©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 5 Itemized Deductions and Other Incentives Income Tax Fundamentals 2008 edition Gerald E. Whittenburg Martha Altus-Buller Student’s copy

©2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 2 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

©2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 3 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

©2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 4 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

©2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 5 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

©2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 6 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

©2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 7 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

©2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 8 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

©2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 9 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

©2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 10 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

©2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 11 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

©2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 12 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

©2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 13 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

©2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 14 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 for limits based on filing status  Phase out limited to 1/3 of exemption amount ($1,133)

©2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 15 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