Deductions and Losses: Certain Itemized Deductions

Deductions and Losses: Certain Itemized Deductions
© 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Big Picture (slide 1 of 3)
John and Susan Williamson have been renting an apartment since they were married They now want to purchase their own home Their current monthly rent is $2,000 They are willing to spend $2,500 per month on an after-tax basis if necessary to purchase their first home 2 © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

After months of house hunting, they have found the perfect home, but they fear it may be too expensive Using a standard mortgage to finance the purchase, the total cash outlay during the first year of ownership would be as follows: Principal payments $ 2,000 Interest payments 37,000 Real estate taxes 4,000 Total cash outlay $43,000 Monthly cost ($43,000 ÷ 12) = $ 3,583 3 © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Alternatively, if they use their retirement and taxable investments to secure financing, they could qualify for a lower interest rate Reduces the interest charge from $37,000 to $35,000 Their Federal AGI will be $200,000 and their taxable income will be between $160,000 and $176,000 for the year They do not itemize their deductions Assume their marginal income tax rate under Georgia law is 6% Can John and Susan Williamson afford to pursue their dream of home ownership? Read the chapter and formulate your response 4 © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Itemized Deductions (slide 1 of 2)
Personal expenditures that are deductible from AGI as itemized deductions include: Medical expenses Certain taxes Mortgage and investment interest Charitable Contributions 5 © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Itemized Deductions (slide 2 of 2)
Itemized deductions provide a tax benefit only to extent that, in total, they exceed the standard deduction amount for the taxpayer © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Big Picture - Example 1 Allowable Itemized Deductions
Return to the facts of The Big Picture on p. 10-1 With the purchase of a home, John and Susan will be able to itemize their deductions for the first time instead of claiming the standard deduction Assuming the home mortgage interest expense and real estate taxes meet the requirements discussed in this chapter, they will be deducted from AGI Their total itemized deductions will exceed the amount of their allowable standard deduction Further, other qualifying expenditures, including up to $10,000 of state and local income and property taxes and charitable contributions will be deductible as itemized deductions, providing an explicit tax benefit to the Williamsons 7 © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Medical Expenses (slide 1 of 5)
Medical expenses are deductible to the extent unreimbursed medical expenses, in total, exceed 7.5% of AGI 10% of AGI for 2019 and later years © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Example of medical expense deduction limitation: Amy, age 24, has AGI of $10,000 and medical expenses of $1,500 in 2018 Amy’s medical expense deduction = $750 [$1,500 – ($10,000 × 7.5%)] © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Expenditures for: The diagnosis, cure, mitigation, treatment, prevention of disease The purpose of affecting any structure or function of the body of the taxpayer, spouse, or dependents Includes prescription drugs and insulin © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Does not include the cost of items such as: Unnecessary cosmetic surgery General health items Nonprescription drugs If cosmetic surgery is deemed necessary, it is deductible as a medical expense Cosmetic surgery is necessary when it ameliorates A deformity arising from a congenital abnormality A personal injury A disfiguring disease © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Medical expenditures are deductible in year paid Includes payment by check or credit card © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Big Picture - Example 2 Medical Expenses
13 © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Examples of Deductible and Nondeductible Medical Expenses
Exhibit 10.1 © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Nursing Home Expenditures
If primary reason for being in nursing home is medical, costs (including meals and lodging) qualify If primary purpose of placement in home is personal, only specific medical costs qualify (no meals or lodging) © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Special School Expenditures
Medical expense deduction may include the expenses of a special school for a mentally or physically handicapped individual Deduction is allowed if a principal reason for sending the individual to the school is the school’s special resources for alleviating the infirmities In this case, the cost of meals and lodging, in addition to the tuition, is a proper medical expense deduction © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Capital Medical Expenditures
May include a pool, air conditioners if they do not become permanent improvements, dust elimination systems, elevators, etc Must be medical necessity, advised by a physician, used primarily by patient, and expense is reasonable Full amount of cost is medical expense in year paid Maintenance on capital expenditures also medical expense © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Capital Improvement to Home
