Chapter11 - Chapter 11 1 Itemized Deductions s Form 1040,...

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Unformatted text preview: Chapter 11 1 Itemized Deductions s Form 1040, Schedule A Form Medical Expenses s Taxes (state & local income, sales, property) s Interest Expense s Charitable Contributions s Casualty & Theft Losses s Miscellaneous Deductions s 2 Before you operate… Is this deductible? What medical expenses can I deduct? 4 What medical expenses can I deduct? s s s s s s s s s s Elton John: I want to deduct my 4,000 pairs of glasses. Michael Jackson: Can I deduct visits to my shrink? Bill Clinton: can I deduct the cost of my Viagra? Dennis Rodman: Can I deduct the costs of coloring my hair as Dennis well as my tattoos? Al Roker: I want to be thin. How about a weight loss program Al or gastric bypass surgery? or Professional athlete: If I use steroids, can I deduct them? How Professional about weight-lifting equipment? Bicycle? Treadmill? about I don't believe in doctors. Can I deduct the cost of going to a don't Christian Science practitioner Christian Normal medicine doesn't work. How about acupuncture? Abortion, Vitamins? Hair transplant? Toupee? Liposuction? Abortion, Hair Aspirin? Tylenol? Birth control pills? Nicoderm patch? 5 § 213: Medical Expenses s What is deductible? s Deduct unreimbursed costs of “medical care” For taxpayer, spouse, and dependents s s Who may deduct medical expenses? s Dependents s s Qualifying child Qualifying relative s Gross income and joint return tests are waived for determining Gross dependency status under this test dependency Parent who pays deducts, regardless of who claims dependency Parent exemption exemption 6 s Children of divorced parents: Children s Medical Expenses s Limitations on deduction s Deduct only to extent > 7.5% of AGI s Deduct only unreimbursed expenses Deduct s Reimbursements Reimbursements s s Reduce amount deductible Received in subsequent year are income to extent a tax Received benefit was received 7 Problem 11-6 Drugs Glasses Total Reimbursements Unreimbursed costs Limitations AGI Percentage limit Floor Itemized deduction $ 1,800 250 2,050 ( 0) $2,050 $ 20,000 x 7.5% (1,500) $ 550 Drugs Glasses Total Reimbursements Unreimbursed costs Limitations AGI Percentage limit Floor Itemized deduction Problem 11-6 $ 1,800 250 2,050 ( 0) $2,050 $ 20,000 x 7.5% (1,500) $ 550 Problem 11-28(a) Drugs Insurance Doctors Total Reimbursements Unreimbursed Limitations AGI Percentage limit Floor Itemized deduction $ 300 600 1,100 2,000 ( 0) $2,000 $ 20,000 x 7.5% (1,500) 500 Drugs Insurance Doctors Total Reimbursements Unreimbursed Limitations AGI Percentage limit Floor Itemized deduction Problem 11-28(a) $ 300 600 1,100 2,000 ( 0) $2,000 $ 20,000 x 7.5% (1,500) 500 Problem 11-28 (b) (b) What is the effect on this year’s deduction of reimbursement filed for in current year but not received until next year? (b) No effect on current year’s deduction (b) How should the reimbursement be treated when received next year if itemized deductions were $4,500 greater than the standard? (b) Taxable since received tax benefit Itemized deductions – standard deduction > $4,500 Problem 11-28 (c) (c) How should the reimbursement be treated when received next year if itemized deductions were $400 greater than standard? (c) Only $400 is taxable since that is the tax benefit that he received in the prior year: Lesser of $400 or deduction for medical expenses Eligible Medical Expenses What is medical care? What medical s s s s s Diagnosis, cure, mitigation, treatment or Diagnosis, prevention of disease, or for the purpose of affecting any structure or function of the body Transportation for and essential to the above Transportation Insurance which covers the above and Qualified long-term care services Prescription drugs Prescription s Insulin and syringes need no prescription 14 Medical Expenses Medical s s s s s s s s s s s s s Acupuncture Acupuncture Air conditioner necessary for relief from allergies or other respiratory problems Air (less any increase in the value of your home resulting from installation of air conditioning) Alcoholism treatment, including inpatient treatment, meals, and lodging at a Alcoholism therapeutic center for alcohol addiction Artificial limbs Artificial