1. 7-1 ©2010 Pearson Education, Inc. Publishing as Prentice Hall

2. 7-2 ITEMIZED DEDUCTIONS (1 of 2)  Medical expenses  Taxes  Interest  Charitable contributions  Casualty and theft losses  Miscellaneous itemized deductions ©2010 Pearson Education, Inc. Publishing as Prentice Hall

3. 7-3 ITEMIZED DEDUCTIONS (2 of 2)  Reduction of certain itemized deductions  Tax planning considerations  Compliance and procedural considerations ©2010 Pearson Education, Inc. Publishing as Prentice Hall

4. 7-4 Medical Expenses  Qualified individuals  Qualified medical expenses  Amount and timing of deduction ©2010 Pearson Education, Inc. Publishing as Prentice Hall

5. 7-5 Qualified Individuals  Medical expenses paid for taxpayer, taxpayer’s spouse, or dependent  Dependent qualifies even if fails dependency test due to failure to meet gross income or joint return tests  Children of divorced parents  Not required to be custodial parent to take deduction for medical expenses paid on behalf of a person ©2010 Pearson Education, Inc. Publishing as Prentice Hall

6. 7-6 Qualified Medical Expenses (1 of 2)  Diagnosis, cure, mitigation, treatment, or prevention of disease  Transportation  $0.24/mile std. mileage rate  Includes meals & lodging if overnight  Capital expenditures  Excess of cost over amount by which value of home increases ©2010 Pearson Education, Inc. Publishing as Prentice Hall

7. 7-7 Qualified Medical Expenses (2 of 2)  Cost of living in institutions  Medical insurance premiums  Includes qualified long-term care insurance premiums  No cosmetic surgery unless it treats illness or promotes proper body function ©2010 Pearson Education, Inc. Publishing as Prentice Hall

8. 7-8 Amount and Timing of Deduction  Deductible in year paid  Amount of qualified medical expenses that exceed 7.5% of AGI  Medical insurance reimbursements  Only unreimbursed portion deductible  Self-employeds may deduct health insurance as a for deduction AGI ©2010 Pearson Education, Inc. Publishing as Prentice Hall

9. 7-9Taxes  Definition of a tax  Deductible taxes  Nondeductible taxes  State and local income taxes  State and local sales taxes  Personal property taxes  Real estate taxes  Self-employment tax ©2010 Pearson Education, Inc. Publishing as Prentice Hall

10. 7-10 Definition of a Tax  Mandatory assessment levied under authority of a political entity for purpose of raising revenue used for public or governmental purposes ©2010 Pearson Education, Inc. Publishing as Prentice Hall

11. 7-11 Deductible Taxes  State, local, & foreign real property taxes  State and local personal property taxes  If based on value  Foreign, state & local income, war profits, and excess profits taxes  State and local sales taxes  If an election is made instead of deducting state and local income taxes (through 2009) ©2010 Pearson Education, Inc. Publishing as Prentice Hall

12. 7-12 Nondeductible Taxes  Taxes imposed by the Federal gov’t generally not deductible  Exceptions  Employer’s share of social security tax is deductible by employer as business expense  Federal import tariffs & excise taxes  Unless for business or production of income ©2010 Pearson Education, Inc. Publishing as Prentice Hall

13. 7-13 State and Local Income Taxes  Cash-basis taxpayers deduct state and local income tax paid or withheld even if the taxes are attributable to another tax year ©2010 Pearson Education, Inc. Publishing as Prentice Hall

14. 7-14 Personal Property Taxes  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 ©2010 Pearson Education, Inc. Publishing as Prentice Hall

15. 7-15 Real Estate Taxes (1 of 2)  Apportionment of taxes  Necessary when real estate is sold during the year  Real property assessments only against property benefited  Capitalized costs—not deductible  E.g., Sidewalk or new sewer lines ©2010 Pearson Education, Inc. Publishing as Prentice Hall

