2013 cch basic principles ch08

Chapter 8

Deductions:Itemized Deductions

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CCH Federal Taxation Basic Principles 2 of 24

1. Medical Expenses

2. Medical Care—Capital Expenditures

3. Medical Transportation and Lodging

4. Medical Care

5. Medical Insurance Premiums

6. Property Taxes

7. Income Taxes

8. Interest

9. Qualified Residence Interest

Chapter 8 Exhibits

Chapter 8, Exhibit Contents A


10. Other Interest

11. Charitable Contributions

12. Charitable Organizations

13. Charitable Contribution Limitations

14. Charitable Contribution Valuations

15. Personal Casualty and Theft Losses

16. Netting Personal-Use Casualty and Theft Gains and Losses

17. Special Disaster Election

18. Miscellaneous Itemized Deductions

Chapter 8 Exhibits

Chapter 8, Exhibit Contents B


Medical Expenses

Medical expenses in excess of 7.5% of AGI are allowed as an itemized deduction.

The deduction is allowed only for medical expenses actually paid during the year.

Medical expenses must be for medical care of the taxpayer, spouse or a dependent of the taxpayer. A child of divorced parents is treated as the dependent of both parents for purposes of the medical expense deduction. Also, the gross income requirement for the dependency exemption is waived for the purpose of the medical expense deduction.

Chapter 8, Exhibit 1


Qualified expenditures for home improvements and additions may be deductible to the extent that their costs exceed any increase in the fair market value of the existing structure.

Examples: Adding wheelchair ramps Widening doorways to create wheelchair access Adding a swimming pool prescribed by a physician to

alleviate some ailment such as partial paralysis Installing an elevator to provide handicap access between

floors

Medical Care—Capital Expenditures

Chapter 8, Exhibit 2a


Capital expenditures may qualify for an immediate medical deduction (subject to the 7.5% floor) if prescribed by a physician to alleviate a physical or mental defect or illness.

Examples: Seeing eye dogs Wheelchairs Eyeglasses Dentures

Medical Care—Capital Expenditures

Chapter 8, Exhibit 2b


Mileage - If mileage was primarily for and essential to medical care, the taxpayer may choose between

the standard mileage allowance of 23 cents, plus parking and tolls, or

actual expenditures.

Meals - Meals consumed during medical-related transportation are NOT deductible even if the transportation is primarily for and essential to the rendition of medical care.


Medical Transportation and Lodging


Medical Transportation and Lodging

Nondiscretionary lodging during travel - A medical expense deduction is allowed for lodging (but not meals) while away from home primarily for and essential to medical care. This lodging cannot exceed $50 per night for each individual. The deduction may also be claimed for a person who must accompany the individual seeking medical care.

Discretionary lodging during travel - If a doctor prescribes an operation or other medical care and the taxpayer chooses, purely for personal considerations, to travel to an out-of-town locality for medical treatment, the lodging is not deductible.



The cost of in-patient (overnight) hospital care, including meals and lodging, is an allowable deduction Meals consumed by patients during hospital stays are not subject to the 50% reduction.

All medicines and drugs except for insulin require a prescription to be deductible. Cosmetics and toiletries are not considered medicine and drugs.

Medical Care



Medical Insurance Premiums

A medical expense deduction is allowed for medical insurance premiums.

Premiums paid by the taxpayer for long term care insurance are allowed as medical expense deduction, subject to limitation. In 2012, the maximum deduction for prepaid long term care insurance premiums ranges from $350 for a taxpayer age 40 or less to $4,370 for a taxpayer over age 70.

Self-employed taxpayers are allowed to deduct 100% of medical insurance premiums “FOR” AGI.



Property Taxes

State, local or foreign real property taxes and personal property taxes are allowed as an itemized deduction.

If real property is sold during the year, the tax deduction

must be allocated between the buyer and seller based on the number of days each party held the property. This method is required regardless of which party actually pays the property taxes.

Personal property taxes must be ad valorem (based on the value of the property) in order to be deductible.



Income Taxes

State or local income taxes are deductible as an itemized deduction in the year they are paid.

For years through 2011, taxpayers can elect to deduct state and local sales taxes rather than state and local income taxes.

Taxpayers may also deduct state and local income taxes withheld from their salary.

If a taxpayer receives a refund of state or local income taxes in a later year, the refund may need to be included in gross income (if there was a tax benefit from the original deduction).



Interest

Personal interest is NOT deductible. Thus, interest on consumer debt, such as car loans and credit card debt, is not deductible.

Qualified education loan interest of up to $2,500 may be deducted FOR AGI. The deduction is phased out for single taxpayers with AGI of $60,000 ($125,000 for married taxpayers).



