Income Tax Exam Chapter 5
If the benefit is not taxed
the cost of generating the benefit is not deductible.
Prescription drugs obtained from sources outside the United States, such as Canada, are
Deductible if prescribed by a physician and approved by the FDA for legal importation. Feedback: A physician prescribes imported marijuana for a terminally ill cancer patient, which is legal under state statute. However, because the importation of marijuana is not approved by the FDA, and is illegal under federal statute as well, this would not be an acceptable example.
Donations to what types of organizations are tax deductible?
Deductions, subject to limitations, are allowed for donations to public charities, private foundations, and organizations such as war veterans' organizations, fraternal orders, cemetery companies, and certain non-operating private foundations.
Generally, a taxpayer may deduct the cost of medical expenses for which of the following?
Doctor-prescribed birth control pills.
What is the difference between deductions from AGI and deductions for AGI?
For AGI expenditures are outflows generally made for the production of income or for a trade or business and are included in the calculation of adjusted gross income. From AGI deductions are primarily personal expenditures that are allowed to reduce taxable income.
Which expense, incurred and paid in 2019, can be claimed as an other itemized deduction?
Gambling Losses Feedback Only c qualifies as an other itemized deduction subject to the limitation of gambling winnings.
What is the proper tax treatment for prescription drugs obtained outside the United States, such as from Canada?
Prescription drugs obtained from sources outside the United States, such as Canada, are deductible if prescribed by a physician for the treatment of a medical condition and the FDA has approved that they can be legally imported. In the event the prescribed drugs do not have FDA approval for legal importation, they cannot be deducted.
The majority of itemized deductions are
Personal living expenses.
For Foreign Taxes what is the acceptable source document?
Prior Year's Foreign Tax Return Mutual Fund/Stock Statements Canceled Checks
For State/Local Income Taxes what is the acceptable source document?
W-2 Wage Stmt - State W/H Box W-2 Wage Stmt - Local W/H Box Quarterly Estimated Tax Payments
You may claim an itemized deduction for the state and local income taxes that you pay during the tax year. It makes no difference to what year the taxes are actually attributable to - if the taxes are paid during the year 2019, they are deductible by a
cash-basis taxpayer in 2019
Individual taxpayers may claim an itemized deduction on Schedule A for
contributions of either cash or property to a qualified donee organization
What is the maximum amount that Thomas could deduct in 2019 as investment interest expense?
$7,000 Feedback Investment interest expense is deducible to the amount of net investment income.
. Beginning in 2018, the category of Miscellaneous Itemized Deductions subject to the
2% of AGI limitation was totally eliminated. The category of Other Itemized Deductions is what remains.
Which of the following organizations qualifies for deductible charitable contributions?
A nonprofit educational institution, The Salvation Army, Churches. Feedback To determine whether an organization is a qualified donee organization, check IRS Exempt Organization on-line search tool at https://www.irs.gov/charities-non-profits/tax-exempt-organization-search
Of the following items, which one does not qualify as an itemized deduction for state and local taxes?
Hotel taxes incurred on personal travel. Feedback there is no deduction for hotel taxes under the category of itemized deduction for state and local taxes.
If state or local income taxes are deducted as an itemized deduction on the current year's tax return, what is required if the taxpayer receives a refund in the following year?
If a refund is received, the tax preparer must include all or a portion of the refund in income for the current year (assuming the taxpayer itemized his/her return and deducted state taxes in the previous year).
For Cash equal to or greater than $250 what are the substantiation requirements?
Obtain a written acknowledgment from the Charity stating the date and amount of the contribution.
The only types of personal interest still available as a deduction are
mortgage interest on a personal residence and investment interest.
Nontaxable investment income, such as interest income on
municipal bonds, is not included in the calculation of net investment income
The 20% limitation refers to
the donation of capital gain property to a private foundation. The deduction for cash given to a private foundation is limited to 30% of AGI, whereas capital gain property given to the same organization is limited to 20% of AGI.
Investment interest is any interest that is
paid or accrued on indebtedness properly allocable to property held for investment.
Real estate taxes are deductible in the calculation of federal taxable income. If the tax is paid on personal use real estate, such as
your principal residence, it is an itemized deduction on Schedule A.
Raquel, who works in medical sales, drives her own vehicle to various locations for client sales meetings. Her employer reimburses her $400 each month for various business expenses and does not expect Raquel to provide proof of her expenses. Her employer included this $4,800 reimbursement in Raquel's 2019 W-2 as part of her wages. In 2019, Raquel incurred $3,000 in transportation expense, $1,000 in parking and tolls expense, $1,800 in car repair expense, and $600 for expenses while attending a professional association convention. Assume that Raquel uses the vehicle for business purposes only and that she maintains adequate documentation to support all of these expenditures. What amount is Raquel entitled to deduct on her Schedule A for an other itemized deduction?
