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Itemized receipt example for Research and Development

chapter 12 itemized deductions the following Forms and Publications were used in the research and development of this lesson Forms and Publications are available at .irs.gov the primary form utilized with itemized deductions is schedule a at the end of this lesson the student will be able to Define schedule a a phase out limits if any what does the term the floor mean what deductions are limited by the 7.5% floor what deductions are limited to the 2% floor how to calculate the floor and phase out from the taxpayer's AGI the taxpayer must decide whether to itemize deductions or use the standard deduction generally speaking experience will tell you unless someone has a mortgage in a mortgage on their property and are making payments on their mortgage they don't usually have enough itemized deductions to go that route and will benefit more from the standard deduction generally speaking but not always the case taxpayers should itemize deductions if the allowable itemize deductions are more than the standard deduction and that is always the challenge and easy to do with and doesn't take much time to sit with a client and review I had one client came in it was all excited because they had donated their car to a qualifying charity had received the form that indicated the value was $1,300 and of course was told that she could deduct this on her taxes unfortunately she had no other itemized deductions enough to Warrant using itemized deductions standard deduction was still a greater amount of deduction it was quite challenging to help her understand it's one or the other she of course would rather have both taxpayers not eligible to use the standard deduction are non-resident aliens dual status aliens and individuals who file returns for periods of less than 12 months taxpayers should itemize if they meet the following criteria if they do not qualify for the standard deduction or have large reimbursed medical or dental expenses that's another one I look for because even if they don't have a mortgage that may mean that standard deduction is greater it's possible with the large amount of medical or dental expenses it would still be greater to go with itemized deductions obviously the big one we see is paid mortgage interest or have a large unreimbursed employee business expenses I have several uh correctional officers that that fall under that category a lot of business expenses with their work that they pay for out of pocket that allows them and makes the itemized deductions amount larger or made large contributions to qualified Charities there's another one that could potentially it's never a bad thing it's always an easy quick thing to do if the client thinks that they're going to benefit better go through a quick exercise open up a schedu a ask them the questions enter the information under each category most of the time my experience shows that even when they think they qualify once you go through the exercise and show them the bottom line they will at least then understand no they're still better off with standard deduction but itemized deductions have to be higher than the standard deduction for their filing status makes sense now married filing separate taxpayers is unique category if the taxpayers are filing married filing separate and one spouse itemizes the other spouse spouse must itemize regardless of the fact that their total deductions may be less than the standard deduction to which they would otherwise be entitled again experience shows that if one benefits from itemized deductions probably the other spouse does not benefit and will actually be impacted with itemized deductions but they don't have a choice the first part of schedule a itemized d uctions is medical and dental expenses now this is a tricky one for people because they of course want to include everything which understandable as even including medical insurance the problem is in many cases the medical insurance is paid out of their payroll and is already on a pre-tax basis so they're already getting the benefit of it because it's already taken out of their taxable income and that's not always easy to show unless their paycheck is done by ADP because those pay stubs and those W2s do show the total income including what they were what they paid for their CAF plans and that's Cafe meaning and standing for medical and dental and possibly Vision uh insurance premiums so with that it's helpful to demonstrate to them that they've already received the tax Ben benefit upfront pre-tax which is why that is done through the payroll deductions so that cannot be included unless and the best question to ask is do you write a monthly check to an insurance company for medical no it comes out of my peoll bingo there's your clue then if you add it or not add it other than that medical and dental exper expenses do have a cap and that is if you see there on line three the 7.5% another term for a cap is a minimum cap or the floor medical care expenses can be deducted if amounts are paid for the diagnosis cure treatment or prevention of a disease or ailments affecting any part of or function of the body procedures such as face lifts hair transplants hair removal and lipos suction generally are not deductible cosmetic surgery is only deductible if it is to improve a deformity arising from or directly related to A congenital abnormality a personal injury resulting from an accident or trauma or a disfiguring disease one that we run across fairly often is tattoo removals so a person has had a tattoo and is decided that they don't want the tattoo anymore and go and pay for the tattoo to be removed the question again whether it's acceptable as a medic valid medical expense or not is was it used to improve or just you just chose you wanted it removed for instance if I have had issues where a person be uh got infected with the tattoo and therefore it was a medical necessity to remove it but if