CH10: Deduction and Losses: Certain Itemized Deductions

Business expenses appear on Schedule C of Form 1040,

and expenses related to rents or royalties are reported on Schedule E.

Amounts paid for unnecessary cosmetic surgery are not deductible medical expenses. Cosmetic surgery is necessary—and, therefore, deductible—when it improves the effects of:

(1) a deformity arising from a congenital abnormality, (2) a personal injury, or (3) a disfiguring disease.

Documentation and Substantiation Requirements for Charitable Contributions: Noncash Gifts (e.g., household items)

-A receipt from the charity must be kept for any gift of property other than money. Clothes or other household items are deductible if they are in "good used condition or better" at the time of the gift. -If an item is not in good used condition or better and its value exceeds $500, a deduction is allowed if a "qualified appraisal" is included with the return.

To be deductible, a contribution must be made to one of the following organizations:

-A state or possession of the United States (or any subdivision). -A corporation, trust, community chest, fund, or foundation located in the United States and organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes or for the prevention of cruelty to children or animals. -A veterans' organization. -A fraternal organization operating under the lodge system. -A cemetery company.

In addition to the benefit received rule and the restrictions placed on contributions of services, the following items may not be deducted as charitable contributions:

-Dues, fees, or bills paid to country clubs, lodges, fraternal orders, or similar groups. -Cost of raffle, bingo, or lottery tickets. -Cost of tuition. -Payment for the right to purchase tickets for seating at an athletic event in a university stadium. -Value of blood given to a blood bank. -Donations to homeowners associations. -Gifts to individuals. -Rental value of property used by a qualified charity.

Nondeductible Taxes

-Federal income taxes -FICA taxes imposed on employees -Employer FICA taxes paid on domestic household workers -Estate, inheritance, and gift taxes -Federal, state, and local excise taxes (e.g., gasoline, tobacco, and spirits) -Foreign income taxes if the taxpayer chooses the foreign tax credit option -Taxes on real property to the extent these taxes are to be apportioned and treated as imposed on another taxpayer

Deductible Taxes

-State, local, and foreign real property taxes -State and local personal property taxes -State and local income taxes or sales/use taxes -Foreign income taxes

A deduction is allowable for lodging while away from home for medical care if the following requirements are met:

-The lodging is primarily for and essential to medical care. -Medical care is provided by a physician in a licensed hospital or a similar medical facility (e.g., a clinic). -The lodging is not lavish or extravagant. -There is no significant element of personal pleasure in the travel.

A charitable contribution generally is deducted in the year the payment is made. This rule applies to both cash and accrual basis individuals.

A contribution is ordinarily deemed to have been made on the delivery of the property to the donee.

Gifts made to needy individuals are not deductible (e.g., a needy family or a homeless individual).

A deduction is allowed only if the gift is made to a qualified organization.

The charitable contribution provisions are among the most complex in the tax law. To determine the amount deductible as a charitable contribution, several important questions must be answered:

-What constitutes a charitable contribution? -Was the contribution made to a qualified organization? -When is the contribution deductible? -What record-keeping and reporting requirements apply to charitable contributions? -How is the value of donated property determined? -What special rules apply to contributions of property that has increased in value? -What percentage limitations apply to the charitable contribution deduction? -What rules apply to amounts in excess of percentage limitations (carryovers)?

To establish an HSA, a taxpayer contributes funds to a custodial account. As illustrated in the preceding example, funds can be withdrawn from an HSA to pay medical expenses that are not covered by the high-deductible policy. The following general tax rules apply to HSAs:

1. Contributions made by the taxpayer to an HSA are a deduction for AGI (i.e., the contributions reduce gross income in arriving at AGI). As a result, the taxpayer does not need to itemize to take the deduction. 2. Earnings on HSAs are not subject to taxation unless distributed, in which case taxability depends on the way the funds are used. -Distributions from HSAs are excluded from gross income if they are used to pay for medical expenses not covered by the high-deductible policy. -Distributions that are not used to pay for medical expenses are included in gross income and are subject to an additional 20 percent penalty if made before age 65, death, or disability. Any distributions made by reason of death or disability and distributions made after the HSA beneficiary becomes eligible for Medicare are taxed but not penalized.

