©2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 1 CHAPTER

©2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star ©2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license.logo, and South-Western are trademarks used herein under license. 1

CHAPTER 5

Itemized Deductions and Other IncentivesIncome Tax Fundamentals 2008 edition Gerald E. Whittenburg Martha Altus-Buller

Student’s copy


Medical Expenses First itemized deduction on Schedule A Medical expenses allowed:

For spouse, self and dependents Amounts that exceed 7.5% of AGI

See page 5-2 for list of expenditures that qualify

Medical insurance premiums deductible Health, dental, optical Health insurance for self employed is deductible

for AGI Long term care insurance premiums deductible

Specified limits that change each year based on taxpayer’s age


Health Savings Accounts [HSA]

HSA is an instrument that allows funds to be contributed to an account similar to an IRA Employee must participate in ‘high-deductible’

medical insurance plan Distributions to cover medical expenses are not

taxed or penalized Earnings not taxed Employee contributions to an HSA is a deduction

for AGI


Taxes Deductions for certain taxes are allowed Taxes are deductible, fees are not

Taxes are imposed by a government to raise revenue for general public purposes

Fees are charges with a direct benefit to person paying Examples of deductible taxes

State and local income taxes [deductible in year paid] Sales/use tax [pending Congressional approval to continue

for tax years after 2007] Use either actual or sale taxes from IRS tables

Real property taxes Personal property taxes

Example of nondeductible taxes include estate taxes, Social Security taxes and excise taxes


Overview of Interest

Examples of deductible interest include Qualified mortgage interest and points Mortgage interest prepayment penalties Amortized points on refinanced mortgage Investment interest Education loan interest

Consumer (personal) interest is not deductible


Mortgage Interest Qualified residence interest is mortgage interest

that is deductible Used to secure/construct first or second residence

Limited to loans up to $1,000,000 Home equity loans

Limited to loans up to $100,000 Deductible even if proceeds used for personal purposes

Loan origination fees [called ‘points’ because they are quoted as percentage points of principal] are deductible Refinancing points must be capitalized & amortized

Deducted over life of loan Reported on 4562 and carries to Schedules A or E


Contributions Charitable contributions are allowed as a

deduction Can contribute cash or property

Out of pocket expenses are deductible $.14/mile for mileage deduction Value of free use of taxpayer’s property is not

deductible To be deductible, donation must be made to a

qualified recipient [see page 5-11 for list] IRS publishes Cumulative List of Organizations,

Pub #78


Contributions - Substantiation Taxpayers should document charitable contributions

Cannot claim deduction of $250 or more unless taxpayer has written acknowledgment from organization

Beginning in 2007, need records even if contribution is less than $250 Even amounts put in plate at church , for example, should be in form of a

check If property contributed exceeds $500, must attach Form 8283 If property contributed exceeds $5,000, formal appraisal must

be submitted


Donation of Vehicles

Deduction for a donated vehicle limited to the amount for which the charity sells the vehicle Same rule applies to boats and planes

Charitable organization sends a Form 1098C to taxpayer showing resale information Or certifies that no resale amount may be provided

as vehicle donated to needy individual Taxpayer must attach 1098C to tax return

Taxpayer may claim estimated value if charity uses donated auto rather than selling it


Casualty and Theft Losses

Deductions are allowed for casualty and theft losses

To be classified as casualty loss, event needs to be sudden, unexpected or unusual If theft, need to prove (for example, by police report)

Casualty losses are deductible in year of occurrence Exception for disaster area losses [can amend prior

year return and deduction in that year and file for refund]

Limit to personal casualty loss is: Loss - $100 floor and then in excess of 10% of AGI


Miscellaneous Deductions

There are two types of miscellaneous deductions “Those not limited to amount over 2% AGI”,

common examples include Handicapped “impairment related work

expenses” Certain estate taxes Amortizable bond premiums Gambling losses to extent of gambling winnings Terminated annuity payments


Miscellaneous Deductions

“Those limited to amount over 2% AGI”, common examples include Unreimbursed employee expenses Reimbursed employee expenses reimbursed under a

non-accountable plan Union dues Tax preparation fees Safety deposit box Professional journals/subscriptions Investment expenses Job hunting fees


Limitation on Itemized Deductions Ability to deduct total itemized deductions is

phased out for high income taxpayers 2% x (AGI - Threshold Amount)

Threshold amount $ 78,200 for MFS or $156,400 (all other filing types)

Phase-out calculation (AGI – Threshold Amount) x 2% but limited to

53-1/3% x all itemized deductions except medical, investment interest expense, casualty losses and wagering losses


Limitation on Personal Exemptions

For taxpayer and each dependent - $3,400 per person Phased out for high income taxpayers

2/3 of 2% per $2,500 [$1250 if MFS] over threshold

See p. 5-22 for limits based on filing status Phase out limited to 1/3 of exemption

amount ($1,133)


Moving Expenses

Can take deduction for moving expenses if an employee or self-employed

To qualify for deductible moving expense Must change job sites Move can be with new or existing company Travel from new job site to old residence must be

longer by at least 50 miles than the distance from old job site to old residence

Must work 39 weeks in the next 12 months Or, if self-employed, must work 78 weeks in the next

24 months

Documents

©2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 1 CHAPTER