As tax law is very complicated, this article is intended only for educational or illustrative purposes and should not be construed to communicate legal or professional advise. You should contact us with any specific questions so we can properly interpret how the tax laws applies to your situation. Killingbeck Tax Preparation, Kokomo, Indiana. 765-452-8000.
How to Save with Itemized Deductions!
We have put together for you the below listing of the basic rules for itemized deductible savings. (For additional tax savings laws, please see our listing of Federal Tax Credits, Federal Tax Deductions, State Tax Deductions and Credits under our Tax Preparation listing.)
Itemized Deductions save you money when your total itemized deductions from allowable medical costs, taxes, mortgage interest, contributions and miscellaneous deductions exceed your standard deduction. (See the How to Figure Your Tax section to see what your Standard Deduction amount is.)
The tax deductible savings you receive by claiming Itemized Deductions depends on your top tax bracket. For example, if you are in the 15% bracket, after exceeding the Standard Deduction threshold, you save 15% of your excess amounts. If you are in the 25% bracket, you will save around 25%. Now if your income is low and you are in the 0% tax bracket, unfortunately the way the system is designed you won't have any tax deductible savings. Let us know if you have questions. Killingbeck Insurance, Kokomo Indiana, 765-452-8000.
Itemized Deductions- General Rules
- Taxpayers should itemize deductions when their allowable deductions exceed their normal standard deduction.
- Taxpayers who must itemize deductions (can't claim the Standard Deduction)
- Must itemize if married, filing Married Filing Separately, and other spouse itemizes.
- You may want to advise taxpayer that postponing or paying expenses early, such as contributions or state taxes, may allow someone to itemize every other year.
- Itemized Deductions Phaseout. In 2015 Phase out starts at: Single AGI > $258,250, Head of Household AGI > $284,050, and Married Filing Joint AGI > $309,900.
- The phase out goes up to 80% of itemized deductions.
- The phase out does not apply to medical expenses, investment interest, casualty loss or gambling losses.
- If Taxpayer subject to AMT should itemize even if not enough to itemize for regular tax if has: charitable contributions, home interest from purchase of home, medical bills if over % limit or misc. deductions not subject to 2%.
The reason for this is AMT doesn't deduct the standard deduction when computing tax but does allow these deductions.
Expenses That Are Not Deductible
- Illegal payments, bribes, kickbacks
- Lobbying and political expenses
- Fines and penalties
- Gambling losses in excess of winnings
- Cost of first residential telephone land line
- Expenses related to tax-exempt income
- Club dues
- The amount of business gifts in excess of $25 per individual
- Attendance at investment seminar unless related to business
- Expenses over $2000 to convention on a cruise boat
- Luxury water transportation in excess of twice the per diem rate
- Travel as a form of education
- Travel expenses of spouse or dependent unless they are employees
- 50% of business meal and entertainment
- Expenses connected with renting a home office to employer
- Luxury auto depreciation in excess of prescribed limits
1. Medical Expenses You Can Claim as Itemized Deductions
Only a small percentage of taxpayers can claim medical expenses as itemized deductions because of the limitation that medical bills have to exceed 10% of your adjusted gross income (7.5% if either spouse is 65 or older) and then your total itemized deductions must exceed your standard deduction. On the other hand, taxpayers with high medical expenses may have substantial savings from claiming their medical expenses.
A. Whose Expenses Can Be Claimed as Medical Itemized Deductions?
- Can deduct taxpayer and spouse’s medical expenses, and those of their dependents that taxpayer paid.
- If married filing separately, amounts paid from a joint account are considered paid 50% by each.
- May deduct medical expenses you paid for spouse if you were married at the time the expenses were incurred or at the time the bills were paid.
- Children of divorced parents can deduct medical expenses they paid regardless of which parent claims child.
- Medical expenses paid for any person who meets all dependency tests except:
- If claimed by either parent under rules for separated parents.
- Filed a joint return.
- If you are a dependent of another taxpayer and can’t claim the dependent due to dependent rules or
- Have been “qualifying relative” except had over $4000 income.
- Were a dependent when services were provided or paid.
- Aren't a dependent but are insured's child under age 27.
- Can claim expenses of child before adoption.
B. You can only deduct medical expenses in the year paid.
- Expenses paid by charge card or loan are considered paid at time of charge or loan.
- A decedent’s medical expenses paid within one year of death out of decedents estate may be treated as paid in the year incurred.
C. Can’t deduct medical expenses if reimbursed by insurance.
- Personal injury settlements & auto accidents do not reduce medical expense unless labeled in the settlement.