Artificial teeth Artificial Birth control pills prescribed by a doctor Birth Braille books and magazines used by a visually-impaired person Braille A clarinet and lessons to treat the improper alignment of a child's upper and clarinet lower teeth Chiropractors Contact lenses, including equipment and materials for using contacts Contact Cosmetic surgery, if it's necessary to improve a deformity related to a Cosmetic congenital abnormality, accident or disease Dentists Diet, special. When prescribed by a doctor, you can deduct the extra cost of Diet, purchasing special food to alleviate a specific medical condition Medical Expenses Medical s s s s s s s s s s s s s Doctor or physician expenses Doctor Drug addiction treatment, including inpatient treatment, meals, and lodging at a Drug therapeutic center for drug addiction Elastic hosiery to treat blood circulation problems Elastic Exercise program if a doctor has recommended it as treatment for a specific Exercise condition Extra rent or utilities for a larger apartment required in order to provide space Extra for a nurse/attendant Eye surgery, when it is not for cosmetic purposes only Eye Guide dog or other animal used by a visually-impaired, hearing-impaired, or Guide otherwise physically disabled person Hospital care Hospital Household help for nursing care services only Household Insurance premiums for medical care coverage Insurance Laboratory fees Laboratory Lead-based paint removal, including the cost of removing lead-based paints Lead-based from surfaces when a child has lead poisoning or was previously diagnosed with lead poisoning. (Does not include the cost of repainting) Legal fees paid to authorize treatment for mental illness Legal Medical Expenses Medical s s s s s s s s s s s s s Lifetime care advance payments Lifetime Lodging expenses while away from home to receive medical care in a hospital Lodging or medical facility Long-term care insurance and long term care expenses (there are limitations to Long-term what you can deduct) Mattresses and boards bought specifically to alleviate an arthritic condition Mattresses Medical aids, including wheelchairs, hearing aids and batteries, eyeglasses, Medical contact lenses, crutches, braces, and guide dogs (and their care) Medical conference admission costs and travel expenses for a chronically ill Medical person or a parent of a chronically ill child to learn about new medical treatments Medicines and drugs Medicines Nursing care Nursing Nursing home expenses, including the entire cost of medical care, plus meals Nursing and lodging if the main reason for being in the home is to obtain medical care Oxygen and oxygen equipment Oxygen Operations Psychiatric treatment of sexual inadequacy Reclining chair bought on a doctor's advice by a person with a cardiac condition Reclining Medical Expenses Medical s s s s s s s s s s s s Special education; tuition for sending a mentally impaired or physically Special disabled person to a special school that has resources to relieve the disability Smoking cessation programs (does not have to be recommended by a physician) Smoking Swimming (the cost of therapeutic swimming prescribed by a physician) Swimming Telephone (the cost and repair of special telephone equipment for a hearingimpaired person) impaired Television (the cost of equipment used to display the audio part of a TV Television program for hearing-impaired persons) Transplant of an organ (but not hair transplants) Transplant Transportation costs for obtaining medical care Transportation Travel expenses for parents visiting their child in a special school for children Travel with drug problems, where the visits are part of the medical treatment Weight loss program, if it is recommended by a doctor to treat a specific Weight medical condition or to cure any specific ailment or disease Whirlpool baths prescribed by a doctor Whirlpool Wig for the mental health of a patient who has lost his or her hair due to a Wig disease X-ray services X-ray Face lifts? Hair transplants? Liposuction? Eligible Medical Expenses Medical care defined: No deductions for: s s s s Cosmetic surgery except reconstructive surgery Cosmetic for deformities, and disfigurements arising from trauma or disease trauma Illegal operations or treatment Maintain general