liberty tax service online basic income tax course. lesson 8

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Liberty Tax Service Liberty Tax Service Online Basic Income Tax Online Basic Income Tax

Course.Course.

Lesson 8Lesson 8

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Homework Chapter 7Homework Chapter 7

HOMEWORK ONE: What is the amount of the earned income credit in the following situations? They have no investment income over $2,950.

1. Married filing jointly, two qualifying children, Earned Income - $16,528,AGI - $16,693 $4,824

2. Head of Household, one qualifying child, Earned Income - $26,000, AGI -$25,849 $1,274

3. Single, age 24, no qualifying child, Earned Income - $8,925, AGI - $9,000 $0

4. Married Filing Separately, age 27, Earned Income - $6,700, AGI - $6,723 $0

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Homework Chapter 7Homework Chapter 7HOMEWORK TWO:

Gerald T. (born 6/8/1967) and Belle M. Harrison (born 12/12/1971) are married and live at 1220 Torrence Ave. Boulder, CO, 80302. Mrs. Harrison’s niece Greta S. Borg (242-44-2224, born 7/7/2000) has lived with them all year and they provided all of her support.

The Harrisons pay for after school care for Greta so Gerald can work as an optician and Belle can go to her job as a desk clerk in a motel. In 2008, they paid $300 to Tot World (EIN 22-7744333), 4349 Brunswick Blvd., Boulder, CO 80312 for Greta.

Gerald and Belle did not itemize their deductions for 2008.

Prepare a 2008 tax return for Gerald and Belle.

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Homework Chapter 7Homework Chapter 7Homework 2

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Chapter 8: Itemized Deductions Chapter 8: Itemized Deductions

Chapter ContentChapter ContentItemized DeductionsItemized Deductions

Medical and Dental ExpensesMedical and Dental ExpensesTaxes You PaidTaxes You PaidInterest You PaidInterest You PaidGifts To CharityGifts To CharityOther Miscellaneous DeductionsOther Miscellaneous Deductions

Key IdeasKey Ideas

ObjectivesObjectivesCompare Standard Deduction to Itemized DeductionsCompare Standard Deduction to Itemized DeductionsLearn About Deductible and Nondeductible Medical Learn About Deductible and Nondeductible Medical

and Dental Expensesand Dental ExpensesLearn About Which Taxes Paid Which Are DeductibleLearn About Which Taxes Paid Which Are DeductibleDetermine What Interest Paid is DeductibleDetermine What Interest Paid is DeductibleRecognize Deductible Charitable ContributionsRecognize Deductible Charitable ContributionsIdentify Other Miscellaneous DeductionsIdentify Other Miscellaneous Deductions

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Itemized DeductionsItemized Deductions

Itemized deductionsItemized deductions

1.1. If the total amount of your itemized deductions If the total amount of your itemized deductions is higher than your standard deduction, you will is higher than your standard deduction, you will probably want to itemize.probably want to itemize.

2.2. Reduces your AGI and lowers tax liability.Reduces your AGI and lowers tax liability.

3.3. You are subject to a limit on certain itemized You are subject to a limit on certain itemized deductions if your adjusted gross income (AGI) deductions if your adjusted gross income (AGI) is more than $156,400 (or $78,200 if MFS).is more than $156,400 (or $78,200 if MFS).

4.4. Report itemized deductions on Schedule A; the Report itemized deductions on Schedule A; the amount from line 29 of Schedule A is entered on amount from line 29 of Schedule A is entered on line 40 of Form 1040.line 40 of Form 1040.

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Deductions you may be able to claim include:Deductions you may be able to claim include:

Medical and dental expensesMedical and dental expenses Taxes you paidTaxes you paid Interest you paidInterest you paid Gifts to charityGifts to charity Casualty and theft lossesCasualty and theft losses Job expenses and most other miscellaneous Job expenses and most other miscellaneous

deductionsdeductions Other miscellaneous deductionsOther miscellaneous deductions

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Itemized DeductionsItemized DeductionsSchedule ASchedule A

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Itemized DeductionsItemized DeductionsSchedule ASchedule A

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Medical and Dental ExpensesMedical and Dental Expenses

You can include medical expenses you pay for You can include medical expenses you pay for YOURSELF and for:YOURSELF and for:

Your spouse.Your spouse. Dependents claimed on your return.Dependents claimed on your return. Others who could have been claimed Others who could have been claimed

as dependents except they had as dependents except they had gross income ofgross income of $3,500 or more, or $3,500 or more, or they filed a joint return.they filed a joint return.

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Medical and Dental ExpensesMedical and Dental Expenses

Medical and dental expenses that exceed Medical and dental expenses that exceed 7.5% of your AGI are deductible.7.5% of your AGI are deductible.

Note: You may want to determine 7.5% of Note: You may want to determine 7.5% of your AGI before adding all of the expenses your AGI before adding all of the expenses up to see if your medical expenses are up to see if your medical expenses are likely to exceed this amount.likely to exceed this amount.

Schedule ASchedule A

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Medical and Dental Expenses – Problem 1Medical and Dental Expenses – Problem 1

Chico’s adjusted gross income is $25,000 and Chico’s adjusted gross income is $25,000 and 7.5% of that amount is $1,875. He paid medical 7.5% of that amount is $1,875. He paid medical and dental expenses of $2,000 which he reports and dental expenses of $2,000 which he reports on Schedule A. He has $125 ($2,000 - $1,875) as on Schedule A. He has $125 ($2,000 - $1,875) as deductible medical and dental expenses on deductible medical and dental expenses on Schedule A. Schedule A.

