Please enable JavaScript.

Coggle requires JavaScript to display documents.

Deductions FROM Adjusted Gross Income (AGI) (Itemized Deductions (State…

- - - - Medical Care:
        
        Doctor costs for physical or mental services
        
        Prescription drugs
        
        Necessary dental care costs
        
        Eye care costs (e.g., glasses and contact lenses
        
        Payments for medical insurance (including the dental and eye) with after-tax money
        
        Transportation to allowable medical care
        
        Long-term care services (26 USC § 213(d))
        
        Cosmetic Surgery not included (26 USC § 213(d)(9))
        
        Some capital expenditures (26 CFR § 1.213-1(e)(1)(iii))
        
        Long-term Care Services: Medical Care for the Chronically Ill as prescribed by a licensed health care practitioner. (26 USC § 7702B(c)(1))
        
        Chronically Ill: Anyone who is certified by a licensed health care practitioner as:
        
        Being unable to perform, without substantial help, at least two activities of daily living for at least 90 days.
        
        Needing substantial supervision to protect the person from threats to health and safety due to severe cognitive impairment (26 USC § 7702B(c)(2))
        
        Premiums paid on long-term-care insurance policies (i.e., nursing home policies) are also deductible. The deduction amount is based on the individual's age. Since the deductible amount changes due to inflation, refer to the IRS website for the current amount allowed. (26 USC § 213(d)(10))
        
        Tax payers are not allowed to deduct payment for long-term care provided by a relative or related parties. (26 USC § 213(d)(11)) See 26 USC § 152(d)(2)(A-G) for meaning of relative
        
        If a self-employed taxpayer does not qualify to take the self-employment health insurance deduction FOR AGI, he or she can include health insurance payments as an itemized deduction.
        
        Transportation | Lodging: Included in the allowable medical expenses are amounts paid while away from home primarily to receive medical care. Along with transportation costs, a $50 per night, per- individual deduction is allowed for lodging; this $50 is reserved for the patient and a companion who is needed to travel with him or her. (26 USC § 213(d)(2))
        
        Prescribed Drugs: Only prescription drugs and insulin are included in this category. Over-the-counter medications, including vitamins, are not considered medical expenditures for the purpose of calculating deductions. (26 USC § 213(d)(3))
        
        Cosmetic Surgery: Allowable if it is intended to cure a deformity, congenital abnormality, or physical injury from an accident, trauma, or a disease. (26 USC § 213(d)(9))
        
        Capital Expenditures Example: A taxpayer is advised by a physician to install an elevator in his residence so that his wife, who is afflicted with heart disease, will not be required to climb stairs. If the cost of installing the elevator is $1,000 and the increase in the residence's value is determined to be only $700, the difference of $300—the amount in excess of the value enhancement—is deductible as a medical expense. If, however, the residence's value has not been increased because of the installation, the entire cost would qualify as a medical expense.
  - - - Payment of prior year taxes owed.
      - Self-employed income tax payments made in the taxable year to the state government
        
        Once one had determined the total amount of state and local taxes paid, the deduction is limited to $10,000 ($5,000 for MFS) (2018-2025)
        (26 USC § 164(b)(6)(B))
        
        Foreign property taxes are not allowed to be deducted as an itemized deduction (2018-2025).
        (26 USC § 164(b)(6)(B))
    - - Many taxpayers, especially retirees, do not have earned income and therefore are not subject to paying state or local income taxes; however, they do pay state and local sales taxes on items that they purchase.
      - Several states do not tax earned income, so taxpayers in these states have the option of deducting state sales taxes instead.
      - The sales tax deduction has been in and out of favor, with the most recent change (2019) allowing taxpayers to choose between using the state and local income tax deduction and using the sales tax deduction—whichever provides the better benefit.
        
        If the taxpayer has saved all of his or her purchase receipts during the year, the total amounts listed on them can be used for the deduction.
        
        The taxpayer can also use a state sales tax calculator, which will provide the “average” sales tax deduction based upon the answers to a few questions.
        
        The "average" sales tax calculation is based on AGI and available on the IRS website.
    - - Real estate taxes paid during the tax year are a deductible expense. Taxes paid on real estate that is the taxpayer's responsibility can be deducted. If, however, the taxpayer owns a property but is in the process of selling it and the purchaser, responsible for paying, makes the payment, the taxpayer is not entitled to the deduction. (26 USC § 164(a))
        
        When a property is sold during the year, real estate taxes will be allocated between the seller and the purchaser. The prorated amount that the purchaser pays to the seller (as compensation for the seller having already paid the taxes) can be deducted on Schedule A in the year of the sale. (26 USC § 164(d))
        
        The prorated amount is usually found on the settlement sheets of the sale; the tax accountant needs to review these settlement sheets for other vital items that might be deductible in the year of the purchase.
        