High-deductible policies are less expensive than low-deductible policies, so taxpayers with low medical costs can benefit from the lower premiums and use funds from the HSA to pay costs not covered by the high-deductible policy. A plan must meet two requirements to qualify as a high-deductible plan.

1. The annual deductible in 2020 is not less than $1,400 for self-only coverage ($2,800 for family coverage). 2. The annual limit in 2020 on total out-of-pocket costs (excluding premiums) under the plan does not exceed $6,900 for self-only coverage ($13,800 for family coverage).

Points paid by the seller for a buyer are, in effect, treated as an adjustment to the price of the residence, and the buyer is treated as having used cash to pay the points that were paid by the seller.

A buyer may deduct seller-paid points in the tax year in which they are paid if certain conditions are met.

Documentation and Substantiation Requirements for Charitable Contributions: Cash or noncash gifts (including out-of-pocket expenses) of $250 or more

A contemporaneous written acknowledgment (CWA) from the charity (as well as certain payroll records in the case of gifts made by payroll deductions) is required to deduct a single cash or property contribution of $250 or more. A CWA is also required for a donation of $250 or more of out-of-pocket expenses a donor might incur in providing services to a charity. The CWA must include the amount of money and a description of any other property contributed, whether the charity provided any goods or services in return for the contribution, and a description and estimated value of the goods or services provided. Contemporaneous means that the donor must have the CWA by the earlier of (1) the date the tax return is filed for the year of the donation or (2) the due date (including extensions) for the tax return.

Documentation and Substantiation Requirements for Charitable Contributions: Cash Gifts

A deduction is allowed only if the taxpayer has a proper receipt (e.g., a canceled check or written statement from the charity) showing the name of the charitable organization and the date and amount of the contribution. A written statement from the charity is required if a payment is for more than $75 and is partly a contribution and partly for goods or services. The statement must provide an estimate of the value of the goods and services received by the donor.

A taxpayer who has more than one second residence can choose the qualified second residence each year (i.e., the taxpayer can select a different second residence each year).

A residence includes a house, a cooperative apartment, a condominium, and mobile homes and boats that have living quarters (sleeping, bathroom, and cooking facilities).

Qualifying individuals may make deductible contributions to a Health Savings Account (HSA).

A taxpayer can use an HSA in conjunction with a high-deductible medical insurance policy to help reduce the overall cost of medical coverage. Converting from a low-deductible to a high-deductible plan can generally save an individual a considerable amount in premiums. The high-deductible policy provides coverage for extraordinary medical expenses (in excess of the deductible), and expenses not covered by the policy can be paid with funds withdrawn tax-free from the HSA.

Under the tax benefit rule, a taxpayer who receives an insurance reimbursement for medical expenses deducted in a previous year must include the reimbursement in income up to the amount of the deductions that decreased taxable income in the earlier year.

A taxpayer who did not itemize deductions in the year the expenses were paid did not receive a tax benefit and is not required to include a reimbursement in gross income.

Allowable itemized deductions are deductible from AGI in arriving at taxable income if the taxpayer elects to itemize.

A taxpayer will elect to itemize when total itemized deductions exceed the standard deduction based on the taxpayer's filing status. Itemized deductions are reported on Schedule A (Form 1040) and filed with an individual's Federal income tax return (Form 1040).

Qualified Residence Interest

A term relevant in determining the amount of interest expense the individual taxpayer may deduct as an itemized deduction for what otherwise would be disallowed as a component of personal interest (consumer interest). Qualified residence interest consists of interest paid on qualified residences (principal residence and one other residence) of the taxpayer. Debt that qualifies as qualified residence interest is limited to $1,000,000 of debt to acquire, construct, or substantially improve qualified residences (acquisition indebtedness). For acquisition indebtedness incurred after December 15, 2017, the limit is reduced to $750,000. § 163(h)(3).

