Itemized deductions

1. Itemized deductions Spring 2018, lamc

2. introduction • Taxpayers should generally itemize their deductions if they are greater than their standard deduction. • Itemized deductions: subtractions from a person’s adjusted gross income (AGI) that reduce the amount of income that is taxed. • Most taxpayers have choice to either take the standard deduction or itemized deduction. • Who should itemize? Those who have zero standard deduction – • MFS and spouse is itemizing • Filing return for short tax year b/c of change in annual accounting period • Considered to be nonresident alien or dual status alien during tax year (not married to U.S. citizen or resident at end of tax year)

3. Itemized deductions • Itemized deductions include: • Medical and dental expenses • Certain taxes paid • Mortgage interest • Gifts to charity • Casualty and theft losses (outside scope of VITA) • Miscellaneous deductions

4. Medical and dental expenses • Only medical and dental expenses that exceed 10% of AGI can be deducted. • Whose expenses are covered? • Taxpayer • Spouse • Dependents at time medical services provided or paid • Individuals who could be taxpayer’s dependent except – • Do not meet gross income test; or • Do not meet joint return test; or • Taxpayers, or their spouse filing jointly, could be claimed as a dependent on someone else’s return

5. Medical and dental expenses • Types of expenses covered • Refer to Publication 4012, Tab F: F-5, Schedule A – Itemized Expenses • Types of expenses covered: Fertility enhancement, treatment for drug or alcohol center, diagnostic services, stop-smoking program • Types of expenses not covered: cosmetic surgery, funeral expenses, nutritional supplements

6. exercises • Martha paid medical and dental bills listed below., and wants to know which bills are qualified expenses for her tax return. The total of her qualified medical expenses is $_________.

7. Deductible taxes • Taxes that can be deductible are: • State and local income tax (i.e. withheld taxes, estimated tax payments, other tax payments) • Sales tax • Real estate taxes (generally reported on Form 1098 – Mortgage Interest Statement • Homeowner Association fees not deductible • Taxpayers may deduct either sales tax or state and local income tax, but not both • Taxes NOT deductible • Employment taxes • Federal income taxes • License fees

8. Home mortgage interest • Home mortgage interest, points (paid as a form of interest) and investment interest (outside scope) can be itemized. • Home mortgage interest is any interest paid on a loan, line of credit, or home equity loan secured by the taxpayer’s home. • Form 1098-Mortgage Interest Statement will show the amount of interest paid. • Only taxpayers who are legally liable for the debt can deduct the interest in the year it is paid. • Points: charged to borrower to secure a loan – • Maximum loan charges • Premium charges • Loan discount points • Prepaid interest • Only points in the form of interest are deductible

9. interest • Types of interest not deductible: • Interest on car loans where the car is used for nonbusiness purposes • Other personal loans • Credit investigation fees • Loan fees for services needed to get a loan • Interest on a debt the taxpayer is not legally obligated to pay • Finance charges for nonbusiness credit card purchases

10. Exercises Jason and Lily file a joint return. During the year, they made the interest payments listed below. The total of Jason and Lily’s fully deductible interest for the tax year is $ _________.

11. Charitable contributions • Charitable contribution: donation or gift to a qualified organization, which may be deductible if the taxpayer itemizes. • Cash, check, and noncash contributions are reported Schedule A, line 16 and line 17 (respectively). • Deductions may be taken for contributions to: • Organizations that operate exclusively for religious, charitable, educational, scientific, or literary purposes • Organizations that work to prevent cruelty to children or animals • Organizations that foster national or international amateur sports competition if they do not provide athletic facilities or Equipment • War veterans’ organizations • Certain nonprofit cemetery companies or corporations • The United States, or any state, the District of Columbia, a U.S. possession (including Puerto Rico), a political subdivision of a state or U.S. possession, or an Indian tribal government or any of its subdivisions that perform substantial government functions

12. Charitable contributions • Deductible items include: • Monetary donations • Dues, fees, and assessments paid to qualified organizations above the value of benefits received • Fair market value of used clothing, furniture, and other items in good condition • Cost and upkeep of uniforms that have no general use but must be worn while performing services donated to a charitable organization • Unreimbursed transportation expenses that relate directly to the services the taxpayer provided for the organization • Part of a contribution above the fair market value for items received such as merchandise and tickets to charity balls or sporting events • Transportation expenses, including bus fare, parking fees, tolls, and either the cost of gas and oil or the standard mileage deduction may be taken.

13. Charitable contributions • Nondeductible charitable contributions include: • Business organizations, such as the Chamber of Commerce • Civic leagues and associations • Political organizations and candidates • Social clubs • Foreign organizations • Homeowners’ associations • Communist organizations

14. Charitable contributions • Amounts that may not be deducted: • Cost of raffle, bingo, or lottery tickets • Tuition • Value of a person’s time or service • Blood donated to a blood bank or Red Cross • Car depreciation, insurance, general repairs, or maintenance • Direct contributions to an individual • Sickness or burial expenses for members of a fraternal society • Part of a contribution that benefits the taxpayer, such as the fair market value of a meal eaten at a charity dinner

15. Charitable contributions • Limits for charitable contributions: • If contributions total more than 20% of AGI, then may be able to deduct only percentage of contributions and must carry over the remainder to a later tax year. • Records of charitable contributions • Must keep records to verify cash and noncash contributions. • Cash contributions cannot be deducted unless – • Record of payment; or • Written communication from charity which includes charity name, date of contribution and amount of contribution.

16. Charitable contributions • Noncash contributions less than $250: Taxpayer must keep: • A receipt or other written communication from the organization or the taxpayer’s own reliable written records for each item, showing: • Name and address of organization • Date and location of the contribution • Reasonably detailed description of the donated property • Fair market value of the donated property

17. Charitable contributions • Noncash contributions of at least $250 but not more than $500 • must have all the documentation described for noncash contributions less than $250. • Also need organization’s written acknowledgment stating whether the taxpayer received any goods or services in return and a description and good faith estimate of any such items. • Noncash contributions of more than $500 • Out of scope (refer to professional tax preparer.

18. Miscellaneous deductions • For some deductions, only portion that exceeds 2% of AGI can be deducted. Some of these are – • Union dues and fees • Professional society dues • Small tools and supplies used for business • Professional books, magazines, and journals • Expenses of looking for a new job in your present occupation • Tax counsel and assistance • Deductions not subject to 2% of AGI rule: • Gambling losses (to the extent of gambling winnings) • Work-related expenses for disabled individuals that enables them to work, such as attendant care services at their workplace

19. Miscellaneous deductions • Nondeductible expenses include – • Commuting expenses (mileage to and from a taxpayer’s regular place of work) • Political contributions • The cost of entertaining friends • Lost or misplaced cash or property • Travel as a form of education

20. Exercises • Which of Bob’s miscellaneous expenses is deductible?