$0 because employee expenses are no longer deductible as an itemized deduction. Feedback Under the Tax Cuts and Jobs Act of 2017, employee expenses are no longer deductible as an itemized deduction.
What is the total amount of medical expenses (before considering the limitation based on AGI) that would enter the calculation of itemized deductions for Raul's 2019 income tax return?
$1,170 Answer $470 + $700 = $1,170 Feedback: Deductible medical expenses are those that are doctor-directed and do not include optional treatments for the maintenance of general health and appearance. Personal expenditures that are not prescribed, such as health club memberships, are not deductible.
Premiums for medical insurance, such as major medical, hospitalization, dental, and vision insurance, are deductible. Premiums for long-term care policies are deductible, subject to the following dollar limitations The Tax Cuts and Jobs Act (TCJA) of 2017 limited the deduction for income, real estate and other state and local taxes. The limitation for the deductibility of all state and local taxes is now
$10,000 ($5,000 for MFS).
Prior Year's State/Local Tax Return Limitation for the deductibility of all state and local taxes is
$10,000 ($5,000 for MFS).
The limitation for the deductibility of all state and local taxes is now
$10,000 ($5,000 for MFS).
In 2019, the Rinaldis' vacation cottage was severely damaged by an earthquake in a location that was a presidentially declared disaster area. They had AGI of $110,000 in 2019. Following is information related to the cottage: Cost basis $95,000, FMV before casualty 135,000, FMV after casualty 20,000 The Rinaldis had insurance and received an $80,000 insurance settlement. What is the amount of allowable casualty loss deduction for the Rinaldis in 2019 before the AGI and event limitation?
$15,000 Feedback: $95,000 - 80,000 = $15,000. As this event occurred in a federally declared disaster area, it is eligible for deduction. First, the lower of the basis of the property or the difference in the FMV before and after the event is determined. Then from that number we subtract the insurance reimbursement to determine the starting point for the calculation of the allowable casualty loss deduction before the AGI and event limitation.
Cindy Byrd donated stock (capital gain property) to a public charity that she has long supported. She purchased the stock 4 years ago for $100,000, and on the date of the gift, it had a fair market value of $300,000. What is her maximum charitable contribution deduction for the year on this contribution of stock if her AGI is $500,000?
$150,000 Feedback $500,000 x 60% = $300,000, the overall AGI limitation for charitable contributions. $500,000 x 30% = $150,000, the amount of the deduction allowable in a given year for appreciated capital gain property. Since the $150K is less than the 300K, she can deduct the full amount of $150K for this year providing there are no other contributions that push her over the overall limit. The remaining $150,000 of the deduction will be carryforward to future years. The 30% charitable deduction limitation applies to contributions of appreciated capital gain property. Generally, when capital gain property is contributed to a public charity, the taxpayer gets a deduction for the FMV of the asset, subject to the 30% limitation for any give year. Any unused amount of the deduction can be carryforward for five years.
For 2019, Perla, who is single and 55 years of age, had AGI of $60,000. During the year, she incurred and paid the following medical costs: Doctor and dentist fees $4,350, Prescription medicines 625, Medical care insurance premiums 380, Long-term care insurance premiums 1,640(paid for with after tax funds) Hearing aid 150 What amount can Perla take as a medical expense deduction (after the AGI limitation) for her 2019 tax return?
$2,585. $4,350 + $625 + $380 + $ 1,580 + $150 = $7,085 - $4,500 = $2,585. Feedback: All the expenses listed above are deductible; however, the deduction for the long- term care insurance premiums is limited by Perla's age.
The aggregate amount treated as acquisition indebtedness for any period cannot exceed
$750,000 ($375,000 for married individuals filing separate returns). It is the interest on this amount that is deductible.
What is the maximum amount of personal residence acquisition debt on which interest is fully deductible on Schedule A?
$750,000 Feedback Acquisition indebtedness means any debt incurred to acquire, build, or substantially improve any qualified residence. As a result of the TCJA, the aggregate amount treated as acquisition indebtedness for any period cannot exceed $750,000 ($375,000 for married individuals filing separate returns).
For 2019, taxpayers can elect to take an itemized deduction for the amount of either
(1) state and local income taxes or (2) state and local general sales taxes paid during the tax year. Generally, taxpayers cannot take both.