it's strictly a cosmetic oh I like that tattoo now I've changed my mind I want it removed that is not covered under schedule a medications are only deductible if prescribed by a doctor so certainly if there is some frequent medication as an example I was I have to take heartburn medication and heartburn medication is over the counter I asked my doctor if there's a way to get a prescription for the same thing and they said yes so now I am getting a prescription for it and the taxpayer can deduct medical and dental expenses that that exceed 7.5% of their AGI found on line 38 form 1040 so that's what that is doing here and when you see under the form of schedule a line one enter all your medical and dental expenses line two enter your AGI adjusted gross income line three multiply that by 7.5% and then subtract so only the difference so for example if you're if your AGI is $100,000 the first $7,500 of medical and dental expenses don't help you it's only the difference that you're able to deduct so it's a huge amount matter of fact our understanding is next year for 2014 that is going to be increased to 10% so again same example if you make 100,000 then you'd have to have medical and dental expenses greater than 10,000 before you could deduct even a dollar and in most cases we find that it's excessive I you know it's it's humorous to me the number of clients that come in say oh I had a lot of medical expenses this year oh what was your and before we get in and some and many times they'll bring in all the receipts and they're ready to add them all up I usually will save myself a lot of work by asking the client do you think it's more than $1,000 and many times oh no it's not anywhere near that all right well let's just say it's a thousand since you know it's no way can be at be more than that and then we do I do the formulation here in the calculation on the screen for the schedule a to determine okay see your income and 75 7.5% means that you'd have to have more than 3,000 before you could deduct anything and by that point they're like oh it's not anywhere near that and they put the receipts away and you save yourself quite a bit of time the taxpayer can deduct as medical expenses only those amounts paid during the taxable year for which they received no insurance or other reimbursement they must reduce their total medical expenses for the Year by all reimbursements for medical expenses that were received from insurance or other sources during the year this includes payments from Medicare they must be reduced by any reimbursement received for the expenses again to emphasize only the amount which is above the floor 7.5% or I like to call it minimum cap of the AGI will be deducted if the taxpayer has enough to file schedule a now here are some examples of deductible medical expenses medical insurance premiums including Medicare that were not paid through payroll now that's an important distinction there cuz people do well I pay medical insurance well sure you do how is it paid it comes out of my payroll well then it's already pre-taxed and you haven't paid tax and your only taxable income is the difference dental treatment prescription medicines medical service fees premiums paid for qualified long-term care insurance contracts can be deducted within limits for long-term care insurance also medical miles where I live the the closest uh Advanced facility is in Stanford about 120 miles away so many situations require commuting or or traveling to Stanford and back for treatments those are medic considered medical miles and are also deductible premiums paid for qualified long-term care insurance contracts can be deducted within limits for long-term care insurance certainly you want to look into more research on the spefic specifics if that applies you fees paid to retirement or nursing homes that are designed for medical care and psychiatric care are deductible meals lodging and prescriptions are deductible only if the individual is in the home primarily to get medical care if the main reason the individual is in the home is personal meals and lodging are not deductible a deduction may be taken for inpatient treatment at a drug or alcohol f therapeutic center for the addiction and in that case meals and lodging while at the center are deductible now what is non-deductible that are medical the biggest one your your patients will bring to you or patients your clients will bring to you is over-the-counter medication that cannot be deducted cough syrups you know aspirin anything like that expenses for General Health items so if you like to take take protein supplements or vitamin supplements they're not Ava it's not deductible Health Club dues funeral expenses that's sad you'll get that question a few times you know oh I I have all these expenses that had to bury my father unfortunately funeral expenses are not deductible insurance premiums paid for life insurance loss of earnings limb or site guaranteed payments for days the taxpayers is hospitalized for sickness or injury and the medical insurance coverage portion of the taxpayers auto insurance are not deductible cafeteria plans are not deductible unless the premiums are included in box one of form W2 and of course they're not if if it's taken out through payroll it is not included in box one the next section of the schedule a after medical and dental expenses is taxes you paid what taxes did you pay that you can use as a deduction on your federal taxes state taxes if you pay state taxes those are deductible on the federal local taxes if any apply foreign taxes how about real estate taxes or property taxes even personal property taxes can be deducted by the taxpayer such as DMV fees state and local general sales tax can be deducted instead of state and local income taxes as an itemized deduction that's always a question I ask any client did you purchase a new vehicle the previous year doesn't have to be brand new just new to you and if they say no generally speaking the state tax withheld is going to