Documentation and Substantiation Requirements for Charitable Contributions: Noncash gifts of more than $500

Additional substantiation (e.g., how the property was acquired and its basis) is required on the tax return if donated noncash property is valued at more than $500. Qualified appraisals may be required if noncash contributions exceed $5,000 in value.

In contrast, real property taxes imposed on an individual's personal residence are only deductible if the individual itemizes his or her deductions [i.e., from AGI; reported on Schedule A (Form 1040)].

Additionally, real property taxes imposed on investment property (e.g., undeveloped land held for investment) are deductible as an itemized deduction (and not subject to the annual cap on state and local taxes discussed below).

Whether the taxpayer chooses to claim out-of-pocket automobile expenses or the 17 cents per mile automatic mileage option, related parking fees and tolls can also be deducted.

Also included are transportation expenditures for someone like a family member or nurse who must accompany the patient. The cost of meals while en route to obtain medical care is not deductible.

Both a capital expenditure for a permanent improvement and related operating and maintenance costs may qualify as medical expenses. The allowable costs are deductible in the year incurred

Although depreciation is required for most other capital expenditures, it is not required for those qualifying for medical purposes (in other words, the entire cost of a qualifying capital expenditure is immediately deductible).

Not all taxes are deductible. For example, Federal income taxes are not deductible. Other taxes are not deductible by individuals if they relate to personal activities (rather than business activities).

An example is excise taxes included in the cost of purchasing gasoline.

A permanent capital improvement that ordinarily would not have a medical purpose qualifies as a medical expense if it is directly related to prescribed medical care (e.g., an elevator in a personal residence). Here, the cost is deductible to the extent it exceeds the increase in value of the related property.

Appraisal costs related to capital improvements are not medical expenses. Instead, these costs are classified as miscellaneous itemized deductions (expenses incurred in the determination of the taxpayer's tax liability). However, the deduction for miscellaneous itemized deductions has been suspended from 2018 through 2025.

Only medical expenses in excess of the "7.5%-of-AGI floor" are deductible.

As a result, a medical expense deduction is rare (especially for high-income taxpayers).

It is important to understand the difference between a tax and a fee, because fees are not deductible unless incurred as a business expense or as an expense in the production of income.

As a result, fees for dog licenses, automobile inspections, automobile titles and registration, hunting and fishing licenses, bridge and highway tolls, driver's licenses, parking meter deposits, and postage are not taxes.

It is commonly understood that contributions to a church, synagogue, or other religious organization are allowed.

But for less well-known recipients, taxpayers can consult an IRS list of organizations that have applied for and received tax-exempt status under § 501 of the Code.

A charitable contribution is defined as a gift of property made to a qualified organization. The major elements needed to qualify a contribution as a gift are a donative intent, the absence of consideration, and acceptance by the donee.

Consequently, the taxpayer has the burden of establishing that the transfer was made from motives of disinterested generosity as established by the courts. This test is quite subjective and has led to problems of interpretation.

Charitable Contribution

Contributions made to qualified nonprofit organizations. Taxpayers, regardless of their accounting method, are generally allowed to deduct (subject to various restrictions and limitations) contributions in the year of payment. Accrual basis corporations may accrue contributions at year-end if payment is properly authorized before the end of the year and payment is made within three and one-half months after the end of the year. § 170.

Allowed interest is deductible if the related debt represents a bona fide obligation of the taxpayer.

For interest to be deductible, both the debtor and the creditor must intend for the loan to be repaid. Intent of the parties can be especially crucial between related parties (e.g., family members or a shareholder and a closely held corporation).

