Principles of Federal Income Tax – Chapter 8: Itemized Deductions

Vocabulary flashcards summarizing the key itemized-deduction concepts, definitions, limitations, and rules discussed in Chapter 8 of Acct 3315/5314: Principles of Federal Income Tax.

Itemized Deductions

Specified personal expenses subtracted "FROM" AGI on Schedule A when they exceed the standard deduction.

Schedule A

Form 1040 attachment used to report and claim itemized deductions.

Standard Deduction

Fixed amount a taxpayer may deduct in lieu of itemizing; deduct the higher of this or itemized deductions.

Qualified Medical Expenses

Payments for diagnosis, cure, mitigation, treatment or prevention of disease for taxpayer, dependents, or children of divorced parents.

7.5% AGI Floor for Medical Expenses

Only unreimbursed medical costs exceeding 7.5% of AGI are deductible.

Chronically Ill (for LTC deduction)

Individual unable to perform at least two ADLs (eating, toileting, bathing, dressing) for 90 days.

Transportation for Medical Care

Deductible at 21¢ per mile plus parking, tolls, or actual costs; lodging limited to $50 per night per person.

Capital Expenditures for Medical Care

Home improvements deductible only to the extent cost exceeds the increase in FMV; equipment for the ill is fully deductible.

Cost of Living in Institutions

Meals, lodging, and care deductible when the primary reason for residence is medical treatment.

Timing of Medical Expense Deduction

Expenses are deductible in the year paid; credit-card charges count when charged.

State and Local Tax (SALT) Deduction

Itemized deduction for state/local income or sales tax, real estate tax, and personal property tax.

SALT Cap

Total state and local tax deduction limited to $10,000 ($5,000 MFS).

Self-Employment Tax Deduction

One-half of SE tax paid is deductible "FOR" AGI.

Additional Medicare Tax

0.9% tax on wages/SE income above $200,000 (single) or $250,000 (MFJ).

Net Investment Income Tax

3.8% tax on investment income for high-income taxpayers.

Active Trade or Business Interest

Interest deductible up to 30% of business income; rule applies only to businesses with > $30 million average gross receipts.

Passive Activity Interest

Interest on activities without material participation; deduction subject to passive activity loss (PAL) limits.

Investment Interest

Interest on debt used to buy investment property; deductible up to net investment income, with carryover of excess.

Qualified Residence Interest

Mortgage interest on up to two personal residences (principal + one other) that meet use tests.

Acquisition Indebtedness

Debt to buy, build, or improve a residence and secured by it; interest deductible on first $750,000 ($375,000 MFS).

Points

Prepaid interest deductible in full if paid on purchase of principal residence and customary in area; otherwise amortized.

Refinanced Mortgage Points

Must be amortized over loan term; remaining balance deductible when loan is terminated.

Student Loan Interest Deduction

Up to $2,500 "FOR" AGI for qualified higher-education loan interest; phased out starting at $80,000 AGI ($165,000 MFJ).

"FOR" vs. "FROM" AGI Interest

"FOR" AGI: trade/business, student loans, passive activity. "FROM" AGI: mortgage and investment interest.

Charitable Contribution

Donation of cash or property to qualifying organization deductible subject to AGI limits.

Qualifying Organization

Entities such as §501(c)(3) charities, churches, schools, hospitals, war veterans posts, and federal or state governments.

Quid Pro Quo Reduction

Deduction reduced by the value of any significant benefit received from the charity.

Charitable Contribution Carryforward

Excess charitable deductions may be carried forward up to five years.

60% AGI Limit

Maximum deduction for cash gifts to public charities equals 60% of AGI.

50% AGI Limit

Combined ceiling for most contributions to public charities when not subject to 60% rule.

30% AGI Limit

Limit for gifts of capital-gain property to public charities or cash to certain private foundations.

20% AGI Limit

Lowest ceiling, generally for gifts of appreciated property to private non-operating foundations.

Substantiation Requirements

Need written acknowledgment for gifts ≥ $250, appraisals and Form 8283 for large property donations.

Casualty and Theft Loss

Personal losses deductible only if attributable to a federally declared disaster, reduced by $100 per event and 10% of AGI.

Qualified Business Income (QBI) Deduction

20% deduction for pass-through business income, limited by wages/property and excluded for some service businesses.

W-2 Wage Limitation (QBI)

Deduction limited to the greater of 50% of W-2 wages or 25% of wages plus 2.5% of qualified property basis.

Specified Service Trade or Business (SSTB)

Service fields (e.g., law, health) ineligible for QBI deduction above income thresholds ($191,950 single / $383,900 MFJ).

Medical Mileage Rate

Standard rate of 21 cents per mile for medical travel in 2025.

Medical Lodging Limit

Deductible lodging for medical travel capped at $50 per night per person.

Prepaid Interest

Generally deductible as incurred over time; exception for deductible points on home purchase.

Non-Deductible Interest

Personal credit-card, auto loan, and other consumer interest not connected to business or investments.

Personal Property Tax

State or local tax based solely on the property's value; deductible within the SALT cap.

Home Equity Indebtedness

Post-2017 interest deductible only if funds used to buy, build, or substantially improve the home.

Passive Activity Loss (PAL) Rules

Disallow current deduction of passive losses; suspend and carry forward until offset by passive income or disposition.

Credit Card Rule for Medical Expenses

Medical costs charged to a credit card are treated as paid when charged, even if not yet paid to the issuer.