VITA: 01/17/09
Lesson 19: Itemized Deductions
Winter 2008
Kristina Shroyer
Lesson 20: Itemized Deductions
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What is an Itemized Deduction?
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Most taxpayers have a choice between taking the standard deduction or itemized
deductions whichever is better for them
Itemized Deductions are also subtracted from a taxpayers AGI.
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However, itemized deductions are based on specific personal expenses of the taxpayer
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To determine if a taxpayer MUST Itemize
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use the Interview tips in Tab F (Page F-1) of your Volunteer Resource Guide (we talked
about this in the last lesson)
Read the tip on page 20-2
If you think a taxpayer may benefit from itemizing
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Enter the qualified expense in the TaxWise software
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will be different for each taxpayer based on a number of factors
taxpayer must keep records of these personal expenses
Taxwise will automatically select the larger of the standard deduction and the itemized
deduction for the taxpayer's return
You can also use the interview tips on Page F-2 and F-3 of your Volunteer Resource
Guide
How are Itemized Deductions Determined/Reported?
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Using Schedule A (Page 219 in Appendix C of Pub 4491-W)
Once the Itemized Deductions are calculated (if greater than the standard deduction)
they go on line 40 of Form 1040
Lesson 20: Itemized Deductions
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What expenses to Itemized Deductions Include?
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Medical and Dental Expenses
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Certain Taxes Paid
Mortgage Interest and certain Investment Interest
Gifts to Charity
Other Miscellaneous Deductions
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Medical and Dental Expenses (Sch A lines 1-4)
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Taxpayers can deduct on Schedule A only the amount of deductible medical and dental
expenses that EXCEED 7.5% of their AGI
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So multiply the taxpayer's AGI by .075 and only medical expenses in excess of this are
deductible
Let's say a taxpayer had AGI of $100,000 and medical expenses of $5000 - None would be
deductible
Which Medical Expenses are Deductible?
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Whose Expenses are covered?
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What type of Expenses are covered?
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Expenses paid by the taxpayer for: the taxpayer, the taxpayer's spouse, and any
dependents claimed at the time the medical services were provided or paid for
Look at the second tip
Unreimbursed medical and dental expenses and eligible Long Term care premiums
the expenses can NOT be paid with pre-tax dollars or reimbursed by an insurance
company
See Publication 17 Page 143 for a general checklist
Look at Exercise page 20-3
Lesson 20: Itemized Deductions
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Taxes that May be Deductible
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Look at page146 of Publication 17 for more info on these
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Real Estate Taxes (line 6)
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state foreign or local based on the assessed value of the taxpayer's real
property
To claim real estate taxes, the taxpayer must be legally liable for the taxes
and must pay them during the year
These are either reported on Form 1098 or can be found on a taxpayers
yearly property tax assessment
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Make sure the taxpayer has a record of what they actually PAID during the
year, just because the taxes were assessed doesn't mean they were paid
State and Local Income Taxes (line 5)
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We'll talk about Sales Taxes when we go over the supplement
The taxes that can be deducted for this are state and local tax withheld on a
W-2 (CA State W/H and CA SDI), other state or local tax withheld,
estimated state or local tax payments and state tax paid this year for an
earlier year
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The key it is it is state and local taxes paid this year
Lesson 20: Itemized Deductions
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Taxes that May be Deductible (continued)
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General Sales Taxes instead of State and Local Income Taxes
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We were just talking about deducting State and Local Income taxes on line 5
In 2008 a taxpayer can elect to deduct state and local general SALES taxes instead of
state and local income taxes
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This would only be done if state and local sales taxes results in a higher deduction for the taxpayer than
state and local income taxes
If the taxpayer makes this election
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This material is in the publication 4991-X Supplement we handed out
Check box b on line 5 of Schedule A
Get the amount of state and local sales taxes to enter on line 5 from
1.
2.
