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Basic Income Tax Course

CHAPTER 9 - ITEMIZED DEDUCTIONS

Chapter 9: Itemized Deductions

1. Itemized Deductions ..............................................................................1

• Married Filing Separate Taxpayers............................................1 • Limitation on Itemized Deductions .............................................2

2. Medical Expenses................................................................................. 3 • Limitation of Medical Expense Deduction ..................................4 • Deductible Medical Expenses....................................................4 • Nondeductible Expenses .......................................................... 5 • Spouse and Dependent Medical Expenses ...............................5 • Medical Expenses for an Adopted Child ....................................6

3. Taxes Paid.............................................................................................6 • State and Local Income Taxes ..................................................7 • General Sales Tax .....................................................................7 • Real Estate Taxes......................................................................8 • Personal Property Taxes ...........................................................8 • Foreign Taxes ........................................................................... 9

4. Home Mortgage Interest and Points ......................................................9 5. Mortgage Insurance Premiums..............................................................11

• Qualified Mortgage Insurance……………………………………..11 • Special Rules for Prepaid Mortgage Insurance………………… 11• Limit in Deduction …………………………………………………..11

6. Investment Interest ..............................................................................127. Contributions...........................................................................................13

• Out-of-Pocket Expenses …………………………………………...13• Limitations of Deductible Charitable Contributions……………....14 • Carryovers...................................................................................14

8. Non-business Casualty and Theft Losses ..............................................149. Miscellaneous Deductions.......................................................................15

• Subject to 2% Limit......................................................................15• Not Subject to 2% Limit-Schedule A, Line 27..............................16

10. Gambling Losses Up to the Amount of Gambling Winnings....................16

Copyright © Tax O Sphere School – 2009 - All Rights Reserved 1

Chapter 9: Itemized Deductions

Learning Objective: Students will be able to determine the most advantageous deduction for the taxpayer, standard or itemized deductions. They will also examine eligible medical expenses, what items qualify as taxes, and eligible interest deductions. Limitations on itemized deductions will be discussed. Also they will learn how to value charitable contributions, report casualties and thefts, and the different types of miscellaneous deductions that can be taken. Students will complete Schedule A, Form 4684 - Casualties and Thefts, Form 8283 - Noncash Contributions, and learn where to enter the information from these forms.

Itemized Deductions

The taxpayer should always choose whichever reduces taxable income more - itemized or standard deduction. As studied in Chapter Two, a standard deduction is a set amount that the taxpayer is allowed to use instead of itemizing his deductions. However, in some circumstances the taxpayer may not be allowed to use the standard deduction (for instance, an individual choosing to use the Married Filing Separate status if the spouse has used the itemized deduction method). Itemized deductions are shown on the tax return using Schedule A - Itemized Deductions.

It is more beneficial for the taxpayer to itemize his deductions if the total of his itemized deductions exceed his standard deduction. Taxpayers should also itemize or consider itemizing if they meet the following criteria:

• They do not qualify for the standard deduction, or it is limited • The taxpayers had large unreimbursed medical or dental expenses • The taxpayers paid mortgage interest and taxes on their residence • They had large unreimbursed employee business expenses or other miscellaneous expenses • They had casualty or theft losses not covered by insurance • The taxpayers made large contributions to qualified charities • The total of the taxpayers' itemized deductions is higher than the standard deduction to which

they would be entitled

Married Filing Separate Taxpayers

If the taxpayers are filing Married Filing Separate and one spouse itemizes, the other spouse must itemize, regardless of the fact that his total deductions may be less than the standard deduction to which he would otherwise be entitled. If either taxpayer later amends his return, the spouse must also amend his or her return. Both taxpayers must file a consent to assessment for any additional tax either one may owe as a result of the amendment.

In the case of a spouse who qualifies as Head of Household, this rule will not apply. The spouse who qualifies as Head of Household is not required to itemize deductions even if the spouse who is required to file Married Filing Separately decides to itemize his deductions. However, if the spouse filing Head of Household decides to itemize deductions, the spouse filing Married Filing Separately is required to itemize deductions.


