E aie ITEMIZED DEDUCTIONS LEARNING OBJECTIVES After studying this chapter, you should be able to > Identify qualified medical expenses and compute the medical expense deduction P> Determine the timing of a medical expense deduction and the effect of a reimbursement D> Identify taxes that are deductible as itemized deductions D> Identity ciferent types of interest deductions B> Compute the amount of investment interest deduction D> Compute the deduction for qualified residence interest Compute the amount of a charitable contribution deduction and ~ identity imitations D> Identify certain miscellaneous itemized deductions subject to the 2% of = = AGI limit D> Compute total itemized deductions for a taxpayer who is subject to the itemized deduction phase-out i TA7-2 Individuals ¥ Chapter 7 CHAPTER OUTLINE —_Asexplained in Chapter I:6, most deductible expenses for individuals fit into three general Medical Expenses..7.2 categories: Tse > Expenses incurred in a trade or business Chartabi Contributions..7-21 ® Expenses incurred for the production of income (an investment activity) or for tax Casualty and Theft Losses..7-28 advice Miscellaneous itemized ‘ertain specified personal expenses Deductions. 28 Fearne Reduction of Cerin temized _Ifan expense is deductible based on the above categories, the expense must be classified as Deductons.7-29 either for AGL or from AGI. The distinction between for and from AGI was discussed in ExFlanning Considerations..7-30 Chapter 1:6. This chapter focuses on deductions from AGI, also referred to as itemized Gaines deductions, which include medical expenses, taxes, interest, and charitable contributions. Chapter I:9 discusses other itemized deductions, such as employee business expenses, and Chapter 1:8 discusses casualty losses on personal-use property. In arriving at taxable income, individuals may subtract from AGI the larger of the standard deduction or the sum of all itemized deductions. However, as explained later in this chapter, having AGI in excess of certain limits causes certain itemized deductions to be reduced, (EMA vicar ExPENSES ‘Medical expenses, which comprise one category of deductible personal expenditures, are deductible because Congress felt that excessive medical expenses might ultimately affect a taxpayer's ability to pay his or her federal income tax. However, under Sec. 213, taxpay- cers may deduct medical expenses only to the extent the expenses exceed 7.5% of the tax- payer's AGI. To qualify as a medical expense deduction, the expenditure must be incurred. for the medical care of a qualified individual. Taxpayers may not take a deduction for ‘medical expenses to the extent the expenses are reimbursed (ie., compensated for by insurance or otherwise) QUALIFIED INDIVIDUALS To deduct medical expenses, taxpayers must pay the expenses on behalf of themselves, their spouses, or their dependents. ‘TAXPAYER'S DEPENDENT. Deductible medical expenses include those paid on behalf cof 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.! EXAMPLE 1:7-1 D> _ InMarch of the current year, Jean's son, Steve is involved in an automobile accident. Steve is 25 years old at the time of the accident and has worked full-time for part of the year, earning a KEY POINT total of $15,000. Because Steve has no medical insurance and cannot pay the medical bills or Medical expenses are deductible support himself asa result ofthe accident, Jean pays Steve's medical expenses and supports him {or a person wh satiies only the for the rest of the year. Because Jean provides over one-half of Steve's support forthe year and ‘Supper. relatinship. andctzer~ steve, except for the gross income test, otherwise qualifies as Jean's dependent, Jean may ‘deduct the medical expenses she pays on his behalf. Jean may not claim a dependency exemp- tion for Steve because the gross income tests not satisfied. < CHILDREN OF DIVORCED PARENTS. As long as one divorced parent qualifies to claim the dependency exemption under Sec. 152(e), the parent who pays medical expenses ‘on behalf of the children may deduct the expenses. The parent taking the medical expense deduction need not be the parent who may claim the dependency exemption. * Sec. 152 See Chapter 2 forthe tess that mus be met to claim a gualihing child or quahiyingtlaive as a dependent.GE 1 Identity qualified medical expenses and compute the medical expense deduction ADDITIONAL COMMENT In 2005, the deduction for med. ical