Itemized Deductions ()

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Itemized Deductions

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Definition 

Itemized deductions are subtractions from a taxpayers' adjusted gross income (AGI) that reduce the amount of income that is taxed.

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Most taxpayers have a choice of taking a standard deduction or itemizing deductions.

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Itemizing vs Standard 

Taxpayers should itemize their deductions if itemizing results in a lower tax than taking the standard deduction.

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To benefit from itemizing their deductions, taxpayers must have mortgage interest or a very large amount of unreimbursed medical/dental expenses compared to their income.

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Example of what could be deducted 

Qualified medical and dental expenses

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Certain taxes

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Mortgage interest

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Gifts to charity

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Casualty and theft losses, and certain miscellaneous deductions

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Rules 

Medical and dental expenses are deductible only if taxpayers itemize their deductions.

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Taxpayers can deduct only the amount of unreimbursed medical and dental expenses that exceeds 7.5 percent of their adjusted gross income (AGI).

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Qualified medical and dental expenses paid by the taxpayer during the tax year can be included for:   

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The taxpayer The taxpayer’s spouse, and Dependents (must have qualified as dependents at the time the medical services were provided or at the time the expenses were paid)

If a child of divorced or separated parents is claimed as a dependent on either parent's return, each parent may deduct the medical expenses they individually paid for the child.

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Deductible Expenses 

Taxpayers may deduct unreimbursed medical and dental expenses and eligible Long-Term Care premiums.

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Be sure the expenses were not paid with pretax dollars or reimbursed by an insurance company.

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Even vehicle mileage may be deducted if the out-of-pocket expenses were used for medical reasons, such as transportation to and from treatments.

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Exercise 

Vicky and Chuck file a joint return and claim their two children as dependents. They have an adjusted gross income of $95,400. Last year the family accumulated $6,620 in unreimbursed medical and dental expenses that included the following: Insulin for Vicky's diabetes ($320)Prescription eyeglasses for the entire family ($1,000)Chuck's smokingcessation program ($5,300). The total of Chuck and Vicky's deductible medical expenses is _____. a.

$6,620

b.

$6,300

c.

$5,620

d.

$0

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Deductible Taxes 

Taxpayers can deduct certain taxes if they itemize their deductions.

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To be deductible, the tax must have been imposed on the taxpayer and paid by the taxpayer during the current tax year.

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Taxes that are deductible include: 

State and local taxes

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General Sales Taxes

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Deductible Taxes 

Taxpayers cannot deduct both state and local income taxes and general sales taxes in the same year; they must elect to deduct one or the other.

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State and local income taxes include withheld taxes, estimated tax payments, or other tax payments such as a prior year refund of a state or local income tax that taxpayers applied to their estimated state or local income taxes

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General sales taxes can be determined by using the taxpayer's actual expenses or the state and local sales tax tables located in the Form 1040, Schedule A Instructions

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Deductible Taxes 

Real estate taxes 

estate taxes are generally reported on Form 1098, Mortgage Interest Statement, or a similar statement from the mortgage holder.

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If the taxes are not paid through the mortgage company, taxpayers should have a record of what they have paid during the year.

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Some real estate taxes are not deductible, including taxes for local benefits, itemized charges for services, transfer taxes, rent increases due to higher real estate taxes, and homeowners association fees.

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Deductible Taxes 

Personal property taxes; state or local taxes are deductible if they are: 

Charged on personal property

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Based only on the value of the personal property, and

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Charged on a yearly basis, even if collected more or less than once a year

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Mortgage Interest 

Generally, taxpayers receive Form 1098, Mortgage Interest Statement, which shows the deductible amount of home mortgage interest paid by the taxpayer.

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Only taxpayers who are legally liable for the debt can deduct the interest in the year it is paid.

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Taxpayers may have more than one mortgage or may have refinanced during the year and may have multiple Mortgage Interest Statements.

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Gifts to Charity 

A charitable contribution is a donation or gift to a qualified organization.

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Taxpayers must itemize deductions to be able to deduct a charitable contribution.