If his medical and dental expenses had been If his medical and dental expenses had been $1,500 would he have medical deductions on $1,500 would he have medical deductions on Schedule A?Schedule A?

Yes or No?Yes or No?

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Medical and Dental Expenses – Problem 1Medical and Dental Expenses – Problem 1

Chico’s adjusted gross income is $25,000 and Chico’s adjusted gross income is $25,000 and 7.5% of that amount is $1,875. He paid medical 7.5% of that amount is $1,875. He paid medical and dental expenses of $2,000 which he reports and dental expenses of $2,000 which he reports on Schedule A. He has $125 ($2,000 - $1,875) as on Schedule A. He has $125 ($2,000 - $1,875) as deductible medical and dental expenses on deductible medical and dental expenses on Schedule A. Schedule A.

If his medical and dental expenses had been If his medical and dental expenses had been $1,500 would he have medical deductions on $1,500 would he have medical deductions on Schedule A?Schedule A?

NoNoBecause medical and dental expenses must Because medical and dental expenses must

exceedexceed 7.5% of AGI. 7.5% of AGI.

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Medical and Dental ExpensesMedical and Dental ExpensesBelow are medical and dental expenses you can and cannot deduct:Below are medical and dental expenses you can and cannot deduct:

3131

TransportationTransportation

Transportation expenses incurred Transportation expenses incurred primarily for, and essential to, medical primarily for, and essential to, medical care are deductible.care are deductible.

Standard rate is 19 cents a mile for miles Standard rate is 19 cents a mile for miles driven Jan 1 through Jun 30 and 27 cents a driven Jan 1 through Jun 30 and 27 cents a mile for miles driven Jul 1 through Dec 31 mile for miles driven Jul 1 through Dec 31 or can deduct actual out-of-pocket or can deduct actual out-of-pocket expenses.expenses.

Do not deduct depreciation, insurance, Do not deduct depreciation, insurance, general repair, and maintenance expenses.general repair, and maintenance expenses.

Deduct tolls and parking fees in either Deduct tolls and parking fees in either casecase

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Transportation – Problem 1Transportation – Problem 1

Chris drove 1,000 miles for medical reasons Chris drove 1,000 miles for medical reasons from 1/1/2008 to 6/30/2008 and 800 miles from 1/1/2008 to 6/30/2008 and 800 miles from 7/1/2008 to 12/31/2008. He used his from 7/1/2008 to 12/31/2008. He used his car and his actual expenses were:car and his actual expenses were: $370 for gas$370 for gas $10 for oil$10 for oil $20 for tolls and parking.$20 for tolls and parking.

Should Chris use actual expenses or standard Should Chris use actual expenses or standard mileage for deducting his transportation mileage for deducting his transportation expenses?expenses?

a. Actual Expensesa. Actual Expensesb. Standard Mileageb. Standard Mileage

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Transportation – Problem 1Transportation – Problem 1

Chris drove 1,000 miles for medical reasons from 1/1/2008 to Chris drove 1,000 miles for medical reasons from 1/1/2008 to 6/30/2008 and 800 miles from 7/1/2008 to 12/31/2008. He 6/30/2008 and 800 miles from 7/1/2008 to 12/31/2008. He used his car and his actual expenses wereused his car and his actual expenses were $370 for gas$370 for gas $10 for oil$10 for oil $20 for tolls and parking. $20 for tolls and parking.

Should Chris use actual expenses or standard mileage for Should Chris use actual expenses or standard mileage for deducting his transportation expenses?deducting his transportation expenses?

b. Standard Mileageb. Standard Mileage

His actual expenses total $380 ($370 gas + $10 oil). If he His actual expenses total $380 ($370 gas + $10 oil). If he uses the standard mileage amount, his total expense is uses the standard mileage amount, his total expense is $406 (1,000 x 19 cents/mile = $190 plus 800 x 27 $406 (1,000 x 19 cents/mile = $190 plus 800 x 27 cents/mile = $216).cents/mile = $216). He will use $426 ($406 plus $20 for He will use $426 ($406 plus $20 for tolls and parking) for his car expense along with his other tolls and parking) for his car expense along with his other medical expenses because it is more than the $400 ($380 medical expenses because it is more than the $400 ($380 plus $20 for tolls and parking) he figured for his actual plus $20 for tolls and parking) he figured for his actual expenses.expenses.

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TransportationTransportation

Other transportation expenses you can Other transportation expenses you can deduct are bus, taxi, train, plane fares, or deduct are bus, taxi, train, plane fares, or ambulance services. ambulance services.

The transportation expenses of a parent to The transportation expenses of a parent to accompany a child who requires medical accompany a child who requires medical care are deductible. care are deductible.

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LodgingLodging The cost of lodging and meals at a hospital or similar The cost of lodging and meals at a hospital or similar

institution can be deducted if the main reason for being institution can be deducted if the main reason for being there is for medical care.there is for medical care.

You can include as part of your medical expenses the cost You can include as part of your medical expenses the cost of lodging not provided by the medical facility if all of of lodging not provided by the medical facility if all of the following requirements are met:the following requirements are met:

a.a. Lodging primarily essential to medical careLodging primarily essential to medical careb.b. Medical care provided by doctor in a medical care Medical care provided by doctor in a medical care

facilityfacilityc.c. Lodging is not extravagantLodging is not extravagantd.d. No significant element of personal pleasure, recreation, No significant element of personal pleasure, recreation,

or vacation in the travel away from homeor vacation in the travel away from home

The amount you include in medical expenses for lodging The amount you include in medical expenses for lodging cannot be more than $50 for each night for each cannot be more than $50 for each night for each person. The cost of lodging for the person person. The cost of lodging for the person accompanying the patient is deductible. Meals under accompanying the patient is deductible. Meals under these circumstances are not deductible.these circumstances are not deductible.

