DISCUSSION QUESTIONS AND PROBLEMS
1. What is the difference between deductions from AGI and deductions for AGI?
For AGI expenditures are outflows made for the production of income or for a trade or business and are included in the calculation of adjusted gross income. From AGI deductions are primarily personal expenditures that are allowed to reduce taxable income.
2. What are the six types of personal expenses that can be classified as itemized deductions on Schedule A, Form 1040?
Personal expenses allowed as itemized deductions include medical expenses, state and local taxes, ...view middle of the document...
6. When are travel costs deductible as medical costs? How are the medical travel costs calculated?
Travel costs are deductible when incurred for transportation primarily for and essential to medical care. There is no deduction allowed for travel expenses unless there is no significant element of personal pleasure, recreation, or vacation in the travel away from home. Transportation costs could include such items as cab, bus, or train fares, as well as expenses for a personal auto. The cost of the transportation must be primarily for, and essential to, deductible medical care. The amount of the deduction for the use of a personal auto for transportation for medical care can be calculated using the actual cost of operating the car for medical purposes or the optional standard mileage allowance.
7. What is the proper tax treatment for prescription drugs obtained outside the United States, such as Canada?
Prescription drugs obtained from sources outside the United States, such as Canada, are deductible if prescribed by a physician for the treatment of a medical condition and the FDA has approved that they can be legally imported.
8. How do reimbursements from health insurance policies affect the amount of the medical deduction? Does a taxpayer get a deduction for premiums paid for health insurance? What happens if an insurance reimbursement for medical expenses is received in a subsequent tax year?
Any insurance reimbursements or partial reimbursements must be subtracted from the gross medical expenses to give the net medical expenses that are subject to the 7.5% AGI limitation. The insurance reimbursement would be included in income to the extent that benefit was received in the prior year. Health insurance premiums are only deductible if the premiums are paid with after-tax funds (not in an employer pre-tax plan).
9. What are the four major categories of deductible taxes on individual returns?
The four major categories of deductible taxes are personal property taxes, local real estate taxes, other state, and local taxes, and foreign taxes.
10. For a tax to be deductible as an itemized deduction, what three tests are required?
State or local property taxes must meet the three tests in order to be deductible. The tax must be levied on personal property, the tax must be an "ad valorem tax,” and the tax must be imposed at a minimum on an annual basis with respect of personal property.
11. If state or local income taxes are deducted on the current year’s tax return, what is required if the taxpayer gets a refund in the next year?
If a refund was received, the tax preparer must include the refund in income for the current year (assuming the taxpayer itemized his/her return and deducted state taxes in the previous year).
12. For 2007, how is the amount of the sales tax deduction...