Hans Kasper, MS-CPA, PS

Itemized Deductions - Form 1040 Schedule A
 

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Medical Expenses

Taxes

Interest Expense

Charitable Contributions

Casualty Losses

Miscellaneous Deductions

Phase Out Rules (Very Important)

Typically, a person can only itemize their deductions if they own a home or they have large charitable contributions; otherwise, a standard deduction should be taken.  To itemize your deductions, you must file Form 1040 and include Schedule A--itemized deductions.  A person with a standard deduction may use Form 1040, but commonly uses Form 1040EZ or Form 1040A.


Medical Expenses

Medical expenses are only deductible when the total for the year exceeds 7.5% of your adjusted gross income.  Medical expenses include out of pocket expenses not reimbursed by medical insurance or an employer's Section 125 plan and medical expenses not covered by a claim in a lawsuit including funds received for future medical expenses.  These expenses can include:

  • Medical insurance premiums,

  • Co-pays for doctors and drugs,

  • Expenses for dentist and doctor visits, drugs, hospitals, and prescribed medical procedures,

  • Transportation expenses including mileage for trips for medical expenses and travel to locations outside of your local area for medical treatment including lodging (meals can sometimes be included as well),

  • Capital expenses (decreased by the increase in the fair market value of your home due to the expenditure) including wheelchair accessible modifications to your home and lead based paint or asbestos removal,

  • Nursing home care for those unable to care for themselves and for medical care including the mentally ill or mentally retarded,

  • Learning disability treatments,

  • Certain amounts of long-term care insurance,

  • Medical conference fees for a chronic illness,

  • In and out-of-home nursing services,

  • Schools for Braille students and handicapped students, and

  • Weight loss programs prescribed by a doctor.

Not allowed are:

  • Cosmetic surgery,

  • Household help for medical problems excluding nursing care,

  • Dance lessons,

  • Non-prescription drugs,

  • Health club dues, and

  • Swimming lessons.

Records to keep are all medical bills and receipts and proof of payment such as cancelled checks, bank statements, and credit card statements.

See IRS publication 17 and 502 for more information.

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Taxes

Prior to 1986, gasoline tax and state sales tax were deductible and no longer are.

If you itemize your deductions, the following taxes are fully deductible if they have been paid during the current year.  For example: if you are three years behind in your real estate tax payments, then you can only deduct them when you finally do pay them.

  • State, local, and foreign income taxes paid during the year including estimated taxes;

  • Washington State supplemental workmen's compensation fund deducted from your payroll check;

  • State, local, and foreign real estate taxes on all properties that you own whether a home is on the land or not (includes real estate taxes on timeshares and condos);

  • Real estate taxes placed in an escrow account can not be deducted until the taxes are paid from the account; and

  • Personal property taxes based on the value of the property (auto excise tax in Washington State).

Not allowed are:

  • Excise tax (a transfer tax) on the sale of your home;

  • Estate or inheritance taxes (however, see miscellaneous deductions below);

  • Federal income taxes;

  • Fines and penalties;

  • Gift taxes;

  • License fees (see personal property tax above for excise taxes); and

  • Social security tax.

Records to keep are tax statements, state tax returns, and receipts and proof of payment such as cancelled checks, bank statements, and credit card statements.

See IRS publication 17 for more information.

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Interest Expense

Prior to 1986, credit card and auto loan interest was deductible and no longer is.

If you itemize your deductions, the following interest expense is fully or partially deductible if they have been paid during the current year.  For example: if you are behind in your mortgage payments, then you can only deduct the interest when you finally make the payments.

  • Home mortgage interest on your personal residence and one other home (only two homes are allowed);

  • Interest on non-home mortgage debt that has been refinanced into the home mortgage is only deductible on debt amounts up to $100,000;

  • Home mortgage interest on mortgages larger than $1,000,000 must be prorated as the interest will not be fully deductible;

  • Points (loan origination and discount fees) paid to obtain a home mortgage to purchase a home are considered to be home mortgage interest and may be deducted in the year of purchase or over the life of the loan;

  • Points (loan origination and discount fees) paid to refinance a home mortgage or to obtain additional financing are considered to be home mortgage interest and may only be deducted over the life of the loan;

  • At the time of refinance, points not fully deducted on a prior loan may be deducted in full in the year of refinance;

  • Points on a second home must be deducted over the life of the loan; and

  • Investment interest expense is deductible to the extent that it does not exceed investment income.  Investment interest includes margin interest on brokerage accounts.  Investment income can include net capital gains but you must be careful with this election as it also eliminates the lower tax on capital gains.  Investment interest that is nondeductible in the current year due to investment income limitations can be carried over into future years and may be deductible at that time.

  • Student loan interest is deductible in another area of the tax return.

Not allowed are:

  • Credit card interest,

  • Auto and boat (allowed if it has a bathroom, cooking, and sleeping facilities and is your first or second home) loan interest,

  • Late payment interest on taxes, and

  • All other personal loan interest.

Records to keep are bills and statements showing the interest, and receipts and proof of payment such as cancelled checks, bank statements, and credit card statements.

See IRS publication 17 for more information.

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Contributions

If you itemize your deductions, the following charitable contributions are fully or partially deductible if they have been paid during the current year. 

WARNING:  As a general rule, owners of "C" corporations should make all of their charitable contributions personally and not through the "C" corporation.  However, with the itemized deduction phase out rules, if their personal income is in the phase out zone and the "C" corporation's net income is high, then it may be better have the "C" corporation make the contribution.  Please call us on this matter.

The types of organizations that you can contribute to and receive a deduction for are IRS approved 501(C)3 organizations that are religious, charitable, educational, scientific, literary, prevention of cruelty to children or animals, war veterans organizations,  fraternal societies and lodges that use the funds for charitable purposes (not dues), and US government and State and local governments.