be greater now if you happen to be in a state like Texas where there is no state tax then obviously the sales tax is the amount you want to include there can either deduct actual expenses or an amount figured using the optional state sales tax tables and that you can find through your 1040 instructions the optional state sales tax tables is nice because you may be able to add to the table any state and local sales tax paid on Motor Vehicles boats and other items specified in publication 600 so that's why I ask about a new newer car can be a truck could be a boat could be an RV but though that is not a normal sales tax that a person pays out so the optional state sales tax tables figures in your AGI and determines you probably spent based on the percentage of sales tax in your area an x amount of money for sales tax if that amount is greater than the state tax withheld from the the checks then sales tax is used instead of state tax also real estate taxes paid State local or foreign real estate taxes paid for Real Estate owned by the taxpayer and only if the taxes are based on the assessed value of the property is deductible now many times this is and we'll speak about it in a couple of slides the real estate taxes are paid out through your mortgage in escrow account in which case there will be a documentation showing that if not then you will rely on your client to bring you the amount of real estate taxes paid most people are familiar with this as a viable deduction and bring the county uh sheets that have the little receipt coupons in there and it let you understand and gives you the information you need to enter the right amount of real estate taxes paid now the taxpayer should not include the following items when calculating his real estate tax deduction itemize charges for services to specific property or person charges for improvements that tend to increase the value of the property or if the charges were to repair an existing sidewalk the charges and any interest would be deductible refunds and rebates of real estate taxes or interest and penalties so the only two op two deductible expenses on primary residents is mortgage interest and property taxes or real estate taxes then you will have clients come in they'll have all their receipts for all the repairs they did on their primary residence and of course the improvements I would love that we could and this is how I help them understand I would love to be able to deduct that on my primary residence I just spent $112,000 replacing my roof unfortunately it will improve the quality of the home and will help me when I sell it but at the moment it is not a deduction personal property tax a taxpayer should deduct personal property tax only if it is a state or local tax that meets the following requirements charged on personal property your car tags boat tags quad tags ba motorcycle tags based only on the value of the personal property and charged on a yearly basis even if it is collected more than once a year or less than once a year so DMV fees is what we look at foreign taxes taxpayers can claim a credit for foreign taxes paid or take it as an itemized deduction under other taxes taxpayer may or may not have to complete form 1116 foreign tax credits if he elects not to deduct his foreign taxes paid on schedule a as an itemized deduction the tax professional should always review 1099 for for foreign taxes paid it is a box that you will see either under 1099 B or 1099d or 109 int any of them look for the box for foreign tax paid interest paid now you always have someone wanting to you put in here their car interest or their credit card interest personal loans such as cars such as uh credit cards are never a deductible or never a deduction you cannot deduct that interest but home mortgage interest and points absolutely now this is critical because to be able to put home mortgage interest in here you really need to see form 1098 and many times your clients will have them once in a while you'll get a client who do does not have say well I haven't received it well I've got to have it because that form goes to the IRS and it has the information of who whose name appears on the loan and the exact amount of interest paid out now it's possible that you have a client and I have several who bought the house in connection with a brother and therefore the brother's name may appear on the loan and they're qualified for half so it's important that you double check and know that all the interest on that 1098 is going to have the the full portion and then the clients telling you only half applies to them and that's perfectly fine home mortgage interest and points are deductible on a main home and a second home the home acquisition and home equity debt dollar limit apply to the total mortgage on both homes so I have many clients who have a rental have a home not a rental a main home primary residence and a vacation home say up at Lake Tahoe from not too far from here now form 109 98 mortgage interest statement usually includes the amount of points paid mortgage interest and real estate taxes if it's held in an escrow account otherwise like I said you will they will bring you the separate statements if you cannot if your client does not bring you a 1098 it's possible and what I've done many times is to look it up online but if it's not possible to look it up online you need to unfortunately have your client return once they get that 1098 or have them call the bank or the lending institution to see if you get someone to tell you that exact amount but we need the exact amount because that's the information that's going to the IRS so points often called loan origination fees maximum loan charges loan discount loan placement fees or discount points are really prepaid interest points that the seller pays for the the borrower are treated as being paid by the borrower generally the full amount of points paid cannot be deducted in the year paid because they are prepaid interest they must generally be deducted over