Itemized Deductions- General Rules

1. Taxpayers should itemize deductions when their allowable deductions exceed their normal standard deduction.
2. Taxpayers who must itemize deductions (can't claim the Standard Deduction)
   1. Must itemize if married and other spouse itemizes.
3. 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.
4. Itemized  Deductions Phaseout.   There is no phaseout of itemized deductions for higher income taxpayersfor 2011 to 2012 

Expenses That Are Not Deductible 

1. Illegal payments, bribes, kickbacks
2. Lobbying and political expenses.
3. Fines and penalties.
4. Gambling losses in excess of winnings
5. Cost of first residential telephone line.
6. Expenses related to tax-exempt income
7. Club dues
8. The amount of business gifts in excess of $25 per individual.
9. Attendance at investment seminar unless related to business.
10. Expenses over $2000 to convention on a cruise boat.
11. Luxury water transportation in excess of twice the per diem rate.
12. Travel as a form of education.
13. Travel expenses of spouse or dependent unless they are employees.
14. 50% of business meal and entertainment.
15.  Expenses connected with renting a home office to employer.
16. 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 7.5% of your adjusted gross income 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?

1. Can deduct taxpayer and  spouse’s medical expenses, and those of their dependents that taxpayer paid. 
   1.  If married filing separately, amounts paid from a joint account are  considered paid 50%  by each.
2. 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.
3. Medical expenses paid for any person who meets all  dependency tests except:
   1. if claimed by either parent under rules for separated parents.
   2. filed a  joint  return.
   3. if you are a dependent of another taxpayer and can’t claim the dependent due to dependent rules or
   4. have been “qualifying relative” except had over $3700 income
   5. Were a dependent when services were provided or paid.

B.  You can only deduct medical expenses in the year paid.

1. Expenses paid by charge card or loan are considered paid at time of charge or loan.
2. 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.

1. Personal injury settlements & auto accidents do not reduce medical expense unless labeled in the settlement.
2. If reimbursed for deduction claimed in previous year, add back as other income.    

D.  Must exceed 7.5% of AGI (Adjusted Gross Income)  to deduct medical expenses.

E.  Can’t deduct following items as medical expenses itemized deductions.

1. Cosmetic surgery unless medically necessary.
2. Car insurance medical
3. Expenses reimbursed by insurance.
4. Funeral expenses.
5. Health club
6. Medical conference costs unless chronic illness
7. Health Savings Account contribution
8. Life Insurance
9. Nutritional supplements unless for treatment.
10. Sex change.
11. Teeth Whitening
12. Vacation beneficial to health.

F.  What Medical Expenses Are Deductible

1. Must be for Prescription Medicine or insulin
   1. a. Prescribed foods only if in addition to a normal diet.
2. Premiums for Medical and Long Term Care Insurance:
   1. a. Medical insurance for hospitalization, dental, surgery, medicine, 
   2. Medicare B ($96.40 mo. < $85K S,$170K MFJ), D(cost varies.)
   3. Long term care limited per spouse to $340 under age 41, $640 age 41-50, $1270 age 51-60, $3440 age 61-70 and $4240 71+
   4. Can’t deduct insurance premiums claimed for self employed health insurance deduction.
3.  Doctors, Dentists, Optometrists, Chiropractors, psychiatrist, nurse, & hospitals.  Includes laser eyes surgery.
   1. Non-medical Cosmetic surgery isn’t deductible.
   2. Obesity is considered a disease if doctor is treating.  A weight loss program is deductible if doctor is treating.
4. Nursing home,  home nurse or special schooling is deductible if  to receive medical care at doctors prescription.  Can including nurse's meals & extra home upkeep costs as medical expenses.
   1. Medical care means unable to perform at least 2 activities of daily living (eating, toileting, transferring, bathing, dressing & continence) or requires supervision for safety or health reasons
   2. A registered or licensed nurse hired by taxpayer in home are considered self employed.  Aids, practical nurse and other domestics are considered employees.        
   3. If taxpayer in retirement community, you can deduct a portion of fees allocable to medical care.
5. 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.  
   1. Includes bus, taxi, plane, and car costs of 19¢ a mile for first 1/2 of 2011, 23.5c for second half of  year. 
   2. Actual costs include only gas, oil, parking and tolls.
   3. A lodging allowance of up to $50 per eligible person plus $50 for  parent of a dependent child.
   4. Conference travel (no lodging) for a specific disease.
6. Special Items and Equipment medical expenses 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.
    