        Example: Bill purchased a home several years ago but has recently lost his job. Bill cannot pay his real estate taxes, so his father pays them for him. Although he paid the taxes, Bill's father cannot take the deduction because the house was not his responsibility. This payment is a gift from Bill's father for which Bill can take a deduction since it is irrelevant where the money originates.
    - - Personal property tax is an ad valorem tax assessed by a state or locality on items personally owned by the taxpayer, including:
        
        Vehicles
        
        Equipment
        
        Business Furnishings
        
        Jewelry
        
        Luxury Items (e.g., boats, motor homes, and trailers)
        (26 USC § 164(a)(2))
        
        Personal Property Tax: The property tax must be an annual tax, not a single assessment, based on the value of the asset (ad valorem). (26 USC § 164(b)(1), 26 CFR § 1.164-4(c))
    - - Other taxes paid during the year may also be deductible, so it is wise to research this information each year to see what might be included.
        
        Example: In the state of Pennsylvania, every taxpayer is required to pay an emergency and municipal service tax, which varies by locality and is withheld by the employer. This is a deductible tax (usually in the amount of $52), because it is assessed by the municipality to support the 911 emergency system—or, at least, that is the concept. Another deductible tax is the Pennsylvania state unemployment insurance, which is also withheld by the employer.
        
        Example: In New Jersey, several taxes are levied on the taxpayer and withheld by the employer; they deal with long-term disability, unemployment, and occupational privilege.
      - Non-Deductable Taxes Paid:
        
        Social Security (FICA)
        
        Medicare
        
        Gift
        
        Estate
        
        Inheritance
        
        Federal Income
        
        War Profits
        (26 USC § 275)
        
        When you are in doubt, 26 USC § 275 & 26 CFR § 1.164-2 are the places to determine which taxes are not deductible.
  - - - An individual taxpayer can deduct:
        
        Interest paid or accrued on debts properly allocable to a trade of business (other than performing a service as an employee)
        
        Any investment interest of subsection (d).
        
        Qualified Residence Interest (Limited)
        (26 USC § 163(h)(2)(A-B,D))
        
        Business Purpose (Above-the-Line): The obvious allowable deduction is any interest paid on loans for business purposes—this kind of deduction would be taken as a
        
        Sole proprietor on Schedule C, as a r
        
        Rental expense on Schedule E
        
        Farm expense on Schedule F
        (26 USC § 163(h)(2)(A))
        
        Investment Interest (Schedule A): The code allows a deduction for interest paid on loans used to purchase investments. This interest deduction is taken on Schedule A and may require the filing of Form 4952.
        (26 USC § 163(h)(2)(B))
        
        A taxpayer is allowed to deduct investment interest up to the amount of income that the investment generates, with some reductions stipulated by the code:
        
        If the income from dividends and interest shown on Schedule B exceeds (the amount of investment interest paid(, then Form 4952 is not required. If, however, the investment income shown on Schedule B does not exceed the investment interest paid, or if the taxpayer has investment expenses, then the taxpayer must complete Form 4952.
        
        If the taxpayer has investment interest expenses from non-taxable investments, those expenses are not deductible because the investments will not yield taxable income.
        
        If the taxpayer claims investment expenses, such as commissions or fees for handling the investment, then the investment income must be reduced by those expenses before being considered for the interest deduction.
        
        If the interest paid involves foreign investment, then the interest is not a deductible expense.
        
        Qualified Residence Interest: Interest paid on loans in which a qualified residence is used as collateral and the proceeds of the loan were used to purchase, build, or substantially improve the residence may be deductible; they would be deducted in Schedule A.
        (26 USC § 163(h)(3)(A-B, F(i)))
        
        Debt Acquired Before 12/15/17:
        
        Only the interest paid on the qualifying acquisition indebtedness of two residences may be deductible.
        (26 USC § 163(h)(4)(A))
        
        Qualifying Acquisition Indebtedness: Debt that is used to
        acquire, construct, or substantially improve the residence.
        (26 USC § 163(h)(3)(B))
        
        Under this section, only the qualified mortgage interest corresponding to the first $1,000,000 of loans from the two residences will be deductible. Therefore, if the loan amount is above $1,000,000, the interest deduction would be allocated so that only the interest related to the aggregate loan amounts of $1,000,000 would be deducted.
        (26 USC § 163(h)(3)(B)(ii))
        
