South-Western Federal Taxation 2018

Corporations Partnerships 41st Edition

Hoffman Solutions Manual
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 Instructor’s Manual – McGraw-Hill’s Taxation, by Spilker et al

Chapter 7
Individual From AGI Deductions

INSTRUCTOR’S MANUAL

Learning Objectives
1. Describe the different types of itemized deductions available to individuals and compute itemized
deductions.
2. Explain the operation of the standard deduction, determine the deduction for personal and
dependency exemptions, and compute taxable income.

Teaching suggestions
In Chapter 5, we discussed the calculation of gross income and identified several specific types of taxable
income and exclusions. In Chapter 6, we described the for AGI deductions. In this chapter, we complete
the computation of taxable income by explaining deductions “from AGI” (also called deductions “below
the line” or “itemized” deductions). The chapter provides sufficient detail for a rather in-depth
understanding of itemized deductions, which could easily be covered in one class session. However, if the
course is a “survey” course, you might suggest students skip the detailed calculations for charitable
contributions and the hobby loss rules, which are two of the more challenging computations in the
chapter.

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 Instructor’s Manual – McGraw-Hill’s Taxation, by Spilker et al

Assignment Matrix
Learning Text Feature
Objective

Tax Forms
Research

Planning
Problem
Difficulty

Time
LO1

LO2

LO3
DQ7-1 20 min. Medium X
DQ7-2 20 min. Medium X
DQ7-3 20 min. Medium X
DQ7-4 20 min. Medium X X
DQ7-5 20 min. Medium X X
DQ7-6 20 min. Medium X X
DQ7-7 20 min. Medium X X
DQ7-8 20 min. Medium X X
DQ7-9 20 min. Medium X X
DQ7-10 20 min. Medium X X
DQ7-11 20 min. Medium X X
DQ7-12 10 min. Medium X
DQ7-13 10 min. Medium X X
DQ7-14 10 min. Medium X X
DQ7-15 10 min. Medium X X
DQ7-16 10 min. Medium X X
DQ7-17 25 min. Hard X X
DQ7-18 25 min. Hard X X
DQ7-19 25 min. Hard X X
DQ7-20 20 min. Hard X X
DQ7-21 20 min. Medium X
DQ7-22 20 min. Medium X
DQ7-23 20 min. Hard X X
DQ7-24 20 min. Hard X X
DQ7-25 20 min. Hard X X
DQ7-26 20 min. Hard X
DQ7-27 20 min. Hard X
P7-28 15 min. Easy X
P7-29 15 min. Easy X
P7-30 20 min. Medium X
P7-31 20 min. Medium X
P7-32 10 min. Easy X
P7-33 20 min. Medium X
P7-34 15 min. Easy X
P7-35 15 min. Easy X X
P7-36 20 min. Medium X
P7-37 20 min. Medium X
P7-38 20 min. Medium X
P7-39 20 min. Medium X X

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 Instructor’s Manual – McGraw-Hill’s Taxation, by Spilker et al

P7-40 15 min. Easy X

P7-41 25 min. Medium X
P7-42 20 min. Medium X
P7-43 25 min. Medium X
P7-44 30 min. Hard X
P7-45 25 min. Medium X
P7-46 20 min. Medium X
P7-47 20 min. Easy X
P7-48 20 min. Easy X
P7-49 20 min. Medium X X
P7-50 25 min. Medium X X
P7-51 20 min. Medium X X
CP7-52 45 min. Hard X X X X
CP7-53 45 min. Hard X X X X
CP7-54 45 min. Hard X X X X

