Deducting Gambling Losses On Your Taxes

In previous posts, I have been talking about deductions that are subject to the 2% floor.  Now, I will be discussing an itemized deduction that is not subject to this limit.  This would be reported on line 28 of Schedule A, which is labeled “Other Miscellaneous Deductions”.

Do you spend a little time gambling?  Go see the ponies run and place a little something to make it fun?  Do you buy lottery tickets?  Did you play blackjack on that trip to Las Vegas?   Did you win anything?  If so, you will need to report any winnings as income on your 1040.  You will get a Form W-2G, which will show you the winnings you need to include on line 21 as “Other Income”.  You will get a Form W-2G if one of the following occurs:

  1. The winnings are $1,200 or more from playing bingo or a slot machine,
  2. The winnings, reduced by the amount of the wager, are from playing keno and are $1,500 or more,
  3. The winnings, reduced by the amount of the wager, are from playing in a poker tournament and are $5,000 or more,
  4. The winnings from other games, when reduced by the wager (if you choose to reduce the winnings by the amount of the wager), are
    1. $600 or more, and
    2. At least 300 times the amount of the wager, or
    3. The winnings are subject to federal income tax withholding.

Now that you have recorded your winnings as other income, you can take an itemized deduction for your losses.  Now, a little bit of bad news here:  You can only deduct losses to the extent that you have winnings.  For instance, if you won $500 during the year, but lost $1,000, you can only deduct $500 of the losses.  A little unfair if you had a bad year, but hopefully you have better luck in a following year.

It is very important that you keep good records of your wins and losses.  This will help in providing support of the deduction in case of an audit.  You need to be able to provide receipts, tickets, statements or other records to substantiate the amount of your wins and losses.

Other types of deductions allow for you to carry forward a loss to a future year.  However, you cannot do this with a net gambling loss.

What experiences have you had with reporting gambling losses on your tax return?  Do you have any other cautionary tales about gambling and taxes?  I’d love to hear about it.  Also, if you have any questions, shoot them to me at chrispedencpa@yahoo.com, and I would be happy to answer them.  If you need help with other tax questions, or with preparing a return, drop me a line, and we can discuss your situation.

Deducting Costs of Traveling For Your Job

In a previous post, I talked about deductions that are subject to the 2% floor.  As you may remember, these expenses, when taken in total, are greater than 2% of your adjusted gross income.  You can only deduct the amount that is above this 2% floor.  For example, if you had an adjusted gross income of $100,000 and expenses of $2,500, you would be able to deduct $500 of these expenses ($2,500-$2,000, which is 2% of $100,000).

In this post, I’d like to discuss the deductibility of travel expenses you incur as an employee.  Keep in mind that you can only deduct these costs if you are not reimbursed by your employer, and have traveled away from you tax home overnight and on business.

Living in the Washington, D.C. area, one of the questions I get asked is if commuting costs are deductible.  I wish they were.  However, you can deduct the costs of going from one workplace to another, whether it is another location used by your employer, or if you have a second job and are going there from your second job.  If you have a temporary work location outside of the metropolitan area where you live, and you reasonably expect to be working there one year or less, you can deduct the cost of going from your home to this temporary location.

So, what types of costs are deductible?  The types of costs that are deductible would include the following:

  1. Cost of travel by airplane, automobile, bus, or train,
  2. Taxi, commuter bus (not being used for commuting to your job), and limousine costs,
  3. Cost of sending luggage and display materials,
  4. Costs to operate and maintain your automobile when traveling away from home on business,
  5. Cost of meals if your trip is overnight or long enough to require you to get substantial rest,
  6. Cost of lodging if your trip is overnight or long enough to require you to get substantial rest,
  7. Cost of cleaning and laundry on an overnight trip,
  8. Cost of business calls,
  9. Tips for providing the services listed above.

The best way to make sure you get the proper deduction, as with other deductions, is to keep your receipts and make sure the purpose of the trips are noted, either on the receipt or a listing of your expenditures you keep for tax purposes.

