CCH Essentials of Federal Income Taxation
Personal Itemized Deductions
Chapter 5
Wisconsin Income Tax Overview
http://www.revenue.wi.gov/html/taxind.html
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When to Itemize?
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Itemized Deductions > Standard Deduction
Single
$5,350
Married/Joint $10,700
Married/Separately
$5,350
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Each partner must itemize or claim Standard
Head of Household $7,850
Usually applies to homeowners
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Itemized Deductions Reported on Schedule A
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Examine Schedule A—p. 5.4
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Medical and Dental Expenses (line 4)
Taxes You Paid (line 9)
Interest You Paid (line 15)
Gifts to Charity (line 19)
Casualty and Theft Losses (line 20)
Job Expenses and Most Miscellaneous
Deductions (line 27)
Other Miscellaneous Deductions (line 28)
Total Itemized Deductions (line 29)
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Three Groups of Medical Expenses
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Prescription drugs and insulin
All medical and dental insurance premiums
paid by the taxpayer
Other medical expenses
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Prescription Drugs and Insulin
Only medications and accessories purchased on
the basis of written prescriptions generate
deductible medical expenses. Even when
prescribed, the purchase of over-the-counter
medications and vitamins does not qualify. When
prescribed for certain conditions, some items (e.g.,
distilled water, special foods) are only deductible
when they cost more than regular foods of the
same types. Even then, only the additional cost
becomes a deduction.
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Medical and Dental Insurance Premiums
Medical expenses include the full amounts of
insurance premiums covering medical and dental
care.
 Self-employed taxpayers can use 100% of the
family’s total insurance premiums to reduce gross
income before AGI.
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Taxpayers may not use this premium cost for any month
the taxpayer or spouse has eligibility under an employer’s
medical plan.
Medicare premiums and long-term care insurance
premiums are included
 Life insurance, auto medical payments, and
premiums paid through cafeteria plans are excluded
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Other Medical Expenses
General items—normal expenses
 Special medical expenses
 Nursing home care
 School for the handicapped
 Employee physicals (not employer
required
 Transportation expenses--.20 per mile
 Travel expenses--$50 per night lodging
 Capital expenditures—prescribed home
improvements
 Other—eyeglasses, hearing aids,
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dentures,wheelchairs
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MEDICAL REIMBURSEMENTS
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RARE--If an employer paid insurance plan
provides reimbursement for more than the
actual medical cost, the excess is taxable
SOMETIMES—a taxpayer takes a deduction
for medical in one tax year, but receives a
reimbursement payment from insurance in
the following tax year
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Reimbursement is taxable income only to the
effect of the tax-benefit rule
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MEDICAL DEDUCTIBILITY
AMOUNT
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7.5% of AGI rule
ONLY the amount of medical costs which are
over 7.5% of AGI are deductible
Most taxpayers with health insurance
coverage will not have sufficient medical
costs to itemize
Problems 1--5
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Deductible Taxes
Income Taxes (State, Local, or Foreign)
State
and local income taxes from W-2
Estimated tax deposits paid
Taxes paid for previous years
Foreign income taxes (if not used as a
tax credit)
Employee contributions to a state
unemployment fund
OR General Sales Tax
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see Pub. 600 for individual states
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Deductible Taxes--Real estate taxes
Ad Valorem tax—on property value
 State
and local real estate taxes
 Foreign real estate taxes
 Tenant’s share of real estate taxes paid by a
cooperative housing corporation
 Real estate taxes on condominium units
 Apportioned amount at Sale
 Personal
property taxes
 State
and local personal property taxes
 Usually tangible property which is taxed
according to its value
 May include boats, airplanes, trucks, trailers,
RVs, mobile homes, cars in some states
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Nondeductible Taxes
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Federal income taxes
Social security and Medicare taxes
Federal or state, estate, gift, or inheritance taxes
State and local license fees (driver’s, marriage,
fishing)
Sales, use, and excise taxes (gasoline, cigarette,
alcohol)
Qualified taxes paid on behalf of other taxpayers
Fines; Penalties and interest included in tax bills
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Interest Paid
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Interest on qualified personal residence
Acquisition indebtedness
Home equity indebtedness
Points
Some mortgage insurance premiums
Investment interest expense
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Interest on a Qualified Personal
Residence
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Taxpayer’s main home
Plus one secondary residence
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Vacation home, home in another city,
condominium
Interest must have been actually paid by
taxpayer
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Acquisition Indebtedness Interest
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Home mortgage interest
Interest on money borrowed to buy, build, or
extensively remodel the residence
Applies to Principal or secondary home
Debt limited to $1 million
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Or $500,000 (MFS)
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Home Equity Interest
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Sometimes referred to as Second Mortgage
Interest which is secured by taxpayer’s home
Total loan debt (acquisition + home equity)
cannot exceed FMV of the home
Debt limited to $100,000
No restrictions on use of the loan money
Form 1098 reports interest paid to a lender
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Points & Mortgage Insurance premiums
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Points are interest charges paid up-front,
usually as part of the cost of financing
Deduct on line 10 if they are reported on 1098
Deduct on line 12 if not reported—may be
amortized amounts from previous years
Mortgage Insurance premiums
for homes purchased in 2007 which are
subject to mortgage insurance
AGI phaseouts begin at $100,000 or $50,000
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Investment Interest Expense
Interest PAID to buy or keep investments
 Limited to Margin Accounts, stocks, bonds,
vacant land, partnerships, artwork, gems
 Other investments are covered under
“passive investments” or rental properties
 Expense limited to net investment income
(excess of income over expense)
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Additional amount may be carried over
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Gifts to Charity
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Must be a recognized charity, religious
organization, government, educational,
scientific or qualified institution (per IRS)
Contributions by cash or check or property
$250 or more single donation must have
written receipt
Must exclude anything of value received
as part of the gift or contribution
Pledges are not deductible until paid
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Noncash Contributions
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Auto expenses deductible at .14 per mile
Property usually at FMV
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Tangible Personal Property such as clothing,
furniture, etc. at FMV, with a statement of value
from the organization
Intangible Property such as stocks and bonds at
FMV. Also called Qualified Gain Property. Must
be held more than 1 year.
Ordinary income property at cost basis
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Nondeductible Contributions
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Political parties or political action groups
Private individuals
Clubs and lodges and social organizations
Tuitions at private schools
Raffle tickets
Foreign organizations
The value of your time or services
Total limitation of 50% of AGI (or 30%--20%)
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Casualty and Theft Losses
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Casualty events—sudden, unexpected, or
unusual event
Reduce deductible loss by
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$100 per event
And 10% of AGI
Must provide proof of casualty and FMV
Only for damages to taxpayer’s property
Usually deducted in the year of casualty
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DEDUCTIONS LIMITATION
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High income taxpayers may have their
deductions limited
If AGI is in excess of $150,500 (75,250 mfs)
the taxpayer may lose 2% of excess AGI
Includes Taxes, mortgage interest and points,
charitable contributions, misc deductions
Not limited deductions are medical,
investment interest, casualty-theft losses,
gambling losses
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