There are two ways to calculate the deduction for the use of a personal auto for medical transportation
(1) the actual cost of operating the car for medical purposes; or (2) the optional standard mileage allowance, which for 2019 is $0.20 cents per mile.
There are four major categories of deductible taxes on individual returns
1. Personal property taxes; 2. Local real estate taxes; 3. Other state and local taxes, sales taxes and 4. Foreign taxes.
You may deduct costs for medical care, including amounts paid for
1. The diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body; 2. Transportation primarily for and essential to medical care; 3. Qualified long-term care services; and 4. Insurance for medical care or qualified long-term care services.
Mickey is a 12-year-old dialysis patient. Three times a week for the entire year he and his mother, Sue, drive 20 miles one way to Mickey's dialysis clinic. On the way home, they go 10 miles out of their way to stop at Mickey's favorite restaurant. Their total round trip is 50 miles per day. How many of those miles, if any, can Sue use to calculate an itemized deduction for medical transportation? Use the medical mileage rate in effect for 2019. Explain your answer.
40 miles round-trip * 3/week = 120 miles/week, * 52 weeks, 6,240 miles x $0. .20 per mile = $ 1,248 Feedback: The extra ten miles is not for medical purposes and therefore would not be considered into the allowable mileage calculation.
The threshold amount for the deductibility of allowable medical expenses ordinarily is
7.5% of AGI.
Which of the following statements is not true regarding documentation requirements for charitable contributions?
A contribution charged to a credit card is a noncash contribution for purposes of documentation requirements. Feedback A contribution charged to a credit card is considered a cash contribution.
Define personal casualty loss. Include in your discussion the concepts of sudden, unexpected, and unusual.
A personal casualty loss includes losses of personal use property, such as a personal residence, personal auto, or vacation home.As a result of the TCJA, a personal casualty is now deductible only if such a loss is attributable to Federally Declared Disaster areas that is designated as such by the president. A sudden event is noted as an event that is swift, not gradual or progressive. An unexpected event is defined as an event that is ordinarily unanticipated and occurs without the intent of the taxpayers. An unusual event is one that is extraordinary and nonrecurring.
How is a personal casualty determined and how is the loss calculated? Include in your discussion how the determination of the loss is made and limits or floors placed on personal casualties, and any exceptions to those limits.
As a result of the TCJA, a personal casualty is now deductible only if such a loss is attributable to Federally Declared Disaster areas that is designated as such by the president. In general, the casualty loss is the lesser of the FMV immediately before the casualty reduced by the FMV immediately after the casualty, or the amount of the adjusted basis for determining the loss from the sale or other disposition of the property involved. There are two limitations on personal casualty deductions. First, each separate casualty is reduced by $100 ($100 per casualty, not $100 per item of property). The second and more substantial limitation is the 10% of AGI limitation. In order to obtain any benefit from a casualty loss, the total losses for the year, after the $100 per casualty deduction, must be in excess of 10% of AGI. Because of the 10% limitation, most taxpayers do not benefit from casualty losses unless the loss was substantial.
Daryl, who had significant itemized deductions for 2019 and therefore was eligible to use Schedule A, purchased a new vehicle in 2019 for $40,000 with a state sales tax of 10%. The allocated deduction amount for other purchases made by Daryl throughout the year, using the IRS state and local sales tax tables, would be $750. He also paid state income taxes of $4,500 for 2019. Daryl's best option to legally maximize his tax savings in 2019, assuming he was under the $10,000 limit for state and local taxes would be to
Deduct his total amount of allowable state sales tax deduction on Schedule A. Feedback: When taxpayers elect to use the sales tax tables to determine the amount of their sales tax deduction, they are permitted to add to that amount the actual amount of sales tax on motor vehicles, boats, and homes, with certain limitations.
For 2019, the amount of the sales tax deduction is calculated by:
Determining the actual sales tax paid during the year. Using the IRS sales tax deduction calculator. Using the sales worksheet and tax tables provided by the IRS in the Schedule A instructions. Feedback: All three are acceptable methods for determining the allowable sales tax deduction.
Can an individual take a medical deduction for a capital improvement to his or her personal residence? If so, how is it calculated?
For medical capital expenditures that improve the taxpayer's property, the deduction is available only to the extent that the medical expenditure exceeds the increase in the FMV of the residence. A deduction of this type may often require an appraisal to determine the increase in the FMV of the residence.
For gambling losses, what is the process for determining their deductibility?