Deductible medical expense only to extent cost exceeds increase in value of home Appraisal costs related to capital improvements are miscellaneous itemized deductions, but not medical expenses Exception: Removal of structural barriers to home of handicapped are deemed to add no value to home As a result, the full amount is a medical expense © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Medical Care for Spouse and Dependents
Taxpayer may deduct cost of medical care for spouse and dependents Dependents need not meet gross income or joint return tests Medical expenses of children of divorced parents can be deducted by non-custodial parent even though child is claimed as dependent of custodial parent © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Medical Transportation and Lodging
Transportation costs to and from medical care are deductible Mileage allowance of 18 cents per mile (in 2018) may be used instead of actual out-of-pocket automobile expenses Lodging while away from home for medical care Allowable amount is $50 per person per night If parent and/or aide needs to accompany patient, their expenses are also deductible © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Big Picture - Example 9 Medical Expenses
Return to the facts of The Big Picture on p. 10-1 Because of her disabilities, John’s mother, Martha, moves in with them She becomes their dependent The family physician advises them that Martha needs specialized treatment for her heart condition. John and Martha fly to Cleveland, Ohio, where Martha receives therapy Expenses in connection with the trip are as follows: Round-trip airfare ($250 each) $500 Lodging in Cleveland for two nights ($120 each per night) $480 Assuming that the Williamsons itemize their deductions, the medical expense deduction is as follows: Transportation $500 Lodging ($50 per night per person) $200 Because Martha is disabled, it is assumed that John’s accompanying her is justified 21 © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Medical Insurance Premiums (slide 1 of 2)
Premiums paid for medical care insurance are deductible medical expenses If employer pays all or part of taxpayer’s medical insurance premiums the amount paid by employer is Not included in gross income by employee Not deductible by the employee as medical expense © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Medical Insurance Premiums (slide 2 of 2)
For self-employed, 100% of insurance premiums are deductible for AGI Includes amounts paid for taxpayer’s spouse and dependents Not allowed if taxpayer is eligible to participate in a subsidized health plan maintained by any employer of the taxpayer or the taxpayer’s spouse Premiums paid for qualified long-term care insurance are deductible medical expenses Subject to limitations based on age of the insured 23 © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Big Picture - Example 10 Medical Insurance Premiums
Return to the facts of The Big Picture on p. 10-1 John Williamson is the sole practitioner in his unincorporated accounting practice During the year, he paid health insurance premiums of $12,000 for his own coverage and $8,000 for coverage for his wife, Susan John can deduct $20,000 as a business deduction (for AGI) in computing their taxable income 24 © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Reimbursement by Medical Insurance
If reimbursed in same year as expense paid: Reimbursement offsets medical expense Amount deductible is excess of expenses over reimbursement If reimbursed in the year after medical expenses were paid: Reimbursement is income only to extent medical deduction decreased taxable income in the earlier year (tax benefit rule) If standard deduction was taken in year expenses were paid, none of the reimbursement is included in income © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Example of Medical Reimbursements (slide 1 of 2)
In 2018, a taxpayer, age 35, paid medical expenses of $4,200 In 2018, taxpayer was reimbursed $800 by insurance company For 2018, deductible medical expense is: ($4,200 - $800) = $3,400 – (7.5% × AGI) © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Example of Medical Reimbursements (slide 2 of 2)
In 2018, taxpayer, paid medical expenses of $4,200 In 2019, taxpayer is reimbursed $800 by insurance company For 2018, deductible medical expense is: $4,200 – (7.5% × AGI) For 2019, reimbursement is income to extent taxpayer received a tax benefit from medical expense deduction in 2018 © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Health Savings Accounts
Used in conjunction with a high deductible medical insurance policy Employee contributions to HSA are deductible for AGI and earnings on funds in account are not taxable Deductible contributions are limited to the sum of the monthly limitations. The monthly deductible amount is limited to the lesser of one twelfth of: $3,450 for self-only ($6,850 for family coverage) in 2018 Withdrawals from HSA are excludible to the extent used for qualified medical expenses © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Taxes (slide 1 of 5) State, local, and foreign income and real property taxes are deductible in the year paid Real property taxes do not include taxes assessed for local benefits For example, special assessments for streets, sidewalks, curbing, and other similar improvements State and local personal property taxes based on value (ad valorem) are deductible in the year paid © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Taxes (slide 2 of 5) Other taxes such as FICA, excise, etc. are not deductible May be