Question

Ken and Mary Jane Blough, your neighbors, have asked you for advice after receiving correspondence in the mail from the IRS. You learn that the IRS is asking for documentation in support of the itemized deductions the Bloughs claimed on a recent tax return. The Bloughs tell you that their income in the year of question was $75,000. Because their record-keeping habits are poor, they felt justified in claiming itemized deductions equal to the amounts that represent the average claimed by other taxpayers in their income bracket. These averages are calculated and reported by the IRS annually based on actual returns filed in an earlier year. Accordingly, they claimed medical expenses of $7,102, taxes of $6,050, interest of $10,659, and charitable contributions of $2,693. What advice do you give the Bloughs?

Partial list of research aids:

Cheryl L. de Werff, T.C. Summary Opinion, 2011–29.

Answer 1

The process of itemization is dependent on documentation and record keeping.Deductions are required to be placed on IRS Form Schedule A. Receipts,invoices,and bills should be kept in a working file accompanied by relevant notes for attachment to the return.

The itemized deductions are usually personal in nature. They are not business expenses related to other business entities in which the taxpayer is involved. Itemized deductions include the following:

• Casulaty and theft losses,
• Charitable contributions,
• Home mortgage and investment interest,
• Real estate and personal property taxes,
• Gambling losses and tax preparetion fees.
• Medical and dental,
• State and local income taxes,
• Job expenses,and investment expenses,

Typically,the largest deduction is for mortgage interest,property tax,and state income tax.Most expenses cannot be deducted fully and have limitations.Medical expenses can be deducted only to the extent up to which they exceed 10% of the adjusted gross income,Job expenses can be deducted only to the extent up to which they exceed 2% of the adjusted gross income.