So what happens if your company gives you an advance or reimburses you for expenses?  These payments are considered to be made under an accountable plan.  To be considered an accountable plan, your employer’s program must have the following three characteristics:

  1. The employee must have expenses that are deductible which were incurred when performing their duties as an employee,
  2. An adequate accounting of the expenses must be made to the employer by the employee within a reasonable amount of time, and
  3. The employee must return any excess reimbursement or advance within a reasonable amount of time.

If the plan does not meet all three requirements, any reimbursement or advance received by the employee must be reported as wages on the employee’s W-2.  If this happens to you, you must report these payments as income, and complete Form 2106 to itemize the deductions.

What experiences have you had with reporting the expenses related to traveling for your job on your tax return?  I’d love to hear about it.  Also, if you have any questions, shoot them to me at chrispedencpa@yahoo.com, and I would be happy to answer them.  If you need help with other tax questions, or with preparing a return, drop me a line, and we can discuss your situation.

Deducting Investment Expenses

In a previous post, I talked about deductions that are subject to the 2% floor.  As you may remember, these expenses, when taken in total, are greater than 2% of your adjusted gross income.  You can only deduct the amount that is above this 2% floor.  For example, if you had an adjusted gross income of $100,000 and expenses of $2,500, you would be able to deduct $500 of these expenses ($2,500-$2,000, which is 2% of $100,000).

Included in these types of expenses are those costs that relate to your investment expenses.  These would be expenses that are for the management of your investment portfolio on your taxable investments.  Let’s take a look at a few of the items that you can deduct.

You many have an investment manager who oversees your portfolio.  If you they charge you fees that relate to taxable income, these fees are deductible.  If they charge you to collect interest and dividends, contacting those companies that owe you the interest and dividends on taxable investments and collect the money owed to you, you can deduct these expenses.  Additionally, if they charge you to set up and administer an IRA, those fees are deductible.

If you have an accountant who keeps track of your investments and does the record keeping, you can deduct their fees for the record keeping.  Be sure that your accountant lists these fees separately from the fees for your tax return and other services performed.  Likewise, if you pay someone to keep records of your taxable investment income besides your accountant, you can deduct their fees.  Additionally, if you have a lawyer who gives you legal advice, be sure they break out the charges for legal advice related to investments, as you can deduct these fees related to taxable investment income.

As you become more active in your investments, and start attending shareholding meetings, and may become involved in proxy fights.  As long as these proxy fights are about legitimate corporate policies, you can deduct the expenses related to these contests.

At the end of January, you should receive form 1099-DIV.  On this form, box 5 will list investment expenses.  These expenses are deductible as investment expenses, as you might expect.

If a minor has a guardian, and that guardian manages or oversees the minor investment portfolio, any fees that this guardian charges for collecting or producing income are deductible.

If you have a safety deposit box that is only used to house securities and investments, you can deduct the safety deposit box fees.  If you hold other items in this box, you cannot deduct these fees.

If you lose the paper copy of the indemnity bonds that you hold, you can deduct the premiums for indemnity bonds for the missing securities.

Lastly, if you subscribe to investment services, you can deduct the cost of these subscriptions.

There are a few items that you cannot deduct.  These would include costs related to the following:

  • If you attend investment conventions or seminars, you cannot deduct the costs of attendance.
  • If any of the aforementioned expenses are for tax-exempt investments, you cannot deduct these costs.  If an expense is related to taxable and nontaxable items, be sure to allocate the expense between the two.
  • The cost of traveling to shareholder meetings is not deductible.

What experiences have you had with reporting the expenses related to your investments on your tax return?  I’d love to hear about it.  Also, if you have any questions, shoot them to me at chrispedencpa@yahoo.com, and I would be happy to answer them.  If you need help with other tax questions, or with preparing a return, drop me a line, and we can discuss your situation.

Deducting Miscellaneous Expenses

Outside of the more popular deductions reported on Schedule A (mortgage interest, charitable contributions, and medical expenses), there are a few that don’t get as much attention, but can still have an effect on your taxes.  In this post, we’ll take a look at a few of the deductions that are subject to the 2% floor.  This means that these expenses, in total, are greater than 2% of your adjusted gross income.  You can only deduct the amount that is above this 2% floor.  For example, if you had an adjusted gross income of $100,000 and expenses of $2,500, you would be able to deduct $500 of these expenses ($2,500-$2,000, which is 2% of $100,000).

