INDIVIDUAL - DEDUCTIONS FROM AGI

Question 1

What is taken into account to determine a taxpayers Standard Deduction?

Answer 1

Taxpayers standard deduction varies based on

1. their age,
2. filing status,
3. income, and
4. whether they’re blind.

Question 2

Give (4) examples when a taxpayer can not use the Standard Deduction.

Answer 2

1. When a couple files Married Filing Separately, if one itemizes, they both must itemize.
2. If the taxpayer has a short tax year due to a change in accounting period
3. An Estate or Trust, Common Trust partnership, and
4. A taxpayer who was a non resident alien or dual status alien during the year.

Question 3

Why are Standard Deductions increased annually?

Answer 3

Because they are indexed for inflation.

Question 4

When can a Non Residen Alien use the Standard Deduction?

Answer 4

Non resident aliens who are married to a US citizen or resident alien at the end of the year may choose to be treated as citizens if they’re filing jointly with their spouse. In this instance, they can use the standard deduction.

Question 5

What medical and dental expenses can be taken as an itemized deduction?

Answer 5

The amount of Medical and Dental expenses that’s more than 7.5% (for 2019) of one’s AGI (Adjusted Gross Income) can be taken as an itemized deduction.

NOTE: This deduction is available only for expenses actually paid or charged by credit card during the tax period for the taxpayer himself, their spouse, dependents, and individuals the taxpayer could have claimed as a dependent except the person earned $4,200 or more for 2019.

Question 6

What is SALT and what 3 items does it include?

Answer 6

State And Local (income) Tax.

This includes

1. State and Local income tax, or general sales tax. Either or.
2. State and local real estate taxes, and
3. State and local personal property taxes.

Question 7

What is the SALT limitation against state and local taxes?

Answer 7

$10,000.00 for Married Filing Jointly, and

$5,000.00 if filing separately.

Question 8

How many homes qualify for the Home Mortgage Interest deduction?

Answer 8

Only the first two homes owned by a taxpayer qualify.

The taxpayer must have an ownership interest in the home(s), and the home(s) must be security for the loan.

Question 9

When can points (charges to obtain a mortgage rate) be fully deductible?

Answer 9

Points are deductible if they are:

1. deducted in the year paid
2. they are used to buy, build, or improve a main home.
3. They are figured as a percentage of the principal amount of a mortgage, and
4. the amount charged must be reasonable for the area.

The taxpayer must be a CASH METHOD taxpayer and the points can not be a substitute for other fees.

Question 10

What is PMI?

Answer 10

Private Mortgage Insurance

Question 11

What is MIP and when is it deductible?

Answer 11

MIP (Mortgage Insurance Premiums) is deductible as home mortgage interest if a taxpayer is itemizing.

Note: MIP applies to FHA government backed loans.

With PMI (Private Mortgage Insurance), the mortgage insurance is supplied by a third party.

Question 12

What would reduce the potential deduction for PMI?

Answer 12

PMI = Private Mortgage Insurance

Once income reaches $100,000 (MFJ) or $50,000 (MFS), there will be a reduction in what is deductible.

Once income exceeds $109,000 (MFJ) none of the PMI is deductible.

FYI - The bill that extended PMI deductions is the “Further Consolidated Appropriations Act, 2020.”

Question 13

Joe, a 22 year old College student, can be claimed as a dependent on his parent’s 2019 tax return. Joe is married and files a separate return. His wife doesn’t itemize deductions on her separate return.
Joe has $1,500 in interest income and wages of $3,800.
He has no itemized deductions. What is Joe’s standard deduction?

Answer 13

$3,800 + $350 = $4150

Remember for a dependent, the standard deduction is limited to the greater of $1,100 or earned income, which, in Joe’s case is $3,800, plus $350.

Note: Joe’s interest income isn’t earned income.

Question 14

Which person most likely qualifies as your dependent for purposes of the medical expenses deduction.
A. A person who would qualify as a dependent except for their amount of gross income.
B. The person was a foreign student staying briefly at your home.
C. The person is your sibling’s unmarried adult child.
D. The person is the unrelated caregiver for your elderly parents.