health See Exhibit 11-1 and 11-2 pages 11-2 and 11-3 20 Disease Prevention vs. Maintenance of General Health s Maintenance of general health or disease prevention s Move to warmer climate to improve health s Stop smoking programs s Health club dues s Vaccinations s Vitamins, health foods s Maternity clothes s Bottled water s Toothpaste and toothbrushes s Dental (cavities) has highest incidence of any disease 21 Capital Expenditures s s Fully deductible Improvements deductible to extent cost exceeds the Improvements increase to the property's value EXAMPLE A physician recommends daily swimming for a paraplegic. A lap pool costing $30,000 is installed. The FMV of the home rises by $5,000. $25,000 may be deducted as a medical expense. 23 Affecting Any Structure or Function of the Body Deductions are available for such capital expenditures as: s s s s s s prosthesis dental braces, false teeth eye glasses hearing aids wheelchairs special equipment purchased primarily for prevention or alleviation of a physical or mental illness, including operational costs DEDUCTIBLE EXAMPLE The cost of operating an air conditioning system for someone with allergies, if recommended by a physician 24 Medical Expenses s When deductible? s Deduction Deduction allowed when paid s Prepayment Prepayment s Allowed if required as condition of receiving Allowed medical services medical 25 Special Care Facilities s Costs for special care facilities qualify as medical Costs expenses expenses s s Examples Nursing home or special school (deaf, blind) If principal reason in an institution is availability of medical If care, entire cost qualifies as a medical expenditure care, s s s Treatment s Includes cost of meals and lodging Includes Tuition expenses of special schools s If not principal reason, only costs attributable to medical care 26 Long-Term Care Services and Insurance s Deduct costs for qualified long-term care services and Deduct premiums (limited) paid for long-term care insurance premiums s Includes diagnostic, preventive, therapeutic, curing, treating, Includes mitigating and rehabilitative services required pursuant to a plan prescribed by licensed health care practitioner. plan s Only if provided to chronically-ill taxpayer, spouse or Only dependents dependents s Chronically ill if unable to perform at least 2 activities of Chronically daily living (e.g., eating, toileting, transferring, bathing, dressing, and continence) for a period of at least 90 days. s Deduct as a medical expense subject to 7.5% floor 27 Long-Term Care Services and Insurance s Deductible premiums are limited per yr based on Deductible age at yr end age s Examples in 2009: Examples s s Age 40 or less: $320 Age more than 70: $3,980 s 28 Medical Travel & Transportation s Transportation and travel to obtain medical care • $.24 (2009) per mile plus parking and tolls • Lodging costs (but not meals) up to $50 per day for Lodging taxpayer and 1 additional person if overnight stay necessary necessary s Example s W, who lives in Denver, takes her child to Rochester, W, NY for medical treatment. The transportation cost for both persons and up to $50 per night for each individual is deductible. individual 29 Medical Insurance Costs s Medical insurance premiums are deductible Medical medical expenses if paid by taxpayer with aftermedical tax dollars and for coverage for the taxpayer, tax spouse, and dependents spouse, Not deductible if employer uses some of Not employee’s pretax salary to pay for premiums employee’s s 30 Medical Reimbursements s If taxpayer claimed a deduction for medical expenses in If prior year, the reimbursement must be included in gross income to extent of lesser of: income s s 1) previous medical expenses deduction 2) excess of taxpayer’s itemized deductions over his standard 2) deduction deduction s If no medical expenses deduction was taken in year in If which expenses were paid (e.g., taxpayer used standard deduction or total medical expenses did not exceed the required percentage of AGI) any reimbursement will not be included in gross income be 31 Health Insurance Costs of Self-Employed s Self employed individual s Amount paid for health insurance for individual, Amount spouse, and dependents are deductible as a business expense (e.g. deduction for AGI) expense