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Chapter 8
Deductions: Itemized Deductions
SUMMARY OF CHAPTER
Personal expenses deductible from adjusted gross income are referred to as itemized
deductions and are deductible on Schedule A of Form 1040. No deduction is allowed unless the
Code specifically states that the personal expense is deductible.
Medical Expenses
¶8001 Requirements for the Deduction
An itemized deduction is allowed for expenses paid for the medical care of the taxpayer,
spouse, or a dependent. The deduction is allowable only for medical expenses actually paid during
the year, regardless of when the expenses were incurred or the method of accounting used by the
taxpayer. The expense must not be compensated for by insurance or otherwise. Only such medical
expenses as exceed 10 percent of adjusted gross income for the year are deductible (7.5 percent for
those 65 or older through 2016).
¶8015 Medical Care Expenses
The term "medical care" is broadly defined to include amounts paid for the diagnosis, cure,
mitigation, treatment, or prevention of disease. Further, expenses paid for "medical care" include
those paid for the purpose of affecting any structure or function of the body or for transportation
primarily for and essential to medical care. Payments for unnecessary cosmetic surgery to improve
the patient's appearance are not deductible medical expenses.
¶8025 Capital Expenditures
Capital expenditures for home improvements and additions which are added primarily for the
medical care of an individual generally qualify for a medical expense deduction only to the extent
that the cost of the improvement or addition exceeds any increase in the value of the affected
property. The entire cost of additions or improvements that do not increase the value of the home is
deductible as a medical expense.
¶8035 Transportation and Lodging Expenses
Expenses paid for transportation primarily for and essential to the rendition of medical care
are expenses paid for medical care. However, the transportation deduction does not include the cost
of any meals while away from home receiving medical treatment. In lieu of a deduction for actual
expenses incurred, a standard mileage rate of $.19 per mile for 2016 is allowed in computing the
cost of operating an automobile where transportation expenses are deductible as medical expenses.
¶8045 Hospital and Other Institutional Care
The cost of in-patient hospital care, including the cost of meals and lodging, is an allowable
deduction for medical care. Expenses for care in an institution other than a hospital (e.g., a nursing
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CCH Federal Taxation—Basic Principles
home, home for the aged, or therapeutic center for alcohol or drug addiction) may qualify as a
deduction for medical care.
¶8055 Medicines and Drugs
Only amounts paid for insulin and prescription medicines or drugs are deductible as a medical
expense. Pharmaceutical items acquired without a prescription do not qualify even though they are
used for a particular illness, disease, or medical condition. Cosmetics and toiletries are not
considered medicines and drugs.
¶8065 Medical Insurance Premiums
A medical expense deduction is allowed for premiums paid for medical care insurance
(including contact lens insurance), subject to the 10 percent limitation. Amounts paid as selfemployment tax or as employee tax for hospital insurance under the Medicare program are not
medical expenses.
Taxes
¶8101 Summary of Deductible Taxes
The following taxes are deductible as itemized deductions: (1) state, local, and foreign real
property taxes; (2) state and local personal property taxes; and (3) state, local, and foreign income
taxes. Taxpayers are allowed to deduct the greater of state and local income taxes or state and local
sales taxes.
¶8105 Property Taxes
Local, state, and foreign real property taxes are generally deductible only by the person upon
whom they are imposed in the year in which they were paid or accrued. Real property taxes are
taxes imposed on interests in real property and levied for the general public welfare. Such taxes do
not include taxes assessed against local benefits.
¶8115 Income Taxes
State or city taxes, including franchise taxes measured by net income, are deductible as
itemized deductions by individuals. State and local income taxes on interest income that is exempt
from federal income tax are also deductible. However, state and local income taxes on other
exempt income are not deductible.
Interest
¶8201 Requirements for Deduction
Interest incurred in a trade or business is deductible; however, interest incurred to purchase
assets on which the income is tax-exempt is not deductible.
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¶8205 Personal (Consumer) Interest
Generally, interest on personal loans is nondeductible by individual taxpayers.
¶8210 Qualified Education Loan Interest
An interest deduction of up to $2,500, deductible for AGI, is allowed for interest paid on
qualified education loans.
¶8215 Qualified Residence Interest
Taxpayers may deduct interest on loans secured by first or second homes. Qualified residence
interest is deductible to the extent of interest on up to $1 million of acquisition indebtedness. In
addition, up to $100,000 of home equity loan interest is deductible as qualified residence interest.
¶8225 Investment Interest
The deduction for investment interest is limited to the amount of net investment income.
Interest disallowed is carried forward and treated as investment interest in the succeeding tax year.