the life of the mortgage so invariably you have to include that as and it ends up being like a $30 to $50 per year on their tax return for the next 30 Years investment interest is interest paid on money borrowed that is attributable to property held for investment it does not include any interest related to passive activities such as rental homes or to Securities that generate tax exempt income investment interest does not include any qualified home mortgage interest or any interest taken into account in Computing income or loss from a passive activity a passive activity again if you remember rental homes the next section of schedule a itemized dedu deductions is gifts to charity the IRS separates donations to charity in by cash or non-cash or other than cash meaning cash now when you tell somebody cash was I write a check that's cash that's considered cash some churches are even going to uh a credit card debit card system to where they pass through the instead of a plate they pass the little machine you can scan your your card and put in the amount that you want to give and therefore that is still considered cash otherwise other than cash and so I always ask my clients cash charity noncash meaning clothing Furniture anything or you know old computer anything that you may have donated to charity one key Point has to do it must be an a recognized charitable organization so Salvation Army Red Cross Goodwill these are recognized charitable organizations if they are not you know 503 companies which is a charitable organization then you can't just give it you can't give it to your Aunt Jane in you know in Oklahoma it's not she's not considered a charitable organization unless she does have a not for-profit organization you know and and license it's possible but they would have to have that contributions of money or property such as clothing to qualified organizations may be deducted not deductible are dues fees or bills to clubs lodges fraternal orders Civic leagues political groups for-profit organizations or similar groups also not deductible are Gifts of money or property to an individual such as a local collection to help a child receive an expensive medical treatment and that sounds sad but again that's not a or charitable organization perhaps in lie of giving find out what where the child is being treated and give a donation to the hospital or to the medical group that is treating them also the taxpayer may be able to deduct contributions to certain Mexican and Canadian charitable organizations under an income tax treaty with Mexico and Canada the organization must meet tests that are essentially the same as the tests that qualify us organizations to receive deductible contributions the organization may be able to tell you if they meet the necessary test one of the challenges too when you ask clients about cash donations they will usually talk about how they put $5 to $10 in the plate on Sunday mornings at at church as an example and make sure they understand the importance of having some type of a paper trail or you've got to have some kind of record that you actually donated so advise them not to just put cash in there but to write a check or if their Church provides envelopes put envelopes in put the money in envelopes and put your name on it therefore you will come back to you at the end of the year in a charitable statement contribution statement that will put you know will will be a document showing that how much you did donate because it's all has to be proved now another issue does have to do with casualty and theft losses and attach form 4684 and all of these usually have an additional form to attach not all of them but many of them do now casualty is the damage destruction or loss of property resulting from an identifiable event that is sudden unexpected or unusual the tornado in Oklahoma as is a very good example very sudden unexpected and unusual a loss on deposits can occur when a bank credit union or other financial institution becomes insolvent or bankrupt when property is damaged or destroyed as a result of hurricanes earthquakes tornadoes fires vandalism car accidents and similar events it is called a casualty loss a casualty loss must be sudden and unexpected therefore termite damage would not qualify taxpayer will need to complete form 4684 casualty and theft and attach it to his return the other limitation is in the minimum amount I had a good client good friend of mine who had his home broken into and they stole about $1,500 worth of personal belongings now he had insurance that covered it up to $1,000 deductible so we had $11,000 the minimum that cap on what can be included under casualty and theft is 10% of adjusted gross income as he and his wife combined make the $100,000 a year that meant the minimum to even enter a dollar amount under casualty and theft would for him have to have been $10,000 so it doesn't really benefit him I don't think I've ever done a return where someone had a big enough loss that they would actually be able to include it in their tax return apparently it looks like many and more Oklahoma will this year the next section is job expenses and certain miscellaneous deductions now these expenses for job expenses these are not self-employed people that is for Schedule C this is for you are an employee but there are certain expenses that are not paid by your employer you pay them I know of many life insurance salesmen who do a lot of traveling extensive traveling and none of those expenses are paid for or reimbursed by the parent company he makes Commission on it but he is still considered an employee he is not self-employed so as a W2 employee he has expenses that are not reimbursed a good example is here in the state of California correctional officers correctional officers must provide and pay for their own uniforms there is spefic specific requirements they're very expensive so they're able to deduct those uniforms cleaning fees requirements for grooming they're they're required to have and