s No deduction allowed if the SE person or his/her No spouse is eligible for a group health insurance plan through an employer plan 32 Health Savings Accounts Tax-wise Saving Health Care: HSAs Retirement: IRAs 33 Health Savings Accounts s Tax treatment (Form 8889) s Contributions are 100% deductible for AGI s s $3,000 for singles; $5,950 for marrieds (2009) Catch-up for 55-64 if 55: $1,000 s s Earnings are nontaxable Distributions nontaxable to extent used for medical expenses s No deduction for medical expenses paid No Penalty of 10% (waived if 65) and taxable income s Distributions not used for medical expenses s HSA 34 Health Savings Accounts s Requirements s High deductible health plan High In 2009: $1,150 & $2,300 Catastrophic protection: Catastrophic s s s Limits out of pocket, including deductible, to $5,800 & $11,600 s s Not eligible for Medicare (not 65) Not covered by another plan 35 Health Savings Accounts s Income tax treatment at death s Surviving spouse s No income (treats account as her own) Taxable income s Other beneficiary s s Estate tax treatment s Included in gross estate (but marital deduction) HSA 36 Deductions for Taxes 37 Deductible Taxes for Individuals s s Deductible per § 163 (need not be business or Deductible investment) investment) State, local, and foreign income taxes may be deducted State, income (foreign tax may be claimed as a credit) (foreign s Federal income taxes, including Social Security taxes, are not Federal deductible by individuals deductible s s State and local sales and use taxes IN LIEU OF state State sales income taxes income State, local, and foreign real property taxes State, real s But may add these to standard deduction up to $500 ($1,000 if But married) married) s State & local personal property taxes, if based on value State personal 38 Income Taxes s s A deduction for state and local income taxes is deduction allowed only if taxpayer itemizes his deductions allowed What can be deducted? Withholding s Estimated payments s Amount paid with filing of return s Refunds do not affect deduction s 39 Sales Taxes s s Beginning in 2004 state and local sales and use taxes Beginning may be deducted IN LIEU OF state income taxes IN Deduct either s s Amount based on actual receipts IRS table amount IRS s s Based on state, filing status, number of dependents, AGI Based May add sales tax on vehicles, boats, similar items s Pre-1987 could deduct BOTH state income taxes and Pre-1987 sales taxes! sales 40 Sales Taxes s Opportunities s 7 states do not impose an income tax states s FL, AL, NV, SD, TX, WA, WY s Indiana: 6% sales tax vs. 4.4% income tax 42 The Tax Benefit Rule Refunds or reimbursements of items deducted in an Refunds earlier year are subject to the “tax benefit rule” earlier The “Tax Benefit Rule” Deduct greater of state income tax or sales tax Refund taxable: lesser of s To extent it exceeded the prior year’s sales tax deduction that could have been claimed s Amount by which the prior year’s itemized deduction exceeded the standard deduction 43 Example: State Income Tax Refund 2009 State income tax Sales tax Taxable refund $11,000 10,000 $1,000 2010 $2,500 Refund Example: State Income Tax Refund 2009 State income tax Sales tax Taxable refund $11,000 10,000 $1,000 2010 $2,500 Refund Problem 11-29 Problem Facts Estimated state income taxes paid in 2005 2009 Deduction $500 $400 $200 $500 $400 No effect on deduction $900 State income taxes withheld during 2005 In 2005 received refund check of state income taxes paid in 2004 (itemized deduction for Federal in 2004) Total deduction Problem 11-29 Problem Facts Estimated state income taxes paid in 2005 Deduction $500 $400 $600 $500 $400 $600 State income taxes withheld during 2005 State income taxes paid with filing of 2004 return on April 15, 2005 Total deduction $1,500 TAXES s Distinguish between a user fee and a tax s User fee examples: s s s Driver’s licenses & hunting licenses Vehicle registration based on weight Street improvements billed to property owners s Tax: Usually a payor does not get benefits in proportion to the amount paid the 48 Deductible Taxes for Individuals s A tax is deductible only if: s It is imposed on the taxpayer’s income or property Rent vs. Own 50 Apportionment of Real Estate Taxes When real estate is sold, real estate taxes must be When apportioned between buyer and seller based on number of days each taxpayer held ownership number 51 Apportionment of Real Estate Taxes Between Buyer & Seller EXAMPLE On 11/1/07 taxpayer Z prepaid $2,000 real estate taxes for the city fiscal year ending October 31. On 1/15/08, Z sold his property to A. Z owned the property 76 days (30+31+15), and A owned it 289 days (365-76). 