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Lodging – Problem 1Lodging – Problem 1

Claudia took her 8-year-old son, Ramos, to a Claudia took her 8-year-old son, Ramos, to a medical center to undergo tests. They stayed at medical center to undergo tests. They stayed at a motel for three nights while the medical tests a motel for three nights while the medical tests were run. The motel cost $70 per night and their were run. The motel cost $70 per night and their meals totaled $120. How much, if any, can meals totaled $120. How much, if any, can Claudia deduct for medical expense?Claudia deduct for medical expense?

a. $120a. $120b. $0b. $0c. $330c. $330d. $210d. $210

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Claudia took her 8-year-old son, Ramos, to a medical Claudia took her 8-year-old son, Ramos, to a medical center to undergo tests. They stayed at a motel for center to undergo tests. They stayed at a motel for three nights while the medical tests were run. The three nights while the medical tests were run. The motel cost $70 per night and their meals totaled motel cost $70 per night and their meals totaled $120. How much, if any, can Claudia deduct for $120. How much, if any, can Claudia deduct for medical expenses?medical expenses?

d. $210d. $210

Claudia can deduct $210 ($70 x 3 nights) for lodging. Claudia can deduct $210 ($70 x 3 nights) for lodging. She and Ramos each have a $50 per night limit. The She and Ramos each have a $50 per night limit. The $120 for meals cannot be deducted.$120 for meals cannot be deducted.

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LodgingLodging

Cost of living in a retirement or nursing Cost of living in a retirement or nursing home is deductible for yourself, spouse, home is deductible for yourself, spouse, or dependent if there because of or dependent if there because of availability of medical care.availability of medical care.

Home improvements not increasing the Home improvements not increasing the value of your home but required for value of your home but required for medical conditions are deductible.medical conditions are deductible.

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Raymond has severe asthma. His doctor Raymond has severe asthma. His doctor recommended he add central air conditioning to recommended he add central air conditioning to his house. The equipment and installation cost his house. The equipment and installation cost $3,200. An appraiser assessed a $1,500 increase $3,200. An appraiser assessed a $1,500 increase in the value of his house as a result of the air in the value of his house as a result of the air conditioning. conditioning.

How much, if any, can Raymond deduct for home How much, if any, can Raymond deduct for home improvements due to a medical condition?improvements due to a medical condition?

a. $3,200a. $3,200b. $1,700b. $1,700c. $1,500c. $1,500

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Raymond has severe asthma. His doctor recommended Raymond has severe asthma. His doctor recommended he add central air conditioning to his house. The he add central air conditioning to his house. The equipment and installation cost $3,200. An appraiser equipment and installation cost $3,200. An appraiser assessed a $1,500 increase in the value of his house as assessed a $1,500 increase in the value of his house as a result of the air conditioning. a result of the air conditioning.

How much, if any, can Raymond deduct for home How much, if any, can Raymond deduct for home improvements due to a medical condition?improvements due to a medical condition?

b. $1,700b. $1,700

Raymond can deduct $1,700 ($3,200-$1,500) as a Raymond can deduct $1,700 ($3,200-$1,500) as a medical expense this year along with any cost for medical expense this year along with any cost for operating and maintaining the central air operating and maintaining the central air conditioning every year for as long as it is needed conditioning every year for as long as it is needed medically.medically.

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Insurance PremiumsInsurance Premiums

Insurance premiums you pay for policies that Insurance premiums you pay for policies that cover medical care are deductible.cover medical care are deductible.

Policies can provide payment for medical Policies can provide payment for medical and dental expenses, prescription drugs, and dental expenses, prescription drugs, eyeglasses, and replacement of contact eyeglasses, and replacement of contact lenses.lenses.

If you have long-term care insurance, the If you have long-term care insurance, the part of the premium that can be deducted on part of the premium that can be deducted on Schedule A depends on the age of the Schedule A depends on the age of the insured.insured.

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Weight Loss ProgramsWeight Loss Programs

Uncompensated amounts you pay for participation Uncompensated amounts you pay for participation in a weight-loss program as a treatment for a in a weight-loss program as a treatment for a specific disease (including obesity) diagnosed specific disease (including obesity) diagnosed by a physician are deductible.by a physician are deductible.

The cost of purchasing diet food items is not The cost of purchasing diet food items is not deductible.deductible.

Weight-loss programs to improve your general Weight-loss programs to improve your general health or appearance do not qualify and are health or appearance do not qualify and are regarded as nondeductible personal expenses.regarded as nondeductible personal expenses.

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TAXES YOU PAIDTAXES YOU PAID

In order for a tax to be deductible by you, the tax must In order for a tax to be deductible by you, the tax must be imposed on you and must be paid by you during be imposed on you and must be paid by you during your tax year. You report deductible taxes on lines 5 your tax year. You report deductible taxes on lines 5 through 9 of Schedule A.through 9 of Schedule A.

Schedule ASchedule A

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Deductible taxes include:Deductible taxes include:

State and local income taxesState and local income taxes General sales taxesGeneral sales taxes Real estate taxesReal estate taxes Personal property taxesPersonal property taxes Foreign Income TaxesForeign Income Taxes

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State and Local Income TaxesState and Local Income Taxes

These taxes include tax withheld from your These taxes include tax withheld from your salary, estimated payments, and the tax salary, estimated payments, and the tax paid for an earlier year. paid for an earlier year.

