Tuesday, December 12, 2017

Which expenses reduces your Tax liability ? Itemized deductions in 1040

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Which expenses reduces your Tax liability ? Itemized deductions in 1040:

When searching for ways to reduce your taxable income, itemizing your deductions can really maximize your tax savings. The benefit of itemizing is that it allows you to claim a larger deduction that the standard deduction. However, it requires you to complete a Schedule A attachment to your return and to maintain records of all your expenses.
Types of itemized deductions
Itemized deductions include a range of expenses that are not otherwise deductible. Common expenses include the mortgage interest you pay on up to two homes, your state and local income or sales taxes, property taxes, medical and dental expenses that exceed 10 percent of your adjusted gross income, and the charitable donations you make. Itemized deductions also include miscellaneous deductions such as work-related travel and union dues. Once you decide to itemize, you are eligible to claim all of them.
Itemizing requirements
In order to claim itemized deductions, you must file your income taxes using Form 1040 and list your itemized deductions on Schedule A. You cannot file your taxes using Forms 1040A or 1040EZ if you want to itemize your deductions; only the standard deduction can be taken on these shorter forms.
Once you have entered your expenses on the appropriate lines of Schedule A, add them up and copy the total to the second page of your Form 1040. This amount is then subtracted from your income to arrive at the final taxable income number.
Deciding whether to itemize
When deciding whether to itemize, you need to remember that you will be giving up the standard deduction. Therefore, after adding up your itemized deductions, you need to make sure the total is greater than the standard deduction for your filing status. If it’s not, then you will actually pay more in tax if you itemize.
Form 1040A allows you to claim certain common deductions and credits (like education credits), while still claiming the standard deduction. The instructions for Form 1040A explain which deductions and credits you can claim on the form.
When you use TurboTax to prepare your taxes, we’ll ask simple questions about your tax situation and we’ll recommend whether itemizing or claiming the standard deduction will get you a bigger tax refund (or lower tax due).

ITEMS UNDER SCHEDULE A

1.      Medical and Dental Expenses

 We generally can deduct only the part of your medical and dental expenses, Enter the total of your medical and dental expenses, after you reduce these expenses by any payments received from insurance or other sources.
If advance payments of the premium tax credit were made, or you think you may be eligible to claim a premium tax credit, fill out Form 8962 before filling out Schedule A, line 1.
We can include following medical and dental expenses:-
·                     Yourself and your spouse.
·                     All dependents you claim on your return.
·                    Your child whom you don't claim as a dependent because of the rules for children of divorced or   separated parents.
·                     Any person you could have claimed as a dependent on your return except that person received $4,050 or more of gross income or filed a joint return.

·                     Any person you could have claimed as a dependent except that you, or your spouse if filing jointly, can be claimed as a dependent on someone else's 2016 return.

The standard mileage rate allowed for operating expenses for a car when you use it for medical reasons is 19 cents a mile. 

2.      Taxes You Paid
You can elect to deduct state and local general sales taxes instead of state and local income taxes. You can't deduct both.

State and Local Income Taxes
Real Estate Taxes
Personal Property Taxes
 Other Taxes
Home Mortgage Interest
If you paid home mortgage interest and it wasn't reported to you on Form 1098, report your deductible mortgage interest on line 11.
Points Not Reported on Form 1098
Investment Interest
Gifts by Cash or Check
Other than by Cash or Check
Carryover from Prior Year
Tax Preparation Fees
Other Expenses
 7.      Other Miscellaneous Deductions
x
If you elect to deduct state and local income taxes, you must check box a on line 5. Include on this line the state and local income taxes listed next.
·                     State and local income taxes withheld from your salary during 2016. Your Form(s) W-2 will show             these amounts. Forms W-2G, 1099-G, 1099-R, and 1099-MISC may also show state and local income taxes withheld.
·                     State and local income taxes paid in 2016 for a prior year, such as taxes paid with your 2015 state or local income tax return. Don't include penalties or interest.
·                     State and local estimated tax payments made during 2016, including any part of a prior year refund that you chose to have credited to your 2016 state or local income taxes.
·                     Mandatory contributions you made to the California, New Jersey, or New York No occupational Disability Benefit Fund, Rhode Island Temporary Disability Benefit Fund, or Washington State Supplemental Workmen's Compensation Fund.
·                     Mandatory contributions to the Alaska, California, New Jersey, or Pennsylvania state unemployment fund.
·                     Mandatory contributions to state family leave programs, such as the New Jersey Family Leave Insurance (FLI) program and the California Paid Family Leave program.


