© Copyright by M. Ray Gregg. All rights reserved. 1 Federal Income Tax Personal (Itemized) Deductions

© Copyright by M. Ray Gregg. All rights reserved. 2 Business Personal

© Copyright by M. Ray Gregg. All rights reserved. 3 Personal

© Copyright by M. Ray Gregg. All rights reserved. 4 Itemized Deductions See text page 7-36 Medical Taxes Interest Charitable contributions Casualty Losses Other

© Copyright by M. Ray Gregg. All rights reserved. 5 Itemized Deductions Medical Taxes Interest Charitable Contributions Casualty Losses Other

© Copyright by M. Ray Gregg. All rights reserved. 6 Medical Expenses Define “medical” costs –See text pgs 7-3, 7-4 Name as many examples as possible Name some that are NOT deductible Limits: –“out-of-pocket” costs –Reduced by 7.5% of AGI mitigation

© Copyright by M. Ray Gregg. All rights reserved. 7 Medical Expenses Problem 7-4

© Copyright by M. Ray Gregg. All rights reserved. 8 Problem 7-4 Which enroute costs are deductible? Any limits? Auto/Travel$.?? per mile

© Copyright by M. Ray Gregg. All rights reserved. 9 Automobile Expenses Business$.51pg 9 – 11 Moving$.19pg 9 – 20 Medical$.?? Charitable Contribution

© Copyright by M. Ray Gregg. All rights reserved. 10 Automobile Expenses Business$.51pg 9 – 11 Moving$.19pg 9 – 20 Medical $.19 pg 7 – 4 Charitable Contribution Note: $.12 in 2001 $.13 in 2002 $.12 in 2003 $.14 in 2004 $.15 $.22 in 2005 $.18 in 2006 $.20 in 2007 $.19 in 2008 $.27 $.20 in 2009 $.165 in 2010

© Copyright by M. Ray Gregg. All rights reserved. 11 Automobile Expenses Business$.51 *pg 9 – 11 Moving$.19 *pg 9 – 19 Medical Before 7/1 $.19 After 6/30 $.235 pg 7 – 4 Charitable Contribution * agreement

© Copyright by M. Ray Gregg. All rights reserved. 12 Problem 7-4 Which enroute costs are deductible? Any limits? Auto/Travel$.19 per mile Meals

© Copyright by M. Ray Gregg. All rights reserved. 13 Problem 7-4 Which enroute costs are deductible? Any limits? Auto/Travel$.19 per mile Meals50% Hotel

© Copyright by M. Ray Gregg. All rights reserved. 14 Problem 7-4 Which enroute costs are deductible? Any limits? Auto/Travel$.19 per mile Meals50% Hotel$50 per night

© Copyright by M. Ray Gregg. All rights reserved. 15 Medical Expenses Problem 7-4 Problem 7-5

© Copyright by M. Ray Gregg. All rights reserved. 16 Problem 7-5 Meals? –Not deductible See also P7-?? Lodging? –$50 per night Meals and lodging as outpatient?

© Copyright by M. Ray Gregg. All rights reserved. 17 Medical Expenses Problem 7-4 Problem 7-5 Problem 7-38

© Copyright by M. Ray Gregg. All rights reserved. 18 Problem 7-38 Issue? Define “medical dependent” –Regular dependent = 5 tests –Medical dependent = 3 tests All except GI and joint return Page 7-2, 7-8 $7,300 less 7.5% = $4,300

© Copyright by M. Ray Gregg. All rights reserved. 19 Medical Expenses Problem 7-4 Problem 7-5 Problem 7-38 Problem 7-35

