Income Taxation & Strategy

Chapter 7:
Below-the-Line Deductions
(Deductions from AGI)
Adjunct Professor Nagendra K. Singh, EA, CFP®

Prepared by Sharif A. Muhammad & Nagendra K. Singh. All rights reserved.

BELOW-THE-LINE AKA
ITEMIZED DEDUCTIONS
Source: caseymosstax.com

• Below-the-Line Deductions
• Mostly Personal Expenditures
• Reported on Schedule A
• Include
• Medical Expenses
• Taxes
• Interest Paid
• Charitable Contributions
• Casualty Losses Source: jacksonhewitt.com

• Miscellaneous Itemized Deductions

© 2023 Money Education Prepared by Nagendra K. Singh All rights reserved. Income Tax Planning 2
 COMPARISON OF ITEMIZED
AND STANDARD DEDUCTIONS
Today, the standard The other option is to
deduction gives almost choose to itemize
90% of taxpayers, their deductions.
largest tax break.
Listing each individual
It is a fixed dollar amount Source: youtube.com/@turbotax deduction (a la carte) that
deduction based on filing the taxpayer qualifies for to
status, age and Deductions help reduce reduce taxable income.
________. the amount of income
Like a deduction that you are taxed on.
lump-sum bundle based Ex: Letʼs compare two taxpayers who have these life expenses.
on your tax situation. Taxpayer 1 Taxpayer 2
Mortgage Interest $9,000 $9,000
Property Tax $4,000 $4,000
Charitable Donations $3,000 $0
Total $16,000 $13,000
Prepared by Nagendra K. Singh. All rights reserved.
 COMPARISON OF ITEMIZED
AND STANDARD DEDUCTIONS
Single taxpayer has gross income of $50,000. What is the taxpayer’s taxable income
in these scenarios: Difference of $3,000
● Itemized (below-the-line) from-AGI deduction of $16,000 does not create a
● Itemized (below-the-line) from-AGI deduction of $13,000 taxable income
difference of $3,000

Tax Formula $16,000 $13,000

From AGI From AGI
Gross Income $50,000 $50,000
Less: For-AGI Deduction 0 0
AGI $50,000 $50,000
Less: From-AGI Deduction (standard / itemized) 16,000 14,600
Less: Personal Exemption 0 0
Taxable Income $34,000 $35,400

© 2023 Money Education Income Tax Planning 4

Prepared by Nagendra K. Singh. All rights reserved.
RECALL: Some Taxpayers MUST ITEMIZE DEDUCTIONS
(Cannot Claim The Standard Deduction)

• A married individual filing separately if the

their spouse itemizes deductions
• An individual who files a tax return for less
than 12 months because of a change in
accounting period
• Nonresident aliens

© 2023 Money Education Prepared by Nagendra K. Singh All rights reserved. Income Tax Planning 5
 The Full List of Below-the-Line Deductions

1. Medical Expenses
2. Taxes
3. Interest Paid
4. Charitable Contributions
5. Casualty Losses
6. Miscellaneous Itemized Deductions

Prepared by Nagendra K. Singh. All rights reserved.

 MEDICAL EXPENSES

Expenditures for:
Diagnosis, cure, treatment, or prevention of disease
affecting any structure or function of the body
Deductible Nondeductible
Prescription Drugs Over-the-Counter Drugs
Doctor’s Visits, Hospital Stays,
Medical Marijuana
Dental Work, Eyewear
Health, Dental, Vision and Gym Membership or Health Club
Prescription Insurance Premiums Dues
Certain Capital Expenditures Dance Lessons
Nursing Home and Special Schools Elective Cosmetic Surgery
Travel and Lodging General Health Items (ex: vitamins)

© 2023 Money Education Prepared by Nagendra K. Singh All rights reserved. Income Tax Planning 7
 MEDICAL EXPENSE
DEDUCTION castroandco.com

• Deductible in year paid, not in year accrued

• Amount in excess of ____% of AGI is deductible
Examples:
1. Tomas has an AGI of 30,000 and pays 2,500 for required cosmetic surgery
2. Ursula has an AGI of 80,000 and pays 6,500 for dental work
3. Viola has an AGI of 10,000 and is billed for 3,600 for lab work
4. Wyatt has an AGI of 250,000 and pays 15,000 for rehab facility
5. Xavier has an AGI of 25,000 and pays 2,400 for a gym membership
6. Yun has an AGI of 180,000 and pays 13,600 to purchase a seeing-eye dog
7. Zack has an AGI of 100,000 and pays 9,200 for medical marijuana