Limitation on Itemized Deductions

Itemized deductions may be limited if the taxpayer's AGI is more than $159,950 ($79,975 if Married Filing Separately). Deductions may be reduced by the smaller of the following reduced by two-thirds:

• 80% of your itemized deductions that are affected by the limit or • 3% of the AGI over $159,950 ($79,975 if Married Filing Separately).

This reduction includes taxes, mortgage interest, contributions, employee expenses not reimbursed, miscellaneous deductions limited to the 2% floor, etc. It does not include medical expenses, investment interest expenses, non-business casualty and theft losses, or gambling. losses.

The limitation is figured after any other limitations. For example, if the taxpayer had employee business expense, the 2% floor would be deducted before figuring the itemized deduction limitation.

The following worksheet will help students calculate reduced itemized deductions. Schedule A should be completed through line 28 before using this worksheet.


Example: For tax year 2008, Bill and Terry Willow are filing a joint return on Form 1040. Their adjusted gross income is $259,600. Their Schedule A itemized deductions are as follows:

Taxes-line 9 ______________________ $ 17,900 Interest - lines 10,11, and 12 __________ 45,000 Investment interest expense - line 14 ___ 41,000 Gifts to charity - line 19 ______________ 21,000 Job expenses - line 27_______________ 17,240 Total ____________________________ $142,140.

The Willows' investment interest expense deduction ($41,000 from line 14 of Schedule A) is not subject to the overall limit on itemized deductions.

The Willows use the Itemized Deductions Worksheet in the Publication 17, page 204, to figure their overall limit. Their completed worksheet is shown in Table 291-1 in Publication 17.

Of their $142,140 total itemized deductions, the Willows can deduct only $141,143 ($142,140 -$997). They enter $141,143 on Schedule A, line 29.

Medical Expenses

Medical care expenses can be deducted if amounts are paid for the diagnosis, cure, treatment or prevention of a disease or ailments affecting any part of or function of the body. Procedures such as facelifts, hair transplants, hair removal, and liposuction generally are not deductible. Cosmetic surgery is only deductible if it is to improve a deformity arising from or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma, or a disfiguring disease. Medications are only deductible if prescribed by a doctor.


Limitation of Medical Expense Deduction

Medical expenses must be reduced by any reimbursement received for the expenses. Only that part which is more than 7.5% of the AGI (Adjusted Gross Income - Form 1040, line 37) is deductible.

Deductible Medical Expenses

Deductible medical expenses include the following: medical insurance premiums, including Medicare, dental treatment, prescription medicines, medical service fees, mileage ($.19 per mile for miles driven before July 1, 2008 and $.27 per mile for miles driven after June 30, 2008) or taxi, ambulance or cost of other transportation for needed medical care, legal abortions, acupuncture, cost and care of guide dogs, eye exams, eyeglasses, contact lenses, solutions, etc, to clean contact lenses, eye surgery for nearsightedness, hospital fees, lab fees, x rays , psychiatric care, hearing aids and batteries, other medical aids, nursing care, artificial limbs and teeth, birth control pills, chiropractor, meals during inpatient care, lodging during hospital treatments when away from home for inpatient and outpatient care, arid capital expenses for medical equipment. Improvements to the home may be deducted if their main purpose is to provide a medical benefit. The deduction is limited to the difference between the increase in the fair market value of the home and the cost of the improvement.

Certain improvements made to the taxpayer's home may not increase the fair market value of the home. Examples of the types of improvements that may negatively impact the fair market value of the taxpayer's home are construction of entrance or exit ramps, widening of doorways or hallways, lowering cabinets and counter tops, installing lifts, modifying stairways, and adding handrails or grab bars anywhere in the home. These costs can be deducted in full as a medical expense.

Premiums paid for qualified long-term care insurance contracts can be deducted within limits for long-term care insurance. The long-term insurance contract must:

• Be guaranteed renewable • Not provide a cash surrender value or other money that can be paid, assigned, pledged, or

borrowed • Provide that refunds, other than refunds on the death of the insured of complete surrender or

cancellation of the contract, and dividends under the contract may be used only to reduce future premiums or increase future benefits, and

• Generally, must not pay or reimburse expenses incurred for services or items; that would be reimbursed under Medicare, except where Medicare is a secondary payer or the contract makes per diem or other periodic payments without regard to expenses.