Interest disallowed is allowed in a subsequent year only to the extent the taxpayer has net
investment income in the subsequent year.
¶8235 Trade or Business Interest
Most interest payments incurred in a trade or business are fully deductible for tax purposes.
Trade or business interest payments are deductible in computing adjusted gross income.
¶8245 Passive Investment Interest
Passive investment interest is the interest incurred on money borrowed to invest in a passive
activity. The amount of passive investment interest is subtracted from any gain or added to any loss
from the passive activity.
¶8255 Payments for Services
Payments for specific services which the lender performs in connection with the borrower's
account are not deductible as interest.
¶8265 Prepaid Interest
Taxpayers on either the accrual or cash method of accounting are allowed to deduct prepaid
interest only over the period of the loan to the extent the interest represents the cost of using the
borrowed funds during each year. Interest deducted in advance from the proceeds of a loan is not
considered paid until the loan payments are made.
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CCH Federal Taxation—Basic Principles
Charitable Contributions
¶8301 Qualified Organizations
To be deductible, a contribution must be made to a qualified organization (public or private
charities). No deduction is allowed for amounts paid to an organization which has a substantial part
of its activities the carrying on of propaganda or otherwise attempting to influence legislation. Gifts
made to individuals generally are not deductible. For a contribution to be deductible, a donor
cannot earmark it for the benefit of a specific individual.
¶8315 Valuation of Charitable Donations
If a charitable contribution is made in property rather than money, the amount of the
contribution is normally the fair market value of the property at the time of the contribution.
¶8325 Limitations on Charitable Contributions
An individual's charitable contribution deduction is subject to 20 percent, 30 percent, and 50
percent of adjusted gross income (AGI) limitations.
¶8355 Filing and Substantiation Requirements
The deduction for contributions is made on Schedule A of Form 1040 as an itemized
deduction. A monetary donation of less than $250 must be documented by a cancelled check, bank
record, or written communication from the charity. No deduction is allowed for any charitable
contribution of $250 or more unless the taxpayer substantiates the contribution by a
contemporaneous written acknowledgment of the contribution from the donee organization.
Personal Casualty and Theft Losses
¶8501 Casualty Losses
Personal casualty and theft losses are deductible as itemized deductions while business
casualty and theft losses are deductible from gross income. Any uninsured loss arising from fire,
storm, shipwreck, or other casualty is allowable as a deduction in the year in which the loss is
sustained. Each personal casualty loss must be reduced by $100. The deduction is limited to that
portion of the net loss which is in excess of 10 percent of AGI.
¶8525 Theft Losses
Any loss arising from theft is treated as sustained in the year in which the taxpayer discovers
the loss. Theft losses of personal property are limited by the same $100 and 10 percent of AGI
reductions that apply to casualty losses.
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Miscellaneous Itemized Deductions
¶8601 Employee Business Expenses
All employee business expenses other than reimbursed expenses are deductible as
miscellaneous itemized deductions. Moreover, most miscellaneous itemized deductions are
allowable only to the extent that the total in this category exceeds 2 percent of adjusted gross
income.
¶8603 Reimbursed Employee Expenses
If an employee makes an adequate accounting to the employer and reimbursement equals
expenses, neither the reimbursement nor the expenses have to be shown on the employee's tax
return.
¶8605 Unreimbursed Employee Expenses
Major categories of employee expenses, which, if unreimbursed, must be taken as
miscellaneous itemized deductions subject to the 2 percent of AGI floor, include: outside
salesperson expenses, transportation expenses, travel expenses, entertainment expenses, jobseeking expenses, and qualifying educational expenses.
¶8655 Job-Seeking Expenses
Job-seeking expenses incurred by an individual are deductible for tax purposes if the
individual is employed in a particular trade or business and is looking for work in the same trade or
business. Job-seeking expenses are deductible from AGI as miscellaneous itemized deductions
subject to the 2 percent of AGI limitation.
¶8665 Education Expenses
Education expenses are deductible by an individual taxpayer if incurred to maintain or
improve skills required in a present job or to meet expressed requirements of an employer or
applicable law to retain an employment position or rate of compensation. However, even though
either of these two requirements are met, education expenses still are not deductible if the education
is necessary to meet minimum education requirements of the individual taxpayer's trade or business
or the education qualifies the individual for a new trade or business. If the taxpayer is selfemployed, all education expenses are deductible for AGI. If the taxpayer is an employee, all
education expenses (except for those qualifying for the higher education expense deduction) are
deductible from AGI as miscellaneous itemized deductions subject to the 2 percent floor.