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Refer to Pub. 17 for qualified organizations

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Deductible Items 

Deductible items include:       

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Monetary donations Dues, fees, and assessments paid to qualified organizations above the value of benefits received Fair market value of used clothing and furniture in good condition Cost and upkeep of uniforms that have no general use but must be worn while performing donated services to a charitable organization Unreimbursed transportation expenses that relate directly to the services the taxpayer provided for the organization Part of a contribution above the fair market value for items received such as merchandise and tickets to charity balls or sporting events Transportation expenses, including bus fare, parking fees, tolls, and either the cost of gas and oil or a standard mileage deduction of 14 cents per mile

Taxpayers are required to keep receipts and records of all their contributions.

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Nondeductible Contribution 

Organizations that do not qualify for deductible contributions include: 

Business organizations, such as the Chamber of Commerce

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Civic leagues and associations

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Political organizations and candidates

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Social clubs

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Foreign organizations

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Homeowners' associations

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Communist organizations

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Limits on Charitable Deductions 

Taxpayers whose total contributions are more than 20 percent of their AGI may only be able to deduct a percentage of their contributions and then carry over the remainder to another tax year.

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The percentage varies, depending on the type of gift and the type of charitable organization.

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More information on these limitations is available in Publication 17.

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Records 

For each contribution, taxpayers they cannot deduct a cash contribution, regardless of the amount, unless one of the following records of the contribution is kept:  

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A bank record, such as a canceled check, a copy of the canceled check, or a bank statement containing the name of the charity, the date, and the amount A written communication from the charity, which includes the name of the charity, date of the contribution, and amount of the contribution

For unreimbursed expenses related to donated services, the taxpayer must have:   

Adequate records of the expenses Written acknowledgement from the organization and a description of the taxpayer's services Only out-of-pocket expenses that are directly related to the donated services can be deducted. The value of time or services donated cannot be deducted.

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Noncash contribution less than $250 

For each single contribution of less than $250, tell the taxpayer to keep: 

Receipt or other written communication from the organization or the taxpayer's own reliable written records for each item, showing: 

Name and address of organization

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Date and location of the contribution

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Reasonably detailed description of the donated property

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Fair market value of the donated property

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250 < contribution < 500 

For each single contribution of at least $250 and not more than $500, the taxpayer must have all the documentation described for noncash contributions less than $250.

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In addition, the organization's written acknowledgement must state whether the taxpayer received any goods or services in return and a description and good faith estimate of any such items.

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> 500 

Refer taxpayers with noncash contributions exceeding $500 to a professional tax preparer.

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Exercise 

Can taxpayers deduct contributions made directly to needy individuals?

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Exercise 

All of the following are deductible contributions that Dora made to a qualifying battered women's shelter EXCEPT _____. a.

Fair market value of the used kitchen appliances, in good or better condition, Dora donated to the shelter

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$35 of the $50 admission Dora paid for a shelter fundraising dinner (the fair market value was $15)

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Fair market value of the hours Dora spent staffing the shelter

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Dora's transportation costs for driving to and from her shift at the shelter

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Miscellaneous Itemized Deduction 

Deductions subject to the 2% limit are reported on lines 21 through 27 of Schedule A:      

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Credit or debit card convenience fees incurred when paying income tax charged by the card processor Union dues and fees Professional society dues Uniforms not adaptable to general use (See the Miscellaneous Deductions chapter in Publication 17)Small tools and supplies used for business Professional books, magazines, and journals Employment-related educational expenses (review Does Your Work-Related Education Qualify? in Publication 17, the Tax Benefits for Work-Related Education chapter) Expenses of looking for a new job in your present occupation Investment counsel fees Investment expenses Safe deposit box rental for investment documents Tax counsel and assistance Fees paid to an IRA custodian

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Miscellaneous Itemized Deduction 

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Deductions that are not subject to the 2% limit are reported on line 28 of Schedule A. Examples include: 

Gambling losses to the extent of gambling winnings

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Work-related expenses for individuals with a disability that enable them to work, such as attendant care services at their workplace

Gambling losses in excess of winnings are not deductible. The full amount of winnings must be reported as income and the losses (up to the amount of winnings) can be claimed as an itemized deduction.

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Nondeductible Miscellaneous 

The types of miscellaneous expenses that are not deductible include: 

Political contributions

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The cost of entertaining friends

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Lost or misplaced cash or property

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Travel as a form of education