Wow, I thought I might not get a chance to write and post this week. I am in the final leg of doing tax returns for clients (ours waits until the clients returns are finished), preparing for a club meeting today, my husband’s birthday this past Monday and a day trip out of state for his birthday yesterday, Tuesday, I have not had a chance to write the post, something I usually do overnight Tuesday to Wednesday. So here it goes -
The last two posts were about income and the most common types of deductions for personal income taxes and saving the paperwork during the year (and sort of what you should be looking for now if you did not save the paperwork during the year) so that the returns can be easily prepared and filed. Today I am going to talk about some common,but less common deductions which go on the same form - Schedule A. You also know that I will now tell you that you should not rely on this post for income tax advice and you should always check with your tax preparer and that different things apply to different people and different situations.
There are an assortment of situations in which one suffers a financial loss. called a casualty loss. Sometimes one can deduct part of the loss on their taxes if they file Schedule A. If you had a theft loss, a accident, such as car accident, vandalism, fire, or storm damage or a bank in which you have money becoming insolvent - these are some of the losses which can be deducted. You need to fill in another form 4684 and attach it to your return, which will give you the information to fill in Schedule A. So if you had any of these situations, keep any paperwork you have - insurance claims, police or fire reports, etc. (Put them in what? Yes, your envelope.) There are limits on this deduction - you have to subtract $100 for each event and the loss has to be more than 10% as calculated in a certain manner and you have to subtract any insurance payment or other reimbursement from your loss. When you do the paperwork for this type of loss you can take the loss in value of the item(s) as the deduction amount. What does this mean? If your car was hit by someone it is a casualty loss. The loss is not what it cost you to fix the car - it is the difference in value before and after the accident. If the car was worth $20,000 immediately before the accident and immediately after the accident it is worth $10,000 - your loss would be $10,000 - but then you have to subtract what you received from insurance (yours or someone else’s) and/or what the person who hit you (or anyone else) paid you towards the damage to the car. Then you subtract $100 and then you will have to do the 10% of your income (calculated a certain way) calculation. If you have an item stolen - then the value after the casualty is zero (unless it only partially stolen). This is the sort of thing that makes it good to have someone help you with your taxes. I thought I would mention it as not everyone knows about it.
Then there are what are called miscellaneous and certain job expenses. If you have certain expenses related to your job (and you are not self- employed) they can be deducted - maybe. Like medical expenses the expenses in the category have to be more than a certain percentage of your income 2%.
First, job expenses. There are specific job expenses which are allowed - union or other dues required for your job. Uniforms or other special clothes you need to provide for your job. This category can be odd. One reason doctors traditionally wear white coats? The white coats are deductible, a suit jacket is not. Deducible clothing can not be clothing which can be worn for every day purposes. This would also include tools if you are required to provide your own tools for work. Commuting to work - your trip to your normal work place and home again - is not deductible, but if your boss sends you out from work and you pay the cost of getting to the other location - it is deductible. There is a form 2106 (isn’t it great how there is a form for everything?) on which one lists their job related expenses - the instructions will let you know what can be deducted, as does the instructions for Schedule A. Some job related education can be deducted - read the instructions. If your boss reimburses you for expenses it is income to you and you want to deduct the expenses you paid out to decrease this income. You can deduct the job expenses allowed against what your boss reimbursed you for same even if you cannot itemize your deductions using the form 2106. If your expenses are more than the your boss gave you - that’s when it is deducted on your Schedule A. Certain expenses are allowed based on your job.
You can also deduct in this section of Schedule A expenses related to making your investments - publications, a safe deposit box if you keep financial papers in it, if you pay your income tax by credit card and you are charged a fee by your credit card company, what you pay for your income tax preparation or consultation, and other items - again they are listed in the instructions for Schedule A. Did you have to close a CD early and pay a fee for doing so? Yes, it is deductible here.
There is also a listing of items you cannot deduct in the instructions for this section in the instructions. Again - keep all the paperwork and put it into your envelope as you get it.
You may wonder why some deductions are allowed less a percentage. This is an attempt to make the taxes fair (yes, I said fair). Your medical expenses can be deducted, for example to the extent that they are more than 10% of your income? Why? Well in a simplified explanation, our friends at IRS realize two things - first, everyone has normal medical expenses and second, people with higher incomes can afford to pay more for their normal medical expenses than someone who makes less money. At the present time the amount they consider to be what is normal for a family is up to the 10%. But they also realize that older people often have more medical expenses and therefore once one is older, the percentage falls to 7.5% of income. Oh - did I mention that medical expenses include dental expenses?
Similarly the idea is that casualty losses of up to 10% can be absorbed by someone, while larger amounts cannot be as easily absorbed - and again those with higher incomes can deduct less - in terms of dollars - than someone with a lower income.
The same idea applies to the job and “miscellaneous” deductions - 2% is normal for these expenses to be, and over that is what is unusual and can be deducted. In this case there is also an understanding that someone who receives reimbursement for their job expenses might be better off not using Schedule A and itemizing (listing) their deductions, so on form 2106 they can offset their reimbursement and job expenses.
Even the idea of itemized deductions is IRS’s understanding that not everyone is the same. Everyone is allowed a “standard deduction” which is what IRS thinks the average person should have in all of these items. (And there are different standard deduction amounts for single people, married couples, heads of household, and older people.) If you have more you are allowed to list what you actually have in these expenses and deduct the actual expenses you have itemized (listed). Once one’s income is over a certain amount than one is not allowed to deduct as much of their itemized deductions - again, those with higher incomes can better afford the expenses listed and are more limited as to what they can deduct.
See, you didn’t know that IRS could be nice to you, did you?
Taxes are much too hard to explain in simple terms so all of this is a generalized, basic idea to tell you what the average person should be aware to keep paperwork to help with their taxes. An envelope - big manila, labeled and in a specific place is a great start to helping you keep it all together for your taxes. Not mentioned here is an assortment of specific items - such as if you own a house - keep the papers from when you bought it and any major repairs or additions until you sell the house.
The instruction books from IRS are actually a good source of help. If you look at them online in pdf format you can search the instructions to find what you need.
Talk to you next week - on a new topic, but don’t forget to start your envelope for this year if you have not done so yet - make your 2016 taxes easy to file in 2017!
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