Itemized Deductions (Tax course)
Danielle is planning to itemize her deductions. In addition to hospital care and nursing help, which of the following expenses can be deducted?
Acupuncture treatment
What are Charitable Contributions?
Charitable contributions made by individuals are deductible on Schedule A, if they are made to a qualified charity and are properly documented. IRS Pub 526 explains charitable contributions in great detail. Contributions can be cash or property (non-cash). Non-cash contributions, if over $500, are reported on Form 8283. There are limits to how much of the deduction is allowed. These limits are based on the contributed property and the donee organization. Unallowed deductions are carried forward. Qualified charities are organizations the IRS has approved as non-profit and include organizations that are religious, charitable, educational, scientific, literary, or that help to prevent cruelty to children or animals. Ask the organization whether it is a qualified organization, or check IRS online Pub 78. Nondeductible contributions include contributions to organizations that are not qualified charitable organizations, contributions to specific individuals, personal expenses, any part of a contribution for which the taxpayer receives a benefit, the value of the taxpayer's time, and qualified charitable distributions from an IRA.
Charitable Contributions
Deductible Contribution Limits The limit of deductible contributions is based on adjusted gross income (AGI). The limit is 50%, 30%, or 20% of the taxpayers AGI, depending on the type of property donated and the type of donee organization. A different limit applies to certain qualified conservation contributions. The 20% limit applies to all capital gain property to or for the use of a qualified organization (other than gifts of capital gain property to a 50% limit organization). A special 30% limit applies to capital gain property donated to 50% limit organizations. There are exceptions to this limitation. However, the exceptions are beyond the scope of this course. The 50% limit applies to the total of all charitable contributions the taxpayer made during the year.
Force Print & Force Standard
Drake Software calculates the amounts entered on Schedule A. If the amounts are greater than the standard deduction, then Schedule A is generated; however, the preparer can force Schedule A to print by checking Print Schedule A on the PRNT screen. This generates Schedule A whether or not the total is greater than the standard deduction. On the A screen in Drake Software, select Force Itemized or Force Standard to choose one of these options. Schedule A is generated or the program forces a standard deduction, depending on which box is selected. NOTE: If a couple is married filing separately, they must both itemize deductions or both take the standard deduction.
Limitations
For 2016, itemized deductions with adjusted gross income exceeding $155,650 may be reduced. Use the Itemized Deductions Worksheet to figure the amount to enter on line 29 if the amount on Form 1040, line 38, is over $311,300 if married filing jointly or qualifying widow(er); $285,350 if head of household; $259,400 if single; or $155,650 if married filing separately.
Itemized Deductions in Drake
Home Mortgage Interest Deduction In Drake, the appropriate mortgage interest and points can be entered either on the 1098 screen or directly on screen A, but not both. Enter investment interest expense on screen 4952.
What Expenses are on Schedule A?
Interest You Paid Home Mortgage Interest Deduction Home mortgage interest on up to $1,000,000 ($500,000 if married filing separately) of acquisition debt, plus $100,000 ($50,000 if married filing separately) of equity debt, is deductible on Schedule A. Acquisition debt is debt secured by the property and used to finance the home, including refinance. Equity debt is a mortgage secured by the property. Mortgage interest is deductible if it is on a first or second home. Points on an original finance are deductible in the year the home is purchased. Points on a refinance are amortizable over the term of the mortgage. Report the appropriate amount for mortgage interest and points on line 10 if it was reported to the taxpayer on Form 1098 or on line 11 if the points were not reported on a Form 1098.
Job Expenses and Certain Miscellaneous Deductions
Job expense and certain miscellaneous deductions are reported on lines 21 through 23. Unreimbursed employee expenses are reported on line 21 and, if appropriate, Form 2106 should be prepared and attached to the return. Also include tax preparation fees on line 22 and other expenses, such as investment expense, safe deposit, etc., on line 23. The expenses are totaled and the excess over 2% of AGI is included as an itemized deduction.
