MGMT 127A Lecture Notes - Lecture 5: Itemized Deduction, Home Equity, Municipal Bond

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8 May 2016
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1. Lecture 5: continuation of section 1
Itemized deductions (these all go on schedule A)
oGMICCISME: gimick kiss me
Get to keep gimick, kissme is scheduled to phase out (will make sense later)
oG: gambling losses
Limited to your winnings- you cannot deduct more than you win
So if you win 1 million dollars and later you lose 1.2 million, then you can only
deduct 1 million
If you lose more than you win, you wont be taxed on your winnings
So if you lost 1.2 million but never won anything, then it is just gone and isn't tax
deductible
Personal expense- follows our general rule
oM: medical expenses
Deductible to the extent that they exceed 10% of AGI
This is a floor- you have to come over the floor before you gain a single dollar of
deduction aka medical expenses have to cost you more than 10% of your AGI before
you get to deduct them
If you are 65 or older, the floor is only 7.5%
Age and marital status are determined at midnight of December 31
If you are an employee, expenses and premiums for medical insurance go here,
if you are self employed the medical insurance premium goes on for AGI and the rest
of the medical expenses go here
Personal expense- follows our general rule
oI: investment interest expense
When you borrow money to buy investments
Up to the net investment income- the interest received from the bonds is the
interest income, the interest you pay on the bonds (pay to the house) is the interest
expense--> find net
Like borrowing money on margin from the "house"- called trading on margin
(very risky)
If you are borrowing money to buy something you are renting out to other
people, that mortgage interest expense, that is going under rental expenses
Investment expenses- breaks our general rule
oC: casualty losses
Casualty loss is damage/destruction/theft of your property
Any time your asset was damaged or destroyed from a sudden casualty event
(like a fire)
If it is a personal use asset, subtract $100 per event and 10% of AGI for the
aggregate in the unlikely event that you have more than 1 casualty event in a year
Ex: someone steals your wallet (casualty event) and you had $5 in the wallet,
you cant deduct it because you have to subtract $100
Ex: someone steals your laptop: subtract 100 from the fair market value (say
500): 500 - 100= 400 then subtract 10% of AGI from this 400
You are usually not going to exceed 10% of AGI if you have a lot of little things
stolen meaning you can't deduct this at all
Therefore, most people wont benefit from casualty losses- this is better for a
catastrophic loss
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Insurance proceeds factor into it: 1 million house burns down but insurance
gives you 1 million back, you have no net loss
Personal expense- follows our general rule
oC: charitable contributions
You can deduct contributions if the nonprofit you are donating to is a 501c3
Can deduct up to 50% of AGI
Personal expense- follows our general rule
oI: interest on home mortgage
This is clearly the biggest section and shows how it is pretty rare to be able to
itemize deductions unless you own your own home
2 components
Acquisition indebtedness
Money borrowed to buy, build, or substantially improve your
house
Can deduct interest on $1 million in principle
It doesn’t mean the interest is 1 million, it means that the asset
is $1 million
Home equity
Interest on 100k on principle
Personal expense- follows our general rule
oS: state and local tax
You can deduct the taxes you pay to the state and local tax authorities
This includes property tax and state income taxes
Personal expense- follows our general rule
oM: miscellaneous
We will get more details about these deductions later
Includes things like paying a CPA to do your taxes
You can deduct up to 2% of your AGI total
Miscellaneous expenses are mainly investment expenses- breaks our general
rule
oE: employee
All the things you pay for that your employer doesn’t reimburse you for
You can deduct up to 2% of your AGI total
EE expense- follows our general rule
Phase out of itemized deductions:
oBush ran on the platform of no new taxes, so when he got into office and saw that they
really needed income, he decided to take away some deductions
This was then repealed through 2012 and reinstated beginning 1/1/13
oCategory 1 you cant lose: GMIC
oCategory 2 gets phased out: CISME
Phased out means that if your AGI is over a specific threshold, you can lose your
right to some deductions
o2015 thresholds:
Single: $258,250
MFJ $309,900
MFS $154,950
oThe single AGI threshold keeps going up (which is good)
oThe married filing jointly is definitely not twice as much as the single threshold, which
shows one of the tax disadvantages of being married
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