If the employer pays long-term care insurance premiums, they are tax free to the employee. If the employee pays the long-term care insurance premiums, he can deduct them as an itemized medical deduction. The limitation on deductible annual long-term care insurance premiums for 2008 from IRS Publication 502, Medical and Dental Expenses, are as follows:

Fees paid to retirement or nursing homes that are designated for medical care and psychiatric care are deductible. Meals, lodging, and prescriptions are deductible only if the individual is in the home primarily to get medical care. If the main reason the individual is in the home is personal, meals and lodging are not deductible.

A deduction may be taken for inpatient treatment at a drug or alcohol therapeutic center for the addiction. Meals and lodging while at the center are also deductible. Travel expenses are deductible if it is deemed necessary as part of the treatment for alcoholism that the taxpayer attends Alcoholics Anonymous meetings.

Stop-smoking programs are deductible as a medical expense. Medications and aids used to help a taxpayer stop smoking must be prescribed by a doctor to be deductible.

The taxpayer can include in medical expenses amounts paid for admission and transportation to a medical conference if the medical conference concerns the chronic illness of the taxpayer, his spouse, or his dependent. The cost of the medical conference must be primarily for and necessary to the medical care of the taxpayer, his spouse, or his dependent. He must spend the majority of his time at the conference attending sessions on medical information. The cost of meals and lodging while attending the conference is not deductible as medical expenses.

Nondeductible Expenses

Examples of nondeductible expenses: Over the counter medication, bottled water, diaper service, expenses for general health items, health club dues {unless related to a specific medical condition), funeral expenses, illegal operations and treatments, weight loss programs (unless recommended by a doctor for a specific medical condition), and swimming pool dues. However, prescribed therapeutic swimming costs are deductible. Insurance premiums paid for life insurance, loss of earnings, limb or sight, guaranteed payments for days the taxpayer is hospitalized for sickness or injury, and the medical insurance coverage portion of the taxpayer's auto insurance are not deductible. Cafeteria plans are not deductible unless the premiums are included in box 1 of Form W-2.

Spouse and Dependent Medical Expenses

The taxpayer is allowed to claim medical expenses that he paid for his spouse. To claim the expenses, he must have been married at the time his spouse received medical treatment or at the time the expenses were paid. If the taxpayer and his spouse live in a non-community property state and file separate returns, each can claim only the medical expenses that he actually paid. If the taxpayer and his spouse live in a community property state and file separate returns, the medical expenses must be divided equally if they were paid out of community funds.


The taxpayer is allowed to claim medical expenses that he paid for his dependent. To claim these expenses, the individual must have been a dependent at the time he received medical treatment or at the time the expenses were paid. Generally an individual qualifies as a dependent if:

• The individual lived with the taxpayer the entire year as a member of the household, or is related to the taxpayer,

• The individual was a U.S. citizen or resident, or a resident of Canada or Mexico for some part of the calendar year in which the taxpayer's tax year began, or

• The taxpayer provided over half of the individual's total support for the; calendar year.

Medical expenses can be deducted for any individual who is a dependent of the taxpayer even if the taxpayer cannot claim the exemption for the individual on his return.

Medical Expenses for an Adopted Child

Medical expenses paid for an adopted child (prior to the adoption beaming final) can be deducted if the child qualified as the taxpayer's dependent. If the taxpayer reimbursed an agency or other persons for medical expenses they paid under an agreement with the taxpayer (after the adoption process began), the taxpayer would be allowed to deduct those expenses. If the expenses were paid before the adoption process began, they would not be deductible.

Taxes Paid

Certain taxes such as state, local, or foreign income taxes, real estate taxes, and personal property taxes can be deducted by the taxpayer. Property taxes can only be deducted by the owner of the property. Real estate taxes are deductible on Schedule A for al I property owned by the taxpayer; it is not limited to personal residences like mortgage interest. Deeded time shares have a deductible real estate tax as well.

See the chart on the next page for taxes that can be deducted.