The first type of expense is expenses related to your job.  These would be expenses you incur in the course of doing your job that are unreimbursed by your employer.  These would be for things like business cards, licenses, union dues, small tools and supplies, employment related educational outlays, home office expenses and the like.  These will be reported on Form 2106, Employee Business Expenses.  If you work for yourself, you would report these expenses on Schedule C, and not be limited to the 2% floor for these types of expenses for schedule A.

The next type of miscellaneous expense is job hunting expenses.  You can deduct for costs of putting together your resume, fees for employment and search agencies, travel costs, and meals while traveling (limited to 50% of your costs).  If you are starting out and looking for your first job, you cannot take a deduction for these expenses.  Likewise, you cannot take a deduction for expenses when you look for a job in a new line of work.   Make sure you keep your receipts, as you should for anything you want to deduct.

Lastly, you can deduct the cost of preparing your tax return.  That is a big selling point for CPAs, that our fees for preparing your returns can be deducted.  You can also deduct for legal fees you are charged, as long as they relate to any tax advice provided, and not other legal matters.

What experiences have you had with reporting the expenses related to your job or the costs of searching for a job on your tax return?  I’d love to hear about it.  Also, if you have any questions, shoot them to me at chrispedencpa@yahoo.com, and I would be happy to answer them.  If you need help with other tax questions, or with preparing a return, drop me a line, and we can discuss your situation.

Deducting Casualty and Theft Losses

A couple of years ago, we were robbed right before Christmas.  Someone broke into our home while everyone was out, and took my laptop, some other electronics, and the money my wife had earned from a craft show.  Thankfully, no one was hurt, and we were able to repair the damage fairly easily.

Others may not be so lucky, and suffer what is called a casualty or theft loss.  While most people know what a theft is, a casualty loss is one where property is damaged, destroyed or lost due to an event that is sudden, unexpected, or unusual in nature.  Additionally, it can be the result of a government mandated demolition or relocation of your home due to a disaster.

Fortunately, these types of events can be deductible on your taxes.  Let’s take a look at how to claim a casualty or theft loss as an itemized deduction on schedule A of your tax return.

The first thing to do is to determine the amount of the loss.  You will need to determine which is lower, the basis in the damaged or stolen property immediately before it was damaged or stolen, or the decline in the property’s fair market value due to the loss or casualty.  Next, you will need to reduce the lower of these two amounts by any insurance reimbursements you receive.  Next, subtract the $100 floor that is in place for each occurrence (hopefully, it is not more than one).

Finally, group all your items of casualty together and get a total.  Take this total and reduce it by 10% of your adjusted gross income.  This is the amount of your deduction.

In determining the amount of the loss for reporting on your taxes, you will need to complete Form 4684 Casualties and Thefts, which feeds the amount onto Schedule A with the rest of your itemized deductions.

If your losses are large and exceed your income, you may have a net operating loss for the year.  You can carry back this loss to a previous year (or years) and get a refund for the years to which the loss was carried back.

You want to be sure to keep good records of the casualty loss deductions taken, as well as any insurance payouts received.  These reduce the amount of your basis in the property which will be used when you sell the property and need to determine any gain or loss.

What experiences have you had with reporting casualty and theft losses on your tax return?  I’d love to hear about it.  Also, if you have any questions, shoot them to me at chrispedencpa@yahoo.com, and I would be happy to answer them.  If you need help with other tax questions, or with preparing a return, drop me a line, and we can discuss your situation.

Deducting Charitable Contributions

As Americans, we are some of the most generous people on earth.  We give millions, if not billions, to our churches each year.  And when a tragedy occurs overseas, we will pour out even more money to help the victims get back on their feet.  In addition, our congress allocates billions more each year to maintain goodwill with other nations.

As part of preparing your tax return for the year, you can deduct some of your contributions to charity.  Let’s take a look at some of the items you can deduct for your generosity during the year.