deductible if incurred in business or production of income activity Fees are not deductible as a tax © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Taxes (slide 3 of 5) Real estate taxes for year property is sold must be apportioned between the buyer and the seller Failure to correctly apportion requires offsetting adjustments to seller’s amount realized and buyer’s adjusted basis © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Taxes (slide 4 of 5) Can elect to deduct either state and local income taxes or sales/use taxes For state and local income taxes, deduct amounts paid during year: Amounts withheld Estimated tax payments Amounts paid in current year for prior year’s liability For sales/use taxes, deduct either: Actual sales/use tax payments or Amount from an IRS table Table amount may be increased by sales tax paid on certain specific items (e.g., purchase of motor vehicles, boats, etc) © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Taxes (slide 5 of 5) Overall Limit on State and Local Taxes
From 2018 through 2025, the Tax Cuts and Jobs Act (TCJA) of 2017 limits the deduction for all state and local taxes to a maximum of $10,000 per year ($5,000 if married filing separately) Includes property taxes and either income taxes or sales taxes © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Big Picture - Example 16 Deductible Property Taxes
Return to the facts of The Big Picture on p. 10-1 If the Williamsons purchase their home, the real estate taxes they pay will be deductible from AGI (subject to the $10,000 limit) as an itemized deduction If they also pay personal property tax on their car, the payment may be only partially deductible Assume that in their state, the motor vehicle registration tax is 2% of the value of the vehicle plus 40 cents per hundredweight The Williamsons car is valued at $20,000 and weighs 3,000 lbs Their annual registration fee is $412 $400 (2% of $20,000) is deductible as a personal property tax The remaining $12, based on the weight of the car, is not deductible 34 © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Interest Expense Deduction of interest expense is limited to:
Interest on qualified student loans Investment interest Qualified residence (home mortgage) interest Business interest Personal interest expense is not deductible © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Interest on Qualified Student Loans
Deductible for AGI, subject to limits Maximum deduction is $2,500 per year Deduction is phased out for taxpayers with modified AGI (MAGI) between $65,000 and $80,000 ($135,000 and $165,000 on joint returns) Not allowed for those claimed as a dependent or for married filing separate returns © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Qualified Residence Interest (slide 1 of 3)
Interest on indebtedness secured by the principal residence and one other residence (qualified residences) Interest must be on acquisition indebtedness or home equity loans Under the TCJA of 2017, from 2018 through 2025, qualified residence interest only includes interest on acquisition indebtedness Interest on home equity loans is not deductible © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Acquisition indebtedness: amounts incurred to acquire, construct, or substantially improve the qualified residences If the debt is incurred on or before 12/15/17, interest paid on aggregate acquisition indebtedness of $1 million or less ($500,000 for married, filing separately) is deductible as qualified residence interest If the debt is incurred after 12/15/17, and before 01/01/26, acquisition indebtedness is limited to $750,000 ($375,000 for married taxpayers filing separate returns These higher debt limits will apply to all homeowners after 2025, regardless of the date of borrowing. © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Prior to 2018 and after 2025, qualified residence interest also includes interest on home equity loans Home equity loans are secured by qualified residences Interest is deductible only on portion of home equity loan that does not exceed the lesser of: $100,000 ($50,000 for married, filing separate) FMV of home – acquisition indebtedness © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Big Picture - Example 21 Acquisition Indebtedness
Return to the facts of The Big Picture on p. 10-1 John and Susan will need to borrow at least a portion of the purchase price of their new home A standard mortgage likely will qualify as acquisition indebtedness However, the interest on the acquisition indebtedness will be fully deductible only if The amount of the mortgage is $750,000 or less (assuming they file a joint return), and The mortgage is secured by the home Recall that they are also considering what appears to be a less expensive route of using their investments to secure the debt If they choose this alternative, the interest will not be deductible as qualified residence interest because the loan would not be acquisition indebtedness 40 © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Interest Paid For Services (slide 1 of 2)
“Points” paid for the use or forbearance of money qualify as deductible interest Cannot be a service charge if they are to qualify as deductible interest Points generally must be capitalized and amortized over the life of loan © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Interest Paid For Services (slide 2 of 2)
