BA 128A -Agenda 2-22
• Questions from lecture
• Answers on the web Ch1-6, Ch7 will be
posted after section
• Review Section - Wednesday 5-6:30?
• Office hours change - Thursday 8-9:30am
or 5-6:30pm
• Review
• Assignment - I7-39,45,48
• Additional - I7-36,37,46,47
Itemized deductions
• Deduct only if it exceeds standard deduction
• Subject to phase out - 3% of amount exceeds
threshold. Phase out amount cannot be > 80% of
total itemized deductions other than medical,
investment interest, casualty losses, and wagering
losses.
• Qualified medical expenses
• Taxes
• Qualified interest
• Casualty and theft losses
• Miscellaneous deductions
• Charitable Contributions
Qualified Medical Expenses
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Deduct the amount that exceed 7.5% of AGI
No deduction it it is reimbursed
Include taxpayer, taxpayer’s spouse and dependent
Support test OK even if gross income test is not
Parent who paid for the child’s medical expenses
are deductible regardless of the claiming of
dependency exemption
• Self employed - can deduct 45% as for AGI, rest
from AGI
Qualified Medical Expenses
• Diagnosis, cure, mitigation, treatment and
prevention of disease - for special ailment
• Medical procedures involving function or
structure of body - except cosmetic surgery unless
for deformity correction
• Transportation for medical reasons - lodging limit
$50 a night, $0.1 a mile, 50% of meals
• Long term care
• Capital expenditures for medical care - add a
swimming pool, remove physical barriers
• Medical insurance premiums
Timing of medical payments and
reimbursements
• Deduct when paid
• Prepayment - deduction has to be deferred
until the year the care is rendered unless
prepayment is a requirement
• Medical insurance reimbursement - reduced
expenses in the year of payment. For
reimbursements in in subsequent year need to include in income the taxable
benefit derived from previous years
Taxes
• Deductible - state and local income, real property,
personal property taxes, fees not deductible
• Personal property taxes - based on value and
imposed on annual basis
• Real property taxes - apportion based of time of
ownership instead of the paying party
• Nondeductible - Federal taxes, state and local
sales taxes, employee social security taxes
• Usually deduct when paid
• State income tax refund is included in income to
the extent of tax benefit
• Self-employement tax - deduct 1/2 as for AGI
Classification of interest
• Active trade and business - for AGI
• Passive activity - e.g. rental activity - for
AGI - Chapter 8
• Investment interest - offset investment
income - from AGI
• Personal interest - not deductible
• Qualified residence - from AGI
• Student loan - for AGI
Borrowed funds
• Interest deductibility depends on use of
funds
• Deposit in bank - investment interest
• If loan was applied to a variety of uses and
is partially repaid - order of reallocation of
interest expenses is 1) personal expenditures
2) investment expenditures 2) passive
activity expenditure on real estate 4) trade
or business expenditure
Investment Interest
• Investments - generates portfolio of income such as
interest, dividends, annuities and royalties, not
personal or business, not passive and not tax exempt
securities
• Net investment income = Investment income investment expenses. Investment income include
net gain to the extent that net gain exceeds net
capital gain
• Taxpayer can elect to include net capital gain in
investment income that will be subject to regular tax
rates
• Investment expenses only deductible to the extent
that it is >2% of AGI - ie this is the amount used to
calculate net investment income
Qualified residence interest
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Principal + secondary residence
Secured by home
Acquisition indebtedness - up to $1,000,000
Home equity interest - can only deduct the amount
applied to the lesser of FMV of qualified residence
in excess of acquisition indebtedness or $100,000
• Points are like prepaid interest - can automatically
deduct all points for only principal residence
• Qualified residence - personally used the property
for the greater of 14days or 10% of rental days
during the year
Student loan interest
• For higher education expenses
• FOR AGI deduction
• Maximum deductible amount = $1000 in
1998.
• Phased out ratably for AGI between 40,000
and 50,000
Miscellaneous Itemized
deduction
• Allowed to deduct in excess of 2% of AGI
• Non reimbursed employee expenses
• Investment expenses - subject to 2% of AGI
limitation
• Cost of tax advice
Other timing and deduction issues
• Discount notes
• Related party transactions