Chapter 10
Deductions and Losses:
Certain Itemized Deductions
Individual Income Taxes
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1
The Big Picture (slide 1 of 3)
• John and Susan Williamson have been
renting an apartment since they were
married.
– They now want to purchase their own home.
• Their current monthly rent is $2,000.
– They are willing to spend $2,500 per month
on an after-tax basis if necessary to purchase
their first home.
2
The Big Picture (slide 2 of 3)
• After months of house hunting, they have found the perfect
home, but they fear it may be too expensive.
• Using a standard mortgage to finance the purchase, the total
cash outlay during the first year of ownership would be as
follows.
Principal payments
Interest payments
Real estate taxes
Total cash outlay
$ 2,000
37,000
4,000
$43,000
Monthly cost ($43,000 ÷ 12) = $ 3,583
3
The Big Picture (slide 3 of 3)
• Alternatively, if they use investments to secure
financing, they could qualify for a lower interest rate.
– Reduces the interest charge from $37,000 to $35,000.
• Their Federal AGI will be $200,000 and their taxable
income will be between $160,000 and $185,000 for
the year.
– They do not itemize their deductions.
• Can John and Susan Williamson afford to pursue
their dream of home ownership?
– Read the chapter and formulate your response.
4
Itemized Deductions
(slide 1 of 2)
• Personal expenditures that are deductible from
AGI as itemized deductions include:
–
–
–
–
–
Medical expenses
Certain taxes
Mortgage and investment interest
Charitable Contributions
Miscellaneous itemized deductions
5
Itemized Deductions
(slide 2 of 2)
• Itemized deductions provide a tax benefit only
to extent that, in total, they exceed the standard
deduction amount for the taxpayer
6
The Big Picture - Example 1
Allowable Itemized Deductions
• Return to the facts of The Big Picture on p. 10-1.
• With the purchase of a home, John and Susan will be able to
itemize their deductions for the first time instead of claiming
the standard deduction.
– Assuming the home mortgage interest expense and real estate taxes
meet the requirements discussed in this chapter, they will be deducted
from AGI.
– Their total itemized deductions will exceed the amount of their
allowable standard deduction.
• Further, other qualifying expenditures (e.g., state income taxes
and charitable contributions) likewise will be deductible as
itemized deductions, providing an explicit tax benefit to the
Williamsons.
7
Medical Expenses
(slide 1 of 6)
• Medical expenses are deductible to the extent
unreimbursed medical expenses, in total,
exceed 10% of AGI
– For taxpayers age 65 and older, the threshold is
7.5% of AGI until 2017, when it increases to 10%
– Prior to 2013, the percentage threshold for regular
income tax purposes was 7.5% of AGI for all
taxpayers
8
Medical Expenses
(slide 2 of 6)
• Example of medical expense deduction
limitation:
– Amy, age 24, has AGI of $10,000 and medical
expenses of $1,500
– Amy’s medical expense deduction = $500
[$1,500 – ($10,000 × 10%)]
9
Medical Expenses
(slide 3 of 6)
• Example of medical expense deduction
limitation:
– Bob, age 67, has AGI of $4,000 and medical
expenses of $1,000
– Bob’s medical expense deduction = $700
[$1,000 – ($4,000 × 7.5%)]
10
Medical Expenses
(slide 4 of 6)
• Expenditures for:
– The diagnosis, cure, mitigation, treatment,
prevention of disease, or
– The purpose of affecting any structure or function
of the body of the taxpayer, spouse, or dependents
– Includes prescription drugs and insulin
11
Medical Expenses
(slide 5 of 6)
• Does not include the cost of items such as :
– Unnecessary cosmetic surgery
– General health items
– Nonprescription drugs
• If cosmetic surgery is deemed necessary, it is
deductible as a medical expense
– Cosmetic surgery is necessary when it ameliorates
• A deformity arising from a congenital abnormality
• A personal injury, or
• A disfiguring disease
12
Medical Expenses
(slide 6 of 6)
• Medical expenditures are deductible in year
paid
– Includes payment by check or credit card
13
The Big Picture - Example 2
Medical Expenses
14
Examples of Deductible and
Nondeductible Medical Expenses
Exhibit 10.1
15
Nursing Home Expenditures
• If primary reason for being in nursing home is
medical, costs (including meals and lodging)
qualify
• If primary purpose of placement in home is
personal, only specific medical costs qualify
(no meals or lodging)
16
Special School Expenditures
• Medical expense deduction may include the
expenses of a special school for a mentally or
physically handicapped individual
– Deduction is allowed if a principal reason for
sending the individual to the school is the school’s
special resources for alleviating the infirmities
– In this case, the cost of meals and lodging, in
addition to the tuition, is a proper medical expense
deduction
17
Capital Medical Expenditures
• May include a pool, air conditioners if they do not
become permanent improvements, dust elimination
systems, elevators, etc.