Examples of Nondeductible Medical Expenses:

Funeral, burial, or cremation expenses Over-the-counter medicines (except insulin) Bottled water Toiletries, cosmetics Diaper service, maternity clothes Programs for the general improvement of health: -Weight reduction -Health spas -Social activities (e.g., dancing and swimming lessons) Unnecessary cosmetic surgery

Acquisition Indebtedness

Debt incurred in acquiring, constructing, or substantially improving a qualified residence of the taxpayer. The interest on such loans is deductible as qualified residence interest. However, interest on such debt is deductible only on the portion of the indebtedness that does not exceed $750,000 ($1,000,000 for debt incurred before December 15, 2017). § 163(h)(3).

Deductibility of Qualified Residence Interest (Acquisition Indebtedness): Deductible?: Yes ; Comments:

Deductible as an itemized deduction; limited to indebtedness of $750,000 (up to $1 million if incurred on or before December 15, 2017).

State, local, and foreign taxes on real property are generally deductible only by the person upon whom the tax is imposed. Foreign real property taxes are not deductible from 2018 through 2025 unless the taxes relate to an individual's business or investment property.

Deductible personal property taxes must be ad valorem (assessed in relation to the value of the property). So a motor vehicle tax based on weight, model, year, and horsepower is not deductible. However, a tax based on value and other criteria will be partially deductible.

Deductibility of Investment Interest (related to rental or royalty property) Deductible?: Yes ; Comments:

Deduction for AGI; limited to net investment income for the year; disallowed interest can be carried over to future years.

Deductibility of Qualified Student Loan Interest: Deductible?: Yes ; Comments:

Deduction for AGI; subject to limitations.

Other fees, sometimes called points and expressed as a percentage of the loan amount, are paid to reduce the interest rate charged over the term of the loan.

Essentially, the payment of points is a prepayment of interest and is considered compensation to a lender for the use of money.

When capital expenditures are incurred for medical purposes, they must be deemed medically necessary by a physician and used primarily by the patient. In addition, their costs must be reasonable.

Examples include dust elimination systems, elevators, and vans specially designed for wheelchair-bound taxpayers. Other expenditures that may qualify are swimming pools (if the taxpayer does not have access to a neighborhood pool) and air conditioners if they do not become permanent improvements (e.g., window units).

The taxpayer must have the required documentation by the date the tax return is filed for the year the contribution is claimed (and no later than the due date, including extensions, of that tax return).

Failure to comply with the reporting rules typically results in disallowance of the charitable contribution deduction. In addition, substantial penalties may apply if the taxpayer significantly overvalues any contributed property.

Taxpayers may also include premiums paid on qualified long-term care insurance contracts in medical expenses, subject to limitations based on the age of the insured.

For 2020, the per-person limits range from $430 for taxpayers age 40 and under to $5,430 for taxpayers over age 70.

State and local taxes imposed directly on business or rental or royalty property are deductible for AGI.

For example, real property taxes imposed on the buildings or personal property taxes imposed on the equipment used by a sole proprietor are deductible as a business expense [for AGI; reported on Schedule C (Form 1040)]. Real property taxes imposed on an individual's rental property are also deductible for AGI.

From 2018 through 2025, interest on home equity loans is not deductible unless the funds are used to improve the principal residence (and the total acquisition debt and home equity debt is $750,000 or less).

Home equity loans utilize the personal residence of the taxpayer as security, typically in the form of a second mortgage. If the funds from home equity loans are used for personal purposes (e.g., auto purchases, vacations, medical expenses), the related interest expense is not deductible.

As a general rule, personal expenses are not deductible (see § 262 of the Code).

However, Congress has chosen to allow certain personal expenses to be deducted as itemized deductions.

Personal (consumer) interest is not deductible. This includes credit card interest, interest on car loans, and other types of personal interest.

However, interest on qualified student loans, qualified residence (home mortgage) interest, and investment interest are deductible, subject to the limits discussed on the next section.

No deduction is allowed for a contribution of one's services to a qualified charitable organization.