- If reimbursed for deduction claimed in previous year, add back as other income.
D. Must exceed 10% of AGI (Adjusted Gross Income) to deduct medical expenses. If 65 or older must exceed 7.5% of AGI.
E. Can’t deduct following items as medical expenses for itemized deductions:
- Cosmetic surgery unless medically necessary
- Car insurance medical
- Expenses reimbursed by insurance
- Funeral expenses
- Health club
- Medical conference costs unless chronic illness
- Health Savings Account contribution
- Life Insurance
- Nutritional supplements unless for treatment
- Sex change
- Teeth whitening
- Vacation beneficial to health
F. What Medical Expenses Are Deductible
- Must be for Prescription Medicine or insulin.
- Prescribed foods only if in addition to a normal diet.
- Premiums for Medical and Long Term Care Insurance:
- Medical insurance for hospitalization, dental, surgery, medicine.
- Medicare B ($104.90 mo. < $85K S, $170K MFJ), Medicare D (cost varies)
- Long term care limited per spouse to $380 under age 41, $710 age 41-50, $1430 age 51-60, $3800 age 61-70 and $4750 71+
- Can’t deduct insurance premiums claimed for self employed health insurance deduction.
- Doctors, Dentists, Optometrists, Chiropractors, Psychiatrist, nurse, & hospitals. Includes laser eyes surgery.
- Non-medical Cosmetic surgery isn’t deductible.
- Obesity is considered a disease if doctor is treating. A weight loss program is deductible if doctor is treating.
- Nursing home, home nurse or special schooling is deductible (if at least 90 days) if to receive medical care at doctors prescription. Can include nurse's meals & extra home upkeep costs as medical expenses.
- Medical care means unable to perform at least 2 activities of daily living (eating, toileting, transferring, bathing, dressing & continence) or requires supervision for safety, health or cognitive reasons.
- Practical nurse and other domestics are considered employees if taxpayer hired them directly. Care by a relative is not deductible unless relative is licensed health care worker.
- If taxpayer is in retirement community, you can deduct a portion of fees allocable to medical care.
- Transportation & Lodging medical expenses include costs necessary to get patient to medical care, costs of parent or nurse to go with child, & parent’s costs to visit. Can count in town and out of town mileage.
- Includes bus, taxi, plane, and car costs of 23¢ a mile. (19 for 2016)
- Actual costs include only gas, oil, parking and tolls.
- A lodging allowance of up to $50 per eligible person plus $50 for parent of a dependent child. Can only include meals in medical care.
- Conference travel (no lodging) for a specific disease.
- Special Items and Equipment include false teeth, artificial limbs, eye-glasses, hearing aids, crutches, cost & care of guide dogs, bandages, cost of Braille books and magazines that exceed normal costs, the cost of a TV adapter or special telephone for the deaf, a wheelchair, equipment to make a car drivable by handicapped, etc.
- Medically Prescribed Equipment or Home Improvement recommended by doctor include elevator for a heart patient, a pool for medical treatment, an air conditioner for an asthmatic patient, ...
- Can deduct the full cost in the year purchased except to the extent it increases the value of the home.
- Appraisal recommended on large items.
- Can deduct operating cost as well.
- Taxpayer should attach a written statement from doctor to return explaining the need for the improvement.
- Includes: ramps, modify doors or stairs, railings & supports, altering cabinets, fixtures, warning systems, car modifications.
2. Taxes You Can Deduct as Itemized Deductions
A. Taxes expenses are only deductible as itemized deductions by
- The property owner in the case of real estate or by the person required by law to pay the taxes.
- Married filing separately, each spouse only deducts the amount they paid & were liable for. (If property only in one spouse's name, other spouse can't deduct. From a joint account, each is considered paying 50%.
- If divorce decree requires to pay taxes, AND PAYMENT IS NOT RELATED TO CHILD SUPPORT
- If home is jointly owned then ½ of payment may be alimony. Other half is deducted as taxes paid. Receiving spouse adds alimony income and can deduct their half of taxes.
- If home not owned by paying spouse, may be alimony. If home owned by paying spouse, deduct as taxes.
- Renters & boarders can’t deduct taxes they pay, only the owner can deduct. (Is rent)
B. You can only deduct taxes in the year paid. Can’t prepay. Can deduct back taxes paid, but not fees or penalties. A purchaser must add back taxes to the basis of property.
Can’t deduct payments into escrow account till actually paid to taxing authority.
C. Real Estate Taxes on real estate property are deductible.
Can deduct taxes on all properties owned, not limited to 2 as interest deduction does.
