Posted by Dean Alexander on Thu, Aug 26, 2010
Many taxpayers travel frequently because of their business or job. Most people are burdened by keeping receipts, credit card bills and other travel expense substantiation. The tax relief offered by law is in the flat rate allowance for travel while you are out of town on business.
The IRS will allow you a rate that covers both meals and lodging. Those meals and lodging rates vary from one city to another in the USA. There is also a per diem rate for international travel that varies from country to another and from city to another in the foreign country.
When you decide to use the per diem rate you do not have to keep receipts for substantiation (keep your receipts anyway just in case but do not submit to the IRS.) Instead claim the flat rate and that is it period.
A tax problem pops up every once in awhile in an IRS tax audit. If the travel time is extended the IRS may contend that the taxpayer should change his tax home and he should be considered as to have lived in the area where most of his travel is and thus disallows the per diem expense.
The answer to that is the one year rule. This rule means that as long as your travel did not exceed one year, then you are considered to be travelling from your original home to the place of business. Thus you can claim your per diem rate.
How do you calculate per diem expense? Simply, find the rate for the city where you traveled from the IRS per diem guide (See publication 1542) and then multiply the amount per day times the number of days you stayed in the city. For information that is more pertinent to your case, consult a CPA or a tax attorney.
Posted by Dean Alexander on Fri, Aug 20, 2010
There are basically three considerations that will determine what type of entity to choose:
The first is economic. If you are going big, meaning public, you will choose a C corporation. If not, it will eventually choose you.
The second consideration is limited liability corporation (LLC). If you prefer to be solo but expect to be exposed to liability, the corporate form may be the better choice.
The third consideration is tax implication. This is what this blog is trying to explain. Let’s start at the beginning; If you are a self employed individual and earn $50,000 a year, we will report this income on your personal tax return. You simply add an additional form to your return called Schedule C. On a Schedule C, you report your income and your expenses. What is left is your income, which you pay tax.
C Corporation will be the same. It is a legal “individual” entity (the correct term is entity). It reports its income and expenses and the difference is the net in which the C corporation pays tax on. So far so good? But recall that the corporation is owned by someone. That person paid for the stock of the corporation for a reason, which is to make money.
The corporation compensates the person who owns its stock by paying the dividend. The dividend is part of the profit that the corporation just paid tax on. The individual takes the money from the corporation and tells the IRS about it. Now he has a dividend to pay tax on. So let us trace the money now that the stock owner just paid income tax on. This money came from the corporation.
The corporation just paid income tax on this money. It gave the stock owner part of its income as a dividend. The stock owner turns around and pays tax again on the dividend. So the tax now is paid twice on the same money which is the dividend.
That is the background for creating Sub S and LLC. The idea was to pay taxes only once while maintaining the benefit of a corporation that protects the owners against legal liability. So let us start with Sub S. Sub S corporation is really nothing but an S corporation that requested tax relief from the IRS by filing a form and asked to be treated differently for tax purposes.
Filing with the IRS will provide the tax help to the corporation by exempting the corporation from paying income tax on the profits. It lets the owners report this income on their personal tax return. They call the corporation then a pass through. It passes through the income to the owners without paying tax on the money. Thus a Sub S is a pass through corporation that avoids double taxation.
LLC is also a pass through company.
It's confusing to dissect. Have a question? Comment? Let us know about it.
Posted by Dean Alexander on Wed, Aug 18, 2010
It is not a secret that the IRS can seize your property if you owe back taxes. But people always ask a question with regards to their primary residence. Can the IRS levy my house? The short answer is, yes. The question that must follow quickly is, but why?
Let us just speak of some details about seizures of your residence and then answer the “but why.” To begin with, the IRS cannot take your house if your tax debt is less than $5,000. Furthermore the IRS cannot summarily levy your house without a court order. You know that the IRS has such a massive power (they ought not) that they can issue a bank levy or wage garnishment; especially a bank levy without a court order. This is not the case with regards to your personal residence. They have to take permission from the court.
Now we come to the question of why would the IRS seize your personal residence? We should ask the question in a better way; why would anyone let his tax problem fester so long that the IRS seizes his or her property? If you have good tax representation all along this should not have happened. If you have a good CPA or a tax attorney, you should have been responding to the different circumstances and your tax settlement should have reflected your situation no matter what that situation was. This is true across the board except in criminal cases.