© 2023 Money Education Prepared by Nagendra K. Singh All rights reserved. Income Tax Planning 8
CAPITAL MEDICAL
EXPENSES Source: adobe.com

• Includes:
• Wheelchairs
• Medical beds
• Seeing eye dogs

• Must be:
• Medical necessity
• Advised by a physician
• Used primarily by patient
• Reasonable

• Maintenance on capital expenditures also deductible

© 2023 Money Education Prepared by Nagendra K. Singh All rights reserved. Income Tax Planning 9
CAPITAL IMPROVEMENT TO HOME
Deductible to extent that the cost of In other words, the medical deduction allowed is
improvement exceeds the increase in (amount spent - increase in home’s value)
value to home
- Exceptions:
• Removal of structural barriers to
home of handicapped are deemed
to add no value to home, so full
amount is deductible.
• Accessibility improvements are
always deductible, e.g.
• Handicapped entrance/exit ramps
• Modifications to bathroom and
kitchens
Source: bankrate.com

© 2023 Money Education Prepared by Nagendra K. Singh All rights reserved. Income Tax Planning 10
 Sami is married and the AGI on his tax
return is $30,000. Unfortunately, he is
unable to walk because of a degenerative
disease. He decides to add an elevator to
his two-story home which costs $17,000.
The value of his house increases by
$5,000 because of this renovation. How
much will Sami be allowed to claim as a
medical deduction assuming he has no
other medical expenses?

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 CALCULATION
Sami is married and the AGI on his tax return is $30,000. Unfortunately, he is
unable to walk because of a degenerative disease. He decides to add an
elevator to his two-story home which costs $17,000. The value of his house
increases by $5,000 because of this renovation.
How much will Sami be allowed to claim as a deduction?

Prepared by Nagendra K. Singh. All rights reserved.

NURSING HOME & SPECIAL SCHOOL EXPENSES

• If the primary purpose is medical treatment, all costs

(including meals and lodging) qualify as medical expenses
• If the primary purpose is personal, only specific medical
costs qualify (no meals or lodging).

Source: aarp.org

© 2023 Money Education Income Tax Planning 13

Prepared by Nagendra K. Singh. All rights reserved.
 TRANSPORTATION AND LODGING
• Transportation to and from medical
care is deductible
• Cost of specific medical transport, or
• Person vehicle: 21¢ per mile for all Source: patientengagementhit.org
of 2024
• Lodging while away from home for
medical care
• Allowable amount is $50 per person
per night
Source: lodgingly.com
• If parent and/or aide needs to
accompany patient, their expenses
are also deductible

© 2023 Money Education Income Tax Planning 14

Prepared by Nagendra K. Singh. All rights reserved.
HEALTH INSURANCE PREMIUMS
• Premiums paid for medical care insurance
are deductible medical expenses.

• For self-employed, 100% of insurance

premiums are deductible above-the-line.

• For remaining taxpayers, 100% of

insurance premiums paid out-of-pocket are
deductible as a below-the-line itemized
Source: ahrq.gov
deduction.

© 2023 Money Education Prepared by Nagendra K. Singh All rights reserved. Income Tax Planning 15
REIMBURSED
EXPENSES
Source: holmstromlaw.com

• If reimbursed in same year as expense paid:

• Reimbursement offsets the deduction to be

claimed.

• If reimbursed in the year after medical expenses

were paid:

• Reimbursement is income only to extent medical

deduction was taken by taxpayer. (Remember to
follow the tax benefit rule.)

© 2023 Money Education Prepared by Nagendra K. Singh All rights reserved. Income Tax Planning 16
 The Full List of Below-the-Line Deductions

1. Medical Expenses
2. Taxes
3. Interest Paid
4. Charitable Contributions
5. Casualty Losses
6. Miscellaneous Itemized Deductions

Prepared by Nagendra K. Singh. All rights reserved.

 SOMETIMES, ALWAYS, NEVER
ALSO APPLIES TO DEDUCTION OF TAXES

FOREIGN SOMETIMES

STATE / LOCAL ALWAYS

Source: blacklapel.com FEDERAL NEVER

Of course, there are always exceptions…
© 2023 Money Education Prepared by Nagendra K. Singh All rights reserved. Income Tax Planning 18
 THERE ARE MANY KINDS OF TAXES.
WHICH TAXES ARE BELOW-THE-LINE DEDUCTIONS?
Type of Tax Foreign State or Local (County, Federal or
Provincial City, Town) National

Income 🗹🗹
🗹 🗹🗹
🗹 🗹🗹
🗹 🗹
Sales 🗹 🗹🗹
🗹 🗹🗹
🗹
Payroll 🗹 🗹🗹
🗹 🗹🗹
🗹 🗹
Excise 🗹 🗹 🗹 🗹
Property 🗹 🗹🗹
🗹 🗹🗹
🗹
Estate 🗹 🗹 🗹
Source: lumenlearning.com

🗹 - EXISTS
🗹 - EXISTS
🗹 - DEDUCTIBLE
This one falls into the category of
© 2023 Money Education
miscellaneous deduction.
Income Tax Planning 19

Prepared by Nagendra K. Singh All rights reserved.