Answer 14

A. A person who would qualify as a dependent except for their amount of gross income.

If their gross income was above $4200, and you couldn’t claim them as a dependent for that reason, you can still deduct the qualified medical expenses you paid for that person.

If the person filed a joint return for the year, and that’s why they weren’t considered your dependent, you can still claim their expenses.

And even if you the taxpayer can be claimed as a dependent on someone else’s return, and that is why you can’t claim a person for whom you paid their medical expenses, you can still claim their medical expenses.

Question 15

Who qualifies as someone you can deduct their medical expenses for?

Answer 15

Deductible expenses generally include those a taxpayer pays for himself, and someone who is a spouse or dependent at the time the services were provided, or at the time of payment.

Question 16

When paying someone else’s medical expenses to a medical institution, even if a taxpayer is not allowed to take the deduction for the expenses, the amount is NOT considered a taxable gift. True or False?

Answer 16

True.

Question 17

James owns and lives in a home he bought several years ago. Property taxes on his home amount to $2,000 for the current year.
James is having financial difficulties and is unable to pay this assessment. His sister Janice, superhero that she is, swoops in and pays the entire $2000 on the House.

How much of this payment can Janice take if she itemizes?

How much of this payment can James take if he itemizes?

Answer 17

How much of this payment can Janice take if she itemizes?

$0.00 since she is not legally liable for the taxes.

How much of this payment can James take if he itemizes?

$2,000.00. Even though he didn’t pay the taxes, he’s legally liable for them.

When someone pays taxes for another person, the amount can be treated as a loan, compensation, rental income, or as a gift to the owner. In any of these situations, the beneficiary of the payment, who is the property owner, is able to deduct the taxes.

Question 18

George had the following income and expenses:

• Interest and dividend income of $8,000
• gross wages of $100,000
• margin interests of $10,000
• mortgage interests of $6,000
• interest on a mobile home, used as a second home for $3,000 and
• credit card interest of $2,000.

How much interest can George deduct on schedule A?

Answer 18

$8,000 Interest and Dividends
$6,000 Mortgage Interest
$3,000 Interest on a Second Home

= $17,000 of interest is deductible.

Note: George has $8,000 of interest in dividend income. So, $8,000 of the $10,000 Margin interests paid is deductible as an interest expense.
If this margin interest was paid on a loan for tax exempt securities, or to generate tax exempt income, it would have said so in the question. That is the only way you’d be able to know that that amount isn’t deductible.

Question 19

What is Margin Interest?

Answer 19

Margin Interest is the interest paid on loans, to buy property held for investment purposes.

Margin Interest is Investment Interest.

Question 20

Margin Interest is completely deductible interest. True or False?

Answer 20

False.

Margin Interest paid on loans that are used to buy tax exempt securities, or to generate tax exempt income, is not deductible interest.

Margin interest is only deductible up to the amount of interest in dividend income shown on the return.

Question 21

Mister and Mrs. Van Winkle have three loans outstanding:

1. $1.4 million dollars used to buy their principal residence in 2016. In 2019, the interest paid was $120,000, and the loan had an average balance of $1.2 million
2. $160,000 home equity loan used to buy a ski boat, in 2019. Interest was $16,000 and the loan had an average balance of $150,000.
3. An $80,000 loan to buy a new car in 2019. Interest was $8,000 and the loan had an average balance of $75,000.

How much of this interest can the Van Winkle’s claim as an itemized deduction?

Answer 21

1. $100,000 limited by average balance $120,000 x ($1 million / $1.2 million)
2. $0. Note home acquisition debt. Nondeductible personal interest.
3. $0. Nondeductible personal interest.

Question 22

For home acquisition debt acquired after 2017, so beginning January 1, 2018, interest on up to $750,000 can be deducted.

If taxpayers are married, filing separate, that limit is half the interest on Debt Up to $375,000.

For home acquisition debt acquired on or before December 15th, 2017, interests on up to $1 million is deductible.