Let us now discuss what we are saying: we are saying that a tax problem should not have advanced so badly that it causes you to lose your house. Tax relief should have come way earlier. We would like to make a statement that we will defend as we progress in this blog. The statement is (please try to remember this all the time) you cannot have a tax problem without a tax solution. Every IRS problem has a solution. Here are the examples:
Mr. Destitute owns a home fully paid for but no cash to pay for his back taxes of $200,000. Do we have a solution? The answer is yes. The solution is possibly Currently-Not-Collectible.
Mr. Destitute number 2 owns a house. His mortgage equals the fair market value of the house (no equity) and no cash flow to mention to pay his tax debt of $200,000. There is a solution which may be either an Offer in Compromise or Currently Not Collectible.
Now Mr. or Mrs. Destitute are no longer Destitute and they are making good money every month and have a house paid for. Again we have a solution for this lady or the gentleman as well. It is an Installment Agreement.
So, as you see there is a solution for your tax problem if you have asset (house paid) for and no money such as Currently Not collectible. There is another solution for your IRS problem if you have no equity and no monthly income which may be an Offer in Compromise or Currently Not collectible. Finally if you have assets and you have money there is always the good old Installment Agreement.
The only exception that bars you from tax relief may be a criminal case where no Offer in compromise, no Currently Not collectible status or Installment Agreement is available to you.
Posted by Dean Alexander on Tue, Aug 10, 2010
In trying to reach an IRS settlement, will they consider abatement of penalty? The answer is yes. Then the next question is:would they consider abatement of interest? The answer is generally no. There will be instances of abatement of interest as in the case of an erroneous IRS advice that caused some interest during a specific period or unnecessary delay that caused you to pay extra interest that otherwise you would not have to pay. Make a long story short, penalty can be abated, interest let us just say no.
When you seek tax relief from penalties here are some common reasons you may cite to request an abatement of penalty:
1) You have called the IRS and they told you something wrong that caused you to pay penalty. It would be nice if you have a name and badge number of an IRS employee. Remembering the date will go a long way in solving the tax problem when it relates to conversations with the IRS, especially if you don’t have a name and badge number. What you are hoping for is that they may verify your call through their records.
2) Relying on your bookkeeper's advice. You can obtain IRS tax relief to your tax problem if you relied on the wrong advice of your CPA, tax attorney or an enrolled agent. If the facts support your claim, that may go a long way for the IRS settlement that you are seeking.
3) There is tax relief from penalty if an act of nature caused you not to be able to file or comply with the law. This may be easier to prove because those acts are well publicized.
4) If you could not, for some reason, obtain your books of original entries or any documents that gives you an opportunity to seek IRS tax help, there may be a tax relief to settle the IRS problem with regards to penalty abatement.
5) You may be able to get IRS tax relief by abatement of penalty if you realized you were aware of your tax liability but it was financially very difficult to pay such liability. The tax help in this regard would be in getting tax relief from delinquency tax penalties.
6) Your prior history of compliance will make IRS tax help much easier. The IRS is willing to offer you tax relief from penalty if your prior history shows that you have always been in compliance.
7) If you were sick or physically impaired, the IRS may be willing to offer you tax relief by abatement of penalty. Tax settlement will be much easier if in any of these cases you can support your claim.
Posted by Dean Alexander on Fri, Jul 23, 2010
We discussed in the last blog of 3 possible tax settlement options available to settle IRS debt to prevent or remove wage garnishment, or bank levy. Tax lien will be a subject of its own in subsequent blogs. We mentioned three alternatives, installment agreement, offer in compromise and being declared currently-not collectible by the IRS.
We saw that installment agreement meant that we will pay all IRS taxes including interest and penalty but instead of a lump sum settlement, we will do it over certain period. We also said that we the tax relief that we will get for our back taxes will be shaped by our financial situation; assets and liabilities on one hand and income and expenses on the other.
Your CPA or tax lawyer has to calculate both the amount of income in excess of your expenses and the net worth to decide the best tax help for your tax problem he or she should recommend. Generally, if you have assets to pay in full your total tax debt or if your monthly income is more than your monthly expenses in such a way that it is enough to pay your tax debt over the statute of limitation, you are not eligible for an offer in compromise but you may be eligible for an installment agreement and possibly the currently not collectible status.
