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CHAPTER 5 Itemized Deductions & Other Incentives. Income Tax Fundamentals 2013 Student Slides Gerald E. Whittenburg Martha Altus- Buller Steven Gill. Medical Expenses. First itemized deduction on Schedule A Medical expenses allowed For spouse, self and dependents

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Chapter 5 itemized deductions other incentives

CHAPTER 5Itemized Deductions & Other Incentives

Income Tax Fundamentals 2013

Student Slides

Gerald E. Whittenburg

Martha Altus-Buller

Steven Gill

2013 Cengage Learning

Medical expenses
Medical Expenses

  • First itemized deduction on Schedule A

  • Medical expenses allowed

    • For spouse, self and dependents

    • For amounts spent that exceed 7.5% of AGI

    • Must be reduced by amount of insurance reimbursement

    • See page 5-2 for list of health, dental, and optical expenditures that qualify

    • Medical insurance premiums (including Medicare)

    • Long-term care insurance premiums

      • Specified limits that change each year based on taxpayer’s age

      • If deducted for AGI, excluded from Schedule A calculations

        Note: Health insurance for self employed is deduction for AGI – see Chapter 4

2013 Cengage Learning


  • Deductions for certain taxes are allowed

  • Taxes are deductible, fees are not

    • Taxes are imposed by a government to raise revenue for general public purposes

    • Fees are charges with a direct benefit to person paying

  • Examples of deductible taxes

    • State and local income taxes (deductible in year paid)

    • Sales/use tax

      • May use actual sales tax or from IRS-provided tables

      • If actual deduction, must keep receipts for all sales tax paid

      • Expected to be extended retroactively to 2012

    • Real property taxes

    • Personal property taxes

  • Example of nondeductible taxes include estate taxes, gift taxes and excise taxes

2013 Cengage Learning

Overview of interest
Overview of Interest

  • Interest is amount paid for use of borrowed funds

    • Borrower must be legally liable for note in order to deduct the interest

  • Examples of deductible interest include

    • Qualified mortgage interest and points

    • Mortgage interest prepayment penalties

    • Investment interest*

    • Certain interest associated with passive activities

  • Consumer (personal) interest is not deductible

  • Private mortgage insurance (PMI) related to purchase of personal residence deductible (phase-outs apply)

    *Nondeductible if used to generate tax-exempt income

2013 Cengage Learning


  • Charitable contributions are allowed as a deduction

  • Can contribute cash or property

    • Out of pocket expenses are deductible

    • $.14/mile for mileage deduction

    • Value of free use of taxpayer’s property is not deductible

  • To be deductible, donation must be made to a qualified recipient (see pages 5-12 and 5-13)

  • IRS publishes online search tool called “Exempt Organizations Select Check”

2013 Cengage Learning

Casualty and theft losses
Casualty and Theft Losses

  • Deductions are allowed for casualty and theft losses

  • To be classified as casualty loss, event needs to be sudden, unexpected or unusual

    • If theft, need to prove (for example, by police report)

    • Different calculations for deduction based on what type of property

  • Casualty losses are only deductible in year of occurrence

    • Exception: for federally declared disaster area losses, taxpayer can amend prior year return and deduct in that year and file for refund

2013 Cengage Learning

Miscellaneous deductions
Miscellaneous Deductions

There are two types of miscellaneous deductions

“Those not limited to amounts over 2% of AGI”

  • Handicapped “impairment related work expenses”

  • Certain estate taxes

  • Amortizable bond premiums (for bonds purchased prior to 10/23/86)

  • Gambling losses to extent of gambling winnings

  • Terminated annuity payments

2013 Cengage Learning

Miscellaneous deductions1
Miscellaneous Deductions

“Those limited to amounts over 2% AGI”

  • Unreimbursed employee expenses (use Form 2106 or 2106-EZ)

  • Reimbursed employee expenses made under a non-accountable plan

  • Union dues

  • Tax preparation fees

  • Safety deposit box

  • Professional journals/subscriptions

  • Investment expenses

  • Job-hunting fees

2013 Cengage Learning

Qualified tuition programs qtp
Qualified Tuition Programs (QTP)

  • Sometimes called §529 tuition plans

  • Allows taxpayers to meet higher education expenses by

    • Buying in-kind tuition credits or certificates


    • Contributing to an established account

  • Distributions are generally not taxed if funds used for higher education

    • Tuition, fees, books, supplies, equipment plus reasonable amount for room and board

    • Computer technology primarily used for educational purposes

    • If not used for purposes outlined or the taxpayer withdraws early, then distributions are taxable plus 10% penalty

2013 Cengage Learning

Education savings accounts
Education Savings Accounts

  • These accounts allow taxpayers to meet higher education expenses by contributing to an educational savings account

  • Annual contributions are not deductible

    • Allowed until beneficiary reaches 18

    • Limited to $2,000/year per child

    • Can’t make in same year as contribution to QTP

    • Phase-out when AGI exceeds $190,000 (MFJ) or $95,000 (S)

2013 Cengage Learning