MainStreet's Tax Deduction Checklist

  • Double Check That Return

    Before you stick that last-minute return in the mail (after all, a lot of Americans procrastinate on their taxes), you should look over your return with MainStreet's deduction checklist to make sure you didn't miss anything. Here, we give you some of the important deductions that you could possibly have missed the first time around. And if you think you did miss something, remember you still have time to fix the mistake and get more money back from Uncle Sam. Photo Credit: Getty Images
    Charitable Donations
  • Charitable Donations

    Most of us know you can deduct on your Schedule A any contributions you make to a qualified church or tax-exempt charity. The IRS says you must have a hard-copy receipt for every single dollar you contribute to claim a tax deduction, though, and those must meet certain criteria. Deductions will not be allowed for any contribution by cash or check unless you have a record of the contribution – such as:
    • an actual canceled check
    • a bank record, such as a copy of the front of the check included on your monthly bank statement
    • an entry on a bank or credit card statement showing a credit or debit card charge
    • a written receipt or acknowledgement from the church or charity with its name, date of contribution and amount of the contribution
    • a pay stub or other employer-furnished document showing the amount withheld for a payment to a charity.
    You can no longer tell the IRS you put a $10 bill in the collection plate each week. You must write a check to the church for the $10 each week. Or you must take advantage of the church's envelope system, which provides you with a written receipt at the end of the year. The law does not say all contributions of more than $50 or more than $100 must be documented — it says all cash contributions must be documented. So if you give the Disabled American Veterans a dollar for a poppy you must get a receipt! Photo Credit: Getty Images
    Mortgage Points
  • Mortgage Points

    A “point” is a percentage fee charged to get a mortgage. One point on a $100,000 mortgage is $1,000. Points, also called Loan Origination Fees or Loan Discounts, are usually reported on Lines 801-802 on your Closing Statement. Generally points are “amortized” over the life of the loan. But you can deduct the total amount of points paid in full in the year paid on a mortgage used to buy, build or substantially improve your principal residence that is secured by the loan. If the seller elects to pay all or part of the points to help the buyer get the mortgage, or as an additional incentive to buy, the seller-paid amount is considered to have been paid by the buyer. To deduct the points in full in the year of purchase, the amount of money paid at closing, including any seller-paid points and the initial down payment or deposit, must at least equal the amount of points charged. If the points on a $300,000 mortgage are $6,000 and you had made a $1,000 deposit and paid $25,000 at closing, the $6,000 is fully deductible on your Schedule A. The mortgage lender should report points paid on the purchase of a principal residence on Form 1098. If so, the points are included in the amount reported on Line 10 of your Schedule A. Points not reported on a Form 1098 are reported on Line 12. Deductible points are limited by the same $1 Million in acquisition debt as mortgage interest. Photo Credit: Getty Images
    Mortgage Interest
  • Mortgage Interest

    Most of us are aware that mortgage interest on a personal residence - interest on debt secured by the residence - can be deducted on Schedule A. But did you know that, unlike real estate tax, you can only deduct interest on two properties at a time? If you own a personal residence in New Jersey and two separate vacation properties, one in Florida and one in the Pocono Mountains, for example, and all three properties have a mortgage, you can only deduct the mortgage interest on two of the properties. And did you know that there are two kinds of deductible mortgage interest?
    1. Acquisition debt is debt acquired after Oct. 13, 1987 to buy, build or substantially improve the property. A “substantial improvement” is one that adds value to the home, prolongs the home’s useful life, or adapts the home to new uses. You can deduct in full the interest on up to $1 million in acquisition debt ($500,000 if you're married and filing separately).
    2. Home equity debt is debt secured by property that is not used to buy, build or substantially improve the property. There is no restriction or limitation on what the money can be used for. You can use home equity borrowings to buy a car, pay for college or a wedding, or to pay down credit card balances. You are only allowed to deduct interest on up to $100,000 of home equity debt ($50,000 if filing separate).
    Photo Credit: IRS
    Job Costs
  • Job Costs

    Do you live and/or work in Alaska, California, New Jersey, New York, Pennsylvania, Rhode Island, Washington or West Virginia? If so, chances are your employer is withholding mandatory contributions to a state disability, family leave, unemployment, and/or workers’ compensation fund from your paycheck. You can deduct these mandatory employee contributions as a tax if you itemize it on Schedule A. These withholdings are considered a form of state and local income tax. So if you elect to deduct state and local sales tax instead of state and local income tax you cannot also deduct your contributions to these state funds. In most states, as is the case with New Jersey withholdings, there is a statutory maximum contribution for each fund. If you have more than one employer and because of this you have more than the maximum amount of contributions withheld during the year you may be able to get a refund of the excess contributions. In New Jersey you can claim a refund of excess family leave, disability and/or unemployment withholding on the state resident or non-resident income tax return. Photo Credit: psd
    Older Real Estate Holdings
  • Older Real Estate Holdings