In the last blog we gave an example of how would an installment agreement be the only option to pay your back taxes and solve your tax problem. Now it is time to talk about offer in compromise as an IRS tax relief solution to your tax debt. Let us assume that your tax debt is $10,000 and you have no assets whatsoever. Let us assume that your monthly income is $1,000 and your monthly expenses are $1,100. In this case you have no assets and no residual income to payoff your tax debt. You are a perfect candidate for offer in compromise or currently not collectible.
The question then, should we try to declare you as currently not collectible or seek tax relief in an offer in compromise? We will discuss the difference between both alternatives as a way to resolve your IRS problems.
Posted by Dean Alexander on Mon, Jul 19, 2010
The simplest argument for filing taxes in time is that it is the law. You must comply with the law. If you are not a tax protestor, and we hope that you are not (tax protestors usually end up on the wrong side of the bed) then you have no qualms with the legality of filing.
There are many benefits of filing in time besides being in compliance with the law. The most obvious benefit is getting your refund. If you are entitled to a refund and you don’t file, you may lose your refund because you are barred by the statute of limitations when you eventually file. We have seen people losing $7,000 or more of money in some cases that were coming to them and when they filed late they got nothing. Never mind that the IRS will ask you to pay the tax debt even if you don’t file. You guessed it. They file for you and now you owe back taxes (more on that later.)
One of the benefits of filing is that you may be able to wait out the IRS on you tax debt. The law states that the collection statute of limitation is 10 years. If for example you owe taxes and disappeared from the radar of the IRS for ten years, the IRS may have lost the amount of tax you owed forever. In this case you have got yourself a nice tax settlement.
One of the disadvantage of not filing your taxes is that the IRS will file on your behalf. IRS calls that SFR or substitute for return. Needless to say, in preparing your unfiled taxes, the IRS will not look after your best interests. The IRS will assume the worst against you. They will do a return for you as married filing separate even if you are single because filing separately causes you a tax liability higher than the latter. In an SFR, you will not get any deductions for your expenses.
For example, if you sell a house, the tile company will give you a 1099 for the proceeds and sends the IRS a copy of this 1099. The IRS records the total sale price as your income even if you were upside down on the house and they will not record the cost of the house. That is why we have many clients who come to us for $70,000 or even $100,000 of tax liability because of the sale of their residence when in fact they lost money. Unless you file, the tax liability remains on the book. The IRS had one of our clients owing over $250,000 in 2003 because of this exact issue. Guess how much he would have owed? Zero.
Because the amount of taxes owed is usually high you may even have a revenue officer appointed. When you have a revenue officer, that spells bad news. And to make things worse, we do charge more for revenue officers. So, that is another reason that you should file your taxes earlier.
Audits is another reason. If you don’t file, the IRS can select any return regardless how old it is for an audit. On the other hand if file in time and you happen to have a year in the past that you made a lot of income and you think if you get audited on that year you will pay a lot of money, this year cannot be audited after three years. So, here you may have gotten away with murder.
We have seen other benefits to filing your taxes in time that particularly come in handy when you have a bank levy or wage garnishment or even when you want to do an installment agreement or an offer in compromise. If you have unfiled returns, there will been no tax settlement for your tax debt unless you are in compliance. Tax compliance in this instance means filing all your back taxes. If have not filed, that may delay the process of IRS negotiation when you need it most.
Finally the IRS may even look sympethatic on your case if you have been filing on time.
Posted by Dean Alexander on Fri, Jul 16, 2010
The IRS is preparing to provide help to people with tax problems related to the oil spill in the Gulf of Mexico. BP is beginning to issue payments as compensation for lost wages or income, property damage, or physical injury. People receiving these payments may have questions as to whether these payments are subject to taxes or not. If you are benefiting from any of these payments, it might be a good time to foresee any future tax issues. The IRS has announced a Special Assistance Day on Saturday, July 17th from 9 a.m. to 2 p.m. local time at the following Centers in seven different cities:
1110 Montlimar Drive, Mobile, Alabama
651-F West 14th St., Panama City, Florida
7180 9th Ave. North, Pensacola, Florida
2600 Citiplace Centre, Baton Rouge, La.
423 Lafayette St., Houma, La.
1555 Poydras St., New Orleans, La.
11309 Old Highway 49, Gulfport, Miss.
It is good to know that the IRS is willing to provide help to those who are already experiencing a very difficult situation. At the Centers you will have the opportunity to work with IRS employees to provide tax help and resolve any tax issues you may have related to the oil spill. You will be able to ask questions about your specific tax situation and possibly have faster tax resolution to your tax problem. The IRS has also opened a toll-free line for people with tax problems due to the situation in the Gulf: 866-562-5227. You can call this number on weekdays from 7 a.m. to 10 p.m. and also on Saturday, July 17th from 9 to 2 CT.
If you have or anticipate a difficult tax problem related to the Gulf disaster and you need tax help, don’t hesitate to take advantage of these opportunities to resolve or foresee any tax issues. It is better to take care of things before they become more complicated.
Basically, it is anticipated the tax problems will evolve around three issues:
1. Property damage tax issues
2. Payments in lieu of lost wages
3. Payments for sufferings
First if you get compensated for the property damage you incurred the tax problem that you may be facing is the following question: do I recognize gain or loss on payments of damage? The answer depends on what is called the tax basis in the property. For starters think of tax basis as the cost of the property. If you are compensated more than your cost then you have a taxable income.
Now let us instead of saying cost we use the term “basis” The term tax basis means simply modified cost. If you benefited from having the property and depreciated the property then the IRS will not use the cost but the cost minus the depreciation that you took in prior years and that is what they call basis.
The second issue that inevitably will come about as a result to the spill in the Gulf is compensation for lost income. This compensation is taxable because it is considered as wages that would have been taxable in way had it been earned without the Gulf spill.
Third type of compensation which we may encounter and you may need tax help on is the compensation damage as a result to some physical damage or mental anguish. This type is not taxable compensation.
Posted by Dean Alexander on Tue, Jul 06, 2010
We continue to explain the Taxpayer Advocate's findings with regards to the difficulties that US taxpayers encounter in dealing with the IRS. In the previous two blogs we discussed the issue of tax-related identity theft and cancellation of debt. We found that identity theft can cause the IRS to take actions against an innocent, oblivious taxpayer such as wage garnishment or bank levies. We found out that the IRS system as it exists does not have the mechanisms to accommodate the innocent party. The system as it exists will assume that you are guilty until you can prove that you are innocent by refuting that the 1099 income that you received was a bogus one.
We also discussed cancellation of debt income considered by the Taxpayer Advocate to be the second worst harm that inflicts a great deal of injustice upon people who are suffering financial difficulty. Basically, and as an example, if a taxpayer suffered mortgage foreclosure that cause him or her to lose their home, they will not only be devastated by the incident but may have to be subject to IRS actions because the bank reports them to the IRS claiming in essence that they made money by losing their house because the bank forgave the debt owed to them. And according to IRS rules, the forgivenss of debt is a taxable event. Luckily now this injustice can be addressed.
Property Seizure, Levies, Installment Agreement Allowable Living Expense Standards
This time we want to explain the hardships visited upon people when they are subjected to aggressive techniques such as seizing property that they may be in desperate need to have or others such as bank levies. I spoke to a person who was getting kidney dialysis and was in such distress over the seizure of his automobile that he was using going back and forth for his dialysis. It did not matter to the IRS that the person's car they took may have only a few years to live.
The Taxpayer Advocate is arguing that the IRS uses these collection avenues more readily than they should. The advocate wants the IRS to give the taxpayer more time or possibly resort to other methods before instituting a seizure. We remove tax garnishment for clients whose salary is $50,000 a year and the IRS leaves them with $300 a month to live on before our intervention. What makes that matter worse is when the taxpayer had fullfiled all the required documents needed to negotiate an installment agreement to remove the levy, a revenue officer refuses to return the call. We have made eight communication attempts to reach a revenue officer who holds the fate of a lady in her hand. Meanwhile the levy continues with the $300. So many times the taxpayer is in compliance but a Revenue Officer or collection people are so overwhelmed that they don’t return the calls. We had to interfere at higher levels to get their attention.
