CH10 outline

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School

Iowa State University *

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301

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Accounting

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Feb 20, 2024

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MEDICAL EXPENSES, TAXES, INTEREST, AND CHARITABLE CONTRIBUTIONS CH 10 Personal expenses 1. As a general rule, are personal expenses deductible? No, they are not deductible 2. Are there exceptions? If so, are the expenses deductible for or from AGI? yes, examples are certain alimony, and traditional IRA contributions are deductible for AGI Medical expenses 1. Are medical expenses deductible? What is the threshold percentage? Explain. Yes, 7.5% exceed from AGI 2. What types of medical costs are deductible? Review Exhibit 10.1 on pg. 10-3. Prescription drugs and insulin, wheelchairs, doctors, dentists, glasses, medical, alcohol rehabilitation 3. What rules apply to cosmetic surgery? Unnecessary cosmetic surgery are not deductible medical expenses Only deductible when improves the effects of 1) a deformity arising from a congenital abnormality, 2) a personal injury and 3) a disfiguring disease. Then its deductible 4. What rules apply to nursing home expenses? Is deductible if the main reason for being in the home is to get medical care, includes meals and lodging 5. What rules apply to special school expenses? Deduction is allowed if a principal reason for sending the individuals to the school’s special resources for alleviating the infirmities, so the cost of meals and lodging, in the addition to the tuition, are deductible medical expenses 6. Capital expenditures a. Provide examples of capital expenditures for medical purposes. Dust elimination systems, elevators, and vans designed for wheelchair-bound b. What rules apply to capital expenditures? When capital expenditures are incurred for medical purposes, they must be deemed medically necessary by a physician and used primarily by the patient. In addition, their costs must be reasonable. The allowable costs are deductible in the year incurred. The full cost of certain home-related capital expenditures incurred to enable a physically handicapped individual to live independently and productively qualifies as a medical expense. These expenditures are only subject to the AGI floor; the increase in the home's value is deemed to be zero. 7. For whom may a taxpayer deduct medical expenses? A taxpayer may include medical expenses for a spouse and for a person who was a dependent at the time the expenses were paid or incurred 8. Transportation costs a. Are transportation costs related to medical care deductible? Yes, these costs include bus, taxi, train, or plane flare: charges for ambulance service, and out-of pocket expenses for the use of aoutomobile b. What is the mileage allowance? A mileage allowance of 16 cents per mile for 2021may be used instead of actual out-of- pocket automobile expenses 9. Is the cost of meals while in route to obtain medical care deductible? The cost of meals while in route to obtain medical is not deductible 10. Lodging a. When is lodging for medical care deductible? The lodging is primarily for and essential to medical care. Medical care is provided by a physician in a licensed hospital or a similar medical facility (e.g., a clinic). The lodging is not lavish or extravagant.