Answer 22

Yep.

Question 23

Interest on a home equity loan can be deductible if the proceeds are spent on buying, building or improving the qualified home that secures the loan.

So the interest on a home equity loan spent to add a room to the main home, can be deductible.

Answer 23

Yep.

Question 24

Earle is single and took out a mortgage for $250,000. He purchased his home in 2007. In the current year, when the home’s fair market value is $430,000, Earle took out a home equity loan for $140,000. He used the proceeds as follows:

• $90,000 on Home Improvements for the Home,
• $30,000 to pay off a credit card and
• $20,000 to purchase some securities that produce tax free income.

How much of the $140,000 loan would produce deductible mortgage interest?

Answer 24

$90,000 for home improvements produces deductible mortgage interest.

$30,000 is nondeductible home equity debt

$20,000 interest incurred to produce tax-exempt income is not deductibe.

Question 25

What are qualified Medical Expenses?

Answer 25

Qualified medical expenses are those incurred for
- Diagnosis,
- Cure,
- Mitigation,
- Treatment or
- Prevention
of disease, or for the purpose of affecting any structure or function of the body. Qualified medical expenses are those incurred at a medical facility.

Question 26

Examples of Qualified Medical Expenses for Deductions

Answer 26

INSURANCE premiums for medical and dental care

PRESCRIPTION medicine or insulin

Acupuncturists, chiropractors, dentists, eye doctors, medical doctors, and other medical practitioners that are connected to an ESTABLISHED medical center

DIAGNOSTIC tests, medical exams, laboratory services, nursing help, hospital care (including lodging)

PROGRAMS to stop smoking, weight loss treatments for a specific disease diagnosed by a doctor

Costs of medical CARE in a nursing home, home for the aged, or similar institution

Medical treatment at a center for drug or alcohol ADDICTION

MEDICAL AIDS such as eyeglasses, contact lenses, hearing aids, braces, crutches, wheelchairs or other supplies that are required for medical care

Costs for (including acquisition and repair) wheelchairs of a physically HANDICAPPED DEPENDENT

TRANSPORTATION to the medical care facility for required medical care

LODGING incurred while away from home while seeking care provided by a physician associated with a hospital or similar facility

Question 27

Other Medical Expense Deductions

Answer 27

Deductions may also be made for the cost of MAKING A HOUSE MORE ACCESSIBLE for the handicapped.

You can only claim the amount that doesn’t increase the value of the home.

If the taxpayer receives an insurance settlement for medical expenses, the amount covered by insurance cannot be claimed as a deductible expense.

Question 28

Are Medical Expenses related to cosmetic surgery deductible?

Answer 28

No. Not if the surgery is elective.

However, if the cosmetic surgery is necessary to address a deformity, congenital abnormality, personal injury trauma or some disfiguring disease, it can be deductible.

Question 29

What is the total Deduction limit for Taxes Paid?

Answer 29

$10,000

Taxpayers who itemize deductions on their federal income tax returns can deduct state and local real estate and personal property taxes, as well as either income taxes or general sales taxes. The Tax Cuts and Jobs Act limits the total state and local tax deduction to $10,000.

Question 30

What are examples of Taxes Paid that can be Deducted?

Answer 30

State and local income taxes OR state and local general sales tax.

State and local real estate taxes paid by the owner. You can’t deduct taxes you pay for another owner’s property.

State and local personal property taxes.

Other deductible taxes, including taxes paid to a foreign government.

Question 31

Examples of Non-deductible Taxes

Answer 31

Special assessments for local benefits that increase the property value, such as sidewalks or sewer

Itemized fixed charge assessments for services

Transfer taxes (or stamp taxes)

Rent increases due to higher real estate taxes

Homeowners’ association charges

Foreign real property taxes

Employment taxes, including Social Security and Medicare, Estate, inheritance, legacy, or succession taxes

Federal income taxes

Fines and penalties

Gift taxes

License fees, and per capita taxes

Question 32

Examples of Interest Paid that are Deductible

Answer 32

Acquisition indebtedness (Home Construction or Improvement)

Investment interest expense

A home mortgage is any loan that is secured by the taxpayer’s main home or second home.

