Insurance Premium paid with Pre-Tax Dollars
Do not claim on Schedule A any insurance premiums paid to an employer-sponsored health plan with pre-tax dollars.
Qualified Medial Expense and HSA
You cannot deduct qualified medical expenses as an itemized deduction on Schedule A (Form 1040) that are equal to the tax-free distribution from your HSA.
Legal Liability to Deduct Mortgage Interest
A taxpayer must be legally liable for the loan to deduct interest on a home mortgage. Payments made on a loan in which the taxpayer is not directly liable are deductible only if the taxpayer is the legal or equitable owner of the real estate. For example, if you live in your mother’s home, are not listed on the house title or mortgage, and make mortgage payments for your mother, you cannot deduct the interest as home mortgage interest because you are not liable for the debt and are not a co-owner of the house.
Amortization of Bond Premium
You reduce the cost basis of the bond by the amount of the premium taken as a deduction. If you do not elect to amortize the premium on a taxable bond, you will realize a capital loss when the bond is redeemed at a par value or you sell it for less than you paid for it.
Deducting Work-related Education Costs
If you have qualifying work-related education costs, you should determine whether you can claim the Lifetime Learning Credit. Also you may be eligible for Tuition and Fees deduction. However, you cannot use the SAME educational expenses to claim both benefits (no “double benefit”).
You may choose to allocate some of your expenses to the deduction and others to the credit.
Tuition Reimbursements as W-2 Wages
If your under-graduate/graduate school tuition is deductible and the reimbursements from your employer are included in your income as wages, you may take the expense as a miscellaneous itemized deduction on Form 1040 Schedule A (PDF), Itemized Deductions. You may also need to attach Form 2106 (PDF), Employee Business Expenses. This deduction is subject to the 2% of adjusted-gross-income floor that applies to certain miscellaneous itemized deductions.
Student Loan Interest Deduction
In order for a taxpayer to claim a deduction for student loan interest, the loan must be incurred for the taxpayer, the taxpayer's spouse, or a person who was the taxpayer's dependent when the taxpayer took out the loan.
Therefore, if you were not your parents' dependent when they took out the student loan, the interest they paid on the loan does not qualify for the student loan interest deduction.
Recapture of Education Tax Credits
If you claim an education tax credit and after you file your tax return for that year you receive tax-free educational assistance for the prior year or receive a refund of an expense used to calculate the prior-year credit, you have to re-calculate the original credit. If the refund or assistance would have reduced the original credit, the amount of the reduction must be added to your tax liability for the year you receive the refund or assistance.
Recapture of Tuition and Fees Deduction
If you receive a refund of an expense used to calculate the qualified tuition and fees deduction, you recapture the deduction to the extent it gave you a tax benefit by reducing your tax. To the extent of the increase in tax liability, you must include the refunded amount in your income for the year you received it.
Off-the-Shelf Computer Software
Off-the-shelf computer software is eligible for IRC §179 depreciation through 2013.
A Rented Room Not a Separate Dwelling Unit
The Tax Court says that a rented room must be separate and distinct from the rest of the house the owner used in order to claim a rental-activity loss. If the house is a single dwelling unit shared by the owner and his tenant, the owner cannot claim a rental loss.
Rental Activities: Repairs and Improvements
Only maintenance and incidental repair costs are deductible against rental income. Improvements that add to the value or prolong the life of the property are capital depreciable capital improvements.
Repair examples: Painting, fixing floors, fixing leaks, replacing broken windows
Improvement examples:Paving a driveway, putting up a fence, new plumbing, new roof*
* if the roof replacement merely restored the property to leak-free condition and did not increase the value of the house, such a cost for a new roof is considered a repair.
Effective in 2013: Qualifying taxpayers can elect to expense improvements made to a building during the year in an amount equal to the lesser of $10,000 or 2% of the unadjusted basis of the building. The election is made annually on a building-by-building basis by including a statement on timely filed original tax return for the year the cost are incurred.
Clergy Second Home Doesn't Apply for Parsonage Allowance
The Court of Appeals for the Eleventh Circuit has ruled that a parsonage allowance does not include a second home. (Comm. v. Driscoll (February 8, 2012)
Foreign Earned Income Exclusion
Foreign earned income includes salaries, wages, commissions, professional fees, and bonuses for personal services performed while your tax home is in a foreign country and you meet either the foreign residence test or the physical presence test. Also the earned income includes allowances from your employer for housing.
Rental income is generally not earned income. However, if you perform personal services, 30% of your net rents may be earned income.
If you claim the foreign earned income exclusion, you may not (1) claim business deductions allocable to the excluded income; (2) make a deductible traditional IRA contribution or a Roth IRA contribution based on the excluded income; or (3) claim foreign taxes paid on excluded income as a credit or deduction.
For self-employed persons, if your business solely consists of services, all gross income is considered earned income. The excluded amount will reduce the individual’s regular income tax, but will not reduce the individual’s self-employment tax.
For SEP and qualified plans, net earnings from self-employment does not include items excluded from gross income other than foreign earned income and foreign housing cost amounts.
Charitable contributions can be tax deductible, but you must have the proper records to support your deduction. Due to the Pension Protection Act of 2006 the rules on recordkeeping for charitable contributions became a little more strict beginning in January 2007. For 2007 and later years, generally all cash and non-cash contributions require verification.
Under the new substantiation rule, the IRS can easily audit charitable contributions. If you don’t have appropriate records, your contribution deductions will be disallowed.
To deduct a charitable cash donation, regardless of the amount, you must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. Acceptable bank records would include canceled checks or bank or credit union statements containing the name of the charity, the date and the amount of the contribution.
To deduct a non-cash donation, you must receive and keep a receipt from the charity. The required information is slightly different, depending on the amount of deduction:
Receive Timely Written Acknowledgement
IRS disallows deductions for any contribution of $250 or more unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgement of the contribution by the donee organization.
A written acknowledgment is contemporaneous if it is obtained by the taxpayer on or before the earlier of:
(1) the date the taxpayer files the original return for the taxable year of the contribution or
(2) the due date (including extensions) for filing the original return for the year.
Contribution of Use of Timeshare to Charity
A married couple donated a one-week use of their three-week timeshare and deducted the fair rental value of the residence for one week as charitable contribution. The Tax Court denied the deduction because, generally, no deduction is allowed for partial interests in property. A donation of a timeshare is a deductible charitable contribution only if you donate the ownership of the property.
Apartment Lease Cancellation Fee Is Not Moving Expense
The Tax Court has ruled that lease cancellation costs cannot be deducted as a moving expense. (Newell v. Comm., TCS 2012-57) IRC §217 only provides for the expenses of moving household goods and traveling from the former residence to the new residence. Other expenses incurred in connection with moving from one residence to another are nondeductible personal expenses.
If IRS Asks Your Canceled Checks as Evidence
What happens when the IRS conducts an examination and asks for a canceled check to substantiate payment of an expense? Usually, the IRS accepts a copy of the canceled check. So taxpayers must take extra care to protect the copies of checks that may accompany their bank statements. The bank normally has quick access to copies of these checks. In rare instances where the IRS demands more than the copy of the canceled check included in the bank statement, taxpayers can request a substitute check from the bank. A substitute check is legally the same as the original check if it accurately represents the information on the original check and includes the following statement: “This is a legal copy of your check. You can use it the same way you would use the original check” (Check 21 Act, §§4(b)(2), 4(e)).