Itemized Deductions - Schedule A

Itemized Deductions - Schedule A

Medical deductions

Taxes

Interest

Charity

Casualty and theft losses

Miscellaneous expenses

A reminder about itemized deductions

Average itemized deductions taken by tax payers

Medical deductions

Practically need one foot in grave to get meaningful deductions

Can only deduct portion of expenses above 7.5 percent of AGI

Can only count as an expense portion not reimbursed by insurance

Example with AGI of $50,000

Total medical expenses	$10,000
Insurance reimbursement	- 6,000
	------------
Unreimbursed medical expenses	4,000
7.5 percent of AGI	- 3,750
	------------
Deductible medical expenses	250

You can only deduct $250 of a total of $10,000 in expenses!

Items that qualify for medical deduction

• Medical insurance premiums
• Medical service fees (for doctors, dentists, lab fees)
• Prescription medicines
• Psychiatric care at medical center
• Transportation related to medical care
• New item in 1996 : Long-term care insurance premiums

Items that don't qualify for medical deduction

• Health club dues
• Weight loss programs
• Life insurance or disability insurance
• Nonprescription medicines
• Cosmetic surgery
• Toiletries

Taxes

No AGI floor like medical expenses

Can deduct

• State income taxes
• State and local property taxes
• State and local personal property taxes (typically imposed on autos)

Can not deduct

• Federal income taxes
• Sales taxes
• Assessments associated with a service (e.g., garbage disposal)
• Assessments associated with an improvement (e.g., assessments for sewage improvements increase basis in property and are not deductible)
• Fees such as driver's license fee

Interest

No AGI floor like medical expenses

Cannot deduct personal interest

Interest associated with credit cards or autos used for personal activities is not deductible

Mortgage interest

Generally can deduct mortgage interest expense on up to two homes

Deductible interest generally limited to the interest on $1.1 million in principal

• $1 million in primary mortgage principal
• $100,000 in home equity principal

Points deductible when paid on initial mortgage

Points must be amortized over life of mortgage on refinanced mortgages

If you own a second home which you rent out fully (no private use) include the mortgage interest for that home, along with other expenses, on Schedule E

Your lending institution reports the interest you paid on Form 1098

Investment interest

Typically interest associated with a margin account at a brokerage

Deductible investment interest limited to investment income

Investment income can include capital gains income

But you can not achieve favorable treatment on capital gains income and then fully apply these gains to offset investment interest (applies only to high income individuals)

Charity

No AGI floor like medical deductions

May be limited if you give more than 20 percent of your AGI

Deductible contributions include money or property you give

• Religious organizations
• Federal, state and local governments
• Nonprofit schools and hospitals
• Recognized civic organizations such as the Red Cross, Salvation Army, Boy Scouts, Girl Scouts
• Out of pocket expenses when you volunteer (transportation, incidentals)

Nondeductible contributions include money or property you give

• Labor unions and chambers of commerce
• Lobbying organizations
• Political parties
• Schools for tuition
• Value of your time
• Contributions given to individuals

If the contribution is more than $250 you should get a receipt

Can only deduct your contribution less the fair market value of whatever you received

If you give $100 and receive a $25 dinner, your deductible contribution is $75

Casualty and theft losses

Only good for major uninsured losses

Subject to AGI floor like medical deductions

Can only deduct unreimbursed losses above 10 percent of AGI

Each loss also subject to a $100 floor

Example

Your $95 watch is stolen by a pickpocket

No deduction since below $100 floor

Example of more sizable loss

Auto accident damage	$2,000
Insurance reimbursement after your $1,000 deductible	- 1,000
	---------
Your net loss	1,000
IRS deductible	- 100
	---------
"Deductible" loss after $100 tax floor	900
10 percent of AGI of $30,000	- 3,000
Deductible loss after 10 percent AGI limit	0

No deduction in this case since your "deductible" loss of $900 is less than the 10-percent-of-AGI floor of $3,000

Miscellaneous expenses

Subject to AGI floor like medical deductions

Can only deduct expenses above 2 percent of AGI

Primarily used for unreimbursed job expenses

Example

Unreimbursed job expenses	$1,800
2 percent of AGI of $25,000	- 500
	----------
Deductible job expenses	1,300

A reminder about itemized deductions

Your AGI is a very important number in many deductions

You should work to reduce your AGI by contributing to retirement accounts

Business and rental losses can also reduce your AGI

Itemizing increases your chances for an audit

Itemizing is a hassle

Only itemize if your itemized deductions are greater than the standard deduction

Unless you have a home with a mortgage and property taxes, it probably won't pay to itemize

75 percent of taxpayers don't itemize

Average itemized deductions taken by tax payers

1992 data from the IRS

AGI $000	Medical	Taxes	Interest	Charity	Misc. Exp.
$25 - 30	$4,200	$2,200	$5,400	$1,300	$2,600
$30 - 40	3,000	2,600	5,400	1,400	2,700
$40 - 50	3,600	3,300	5,800	1,500	3,200
$50 - 75	4,600	4,400	6,800	1,700	3,900
$75 - 100	5,200	6,200	8,900	2,400	6,400

These are average data only

• Don't just plug these numbers into your return
• You must have documentation to support all deductions

If your figures are above these numbers you may increase your chances of an audit

But don't give up a valid deduction just because it's above average