Gambling losses are an example of an other itemized deduction as they have a "built in" limitation, which is deductibility to the extent of gambling winnings. The winnings are reported as income on the Form 1040 Schedule 1 and the losses are reported on the Schedule A.
Which of the following is an other itemized deduction on the Schedule A?
Gambling losses. Feedback: Gambling losses are deductible to the extent of the "built-in limitation" of gambling winnings.
Distinguish between the tax treatment for donations to charitable organizations of cash, ordinary income property, and capital gain property.
Generally, if capital gain property is donated to a public charity, the donation amount is the FMV of the property, with certain exceptions. When ordinary income property such as accounts receivable and inventory is donated, the deductible amount is the tax basis of the property. Cash given to a private foundation would be limited to 30% of AGI, whereas capital gain property given to the same organization would be limited to 20% of AGI. The 30% limitation also applies to any contribution (cash or property) to charities that are not 60% limitation charities such as war veterans' organizations, fraternal orders, cemetery companies, and certain non-operating private foundations.
Can a taxpayer take a deduction for premiums paid for health insurance? How do reimbursements from health insurance policies affect the amount of the medical deduction? What happens if an insurance reimbursement for medical expenses is received in a subsequent tax year?
Health insurance premiums are only deductible if the premiums are paid with after-tax funds (not in an employer pre-tax plan). Insurance reimbursements or partial reimbursements must be subtracted from the gross medical expenses to give the net medical expenses that are subject to the 7.5% of AGI limitation. The insurance reimbursement would be included in income to the extent that the benefit was received in the prior year.
What is a home equity loan? Is the interest tax deductible? Are there any requirements for the deductibility of home equity loan interest?
Home equity loans are loans that are secured by a qualified residence and in an amount that does not exceed the fair market value of the residence less the acquisition debt. As a result of the TCJA, there are some new restrictions applied to Home Equity Indebtedness. However, taxpayers can often still deduct interest on a home equity loan, a home equity line of credit or a second mortgage, no matter how the loan is labeled, as long as the loan is used to buy, build or substantially improve the taxpayer's home that secures the loan and the total acquisition debt amount (mortgage principal and home equity loan principal) does not exceed the $750K ($375K) limits.
Shelby has net investment income of $18,450 and wage income of $80,500. She paid investment interest expense of $19,000. What is Shelby's deduction for investment interest expense? Explain your answer.
Investment interest expense (limited to net investment income): $18,450 The remaining $550 of expense can be carried forward to future years.
Referring to the previous question, what is the treatment for the interest expense that Thomas could not deduct in 2019?
It can be carried forward and deducted in succeeding years. Feedback If the investment interest expense exceeds the taxpayer's net investment income, he or she can carry forward the excess expense to future tax years when net investment income is available.
In 2019, the president of the United States declared a federal disaster due to brush fires in the Southwest. Lisa lives in that area and lost her home in the fires. What choice does she have regarding when she can claim the loss on her tax return?
It may be claimed in 2018 or 2019. Feedback The presidential declaration of a federal disaster area enables the taxpayer to deduct the loss as well as allowing her to deduct either in the previous year, to provide a more immediate benefit, or in the current year.
For 2019, the deduction by a taxpayer for investment interest expense is
Limited to the taxpayer's net investment income for 2019. Feedback Net investment interest income is gross investment interest income less deductible investment expenses.
What are the general requirements for a medical expense to be considered deductible?
Medical expenses are allowed as itemized deductions to the extent the expenses exceed 7.5% of adjusted gross income and are not reimbursed. Qualified medical care expenses include amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease or for the purpose of affecting any structure or function of the body, for transportation primarily for and essential to medical care, for qualified long-term care services, and for insurance covering medical care if paid using after-tax dollars.
Steve purchased a personal residence from Adam. To sell the residence, Adam agreed to pay $4,500 in points related to Steve's mortgage. Discuss the tax consequences from the perspective of both Steve and Adam.
Mortgage points paid on a personal residence are deductible if paid by the taxpayer. If the seller pays the points (as is the case here), the buyer is still treated as paying the points if the amount is subtracted from the purchase price of the residence, thereby reducing the cost basis to the buyer. So, if the purchase price paid by Steve was $200,000, his carrying basis of the house would now be $195,500.
For 2019, Thomas, a single parent, reported the following amounts relating to his investments:
Net investment income $7,000 Interest expense on a loan to purchase stocks 2,000 Interest expense on funds borrowed to purchase land for investment 6,000
In 2019, Arturo's pleasure boat that he purchased in 2013 for $48,500 was destroyed by a hurricane in a part of Florida that was declared a federal disaster area. His loss was not totally covered by his insurance. On what form(s) will Arturo report this loss?
