Deductions Pub 4012 Tab F Pub 4491 Part 5 Lessons 20 & 21 Deductions Subtracts from a taxpayer s adjusted gross income (AGI) Reduces amount of income taxed Most taxpayers have a choice Standard deduction Itemized deductions Use type of deduction that results in lower tax 2 NTTC Training TY2017 1
Standard Deduction Fixed reduction of AGI based on: Filing status Age (65 or older) Blindness Dependency Standard amounts change each year 3 NTTC Training TY2017 3 Deductions Filing as Married Filing Separate If either itemizes both must itemize Does not matter who files first Note: if considered unmarried for Head of Household, may claim standard deduction If first to file uses standard deduction and 2 nd itemizes then first must amend 4 NTTC Training TY2017 2
Blindness Totally blind taxpayer or Certified statement from eye doctor that Taxpayer cannot see better than 20/200 in the better eye withglasses or contact lenses -OR- Field of vision is not more than 20 degrees 5 NTTC Training TY2017 Standard Deduction Special Rule Pub 4012 Page F-2 Dependent of another Standard deduction is $350 plus earned income Minimum: $1,050 Maximum: the regular standard deduction amount Plus $1,550 for 65 or older or blind ($1,250 if married) 7 NTTC Training TY2017 3
Deductions May claim larger of Standard deduction Increased if at least 65 or blind -OR- Itemized deductions If itemized deductions are entered, software will select better option 10 Intake/Interview Verify there is taxable income (Form 1040, Line 43) after standard deduction before itemizing Consider state return, if any 11 4
Possible Itemized Deductions Medical or dental expenses Taxes Interest Gifts to charity Pub 4012 F-3 Casualty and theft losses Out of Scope Miscellaneous expenses subject to 2% Miscellaneous expenses not subject to 2% 12 Limitations on Scope Individuals with the following should be referred to a paid preparer Investment interest expense A charitable contribution carryover from a prior year or created in the current year Noncash donations exceeding $5,000 Job expenses which were partially reimbursed by the employer Casualties or theft losses 13 5
Schedule A 15 Medical Expenses Medical expenses include Diagnosis, cure, mitigation, treatment, or prevention of disease Treatments affecting any part or function of body Equipment, supplies, and diagnostic devices Premiums for insurance that covers medical care Long-term care insurance premiums (limited) Transportation/travel to get medical care 16 6
Medical Expenses Pub 17 Table 21-1; Pub 502 Not all medical expenses qualify Examples of not qualified expenses: Cosmetic surgery Funeral or burial expenses Nonprescription drugs (except insulin) Weight loss program not prescribed Diet food 17 Medical Expenses Must be paid during tax year Cannot be reimbursed expenses including expenses claimed for HSA Only for taxpayer, spouse, dependents or individuals that would have been dependent except for gross income or filing situation when paid or when incurred 17 /mile for travel for medical purposes 18 7
Medical Deduction Quiz Deductible medical expense? Prescription sunglasses Yes Contact lenses Yes Dentist teeth whitening No Gym fee (doctor suggested exercise) Dentist teeth cleaning Yes No 19 Taxes MUST be imposed on taxpayer MUST be paid in current tax year 20 8
Taxes State and local taxes Income tax OR General sales tax Real estate tax (U.S. or foreign) Personal property tax based on value Foreign income tax (if not claiming a credit) 21 Interview If Sales Tax is an option any large purchases? Motor vehicle (car, motorcycle, motor home, off-road vehicle, etc.) Boat or airplane Home, home addition or renovation Sales tax must have been separately stated and paid by taxpayer (not the contractor) 23 9
TaxSlayer versus IRS Sales Tax Calculators Both TaxSlayer and IRS Sales Tax Calculators get the same answers, when data are entered properly Advantages of TaxSlayer Sales Tax Calculator Calculates the correct MAGI Volunteers do not have to calculate sales tax Volunteers do not have to leave TaxSlayer to get the calculation 24 TaxSlayer versus IRS Sales Tax Calculators If you use the IRS version enter answer in Override box Override option will NOT appear once any data entered into TaxSlayer Sales Tax Calculator on the Sales Tax Deduction sheet To access Override option EDIT and remove any data entered into TaxSlayer portion of the Sales Taxes Deduction sheet 25 10