7.  Medically Prescribed Equipment or Home Improvement recommended by doctor: elevator for a heart  patient, a pool for medical treatment, an air conditioner for an asthmatic patient, ...  
   1. Can deduct the full cost in the year purchased except to the extent it increases the value of the home.
   2. Appraisal recommended on large items.
   3. Can deduct operating cost as well.
   4. Taxpayer should attach a written statement from doctor to return explaining the need for the improvement.
   5. 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 

1. The property owner in the case of real estate or by the person required by law to pay the taxes.
2.  Married filing separately, each spouse only deducts the amount they paid & were liable for.  From a joint account, each is considered paying 50%.
3.  If divorce decree requires to pay taxes,  AND PAYMENT IS NOT RELATED TO CHILD SUPPORT
   1.  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.
   2. If home not owned by paying spouse, may be alimony If home owned by paying spouse, deduct as taxes.
4. 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. Back taxes are added to the basis of property. 

1. Can’t deduct payments into escrow account.   

  C.  Real estate Taxes are on real estate property are deductible.

1. Can deduct taxes on all properties owned, not limited to 2 as interest deduction does.
   
2. Condominium owners can deduct their share of taxes.
3. 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.
4. Do not include cooperative maintenance or trash fees or homeowners association fees as these are not considered taxes.
5. If property was bought or sold  the seller must prorate taxes paid to the date of sale.  Buyer claims taxes for the rest of theyear even if paid by seller. 

6. Worksheet

   1. Enter total real estate taxes for the real property year ____
   2. Enter number of days in real property year you owned ____
   3. Divide line 2 by 365                                                                  ____
   4. Multiply line 1 by line 3.  This is your deduction.               ____

   D. Sales tax or State & Local Income Taxes 

    Sales Tax Method:  Can deduct sales tax instead of income tax if sales tax is higher.  

1. Use sales tax table.  Be sure to include nontaxable income like social security, exempt interest, veterans benefits, etc.

   1. Add sales tax on major purchases such as cars, boats, motorcycle, RVs, mobilehomes, motorhomes, materials to build a home, aircraft.

   2. Or can use total from actual receipts

2.  Income Tax Method

   1. Add amounts withheld for state and county taxes and

   2. Add estimated taxes paid the year, and

   3. Add amount paid when tax return was filed.

  E. Personal property taxes based on the value of boats, cars, truck, trailers, or recreational vehicles.

1.  Must list auto excise taxes as personal property tax.
   
2. Only deduct excise & county taxes based on value
3. Can’t deduct the license plate fee as taxes:  $20.75  
4. Can’t deduct the first $12 of excise tax as taxes.
5. Can’t deduct the first $7.50 of Wheel/Surcharge Tax.       

  F.  Foreign Taxes are deductible

        Usually better to take a tax credit on back of 1040

  G.  Nondeductible taxes

1. All Federal Taxes: income, excise, social security, estate, gift, gas...
   
2. 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.
   
   1. 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? 

1. Must be legally liable for the debt to take interest deduction. 
2. On a married filing separate return, each spouse can only deduct costs for which he or she is liable and pays.    
3. 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 

1. If home is jointly owned then ½ of payment may be alimony. 
2. 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.
3. If home not owned by paying spouse, may be alimony.
4. 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 Sch. 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

1. F.   Requirements to take Interest deduction:      

1. Loans must be secured by 1st or 2nd home of taxpayer or of taxpayer's close relatives
2. Motorhomes, houseboat, timeshare  & housetrailers qualify if permanent toilet, sleeping & cooking units.
3. Can be another home where they don’t live if no rent is collected and for a close relative. 
   1. Close relatives include:  Brother, sister, half brother/ sister, parents, spouse, grandparents, grandchildren.
4. Condominium owners can deduct interest of 1^st or 2^nd home. 
5. Construction loans qualify if home done in 2 years.
   1. Can’t claim interest on lot loan untill construction starts.
   2. Can elect to add interest & taxes to land value if can’t itemize.
   3. Interest after 2 year period is consider personal interest.

   G.  You can take an interest deduction on loans up to $1 million ($500,000 MFS) for home acquisition or improvements 

   1. Home equity loans not for improvements are limited to smaller of $100,000 or fair market value of home  reducted by mortgage debt or home aquistion indebtedness.  

   H.  Points, loan origination fees, Mortage Insurance or prepaid interest deduction are fully deductible only for the 1^st principal residence.