On Form 4684, Casualties and Thefts and Schedule A, Itemized Deductions.
Jinhee purchased a ticket to a concert to raise money for the local university. The ticket cost $350, but the normal cost of a ticket to this concert is $100. How much is deductible as a charitable contribution?
Only $250 is deductible - the excess of the amount over the FMV of the goods or services received ($350 - $100 value of ticket). Feedback: The rationale for only $250 being deductible is that the $100 value of the ticket represents a consumed item and therefore has no element of a gift.
Give an example of an other itemized deduction. How are other itemized deductions limited?
Other itemized deductions are subject to a built in "limitation." Gambling losses are an example of an other itemized deduction, as they have a "built in" limitation, which is deductibility to the extent of gambling winnings.
During 2019, Raul incurred and paid the following expenses:
Prescription drugs $ 470, Vitamins and over-the-counter cold remedies 130, Doctors and dentist visits Doctors and dentist visits, Health club fee 250, Hair Transplant Surgery 2,400
For Sales Tax what is the acceptable source document?
Purchase Receipts Sales Tax Tables in IRS Schedule A instructions, or sales tax deduction calculator at the IRS website
What is qualified residence interest? Are there any limits to the deductibility of acquisition loan interest?
Qualified residence interest is any interest that is paid or accrued during the taxable year on acquisition indebtedness or home equity indebtedness with respect to any qualified residence of the taxpayer. Taxpayers are allowed a deduction for qualified residence interest on their principal residence and a second residence selected by the taxpayer. As a result of the TCJA, the aggregate amount treated as acquisition indebtedness for any period cannot exceed $750,000 ($375,000 for married individuals filing separate returns). However, in the case of unmarried co-owners of a property, that limitation is extended to $750,000 per person. The $750,000 limitation refers to the amount of principal on the debt, not the interest paid.
What happens to a charitable contribution that is in excess of the AGI limits?
The excess charitable contribution can be carried forward for 5 years. In carryover years, current contributions are deducted first. The carryover is considered even in subsequent years when using the standard deduction rather than itemizing.
What are the four major categories of deductible taxes on individual returns?
The four major categories of deductible taxes are personal property taxes, local real estate taxes, other state and local taxes, and foreign taxes. As a result of the Tax Cuts and Job Acts of 2017 (TCJA) the itemized deduction for state & local taxes is now limited to a maximum of $10,000 ($5,000 for MFS). This includes state or local income tax, sales tax, and property tax.
When using the IRS sales tax deduction calculator to assist in determining a sales tax deduction, what information concerning the taxpayer do you need?
The information needed includes the state of residence and zip code for the taxpayer, the amount of income (modified AGI), the number of family menbers as well as other information required by the IRS.
Describe the deductibility and reporting of medical expenses
The medical expense deduction is an itemized deduction claimed on Schedule A. For 2019, a taxpayer may deduct medical expenses the extent the unreimbursed expenses exceed 7.5 % of AGI.
Explain the relationship between the standard deduction and itemized deductions.
The standard deduction is taken as a below the line deduction when the taxpayer does not have a total of itemized deductions that exceed the allowed deduction for the standard deduction. The goal here is to utilize whichever one provides the greater tax benefit. The Tax Cuts and Jobs Act (TCJA) of 2017 substantially increased the amounts for the standard deduction for future periods.
What options does the taxpayer who paid foreign taxes have when considering his or her tax treatment? Which option is usually more tax beneficial?
The tax code allows the option of either taking a credit for foreign taxes or deducting the taxes. Typically, it is more beneficial for individual taxpayers to utilize the credit rather than the deduction because the credit is a dollar-for-dollar reduction in taxes. The deduction just reduces taxable income and the net tax effect is dependent on the taxpayer's tax rate.
State or local property taxes must meet three tests in order to be deductible:
The tax must be levied on personal property. The tax must be an "ad valorem tax"; that is, the tax must be based on the value of the property. The tax must be imposed, at a minimum, on an annual basis with respect to personal property.
Itemized deductions are taken when
They are higher than the standard deduction.
When are travel costs deductible as medical costs? How are medical travel costs calculated?
