Tax write-offs generally consist of deductions, credits and adjustments to income. Credits give you the biggest bang for your buck, with adjustments to income next and finally deductions. Generally you are better off keeping track of all your deductions and itemizing them with Schedule A. If you don’t have enough deductions to itemize, you are allowed a standard deduction.
Adjustments to income reduce Adjusted Gross Income, which, in turn, can help maximize your itemized deductions.
Teachers of grades K – 12, counselors, principals and aides can deduct up to $250 of out-of-pocket expenses as an adjustment to income. Qualified expenses are those used in the classroom. To qualify, you must have spent at least 900 hours during the school year as an educator.
Generally, contributions to a qualified health savings account are an adjustment to income. You should receive a Form 54980SA from your HSA trustee.
To deduct moving expenses, your new job location and former house must be at least 50 miles further than the old job location and former house. Members of the armed forces on active duty who move due to a permanent change of station do not have to meet the distance and time tests. Deductible costs include the costs of moving household goods and personal effects, storage. Travel expenses and lodging are qualified expenses but meals are not.
To be deductible, alimony must be required by a divorce or separation decree. Child support, property settlements and voluntary payments are not deductible alimony.
Contributions to a traditional IRA are generally deductible. Exceptions apply with higher income levels. Roth IRAs are not deductible. 2007 IRA contributions must be made by April 15, 2008.
Student loan interest up to $2500 may be deducted up to certain income levels. No deduction is allowed for Married Filing Separate returns.
The maximum deduction if $4000 or $2000, depending on your filing status and phases out at higher income levels. Deciding whether to use the deduction or a credit can be tricky, we can help.
Unfortunately the IRS ran out of room on their 1040. There are additional adjustments allowed, even though they are not listed on the return. These include contributions to an Archer MSA plan and attorney fees paid for settlements in connection with unlawful discrimination to the extent of the amount included in income.
Medical expenses in excess of 7.5 % of AGI are deductible in the year paid. Medical expenses include birth control pills, childbirth preparation classes, contact lenses including cleaning solutions, dental expenses, glasses, vasectomy, and wheelchairs. Nursing home expenses are deductible in full, including meals and lodging, when the main purpose of entering the home is to obtain medical care. Treatment, meals and lodging at drug rehabilitation centers are deductible as well.
Medical insurance premiums deducted by your employer from your paycheck will not be deductible if your employer has a pre-tax plan. This will be the case in most situations. Medical premiums paid directly by you are deductible. Long-Term Care Insurance premiums are deductible but they are subject to limits.
State and local income taxes are deductible on Schedule A in the year paid. General sales taxes can be deducted either by itemizing amounts paid during the year or using the IRS tables. Sales tax paid on the purchase of a motor vehicle (including boats and RVs) can be added to the IRS table amount.
Real estate taxes are deductible in the year paid. When purchasing or selling real estate, there will often property tax paid or credited through escrow. These amounts must be taken into account on your return.
Personal interest such as credit card interest is generally not deductible. Debt incurred to buy, build or substantially improve your main home or second home is deductible with a few limitations. The debt must be secured by the home and the debt cannot exceed a total of $1 million. If total debt for your main home and second home exceeds $1 million, your mortgage interest write-off will be limited.
Points paid on the purchase of your main home are deducted in the year paid. On your escrow statement, these are often called loan origination fees or loan discount. Refinance points are amortized over the life of the loan.
Interest paid on reverse mortgages is not deductible until the loan is paid off.
Beginning in year 2007, mortgage insurance premiums will be deductible subject to phase out at higher income levels.
There are new recordkeeping requirements for charitable donations. For cash or noncash donations over $250, you must have written substantiation from the organization to take the deduction. For noncash donations over $5000, you must have a written appraisal. For car donations, you are generally only allowed an amount equal to the selling price obtained by the charity and the charity must issue you a Form 1098-C.
Generally, unreimbursed job related expenses in excess of 2% of your Adjusted Gross Income are deductible. Uniforms and work clothes are only deductible if they are required as a condition of employment and they are not adaptable to everyday wear. Clothing with a company logo or name badge and protective clothing such as safety boots or work gloves are deductible. Unreimbursed auto expenses related to your job are also deductible.
Individuals can generally deduct legal expenses incurred in attempting to produce or collect taxable income. Only estate planning fees related to tax matters are deductible. Legal fees associated with a divorce action, even though the division of property and payment of alimony are at stake, are not at all deductible. On the fees for tax advice as relates to the divorce are deductible. Fees incurred to collect overdue alimony would be an exception as they are deductible.
If you aren’t able to claim the full $1,000 child tax credit, the remainder becomes a refundable credit.
For expenses incurred in the legal adoption of a child under age 18 or for the adoption of an incapacitated or special needs person, regardless of age. The amount is limited to $11,390 per child and phases out at higher income levels.
Day care expenses for dependents under age 13 or incapacitated that allow you to work or look for work. This generally includes summer day camp and after school programs as well as preschool.
$1000 per child under age 17 with phase-outs for higher income levels. Children turning 13 during the year will not qualify for the credit.
Working taxpayers with low income levels may qualify for earned income credit, especially if you have minor children. To qualify, taxpayer and qualifying children must be U.S. citizens or resident aliens.
The Hope credit is available for the first two years of college and is per student. The Lifetime Learning credit is available regardless of year and is limited per return.
For income taxes paid to a foreign country or U.S. possession on income that is also subject to U.S. federal income tax.
This credit is based on the total number of cars that the manufacturer has sold and the amount is different for each make and model. For original purchasers of Toyota and Lexus hybrids, the original credit is limited as follows: 50% for vehicles purchased in the first quarter of 2007, 25% for vehicles purchased in the second and third quarter 2007 and no credit for vehicles purchased after 9/30/07. Honda is expected to meet the threshold near the end of 2007 so it’s credit will likely be only 50% of the original amount starting in 2008.
If you were subject to AMT in the prior year, you may qualify for this credit.
Tax law is complex and general rules do not always apply to your situation. Please call us today (619.422.6181) for an appointment to discuss your tax situation or email us at info@brntax.com.