expenses totaled over $67 bil lion, representing 6.0% of the ‘ota dollar amount of itemized deductions, making ithe fifth largest itemized deduction. EXAMPLE 1:7-2 EXAMPLE 1:7-3 ADDITIONAL COMMENT ‘One cannot deduct the cast of nonprescription medicine (except insulin), toothpaste, toiletries, maternity clothes, diaper sevice, ‘or funeral expenses Itemized Deductions ¥ Individuals 7-3 QUALIFIED MEDICAL EXPENSES ‘The medical expense deduction is available only for expenditures paid for medical care. Section 213 defines medical care as amounts paid for > ‘The diagnosis, cure, 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 DIAGNOSIS, CURE, MITIGATION, TREATMENT, OR PREVENTION OF DISEASE. Although the tax law does not precisely define the term medical expense, it is clear that medical expenses are deductible only if paid for procedures or treatments that are legal in the locality in which they are performed. For example, taxpayers may not deduct expen- ditures for controlled substances. The definition of medical care includes preventive measures such as routine physical and dental examinations. However, other expenses should be “confined strictly to expenses incurred primarily for the prevention or allevia- tion of a physical or mental defect or illness.” Thus, unless they are for routine physical oF dental examinations, the expenditures must be for the purpose of curing a specific ailment rather than related to the general health of an individual. This determination is especially critical when the expenditures in question are for items such as vacations, weight loss pro ‘grams, or stop smoking programs. The taxpayer may or may not incur such expenses for a specific ailment. > Helmut is nervous and iritable because of pressures at work and begins to suffer angina symp- ‘toms. In order to relax and get away from it all, he takes an ocean cruise around the wortd Helmut’s angina symptoms ease while he is on the cruise. However, the Tax Court held that a ‘cruise is nota proven medical necessity because Helmut's physician did not specifically prescribe it. Although the cruise was beneficial to Helmut's general health, it was not deductible? > Dave enrolls in a weight reduction program on the advice of two doctors who prescribe the program as a means of relieving his obesity, hypertension, and certain hearing problems. These ‘expenses qualify as deductible medical expenditures because they are incurred for specific medical conditions.* < Although receipt of a doctor's recommendation for incurring the cost appears to lend ‘a great deal of weight to deductibility, itis not always sufficient. For example, a taxpayer could not deduct the cost of dancing lessons for an emotionally disturbed child, even though the lessons proved to be beneficial and were recommended by a physician. Likewise, a taxpayer suffering from arthritis could not deduct the cost of ballroom dance lessons, even though a doctor recommended the lessons. On the other hand, the IRS has ruled that the cost ofa clarinet and clarinet lessons was deductible when recommended by an orthodontist to correct a malocclusion of a child’s teeth.’ In short, determining the deductibility of certain expenditures can be difficult. Range of Deductible Medical Services. According to the Treasury Regulations, typical medical expenses include payments for a wide range of medical, dental, and other diagnos- tic and healing services. Thus, taxpayers may deduct payments to licensed or certified med- ical professionals such as general practitioners, obstetricians, surgeons, ophthalmologists, opticians, dentists, and orthodontists. Furthermore, deductible medical expenditures 2 Reg, Se. 1.213-If)I}i See also Rev. Ra 97-9, 1997-1 CB. 77 and IRS Poblicacion S02 (2007) which contain the IRS recommended trestment for 4 numberof medical expenses. ® Daniel E. Mil, 1980 PH TC. Memo 80,227, 40°CM 552. Even ifthe taxpayers physician had prescribed the tip, i still may not have been edible See Reg See. 1.13-1(€1 Hl * Ret Rul 2002-19, 2002-1 CB. 778. However, the cos of det fods or weight loss programs directed at general health or appearance is not ‘edctble. Farhermore, coms incired for prescription drops and programs to sop smoking are deduce but overhe-counter stop smoking ids are ot See Rey. Rul 99.28, 1999-1 CB. 1269. Sfobs J. Thoene, 33 EC. 62 (1959), Rose C. France CIR, $0 AFTR 2d 82 $508, 1982-1 USTC 49225 (6th Cir, 1982), and Rev, Rol. 62-210, 1962-2 cats,