Accessing Override or TaxSlayer Sales Tax Calculator Navigation: Income>Deductions> Itemized Deductions>Taxes You Paid Click: Add Sales Tax Worksheet 26 Sales Tax Worksheet Added Income>Deductions>Itemized Deductions> Taxes You Paid>Click on Add Sales Tax Worksheet TaxSlayer Sales Tax Calculator Click Here to view IRS sales tax deduction calculator 27 11
Two Steps To Use IRS Sales Tax Calculator Step 2: Enter General Sales Taxes Paid from IRS Calculator Step 1 Click to view IRS Sales Tax Calculator 28 TaxSlayer Sales Tax Calculator One Step 29 12
General Sales Taxes Appears on Schedule A TaxSlayer calculated the General Sales Tax and posted the results on Schedule A ALBERT & LOIS MEADOWS X 1412 1412 30 Deductible Taxes Line 6 Real Estate (Property) Taxes May be reported by mortgage company on Form 1098 Includes parcel taxes Not for Benefit to property (tending to increase value) Itemized charges for services (such as trash pickup or sewer fees) Transfer taxes (or stamp taxes) Homeowners' association charges 31 13
Other Deductible Taxes Line 7 Personal Property Taxes based on value of personal property only If based on weight and value, only value portion is deductible (boat, vehicles, RVs, etc.) Line 8 Other Taxes Foreign income taxes, if credit not claimed on Form 1116 (1040 line 48) 32 Non-Deductible Taxes Federal income and excise taxes Social Security, Medicare Federal Unemployment (FUTA) Railroad retirement taxes (RRTA) Customs duties Federal estate and gift taxes Per capita tax Pub 17, Table 22-1 33 14
Home Mortgage Interest Interest on loan secured by main home or second home Mortgage to buy or build home or second home (both limited) Home equity loan or line of credit (limited) Both taxpayer and lender must intend that loan be repaid 34 Home Mortgage Interest Deductibility Mortgages taken out before October 14, 1987 fully deductible, no limit Mortgages after October 13, 1987, to buy, build, or improve home Limited to $1,000,000 total debt (this plus pre- 10/14/87 ) ($500,000 MFS) Note: Lender late charges are deductible as interest if interest on underlying loan is qualified 35 15
Home Mortgage Interest Deductibility Mortgages post October 13, 1987, not to buy, build, or improve home limited to Debt of $100,000 ($50,000 MFS) and Total debt on home does not exceed fair market value of home when taken out Is an addback for AMT on form 6251 (return is OOS if AMT applies) $1,000,000 and $100,000 limits apply to combined mortgages on main home and second home 36 Home Mortgage Interest Points Paid at loan origination If to buy or build main home, deductible in full If to refinance qualified debt, spread over life of loan If underlying loan is not qualified, points are not deductible 37 16
Home Mortgage Interest Examples Deduct points on purchase, loan #1 Refinance A points on Refinance A are spread over life of new loan (#2) Refinance B Remaining points on loan #2 can be deducted when loan #2 is paid off Points on Refinance B (loan #3) are spread over life of loan #3 38 Reverse Mortgage Any interest (including original issue discount) accrued is NOT deductible until the loan is paid in full. Pub 4491 21-6 When paid off, interest deduction is subject to the limitations on debt amount To buy or improve the home To buy investments, out of scope Otherwise, up to $100,000 of debt 39 17
Non-Deductible Items Personal interest Service charges Annual fees for credit cards Loan fees Credit investigation fees Interest to purchase or carry tax-exempt securities Fines and penalties paid to a government for violations of law 41 Gifts to Charity Qualified charity Churches, governments, schools, etc. Approved by IRS U.S. charity irs.gov/charities for list Limited to % of AGI Public charity: <50% of AGI Private foundations: <20% or 30% of AGI 42 18
Gifts to Charity Monetary contribution less than $250 Bank record (check, credit card or bank statement) or receipt -OR- Written acknowledgement from charity If payment is >$75, charity must state value of goods/services provided, if any 43 Gifts to Charity Monetary contribution $250 or more Written acknowledgement from charity Must state value of goods or services provided in exchange for contribution, if any e.g., fundraising dinner value of dinner must be deducted from ticket price paid; only net amount deductible 44 19