¶8675 Work Clothes and Uniforms
Taxpayers may deduct the cost and upkeep of special equipment or work clothes only if they
are required as a condition of employment and are not suitable for everyday use. Such expenses are
miscellaneous deductions subject to the 2 percent of AGI limitation.
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CCH Federal Taxation—Basic Principles
¶8680 Tax Counsel and Return Preparer Fees
Expenses paid or incurred by a taxpayer for tax counsel or expenses paid or incurred in
connection with the preparation of returns or in connection with any proceedings involved in
determining the extent of the tax liability or in contesting a tax liability are deductible as
miscellaneous itemized deductions, subject to the 2 percent floor.
Investment Expenses
¶8701 Rent and Royalty Expenses
Rent and royalty income expenses are deductible for AGI. Rents generally involve payments
for use of land, buildings, and other tangible property whereas royalties usually involve payments
for copyrights, patents, and oil, gas, or mineral property.
¶8745 Miscellaneous Investment Expenses
Investment-related expenses allowed under Code Sec. 212 are deductible from adjusted gross
income as miscellaneous itemized deductions, subject to the 2 percent of AGI limitation. Rent and
royalty expenses, however, are an exception and are deductible for adjusted gross income.
¶8775 Wagering Losses
Losses sustained during the year on wagering transactions are allowed as a deduction but only
to the extent of the gains during the year from wagering. If gambling is conducted as a business, the
losses are deductible as business losses, but only to the extent of gains. Losses of nonprofessional
gamblers are nonbusiness losses and are deductible (to the extent of gains) only if itemized. They
are not subject to the 2 percent floor on miscellaneous itemized deductions.
¶8785 Unrecovered Investment in Annuity
If a taxpayer dies before the entire cost of an after-tax annuity is recovered tax-free, any
unrecovered cost of the annuity can be deducted as a miscellaneous deduction on the taxpayer's
final tax return.
ANSWER TO KEYSTONE PROBLEM—CHAPTER 8
(¶8605.) Under Assumption 1: If an individual is self-employed, all trade or business expenses
are deductible for adjusted gross income (AGI). Since Ralph is self-employed, $8,000 of business
expenses incurred by Ralph are deductible for AGI. The $8,000 of business expenses consists of
$4,000 in travel expenses, $2,000 in transportation expenses, $800 (50% of $1,600) in meal
expenses, and $1,200 (50% of $2,400) in entertainment expenses. Only 50 percent of meal and
entertainment expenses is deductible for tax purposes.
Under Assumption 2: The excess expenses of $2,000 ($10,000 - $8,000 reimbursement)
would normally be deductible, subject to the 2% of AGI limitation. However, only 50% of the meal
and entertainment expenses are deductible. Since 80% ($8,000/$10,000) of all expenses were
reimbursed, 20% of all expenses were not reimbursed. That means that $4,000 × 20% = $800 of
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meal and entertainment expenses were not reimbursed, and 50% ($400) of that would not be
deductible. $2,000 excess expenses - $400 nondeductible meal and entertainment expenses =
$1,600 of deductible expenses ($400 meal and entertainment and $1,200 of travel and
transportation), subject to the 2% of AGI limitation.
ANSWERS TO QUESTIONS—CHAPTER 8
Topical List of Questions
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
Medical Expenses Limits (¶8001)
Medical Expenses: Capital Expenditures (¶8025)
Medical Transportation Costs (¶8035)
Deductible Medical Expenses (¶8035, ¶8045, ¶8055)
Deductible Medical Expenses (¶8035, ¶8045, ¶8055, ¶8065)
Personal Property Taxes (¶8105)
State and Local Income Tax Refunds (¶8115)
Deductible Taxes (¶8101, ¶8105, ¶8115)
Deductible Taxes (¶8101, ¶8105, ¶8115)
Net Investment Income Definition (¶8225)
Prepaid Interest (¶8265)
Charitable Organizations: Categories (¶8301)
Private Operating v. Nonoperating Foundation (¶8301)
Charitable Services Deduction (¶8315)
Unrelated Use Charitable Contributions (¶8325)
Charitable Contributions Carryovers (¶8325)
Charitable Contributions Appraisals (¶8355)
Casualty Loss Definition (¶8501)
Theft Losses (¶8525)
Employee Expenses (¶8601)
Nonaccountable Reimbursement Plans (¶8603)
Job-Seeking Expenses (¶8655)
Education Expenses (¶8665)
Answers to Questions
Medical Expenses Limits
1.