© Copyright by M. Ray Gregg. All rights reserved. 20 Problem 7-35

© Copyright by M. Ray Gregg. All rights reserved. 21 Problem 7-35

© Copyright by M. Ray Gregg. All rights reserved. 22 Problem 7-35

© Copyright by M. Ray Gregg. All rights reserved. 23 Problem 7-35

© Copyright by M. Ray Gregg. All rights reserved. 24 Problem 7-35

© Copyright by M. Ray Gregg. All rights reserved. 25 Problem 7-35

© Copyright by M. Ray Gregg. All rights reserved. 26 Problem 7-35

© Copyright by M. Ray Gregg. All rights reserved. 27 Problem 7-35

© Copyright by M. Ray Gregg. All rights reserved. 28 Problem 7-35

© Copyright by M. Ray Gregg. All rights reserved. 29 Problem 7-35

© Copyright by M. Ray Gregg. All rights reserved. 30 Medical Expenses Problem 7-4 Problem 7-5 Problem 7-38 Problem 7-35 Problem 7-36

© Copyright by M. Ray Gregg. All rights reserved. 31 Problem 7-36

© Copyright by M. Ray Gregg. All rights reserved. 32 Problem 7-36

© Copyright by M. Ray Gregg. All rights reserved. 33 Problem 7-36

© Copyright by M. Ray Gregg. All rights reserved. 34 Problem 7-36

© Copyright by M. Ray Gregg. All rights reserved. 35 Problem 7-36

© Copyright by M. Ray Gregg. All rights reserved. 36 Problem 7-36 Must include “tax benefit.”

© Copyright by M. Ray Gregg. All rights reserved. 37 Medical Expenses Problem 7-4 Problem 7-5 Problem 7-38 Problem 7-35 Problem 7-36 Another Illustration

© Copyright by M. Ray Gregg. All rights reserved. 38 Another Illustration Part I: During the current year, Melanie is involved in an automobile accident and incurs the following expenditures: Doctor bills$11,000 Hospital bills13,000 Melanie is single and has no dependents. Her salary is $40,000, and other itemized deductions are $2,800. Melanie also receives a reimbursement of $17,000 from the insurance company for medical expenses incurred in connection with the accident. What is Melanie’s taxable income for the current year?

© Copyright by M. Ray Gregg. All rights reserved. 39 Another Illustration

© Copyright by M. Ray Gregg. All rights reserved. 40 Another Illustration

© Copyright by M. Ray Gregg. All rights reserved. 41 Another Illustration

© Copyright by M. Ray Gregg. All rights reserved. 42 Another Illustration

© Copyright by M. Ray Gregg. All rights reserved. 43 Another Illustration

© Copyright by M. Ray Gregg. All rights reserved. 44 Another Illustration

© Copyright by M. Ray Gregg. All rights reserved. 45 Another Illustration

© Copyright by M. Ray Gregg. All rights reserved. 46 Another Illustration Remember This

© Copyright by M. Ray Gregg. All rights reserved. 47 Another Illustration Part II: Assume all the same facts, and assume in the following year Melanie receives an additional $6,000 in settlement of a lawsuit arising because of the automobile accident. The settlement is to pay Melanie for the medical expenses incurred because of the accident that were not covered by insurance. What is the proper treatment of this $6,000 settlement?

© Copyright by M. Ray Gregg. All rights reserved. 48 Another Illustration

© Copyright by M. Ray Gregg. All rights reserved. 49 Another Illustration

© Copyright by M. Ray Gregg. All rights reserved. 50 Another Illustration

© Copyright by M. Ray Gregg. All rights reserved. 51 Another Illustration

© Copyright by M. Ray Gregg. All rights reserved. 52 Another Illustration Remember This

© Copyright by M. Ray Gregg. All rights reserved. 53 Another Illustration Must include “tax benefit.”