• Must be medical necessity, advised by a physician,
used primarily by patient, and expense is reasonable
• Full amount of cost is medical expense in year paid
• Maintenance on capital expenditures also medical
expense
18
Capital Improvement to Home
• Deductible medical expense only to extent cost
exceeds increase in value of home
– Appraisal costs related to capital improvements are
also deductible, but not as medical expenses
• Exception: removal of structural barriers to
home of handicapped are deemed to add no
value to home
– Thus, full amount is a medical expense
19
Medical Care for Spouse
and Dependents
• Taxpayer may deduct cost of medical care for
spouse and dependents
– Dependents need not meet gross income or joint
return tests
– Medical expenses of children of divorced parents
can be deducted by non-custodial parent even
though child is claimed as dependent of custodial
parent
20
Medical Transportation
and Lodging
• Transportation costs to and from medical care are
deductible
– Mileage allowance of 23 cents per mile (in 2015) may be
used instead of actual out-of-pocket automobile expenses
• Lodging while away from home for medical care
– Allowable amount is $50 per person per night
• If parent and/or aide needs to accompany patient,
their expenses are also deductible
21
Medical Transportation
and Lodging
• Transportation costs to and from medical care are
deductible
– Mileage allowance of 23 cents per mile (in 2015) may be
used instead of actual out-of-pocket automobile expenses
• Lodging while away from home for medical care
– Allowable amount is $50 per person per night
• If parent and/or aide needs to accompany patient,
their expenses are also deductible
22
Medical Transportation
and Lodging
• Transportation costs to and from medical care are
deductible
– Mileage allowance of 23 cents per mile (in 2015) may be
used instead of actual out-of-pocket automobile expenses
• Lodging while away from home for medical care
– Allowable amount is $50 per person per night
• If parent and/or aide needs to accompany patient,
their expenses are also deductible
23
The Big Picture - Example 9
Medical Expenses
•
Return to the facts of The Big Picture on p. 10-1.
• Because of her disabilities, John’s mother, Martha, moves in with them.
– She becomes their dependent.
• The family physician advises them that Martha needs specialized treatment
for her heart condition.
– John and Martha fly to Cleveland, Ohio, where Martha receives therapy
• Expenses in connection with the trip are as follows:
– Round-trip airfare ($250 each)
– Lodging in Cleveland for two nights ($120 each per night)
$500
$480
• Assuming that the Williamsons itemize their deductions, the medical
expense deduction is as follows:
– Transportation
– Lodging ($50 per night per person)
$500
$200
• Because Martha is disabled, it is assumed that John’s accompanying her is justified.
24
Medical Insurance Premiums
(slide 1 of 2)
• Premiums paid for medical care insurance are
deductible medical expenses
– If employer pays all or part of taxpayer’s medical
insurance premiums the amount paid by employer
is
• Not included in gross income by employee
• Not deductible by the employee as medical expense
25
Medical Insurance Premiums
(slide 2 of 2)
• For self-employed, 100% of insurance premiums are
deductible for AGI
– Includes amounts paid for taxpayer’s spouse and
dependents
– Not allowed if taxpayer is eligible to participate in a
subsidized health plan maintained by any employer of the
taxpayer or the taxpayer’s spouse
• Premiums paid for qualified long-term care insurance
are deductible medical expenses
– Subject to limitations based on age of the insured
26
Medical Insurance Premiums
(slide 2 of 2)
• For self-employed, 100% of insurance premiums are
deductible for AGI
– Includes amounts paid for taxpayer’s spouse and
dependents
– Not allowed if taxpayer is eligible to participate in a
subsidized health plan maintained by any employer of the
taxpayer or the taxpayer’s spouse
• Premiums paid for qualified long-term care insurance
are deductible medical expenses
– Subject to limitations based on age of the insured
27
The Big Picture - Example 10
Medical Insurance Premiums
• Return to the facts of The Big Picture on p. 10-1.
• John Williamson is the sole practitioner in his
unincorporated accounting firm.