Medicines and drugs are limited to prescription medicines and drugs. Total
unreimbursed medical expenses must be reduced by 10 percent of adjusted gross
income.
Medical Expenses: Capital Expenditures
2.
Capital expenditures incurred for medical expense purposes are deductible to the extent
that the expenditure exceeds the increase in value of the related property.
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Medical Transportation Costs
3.
Transportation incurred primarily for and essential to medical care is deductible. A
deduction rate of $.19 per mile is allowed in computing the cost of operating an
automobile. The cost of travel to another locality for personal consideration is not
deductible.
Deductible Medical Expenses
4.
a.
No, nonprescription item
b.
No, travel not required for health
c.
Yes
d.
Yes
e.
Yes
Deductible Medical Expenses
5.
a.
No, not prescription item
b.
Yes
c.
Yes
d.
Yes
e.
No, specifically excluded by statute
Personal Property Taxes
6.
Personal property taxes must be based on the value of the property to qualify as an
itemized deduction. A tax based partly on value may qualify in part.
State and Local Income Tax Refunds
7.
A refund of a state or local income tax is reported as income in the year received to the
extent that a benefit was received in the year paid. The benefit received is the lower of
the deduction taken for the taxes paid or the excess of the itemized deductions over the
standard deduction for the year the taxes were paid.
Deductible Taxes
8.
a.
Yes, since based on the value of the property
b.
No, not a deductible tax
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c.
No, not a deductible tax
d.
Yes, sales taxes are deductible if they exceed state and local income taxes
Deductible Taxes
9.
a.
No, not deductible tax
b.
No, not deductible tax
c.
Yes
d.
No, not deductible tax
Net Investment Income Definition
10.
Investment income includes portfolio income such as interest, dividends, rents and
royalties, and capital gains, along with certain depreciation recapture items. Tax-exempt
interest is not included as investment income for purposes of the investment interest
limitation.
Prepaid Interest
11.
Prepaid interest is only deductible for the period to which it applies. Both cash and
accrual basis taxpayers must allocate prepaid interest over current and future time
periods. The exception to this treatment is for "points" paid on acquisition indebtedness
of a principal residence.
Charitable Organizations: Categories
12.
Qualified charitable organizations are divided into categories: public charities and
private charities. Private charities are private nonoperating foundations that do not
distribute all of their income to public charities.. Public charities would include all other
qualified charities.
Private Operating v. Nonoperating Foundation
13.
A private operating foundation distributes substantially all of its income for the conduct
of charitable purposes. A private nonoperating foundation does not distribute all of its
income for the conduct of charitable purposes.
Charitable Services Deduction
14.
The value of donated services is not deductible as a charitable contribution.
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Unrelated Use Charitable Contributions
15.
When an asset is being sold by a charitable organization, the asset is considered to have
unrelated use. The fair market value of tangible personal property with unrelated use
generally must be reduced by any gain to determine the charitable deduction.
Charitable Contributions Carryovers
16.
Any charitable contributions disallowed because of the percentage limitations are
carried forward for five years.
Charitable Contributions Appraisals
17.
When the claimed value of an item or a group of similar items exceeds $5,000, an
appraisal of the donated property's fair market value must be attached to the income tax
returns.
Casualty Loss Definition
18.
A casualty loss is any loss arising from fire, storm, shipwreck, or other casualty. The
loss must be the result of sudden, unexpected, identifiable, and provable events of an
unusual nature.
Theft Losses
19.
A theft loss is deductible in the year in which the taxpayer discovers the loss.
Employee Expenses
20.
In order to be deductible by an employee, the employee's expenses must be directly
related to the performance of duties or be required by an employment agreement.
Nonaccountable Reimbursement Plans
21.
Nonaccountable reimbursement plans are arrangements that (1) do not require the
employee to substantiate the reimbursed expenses to the employer, or (2) permit the
employee to retain amounts in excess of the substantiated expenses covered under the
arrangement.
Job-Seeking Expenses
22.
Job-seeking expenses incurred by an individual are deductible for tax purposes if the
individual is employed in a particular trade or business and is looking for work in the
same trade or business. If an individual is unemployed when incurring the job-seeking
expenses, the expenses are deductible if the individual is looking for work in the same
trade or business in which the individual was employed prior to unemployment. Jobseeking expenses include travel and transportation expenses incurred while going to and
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from different job locations, expenses of preparing a resume, mailing expenses, and
employment agency fees.
Education Expenses
23.
