CPA REG: Complete Guide to Itemized Deductions
Detailed breakdown of itemized deductions for the CPA REG exam including medical expenses, state and local taxes, mortgage interest, charitable contributions, and casualty losses.
Itemized Deductions: What CPA Candidates Must Know
Itemized deductions, reported on Schedule A of Form 1040, allow taxpayers to reduce taxable income by the sum of qualifying personal expenses. A taxpayer benefits from itemizing only when total itemized deductions exceed the standard deduction. Under the Tax Cuts and Jobs Act (TCJA), the higher standard deduction reduced the number of taxpayers who itemize, but the rules remain heavily tested on the REG exam.
Medical and Dental Expenses (IRC Section 213)
Taxpayers may deduct unreimbursed medical and dental expenses that exceed 7.5% of adjusted gross income (AGI). Qualifying expenses include payments for diagnosis, cure, mitigation, treatment, or prevention of disease, as well as transportation costs for medical care and health insurance premiums (including Medicare premiums). Capital expenditures that improve a home for medical purposes are deductible to the extent they exceed any increase in the property's value.
Expenses that do not qualify include cosmetic surgery (unless related to a deformity from a congenital abnormality, personal injury, or disfiguring disease), nonprescription medications (except insulin), and general health improvements. The exam frequently tests the AGI floor calculation and whether specific items constitute qualifying medical expenses.
State and Local Taxes (IRC Section 164)
The SALT deduction is capped at $10,000 ($5,000 for MFS) and includes state and local income taxes (or general sales taxes, at the taxpayer's election), real property taxes, and personal property taxes. Foreign income taxes may be deducted as an itemized deduction or taken as a credit, but not both. If a taxpayer receives a refund of state taxes deducted in a prior year, the refund is includable in income to the extent the deduction provided a tax benefit (the tax benefit rule under IRC Section 111).
Key exam points include that federal income taxes and federal payroll taxes are never deductible. Real estate taxes must be apportioned between buyer and seller based on the number of days each owned the property during the year of sale, regardless of who actually pays the tax bill.
Interest Expense (IRC Section 163)
Home mortgage interest is deductible on acquisition indebtedness up to $750,000 ($375,000 MFS) for mortgages originating after December 15, 2017. Mortgages originating on or before that date retain the $1 million ($500,000 MFS) limit. Home equity loan interest is deductible only if the proceeds are used to buy, build, or substantially improve the home securing the loan. Points paid on a home purchase loan are generally deductible in the year paid. Points paid on a refinance must be amortized over the life of the loan.
Investment interest expense is deductible to the extent of net investment income under IRC Section 163(d). Any excess is carried forward. The taxpayer may elect to include net capital gains in investment income, but those gains are then taxed at ordinary rates rather than preferential capital gains rates.
Charitable Contributions (IRC Section 170)
Contributions to qualified organizations are deductible subject to AGI limitations. Cash contributions to public charities are limited to 60% of AGI. Capital gain property contributed to public charities is limited to 30% of AGI (or 50% if the taxpayer elects to reduce the contribution by the appreciation). Contributions to private foundations are generally limited to 30% of AGI for cash and 20% for capital gain property. Excess contributions may be carried forward for five years.
For property contributions, the deduction amount depends on the type of property and the recipient. Long-term capital gain property donated to a public charity is generally deductible at fair market value. Ordinary income property (such as inventory or short-term capital gain property) is deductible at the lesser of fair market value or the donor's basis. Contributions of services are never deductible, but unreimbursed out-of-pocket expenses incurred while performing charitable services qualify (including 14 cents per mile for charitable driving).
Substantiation requirements include a contemporaneous written acknowledgment for contributions of $250 or more and a qualified appraisal for noncash contributions exceeding $5,000 (except for publicly traded securities).
Casualty and Theft Losses (IRC Section 165)
Under the TCJA, personal casualty and theft losses are deductible only if attributable to a federally declared disaster. Each loss is reduced by $100, and the total net casualty loss is further reduced by 10% of AGI. The loss is measured as the lesser of the decline in fair market value or the adjusted basis of the property, minus any insurance reimbursement. If the taxpayer has a reasonable expectation of insurance recovery, the potential reimbursement must reduce the deduction in the year of loss.
Other Deductions and Exam Tips
Gambling losses are deductible as itemized deductions, but only to the extent of gambling winnings. Under the TCJA, miscellaneous itemized deductions subject to the 2% AGI floor (such as unreimbursed employee expenses and tax preparation fees) are suspended through 2025.
- Always compare total itemized deductions to the standard deduction to determine which provides the greater benefit
- Watch for the SALT cap and its impact on high-tax-state residents
- Remember the AGI percentage floors for medical expenses (7.5%) and casualty losses (10%)
- Charitable contribution questions often test the AGI limitations and the rules for noncash property
- The Pease limitation on itemized deductions was eliminated by the TCJA through 2025
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