• During the year, he paid health insurance premiums
of $8,000 for his own coverage and $7,000 for
coverage for his wife, Susan.
– John can deduct $15,000 as a business deduction (for AGI)
in computing their taxable income
28
Reimbursement by
Medical Insurance
• If reimbursed in same year as expense paid:
– Reimbursement offsets medical expense
– Amount deductible is excess of expenses over
reimbursement
• If reimbursed in the year after medical expenses were
paid:
– Reimbursement is income only to extent medical deduction
decreased taxable income in the earlier year (tax benefit
rule)
– If standard deduction was taken in year expenses were
paid, none of the reimbursement is included in income
29
Reimbursement by
Medical Insurance
• If reimbursed in same year as expense paid:
– Reimbursement offsets medical expense
– Amount deductible is excess of expenses over
reimbursement
• If reimbursed in the year after medical expenses were
paid:
– Reimbursement is income only to extent medical deduction
decreased taxable income in the earlier year (tax benefit
rule)
– If standard deduction was taken in year expenses were
paid, none of the reimbursement is included in income
30
Example of Medical Reimbursements
(slide 1 of 2)
• In 2014 taxpayer, age 35, paid medical
expenses = $4,200; In 2015, reimbursed $800
by insurance company
– For 2015, deductible medical expense is
$3,400 – (10% × AGI)
31
Example of Medical Reimbursements
(slide 2 of 2)
• In 2015, taxpayer, age 35, paid medical
expenses of $4,200; In 2016, reimbursed
$800 by insurance company
– For 2015, deductible medical expense is
$4,200 – (10% × AGI)
– For 2016, reimbursement is income to extent
taxpayer received a tax benefit from medical
expense deduction in 2015
32
Health Savings Accounts
• Used in conjunction with a high deductible medical
insurance policy
– Employee contributions to HSA are deductible for AGI and
earnings on funds in account are not taxable
– Deductible contributions are limited to the sum of the
monthly limitations. The monthly deductible amount is
limited to the lesser of one twelfth of:
• $3,350 for self-only ($6,650 for family coverage) in 2015
– Withdrawals from HSA are excludible to the extent used
for qualified medical expenses
33
Taxes
(slide 1 of 4)
• State, local, and foreign income and real
property taxes are deductible in the year paid
– Real property taxes do not include taxes assessed
for local benefits
• e.g., Special assessments for streets, sidewalks, curbing,
and other similar improvements
• State and local personal property taxes based
on value (ad valorem) are deductible in the
year paid
34
Taxes
(slide 2 of 4)
• Other taxes such as FICA, excise, etc., are not
deductible
– May be deductible if incurred in business or
production of income activity
• Fees are not deductible as tax
35
Taxes
(slide 3 of 4)
• Real estate taxes for year property is sold must
be apportioned between the buyer and the
seller
– Failure to correctly apportion requires offsetting
adjustments to seller’s amount realized and buyer’s
adjusted basis
36
Taxes
(slide 3 of 4)
• Real estate taxes for year property is sold must
be apportioned between the buyer and the
seller
– Failure to correctly apportion requires offsetting
adjustments to seller’s amount realized and buyer’s
adjusted basis
37
Taxes
(slide 4 of 4)
• Can elect to deduct either state & local income taxes
or sales/use taxes
– For state and local income taxes, deduct amounts paid
during year:
• Amounts withheld
• Estimated tax payments
• Amounts paid in current year for prior year’s liability
– For sales/use taxes, deduct either:
• Actual sales/use tax payments or
• Amount from an IRS table
– Table amount may be increased by sales tax paid on certain specific
items (e.g., purchase of motor vehicles, boats, etc.)
– This deduction alternative was available through 2014
• Many tax professionals believe that Congress will extend this provision
38
The Big Picture - Example 16
Deductible Property Taxes
• Return to the facts of The Big Picture on p. 10-1.
• If the Williamsons purchase their home, the real
estate taxes they pay will be deductible from AGI as
an itemized deduction.
• If they also pay personal property tax on their car, the
payment may be only partially deductible.
– In their state, the motor vehicle registration tax is 2% of the
value of the vehicle plus 40 cents per hundredweight.
– The Williamsons car is valued at $20,000 and weighs 3,000
lbs.
– Their annual registration fee is $412.
• $400 (2% of $20,000) is deductible as a personal property tax.
• The remaining $12, based on the weight of the car, is not
deductible.