Which Taxes Can be Deducted

___________________________________________________________________________. ___________________________________

State and Local Income Taxes

State and local taxes withheld from a taxpayer's wages can be deducted on line 5a of Schedule A. The taxpayer can also deduct state and local taxes paid during the current tax year for a prior tax year. If the taxpayer made estimated tax payments during the current filing year, he should deduct them on line 5 Schedule A.

Note: Interest and penalties for late payment of taxes are never included as a deduction.

General Sales Tax

The option to deduct state and local general sales tax, instead of state and local income taxes as an itemized deduction on Schedule A (Form 1040), has been extended through 2009. You can deduct either your actual expenses or an amount figured using the Optional State Sales Tax Tables found in the 1040 Instructions, page A-11. If you use the Optional State Sales Tax Tables, you may be able to add to the table amount any state and local general sales tax you paid on motor vehicles, boats, and other items specified in the 1040 Instructions, page A-3.

Type of Tax You Can Deduct You Cannot Deduct

Fees and Charges Fees and charges that are expenses of your trade or Fees and charges that are not expenses of your trade business or of producing income. or business or of producing income, such as fees for

driver's licenses, car inspections, parking, or charges for water bills {see Taxes and Fees You Cannot Deduct). Fines and penalties.

General Sales Taxes State and local general sales taxes, including State and local income taxes if you choose to deduct compensating use taxes. state and local general sales taxes. Income Taxes State and local income taxes. Foreign income taxes. Federal income taxes. Employee contributions to Employee contributions to state funds listed under private or voluntary disability plans. State and local Contributions to state benefit funds. general sales taxes if you choose to deduct state and

local income taxes. Other Taxes Taxes that are expenses of your trade or business. Federal excise taxes, such as tax on gasoline, which Taxes on property producing rent or royalty income. are not expenses of your trade or business or of Occupational taxes. See chapter 28 of Pub. 17.

One-half of self-employment tax paid.producing income. Per capita taxes.

Personal Property State and local personal property taxes. Customs duties that are not expenses of your trade or Taxes business or of producing income. Real Estate Taxes State and local real estate taxes. Foreign real estate Real estate taxes that are treated as imposed on taxes. Tenant's share of real estate taxes paid by someone else (see Division of real estate taxes cooperative housing corporation. between buyers and sellers). Taxes for local benefits

(with exceptions). See Real Estate-Related Items You Cannot Deduct. Trash and garbage pickup fees (with exceptions). See Real Estate-Related Items You Cannot Deduct. Rent increase due to higher real estate taxes. Homeowners' association charges.


Real Estate Taxes

State, local or foreign real estate taxes paid for real estate owned by the taxpayer, aid only if the taxes are based on the assessed value of the property, are deducted on line 6 of Schedule A. The taxpayer should not include the following items when calculating his reel estate tax deduction:

• Itemized charges for services to specific property or persons such as a $20 monthly charge per house for trash collection

• Charges for improvements that tend to increase the value of the property such as an assessment to build a new sidewalk. If the charge were to repair an existing sidewalk, the charge and any interest would be deductible

• Refunds and rebates of real estate taxes, or • Interest and penalties

If the taxpayer's real estate taxes are included in his mortgage and pail out of an escrow account, he should be careful to deduct only the amount paid by the mortgage company.

If the taxpayer bought or sold real estate during the year, the real estate taxes must be divided between the buyer and the seller. The buyer and the seller must divide the real estate taxes according to the number of days in the real property tax year (the period to which the tax imposed relates) that each owned the property. The seller is treated as paying the taxes up to, but not including, the date of sale. The buyer is treated as paying the taxes beginning with the date of sale. This applies regardless of the lien dates under local law. Generally, this information is included on the settlement statement provided at the closing.

If the monthly mortgage payment includes an amount placed in escrow (put in the care of a third party) for real estate taxes, the taxpayer may not be able to deduct the total amount placed in escrow. You can deduct only the real estate tax that the third party actually paid lo the taxing authority. If the third party does not notify the taxpayer of the amount of real estate tax that was paid for the taxpayer, contact the third party or the taxing authority to find the proper amount to show on the return.

Note: Effective for 2008, if the taxpayer does not have enough to itemize his deductions, his real estate taxes may be added to his standard deduction. This is limited to $500 ($1,000 if Married Filing Jointly). See Chapter 2 of this textbook for more information.

