Federal Income Tax Personal (Itemized) Deductions.

Federal Income Tax

Personal (Itemized) Deductions

Gross Income- FOR= AGI- FROM= Taxable Income

Business

Personal

Gross Income- FOR= AGI- FROM= Taxable Income

Personal

Itemized Deductions

See text page 7-36• Medical• Taxes• Interest• Charitable

Contributions• Casualty Losses• Other

Itemized Deductions

• Medical

• Taxes• Interest• Charitable

Medical Expenses

• Define “medical” costs– See text pg 7-3

• Name as many examples as possible

• Name some that are NOT deductible

• Limits:– “out-of-pocket” costs– Reduced by 10% of AGI

mitigation

Medical Expenses

• Problem 7-4

Problem 7-4Which enroute costs are deductible?

Any limits?Auto/Travel $.?? per mile

Automobile Expenses

Business

$.565 pg 9 – 11

Moving $.24 pg 9 – 20

Medical $.??

CharitableContribution

Automobile Expenses

Business

$.565 pg 9 – 11

Moving $.24 pg 9 – 20

Medical $.24 pg 7 – 4

CharitableContribution

Note: $.12 in 2001$.13 in 2002$.12 in 2003$.14 in 2004$.15$.22 in 2005$.18 in 2006$.20 in 2007$.19 in 2008$.27$.20 in 2009$.165 in 2010$.19 in 2011$.23 in 2012

Any limits?Auto/Travel $.24 per mile

Meals 50%

Hotel $50 per night

Medical Expenses

• Problem 7-4• Problem 7-5

Problem 7-5

• Meals?– Not deductible

• See also Pub 17, p. 145

Meals and lodging as outpatient?

Problem 7-5

• Meals?– Not deductible

• See also Pub 17, p. 145

Meals and lodging as outpatient?

• Lodging?

– $50 per night

Medical Expenses

• Problem 7-4• Problem 7-5• Problem 7-38

Problem 7-38

• Issue?• Define “medical dependent”

– Regular dependent = 5 tests– Medical dependent = 3 tests

• All except GI and joint return• Page 7-2, 7-8

• $6,400 less 10% = $4,000

Medical Expenses

• Problem 7-4• Problem 7-5• Problem 7-38• Problem 7-35

Problem 7-35

GI- FOR

= AGI- FROM

Problem 7-35

GI 58,000- FOR

= AGI 58,000- FROM

Problem 7-35

Doctor 11,700Hospital 9,400Med Ins 600Total 21,700

Problem 7-35Reimb

Doctor 11,700 10,000 1,700Hospital 9,400 9,400Med Ins 600 600Total 21,700 10,000 11,700

Problem 7-35Reimb

Doctor 11,700 10,000 1,700Hospital 9,400 9,400Med Ins 600 600Total 21,700 10,000 11,700Less: 10% of AGI 5,800Deductible Medical 5,900

Problem 7-35Reimb

Doctor 11,700 10,000 1,700Hospital 9,400 9,400Med Ins 600 600Total 21,700 10,000 11,700Less: 10% of AGI 5,800Deductible Medical 5,900Other Itemized 2,750Total Itemized 8,650

ReimbDoctor 11,700 10,000 1,700Hospital 9,400 9,400Med Ins 600 600Total 21,700 10,000 11,700Less: 10% of AGI 5,800Deductible Medical 5,900Other Itemized 2,750Total Itemized 8,650

(compared to standard?)

Problem 7-35

GI 58,000- FOR= AGI 58,000- FROM 8,650

Problem 7-35

GI 58,000FORAGI 58,000FROM 8,650

3,900TI

Problem 7-35

GI 58,000FORAGI 58,000FROM 8,650

3,900 12,550TI 45,450

Medical Expenses

• Problem 7-4• Problem 7-5• Problem 7-38• Problem 7-35• Problem 7-36

Problem 7-36Medical 4,000Legal Fees 3,000Total Reimbursement 7,000

ReimbDoctor 11,700 10,000 1,700Hospital 9,400 4,000 5,400Med Ins 600 600Total 21,700 14,000 7,700Less: 10% of AGI 5,800Deductible Medical 1,900Other Itemized 2,750Total Itemized 4,650

(compared to standard?)

Problem 7-36

GI 58,000- FOR

= AGI 58,000- FROM 6,100

Problem 7-36

GI 58,000FORAGI 58,000FROM 6,100

3,900TI

Problem 7-36

GI 58,000FORAGI 58,000FROM 6,100

3,900 10,000TI 48,000

Problem 7-36Taxable Income Revised 48,000Taxable Income Reported 45,450Difference 2,550

Must include “tax benefit.”