© Copyright by M. Ray Gregg. All rights reserved. 54 Medical Expenses Problem 7-4 Problem 7-5 Problem 7-38 Problem 7-35 Problem 7-36 Problem 7-39

© Copyright by M. Ray Gregg. All rights reserved. 55 Problem 7-39

© Copyright by M. Ray Gregg. All rights reserved. 56 Problem 7-39

© Copyright by M. Ray Gregg. All rights reserved. 57 Problem 7-39

© Copyright by M. Ray Gregg. All rights reserved. 58 Problem 7-39

© Copyright by M. Ray Gregg. All rights reserved. 59 Problem 7-39

© Copyright by M. Ray Gregg. All rights reserved. 60 Problem 7-39

© Copyright by M. Ray Gregg. All rights reserved. 61 Problem 7-39

© Copyright by M. Ray Gregg. All rights reserved. 62 Problem 7-39

© Copyright by M. Ray Gregg. All rights reserved. 63 Problem 7-39

© Copyright by M. Ray Gregg. All rights reserved. 64 Problem 7-39

© Copyright by M. Ray Gregg. All rights reserved. 65 Problem 7-39

© Copyright by M. Ray Gregg. All rights reserved. 66 Problem 7-39

© Copyright by M. Ray Gregg. All rights reserved. 67 Problem 7-39

© Copyright by M. Ray Gregg. All rights reserved. 68 Problem 7-39

© Copyright by M. Ray Gregg. All rights reserved. 69 Problem $9,000

© Copyright by M. Ray Gregg. All rights reserved. 70 Problem $9,000 “tax benefit”

© Copyright by M. Ray Gregg. All rights reserved. 71 Problem 7-39

© Copyright by M. Ray Gregg. All rights reserved. 72 Problem 7-39

© Copyright by M. Ray Gregg. All rights reserved. 73 Itemized Deductions Medical Taxes Interest Charitable Contributions Casualty Losses Other

© Copyright by M. Ray Gregg. All rights reserved. 74 Taxes Deductible –Property taxes –State income tax –Local income tax Not Deductible –Federal taxes –Sales tax –Excise taxes

© Copyright by M. Ray Gregg. All rights reserved. 75 Taxes Deductible –Property taxes –State income tax –Local income tax Not Deductible –Federal taxes –Sales tax * –Excise taxes

© Copyright by M. Ray Gregg. All rights reserved. © Copyright by M. Ray Gregg. All rights reserved. 76 Sales Tax Update On Oct, 11, 2004 the Senate by a vote of 69-17, approved H.R. 4520, the "American Jobs Creation Act of 2004," clearing the way for the President's expected signature of the measure. The House approved the measure on Oct. 7 by a vote of

© Copyright by M. Ray Gregg. All rights reserved. © Copyright by M. Ray Gregg. All rights reserved. 77 Sales Tax Update Most of the 633 pages of the American Jobs Creation Bill of 2004 dealt with taxes on and tax breaks for businesses. But sandwiched in the tax tome [A book, especially a large or scholarly one], approved by Congress and signed into law by the president, is the OK for consumers to deduct sales taxes from their federal filings. The deduction will be available on 2004 and 2005 tax returns.

© Copyright by M. Ray Gregg. All rights reserved. © Copyright by M. Ray Gregg. All rights reserved. 78 Sales Tax Update “This tax break isn't an add-on; it will require you to choose. You must decide whether you want to deduct the sales taxes you paid or your state income tax amounts.” “The choice is obvious for residents of the seven states that do not collect state income taxes but do levy state sales taxes: Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming.”

© Copyright by M. Ray Gregg. All rights reserved. 79 Taxes Problem 7-40

© Copyright by M. Ray Gregg. All rights reserved. 80 Problem /1 12/

© Copyright by M. Ray Gregg. All rights reserved. 81 Problem /1 4/11 12/31 Pd $

© Copyright by M. Ray Gregg. All rights reserved. 82 Problem /1 12/31 Employer w/h $1, /11 Pd $120

© Copyright by M. Ray Gregg. All rights reserved. 83 Problem /1 4/11 4/1312/31 Employer w/h $1,600 Pd $120 $

© Copyright by M. Ray Gregg. All rights reserved. 84 Problem /1 4/11 4/1512/31 Employer w/h $1,600 Pd $120 $200 Amount deductible? 2010

© Copyright by M. Ray Gregg. All rights reserved. 85 Problem /1 4/11 12/31 Employer w/h $1,600 Pd $120 Did she itemize? 2010