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TAXES YOU PAIDTAXES YOU PAIDGeneral sales taxes.General sales taxes.

You can elect to deduct state and local general You can elect to deduct state and local general sales taxes sales taxes insteadinstead of state and local income of state and local income taxes. You taxes. You cannotcannot deduct both. deduct both.

To figure your deduction you can use either of the To figure your deduction you can use either of the following methods: following methods:

1.1. Actual state and local general sales tax and Actual state and local general sales tax and sales tax on motor vehicles or the optional sales tax on motor vehicles or the optional sales tax tablesales tax table(You must keep your actual receipts showing (You must keep your actual receipts showing general sales taxes paid if you use this general sales taxes paid if you use this method.method.

2.2. IRS has website for calculating sales tax IRS has website for calculating sales tax http://apps.irs.gov/app/stdc/http://apps.irs.gov/app/stdc/

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Real estate taxes.Real estate taxes.

These are taxes on real property, such as your These are taxes on real property, such as your house or other land that you own that was not house or other land that you own that was not used for business. used for business.

The taxes must be based on the assessed value of The taxes must be based on the assessed value of the property.the property.

Generally, real estate taxes are deductible when Generally, real estate taxes are deductible when paid. With an escrow account, you can deduct paid. With an escrow account, you can deduct the real estate tax the year the lending the real estate tax the year the lending institution pays it.institution pays it.

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Personal property taxes.Personal property taxes.

Taxes that state and local governments Taxes that state and local governments charge on the value of personal property charge on the value of personal property are deductible. An example is personal are deductible. An example is personal property taxes based on the value of your property taxes based on the value of your car or boat. In some states, a portion of the car or boat. In some states, a portion of the cost of personal vehicle registration may be cost of personal vehicle registration may be deductible if part of the fee is based on the deductible if part of the fee is based on the value of your car.value of your car.

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Foreign Income TaxesForeign Income Taxes

Generally, you can take either a deduction or Generally, you can take either a deduction or a credit for income taxes imposed on you by a credit for income taxes imposed on you by a foreign country or a U.S. possession.a foreign country or a U.S. possession.

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Taxes and fees that are generally NOT deductible Taxes and fees that are generally NOT deductible include:include:

Federal taxes such as income tax, social Federal taxes such as income tax, social security (FICA), and Medicaresecurity (FICA), and Medicare

Driver’s, marriage, hunting, or pet licensesDriver’s, marriage, hunting, or pet licenses Water and sewer taxesWater and sewer taxes Taxes on alcoholic beverages, cigarettes, and Taxes on alcoholic beverages, cigarettes, and

tobaccotobacco Taxes on gasoline, diesel, and other motor Taxes on gasoline, diesel, and other motor

fuels used in a non-business vehiclefuels used in a non-business vehicle Utility taxes - telephone, gas, electricity, etc.Utility taxes - telephone, gas, electricity, etc. Fines or penaltiesFines or penalties

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For 2008, if you are not able to use the real For 2008, if you are not able to use the real estate taxes paid because you do not estate taxes paid because you do not have enough deductions to itemize, you have enough deductions to itemize, you may be able to claim up to $500 ($1,000 may be able to claim up to $500 ($1,000 if MFJ) as an addition to the standard if MFJ) as an addition to the standard deduction. If you paid real estate taxes deduction. If you paid real estate taxes and are unable to itemize deductions, and are unable to itemize deductions, use the worksheet is Table 8-3 to use the worksheet is Table 8-3 to determine the amount of your standard determine the amount of your standard deduction. deduction.

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5454

INTEREST YOU PAIDINTEREST YOU PAID

Report interest you paid on lines 10-14 Report interest you paid on lines 10-14 of Schedule Aof Schedule A

Amount you pay for the use of borrowed Amount you pay for the use of borrowed moneymoney

Types include home mortgage interest Types include home mortgage interest and investment interestand investment interest

Qualified mortgage insurance premiumsQualified mortgage insurance premiums

Schedule A

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INTEREST YOU PAIDINTEREST YOU PAIDHome Mortgage InterestHome Mortgage InterestReport home mortgage interest on line 10 of Schedule Report home mortgage interest on line 10 of Schedule

A if you receive a Form 1098, A if you receive a Form 1098, Mortgage Interest Mortgage Interest StatementStatement. .

If you do not receive a Form 1098, report the home If you do not receive a Form 1098, report the home mortgage interest on line 11 of Schedule A.mortgage interest on line 11 of Schedule A.

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POINTSPOINTS

Points specifically paid for the use of money Points specifically paid for the use of money are considered prepaid interest.are considered prepaid interest.

Generally cannot deduct full amount of Generally cannot deduct full amount of points in year paid.points in year paid.

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INTEREST YOU PAIDINTEREST YOU PAIDYou can fully deduct points in the year you pay them You can fully deduct points in the year you pay them only if allonly if all

these apply:these apply:

You itemize deductionsYou itemize deductions Your loan is secured by your main homeYour loan is secured by your main home Paying points is an established business practice where loan Paying points is an established business practice where loan

was madewas made Points paid were not more than points generally charged in Points paid were not more than points generally charged in

areaarea You use cash method of accountingYou use cash method of accounting Points were not paid in place of amounts that ordinarily are Points were not paid in place of amounts that ordinarily are

stated separately on settlement statementstated separately on settlement statement You use your loan to buy or build your main homeYou use your loan to buy or build your main home Points were computed as percentage of principal amount of Points were computed as percentage of principal amount of

mortgagemortgage Amount is clearly shown on settlement statement as points Amount is clearly shown on settlement statement as points

charged for mortgagecharged for mortgage Funds you provided at or before closing plus any points seller Funds you provided at or before closing plus any points seller

paid were at least as much as points charged.paid were at least as much as points charged.

