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TCP CPA Practice Questions: Itemized Deductions Vs. Standard Deduction
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May 20, 2024
In this video, we walk through 5 TCP CPA exam practice questions teaching how to determine whether to itemize deductions or take the standard deduction for tax planning purposes. Important Links Link to the free study training webinar mentioned in the video: https://www.superfastcpa.com/strategic-study See the full post for this video: https://www.superfastcpa.com/tcp-cpa-practice-questions-explained-itemized-deductions-vs-the-standard-deduction/ See the other TCP walkthrough videos here: https://www.superfastcpa.com/free-tcp-cpa-practice-question-walkthroughs/ 00:00 Intro 00:48 Question 1: Charitable Contributions 03:25 Question 2: Medical Expenses 05:38 Question 3: Non-Qualified Medical Expenses 08:48 Question 4: State and Local Taxes (SALT) 10:35 Question 5: Putting it all Together 12:20 Pillar Topics
View Video Transcript
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Welcome to another TCP walkthrough video. I'm Logan, and in today's video, we're going to be going over
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whether to take the itemized deductions or the standard deduction for tax planning. And we're going to be
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doing that the Super Fast CPA way, which is diving straight into questions to learn the material
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If you don't know much about our strategies, make sure you go check out our free one-hour webinar
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training on SuperfastCPA.com. Again, it's one hour, it's free, and we teach the key ingredients to passing
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the CPA exam. You don't want to miss it. The link will be in the description, make sure you go check it out. Also, just letting you know, in this video, we'll only be
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going over five questions, but Super Fast CPA members will have access to the full 10 question
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video when we post it on the members forum. So if you like this, you can get more of it by becoming
0:43
a Super Fast CPA member. With that said, let's dive straight into the questions. Okay, here is
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question one. Linda, a single taxpayer, has an adjusted gross income of $45,000 for the year
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She donated $2,500 in cash to a local food bank. She contributed shares of a publicly traded company to a charity, which she had bought 18 months ago for $4,000, now worth $10,000 at the time of the donation, and she gave old books to her library with a fair market value of $300
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Given that the standard deduction for a single taxpayer is $12,550, calculate Linda's total allowable charitable contributions and determine whether she should itemize her deductions or choose the standard deduction
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So if you don't know very much about itemized and standard deductions up to this point, that's okay
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That's what we're here to learn. So let's go ahead and look at the answer to start learning what the nuances are for choosing the itemized deductions or the standard deduction
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Okay, and the answer is that her total contributions are $12,800, so she should itemize her deductions since those exceed the standard deduction
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So let's learn this calculation. The cash contribution of $2,500 is deductible at the given amount
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Okay. The stock contribution is deductible at its current fair market value since it was held for more than a year, totaling $10,000. The books donated are deductible at their fair market value of $300. So the total charitable contributions, Linda can claim are the $2,500, the $10,000 and the $300,000, equaling $12,800. Okay, and that is bigger than the standard deduction in this case. So that's why she would take the itemized deductions instead of the standard deduction. Let's read a little bit more about donating stocks. When donating
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stocks to charity, if the stocks are held for more than a year, so they're long term, they are
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generally deductible at their fair market value on the date of the donation, allowing the donor
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to avoid paying capital games tax on any increase in value. However, if stocks are held for
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less than a year, so they're short term, the deduction is limited to the lesser of the fair market
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value or the cost basis, which was the purchase price. For long-term held stocks, you can deduct
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up to 30% of your adjusted gross income for these contributions to public charities, with the ability
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to carry forward any unused deductions for up to five years, making it an advantageous way to support
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charitable causes financially. Okay, so basically, long-term capital gain property that's like
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stocks and things like that, that is limited to 30% of your AGI. So if this was significantly
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higher, it would have been limited to 30% of her AGI. All right, we learned a little bit about
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what things can be deducted as charitable deductions there, and those are itemized deductions
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So let's go ahead and go to the next question to learn some more
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Okay, here is question two. Robert, a married taxpayer filing jointly with his wife, has an adjusted gross income or
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AGI of $100,000 for the year. They incurred the following medical expenses Hospital bills of prescription medications of doctor fees for and health insurance premiums for Given that the standard deduction for a married couple filing jointly is
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calculate the amount of medical expenses Robert can deduct and determine whether they should itemize their deductions or take the standard deduction
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Okay, so this is a new kind of itemized deduction. These are medical expenses, but we don't really know if there's some kind of limitation
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on them or something like that. So if you'd like, you can take a second, pause the video and see
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if you can figure it out. But otherwise, let's go ahead and look at the answer together. Okay
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and the answer is that the total deductible medical expenses are $18,500. They should take the
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standard deduction because it exceeds their itemized deductions. Okay, so let's go ahead and look at the
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calculation. So total medical expenses, you just add it all up, and that was $26,000. And then
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this is really important right here. The threshold for medical expenses, to be deductible is 7.5% of AGI