Medical Expenses

• Problem 7-4• Problem 7-5• Problem 7-38• Problem 7-35• Problem 7-36• Another Illustration

Medical Expenses

• Problem 7-4• Problem 7-5• Problem 7-38• Problem 7-35• Problem 7-36• Problem 7-39

Problem 7-39Y 1 Y 2

AGI 38,000 43,000

Problem 7-39Y 1 Y 2

AGI 38,000 43,000

Medical Costs 14,000

Problem 7-39Y 1 Y 2

AGI 38,000 43,000

Medical Costs 14,000Pool ???

Problem 7-39Y 1 Y 2

AGI 38,000 43,000

Medical Costs 14,000Pool 3,000

Problem 7-39Y 1 Y 2

AGI 38,000 43,000

Medical Costs 14,000Pool 3,000Maintenance 930 1,060

Problem 7-39Y 1 Y 2

AGI 38,000 43,000

Medical Costs 14,000Pool 3,000Maintenance 930 1,060Wheelchair ??? ???

Problem 7-39Y 1 Y 2

AGI 38,000 43,000

Medical Costs 14,000Pool 3,000Maintenance 930 1,060Wheelchair 2,300

Problem 7-39Y 1 Y 2

AGI 38,000 43,000

Medical Costs 14,000Pool 3,000Maintenance 930 1,060Wheelchair & Bed ??? ???

Problem 7-39Y 1 Y 2

AGI 38,000 43,000

Medical Costs 14,000Pool 3,000Maintenance 930 1,060Wheelchair & Bed 2,300 3,800

Problem 7-39Y 1 Y 2

AGI 38,000 43,000

Medical Costs 14,000Pool 3,000Maintenance 930 1,060Wheelchair & Bed 2,300 3,800Physical Therapist ??? ???

Problem 7-39Y 1 Y 2

AGI 38,000 43,000

Medical Costs 14,000Pool 3,000Maintenance 930 1,060Wheelchair & Bed 2,300 3,800Physical Therapist 4,000

Problem 7-39Y 1 Y 2

AGI 38,000 43,000

Medical Costs 14,000Pool 3,000Maintenance 930 1,060Wheelchair & Bed 2,300 3,800Physical Therapist 4,000Medical Insurance 1,200 1,200

Problem 7-39Y 1 Y 2

AGI 38,000 43,000

Medical Costs 14,000Pool 3,000Maintenance 930 1,060Wheelchair & Bed 2,300 3,800Physical Therapist 4,000Medical Insurance 1,200 1,200Sub-Total 21,430

Problem 7-39Y 1 Y 2

AGI 38,000 43,000

Medical Costs 14,000Pool 3,000Maintenance 930 1,060Wheelchair & Bed 2,300 3,800Physical Therapist 4,000Medical Insurance 1,200 1,200Sub-Total 21,430Less: 10% of AGI 3,800

Problem 7-39Y 1 Y 2

AGI 38,000 43,000

Medical Costs 14,000Pool 3,000Maintenance 930 1,060Wheelchair & Bed 2,300 3,800Physical Therapist 4,000Medical Insurance 1,200 1,200Sub-Total 21,430Less: 10% of AGI 3,800Med Exp Deduction 17,630

-$9,000

Problem 7-39Y 1 Y 2

AGI 38,000 43,000

Medical Costs 5,000Pool 3,000Maintenance 930 1,060Wheelchair & Bed 2,300 3,800Physical Therapist 4,000Medical Insurance 1,200 1,200Sub-Total 12,430Less: 10% of AGI 3,800Med Exp Deduction 8,630

+$9,000 “tax benefit”

Problem 7-39Y 1 Y 2

AGI 38,000 52,000

Medical Costs 5,000Pool 3,000Maintenance 930 1,060Wheelchair & Bed 2,300 3,800Physical Therapist 4,000Medical Insurance 1,200 1,200Sub-Total 12,430 10,060Less: 10% of AGI 3,800Med Exp Deduction 8,630

Problem 7-39Y 1 Y 2

AGI 38,000 52,000

Medical Costs 5,000Pool 3,000Maintenance 930 1,060Wheelchair & Bed 2,300 3,800Physical Therapist 4,000Medical Insurance 1,200 1,200Sub-Total 12,430 10,060Less: 10% of AGI 3,800 5,200Med Exp Deduction 8,630 4,860

