PFP 472 Chapter 7

Itemized Deductions

Deductions reported on Schedule A instead of taking the standard deduction.

Schedule A

Tax form used to report itemized deductions.

Main Categories of Itemized Deductions

Medical expenses; taxes paid; interest; charitable contributions; casualty losses; and miscellaneous deductions.

Medical Expense Deduction

Qualified medical expenses are deductible only to the extent they exceed 7.5% of AGI.

Medical Expense Formula

Qualified medical expenses minus 7.5% of AGI.

Year Medical Expenses Are Deducted

The year the expenses are paid.

Deductible Medical Expenses

Prescription drugs; diagnosis and treatment; qualifying insurance premiums; medical equipment; nursing care; and medical travel.

Nondeductible Medical Expenses

Elective cosmetic surgery; dance lessons; health club dues; marijuana; general health vitamins; and most over-the-counter drugs.

Capital Medical Expenses

Medical home improvements or equipment needed for treatment or accessibility.

Medical Home Improvement Deduction

Cost of improvement minus increase in the home's value.

Accessibility Improvements

Qualifying modifications such as wheelchair ramps are treated as adding no home value for medical deduction purposes.

Nursing Home Medical Expenses

Meals and lodging qualify if the primary purpose of the stay is medical treatment.

Nursing Home Personal Expenses

If the primary purpose is personal only specific medical costs qualify.

Medical Mileage Rate 2026

20.5 cents per mile according to the course notes.

Medical Lodging Limit

$50 per person per night for qualifying medical travel.

Health Insurance Premiums

After-tax medical insurance premiums may qualify as medical expenses.

Self-Employed Health Insurance

Eligible self-employed taxpayers may deduct qualifying premiums above the line.

Medical Reimbursements in Same Year

Reduce the amount of deductible medical expenses.

Medical Reimbursements in Later Year

Included in income only to the extent the prior deduction provided a tax benefit.

Medical Deduction Example

AGI of $100000 and medical expenses of $10000 gives a $2500 deduction.

SALT Deduction

Deduction for qualifying state and local income or sales taxes and property taxes.

2026 SALT Limit

$40400 according to the course notes.

2026 SALT Phaseout Threshold

The deduction limit is reduced by 30% of MAGI exceeding $505000.

State Income vs Sales Tax

Taxpayers can deduct qualifying state income taxes or sales taxes but not both.

Deductible Property Taxes

Qualifying state and local real estate and personal property taxes.

Nondeductible Taxes

Foreign property taxes; certain tax prepayments; fines; fees; excise taxes; gift taxes; and estate taxes.

Qualified Residence Interest

Deductible mortgage interest on a principal residence and one qualifying second residence.

Qualified Second Residence

May include a vacation home or qualifying boat or vehicle with sleeping and eating accommodations.

Acquisition Indebtedness

Debt used to acquire; construct; or substantially improve a qualified residence.

Mortgage Debt Limit

$750000 for qualifying post-2017 acquisition indebtedness.

Mortgage Debt Limit for MFS

$375000 for qualifying post-2017 acquisition indebtedness.

Older Mortgage Debt Limit

$1000000 for qualifying debt incurred before December 16 2017.

Home Equity Interest

Generally deductible only when the borrowed funds are used to buy; build; or substantially improve the home securing the loan.

Mortgage Points

Prepaid interest generally deducted over the life of the loan.

Exception for Mortgage Points

Qualifying points paid to acquire or improve a principal residence may be deducted in the year paid.

Private Mortgage Insurance

Qualifying PMI premiums are deductible beginning in 2026 subject to income limitations according to the notes.

PMI Income Phaseout

Deduction reduced by 10% for each $1000 of AGI above $100000 or $500 above $50000 for MFS.

Investment Interest Expense

Interest on borrowed money used to purchase taxable investments.

Investment Interest Limit

Deduction limited to net investment income.

Investment Interest Carryforward

Disallowed investment interest may be carried forward indefinitely.

Personal Interest

Generally nondeductible interest such as credit card interest and ordinary personal loans.

Municipal Bond Interest Expense

Interest on debt used to purchase tax-exempt municipal bonds is generally nondeductible.

Charitable Contribution Requirements

Must be given to a qualified organization as cash or property before the end of the tax year.

Qualified Charity

An organization operated for religious; charitable; scientific; literary; educational; or other qualifying purposes.

Donated Volunteer Services

The value of donated time or services is not deductible.

