Ken and Mary Jane Blough, your neighbors, have asked you for advice after receiv
ID: 2480815 • Letter: K
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 Boughs?
Explanation / Answer
The total value of deduction that can be claimed in respect of medical expenses is allowed only to the extent such expenses exceed the adjusted gross income by 10%. Therefore, Ken and Mary Jane Blough should first determine the value of AGI after claiming allowed deductions and than claim the medical expense deduction (if available).
The deductions related to charitable contributions can be claimed on the production of supporting evidence. In the given case, Ken and Mary Jane Blough will have to arrange for a detailed acknowledgment/receipt from the charitable organization to which the donation has been made by them in the relevant year.
The nature of deduction related to interest is not clear. Therefore, we will assume that the interest falls in the category of "Mortgage Interest". If all the conditions (as specified by IRS from time to time) are satisfied, the property owner can claim the entire amount of mortgage interest as deduction. Therefore, Ken and Mary Jane Blough should claim deduction for the actual amount of interest obligation.
The value of tax can be determined only after all the deductions have claimed in the correct amount. The tax should be calculated in accordance with the applicable tax rates as specified by IRS for each year.
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