 Which of the following taxes is
NOT a below-the-line deduction?
(CHOOSE MORE THAN ONE.)

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 Multiple Choice
Which of the following taxes is NOT a below-the-line deduction?
A. Self-employment tax
B. Capital gains tax
C. Town property tax
D. Estate tax
E. Excise tax
F. City sales tax
G. Local income tax
H. State payroll tax

Prepared by Nagendra K. Singh. All rights reserved.

 Multiple Choice
Which of the following is NOT allowed as a below-the-line deduction?
A. The store located here on 42nd street charges $2.99 for a small candy
bar, but when a customer pays at the register it is costs $3.26 (an
increase of 8.875%).
B. Employees in New York are charged a tax of 0.455% on their wages as
part of the state’s PFL program.
C. Sullivan county in upstate New York charges an annual tax on homes
located there at the rate of 2% * the value of the home.
D. Every pack of cigarettes has an additional tax of $2.98 added to it.

Prepared by Nagendra K. Singh. All rights reserved.

is limited to $10,000 (TCJA 2017) HOW ARE THESE TAX DEDUCTIONS LIMITED?
The total of ALL OF THIS

State and local property taxes

PLUS
Greater of
Foreign, state and local income + payroll taxes this
OR OR
State and local sales taxes that

Don’t forget about Tax Benefit rule! Must be an Ad valorem tax.

Ad valorem: Latin term that
(If you overpay your tax and claim this deduction,
means "according to value"
then when you receive a refund of that overpaid
i.e. taxes that are based on
tax the next year, it will be recognized as income.
the value of the property.
© 2023 Money Education Prepared by Nagendra K. Singh All rights reserved. Income Tax Planning 23
 KNOWLEDGE CHECK
Shari paid the following taxes this year:
● $5,500 of property taxes on her main home in Virginia
● $1,500 of property taxes on her condo in DC
● $500 of property taxes on her personal car
● $700 of property taxes for farmland in Italy
● $3,500 of sales tax on various purchases
● $2,500 of federal estate tax
● $2,000 of income tax to the state
● $30 of disability tax (a payroll tax) to the state
How much will Shari be allowed to claim as a deduction?

Prepared by Nagendra K. Singh. All rights reserved.

Case One, Part One Deadline Tomorrow
What does ChatGPT think?

Five Minute Break

Prepared by Nagendra K. Singh All rights reserved. 25

 The Full List of Below-the-Line Deductions

1. Medical Expenses
2. Taxes
3. Interest Paid
4. Charitable Contributions
5. Casualty Losses
6. Miscellaneous Itemized Deductions

Prepared by Nagendra K. Singh. All rights reserved.

INTEREST
Only the following types of interest deductible:
• Qualified residence interest
• Interest incurred in a trade or business
• Interest incurred for production of income

How does a taxpayer

show that the loan was
• Interest includes: used for these purposes?
• Prepayment penalties
• Points
• Late payment fees

© 2023 Money Education Prepared by Nagendra K. Singh All rights reserved. Income Tax Planning 27
 Source: marimarkmortgage.com
QUALIFIED RESIDENCE INTEREST (1 OF 3)
WHAT KIND OF PROPERTY?
• Can deduct interest on:
• Principal residence, PLUS
• One vacation home
• Includes boat/vehicle with sleeping, eating and toileting
accommodations
• Vacation home treated as “qualified residence” if the home
is not rented out during the year or if the home does not
meet the “rental use” exception of IRC Section 280A.

• Can NOT deduct interest on:

• Land (Why?)

© 2023 Money Education Prepared by Nagendra K. Singh All rights reserved. Income Tax Planning 28
 QUALIFIED RESIDENCE INTEREST (2 OF 3)
WHAT KIND OF DEBT?