39
Interest Expense
• Deduction of interest expense is limited to:
–
–
–
–
Interest on qualified student loans
Investment interest
Qualified residence (home mortgage) interest
Business interest
• Personal interest expense is not deductible
40
Interest on Qualified
Student Loans
• Deductible for AGI, subject to limits
– Maximum deduction is $2,500 per year
– Deduction is phased out for taxpayers with
modified AGI (MAGI) between $65,000 and
$80,000 ($130,000 and $160,000 on joint returns)
– Not allowed for those claimed as a dependent or
for married filing separate returns
41
Qualified Residence Interest
(slide 1 of 4)
• Interest on indebtedness secured by the
principal residence and one other residence
(qualified residences)
• Interest must be on acquisition indebtedness or
home equity loans
42
Qualified Residence Interest
(slide 2 of 4)
• Acquisition indebtedness: amounts incurred to
acquire, construct, or substantially improve the
qualified residences
– Interest paid on aggregate acquisition indebtedness
of $1 million or less ($500,000 for married, filing
separately) is deductible as qualified residence
interest
43
Qualified Residence Interest
(slide 3 of 4)
• Home equity indebtedness: loans secured by
qualified residences
• Interest is deductible only on portion of home
equity loan that does not exceed the lesser of:
– $100,000 ($50,000 for married, filing separate), or
– FMV of home – acquisition indebtedness
44
Qualified Residence Interest
(slide 4 of 4)
• Thus, maximum loans on qualified residences
that will produce qualified residence interest is
$1.1 million
• Interest on mortgage debt exceeding $1.1
million or on mortgage debt relating to
nonqualified residence (e.g., second vacation
home) is nondeductible personal interest
45
The Big Picture - Example 21
Acquisition Indebtedness
• Return to the facts of The Big Picture on p. 10-1.
• John and Susan will need to borrow at least a portion of the
purchase price of their new home
– A standard mortgage likely will qualify as acquisition indebtedness.
– However, the interest on the acquisition indebtedness will be fully
deductible only if
• The amount of the mortgage is $1 million or less (assuming they file a
joint return), and
• The mortgage is secured by the home.
• Recall that they are also considering what appears to be a less
expensive route of using their investments to secure the debt.
– If they choose this alternative, the interest will not be deductible as
qualified residence interest because the loan would not be acquisition
indebtedness.
46
Interest Paid For Services
(slide 1 of 2)
• “Points” paid for the use or forbearance of
money qualify as deductible interest
– Cannot be a service charge if they are to qualify as
deductible interest
• Points generally must be capitalized and
amortized over the life of loan
47
Interest Paid For Services
(slide 2 of 2)
• Exception: Points paid in the acquisition or
improvement of principal residence
– Entire amount of such points are deductible in the
year paid
– Points paid to refinance an existing home
mortgage must be capitalized and amortized over
the life of the new loan
48
Interest Paid For Services
(slide 2 of 2)
• Exception: Points paid in the acquisition or
improvement of principal residence
– Entire amount of such points are deductible in the
year paid
– Points paid to refinance an existing home
mortgage must be capitalized and amortized over
the life of the new loan
49
Investment Interest
• Investment interest on loans whose proceeds
are used to purchase investment property may
be deductible
– e.g., Investment property may include stock,
bonds, and land held for investment
• Deduction of investment interest expense is
limited to net investment income
50
Other Interest Expense Limits
• Interest expense payable to related parties
• Interest expense incurred to purchase tax
exempt securities
• Others
51
Other Interest Expense Limits
• Interest expense payable to related parties
• Interest expense incurred to purchase tax
exempt securities
• Others
52
Classification of Interest Expense
• Whether interest is deductible for AGI or as an itemized
deduction (from AGI) depends on purpose of indebtedness
– If related to a business or the production of rent or royalty income
• Interest is deductible for AGI
– If incurred for personal use, such as qualified residence interest
• Deduction is reported on Schedule A, Form 1040 if taxpayer itemizes
• However, interest on a student loan is a deduction for AGI
– If the taxpayer incurs debt in relation to his or her employment
• Interest is considered to be personal, or consumer, interest
53
Charitable Contributions
(slide 1 of 2)
• Individuals and corporations may deduct
contributions made to qualified domestic
organizations
• Contributor must have donative intent and
expect nothing in return
– If contributor receives tangible benefit, the FMV