16. 7-16 Real Estate Taxes (2 of 2)  Additional standard deduction for real property taxes in 2009 if taxpayer does not itemize deductions  Limited to lesser of  Amount that would be deductible as an itemized deduction, or  $500 ($1,000 if MFJ) ©2010 Pearson Education, Inc. Publishing as Prentice Hall

17. 7-17 Self-Employment Tax  Pay tax on self-employment income in lieu of payment of Social Security tax on salary  ½ of SE tax deductible for AGI ©2010 Pearson Education, Inc. Publishing as Prentice Hall

18. 7-18Interest  Definition of interest  Classification of interest expense  Timing of the interest deduction ©2010 Pearson Education, Inc. Publishing as Prentice Hall

19. 7-19 Definition of Interest  Compensation for use or forbearance of money  Bank service charges and certain loan acquisition costs not considered interest for tax purposes ©2010 Pearson Education, Inc. Publishing as Prentice Hall

20. 7-20 Classification of Interest Expense (1 of 2)  Depends on purpose of indebtedness  Active trade or business  For AGI deduction  Passive activity  Subject to passive activity loss limitation  Used to compute net passive income/loss  Investment interest  Deductible up to net investment income ©2010 Pearson Education, Inc. Publishing as Prentice Hall

21. 7-21 Classification of Interest Expense (2 of 2)  Qualified residence and home equity loan  Interest on up to $1M of acquisition debt  Points on acquisition indebtedness also deductible  May deduct interest on additional $100K of home equity indebtedness  Student loan interest  Up to $2,500 deductible as for AGI deduction  Phased out at higher income levels ©2010 Pearson Education, Inc. Publishing as Prentice Hall

22. 7-22 Timing of the Interest Deduction (1 of 2)  Prepaid interest  Capitalized and amortized over period to which interest relates  Discounted notes  Cash method taxpayer deducts at time of repayment  Accrual method taxpayer amortizes over life of loan ©2010 Pearson Education, Inc. Publishing as Prentice Hall

23. 7-23 Timing of the Interest Deduction (2 of 2)  Interest paid on debt used to pay another creditor generally deductible  Interest owed to a related party by an accrual method taxpayer  Cannot deduct interest until interest paid  Imputed interest  Applies to below-market loans ©2010 Pearson Education, Inc. Publishing as Prentice Hall

24. 7-24 Charitable Contributions  Qualifying organization  Type of property contributed  Deduction limitations  Application of carryovers  Special rules for charitable contributions made by corporations ©2010 Pearson Education, Inc. Publishing as Prentice Hall

25. 7-25 Qualifying Organization  U.S., District of Columbia, state or possession of U.S.  Post or organization of war veterans  Domestic fraternal society, or order, or association  Public Charities  Churches, educational Institutions, hospitals, medical schools ©2010 Pearson Education, Inc. Publishing as Prentice Hall

26. 7-26 Type of Property Contributed (1 of 2)  Contribution of long-term capital gain property  Generally FMV  Use adjusted basis if  Contributed to private nonoperating foundation  Unrelated use by charitable organization  Certain intangibles ©2010 Pearson Education, Inc. Publishing as Prentice Hall

27. 7-27 Type of Property Contributed (2 of 2)  Contribution of ordinary income prop  Value generally adjusted basis  Exception for corp donation of inventory  Contribution of services  Only out-of-pocket and transportation expenses deductible ©2010 Pearson Education, Inc. Publishing as Prentice Hall

28. 7-28 Deduction Limitations  50% of AGI overall limitation  Applies to public charities  Sum of all contributions limited to 50%  30% of AGI limitation  Contributions of capital gain property  20% of AGI limitation  Capital gain property contributed to private nonoperating foundations ©2010 Pearson Education, Inc. Publishing as Prentice Hall

29. 7-29 Application of Carryovers  Carried over and deducted in subsequent five years  Apply with regard to special limitations  Use FIFO to apply carryovers ©2010 Pearson Education, Inc. Publishing as Prentice Hall

30. 7-30 Special Rules for Contributions Made by Corporations  Pledges made by accrual method corporations  Deductible in year pledged if paid by 15 th day of 3 rd month after year end  Limitation applicable to corporations  Cannot exceed 10% of corporation’s taxable income ©2010 Pearson Education, Inc. Publishing as Prentice Hall