    Instead of claiming a current deduction, you can elect to “capitalize” (add to the cost basis) any real estate taxes paid on unimproved and unproductive land (i.e., a vacant lot) held for investment. The same election can be made to any mortgage interest on the lot, and doing this will reduce the taxable gain, or increase the loss, when you sell the lot. The election can be made on an annual basis, so you can choose each year whether to capitalize or claim the deduction. You can also decide to capitalize the taxes on a lot in 2010, 2012 and 2015, and claim a tax deduction in all the other years. A statement must be attached to the original Form 1040 for each year that the election is made. Another option is to choose to deduct the taxes and capitalize the mortgage interest. Remember, the deduction for mortgage and investment interest may be limited based on income or other factors. In a year you are not able to itemize you won’t lose the tax benefit of the real estate taxes, and you can maximize deductions in a high-income year. Photo Credit: e-du
    Nursing Home Expenses
  • Nursing Home Expenses

    Many senior citizens, like my parents, choose to spend their “golden years” in a continuing care retirement community, which provides options for independent living, assisted living and nursing care in a single facility. In such a community residents can move from one venue to another as their situation changes and additional levels of care may be needed. Once accepted into the facility, residents are often guaranteed health or long-term care coverage for life. In most cases a resident must pay a sizable entry fee, plus a monthly maintenance fee to the home. That part of a lump-sum entrance fee paid to a “life-care” or “continuing-care” facility that is specified in the residential agreement as a condition for the facility’s promise to provide lifetime medical care can be deducted. The deduction must be made for the full amount on the Schedule A form for itemized deductions as a medical expense in the year it is paid, even though the medical care will be provided at some time in the future. Similarly, a one-time upfront medical payment paid to a nursing home for a lifetime of medical care can be deducted in full in the year it is paid, despite the fact much of the medical care will be provided in future years. Photo Credit: Oquendo
    Medical Expenses
  • Medical Expenses

    You can take a medical deduction on Schedule A for the “diagnosis, cure, mitigation, treatment or prevention of disease or for the purpose of affecting any structure or function of the body." This includes costs related to psychological or emotional disorders as well as physical disorders. Medical expenses are deductible only to the extent the total exceeds 7.5% of your Adjusted Gross Income (AGI). If your AGI is $70,000, for example, then the first $5,250 of expenses is not deductible. Under this example, if the total of your medical expenses for the year is $5,000 then you'll get no deduction, but if your expenses total $6,000, you can get a tax deduction of $750. If you are a victim of the dreaded Alternative Minimum Tax, then medical expenses are only deductible to the extent that they exceed 10% of AGI. Because of the AGI exclusion most taxpayers automatically think they will have enough medical expenses to claim. But don’t overlook these two items:
    • Roundtrip travel to the doctor, dentist, clinic, hospital, etc. to receive medical care. If you take a taxi or bus you can deduct the actual expense. If you drive you can deduct 16.5 cents per mile, plus any tolls and parking costs.
    • Long-term care insurance premiums. The deduction is limited based on the taxpayer’s age (age 40 or less = $330, age 41-50 = $620, age 51-60 = $1,230, age 61-70 = $3,290, and age 71 + older = $4,110). Each spouse is treated separately in determining the age-based limitation.
    Photo Credit: Charleston's TheDigitel
    School Expenses
  • School Expenses

    So-called “above-the-line” deductions for educator expenses and tuition and school fees are back for 2010 (and 2011), thanks to the compromise Tax Act that Congress passed in mid-December which extended for two years some popular tax breaks that had expired on December 31, 2009. Teachers, counselors, principals, and aides of students in Kindergarten through 12th grade can deduct up to $250 of unreimbursed out-of-pocket expenses for books, supplies, computer software, equipment, and other classroom materials as an “adjustment to income” on Page 1 of their 1040 tax returns. If both husband and wife are qualified educators they can each deduct up to $250. To qualify, the educator must have worked at least 900 hours during the school year. Most teachers spend more than $250 on supplies. They can deduct expenses in excess of that amount as “employee business expenses” if they itemize on Schedule A and their total miscellaneous deductions exceed 2% of their Adjusted Gross Income (AGI). While most undergraduate college students get the best tax benefit by claiming the American Opportunity Credit, graduate students must choose between the Lifetime Learning Credit and the special tuition and fees Deduction. Also available “above the line” (as an "Adjustment to Income"), the tuition and fees deduction is available for up to $4,000 in qualifying expenses for joint filers with an AGI of $130,000 or less. That deduction comes to $2,000 for couples with an AGI between $130,001 and $160,000. For singles the AGI cutoff is $65,000 or $80.000. Qualifying expenses include tuition and fees and required books, supplies and equipment. Pretty much every student will have these expenses for every term, so all of them should be able to take advantage of the deduction. Photo Credit: Editor B
    Moving Expenses
  • Moving Expenses