Travel costs are deductible when incurred for transportation primarily for and essential to medical care. There is no deduction allowed for travel expenses unless there is no significant element of personal pleasure, recreation, or vacation in the travel away from home. Transportation costs could include such items as cab, bus, or train fares, as well as expenses for a personal auto. The amount of the deduction for the use of a personal auto for transportation for medical care can be calculated using the actual cost of operating the car for those medical purposes, meaning amounts paid for gasoline, oil, and repairs related directly to providing transportation for the medical purpose, but not for general repairs. Conversely, the taxpayer may use the optional standard mileage allowance of 20 cents per mile to calculate the amount of the deduction and forgo the need for receipts.
What is investment interest expense? What are the limits to the deductibility of investment interest expense?
Typical items that comprise investment income are interest income, ordinary dividends, and short term capital gains. The deduction of investment interest expense is limited to the net investment income for the year.
In 2018, Tomas, a single taxpayer, had $3,750 in state tax withheld from his paycheck. He properly deducted that amount on his 2018 tax return as an itemized deduction that he qualified for, thus reducing his tax liability. After filing his 2018 tax return, Tomas discovered that he had overpaid his state tax by $417. He received his refund in July 2019. What must Tomas do with the $417 refund? Explain your answer.
When Tomas files his 2019 federal return, the $417 would be included in taxable income. Feedback: Because Tomas deducted the taxes from his taxable income in the previous year, and therefore received a "tax benefit" in excess of what he was really entitled to, the refund must be included in income in the year received.
Dante and Rosa, both under 65 and married, have a combined AGI of $45,000 in year 2019. Due to certain heart issues, Dante has been prescribed Lipitor® by a physician. For year 2019, Dante spent a total of $3,100 on the medication and $1,750 on doctor's bills. Can Dante deduct the medical costs as an itemized deduction? Explain your answer.
Yes, The expenses of the prescribed medications and the payments to doctors meet the criteria for deduction. Their deduction is limited by the 7.5% floor, so they will receive an itemized deduction for medical expenses of $1,475.
The cost of vitamins, aspirin, and other medications that can be purchased without a prescription is what type of expense?
a nondeductible personal expense
the law allows an exception for points paid in connection with
a principal residence
Mortgage points are
amounts paid by borrowers in order to obtain a mortgage. The most common names of these charges are "loan origination fees" or "loan processing fees." Each point equals 1% of the loan principal.
Acquisition indebtedness means
any debt incurred to acquire, construct, or substantially improve any qualified residence.
The amount of the sales tax deduction can be determined by
calculating actual sales taxes paid during the year.
What amount can Noriko deduct as property taxes in calculating itemized deductions, assuming she was under the $10,000 limit for state and local taxes, for 2019?
d. $2,800. Answer: $1,800 + $600 +$ 400 = $2,800 Feedback: As the state personal property tax was based on the value of her vehicle, it is a tax and not a fee, and is allowable as a deduction. The Tax Cuts and Jobs Act (TCJA) of 2017 limited the deduction for income, real estate and other state and local taxes. The limitation for the deductibility of all state and local taxes is now $10,000 ($5,000 for MFS).
Qualified residence interest is
interest paid on an acquisition loan or a home equity loan secured by a qualified residence
The 9th Circuit Court of Appeals ruled a few years ago that the mortgage interest deduction debt limits apply to unmarried co-owners on a
on a per-taxpayer basis, not on a per-residence basis and the IRS, in AOD (Action on Decision) 2016-02, acquiesced to that decision.
Personal property taxes paid on
personal use assets, such as the family car, are deductible on Schedule A
Prescription drugs obtained from sources outside the United States, such as Canada, are deductible if
prescribed by a physician for the treatment of a medical condition and the FDA has approved that they can be legally imported.
Often individuals who purchase a home with a down payment of less than 20% are required to pay a mortgage insurance premium or, as it is sometimes referred to,
private mortgage insurance (PMI). In effect, mortgage insurance protects the lender against a loan default.
Home equity loans are
secured by a qualified residence in an amount that does not exceed the fair market value (FMV) of the residence less the acquisition debt.
If the state tax payments that were deducted result in the taxpayer receiving a refund in the following year, the state tax refund must be included as taxable income in the year of receipt. This is called the
tax benefit rule
Taxpayers can deduct qualified residence interest on their principal residence and on a second residence selected by the taxpayer as long as
the combined total does not exceed the mortgage acquisition debt limit. If it did exceed the limit, only the interest apportioned to the limit would be deductible.
The deduction of investment interest expense is limited to
the net investment income for the year and is deductible as an itemized deduction on Schedule A.
A taxpayer may deduct medical expenses that they pay for who?
themselves, their spouse, or their dependents. The qualifying relationship must exist at the date the expenses are incurred or paid. For purposes of the medical expense deduction, the gross income test is waived as a test for dependency relating to incurred medical costs.