        Under this section, only the interest on qualifying acquisition indebtedness corresponding to the first $750,000 of loans from the two residences will be deductible. Therefore, if the loan amount is above $750,000, the interest deduction would be allocated so that only the interest related to the $750,000 would be deducted.
        (26 USC § 163(h)(3)(F)(i)(II))
        
        Debt Acquired After 12/15/17:
        
        In a home equity loan, a taxpayer uses the portion of the home that's already paid off as collateral to borrow additional funds.
        (26 USC § 163(h)(3)(F)(i)(I))
        
        Home Equity:The home's fair market value (FMV) minus the balance on the original mortgage.
        
        Home equity loan interest is not deductible, unless it is used to acquire, improve, or construct the residence, then the loan does qualify under acquisition indebtedness, and would be considered part of the aggregate debt interest deductible.
        
        There are also restrictions on the ability to deduct prepaid interest (a.k.a. points) which is paid to obtain a preferred mortgage interest rate.
        
        Points: Payments made to purchase a lower interest rate. They can be considered prepaid interest based on the amount of the loan.
        
        Example: Each point reflects 1% of the loan amount. Often, mortgages are quoted as "3.5% APR + 2 points," meaning that, if you want a loan with a 3.5% APR, you must pay 2% of the principal. For a $200,000 mortgage, that would require paying $4,000 of points or prepaid interest.
        
        Deducting Points: Under the normal rule, prepaid interest should be capitalized or added to the cost of the home, but an exception allows an immediate (in the year of payment) deduction of points on the original acquisition or on refinancing used to improve the residence.
        (26 USC § 461(g))
        
        Points paid on refinancing an original loan—where the proceeds are not used to improve the home—are amortized over the life of the loan.
        
        Another provision allows the deduction of mortgage-interest insurance premiums paid during the tax year. .
        
        Mortgage-interest insurance is often required when a taxpayer has not made a down payment of at least 20%, meaning the lender is providing a loan of more than 80% of the residence's value. In order to protect the lender, this insurance is required, as it will guarantee the payment of the loan if the taxpayer defaults
  - - - Personal casualty & theft losses are deductible except:
        (26 USC § 165(c)(3))
        
        Dollar Limitation: Loss must exceed $100
        (26 USC § 165(h)(1))
        
        Net casualty loses allowed is only to the amount greater than 10% of adjusted gross income (AGI).
        (26 USC § 165(h)(2))
        
        Net Casualty Loses: The amount of casualty loss exceeds casualty gains.
        (26 USC §165(h)(2)(A))
        
        When Casualty Gains Exceed Casualty Losses:
        
        Such Gains & Losses are treated as Capital assets
        (26 USC § 165(h)(2)(B))
        
        Capital Gains Treatment: Casualty gains may occur if a settlement (such as insurance) exceeds the original loss. If a casualty results in gains, they can be used to offset any other casualty losses. If these gains exceed all the casualty losses, they are considered capital gains and receive the relevant special tax treatment.
        
        From January 1, 2018, to December 31, 2025,, the code limits losses to those in federally recognized disaster areas.
        (26 USC § 165(h)(5))
        
        After 12/31/25
        
        You may deduct the lesser of:
        
        The Fair Market Value (FMV) immediately before the loss – FMV immediately after the loss, or
        
        The Adjusted Basis (see 26 CFR § 1.1011-1)
        (26 CFR § 1.165-7(b)(1))
        
        Adjusted Basis: Cost of purchasing and establishing for use of the asset. (26 USC § 1012(a))
        
        Example: Carl’s county was declared a federal disaster area due to a hurricane. Carl’s home was severely damaged by wind and rain during that event. The adjusted basis of his home is $200,000. The fair market value of his home before and after the hurricane was $250,000 and $77,000, respectively. Carl does not have hurricane insurance and will not have any type of assistance to rebuild his home. His current AGI is $375,000. What is the personal casualty loss that Carl can deduct as an itemized deduction?
        
