Chapter 7
Itemized Deductions
Learning Objectives
? Identify qualified medical expenses and
compute the medical expense deduction
? Determine the timing of a medical expense
deduction and the effect of a
reimbursement
? Identify taxes that are deductible as
itemized deductions
Learning Objectives
? Identify different types of interest
deductions
? Compute the amount of investment
interest deduction
? Compute the deduction for qualified
residence interest
Learning Objectives
? Compute the amount of a charitable
contribution deduction and identify
limitations
? Identify certain miscellaneous itemized
deductions subject to the 2% of AGI
limitation
? Compute total itemized deductions for a
taxpayer who is subject to the itemized
deduction phase-out
Medical Expenses
? Qualified individuals
? Qualified medical
expenses
? Amount and timing
of deduction
Qualified Individuals
? Medical expenses paid for the taxpayer,
taxpayer’s spouse,or dependent
? For dependents,if the taxpayer could take
a dependency deduction except for the
failure to meet the gross income or joint
return tests
? For children of divorced parents,
– the parent need not be the custodial
parent in order to take deduction for
medical expenses paid on behalf of a
person
Qualified Medical Expenses
? Those paid for the diagnosis,cure,mitigation,
treatment,or prevention of disease,including
transportation,meals & lodging,certain
capital expenditures,& medical insurance
premiums,
? In 2001 self-employed individuals may deduct
60 % of health insurance as a deduction for
AGI,In 2002 will the percentage will increase
to 70%
? No cosmetic surgery unless it treats illness or
promotes proper body function,
Qualified Medical Expenses
? Transportation that is primarily for and
essential to qualified medical care
? Medical insurance premiums
? Qualified long-term care insurance
premiums
? Capital expenditures must meet standard
Amount And Timing Of
Deduction
? Medical expense deduction
is only allowed to the
extent qualified medical
expenses exceed 7.5% of
AGI
? During tax year -
reimbursements reduce
allowable deductions
? Subsequent tax years -
reimbursements included
in gross income under the
tax benefit rule
Statutory Definition Of A Tax
? Mandatory
assessment levied
under the authority
of a political entity
for the purpose of
raising revenue to
be used for public
or governmental
purposes
Deductible Taxes
? Include state,local and
foreign real property
taxes; state and local
personal property taxes;
foreign,state,and local
income taxes
? Personal property only
based on the value of the
personal property
Nondeductible Taxes
? Include federal income tax,employee’s
social security tax,and federal estate &
gift tax
? Employer’s share of social security tax
is deductible as business expense
? Self-employed taxpayer may also
deduct 1/2 of the self-employment
taxes paid for AGI
State And Local Income
Taxes
? Cash-basis taxpayers deduct state
and/or local income tax paid or
withheld regardless of tax year
involved
Personal Property Taxes
? In order to be deductible,tax must be
an ad valorem tax on personal
property imposed on an annual basis
? Any portion of the tax which is flat
fee is not deductible
Real Estate Taxes
? Apportionment of taxes is
necessary when real estate
is sold during the year
? Taxes assessed only
against the property
benefited are capitalize
costs( i.e.,Sidewalk or new
sewer lines) not deduction
General Sales Tax
? The deduction for general sales tax
was repealed by the tax reform act of
1986,effective for 1987 and later
? Residents of a state without an
income tax have a tax deduction
advantage
Definition Of Interest
? The charge for the use or
forbearance of money
– Bank service charges and
certain loan acquisition
costs are not considered
interest for tax purposes
Classification Of Interest
? Proper classification of interest
expense is critical in determining the
amount of interest expense deduction
– Active trade or business
– Passive activity
– Investment
– Personal
– Qualified residence and Home equity loan
– Student loan interest
Timing Of The Interest
Deduction
? Prepaid interest
? Interest paid with loan proceeds
? Discounted notes
? Imputed interest
? Interest owed to a related party by an
accrual method taxpayer
Charitable Contributions
? Qualifying organization
– The United States,The District of
Columbia,a state or possession
of the United States,
– A post or organization of war
veterans
– A domestic fraternal society,or
order,or association
? Public Charities
– Churches
– Educational Institutions
– Hospitals,Medical schools
Charitable Contributions
? Type of property contributed
? Deduction limitations
? 50% for public charities
? 30% for Contributions of
capital gain property
?Application of carryovers
?Special rules for contributions
made by corporations
Casualty And Theft Losses
? Individuals can
deduct casualty or
theft loss on
personal-use
property as an
itemized deduction
Schedule A of
Form 1040,
Subject to $100
and 10 % floor
Miscellaneous Itemized
Deductions
? Unreimbursed employee business
expenses
? Expenses to produce income
? Costs of tax advice,tax return
preparation,and any related fee
? Reduction of certain itemized
deductions
Tax Planning
Considerations
? Medical expense deduction
? Interest Expense Deduction
? Deduction for charitable contributions
Compliance & Procedural
Considerations
? Medical expenses
–Dependent care credit
vs,Medical expense
deduction
–Compare dependent
care credit rate with
effective marginal tax
rate for additional
medical deductions
Compliance & Procedural
Considerations
? Charitable contributions
– >$500 must file Form
8283
– Property > $5000 should
have appraisal
– >$250 and quid pro quo >
$75 require additional
documentation
Taxes
? Schedule C - related to
taxpayer’s trade or
business
? Schedule E - related to the
production of rents and/or
royalties,or
? Schedule A - if personal