Education expenses are generally deductible by an individual taxpayer if incurred to
maintain or improve skills required in a present job or to meet expressed requirements
of an employer or applicable law to retain an employment position or rate of
compensation. However, even though either of these two requirements are met,
education expenses still are not deductible if the education is necessary to meet
minimum education requirements of the individual taxpayer's trade or business, or the
education qualifies the individual for a new trade or business. Through 2016, up to
$4,000 of qualified higher education expenses can be deducted for AGI.
ANSWERS TO PROBLEMS—CHAPTER 8
Topical List of Problems
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
51.
52.
Medical Expenses: Nondependent Parent (¶8001)
Medical Expenses: Capital Improvements (¶8025)
Medical Expense Computation (¶8035, ¶8045, ¶8055, ¶8065)
Medical Expense Computation (¶8035, ¶8045, ¶8055, ¶8065)
Property Taxes (¶8105)
Tax Expenses Deduction (¶8115)
State Income Tax Refund (¶8115)
Prepaid Interest (¶8265)
Qualified Student Loan Interest (¶8210)
Qualified Student Loan Interest (¶8210)
Interest Expense Deduction (¶8205, ¶8215, ¶8225)
Interest Expense Deduction (¶8205, ¶8210, ¶8215, ¶8225)
Qualified Residence Interest Deduction (¶8215)
Investment Interest Deduction (¶8225)
Prepaid Interest (¶8265)
Charitable Contributions Deduction: Pledges (¶8315)
Charitable Contributions Deduction Computation (¶8315, ¶8325)
Charitable Contributions Deduction Computation (¶8315, ¶8325)
Charitable Contributions Deduction Computation (¶8315, ¶8325)
Charitable Contributions Deduction Computation (¶8315, ¶8325)
Casualty and Theft Losses (¶8501, ¶8525)
Casualty Losses (¶8501)
Casualty Losses (¶8501)
Casualty Losses (¶8501)
Reimbursed Employee Expenses (¶8603)
Job-Seeking Expenses (¶8655)
Multiple Choice—Charitable Contribution (¶8325)
Multiple Choice—Unreimbursed Employee Expenses (¶8605)
Multiple Choice—Employee Reimbursed Expenses (¶8603)
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53.
54.
55.
56.
57.
Multiple Choice—Employee Reimbursed Expenses (¶8603)
Comprehensive Problem—Taxable Income Computation
Comprehensive Problem—Taxable Liability Computation
Research Problem—Medical Expenses
Research Problem—Travel Deductions
Answers to Problems
Medical Expenses: Nondependent Parent
24.
Oliver is able to claim the medical expenses paid for his father. The gross income
dependency test is waived for the medical expense deduction.
Medical Expenses: Capital Improvements
25.
The medical deduction for the elevator is $12,000.
Cost of elevator
Less: Increase in fair market value of related
property
Medical expense deduction
$15,000
3,000
$12,000
Medical Expense Computation
26.
The medical expenses of the mother are included among Tom and Shannon's medical
expenses.
Medicines and drugs
Insurance
Hospital
Doctor
Cosmetic surgery (unnecessary)
Mileage (400 × $.19)
Total medical expenses
Less 10% AGI
Medical deduction
$1,800
4,000
3,200
4,200
0
76
$13,276
8,500
$ 4,776
Medical Expense Computation
27.
Medicines and drugs
Insurance
Other medical (after reimbursement) ($7,476 - 4,100)
Total medical
Less 10% AGI
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$1,800
4,000
3,376
$9,176
8,500
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Medical deduction
$ 676
Property Taxes
28.
Assuming it is not a leap year, Blake will be entitled to the property tax allocable to 181
days of the year. He will therefore be entitled to deduct $2,172 ($4,380 × 181/365) of
the property taxes, while Miranda will be entitled to deduct the remaining $2,208
($4,380 × 184/365).
Tax Expenses Deduction
29.
$6,000. The taxpayer would not deduct the sales taxes (because they are less than the
state income tax), the license plate fee, or the federal income tax.
State Income Tax Refund
30.
Adolpho's tax deduction for state income taxes for 2016 is $3,700, and in 2017 it is
$4,400. The refund received in 2017 is income in 2017 to the extent that a tax benefit
was realized in 2016. The tax benefit in 2016 was $8,000 - $6,300 = $1,700. The refund
was $1,600, so all of it would be included in income.
Prepaid Interest
31.
Raphael is allowed a $250 ($3,000 ÷ 12) deduction for the first year if he makes a
separate payment of the $3,000. Prepaid interest must be allocated over the life of the
loan. If the $3,000 is offset against the $20,000 loan, there is no deduction until the loan
is paid.
Qualified Student Loan Interest
32.