    Did you move for a new job, or to be closer to your current job, or did your company relocate you in 2010? If so, you may be entitled to an “above-the-line” deduction for moving expenses. You can deduct the unreimbursed costs of moving your household goods to your new location and travel expenses, including overnight lodging on the road for one trip for yourself and each member of your household. Meals aren't included. If you drove, you can claim a standard mileage allowance of 16.5 cents per mile. If you and your spouse each have a car, and you each drove your car to your new location, you can both claim the mileage allowance for the trip. For moves within the U.S. you can also deduct storage and insurance of your household goods for up to 30 days after leaving your former residence. For your expenses to be deductible, however, you must meet a distance and time test. The distance between your new job and former residence must be at least 50 miles more than the distance between your old job and former residence.  Or you must move at least 50 miles closer to work. If you are an employee you must work full-time at your new location for at least 39 weeks in the 12 months following the move. If you are self-employed you must meet the same test, and also work full-time for a total of at least 78 weeks during 24 months following the move.  Any combination of full-time employment and self-employment will count toward this test. If you are married only one spouse must satisfy the time test. To claim these expenses, use Form 3903. Photo Credit: Wetsun
    Alimony
  • Alimony

    If you pay alimony to an ex-spouse you may be able to claim an “above-the-line” deduction on your 1040. You must enter the Social Security number of your “ex,” who in turn must report the alimony received as taxable income. To be deductible, alimony payments must be in cash (or check) and required as a condition of the divorce decree. You and your “ex” must not live together in the same household, and payments must end upon the death of the “ex." Deductible alimony is not limited to support payments. It includes payments made to a third party on behalf of your former spouse that are required under the terms of the divorce instrument. This could be payments for medical expenses, housing costs, taxes, tuition, life insurance premiums (if the former spouse owns the policy), etc. These payments are treated as received by your former spouse and then paid to the third party. If you must pay all the mortgage payments (principal and interest) on a home you own jointly with your “ex” you can deduct half the payments as alimony.  If you are required to pay all real estate taxes and/or insurance on a home held as “tenants in common” you can claim half as alimony, but if the home is held as “tenants by the entirety” or “joint tenants” none of the payments are deductible as alimony. The above rules also apply to separate maintenance payments made under a separation agreement. Child support payments are not deductible. Photo Credit: Getty Images
    Student Loan Interest
  • Student Loan Interest

    You can deduct up to $2,500 in interest paid on qualified student loans (that is, those used for post-secondary education, such as college or vocational school) for yourself, your spouse or your dependent as an “adjustment to income” on Page 1 of your Form 1040. You do not have to itemize to benefit from this deduction. To claim a deduction you must have the “primary obligation” to repay the loan and you must actually make the payments. If the student has the primary obligation to pay the loan, but the payments are made by the parents, neither the parents nor the student can claim this deduction. Also, if you are claimed as a dependent on your parents’ or anyone else’s tax return, you cannot deduct student loan interest on your return, even if you have the primary obligation and make the payments. The amount you can deduct is phased out as your Adjusted Gross Income (AGI) goes from $60,000 to $75,000 if you are single, or from $120,000 to $150,000 on a joint return. You cannot claim the deduction if you are married and filing separately. Interest on loans from a related party or from a qualified employer plan, like a 401(k), are not deductible. Student loan interest paid is reported on Form 1098-E.  As a general rule, the Social Security number and name of the person with the “primary obligation” will appear on this form. Photo Credit: Chet Overall
    The New Rules of 2010
  • The New Rules of 2010

    Before you begin preparing your 2010 tax return, make a note of the tax changes that recently went into effect: The deduction for each Personal Exemption is $3,650. The Standard Deduction is:
    • $ 5,700 for Single
    • $11,400 for Married Filing Joint and Qualifying Widow(er)
    • $ 8,400 for Head of Household
    • $ 5,700 for Married Filing Separate
    The additional amounts for age 65 or older and/or blind are:
    • $1,400 for Single and Head of Household
    • $1,100 for Married (Joint and Separate) and Qualifying Widow(er)
    The Standard Deduction for a dependent is the greater of either $950 or $300 plus the dependent's earned income, which should not exceed $5,700 (plus $1,400 if the taxpayer is 65 or blind). The maximum amount you can contribute to a traditional or Roth IRA is $5,000, or $6,000 if you are age 50 or older. The deduction for an IRA contribution made by a taxpayer who is an active participant in an employer plan is phased-out for singles with Adjusted Gross Income (AGI) between $56,000 and $66,000, or AGIs from $89,000 to $109,000 for married couples filing a joint return. If only one spouse is an active participant in an employer plan, then the deduction for a contribution by the other spouse is phased out on a joint return if the couple’s AGI is between $167,000 and $177,000. The amount you can contribute to a Roth IRA is phased-out for a single filer if the AGI is between $105,000 and $120,000, or between $167,000 and $177,000 on a joint return. Photo Credit: Getty Images
    Essential Tax Tips
  • Essential Tax Tips

    And, if you are looking for tips on any other special situations, chances are we've got you covered in MainStreet's Tax Center. We will be adding tax tips daily until the filing deadline on April 18th! Photo Credit: Getty Images
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