However, unreimbursed expenses related to the services rendered may be deductible. For example, the cost of a uniform (without general utility) that is required to be worn while performing services may be deductible. In addition, deductions are permitted for out-of-pocket transportation costs, reasonable expenses for lodging, and the cost of meals while away from home that are incurred in performing the donated services. In lieu of these out-of-pocket costs for an automobile, a standard mileage rate of 14 cents per mile is allowed. The travel expenses are not deductible if the travel involves a significant element of personal pleasure, recreation, or vacation.

No deduction is allowed for the cost of meals unless they are part of the medical care and are furnished at a medical facility.

If deductible, these meals are not subject to the 50 percent limit applicable to business meals.

A contribution made by check is considered delivered on the date of mailing. Thus, a check mailed on December 31, 2020, is deductible on the taxpayer's 2020 tax return.

If the contribution is charged on a credit card, the date the charge is made determines the year of deduction.

A deduction is allowed for interest paid or accrued during the tax year on aggregate acquisition indebtedness. Acquisition indebtedness refers to amounts incurred in acquiring, constructing, or substantially improving the taxpayer's qualified residence that serves as security for that indebtedness. The amount of acquisition indebtedness is limited based on when the debt was incurred.

If the debt is incurred after December 15, 2017, and before January 1, 2026, acquisition indebtedness is limited to $750,000 ($375,000 for married taxpayers filing separate returns). Debt incurred on or before December 15, 2017, is limited to $1 million ($500,000 for married taxpayers filing separate returns). These higher debt limits will apply to all homeowners after 2025, regardless of the date of borrowing.

Whether interest is deductible for AGI or as an itemized deduction (from AGI) depends on whether the indebtedness has a business, investment, or personal purpose.

If the debt proceeds are used for a business expense (other than performing services as an employee) or for an expense for an activity for the production of rent or royalty income, the interest is deductible for AGI.

The cost of care in a nursing home or home for the aged, including meals and lodging, is a deductible medical expense if the primary reason for being in the home is to get medical care.

If the primary reason for being there is personal, any costs for medical or nursing care are deductible medical expenses, but the cost of meals and lodging must be excluded.

If the indebtedness produces qualified residence interest, any deduction allowed is taken from AGI and is reported on Schedule A of Form 1040 (the taxpayer must itemize deductions to get any benefit). Recall, however, that interest on a limited amount of student loans is a deduction for AGI.

If the taxpayer is an employee who incurs debt in relation to his or her employment, the interest is considered to be personal, or consumer, interest and is not deductible. Debt proceeds used for personal purposes (e.g., to pay for a vacation or personal credit card bills) produce nondeductible personal interest expense.

In order to claim a charitable contribution deduction, the taxpayer must have appropriate documentation. The specific type of documentation required depends on the amount of the contribution and whether the contribution is made in cash or noncash property.

In addition, special rules may apply to gifts of certain types of property (e.g., used cars or boats) where Congress noted taxpayer abuse in the past. In addition, for certain gifts of noncash property, Form 8283 (Noncash Charitable Contributions) must be attached to the taxpayer's return.

Deductibility of Qualified residence interest (Home Equity Indebtedness): Deductible?: No ; Comments:

In general, not deductible from 2018 through 2025. Prior to 2018 and after 2025, deductible as an itemized deduction; limited to indebtedness equal to the lesser of $100,000 or the FMV of residence minus acquisition indebtedness.

Tuition expenses of a dependent at a special school for a mentally or physically handicapped individual may be deductible as a medical expense. The deduction is allowed if a principal reason for sending the individual to the school is the school's special resources for alleviating the infirmities.

In this case, the cost of meals and lodging, in addition to the tuition, is a proper medical expense deduction.

Deductibility of Personal (Consumer) Interest: Deductible?: No ; Comments:

Includes any interest that is not qualified residence interest, qualified student loan interest, investment interest, or business interest. Examples include interest on car loans and credit card debt.