Include taxes (state, local, or foreign) you paid on real estate you own that wasn't used for business, but only if the taxes are assessed uniformly at a like rate on all real property throughout the community, and the proceeds are used for general community or governmental purposes.

If your mortgage payments include your real estate taxes, you can deduct only the amount the mortgage company actually paid to the taxing authority in 2016.


We need to enter the state and local personal property taxes you paid, but only if the taxes were based on value alone and were imposed on a yearly basis.

Example:
You paid a yearly fee for the registration of your car. Part of the fee was based on the car's value and part was based on its weight. You can deduct only the part of the fee that was based on the car's value.

I f you had any deductible tax not listed under above taxes, list the type and amount of tax. Enter only one total on line 8. Include on this line income tax you paid to a foreign country or U.S. possession. You may want to take a credit for the foreign tax instead of a deduction. 

3.      Interest You Paid

A home mortgage is any loan that is secured by your main home or second home. It includes first and second mortgages, home equity loans, and refinanced mortgages.
A home can be a house, condominium, cooperative, mobile home, boat, or similar property. It must provide basic living accommodations including sleeping space, toilet, and cooking facilities.
Enter on line 10 mortgage interest and points reported to you on Form 1098. If your Form 1098 shows any refund of overpaid interest, don't reduce your deduction by the refund
If you are claiming the mortgage interest credit (for holders of qualified mortgage credit certificates issued by state or local governmental units or agencies), subtract the amount shown on Form 8396, line 3, from the total deductible interest you paid on your home mortgage. Enter the result on line 10.
Points are shown on your settlement statement. Points you paid only to borrow money are generally deductible over the life of the loan.

Mortgage Insurance Premiums
Enter the qualified mortgage insurance premiums you paid under mortgage insurance. Box 5 of Form 1098 shows the amount of premiums you paid.

Limit on amount you can deduct.
 You can't deduct your mortgage insurance premiums if the amount on Form 1040, line 38, is more than $109,000 ($54,500 if married filing separately). If the amount on Form 1040, line 38, is more than $100,000 ($50,000 if married filing separately), your deduction is limited and you must use the Mortgage Insurance Premiums Deduction Worksheet to figure your deduction.

Investment interest is interest paid on money you borrowed that is allocable to property held for investment. It doesn't include any interest allocable to passive activities or to securities that generate tax-exempt income.
Complete and attach Form 4952 to figure your deduction.
Exception.
 You don't have to file Form 4952 if all three of the following apply.
1.           Your investment interest expense isn't more than your investment income from interest and ordinary dividends minus any qualified dividends.
2.           You have no other deductible investment expenses.
3.           You have no disallowed investment interest expense from 2015.

4.       Gifts to Charity
You can deduct contributions or gifts you gave to organizations that are religious, charitable, educational, scientific, or literary in purpose. You can also deduct what you gave to organizations that work to prevent cruelty to children or animals.
Contributions can be in cash, property, or out-of-pocket expenses you paid to do volunteer work. If you drove to and from the volunteer work, you can take the actual cost of gas and oil or 14 cents a mile. Add parking and tolls to the amount you claim under either method. But don't deduct any amounts that were repaid to you.
Enter on line 16 the total value of gifts you made in cash or by check (including out-of-pocket expenses).
Recordkeeping.
 For any contribution made in cash, regardless of the amount, you must maintain as a record of the contribution a bank record (such as a canceled check or credit card statement) or a written record from the charity. The written record must include the name of the charity, date, and amount of the contribution. If you made contributions through payroll deduction, don’t attach the record to your tax return. Instead, keep it with your other tax records.

Enter on line 17 the total value of your contributions of property other than by cash or check. If you gave used items, such as clothing or furniture, deduct their fair market value at the time you gave them. Fair market value is what a willing buyer would pay a willing seller when neither has to buy or sell and both are aware of the conditions of the sale. 
If the amount of your deduction is more than $500, you must complete and attach Form 8283. For this purpose, the "amount of your deduction" means your deduction before applying any income limits that could result in a carryover of contributions. If you deduct more than $500 for a contribution of a motor vehicle, boat, or airplane, you must also attach a statement from the charitable organization to your paper return. The organization may use Form 1098-C to provide the required information. If you’re total deduction is over $5,000 ($500 for certain contributions of clothing and household items), you may also have to get appraisals of the values of the donated property.