Personal Property Taxes

Personal property taxes are deducted on line 7 of Schedule A. The taxpayer should deduct personal property tax only if it is a state or local tax that meets the following requirements:

1) Charged on personal property 2) Based only on the value of the personal property, and 3) Charged on a yearly basis, even if it is collected more than once a year, or less than once a

year

A tax that meets the above requirements can be considered charged on personal property even if it is for the exercise of a privilege.

Example: A yearly tax based on value qualifies as a personal property tax even if it is called a registration fee and is for the privilege of registering motor vehicles or using them on the highways.


The taxpayer should be careful not to include refunds, rebates, interest, or penalties.

Preparer Note: Decals for vehicle license tags and license fees are not deductible. These fees are not based on the value of the personal property.

Example: The state charges a yearly motor vehicle registration tax of 1% of value plus 50 cents per hundredweight. The taxpayer paid $32 based on the value ($1,500) and weight (3,400 lbs.) of his car. He can deduct $15(1% x $1,500) as personal property tax, since it is based on the value. The remaining $17 ($.50 * 34), based on the weight, is not deductible.

Foreign Taxes

The taxpayer can claim a credit for foreign taxes on Form 1040, line 47, or take it as an itemized deduction on Schedule A under "other taxes." The taxpayer may or may not have to complete Form 1116, Foreign Tax Credits, if he elects not to deduct his foreign taxes paid on Schedule A as an itemized deduction. The preparer should always review 1099s for foreign taxes paid.

Home Mortgage Interest and Points

If the taxpayer has a main home and a second home, the home acquisition and home equity debt dollar limits apply to the total mortgages on both homes. If the taxpayer's mortgages fit into one or more of the following three categories at ail times during the year, he can deduct all of the interest on those mortgages. If any one mortgage fits into more than one category, add the debt that fits in each category to your other debt in the same category. These categories are:

• Mortgages taken out on or before October 13, 1987 (known as a grandfathered debt) • Mortgages taken out after October 13, 1987, to buy, build, or improve the home (called an

acquisition debt), but only if throughout 2008 these mortgages, plus any grandfathered debt totaled $1 million or less ($500,000 or less if Married Filing Separately)

• Mortgages taken out after October 13, 1987, other than to buy, build, or improve the home (called home equity debt) but only if throughout 2008 these mortgages totaled $100,000 or less ($50,000 or less if Married Filing Separately) and totaled no more than the fair market value of the home reduced by (1) and (2).

The dollar limits for the second and third categories apply to the combined mortgages on the main home and second home.

Interest that does not fit into any of the above categories is not fully deducted. This topic is not covered further in this course. If this situation occurs, more research will need to be done to determine the amount of deductible interest. See Publication 936, Home Mortgage Interest Deduction, for additional information.

The main home is the property where the taxpayer lives most of the time. It must provide basic living accommodations including sleeping space, toilet, and cooking facilities. The second home is similar property that is selected to be the second home. The main or second home may be a boat or recreational vehicle, but it must contain the basic living accommodations. If mortgage interest and points are reported to the taxpayer on Form 1098 (see the next paragraph), they will be entered on line 10 of Schedule A.


Form 1098 - Mortgage Interest Statement, usually includes the amount of points paid (points are defined below), mortgage interest, and real estate taxes. Often mortgage companies will "sell" mortgages during the year. If this occurs, the taxpayer will have more than one Form 1098. The preparer should ask his client if he had more than one mortgage comp any during the year because often the taxpayer will forget. If the taxpayer has more than one Form 1098, ask if there was a second mortgage or if they bought and sold homes during the tax year

Mortgage interest paid to an individual who does not issue a Form 1098 should be reported on line 11 of Schedule A. The recipient's name and Social Security number or employer identification number are required. Failure to provide this information may result in a $50 penalty.

Points, often called loan origination fees, maximum loan charges, loan discount, loch placement fees, or discount points, are prepaid interest. Points that the seller pays or the borrower are treated as being paid by the borrower. The seller cannot deduct these points as interest. However, they are a selling expense that reduces the amount of any gain realized by the seller.

