Tax Help on the Schedule A for Itemized Tax Deductions

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.

Practical Family Tax Planning; Get to Know the Gift Tax Rule.

 Yes, the Federal government has bailed out Wall Street, Detroit, and spent stimulus money at an unprecedented pace in an attempt to avoid a deeper recession. States across the country have massive budget shortfalls. Our government at all levels (Federal, state, and local) will be reducing benefits and increasing taxes to help pay for it all. An article published last month on CNN Money discusses this development at the state level:  http://money.cnn.com/2009/12/04/news/economy/state_tax_increases/index.htm

In this environment, it is imperative that you have a good handle on tax issues and know how your decisions affect your taxes. The name of the game is reducing your tax debt to protect your money from these higher tax rates we all know are coming. Here I'll tell you about a little-discussed tax topic to ensure you keep your money with your family and not hand it over to the IRS: financial gift giving.

Did you know that you can give anyone up to $12,000 a year completely tax-free? It's true. The IRS allows gifts of up to $12,000 without any taxes due. And if you're married, between you and your spouse you can give $24,000 to any individual before taxes. 

This is called the annual gift tax exclusion, and it is very useful in many practical ways. First, it can be an effective way to pass your wealth to the next generation without having estate tax problems, which are currently being discussed for increases in Congress. For example, if you're married and have 3 children, you and your spouse can each give each of you children $12,000 a year tax free. That means you can effectively give $72,000 each year ($24,000 combined to each child) to your children without worrying about paying Uncle Sam. Talk to a tax representative to set this up, as it may involve establishing a trust depending on how you want things arranged. As you see, it pays to know the rules and plan ahead.

There are also several types of gifts that are not subject to this tax: gifts for qualified education expenses, qualified medical expenses, gifts to charities, gifts to your spouse, or gifts to political organizations. So paying your child's tuition or a loved one's medical expenses does not count as a gift that could be taxed. Another good point to know is that if you give a present to someone, like a car, you must report the free market value of the gift at the time of the transfer on Form 709. I often talk to people who assume they can subtract the amount they spent on the car as their cost for the gift, but this is not true. 

You have to fill out Form 709, the Individual Gift Tax Return, if your gift to any one person or group is greater than $12,000 (including a future interest), you and your spouse are splitting gifts, or if you gave your spouse interest in property (like your house) that will be ended by some future event (like death). 

Just knowing about this exception is powerful tax knowledge as you plan your tax savings and try to hold onto your wealth in these trying times. You now know something most people don't when it comes to taxes. There are a few details about gift giving you should know about before you give someone a large gift, and I don't want to get into them here for the sake of all readers. However, I do recommend you discuss your specific situation with your tax representative before you start making big moves to make sure you're doing things correctly.