cch federal taxation basic principles chapter 8 deductions: itemized deductions ©2003, cch...

CCH Federal TaxationBasic Principles

Chapter 8Deductions:

Itemized Deductions

©2003, CCH INCORPORATED4025 W. Peterson Ave.Chicago, IL 60646-6085800 248 3248http://tax.cchgroup.com

CCH Federal Taxation Basic Principles 2 of 23

Chapter 8 Exhibits 1. Medical Expenses

2. Medical Care

3. Medical Transportation and Lodging

4. Medical Insurance Premiums

5. Qualified Residence Defined

6. Qualified Residence Debt—Limitations

7. Qualified Residence Debt—Prorating Interest

8. Prorating Principal Residence Interest—Example

9. Methods of Prorating Principal Residence Interest—Solution

10. Charitable Deductions

11. Charitable Deduction Without Category 3 Election—Example

12. Charitable Deduction With Category 3 Election—Example

Chapter 8, Exhibit Contents


Medical Expenses

Deductible medical expenses include medical care, medical transportation and lodging, and health insurance premiums.

Chapter 8, Exhibit 1


Medical Care

The diagnosis, cure, mitigation, treatment, or prevention of disease, or

To affect any structure or function of the

body

Chapter 8, Exhibit 2a


Inpatient hospital care. Includes meals and lodging. Meals consumed by patients during hospital stays are not subject to the 50% exclusion.

Medicines and drugs. All require a prescription.

Medical Care

Chapter 8, Exhibit 2b


Capital expenditures—general. Capital expenditures may qualify for an immediate medical deduction (subject to the 7.5% floor) if prescribed by a physician to alleviate a physical or mental defect or illness. Examples:

Seeing Eye dogs Wheelchairs Eyeglasses

Medical Care

Chapter 8, Exhibit 2c


Capital expenditures—home improvements. Qualified expenditures for home improvements and additions may be deductible to the extent that their costs exceed any increase in the fair market value of the existing structure. Examples:

Adding wheelchair ramps Widening doorways to create wheelchair access Adding a swimming pool prescribed by a physician to

alleviate some ailment such as partial paralysis Installing an elevator to provide handicap access

between floors

Medical Care

Chapter 8, Exhibit 2d


Medical Transportation and Lodging

Mileage. If mileage was primarily for and essential to medical care, the taxpayer may choose between

the standard mileage allowance of 12 cents per mile (for year 2003), plus parking and tolls, or

actual expenditures.




Meals during medical-related travel. Meals consumed during medical-related transportation are NOT deductible even if the transportation is primarily for and essential to the rendition of medical care.




Lodging during travel—nondiscretionary. A medical expense deduction is allowed for lodging (but not meals) while away from home primarily for and essential to medical care. This lodging deduction is limited to amounts that are not lavish or extravagant and cannot exceed $50 per night for each individual. (Code Sec. 213(d)(2).) The deduction may also be claimed for a person who must accompany the individual seeking medical care.

Examples: Lodging during away-from-home travel and Out-of-town lodging incurred by a friend or relative while

the patient is in the hospital

Chapter 8, Exhibit 3c



Lodging during travel—discretionary. If a doctor prescribes an operation or other medical care and the taxpayer chooses, purely for personal considerations, to travel to an out-of-town locality for medical treatment, the lodging is not deductible.

Chapter 8, Exhibit 3d


Medical Insurance Premiums

For 2003, self-employed persons may deduct

100% of medical insurance premiums “FOR” AGI



Qualified Residence Defined

A principal residence and Any second residence that is for personal use

Unusual principal residences. A qualified principal residence may include a houseboat trailer, airplane, automobile, or mobile home, if it has kitchen and

bathroom facilities.



Qualified Residence Debt—Limitations

For acquisition loans, qualified residence debt is the least of the following four amounts: 1. Adjusted purchase price as of the end of the tax year

2. Average loan balance (a lesser amount than the original acquisition loan if a refinancing has occurred)

3. Fair market value of the residence on the date of the acquisition loan

4. $1 million



Qualified Residence Debt—Limitations

For home equity loans, the limitation is the lesser of thefollowing two amounts:

1. Either The lesser of the adjusted purchase price as of the end of the tax year or the fair market value of the house on the date of the home equity loan minus the average balance of the ACQUISITION LOAN

2. $100,000



Qualified Residence Debt—Prorating Interest

Reg. §1.163-10T(d) and (e) provides two methods forprorating interest between qualified and excess debt:

1. The simplified method prorates the combined amount of

interest on the acquisition and home equity loans.

2. The exact method prorates interest on the acquisition loan, then prorates interest on the home equity loan.

Any interest remaining after prorating deductible interest isconsidered nondeductible consumer interest.



Prorating Principal Residence Interest – Example

FACTS:

On December 31, 200X, the adjusted purchase price of Roger’s principal residence is $105,000. Roger has two debts secured by the residence. The beginning and ending balances and interest payments on each debt during 200X and the fair market value of the residence on the date each debt was secured are as follows:

Type of Debt Date of Debt

FMV on Date of Debt

01/01/0X Loan

Balance

12/31/0X Loan

Balance

200X Interest

Paid

Acquisition Loan June 1995 $ 95,000 $82,000 $78,000 $8,000

Home Equity Loan May 1999 $140,000 $41,000 $39,000 $4,800

QUESTION: Determine the amount of deductible and nondeductible interest under the simplified and exact methods of Reg. §1.163-10T(d) and (e).



