Federal Tax Deductions

Organization is key. If you’ve kept careful records all year, completing your tax returns and getting those deductions should be a breeze. If you haven’t, it is not as easy. But it still might be worth your while to itemize deductions this year, or, at least, think about getting organized for next year. One step at a time.

The list of deductions most of us can take is not that long. The first is “Medical and Dental Expenses.” Because this deduction is limited to the amount that exceeds 7.5% of your Adjusted Gross Income (aka “AGI,” the amount that ends up on line 38 of your Form 1040), not as many people can take this deduction as you might imagine. Let’s look at an example. Assuming your 2010 AGI was $56,799, the median household income in Sacramento County, you can only deduct the amount you spent on medical and dental expenses that exceeds $4,259.92, or 7.5% of $56,799. Hopefully you didn’t have to spend that much. According to a popular baby cost calculator, the average annual cost for healthcare from birth to age 18 is $735. Multiply that by four (the average family size in Sacramento County is 3.29), and you get $2,940.

For each medical expense you should keep a record of the name and address of the person paid, the amount and date paid, and the amount paid for transportation (mileage, taxi, etc.) to get medical care. You can deduct either actual transportation expenses or you can use the standard medical mileage rate of 16.5 cents per mile. For more information about deductible medical expenses, see IRS Publication 502.

The second type of itemized deduction you can take is “Taxes You Paid.” You can deduct either state and local general sales taxes or state and local income taxes—not both. If you live in a state that imposes income tax, like California, you probably paid more income tax than sales tax, so the income-tax deduction is the better deal. Obtaining the amount you paid in state and local income taxes should be easy—all income taxes withheld from your salary are listed on your W-2. If you choose to deduct state and local sales taxes, instead, however, you can use actual expenses or the optional sales tax tables contained in the Instructions to Schedule A.

You can also deduct state and local personal property taxes you paid; save your payment stubs. In California, personal property tax includes part of the amount you paid for your car tags. If you’ve misplaced your receipt, you can use the DMV’s Vehicle Registration Fee Calculator to figure out how much of your vehicle license fee was in lieu of local property tax. Just plug in your license plate number, the last five digits of your Vehicle Identification Number, and the appropriate tax year.

You can also deduct real estate taxes paid on your home. If your mortgage payments include your real estate taxes, the amount paid will be on the statement you receive from your mortgage company. If it isn’t, you can contact your taxing authority. In Sacramento County you can use Sacramento County’s Online Property Tax Bill Information System. Just pop in your parcel number for a property tax bill payment history. If you do not know your 14-digit parcel number, you may obtain it by entering your address at the Sacramento County Assessor’s Office Parcel Viewer.

The third category of itemized deduction is “Interest You Paid.” The most common types of interest people pay and wish to deduct are home mortgage interest, student loan interest, and personal interest. Unfortunately, personal interest paid on car loans, credit cards, and the like, is not tax deductible at all.

If your modified adjusted gross income is less than $75,000 ($150,000 if filing jointly), you can deduct up to $2,500 for interest paid on qualified education loans. You should receive a Form 1098-E, Student Loan Interest Statement, from each institution (such as a bank or governmental agency) that received interest payments of $600 or more during 2010. For more on deducting student loan interest payments, see IRS Publication 970, Tax Benefits for Education.

Home mortgage interest is generally reported to you on Form 1098, Mortgage Interest Statement, by the financial institution to which you made the payments. For more information, see IRS Publication 936, Home Mortgage Interest Deduction.

The fourth type of itemized deduction you can take is “Gifts to Charity.” To deduct monetary contributions up to $250, you must show a bank record, payroll deduction record, or a written communication from a qualified organization containing the name of that organization, the date of the contribution, and the amount of the contribution. If you donate cash or property worth $250 or more, you must also show a written acknowledgment from the organization showing the amount of the cash and a description of any property contributed, and stating whether the organization provided any goods or services in exchange for the gift. If your total deduction for all noncash contributions for the year is over $500, you must complete and attach IRS Form 8283, Noncash Charitable Contributions, to your return. For more information, refer to IRS Publication 526, Charitable Contributions.

The fifth type of itemized deduction you can take is “Casualty and Theft Losses.”  You can deduct the amount of casualty or theft losses that exceed 10% of your AGI, after subtracting $100 for each occurrence. If your property is covered by insurance, you cannot deduct a loss unless you file a timely insurance claim for reimbursement, even if no reimbursement is expected. If you were uninsured, you must show some other kind of actual record or satisfactory evidence to support your deduction. For more information, see IRS Publication 547, Casualties, Disasters, and Thefts (Business and Nonbusiness).

The sixth type of itemized deduction you can take is called “Job expenses and Certain Miscellaneous Deductions.” These deductions are subject to subject to a 2% limit, which means you can deduct the amount left after you subtract 2% of your AGI from the total. Using our Sacramento County median household income example of $56,799, and assuming you spent $2,000 on job and other miscellaneous deductible expenses, the total amount you could deduct would be $864.02 ($2,000 – $1,135.98 [2% of $56,799] = $864.02).

“Job expenses and Certain Miscellaneous Deductions” include unreimbursed employee expenses, tax preparation fees, and other expenses paid to produce or collect taxable income or manage or protect property held for earning income. “Unreimbursed employee expenses” include dues to professional societies, educator expenses, licenses and regulatory fees, subscriptions to professional journals and trade magazines related to your work, union dues and expenses, and work-related education. For more information, see IRS Publication 529, Other Miscellaneous Deductions.

Perhaps the most popular unreimbursed employee expense deduction is the “Home Office Deduction.” It is not as easy to qualify for this deduction as the media might lead you to believe. Your home office must be used regularly and exclusively for your work: if your ten-year-old son uses the computer in that room for his homework, you fail the exclusivity test. For more information, see IRS Publication 587, Business Use of Your Home. Then there is figuring the deduction itself. For the kinds of records you will need to keep to prove all of this, see IRS Publication 583, Starting a Business and Keeping Records.

Although not an itemized expense, moving expenses to a new job location can be deducted, and they are not subject to the 2% limit like the other unreimbursed employee expenses discussed above. See IRS Publication 521, Moving Expenses.

The seventh, and last type of itemized deduction, is called “Other Miscellaneous Expenses.” Although not subject to the 2% limit, these “Other Miscellaneous Expense” deductions are not that common. The most common deduction is one that hopefully, not too many of us, will have: gambling losses. If you are so unfortunate as to have suffered gambling losses, you may deduct them, up to the amount of your winnings. You cannot reduce your gambling winnings by your gambling losses and report the difference as a deduction; you must report your winnings as income. Therefore, your records must show your winnings separately from your losses. In addition to an accurate diary of your winnings and losses, you should also keep wagering tickets, canceled checks, substitute checks, credit records, bank withdrawals, and statements of actual winnings or payment slips provided to you by the gambling establishment. For more information, see Tax Topic 419, Gambling Income and Losses.

We have several books at the law library that can help you with your 2010 taxes. You may wish to check out J.K. Lasser’s 1001 Deductions & Tax Breaks, J.K. Lasser’s Your Income Tax: For Preparing Your Tax Return, and Tax Deductions for Professionals.  You may also wish to refer to our Legal Research Guides on Federal Tax Law and California Tax Law.

kb 3/11
updated 5/15