Actual receipts (provided by the taxpayer)
Optional Sales Tax Tables in the Schedule A instructions
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Get these from the IRS website www.irs.gov - Page A-11 through A-13
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First find CA in the first optional table, and based on the taxpayer's filing status and exemptions find an amount
Some states and localities get to use optional tables to add additional taxes to the amount from the first table
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For Los Angeles County you will use one of the Optional Tables, Table A
Add this amount to what you calculated from the first table
Taxpayers using this method may also add state and local sales tax paid on certain specified items
such as motor vehicles, boats, homes, and home building materials
There is a worksheet to do this with on page A-4 of the Schedule A instructions
Example: What would the sales tax number be for a taxpayer from LA county with
$55,000 in AGI and one exemption ($678 + $92
Lesson 20: Itemized Deductions
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Taxes that May be Deductible (continued)
General Sales Taxes instead of State and Local Income Taxes
(cointinued)
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This material is in the publication 4991-X Supplement we handed out
How to compute Sales Tax using the Optional Sales Tax Tables instead
of actual receipts
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Optional Sales Tax Tables in the Schedule A instructions
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Get these from the IRS website www.irs.gov - Page A-11 through A-13
General Idea on how it works (there's a little more to it in the worksheet but just follow the
instructions):
1.
2.
First find CA in the first optional table, and based on the taxpayer's filing status and
exemptions find an amount
Some states and localities get to use optional tables to add additional taxes to the amount
from the first table
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For Los Angeles County you will use one of the Optional Tables, Table A
Add this amount to what you calculated from the first table
Taxpayers using this method may also add state and local sales tax paid on certain
specified items such as motor vehicles, boats, homes, and home building materials
There is a worksheet to do this with on page A-4 of the Schedule A instructions
Lesson 20: Itemized Deductions
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Taxes that May be Deductible (continued)
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Look at page146 of Publication 17 for more info on these
Personal Property Tax (line 7)
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Foreign Income taxes (line 8)
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Payments based on the value of personal property
Most common one – property tax paid with the DMV
registration…you can only deduct the property tax portion (the part
paid based on the value)
Sometimes these will show up on a 1099-DIV
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Anything other than this is probably out of scope for VITA
If they do you can deduct them here or take them as a credit
whichever is better
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The credit will be discussed in lessons coming up
Exercise page 20-5
Lesson 20: Itemized Deductions
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Interest
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Types of Interest that are deductible (lines 10-15)
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Home Mortgage Interest
Points (paid in the form of interest)
Certain Types of Investment Interest
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This is outside the scope of VITA and taxpayers with this should be referred to a professional tax
preparer
Home mortgage interest is normally reported on Form 1098
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Points paid in connection with the purchase of a home are also normally reported on Form 1098
Points paid with a refinance are often shown on the closing statement for the refinance
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Only taxpayers legally liable for the debt can deduct the mortgage interest in the year
it was paid
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Taxpayers may have multiple mortgages and may have refinanced one or more times
during the year
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Make sure you ask and have all the Form 1098s and closing papers if needed
For mortgage interest to be fully deductible it must fit into one of the categories on
page 151 of Publication 17 (let's read these out loud)
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There is a flow chart that you can use on page 152 also
Now look at the example on page 20-6
Lesson 20: Itemized Deductions
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Interest (continued)
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Home Mortgage Interest and Points Reported on Form 1098
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Taxpayers can deduct interest on their main home and on a second home if
the interest on both is deductible based on the rules.
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Go on line 10 of Sch A
Home: house, condo, mobile home, houseboat etc.
What about points?
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Points are charges paid by the borrower/seller/both to secure a loan.