Itemized Deductions

• Medical

• Deductible– Property taxes– State income tax– Local income tax

• Not Deductible– Federal taxes– Sales tax– Excise taxes

• Deductible– Property taxes– State income tax– Local income tax

• Not Deductible– Federal taxes– Sales tax *– Excise taxes

Sales Tax Update• Most of the 633 pages of the American

Jobs Creation Bill of 2004 dealt with taxes on and tax breaks for businesses. But sandwiched in the tax tome [A book,

especially a large or scholarly one], approved by Congress and signed into law by the president, is the OK for consumers to deduct sales taxes from their federal filings. The deduction will be available on 2004 and 2005 tax returns.

http://www.bankrate.com/brm/itax/20041012b1.asp

Sales Tax Update• “This tax break isn't an add-on; it

will require you to choose. You must decide whether you want to deduct the sales taxes you paid or your state income tax amounts.”

• “The choice is obvious for residents of the seven states that do not collect state income taxes but do levy state sales taxes: Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming.” http://www.bankrate.com/brm/itax/20041012b1.asp

• Problem 7-40

Problem 7-40

1/1 12/31

Problem 7-40

1/1 4/11 12/31

Pd $120

Problem 7-40

1/1 12/31

Employer w/h $1,600

Pd $120

Problem 7-40

1/1 4/11 4/1312/31

Employer w/h $1,600

Pd $120

Problem 7-40

1/1 4/11 4/1512/31

Employer w/h $1,600

Pd $120

Amount deductible?

Problem 7-40

1/1 4/11 12/31

Employer w/h $1,600

Pd $120

Did she itemize?

Problem 7-40

1/1 4/11 12/31

Employer w/h $1,600

Pd $120

$1,600 + $120 < SD

Problem 7-40 (b)

1/1 12/31

Problem 7-40 (b)

1/1 12/31

Employer w/h $2,100

Problem 7-40 (b)

1/1 4/13 12/31

Employer w/h $2,100

Pd $200

Problem 7-40 (b)

1/1 4/13 4/1512/31

Employer w/h $2,100

Pd $200

Rfd $450

Problem 7-40 (b)

1/1 4/13 4/1512/31

Employer w/h $2,100

Pd $200

Rfd $450

Amount deductible?

Problem 7-40 (b)

1/1 4/13 12/31

Employer w/h $2,100

Pd $200

$2,100 + $200 = $2,300

Problem 7-40 (b)

1/1 4/13 12/31

Employer w/h $2,100

Pd $200

Did she itemize?

Problem 7-40 (b)

1/1 4/13 12/31

Employer w/h $2,100

Pd $200

$2,300 + $5,500 > SD

Problem 7-40 (c)

AGI $51,000

From: Item Ded $7,800

Exemption 3,900 11,700

Taxable Income $39,300

Problem 7-40 (c)

AGI $51,000

From: Item Ded $7,350

Exemption 3,900 11,250

2013 - revised

Problem 7-40 (d)

AGI $53,500

Add: State Tax Rfd From ’12 450

New AGI $53,950

Problem 7-412013

State Income Tax $2,300Mortgage Interest 3,000Total Item Ded $5,300

Problem 7-412013

Gross Income $51,000

Total Item Ded $5,300Exemption 3,200 9,500

Problem 7-412013

Std Ded $6,100Exemption 3,200 9,500

Problem 7-412013

Std Ded $6,100Exemption 3,900 10,000

Problem 7-41 (b)

AGI $53,500

Add: State Tax Rfd From ’13* 0

New AGI $53,500

* No effect since she used standard deduction.

• Problem 7-40• Problem 7-41• Problem 7-42

Problem 7-42 Total Deductible

Fed Taxes W/H $5,400State Tax W/H 2,000 $2,000FICA Tax W/H 3,800Sales Tax on Car 600License 70Prop Tax on Car 2%

Fed Taxes W/H $5,400State Tax W/H 2,000 $2,000FICA Tax W/H 3,800Sales Tax on Car 600License 70Prop Tax on Car 2% 400Prop Tax on Car $10/100#

Fed Taxes W/H $5,400State Tax W/H 2,000 $2,000FICA Tax W/H 3,800Sales Tax on Car 600License 70Prop Tax on Car 2% 400Prop Tax on Car $10/100#Prop Tax on House 1,850 ???