There is a $2,500 maximum deduction for AGI in 2016, and no reduction in that
maximum occurs because AGI is not more than $65,000.
Qualified Student Loan Interest
33.
The $2,500 maximum deduction for AGI in 2016 is reduced to give a $1,667 deduction
for AGI. The reduction is $833:
$70,000 - $65,000
$15,000
$2,500 - 833 = $1,667
× $2,500 = $833
Interest Expense Deduction
34.
Josephine is allowed a deduction for the interest on her personal residence. The interest
on the loan to buy state and municipal bonds of $750 (3/4 × $1,000) is not deductible.
The other $250 of interest is deductible as investment interest. The interest paid to her
credit card company is personal interest and is not deductible.
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CCH Federal Taxation—Basic Principles
Interest Expense Deduction
35.
Total interest deduction of $13,000 is allowed to Mike and Sally. $6,500 of the
investment interest equal to net investment income, is allowed, and $4,000 home
mortgage interest is allowed. The remaining $8,500 of investment interest is carried
forward. In addition, a maximum of $2,500 of interest on qualified education loans is
allowed.
Qualified Residence Interest Deduction
36.
Deductible interest is $10,000. Interest deduction is limited to interest on the first
$100,000 of the home equity loan. ($21,600 interest × $100,000 limit/$216,000 loan =
$10,000 deductible interest.)
Investment Interest Deduction
37.
Total investment interest deduction of $7,000 is allowed. The remaining $14,000 of
investment interest is carried forward.
Prepaid Interest
38.
If it is his principal residence he can deduct the entire $6,000. If the property is not his
principal residence, he must amortize the $6,000 over the life of the loan. Since he only
had the loan for one month out of the year, and the loan is amortized over 15 years, he
would only deduct $6,000 × 1/15 × 1/12 = $33.33.
Charitable Contributions Deduction: Pledges
39.
The charitable contribution for 2016 is $200. A contribution is made at the time delivery
is effected. The unconditional delivery or mailing of a check which subsequently clears
in due course constitutes an effective contribution on the date of delivery or mailing.
The pledge is not deductible until paid.
Charitable Contributions Deduction Computation
40.
AGI = $50,000
50%
30% Public
30% Private
Total
AGI % Limit
$3,000
$25,000
40,000
15,000
8,000
15,000
$51,000
Overall (50%)
Limit
Deduction
Carryover
$25,000
$3,000
$0
22,000
15,000
25,000
0
0
8,000
$18,000
$33,000
The 30% public deduction is limited to 30% of AGI, or $15,000. The 30% private
deduction is limited to 50% of AGI ($25,000) less the 50% contribution ($3,000) less
the 30% public contribution ($40,000), or zero. The overall carryover is $33,000.
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Charitable Contributions Deduction Computation
41.
a. AGI = $80,000
50%
30% Public
20%
Total
AGI % Limit
$5,000
$40,000
30,000
24,000
5,000
16,000
$40,000
Overall (50%)
Limit
$40,000
35,000
5,000
Deduction
$5,000
24,000
5,000
$34,000
Carryover
$0
6,000
0
$6,000
The donation to needy families is not deductible. The full $30,000 from the land
must be considered before the 20 percent category is considered. The painting
given to a 20 percent charity must be reduced by $2,000, the long-term capital
gain, to the basis of $5,000. The carryover is $6,000, all in the 30% public
category. The 20% limit is the lesser of (1) $16,000 (20% of AGI) or (2) $5,000
[50% of AGI ($40,000) minus the other contributions ($35,000)].
b.
Since the deduction from the 20% limit category already uses up the remainder of
the overall (50%) limit, the charitable contribution deduction remains at $34,000.
The carryover, however, would increase to $26,000, $6,000 from the 30% public
category, and $20,000 from the 20% category.
Charitable Contributions Deduction Computation
42.
a.
$600—The deduction for ordinary income property given to a charity is limited to
basis.
b.
$7,000—The general rule is that when property is given to private charities, the
fair market value is used.
c.
$6,000—Since the asset is to be sold, it has unrelated use and the fair market value
must be reduced by the gain.
Charitable Contributions Deduction Computation
43.
a.
Charitable deduction is limited to $30,000 ($100,000 AGI × 30%). Carryover is
$10,000.
b.
Fair market value is reduced by $8,000 ($40,000 - $32,000). Charitable
contribution is $32,000. No carryover, because 50% limit applies.
c.
Fair market value must be reduced by $8,000 and the charitable deduction is
limited to $20,000 ($100,000 AGI × 20%). The carryover is $12,000 ($32,000 $20,000).