There is no significant element of personal pleasure in the travel. b. What is the limitation? The deduction for lodging expenses cannot exceed $50 per night for each person. The lodging deduction is allowed not only for the patient but also for anyone who must travel with the patient. 11. How are medical insurance premiums treated? Distinguish between employer, employee and self-employed taxpayers. Medical insurance premiums are included with other medical expenses subject to the AGI floor. Premiums paid by the taxpayer under a group plan or an individual plan are included as medical expenses. If an employer pays all or part of the taxpayer's medical insurance premiums, the amount paid by the employer is not included in the employee's gross income. The medical insurance premiums paid by the employer are deductible as business expenses on the employer's tax return. If a taxpayer is self-employed, insurance premiums paid for medical coverage are deductible as a business expense. ( for AGI) 12. Are medical expenses deductible in the year incurred or in the year paid? Regardless of a taxpayer's method of accounting, medical expenses are deductible only in the year paid 13. How are reimbursements treated? Reimbursement in the same year, no problem, in a different year, capital loss Health savings accounts (HSA) 1. Explain generally how health savings accounts are used. they're used in conjunction with a high deductible medical insurance policy to help reduce the overall cost of medical coverage. Converting from a low deductible to a high deductible plan can generally save an individual a considerable amount in premiums. And expenses not covered by the policy, can be paid with funds withdrawn tax free from the health savings account. 2. What are the requirements for a plan to qualify as a high-deductible plan? The annual deductible in 2020 is not less than $1,400 for self-only coverage ($2,800 for family coverage). - The annual limit in 2020 on total out-of-pocket costs (excluding premiums) under the plan does not exceed $6,900 for self-only coverage ($13,800 for family coverage). 3. How are the following items treated for tax purposes? a. Taxpayer contributions to HSA (be sure to discuss limitations) Contributions made by the taxpayer to an HSA are a deduction for AGI (i.e., the contributions reduce gross income in arriving at AGI). As a result, the taxpayer does not need to itemize to take the deduction b. Earnings on fund Earnings on HAS are not subject to taxation unless distributed, in which case taxability depends on the way the funds are used c. Distributions for medical expenses Distributions from HAS are excluded from gross income if they are used to pay for medical expenses not covered by the high-deductible policy d. Distributions not for medical expenses Distributions that are not used to pay for medical expenses are included in gross income and are subject to an additional 20 percent penalty if made before age 65, death or disability. Any distribution made by reason of death or disability and distribution made after HAS beneficiary becomes eligible for Medicare are taxed but not penalized Distinguish between a tax and a fee. Fees are not deductible unless incurred as a business expense or as an expense in the production of income. The IRS defines the word taxes as "an enforced contribution, exacted pursuant to legislative authority in the exercise of taxing power and imposed and collected for the purpose of raising revenue to be used for public or governmental purposes and not as payment for some special privilege granted or service rendered."

Explain the distinction between state and local taxes imposed directly on business versus only indirectly. Be specific as to real property taxes and income taxes. What is the overall limit on state and local taxes from 2018 to 2025? From 2018 through 2025, the decution for state and local taxes( including property taxes and either income taxes or sales taxes) is limited to a maximum of $10000 per year ($5000 if married filing separately) Property taxes 1. Are property taxes on real property deductible? Yes, state, local, and foreign taxes 2. Are property taxes on personal property deductible? No, only ad valorem 3. Are assessments for local benefits deductible? Instead of being deductible, these assessment are added to the basis of the taxpayer’s property 4. Explain how property taxes are allocated between seller and purchaser. Based on the number of days property was held for each person Are state and local income taxes deductible? If so, in what year are such taxes deducted? Deductible only as itemized deductions, even if the taxpayer’s sole source of income is from a business, rents, or royalties. Cash basis are entitled to deduct state income taxes in the year is made Are sales taxes deductible? Explain. Yes, but individuals can elect to deduct either their state and local income taxes OR their sales/use taxes paid as an itemized deduction. Not both. Taxpayers making this election can either deduct actual sales/use tax payments or an amount from an IRS table. The IRS table amount can be increased by sales tax paid on the purchase of motor vehicles, boats, and other specified items. Student loan interest 1. Is student loan interest deductible for or from AGI? For AGI 2. What is the limitation? Detail the phase-out. The maximum annual deduction is $2500. In 2021, the deduction is phased out for taxpayers with modified AGI between $700 and $85000 ($140000 and $170,000 joint returns) phased out by applying this formula. 3. Which taxpayers are disallowed the deduction? Taxpayers who are claimed as dependents or for married taxpayers filing separately Qualified residence interest 1. Define qualified residence interest. Interest paid or accrued during the taxable year on indebtedness secured by a qualified residence of the taxpayer 2. Define a qualified residence. The taxpayer’s principal residence and one other residence of the taxpayer or spouse 3. Categories of qualified residence interest a. Acquisition indebtedness i. What is acquisition indebtedness? Amounts incurred in acquiring constructing or substantially improving the taxpayer’s qualified residence that serves as security for that indebtedness ii. Is interest on acquisition indebtedness deductible? yes iii. What is the limitation? If the debt is incurred after December 15, 2017 and before January 1, 2026 acquisition indebtedness is limited to $750,000 or $375,000 for married taxpayers filing separate returns. Debt incurred on or before December 15, 2017 is limited to $1,000,000 or $500,000 for married taxpayers filing separate returns.