Problem 7-42

1/1 4/15 12/31

Taxes $1,850 for year

Problem 7-42

1/1 4/15 12/31

Fed Taxes W/H $5,400State Tax W/H 2,000 $2,000FICA Tax W/H 3,800Sales Tax on Car 600License 70Prop Tax on Car 2% 400Prop Tax on Car $10/100#Prop Tax on House 1,850 527Total $2,927

• Problem 7-40• Problem 7-41• Problem 7-42• Problem 7-43

Problem 7-43

$6,000

Problem 7-43 (a)

$6,000

Janet (buyer): $6,000 x 61/365 = $1,003

Problem 7-43 (b)

$6,000

Janet (buyer): $6,000 x 61/365 = $1,003Tara (seller): $6,000 x 304/365 = $4,997

Problem 7-43 (c)Janet (buyer): $6,000 x 61/365 = $1,003Tara (seller): $6,000 x 304/365 = $4,997Tara’s sales price = $500,000 + $4,997

Janet’s purchase price = $500,000 + $4,997

Itemized Deductions

• Medical

Interest

, line 33

ForStudent Loan

Schedule AFromHome Mortgage

NotNotPersonal

Schedule AFromInvestment

NotNotPassive

Schedule CForBusiness

Interest

, line 33

ForStudent Loan

Schedule AFromHome Mortgage

NotNotPersonal

Schedule AFromInvestment

NotNotPassive

Schedule CForBusiness

Interest

• Problem 7-14• How is the classification

determined?– Collateral?– Use?

• Use

Interest

• Problem 7-14 • Investment Interest

Illustration

Investment InterestInvestment interest deductible to the extent of “net investment income.”

“Net Investment Income” determined as follows:

II- IE= NII

Investment Interest Illustration

During the current year, David reports interest and dividend income of $18,000, net short-term capital gains of $6,000, and net long-term capital gains of $7,000. His AGI is $120,000. His investment expenses, exclusive of interest, are $5,000. During the year David also pays a total of $55,000 interest on debt incurred on his investment activities. David is married and files a joint return.a. What is the total amount of deduction Dave may

take with respect to his investment interest expense if he does not make a special election?

Illustration (a)INVESTMENT INCOME:Interest & Dividend 18,000ST Capital Gains 6,000LT Capital Gains 7,000Total Income 31,000

Illustration (a)INVESTMENT INCOME:Interest & Dividend 18,000ST Capital Gains 6,000LT Capital Gains 0Total Income 24,000

Illustration (a)INVESTMENT INCOME:Interest & Dividend 18,000ST Capital Gains 6,000LT Capital Gains 0Total Income 24,000INVESTMENT EXPENSES 5,000

Illustration (a)INVESTMENT INCOME:Interest & Dividend 18,000ST Capital Gains 6,000LT Capital Gains 0Total Income 24,000INVESTMENT EXPENSES 5,000Less: 2% of AGI 2,400

Illustration (a)INVESTMENT INCOME:Interest & Dividend 18,000ST Capital Gains 6,000LT Capital Gains 0Total Income 24,000INVESTMENT EXPENSES 5,000Less: 2% of AGI 2,400 2,600NET INVESTMENT INCOME 21,400

b. What is the treatment of any disallowed investment interest expense?

Illustration (b)

Investment Interest 55,000Deductible Amount 21,400Carryover 33,600

b. What is the treatment of any disallowed investment interest expense?

c. What is the total amount of deduction David may take with respect to his investment interest expense if he elects to have his net capital gain taxed at the regular marginal tax rates?

Illustration (c)INVESTMENT INCOME:Interest & Dividend 18,000ST Capital Gains 6,000LT Capital Gains 7,000Total Income 31,000

Illustration (c)INVESTMENT INCOME:Interest & Dividend 18,000ST Capital Gains 6,000LT Capital Gains 7,000Total Income 31,000INVESTMENT EXPENSES 5,000Less: 2% of AGI 2,400 2,600NET INVESTMENT INCOME 28,400

Illustration (c)

Investment Interest 55,000Deductible Amount 28,400Carryover 26,600

Interest

• Problem 7-14• Investment Interest

Illustration• Problem 7-49

Problem 7-49

a. ($12,000 - $10,200) = $1,800

$1,800 4 = $450

$450 x 2 = $900

b. None – no payments made

c. $1,800 x 9/12 = $1,350

Itemized Deductions

• Medical

Federal Income Tax Personal (Itemized) Deductions.

ray gregg

medical expenses problem

mile slide

hotel slide

night slide

medical costs

charitable contribution

business personal slide

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