Itemized Deductions in Drake
Line 1 - Medical and Dental Expenses Enter the amount of medical and dental expenses. Do not include expenses entered elsewhere. For example, if health insurance premiums are deducted on Form 1040, line 29, Self-employed health insurance deduction, do not include these amounts on Schedule A. However, if only parts of the health insurance premiums are deducted on line 29, include the remaining expense on Schedule A. Enter the amount of post-tax health insurance payments not deducted elsewhere in the first box on line 1. Up to two long-term care premiums may be entered on each screen A. From the drop list, select the appropriate letter for beneficiary of the contract and enter the amount in the appropriate box. Enter medical miles in the appropriate box. Drake multiplies this amount by 19 cents and includes the total in medical expenses. Enter Other medical and dental expenses on the appropriate line, for example: payments to doctors, dentists, hospitals, etc.
Itemized Deductions in Drake
Line 20 When information is entered on the 4684 screen in Drake Software, the allowable amount is calculated and flows to the Schedule A, line 20. If more than one item was damaged or stolen, press PAGE DOWN to create additional 4684 screens. The program calculates the total of all Forms 4684 and carries the amount to line 20 of the Schedule A.
Itemized Deductions in Drake
Line 21 Enter employee expenses on line 21 unreimbursed employee expenses, or, if appropriate, click the Form 2106 link and complete the 2106 screen. The IRS instructions for Schedule A provides examples of "Other Expenses". Click the "Miscellaneous Deductions on Screen A" button below to view these instructions.
Itemized Deductions in Drake
Line 28 Enter expenses not subject to the 2% of AGI limit on line 28 Other not subject to 2% limit expenses. Click the "Other Miscellaneous" button below to see the list of deductions not subject to the 2% limit, per IRS publication 529, or review this publication for a detailed description of these deductions.
Other Miscellaneous Deductions
Line 28 - Other Enter a description and the amount for miscellaneous deductions not subject to the 2% limitation. If there is not enough room available on the line, attach a schedule to the tax return. These deductions include such things as: Gambling losses to the extent of winnings reported on Form 1040, line 21 Casualty and theft losses of income-producing property Loss from other activities from Schedule K-1 Federal estate tax on income in respect of a decedent Amortizable bond premium on bonds acquired before October 23,1986 Deduction for repayment of amounts under a claim of right if over $3,000 Certain unrecovered investment in a pension Impairment-related work expenses of a disabled person
Charitable Contributions
Lines 16 and 17 Line 16 - Gifts by Cash or Check Enter the total gifts made by cash or check (including out-of-pocket expenses) on line 16. The IRS requires written evidence of the taxpayer's contributions in the form of canceled checks, receipts, etc. Contributions of $250 or more require a statement from the charitable organization showing the following information: the amount of money contributed, a description (but not value) of any property donated, and if the organization gave the taxpayer any goods or services in return for the contribution. Line 17 - Other than by Cash or Check Enter contributions of property on line 17. If the contributions were used items, such as clothing or furniture, deduct their fair market value at the time they were given. The fair market value is what a willing buyer would pay a willing seller if neither has to buy or sell and both are aware of the conditions of the sale. If the deduction exceeds $500, the taxpayer must complete and attach Form 8283.
Itemized Deductions in Drake
Lines 16, 17, and 18 Enter on line 16 total gifts by cash or check. If subject to the 30% limitation, enter in the appropriate space or double-click in the data entry box to access a detail worksheet, and enter the gifts to charities individually. Enter on line 17 Other than cash or check, noncash property donations if less than $500. If $500 or more, click the link to access Form 8283 and complete the appropriate information on the 8283 screen. Enter carryover from prior year in the appropriate box on line 18.
