter on line 5 from • Actual receipts (provided by the taxpayer) • Optional Sales Tax Tables in the Schedule A instructions • Get these from the IRS website www.irs.gov - Page A-11 through A-13 • First find CA in the first optional table, and based on the taxpayer's filing status and exemptions find an amount • Some states and localities get to use optional tables to add additional taxes to the amount from the first table • For Los Angeles County you will use one of the Optional Tables, Table A • Add this amount to what you calculated from the first table • Taxpayers using this method may also add state and local sales tax paid on certain specified items such as motor vehicles, boats, homes, and home building materials • There is a worksheet to do this with on page A-4 of the Schedule A instructions • Example: What would the sales tax number be for a taxpayer from LA county with $55,000 in AGI and one exemption ($678 + $92

6. Lesson 20: Itemized Deductions • Taxes that May be Deductible (continued) • General Sales Taxes instead of State and Local Income Taxes (cointinued) • This material is in the publication 4991-X Supplement we handed out • How to compute Sales Tax using the Optional Sales Tax Tables instead of actual receipts • Optional Sales Tax Tables in the Schedule A instructions • Get these from the IRS website www.irs.gov - Page A-11 through A-13 • General Idea on how it works (there's a little more to it in the worksheet but just follow the instructions): • First find CA in the first optional table, and based on the taxpayer's filing status and exemptions find an amount • Some states and localities get to use optional tables to add additional taxes to the amount from the first table • For Los Angeles County you will use one of the Optional Tables, Table A • Add this amount to what you calculated from the first table • Taxpayers using this method may also add state and local sales tax paid on certain specified items such as motor vehicles, boats, homes, and home building materials • There is a worksheet to do this with on page A-4 of the Schedule A instructions

7. Lesson 20: Itemized Deductions • Taxes that May be Deductible (continued) • Look at page146 of Publication 17 for more info on these • Personal Property Tax (line 7) • Payments based on the value of personal property • Most common one – property tax paid with the DMV registration…you can only deduct the property tax portion (the part paid based on the value) • Foreign Income taxes (line 8) • Sometimes these will show up on a 1099-DIV • Anything other than this is probably out of scope for VITA • If they do you can deduct them here or take them as a credit whichever is better • The credit will be discussed in lessons coming up • Exercise page 20-5

8. Lesson 20: Itemized Deductions • Interest • Types of Interest that are deductible (lines 10-15) • Home Mortgage Interest • Points (paid in the form of interest) • Certain Types of Investment Interest • This is outside the scope of VITA and taxpayers with this should be referred to a professional tax preparer • Home mortgage interest is normally reported on Form 1098 • Points paid in connection with the purchase of a home are also normally reported on Form 1098 • Points paid with a refinance are often shown on the closing statement for the refinance • Only taxpayers legally liable for the debt can deduct the mortgage interest in the year it was paid • Taxpayers may have multiple mortgages and may have refinanced one or more times during the year • Make sure you ask and have all the Form 1098s and closing papers if needed • For mortgage interest to be fully deductible it must fit into one of the categories on page 151 of Publication 17 (let's read these out loud) • There is a flow chart that you can use on page 152 also • Now look at the example on page 20-6

9. Lesson 20: Itemized Deductions • Interest (continued) • Home Mortgage Interest and Points Reported on Form 1098 • Go on line 10 of Sch A • Taxpayers can deduct interest on their main home and on a second home if the interest on both is deductible based on the rules. • Home: house, condo, mobile home, houseboat etc. • What about points? • Points are charges paid by the borrower/seller/both to secure a loan. • Points go by different names (you'll see them listed as such on closing statements) • See list on page 20-6 • Most common ones I see are: Loan Origination Fees and Prepaid Interest • Only points paid as a form of interest (for the use of money) can be deducted on Sch A • Points paid on a loan to buy or build a taxpayers main home may be fully deductible in the year paid • Points paid for a refinance (in most situations) or any reason other than the above must be deducted over the live of the mortgage (usually 15-30 years) • Points paid for specific services such as appraisal fees, preparation fees etc. are not interest and are not deductible • Use flow chart in Publication 17 – Page 154