76 Z may deduct × $2,000 = $416.44 365 189 A may deduct × $2,000 = $1,583.56 365 52 Deductible Interest Expense Types of Deductible Interest Expenses: 1. Trade or business interest 2. Interest from passive activities (see Chapter 12) 3. Interest on qualified educational loans 4. Qualified residence interest 5. Investment interest to extent of “net investment income” 6. Interest on deferred payments of estate taxes Personal interest is not deductible 53 Nondeductible Interest s “Personal Interest” is not deductible s Defined as all interest except qualified student loan interest, Defined business interest, investment interest and passive interest business “Personal Interest” Examples s Interest incurred by employee in connection with Interest business of being an employee business s Automobile, furniture, appliance s s Credit card debts Interest on loans from insurance policies Interest on late Interest insurance tax payments and penalties tax 54 Student Loan Interest (§ 221) s s Interest on qualified educational loans is deductible Interest Qualified if loan used for: s Qualified educational expenses s Tuition, fees, room & board, books, supplies s Taxpayer, spouse or dependent if individual was of half-time or Taxpayer, greater student when loan was made greater s s s Maximum annual deduction: $2,500 Deductible for AGI Phase out: (2009) s Joint ($120,000 - $150,000); Other ($60,000 - $75,000) 55 Qualified Residence Interest s Deduction allowed for qualified residence Deduction interest interest s “Residence” Residence” s Vacation homes, condos, mobile homes, boats, or RVs if Vacation they include basic living accommodations they Acquisition indebtedness Home equity indebtedness s Qualified residence interest is interest on: s s 56 Qualified Residence Interest s Acquisition Debt: Debt incurred to purchase, construct, or improve a Debt principal or secondary residence and secured by the secured residence residence s If debt is used for home but not secured by home, no If deduction deduction s Limited to interest on debt up $1,000,000 s 57 Qualified Residence Interest s Acquisition Debt: s Refinancing limited Original acquisition debt Original - Principal payments Balance of acquisition debt +Amount used for improvements Qualifying debt 61 Refinancing Existing Mortgage Refinancing Original acquisition debt - Principal payments Balance of acquisition debt: maximum… +Amount used for improvements Qualifying debt Result if refinance and get $330,000? $300,000 ($70,000) $230,000 $40,000 $270,000 $60,000 not acquisition debt but maybe home equity Qualified Residence Interest s Home Equity Debt: s s Debt secured by a primary or secondary residence Limit FMV of home - Acquisition debt Maximum home equity debt not > $100,000 s Use s The loan proceeds may be used for any purpose s Interest on debt up to $100,000 deductible 64 Limitations on Qualified Residence Interest s s s s s Deductible interest on aggregate acquisition debt is limited to Deductible $1,000,000 of debt ($500,000 if MFS) $1,000,000 Deductible interest on home equity loans is limited to $100,000 of Deductible debt ($50,000 if MFS) debt Total amount of debt in any one year on which interest is paid or Total accrued will be treated as qualified residence interest cannot exceed $1.1 million exceed Acquisition debt is increased only if capital improvements are Acquisition only made made Home equity debt may be increased at any time 65 “Points” as Interest s Interest paid at the time of obtaining a loan is Interest called “points.” Essentially, points are prepaid interest. interest. One Point = 1% of the mortgage amount Points paid by the buyer or seller of a residence Points are deductible if incurred to obtain the mortgage are Points for second home or refinancing must be Points amortized amortized Homes costing > $1,000,000 no deduction 66 s s s Home Mortgage Insurance