Volunteer Expenses

Qualifying unreimbursed expenses related to volunteer work may be deducted.

Charitable Mileage Rate 2026

14 cents per mile.

Public Charity Cash Contribution Limit

60% of AGI.

Public Charity Non-LTCG Property Limit

50% of AGI.

Public Charity LTCG Property Limit

30% of AGI.

Private Charity Cash Contribution Limit

30% of AGI.

Private Charity Non-LTCG Property Limit

30% of AGI.

Private Charity LTCG Property Limit

20% of AGI.

Overall Property Contribution Limit

50% of AGI according to the notes.

Overall Cash and Property Limit

60% of AGI according to the notes.

Charitable Contribution Ordering

50% gifts first; then 30% gifts; then 20% gifts; then 60% cash gifts.

2026 Charitable Contribution Floor

0.5% of AGI for taxpayers who itemize.

Charitable Contribution Carryforward

Excess contributions subject to AGI ceilings may be carried forward for five years.

College Athletic Ticket Donations

Payments for the right to purchase athletic tickets or seating are not deductible.

Long-Term Capital Gain Property

Generally deducted at fair market value subject to applicable AGI limits.

Ordinary Income Property

Generally deducted at cost basis rather than fair market value.

Related-Use Tangible Property

Generally deductible at fair market value subject to a 30% AGI limit.

Unrelated-Use Tangible Property

Generally deductible at adjusted basis subject to a 50% AGI limit.

Charitable Floor Example

AGI of $100000 and a $30000 cash donation results in a $29500 deduction after the $500 floor.

Casualty Loss Deduction

Deduction for qualifying personal property losses caused by declared disasters.

Qualifying Casualty Disaster

Federally declared disaster or qualifying state governor-declared disaster under the 2026 rules in the notes.

Casualty Loss Calculation

Lower of the decrease in fair market value or adjusted basis minus insurance reimbursement.

Casualty Loss Per-Event Reduction

$100 per occurrence.

Casualty Loss AGI Floor

10% of AGI.

Casualty Loss Example

A $250000 qualifying loss with $120000 AGI produces a $237900 deduction after the $100 and 10% AGI reductions.

Casualty Gains Exceeding Losses

Excess gains are generally treated as capital gains depending on the holding period.

Tier 1 Miscellaneous Deductions

Certain deductions not subject to the former 2% AGI limitation.

Examples of Tier 1 Deductions

Gambling losses; certain annuity losses; income repayments; impairment-related work expenses; and qualified educator expenses.

Tier 2 Miscellaneous Deductions

Permanently repealed under OBBBA according to the notes.

Deduction Clustering

Combining deductible expenses in one year to itemize and taking the standard deduction in another year.

2026 High-Income Itemized Deduction Limitation

Itemized deductions are reduced by 2/37 times the lesser of total itemized deductions or income above the start of the 37% bracket.

Qualified Business Income Deduction

A below-the-line deduction generally equal to the lesser of 20% of QBI or 20% of adjusted taxable income.

QBI Deduction Eligibility

Eligible pass-through business owners may claim the deduction whether they itemize or use the standard deduction.

Pass-Through Businesses

Sole proprietorships; partnerships; LLCs; and S corporations.

Income Excluded from QBI

Capital gains; dividends; unrelated interest; certain compensation; and guaranteed payments.

QBI Deduction Example

QBI of $97000 and adjusted taxable income of $73000 produces a $14600 deduction.

2026 QBI MFJ Threshold

$403500 with the phaseout range extending to $553500 according to the notes.

2026 QBI Other Filing Status Threshold

$201750 with the phaseout range extending to $276750 according to the notes.

2026 Non-Itemizer Charitable Deduction

Up to $1000 or $2000 for married filing jointly for qualifying cash contributions.

Senior Bonus Deduction

Up to $6000 for eligible taxpayers age 65 or older subject to income limitations.

Qualifying Car Loan Interest Deduction

Up to $10000 for qualifying new vehicle loans subject to income limitations.

Qualified Tips Deduction

Up to $25000 for qualifying tips subject to income limitations.

Qualified Overtime Deduction

Up to $12500 or $25000 for married filing jointly subject to income limitations.

Post-OBBBA Charitable Example

Allie's total contribution deduction is $120000 before applying the 0.5% floor.

Post-OBBBA Charitable Carryforward Example

Allie carries forward $10000 of stock contributions and $20000 of cash contributions before floor adjustments.