Itemized Deductions
Learning Objectives
? Identify qualified medical expenses and
compute the medical expense deduction
? Determine the timing of a medical expense
deduction and the effect of a
reimbursement
? Identify taxes that are deductible as
itemized deductions
Learning Objectives
? Identify different types of interest
deductions
? Compute the amount of investment
interest deduction
? Compute the deduction for qualified
residence interest
Learning Objectives
? Compute the amount of a charitable
contribution deduction and identify
limitations
? Identify certain miscellaneous itemized
deductions subject to the 2% of AGI
limitation
? Compute total itemized deductions for a
taxpayer who is subject to the itemized
deduction phase-out
Medical Expenses
? Qualified individuals
? Qualified medical
expenses
? Amount and timing
of deduction
Qualified Individuals
? Medical expenses paid for the taxpayer,
taxpayer’s spouse,or dependent
? For dependents,if the taxpayer could take
a dependency deduction except for the
failure to meet the gross income or joint
return tests
? For children of divorced parents,
– the parent need not be the custodial
parent in order to take deduction for
medical expenses paid on behalf of a
person
Qualified Medical Expenses
? Those paid for the diagnosis,cure,mitigation,
treatment,or prevention of disease,including
transportation,meals & lodging,certain
capital expenditures,& medical insurance
premiums,
? In 2001 self-employed individuals may deduct
60 % of health insurance as a deduction for
AGI,In 2002 will the percentage will increase
to 70%
? No cosmetic surgery unless it treats illness or
promotes proper body function,
Qualified Medical Expenses
? Transportation that is primarily for and
essential to qualified medical care
? Medical insurance premiums
? Qualified long-term care insurance
premiums
? Capital expenditures must meet standard
Amount And Timing Of
Deduction
? Medical expense deduction
is only allowed to the
extent qualified medical
expenses exceed 7.5% of
AGI
? During tax year -
reimbursements reduce
allowable deductions
? Subsequent tax years -
reimbursements included
in gross income under the
tax benefit rule
Statutory Definition Of A Tax
? Mandatory
assessment levied
under the authority
of a political entity
for the purpose of
raising revenue to
be used for public
or governmental
purposes
Deductible Taxes
? Include state,local and
foreign real property
taxes; state and local
personal property taxes;
foreign,state,and local
income taxes
? Personal property only
based on the value of the
personal property
Nondeductible Taxes
? Include federal income tax,employee’s
social security tax,and federal estate &
gift tax
? Employer’s share of social security tax
is deductible as business expense
? Self-employed taxpayer may also
deduct 1/2 of the self-employment
taxes paid for AGI
State And Local Income
Taxes
? Cash-basis taxpayers deduct state
and/or local income tax paid or
withheld regardless of tax year
involved
Personal Property Taxes
? In order to be deductible,tax must be
an ad valorem tax on personal
property imposed on an annual basis
? Any portion of the tax which is flat
fee is not deductible
Real Estate Taxes
? Apportionment of taxes is
necessary when real estate
is sold during the year
? Taxes assessed only
against the property
benefited are capitalize
costs( i.e.,Sidewalk or new
sewer lines) not deduction
General Sales Tax
? The deduction for general sales tax
was repealed by the tax reform act of
1986,effective for 1987 and later
? Residents of a state without an
income tax have a tax deduction
advantage
Definition Of Interest
? The charge for the use or
forbearance of money
– Bank service charges and
certain loan acquisition
costs are not considered
interest for tax purposes
Classification Of Interest
? Proper classification of interest
expense is critical in determining the
amount of interest expense deduction
– Active trade or business
– Passive activity
– Investment
– Personal
– Qualified residence and Home equity loan
– Student loan interest
Timing Of The Interest
Deduction
? Prepaid interest
? Interest paid with loan proceeds
? Discounted notes
? Imputed interest
? Interest owed to a related party by an
accrual method taxpayer
Charitable Contributions
? Qualifying organization
– The United States,The District of
Columbia,a state or possession
of the United States,
– A post or organization of war
veterans
– A domestic fraternal society,or
order,or association
? Public Charities
– Churches
– Educational Institutions
– Hospitals,Medical schools
Charitable Contributions
? Type of property contributed
? Deduction limitations
? 50% for public charities
? 30% for Contributions of
capital gain property
?Application of carryovers
?Special rules for contributions
made by corporations
Casualty And Theft Losses
? Individuals can
deduct casualty or
theft loss on
personal-use
property as an
itemized deduction
Schedule A of
Form 1040,
Subject to $100
and 10 % floor
Miscellaneous Itemized
Deductions
? Unreimbursed employee business
expenses
? Expenses to produce income
? Costs of tax advice,tax return
preparation,and any related fee
? Reduction of certain itemized
deductions
Tax Planning
Considerations
? Medical expense deduction
? Interest Expense Deduction
? Deduction for charitable contributions
Compliance & Procedural
Considerations
? Medical expenses
–Dependent care credit
vs,Medical expense
deduction
–Compare dependent
care credit rate with
effective marginal tax
rate for additional
medical deductions
Compliance & Procedural
Considerations
? Charitable contributions
– >$500 must file Form
8283
– Property > $5000 should
have appraisal
– >$250 and quid pro quo >
$75 require additional
documentation
Taxes
? Schedule C - related to
taxpayer’s trade or
business
? Schedule E - related to the
production of rents and/or
royalties,or
? Schedule A - if personal
