Chapter 5
Itemized Deductions
“A person should be taxed according
to his means”
--The Talmud
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LO #1 Deductible Medical Expenses
 Medical expenses are normally deductible to the
extent that they now exceed 10% of AGI.
– Taxpayers can deduct an itemized deduction for
medical expenses (net of insurance proceeds)
for themselves, their spouse, and dependents.
– The qualifying relationship must exist on the
date expenses are incurred or paid.
– For taxpayers > age 65, the old threshold of
7.5% applies for the years 2013-2016.
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LO #1 Deductible Medical Expenses
 Taxpayers may deduct just about all
medical expenses that are doctorprescribed.
 Expenses related to the maintenance of
general health are usually not deductible.
 A deduction may be claimed only for
medical expenses actually paid during the
taxable year,
 regardless of when the care was provided and
regardless of the taxpayer’s method of
accounting.
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LO #1 Deductible Medical Expenses
 Medical capital expenditures are deductible
only to the extent that the expenditure
exceeds the increase in FMV of the
property.
• Transportation costs for medical purposes
are deductible and could include such items
as cab, bus, or train fares, as well as
expenses for a personal auto.
• Premiums for Long Term Care insurance
are deductible, but the extent to which is
dependent on the taxpayer’s age.
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LO #2 Deductible State and Local Taxes
 There are four major categories of
deductible taxes on individual returns:
personal property taxes, local real estate
taxes, other state and local taxes, and
foreign taxes.
• The taxes that most individual taxpayers
deduct on Schedule A are state and local
income taxes and property taxes on real
estate and personal property.
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LO #2 Deductible State and Local Taxes
• Real estate taxes are deductible in the
calculation of federal taxable income.
– If the tax is paid on personal use real estate,
such as a principal residence, it is an itemized
deduction on Schedule A.
• Personal property taxes paid on personal
use assets, such as the family car, are
deductible on Schedule A.
– For a property tax to be deductible, it must be
based on the value of the property.
– Must be levied on personal property.
– Must be imposed, at a minimum, on an annual
basis
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LO #2 Deductible State and Local Taxes
 An individual taxpayer can deduct the
amount of state income taxes actually paid.
 Whether through withholding, estimated taxes, or
with the filing of the prior year’s state tax return.
 However, if a taxpayer receives a state tax
refund in a following year for taxes deducted
in a prior year, the refund must be included
as taxable income in the year of receipt.
 This is the tax benefit rule.
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LO #2 Deductible State and Local Taxes
• The amount of the sales tax deduction
can be determined by calculating
actual sales taxes paid during the year.
– Another way to compute the deduction is to use
the sales tax deduction tables provided by the
IRS in the instructions for Schedule A.
– An additional option is to use the sales tax
deduction calculator on the IRS website
– When using the sales tax tables, taxpayers
determine their sales tax deduction based on
their income and number of exemptions.
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LO #2 Deductible State and Local Taxes
• Foreign taxes paid are deductible.
• Taxpayers have the option of taking a
credit for foreign taxes paid or
deducting the taxes as an itemized
deduction on Schedule A.
– Individual taxpayers are generally better
off utilizing the credit rather than the
deduction because a credit is a dollar-fordollar reduction in taxes.
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LO #3 Deductible Interest
 Interest paid on a home acquisition
loan or a home equity loan secured by
a qualified residence is deductible up
to certain limits.
 For home acquisition indebtedness, the
interest is deductible only on principal
amounts up to $1,000,000.
 For home equity indebtedness, the
interest is deductible only on principal
amounts up to $100,000.
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LO #3 Deductible Interest
• Investment interest is any interest that is paid
or accrued on indebtedness properly
allocable to property held for investment.
– The deduction of investment interest expense is
limited to the net investment income for the year.
– If investment interest expense exceeds net
investment income, the non-deductible excess
expense can be carried forward to future tax
years when net investment income is available.
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LO #4 – Deductible Gifts to Charity
• A charitable contribution deduction
may be claimed as an itemized
deduction on Schedule A.
– The amount of the deduction depends on
the type of donated property and is
subject to AGI limitations.
– In order to be deductible, the donation
must be cash or other property of value.
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LO #4 – Deductible Gifts to Charity
• Depending on the nature of the item
contributed, there are three deduction
limitations for charitable contributions by
individual taxpayers: 50%, 30%, and 20% of
AGI.
– Charitable contributions to public charities are
limited to an overall 50% of AGI.
– The 30% of AGI limitation applies to contributions
of appreciated capital gain property.
– The 20% of AGI limitation is for donations of
capital gain property to a private foundation.
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LO #5 – Deductible Casualty and Theft
Losses
 A casualty is defined as an identifiable
event of a sudden, unexpected, or unusual
nature. "Sudden" means the event is not
gradual or progressive.
– In order to claim a deduction, the taxpayer must
own the damaged property.
– The taxpayer’s uninsured loss is calculated as:
Uninsured loss = loss due to casualty or theft
minus insurance recovery.
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LO #5 – Deductible Casualty and Theft
Losses
• In general, the casualty loss is the
lesser of:
– the FMV immediately before the casualty
reduced by the FMV immediately after the
casualty.
– the amount of the adjusted basis for
determining the loss from the sale or
other disposition of the property involved.
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LO #5 – Deductible Casualty and Theft
Losses
• Typically, a taxpayer reports a casualty on
the tax return in the tax year the casualty
took place. However, there are three
instances when casualty losses may be
deducted in different tax years:
– Theft losses.
– Reimbursement by insurance or otherwise
(negligence claim against an individual or
company that caused the loss).
– Disaster area losses.
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LO #5 – Deductible Casualty and Theft
Losses
• The deductible amount is limited.
First, each separate casualty is
reduced by $100. Second, the loss
must be in excess of 10% of AGI.
• Casualty losses are first reported on
Form 4684 and the net loss is carried
to the appropriate form.
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LO #6 – Miscellaneous Itemized
Deductions
• The sum of all the miscellaneous
deductions must exceed 2% of the
taxpayer's AGI before any benefit is
received.
• Unreimbursed employee business
expenses are usually the largest and are
most likely to cause the total miscellaneous
deduction to exceed the 2% floor.
– These expenses are costs incurred by the
taxpayer as a part of his or her employment but
which are not reimbursed by the employer.
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LO #6 – Miscellaneous Itemized
Deductions
• If any travel, transportation, meals, or
entertainment expenses were incurred or
some expenses were reimbursed, then the
taxpayer must complete Form 2106.
• One deduction often missed by taxpayers is
investment advice. If a taxpayer has a large
portfolio of stock or investments, the
advisory cost can be substantial.
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LO #7 – Limitation of Total Itemized
Deductions
• In the case of a "high-income" taxpayer, in the
past a portion of the itemized deductions may
have been forfeited.
– This effectively increased the tax rate of highincome individuals by denying deductions, rather
than increasing rates. The high-income limitation on
itemized deductions was phased out from 2006
through 2009
• For 2013 this limitation is back in effect.
– If a taxpayer’s AGI is above a certain amount,
itemized deductions allowed for the year are
reduced.
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