Exception: Points paid in the acquisition or improvement of principal residence Entire amount of such points are deductible in the year paid Points paid to refinance an existing home mortgage must be capitalized and amortized over the life of the new loan © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Investment Interest Investment interest on loans whose proceeds are used to purchase investment property may be deductible For example, investment property may include stock, bonds, and land held for investment Deduction of investment interest expense is limited to net investment income 43 © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Other Interest Expense Limits
Interest expense payable to related parties Interest expense incurred to purchase tax exempt securities Others 44 © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Classification of Interest Expense
Whether interest is deductible for AGI or as an itemized deduction (from AGI) depends on purpose of indebtedness If related to a business or the production of rent or royalty income Interest is deductible for AGI If incurred for personal use, such as qualified residence interest Deduction is reported on Schedule A, Form 1040 if taxpayer itemizes However, interest on a student loan is a deduction for AGI If the taxpayer incurs debt in relation to his or her employment Interest is considered to be personal, or consumer, interest © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Charitable Contributions
Individuals and corporations may deduct contributions made to qualified domestic organizations Contributor must have donative intent and expect nothing in return If contributor receives tangible benefit, the FMV of such benefit reduces the amount of the charitable contribution deduction © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Contribution of Services
No deduction is allowed for the contribution of services Unreimbursed expenses related to the services are deductible Out-of-pocket transportation costs or a standard mileage rate of 14 cents per mile are deductible Deductions are also permitted for transportation, reasonable expenses for lodging, and the cost of meals while away from home incurred in performing the donated services © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Nondeductible Items The following items may not be deducted as charitable contributions: Dues, fees, or bills paid to country clubs, lodges, fraternal orders, or similar groups Cost of raffle, bingo, or lottery tickets Cost of tuition Payment for the right to purchase tickets for seating at an athletic event in a university stadium Value of blood given to a blood bank Donations to homeowners associations Gifts to individuals Rental value of property used by a qualified charity © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Qualified Organizations
To be deductible, contributions must be to a qualified domestic nonprofit organization or state or possession of U.S. or any subdivisions thereof Many (but not all) qualified domestic charities are listed in IRS Publication 78 The IRS maintains a searchable database at: © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Record-Keeping Requirements
No deduction is allowed for charitable contributions unless the taxpayer has appropriate documentation and substantiation The specific type of documentation required depends on the amount of the contribution and whether the contribution is made in cash or noncash property Special rules may apply to gifts of certain types of property (e.g., used automobiles) where Congress has noted taxpayer abuse in the past © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Ordinary Income Property
Defined: assets that would produce ordinary income or short-term capital gain if sold Contribution amount FMV of asset less ordinary income (or STCG) potential; generally the lower of adjusted basis or FMV © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Capital Gain Property Defined: assets that would produce long-term capital gain or Section 1231 gain if sold Contribution amount Generally FMV of asset © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Exceptions to FMV Deduction of Capital Gain Property (slide 1 of 2)
Private nonoperating foundations Deduction for contributions to private nonoperating foundations must be reduced by the amount of long-term capital gain potential Thus, the contribution deduction is limited to the adjusted basis © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Exceptions to FMV Deduction of Capital Gain Property (slide 2 of 2)
For contributions of tangible personalty The charitable deduction may be limited to the adjusted basis if the asset contributed is not used in charity’s exempt function This reduction generally does not apply if The property is, in fact, not put to an unrelated use, or At the time of the contribution, it was reasonable to anticipate that the property would not be put to an unrelated use by the donee © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Example of Contributions of Tangible Personalty
Taxpayer contributes painting to local charity: FMV $100,000 and adjusted basis $10,000 If charitable organization is a local museum that hangs the painting for patrons to view, taxpayer has $100,000 contribution deduction If charitable organization is a local church that sells the painting immediately to obtain funds for its operation, taxpayer has $10,000 contribution © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Charitable Contribution Limitations (slide 1 of 5)
