7-1©2011 Pearson Education, Inc. Publishing as Prentice Hall

7-2

ITEMIZED DEDUCTIONS(1 of 2)

Medical expensesTaxesInterest Charitable contributionsCasualty and theft lossesMiscellaneous itemized

deductions©2011 Pearson Education, Inc. Publishing as Prentice

Hall

7-3

ITEMIZED DEDUCTIONS(2 of 2)

Reduction of certain itemized deductions

Tax planning considerationsCompliance and procedural

considerations

©2011 Pearson Education, Inc. Publishing as Prentice Hall

7-4

Medical ExpensesQualified individualsQualified medical expensesAmount and timing of deduction

©2011 Pearson Education, Inc. Publishing as Prentice Hall

7-5

Qualified IndividualsMedical expenses paid for

taxpayer, taxpayer’s spouse, or dependentDependent qualifies even if fails

dependency test due to failure to meet gross income or joint return tests

Children of divorced parentsNot required to be custodial parent

to take deduction for medical expenses paid on behalf of a person

©2011 Pearson Education, Inc. Publishing as Prentice Hall

7-6

Qualified Medical Expenses(1 of 2)

Diagnosis, cure, mitigation, treatment, or prevention of disease

Transportation$0.165/mile std. mileage rateIncludes meals & lodging if

overnightCapital expenditures

Excess of cost over amount by which value of home increases

©2011 Pearson Education, Inc. Publishing as Prentice Hall

7-7

Qualified Medical Expenses(2 of 2)

Cost of living in institutionsMedical insurance premiums

Includes qualified long-term care insurance premiums

No cosmetic surgery unless it treats illness or promotes proper body function

©2011 Pearson Education, Inc. Publishing as Prentice Hall

7-8

Amount and Timing of Deduction

Deductible in year paidAmount of qualified medical

expenses that exceed 7.5% of AGI

Medical insurance reimbursementsOnly unreimbursed portion

deductibleSelf-employeds may deduct

health insurance as a for deduction AGI

©2011 Pearson Education, Inc. Publishing as Prentice Hall

7-9

Taxes Definition of a taxDeductible taxesState and local income taxesState and local sales taxesPersonal property taxesReal estate taxesSelf-employment taxNondeductible taxes

©2011 Pearson Education, Inc. Publishing as Prentice Hall

7-10

Definition of a TaxMandatory assessment levied

under authority of a political entity for purpose of raising revenue used for public or governmental purposes

©2011 Pearson Education, Inc. Publishing as Prentice Hall

7-11

Deductible TaxesState, local, & foreign real property

taxesState and local personal property

taxesIf based on value

Foreign, state & local income, war profits, and excess profits taxes

©2011 Pearson Education, Inc. Publishing as Prentice Hall

7-12

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

State and local sales taxesMay deduct For AGI in 2009

instead of deducting state and local income taxesMay be extended for 2010©2011 Pearson Education, Inc. Publishing as Prentice

Hall

7-13

Personal Property TaxesTax 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

©2011 Pearson Education, Inc. Publishing as Prentice Hall

7-14

Real Estate Taxes(1 of 2)

Apportionment of taxesNecessary when real estate is sold

during the yearReal property assessments only

against property benefitedCapitalized costs—not deductible

E.g., Sidewalk or new sewer lines

©2011 Pearson Education, Inc. Publishing as Prentice Hall

7-15

Real Estate Taxes(2 of 2)

Additional standard deduction for real property taxes if taxpayer does not itemize deductionsExpired in 2009, but may be

extended for 2010Limited to lesser of

Amount that would be deductible as an itemized deduction, or $500 ($1,000 if MFJ)

©2011 Pearson Education, Inc. Publishing as Prentice Hall

7-16

Self-Employment TaxPay tax on self-employment

income in lieu of payment of Social Security (12.4%) and Medicare taxes (2.9%) on salaryCeiling $106,800 for Social Sec.

TaxNo ceiling for Medicare tax

½ of SE tax deductible for AGI©2011 Pearson Education, Inc. Publishing as Prentice

Hall

7-17

Nondeductible TaxesTaxes imposed by the Federal gov’t

generally not deductibleExceptions

Employer’s share of social security tax is deductible by employer as business expense

Federal import tariffs & excise taxesUnless for business or production of

income ©2011 Pearson Education, Inc. Publishing as Prentice Hall

7-18

Interest Definition of interestClassification of interest

expenseTiming of the interest deduction

©2011 Pearson Education, Inc. Publishing as Prentice Hall

7-19

Definition of InterestCompensation for use or

forbearance of moneyBank service charges and certain

loan acquisition costs not considered interest for tax purposes

©2011 Pearson Education, Inc. Publishing as Prentice Hall

7-20

Classification of Interest Expense

(1 of 2)

Depends on purpose of indebtednessActive trade or business

For AGI deductionPassive activity

Subject to passive activity loss limitation

Used to compute net passive income/loss

Investment interestDeductible up to net investment

income

©2011 Pearson Education, Inc. Publishing as Prentice Hall

7-21

Classification of Interest Expense

(2 of 2)

Qualified residence and home equity loanInterest 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 interestUp to $2,500 deductible as for AGI

deductionPhased out at higher income levels

©2011 Pearson Education, Inc. Publishing as Prentice Hall

7-22

Timing of the Interest Deduction

(1 of 2)