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These higher debt limits will apply to all homeowners after 2025, regardless of the date of borrowing. b. Home equity interest i. What is a home equity loan? Utilize the personal residence of the taxpayer as security , typically in the form of a second mortgage . ii. Is interest on home equity loans deductible? From 2018-2025 not deductible unless funds are used to improve the principal residence iii. What is the limitation? Total acquisition debt and home debt is $750,000 or less Charitable contributions 1. What is a charitable contribution? Defined a gift of property made to qualified organizations 2. What results if donor receives a tangible benefit from the contribution? The donor cannot deduct the value of the benefit 3. Discuss the IRS rules related to state and local tax credits provided to taxpayers who donate to specific state charities. If taxpayers receive a state or local tax credit greater than 15% of the payments made, the taxpayers must reduce their charitable contribution deduction by the amount of that credit. 4. Can you deduct the value of services provided to a charitable organization? No. But deductions are permitted for unreimbursed expenses related to the services rendered 5. List other items that may not be deducted as a charitable contribution. - Dues, fees, or bills paid to country clubs, lodges, fraternal orders or similar groups. - Cost of raffle, bingo, or lottery tickets. - Cost of tuition. - Payment for the right to purchase tickets for seating at an athletic event in a university stadium. - Value of blood given to a blood bank. - Donations to homeowners associations. - Gifts to individuals. - Rental value of property used by a qualified charity. 6. List examples of qualified organizations. A state or possession of the United States. - A corporation trust, community chest, fund, or foundation located in the United States and organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes or for the prevention of cruelty to children or animals. - A veteran's organization. - A fraternal organization operating under the Lodge system. - A cemetery company. 7. When is a charitable contribution deducted? The year the payment is made 8. Summarize the general limitations on charitable contribution deductions. - Fully deductible if they total 20% or less of AGI for the year - If are more than 20% AGI, deductible amount may be limited to 20, 30, 50, or 60 % of AGI depending on the type of property given and on the organization who receives the donation - Maximum deduction may not exceed 60% of AGI (100% in 2020 and 2021) 9. Ordinary income property a. Define ordinary income property. Property that if sold will result in the recognition of ordinary income b. What is the deductible amount? The fair market value of the property less the amount of ordinary income that would have been reported had the property been sold 10. Capital gain property a. Define capital gain property. Anny property that would have resulted in the recognition of long-term capital gains or code 1231 gain if had been sold by done. b. Per the general rule, what is the deductible amount? Fair market value of property

c. Discuss the term “unrelated use.” What result if tangible personalty is contributed and put to an unrelated use? Unrelated use means a use that is unrelated to the exempt purpose or function of the charitable organization. if this happen, deduction is limited to the property’s basis 11. Limitations a. Discuss the 50% ceiling. Contributions made may not exceed 50% of AGI b. Discuss the temporary 60% ceiling. For 2018-2025 the deduction limit for cash donations to 50 percent organizations is 60% rather than 50% c. Discuss the 30% ceiling. This applies to contributions of cash and ordinary income property to private nonoperating foundations that are not 50% organizations. Also to contributions of appreciated capital gain property to 50 percent organizations d. Can contributions that exceed the limits be carried forward? Yes, for five years Are gambling losses deductible? If so, to what extent? Yes, to the extent of gambling winnings claimed in gross income Summarize the rules for miscellaneous itemized deductions subject to 2% floor for years 2018 to 2025. These expenses are not deductible