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Or in other words, all your medical expenses that are above this 7.5% of AGI are deductible
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So you take the $26,000 of expenses, less this $7,500, which is the 7.5% of AGI
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And that gives you $18,500 of medical expenses that can be deducted
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But this total is less than the standard deduction in this case, so they're still going to take
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the standard deduction because it's higher. So the over 7.5% of AGI rule for medical expenses is a tax deduction guideline that allows taxpayers to deduct medical and dental expenses that exceed 7.5% of their adjusted gross income
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To utilize this deduction, taxpayers must itemize their deductions instead of making the standard deduction
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So it's either or. You don't get to take the standard deduction and then also take the medical expenses over 7.5% of AGI
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This 7.5% of AGI is specifically for when you itemize your deductions
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All right, let's go ahead and go to the next question. Okay, here is question three
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Samantha, a single taxpayer has an adjusted gross income of $80,000. During the tax year, she incurred the following medical expenses
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Medical insurance premiums paid out of pocket for $6,000, prescription medications for $1,500, doctor's consultation fees for $3,500
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non-prescription over-the-counter medications, $500, dental surgery for $7,000, transportation expenses related to medical care for $800
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So we need to calculate the total. Qualifying Medical Expenses that exceed 7.5% of Samantha's AGI and determine the amount that she can deduct
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Assume the standard deduction for a single taxpayer is $12,550 in this case
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Okay, this is very similar to what we just did, so you probably can figure this out
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Go ahead and pause the video, do the calculation, and when you're ready, come back and we'll look at the answer together
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Okay, and the answer is that the total qualifying medical expenses are $18,800, and the deductible amount is $12,800
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So let's learn about that. So first you add up all the allowable medical expenses, and I want to note here that the non-prescription
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over-the-counter medications, those are not deductible, and we'll read about that in just a second here
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So you add up the insurance, the prescriptions that were prescribed, not the over-the-counter stuff
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not the non-prescription stuff, the doctor's fees, the dental surgery, and the transportation
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and that gives you $18,800. And then the threshold in this case is $6,000, which is $7.5% of the doctor's
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of the AGI of $80,000. And then you subtract the $6,000 from the $18,800
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of total expenses. And that gives you the $12,800 of deductions. And by the way, it wasn't asking for this in this question
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but that is higher than the standard deduction in this case So that means that she would wanna take itemized deductions instead of the standard deduction Now let read a little bit about what is considered an allowable medical expense
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Allowable medical expenses for tax deduction purposes include costs paid out of pocket for the diagnosis
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cure, mitigation, treatment, or prevention of disease, and for treatments affecting any part or function of the body
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These expenses can include payments for legal medical services rendered by physicians, surgeons, dentists, and other medical practitioners
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They also cover the costs of equipment, supplies, and diagnostic devices needed for these
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purposes, premiums paid for medical insurance, transportation costs necessary for receiving medical
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care, and expenses for psychiatric and psychological treatment are also deductible. However, expenses must be primarily to alleviate or prevent a physical or mental defect
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or illness to qualify. Non-prescription drugs, except for insulin, so that is one notable exception, general health
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items and most cosmetic procedures are not considered deductible medical expenses. So basically
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a deductible medical expense is anything that is prescribed or done by a medical professional
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you know, surgeries, prescriptions, most anything that is actually done by and prescribed by a
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medical professional. And then pretty much everything else that you're kind of just doing on your
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own, you know, you're just buying ibuprofen or you're getting some kind of cosmetic surgery
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Those things would not typically qualify. All right, let's go. ahead and look at the next question. Okay, here is question four. Alice and Tom, a married couple
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filing jointly, paid the following state and local taxes during the year, $4,000 in state income taxes
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$6,000 in real estate property taxes, and 2,000 on personal property taxes on their vehicles
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Calculate the total deductible amount for their salt taxes, and determine if this would
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influence their decision to itemized deductions, assuming their total itemized deductions, include all salt, and by the way, salt is state and local taxes, come to $26,000
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And the standard deduction for a married couple filing jointly is $25,100
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Okay, this question could be a little deceiving if you don't really know how this works yet
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which you might not. So go ahead and pause the video, and if you know how this works, select the correct answer
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And if not, let's go ahead and look at the answer so you can start learning some of the
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limitations on the salt deduction. Okay. and the answer is that they can only deduct $10,000 in salt taxes
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They should take the standard deduction because it exceeds their total itemized deductions. So this could have been a little bit confusing, so let's walk through it