In general, you can make contributions to the following types of qualifying organizations:

  1. Organizations that are set up exclusively for charitable, religious, scientific, educational, scientific, or literary purposes.
  2. Organizations that have a mission to prevent cruelty to animals and children.
  3. Organizations that put together amateur sports competition, either here or abroad, as long as they do not provide the facilities or equipment.

Donations to these types of organizations are tax deductible, but make sure you check with them before making a contribution to see if they can receive tax deductible contributions.  The IRS has a website set up where you can check to see if they are a qualifying organization.

So what if the organization is not based in the United States?  Can you get a tax break for donating to them?  With the exception of certain Canadian and Mexican charities, you cannot get a deduction for these types of organizations.  However, you can donate to organizations within the United States who distribute the funds gathered to foreign charities, as long as the domestic organization controls to whom the funds are distributed.

Did you donate some type of art or collectible to charity.  You want to do a couple of things if you do this.  First, get a letter from the organization stating that it intends to use the item donated in its main activity or tax exempt purpose.  If you don’t get this letter, and the organization sells the property, your donation will be limited to your basis in the property when you donate it.  Otherwise, you can deduct the fair market value of the item donated.

You probably know you can donate cash to these organizations.  And you know that you can donate property that is in good condition for the fair market value of the item at the time of the contribution.  But did you know that you can also deduct the transportation expenses you incur when doing charitable work?  The transportation costs have to be directly related to the charity work. You can deduct the cost of parking, tolls, fees, bus fare, and either the actual cost of gas and oil or the mileage times the current charitable mileage rate put out by the IRS (for 2013, it was $0.24 per mile).

If you volunteer your time with an organization, you cannot deduct the value of your time or the services provided.  Additionally, if you hire a babysitter to watch your children while you do volunteer work, you cannot deduct what you paid the babysitter.  However, if you had to purchase a special uniform that cannot be used outside of where you are volunteering; you can deduct the cost of this uniform.

Just in case you go hog wild and donate most of your possessions to charity, you will have to keep in mind that your deductions are limited.  You can only deduct up to 50% of your adjusted gross income for what you donate in cash, as well as 30% of your adjusted gross income for donations of property.  However, you are able to carryover for five years any contributions above this limit.

Now that you know what you can donate, you need to be sure that you keep good records of what you have donated.  This means that you keep a listing of any items donated, the date they were donated, and the name of the organization to which the donations were made.  Additionally, get a receipt from the organization acknowledging the donation.  A list of the cash contributions made, along with the date and organization to which the payment was made will make completing your tax forms much easier.

What experiences have you had with deducting charitable contributions on your tax return?  I’d love to hear about it.  Also, if you have any questions, shoot them to me at chrispedencpa@yahoo.com, and I would be happy to answer them.  If you need help with other tax questions, or with preparing a return, drop me a line, and we can discuss your situation.

Deducting Points On Your Tax Return

Yesterday, I wrote a post about deducting mortgage interest payments.  However, they are not the only payments related to a house that are deductible.  We’ll take a look at taxes later, but for now let’s take a look at points.

Now when I say points, I am not talking touchdowns or field goals.  Points are what you would pay to whomever you are borrowing money to buy a house to get a loan.  These could also be call loan origination fees (including VA and FHA fees), premium charges, maximum loan charges, and loan discount points.

At the beginning of a new year, you should receive a Form 1098 from the lender.  Mortgage interest would be listed in box 1 of this form, and points paid on the purchase of your main home would be included in box 2.  When you include the amount of points on your taxes, you would include these on line 12 of your Schedule A, which is used to list your itemized deductions.

Normally, if you can deduct your mortgage interest, you can deduct the points paid on your mortgage.  However, the points paid must be a form of interest.  They must also be spread over the term of your mortgage, as well as paid and deductible of the course of the term.

