This article is a quick look at some potential tax deductions (often called "tax write-offs" or "tax breaks") for taxpayers who itemize on their federal tax returns. Taxpayers who think any of these often missed Schedule A deductions might apply to them should research them further by a visit the Internal Revenue Service (IRS) website or a tax professional. While this list provides the gist of each of the deductions, there can be exceptions, exemptions, exclusions, phase outs, threshold limits, or other restrictions that apply to them.
State or Local Personal Property Taxes
State or local taxes which are based on the property’s value and which are regularly collected, such as registration fees for cars and boats, are deductible.
Foreign Taxes
The taxpayer can generally take either a credit or deduction for taxes paid to a foreign country or U.S. possession, unless the income involved is exempt from US tax under the foreign earned income exclusion or foreign housing exclusion. While it’s generally better to take a tax credit rather than a deduction, as a credit reduces the tax bill dollar for dollar, there are individual situations where it may be more beneficial to take the Schedule A deduction.
Employee Contributions to State Disability Funds
Some states require employees to contribute to state funds used to offset loss of wages, and these mandatory contributions are deductible as state income taxes. Contributions to disability plans that are private or voluntary are not write-offs.
Points on Mortgages and Refinancing
Points are prepaid interest paid to a mortgage lender that go by a variety of names, such as loan origination fees, discount points, and loan discounts. The amounts can be found on the homeowner's final closing papers. The points the taxpayer paid with the purchase of his or her principal residence can be deducted in increments over the life of the mortgage, or deducted in full the year paid if a number of requirements are met. Seller-paid points are also deductible and are subject to the same conditions.
Points paid when refinancing a principal residence must be deducted incrementally over the life of the loan, except for any part of the loan that is used for home improvements. The proportion of the points attributable to the home improvement funds can be deducted the year paid.
Charitable Donations
Out-of-pocket expenses connected with charitable work for qualified organizations are deductible. These unreimbursed expenses must be directly connected with the services given, and not part of personal, living, or family expenses. They can include expenses such as mileage, uniforms (e.g., those of a scout leader), donated foods, office supplies, and travel expenses. The value of the services (as in the equivalent of salary) cannot be deducted, nor can expenses such as babysitting be deducted, even if required for the taxpayer to be able to do charitable work.
Taxpayers donating items that cost more than $5,000 generally require an appraisal for IRS purposes, and those associated fees are deductible.
Casualty and Theft Deductions
Taxpayers who had significant unreimbursed thefts or casualties (like fires, floods, tornadoes, or car accidents) can deduct their out-of-pocket expenses, to include even the fees for any appraisals the IRS requires. However, the rules are especially complicated and stringent in the Casualty and Theft facet of tax law, and the threshold for deductions is high. Taxpayers can’t even begin to claim any deductions until out-of-pocket losses exceed 10% of their AGIs. However, for taxpayers who had losses in federally declared disaster areas, the rules are different and more generous.
Accounting Fees for Tax Preparation or Advice
Tax preparation or advice fees are deductible, as are fees for safe-deposit boxes, as long as they contain taxable income-related items like stocks, bonds or other investment papers.
Legal Fees Incurred in Divorce Actions
Many legal fees associated with divorce are not deductible, but those associated tax advice are, as are those associated with actions to collect overdue alimony. Legal fees associated with child support actions are not deductible
Gambling Losses
Gambling losses are deductible up to the amount of winnings. So a taxpayer who loses $20,000 but wins $10,000 can deduct $10,000. The catch here is that extremely detailed documentation of losses is required.
Overlooked Job-Related and Medical Deductions
There are also many overlooked job-related deductions and a very long list of medical deductions, many of which come as a surprise to many taxpayers. These Schedule A deductions should be pursued by taxpayers having significant out-of-pocket expenses in either area.
Sources:
J. K. Lasser Institute. Your Income Tax 2010. New York: John Wiley and Sons, Inc., 2009.
Tax Partners and Professionals of Ernst & Young LLP. The Ernst and Young Tax Guide 2007, 22nd Ed., Peter Bernstein, Editor. New York: CDS Books, 2006.
Thompson Reuters. Quickfinder Handbook: Form 1040 2008 Tax Year. Ft. Worth, Texas: Thompson Reuters, 2008.
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