Acquisition Indebtedness
• Loan used to acquire, construct, or improve principal residence

For tax years 2018-2025 Otherwise

Interest is deductible up to Interest is deductible up to

$750,000 maximum $1,000,000 maximum
principal amount principal amount
($375,000 for married separately) ($500,000 for married separately)

© 2023 Money Education Prepared by Nagendra K. Singh All rights reserved. Income Tax Planning 29
 QUALIFIED RESIDENCE INTEREST (3 OF 3)
WHAT KIND OF DEBT?

Home Equity Indebtedness

• Loan used to access home equity

For tax years 2018-2025 Otherwise

Must qualify as acquisition Interest is deductible up to

indebtedness, otherwise NOT $100,000 maximum
deductible. (Cannot exceed the principal amount
FMV of the home) ($50,000 for married separately)

© 2023 Money Education Prepared by Nagendra K. Singh All rights reserved. Income Tax Planning 30
 Calculation
Lydia owns a home and with a mortgage (loan) that still needs to be paid off
eventually. How much is her below-the-line deduction if…

Home purchase 2010 Mortgage started 2010 Mortgage amount 800k Interest only rate 5%

Home purchase 2010 Mortgage started 2010 Mortgage amount 1200k Interest only rate 5%

Home purchase 2020 Mortgage started 2020 Mortgage amount 800k Interest only rate 5%

Home purchase 2010 Mortgage started 2015 Mortgage amount 50k Interest only rate 5%

Home purchase 2010 Mortgage started 2015 Mortgage amount 200k Interest only rate 5%

Home purchase 2010 Mortgage started 2020 Mortgage amount 200k Interest only rate 5%

Prepared by Nagendra K. Singh. All rights reserved.

PAID INTEREST (POINTS)
Mortgage points are a form of prepaid interest that you can pay when acquiring a
mortgage. They are used to reduce the interest rate on your mortgage. By paying
points upfront, you lower the interest rate on the life of the loan.

Part of acquisition Otherwise

or improvement (i.e. refinance)
Prorated amount (amortized) Entire amount is deducted
deducted over life of loan (i.e. a in year paid
deduction is claimed every year)

For tax years 2018-2025 Otherwise

Only points paid on the first Only points paid on the first
$750,000 of acquisition $1,000,000 of acquisition
indebtedness indebtedness

© 2023 Money Education Prepared by Nagendra K. Singh All rights reserved. Income Tax Planning 32
 Damien has a $400,000 mortgage on his
home w/an interest rate of 5.5%. The
mortgage broker offered to refinance his
mortgage at new interest rate of 3.75%.
The new mortgage is for 30 years and
Damien will have to pay $1,500 in points
upfront to obtain this lower mortgage rate.
How much of these points will Damien be
allowed to deduct during the year?

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 CALCULATION
Damien has a $400,000 mortgage on his home w/an interest
rate of 5.5%. The mortgage broker offered to refinance his
mortgage at new interest rate of 3.75%. The new mortgage is
for 30 years and Damien will have to pay $1,500 in points
upfront to obtain this lower mortgage rate. How much of these
points will Damien be allowed to deduct during the year?

Prepared by Nagendra K. Singh. All rights reserved.

 INVESTMENT EXPENSES
TWO TYPES
MARGIN INTEREST - OTHER EXPENSES -
Interest incurred to Ongoing costs incurred
purchase investments while holding investments

• Limited to Net Investment • Not deductible until after

x
Income (NII) 2025 and then only if in
• Unlimited carryforward is excess of 2% of AGI
allowed • No carryforward is allowed
• NOT subject to AGI • Ex: advisor fees, custodian
phaseout for high income fees, ADR fees, investment
taxpayers journals
© 2023 Money Education Income Tax Planning 35
Prepared by Nagendra K. Singh. All rights reserved.
NET INVESTMENT INCOME
NII = Investment income - Investment expenses OTHER
THAN INTEREST
Investment income includes:
• Interest earned
• Nonqualified dividends
• Short-term capital gains
• Gains on property taxed at ordinary rates under depreciation recapture
rules
• Long-term capital gains and qualified dividends can be included if taxpayer
elects to pay tax at ordinary rates
Investment expenses other than interest:
• Those that are directly connected with the production of investment income
• Ex: Management fees of the investment advisor, custodian fees, ADR fees,
investment journals

© 2023 Money Education Income Tax Planning 36

Prepared by Nagendra K. Singh. All rights reserved.
 Calculation
Joe finally decided to start investing. He opened a margin account with his
brokerage firm and deposited $15,000. He purchased 100 shares of Amgen
Corp at $290 per share. He was able to do this because the brokerage lent him
the additional money needed on margin.
How much did the brokerage lend him?

Prepared by Nagendra K. Singh. All rights reserved.