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CCH Federal Taxation—Basic Principles
d.
Charitable deduction is limited to $20,000 ($100,000 AGI × 20%). The carryover
is $20,000. Because the charitable contribution is qualified appreciated stock, no
reduction by the capital gain is necessary.
Casualty and Theft Losses
44.
There are two separate losses, each personal and subject to the $100 reduction.
Theft
Cash
Wristwatch
Beer and cooler
Less: Reduction
Loss from theft
Loss from fire
Loss from theft
Total losses
Less: 10% Adjusted gross
income reduction
Deductible casualty and theft
losses
$150
200
75
$425
100
$325
Casualty
Loss limited to basis
Less: Insurance
Less: Reduction
Loss from fire
$200,000
170,000
$30,000
100
$29,900
$29,900
325
$30,225
10,000
$20,225
Casualty Losses
45.
Cost
Less: Depreciation
Basis for casualty
Business
$12,000
6,000
$ 6,000
Personal
$6,000
$6,000
The $3,600 in repairs must be allocated between business and personal. Thus, $2,400 is
a business casualty loss deduction deductible for AGI and the $1,200 allocated to
personal use is not deductible since it does not exceed the 10 percent of AGI and the
$100 reductions. The basis for casualty has to be computed to compare the decrease in
FMV against the basis. Usually the cost of repairing can be used as an estimate of the
decrease in FMV.
Casualty Losses
46.
No deduction in 2016 is allowed since Pablo expected to recover his loss. A $17,900
deduction is allowed in 2017 ($24,000 - $1,000 - $100 - $5,000) as an itemized
deduction.
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Chapter 8
Instructor’s Manual
17
Casualty Losses
47.
Sam can deduct $2,800 as a personal casualty loss (itemized deduction) for the year.
Fair market value before accident
Fair market value after accident
Decrease in fair market value
Less: Reduction
Less: 10% Adjusted gross income reduction
Deductible casualty loss
$7,200
1,300
$5,900
100
3,000
$2,800
Reimbursed Employee Expenses
48.
a.
Since Peter received less than a full reimbursement from the employer, the
reimbursement is allocated proportionately between the travel (.) and
entertainment (.) expense—$2,000 travel reimbursement and $1,000 meal and
entertainment reimbursement. The $400 of unreimbursed travel ($2,400 $2,000)plus $100 ($200 × 50%) unreimbursed meal and entertainment expenses
are deductible as miscellaneous itemized deductions subject to the 2 percent of
AGI limitation.
b.
If Peter receives $3,600 in reimbursement from his employer, neither the expenses
nor the reimbursement has to be shown on his tax return.
Job-Seeking Expenses
49.
Kathleen would not get to deduct any expenses if she is looking for her first job or she
wants to change from a sales job to an information systems job. If she is looking for a
different position in accounting, she will be able to deduct $2,000 - ($11,000 × 2%) =
$1,780 as an itemized deduction.
Multiple Choice—Charitable Contribution
50.
c. The deduction for the contribution of short-term stock is limited to basis.
Multiple Choice—Unreimbursed Employee Expenses
51.
d. Unreimbursed expenses are deductible as miscellaneous itemized deductions.
Multiple Choice—Employee Reimbursed Expenses
52.
b. The business expenses should be shown as miscellaneous itemized deductions subject
to the 2 percent nondeductible floor.
Multiple Choice—Employee Reimbursed Expenses
53.
b. The excess expenses should be shown as miscellaneous itemized deductions subject
to the 2 percent nondeductible floor.
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Chapter 8
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CCH Federal Taxation—Basic Principles
Comprehensive Problem (Tax Return Problem)—Taxable Income Computation
54.
Andy and Marcia's taxable income for 2016 is $59,170, computed as follows:
Andy's salary
Marcia's salary
Dividends
Total gross income
Less: Deductions toward adjusted gross income
Andy's IRA contribution
Adjusted gross income
Less: Itemized deductions
Medical expenses
Doctors and hospitals
Health insurance
Prescription drugs and medicines
Eyeglasses
Less: 10% of AGI
Taxes
Residence
State income taxes
Interest
Home mortgage
Credit cards (nondeductible
personal interest)
Miscellaneous
Union dues and subscriptions
Tax preparation fee
Less: 2% of AGI
Total itemized deductions
Less: Personal exemptions (4 × $4,050)
Taxable income
Tax Liability [$1855 + .15($59,170 $18,550)]
Federal Income Tax Withheld
Tax Owed
$50,000
42,000
950
$92,950
2,000
$90,950
$8,200
2,600
800
175
(9,095 )
$2,680
2,300
2,800
5,100
$7,800
0
7,800
$480
125
( 1,819 )
0
$15,580
16,200
$59,170
$ 7,948
$ 7,500
$ 448
Comprehensive Problem (Tax Return Problem)—Tax Liability Computation
55.