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Points paid by the seller are deductible by Points paid by the seller are deductible by the buyer.the buyer.

Points paid to refinance a mortgage are Points paid to refinance a mortgage are generally not deductible in full the year generally not deductible in full the year you pay them.you pay them.

Report points reported on Form 1098 on Report points reported on Form 1098 on line 10 of Schedule A; if not reported on line 10 of Schedule A; if not reported on Form 1098, enter them on line 12 of Form 1098, enter them on line 12 of Schedule A.Schedule A.

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INTEREST YOU PAID – Problem 1INTEREST YOU PAID – Problem 1

Tom and Debra Mazur bought a house costing Tom and Debra Mazur bought a house costing $200,000 in 2008. They paid 2 points to $200,000 in 2008. They paid 2 points to the lender. The seller paid 1 point to the the lender. The seller paid 1 point to the lender. How much can the Mazurs deduct lender. How much can the Mazurs deduct on their 2008 return?on their 2008 return?

a.a. $2,000$2,000

b.b. $4,000$4,000

c.c. $6,000$6,000

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INTEREST YOU PAID – Problem 1INTEREST YOU PAID – Problem 1

Tom and Debra Mazur bought a house costing Tom and Debra Mazur bought a house costing $200,000 in 2008. They paid 2 points to the $200,000 in 2008. They paid 2 points to the lender. The seller paid 1 point to the lender. lender. The seller paid 1 point to the lender. How much can the Mazurs deduct on their How much can the Mazurs deduct on their 2008 return?2008 return?

c. $6,000c. $6,000

$6,000 in points$6,000 in points

$200,000 x 2% = $4,000 plus$200,000 x 2% = $4,000 plus

$200,000 x 1% = $2,000$200,000 x 1% = $2,000

The basis of their house is reduced by $2,000 The basis of their house is reduced by $2,000 (seller’s points they deducted) to $198,000.(seller’s points they deducted) to $198,000.

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Mortgage Insurance PremiumsMortgage Insurance Premiums

Premiums paid for Premiums paid for qualifiedqualified mortgage insurance mortgage insurance are treated as deductible mortgage interest. The are treated as deductible mortgage interest. The deduction does not apply to any contract issued deduction does not apply to any contract issued before January 1, 2007 and does not apply to any before January 1, 2007 and does not apply to any amounts paid or accrued after December 31, amounts paid or accrued after December 31, 2010.2010.

Qualified mortgage insurance providers include Qualified mortgage insurance providers include the Veterans Administration, the Federal Housing the Veterans Administration, the Federal Housing Administration or the Rural Housing Administration or the Rural Housing Administration and private mortgage insurance. Administration and private mortgage insurance. Box 4 of Form 1098 may show the amount of Box 4 of Form 1098 may show the amount of premiums paid in 2008.premiums paid in 2008.

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Investment InterestInvestment Interest

Deduct investment interest to the Deduct investment interest to the extent of investment income.extent of investment income.

Excess of investment interest can be Excess of investment interest can be carried over to future years.carried over to future years.

You generally use Form 4952 to You generally use Form 4952 to determine amount of deductible determine amount of deductible investment interest.investment interest.

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GIFTS TO CHARITYGIFTS TO CHARITY

Charitable contributions can be deducted Charitable contributions can be deducted only if you make them to a qualified only if you make them to a qualified organization.organization.

Can be cash or non-cash.Can be cash or non-cash. Report on lines 16-19 of Schedule A.Report on lines 16-19 of Schedule A. Generally cannot exceed 50% of your Generally cannot exceed 50% of your

AGI.AGI. Non-cash contributions are reported on Non-cash contributions are reported on

line 17 of Schedule A. line 17 of Schedule A. Refer to Table 8-5 for examples of Refer to Table 8-5 for examples of

qualified contributions andqualified contributions and organizations organizations and those that do not qualify.and those that do not qualify.

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Schedule A

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GIFTS TO CHARITYGIFTS TO CHARITYPropertyProperty

The fair market value of property you give to a The fair market value of property you give to a charitable organization can be deducted; it is charitable organization can be deducted; it is determined on the date of the gift.determined on the date of the gift.

If property has If property has increasedincreased in value during time you in value during time you owned it, deduct your basis in it or the property’s owned it, deduct your basis in it or the property’s FMV on date of gift; if property has decreased in FMV on date of gift; if property has decreased in value during the time you owned it, usually deduct value during the time you owned it, usually deduct its FMV (e.g. used clothing, furniture, books, its FMV (e.g. used clothing, furniture, books, appliances)appliances)

Example:Example:

Ed bought land in 1996 for $8,000. He donated the Ed bought land in 1996 for $8,000. He donated the land to his church in 2008 when it was worth land to his church in 2008 when it was worth $12,000. Ed can deduct $12,000.$12,000. Ed can deduct $12,000.

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Clothing or household items donated must Clothing or household items donated must be in good, used condition. An item not in be in good, used condition. An item not in good used condition can be deducted if it is good used condition can be deducted if it is more than $500 and a qualified appraisal is more than $500 and a qualified appraisal is included.included.

Used vehicles, boats and airplanes that have Used vehicles, boats and airplanes that have a claimed value of $500 or more must have a a claimed value of $500 or more must have a written acknowledgement from the written acknowledgement from the organization. The deduction is the smaller of organization. The deduction is the smaller of the FMV on the date of the contribution or the FMV on the date of the contribution or the gross proceeds received from the sale.the gross proceeds received from the sale.