Contributions of clothing and household items: - A deduction for these contributions will be allowed only if the items are in good used condition or better. However, this rule doesn't apply to a contribution of any single item for which a deduction of more than $500 is claimed and for which you include a qualified appraisal and Form 8283 with your tax return.

You may have contributions that you couldn't deduct in an earlier year because they exceeded the limits on the amount you could deduct. In most cases, you have 5 years to use contributions that were limited in an earlier year. The same limits apply this year to your carryover amounts as applied to those amounts in the earlier year. After applying those limits, enter the amount of your carryover that you are allowed to deduct this year.

5.       Casualty and Theft Losses

We need to complete and attach Form 4684 to figure the amount of your loss to enter on line 20.
You may be able to deduct part or all of each loss caused by theft, vandalism, fire, storm, or similar causes; car, boat, and other accidents; and corrosive drywall. You may also be able to deduct money you had in a financial institution but lost because of the insolvency or bankruptcy of the institution.
You can deduct personal casualty or theft losses only to the extent that:
1.           The amount of each separate casualty or theft loss is more than $100, and
2.           The total amount of all losses during the year (reduced by the $100 limit discussed in (1)) is more than 10% of the amount on Form 1040, line 38.

6.      Job Expenses and Certain Miscellaneous Deductions
 Unreimbursed Employee Expenses
Enter the total ordinary and necessary job expenses you paid for which you weren't reimbursed. (Amounts your employer included in box 1 of your Form W-2 aren't considered reimbursements.)

We must fill in and attach Form 2106 if:-
1.       You claim any travel, transportation, meal, or entertainment expenses for your job.
2.       Your employer paid you for any of your job expenses that you would otherwise report on line 21.


Enter the fees you paid for preparation of your tax return, including fees paid for filing your return electronically. 

Enter the total amount you paid to produce or collect taxable income and manage or protect property held for earning income. But don't include any personal expenses. 
Examples of expenses to include on other expenses:-
·                     Certain legal and accounting fees.
·                     Clerical help and office rent.
·                     Custodial (for example, trust account) fees.
·                     Your share of the investment expenses of a regulated investment company.
·                     Certain losses on nonfederal insured deposits in an insolvent or bankrupt financial institution.
·                    Casualty and theft losses of property used in performing services as an employee from Form 4684, lines 32 and 38b, or Form 4797, line 18a.
·                     Deduction for repayment of amounts under a claim of right if $3,000 or less.
·                     Convenience fee charged by the card processor for paying your income tax (including estimated tax payments) by credit or debit card. The deduction is claimed for the year in which the fee was charged to your card.


Only the following expenses are deducted under Other Miscellaneous Deductions:-
·                     Gambling losses (gambling losses include, but aren't limited to, the cost of non-winning bingo, lottery, and raffle tickets), but only to the extent of gambling winnings reported on Form 1040, line 21.
·                     Casualty and theft losses of income-producing property from Form 4684, lines 32 and 38b, or Form 4797, line 18a.
·                     Loss from other activities from Schedule K-1 (Form 1065-B), box 2.
·                     Federal estate tax on income in respect of a decedent.
·                     A deduction for amortizable bond premium (for example, a deduction allowed for a bond premium carry forward or a deduction for amortizable bond premium on bonds acquired before October 23, 1986).
·                     An ordinary loss attributable to a contingent payment debt instrument or an inflation-indexed debt instrument (for example, a Treasury Inflation-Protected Security).
·                     Deduction for repayment of amounts under a claim of right if over $3,000. See Pub. 525 for details.
·                     Certain unrecoverable investment in a pension.
·                     Impairment-related work expenses of a disabled person.

8.      Total Itemized Deductions
Use the Itemized Deductions Worksheet, to figure the amount to enter on line 29 if the amount on Form 1040, line 38, is over $311,300 if married filing jointly or qualifying widow(er); $285,350 if head of household; $259,400 if single; or $155,650 if married filing separately.