- Condominium owners can deduct their share of taxes.
- Can include ditch, sidewalk, street, or other assessments only if for maintenance or repair. Assessments for a new ditch, sidewalk…add to the property's basis.
- Do not include cooperative maintenance or trash fees or homeowners association fees as these are not considered taxes.
- If property was bought or sold the seller gets to claim the full year of property taxes even if paid by seller. (In Indiana the seller is legally liable for taxes imposed the prior year.) The IRS considers any payment by the buyer to be an adjustment to sales price.
D. Sales Tax or State & Local Income Taxes
Sales Tax Method: Can deduct sales tax instead of income tax if sales tax is higher.
Use sales tax table. Be sure to include nontaxable income like social security, exempt interest, veterans benefits, etc.
a. Add sales tax on major purchases such as cars, boats, motorcycles, RVs, mobile homes, motor homes, materials to build a home, aircraft.
b. Or can use total from actual receipts.
Income Tax Method
a. Add amounts withheld for state and county taxes and
b. Add estimated taxes paid during the year (do not include 4th installment if paid in January) and
c. Add amount paid when tax return was filed.
E. Personal property taxes based on the value of boats, cars, truck, trailers, or recreational vehicles.
F. Foreign Taxes are deductible.
Must list auto excise taxes as personal property tax.
- Only deduct excise & county taxes based on value.
- Can’t deduct the license plate fee as taxes: $20.75.
- Can’t deduct the first $12 of excise tax as taxes.
- Can’t deduct the first $7.50 of Wheel/Surcharge Tax.
Usually better to take a tax credit on back of 1040.
G. Nondeductible taxes
All Federal Taxes: income, excise, social security, estate, gift, gas...
Some state taxes: Inheritance, gift, cigarette, liquor, gas taxes, drivers license fees, plate fees, tolls, dog tags, marriage license, assessments, transfer taxes, and other excise taxes.
- Sales Tax adds to basis of the asset if don’t claim.
3. Interest You Can Claim as Itemized Deductions.
A. WHO MAY CLAIM an INTEREST Deduction as Itemized Deduction?
- Must be legally liable for the debt to take interest deduction.
- On a Married Filing Separate return, each spouse can only deduct costs for which he or she is liable and pays.
- Attach statement if claiming interest deduction and Form 1098 is in someone else’s name.
B. To claim an Interest Deduction it must be paid during the year.
C. If divorce decree requires to pay interest deduction AND PAYMENT IS NOT RELATED TO CHILD SUPPORT and must be paid for more than 3 years, see alimony rules.
- If home is jointly owned then ½ of payment may be alimony.
- Other half can only be deducted as interest deduction by nonresident spouse if home was second residence for them or a close relative. Receiving spouse adds alimony income and can deduct their half of interest deduction.
- If home not owned by paying spouse, may be alimony.
- If home owned by paying spouse, they can only an interest deduction if their second residence or a close relative.
D. Allocation rules require you to take interest deduction on form that relates to the reason borrowed. Exception: Home loans can go on Schedule A or appropriate form. If taxpayer takes loan on rental to buy a car, can’t take interest deduction!
E. Taxpayer must match interest deduction claimed with form 1098 from bank. Attach statement if different or if different person received 1098, attach their name and address.
F. Requirements to take Interest deduction:
- Loans must be secured by 1st or 2nd home of taxpayer or of taxpayer's close relatives.
- Motor homes, houseboat, timeshare & house trailers qualify if permanent toilet, sleeping & cooking units.
- Can be another home where they don’t live if no rent is collected and for a close relative.
- Close relatives include: Brother, sister, half brother/ sister, parents, spouse, grandparents, grandchildren.
- Condominium owners can deduct interest of 1st or 2nd home.
- Construction loans qualify if home done in 2 years.
a. Can't claim interest on lot loan until construction starts.
b. Can't elect to add interest & taxes to land value if can't itemize.
c. Interest after 2 year period is considered personal interest.
G. You can take an interest deduction on loans up to $1,000,000 ($500,000 MFS) for home acquisition or improvements.
- Home equity loans not for improvements are limited to smaller of $100,000 or fair market value of home reduced by mortgage debt or home acquisition indebtedness.
H. Points, loan origination fees, Mortgage Insurance or prepaid interest deduction are fully deductible only for the 1st principal residence.
- Mortgage insurance premiums paid to acquire a new residence after 2006 will be considered interest.
- The amount of deduction will be listed in box 4 of 1098.