Generally, the full amount of points paid cannot be deducted in the year paid. Because they are prepaid interest, they must generally be deducted over the life of the mortgage. The taxpayer can fully deduct points in the year paid if he meets all the following tests:

• The loan is secured by the main home (the home that is lived in most) • Paying points is an established business practice in the area where the loan was made. • The points paid were not more than the points generally charged in that area

• The cash method of accounting is used. This means the taxpayer reports income in the year he receives it and deducts expenses in the year he pays them.

• The points were not paid in place of amounts that ordinarily are stated separately on the settlement statement, such as appraisal fees, attorney fees, and property taxes.

• The loan is used to buy or build the main home • The points were computed as a percentage of the principal amount o the mortgage • The amount is clearly shown on the settlement statement (such as the Uniform Settlement

Statement, Form HUD-1) as points charged for the mortgage. The points may be shown as paid from either the buyer's or seller's funds

• The funds provided at or before closing, plus any points the seller paid, were at least as much as the points charged. The funds provided do not have to have been applied to the points. They can include a down payment, an escrow deposit, earnest money, and other funds paid at or before closing for any purpose. The funds cannot have been borrowed from a lender or mortgage broker.

Points not reported on Form 1098 are reported on line 12 of Schedule A. Often, points from the purchase of a home are shown on a settlement statement. Points paid to borrow money and for refinancing are generally deductible over the life of the loan. If some of the proceeds are used for home improvements, deduct the amount of points related to the improvement; in the ^ear paid. If


the taxpayer pays off his mortgage early; he can deduct the remaining points in the year of the pay off. Points are only currently deductible if paid from the taxpayer's funds. Financed points must be deducted over the life of the loan.

Mortgage Insurance Premiums

A new deduction, available first for 2007 is the Mortgage Insurance Premiums deduction on line 13. This deduction has been extended through 2010. Amounts the taxpayer paid during 2008 for qualified mortgage insurance can be treated as home mortgage interest. The insurance must be in connection with home acquisition debt, the insurance contract must have been issued after December 31, 2006, and the taxpayer must have paid the premiums before 2009 for coverage in effect during 2008.

Qualified Mortgage Insurance

Qualified mortgage insurance is mortgage insurance provided by the Department of Veterans Affairs, the Federal Housing Administration, or the Rural Housing Service, and private mortgage insurance.

Mortgage insurance provided by the Department of Veterans Affairs is commonly known as a funding fee. If provided by the Rural Housing Service, it is commonly known as a guarantee fee. These fees can be deducted fully in 2008 if the mortgage insurance contract was issued after 2006. The taxpayer should contact the mortgage insurance issuer to determine the deductible amount if it is not reported in box 4 of Form 1098.

Special Rules for Prepaid Mortgage Insurance

If the taxpayer paid premiums for qualified mortgage insurance that are allocable to periods after 2008, these premiums are treated as paid in the period to which they are allocated. No deduction is allowed for the unamortized balance if the mortgage is satisfied before its term. This does not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or Rural Housing Service.

Limit on Deduction

If the taxpayer's adjusted gross income on Form 1040, tine 38, is more than $100,000 ($50,000 if the taxpayer's filing status is married filing separately), the amount of the taxpayer's mortgage insurance premiums that are otherwise deductible is reduced and may be eliminated. See Line 13 in the instructions for Schedule A (Form 1040) and complete the Qualified mortgage Insurance Premiums Deduction Worksheet to figure the amount the taxpayer can deduct. If the taxpayer's adjusted gross income is more than $109,000 ($54,500 if married filing separately), the taxpayer cannot deduct his mortgage insurance premiums.

See the Qualified Mortgage Insurance Premiums Deduction Worksheet on the following page.


Investment Interest

Investment interest paid is deducted on tine 14 of Schedule A. Investment interest is interest paid on money borrowed that is attributable to property held for investment. It does not include any interest related to passive activities or to securities that generate tax-exempt income. Investment expense deduction is limited to investment income. (An example of investment income is interest income, dividend income, stock sales, etc.) Property held for investment includes property that produces interest dividends, annuities or royalties not derived in the ordinary course of a trade or business.

Investment interest does not include any qualified home mortgage interest or any interest taken into account in computing income or loss from a passive activity.