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The deduction is not limited if the The deduction is not limited if the organization gives or sells the vehicle to a organization gives or sells the vehicle to a needy individual, makes significant use of needy individual, makes significant use of the vehicle or makes material the vehicle or makes material improvements before transferring it. improvements before transferring it.

A used car guide can help determine the A used car guide can help determine the FMV of the vehicle. FMV of the vehicle.

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GIFTS TO CHARITY – Problem 1GIFTS TO CHARITY – Problem 1

Brad donates his 2001 Jeep Wrangler, which he Brad donates his 2001 Jeep Wrangler, which he bought new for $22,000 in 2001. A used car bought new for $22,000 in 2001. A used car guide indicates the FMV for his car is $9,950. guide indicates the FMV for his car is $9,950. Brad receives a Form 1098-C which shows that Brad receives a Form 1098-C which shows that the car was sold for $7,000. How much can he the car was sold for $7,000. How much can he deduct on his return?deduct on his return?

a. $9,950a. $9,950

b. $7,000b. $7,000

c. $2,950c. $2,950

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GIFTS TO CHARITY – Problem 1GIFTS TO CHARITY – Problem 1

Brad donates his 2001 Jeep Wrangler, which he Brad donates his 2001 Jeep Wrangler, which he bought new for $22,000 in 2001. A used car bought new for $22,000 in 2001. A used car guide indicates the FMV for his car is $9,950. guide indicates the FMV for his car is $9,950. Brad receives a Form 1098-C which shows that Brad receives a Form 1098-C which shows that the car was sold for $7,000. How much can he the car was sold for $7,000. How much can he deduct on his return?deduct on his return?

b. $7,000b. $7,000

He can deduct $7,000 and he must attach Form He can deduct $7,000 and he must attach Form 1098-C to his return.1098-C to his return.

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If your contributions of noncash items are If your contributions of noncash items are over $500 in any year, you are required to over $500 in any year, you are required to file Form 8283, file Form 8283, Noncash Charitable Noncash Charitable Contributions Contributions to give more information to give more information about them.about them.

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Limit On DeductionsLimit On Deductions

Amount of deduction may be limited to Amount of deduction may be limited to 20%, 30%, or 50% of AGI depending on 20%, 30%, or 50% of AGI depending on type of property and type of charitable type of property and type of charitable organization. organization.

Can carry over contributions exceeding Can carry over contributions exceeding AGI limit and deduct excess in each of AGI limit and deduct excess in each of next 5 years until used upnext 5 years until used up

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Record KeepingRecord Keeping

Keep records of all your cash and noncash Keep records of all your cash and noncash contributions for the year; contributions for the year; if under $250if under $250, , proof can be canceled check, receipt, etc.; proof can be canceled check, receipt, etc.; if $250 or moreif $250 or more, proof must be written , proof must be written acknowledgment (see Publication 526 for acknowledgment (see Publication 526 for more details).more details).

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OTHER MISCELLANEOUS DEDUCTIONSOTHER MISCELLANEOUS DEDUCTIONS

Casualty and theft losses, job expenses Casualty and theft losses, job expenses and most other miscellaneous deductions and most other miscellaneous deductions are covered in Chapter 13.are covered in Chapter 13.

Line 28 of Schedule A takes care of Line 28 of Schedule A takes care of other other miscellaneous deductionsmiscellaneous deductions including: including: gambling losses up to amount of winnings, gambling losses up to amount of winnings, impairment-related work expenses of impairment-related work expenses of persons with disabilities,persons with disabilities,

repayments of more than $3,000 under a repayments of more than $3,000 under a claim of right.claim of right.

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KEY IDEASKEY IDEAS

Itemized deductions are reported on Schedule A of Itemized deductions are reported on Schedule A of Form 1040. Itemized deductions include:Form 1040. Itemized deductions include:

Medical and dental expensesMedical and dental expenses Taxes paidTaxes paid Home mortgage and certain investment interest Home mortgage and certain investment interest

paidpaid Charitable contributionsCharitable contributions Casualty and theft losses (covered in a later Casualty and theft losses (covered in a later

chapter)chapter) Miscellaneous itemized deductions (some covered Miscellaneous itemized deductions (some covered

in a later chapter)in a later chapter)

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Itemized DeductionsItemized DeductionsKEY IDEASKEY IDEAS

Medical and dental expenses that exceed 7.5 percent of Medical and dental expenses that exceed 7.5 percent of adjusted gross income are deductible.adjusted gross income are deductible.

Either state and local income taxes or general sales tax can Either state and local income taxes or general sales tax can be deducted, but not both.be deducted, but not both.

Mortgage interest can be deducted if you are legally liable for Mortgage interest can be deducted if you are legally liable for the debt.the debt.

Regardless of the amount, you cannot deduct a cash Regardless of the amount, you cannot deduct a cash contribution unless you keep as a record of the contribution unless you keep as a record of the contribution a bank record, such as a cancelled check.contribution a bank record, such as a cancelled check.

You cannot deduct a contribution of clothing or household You cannot deduct a contribution of clothing or household items unless the items are in good used condition or items unless the items are in good used condition or better.better.

You compare your total itemized deductions to your standard You compare your total itemized deductions to your standard deduction and enter the larger amount on line 40 of Form deduction and enter the larger amount on line 40 of Form 1040.1040.

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Itemized DeductionsItemized DeductionsCLASSWORK 1: True or False.CLASSWORK 1: True or False.