- The deduction is subject to phase out with AGI over $100,000
- On a primary home purchase are deductible even if paid by seller. (Basis is reduced, seller reduces selling price.)
- V.A. & FHA Points are Deductible by the buyer even if the seller pays the points
- If refinancing can only fully deduct points as a percentage of the home improvements done.
- Can’t deduct if refinanced with same bank.
- Points not related to home improvements are deducted over the life of loan. Can deduct balance of points when loan is paid if refinance with a different bank or home sold.
I. Investment interest is a full interest deduction only to extent of net investment income each year. (Doesn’t include passive real estate rentals).
Investment property is
1. Property that produces interest, dividends, annuities or royalties.
2. Property that produces gain or loss on sale of items that produce income listed in 1 above or held for investment.
3. Also includes interest in business which you did not materially participate (other than a passive activity.)
Complete form 4952 if interest is more than income or interest is being carried forward from a previous year.
A. Can elect on form 4952 to make dividend income & capital gains investment income but lose lower tax on those items.
B. Unclaimed interest is carried to future year.
C. Can’t claim if money used to buy tax-exempt bonds or investments, passive interest, life insurance or annuity.
J. If taxpayers claims a Mortgage Interest Credit from a qualified state program, you must reduce the interest deduction by the amount of the credit.
K. Interest that is not deductible includes:
- No personal interest (car loans, credit cards) since 1990.
- Late charges for a specific service.
- Service charges or Installment charges.
- Interest to purchase tax exempt securities, short sales, single premium life insurance, endowment contracts, straddles and non-recourse loans.
- Interest on non-home loans, insurance, 401K, IRA or endowment policies.
- Interest paid on another person's debts.
- If taxpayer claims a credit for home mortgage certificate, the interest claimed on return must be reduced by amount of credit claimed.
- Business interest is deducted on Schedule C, E, or F.
4. Contributions You Can Deduct as Itemized Deductions
Rules to be able to claim itemized deductions.
- Must have proof of contribution deduction.
- Must have acknowledgement from charity for each individual contribution over $250 (>$0 for donation of property) that shows organization's name, address, date and description and whether it provides good or services. A cancelled check won’t suffice.The receipt must be obtained before filing the return.
- Under $250 donor must have bank record, cancelled check or notice from organization.
- Payroll deduction doesn’t require receipt.
- Separate payments are treated as separate contributions and don’t add together to determine $250 limit. Can't write two checks at same time though!
- A donated auto, boat, or plane over $500:
- Must attach 1098C statement from charity to return.
- Can only deduct: What the charity reports was sold for or
- The fair market value (if box checked on form 1098C) if charity used for their own use or charity gave to a low income individual.
- Can use used car guide to estimate value.
- If fair market value is used, it is subject to recapture if charity sells within 3 yrs.
- A check dated 12/31 & mailed is deductible as dated.
- Must be to an IRS approved organization
- Local, state or US government if for charitable reason.
- A nonprofit volunteer fire company, civil defense unit, or a nonprofit hospital.
- Other organizations operated for charitable, literary religious, educational, scientific or amateur sports.
- Contributions that Benefit a Taxpayer you have to reduce deduction by amount of benefit received.
- A donation that includes elements of entertainment or service can only deduct the charitable part. (Doesn’t include free admission to museum or zoo or other building.)
- Exception: If membership fee is under $75, you can deduct the full amount if benefits are of token value.
- Non-deductible contributions:
- Political contributions, Chamber of Commerce, social clubs, civic leagues & professional groups.
- Contributions directly to needy individuals.
- No deduction for house donated to fire department.
- The value of blood, the value of time or services, the value of use of property. You must spend money.
- Lotteries & raffles run for charity aren't deductible.
- Contributions Deduction limits & carryovers:
- The deduction for charitable contributions is limited to 50% of AGI. Certain gifts of property are limited to 30% & 20% of AGI, with a carryover up to 5 years.
- Taxpayers who donate securities or real estate held long term can deduct the fair market value up to 30% of AGI. They avoid tax on the sale.
- Approved Foster Parents can deduct the extra costs of to feed, clothes & care for a qualified Individual if no profit motive and not planning to adopt child.
- Exchange Students: The extra costs associated with an unrelated student is a contribution up to $50 a month.
- The costs of volunteer services are deductible contribution if authorized by charity. These include:
- Cost of supplies,
- Special equipment.
- Long distance telephone calls are deductible if not substantial personal element.
- To deduct travel & car expenses as contributions they must be an approved representative. (For example, a church delegate to a convention.)
- If you drove to and from the volunteer work, car expenses are deductible up to 14¢ a mile.