As a general rule, real property taxes do not include taxes assessed for local benefits if the assessments increase the value of the property (e.g., special assessments for streets, sidewalks, curbing, and other similar improvements).

Instead of being deductible, these assessments are added to the basis of the taxpayer's property. Assessments included for personal benefit (e.g., trash removal and tree trimming) are not deductible and do not affect the basis of the property.

For medical expenses, however, any expected reimbursement is disregarded in measuring the amount of the deduction.

Instead, the reimbursement is accounted for separately in the year in which it occurs.

Deductibility of Investment Interest (not related to rental or royalty property) Deductible?: Yes ; Comments:

Itemized deduction; limited to net investment income for the year; disallowed interest can be carried over to future years.

Mortgage loan companies commonly charge a fee, often called a loan origination fee, for finding, placing, or processing a mortgage loan.

Loan origination fees are typically nondeductible amounts included in the basis of the acquired property.

Points

Loan origination fees that may be deductible as interest by a buyer of property. A seller of property who pays points reduces the selling price by the amount of the points paid for the buyer. While the seller is not permitted to deduct this amount as interest, the buyer may do so.

Home Equity Loans

Loans that utilize the personal residence of the taxpayer as security. The interest on such loans is deductible as qualified residence interest. However, interest is deductible only on the portion of the loan that does not exceed the lesser of (1) the fair market value of the residence, reduced by the acquisition indebtedness, or (2) $100,000 ($50,000 for married persons filing separate returns). A major benefit of a home equity loan is that there are no tracing rules regarding the use of the loan proceeds. The TCJA of 2017 suspended the deduction of interest on home equity indebtedness for tax years after 2017 (and through 2025). § 163(h)(3).

Medical insurance premiums (including Medicare insurance costs withheld from a Social Security recipient's monthly benefits) are included with other medical expenses subject to the AGI floor.

Premiums paid by the taxpayer under a group plan or an individual plan are included as medical expenses. If an employer pays all or part of the taxpayer's medical insurance premiums, the amount paid by the employer is not included in the employee's gross income (and these amounts are not deductible by the employee). However, the medical insurance premiums paid by the employer are deductible as business expenses on the employer's tax return.

If a taxpayer is self-employed, insurance premiums paid for medical coverage are deductible as a business expense (for AGI).

The deduction for AGI is allowed for premiums paid for the taxpayer, the taxpayer's spouse, and dependents of the taxpayer. However, this deduction is not allowed if the taxpayer (or taxpayer's spouse) is eligible to participate in an employer-provided health plan.

Examples of Deductible Medical Expenses:

Medical (including dental, mental, and hospital) care Prescription drugs and insulin Special equipment: -Wheelchairs -Crutches -Artificial limbs -Eyeglasses (including contact lenses) -Hearing aids Transportation for medical care Medical and hospital insurance premiums Long-term care insurance premiums (subject to limitations) Cost of alcohol and drug rehabilitation Certain costs to stop smoking Weight reduction programs related to obesity

Medical Expenses

Medical expenses of an individual, a spouse, and dependents are allowed as an itemized deduction to the extent such amounts (less insurance reimbursements) exceed 7.5 percent of adjusted gross income. § 213.

Generally, charitable organizations do not provide the fair market value of the donated property.

Nevertheless, as noted in Concept Summary 10.2, the taxpayer must obtain written evidence of the donation from the charity and value the donation appropriately.

Recall that income tax deductions allowed by law are a matter of legislative grace, but a taxpayer still bears the burden of showing that he or she is entitled to claim the deduction.

Not surprisingly, the tax law provides specific documentation requirements that must be met to claim a charitable contribution deduction.

In computing the medical expense deduction, a taxpayer may include medical expenses for a spouse and for a person who was a dependent at the time the expenses were paid or incurred.

Of the requirements that normally apply in determining dependency status, neither the gross income nor the joint return test applies in determining dependency status for medical expense deduction purposes.