1.1. You may benefit from itemizing your deductions if you paid You may benefit from itemizing your deductions if you paid mortgage interest and real estate taxes on your home. mortgage interest and real estate taxes on your home.

2.2. You cannot deduct general sales tax on your tax return. You cannot deduct general sales tax on your tax return.

3.3. The standard rate is 20 cents per mile for a medical travel The standard rate is 20 cents per mile for a medical travel expense. expense.

4.4. If you are married filing separately and your spouse itemizes If you are married filing separately and your spouse itemizes his/her deductions, you too must itemize your deductions even his/her deductions, you too must itemize your deductions even if they are below the standard deduction. if they are below the standard deduction.

5.5. You can claim a cash charitable donation of $5 even if you do You can claim a cash charitable donation of $5 even if you do not have a receipt. . not have a receipt. .

6.6. Points paid by the seller are deductible by the buyer as Points paid by the seller are deductible by the buyer as interest. interest.

7.7. The fair market value is determined on the date of the gift. The fair market value is determined on the date of the gift.

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8.8. Your total medical and dental expense must exceed 7.5% Your total medical and dental expense must exceed 7.5% of your total income to take the deduction. of your total income to take the deduction.

9.9. Real estate taxes are deductible on your return when Real estate taxes are deductible on your return when actually paid. actually paid.

10.10. Your total charitable contributions may have limited Your total charitable contributions may have limited deductibility if they are over 10% of your AGI. deductibility if they are over 10% of your AGI.

11.11. You can deduct a weight loss program as a medical You can deduct a weight loss program as a medical deduction if it is a treatment for a disease diagnosed by deduction if it is a treatment for a disease diagnosed by your doctor . your doctor .

12.12. Credit card interest for personal expenses is a deductible Credit card interest for personal expenses is a deductible interest. interest.

13.13. Any meal costs you pay at a hospital are deductible if the Any meal costs you pay at a hospital are deductible if the principal reason you are there is to receive medical care . principal reason you are there is to receive medical care .

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14.14. You can deduct what you paid for clothing in good used You can deduct what you paid for clothing in good used condition or better that you donate to a qualified charitable condition or better that you donate to a qualified charitable organization. organization.

15.15. You can deduct the mortgage interest you paid on your You can deduct the mortgage interest you paid on your son’s home even if you are not legally liable for the loan. son’s home even if you are not legally liable for the loan.

16.16. A church raffle ticket that you purchased can be deducted A church raffle ticket that you purchased can be deducted as a charitable donation. as a charitable donation.

17.17. Health insurance premiums paid by your employer are fully Health insurance premiums paid by your employer are fully deductible as a medical expensedeductible as a medical expense . .

18.18. If you used the money to purchase a car, the points paid to If you used the money to purchase a car, the points paid to refinance your home mortgage are fully deductible in the refinance your home mortgage are fully deductible in the year you paid them. year you paid them.

19.19. You can deduct the full cost of a nursing home even if you You can deduct the full cost of a nursing home even if you reside there for personal reasons. reside there for personal reasons.

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20.20. Federal income tax is deductible on Schedule A. Federal income tax is deductible on Schedule A.

21.21. State tax withheld from your salary is reported to State tax withheld from your salary is reported to you in box 17 of Form W-2. you in box 17 of Form W-2.

22.22. Tuition to a nonprofit school is a deductible Tuition to a nonprofit school is a deductible charitable contribution. charitable contribution.

23.23. Money given to a needy person can be deducted as Money given to a needy person can be deducted as a charitable contribution. a charitable contribution.

24.24. In addition to your state and local income tax In addition to your state and local income tax withholding, you can deduct on your 2008 Schedule withholding, you can deduct on your 2008 Schedule A, any prior year’s state income tax owed that you A, any prior year’s state income tax owed that you paid in 2008. paid in 2008.

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1.1. You may benefit from itemizing your deductions if you paid You may benefit from itemizing your deductions if you paid mortgage interest and real estate taxes on your home.mortgage interest and real estate taxes on your home. TT

2.2. You cannot deduct general sales tax on your tax return. You cannot deduct general sales tax on your tax return. FF

3.3. The standard rate is 20 cents per mile for a medical travel expense. The standard rate is 20 cents per mile for a medical travel expense. FF

4.4. If you are married filing separately and your spouse itemizes If you are married filing separately and your spouse itemizes his/her deductions, you too must itemize your deductions even if his/her deductions, you too must itemize your deductions even if they are below the standard deduction. they are below the standard deduction. TT

5.5. You can claim a cash charitable donation of $5 even if you do not have a receipt. You can claim a cash charitable donation of $5 even if you do not have a receipt. FF

6.6. Points paid by the seller are deductible by the buyer as interest. Points paid by the seller are deductible by the buyer as interest. TT

7.7. The fair market value is determined on the date of the gift. The fair market value is determined on the date of the gift. TT

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8.8. Your total medical and dental expense must exceed 7.5% Your total medical and dental expense must exceed 7.5% of your total income to take the deduction. of your total income to take the deduction. FF

9.9. Real estate taxes are deductible on your return when Real estate taxes are deductible on your return when actually paid. actually paid. T T

10.10. Your total charitable contributions may have limited Your total charitable contributions may have limited deductibility if they are over 10% of your AGI. deductibility if they are over 10% of your AGI. FF

11.11. You can deduct a weight loss program as a medical You can deduct a weight loss program as a medical deduction if it is a treatment for a disease diagnosed by deduction if it is a treatment for a disease diagnosed by your doctor . your doctor . TT