Generally, the deduction for investment interest expense is limited to he amount of net investment income.

For additional information on investment interest see Pub. 550, Investment income and Expense.

Example: Sandy had interest income in the amount of $800. She also had dividend income in the amount of $325. Sandy's investment interest expense far the year was $695. Sandy will be allowed to deduct the full amount of investment interest on her Schedule A since her investment income exceeds her investment interest expense.

If Sandy's investment income consisted of dividends only she would have been limited to the $325 of investment interest she could deduct. The remaining $370 of investment interest would have been a carryover for next year.


Contributions

The current recordkeeping requirements for cash contributions were first effective for tax year 2007. You cannot deduct a cash contribution, regardless of the amount, unless you keep as a record of the contribution a bank record (such as a canceled check, a bank copy of a canceled check, or a bank statement containing the name of the charity, the date, and the amount) or a written communication from the charity. The written communication must include the name of the charity, date of the contribution, and amount of the contribution.

Contributions of money or property such as clothing, to qualified organizations may be deducted. Not deductible are dues, fees, or bills to clubs, lodges, fraternal orders, civic leagues, political groups, for profit organizations, or similar groups. Also not deductible are gifts of money or property to an individual, such as a local collection to help a child receive an expensive medical treatment. Raffle tickets or church bingo games would not be deductible expense (they may count as gambling expenses). If the taxpayer received a benefit (ex. a gift for donating $60) from the donation, then the donation amount must be reduced by the value of the benefit. Cash contributions are deducted on line 16 of Schedule A. Other than cash or check, contributions are deducted on line 17 of Schedule A.

If a taxpayer makes a single contribution of more than $250 in cash or check, he must have a receipt from that organization. If, for example, the taxpayer gave $10 a week to his church, the total would be over $250, but since each amount is under $250, no receipt is required. If in addition he gave $251 to the church for the building fund, he would need a receipt for that amount since it exceeds $250.

If noncash charitable contributions are made with a value of more than $500, the taxpayer is required to complete Form 8283 - Noncash Charitable Contributions and attach it to his return.

Note: Don't overlook amounts paid to United Way through payroll deductions. They would appear on the taxpayer's last check stub or W-2. Advise the client to make donations with checks and not cash. Please make sure they get a receipt for all cash donations. This was mandatory as of tax year 2007. When they give items to Goodwill, AMVETS, etc., make sure they keep a list of the items donated and they get a receipt. Items donated are priced according to resale value (consignment shop).

Out-of-Pocket Expenses

Some costs incurred in giving services to a charitable organization can be deducted. These include travel and transportation, uniforms, foster parents, and child care expense. Mileage for charitable services is $.14 per mile. The value of time, childcare expense, or expenses of others is not deductible.

The 2008 rate for charitable use of the taxpayer's vehicle to provide relief related to a Midwestern disaster area is $.36 a mile before July 1, 2008 and $.41 a mile after June 30, 2008.


Limitations of Deductible Charitable Contributions

Charitable contributions may be limited if the total contributions are more than 20% of the taxpayer's AGI. The deduction may be limited to 20%, 30% or 50% of the taxpayer's AGI depending on the type of property and organization to which it was given.

The 50% limit applies to the total of all charitable contributions made during, the year. Simply stated, the charitable contribution deduction cannot exceed more than 50% of the taxpayer's AGI for the current tax year. The 50% limit is the only limit that applies to organizations that are considered 50% Limit Organizations, such as a church, hospital, educational organizations, etc.

The 30% limit applies to gifts of capital gain property to 50% Limit Organizations, gifts for use of any organization, gifts to all qualified organizations other than 50% Limit Organizations, and amounts paid or spent on behalf of a student living with the taxpayer.

The 20% limit applies to all gifts of capital gain property to or for tie use of qualified organizations, other than gifts of capital gain property to 50% limit organizations. (See Publication 526.)

Certain cash contributions the taxpayer made for relief efforts in a Midwestern disaster area are not subject to the overall limitation on itemized deductions or the 50% adjusted cross income limitation. See Publication 526 for more details.

Note: This material is beyond the scope of this course. This discussion is simply to make the student aware that these limitations exist.