You may be able to deduct them in full in the year you paid them, if you meet all of the following conditions:

  1. Your loan is secured by your main home, which is the one you lived in most of the year.
  2. You used the loan to buy or build the home.
  3. The practice of paying points is an established business practice in your area.
  4. The amount you pay in points is not more than the amount charged in your area.
  5. You report income in the year you receive it and deduct expenses in the year you paid them.
  6. The points are not paid for things that are separately listed on your settlement sheet, such as appraisal fees, attorney fees, or inspection fees.
  7. You must have provided money at or before the closing on your home that were at least as much as the points charged and paid by you.  This means that you cannot have borrowed the funds from the lender to pay the points.
  8. The points were not calculated using a percentage of the loan amount.
  9. The amount of the points must be clearly stated on the settlement statement.

There are a couple of other items you may want to be on the lookout for when dealing with points.  First, if you are charged for specific services, like appraisal fees and notary fees, these items may be referred to as “points”.  You need to keep in mind that these items are not interest, and therefore not points.  You cannot deduct these.

Second, any points paid by the seller are not deductible on your tax return.  I know that sounds logical, but I have heard people saying that you could deduct these items.  Don’t fall into that trap.  However, you may be able to deduct these if you subtract them from the cost of your residence.

Third, if you paid any points on a loan that was secured by your second home, you can only deduct these over the life of the loan.

Lastly, if you paid points over and above what is normally charged in your region, you can deduct these points over the life of the mortgage.

What experiences have you had with deducting points on your tax return?  I’d love to hear about it.  Also, if you have any questions, shoot them to me at chrispedencpa@yahoo.com, and I would be happy to answer them.  If you need help with other tax questions, or with preparing a return, drop me a line, and we can discuss your situation.

Deducting Home Mortgage Interest

Owning your own home.  It’s the American dream.  You spend years trying to save up the down payment, and spend weeks looking for the perfect place to call your own.  You sign a ton of papers, and the realtor hands you the keys to your new home.

Then you see the monthly payments.  Much bigger than your car payment, right?  That’s a lot of money.  But you write a check every month so you can continue to live in your piece of the American dream.

However, there is an advantage to making these payments.  The first couple of years, most of the payment is for interest on your home loan, and this interest could be deductible.  Let’s take a look at what you need you do to be able to deduct the interest on your mortgage payments.

Since most loans occurred after October of 1987, I will focus on those in this article (interest on those loans before then are generally deductible as long as they are secured by a main or second home).  To deduct interest paid during the year, your loan must:

  1. Not exceed $1,000,000 in amount ($500,000 if you file married filing separately), and
  2. Be used to buy, build or improve the home

So when can you start deducting this interest?  Normally, it would be from the start of the loan.  However, if you have a construction loan, and the construction lasts more than 24 months, any mortgage interest after 24 months would not be deductible.  However, the interest paid on the mortgage loan when the home is complete is fully deductible.

When you close on your loan, you have to pay some closing costs.  These include things such as appraisal fees, attorney fees and lender fees.  The only items that are deductible are real estate taxes and mortgage points charged.  Additionally, if you prepay any interest at closing, you can deduct that interest as well.

Everyone tries to pay their mortgage on time.  However, you may be late on a payment or two, and be charged late fees.  These late charges are deductible as long as they are not for any specific service performed for you by the lender.

Now, let’s say you hit the lottery and want to pay off your mortgage early.  You may get hit with early payment penalties (unless you buy the bank with your lottery winnings).  You can deduct these fees as itemized deductions.

What experiences have you had with deducting mortgage interest on your tax return?  I’d love to hear about it.  Also, if you have any questions, shoot them to me at chrispedencpa@yahoo.com, and I would be happy to answer them.  If you need help with other tax questions, or with preparing a return, drop me a line, and we can discuss your situation.

Deducting Investment Interest Expenses

When did you begin to feel like a grown up?  Was it when you graduated from school?  Or perhaps when you got married?  I know the big turning point was when I started taking care of my own money.  Knowing that I was in charge of my finances not only gave me a sense of control, but a feeling that I was on my own, and the decisions I made mattered.

I made a decision to invest in my company’s 401(k) plan early on, but have not done any investing outside of that.  Maybe you have done more, possibly investing in stocks and bonds, or some interest bearing instruments.  If you have done so, did you know that you can deduct the investment interest that you pay out as an itemized deduction?  Let’s take a look at what you need to do to deduct this interest.

