REG 2 - Itemized Deductions

Question 1

What are three state and local income taxes that can be deducted as itemized deductions?

Answer 1

1) Estimated taxes
2) Withholding taxes from paycheck
3) Assessments

Question 2

Do income taxes get deducted on a cash basis on accrual basis?

Answer 2

Income taxes get deducted on a cash basis.

E.g. If taxpayer pays 4th quarter state tax estimate in Dec, they can imtemize.

E.g. If taxpayer pays 4th quarter state tax estimate in Jan, they can NOT itemize.

Question 3

Define personal property tax?

Answer 3

Personal property taxes are assessed are assessed by state and local governments on personal property such as boats and vehicles.

Question 4

Can taxpayer deduct sales tax or income tax as an itemized deduction?

Answer 4

Taxpayers can only deduct either:

1) State and local income taxes
OR
2) State and local general sales tax

Question 5

What are nondeductible taxes for itemized deductions? FIB

Answer 5

Federal taxes
Inheritatance taxes
Business taxes

Question 6

What are the five types of interest expense? HIPPE

Answer 6

1) Home mortgate interest
2) Investment interest expense
3) Personal (consumer) interest
4) Prepaid interest
5) Education loan interest

Question 7

Define acquisition indebtedness for home mortgage interest? What is the maximum allowable deduciton for acquisition indebtedness?

Answer 7

• Incurred in buying, constructing, or substantially improving taxpayer’s principal residence AND/OR secondary residence
• Up to $1,000,000 for MFJ and $500,000 for single taxpayers are deductible as home mortgage interest

Question 8

Define home equity indebtedness for home mortgage interest? What is the maximum allowable deduciton for acquisition indebtedness?

Answer 8

• It is not used to acquire, build, or improve home

- Up to $100,000 for MFJ and $50,000 for single taxpayers are deductible as home mortgage interest

Question 9

Explain how points related to acquisition indebtedness are deducted?

Answer 9

Points related to acquisition indebtedness are deducted immediatley

Question 10

Explain how refinancing points are deducted?

Answer 10

Points related to refinancing are amortized over the period of the loan

Question 11

What amount is investment interest expense limited to? Can there be a investment interest expense loss?

Answer 11

• Investment interest expense is limited to net TAXABLE investment income (like gambling losses)
• There is no negative amount of loss allowed as a deduction

Question 12

Which investment interest expense is excluded as being an itemized deduction?

Answer 12

Interest expense used to purchase tax-free bonds is NOT deductible

Question 13

Define personal (consumer) interest? Can personal (consumer) interest be deducted?

Answer 13

• Personal (Consumer) interest is NOT deductible.

- Personal (Consumer) interest is: credit cards, life insurance loans, student loan interest over $2,500

Question 14

Does prepaid interest get deducted on a cash basis on accrual basis?

Answer 14

• Prepaid interest gets deducted over the period of a loan like accrual basis
• It is deducted only when: incurred and paid

Question 15

How is education loan interest deducted?

Answer 15

Education loan interest is an ADJUSTMENT and allowed up to $2,500.