A home can be a house, condominium, cooperative, mobile home, boat, or similar property.

Question 33

What deductions are allowed for Acquisition Indebtedness?

Answer 33

Interest on up to $750,000 of debt incurred to acquire (or build), construct or improve a first or second home is deductible ($375,000 if married filing separately).

Penalties for the early prepayment of a home mortgage are also deductible.

Note: ACQUISITION DEBT is a financial obligation taken on during the construction, improvement, or purchase of a primary or secondary residence

Question 34

Is Investment Interest Tax Deductible?

Answer 34

Yes.

Investment interest is interest paid on money borrowed that is allocable to property held for investment.

However, it does not include any interest allocable to passive activities or to securities that generate tax-exempt income.

The investment interest expense deduction is limited to the net investment income of the taxpayer. It can offset net investment income.

Question 35

What defines a qualified Gift To Charity?

Answer 35

Charitable contributions that qualify are

• actually paid to a QUALIFIED DONEE (recipient)
• made during the tax year are deductible.

Note: Only up to a certain percentage of AGI.

Question 36

What forms of payment can charitable contributions take?

Answer 36

The contribution can be made in CASH or PROPERTY, and can include OUT OF POCKET EXPENSES incurred in the provision of the support to the charitable organization, for a public good.

Question 37

Example of Charity that is NOT tax deductible.

Answer 37

The fair value of donated time or services is not tax deductible.

Political contributions are not tax deductible.

Direct cash donations to individuals or families in need are not donations for tax purposes. They are gifts and not tax-deductible. The gift must be made to an organization in order to be deductible.

Question 38

What are the requirements of gifts of $250 or more?

Answer 38

Gifts of $250 or more may be deducted only if the taxpayer has a statement from the charitable organization showing:

The amount of any money contributed and a description (but not value) of any property donated.

Whether the organization did or did not give the taxpayer any goods or services in return for your contribution.

Question 39

Is there a limit to how much Tax Deductions are allowed for Charitable Giving?

Answer 39

Yes. There is a limit to the amount of charitable contributions that may be deducted for tax purposes in a given year.

Note: Any contribution that is not deductible because of this AGI limit may be carried forward and deducted in for a future year for up to five years.

Question 40

What are the Tax Deductible limits for Charitable Giving?

Answer 40

The total deduction to “qualified PUBLIC organizations” cannot exceed 50% of AGI. 60% for gifts of cash or check. This pertains to Churches, Educational organizations, Hospitals, Government units, and private operating orgs.

The tax deduction may not exceed 30% of AGI for “other” PRIVATE organizations.

Question 41

Charitable Giving Example:

Last year, Matthew made cash con­tributions of $11,000 to which the 50% limit ap­plies, but because of the limit Matthew deducted only $10,000 and carried over $1,000 to this year.

This year, Matthew’s adjusted gross income is $20,000 and he made cash contributions of $9,500 to which the 50% limit applies.

How much is the total amount Matthew can deduct this year?

Answer 41

Matthew can deduct $10,000 (50% of $20,000) this year.

Carryover Option: Since he only gave contributions of $9,500 for this year, he can deduct an additional $500 of his carryover contribution from last year. Matthew can carry over the $500 balance of his carry­over from last year to next year.

Question 42

Rules for the Donation of Property

Answer 42

If the donor makes a contribution of property, the amount that may be taken as a deduction depends on how long the donated property had been held.

If the property has been held for more than 1 year, the amount of the contribution is equal to the fair market value of the property, but the deductible amount is limited to 30% and 20% of AGI, rather than the 50% and 30% from above. (Capital Gain Property)

If the property has been held for 1 year or less, the amount of the contribution is equal to the FMV of the property minus the amount that would have been a gain if it had been sold. This is essentially the cost basis of the property. (Ordinary Income Property)

Question 43

Donation of Property Example

Answer 43

Your adjusted gross income is $50,000. During the year, you gave capital gain property with a fair market value of $15,000 to a 50% limit organization. You do not choose to reduce the property’s fair market value by its appreciation in value.