of such benefit reduces the amount of the
charitable contribution deduction
54
Charitable Contributions
(slide 2 of 2)
• Exception to tangible benefit rule
– Allows deduction of 80% of amount paid for the
right to purchase athletic tickets from colleges and
universities
55
Contribution of Services
• No deduction is allowed for the contribution of
services
– Unreimbursed expenses related to the services are
deductible
– Out-of-pocket transportation costs or a standard
mileage rate of 14 cents per mile are deductible
– Deductions are also permitted for transportation,
reasonable expenses for lodging, and the cost of
meals while away from home incurred in
performing the donated services
56
Nondeductible Items
• The following items may not be deducted as
charitable contributions:
– Dues, fees, or bills paid to country clubs, lodges, fraternal
orders, or similar groups
– Cost of raffle, bingo, or lottery tickets
– Cost of tuition
– Value of blood given to a blood bank
– Donations to homeowners associations
– Gifts to individuals
– Rental value of property used by a qualified charity
57
Qualified Organizations
• To be deductible, contributions must be to a
qualified domestic nonprofit organization or
state or possession of U.S. or any subdivisions
thereof
– Many (but not all) qualified domestic charities are
listed in IRS Publication #78
58
Qualified Organizations
• To be deductible, contributions must be to a
qualified domestic nonprofit organization or
state or possession of U.S. or any subdivisions
thereof
– Many (but not all) qualified domestic charities are
listed in IRS Publication #78
59
Record-Keeping Requirements
• No deduction is allowed for charitable
contributions unless the taxpayer has
appropriate documentation and substantiation
– The specific type of documentation required
depends on the amount of the contribution and
whether the contribution is made in cash or
noncash property
– Special rules may apply to gifts of certain types of
property (e.g., used automobiles) where Congress
has noted taxpayer abuse in the past
60
Ordinary Income Property
• Defined: assets that would produce ordinary
income or short-term capital gain if sold
• Contribution amount
– FMV of asset less ordinary income (or STCG)
potential; generally the lower of adjusted basis or
FMV
61
Capital Gain Property
• Defined: assets that would produce long-term
capital gain or Section 1231 gain if sold
• Contribution amount
– Generally FMV of asset
62
Exceptions to FMV Deduction
of Capital Gain Property (slide 1 of 3)
• Private nonoperating foundations
– Deduction for contributions to private
nonoperating foundations must be reduced by the
amount of long-term capital gain potential
– Thus, the contribution deduction is limited to the
adjusted basis
63
Exceptions to FMV Deduction
of Capital Gain Property (slide 2 of 3)
• For contributions of tangible personalty
– The charitable deduction may limited to the
adjusted basis if the asset contributed is not used in
charity’s exempt function
– This reduction generally does not apply if
• The property is, in fact, not put to an unrelated use, or
• At the time of the contribution, it was reasonable to
anticipate that the property would not be put to an
unrelated use by the donee
64
Exceptions to FMV Deduction
of Capital Gain Property (slide 3 of 3)
• For contributions of certain types of
intellectual property
– Contribution deduction is limited to the lesser of
the taxpayer’s basis in the property or the
property’s fair market value
– Includes patents, certain copyrights, trademarks,
trade names, trade secrets, know-how, and some
software
65
Example of Contributions
of Tangible Personalty
• Taxpayer contributes painting to local charity:
FMV $100,000 and adjusted basis $10,000
– If charitable organization is a local museum that
hangs the painting for patrons to view, taxpayer
has $100,000 contribution deduction
– If charitable organization is a local church that
sells the painting immediately to obtain funds for
its operation, taxpayer has $10,000 contribution
66
Charitable Contribution
Limitations (slide 1 of 4)
• 50% limit
– In no case can the charitable contribution deduction for a
year exceed 50% of the taxpayer’s AGI
– Contributions of cash, ordinary income property, and
certain capital gain property (where the contribution
amount is adjusted basis) are subject to the 50% limit (50%
assets)
– Generally, applies to contributions to public charities
• e.g., Churches, schools, hospitals, and Federal, state, or local
governmental units
• Also applies to private operating foundations and certain private
nonoperating foundations
67
Charitable Contribution
Limitations (slide 2 of 4)
• 30% limit
– Charitable contribution deduction for certain assets
cannot exceed 30% of the taxpayer’s AGI
• Applies to 30% assets which are:
– Capital gain property for which the contribution amount is
FMV
