CCH Federal Taxation Comprehensive Topics Chapter 8 Deductions: Itemized Deductions

Chapter 8 Exhibits 1. Medical Expenses 2. Medical Care 3. Medical Transportation and Lodging 4. Medical Insurance Premiums 5. Qualified Residence Defined 6. Qualified Residence Debt—Limitations 7. Qualified Residence Debt—Prorating Interest 8. Prorating Principal Residence Interest—Example 9. Methods of Prorating Principal Residence Interest—Solution 10. Charitable Deductions 11. Charitable Deduction Without Category 3 Election—Example 12. Charitable Deduction With Category 3 Election—Example Chapter 8, Exhibit Contents CCH Federal Taxation Comprehensive Topics

Medical Expenses Deductible medical expenses include • medical care, • medical transportation and lodging, and • health insurance premiums. Chapter 8, Exhibit 1 CCH Federal Taxation Comprehensive Topics

Medical Care • The diagnosis, cure, mitigation, treatment, or prevention of disease, or • To affect any structure or function of the body Chapter 8, Exhibit 2a CCH Federal Taxation Comprehensive Topics

Medical Care • Inpatient hospital care. Includes meals and lodging. Meals consumed by patients during hospital stays are not subject to the 50% exclusion. • Medicines and drugs. All require a prescription. Chapter 8, Exhibit 2b CCH Federal Taxation Comprehensive Topics

Medical Care Capital expenditures—general. Capital expenditures may qualify for an immediate medical deduction (subject to the 7.5% floor) if prescribed by a physician to alleviate a physical or mental defect or illness. Examples: • Seeing Eye dogs • Wheelchairs • Eyeglasses Chapter 8, Exhibit 2c CCH Federal Taxation Comprehensive Topics

Medical Care Capital expenditures—home improvements. Qualified expenditures for home improvements and additions may be deductible to the extent that their costs exceed any increase in the fair market value of the existing structure. Examples: • Adding wheelchair ramps • Widening doorways to create wheelchair access • Adding a swimming pool prescribed by a physician to alleviate some ailment such as partial paralysis • Installing an elevator to provide handicap access between floors Chapter 8, Exhibit 2d CCH Federal Taxation Comprehensive Topics

Medical Transportation and Lodging Mileage. If mileage was primarily for and essential to medical care,the taxpayer may choose between • the standard mileage allowance of 18 cents per mile (for year 2006), plus parking and tolls, or • actual expenditures. Chapter 8, Exhibit 3a CCH Federal Taxation Comprehensive Topics

Medical Transportation and Lodging Meals during medical-related travel. Meals consumed during medical-related transportation are NOT deductible even if the transportation is primarily for and essential to the rendition of medical care. Chapter 8, Exhibit 3b CCH Federal Taxation Comprehensive Topics

Medical Transportation and Lodging Lodging during travel—nondiscretionary. A medical expense deduction is allowed for lodging (but not meals) while away from home primarily for and essential to medical care. This lodging deduction is limited to amounts that are not lavish or extravagant and cannot exceed $50 per night for each individual. (Code Sec. 213(d)(2).) The deduction may also be claimed for a person who must accompany the individual seeking medical care. Examples: • Lodging during away-from-home travel and • Out-of-town lodging incurred by a friend or relative while the patient is in the hospital Chapter 8, Exhibit 3c CCH Federal Taxation Comprehensive Topics

Medical Transportation and Lodging Lodging during travel—discretionary. If a doctor prescribes an operation or other medical care and the taxpayer chooses, purely for personal considerations, to travel to an out-of-town locality for medical treatment, the lodging is not deductible. Chapter 8, Exhibit 3d CCH Federal Taxation Comprehensive Topics

Medical Insurance Premiums For 2006, self-employed persons may deduct • 100% of medical insurance premiums “FOR” AGI Chapter 8, Exhibit 4 CCH Federal Taxation Comprehensive Topics

Qualified Residence Defined • A principal residence and • Any second residence that is for personal use Unusual principal residences. A qualified principal residence may include a houseboat trailer, airplane, automobile, or mobile home, if it has kitchen and bathroom facilities. Chapter 8, Exhibit 5 CCH Federal Taxation Comprehensive Topics

Qualified Residence Debt—Limitations For acquisition loans, qualified residence debt is the least of the following four amounts:1. Adjusted purchase price as of the end of the tax year2. Average loan balance (a lesser amount than the original acquisition loan if a refinancing has occurred)3. Fair market value of the residence on the date of the acquisition loan4. $1 million Chapter 8, Exhibit 6a CCH Federal Taxation Comprehensive Topics

Qualified Residence Debt—Limitations For home equity loans, the limitation is the lesser of the following two amounts: 1. Either The lesser of the adjusted purchase price as of the end of the tax year or the fair market value of the house on the date of the home equity loan minus the average balance of the ACQUISITION LOAN2. $100,000 Chapter 8, Exhibit 6b CCH Federal Taxation Comprehensive Topics

Qualified Residence Debt—Prorating Interest Reg. §1.163-10T(d) and (e) provides two methods for prorating interest between qualified and excess debt: 1. The simplified method prorates the combined amount of interest on the acquisition and home equity loans. 2. The exact method prorates interest on the acquisition loan, then prorates interest on the home equity loan. Any interest remaining after prorating deductible interest is considered nondeductible consumer interest. Chapter 8, Exhibit 7 CCH Federal Taxation Comprehensive Topics

Prorating Principal Residence Interest – Example Chapter 8, Exhibit 8 CCH Federal Taxation Comprehensive Topics

Simplified Method of Prorating Interest – Solution Chapter 8, Exhibit 9a CCH Federal Taxation Comprehensive Topics

Exact Method of Prorating Interest – Solution Chapter 8, Exhibit 9b CCH Federal Taxation Comprehensive Topics

Charitable Deductions Chapter 8, Exhibit 10 CCH Federal Taxation Comprehensive Topics

Charitable Deduction Without Category 3 Election—Example 1 Chapter 8, Exhibit 11 CCH Federal Taxation Comprehensive Topics

Facts: AGI = $40,000, and the following charitable contributions were made: Charity Frick Museum (private) Church (public) Boy Scouts (public) United Way (public) State University (public) Property Cash Cash Cash Cash Stock (held long-term) Amount $10,000 3,500 500 1,000 Basis: $1,000; FMV: $11,000 Determine the amount of charitable deductions with the special category 3 election. Charitable Deduction With Category 3 Election—Example 2 Chapter 8, Exhibit 12a CCH Federal Taxation Comprehensive Topics

Solution Category 1 2 3 Contribution Valuation $5,000 ($1,000 + $3,500 + $500) $10,000 $1,000 (using basis rather than FMV, with election) • Limitation • 50% x $40,000 = $20,000 • Lesser of: • (30% x $40,000) – $1,000 = $11,000 • 50% x $40,000 – ($5,000 + $11,000) = $14,000 The lesser amount is $11,000. • 50% x $40,000 – ($5,000 + $10,000) = $5,000 Deduction $5,000 10,000 1,000 $16,000 Carryover 0 0 0 0 Totals Charitable Deduction With Category 3 Election—Example 2 Observations: 1. A category three election requires recomputing the limitations for categories two and four! 2. The category three election usually is not favorable if the basis of the long-term capital gain property is substantially lower than its FMV. Chapter 8, Exhibit 12b CCH Federal Taxation Comprehensive Topics

CCH Federal Taxation Comprehensive Topics Chapter 8 Deductions: Itemized Deductions