Prepaid interestCapitalized and amortized over

period to which interest relatesDiscounted notes

Cash method taxpayer deducts at time of repayment

Accrual method taxpayer amortizes over life of loan

©2011 Pearson Education, Inc. Publishing as Prentice Hall

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 taxpayerCannot deduct interest until

interest paidImputed interest

Applies to below-market loans©2011 Pearson Education, Inc. Publishing as Prentice Hall

7-24

Charitable ContributionsQualifying organizationType of property contributedDeduction limitationsApplication of carryoversSpecial rules for charitable

contributions made by corporations

©2011 Pearson Education, Inc. Publishing as Prentice Hall

7-25

Qualifying OrganizationU.S., District of Columbia, state

or possession of U.S. Post or organization of war

veteransDomestic fraternal society, or

order, or associationPublic Charities

Churches, educational Institutions, hospitals, medical schools

©2011 Pearson Education, Inc. Publishing as Prentice Hall

7-26

Type of Property Contributed

(1 of 2)

Contribution of long-term capital gain propertyGenerally FMV

Use adjusted basis if Contributed to private nonoperating

foundationUnrelated use by charitable organization Certain intangibles

©2011 Pearson Education, Inc. Publishing as Prentice Hall

7-27

Type of Property Contributed

(2 of 2)

Contribution of ordinary income propValue generally adjusted basisException for corp donation of

inventoryContribution of services

Only out-of-pocket and transportation expenses deductible

©2011 Pearson Education, Inc. Publishing as Prentice Hall

7-28

Deduction Limitations50% of AGI overall limitation

Applies to public charitiesSum of all contributions limited to

50%30% of AGI limitation

Contributions of capital gain property

20% of AGI limitationCapital gain property contributed

to private nonoperating foundations

©2011 Pearson Education, Inc. Publishing as Prentice Hall

7-29

Application of CarryoversCarried over and deducted in

subsequent five yearsApply with regard to special

limitationsUse FIFO to apply carryovers

©2011 Pearson Education, Inc. Publishing as Prentice Hall

7-30

Special Rules for Contributions Made by

CorporationsPledges made by accrual

method corporationsDeductible in year pledged if paid

by 15th day of 3rd month after year end

Limitation applicable to corporationsCannot exceed 10% of

corporation’s taxable income©2011 Pearson Education, Inc. Publishing as Prentice Hall

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

©2011 Pearson Education, Inc. Publishing as Prentice Hall

7-32

Miscellaneous Itemized Deductions

Certain employee expensesExpenses to produce incomeCost of tax advice

©2011 Pearson Education, Inc. Publishing as Prentice Hall

7-33

Certain Employee ExpensesUnreimbursed employee

business expensesInclude travel, transportation,

dues to professional organizations, cost of job hunting

Generally miscellaneous itemized deductions subject to a 2% of AGI floor

©2011 Pearson Education, Inc. Publishing as Prentice Hall

7-34

Expenses to Produce Income

Expenses to produce investment income other than rents or royalties

Miscellaneous itemized deductions subject to 2% of AGI floorInvestment interest NOT subject

to the 2% of AGI floor©2011 Pearson Education, Inc. Publishing as Prentice

Hall

7-35

Cost of Tax AdviceIncludes

Tax return preparation feesAppraisal fees in determining

amount of casualty lossAccountant fees for

representation in a tax auditMiscellaneous itemized

deductions subject to 2% of AGI floor ©2011 Pearson Education, Inc. Publishing as Prentice

Hall

7-36

Reduction of Certain Itemized Deductions (1 of 2)

Reduction in total of most itemized deductions for high-income taxpayersExpired in 2009Reduction will resume in 2011

unless Congress passes a law to temporarily or permanently eliminate the reduction3% of amount that individual’s AGI

for year exceeds threshold amount©2011 Pearson Education, Inc. Publishing as Prentice

Hall

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 3% is applied after taking into account other limitations on itemized deductions

e.g. 2% of AGI on miscellaneous deductions

©2011 Pearson Education, Inc. Publishing as Prentice Hall

7-38

Tax Planning Considerations

(1 of 2)

Medical expense deductionBunch medical expenses into a

single year to exceed 7.5% of AGI floor

Interest expense deductionMay deduct residential interest

on any two residencesIf vacation home used > of 14 days

or 10% of rental days personal portion qualifies as a residence©2011 Pearson Education, Inc. Publishing as Prentice

Hall

7-39

Tax Planning Considerations

(2 of 2)

Deduction for charitable contributionsElection to reduce amount of

contributionDonation of appreciated long-

term capital gain propertySignificant substantiation

requirement©2011 Pearson Education, Inc. Publishing as Prentice

Hall

7-40

Compliance and Procedural

Considerations (1 of 3)

Medical expensesDependent care credit vs. medical expense deduction

Compare dependent care credit rate with effective marginal tax rate for additional medical deductions

©2011 Pearson Education, Inc. Publishing as Prentice Hall

7-41

Compliance and Procedural

Considerations (2 of 3)

Charitable contributions>$500 must file Form 8283Property > $5,000 should have

appraisal>$250 and quid pro quo > $75

require additional documentation

©2011 Pearson Education, Inc. Publishing as Prentice Hall

7-42

Compliance and Procedural

Considerations (3 of 3)

TaxesSchedule C - related to taxpayer’s

trade or businessSchedule E - related to the

production of rents and/or royalties

Schedule A - if personal

©2011 Pearson Education, Inc. Publishing as Prentice Hall

Comments or questions about PowerPoint Slides?Contact Dr. Richard Newmark at University of Northern Colorado’s

Kenneth W. Monfort College of Businessrichard.newmark@PhDuh.com

7-43©2011 Pearson Education, Inc. Publishing as Prentice Hall