– Certain contributions to private nonoperating foundations
68
Charitable Contribution
Limitations (slide 3 of 4)
• 30% limit
– Taxpayer can elect to treat capital gain property as
50% assets by limiting the amount of such
contributions to their adjusted bases
– Referred to as the reduced deduction election
• Enables the taxpayer to move from the 30% limitation
to the 50% limitation
69
Charitable Contribution
Limitations (slide 4 of 4)
• 20% limit
– Certain contributions of capital gain property to
private nonoperating foundations
70
Charitable Contributions Carryover
• Contributions that cannot be taken in current
year due to limitations may be carried forward
for 5 years
– Contributions carried forward retain their
classification
• e.g., If the contribution originally involved 30%
property, the carryover will continue to be classified as
30% property in the carryover year
– When using carryovers, current contributions are
used first, then carryovers used on a FIFO basis
71
Example of Charitable Contribution
AGI Limits
• Taxpayer, AGI $100,000, contributed $40,000
cash and long-term stocks with a FMV of
$35,000 and a basis of $8,000 to a University
• 50% limit = $50,000
30% limit = $30,000
– Amount of deduction = $50,000 (40,000 cash +
10,000 stock)
– Contribution carryforward = $25,000 stock (as
30% asset)
72
Miscellaneous Itemized Deductions
• Some expenditures are deductible only to the extent
they exceed 2% of AGI
• Examples include:
–
–
–
–
–
–
–
Professional dues
Uniforms
Tax return prep fees
Job-hunting costs
Certain investment expenses
Hobby losses
Unreimbursed employee expenses
73
Misc. Itemized Deductions Not Subject
to 2% of AGI Floor
• Examples include:
– Gambling losses to the extent of gambling
winnings
– Impairment-related work expenses of a
handicapped person
– Deduction for repayment of amounts under a claim
of right if more than $3,000
– Unrecovered investment in an annuity contract
when annuity ceases by reason of death
74
Itemized Deduction Phaseout
(slide 1 of 3)
• For higher income taxpayers, the otherwise
allowable itemized deductions are reduced by
3% of the amount AGI exceeds the applicable
threshold amount
– The reduction in itemized deductions is limited to
80% of affected itemized deductions
75
Itemized Deduction Phaseout
(slide 2 of 3)
• The limitation applies to the following frequently encountered
itemized deductions:
–
–
–
–
Taxes
Home mortgage interest, including points
Charitable contributions
Unreimbursed employee expenses and all other expenses subject to the
2%-of-AGI floor
• Certain itemized deductions are not subject to phaseout
including:
–
–
–
–
Medical expenses
Investment interest expense
Wagering losses, and
Casualty and theft losses
76
Itemized Deduction Phaseout
(slide 3 of 3)
• The applicable threshold amounts in 2015 for the itemized
deduction phaseout are as follows:
Filing status
AGI Threshold
Single
$258,250
Married, filing jointly
309,900
Head of household
284,050
Married, filing separately
154,950
• These threshold amounts are adjusted for inflation annually
77
Refocus On The Big Picture (slide 1 of 2)
•
•
Because qualified residence interest and real estate taxes are deductible, the aftertax cost of a home purchase is reduced by the tax savings associated with these
itemized tax deductions.
Given the Williamsons’ projected taxable income, they are in the 28% Federal and
6% state tax brackets for an aggregate marginal tax bracket of 34%.
– As a result, the after-tax cost of financing the purchase of the home will be:
•
Nondeductible principal payments
Deductible qualified residence interest and
real estate taxes [($37,000 + $4,000) X (1- .34)]
Total
$ 2,000
27,060
$29,060
After-tax monthly cost ($29,060 ÷ 12)
$ 2,422
Because the Williamsons will be able to itemize their deductions if they purchase a
new home and will be able to deduct most of their monthly house payment, the
home purchase will be affordable.
78
Refocus On The Big Picture (slide 2 of 2)
• What if the Williamsons choose to finance the purchase of
their home using their investments as security for the loan?
– What may appear to be a cost-effective approach ends up being more
costly on an after-tax basis.
• With this approach, the interest expense is not deductible.
– It is not qualified residence interest or investment interest.
• Therefore, the after-tax cost of financing the home using this
approach makes the home unaffordable.
Nondeductible principal and interest payments
Deductible real estate taxes [$4,000 X (1 - .34)]
Total
$37,000
2,640
$39,640
After-tax monthly cost ($39,640 ÷ 12)
$ 3,303
79
If you have any comments or suggestions concerning this
PowerPoint Presentation for South-Western Federal
Taxation, please contact:
Dr. Donald R. Trippeer, CPA
trippedr@oneonta.edu
SUNY Oneonta
© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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