The charitable contribution deduction for a year cannot exceed 50% of the taxpayer’s AGI Contributions of cash, ordinary income property, and certain capital gain property (where the contribution amount is adjusted basis) are subject to the 50% limit (50% assets) Generally, applies to contributions to public charities For example, churches, schools, hospitals, and Federal, state, or local governmental units Also applies to private operating foundations and certain private nonoperating foundations © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Temporary 60 Percent Ceiling From 2018 through 2025, the TCJA of 2017 increases the deduction limit to 60% of AGI for cash donations to organizations subject to the 50% limit The rationale for this increase is to offset the likely drop in charitable donations due to the effect of the TCJA of 2017 on charitable contributions The higher standard deduction and the scaling back of many individual itemized deductions will result in fewer individuals itemizing deductions These changes may reduce the tax incentive to make charitable contributions © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

A 30% ceiling applies to contributions of cash and ordinary income property to private nonoperating foundations that are not 50% organizations The 30% ceiling also applies to contributions of appreciated capital gain property to 50% organizations © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Taxpayer can elect to treat capital gain property as 50% assets by limiting the amount of such contributions to their adjusted bases Referred to as the reduced deduction election Enables the taxpayer to move from the 30% limitation to the 50% limitation © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Certain contributions of capital gain property to private nonoperating foundations © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Charitable Contributions Carryover
Contributions that cannot be taken in current year due to limitations may be carried forward for 5 years Contributions carried forward retain their classification For example, if the contribution originally involved 30% property, the carryover will continue to be classified as 30% property in the carryover year When using carryovers, current contributions are used first, then carryovers used on a FIFO basis © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Example of Charitable Contribution AGI Limits
Taxpayer, AGI $60,000, contributed $2,000 cash and land with a FMV of $30,000 Potential total charitable contribution deduction is $32,000 ($2,000 cash + $30,000 land) 50% limit = $30, % limit = $18,000 Current deduction for the land is limited to $18,000 Amount of current deduction = $20,000 $2,000 cash + $18,000 land = $20,000 Contribution carryforward = $12,000 land (as 30% asset) © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Miscellaneous Itemized Deductions
Prior to 2018 and after 2025, certain expenses are deductible only to the extent, in total, they exceed 2% of AGI Examples include: Professional dues Uniforms Tax return prep fees Job-hunting costs Certain investment expenses Hobby losses Unreimbursed employee expenses © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Misc. Itemized Deductions Not Subject to 2% of AGI Floor
Examples, which are currently deductible, include: Gambling losses to the extent of gambling winnings Impairment-related work expenses of a handicapped person Federal estate tax on income in respect of a decedent Deduction for repayment of amounts under a claim of right if more than $3,000 Unrecovered investment in an annuity contract when annuity ceases by reason of death © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Refocus On The Big Picture (slide 1 of 2)
Because qualified residence interest and real estate taxes are deductible, the after-tax cost of a home purchase is reduced by the tax savings associated with these itemized tax deductions Given the Williamsons’ projected taxable income, they are in the 24% Federal and 6% state tax brackets for an aggregate marginal tax bracket of 30% As a result, the after-tax cost of financing the purchase of the home will be: Nondeductible principal payments $ 2,000 Deductible qualified residence interest and real estate taxes [($37,000 + $4,000) X (1- .30)] 28,700 Total $30,700 After-tax monthly cost ($30,700 ÷ 12) $ 2,558 Because the Williamsons will be able to itemize their deductions if they purchase a new home and will be able to deduct most of their monthly house payment, the home purchase will be affordable 65 © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Refocus On The Big Picture (slide 2 of 2)
What if the Williamsons choose to finance the purchase of their home using their investments as security for the loan? What may appear to be a cost-effective approach ends up being more costly on an after-tax basis With this approach, the interest expense is not deductible It is not qualified residence interest or investment interest Therefore, the after-tax cost of financing the home using this approach makes the home more expensive Nondeductible principal and interest payments $37,000 Deductible real estate taxes [$4,000 X ( )] 2,800 Total $39,800 After-tax monthly cost ($39,800 ÷ 12) $ 3,317 66 © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Dr. Donald R. Trippeer, CPA
If you have any comments or suggestions concerning this PowerPoint Presentation for South-Western Federal Taxation, please contact: Dr. Donald R. Trippeer, CPA SUNY Oneonta © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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