Home s What is it? s Provides funds to pay off mortgage or help meet payments on mortgage in case of death or disability or default Home Mortgage Insurance Home s s Tax treatment Deduct qualified mortgage insurance premiums s Insurance provided by VA, FHA, RHA and private mortgage insurance (PMI) Must be on acquisition indebtedness on a qualified residence s s Debt secured on primary & second home used by the taxpayer s Phase-out: AGI between $100,000 - $109,000 Investment Interest s Defined: Defined: s Interest on debt used to acquire investment other than a passive Interest activity activity Limited to net investment income Interest, royalties s s Deduction Limitation Deduction s s Investment income s Dividends and LTCGs if elect to tax as ordinary income s Investment expenses s Expenses incurred to produce the investment income Carried over until exhausted 69 s Disallowed interest Disallowed s Investment Interest s Examples Margin accounts s Loans to acquire unimproved land s Loans to acquire collectibles s Loans to make contributions to IRAs s 70 Classification of Interest How classify interest? How s Based on how loan proceeds spent s Proceeds not spent, but invested in money market Proceeds fund fund s Interest classified as investment interest expense even if Interest account does not bear interest account s Temporary Regulation Section 1.163-8T 71 Gift of $37.4 billion of Berkshire stock to Gates private nonoperating foundation 72 Barron Hilton pledges fortune to charity… poor Paris Charitable Contributions 75 Charitable Contributions Three considerations: Three Was the contribution made to a qualifying Was charity? charity? How is the contribution valued (i.e., at FMV or How adjusted basis)? adjusted Is there any limitation on the amount of the Is contribution that can be claimed? contribution 1. 1. 1. 76 Qualifying Donees s s State or Federal government or subdivision thereof. Corporations, trusts, funds or foundation operated for a charitable purpose but only if created or organized in U.S. s Purposes: religious, charitable, scientific, literary, educational, prevention of cruelty to children or animals, national amateur sports s s War veterans’ organization Fraternal organizations such as the Knights of Pythias, Elks, Moose, Possums, and Bloodhounds s s Dues to such organizations are deductible if they are used exclusively for charitable purposes. Typical charities: Church, public or private schools, United Way, etc. 79 Nonqualifying Possibilities s s Direct contributions to the needy Contributions restricted to the use by a specific person Expectation and receipt of significant economic benefit s 81 Charitable Contributions: Year of Deduction s Noncorporate taxpayers When paid s Pledges s s Corporations (C & S) s Accrual allowed if s s Approved by board of directors by close of tax year Paid by due date of tax return s Pledges may be accrued if meet requirements 82 Types and Amounts of Deductible Contributions s s s s General rule s Deduction allowed for cash + FMV property No No Miscellaneous expenses incurred in carrying on Miscellaneous charitable work or providing services to charitable organizations are deductible organizations Transportation expenses: Transportation s s Contribution of services? s Foregone income (e.g., lost rents) s Out-of-pocket expenses. s s Actual or 14 cents per mile (2009) Actual 14 cents Examples: volunteers drive for charity, delivering food to the Examples: needy, transporting seniors to doctors, etc. needy, 83 Types and Amounts of Deductible Contributions s Travel expenses Travel Unless significant element of personal pleasure Unless in the travel in s Only 50% of any meal cost is deductible s s Attending conventions s Deductible if chosen representative (but not just Deductible a church member) to attend a convention of a qualified organization qualified 84 Types and Amounts of Deductible Contributions s Purchases s Excess of cost over item's FMV is deductible Excess s What if don’t use? What s s Deductible even if the taxpayer does not use the item. Deductible Entire cost of the item is deductible if it is given back to the charity. s Membership fees or dues to charitable Membership organizations organizations s s Only to extent that amount paid exceed the benefits Only