be on call 24 hours a day so they're required to have a cell phone with them at all times and yet they do not provide a cell phone so here are valid job related expenses that they of course must keep track of all the receipts on it and are able to include them under this category of job expenses and certain miscellaneous deductions one of the problems with this particular form is it's subject to 2% floor or there's a minimum cap so as you saw one of the line items is tax preparation fees now if that's the only thing someone has as tax preparation fees they usually cannot in that's not helping them because it's less than the minimum 2% so miscellaneous expenses may or may not be subject to a 2% limitation normally they are depending on the type of deduction only those miscellaneous expenses that exceed 2% of the taxpayers adjusted gross income can be deducted this effectively removes the deduction for most taxpayers it really does but for instance the correctional officers they mostly have all those viable expenses plus union dues that's another one that you can include here and uniforms you know that's nurses and doctors scrubs these are all viable expenses that they can deduct now the last little category under the schedule a is other miscellaneous deductions now there there is a list look at the list in the 1040 instructions for a complete detail there's a lot of tiny little things that don't generally apply to most people one that can is gambling losses now I always get a a giggle from my clients when I mention how much did you have in gambling losses and they're like oh my I well obviously some say I never gamble others say oh my I don't even want to try to count that up the tricky part with this one is that it's only losses up to the amount of gambling winnings which is always confusing to people because if there were no winnings then there are no losses to deduct the example I give is the gentleman who walks in and most you know typically when people go to gamble it's for entertainment so they're spending money and so they've spent a couple of thousand dollars and then he hits the jackpot and wins a th000 so he's all excited he won $1,000 he goes home and tells his family and his friends hey I want $1,000 in Vegas did he really win $1,000 no he actually still came out having spent $1,000 cuz he totally spent $2,000 but did get a jackpot of $1,000 so he's still in the hole that's where I've learned when people say they come back from Vegas and they break even they're not they didn't break even they're not building billion dooll hotels because people leave breaking even he's just saying that he didn't spend any more money than what he had planned on spending and that's fine that's good entertainment they enjoy it but it is is important under the tax return you must report the full amount of gambling winnings for the year you will get a w2g that information is entered then you see that income and we talked about it for line 21 of the 1040 and then you may deduct your losses no more than winnings on line 28 of schedule a you cannot reduce your gambling winnings by gambling losses and then just report the difference you must report the full amount of winnings as income and claim losses up to the amount of winnings I also remind my clients that the IRS can always ask you to prove that for instance if you know my client says hey I I you know got lucky on my on the scratch tickets and I won a million dollar I want to put on the return that I lost a million dollar as well well I think the IRS will probably want you to prove that most people especially if their incomes you know if they don't have much you know if they're not showing any money in in in savings accounts and they make $50,000 a year you know I would be suspect that that he had spent a million dollars to win a million dollars so I do advise people all EX all losses must be proven and of course that's usually the question I get back how do I prove that and I say well I don't know cuz I personally don't gamble but by all means you need a double check wherever you go ask them how can I prove what I've spent I'm sure they have a method calculated for you and figured out for you to track any gambling losses just so then in case you do win you can use those and you have your proof at the end of schedule a then you have total itemized deductions add the amounts in the far right column for lines 4 through 28 also enter this amount on form 1040 line 40 there have been in the past limitations if you had phase out amounts so if you made over a certain amount of money and I believe it was 125,000 a portion of your deductions could be reduced that has not into play for 2012 and and going forward also if you elect to itemize deductions even though they are less than your standard check here I have never had anybody feel that out I've never seen anybody really truly wishing to put in a lower amount then verily they're going to want and include whichever is the greater amount another fun issue is when for whatever reason a particular year someone has more deductions than their income it is possible with mortgage loans being paid off or refinanced that a d a 1098 might actually show more interest paid than what they actually make in a year CU once the the deduction is applied and the taxable income be turns to zero there is nothing else to deduct you can't go below zero and it's been humorous to try to help the clients understand there is no more to deduct well I've got more to deduct they're pulling out receipts they've got property taxes they've got all these things and like I usually just end up going ahead and entering it for them because it makes them feel better about it but it really doesn't matter the goal of it of course is to get to as close to zero taxable income as possible and if they're already there you're done there's nothing else to deduct that concludes itemized deductions your homework is to do chapter 12 review questions and tpas online and read chapter 13 for next one thank you