 Calculation
Joe finally decided to start investing. He borrow $14,000 on margin to make
his first ever stock purchase. The annual interest rate charged on margin debt
by his brokerage is 8%.
How much annual margin interest expense will Joe incur?

Prepared by Nagendra K. Singh. All rights reserved.

 Calculation
Joe finally decided to start investing. His first stock purchase was 100 shares of
Amgen Corp at $290 per share. Joe felt this was a good investment because
the dividend yield is 3%.
How much is Joe’s expected dividend income for the year from Amgen?

Prepared by Nagendra K. Singh. All rights reserved.

 Calculation
Joe’s only investment income is dividends for the year from Amgen is $870.
Joe’s margin interest expense for the year is $1,120.
How much is Joe allowed to claim as a below-the-line deduction for
Investment Income Deduction?

Prepared by Nagendra K. Singh. All rights reserved.

EXPENSE & INTEREST TO GENERATE TAX-
EXEMPT INCOME

Not deductible for regular tax purposes

• If municipal bond interest is taxable when the
AMT applies, the taxpayer may deduct
interest expense incurred in purchasing the
municipal bonds. (Chapter 15)

Other expenses associated with the purchase of

tax-exempt securities are not deductible.

© 2023 Money Education Income Tax Planning 41

Prepared by Nagendra K. Singh. All rights reserved.
 SUMMARY OF DEDUCTIBLE & NONDEDUCTIBLE
INTEREST EXPENSES AS ITEMIZED DEDUCTIONS

Deductible Nondeductible
Qualified Residence Interest (Limit 2
Personal Interest (including credit
houses and $1,000,000 pre-2008 debt or
cards, car, personal loans, etc.)
$750,000 post-2007 debt)
Home Equity Line of Credit up to
$100,000 limit (before 2018 & after 2025).
Interest used to buy tax-free
No deduction for home equity interest
municipal bonds (regular tax)
from 2018-2025 (unless it qualifies as
acquisition indebtedness).
Investment Interest Expense (to extent of Home equity interest for tax years
investment income) 2018-2025.

© 2023 Money Education Income Tax Planning 42

Prepared by Nagendra K. Singh. All rights reserved.
 TRUE or FALSE: Credit card interest is not
an allowable deduction,
unless it is used in a taxpayer’s trade or
business.

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 TRUE or FALSE

Credit card interest is not an allowable deduction,

unless it is used in a taxpayer’s trade or business.

Prepared by Nagendra K. Singh. All rights reserved.

 The Full List of Below-the-Line Deductions

1. Medical Expenses
2. Taxes
3. Interest Paid
4. Charitable Contributions
5. Casualty Losses
6. Miscellaneous Itemized Deductions

Prepared by Nagendra K. Singh. All rights reserved.

GENERAL REQUIREMENTS
FOR INCOME TAX
CHARITABLE DEDUCTION

• Made to qualified organizations

• Subject of the gift is property (not services)

• Deductible portion must exceed value received by donor

• Paid in cash (cash-like) or property before close of tax year

© 2023 Money Education Income Tax Planning 46

Prepared by Nagendra K. Singh. All rights reserved.
 INCOME TAX DEDUCTION DEPENDS ON …
• Type of property given away
• Identity of the donor and donee
• Amount of property given away
• Place where charity is organized
• The type of charitable organization

© 2023 Money Education

$
Prepared by Nagendra K. Singh. All rights reserved.
Income Tax Planning 47
QUALIFIED CHARITY
• Must be operated exclusively for:
• Religious, charitable, scientific, literary, or educational
purposes, or for the prevention of cruelty to animals or
children
• No earnings may benefit a private party
• No substantial propaganda or lobbying
• For income tax purposes, must be a domestic charity i.e. a
United States 501c3 organization
NOT A QUALIFIED CHARITY
• Any foreign organization
• Any individual

© 2023 Money Education Income Tax Planning 48

Prepared by Nagendra K. Singh. All rights reserved.
 CHARITY
DONATIONS OF PARTIAL INTERESTS
• Right to use property is not deductible.
• i.e., rent-free occupancy
TAXPAYER

• Gifts of less than entire interest are not deductible unless it is:
• An undivided portion of donor’s entire interest
• A remainder interest in personal residence or farm
• A partial interest if transferred in trust (charitable lead
trust, charitable remainder trust, pooled income fund)
• A charitable gift annuity

What is the benefit of donating this way?

