Chapter 7-Prentice Hall's Federal Taxation 2016

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Medical expense deductions

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Section 231, taxpayers may deduct medical expenses only to the extent the expenses exceed 10% of the taxpayer's AGI.

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Taxpayer's dependent

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Deductible medical expenses include those paid on behalf of a taxpayer's dependent as well as on behalf of a person for whom the taxpayer could take a dependency exemption except for the failure to meet the gross income or joint return tests.

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Children of divorced parents

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As long as one parent qualifies to claim the dependency exemption under section 152(e), the parent who pays medical expenses on behalf of the children may deduct the expenses. The parent taking the medical expense deduction doesn't need to be the parent who may claim the dependency exemption.

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Qualified medical expenses

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Section 213 defines medical care as amounts paid for

-The diagnosis, cute, mitigation, treatment, or prevention of disease.

-The purpose of affecting any structure or function of the body.

-Transportation primarily for and essential to the first two items listed above.

-Qualified long-term care services.

-Insurance covering all of the items listed above.

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Capital expenditures for medical care

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Generally, taxpayers may not currently deduct capital expenditures for federal income tax purposes. Capital expenditures incurred for personal medical purposes are not depreciable or amortization. However, a deduction is available when the capital expenditure is made to acquire an asset primarily for the medical care of the taxpayer, the taxpayer's spouse, or the taxpayer's dependents.

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Three categories of deductible capital expenditures for medical care

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1. Expenditures that relate only to the sick or handicapped person, not to the permanent improvement or betterment of the taxpayer's property.

2. Expenditures that permanently improve or better the taxpayer's residence for the purpose of providing medical care.

3. Expenditures to remove structural barriers in the home of a physically disabled individual.

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Capital expenditures that relate only to a sick person

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Fully deductible in the year paid

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Expenditures that improve the residence

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Deductible only to the extent that the amount of the expenditure exceeds the increase in the fair market value of the residence.

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Expenditures to remove physical barriers in the home of a physically disabled person

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Deductible in full

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Any costs of maintaining the assets in all three categories

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Deductible as long as the medical reason for the capital expenditure continues to exist.

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Costs of living in institutions

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The entire cost of in-patient hospital care, including meals and lodging, qualifies as a medical expense.

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Medical insurance premiums

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Qualified medical expenses also include premiums paid for medical insurance, including premiums paid for supplementary medical insurance for the aged under the social security act and premiums paid for qualified long-term care insurance contracts.

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Limitation on amount deductible

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Other than medical insurance premiums paid by self-employed individuals, the tax law allows a medical expense deduction only for the years in which the taxpayer itemizes his or her deductions and the taxpayer's expenditures for medical care exceed 10% of AGI.

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Medical insurance reimbursements

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Taxpayer's may only deduct unreimbursed medical expenditures.

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State and local income taxes

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Normally an itemized from AGI deduction. A taxpayer does not receive any federal income tax benefit if these taxes, in addition to the taxpayer's other itemized deductions, do not exceed the standard deductions.

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State and local sale taxes

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Taxpayer's are allowed to deduct state and local sales taxes in lieu of state and local income taxes.

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Personal property taxes

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To qualify as a deductible personal property tax, the levy must meet two basic tests:

1. The tax must be an ad valorem tax on personal property. The property's value determines the amount of the tax rather than some other measure such as a vehicles weight or model year.

2. The tax must be imposed on an annual basis, even if not collected annually.

If a personal property tax is based partly on value and partly on some other basis,'only the ad valorem portion is deductible.

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Real Estate taxea

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When real estate is sold during the year, the federal income tax deduction for property taxes imposed on that real estate is allocated between the seller and the purchaser based on the amount of time each taxpayer owns the property during the real property tax year.

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Self-Employment Tax

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Wages paid to an employee are subject to a payroll tax which consists of two components (OASDI and Medicare). Both the employer and the employee generally pay a share of the tax imposed. Self employed individuals must pay both of these taxes on their self-employment income.

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Classification of interest expense

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Interest incurred in the taxpayers active business is deductible in full against the business income (a deduction for AGI). Except for certain student loan interest and certain interest on a personal residence, taxpayers may not deduct interest allocated to personal-use expenditures.