You also gave $10,000 cash to a qualified organization that is not a 50% limit organization.

The $15,000 gift of property is subject to the special 30% limit. The $10,000 cash gift is subject to the other 30% limit.

Both gifts are fully deductible because neither is more than the 30% limit that applies ($15,000 in each case) and together they are not more than the 50% limit ($25,000).

Question 44

What triggers the ability to deduct Casualty (destruction) and theft losses on personal property?

Answer 44

To be deductible, the loss must be a presidentially declared disaster.

Question 45

How to calculate the loss of an asset for Deductibility as a result of a casualty.

Answer 45

The loss is equal to the lesser of

1. The decrease in the fair market value, or
2. The adjusted basis of the asset.

Also, you must reduce the loss by any amount received as an insurance settlement.

Question 46

What is the deductible limit before you can begin claiming a loss?

Answer 46

$100

$100 needs to be subtracted from the losses for each event that causes a loss.

Not $100 for each item damaged in a single event.

Question 47

What % of the AGI is necessary to meet before the Deductible Loss is in play?

Answer 47

The deductible loss is the amount above 10% of AGI.

So, if there is a Federally declared disaster and your loss is less than 10% of your AGI, you can’t deduct any loss. And once the loss is above the 10% threshold of your AGI, your deduction is only for the amount above the 10% of your AGI.

Question 48

Taxable Income Equation

Answer 48

Adjusted Gross Income (Line 7)
- Standard or Itemized Deduction (Line 8)
- Qualified Business Income Deduction
= Taxable Income (Line 10)

Question 49

Standard Deduction Amounts

Answer 49

2019
S or MFS = $12,200
HH = $18,350
MFJ or QW = $24,400

Question 50

Additional Standard Deduction

Answer 50

There are additional standard deductions if the taxpayer and/or their spouse are blind and/or 65 or older.

The additional standard deduction is $1,300 for 2019 if MFJ, MFS or QW, or $1,650 for unmarried (S & HH) TPs.

Question 51

What would be the standard deduction for a married couple who are both over 65, and one is blind?

Answer 51

A blind taxpayer and spouse who is not blind, both age 66, may add $3,900 ($1,300 × 3) to the 2019 basic standard deduction of $24,400 for a total deduction of $28,300.

Additionally:
A taxpayer who qualifies as both blind and elderly is entitled to two additional standard deductions, for a total additional amount of $2,600 (if married) or $3,300 (if filing S or HH) for 2019.

Question 52

Where do you record Itemized Deductions on the Tax Return?

Answer 52

Schedule A

Question 53

What are general examples of Itemized Deductions (6)?

Answer 53

1. Medical and dental expenses
2. Taxes paid
3. Interest paid
4. Gifts to charity
5. Casualty and theft losses
6. Other itemized deductions

Question 54

Charitable Contribution deductions are equal when given to either a public or private organization. True or False?

Answer 54

FALSE.

Deductions are higher when giving to “public organizations.”

Question 55

On which form is mortgage interest paid reported to a taxpayer by the mortgage holder?

Answer 55

Form 1098

Question 56

What is Investment Interest?

Answer 56

Investment Interest is interest on loans to buy property held for investment.

Question 57

What Form is used when claiming an Investment Interest deduction.

Answer 57

Form 4952 is used when claiming a deduction for investment interest expenses.

Question 58

What limits the allowable amount of the deduction for Investment Interest.

Answer 58

The deduction for investment interest is limited to the taxpayer’s net investment income.

If the deduction is not used, it can be carried over to the next year.

Note: Interest incurred to produce tax-exempt income is NOT deductible.

Question 59

Non-deductible Contributions

Answer 59

1. Contributions of the value of the taxpayer-provided time or services
2. Contributions of less than the entire interest in property.
3. Contributions to specific individuals
4. Contributions to nonqualified organizations