© 2023 Money Education Income Tax Planning 49

Prepared by Nagendra K. Singh. All rights reserved.
 Charitable Donation of Your Service

Not deductible Is deductible

The value of the The actual costs tied to
taxpayer’s donated performing that donated
service was never service.
brought into income ● Unreimbursed expenses
therefore a deduction ● 14¢ per mile or actual
cannot result from this. travel expenses

Prepared by Nagendra K. Singh All rights reserved.

Is that an allowable charitable deduction?
Todd lives next door to his church.
When he mows his lawn, he also
mows the lawn of the church.

Dhiren allows his temple to use the

back half of his property rent-free to
offer monthly worshipping services.

Penny donates her appreciated

Amazon stock to an educational
institution.

Prepared by Nagendra K. Singh. All rights reserved.

CHARITABLE DEDUCTION LIMITATIONS

Non-LTCG LTCG
Cash
Property Property

Public Charity 60% 50% 30%

Private Charity
(Private Foundation & 30% 30% 20%
Charitable Lead Trust - CLT)
Percentages apply to AGI

Example of a public charity: churches, schools, hospitals, medical research

organizations and other publicly-supported organizations.

Example of a private foundation: The Bill and Melinda Gates Foundation, the
Walton Family Foundation, the Coca-Cola Foundation, Inc and other primarily
privately-supported foundations.

© 2023 Money Education Income Tax Planning 52

Prepared by Nagendra K. Singh. All rights reserved.
 Donation to a private vs public charity

Billy Joel donated the entire Billy Joel donated the entire
proceeds from his concert at proceeds from his concert at
MSG to an animal shelter. MSG to his friend’s foundation.
Let’s assume Billy’s AGI is $1M Let’s assume Billy’s AGI is $1M
and the money donated from the and the money donated from the
concert was $750,000. concert was $750,000.

Billy’s charitable donation limit is Billy’s charitable donation limit is

60% of his AGI = $600,000, so he 30% of his AGI = $300,000, so he
can only deduct $600,000 as a can only deduct $300,000 as a
below-the-line deduction. below-the-line deduction.

What happens to the rest of the donation that he didn’t claim?

Prepared by Nagendra K. Singh All rights reserved.

CHARITABLE DEDUCTION LIMITATIONS

Interaction of Limitations
• When applying the yearly overall 50% limitation for
contributions of property, allowable deductions
• first come from 50 percent gifts,
• then from 30 percent gifts,
• and finally from 20 percent gifts.
• If cash contributions are also made during the year,
the overall 50 percent limit is first reduced by the
amount of the cash contributions.
• Deductions disallowed because of AGI limitations may
be carried over for FIVE YEARS (in FIFO order).

© 2023 Money Education Income Tax Planning 54

Prepared by Nagendra K. Singh. All rights reserved.
GIFTS OF CASH (AKA CASH-EQUIVALENT)

• Fully deductible subject to AGI limitations

• Excess contributions carry forward: 5 years
• Contributions to institutions of higher education in return
for a right to purchase tickets or seating at an athletic
event: NO DEDUCTION IS PERMITTED.

© 2023 Money Education Income Tax Planning 55

Prepared by Nagendra K. Singh. All rights reserved.
LONG-TERM CAPITAL GAIN PROPERTY

Intangible Personal Property and Real Property

• Subject to 30% limitation
• Can qualify for 50% limitation by reducing the value of the gift by
100% of the gain (i.e., limiting the value to the basis)

Tangible Personal Property

• Used by donee in tax-exempt purpose
• Entire fair market value at the date of the gift is deductible
• Subject to 30% AGI limitation

• Not used by donee in tax-exempt purpose

• The fair market value of the gift must be reduced by 100
percent of the potential gain (i.e., value is limited to basis)
• Subject to the 50% limitation

© 2023 Money Education Income Tax Planning 56

Prepared by Nagendra K. Singh. All rights reserved.
ORDINARY INCOME PROPERTY

• Includes
• Short-term capital gain assets
• Works of art, books, letters, and musical compositions if
given by the person who created or prepared them
• Business person’s stock in trade and inventory

• Deduction limited to cost basis

• These gifts should be avoided when the estate will not
be subject to estate taxes.

