Tax Deductions

Certain deductions are a red flag to the IRS and may precipitate an audit. If you have kept careful records, you should have no problems. If your records are incomplete, the IRS may disallow some of the deductions. Some advisers suggest retaining records for three years on the logic that three years is the IRS look-back period. However, any issue they find with those three years give them the justification to look for the same issue back three more years, and so on. Keep your records pretty much forever.

*The Form 1040

Line 23: Educator expenses. If you teach K-12 full-time, you may deduct $250 of your unreimbursed classroom expenses. Part-timers and substitute teachers usually cannot rack up the required 900 hours per year. College instructors do not qualify. Homeschooling expenses do not qualify, nor do nonathletic supplies for health or PE.

Line 26: Moving expenses. You may deduct only the expenses of moving in conjunction with a new job. You do not have to have the new job in order to make the move, but you must get the job with the required time limit. The new home must be at least fifty miles from your old job.

Line 31: Alimony. You may deduct any alimony payments you make. Child support payment are not deductible. All payments to a former spouse will be designated as child support payments to the extent of the child support mandate. Excess payments can then be deducted as alimony.

Line 33: Student loan interest deduction. You may deduct student loan interest only if you are legally liable for the loan. Parents may deduct the interest on Parent Plus loans. The student deducts the interest on Stafford and other loans even if the parent paid the interest.

Line 34: Tuition and fees deduction. You may deduct tuition and fees for education at an eligible educational institution for yourself, listed spouse, or dependents. If you deduct tuition and fees, then you may not use the same expenses for the purpose of an education credit.

*Schedule A, Itemized deductions

Medical expenses: Medical expenses in excess of 7.5% of your adjusted gross income are deductible. The medical category is quite broad, but there are a few expenses that cannot be deducted, such as over the counter medicines and cosmetic procedures. Do not forget to take medical miles; they can add up. Medical home improvements such as bathroom bars may or may not be deductible. If the improvement adds to the value of your home, you must add the cost to the cost basis of the home and recover the cost upon sale of the home. Medical improvements that do not increase the home’s value may be deducted.

Charitable: Gifts to individuals may not be deducted. Generally, you may donate as much as you want to qualified charities, but you may deduct no more than an amount equal to 50% of your adjusted gross income. Excess charitable contributions may be carried forward to the next tax year.

Miscellaneous Deductions. These deductions are subject to a 2% threshold. There are a lot of grey areas under this heading, and the IRS scrutinizes these deductions carefully. For example, if you use your vehicle to run errands for your boss and you are not reimbursed, you may deduct only the amount that exceeds 2% of your income. In order for the Schedule A to be worthwhile to you, the total of your itemized deduction must exceed your standard deduction. For many people the combination of the 2% threshold and the standard deduction threshold wipes out any tax advantage.

Educator expenses in excess of the $250 deducted on line 23 of the 1040 may be deducted under miscellaneous expenses. However, the expenses must be necessary and reasonable.

Generally you may not deduct cell phone costs even if you use your cell phone for business unless you can show that you got an enhanced plan in order to accommodate the extra minutes you need for business. In that case, you may deduct only the cost of the extra minutes.

Gambling winnings are reported as income on the front of the 1040. Gambling losses can be deducted only to the extent of the winnings.

Work-related education may be deducted on the Schedule A if you do not use the tuition and fees deduction or one of the education credits for the same expenses. The advantage of deducting work-related expenses on a Schedule A is you may also deduct the cost of mileage and possibly lodging. Be careful. “Work-related” means education related to the your actual job. For example, a pre-school teacher who is attending class to get a teaching credential in order to become an elementary teacher does NOT have work-related education expenses. Expenses to qualify you for a new job are not work-related. However, it might be possible for that preschool teacher to have other education expenses in conjunction with the job at the preschool.

There are many rules and exceptions related to deductions.  Be sure to read up on any deduction you are considering.  Do not assume that if you made a grey area deduction and the IRS sent you no letter that they must have approved the deduction. They also calculate the cost of enforcement. If the cost of tax recovery is far more than the potential recovery itself, they may ignore it. If in doubt, ask a reputable tax adviser. Tax advisers who are also IRS enrolled agents, that is, authorized by the IRS to represent clients, are generally the most up-to-date on tax information.