Chapter 8: Itemized Deductions Flashcards
Medical expenses
Expenses incurred for the medical care of qualified individuals, in amounts exceeding 7.5% of the taxpayer’s AGI may be deducted. (Though not if reimbursed by insurance or otherwise)
Who counts as a qualified individual for medical deductions?
Self
Spouse
Dependents (including those who could be taken as a dependent but fail to meet gross income or joint return tests)
Medical expenses for children of divorced parents
Parent taking the medical expense deduction need not be the parent who claims dependency
Qualified medical expenses for medical expense deductible deduction
- diagnosis, cure, mitigation, treatment, or prevention of disease
- the purpose of affecting any structure or function of the body
- transportation primarily form and essential to the two items above
- qualified long term care services
- insurance covering the items above
Determination if an expense is a medical expense
With the exceptions of routine physical and dental checkups qualified expenses are confined strictly to expenses incurred primarily for the prevention or alleviation of a physical or mental defect or illness (expenses about a specific ailment)
Medical milage deduction
2021: 16 cents/mile plus any tolls or parking
Cost of meals and lodging en route to medical facility
Deductible, but limited
- only if trip is “long enough to warrant a stop
- only 50% of means deductable (100% of restaurant meals in 2020 and 2021)
- $50/ night for lodging per individual traveling (has to be no significant element of personal pleasure or recreation)
Qualified long term care
Medical services under a prescribed plan of care
Chronically ill individual
Person who for a period of at least 90 days cannot perform at least two “daily living tasks” unassisted (eating, toileting, bathing, dressing)
Long term care services provided by spouse or realtive
Payments not deductable unless spouse or relative is licensed professional
Also if services are provided by a corp/partnership in which taxpayer owns 50%+ they are not deductible
Capital expenditures incurred for personal medical purposes
Not depreciable or amortizable
But can be a current deduction if expenditure is made to acquire an asset primarily for the medical care of a qualified individual. Purchase must be necessary and reasonable
Categories of deductible capital expenditures for medical care
- expenditures that relate only to the sick/handicapped individual, not to the permanent improvement of taxpayer’s property
- expenditures that permanently improve or better the taxpayer’s residence for the purpose of providing medical care
- expenditures to remove structural barriers in the home of a physically disabled person
Expenditures that relate only to the sick/handicapped individual, not to the permanent improvement of taxpayer’s property
Fully deductable in the year paid
Expenditures that permanently improve or better the taxpayer’s residence for the purpose of providing medical care
Deductible only to the extent that the amount of the expenditure exceeds the increase in FMV of the residence
Expenditures to remove structural barriers in the home of a physically disabled person
Deductible in full
Increase in FMV of home considered to be 0
Operations and maintenance of capital assets for medical care
Deductible as long as medical reason for capital expenditure continues to exist
Cost of living in institutions
Depends on principal reason for stay. If medical (like a hospital) entire cost is deductible. If not principally medical then only specifically medical costs are deductible
Nonrefundable advanced payments for lifetime care
Deductible in the year paid for situations where spouse or dependants eventual acceptance into an institution for care is dependant on the current payments.
