1. VITA: 01/17/09 Lesson 19: Itemized Deductions
Winter 2008
Kristina Shroyer

2. Lesson 20: Itemized Deductions
What is an Itemized Deduction?
Most taxpayers have a choice between taking the standard deduction or itemized deductions whichever is better for them
Itemized Deductions are also subtracted from a taxpayers AGI.
However, itemized deductions are based on specific personal expenses of the taxpayer
will be different for each taxpayer based on a number of factors
taxpayer must keep records of these personal expenses
To determine if a taxpayer MUST Itemize
use the Interview tips in Tab F (Page F-1) of your Volunteer Resource Guide (we talked about this in the last lesson)
Read the tip on page 20-2
If you think a taxpayer may benefit from itemizing
Enter the qualified expense in the TaxWise software
Taxwise will automatically select the larger of the standard deduction and the itemized deduction for the taxpayer's return
You can also use the interview tips on Page F-2 and F-3 of your Volunteer Resource Guide
How are Itemized Deductions Determined/Reported?
Using Schedule A (Page 219 in Appendix C of Pub 4491-W)
Once the Itemized Deductions are calculated (if greater than the standard deduction) they go on line 40 of Form 1040

3. Lesson 20: Itemized Deductions
What expenses to Itemized Deductions Include?
Medical and Dental Expenses
Certain Taxes Paid
Mortgage Interest and certain Investment Interest
Gifts to Charity
Other Miscellaneous Deductions
Medical and Dental Expenses (Sch A lines 1-4)
Taxpayers can deduct on Schedule A only the amount of deductible medical and dental expenses that EXCEED 7.5% of their AGI
So multiply the taxpayer's AGI by .075 and only medical expenses in excess of this are deductible
Let's say a taxpayer had AGI of $100,000 and medical expenses of $ None would be deductible
Which Medical Expenses are Deductible?
Whose Expenses are covered?
Expenses paid by the taxpayer for: the taxpayer, the taxpayer's spouse, and any dependents claimed at the time the medical services were provided or paid for
Look at the second tip
What type of Expenses are covered?
Unreimbursed medical and dental expenses and eligible Long Term care premiums
the expenses can NOT be paid with pre-tax dollars or reimbursed by an insurance company
See Publication 17 Page 143 for a general checklist
Look at Exercise page 20-3

4. Lesson 20: Itemized Deductions
Taxes that May be Deductible
Look at page146 of Publication 17 for more info on these
Real Estate Taxes (line 6)
state foreign or local based on the assessed value of the taxpayer's real property
To claim real estate taxes, the taxpayer must be legally liable for the taxes and must pay them during the year
These are either reported on Form 1098 or can be found on a taxpayers yearly property tax assessment
Make sure the taxpayer has a record of what they actually PAID during the year, just because the taxes were assessed doesn't mean they were paid
State and Local Income Taxes (line 5)
We'll talk about Sales Taxes when we go over the supplement
The taxes that can be deducted for this are state and local tax withheld on a W-2 (CA State W/H and CA SDI), other state or local tax withheld, estimated state or local tax payments and state tax paid this year for an earlier year
The key it is it is state and local taxes paid this year

5. Lesson 20: Itemized Deductions
Taxes that May be Deductible (continued)
General Sales Taxes instead of State and Local Income Taxes
This material is in the publication 4991-X Supplement we handed out
We were just talking about deducting State and Local Income taxes on line 5
In 2008 a taxpayer can elect to deduct state and local general SALES taxes instead of state and local income taxes
This would only be done if state and local sales taxes results in a higher deduction for the taxpayer than state and local income taxes
If the taxpayer makes this election
Check box b on line 5 of Schedule A
Get the amount of state and local sales taxes to enter on line 5 from
Actual receipts (provided by the taxpayer)
Optional Sales Tax Tables in the Schedule A instructions
Get these from the IRS website - Page A-11 through A-13
First find CA in the first optional table, and based on the taxpayer's filing status and exemptions find an amount
Some states and localities get to use optional tables to add additional taxes to the amount from the first table
For Los Angeles County you will use one of the Optional Tables, Table A
Add this amount to what you calculated from the first table
Taxpayers using this method may also add state and local sales tax paid on certain specified items such as motor vehicles, boats, homes, and home building materials
There is a worksheet to do this with on page A-4 of the Schedule A instructions
Example: What would the sales tax number be for a taxpayer from LA county with $55,000 in AGI and one exemption ($678 + $92

6. Lesson 20: Itemized Deductions
Taxes that May be Deductible (continued)
General Sales Taxes instead of State and Local Income Taxes (cointinued)
This material is in the publication 4991-X Supplement we handed out
How to compute Sales Tax using the Optional Sales Tax Tables instead of actual receipts
Optional Sales Tax Tables in the Schedule A instructions
Get these from the IRS website - Page A-11 through A-13
General Idea on how it works (there's a little more to it in the worksheet but just follow the instructions):
First find CA in the first optional table, and based on the taxpayer's filing status and exemptions find an amount
Some states and localities get to use optional tables to add additional taxes to the amount from the first table
For Los Angeles County you will use one of the Optional Tables, Table A
Add this amount to what you calculated from the first table
Taxpayers using this method may also add state and local sales tax paid on certain specified items such as motor vehicles, boats, homes, and home building materials
There is a worksheet to do this with on page A-4 of the Schedule A instructions

7. Lesson 20: Itemized Deductions
Taxes that May be Deductible (continued)
Look at page146 of Publication 17 for more info on these
Personal Property Tax (line 7)
Payments based on the value of personal property
Most common one – property tax paid with the DMV registration…you can only deduct the property tax portion (the part paid based on the value)
Foreign Income taxes (line 8)
Sometimes these will show up on a 1099-DIV
Anything other than this is probably out of scope for VITA
If they do you can deduct them here or take them as a credit whichever is better
The credit will be discussed in lessons coming up
Exercise page 20-5

