1. Chapter 7
Itemized Deductions 1

2. 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 2

3. Learning Objectives Identify different types of interest deductions
Compute the amount of investment interest deduction
Compute the deduction for qualified residence interest 2

4. 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 3

5. Medical Expenses Qualified individuals Qualified medical expenses
Amount and timing of deduction 4

6. 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 5

7. 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. 6

8. 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

9. 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 7

10. 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 8

11. 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 9

12. 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 10

13. State And Local Income Taxes
Cash-basis taxpayers deduct state and/or local income tax paid or withheld regardless of tax year involved 11

14. 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 12

15. 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 13

16. General Sales Tax
The deduction for general sales tax was repealed by the tax reform act of 1986, effective for 1987 and later.
Instead sales tax is treated as part of purchase price of the property. 14

17. Self-Employment Tax
Pay tax on their self-employment income in lieu of the payment of Social Security tax on salary

18. 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 15

19. 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 16

20. 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 17

21. 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 18

22. 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

23. Casualty And Theft Losses
Individuals can deduct casualty or theft loss on personal-use property as an itemized deduction Schedule A of Form Subject to $100 and 10 % floor 19

24. 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 20

25. Tax Planning Considerations
Medical expense deduction
Interest Expense Deduction
Deduction for charitable contributions 21

26. 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 22

27. Compliance & Procedural Considerations
Charitable contributions
>$500 must file Form 8283
Property > $5000 should have appraisal
>$250 and quid pro quo > $75 require additional documentation 23

28. 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 24