1. Income Tax Fundamentals 2010 edition Gerald E. Whittenburg Martha Altus-Buller 2010 Cengage Learning
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26. 2010 Cengage Learning Cash 50% of AGI LTCG property (see slide #22) STCG or ordinary income property Can deduct FMV less amount of gain that would’ve been recognized (the basis), then limited to 50% of AGI
27. Contributions to a 30% Organization Cash 30% of AGI LTCG property Cannot exceed 20% of AGI STCG or ordinary income property Can deduct FMV less amount of gain that would’ve been recognized (the basis), then limited to 30% of AGI 2010 Cengage Learning
28. 2010 Cengage Learning Order of charitable contribution deductions 1. Deduct 50% contributions 2. Deduct 30% contributions 3. Deduct 20% contributions Total of all 3 types of deductions still limited to AGI x 50%
Medical expenses, including amounts paid for dental treatment, drugs and medicines, nursing care, and certain transportation and travel required for medical care, are deductible as an itemized deduction. Code Section 213. The section allows a deduction for expenses paid during the taxable year for the medical care of the taxpayer, spouse, and dependents, to the extent that the expenses exceed 7.5 percent of the taxpayer's adjusted gross income (AGI). As a result of the 7.5 percent floor, only those individuals who incur extraordinary medical expenses benefit from the deduction. The medical expense deduction is not subject to the 2 percent floor imposed on miscellaneous itemized deductions. 1 Medical expenses are not deductible to the extent the taxpayer is reimbursed by insurance or otherwise
Eligible individuals may claim an "above the line" deduction for contributions they make during the tax year to their health savings account (HSA). Individuals—and employees, through an employer's cafeteria plan—can establish HSAs to reimburse them for qualified medical expenses paid during the year (Code Sec. 223).64 These accounts allow taxpayers with high deductible health insurance to make contributions in 2009 of up to $3,000 for self-coverage, $5,950 for family coverage, to cover health care costs. In 2010, the contribution limits will be $3,050 for self-coverage, $6,150 for family coverage (Rev. Proc. 2008-29; Rev. Proc. 2009-29). Amounts are excluded from gross income if paid or distributed from an HSA that is used exclusively to pay the qualified medical expenses of the account beneficiary, his or her spouse or dependents (Notice 2004-2).65 Distributions not so used are subject to income tax and a 10-percent penalty, unless made after the beneficiary reaches age 65, dies or becomes disabled (Code Sec. 223(f)(4)). The 10-percent additional tax is not treated as a tax liability for purposes of the alternative minimum tax (¶1420) (Code Secs. 26(b)(2)(S) and 55(c)(1)). Qualified medical expenses are generally the same expenses that qualify for the medical expenses deduction. Premiums for long-term care and coverage during periods of unemployment, whether through COBRA or not, also qualify.
A charitable contribution is a voluntary contribution or gift of property to certain qualified charitable organizations. A charitable contribution must be given without present or future expectation of any monetary or economic benefit to be derived from the contribution. Under Code Section 170, individuals who itemize their deductions are entitled to deduct contributions to a qualified charitable organization. An individual's deduction for charitable contributions is included on Schedule A of Form 1040. The amount of a taxpayer's charitable deduction depends on the type and value of the property contributed to the qualified charitable organization. Generally, a taxpayer may deduct the fair market value (FMV) of property contributed to charity. Reg. Section 1.170A-1(c)(1). Thus, when a taxpayer has depreciated property, it is generally best to sell the property where feasible and then donate the proceeds, if the taxpayer is able to deduct the loss.
In general, a taxpayer may deduct the fair market value (FMV) of property contributed to a charity. 40 In the case of contributions of appreciated property (i.e., property with a FMV in excess of the taxpayer's basis), deducting the FMV of the contributed property is especially beneficial because the contribution ordinarily is not a recognition event, and the taxpayer does not recognize the gain inherent in the property. For example, if a taxpayer contributes to a charity publicly traded stock with a FMV of $10,000 and a basis of $1,000, a $10,000 deduction is allowed. On the other hand, if the taxpayer sold the stock for its FMV and then gave the $10,000 to the charity, the same $10,000 deduction would be allowed, but the taxpayer must recognize a $9,000 gain on the sale, leaving a net benefit of only $1,000.
taxpayer must reduce the amount of a charitable contribution by the amount of gain (other than long-term capital gain, not including long-term gain from certain self-created musical works under Code Section 1221(b)(3)) that would have been recognized if the property had been sold at its fair market value at the time of the contribution. Code Section 170(e)(1)(A); Reg. Section 1.170A-4(a)(1). However, this rule does not apply to certain contributions of food. See Section 42.5(c). In addition, exceptions apply for corporations contributing particular types of property. See Section 42.15(d).