31. 7-31 Casualty and Theft Losses  Individuals can deduct casualty or theft loss on personal-use property as an itemized deduction  Subject to floor of $100 per item plus 10 % of AGI ©2010 Pearson Education, Inc. Publishing as Prentice Hall

32. 7-32 Miscellaneous Itemized Deductions  Certain employee expenses  Expenses to produce income  Cost of tax advice ©2010 Pearson Education, Inc. Publishing as Prentice Hall

33. 7-33 Certain Employee Expenses  Unreimbursed employee business expenses  Include travel, transportation, dues to professional organizations, cost of job hunting  Generally miscellaneous itemized deductions subject to a 2% of AGI floor ©2010 Pearson Education, Inc. Publishing as Prentice Hall

34. 7-34 Expenses to Produce Income  Expenses to produce investment income other than rents or royalties  Miscellaneous itemized deductions subject to 2% of AGI floor  Investment interest NOT subject to the 2% of AGI floor ©2010 Pearson Education, Inc. Publishing as Prentice Hall

35. 7-35 Cost of Tax Advice  Includes  Tax return preparation fees  Appraisal fees in determining amount of casualty loss  Accountant fees for representation in a tax audit  Miscellaneous itemized deductions subject to 2% of AGI floor ©2010 Pearson Education, Inc. Publishing as Prentice Hall

36. 7-36 Reduction of Certain Itemized Deductions (1 of 2)  Reduction in total of most itemized deductions for high-income taxpayers  Only applies to individuals with AGI in excess of $166,800  Reduction is 1% (in 2009) of amount that individual’s AGI for year exceeds threshold amount ©2010 Pearson Education, Inc. Publishing as Prentice Hall

37. 7-37 Reduction of Certain Itemized Deductions (2 of 2)  Two limitations apply  Reduction can not exceed 80% of itemized deduction other than medical, investment, casualty losses, and wagering losses AND  The 1% is applied after taking into account other limitations on itemized deductions  e.g. 2% of AGI on miscellaneous deductions  Reduction eliminated after 2009 ©2010 Pearson Education, Inc. Publishing as Prentice Hall

38. 7-38 Tax Planning Considerations (1 of 2)  Medical expense deduction  Bunch medical expenses into a single year to exceed 7.5% of AGI floor  Interest expense deduction  May deduct residential interest on any two residences  If vacation home used > of 14 days or 10% of rental days personal portion qualifies as a residence ©2010 Pearson Education, Inc. Publishing as Prentice Hall

39. 7-39 Tax Planning Considerations (2 of 2)  Deduction for charitable contributions  Election to reduce amount of contribution  Donation of appreciated long-term capital gain property  Significant substantiation requirement ©2010 Pearson Education, Inc. Publishing as Prentice Hall

40. 7-40 Compliance and Procedural Considerations (1 of 3)  Medical expenses  Dependent care credit vs. medical expense deduction  Compare dependent care credit rate with effective marginal tax rate for additional medical deductions ©2010 Pearson Education, Inc. Publishing as Prentice Hall

41. 7-41 Compliance and Procedural Considerations (2 of 3)  Charitable contributions  >$500 must file Form 8283  Property > $5,000 should have appraisal  >$250 and quid pro quo > $75 require additional documentation ©2010 Pearson Education, Inc. Publishing as Prentice Hall

42. 7-42 Compliance and Procedural Considerations (3 of 3)  Taxes  Schedule C - related to taxpayer’s trade or business  Schedule E - related to the production of rents and/or royalties  Schedule A - if personal ©2010 Pearson Education, Inc. Publishing as Prentice Hall

43. Comments or questions about PowerPoint Slides? Contact Dr. Richard Newmark at University of Northern Colorado’s Kenneth W. Monfort College of Business richard.newmark@PhDuh.com 7-43 ©2010 Pearson Education, Inc. Publishing as Prentice Hall