- Must maintain a log or receipts of cost of gasoline.
- Must be an approved representative away overnight to deduct meals & lodging. The 50% limit on meals applies.
- Contributions of Property-special rules.
- Must complete form 8283 if goes over $500.
- Method used to determine FMV could be “Thrift shop value”, “appraisal”, “catalog”.
- If over $5000, complete section B of 8283. Appraiser must sign.
- See 1D of this contribution secton for details on donating auto, boat, plane.
- An artist or business is limited to actual costs of materials.
- Record keeping rules requires that you have a receipt from the receiving charity showing donee's name, date contributed and reasonably sufficeint description, appraisals over $5000 and a items over $500 should attach a written description to return.
- Donated Clothing: IRS says you can claim as contribution what you would pay in a used clothing store.
- No charitable deduction is allowed unless items are in good condition or better. Does not apply to single item over $500 if appraisal is attached.
- Appreciated securities, real estate, & other property held long term can deduct the fair market value up to 30% of AGI or 50% if charity uses for their own use (not on securities). This avoids tax on the gain!
- Watch to donate before the end of year as it can take up to 3 weeks to transfer.
- If unable to claim full deduction in year of contribution, you can carry forward for 5 years.
- Donations for conservation purposes have special rules.
- Life Estate donations get full deduction in year of agreement.
- IRA Charitable contribution: Must meet the following requirements to be exempt from tax on IRA.
- Must be after taxpayer reaches 70 1/2.
- May not exceed $100,000 (no carryovers) per taxpayer per year.
- Distribution is made directly to charitable organization.
- You do not claim as a charitable deduction on Sch. A but report as 1099 and list 0 as taxable amount.
- A charitable IRA contribution, does not satisfy taxpayers minimum required distribution requirements.
- This exclusion does apply to Simple or SEP IRAs.
5. Misc. Itemized Deductions
A. General Expenses You Can Claim As Itemized Deductions.
Misc. Deductions not subject to 2% of Adjusted Gross Income limit
- Gambling-lottery losses. Can deduct only to the extent of winnings. Must have records.
- Certain impairment related work expenses for disabled Employees to work
- Amortizable bond premium on bonds bought before 10/86
- Estate tax paid on an estate
- Repayment of income over $3000 (under $3000 are subject to 2%). Can also claim IRC1341 credit by recomputing prior years income. See credits section.
- Certain terminated annuity payments.
- Unrecovered investment in annuity or pension for decedent
- Casualty losses on income producing property.
Misc. Itemized Deductions subject to 2% limit
- Tax counsel and preparation fees
- Fees and services paid to investment groups, brokers, & bankers. IRA trustee fees.
- Clerical help and office rent in caring for investments, if really necessary.
- Investment counseling fees and publications. Investment seminars are not.
- A safe deposit box or home safe to store investments in. Does not include jewelry.
- Appraisals fees to determine the amount of a casualty loss or the value of donated property.
- Fees and Legal costs of lawsuits related to taxable income.
- Travel to care for investment property (Rental property is claimed on Schedule E.)
- Other expenses of managing property to produce income or to determine, contest, pay, or claim a refund of tax. (Includes estate planning.)
- Insurance premiums that protect an investment
- Repayments of income under $3000
- Loss on a Roth or traditional IRA (with basis) only allowed when all Roth IRAs are fully distributed (or traditional IRA or pension with a basis).
- Hobby expenses up to hobby income
- Loss on deposit in insolvent institution
- Convenience fees charged by credit card to pay income tax
- Nondeductible investment costs:
- Trips to investigate prospective rental property
- Trips to attend conventions, seminars
- Trips to attend stockholder meetings
- Home office for an investor
- Work Related Expenses are subject to 2% of AGI limit and must be ordinary and necessary job expenses.
- Union, professional dues, licenses.
- Work uniform costs & their cleaning if required by employer & not suitable for everyday use. The courts (not IRS) allowed cleaning of normal clothes when could only be worn 1 day as too dirty.
- Military uniforms are not deductible.
- Necessary protective clothing such as safety shoes, glasses, work gloves or other safety equipment
- Expenses of looking for a job in the same occupation if it isn't a first job & no long break since past job. Don't have to find a job.
- Expenses include: employment agency fees, resume, travel costs (56¢), and if out overnight 50% of meals, lodging (if not personal element to travel).
- Liability and Malpractice insurance paid by employees.
- Trade and Professional costs
- Magazines, journals,
- Professional organizations membership. Can include civic groups, chamber of commerce if conducted to advance business.