   1. Mortgage insurance premiums paid to acquire a new residence will be considered interest. 
      1. The amount of deduction  will be listed in box 4 of 1098. 
      2. The deduction is subject to phase out with AGI over $100,000 
   2.  On a primary home purchase are deductible even if paid by seller. (Basis is reduced, seller reduces selling price.)
   3. V.A. & FHA Points are Deductible by the buyer even if the seller pays the points
   4. If refinancing can only fully deduct points  as a percentage of the home improvements done.  
      1. Can’t deduct if refinanced with same bank.
      2.  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:

   1. No personal interest (car loans, credit cards) since 1990.
   2. Late charges of fixed amount,
   3. Service charges or Installment charges.
   4. Interest to purchase tax exempt securities, short sales, single premium life insurance, endowment                                                    contracts, straddles and non-recourse loans. 
   5.  Interest on non-home loans, insurance, 401K, IRA or endowment policies.
   6. Interest paid on another persons debts. 
   7. Underpayment of estimated tax penalty
   8. If taxpayer claims a credit for home mortgage certificate, the interest claimed on return must be reduced by amount of credit claimed.
   9. Business interest is deducted on Sch. C, E, or F.

   
   

   
   

   4.  Contributions You Can Deduct as Itemized Deductions

   Rules to be able to claim itemized deductions.

          

   1. Must have proof of contribution deduction. 
      1. Must have acknowledgement from charity for  each individual  contribution over $250. (>$0 for donation of property)  A cancelled check won’t suffice.
      2. Under $250 donor must have bank record, cancelled check or notice from organization.
         1. Payroll deduction doesn’t require receipt.  
      3.  Separate payments are treated as separatecontributions and don’t add together to determine $250 limit.  Can't write two checks at same time though!
      4. A donated auto, boat, or plane over $500,
         1. Must attach 1098c statement from charity to return. 
         2. Can only deduct:    What the charity reports was sold for or
         3. 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.
         4. Can use used car guide to estimate value.
         5. If fair market value is used, it is subject to recapture if charity sells within 3 yrs.
      5. A check dated 12/31 & mailed is deductible as dated.|
   2. Must be to an IRS approved organization
      1. Local, state or US government if for charitable reason.
      2. A nonprofit volunteer fire company, civil defense  unit, or a nonprofit hospital.
      3. Other organizations operated for charitable, literary religious, educational, scientific or amateur sports.
   3. Contributions that Benefit a Taxpayer you have to reduce deduction by amount of benefit received.
      1. 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.) 
      2. Exception:  If membership fee is under $75, you can deduct the full amount if benefits are of token value.
   4. Non-deductible contributions:
      1.  Political contributions, Chamber of Commerce,  social clubs, civic leagues & professional groups.
      2.  Contributions directly to needy individuals.
      3. No deduction for house donated to fire department.  
      4. The value of blood, the value of time or services, the value of use of property.  You must spend money.
      5. Lotteries & raffles run for charity aren't deductible.
   5. Contributions Deduction limits &  carryovers:
      1. 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.
      2. 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.
   6. Approved Foster Parents can deduct the extra costs of to feed, clothe & care for a qualified Individual if no profit motive.
   7. Exchange Students:  The extra costs associated with an unrelated  student is a contribution up to $50 a month.
   8. The costs of volunteer services are deductible contribution if authorized by charity. These include:
      1. Cost of supplies,
      2. Uniforms, 
      3. Special  equipment. 
      4. Long distance telephone calls are deductible if not substantial personal element. 
   9. To deduct travel & car expenses as contributions they must be an approved representative. (for example a church delegate to a convention.) 
      1. If you drove to and from the volunteer work, Car expenses is deductible up to 14¢ a mile.  
      2. Must maintain a log or receipts of cost of gasoline.   
      3. Must be an approved representative away overnight to deduct  meals& lodging.  The 50% limit on meals applies.
   10. Contributions of Property-special rules.  
       1. Must complete form 8283 if goes over $500. 
       2. Method used to determine FMV could be “Thrift shop value”, “appraisal”, “catalog”. 
       3. If over $5000, complete section B of 8283.  Appraiser must sign.
       4. See 1D of this contribution secton for details on donating auto, boat, plane. 
       5. An artist or business is limited to actual costs of materials.
       6. Record keeping rules requires that you have a receipt from the receiving charity, appraisals over $5000 and a items over $500 should attach a written description to return.
   11. Donated Clothing:  IRS says you can claim as contribution what you would pay in a used clothing store
       1. 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.
       2. See page 3-6 of Quickfinders books for donation guide.
   12. 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! 
       1. Watch to donate before the end of year as it can take up to 3 weeks  to transfer.
       2. If unalbe to claim full deduction in year of contribution, you can carry forward for 5 years. 
   13.  IRA Charitable contribution:  Must  meet the following requirements to be exempt from tax on IRA.
       1. Must be after taxpayer reaches 70 1/2
       2. May not exceed $100,000 (no carryovers) per taxpayer per year.
       3. Distribution is made directly to charitable organization
       4. You do not claim as a charitable deduction on Sch. A but report as 1099 and list 0 as taxable amount.
       5. A charitable IRA contribution, does not satisfy taxpayers minimum required distribution requirements.
       6. This exclusion does apply to Simple or SEP IRAs.                                            