Qualified Residence Interest

Interest on home loans secured by a first or second home is allowed as an itemized deduction.

The home must be a qualified residence. A qualified residence is

A principal residence or Any second residence that is for personal use

A deduction is allowed for qualified residence interest on up to $1 million of debt to acquire, construct or substantially improve a qualified residence. If the acquisition indebtedness is larger than $1 million, up to $100,000 of the excess can qualify as home equity indebtedness. Interest on the remainder is not deductible.

A taxpayer may borrow up to the lesser of (1) $100,000 or (2) the equity in the home in the form of a home equity loan and deduct the interest on the loan.



Other Interest

Investment Interest—Interest on investment property (stocks, bonds, raw land, for instance) Deductible only up to net investment income—Investment income

(interest, royalties, short-term capital gains) minus investment expenses

Dividends and long-term capital gains are also included by election if the special tax rate (0/15%) is given up

Prepaid interest (including “points”)—allocated over the period to which it applies Exception—points on a mortgage on a principal residence



Charitable Contributions

Charitable contributions are subject to limitations based on adjusted gross income.

Contributions are limited to 20%, 30% or 50% of AGI depending on the type of property donated and type of charity receiving the donated property.

The overall charitable contribution deduction is limited to 50% of AGI.

Unused charitable contributions may be carried forward up to 5 years, subject to the original %-of-AGI limitation in all future years.



Donations can consist of either cash or property. The type of property donated determines which percentage limitation applies.

Ordinary income property includes property held by the donor primarily for sale to customers in the ordinary course of the donor’s business and works of art created by the donor. The deduction for ordinary income property is limited to the basis of the property.

Capital gains property is appreciated property that, if sold at fair market value, would result in a long-term capital gain. Depreciable property and land used in a trade or business is considered capital gains property for charitable contribution purposes. The deduction for capital gains property is either the property’s basis, fair market value, or a reduced amount in the case of depreciable property.


Charitable Contributions


Charitable Organizations

Qualified charitable organizations are divided into 2 categories: public charities and private charities.

Public charities include: Churches and hospitals Educational organizationsOrganizations supported by the governmentPrivate operating foundationsPrivate non-operating foundations that distribute all of their

contributions to public charities

Private charities are private non-operating foundations that do not distribute all of their contributions to public charities.



Charitable Contribution Limitations

Contributions are allocated to the appropriate limitations as follows:

% of AGI Types of Donations

50% Donations to public charities of cash, ordinary income property, and capital gains property with the reduced deduction election

30% Public Donations to public charities of capital gains property [including qualified appreciated stock and appreciated Section 1231 (depreciable) property]

30% Private Donations to private charities of cash and ordinary income property

20% Donations to private charities of capital gains property [including qualified appreciated stock and appreciated Section 1231 (depreciable) property]



Charitable Contribution ValuationsCategory Valuation Property Donated

50% public Cash Cash

Basis Ordinary income property

Basis Capital gains property reduced contributions election

30% public FMV Capital gains property (including qualified appreciated stock)

FMV-OI Section 1231 (depreciable) property

30% private Cash Cash

Basis Ordinary income property

20% private Basis Capital gains property

FMV Qualified appreciated stock



Personal Casualty and Theft Losses

Personal casualty and theft losses are allowed as itemized deductions. As discussed in Chapter 7, business casualty and theft losses are deductible FOR AGI.

The amount of loss is computed as the lesser of: Adjusted basis Decline in fair market value

The loss must be reduced by insurance reimbursements received (or reasonably expected to be received).



Netting Personal-Use Casualty and Theft Gains and Losses

Each personal casualty loss must be reduced by $100 per event. Next, combine all casualty and theft gains and losses.

If the result is a net loss, the net amount is treated as an ordinary itemized deduction and is further reduced by the 10% of AGI floor.

If the result is a net gain, both gains and losses are capital gains and capital losses (discussed in Chapter 12). The losses are NOT reduced by the 10% of AGI floor.



Special Disaster Election

In a Presidentially declared disaster area, taxpayers may elect to deduct the loss in the tax year immediately preceding the year in which the disaster occurred.

Also, in Presidentially declared disaster areas, taxpayers will never have to recognize gain on the receipt of insurance proceeds for personal property contained in personal residences.



Miscellaneous Itemized Deductions

Miscellaneous itemized deductions are generally grouped together on a tax return and are deductible to the extent that the total of all miscellaneous itemized deductions exceeds 2% of adjusted gross income.

Examples: Unreimbursed employee expenses such as professional dues,

subscriptions to professional journals, union dues and uniforms not suitable for everyday use.

Job-seeking and educational expenses. Investment expenses such as safe deposit box rental, subscriptions

to investment related publications, and legal and accounting fees related to investments.

Tax advice and tax return preparation.