- The cost of tools, supplies, cell phones, or books used in work. Include total cost of tools of small cost or short life (<1 year), other items may be expensed or depreciated.
- Supplies bought for work: Teachers can claim amounts they spend for supplies.
- Office in the home costs: For rules on Office In Home, see "What Income is Taxable" in menu and then look in business section.
- Other expenses: business related gifts or entertainment, professors research-lecturing-writing costs, medical exams for work, physicals required by your employer, and long distance phone calls.
- Fireman can take cost of meals if on a 24 hour shift and required by employer to contribute to fund.
- Computers are subject to restrictions. See "What Income is Taxable" in menu and then look in business section.
- Required telephone is not deductible except if second line. Long distance calls are deductible. Prorate business use of cellphone.
- Legal fees to the extent that they are related to taxable income. On Social Security, deductible to the extent that social security is taxable.
- Education expenses- See further down the page.
- Employee Transportation, Food & Lodging expenses Use form 2106
- Employer’s Reimbursement or allowances are not usually in W-2 wages as they are not subject to tax if an approved plan.
- Deductible transportation includes:
- Travel for employer on same day between two job locations or to visit customers.
- Travel on the same day to a second job (but not home), job related schooling, or reserve meeting.
- IRS Rules for Other Deductible Commuting. See travel rules farther down for deducting travel mileage.
- IRS says travel from union hall to job nondeductible commuting.
- Here are IRS situations that are and aren’t deductiblea;
- If you have a regular place of business outside your home or a home office that is your principle place of business, you may deduct the cost of going to a temporary site regardless of location.
- If you do not have a regular place of place of work but normally work at several locations in your metropolitan area where you live, you may deduct the costs of driving to a temporary location that is outside your metropolitan area.
- If you do not have a regular place of work and all of your jobs are outside the metropolitan area where you live, none of your commuting costs are deductible.
- A temporary assignment is one of short duration of less than 1 year. Taxpayer must maintain another permanent residence. If later finds out will be over 1 year, deductibility ends at that time.
- IRS says travel from union hall to job is nondeductible commuting. You are employed where you work not where union hall is.
- Commuting expenses between home & job are not deductible regardless of the distance. Doing business from your car or hauling tools doesn't make deductible except if extra costs can be proved (for example, pulling a trailer).
- How To Deduct Transportation Costs
- For public transportation deduct amount paid.
- Vehicles usually use the mileage method.
- Can use mileage method on up to 4 vehicles. (not on taxicabs or passenger vehicles for hire) List reimbursements on 2106.
- You can only use mileage method if you’ve never claimed expensing or depreciation faster than 5 yr straight line.
- Mileage methods deducts 57.5¢ per mile. (2016 54 cents per mile)
- This includes costs of depreciation, gas, insurance, lease payments, maintenance, oil, repairs, registration, tires.
- Also deduct the business portion of parking fees & tolls.
- Can only deduct interest or excise tax if filing a Schedule C, E, F. Be sure to prorate for % of business use.
- The basis of the vehicle is reduced 12-23¢ for each mile claimed. When vehicle is sold, mileage claimed each year reduces basis on auto sale worksheet (not taxable if traded).
- Leased cars can use the mileage method or the business portion of lease plus operating costs.
- If you want to use mileage method on leases, you must use for entire lease period.
- If using actual cost method, you must add back Lease Inclusion amount. If fair market value is >$18,500 when purchase add back prorated lease exclusion amount on line 24b of 2106 or other income on Schedule C, E, F.
- Or can use the actual expense method.
- Most of our customers use mileage method as better records are required for this method. Expenses are:
- Gas, oil, repairs: tune up, brakes, washing
- Tires, supplies: antifreeze, wiper blades, wax
- Insurance, garage rent, parking, tools
- Interest & excise taxes if a Schedule C,E,F
- Depreciation of the car & improvements
- If leasing, must add back lease exclusion as outlined above.
Charitable, medical or moving costs for actual expense method can only claim out of pocket expenses. Can't claim depreciation, insurance or general maintenance.
- How to Deduct Food, Lodging, and Travel Work Related Expenses
- Employees deduct expenses on 2106. Self employed report on Schedule C.
- Requirements to be deductible.
- Your duties require you to be away from the general area of your tax home (defined below) substantially longer than an ordinary day’s work.
- A temporary assignment of < 1yr. (defined below)
- You need to sleep or rest to meet the demands of your work while you are away from home. Napping in your car doesn’t satisfy requirement.
- Tax Home Definition.
- Your tax home is generally your main place of business regardless where you maintain your family home. it is the city or general area where taxpayer conducts business.