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The couple paid a total of $12,000 in salt taxes. However, due to the salt deduction cap of $10,000, they can only deduct up to $10,000 of those taxes
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So even though they had a total of $12,000, and then they added that to their other itemized
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deductions equaling $26,000, once you apply this deduction cap, that lowers their total itemized deductions down to $24,000 instead of $26,000
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leaving it lower than the standard deduction. So this is one more thing you need to pay attention to
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Medical expenses have their own limits. Charitable contributions have their own limits
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And state and local taxes also have their limit, which is this, the $10,000 salt deduction cap
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All right, let's go ahead and go to the next question. Okay, here is question five
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Emily and Joe, a married couple filing jointly, have the following expense
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in the tax year, adjusted gross income of $100,000, $15,000 in medical expenses, $3,000
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in charitable contributions, $6,000 in state income taxes, and $7,000 in real estate property
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taxes. So we need to calculate their total itemized deductions, and then we also assume the
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standard deduction for a married couple filing jointly is Should Emily and Joe itemize or take the standard deduction All right so we five questions in You learned how each of these things work
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So pause the video, do the calculation, and see if you can get it correct
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and we'll look at it together in just a second. Okay, and the answer is that the total itemized deductions are $20,500
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so they should take the standard deduction because it's higher than the total itemized deductions
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So let's look at this calculation. So first, we look at the allowable medical deduction
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which the limit was anything over 7.5% of the AGI, which is $7,500
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So you subtract that from the medical expenses of $15,000. So that leaves you with $7,500 of medical expenses
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And then you calculate the salt taxes, but again, those are limited to $10,000
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So you can only take $10,000 of those. And then the charitable contributions, we didn't get really any information about that
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So we're kind of assuming it's just a cash contribution and those were fully deductible
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So you add all that together and you only get $20,500 of itemized deductions, which is well below the standard deduction in this case
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So they would take the standard deduction. All right. In just five questions, we learned a lot about the different itemized deductions
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Before we go any further, let's go ahead and do one more part of the strategy, which is something called pillar topics
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Now, the idea behind pillar topics is as you're going through the material, you will notice topics and concepts and calculations that keep popping up
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These are the things that showed up in three, four, five questions, and you just kept having to practice them
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So they're obviously important according to your review course for you to know for the CPA exam
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So you write down those pillar topics so that you can remember them for later. So let's go ahead and look at the pillar topics for this video
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Okay, here are the pillar topics for this video. First is the medical expense deduction
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Taxpayers can deduct medical expenses that exceed 7.5% of their adjusted gross income
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including costs for treatments, surgeries, medications, and related transportation. Now for charitable contributions, these contributions to qualified organizations can be deducted
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if itemizing. The deduction amount for donated property like stocks depends on how long the property
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was held before donation. And by the way, the next video that we're going to be posting
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is all about non-cash property donations, so we'll learn a little bit more about charitable
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contributions in that video as well. Now for state and local tax deductions, this deduction includes
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state and local property and income taxes but is capped at $10,000 for married couples filing jointly
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and by the way, $5,000 for married individuals filing separately. And then finally, with all of this
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properly calculating each type of deductions, so the medical expenses, salt, charitable contributions
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is crucial to determine whether to itemize deductions or choose the standard. And pretty much the
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whole point of this video was to show you how to figure out some of the most common itemized
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deductions because once you figure them out, the choice is really simple. Of course, once you know
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how much the itemized deductions are and what the standard deduction is, it's a really easy decision
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But it might not be so easy to get to where you know what the itemized deductions are for the
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year so you can make that decision. So that was the point of this video to show you how to do
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a lot of those most common itemized deductions. And with that, that is the end of this video
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One more reminder to go check out our free one-hour webinar training on superfast cpa.com
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We go over the key ingredients to passing the CPA exam. It's something you don't want to miss
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And also, if you liked this format going through these five questions, Superfast CPA members will have access to the full 10 question video
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when we posted on the members forum. So again, if you like this, you can get more practice by becoming a Superfast CPA member
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If you liked this video, make sure to like it and leave a comment. Thank you for watching
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I hope this was helpful, and I will see you in. the next video
#Tax Preparation & Planning