   5. Misc.  Itemized Deductions

   A.  General Expenses You Can Claim As Itemized Deductions.  

   1. Misc. Deductions not subject to 2% of Adjusted Gross Income limit  

      1. Gambling-lottery losses.  Can deduct only to the extent of winnings.  Must have records.
      2. Certain impairment related work expenses for disabled  Employees to work.
      3. Amortizable bond premium on bonds bought before 10/86, 
      4.  Estate tax paid on an estate,
      5. Repayment of income over $3000  (under $3000 are subject to 2%).  Can also claim IRC1341 credit by recomputing prior years income.  See credits section.
      6. Certain terminated annuity payments.
      7. Unrecovered investment in annuity or pension for decedent
         

   2. Misc. Itemized Deductions subject to 2% limit

      1. Tax counsel and preparation fees.
      2. Fees and services paid to investment groups, brokers, & bankers.  IRA trustee fees.
      3. Clerical help and office rent in caring for investments, if really necessary.\
      4. Investment counseling fees and publications. Investment seminars are not.
      5. A safe deposit box or home safe to store investments  in.  Does not include jewelry.
      6. Appraisals fees to determine the amount of a casualty loss or the value of donated property.
      7.  Fees and Legal costs of lawsuits related to taxable income.
      8. Travel to care for investment property, (rental property is claimed on schedule E).
      9.  Other expenses of managing property to produce income or to determine, contest, pay, or  claim a refund of tax.(includes estate planning).
      10.  Insurance premiums that protect an investment.
      11. Repayments of income under $3000
      12. Loss when fully distributed on a Roth IRA, traditional IRA with a basis or pension with a basis.
      13. Hobby expenses up to hobby income.
      14. Loss on deposit in insolvent institution.
      15. Convenience fees charged by credit card to pay income tax
   3. Nondeductible investment costs.
      1. Trips to investigate prospective rental property
      2. Trips to attend conventions, seminars.
      3. Trips to attend stockholder meetings.
      4. Home office for an investor
   4. Work Related Expenses are subject to 2% of AGI limit and must be ordinary and necessary job expenes
      1. Union, professional dues, licenses.
      2. Work uniform costs & their cleaning if required  by employer & not suitable for everyday use.  The courts allowed cleaning of normal clothes when could only be worn 1 day as too dirty.
      3. Military uniforms are not deductible. 
      4. Necessary protective clothing such as safety shoes, glasses, work gloves or other safety equipment. 
      5. 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.
         1. Expenses include: employment agency fees, resume, travel costs (50 cents 2010.), and if out overnight 50% of meals, lodging (if not personal element to travel) 
              
      6. Malpractice insurance paid by employees.
      7. Trade and Professional costs 
         1. Magazines, journals, 
         2.  Professional organizations membership. Can include chamber of commerce if conducted to advance business.
      8. The cost of tools or books used in work.    Include total cost of tools of small cost or short life (<1 year), other items may be expensed or depreciate.
      9. Supplies bought for work:  Teachers can claim amounts they spend for supplies. 
      10. Office in the home costs:  For rules on Office In Home, see "What Income is Taxable" in menu and then look in business section.
      11. 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.
           