- If you do not live at your tax home, you cannot deduct the cost of traveling between your tax home & family home.
- You are a truck driver and you and your family lives in Tucson. You are employed by a trucking firm whose terminal is in Phoenix. At the end of your run you return to your terminal in Phoenix and spend one night before you return home. You cannot deduct your expenses in Phoenix or costs going to Tucson as Phoenix is your tax home.
- If you don’t have a main place of business, use the following factors to determine your tax home.
- If you satisfy all 3 factors, your home is your tax home.
- If satisfy 2 factors, it depends on facts & circumstances.
- If satisfy 1 factor, you cannot deduct travel expenses.
- You perform part of your business in the area of your main home and use that home while working there.
- You have living expenses at your main home that you duplicate on travel away from main home.
- You often use that home for lodging or you or family, and have not abandoned the area in which your historic place of lodging (that is your claimed home) is located.
- If you do not have a regular or main place of business hand there is no place you regularly live, you cannot claim travel expenses as your tax home is wherever you work. You are considered a transient.
- A Temporary Assignment is one of short duration of less than 1 year. You determine if it is temporary when you start work and expect it to last less than a year. It may become indefinite due to changed circumstances. (Deduction stops then.)
- A series of assignments to same area is not temporary.
- A job is not temporary unless taxpayer intents to return to tax home after job is finished.
- Costs of weekend trips home can’t exceed living costs if they had stayed at assignment site.
- Travel & lodging expenses include:
- Car, Air, Taxi, baggage charges & shipping
- Food, lodging & the maintenance of a trailer
- Can’t deduct telephone expenses, cleaning & laundry.
- Individuals can’t deduct per diem lodging allowance amounts. (only qualified reimbursement plans)
- Meals and Optional Meal allowance
- Meals, entertainment and meal allowance are limited to a 50% deduction.
- This limitation is 80% for transportation workers.
- The meal allowance is determined by the area where they spent the night. For low cost areas, deduct $46 a day, high cost $65 a day.
- You can use meal allowance whether you are an employee or self employed.
- Transportation industry uses $59/day. (Truckers) $65 a day outside U.S.
- Still must support the deduction with a record of time, place & business purpose (or hotel bill).
- Prorate starting & ending days. 25% each 6 hours.
- Can only deduct 50 of any meal costs.
- Exception: Transportation workers subject to Dept. of Trans. Service hours can deduct 80%
- If can’t claim meals, can take $5 daily allowance for incidental expenses. Can in addition claim laundry, lodging taxes and phone calls.
- Meals for medical or charitable purposes can claim 100%.
- Business vs. personal trips:
- To deduct, trip must be primarily for business.
- If trip was primarily business but you extend stay for a vacation, can only deduct travel costs to & from and business expenses at destination. Can’t deduct family’s costs.
- Trips outside U.S. have special rules.
- Required Record keeping. See further down this page.
- Entertainment Expense must be ordinary & necessary costs & must show a business purpose.
- Service Club or Chamber dues are deductible if used for business purposes.
- Dues to country club, golf course, etc are not deductible.
- Entertainment requires detailed records (log book).
- Only 50% of meals are deductible.
- Gifts limited to $25 per recipient per year.
- Education Expenses
- May be more advantageous to use Lifetime Learning Credit, or American Opportunity Credit or education deduction, if 2% miscellaneous itemized deduction is reducing deduction.
- If have Board and Meal expenses for less than a year may be more advantageous to claim this deduction. Especially if mileage is added in.
- Requirements to be deductible.
- Must be employed or on temporary leave.
- Must be ordinary and necessary expenses for one of the following two reasons:
- The education was taken to maintain or improve skills required in doing the present work. Courses leading to specialization in a field are deductible (a teacher to a principal), a change in a field isn't.
- The education must be required by employer or by law to keep your salary, status or job.
- Deductible Education expenses include:
- The general costs of tuition, books, typing, supplies, lab fees, tutoring, & research.
- Transportation and travel expenses can be deducted as described in following sections.
- Board & Meals may be disallowed if off work over 1 year.
- Record Keeping Requirements to Claim Employee Related Expenses:
- Failure to keep good records will result in disallowance of work related expenses. Must keep records for 4 years.
- The IRS is tough on record keeping. They say, no log or account book, no deduction.
- Taxpayer is to keep:
- Log or account book to list time, place and business purpose.
- Receipts for all lodging bills.
- Receipts for other expenses that are over $75.
- A canceled check is not always sufficient.
