The Schedule A is the form commonly referred to as the Long Form. Actually the 1040 is the Long Form (the 1040A and the 1040EZ are the Short Forms) and the Schedule A is only one of more than 100 forms and schedules that can be attached to it. Schedule A is where you claim your personal deductions: medical, taxes, interest, charity, and job-related deductions. People often run into problems on the Schedule A because different types of deductions are treated in different ways. You can't just take your income, subtract your deductions, and come up with your tax. Each type of deduction has its own rules and limitations.
Credit card interest is no longer deductible and hasn't been for a number of years. In fact, no consumer interest of any kind is deductible: not car loans, personal loans, etc. There is an exception, however. If you have a legitimate business and use a credit card exclusively for that business, you may deduct the interest on the Schedule C (Business and Professions), Schedule E (Rental Income), and Schedule F (Farming), but not on the Schedule A. The only interest allowed on the Schedule A is qualified home mortgages and investment interest. Qualified means your principal residence (you're allowed two). Points are also deducted as interest. These are one-time fees that banks charge when they give you your loan. These are deductible in full in the year in which you paid them. Points charged on a refinance or equity loan have to be amortized and deducted over the life of the loan.
Investment interest is interest paid on money borrowed to buy investment property: stocks, bonds etc. There are limitations here, too. You can deduct interest only up to the amount of the investment income, less expenses, but any excess can be carried over to future years to a time when you may have more income. $10,000 is the maximum you may claim on this type of interest, and the amount is computed on a Form 4952 before being transferred to Schedule A. And finally, you can deduct only interest that's incurred to buy taxable investments. If you used the loan to buy non-taxable municipal bonds, you have no deduction.
Give to Get
In terms of donations, only money and items of value can be deducted. If you donate your time and talent to a charity, the only thing you can deduct is the cost of the gasoline you used to get there and any out-of-pocket expenses. Gifts of cash or goods to religious organizations and qualified charitable organizations are always deductible. The I.R.S. requires that you have a receipt for any gift claimed. It's not necessary to send in a copy of the receipt, but you should be able to provide one if necessary. It's also a good idea to itemize any gift over $250 and attach it to your return.
If the total of all your gifts of goods (clothes, household appliances, etc.) exceeds $500, you must file Form 8283 on which each gift must be itemized: when you obtained it, how much you paid for it, its fair market value (FMV), and the date you donated it. The allowable deduction is the lesser of the purchase price and FMV. A rule of thumb in determining FMV: It's what would you expect to pay for the item in a thrift shop or secondhand store.
If the property has appreciated in value, your deduction becomes the amount you paid for it. Example: You're an important artist, and you donate your work worth $100,000 at any gallery. The I.R.S. says you may deduct only the amount you paid for paint and canvas.
You cannot claim a charitable deduction to any group that will benefit you personally. Example: You give $1,000 to a nonprofit theatrical group, and they cast you in their next production. That's considered a kickback.
Other non-deductible contributions: political groups, social clubs, labor unions, and groups that are run for profit. If you buy a ticket for a fundraiser, the value of the food or any goods you receive are not deductible. The change you donate to your local panhandler isn't deductible, either.
You may deduct up to 50 percent of your income in any one year, but you may carry over to the next year any unclaimed amounts. There are some types of contributions that qualify only for a 30 percent or a 20 percent deduction, and there are special rules that concern gifts of capital gain property. Consult a tax professional on these. Most gifts, however, will fall into the 50 percent category.
Next week: medical deductions. BSW
Frank Wyman is a tax consultant for Amanda Tax and Financial Services.