For medical capital expenditures that improve the taxpayer's property, the deduction is available only
to the extent that the medical expenditure exceeds the increase in the fair market value (FMV) of the residence.
The tax benefit rule states that if you receive a federal tax benefit from an expense when the expense is paid
you are taxed on a refund of that expense when the refund is received.
Under the Appropriations Bill of 2019, mortgage insurance premiums paid during the taxable year related to debt on a qualified residence are treated as
interest expense and are deductible on Schedule A, subject to some AGI limitations, for both 2019 and 2020.
For Non-cash property less than $250 what are the substantiation requirements
Obtain a receipt or letter from the charity showing the name of the charity, the date and location of the contribution, and a description of the donated property.
The amount of the loss is the lesser of the following:
1. the decrease in the FMV of the asset due to the casualty or theft; or 2. the adjusted tax basis of the asset.
Foreign taxes paid are
deductible.
There are three limitations concerning charitable contributions by individual taxpayers:
60%, 30%, and 20% limitations. The general limitation is the 60% limitation. All charitable contributions to public charities are limited to 60% of the individual taxpayer's AGI. A contribution in excess of the limitation is carried forward for the next five tax years, subject to the 60% limitation in those years.
For Real Estate Taxes what is the acceptable source document?
County/City Tax Collector Receipt Check Book Register/Canceled Check Real Estate Closing Statements Form 1098 - Bank Mortgage Interest
For Cash less than $250 what are the substantiation requirements?
Cancelled check or a statement from the charity showing the name of the charity and the date and amount of the contribution.
For Personal Property Taxes what is the acceptable source document?
County/City Tax Collector Receipt Check Book Register/Canceled Check
Generally, two separate limits apply to the personal casualty and theft loss deduction.
First, the uninsured loss from each casualty or theft must exceed a $100 floor. The first $100 of each loss is a nondeductible personal loss. Second, the total uninsured casualty and theft losses for the year in excess of the $100 floor are deductible to the extent they exceed 10% of the taxpayer's AGI for the year of the loss. If the total uninsured losses in excess of the $100 floor do not exceed the 10% of AGI threshold, they are nondeductible.
•The most common other itemized deductions are as follows:
Gambling losses (gambling losses include, but aren't limited to, the cost of non-winning bingo, lottery, and raffle tickets), but only to the extent of gambling winnings reported on line 8 on the Schedule 1 of Form 1040.
For Non-cash property greater than $5,000 what are the substantiation requirements
Obtain a qualified written appraisal for all property donations over $5,000, in addition to all of the information required for non-cash donations in the $250 to $500 range.
For Non-cash property equal to or greater than $250, but no more than $500 what are the substantiation requirements
Obtain a written acknowledgement from the charity stating: 1. the name of the charity; 2. the date and location of the contribution; 3. a description of the donated property; 4. whether you received any benefits as a result of the contribution; and 5. a description and good faith estimate of the value of any benefits you received.
For Non-cash property greater than $500, but no more than $5000 what are the substantiation requirements
Obtain all of the information discussed for donations of $250 - $500 plus additional personal records documenting how and when you got the property and the calculation of its adjusted tax basis.(Form 8283)
What are the six types of personal expenses that can be classified as itemized deductions on Schedule A, Form 1040?
Personal expenses allowed as itemized deductions include medical expenses, state and local taxes, interest, charitable gifts, casualty losses, and other itemized deductions.
During 2019 Noriko paid the following taxes related to her home:
Real Estate property taxes on residence (paid from escrow account)$1,800 State personal property tax on her automobile (based on value) 600 Property taxes on land held for long-term appreciation 400
During the year 2019, Ricki, who is not self-employed and does not receive employer reimbursement for business expenses, drove her car 5,000 miles to visit clients, 10,000 miles to get to her office, and 500 miles to attend business-related seminars. All of this mileage was incurred ratably throughout the year. She spent $300 for airfare to another business seminar and $200 for parking at her office. Using the automobile expense rates in effect for 2019, what is her deductible transportation expense?
Ricki is not allowed any deduction for her transportation expenses. Feedback as a result of the Tax Cuts and Jobs Act of 2017, there are no longer any miscellaneous itemized deductions of which unreimbursed employee business expenses was an element.
The taxpayer has the option of taking a credit or a deduction on what tax schedule?