Carryovers

The taxpayer can carry over contributions that cannot be deducted in the current year because they exceed the AGI limits. The carryover can be deducted in each of the next five years until deducted in full or until the five year time limit has expired.

Non-business Casualty and Theft Losses

A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. A loss on deposits can occur when a bank, credit union, or other financial institution becomes insolvent or bankrupt. When property is damaged or destroyed as a result of hurricanes, earthquakes, tornadoes, fires, vandalism, car accidents, and similar events, it is called a casualty loss. A casualty loss must be sudden and unexpected; therefore, termite damage would not qualify. Theft is the unlawful taking and removing of money or property with the intent to deprive the owner.

The taxpayer will need to complete Form 4684 - Casualty and Theft and attach it to his return. The loss calculated on Form 4684 is transferred to line 20 of Schedule A. The IRS allows those taxpayers who use Schedule A to deduct, to a very limited extent, these losses.

A casualty loss equals the lesser of:

1. Decrease in fair market value (FMV) of property as result of the event, or the


2. Adjusted basis in property before casualty loss, less any insurance reimbursement

After figuring a casualty or theft loss and subtracting any reimbursements, one must figure how much of the loss is deductible. There are two limits on the amount deductible for a casualty or theft loss:

1. Each loss must be reduced by $100 2. The loss must be further reduced by 10% of the AGI

Special rules apply to casualty and theft losses that occurred in the Kansas disaster area, a Midwestern disaster area, or a federally declared disaster area. See the instruction for line 20 that begin on page A-8 of the 1040 Instructions.

Miscellaneous Deductions

Miscellaneous deductions may or may not be subject to a 2% limitation depending on the type of deduction.

Subject to 2% Limit

Only those miscellaneous expenses that exceed 2% of the taxpayer's adjusted gross income can be deducted. This effectively removes the deductions for most taxpayers. The following are among those deductions that would go on Schedule A, line 21:

• Dues (only those that are business related; personal memberships are not deductible) • Home office • Job education • Job search • Work clothes • Unreimbursed business mileage (which must go on Form 2106 and carry over to Schedule A) • Union dues

• Tools, etc. • Work related publications • Medical exams required by employer • Nursing license • Malpractice insurance


Schedule A, line 22 is reserved for tax preparation fees. The following items could be listed on Schedule A, line 23:

• Certain legal and accounting fees • Clerical help and office rent • Custodial (for example, trust account) fees

• The taxpayer's share of the Investment expenses of a regulated investment company • Certain losses on no federally insured deposits in an insolvent or bankrupt financial

institution. For details, including limits that apply, see Pub. 529.

• Casualty and theft losses of property used in performing services as an employee from Form 4684, lines 32 and 38b, or Form 4797, line 18a.

• Deduction for repayment of amounts under claim of right if $3,000 or less

Not Subject to 2% Limit - Schedule A, Line 28

• Gambling losses, but only to the extent of gambling winnings report* d on Form 1040, line 21

• Casualty and theft losses from income producing property from Form 4684 lines 38 and 44b or Form 4797, line 18b(a)

• Losses from other activities from Schedule K-1 (Form 1065-B), box 2 • Federal estate tax on income in respect of a decedent

• Amortizable premium on taxable bonds purchased before October 2 J, 1986 • Deduction for repayment of amounts under a claim of right if over $3,000 • Certain unrecovered investment in a pension (on a decedent's return) • Impairment-related work expenses of persons with disabilities

Gambling Losses Up to the Amount of Gambling Winnings

The taxpayer must report the full amount of his gambling winnings for the year on line 21, Form 1040. He will deduct gambling losses for the year on line 28, Schedule A (Form 1040). He cannot deduct gambling losses that are more than his winnings.

The taxpayer cannot reduce his gambling winnings by his gambling losses and report the difference. He must report the full amount of his winnings as income and claim his losses up to the amount of winnings as an itemized deduction. Therefore, his records should show his winnings separately from his losses.

The taxpayer must keep an accurate diary or similar record of losses and winnings. The diary should contain at least the following information:

1) The date and type of the specific wager or wagering activity 2) The name and address or location of the gambling establishment 3) The names of other persons present with the taxpayer at the gambling establishment 4) The amount(s) won or lost

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