Part 3: Deductions and Exemptions
Mar 13 '00 (Updated Apr 07 '00)
(Again, all line numbers are from form 1040 and associated schedules.)
This Epinion is primarily about non-business itemized deductions, but it covers all non-business aspects of lines 34-40 of form 1040, and of 1040 schedule A.
There are some calculations which don't go on any form, which need to be done before you fill in schedule A.
Standard Deduction calculation
If you cannot be taken as someone's dependent, the standard deduction is calculated by starting with the amount associated with your filing status (as shown on page 2 of form 1040), and then adding $1050 (if filing single or head of household, or $850 otherwise, for each one of you or your spouse who is over 65 or blind. (For this purpose, those born January 1, 1935 are over 65.) If you're blind, it's unlikely you can read the Epinion, but...this site might be disabled-friendly. If you can be taken as someone's dependent, then the specified amount is reduced to the lesser of $700 or your earned income increased be $2500, before adding the blind/aged amount.
I actually calculated my housemate's standard deduction incorrectly in 1985, so this qualifies as an overlooked deduction by me!
Now, on to Schedule A.
Lines 1-4: Medical deductions
Most people don't qualify, because of the line 3 reduction of 7.5% of Adjusted Gross Income (AGI, found on line 34 of form 1040), but if you do qualify, be sure to include (if paid during the tax year):
Medical and dental insurance (if not paid pre-tax by your employer, or deducted elsewhere)
New last year part of long-term care (nursing home) insurance
Doctor's, dentist's, chiropractor's, hospital bills
Legal prescription drugs and insulin
New this year: costs of stop-smoking programs
$.10/cents per mile for auto expenses to go to doctors, hospitals, etc.
Other transportation expenses.
Lodging, if required in order to get to the medical appointment on time (for example, surgery with a hospital check-in at 7:00 am)
Ambulance fees
Ambulance chaser fees (oops, scratch that)
Expenses for maintaining a guide dog/cat/ferret, including food, vet bills, dog license fees, etc.
Cost of installing an elevator in your home, or hand controls in your car, if required for medical reasons (less the increase in value due to the change)
You may include bills paid for you, your spouse, your dependents, your ex-spouses child (in some cases), or any person who you might claim as a dependent except that their wages exceeded the exemption amount.
Note the word person above: you cannot deduct a pet's medical or dental expense unless it is a guide animal. (The IRS has heard all the stories about pets being good for your mental and physical health. It still doesn't count.)
For lines 2-4, check your math. Also, if line 4 would be $0, you don't need to calculate lines 1-3.
Line 5: State and local income taxes.
This includes taxes withheld for 1999, estimated taxes paid in 1999, (including prior year refunds allocated to 1999 taxes, which might have had to have been included as income), and certain mandatory contributions in CA, NJ, NY, RI, or WA. Tax tip if you pay state estimated taxes, make the installment due January 15 on December 31 (unless you are subject to Alternative Minimum Tax (AMT) as I will note later.)
Line 6: Real estate taxes
This is one of the reasons homeowners can usually itemize. This only applies to uniform property taxes based on the value of the property.
Line 7: Personal property taxes
This includes that part of vehicle registration fees based on the value of the vehicle. (I've never seen any other examples, but I've heard of some states which charge a personal property tax on furniture.)
Line 8: Other deductible taxes
This includes foreign income taxes, although the foreign income tax credit is usually better if you're preparing your own return. If a paid preparer does it, he'll probably charge more than your tax benefit to prepare the required form 1116.
Line 9: Do the math
Lines 10-12: Home mortgage interest.
This is the primary reason most homeowners can itemize. In general, all mortgage interest (interest secured by your main or second home) is deductible, unless acquisition debt exceeds $1,000,000, or non-acquisition debt exceeds $100,000, or the total debt exceeds the value of the property.
Acquisition debt means debt where the proceeds are used to buy, build, or improve your home.
A home can include an RV; the requirement is that it must "provide basic living accommodations including sleeping space, toilet, and cooking facilities".