      12.  Fireman can take cost of meals if on a 24 hour shift and required by employer to contribute to fund.
      13. Computers are subject to restrictions.  See "What Income is Taxable" in menu and then look in business section. 
      14.  Required telephone is not deductible except if second line.  Long distance calls are deductible.
      15. Legal fees to the extent that they are related to taxable income.  On Social Security, deductible to the extent that social security is taxable. 
      16. Education expenses-  See further down the page.
      17. Employee Transportation, Food & Lodging  expenses.
          1. Employer’s Reimbursement or allowances are not  usually in W-2wages as they are not subject to tax.
          2.  Deductible transportation includes: 
             1. Travel for employer on same day between two job locations or to visit customers.
             2. Travel on the same day to a second job, job related schooling, or reserve meeting.
             3. IRS Rules for Other Deductible Commuting.  See travel rules on next page for deducting travel mileage
                1. IRS says travel from union hall to job nondeductible commuting.
                2. Here’s IRS  situations that are and aren’t deductible
                   1. 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.
                   2. 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.
                   3. 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. 
                       
                3. A temporary assignment is one of short  duration of less than 1   year. Taxpayer must maintain another permanent residence.
                4. Costs of weekend trips home can never exceed  living costs if they had stayed on assignment.
                5. Commuting expenses between home & job  are  not deductible regardless of the distance.  Hauling tools doesn't make deductible  except if extra costs can be proved.
          3. How To Deduct Transportation Costs
             1.  For public transportation deduct amount paid.
             2. Vehicles usually use the mileage method<
                1. Can use mileage method on up to 4 vehicles. (not on taxicabs or passenger vehicles for hire.)  List reimbursements on 2106
                2. You can only use mileage method if you’ve never claimed expensing or depreciation faster than 5 yr straight line &
                3. Mileage methods deducts 51¢ per mile for 1st half of 2011, 55.5¢ for 2nd half of 2011. 
                   1. This includes costs of depreciation, gas, insurance, lease payments, maintenance, oil, repairs, registration, tires.
                   2. Also deduct the business portion of parking fees & tolls. 
                   3. Can only deduct interest or excise tax
                   4. if filing a Sch. C,E, F.  Be sure to prorate for % of  bus. use     
                   5. The basis of the vehicle is reduced 12-21¢ for each mile claimed.  When vehicle is sold, mileage claimed each yearreduces basis on auto sale worksheet (not taxable if traded). 
                   6.  Leased cars can use the mileage method  the business portion of lease plus operating costs.  
                      1.  If you want to use mileage method on leases, you must use for entire lease period.
                      2. 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 Sch C, E, F.  
                      3. Or can use the actual expense method.  
                      4. Most of our customers use mileage method as better records are required for this method.  Expenses are:
                         1. Gas, oil, repairs: tune up-brakes- washing.   
                         2. Tires, supplies: antifreeze- wiper blades- wax
                         3. Insurance, garage rent, parking, tools.
                         4. Interest & excise taxes if a Sched C,E,F.
                         5. Depreciation of the car & improvements.
      18. How to Deduct Food, Lodging, and Travel Work Related Expenses 
          1. Requirements to be deductible.
             1. 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.
             2. A temporary assignment of < 1yr. (defined below)  
             3. 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. 
          2. Tax Home Definition.
             1. Your tax home is generally your main place of business regardless where you maintain your family home
             2. If you don’t have a main place of business, use the following factors to determine your tax home.
             3. If you satisfy all 3 factors, your home is your tax home. 
             4. If satisfy 2 factors, it depends on facts & circumstances.
             5. If satisfy 1 factor, you cannot deduct travel expenses.
                1. You perform part of your business in the area of your main home and use that home while working there
                2. You have living expenses at your main home that you duplicate on travel away from main home.
                3. You often use that home for lodging or you or family have not abandoned the area in which your historic place of lodging (that is your claimed home) is located.
          3. 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. 

          4. A series of assignments to same area may be indefinite.

          5.  Costs of weekend trips home can’t exceedliving costs if they had stayed at assignment site.
          6. Travel & lodging expenses include 
             1. Car, Air, Taxi, baggage charges & shipping.
             2. Food, lodging & the maintenance of a trailer.
             3. Can’t deduct telephone expenses, cleaning & laundry.
             4. Individuals can’t deduct per diem lodging allowance Amounts (only qualified reimbursement plans). 
          7. Meals and Optional Meal allowance
             1. Meals, entertainment and Meal allowance are limited to a 50% deduction. 
             2. This limitation is 80% for transportation workers.
             3. 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- see page 9-9 of Quickfinder.
             4.  You can use meal allowance whether you are an employee or self employed.  
             5. Transportation industry uses $59/day (Truckers).   $65 outside U.S.  
             6.  Still must support the deduction with a record of time, place & business purpose (or hotel bill).
             7. Prorate starting & ending days. 25% each  6hrs.
             8.  If can’t claim meals, can take $5 daily allowance for incidental expenses. Can in addition claim laundry, lodging  taxes and phone calls.  
                 