Itemized Deductions in Drake
Lines 5 thru 8 Click the "Screen A" button below to view the input screen. Line 5 - Drake includes in state and local income taxes amounts entered on the W2 and ES screens in the income tax calculation. To adjust this total, enter an amount on the A screen. Drake calculates the General sales tax, and this is adjusted on the STAX screen or on screen A. Drake compares the income tax to the sales tax and uses the deduction that results in the lowest 2016 income tax. The STAX screen has a check box to force the tax worksheet and also has a link to the IRS Sales Tax Calculator. Line 6 - Drake includes in real estate taxes amounts entered on the 1098 screen. Adjustments to the 1098 screen are entered on this line, or if real estate taxes are not entered on the 1098 screen, enter the entire amount on this line. Property taxes that qualify for state property tax credit that are not deductible for federal taxes are entered on the Taxes that qualify for State Property Tax Credit line. Drake properly calculates the state tax credit. Line 7 - Enter personal property taxes, such as auto excise tax. Line 8 - Enter other taxes. For example, if instead of claiming a foreign tax credit, the taxpayer is claiming foreign taxes as a deduction.
What Expenses are on Schedule A?
Medical and Dental Expenses Unreimbursed medical and dental expenses that are not satisfied by another tax benefit provision (such as the health insurance AGI deduction for the self-employed, or expenses paid by an HSA - health savings account), that exceed 10% of AGI and are paid in 2016, are an itemized deduction for 2016. Provisions in the ACA increase the deduction from 7.5% of AGI in 2015 to 10% of AGI in 2015 and 2016 for taxpayers under 65 years old. If either the taxpayer or spouse was born before January 2, 1952, then they can deduct dental and medical expenses that exceed 7.5% AGI for 2016. To determine the taxpayers age at death refer to Age at Death. Refer to IRS Publication 502, Medical and Dental Expenses for determining types of expenses that can and cannot be deducted, when capital expenses and special care expenses for disabled persons can be deducted, and whose medical expenses can be included as itemized medical deductions.
Medical and Dental Expenses
Medical expenses must be for legal purposes. These include approval by the FDA, rendered by authorized medical professionals and includes: expenses paid in 2016 for health insurance, diagnosis, cure, mitigation, treatment, or prevention of disease, and the cost for treatments affecting any part or function of the body. Long-term care insurance premiums may be limited. Click the button below for 2016 "Long-Term Care Premium Limits." Qualified expenses include: equipment, supplies, and diagnostic devices required for these purposes. Use the IRS worksheet to determine the deductible portion of the capital expense. Click the "Capital Expense Worksheet" button to view Worksheet A, Capital Expense Worksheet in IRS pub 502.
Charitable Contributions
Nondeductible Contributions The following contributions are not deductible: Travel expenses, unless there was no significant level of personal pleasure in travel Political 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 Value of time or services Value of blood given to a blood bank The transfer of future interest in tangible personal property Gifts to individuals and groups run for personal profit Gifts to organizations engaged in certain political activities that are of direct financial interest to the taxpayer Gifts to groups whose purpose is to lobby for changes in the laws Gifts to civic leagues, social and sports clubs, labor unions, and chambers of commerce Value of benefits received in connection with a contribution to a charitable organization
Interest You Paid
Schedule A, lines 13 and 14 Line 13 - Mortgage Insurance Premium Use the mortgage insurance premium worksheet to calculate the deductible portion of the mortgage insurance premium. Qualified mortgage insurance premiums are paid under a mortgage insurance contract issued after December 31, 2006, in connection with home acquisition debt that was secured by a first or second home. Box 4 of Form 1098 may show the premium paid in 2016. Line 14 - Investment Interest Expense Investment interest expense is interest on money borrowed to buy property held for investment. Generally, the taxpayer's deduction for investment interest expense is limited to the net investment income. Use Form 4952 to calculate investment interest expense.
Charitable Contributions
Substantiation of Donated Property Taxpayers should keep a receipt or written statement from the organization to which the property was donated. For each gift of property, the taxpayer should keep reliable written records that include: How the property's value was figured at the time it was donated. If the value was determined by an appraisal, a signed copy of the appraisal should be kept. The cost or other basis of the property if it is reduced by any ordinary income or capital gain that would have resulted if the property had been sold at its fair market value. How the deduction was figured if the deduction was reduced for gifts of capital gain property. Any conditions attached to the gift. Additional requirements are required for contributions of $5,000 or more.
What Expenses are on Schedule A?