Points go by different names (you'll see them listed as such on closing statements)
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See list on page 20-6
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Only points paid as a form of interest (for the use of money) can be deducted on Sch A
Points paid on a loan to buy or build a taxpayers main home may be fully deductible in
the year paid
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Most common ones I see are: Loan Origination Fees and Prepaid Interest
Points paid for a refinance (in most situations) or any reason other than the above must
be deducted over the live of the mortgage (usually 15-30 years)
Points paid for specific services such as appraisal fees, preparation fees etc. are not
interest and are not deductible
Use flow chart in Publication 17 – Page 154
Lesson 20: Itemized Deductions
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Interest (continued)
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Qualified Mortgage Insurance Premiums
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What type of interest is not deductible
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Also called PMI – Private Mortgage Insurance
Taxpayers can deduct PMI premiums paid or accrued
during the tax year on line 13 of Sch A
The qualifications for PMI to be deductible are on page 207
See list on page 20-7
Exercise Page 20-7
Lesson 20: Itemized Deductions
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Gifts To Charity (lines 16-19 – Sch A)
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Taxpayers can deduct contributions to qualifying organizations
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Qualifying organizations are shown on page 20-8
Page 20-8 also shows deductible items and non-deductible items in
regard to charity
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In particular look at the non-qualifying organizations and non-deductible
items
Some that come up a lot at our firm – taxpayers think they can deduct and
cannot
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Political Donations
Girl Scout Cookies! (You received a cookie so you can't deduct the value of
the cookie, only the amount attributable to charity)
The dinner part of a charity dinner
Look at page 159 of publication 17 – look at Column 1 of the table at
the top of the page for a good list of deductible charitable
contributions
Lesson 20: Itemized Deductions
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Gifts To Charity (lines 16-19 – Sch A - continued)
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What limits apply to Charitable Donations?
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If a taxpayer's charitable contributions are more than 20% of their AGI the deduction will be limited,
the limited amount can be carried forward for a possible deduction in future years
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If you enter the contributions correctly in TaxWise it should apply this limitation for you
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Non Cash and Cash contributions will be entered separately
What records should be kept for cash donations?
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Taxpayers MUST keep records to prove the amount of cash and non-cash charitable donations they
made
If a taxpayer did not keep records they cannot deduct the charitable contribution
They should keep one of the following types of records for EACH CASH donation:
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There are also limits depending on the type of gift – the organizations you do will fall under the 50%
additional limits
A bank record such as a canceled check or a bank statement showing the name, date, and amount of
the check
A written communication from the charity which must include: the charity's name, the date of the
contribution, and the amount of the contribution
What records must be kept for out of pocket charitable expenses?
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The taxpayer must have:
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Adequate Records of the Expenses
The organization's written acknowledgement of the volunteer services
The value of someone's TIME can NOT be deducted
Only expenses directly related to the donated services can be deducted
Lesson 20: Itemized Deductions
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Gifts To Charity (lines 16-19 – Sch A - continued)
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What records must be kept non-cash charitable contributions?
There are different records required for non-cash donations that are less
than $250, non-cash donations that are $250 or more but not more than
$500 and non-cash donations of more than $500
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First lets look at required records for donations less that $250 on page 20-10
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Receipt or written communication from the charity is required and must show
the information listed
Deductions are not allowed for charitable contributions of clothing and
household items if the items are not in good used condition or better
Required records for donations of at least $250 but not more than $500
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Records must be kept for each donation
Taxpayer needs all the records required for donations less than $250 AND
The organizations written acknowledgement must state whether the taxpayer
received any goods or services in return for the donation as well as a good
faith estimate of the value of the donation
Non-cash donations exceeding $500 must be referred to a professional tax
preparer
Exercise page 20-10
Lesson 20: Itemized Deductions
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Casualty and Theft Losses
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Outside the scope of VITA
Miscellaneous Deductions
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Two Types
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Those subject to the 2% limit
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Those not subject to the 2% limit
Deductions Subject to 2% limit (see list on page 20-11)
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Notice a lot of this are unreimbursed professional or job related expenses
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We'll talk more about unreimbursed business expenses in the next section
Deductions NOT subject to the 2% limit
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NOT very many!
Gambling losses to the extent of winnings
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meaning only miscellaneous deductions of this type in excess of 2% of the Taxpayer's AGI are
deductible
Gambling losses in excess of winnings are outside the scope of VITA
Work related expenses for individuals with a disability that enable them to work
Let's take a look at the Miscellaneous Deductions section of the Schedule A
to see where these deductions will be entered and how it will work