          8. Business vs. personal trips: 
             1. To deduct, trip must be primarily for business. 
             2. 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.
             3. Trips outside U.S. must prorate travel expenses by days of business purpose.
             4.  Required Recordkeeping.  See further down this page.
                
          9. Entertainment Expense must be ordinary & necessary costs & must show a business purpose. 
             1.  Service Club or Chamber dues are deductible if used for business purposes. 
             2. Dues to country club, golf course, etc are not deductible.
             3. Entertainment requires detailed records (log book.)
             4. Only 50% of meals are deductible.  
                            
          10. Education Expenses      
              1.  May be more advantageous to use lifetime learning credit, or hope credit or education deduction, if 2% misc. itemized is reducing deduction.
                 1. 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.
              2. Requirements to be deductible.
                 1. Must be employed or on temporary leave 
                 2.  Must  be ordinary and necessary expenses for one of the  following two reasons. 
                    1. 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.
                    2. The education must be required by employer or by  law to keep your salary, status or job.
                 3.  Deductible Education expenses include 
                    1.  The general costs of tuition, books, typing, supplies, lab fees, tutoring, &  research.
                    2. Transportation and travel expenses can be deducted as described in following sections.
                       1. 1.  Board & Meals may be disallowed if off work over 1 year.
          11. Record Keeping Requitements to Claim Employee Related Expenses      
              1.  Failure to keep good records will result in disallowance of work related expenses.   Must keep records for 4 years.
              2. The IRS is  tough on record keeping.  They say, no log or account book, no deduction.
              3. Taxpayer is to keep:
                 1. Log or account book to list time, place and business purpose. 
                 2. Receipts for all lodging bills
                 3. Receipts for other expenses that are over $75.
                 4. A canceled check is not always sufficient.
              4. 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."
              5.  Recordkeeping for Vehicles
                 1. The IRS denies mileage deductions if no log book (which is Kept current) that shows date, mileage driven, place visited & business purpose.
                 2.  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.
                 3.  Farms are allowed to claim 75% business use for one vehicle without keeping records.  Only applies to vehicle primarily used for farming.

6.  Casualty Loss as an Itemized  Deduction 

A casualty loss must be an identifiable event from sudden & destructive force that is unexpected & unusual. 

1. 1. Personal casualties subject to 3 limits.    (Business has none of these limitations, form 4797)
      1. The first $100 is not deductible.
         1. A casualty loss on an investment is not subject to 10% or $100 limit.  Deduct as a misc. item. Ded. not subject to 2%.
      2. The casualty losses must exceed 10% of AGI
         1. 1.  Exception:  If an area is declared a Federal Disaster area, the 10% limit doesn’t apply to a net Disaster loss taken as an additional  Standard Deduction.   Don’t have to itemize to claim.
      3. They must be able to itemize
         
   2. 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.
      1. Can take a loss of a deposit in a financial institution as a casualty or bad debt($3000 per yr.)  If not federally insured, can take a deduction up to $20,000 a year as misc. itemized deduction.
   3. Losses that aren't casualties include
      1. Insect & termite damage, rotting, disease, progressive deterioration, mislaid-lost property, a lost ring,  drought, & damages toother’s property. 
      2. Also related expenses such as injuries, temporary housing, a rental car, or liability payments are not.
      3. Damage to your car in an accident if caused by willful conduct such as drunk driving.
   4. The amount of casualty loss is: the less of A or B.
      1. Taxpayers basis in the property.
      2. The decrease in fair market value of the property  before the loss compared to after the loss.
      3. 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. 
          
   5. Reimbursements must be subtracted from the loss to   determine the amount of the deduction.
      1. 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, 4 years for home in declared disaster area.)
         1. 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.
         2.  For Federal Disaster area, no gain on personal items.  Also allowed to lump reimbursement for building & property.
             
      2. When reimbursement comes in a later year, use expected reimbursement in figuring the deduction.
      3.  Not allowed a casualty loss if the taxpayer could have collected from insurance but chose not to.
         
   6. 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/disaster.
   7. To take a casualty or theft loss you must be able to show that there was a loss & prove the deduction.   
          
   8.  For condemnations of  property you compare amounts received to the basis of the property..
      1.  Personal  residence can be treated as a sale of a principal residence to postpone the gain.
      2. Losses aren't deductible.
   9. A Casualty can Produce a Net Operating Loss  which is carried to another year to reduce taxes.
   10. 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.