Chapter 5
Personal Itemized Deductions
Itemized Deductions Reported on Schedule A
" Medical and Dental Expenses (line 4)
" Taxes You Paid (line 9)
" Interest You Paid (line 15)
" Gifts to Charity (line 18)
" Casualty and Theft Losses (line 20)
" Job Expenses and Most Miscellaneous Deductions (line 27) - Chapter 6
" Other Miscellaneous Deductions (line 28) - Chapter 6
" Total Itemized Deductions (line 29) & limitations
Medical Expenses
" Deductible if expenses exceed 7.5% of AGI
o Few taxpayers will be able to advantage of deduction
" Three groups of medical expenses
o Prescription drugs and insulin
o All medical and dental insurance premiums paid by the taxpayer
o Other medical expenses
" Must be legal - Marijuana
" Must be reduced by reimbursements
" California conforms
Medical Expenses Examples, not inclusive
" Doctors, dentist, nurses, chiropractors, acupuncturists
" Hospitals, clinics
" Prescribed x-rays, lab work
" Medical insurance
" Medical aids such as eyeglasses, hearing aids, crutches, guide dogs
" Prescribed Medicine and Drugs
" Travel and Transportation for Medical Purposes
o Actual cost - gas, oil, etc. no general repairs or insurance
o Standard mileage allowance - 24 cents per mile for 2009
" Lodging up to $50 per day - NO meals
" Long-term Care - only for medical care
" Capital Expenditures - Cost exceeds the increase in FMV
" Reduced by reimbursement
Nondeductible Medical Expenses Examples, not inclusive
" Cosmetic surgery unless it was to improve a deformity, an injury, or disfiguring disease
" Medicare tax withheld from wages
" Nonprescription drugs
" Illegal operations or drugs
" Marriage counseling
" Documentation- bills, cancelled checks, SSA 1099
Taxes You Paid
" Schedule A - personal nature, not related to trade or business
" Your name must be on the title
" Bunching deductions is OK
" Tax Categories
o Income Taxes or Sales tax
o Real Estate Taxes
o Other
Income Taxes You Paid
" State and Local Taxes OR Sales Tax whichever is higher
o State income tax & State Disability Insurance (SDI)
Withholding, Estimated tax, Filing of prior year tax return
" Sales Tax
o Actual spent per receipts or
o worksheet amount (Form 1040 booklet page A-4)
o Table amount (Form 1040 booklet pages A-12 - A-13)
" Employee contributions to a state unemployment fund (NOT in CA)
" California income and SDI taxes not deductible for California
" Documentation - cancelled checks, contracts, Form W-2
" Foreign Taxes
o Deduction - reduces taxable income, or
o Credit - dollar-for-dollar reduction in tax
o Not deductible for California
o Documentation - Form 1099-DIV, cancelled checks
Real Estate Taxes You Paid
" Real Property Tax paid on
o House, bare land, condominium units
o Tenant's share of real wstate taxes paid by a cooperative housing corporation
" Taxes on Property Sold During the Year
o Buyer and Seller receive deduction for portion of real estate tax paid
o Allocation based on number of days owned
" Foreign real estate taxes
" California conforms
" Documentation - cancelled checks, Form 1098-INT, escrow statement
New Motor Vehicle Taxes
" Sales & Excise tax paid after February 16, 2009
" For vehicles costing less than $49,500
" AGI Limitations
" See worksheet on back of Schedule A
Personal Property Taxes
Three conditions apply to the deduction for state or local property taxes. Taxing agencies must do all of the following
" Base the tax on the value of the personal property
" Impose the tax on an annual basis
" Impose the tax on personal property - DMV
California conforms
Nondeductible Taxes
" Federal income taxes
" Social security and Medicare payments
" Federal or state, estate, gift, or inheritance taxes
" State and local license fees (driver's, marriage, fishing)
" Excise taxes (gasoline, cigarette, alcohol, utilities)
" Qualified taxes paid on behalf of other taxpayers
" Penalties and interest included in tax bills
Interest You Paid
" Mortgage Interest & Home Equity Loans
o You must be legally liable
o Primary residence and/or second home
o Acquisition debt (< $1,000,000)
Interest paid on loans to buy, build or substantially improve a personal residence
o Home equity debt (< $100,000)
" Mortgage Points
o Criteria
Must be labeled as loan origination fees, loan processing fees, discount points or points
Must be calculated as a percentage of the loan amount
Established business practice
Acquisition of personal residence
Residence must be held as security
Amount must be paid directly by the taxpayer
o Deductibility
100% deductible in the year that you acquire or improve the property, only primary home
If refinancing, points must be written off over the life of the mortgage
o Form 1098-INT
" Qualified Mortgage Insurance Premiums
o Insurance that protects the lender if the borrower does not pay their mortgage
o AGI limitations
" Investment Interest - 4952
o Limited to net investment income
Dividend income, interest income, capital gain income
Excess can be carried forward to future years
Documentation - brokerage statement, 1098
" Nondeductible Interest - not inclusive
o Consumer interest
o Interest paid to federal and state governments
Gifts to Charity
" Five types of qualifying organizations
o Any governmental unit
o Any non-profit organization - IRC Section 501(c)(3)
o A post or organization of war veterans
o A domestic fraternal society or association
o A cemetery company
" Must be cash/check or other property of value
o Charitable mileage - 14 cents per mile
" No deduction for services
" Deduction amount
o $ of cash gifted
o Capital gain property - stocks, bonds, land, artwork
Fair market value on the date of the gift - Exception - vehicles for 2005 and thereafter
Form 8283
o Ordinary income property - inventory, accounts receivable
Your basis (cost)
o If clothing or household goods, items must be in good used condition or better
" Deduction Limitations
o 50% of adjusted gross income (AGI)
Public charities
o 30% of AGI
Contributions of capital gain property
Unless the property is put to a related use by the charity
Cash or capital gain property given to war veterans' organization, fraternal orders, cemetery companies and certain nonoperating private foundations
o 20% of AGI
Capital gain property to a private foundation
" If you cannot deduct all of your donations, unused amount can be carried forward to the next year
" Nondeductible
o Political contributions
o Non charitable institutions
" Documentation
o Cancelled checks
o Receipt
o Appraisal
o If cash gift is more than $250, you must have a letter from the organization
Personal Casualty and Theft Losses - Form 4684
" What Is a Casualty?
o An identifiable event of sudden, unexpected, or unusual nature
" Determining the Amount of a Casualty Loss
o Lesser of:
The FMV immediately before the casualty reduced by the FMV immediately after the casualty; or
The basis of the property involved
" Deductible in year the casualty took place
o Exceptions
Theft Loss - in the year the theft was discovered
Insurance company reimbursement (anticipated)
Presidential declared Disaster Area Losses
Preceding tax year or year of loss
Work the numbers to the taxpayer's benefit
" Limitation on Personal Casualty Losses
o Reduced by insurance reimbursement
o Each occurrence is reduced by $500
o Must be in excess of 10% of AGI
" Documentation
o Insurance company documents
o Pictures
o Repair bills
o Cancelled checks
Limitations of Total Itemized Deductions if AGI is high
" Itemized deductions reduced by the lesser of):
o 1% of the amount of AGI over maximum limit (MFJ $166,800, MFS $83,400); or
o 26 2/3 % of itemized deductions
o See worksheet (Foem 1040 booklet page A-11)
" Does not apply to certain itemized deductions
o Medical expenses
o Investment interest paid
o Casualty & theft losses
o Gambling losses
End of Chapter 5