12.12. Credit card interest for personal expenses is a deductible Credit card interest for personal expenses is a deductible interest. interest. FF

13.13. Any meal costs you pay at a hospital are deductible if the Any meal costs you pay at a hospital are deductible if the principal reason you are there is to receive medical careprincipal reason you are there is to receive medical care . . TT

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14.14. You can deduct what you paid for clothing in good used You can deduct what you paid for clothing in good used condition or better that you donate to a qualified charitable condition or better that you donate to a qualified charitable organization. organization. FF

15.15. You can deduct the mortgage interest you paid on your son’s You can deduct the mortgage interest you paid on your son’s home even if you are not legally liable for the loan. home even if you are not legally liable for the loan. FF

16.16. A church raffle ticket that you purchased can be deducted as A church raffle ticket that you purchased can be deducted as a charitable donation . a charitable donation . FF

17.17. Health insurance premiums paid by your employer are fully Health insurance premiums paid by your employer are fully deductible as a medical expense . deductible as a medical expense . FF

18.18. If you used the money to purchase a car, the points paid to If you used the money to purchase a car, the points paid to refinance your home mortgage are fully deductible in the refinance your home mortgage are fully deductible in the year you paid them. year you paid them. FF

19.19. You can deduct the full cost of a nursing home even if you You can deduct the full cost of a nursing home even if you reside there for personal reasons. reside there for personal reasons. FF

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20.20. Federal income tax is deductible on Schedule A. Federal income tax is deductible on Schedule A. FF

21.21. State tax withheld from your salary is reported to you State tax withheld from your salary is reported to you in box 17 of Form W-2. in box 17 of Form W-2. TT

22.22. Tuition to a nonprofit school is a deductible charitable Tuition to a nonprofit school is a deductible charitable contribution. contribution. FF

23.23. Money given to a needy person can be deducted as a Money given to a needy person can be deducted as a charitable contribution. charitable contribution. FF

24.24. In addition to your state and local income tax In addition to your state and local income tax withholding, you can deduct on your 2008 Schedule A, withholding, you can deduct on your 2008 Schedule A, any prior year’s state income tax owed that you paid in any prior year’s state income tax owed that you paid in 2008. 2008. TT

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Itemized DeductionsItemized DeductionsCLASSWORK 2CLASSWORK 2:: Greg K. (SSN 033-21-8196, born 10/10/1942) and Beth M. Greg K. (SSN 033-21-8196, born 10/10/1942) and Beth M.

(SSN 212-63-8338, born 12/11/1951) Smith are filing a joint (SSN 212-63-8338, born 12/11/1951) Smith are filing a joint return and they have no dependents. They live in Colorado return and they have no dependents. They live in Colorado City, Texas 79512 and their AGI (line 38 of Form 1040) is City, Texas 79512 and their AGI (line 38 of Form 1040) is $44,000. Greg and Beth have no other income and they did $44,000. Greg and Beth have no other income and they did not purchase a motor vehicle or purchase an aircraft, boat, not purchase a motor vehicle or purchase an aircraft, boat, home or home-building materials.home or home-building materials.

They drove 1,030 miles for doctor visits. They drove 600 They drove 1,030 miles for doctor visits. They drove 600 miles from 1/1/2008 to 6/30/2008 and 430 miles from miles from 1/1/2008 to 6/30/2008 and 430 miles from 7/1/2008 to 12/31/2008. Beth does volunteer work at the 7/1/2008 to 12/31/2008. Beth does volunteer work at the church every week and she drove 250 miles for this church every week and she drove 250 miles for this purpose. They have written records of their automobile purpose. They have written records of their automobile mileage.mileage.

Complete their Schedule A using the following additional Complete their Schedule A using the following additional information. Texas does not have a personal income tax. information. Texas does not have a personal income tax. The local general sales tax for Colorado City is 2%.The local general sales tax for Colorado City is 2%.

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Eyeglasses (Greg)Eyeglasses (Greg) $ 260$ 260 Root Canal (Greg)Root Canal (Greg) $ 425$ 425

Medical InsuranceMedical Insurance $ 2,550$ 2,550 Church donationsChurch donations $ 25/week $ 25/week for 50 weeksfor 50 weeks

Prescription drugsPrescription drugs $ 185$ 185 Goodwill FMV of clothes in Goodwill FMV of clothes in good used conditiongood used condition

$ 300$ 300

Home mortgage interestHome mortgage interest $ 4,350$ 4,350 Benefit for a neighborBenefit for a neighbor $ 130$ 130

Real estate taxesReal estate taxes $ 2,800$ 2,800 State gas taxState gas tax $ 450$ 450

Over-the-counter drugsOver-the-counter drugs $ 150$ 150 Hip surgery (Beth) Hip surgery (Beth)

*reimbursed $2,850*reimbursed $2,850

$ 6,000*$ 6,000*

Bingo – cost of cardsBingo – cost of cards $ 500$ 500

CLASSWORK 2:CLASSWORK 2:

Assuming that their deductions were the same, would they still want to itemize if Beth had been born in 1941?

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Itemized DeductionsItemized DeductionsCLASSWORK 2 - AnswerCLASSWORK 2 - Answer

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When both taxpayers are over 65, the standard deduction is $13,000 plus $1,000 for real estate taxes totaling $14,000 which is higher than their itemized deductions.

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Questions and AnswersQuestions and Answers

liberty tax service online basic income tax course. lesson 8

Documents

homework chapter

medical expenses

investment income

adjusted gross income

earned income credit

dental expensestaxes

certain itemized deductions

dental expensesmedical