1040 Preparation and Planning 9: Standard Deduction and ...

1040 Preparation and Planning 9: Standard Deduction and Itemized Deductions (2021)

Welcome

Welcome to 1040 Preparation and Planning 9: Standard Deduction and Itemized Deductions (2021).

This course is developed by Wolters Kluwer in cooperation with Sidney Kess and Barbara Weltman.

This course covers standard deduction amounts and itemized deductions.

Learning Objectives

Upon completing this course, you should be able to:

List standard deduction amounts List which items can be deducted as medical expenses Identify which type of interest is deductible Determine which taxes are deductible Figure charitable contribution deductions and comply with substantiation

requirements Identify the rules for determining disaster losses Determine which miscellaneous itemized deductions are deductible in

2018 through 2025

Reference Material

IRS Forms and Publications

You will need Acrobat Reader to view or print the Portable Document Format (PDF) resources. If you need to install it, download the free plugin from Adobe's website.

1040 Preparation and Planning 9: Standard Deduction and Itemized Deductions (2021)

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Forms

Form 1040, U.S. Individual Income Tax Return Form 1040-SR, U.S. Tax Return for Seniors Form 1040 or 1040-SR Schedule A, Itemized Deductions Form 1098, Mortgage Interest Statement Form 4684, Casualties and Thefts Form 4952, Investment Interest Expense Deduction Form 8283, Noncash Charitable Contributions

Publication

Publication 502, Medical and Dental Expenses (Including the Health Coverage Tax Credit)

Publication 526, Charitable Contributions Publication 529, Miscellaneous Deductions Publication 547, Casualties, Disasters, and Thefts Publication 550, Investment Income and Expenses (Including Capital Gains

and Losses) Publication 907, Tax Highlights for Persons with Disabilities Publication 936, Home Mortgage Interest Deduction Publication 1771, Charitable Contributions: Substantiation and Disclosure

Requirements

Final versions of all 2020 tax forms, schedules, and other publications have not been released. We have used the most current versions available at the time this course was posted. Additional tax legislation, court decisions and IRS pronouncements could affect 2020 returns.

Standard Deduction

Individuals may elect to itemize their deductions or to take the standard deduction, whichever is greater (Code Sec. 63(c)(7)). The standard deduction amounts for 2020 are:

Joint returns and surviving spouses: $24,800 Heads of household: $18,650 Singles: $12,400 Married persons filing separately: $12,400

1040 Preparation and Planning 9: Standard Deduction and Itemized Deductions (2021)

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Pitfall Married taxpayers filing separate returns are ineligible to use the standard deduction if either spouse itemizes.

Taxpayers of Age 65 or Older There is an additional standard deduction amount for taxpayers who are of age 65 or older by the end of the year and/or blind.

For 2020, the additional amount is $1,650 for singles and heads-of-households, and $1,300 for married persons filing a joint or separate return, and for surviving spouses (Rev. Proc. 2019-44).

Standard Deduction - Examples

Example 1 Jill Gregory is entitled to file a joint return with her husband, Howard Gregory. However, Howard elects to file a separate return for 2020 and itemizes his deductions.

Because he itemizes, Jill is not entitled to claim the standard deduction on her return, but she must also itemize her deductions, if she has any.

Example 2 In 2020, Jerry Gilbert, a single individual, age 55, who is blind (and does not own a home), can claim a standard deduction of $14,050 ($12,400 + $1,650).

A married couple where one spouse is age 66 and the other is age 64 can claim a standard deduction of $26,100 ($24,800 + $1,300).

Standard Deduction for Dependents

A person who is viewed as a dependent on another taxpayer's return is subject to special rules for the standard deduction, which depend on the dependent's age and whether or not the dependent is blind.

For a dependent who is under age 65 and not blind, the standard deduction for 2020 is the greater of:

1040 Preparation and Planning 9: Standard Deduction and Itemized Deductions (2021)

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1. $1,100, or 2. Earned income, plus $350 (but not more than the standard deduction for the

dependent's filing status).

A dependent who is age 65 or older or blind has two parts to his or her standard deduction.

1. The standard deduction is the greater of $1,100, or earned income plus $350 (but not more than the standard deduction for the dependent's filing status).

2. The dependent can add the additional standard deduction amounts for age and/or blindness.

Example

In 2020, Melissa Stills, a single individual, age 17, is her parents' dependent. She has earned income from a summer job of $2,200 and unearned income from investments of $600. Her standard deduction is $2,550 ($2,200 earned income plus $350); this is not more than the standard deduction for her filing status of $12,400.

Assume that Stills is 66, widowed in 2019 (not remarried), and a dependent of her adult son; she has the same income. In this case, as a single person over the age of 65, she can add $1,650 to her standard deduction, for a total standard deduction of $4,200.

Qualified Business Income Deduction

Another type of deduction from adjusted gross income is the qualified business income (QBI) deduction (Code Sec. 199A). The deduction for owners of passthrough entities can be claimed whether the taxpayer uses the standard deduction or itemizes other personal deductions.

The qualified business income deduction is explained in 1040 Preparation and Planning 6: Business, Farm, and Rental Income and Expenses.

1040 Preparation and Planning 9: Standard Deduction and Itemized Deductions (2021)

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Overview of Itemized Deductions

The tax law allows individuals to deduct certain costs if they forego the standard deduction and list the various itemized amounts.

Itemized deductions are reported on Schedule A of Form 1040 or 1040-SR. They include:

Medical expenses State and local taxes Interest payments Charitable contributions Casualty and theft losses in federally declared disasters Gambling losses

For 2018 through 2025, the deduction for miscellaneous itemized deductions subject to the 2%-of-adjusted-gross-income floor is suspended. This means that no deduction can be claimed for such costs as:

Investment expenses

Job-related expenses

Hobby activity expenses

Tax return preparation fees

Medical Expenses

Individuals are no longer required to have minimum essential coverage for themselves and their dependents (the penalty for failing to have such coverage was repealed for 2019 and beyond).

However, the government Marketplaces for health coverage are still in effect.

Those who need financial assistance in paying the premiums because their household income is below a threshold amount may find it in the form of a federal premium tax credit for coverage obtained through a government Marketplace.

The premium health credit is explained in 1040 Preparation and Planning 11: Tax Credits.

1040 Preparation and Planning 9: Standard Deduction and Itemized Deductions (2021)

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