Simplified Method of Prorating Interest – Solution(a) Interest paid on acquisition loan $ 8,000

(b) Interest paid on home equity loan 4,800

(c) = (a) + (b) Total interest paid during the tax year 12,800

(d) Adjusted purchase price at end of tax year 105,000

(e) = Lesser of: Average balance of original loan or $1,000,000

Average balance of qualified acquisition loan amount for the tax year. [(82,000 + 78,000) 2]

80,000

(f) = Lesser of: Average balance of home equity loan or $100,000

Average balance of qualified home equity loan amount for the tax year. [(41,000 + 39,000) 2]

40,000

(g) = (e) + (f) Combined average balances 120,000

(h) = [Lesser of (d) or (g)] (g)

Portion of interest paid that is deductible[(Lesser of $105,000 or $120,000) $120,000]

87.5%

(i) = (c) x (h) Deductible interest 11,200

(j) = (c) - (i) Nondeductible personal interest $ 1,600Chapter 8, Exhibit 9a


(k) FMV of house on date of acquisition loan $ 95,000

(l) FMV on date of home equity loan 140,000

(m) = Least of: (d) (e) (k), or $1,000,000

Limit on acquisition loan. The least of: (d) = $105,000 adjusted purchase price, (e) = $80,000 average balance of acquisition loan (k) = $95,000 FMV on date of acquisition loan $1,000,000

80,000

(n) = (m) (e) Portion of interest on acquisition loan that is deductible ($80,000 limit $80,000 average loan)

100%

(o) = (a) x (n) Deductible interest on acquisition loan ($8,000 x 100%) 8,000

(p) = Lesser of [Lesser of (d) or (l)] - (e) $100,000

Limit on home equity loan. The lesser of: The lesser of:

(d) = $105,000 adjusted purchase price or

(l) = $140,000 FMV on date of home equity loan minus

(e) = $80,000 average balance of acquisition loan $100,000

25,000

(q) = (p) (f) Portion of interest on home equity loan that is deductible

($25,000 limit $40,000 average loan)

62.5%

(r) = (b) x (q) Deductible interest on home equity loan ($4,800 x 62.5%) 3,000

(s) = (b) – (r) Nondeductible “personal” interest ($4,800 - $3,000) $ 1,800

Exact Method of Prorating Interest – Solution



Charitable DeductionsCategory Charity Property Valuation Deduction Limit

1 Public O.I. Basis 50% AGI

2 Private O.I. Basis Lesser of: 30% AGI, LESS: category 3 contribution value before limitation or 50% AGI, LESS: category 1 and 3 contribution value before limitation

3 Public Long-term Capital Gain

(LTCG)

Fair Market Value (FMV)

Lesser of: 30% AGI or 50% AGI, LESS: category 1 and 2 deductions

Special Category 3 election: Basis 50% AGI, LESS: category 1 and 2 deductions

4 Private Long-term Capital Gain

(LTCG)

Lesser of: Basis FMV

Least value of the following: 20% AGI 30% AGI, LESS: category 3 deductions 50% AGI, LESS: category 1, 2, and 3 deductions

Special treatment for qualified appreciated stock (i.e., stock traded publicly that has appreciated in value)

FMV (no need to use the lower basis)

(Same as above)

Contributions that exceed deduction limitations can be carried forward up to 5 years.



Charitable Deduction Without Category 3 Election—Example 1Facts: AGI = $40,000, and the following charitable contributions were made:

Charity Property Amount

Frick Museum (private) Cash $10,000

Church (public) Cash 3,500

Boy Scouts (public) Cash 500

United Way (public) Cash 1,000

State University (public) Stock (held long-term) Basis: $1,000; FMV: $11,000

Determine the amount of charitable deductions without the special category 3 election.

Solution

Category Contribution Valuation Limitation Deduction Carryover

1 $ 5,000 ($1,000 + $3,500 + $500)

50% x $40,000 = $20,000 $5,000 $0

2 $10,000 Lesser of: (30% x $40,000) - $11,000 = $1,000 50% x $40,000 - ($5,000 + $11,000) = $4,000

The lesser amount is 1,000.

1,000 9,000

3 $11,000 Lesser of: 30% x $40,000 = $12,000 50% x $40,000 - ($5,000 +$1,000) = $14,000

The lesser amount is $12,000.

11,000 0

Totals $17,000 $ 9,000Chapter 8, Exhibit 11


Charitable Deduction With Category 3 Election—Example 2

Charity

Frick Museum (private)

Church (public)

Boy Scouts (public)

United Way (public)

State University (public)

Property

Cash

Cash

Cash

Cash

Stock (held long-term)

Amount

$10,000

3,500

500

1,000

Basis: $1,000; FMV: $11,000

Facts: AGI = $40,000, and the following charitable contributions were made:

Determine the amount of charitable deductions with the special category 3 election.



Charitable Deduction With Category 3 Election—Example 2


Category

1

2

3

Contribution Valuation

$5,000 ($1,000 + $3,500 + $500)

$10,000

$1,000 (using basis rather than FMV, with election)

Limitation

50% x $40,000 = $20,000

Lesser of:(30% x $40,000) – $1,000 =

$11,000

50% x $40,000 – ($5,000 + $11,000) = $14,000 The lesser amount is $11,000.

50% x $40,000 – ($5,000 + $10,000) = $5,000

Deduction

$5,000

10,000

1,000

$16,000

Carryover

0

0

0

0

Solution

Totals

Observations:1. A category three election requires recomputing the limitations for categories two and four! 2. The category three election usually is not favorable if the basis of the long-term capital gain property is substantially lower than its FMV.

cch federal taxation basic principles chapter 8 deductions: itemized deductions ©2003, cch...

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