© Copyright by M. Ray Gregg. All rights reserved. 86 Problem /1 4/11 12/31 Employer w/h $1,600 Pd $120 $1,600 + $120 < SD 2010

© Copyright by M. Ray Gregg. All rights reserved. 87 Problem 7-40 (b) 1/1 12/

© Copyright by M. Ray Gregg. All rights reserved. 88 Problem 7-40 (b) 1/1 12/31 Employer w/h $2,

© Copyright by M. Ray Gregg. All rights reserved. 89 Problem 7-40 (b) 1/1 4/13 12/31 Employer w/h $2,100 Pd $

© Copyright by M. Ray Gregg. All rights reserved. 90 Problem 7-40 (b) 1/1 4/13 4/1512/31 Employer w/h $2,100 Pd $200 Rfd $

© Copyright by M. Ray Gregg. All rights reserved. 91 Problem 7-40 (b) 1/1 4/13 4/1512/31 Employer w/h $2,100 Pd $200 Rfd $450 Amount deductible? 2011

© Copyright by M. Ray Gregg. All rights reserved. 92 Problem 7-40 (b) 1/1 4/13 12/31 Employer w/h $2,100 Pd $200 $2,100 + $200 = $2,

© Copyright by M. Ray Gregg. All rights reserved. 93 Problem 7-40 (b) 1/1 4/13 12/31 Employer w/h $2,100 Pd $200 Did she itemize? 2011

© Copyright by M. Ray Gregg. All rights reserved. 94 Problem 7-40 (b) 1/1 4/13 12/31 Employer w/h $2,100 Pd $200 $2,300 + $5,500 > SD 2011

© Copyright by M. Ray Gregg. All rights reserved. 95 Problem 7-40 (c) AGI$51,000 From:Item Ded$7,800 Exemption 3,700 11,500 Taxable Income$39,

© Copyright by M. Ray Gregg. All rights reserved. 96 Problem 7-40 (c) AGI$51,000 From:Item Ded$7,350 Exemption 3,700 11,050 Taxable Income$39, revised

© Copyright by M. Ray Gregg. All rights reserved. 97 Problem 7-40 (d) AGI$53,500 Add: State Tax Rfd From ’ New AGI$53,

© Copyright by M. Ray Gregg. All rights reserved. 98 Taxes Problem 7-40 Problem 7-41

© Copyright by M. Ray Gregg. All rights reserved. 99 Problem /1 4/13 12/31 Employer w/h $2,100 Pd $200 $2,100 + $200 = $2,

© Copyright by M. Ray Gregg. All rights reserved. © Copyright by M. Ray Gregg. All rights reserved. 100 Problem /1 4/13 12/31 Employer w/h $2,100 Pd $200 $2,100 + $200 = $2,

© Copyright by M. Ray Gregg. All rights reserved. 101 Problem State Income Tax$2,300 Mortgage Interest 3,000 Total Item Ded$5,

© Copyright by M. Ray Gregg. All rights reserved. 102 Problem Gross Income$51,000 Total Item Ded$5,300 Exemption 3,200 9,500 Taxable Income$41,

© Copyright by M. Ray Gregg. All rights reserved. 103 Problem Gross Income$51,000 Std Ded$5,800 Exemption 3,200 9,500 Taxable Income$41,

© Copyright by M. Ray Gregg. All rights reserved. 104 Problem Gross Income$51,000 Std Ded$5,800 Exemption 3,700 9,500 Taxable Income$41,

© Copyright by M. Ray Gregg. All rights reserved. 105 Problem 7-41 (b) AGI$53,500 Add: State Tax Rfd From ’11* 0 New AGI$53, * No effect since she used standard deduction.