10. Lesson 20: Itemized Deductions • Interest (continued) • Qualified Mortgage Insurance Premiums • Also called PMI – Private Mortgage Insurance • Taxpayers can deduct PMI premiums paid or accrued during the tax year on line 13 of Sch A • The qualifications for PMI to be deductible are on page 20-7 • What type of interest is not deductible • See list on page 20-7 • Exercise Page 20-7

11. Lesson 20: Itemized Deductions • Gifts To Charity (lines 16-19 – Sch A) • Taxpayers can deduct contributions to qualifying organizations • Qualifying organizations are shown on page 20-8 • Page 20-8 also shows deductible items and non-deductible items in regard to charity • In particular look at the non-qualifying organizations and non-deductible items • Some that come up a lot at our firm – taxpayers think they can deduct and cannot • Political Donations • Girl Scout Cookies! (You received a cookie so you can't deduct the value of the cookie, only the amount attributable to charity) • The dinner part of a charity dinner • Look at page 159 of publication 17 – look at Column 1 of the table at the top of the page for a good list of deductible charitable contributions

12. Lesson 20: Itemized Deductions • Gifts To Charity (lines 16-19 – Sch A - continued) • What limits apply to Charitable Donations? • If a taxpayer's charitable contributions are more than 20% of their AGI the deduction will be limited, the limited amount can be carried forward for a possible deduction in future years • There are also limits depending on the type of gift – the organizations you do will fall under the 50% additional limits • If you enter the contributions correctly in TaxWise it should apply this limitation for you • Non Cash and Cash contributions will be entered separately • What records should be kept for cash donations? • Taxpayers MUST keep records to prove the amount of cash and non-cash charitable donations they made • If a taxpayer did not keep records they cannot deduct the charitable contribution • They should keep one of the following types of records for EACH CASH donation: • A bank record such as a canceled check or a bank statement showing the name, date, and amount of the check • A written communication from the charity which must include: the charity's name, the date of the contribution, and the amount of the contribution • What records must be kept for out of pocket charitable expenses? • The taxpayer must have: • Adequate Records of the Expenses • The organization's written acknowledgement of the volunteer services • The value of someone's TIME can NOT be deducted • Only expenses directly related to the donated services can be deducted

13. Lesson 20: Itemized Deductions • Gifts To Charity (lines 16-19 – Sch A - continued) • What records must be kept non-cash charitable contributions? • There are different records required for non-cash donations that are less than $250, non-cash donations that are $250 or more but not more than $500 and non-cash donations of more than $500 • Records must be kept for each donation • First lets look at required records for donations less that $250 on page 20-10 • Receipt or written communication from the charity is required and must show the information listed • Deductions are not allowed for charitable contributions of clothing and household items if the items are not in good used condition or better • Required records for donations of at least $250 but not more than $500 • Taxpayer needs all the records required for donations less than $250 AND • The organizations written acknowledgement must state whether the taxpayer received any goods or services in return for the donation as well as a good faith estimate of the value of the donation • Non-cash donations exceeding $500 must be referred to a professional tax preparer • Exercise page 20-10

14. Lesson 20: Itemized Deductions • Casualty and Theft Losses • Outside the scope of VITA • Miscellaneous Deductions • Two Types • Those subject to the 2% limit • meaning only miscellaneous deductions of this type in excess of 2% of the Taxpayer's AGI are deductible • Those not subject to the 2% limit • Deductions Subject to 2% limit (see list on page 20-11) • Notice a lot of this are unreimbursed professional or job related expenses • We'll talk more about unreimbursed business expenses in the next section • Deductions NOT subject to the 2% limit • NOT very many! • Gambling losses to the extent of winnings • Gambling losses in excess of winnings are outside the scope of VITA • Work related expenses for individuals with a disability that enable them to work • Let's take a look at the Miscellaneous Deductions section of the Schedule A to see where these deductions will be entered and how it will work