The types of contributions that you can give and deduct to these organizations are:

  • Cash, check and credit card contributions,

  • All direct costs while volunteering at a location that requires you to be away from home overnight.  For example: as a doctor doing a one month mission trip to Haiti, you can deduct the cost of lodging, air fare, meals, and etc.

  • The lower of cost or fair market value (garage sale value) of non-capital gain property (household items and other personal items), and

  • The fair market value of appreciated capital gain property (stock, land, art work, homes and etc.)  No, you do not have to pay tax on the gain, but get to deduct it instead.

Fair market value is:

  • For household and personal items, the garage sale value;

  • For autos, trucks and boats, the blue book value;

  • For works of art and collectibles, the appraisal value;

  • For stocks and other marketable securities, the closing quoted market value on the date of the gift; and

  • For real estate, the appraised value.

  • Salvation Army Non-cash Charitable Contribution Value List

Can I deduct the following items?

  • Gifts to individuals--NO.

  • Gifts to organizations that are designated for an individual such as to a hospital for the care of a friend or relative or to a missions organization designated for a relative--NO.

  • Dues to my lodge organization--NO.

  • My time when I volunteer at a homeless shelter--NO.

  • Donations directly to homeless street-people--NO.

  • Gifts directly to your clergy to spend as they wish--NO.

  • Chambers of commerce--NO.

  • Communist organizations--NO.

  • Foreign organizations and countries--NO.

  • Country clubs--NO.

  • Homeowner associations--NO.

  • Labor unions--NO.

  • Political organizations--NO.

  • Cost of bingo, lottery, and raffle rickets--NO.

  • Tuition to religious schools--NO.

  • Blood donations--NO.

  • Value on income lost while volunteering--NO.

Limitations on deductions

Deductions are limited based on the type of organization and the total amount of your contributions for the year as a percentage of your income.

  • 50% limitation organizations are all of the organizations that we normally contribute to such as churches and etc.

  • 30% limitation organizations are fraternal orders, veterans organizations, and certain non-operating private foundations.

  • 50% of income property is everything other than appreciated capital gain property.

  • 30% of income property is appreciated capital gain property.

For example:  if a person has a $100,000 income, then their total deductible contributions for the year--50% and 30% property-- is limited to $50,000 and the 30% property is limited to $30,000.  Therefore, if they give $35,000 in stock and $60,000 in cash as contributions, they are limited to deducting $30,000 in the stock value and $20,000 in the cash value for the current year.  The remainder is carried over to the future years subject to the same limitations.

Records to keep are all statements and receipts and proof of payment such as cancelled checks, bank statements, and credit card statements.  All contributions over $250 must have a receipt from the organization.

See IRS publications 17 and 526 for more information.

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Casualty Losses

As far as casualty losses are concerned, you generally can forget any deduction due to the limitations imposed.  First, you must deduct from the loss all insurance reimbursements which leaves only the deductible as your loss.  Then, this deductible is deductible only if the loss exceeds 10% of your income.

However, I did have a client where uninsured jewelry was stolen.  They had the appraisal, pictures, and police report which I attached to the tax return and took the deduction.  I also had a client who forgot to pay his auto insurance and the auto was stolen.  Again, we took the deduction.  Otherwise, you can forget it.

Records to keep are all bills, statements, appraisals, photographs, and receipts and proof of payment such as cancelled checks, bank statements, and credit card statements.

See IRS publication 17 for more information.

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Miscellaneous Deductions

Some of these deductions can be deducted without consideration of the 2% limitation below.  Generally, most of us can forget taking any kind of deduction in this area since the deduction is limited in total to 2% of your income.  However, those with unusual situations or with specific employment types can qualify.

The deductions that are subject to the 2% limitation are:

  • Non-reimbursed employee travel, transportation, meals and entertainment, and gift expenses pertaining to their employment excluding club dues;

  • Travel and living expenses away from your tax home to work for a temporary period of time;

  • Work related education expenses that do not qualify you for a new job but instead enhance your ability to perform your current job (educators have a special rule that allows them to qualify for a new job as long as it is within the educational field);

  • Employee liability insurance related to work;

  • Expenses for damages paid to employer on breach of employment contract;

  • Employment related computers and cell phones required by the employer;

  • Professional dues and subscriptions, union dues, and legal fees for the protection of income (a lawsuit against your previous employer for wrongful termination), and malpractice insurance premiums;

  • Office in the home expenses;

  • Job search and travel related expenses;

  • Research expenses of a college professor;

  • Tools used in your work that you are required to purchase (auto mechanics);

  • Work uniforms and safety shoes and equipment;

  • Tax preparation fees and tax planning fees;

  • Investment fees paid to manage accounts;

  • Safe deposit box rental;

  • IRA trustee fees.

The deductions that are NOT subject to the 2% limitation are:

  • Estate tax on income in respect to a decedent;

  • Gambling losses to the extent of gains (you can deduct all of the losses and travel expenses if you are a professional gambler)--a log or a casino report is a must here;

Records to keep are all bills, statements, and receipts and proof of payment such as log books, cancelled checks, bank statements, and credit card statements.

See IRS publication 17 for more information.

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Phase Out Rules

Itemized deductions are phased out when income for 2001 exceeds $137,300 for a joint filer and $68,650 for a separate filer.  When income exceed these amounts, then 3% of the excess is deducted from the total taxes, interest, contributions, and miscellaneous deductions.  This means that even though you have spent the money, you will not get all of your deductions and will have to pay more taxes.

See IRS publication 17 for more information.

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This page was last updated on 05/13/2010

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