        1. Most importantly, only personal losses from federally declared disaster areas are allowed this deduction. Carl's loss qualifies.
        (26 USC § 165(h)(5))
        
        2. The loss of the home is the lesser of the decrease in FMV ($250,000 - $77,000 = $173,000) or the adjusted basis of $200,000, so the amount of the loss is $173,000.
        (26 CFR § 1.165-7(b)(1))
        
        3. Carl must first reduce the amount of loss by the $100 floor, so the remainder is $172,900.
        (26 USC § 165(h)(1))
        
        4. Carl must file an insurance claim. He has no insurance, though, so he cannot do this.
        (26 USC § 165(a))
        
        5. Carl must reduce this loss by 10% of his AGI:
        
        $375,000 × 10% = $37,500
        
        $172,900 - $37,500 = $135,400
        (26 USC § 165(h)(2))
        
        Casualty and Theft Losses From Income-Producing Property: If a taxpayer incurs a casualty or theft loss from a property that produces taxable income, the loss amount is not subject to the 2% AGI limitation.
        
        The income-producing property includes:
        
        stocks
        
        bonds
        
        precious metals
        
        investment property
        
        receivables
        (26 USC § 165(c)(2))
        
        Before 1/1/26
        
        Did the loss occur in a federally recognized disaster area?
        
        No
        
        Not deductable
        (26 USC § 165(h)(5))
        
        Yes
        
        If a taxpayer lives in an area that has been declared a federal disaster area and determines a deductible personal casualty loss, he or she has the option to take the loss in the tax year prior to the event. This means that he or she is not required to wait until filing the current tax return.
  - - - The Contribution Base: Taxpayer's Adjusted Gross Income (AGI)
        
        Contributions are limited to 50% of the AGI. In other words, a person cannot “zero out” income by giving it all to charity.
        (26 USC § 170(b)(1)(A))
      - Qualifying Organizations: Taxpayers are allowed to deduct qualified charitable gifts. Donations must be made to such organizations as churches, schools, medical care facilities, municipal youth sporting groups, and others formed under IRC § 501 (not-for-profits) to be considered charitable. You should check the status of the organization to ensure it qualifies. (see IRS Publication 78)
      - Limitations Based on Specific Types of Gifts:
        
        Cash
        
        Appreciated property
        
        Capital gains property
        
        Cash:
        
        Public Charity & Private Operating Foundation | 60% of AGI
        (26 USC § 170(b)(1)(G)(i))
        
        Private Non-operating Foundation | 30% of AGI
        (26 USC § 170(b)(1)(B)(i))
        
        Carryover Provision: If a contribution is made greater than the limitations, the excess can be carried forward into future tax years.
        (26 USC § 170(b)(1)(B))
        
        Example: Herbert donates a sculpture to his college. The president of the college displays it in his office. The statue has an adjusted basis of $1,000 and a fair market value of $20,000. Herbert has owned the sculpture for 20 years. How much can Herbert report as a charitable contribution deduction?
        
        This asset would result in a long-term capital gain if one had sold it; therefore, Herbert can generally deduct the fair market value of $20,000.
        (26 CFR § 1.170A-1(c)(1))
        
        Since this sculpture, however, was not used for the college’s main charitable function (providing education), Herbert’s deduction will be limited to the adjusted basis of $1,000.
        If the college instead displayed the sculpture at its art gallery for students to use in their study and research, then he would be able to deduct the fair market value of $20,000.
        (26 USC § 170(e)(1)(B)(i)(I))
        
        1 more item...
        
        Capital-Gain Property:
        
        Public Charity & Private Operating Foundation | FMV <= 30% of AGI
        
        Private Non-operating Foundation | Basis <= 20% of AGI
        (26 CFR § 1.170A-1(c)(1))
        
        Ordinary-Income Property:
        
        Public Charity & Private Operating Foundation | Lesser of adjusted basis or FMV <= 50% of AGI
        
        Private Non-operating Foundation | Lesser of adjusted basis or FMV <= 30% of AGI
        (26 USC § 170(e)(1))
        
        Non-cash Contributions Stipulations
        
        When the total of non-cash contributions is greater than $500, Form 8283 must be completed and submitted to support the contributions.
        
        The items must be in good condition and usable.
        
        There must be a receipt indicating the date of the contribution and the approximate FMV, with the method of determination (appraisal, thrift shop, etc.).
        
        The method of acquisition must be provided (purchase, gift, inherited, etc.).
        
        The cost or adjusted basis of the item must be provided.
      - Receipt Required: Each organization that receives more than $250 in charitable contributions must provide a receipt for each gift. The taxpayer must also be able to provide documentation of such gifts.
      - Benefits Received Stipulation: If the taxpayer receives an item or a service in exchange for his or her contribution, the fair market value of the item or service received must be subtracted from the contribution amount.
        
        Items or services received in exchange for charitable contributions:
        
        Magazines
        
        Promotional items
        
        Entrance to sporting or theatrical events
        
        Third-party services
      - Contribution of Services: The taxpayer cannot take a charitable contribution deduction for time or personal services that he or she provides the organization.
        