The case of an installment agreement is another thorn in the side of taxpayers. The IRS has their own definition of allowable expenses based either on national or local standards. They toss many expenses that taxpayers are obigated to pay. So, the definition of taxpayer’s ability to pay is disconnected from reality. If they see you can afford $1,500, that will be the amount they want you to pay as installment agreement. Nevermind that you cannot because you have a contractual obligation. The rationale they have is that you can default on your obligation to others but not on the IRS obligation. It is a distasteful argument. It is therefore the Taxpayer Advocate may be arguing for a partial payment Installment Agreement in the near future.
Posted by Brian Rotolo on Sun, Feb 14, 2010
When it comes to saving for retirement, it can be confusing. Tax help and tax deduction advice is often conflicting. My goal here is to clearly explain how some simple retirement accounts work. There are several types of retirement accounts you can have, depending on your occupation and income level, so it’s really a broad subject. Here I want to focus on the individual retirement account (IRA) options out there, since many taxpayers choose these account vehicles for retirement saving. As for additional retirement account options (like a 401(k)), how much and when to save, and what to invest in, I’ll leave that alone for now.
The IRS gives most of us, depending on our income levels, an opportunity to invest $5000 a year in an IRA (or $6000 if you’re over 50 years old). There are two basic types of IRAs you can open, a Roth IRA or a Traditional IRA (there are a few others, like SIMPLE IRAs, that I won’t get into here). Both accounts have tax advantages, but in exchange for lower taxes you lose some freedom to withdrawal and spend the money you put in. So the liquidity of your retirement savings is reduced, but so is your annual tax debt. In this way, the government is trying to encourage you to save for your retirement. Each IRA is different in exactly how it is taxed and they have different eligibility rules, so I’ll describe each one separately. Note that you can open both accounts, but your $5000 annual limit is used up as you contribute to either account. In other words, in total both your contributions to each account cannot exceed $5000.
Contributions to a Roth IRA are post-tax, meaning that the money you put into your account has already been taxed. There is nothing special about this, as many of you do the same thing when you deposit your paychecks into a checking or savings account after income taxes have already been pulled out. Once you put your money into the account, you have the same flexibility as any brokerage account in that can invest in just about anything you like: stocks, mutual funds, REITs, bonds, commodities, or you can even leave it in cash. Now, the great thing about a Roth is that not only does the principal and earnings grow tax-deferred, but when you start withdrawing your money in retirement, no taxes are due! This means all of your earnings are never taxed. This is a huge tax advantage, especially if you can save at a young age and your earnings grow to be large. A few other facts about a Roth you should know:
- Contributions for a tax year are due by the due date of your tax return, NOT including extensions.
- You can contribute to a Roth without penalty in a given year if your adjusted gross income (AGI) is $116,000 or less for single filers. Compensation for IRA purposes is working compensation, meaning the $116,000 total does not include things like interest, dividends, rental income, pension payments, annuities, partnership income, etc. This limit does change some tax years, so be sure to check before contributing if you’re on the border. If you made more than this and you still contribute, then your contributions are considered in excess.
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You cannot contribute to your IRA past age seventy and a half. If you are older than this and contribute, your contributions are considered in excess.
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Excess contributions over $5000, if your AGI is too high, or you are older than 70.5 are subject to a 6% excess tax.
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You cannot withdrawal money from a Roth before age fifty-nine and a half. If you take out money before this age, these withdrawals are subject to a 10% early distribution tax. There are some exceptions to this, including: money for a first home, money for qualified education costs, money for medical insurance, and money for annuity contracts.
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You NEVER have to withdrawal money from your Roth IRA if you don’t need to.
Now for your main alternative, the Traditional IRA. This account gives you the option of deducting from your taxable income the amount you contribute. Thus, you can put in pre-tax dollars into a Traditional IRA. Like a Roth, your earning grow tax-deferred in this type of IRA, but the difference is that BOTH your earnings and the principal you put in throughout the years are taxed as income upon withdrawal. So in a Roth you pay your taxes first and enjoy no taxes later in life, while in a Traditional you can avoid paying taxes now but will have to pay these taxes upon withdrawal.
This is the fundamental difference between the two. Now, just like a Roth, once you put your money into the account you have the same flexibility as any brokerage account in that can invest in anything you want, with some very minor exceptions. Below are a few more facts you should know about a Traditional IRA:
- Contributions for a tax year are due by the due date of your tax return, NOT including extensions.