Regardless of a taxpayer's method of accounting, medical expenses are deductible only in the year paid. In effect, individual taxpayers are on a cash basis for the medical expense deduction.

One exception, however, is allowed for deceased taxpayers. If the medical expenses are paid within one year from the day following the day of death, they can be treated as being paid at the time they were incurred. As a result, these expenses may be reported on the final income tax return of the decedent or on earlier returns if incurred before the year of death.

Several states provide a state or local tax credit to taxpayers who donate to specified state or local funds or public charities.

Primarily due to concerns that state and local governments might expand the availability of these programs to help taxpayers "work around" the $10,000 state and local tax deduction limit, the IRS issued proposed rules limiting the Federal tax benefits of these "contributions." Under these rules, if taxpayers receive a state or local tax credit greater than 15 percent of the payments made, the taxpayers must reduce their charitable contribution deduction by the amount of that credit.

Qualified residence interest is interest paid or accrued during the taxable year on indebtedness (subject to limitations) secured by a qualified residence of the taxpayer.

Qualified residence interest falls into two categories: (1) interest on acquisition indebtedness and (2) interest on home equity loans.

The full cost of certain home-related capital expenditures incurred to enable a physically handicapped individual to live independently and productively qualifies as a medical expense.

Qualifying costs include expenditures for constructing entrance and exit ramps to the residence, widening hallways and doorways to accommodate wheelchairs, installing support bars and railings in bathrooms and other rooms, and adjusting electrical outlets and fixtures. These expenditures are only subject to the AGI floor; the increase in the home's value is deemed to be zero.

HSAs have at least two other attractive features. First, an HSA is portable. Taxpayers who switch jobs can take their HSAs with them.

Second, anyone under age 65 who has a high-deductible plan and is not covered by another policy that is not a high-deductible plan can establish an HSA.

Taxpayers sometimes borrow funds to acquire investment assets (e.g., stock). Congress, however, has limited the deductibility of interest on funds borrowed to purchase or hold investment property.

The deduction for investment interest expense is limited to the net investment income for the year and is only deductible if the taxpayer itemizes deductions.

Property donated to a charity is generally valued at fair market value at the time the gift is made.

The Code and Regulations give very little guidance on the measurement of the fair market value.

If the actual real estate taxes are not prorated between the buyer and seller as part of the purchase agreement, adjustments are required.

The adjustments are necessary to determine the amount realized by the seller and the basis of the property to the buyer. If the buyer pays the entire amount of the tax, he or she has, in effect, paid the seller's portion of the real estate tax and has therefore paid more for the property than the actual purchase price.

The annual deduction for contributions to an HSA is limited to an amount that depends on whether the taxpayer has self-only coverage or family coverage.

The annual limit for an individual who has self-only coverage in 2020 is $3,550, and the annual limit for an individual who has family coverage in 2020 is $7,100.

Real estate taxes for the entire year are apportioned between the buyer and seller on the basis of the number of days the property was held by each during the real property tax year.

The apportionment determines who is entitled to deduct the real estate taxes in the year of sale. The required apportionment prevents the shifting of the deduction for real estate taxes from the buyer to the seller or vice versa. In making the apportionment, the assessment date and the lien date are disregarded.

Documentation and Substantiation Requirements for Charitable Contributions: Antiques, paintings, jewelry, and other "tangible personal property"

The deduction is equal to the property's appreciated FMV only if the charity puts the property to "a use related to its tax-exempt purpose." Otherwise, the deduction is limited to the property's cost. The taxpayer should obtain a statement from the charity documenting the property's use.

Documentation and Substantiation Requirements for Charitable Contributions: Used cars, boats, or airplanes

The deduction is generally limited to the amount the charity receives on the sale of the car, boat, or airplane. The taxpayer should obtain a statement from the charity documenting the sales price. Form 1098-C (Contributions of Motor Vehicles, Boats, and Airplanes) must be attached to the return if the taxpayer claims a deduction in excess of $500.