8. Lesson 20: Itemized Deductions
Interest
Types of Interest that are deductible (lines 10-15)
Home Mortgage Interest
Points (paid in the form of interest)
Certain Types of Investment Interest
This is outside the scope of VITA and taxpayers with this should be referred to a professional tax preparer
Home mortgage interest is normally reported on Form 1098
Points paid in connection with the purchase of a home are also normally reported on Form 1098
Points paid with a refinance are often shown on the closing statement for the refinance
Only taxpayers legally liable for the debt can deduct the mortgage interest in the year it was paid
Taxpayers may have multiple mortgages and may have refinanced one or more times during the year
Make sure you ask and have all the Form 1098s and closing papers if needed
For mortgage interest to be fully deductible it must fit into one of the categories on page 151 of Publication 17 (let's read these out loud)
There is a flow chart that you can use on page 152 also
Now look at the example on page 20-6

9. Lesson 20: Itemized Deductions
Interest (continued)
Home Mortgage Interest and Points Reported on Form 1098
Go on line 10 of Sch A
Taxpayers can deduct interest on their main home and on a second home if the interest on both is deductible based on the rules.
Home: house, condo, mobile home, houseboat etc.
What about points?
Points are charges paid by the borrower/seller/both to secure a loan.
Points go by different names (you'll see them listed as such on closing statements)
See list on page 20-6
Most common ones I see are: Loan Origination Fees and Prepaid Interest
Only points paid as a form of interest (for the use of money) can be deducted on Sch A
Points paid on a loan to buy or build a taxpayers main home may be fully deductible in the year paid
Points paid for a refinance (in most situations) or any reason other than the above must be deducted over the live of the mortgage (usually years)
Points paid for specific services such as appraisal fees, preparation fees etc. are not interest and are not deductible
Use flow chart in Publication 17 – Page 154

10. Lesson 20: Itemized Deductions
Interest (continued)
Qualified Mortgage Insurance Premiums
Also called PMI – Private Mortgage Insurance
Taxpayers can deduct PMI premiums paid or accrued during the tax year on line 13 of Sch A
The qualifications for PMI to be deductible are on page 20-7
What type of interest is not deductible
See list on page 20-7
Exercise Page 20-7

11. Lesson 20: Itemized Deductions
Gifts To Charity (lines – Sch A)
Taxpayers can deduct contributions to qualifying organizations
Qualifying organizations are shown on page 20-8
Page 20-8 also shows deductible items and non-deductible items in regard to charity
In particular look at the non-qualifying organizations and non-deductible items
Some that come up a lot at our firm – taxpayers think they can deduct and cannot
Political Donations
Girl Scout Cookies! (You received a cookie so you can't deduct the value of the cookie, only the amount attributable to charity)
The dinner part of a charity dinner
Look at page 159 of publication 17 – look at Column 1 of the table at the top of the page for a good list of deductible charitable contributions

12. Lesson 20: Itemized Deductions
Gifts To Charity (lines – Sch A - continued)
What limits apply to Charitable Donations?
If a taxpayer's charitable contributions are more than 20% of their AGI the deduction will be limited, the limited amount can be carried forward for a possible deduction in future years
There are also limits depending on the type of gift – the organizations you do will fall under the 50% additional limits
If you enter the contributions correctly in TaxWise it should apply this limitation for you
Non Cash and Cash contributions will be entered separately
What records should be kept for cash donations?
Taxpayers MUST keep records to prove the amount of cash and non-cash charitable donations they made
If a taxpayer did not keep records they cannot deduct the charitable contribution
They should keep one of the following types of records for EACH CASH donation:
A bank record such as a canceled check or a bank statement showing the name, date, and amount of the check
A written communication from the charity which must include: the charity's name, the date of the contribution, and the amount of the contribution
What records must be kept for out of pocket charitable expenses?
The taxpayer must have:
Adequate Records of the Expenses
The organization's written acknowledgement of the volunteer services
The value of someone's TIME can NOT be deducted
Only expenses directly related to the donated services can be deducted

13. Lesson 20: Itemized Deductions
Gifts To Charity (lines – Sch A - continued)
What records must be kept non-cash charitable contributions?
There are different records required for non-cash donations that are less than $250, non-cash donations that are $250 or more but not more than $500 and non-cash donations of more than $500
Records must be kept for each donation
First lets look at required records for donations less that $250 on page 20-10
Receipt or written communication from the charity is required and must show the information listed
Deductions are not allowed for charitable contributions of clothing and household items if the items are not in good used condition or better
Required records for donations of at least $250 but not more than $500
Taxpayer needs all the records required for donations less than $250 AND
The organizations written acknowledgement must state whether the taxpayer received any goods or services in return for the donation as well as a good faith estimate of the value of the donation
Non-cash donations exceeding $500 must be referred to a professional tax preparer
Exercise page 20-10

14. Lesson 20: Itemized Deductions
Casualty and Theft Losses
Outside the scope of VITA
Miscellaneous Deductions
Two Types
Those subject to the 2% limit
meaning only miscellaneous deductions of this type in excess of 2% of the Taxpayer's AGI are deductible
Those not subject to the 2% limit
Deductions Subject to 2% limit (see list on page 20-11)
Notice a lot of this are unreimbursed professional or job related expenses
We'll talk more about unreimbursed business expenses in the next section
Deductions NOT subject to the 2% limit
NOT very many!
Gambling losses to the extent of winnings
Gambling losses in excess of winnings are outside the scope of VITA
Work related expenses for individuals with a disability that enable them to work
Let's take a look at the Miscellaneous Deductions section of the Schedule A to see where these deductions will be entered and how it will work