- THE IRS says "Taxpayers should keep proof in an account book, diary, or similar record, supported by adequate documentary evidence that will support each element of an expense."
- Record keeping for Vehicles:
- The IRS denies mileage deductions if no log book (which is kept current) that shows date, mileage driven, place visited & business purpose.
- Specialized vehicles that wouldn't be driven other than for business do not need a daily log. Do record odometer at start & end of year.
- Farms are allowed to claim 75% business use for one vehicle without keeping records. Only applies to vehicle primarily used for farming.
- Other Recordkeeping
- The Cohan rule can apply to non-travel expenses.
- It is best, though, to have a receipt to back up every expense.
- The Cohan rule is often used by tax courts to determine deductions are adequately substantiated.
- It says that an approximation of non-travel business expense can be based on credible evidence (check, charge statement, etc.) other than actual documentation (receipt).
6. Casualty Loss as an Itemized Deduction
A casualty loss must be an identifiable event from sudden & destructive force that is unexpected & unusual.
- Personal casualties subject to 4 limits. (Business has none of these limitations; use back of form 4797.)
- Taxpayer must be able to itemize. Must have federal tax in current year, or carryback with NOL to tax in 3 prior eyars or carry forward against future year's tax.
- A casualty loss on an investment is not subject to 10% or $100 limit. Deduct as a misc. item. Ded. not subject to 2%.
- The casualty losses must exceed 10% of AGI
- Exception: A casualty loss on an investment (not rental) is not subject to 10% or $100 limit. Deduct as a miscellaneous itemized deduction not subject to 2%.
- The first $100 is not deductible.
- Ponzi scheme losses(involving fictitious investments) not subject to 10% but subject to 95% or 75% (for 3rd party investments) limitation. Report on page 3 of form 4684.
- Casualty losses include, tornados, floods, storms, vandalism, fires, auto accidents, riot, burglary, embezzlement, robbery, contractor fraud (also can take as a bad debt) & thefts from a known location.
- Can take a loss of a deposit in a financial institution as a casualty or bad debt ($3000 per year). If not federally insured, can take a deduction up to $20,000 a year as miscellaneous itemized deduction.
- Losses that aren't casualties include:
- Insect & termite damage, rotting, disease, progressive deterioration, mislaid-lost property, a lost ring, drought, & damages to other’s property.
- Also, related expenses such as injuries, temporary housing, a rental car, or liability payments.
- Damage to your car in an accident if caused by willful conduct such as drunk driving.
- The amount of casualty loss is: the lesser of A or B.
- A. Taxpayers basis in the property.
- B. The decrease in fair market value of the property before the loss compared to after the loss.
- An exception lets you deduct the costs of cleaning up or the costs of repairs when they just bring the property back to the previous condition. Repair must be done to use this method.
- Reimbursements must be subtracted from the loss to determine the amount of the deduction.
- If the reimbursement exceeds the basis then the taxpayer has a taxable gain. This gain may be postponed if replaced with similar property within 2 years. (3 years for condemned investment or business property, or 4 years for home in declared disaster area).
- To defer tax on gain, attach a statement to return giving details of transaction including computation of gain and intention to buy replacement if not already done.
- For Federal Disaster area, no gain on personal items. Also allowed to lump reimbursement for building & property.
- When reimbursement comes in a later year, use expected reimbursement in figuring the deduction. If reimbursement is higher in later year, add as other income. If less, can amend casualty loss on original return.
- Not allowed a casualty loss if the taxpayer could have collected from insurance but chose not to.
- Generally you can deduct a loss only in the year of the loss unless loss is in a federal disaster area. If in disaster area, can also amend previous year’s return to claim. Must attach signed statement saying you are making this election. Disaster areas listed at www.fema.gov/news/disasters.fema.
- Theft losses are deducted in the year it is discovered.
- To take a casualty or theft loss you must be able to show that there was a loss & prove the deduction.
For items not repaired, should make a list of items damaged showing basis and fair market value before and after the loss. Take the lesser of the two and deduct reimbursements. For items repaired, compare repairs to reimbursements. May need appraisal on large items not repaired.
- For condemnations of property you compare amounts received to the basis of the property.
- Personal residence can be treated as a sale of a principal residence to postpone the gain.
- Losses aren't deductible.
- A Casualty can Produce a Net Operating Loss which is carried to another year to reduce taxes.
- Sales of land on which a home was located, in Presidential disaster areas, is considered part of the original loss.
Give us a call if you have questions or we can be of help, 765-452-8000. Killingbeck Insurance & Tax Preparation, Kokomo, Indiana.