Schedule A for the foreign taxes paid
Hortencia is employed as an accountant for a large firm in San Diego. For relaxation she likes to go to a nearby casino and play in blackjack tournaments. During 2019, she incurred $6,475 in gambling losses and $5,250 in gambling winnings. Hortencia plans to itemize her deductions in 2019 because she purchased a home this year and has mortgage interest expense; what amount could she claim on her return for other itemized deductions for the year?
She can claim $5, 250 in gambling losses for the year. Feedback Gambling losses are an example of an other itemized deductions as they have a "built in" limitation, which is the deductibility to the extent of gambling winnings. The winnings are reported as income on Schedule 1, line 8 and the losses are reported on the Schedule A.
For a tax to be deductible as an itemized deduction, what three tests are required?
State or local property taxes must meet the following three tests to be deductible: the tax must be levied on personal property, the tax must be an "ad valorem tax," and the tax must be imposed, at a minimum, on an annual basis with respect to personal property. In addition, as a result of the Tax Cuts and Jobs Act of 2017, the deduction for income, real estate and other state and local taxes is limited. The limitation for the deductibility of all state and local taxes is now $10,000 ($5,000 for MFS).
Describe the concept of a 7.5% floor for medical deductions.
The 7.5% floor means that medical expense deductions are not allowed until the total medical deductions exceed 7.5% of AGI. Thus, medical expenditures, net of insurance reimbursements, must generally be substantial in order to gain any tax benefit.
Which of the following statements is not true?
The AGI threshold for deductible medical expenses is 10.0% Feedback: The AGI threshold for deductible medical expenses is 7.5%
For 2019, how can the amount of the sales tax deduction be determined?
The amount of the sales tax deduction can be determined by calculating actual sales taxes paid during the year. From a practical perspective, most taxpayers would find it difficult to determine and document actual sales tax payments. Thus, a deduction is permitted using sales tax tables provided by the IRS in the instructions for Schedule A or by using the online calculator the IRS provides on its Web site at http://apps.irs.gov/app/stdc/. To use the IRS sales tax deduction calculator, go to IRS.gov and enter "sales tax deduction calculator" in the search box.
You may deduct your uninsured loss, subject to certain limits. Your uninsured loss is calculated as follows:
Uninsured loss = Loss due to casualty or theft - insurance recovery
. A casualty is an identifiable event of
a sudden, unexpected, or unusual nature. "Sudden" means the event is not gradual or progressive. If a loss is due to progressive deterioration, such as termite damage, it is not deductible as a casualty. A casualty is also an unusual event caused by external forces.
Another element of the new tax law is that no charitable deduction is
allowed for a payment to an education institution for which the taxpayer receives a preferential benefit.
If your investment interest expense exceeds your net investment income, you can
carry forward the excess expense to future tax years when net investment income is available.
The second limitation applies to
contribution of appreciated tangible personal property to a charitable organization. If the property is put to an unrelated use by the charity, for example a sculpture is donated to a museum but, rather than displaying it, they sell it to generate cash, the deduction would be limited to the donor's basis in the asset.
The 30% limitation applies to
contributions of appreciated capital gain property. When capital gain property is contributed to a public charity, the taxpayer gets a deduction for the FMV of the asset. However, the deduction is limited to 30% of the taxpayer's AGI. There are two exceptions to this rule: If the taxpayer elects to reduce the fair market value of the contributed property by the amount of long-term capital gain that would have been recognized if the property had been sold at its fair market value at the time of the contribution, the 60% limitation would apply to the contribution.
You may deduct your out-of-pocket expenses for volunteer work for a charitable organization, such as the cost
of uniforms for a Boy Scout leader. If you drive your car in connection with volunteer work, you may deduct the cost of the gas or claim an allowance of $0.20/mile for 2019.
In order to claim a deduction, you must
own the damaged property and, as stated above, the loss has occurred in an area that has been designated a Federally Declared Disaster area.
A taxpayer receives no deduction for
services rendered to a charitable organization. The services do not give rise to taxable income to the taxpayer, so no deduction is permitted.
Beginning in 2018, a personal casualty is now deductible only if
such a loss is attributable to Federally Declared Disaster areas that are designated as such by the president.
a taxpayer reports a casualty on the tax return in the
tax year the casualty took place. However, theft losses are deducted in the tax year in which the theft was discovered rather than the year of theft, if different, and in all cases, taxpayers must subtract any insurance reimbursement in determining their loss.
If you borrow money to purchase tax-exempt investments, such as municipal bonds,
the interest expense is nondeductible. The interest income is not subject to tax; the interest expense, therefore, is nondeductible.
The amount of the deduction depends on
the type of donated property and is subject to AGI limitations.