Medical insurance premiums
Deductible if medical care insurance. If combined with insurance against loss of life/limb/ sight/income can only deduct medical portion if can get cost of each type separated out
Medicare withholding
Not deductible
Premiums for group medical insurance
Employed taxpayers may deduct their own payments but not their employer’s
Self-employed taxpayers can deduct 100% of insurance payments TO ARRIVE AT AGI (not subject to limitations about exceeding 7.5% AGI)
When medical expenses are deductible
Generally in the year the payment is made (not necessarily care received)
Charges on credit card deemed paid on date of the charge
Deduction for prepaid medical expenses
Deferred until taxpayer receives care unless there was a legal obligation to prepay or prepayment was requirement to receive care
Medical insurance reimbursements
- if received in same year as deduction simply reduces allowed deduction
- if received in subsequent year reimbursement must be included in gross income to the extent the taxpayer derived a benefit from a deduction in the prior year (if no deduction no need to report as income)
Treatment of medical insurance reimbursements if tax deduction was taken for the expense in a prior year
Taxpayer must report as income the lesser of:
- amount of reimbursement, or
- amount that medical expenses reduced taxable income in the prior year (can determine by comparing taxable income with and without the medical deduction)
When can taxes be deducted as an itemized deduction
Cash-method taxpayers: year they pay for tax (even if paying for a different year)
Accrual-method taxpayer: year taxes accrue
What taxes are deductible
Assessments that are specifically a tax (not a fee or charge from government for providing a good or service)
Tax
Mandatory assessment levied under the authority of a political entity for the purpose of raising revenue to use for public or governmental services
Taxes that are specifically deductable
- state, local, and foreign real property taxes
- state and local personal property taxes if based on value
- the generation skipping transfer tax on income distributions
- state, local, and foreign taxes paid or incurred in trade/business/income producing activity
Deduction of state and local sales tax
ONLY ALLOWED if elect to deduct the sales tax Instead of state and local income tax (deduction made annually)
Deduction of federal taxes
Generally not allowed except:
- custom and excise taxes incurred in business/trade as ordinary and necessary expenses
- employer’s portion of FICA and unemployment taxes for employees
- self-employed taxpayers may deduct half of the self employment tax imposed on self employment income (a for AGI deduction)
Limitation on itemized deduction for state and local taxes
Stating in 2018
Limited to $10,000 ($5,000 if married filing separately)
Declaring tax refunds as income
Only required if taxpayer itemized deductions in previous year and then only to the extent that the taxpayer received a benefit from the deduction
How to deduct state and local sales tax
If elect to deduct sales tax instead of income tax can either:
- deduct actual sales tax paid based on receipts
- deduct sales tax paid based on Treasury department tables + tax on major purchases
Tests for tax levy to qualify as personal property tax
- tax is ad valorem tax on personal property (property value determines tax. If only partially ad valorem, only that portion is deductable)
- tax is imposed on annual basis (even if not collected annually
Real property tax year
Determined by local regulation
Apportionment of taxes on real estate sold during the year
Apportioned between buyer and seller based on the number of days each taxpayer owns the property during the real property tax year
Sales agreement usually lists apportionment and each party can deduct their apportioned taxes even if per the agreement one party pays the entire tax owed
If only one party pays the taxes that party can claim their portion in the year paid, the other party claims their portion in the year of the sales agreement
Real property assessments against the property that benefits from the improval
Not deductable (capitalized as part of adjusted basis)
Maximum amount of wages on which social security tax is paid
In 2021
$142,800
Self employment tax deduction
A for AGI deduction
Half of self employment tax (= half of 2.9% on all income for Medicare and 12.4% on income up to $142,800 for social security)
Additional tax on wages/self- employment and investment income
Individuals with over $200,000 in income ($250,000 MFJ)
Additional 3.8% on investment income and 0.9% on wages and self employment income
Not deductable by individuals
Non deductible taxes
- federal income taxes
- federal estate, inheritance, legacy, succession, gift taxes
- federal import or tariff duties and excise tax (unless incurred as a business expense!)
- employee portion of FICA tax
- state and local sales tax (unless election is made)
- state and local inheritance, legacy, succession, gift taxes
- foreign income tax if taxpayer elects to take the taxes as a credit
- property taxes on real estate to the extent treated as imposed on another taxpayer
- patient protection and affordable care act taxes on wages, self employment income and investment income
Categories of income expense
Active trade or business (business deduction)
Passive activity (follows passive income rules)
Investment (limited deductibility)
Personal (not deductible)
Qualified residence (mostly deductible)
Student loan (for AGI deduction with limitations)
Interest for tax ourposes
Compensation for the use of forbearance of money
Not including service charges, finance charges (those may still be deductable as a business expense)
How is interest expense categorized
Based on the use of the borrowed money (not on the use of any property used as collateral for the loan)
Borrowed fund deposited in bank
Considered investment until funds are withdrawn to use for expenses
If both borrowed and personal funds are in an account borrowed funds presumed to be used first