Gifts to Charity Donations of clothing or household items Deduct fair market value Usually thrift store value Good used condition or better Capital gain or business property donations out of scope Any motor vehicle, boat, or plane donations out of scope EXCEPTION: Not OOS Vehicle $500 or less No Form 1098-C is required (unless submitted by recipient) 46 Gifts to Charity Out-of-pocket expenses are also deductible Mileage @ 14 /mi Tolls and parking Out of pocket expenses when serving as volunteer for qualified charity (e.g., hospital volunteer uniform) Need written acknowledgement from charity if any single item is >$250 47 20
Gifts to Charity Limits Total may not exceed 50% of AGI Sort by cash (monetary) or other-thancash If total is over 20% of AGI, sort by organization limit (see Pub 526) If exceed any limit, refer to paid preparer Note: gifts of property that increased in value out of scope 48 Donated Services Out-of-Pocket Expenses Requires adequate records of the expenses Organization s written acknowledgement Description of taxpayer s services for expenses more than $250 49 21
Non-Cash Contributions Need receipt for all non-cash contributions Single non-cash gifts $250 or more Written acknowledgement from charity Enter on A Detail worksheet 50 Non-Cash Contributions (cont) More than $500 TaxSlayer brings up Form 8283 Complete Section A, Part 1 only In-Scope up to $5,000 total More than $5,000 Out-of-Scope Taxpayer should always keep detailed list of items donated (pictures can help) 51 22
Non-Cash Deductions (cont) Generally report by donation date, specify date Taxpayer provides fair market value and other needed information Once over $500 all non-cash have to be on form 8283 52 Form 8283 Complete the following data on Part I of the form (a) Name and address of the organization (c) Description of donated property Follow the line instructions under the Note in Part I and enter the required data on lines (d) through (i) 53 23
Non-Deductible Contributions Contributions to following types of organizations: Business organizations such as Chamber of Commerce Civic leagues and associations Political organizations and candidates Social clubs Foreign organizations Homeowners associations Communist organizations 54 Non-Deductible Contributions Cost of raffle, bingo, or lottery tickets Tuition Value of person s time or service Donated blood Direct contributions to an individual Part of contribution that benefits taxpayer 55 24
Miscellaneous Deductions Pub 17 Chapter 26 Subject to 2% of AGI threshold Line 21 Unreimbursed employee expenses Uniforms, job hunting, union dues, etc. Use Form 2106 for mileage at standard rate or travel Military certification if Form 2106 required for any other reason 56 Miscellaneous Deductions (cont.) Out of scope Includes small tools and supplies needed for job 57 25
Form 2106 Unreimbursed Expenses Mileage or travel Entertainment If unreimbursed employee expenses are other than these, don t need Form 2016 and can input on Line 21 Special rules apply for performing artists Out Of Scope 58 Miscellaneous Deductions (cont) Pub 17 Chapter 26 Subject to 2% of AGI threshold (cont) Line 22 Tax preparation fees Line 23 Other expenses, examples Investment fees Safe deposit box (if holds investments) IRA trustee fee (if paid from outside funds) Repayments of previously claimed income Cost to produce or collect taxable income 61 26
Miscellaneous Not Subject to 2% Gambling wagers and tickets to extent of winnings Unrecovered investment in annuity Certain work-related expenses for persons with a disability Repayments of income >$3,000 under claim of right Certain Ponzi scheme losses Certain casualties out of scope 63 Quality Review Verify blind (and disability if relevant to your state) entries on Intake Sheet Verify type of deduction if MFS Verify amount of deduction if Taxpayer is the dependent of another 66 NTTC Training TY2017 27
Quality Review Review with taxpayer to ensure all deductions considered Review taxpayer s documents to ensure all deductions are entered in TaxSlayer Compare to prior year s deductions Review Schedule A as expected? Any state adjustments needed? 67 Summary with Taxpayer Explain why itemizing does or does not help Explain thresholds Medical expenses exceeding 7.5% of the taxpayer s AGI are deductible Miscellaneous deductions which are exempt from 2% limit (gambling and work-related expenses for individuals with a disability) Remind of need to keep records and receipts 68 28
Itemized Deductions Questions? Comments? 69 29