What is tax deductible? And what isn’t?
One of the biggest areas for discussion with our clients is “what can I take as a deduction?” Are you capturing all the allowed itemized deductions on Schedule A? While the standard deduction is generous, itemized deductions can add up, especially if you are having a large amount of state tax withheld from your paycheck, are paying off a mortgage, owe real estate tax, and contribute to your church or other charitable organizations. Additionally, if you have had a “rough” year medically or significant dental work and incur costs that are in excess of 10% of your adjusted gross income (7.5% if you are 65 or older), those can increase your itemized deductions.
Most preparers give their clients a nice “organizer” that helps them pull together source data, and at Burdette Smith & Bish LLC, we are no exception. Included in that organizer is a three-page questionnaire that helps point us toward areas for potential tax savings. There are also several pages dedicated to Schedule A deductions. While it is up to our clients to pay close attention to the forms, we encourage questions.
When filing your tax returns, you can deduct:
• Charitable contributions, but only with confirmation. In short, keep your receipts, especially if you have given cash. And for contributions more than $250, written acknowledgement from the donee is necessary should you be audited. For non-cash contributions, a receipt, pictures, a comprehensive list, all go toward justifying the write-off. There are nice guides on Goodwill.com and Salvationarmy.com for suggested values for those non-cash contributions.
• Medical expenses for you and your dependents. This includes insurance, travel expenses, parking, and lodging near any necessary medical facilities. (Sorry – no meals, unless they are medically prescribed meals.) With a doctor’s prescription, you can also deduct massages, weight loss or exercise programs (for specific reasons, not overall good health) and medical equipment. And don’t forget Long-Term-Care Insurance premiums. Your deduction is based on your age.
Every year we get this question – “Can I take medical expenses for my pet?” Sadly, no.
• Legal fees. This is a tricky area, so include it in your organizer, but list exactly what it is for, so that your accountant can determine deductibility. If for business, tax, or estate planning, then you can probably claim them. If for a divorce, other than settling alimony, you cannot take them.
• Some, or the entire mortgage and operating expenses of your home. Generally mortgage interest and real estate taxes are Schedule A – Itemized Deductions. However, if you have a qualified home-office, you may be eligible to deduct a portion of your insurance, utility and telecommunications bills, and other expenses related to your home, either on your business return, or as part of your Schedule A (limited to 2% of adjusted gross income). Your Fairfax certified public accountant can provide advice and guidance.
• Expenses related to the upkeep of your second home (particularly if it is a vacation home you rent out for part of the year). This can include mortgage interest, insurance, real estate tax, utilities, home repairs, and landscaping.
• Meals and entertainment. This is another area that might be deductible on your business return, or as an employee business expense under the Miscellaneous Deductions subject to 2% of adjusted gross income. Some may be 100% deductible, and some only 50%, and some not deductible at all. Again, include any expenses that are related to business, and details, and allow your accountant to help you determine what and how much can be taken.
You can’t deduct:
• Political contributions. It’s an election year, and you may be fired-up about your favorite candidate. While any contribution may help him/her get elected, it will not help your tax situation – unless they are pushing lower tax rates down-the-line!
• Charity event extras. Meals, raffle tickets, and non-cash contributions (such as time-share stays or goods donated for raffle or auction prizes) are not eligible to be deducted.
• Cosmetic surgery, unless deemed medically necessary.
• Dancing lessons – never.
• Maternity clothing.
• Life insurance.
This list is not all inclusive, and there are many gray areas. Having said that, include anything and everything on your organizer, ask questions, and let your CPA hash it out.
Call Burdette Smith & Bish, LLC — your CPA firm in Fairfax — for advice and guidance.