Definition

Itemized Deductions

DefinitionItemized deductions are subtractions from a taxpayers' adjusted gross income (AGI) that reduce the amount of income that is taxed.

Most taxpayers have a choice of taking a standard deduction or itemizing deductions.

Standard DeductionThe Standard deduction is a flat amount that most individuals can elect to deduct instead of deducting their itemized deductions. Taxpayers generally deduct the greater of the two.The standard deduction varies according to the taxpayers filing status, age and eyesight.

Standard deduction amounts2013 Standard DeductionMarried, Filing Jointly$12,200Single$6,100Married, Filing Separately$6,100Head of Household$8,950Blind or over 65 and married add:$1,200Blind or over 65 and single/head of household add:$1,500 Gross Income

Deductions For AGIDeductions directly related to business activitiesDeductions indirectly related to business activityDeductions subsidizing specific activities AGI(Adjusted Gross Income)

Deductions From AGI

Itemized Deduction Taxable Income

Types Of Itemized DeductionsMedical ExpensesTaxesInterestCharitable ContributionsCasualty and theft Losses on Personal-Use Assets

Medical ExpensesIt is designed to provide relief for taxpayers whose ability to pay taxes is hindered by health related circumstances.Taxpayers can deduct their medical expenses which are incurred to treat their spouses and dependentsMedical expenses include:- Long term care, prescriptions, health insurance premium, transportation etc.

Note: Medical Expenses for Cosmetic surgery are not deductible unless the surgery is necessary to ameliorate the deformity.Medical Expenses Deduction limit

The deduction for medical expenses is limited to the amount of unreimbursed qualifying medical expenses paid during the year reduced by 7.5% of the taxpayer's AGI.

This restriction is called the floor limitation Example:In April Nancy broke her wrist in a mountain biking accident. She paid for $2000 for a visit to the hospital emergency room and follow up visits with her doctor. While she recuperated, Nancy paid $300 for prescription, medicine and $700 to a therapist for rehabilitation. Nancy's Insurance reimbursed her $1840 for these expenses. What is the amount of Nancy s qualifying medical expense?

DescriptionDeductionEmergency Room and doctor visit$2000Prescription medication$300Physical therapy$700Total qualifying medical expenses$3000Less:- Insurance reimbursement-1840Qualifying medical expense from the accident$1160What amount of medical expenses would Nancy be allowed to deduct if her AGI was $10,000 and unreimbursed qualifying medical expense is $1160

DESCRIPTIONEXPENSESTotal unreimbursed qualifying medical expenses$1160Minus: 7.5% of AGI ($10,000*7.5%)(750)Medical expense itemized deduction$410Taxes

Individuals may deduct as Itemized deductions payments made during the year for the following taxes:State, Local taxes and Foreign Income taxesReal Estate taxes On property heldPersonal property taxes

InterestIndividuals can deduct interest amount paid on acquisition indebtedness and home equity indebtedness secured by a qualified residence. Individuals can deduct interest paid on loans used to purchase investments assets such as stocks, bonds or land. The deduction of investment interest is limited to a taxpayers net Investment Income. Taxpayers not allowed to deduct interest on personal credit card, debt or on loans to acquire personal use- automobiles

Charitable ContributionsTaxpayers are allowed to deduct contributions of money and other property to Qualified Domestic Charitable Organizations.Qualifying Charitable Organizations include Organizations that engage in educational, religious, scientific, governmental and other activities. Political and Campaign Contributions are not deductible even though they indirectly support the Government.Charitable ContributionsContributions of Money- Donations made by check, electronic funds, credit cards etc. Contributions of Capital Gain Property- example:-Investment assets, business assets, Personal use assetsOrdinary Income Property- examples:- 1)Assets the taxpayer held for a year or less2)Inventory that taxpayer sells in a trade or business3)Business assets held for more than a year etc.

14Summary of Charitable Contribution limitation rulesCONTRIBUTION TYPE

PUBLIC CHARITY AND PRIVATE ACTIVITY FOUNDATIONS

PRIVATE NON-OPERATING FOUNDATIONS

CASH:AMOUNTAGI LIMIT

CASH AMOUNT50%CASH AMOUNT30%CAPITAL GAIN PROPERTY:AMOUNTAGI LIMITFMV30%ADJUSTED BASIS20%ORDINARY INCOME PROPERTY:AMOUNTAGI LIMITLESSER OF BASIS OR FMV50%LESSER OF BASIS OR FMV30%

Casualty and Theft Losses on Personal- Use Assets

Individuals cannot deduct the losses they realize when they sell or dispose of assets used for personal purposesHowever, Individuals are allowed to deduct casualty and theft losses realized on personal used assets. The loss is reduced by any reimbursements the individual is eligible to receive.Casualty Loss Deduction Floor LimitationsCasualty Losses must exceed two separate floor limitations to qualify as itemized deductions:

1) $100 for each casualty event during the year

2) 10% of AGI and this applies to the sum of all casualty losses during the year(after applying the 10% floor)Example:In June, Nancy had a bad day at a nearby lake. Her purse containing $200 in cash was stolen, and she wrecked her car on the way home. Nancy purchased her purse for $150 and it was worth $125 at the time of theft. Nancy purchased her car earlier in the year for $22,000 and had to pay $2000 to have it repaired. Nancys Insurance company reimbursed her $1400 for the repairs. What is the amount of Nancys casualty tax loss before deductibility limitation?.Given AGI- 162,000

Answer:- Before deduction limitationDescriptionTheftAccidentFMV before casualty$325 (200+125)FMV after casualty-0(1)Decline in FMV cost to repair3252000(2)Tax basis before casualty350(200+150)22,000Loss before reimbursement(lesser of 1or 2)3252000Insurance reimbursement -0-1400Unreimbursed Casualty loss$325$600After Deduction LimitationDescriptionTheftAccidentTotalLosses before limitations$325$600$925Less: $100 per casualty floor-100-100-$200Casualty loss before AGI limit$225$500$725Less:10% of 162,000-16,200Casualty loss deduction after AGI limit 0Miscellaneous Itemized DeductionsEmployee Business ExpensesTravel and transportationHobby LossesTax preparation fees. etc.Limitation 2% 0f AGI FloorUnlike Miscellaneous itemized deductions, gambling losses are not subject to 2% of AGI floorSummaryDeductions for AGI Deductions from AGI- Itemized DeductionsTypes of Itemized DeductionsStandard DeductionsMiscellaneous Deductions

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