Ch. 7 Notes (Part I)

emized Deductions

Personal Deductible expenses: chapter 7 is principally concerned with expenses that are essentially personal in nature but which are deductible due to legislative grace

Business expenses versus itemized deductions. It is important to understand the differences between business expenses, expenses incurred for the production of income and itemized deductions.

a. Business expenses are deductible under Section 162 and are deductible for AGI. Individual taxpayers who are engaged in a trade or business deduct business expenses on schedule C of form 1040.

b. Generally, expenses incurred for the production of income are itemized deductions under Sec. 212 are reported on schedule A. however, expenses related to the production of rent or royalty income are deductions for AGI and are reported on schedule E.

c. Itemized deductions that are related to the production of income include, but are not limited to, medical expenses, state and local income and sales taxes home mortgages and investment interest, casualty losses, charitable contributions and miscellaneous itemized deductions.

Itemized Deductions versus Standard Deductions – Itemized deductions are deducted from AGI if they exceed the taxpayer’s standard deduction. If itemized deductions do not exceed the standard deduction, they are "lost because they do not produce a tax benefit.

Allowable Medical expenses.

d. Medical expenses include all preventative and diagnostic measures. Thus, the cost of an annual physical exam qualifies even though the taxpayer is in good health.

e. Cosmetic surgery (e.g. Face lifts, hair transplants for necessary cosmetic surgery in not deductible, Necessary cosmetic surgery includes procedures that ameliorate:

1. . a deformity arising from a congenital abnormality

2. a personal injury resulting from accident or trauma or

3. a disfiguring disease



c. nursing home expenses need not be performed by a nurse as long as the services are of a kind generally performed by a nurse.

5. Effect of physician recommendation: Although the recommendation of a doctor is important, it is not controlling as far as deductible expenditures are concerned. Suppose, for example a child psychiatric recommends a private school in order to alleviate the learning disorder of a taxpayer’s child, by itself this does not male the tuition paid to the private school a deductible medical expense.

further investigation is necessary, it the tax benefit the primary reason the child is in the school?

6. Deductible as a medical expense: A capital expenditure dictated by medical necessary can de deducted as a medical expense.

a) Capital expenditures for medical purposes are not capitalized and depreciated. The deduction is taken in the year the medical expense is incurred, even though the asset’s useful life may extend over a period of several years,

b) The measure of the deduction is the amount of the expenditure less the increase in value to the personal residence resulting from the expenditure. In addition, operating costs related to the capital expenditure are deductible.

C) certain qualifying home-related capital expenditures incurred to eliminate structural barriers to accommodate a physical handicap of the taxpayer, spouse, or dependent are deductible in full. Thus, in increase-in-value adjustment need not be made.

d) Past IRS pronouncement have allowed a medical expense deduction for capital modifications to cars, vans, and telephones owned by handicapped taxpayers.

Special Rule for Children of Divorced Parents. One issue mention in the text deals with a situation that can arise in the case of divorced parents with children.

Ex- Fred and Marge were divorced in 2006, and under the terms of the divorce, Marge is awarded custody of their one child Cindy. In addition to required child support payments of 3,600 during 2007, Fred pays 2,555 of Cindy’s medical expenses. Together, both Fred and Marge proved more than ½ of Cindy’s support.

Because either parent could have claimed the child as a dependent of 2007 could have claimed Cindy as a dependent if Marge has signed a waiver to this effect each parent may deduct the medical expenses he or she pay for the child. Thus, Fred can include the 2,500 that he paid for Cindy’s medical expense in computing his medical expense deduction

A) Neither the gross income nor the joint return test applies in determining dependency status for medical expense deductions.

8) Deductibility of Transportation Expenses: In connection with the deductibility of transportation expenses, consider the following:

Example: Jason living in NYC and had a circulatory condition that had resulted in several strokes in the past. Jason’s physician advises him that another winter in the northern climate could prove fatal. According, Jason travels to Florida where he and his family send the winter in a rented apartment.

Based on a classic Supreme Court case, Jason should be allowed to deduct his round-trip transportation costs between New York and Florida. However, the meals and lodging en-route any living expenses while in Florida, or expenses attributed to Jason’s family, would not be deducted.

On the other hand, a change of climate recommended by a physician or general improvement of health is not enough justification to allow the deduction of transportation expenses.

9) Transportation to and from the point of treatment. Payments for transportation to and from point of treatment for medical care are deductible as medical expenses

a) Such expenses include bus, taxi, train, or plane fare charges for ambulance service, and out of pocket expenses for the use of an automobile.

B) Instead of the actual out of pocket expense for the use of an automobile, a mileage allowance of 20 cents per mile may be used in 2007. Related tolls and parking fees are also deductible.

C) Deduction for transportation of an accompanying parent, aide, or nurse is permitted.

10) Lodging for Medical Care

a) A deduction may be allowed for lodging while away from home for medical expenses.

b) To be a deductible, the following requirements are satisfied:

1) the lodging is primarily for and essential to medical care.

2) The medical care is provided by a doctor in a licensed hospital or a similar medical facility.

3) The lodging is not lavish or extravagant under the circumstances.

4) There is no significant element of person pleasure, recreation, or vacation in the travel away from home.

The ceiling on the lodging deduction is 50 per night for each person, including the patient and traveling companion.

11) Medical insurance premiums are included with other medical expenses subject to the 7.5% of AGI floor.

a) The deductible amount included premiums paid for the taxpayer, spouse, and dependents.

b) A self-employed taxpayer may deduct 100% of medical insurance premiums as a business expense.