Taxes You Paid Taxpayers are allowed an itemized deduction for certain taxes, including real estate, personal property, and other taxes, such as taxes paid to a foreign country or U.S. possession. For 2016, a tax deduction is allowed for either state and local income tax or state and local general sales taxes. No deduction is allowed for federal income, payroll, estate, or gift taxes. NOTE: Mandatory contributions made to California, New Jersey, or New York Nonoccupational Disability Benefit Fund, Rhode Island Temporary Disaster Fund, or Washington State Supplemental Workmen's Compensation Fund are included in deductible taxes.
When to Use a Schedule A
The following expenses are included on Schedule A: Medical and dental expenses Certain taxes paid Certain interest paid Gifts to charity Casualty and theft losses Job expenses and certain miscellaneous deductions (that exceed 2% of AGI) Other miscellaneous deductions
Casualty and Theft Losses
Use Form 4684 to figure and report the amount of casualty loss. Casualty loss deductions are entered on line 20 of Schedule A. The taxpayer may be able to deduct part or all of each loss caused by theft, vandalism, fire, storm, auto or boat accident, and corrosive drywall. It may be possible to deduct money the taxpayer had in a financial institution but lost because of bankruptcy of the institution. Nonbusiness casualty or theft losses can be deducted only to the extent that: The amount of each separate casualty or theft loss is more than $100 The total amount of all losses during the year (reduced by the $100 limit above) is more than 10% of AGI.
Summary
Use Schedule A to itemize deductions if itemizing deductions is more beneficial to the taxpayer than taking the standard deduction, or if the taxpayer is filing MFS and the spouse itemized deductions on his or her tax return. The expenses deductible on Schedule A are: medical and dental, taxes, interest, gifts to charity, casualty and theft losses, job and miscellaneous, and other miscellaneous. Other forms that may have to be filed with Schedule A include: Form 2106, Form 4684, and Form 4952. Drake Software calculates the amounts entered on Schedule A and uses the greater of the itemized deductions or the standard deduction for the return. There is an option to force either itemized or standard.
Itemized Deductions Explained
When to Use a Schedule A An alternative to the standard deduction is the itemized deduction. There are specific deductions that, if the total is greater than the standard deduction, can be used instead of the standard deduction to reduce adjusted gross income. This will create a lower taxable income and lower regular tax for the taxpayer. This unit explains these deductions. These deductions are reported on Schedule A of Form 1040. The IRS instructions for Schedule A (Form 1040) provides valuable information for preparing Schedule A. Also included in these instructions are worksheets and tables to assist in the calculation of the allowed deductions for certain expenses. For example, page A-9 provides a worksheet to calculate deductible mortgage insurance premiums, and page A-15 is the optional local sales tax tables. NOTE: Spouses filing married filing separately (MFS) must use the same method of deductions, either standard deduction, or itemized deduction.
Medical and Dental Expenses
Whose Expenses Can be Included? The taxpayer is allowed to include the medical and dental expenses for the following: Taxpayer and spouse Dependents claimed on the return Children who are not claimed as a dependent due to rules for children of divorced or separated parents Any person who could have been claimed as a dependent on the return except that the person received $4,050 or more of gross income or filed a joint return Any person who could have been claimed as a dependent except that the taxpayer or spouse can be claimed as a dependent on someone else's return
Medical and Dental Expenses
Whose Expenses Can be Included? The taxpayer is allowed to include the medical and dental expenses for the following: If the dependent exemption is claimed under a multiple support agreement, only the medical expenses paid by the taxpayer are deductible. Medical expenses paid by others who contributed to the support are not deductible by anyone. Only medical expenses paid before death by the decedent are included in figuring the itemized medical deduction. Travel for medical or dental purposes is allowed and the taxpayer may use a standard mileage amount of 19 cents per mile.
Jon and Lisa are married filing separately. They lived together all year and have no dependents, Jon had a large amount of medical expenses this year to deduct on his return. Lisa has a small amount of charitable gifts she can deduct. How should the couple take their deductions?
both itemize or both take standard
Which of the following taxes is not deductible on Schedule A?
federal income tax
Mike and Sue donated $3,546 to their church as their tithe. Which of the following would meet the guidelines for monetary donation records?
written documentation from the church with dates and amounts paid.