Lecture Notes
1) Deductions from AGI: Itemized Deductions
a) Medical expenses
i) Designed to provide relief for taxpayers whose ability to pay taxes is seriously hindered by
health-related circumstances
ii) Qualifying medical expenses include any payments for the care, prevention, diagnosis, or
cure of injury, disease, or bodily function that are not reimbursed by health insurance or are
not paid for through a “flexible spending account.”
iii) Common medical expenses include:
(1) Prescription medication and medical aids such as eyeglasses, contact lenses, and wheel
chairs.
(2) Payments to medical care providers such as doctors, dentists, and nurses and medical care
facilities such as hospitals.
(3) Transportation for medical purposes.
(4) Hospitals and long-term care facilities.
(5) Health insurance premiums (if not deducted for AGI by self-employed taxpayers) and
insurance for long-term care services.
iv) Work through Example 7-1
v) Transportation and travel for medical purposes
(1) Taxpayers traveling for the primary purpose of receiving essential and deductible medical
care may deduct the cost of the travel (including meals and lodging, with certain
restrictions) and transportation.
(2) Taxpayers using personal automobiles for medical transportation purposes may deduct a
standard mileage allowance in lieu of actual costs.
(3) Work through Example 7-2
vi) Hospitals and long-term care facilities
(1) Taxpayers may deduct the cost of meals and lodging at hospitals.
(2) Work through Example 7-3
vii) Medical expense deduction limitation
(1) The deduction for medical expenses is limited to the amount of unreimbursed qualifying
medical expenses paid during the year (no matter when the services were provided)

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 Instructor’s Manual – McGraw-Hill’s Taxation, by Spilker et al

reduced by 10 percent (7.5 percent if the taxpayer or spouse is 65 or older, through 2016)
of the taxpayer’s AGI.
(2) Work through Example 7-4
b) Taxes
i) State, local, and foreign income taxes, including state and local taxes paid during the year
through employer withholding, estimated tax payments, and overpayments on the prior year
return that the taxpayer applies to the current year
ii) State and local sales tax deduction in lieu of state and local income tax
iii) Real estate taxes on property held for personal or investment purposes
iv) Personal property taxes that are assessed on the value of the specific property
v) Work through Example 7-5
c) Interest
i) Individuals can deduct interest paid on loans secured by a personal residence (on acquisition
indebtedness up to $1,000,000 and home-equity indebtedness up to $100,000).
ii) Individuals can also deduct interest paid on loans used to purchase investment assets such as
stocks, bonds, or land.
iii) Work through Example 7-6 & 7-7
d) Charitable contributions
i) Congress encourages donations to charities by allowing taxpayers to deduct contributions of
money and other property to qualified charitable organizations.
ii) Qualifying charitable organizations include organizations that engage in educational,
religious, scientific, governmental, and other public activities.
iii) Work through Example 7-8
iv) Contribution of money
(1) Cash contributions are deductible in the year paid, including donations of cash or by
check, electronic funds transfers, credit card charges, and payroll deductions.
(2) Work through Example 7-9
v) Contributions of property other than money
(1) When a taxpayer donates property to charity, the amount the taxpayer is allowed to
deduct depends on whether the property is capital gain property or ordinary income
property.
(2) Work through Example 7-10, 7-11, 7-12
vi) Charitable contribution deduction limitations
(1) The amount of a taxpayer’s charitable contribution deduction for the year is limited to a
ceiling or maximum deduction.
(2) Refer to Exhibit 7-1 for a Summary of Charitable Contribution Limitation Rules.
(3) Work through Example 7-13
e) Casualty and theft losses on personal-use assets
i) Individuals are allowed to deduct casualty and theft losses realized on personal-use assets.
ii) Tax loss from casualties
(1) Deductions are allowed for unreimbursed casualty and theft losses because these losses
may substantially reduce a taxpayer’s ability to pay taxes.
(2) Work through Example 7-14
iii) Casualty loss deduction floor limitations
(1) Casualty losses must exceed two separate floor limitations to qualify as itemized
deductions. The first floor is $100 for each casualty event during the year. The second
floor limitation is 10 percent of AGI and it applies to the sum of all casualty losses for the
year (after applying the $100 floor).
(2) Work through Example 7-15
f) Miscellaneous itemized deductions subject to AGI floor
i) Variety of deductions that address specific objectives but do not fit easily into any category