Larry's tax owed for 2016 is $763.25, computed as follows:
Salary
Interest Income
Qualified Dividends
Adjusted Gross Income
Medical Expenses
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$50,000
3,200
800
$54,000
$6,150
Chapter 8
Instructor’s Manual
19
Less: 10% of AGI
Property Taxes on Personal Residence
State and Local Income Taxes
Interest on Home Mortgage
Investment Interest Expense
Casualty Loss ($15,000 - $7,000)
Less: $100
Less: 10% of AGI
Unreimbursed Expenses
Less: 2% of AGI
Total Itemized Deductions
Less: Personal Exemption
Taxable Income
Tax Liability [$927.50 + .15($28,180 - $9,275)]
Federal Income Tax Withheld
Tax Owed
5,400
$8,000
-100
-5,400
2,000
-1,080
750
3,600
2,400
7,600
4,000
2,500
920
21,770
4,050
$ 28,180
$3,763.25
$ 3,000
$ 763.25
Research Problem—Medical Expenses
56.
Lodging while away from home under circumstances in which the lodging is primarily
for and essential to medical care is deductible. The amount of the deduction is limited to
$50 per night for each eligible person. Expenses paid for transportation for and essential
to medical care are deductible. The transportation deduction does not include the cost of
any meals while away from home to receive medical care. Mary's deduction is $1,700
($1,000 transportation and $100 per day for seven days' lodging).
Research Problem—Travel Deductions
57.
a. Burns v. Gray, 61-1 USTC ¶ 9294, 287 F.2d 698 (CA-6 1961) (CCH STANDARD
FEDERAL TAX REPORTS ¶8520.0205).
The Commissioner has ruled that a taxpayer's "home," for purposes of Code Sec.
162(a)(2), is considered to be located at (1) the taxpayer's regular or principal (if
more than one regular) place of business, or (2) if the taxpayer has no regular or
principal place of business because of the nature of the trade or business, then at
the regular place of abode in a real and substantial sense. See Rev. Rul. 60-189
and Rev. Rul. 71-247. If a taxpayer fails to come within either category, the
taxpayer is considered to be an "itinerant" who has a "home" wherever the
taxpayer happens to be working and thus is never "away from home" for traveling
expense deduction purposes. Three objective factors used in determining whether
a taxpayer has a "regular place of abode in a real and substantial sense" or whether
the taxpayer is an itinerant are presented in Rev. Rul. 73-529.
The Commissioner's insistence that a taxpayer's "home," for the purposes of this
statute, is the principal place of business, regardless of where the family maintains
its residence, has historically been the source of some judicial conflict. The Tax
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Chapter 8
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CCH Federal Taxation—Basic Principles
Court's decisions have been consistent with this position, recognizing an exception
when the taxpayer's employment is only temporary as distinguished from
permanent or indefinite. At the same time, this view was rejected by the Ninth
Circuit in Wallace v. Com., 44-2 USTC ¶9437, 144 F. 2d 407, and by the Sixth
Circuit in Burns v. Gray, 61-1 USTC ¶ 9294, 287 F.2d 698.
b.
R. Rosenspan, 71-1 USTC ¶9241, 438 F.2d 905 (CA-2 1971), cert. denied 404 U.S.
864, 92 S.Ct. 54 (CCH STANDARD FEDERAL TAX REPORTS ¶8520.03).
A traveling salesman who could not show that a sleep-in, eat-in home was
maintained on either a year-round or a permanent basis was not entitled to a
business expense deduction.
Similarly, a traveling salesman for several clothing manufacturers, who worked on
a straight commission basis, was not entitled to a business expense deduction for
the cost of meals, lodging, and tips while traveling "away from home" since the
salesman was constantly in a travel status and had no "home" from which to be
away. See G.H. James (CA-9) 62-2 USTC ¶ 9735, 308 F. 2d 204.
c.
H.A. Stidger, 67-1 USTC ¶ 9309, 386 U.S. 287, 87 S.Ct. 1065 (1967) (CCH
STANDARD FEDERAL TAX REPORTS ¶8500.069).
A member of the military services is not "away from home" while at a permanent
duty station and may not deduct traveling expenses, including meals and lodging,
incurred at such location. This is so even though it is not feasible or even
permissible for the family to join the service member.
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Chapter 8