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Slide 1: Income Tax Fundamentals 2009 edition Gerald E. Whittenburg Martha Altus-Buller Student’s copy ©2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 1
Slide 2: First itemized deduction on Schedule A  Medical expenses allowed:  • For spouse, self and dependents • For amounts spend that exceed 7.5% of AGI  See pp. 5-1 and 5-2 for list of expenditures that qualify • Medical insurance premiums deductible • Health, dental, optical • Long term care insurance premiums deductible  Specified limits that change each year based on taxpayer’s age  Health insurance for self employed is deduction for AGI 2 ©2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license.
Slide 3:  HSA is an instrument that allows funds to be contributed to an account similar to an IRA • Employee must participate in ‘high-deductible’ medical insurance plan • Distributions to cover medical expenses are not taxed or penalized • Earnings not taxed • Employee contributions to an HSA is a deduction for AGI ©2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 3
Slide 4:   Deductions for certain taxes are allowed Taxes are deductible, fees are not • Taxes are imposed by a government to raise revenue for general public purposes • Fees are charges with a direct benefit to person paying  Examples of deductible taxes • State and local income taxes [deductible in year paid] • Sales/use tax  Use either actual or sale taxes from IRS tables • Real property taxes • Personal property taxes  Example of nondeductible taxes include estate taxes, Social Security taxes and excise taxes ©2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 4
Slide 5:  Examples of deductible interest include • • • • • Qualified mortgage interest and points Mortgage interest prepayment penalties Amortized points on refinanced mortgage Investment interest Education loan interest  Consumer (personal) interest is not deductible ©2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 5
Slide 6:  Qualified residence interest is mortgage interest that is deductible • Used to secure/construct first or second residence  Limited to loans up to $1,000,000 • Home equity loans  Limited to loans up to $100,000  Deductible even if proceeds used for personal purposes  Loan origination fees [called ‘points’ because they are quoted as percentage points of principal] are deductible • Refinancing points must be capitalized & amortized  Deducted over life of loan  Reported on 4562 and carries to Schedules A or E ©2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 6
Slide 7: Charitable contributions are allowed as a deduction  Can contribute cash or property  • Out of pocket expenses are deductible • $.14/mile for mileage deduction • Value of free use of taxpayer’s property is not deductible To be deductible, donation must be made to a qualified recipient [see page 5-11 for list]  IRS publishes Cumulative List of Organizations, Pub #78  ©2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 7
Slide 8:  Taxpayers should document charitable contributions • Cannot claim deduction of $250 or more unless taxpayer has written acknowledgment from organization • Beginning in 2007, need bank record or cancelled check even if contribution is less than $250  Even amounts put in plate at church, for example, should be in form of a check If property contributed exceeds $500, must attach Form 8283  If property contributed exceeds $5,000, formal appraisal must be submitted  ©2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 8
Slide 9:  Deduction for a donated vehicle limited to the amount for which the charity sells the vehicle • Same rule applies to boats and planes  Charitable organization sends a Form 1098C to taxpayer showing resale information • Or certifies that no resale amount may be provided as vehicle donated to needy individual • Taxpayer must attach 1098C to tax return  Taxpayer may claim estimated value if charity uses donated auto rather than selling it ©2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 9
Slide 10: Deductions are allowed for casualty and theft losses  To be classified as casualty loss, event needs to be sudden, unexpected or unusual   Casualty losses are deductible in year of occurrence • If theft, need to prove (for example, by police report) • Exception for disaster area losses [can amend prior  Limit to personal casualty loss is: Loss - $100 floor and then in excess of 10% of AGI ©2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star 10 logo, and South-Western are trademarks used herein under license. year return and deduction in that year and file for refund]
Slide 11: There are two types of miscellaneous deductions “Those not limited to amount over 2% AGI” , for example: • Handicapped “impairment related work expenses” • Certain estate taxes • Amortizable bond premiums • Gambling losses to extent of gambling winnings • Terminated annuity payments ©2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star 11 logo, and South-Western are trademarks used herein under license.
Slide 12:  “Those limited to amount over 2% AGI”, common examples include • Unreimbursed employee expenses • Reimbursed employee expenses reimbursed under a non• • • • • • accountable plan Union dues Tax preparation fees Safety deposit box Professional journals/subscriptions Investment expenses Job hunting fees ©2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star 12 logo, and South-Western are trademarks used herein under license.
Slide 13:  Ability to deduct total itemized deductions is phased out for high income taxpayers • 1% x (AGI - threshold amount)  Threshold amount  $ 79,975 for MFS or  $159,950 (all other filing types)  Phase-out calculation  (AGI – Threshold Amount) x 1% but limited to  26-2/3% x all itemized deductions except medical, investment interest expense, casualty losses and wagering losses ©2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star 13 logo, and South-Western are trademarks used herein under license.
Slide 14:  For taxpayer and each dependent equals $3,500 per person • Phased out for high income taxpayers  1/3 of 2% per $2,500 [$1250 if MFS] over threshold  See p. 5-21 for limits based on filing status • Phase out limited to 2/3 of exemption amount ($2,333) ©2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star 14 logo, and South-Western are trademarks used herein under license.
Slide 15: Can take deduction for moving expenses if an employee or self-employed  To qualify for deductible moving expense  • Must change job sites • Move can be with new or existing company • Travel from new job site to old residence must be longer by at least 50 miles than the distance from old job site to old residence • Must work 39 weeks in the next 12 months  Or, if self-employed, must work 78 weeks in the next 24 months ©2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star 15 logo, and South-Western are trademarks used herein under license.