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 Instructor’s Manual – McGraw-Hill’s Taxation, by Spilker et al

ii) Employee business expenses

(1) Work through Examples 7-16 and 7-17
(2) Travel and transportation
(a) Work through Example 7-18
(3) Employee expense reimbursements
(a) Work through Example 7-19
iii) Investment expenses
(1) Expenses associated with investment income or property
(2) Investment advisory fees
(3) Safe-deposit box fees
(4) Subscriptions to investment-related publications
iv) Tax preparation fees
(1) Work through Example 7-20
v) Hobby losses
(1) Factors to consider to determine hobby status
(2) If activity, revenue is included in gross income and expenses are deducted as itemized
deductions (mortgage interest, real estate taxes, miscellaneous itemized deductions)
(3) Expenses deducted in specific order (expenses otherwise deductible are deducted 1st
(mortgage interest, real estate taxes), all other deductible expenses except depreciation
are deducted 2nd, and depreciation is deducted last)
(4) Work through Example 7-21
vi) Limitation on miscellaneous itemized deductions (2 percent of AGI floor)
(1) Work through Example 7-22
g) Miscellaneous itemized deductions not subject to AGI floor
h) Phase-out of itemized deductions
i) A taxpayer’s total itemized deductions other than medical expenses, casualty losses,
investment interest expense, and gambling losses is subject to a phase-out.
i) Summary of itemized deductions
i) Work through Example 7-23
ii) Refer to Exhibit 7-2 for Schedule A—Itemized Deductions.
2) The Standard Deduction and Exemptions
a) Standard deduction
i) A flat amount that most individuals can elect to deduct instead of deducting their itemized
deductions (if any)
ii) Taxpayers generally deduct the greater of their standard deduction or their itemized
deductions.
iii) The amount of the standard deduction varies according to the taxpayer’s filing status, age,
and eyesight.
iv) The basic standard deduction is greater for married taxpayers filing jointly and those
supporting a family (head of household) than it is for married taxpayers filing separately and
unmarried taxpayers not supporting a family.
v) Taxpayers who are at least 65 years of age on the last day of the year or blind are entitled to
additional standard deduction amounts above and beyond their basic standard deduction.
vi) Refer to Exhibit 7-3 for Standard Deduction Amounts.
vii) Work through Example 7-24 and 7-25
viii)Bunching itemized deductions
(1) Some taxpayers may deduct the standard deduction every year because their itemized
deductions always fall just short of the standard deduction amount and thus never
produce any tax benefit.

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 Instructor’s Manual – McGraw-Hill’s Taxation, by Spilker et al

(2) The basic strategy consists of shifting itemized deductions into one year such that the
amount of itemized deductions exceeds the standard deduction for the year, and then
deducting the standard deduction in the next year (or vice versa).
(3) Work through Example 7-26
ix) Deduction for personal and dependency exemptions
(1) Taxpayers are generally allowed to deduct $4,050 for each personal and dependency
exemption.
(2) A taxpayer’s total exemption deduction is phased out based on AGI for relatively high
income taxpayers.
(3) Refer to Exhibit 7-4 for phase-out ranges.
(4) Work through Example 7-27
3) Taxable income summary
a) Refer to Exhibits 7-5, 7-6 & 7-7.

Suggested activities
A great activity for this chapter is to compile a list of the deductions that are to be emphasized in the
chapter (employee, education, medical, charitable, etc.) and have students prepare a set of examples for
each type of deduction. Alternatively, prepare a list of expenditures and have students determine whether
the expenditure is deductible and, if so, where the deduction is claimed.

Ethics Discussion:

From page 7-12:

Discussion points:

• If Sabrina gets an appraisal that states the value of the clothes is $6,000, how much tax deduction
will she receive for the clothes?
• If Sabrina’s clothes are worth $6,000, is she better off getting the appraisal or reporting a
deduction of $4,900? What information would you need to answer this question?
• Does Sabrina’s reporting $4,900 violate tax law and/or ethical standards?
• Do you think the IRS has reason to be suspicious of contributions that fall just below $5,000?
Why?

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