The Supreme Court has defined interest as compensation for the use of money.

The general rule permits a deduction for interest paid or accrued within the taxable year on indebtedness. The deduction is not allowed for taxpayers who are claimed as dependents or for married taxpayers filing separately.

The deduction for lodging expenses cannot exceed $50 per night for each person.

The lodging deduction is allowed not only for the patient but also for anyone who must travel with the patient.

For divorced persons with children, a special rule applies to the noncustodial parent.

The noncustodial parent may claim any medical expenses he or she pays even though the children are not the noncustodial parent's dependents.

A qualified residence includes the taxpayer's principal residence and one other residence of the taxpayer or spouse. The principal residence meets the requirement for nonrecognition of gain upon sale under § 121 (see text Section 13-6).

The one other residence, or second residence, is used as a residence if not rented or, if rented, meets the requirements for a personal residence under the rental of vacation home rules (refer to Chapter 6).

Personal expenses that are deductible as itemized deductions include medical expenses, certain taxes, mortgage interest, and charitable contributions.

These (and other) personal expenses allowed as itemized deductions are covered in this chapter. Although certain exceptions exist (e.g., certain alimony and traditional IRA contributions are deductible for AGI), personal expenses not specifically allowed as itemized deductions by the tax law are nondeductible.

Payments for transportation to and from a point of treatment for medical care are deductible as medical expenses (subject to the AGI floor).

These costs include bus, taxi, train, or plane fare; charges for ambulance service; and out-of-pocket expenses for the use of an automobile. A mileage allowance of 17 cents per mile for 2020 may be used instead of actual out-of-pocket automobile expenses.

The accrual method treatment must be used by cash basis taxpayers for interest prepayments that extend beyond the end of the taxable year.

These payments must be allocated to the tax years to which the interest payments relate. This provision prevents cash basis taxpayers from creating tax deductions before the end of the year by prepaying interest.

An eligible taxpayer who has attained age 55 by the end of the tax year may make an additional annual contribution in 2020 of up to $1,000.

This additional amount is referred to as a catch-up contribution. A deduction is not allowed after the individual becomes eligible for Medicare coverage.

Individuals can elect to deduct either their state and local income taxes or their sales/use taxes paid as an itemized deduction.

This election is intended to provide equity to taxpayers living in states that do not impose a state income tax (but do have sales taxes). Taxpayers making this election can either deduct actual sales/use tax payments or an amount from an IRS table (available on the IRS website). The IRS table amount can be increased by sales tax paid on the purchase of motor vehicles, boats, and other specified items.

In general, points are capitalized and are amortized and deductible ratably over the life of the loan. However, the purchaser of a principal residence can deduct qualifying points in the year of payment.

This exception also covers points paid to obtain funds for home improvements.

Cash basis taxpayers are entitled to deduct state income taxes in the year payment is made.

This includes taxes withheld by the employer, amounts paid with the state income tax return when filed, and estimated state income tax payments.

When a mortgage or loan is paid off in full in a lump sum before its term (early), the lending institution may require an additional payment (normally, a specific percentage of the loan balance).

This is known as a prepayment penalty and is considered to be interest (e.g., personal, qualified residence, or investment) in the year paid. The general rules for deductibility of interest also apply to prepayment penalties.

Under the cash method, interest must be paid to secure a deduction.

Under the accrual method, interest is deductible ratably over the life of the loan.

Benefit Received Rule

When a donor derives a tangible benefit from a contribution, he or she cannot deduct the value of the benefit.

No current deduction is allowed for payment for medical care to be rendered in the future unless the taxpayer is under an obligation to make the payment.

Whether an obligation to make the payment exists depends on the policy of the physician or the institution furnishing the medical care.

Even if interest expense is deductible (e.g., qualified residence interest),

a current deduction still may not be available unless certain additional conditions described below are met.