© Copyright by M. Ray Gregg. All rights reserved. 106 Problem /1 4/13 12/31 Employer w/h $2,100 Pd $200 $2,100 + $200 = $2,

© Copyright by M. Ray Gregg. All rights reserved. © Copyright by M. Ray Gregg. All rights reserved. 107 Problem /1 4/13 12/31 Employer w/h $2,100 Pd $200 $2,100 + $200 = $2, State Sales Tax = $3,000

© Copyright by M. Ray Gregg. All rights reserved. 108 Problem State Sales Tax$3,000 Mortgage Interest 3,000 Total Item Ded$6,000

© Copyright by M. Ray Gregg. All rights reserved. 109 Problem Gross Income$51,000 Total Item Ded$6,000 Exemption 3,700 9,700 Taxable Income$41,300

© Copyright by M. Ray Gregg. All rights reserved. 110 Problem Gross Income$51,000 Total Item Ded$6,300 Exemption 3,700 9,950 Taxable Income$41,050

© Copyright by M. Ray Gregg. All rights reserved. 111 Problem 7-41 (b) AGI$53,500 Add: State Tax Rfd From ’11* 0 New AGI$53, * No effect since she deducted sales taxes

© Copyright by M. Ray Gregg. All rights reserved. 112 Problem 7-41 Generally... Itemize previous year = include Standard previous year = exclude “Straddle” Deduct sales tax rather than income tax previous year = exclude “Tax Benefit”

© Copyright by M. Ray Gregg. All rights reserved. 113 Taxes Problem 7-40 Problem 7-41 Problem 7-42

© Copyright by M. Ray Gregg. All rights reserved. 114 Problem 7-42 Total Deductible Fed Taxes W/H$5,400 State Tax W/H2,000$2,000 FICA Tax W/H3,800 Sales Tax on Car600 License70 Prop Tax on Car2%

© Copyright by M. Ray Gregg. All rights reserved. 115 Problem 7-42 Total Deductible Fed Taxes W/H$5,400 State Tax W/H2,000$2,000 FICA Tax W/H3,800 Sales Tax on Car600 License70 Prop Tax on Car2%400 Prop Tax on Car$10/100#

© Copyright by M. Ray Gregg. All rights reserved. 116 Problem 7-42 Total Deductible Fed Taxes W/H$5,400 State Tax W/H2,000$2,000 FICA Tax W/H3,800 Sales Tax on Car600 License70 Prop Tax on Car2%400 Prop Tax on Car$10/100# Prop Tax on House1,850???

© Copyright by M. Ray Gregg. All rights reserved. 117 Problem /1 4/15 12/31 Taxes $1,850 for year

© Copyright by M. Ray Gregg. All rights reserved. 118 Problem /1 4/15 12/31 $

© Copyright by M. Ray Gregg. All rights reserved. 119 Problem 7-42 Total Deductible Fed Taxes W/H$5,400 State Tax W/H2,000$2,000 FICA Tax W/H3,800 Sales Tax on Car600 License70 Prop Tax on Car2%400 Prop Tax on Car$10/100# Prop Tax on House1, Total$2,927

© Copyright by M. Ray Gregg. All rights reserved. 120 Taxes Problem 7-40 Problem 7-41 Problem 7-42 Problem 7-43

© Copyright by M. Ray Gregg. All rights reserved. 121 Problem /30 $6,000 5/1

© Copyright by M. Ray Gregg. All rights reserved. 122 Problem 7-43 (a) 6/30 $6,000 5/1 Janet (buyer): $6,000 x 61/365 = $1,003 ???

© Copyright by M. Ray Gregg. All rights reserved. 123 Problem 7-43 (b) 6/30 $6,000 5/1 Janet (buyer): $6,000 x 61/365 = $1,003 Tara (seller): $6,000 x 304/365 = $4,997

© Copyright by M. Ray Gregg. All rights reserved. 124 Problem 7-43 (c) Janet (buyer): $6,000 x 61/365 = $1,003 Tara (seller): $6,000 x 304/365 = $4,997 Tara’s sales price = $500,000 + $4,997 Janet’s purchase price = $500,000 + $4,997

© Copyright by M. Ray Gregg. All rights reserved. 125 Itemized Deductions Medical Taxes Interest Charitable Contributions Casualty Losses Other