- The phase out amount for being able to deduct your Traditional IRA contribution is an AGI of $63,000 for single filers and $169,000 for married filing jointly filers. Remember that compensation for IRA purposes is only working compensation, meaning the total does not include things like interest, dividends, rental income, pension payments, annuities, partnership income, etc.
- You cannot contribute to your Traditional IRA past age seventy and a half. If you are older than this and contribute, your contributions are considered in excess.
- Excess contributions over $5000 or you are older than 70.5 are subject to a 6% excess tax.
- You cannot withdrawal money from a Traditional IRA before age fifty-nine and a half. If you take out money before this age, these withdrawals are subject to a 10% early distribution tax. There are some exceptions to this, including: money for a first home, money for qualified education costs, money for medical insurance, and money for annuity contracts.
- You HAVE to withdrawal money from your Traditional IRA by April 1st of the year after you turn seventy and a half. I know that sounds like a confusing and random time, but that’s the IRS rule. If you don’t make the required minimum withdrawal, you may be subject to a 50% excise tax on the amount not distributed.
Posted by Brian Rotolo on Fri, Feb 05, 2010
The Schedule A, also known as the long form.
We hear about it from friends and family, especially during tax season. You know, from people who tell you about what you can and can’t write off as a tax deduction on your personal income tax return. We all want the tax help and advice to maximize our tax deductions and reduce our taxes. To help out, I’d like to clear up some of the misconceptions floating around and make it clear to you what items you can deduct. First I’ll give you a basic idea of what the Schedule A Form is and when to use it, and then, of course, some of the common write offs you can take.
Most individuals fill out a Form 1040 when preparing their taxes. On this form, Line 40 is where you can do one of two things: either take a standard tax deduction or put the total tax amount from an attached Schedule A. How do you know which amount to use? The only way to know is to fill out a Schedule A and then compare the total you have there to your standard deduction.
The standard deduction amount varies depending on your filing status and the tax year: in 2008 married filing jointly or qualifying widow(er) it was $10,900, head of household was $8,000, and married filing separately or single filer was $5,450. If the total deduction shown on your Schedule A is less than this amount, you will pay less in taxes if you use your standard deduction. In other words, use the standard deduction!
Generally speaking, those who own homes and pay large mortgages, those who have large medical bills, or those who incur a lot of business expenses not covered by their employer are the typical taxpayers I see who end up using a Schedule A. For many other people, however, the standard deduction is larger and thus should be used. The following are some common deductions and rules you should know as you fill out your Schedule A:
- You can deduct home mortgage loan interest on your main and second home. Only the person who is liable for the loan can make this deduction, even if someone else is actually paying the mortgage. It also must be a home, as only interest on a land purchase isn’t deductible.
- Equity line of credit loan interest is deductible.
- Personal property taxes, like for a home, are deductible if they are charged on a yearly basis and are based only on the value of the personal property.
- Transfer taxes are NOT deductible as real estate taxes.
- Qualified medical expenses in excess of 7.5% of your adjusted gross income (AGI) are deductible. A few specific points I see often: lodging at a hotel during a surgery is deductible at $50 per night per person, the cost of home improvements for medical reasons is deductible minus the value increase in your home, and general health improvements (like a gym membership) are NOT deductible.
- Medical insurance premiums are deductible and are not subject to the 7.5% rule.
- Medicare A (covered under Social Security) is NOT deductible on Schedule A as a medical expense.
- State and local income tax is deductible.
- Qualified business expenses in excess of 2% of your AGI are generally deductible. Meals while on business are only deductible 50%.
- Property losses can be deducted up to the portion not covered by insurance.
Disaster losses in a Presidentially-declared disaster zone are also deductible.
- Charity contributions are deductible, but are limited to a maximum of 50% of your AGI.
There are many specifics when it comes to donations, so I advised you speak with a tax professional before you donate to make sure you document your gift correctly. One note: if you donate a car, you can deduct the smaller of the free market value of the car on the date of transfer or the gross proceeds from the sale of the car by the organization you donated to.
- Margin interest is deductible.
- Gambling losses are deductible only up to the amount of gambling winnings.
- Personal bad debts are not deductible on the Schedule A because they are considered short term capital losses, and as such are limited to $3000 per year. Any balance can be carried forward.