received. received. Certain membership benefits can be disregarded where Certain the membership payment is less than $75 the s s Certain expenses paid for a foreign or American Certain student student Certain costs of foster parents 85 Contributions of Property s Amount of contribution of property s Built-in gain or built-in loss Amount is the FMV of the property. Example: Clothes, toys, electronics Amount differs, depending on whether would recognize ORDINARY INCOME or LTCG if property sold 86 s Loss property (basis > FMV) s s s Gain or appreciated property (FMV > basis) s Contributions of Property s Gifts of ordinary income property (FMV > AB) Gifts s Amount is FMV less ordinary income or STCG s Normally adjusted basis. [§ 170(e)(1)(A)] Normally FMV – Ordinary income Adjusted basis FMV – Adjusted basis Ordinary income s Example…. 87 Contribution of Ordinary Income Property Example: Contribute inventory FMV $6,000, basis $1,000 FMV Adjusted Basis Ordinary income and appreciation Amount of Contribution ??? 6,000 (1,000) 5,000 (5,000) 1,000 88 6,000 Contribution of Ordinary Income Property Example: Contribute inventory FMV $6,000, basis $1,000 FMV Adjusted Basis Ordinary income and appreciation Amount of Contribution ??? 6,000 (1,000) 5,000 (5,000) 1,000 89 6,000 Contributions of Property s Ordinary income property includes s Noncapital assets such as Noncapital s s s Inventory Capital assets held for < one year Inventory and property that donors create, including Inventory works of art and manuscripts works s Depreciable property with depreciation recapture 90 Ordinary Income Property: Recapture Example: Contribute § 1231 machine worth $8,000, cost $4,000, depreciation $3,000, basis $1,000 FMV Adjusted Basis (4,000 – 3,000) Gain Recapture and Ordinary income Amount of Contribution ??? CONTRIBUTION IS NOT ADJUSTED BASIS 8,000 (1,000) 7,000 3,000 8,000 (3,000) 5,000 1,000 91 Ordinary Income Property: Recapture Example: Contribute § 1231 machine worth $8,000, cost $4,000, depreciation $3,000, basis $1,000 FMV 8,000 8,000 Adjusted Basis (4,000 – 3,000) Gain Recapture and Ordinary income Amount of Contribution ??? CONTRIBUTION IS NOT ADJUSTED BASIS (1,000) 7,000 3,000 (3,000) 5,000 1,000 92 Contributions of Property s Special incentives for C corps only Increased deduction Contribution is adjusted basis of property + ½ of the Contribution property’s appreciation but not > twice its basis property’s s s Adjusted basis + ½ (FMV – AB = appreciation) (FMV Deduction not to exceed 2 x AB Example …. 93 Contributions of Property s Special incentives for C corps only Increased deduction Contribution is adjusted basis of property + ½ of the Contribution property’s appreciation but not > twice its basis property’s s s Adjusted basis + ½ (FMV – AB = appreciation) (FMV Deduction not to exceed 2 x AB Example …. 94 Enhanced Contribution Deduction FMV Adjusted Basis Ordinary income and appreciation Contribution Calculation of Enhanced Contribution Deduction Adjusted basis + ½ appreciation Enhancement Limit: 2 x AB 2 x 100 ½ (600 – 100 = 500) 100 250 350 200 95 600 (100) 500 600 (500) 100 Enhanced Contribution Deduction FMV Adjusted Basis Ordinary income and appreciation Contribution Calculation of Enhanced Contribution Deduction Adjusted basis + ½ appreciation Enhancement Limit: 2 x AB 2 x 100 ½ (600 – 100 = 500) 100 250 350 200 96 600 (100) 500 600 (500) 100 Contributions of Property s Contributions eligible for increased deduction 1. Contributions of inventory used for care of children, the Contributions ill or needy 2. Contributions of inventory (scientific property) 2. s s s s s s Is scientific property or apparatus Is Newly manufactured by the corp Newly Donated within 2 years after manufacture Donee is original user Contributed to an educational institution, etc. Contributed 80% of use is for research and experimentation or training 80% Whether inventory or depreciable property Donated to schools (grades K –12) Donated Not more than 2 years old Not 97 1. 