So what is investment interest?  This would be margin interest paid to brokers, as well as interest paid on loans used to invest in securities that bring in income.  Both of these types of interest are deductible.  However, keep in mind that the loans must be used to invest in items that will produce income, whether it is in the form of interest or dividends, or royalties.  These investments must not be in a trade or business, or in a passive activity (an activity that you don’t spend a lot of time on, such as real estate rentals and limited partnerships).  In order to prove that you had used the loan proceeds for income producing investments, you will need to keep good records.

However, there are a few things you cannot invest in with the loan proceeds and deduct the interest.  You cannot use the loan proceeds to purchase:

  • Municipal bonds,
  • Endowment contracts,
  • Annuities,
  • Single-premium life insurance policies,
  • Straddle options (where you hold a position in both a call and put option with the same strike price and expiration date).

So how do you go about deducting this interest?  The first thing you would need to do is reduce your investment income by the amount of non-interest related investment expenses that you will be deducting as miscellaneous expenses on Schedule A.  This will give you the maximum amount of investment interest expenses you can deduct this year.  Any amount you cannot deduct this year can be carried forward to next year.

Next you will need to decide if you need to complete Form 4952Investment Interest Expense Deduction.  You would need to use this form unless you meet the following criteria:

  1. You only had investment income from interest or dividends
  2. You had no other deductible expenses from the production of the interest or dividends
  3. Your investment interest is less than or equal to your total investment income
  4. You had no carryover interest deductions from prior years.

If you meet these criteria, you can just record the expenses on Schedule A.

What experiences have you had with deducting investment interest on your tax return?  I’d love to hear about it.  Also, if you have any questions, shoot them to me at chrispedencpa@yahoo.com, and I would be happy to answer them.  If you need help with other tax questions, or with preparing a return, drop me a line, and we can discuss your situation.

Deducting State, Local and Foreign Taxes

“Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes” said Benjamin Franklin in a letter to Jean-Baptiste Leroy in 1789.  As someone who has worked with taxes for a good many years, I know from experience the myriad of taxes that hit people’s wallets, and hope that I don’t experience death for quite a while.

While just about all of us are none too fond of taxes, we do get a benefit out of paying some taxes.  Several types of state and local taxes are deductible as itemized deductions on the federal return.  Let’s take a look at a few.

The first thing to keep in mind is that in order to deduct some of these taxes, they must have been imposed on you and not someone else.  While you can be a generous person and pay someone else’s taxes, you cannot take a deduction for paying someone else’s taxes.  Additionally, the money actually has to leave your wallet, either through cash, check or credit card, in order to deduct the taxes.  Just because you got a tax bill on December 31st doesn’t mean you can deduct those taxes on your return.

So what taxes are deductible?  Mostly, state, local and foreign taxes are deductible.  These would include taxes withheld, paid for an earlier year in the current year, and estimated taxes.  The following is a listing of some of the additional types of taxes you can deduct:

  1. State, local and foreign income taxes
  2. Employee contributions to state funds listed under state benefit funds.
  3. State, local, and foreign real estate taxes.
  4. A tenant’s share of real estate taxes paid by a cooperative housing corporation.
  5. State and local personal property taxes.
  6. State and local sales taxes (provided you make an election on schedule A to claim them instead of claiming state and local income taxes).
  7. One half of your self-employment taxes that you have paid
  8. Fee and charges that are expenses of your business charged by a government entity.
  9. Taxes on property producing rent or royalty income
  10. Occupational taxes

Now, let’s say you have taxes that are going to be charged to you next year, say property taxes, and you want to prepay them this year to get the tax benefit.  The good news is that you can deduct these taxes in the year you paid them.  The bad news is that you have money going out for taxes.

What experiences have you had with deducting state, local and foreign taxes on your federal tax return?  I’d love to hear about it.  Also, if you have any questions, shoot them to me at chrispedencpa@yahoo.com, and I would be happy to answer them.  If you need help with other tax questions, or with preparing a return, drop me a line, and we can discuss your situation.