© 2023 Money Education Income Tax Planning 57

Prepared by Nagendra K. Singh. All rights reserved.
CHARITABLE DEDUCTION LIMITATIONS:
EXAMPLE

Taxpayer with $100,000 in AGI, contributed $40,000 cash

and long-term stocks with a FMV of $35,000 and a basis of
$8,000 to a university.
• Limits based on $100,000 AGI
• 60% limit (cash) = $60,000
• 30% limit = $30,000
• Overall: 50% limit for property = $50,000

• Taxpayer deduction
• Amount of deduction = $50,000 (40,000 cash + 10,000 stock)
• Contribution carryforward = $25,000 stock (as 30% asset)

© 2023 Money Education Income Tax Planning 58

Prepared by Nagendra K. Singh. All rights reserved.
CHARITABLE DEDUCTIONS

© 2023 Money Education Income Tax Planning 59

Prepared by Nagendra K. Singh. All rights reserved.
CHARITABLE DEDUCTIONS BY CORPORATIONS

• C corporations can deduct up to 10% of their

taxable income. (Can move charitable deductions
to above-the-line, so to speak)

• S corporations pass through charitable gifts (Form

K-1) to owners who deduct their portion on
personal income tax return.

© 2023 Money Education Income Tax Planning 60

Prepared by Nagendra K. Singh. All rights reserved.
QUALIFIED CHARITABLE DEDUCTIONS (QCD)
Definition:
● IRA distribution is an EXCLUSION from income if made directly to a charity.
Eligibility:
● Distribution from IRA accounts (not 401k, 403b, 457) directly to charity.
● Must be 70½ years or older.
● Maximum annual QCD amount: $100,000. Joint filers can each contribute up
to $100,000.
Benefits:
● Counts towards Required Minimum Distributions (RMDs).
● Excluded distribution does not raise AGI which can trigger other taxes.
● Excluded from income so no charitable itemized deduction. (Basic tenet.)
This would be better for taxpayer who claims standard deduction.
Limitations:
● Can only be made to 501c3 organization and not to Donor Advised Funds
(DAFs), private foundations, split-interest charitable trusts.

© 2023 Money Education Income Tax Planning 61

Prepared by Nagendra K. Singh. All rights reserved.
 The Full List of Below-the-Line Deductions

1. Medical Expenses
2. Taxes
3. Interest Paid
4. Charitable Contributions
5. Casualty Losses
6. Miscellaneous Itemized Deductions

Prepared by Nagendra K. Singh. All rights reserved.

CASUALTY LOSS DEDUCTION

Classification of Casualty Loss (Business vs Personal):

• Business Loss – Above-the-Line Deduction
• Personal Loss – Below-the-Line Deduction
Amount of loss and its deductibility depends on whether:
• Loss is from
• Business or production of income property, or
• Personal property
• Loss is partial or complete
Business loss is simple = deduction for the amount of basis
© 2023 Money Education Income Tax Planning 63
Prepared by Nagendra K. Singh. All rights reserved.
 BUSINESS CASUALTY LOSSES

Above-the-Line Deduction
Amount of deduction depends on whether the event caused
• A complete casualty (FMV after the event = 0)
• Loss = Adjusted basis in property* proceeds
• A partial casualty
• Loss is the lesser of
▪ Decline in value, or
▪ Adjusted basis in property*
*less insurance proceeds

© 2023 Money Education Income Tax Planning 64

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BUSINESS CASUALTY LOSS: EXAMPLE

Assume no insurance proceeds received.

Adjusted FMV FMV

Item Loss
Basis Before After
A 6,000 8,000 5,000 3,000 ← Partial Loss
B 6,000 8,000 1,000 6,000 ← Partial Loss
C 6,000 4,000 0 6,000 ← Total Loss

Loss deduction is always limited to basis!

© 2023 Money Education Income Tax Planning 65

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PERSONAL CASUALTY LOSSES
Personal loss is complicated! Below-the-Line Deduction

One of few tax deductions allowed for personal losses.

• For 2018-2025, loss deductible only if attributable to a
DECLARED FEDERAL DISASTER

Applies in extreme cases where the taxpayer has suffered a

large loss due to:
• Fire
• Storm
• Shipwreck
• Theft
• Other sudden, unexpected, unusual event causing losses (Examples?)
© 2023 Money Education Income Tax Planning 66
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PERSONAL CASUALTY LOSSES
• Deduction for personal losses is the lower of:
• Decline in value of the asset less insurance proceeds received
• Taxpayer’s adjusted basis in property, less insurance proceeds
received
• Further Limitations
• $100 is deducted from the loss caused by each occurrence
• Only casualty losses in excess of 10% of AGI are deductible

AS A FORMULA
Personal Itemized Deduction =
= (The lessor of (property basis OR change in FMV) minus insurance proceeds)
minus $100 (per occurrence)
Then limited to excess of 10% of AGI

© 2023 Money Education Income Tax Planning 67

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PERSONAL CASUALTY LOSS:
EXAMPLES
• Dwight owned a home in New Orleans
that was severely damaged by a
hurricane.
• The president declared the hurricane in
New Orleans a FEDERAL DISASTER
AREA.
• Dwight had purchased the home for
$200,000, and the fair market value of
the home prior to the hurricane was
$400,000.
• After the hurricane, the property had a
fair market value of ??????.
• Dwight’s AGI is $100,000.