Mortgages taken out before October 13, 1987 are considered acquisition debt, and are not restricted by the $1,000,000 limit, although they can restrict other acquisition debt. Loans refinanced are treated as if they were the same loan, unless they were refinanced for a larger amount.
"Points" on an acquisition loan for your main home can be deducted immediately; all other "points" are considered prepaid interest, which are deducted (on line 12) over the life of the loan. If you refinance, all of those amortized points are immediately deductible.
Line 13: Investment interest.
Interest on debt you used to purchase investments is generally deductible to the extent of investment income, and additional interest is disallowed and can be deducted against future investment income. (The definition of "investment income" is complicated. See form 4952 for details.)
Line 14: do the math
Lines 15-16: Charitable deductions
If you donate by cash or check, keep the cancelled checks and receipts; and if you make a single gift of $250 or more, you must get a statement from the charity.
If you donate property, keep "reliable written records" showing the organization's name and address (for Goodwill, for example, you can use your city's headquarters, rather than the actual donation location), the date and location of the gift, a description of the property, how you figured the property's value at the time of gift, the property's cost (if it could possibly be less than the property's value), and any conditions or restrictions on the gift.
For used clothing, for example, the value of the donation to a charity running a thrift store would be an estimate of what the thrift store would charge for it, less any cleaning costs. For running vehicles, an estimate would be Blue Book value. For non-running vehicles, you would have to deduct the cost of repairs, or only claim the scrap value less towing fees.
If your total donations of property exceed $500, you must file form 8283.
You can also deduct out-of-pocket costs (but not the value of your time) for volunteer work, and $.14/mile auto expenses.
If your deduction would be more than 20% of AGI, or you donated property which is worth more than you paid for it, your deduction may be further limited. Any amount limited here can be considered for:
Line 17
in a future year.
Line 18: Do the math
Line 19: Casualty and theft losses.
Business losses can be deducted in full; non-business losses can be deducted after reducing the loss by $100/incident and 10% of AGI, so can rarely be taken. (Costs of proving that you have a property loss can be deducted on line 22.)
Lines 20-22: (Most) miscellaneous deductions
It's my understanding that these can also be rarely taken, because of the 2% of AGI calculated on line 25.
I will defer discussion of line 20 deductions until my business deductions Epinion. Line 21 (tax preparation fee) seems self-explanatory. Line 22 generally includes expenses related to securing and retaining income, including legal fees, safe deposit box fees (to the extent the box is used to secure valuables), etc.
Lines 23-26: Do the... You get the idea.
Line 27: Other miscellaneous deductions
The most common one here is gambling losses (to the extent of gambling income). Losing lottery tickets should not be lost...
Line 28: (Additional calculations). If AGI exceeds $126,600 (halved if married filing separately), then itemized deductions other than medical, investment interest, casualty and theft losses, and gambling losses, can be limited.
Form 1040, line 36
Generally, choose the larger of the standard deduction, and your itemized deductions from schedule A.
Line 37 Do the math....
Line 38 Basically, do the math; if AGI is $94,975 or less, multiply the number of exemptions (from line 6d) by $2,750.
(Many of these numbers, $126,600 and $94,975, for example came from the tax simplification acts of 1987-1998. Some simplification ---)
Line 39 Calculate taxable income.
Line 40 Calculate tax. You must use the tax tables if taxable income is less than $100,000.
...and now, a few notes on AMT....
Basically, AMT is an entirely different tax structure, allowing (usually) smaller business deductions, no standard deductions, only medical (with a 10% floor, rather than 7.5%), acquisition mortgage interest, charitable contributions, casualty and theft losses, gambling losses, and an additional $45,000 (MFJ) or $33,750 (single or head of household) exemption, and a tax rate of 26-28%. If the resultant tax is larger than the tax from line 40, the excess is an additional tax on line 51.
Last year, the exemption and some of the child care credits were not allowable against AMT; but this year, they are, so relatively few people have to worry about it.
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