1. Computers and software Computers – – – Contributions of Property s s Gifts of appreciated property LTCG property Amount of contribution is FMV except s Tangible personal property (e.g., art) not used for donee’s tax-exempt purpose s s Deduction limited to property's basis. Not applicable to gifts of stock since intangible s Property donated to or for use of a private nonoperating foundation s s Deduction is limited to the property's basis Amount is FMV – appreciation (e.g., basis) Amount appreciation 98 Contributions of Property: Limitations s Three percentage limitations based on AGI s s s 50% of AGI: general overall limit 30% of AGI: gifts of LTCG property 20% of AGI: gifts of use and gifts to private nonoperating foundations s s Complex application and interaction Carryover of 5 years if limit applies 99 Contributions of Property: Limitations s 50% charities s Public charities (including private universities) and private operating foundations Maximum deduction is 50% of individual taxpayer’s AGI before any NOL carryback Includes (see IRS Pub. 78) s s s s s Churches, hospitals, publicly supported charities Private operating foundations Private nonoperating foundation that make qualifying distributions of 100% of contributions within 2 ½ months following the year they receive the contributions Certain private foundations that contribute to public charities 100 s Contributions of Property: Limitations s 30% on contributions of LTCG property s Contributions of LTCG property to a 50% charity further limited to 30% of AGI Avoiding 30% limit s s Elect not to use FMV but reduce value by unrealized appreciation s Other “30%” limit s Contributions to an organization that does not qualify as a 50% charity, are subject to a 30% limit 101 Contributions to Private Foundations s 20% Charities s Private nonoperating foundations that do not meet tests to be public charity (i.e., minimum distribution rules) Also includes contributions of LTCG property which is “used” by the charity Amount of property contribution is basis s s s Exception for certain "qualified appreciated stock" s Limitation does not apply to gifts of publicly traded stock so deduction is full FMV subject to 20% limitation s Limitation is 20% of AGI s This limitation is reduced by other contributions made during the year to which the 50% and 30% limitations apply Carryover for 5 years 102 s Contributions to Public Charities Tangible Personal Property Yes Yes No No Unrelated to exempt function Yes Yes Face Amount Adjusted Basis (FMV – OI) FMV - 100% apprec Elect to avoid 30% limit No FMV 30% limit Cash No LTCG Yes No Total to 50% Public Charities: Limited to 50% AGI, Excess Carryover Charitable Contributions: Property Type of Charity Type of Property Contributed Cash Ordinary Income Property LTCG Property Exceptions: TPP that is LTCG property not used according to donee’s exempt purpose Qual. Apprec. stock GROUP 1 Public Charities Face Value A/B FMV GROUP 2 Private, Non-operating Foundation, etc. Face Value A/B A/B A/B N/A N/A FMV 104 Charitable Contributions: Limitations Type of Charity Type of Property Contributed GROUP 1 Public Charities 50% AGI 50% AGI 30% AGI GROUP 2 Private, Non-operating Foundation, etc. 30% AGI 30% AGI 20% AGI Cash Ordinary Income Property LTCG Property Exception: If all LTCG property is valued at A/B 50% AGI N/A 105 Contributions of Property: Carryovers s 5 year carryover s Contributions not deductible currently due to various limitations may be carried forward for 5 years s Contributions made in current year are considered before any carryovers Contributions to private nonoperating foundations and certain other charities are subject to other limitations 106 s Charitable Contributions: Substantiation s Cash contributions: must have receipt or bank record Contributions of $250 or more require written Contributions acknowledgement by the donee organization. acknowledgement Noncash contributions of $500 or more require a Noncash description of the property on Form 8283 description No deduction for clothes and household items unless in No good condition! good Noncash contributions of $5,000 or greater must have an Noncash independent appraisal independent 107 s s s s Deduction Cut-Back Rule s Reduce itemized deductions other than medical expenses s gambling losses gambling s investment interest investment s casualty & theft losses by 1% (2008) of their AGI casualty s s Threshold: 2009 s $166,800 $166,800 s Reduction not > 26.67% of deductions subject to Reduction cut-back cut-back 108 ...
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