        He or she can, however, deduct the out-of-pocket expenses that were made from providing those services.
        
        Example 3: If a taxpayer volunteers to mow the church lawn every week and pays for the mower's gas and maintenance, the cost of the gas and maintenance equipment are deductible contributions.
        
        Example 2: If a taxpayer drives nursing-home residents to the local shopping center each week, the mileage rate allowed is 14¢ per mile driven. The taxpayer can also count the miles driven to and from the charitable institution at the same rate. The costs of this mileage would then be deductible.
        
        Example 1: Tolls and parking fees from volunteering with charitable organizations are deductible.
      - Non-deductible "Contributions: People can be confused about what contributions they cannot deduct. A partial and common list of the organizations and payments that do not qualify for charitable status includes:
        
        Dues to fraternities, country clubs, social clubs, or lodges
        
        Contributions to political organizations or parties
        
        Contributions to political candidates
        
        Contributions to lobby groups or political action committees (PACs)
        
        Tuition paid to private or religious schools
        
        Payments to labor unions (which are not the same as union dues)
        
        Payments to municipal organizations (e.g., the local Chamber of Commerce)
        
        Contributions to foreign-based charitable organizations.
  - - - Premium: When the price of a bond is higher than its principal value.
        
        Since the premium is considered prepaid interest, the IRS allows it to be fully deductible on Schedule A.
    - - Example: Maria died last year, and her final income tax return was filed. Liam is her surviving spouse. This current tax year, a bank issued Maria an interest statement of $2,800. This interest should have been paid to Maria, but instead will be included in Liam's income tax return. Liam will be able to deduct the amount of estate tax attributed to the $2,800.
    - - Record of Gambling Wins & Losses Must Include:
        
        Date
        
        Type of wager
        
        Name & Address of the gambling establishment
        
        Name of any witnesses
        
        Amount of Gain or Losses
    - - Example: Jorge is blind. He purchases a voice-activated computer to generate required reports and records. That cost is fully deductible.
- - - - If income less than Income Thresholds
        
        20% of the lesser of:
        
        Taxable income less capital gains
        
        The qualified business income
        (26 USC § 199A(a)(1),(b)(2))
        
        If a taxpayer owns more than one business that qualifies for this deduction, they must combine all income and loss from each entity to arrive at a combined qualified business income amount before determining the deduction.
        (26 USC § 199A(b))
        
        Example: Sarah (single filing status) is a sole proprietor with $50,000 of qualified business income. Her taxable income is $90,000. Included in taxable income is $5,000 of capital gains. What is Sarah’s qualified business income deduction?
        
        First, determine the lesser of:
        
        taxable income - capital gains, or $90,000 - $5,000 = $85,000
        
        qualified business income, or $50,000
        (26 USC § 199A(a)(1),(b)(2))
        
        Then, take 20%: Sarah’s deduction would be $50,000 × 20% = $10,000.
        (26 USC § 199A(a)(1),(b)(2))
      - If income between the Income Thresholds
        
        Is the business income from one of these services?
        
        Health
        
        Law
        
        Accounting
        
        Actuarial Science
        
        Performing Arts
        
        Consulting
        
        Athletics
        
        Financial Services
        
        Brokerage Services
        
        Any trade with the principal asset of the reputation or skill of its employees
        Exceptions:
        
        Engineering
        
        Architecture
        (26 USC § 1202(e)(3)(A))
        
        No
        
        The lesser of:
        
        The greater of:
        
        50% of W-2 wages for the qualified business (usually Box 5 wages)
        
        25% of W-2 wages for the qualified business + 2.5% of the unadjusted basis of the qualified business property (i.e., the depreciable property used in the business)
        (26 USC § 199A(b)(2)(B))
        
        Unadjusted Basis: Costs, not depreciated, basis
        
        If the greater of these two amounts is less than 20% of the qualified business income, then the greater of these two amounts is reduced.
        (26 USC § 199A(e)(2))
        
        1 more item...
        
        20% of the qualified business income
        (26 USC § 199A(b)(1)(B))
        
        Example: Esteban (a single taxpayer) operates a manufacturing business as the sole proprietor. The company has a business profit of $200,000; its payroll is $70,000. The business equipment's unadjusted basis is $1,000,000. Esteban’s taxable income is $321,500. What is the qualified business income deduction that Esteban is allowed this tax year?
        
        1 more item...
        
        Yes
        
        No deduction
      - If income is greater than Income Thresholds
        
        No deduction