© Copyright by M. Ray Gregg. All rights reserved. 126 Interest Page 1, line 33ForStudent Loan Schedule AFromHome Mortgage Not Personal Schedule AFromInvestment Not Passive Schedule CForBusiness

© Copyright by M. Ray Gregg. All rights reserved. 127 Interest Page 1, line 33ForStudent Loan Schedule AFromHome Mortgage Not Personal Schedule AFromInvestment Not Passive Schedule CForBusiness

© Copyright by M. Ray Gregg. All rights reserved. 128 Interest Problem 7-14 How is the classification determined? –Collateral? –Use? Use

© Copyright by M. Ray Gregg. All rights reserved. 129 Interest Problem 7-14 Investment Interest Illustration

© Copyright by M. Ray Gregg. All rights reserved. 130 Investment Interest Investment interest deductible to the extent of “net investment income.” “Net Investment Income” determined as follows: II -IE =NII

© Copyright by M. Ray Gregg. All rights reserved. 131 Investment Interest Illustration During the current year, David reports interest and dividend income of $18,000, net short-term capital gains of $6,000, and net long-term capital gains of $7,000. His AGI is $120,000. His investment expenses, exclusive of interest, are $5,000. During the year David also pays a total of $55,000 interest on debt incurred on his investment activities. David is married and files a joint return. a.What is the total amount of deduction Dave may take with respect to his investment interest expense if he does not make a special election?

© Copyright by M. Ray Gregg. All rights reserved. 132 Illustration (a)

© Copyright by M. Ray Gregg. All rights reserved. 133 Illustration (a)

© Copyright by M. Ray Gregg. All rights reserved. 134 Illustration (a)

© Copyright by M. Ray Gregg. All rights reserved. 135 Illustration (a)

© Copyright by M. Ray Gregg. All rights reserved. 136 Illustration (a)

© Copyright by M. Ray Gregg. All rights reserved. 137 Illustration (a)

© Copyright by M. Ray Gregg. All rights reserved. 138 Investment Interest Illustration During the current year, David reports interest and dividend income of $18,000, net short-term capital gains of $6,000, and net long-term capital gains of $7,000. His AGI is $120,000. His investment expenses, exclusive of interest, are $5,000. During the year David also pays a total of $55,000 interest on debt incurred on his investment activities. David is married and files a joint return. a.What is the total amount of deduction Dave may take with respect to his investment interest expense if he does not make a special election? b.What is the treatment of any disallowed investment interest expense?

© Copyright by M. Ray Gregg. All rights reserved. 139 Illustration (b)

© Copyright by M. Ray Gregg. All rights reserved. 140 Investment Interest Illustration During the current year, David reports interest and dividend income of $18,000, net short-term capital gains of $6,000, and net long-term capital gains of $7,000. His AGI is $120,000. His investment expenses, exclusive of interest, are $5,000. During the year David also pays a total of $55,000 interest on debt incurred on his investment activities. David is married and files a joint return. a.What is the total amount of deduction Dave may take with respect to his investment interest expense if he does not make a special election? b.What is the treatment of any disallowed investment interest expense? c.What is the total amount of deduction David may take with respect to his investment interest expense if he elects to have his net capital gain taxed at the regular marginal tax rates?

© Copyright by M. Ray Gregg. All rights reserved. 141 Illustration (c)

© Copyright by M. Ray Gregg. All rights reserved. 142 Illustration (c)

© Copyright by M. Ray Gregg. All rights reserved. 143 Illustration (c)

© Copyright by M. Ray Gregg. All rights reserved. 144 Interest Problem 7-14 Investment Interest Illustration Problem 7-49

© Copyright by M. Ray Gregg. All rights reserved. 145 Problem 7-49 a. ($12,000 - $10,200) = $1,800 $1,800  4 = $450 $450 x 2 = $900 b. None – no payments made c. $1,800 x 9/12 = $1,350

© Copyright by M. Ray Gregg. All rights reserved. 146 Itemized Deductions Medical Taxes Interest Charitable Contributions Casualty Losses Other

© Copyright by M. Ray Gregg. All rights reserved. 147