For contributions of cash, checks, or other monetary gifts (regardless of amount), made in taxable years beginning after August 17, 2006, no charitable deduction is allowed unless the donor maintains as a record of such contribution (1) a bank record or (2) a written communication from the donee showing the name of the donee organization, the date of the contribution, and the amount of the contribution. Code Section 170(f)(17). The recordkeeping requirements cannot be satisfied by maintaining other written records. A taxpayer making a charitable contribution of property other than cash must have a receipt from the charitable organization receiving the property. Reg. Section 1.170A-13(b)(1). In general, the receipt must include the name of the donee, the date and location of the contribution, and a description of the property in reasonably sufficient detail to identify the particular property contributed. Although the fair market value of the property is one of the circumstances to be taken into account in determining the amount of detail to be included on the receipt, value need not be stated on the receipt. 114 If it would be impracticable to obtain a receipt, the donor must maintain reliable written records regarding the contribution.
Beginning in 2005, contributions of vehicles are subject to rules different than other contributions of property. See Section 42.18(a) for the definition of a vehicle for this purpose. Under these rules, if the claimed value of a donated vehicle exceeds $500, the amount of the deduction is limited to the proceeds of the sale if the charitable organization sells the vehicle without any significant intervening use or material improvement. Code Section 170(f)(12)(A). COMPLIANCE TIP: Copy A of Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes, must be filed with the IRS for each contribution of a qualified vehicle that has a claimed value of more than $500. Form 1098-C, Copy B, may be used as the contemporaneous written acknowledgment for a qualified vehicle with a claimed value of more than $500. Form 1098-C (Copy C only) may be used as the contemporaneous written acknowledgment for a qualified vehicle with a claimed value of at least $250, but not more than $500. 2006 Instructions for Form 1098-C.
An individual is permitted to deduct losses to her property arising from "fire, storm, shipwreck, or other casualty, or from theft." The term "other casualty" has been the subject of a great deal of litigation, but is most often defined as a sudden, unexpected event that is unusual in nature and beyond the control of the taxpayer. A theft loss technically is not a casualty loss, but theft losses are aggregated with casualty losses for most purposes. The first $100 of each personal casualty or theft loss is not deductible, and personal casualty and theft losses are generally deductible only to the extent they exceed 10 percent of the taxpayer's AGI. Casualty losses are ordinarily deductible in the year the casualty occurs. A special relief provision, however, permits a taxpayer to elect to deduct casualty losses caused by certain disasters either in the year of occurrence or the immediately preceding year. Code Section 165(i). To qualify for the election, the loss must be caused by a disaster in an area designated by the President to be an area in need of federal assistance under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. Code Section 165(i)(1).
Talk about Hobby losses--To constitute the carrying on of a trade or business, the activity "must be carried on in good faith, with the dominant hope and intent of making a profit." 6 Profit refers to economic profit, independent of tax savings. 7 The expectation of a profit need not be reasonable, merely bona fide. 8 For a taxpayer to be engaged in a trade or business, his primary purpose for engaging in the activity must be for income and profit -- and he must be involved in the activity with continuity and regularity. Groetzinger v. United States, 480 U.S. 23 (1987). Each of the factors is discussed in the following sections: Manner in Which the Taxpayer Carries on the Activity Expertise of the Taxpayer Time and Effort Expended by the Taxpayer Expectation of Future Profitability or that Assets Used in the Activity May Appreciate in Value; Past Success of the Taxpayer Taxpayer's History with Respect to the Activity Amount of Occasional Profits; Financial Status of the Taxpayer; Elements of Personal Pleasure or Recreation.
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