© 2023 Money Education Income Tax Planning 68

Prepared by Nagendra K. Singh. All rights reserved.
 Dwight’s Casualty Loss
FMV now is only $250,000 & he did FMV now is only $90,000 & he did
NOT have insurance. NOT have insurance.
= (The lessor ($200,000 OR $150,000) = (The lessor ($200,000 OR $310,000)
minus $0 insurance) minus $100 minus minus $0 insurance) minus $100 minus
10% of AGI 10% of AGI
= $150,000 - $0 - $100 - $10,000 = $200,000 - $0 - $100 - $10,000
= $139,900 loss deduction = $189,900 loss deduction

FMV now is only $250,000 & his FMV now is only $90,000 & his
insurance reimbursed him $175,000. insurance reimbursed him $175,000.
WAIT A SECOND! = (The lessor ($200,000 OR $310,000)
Dwight had a house worth $400,000. minus $175,000 insurance) minus $100
minus 10% of AGI
Now he has a house worth $250,000
AND cash of $175,000. = $200,000 -$175,000 - $100 - $10,000
This is a CASUALTY GAIN of $225,000! = $14,900 loss deduction
($425,000 assets - $200,000 purchase)

Prepared by Nagendra K. Singh All rights reserved.

 PERSONAL CASUALTY AND THEFT GAINS

If casualty gains exceed casualty losses:

• Gain offsets any casualty losses suffered in the same year
• Excess gains are treated as the sale of a capital asset
• As we already know, SALES can be short-term or
long-term, depending on holding period of the asset.
• Deferral of gain provisions may apply and will be
discussed in the non-taxable exchanges chapter.
• Personal casualty and theft gains and losses are not
netted with the gains and losses on business and
income-producing property.

© 2023 Money Education Income Tax Planning 70

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 The Full List of Below-the-Line Deductions

1. Medical Expenses
2. Taxes
3. Interest Paid
4. Charitable Contributions
5. Casualty Losses
6. Miscellaneous Itemized Deductions
● Fully Deductible
● Subject to 2% AGI
Prepared by Nagendra K. Singh. All rights reserved.
 MISCELLANEOUS ITEMIZED DEDUCTIONS:
BEFORE 2018 AND AFTER 2025

x
Fully Deductible (Tier I) Deductible (Tier II)
(Not Subject to 2% Hurdle) (Subject to 2% Hurdle)
• Gambling Losses to Extent of • Unreimbursed Employee Business Expenses
Gains (travel, journals, uniforms, union dues)
• Credit for Estate Tax on IRD • Hobby Expenses to Extent of Hobby Income
Assets • Investment Expenses (e.g., fees)
• Loss on Annuity Contracts • Tax Advice and Preparation
(death of annuitant)
• Losses on Terminated IRAs
• Repayment of Income
• Educational Expenses to Maintain or Improve
Taxpayer Competency
• Home Office Deduction (for employees)
NOTE: After the enactment of TCJA 2017, Tier II Miscellaneous Itemized Deductions are not
deductible for tax years 2018 - 2025, but will be available for tax years beginning after 2025
© 2023 Money Education Income Tax Planning 72
Prepared by Nagendra K. Singh. All rights reserved.
 A Final Word
about
Deductions

Prepared by Nagendra K. Singh All rights reserved. 73

DEDUCTION CLUSTERING
A tax planning strategy: Clustering or bunching deductions
together creates a higher amount of deductions.

A taxpayer can control the timing

(with some limitations) payment of:
• Medical expenses
• State and local income or property taxes
• Mortgage interest
• Charitable donations
But how does this help us?

© 2023 Money Education Income Tax Planning 74

Prepared by Nagendra K. Singh. All rights reserved.
THIS WEEK’S UPCOMING ASSIGNMENTS

ASSIGNMENT DUE DATE DESCRIPTION

Case #1: Part 1 Thursday Write an email to
Jay Rosario (tomorrow) your new client
Case #1: Part 2 Monday Answer all the
Jay Rosario client’s questions
Reading Tuesday Chapter 9
night (skip Chapter 8)
Quiz Tuesday Chapter 9
night (skip Chapter 8)

© 2023 Money Education Income Tax Planning 94

Prepared by Nagendra K. Singh. All rights reserved.