Last week we began to talk about Itemized Deductions by explaining medical deductions available to you. This week we'll continue by discussing the deductibility of charitable donations, certain kinds of interest paid, and certain taxes paid.
Only certain types of taxes are deductible on your federal return. They include taxes paid to state, local, and foreign governments (not federal taxes paid the prior year); taxes you pay on your house, co-op, or condo (real estate taxes), and taxes on personal property. Most other taxes, such as sales and excise taxes, are not deductible. You also cannot deduct fees paid to a homeowners association or the fee for your driver's license.
Interest paid by you can also qualify as an Itemized Deduction. The one major type of interest expense that is fully deductible to you is the interest you pay to a financial institution for the mortgage on your home. Look for Form 1098 to be sent to you by the bank, informing you of the amount of interest you paid last year on your mortgage. If you have paid points to secure the mortgage, then these, too, may be deductible.
If you own shares in a co-op, the portion of the maintenance used for interest and real estate taxes by the co-op is deductible to you. You should get a statement from the co-op board telling you the formula to use to determine the exact deductibility of your maintenance. Simply multiply these amounts by the number of shares you own.
Remember now, we are talking about interest that you pay, not interest that is paid to you (such as from a savings account). Interest that you pay is generally deductible as described above. Interest that is paid to you is generally taxable to you. For tax year 2001 any interest you pay on credit cards or personal loans or revolving charges is not deductible.
Donations you make to churches, synagogues, The Salvation Army, American Red Cross, Goodwill Industries, United Way, Boy Scouts, and Girl Scouts are deductible as an Itemized Deduction. So are donations made to veterans organizations, not-for-profit schools and hospitals, not-for-profit arts organizations, and public parks and recreation facilities. Obviously this is only a partial list. A complete list can be obtained from the government. Ask for I.R.S. Publication 78.
Also, please remember that the rules for documentation of these deductions changed a few years ago. The changes basically affect those who contribute $250 or more to a charity. In the past a canceled check would have sufficed as adequate documentation for such a donation. Now, in addition to the canceled check, one is required to provide, if asked, a written acknowledgment of the contribution from the qualified organization.
We've just given you a partial list of organizations to which contributions are deductible. Here is a list of entities to which contributions made are not deductible: donations to homeowner's associations, individuals (such as the homeless), foreign organizations, groups that are for-profit, labor unions, and the cost of bingo and lottery tickets. You may also not deduct the value of blood donated to a blood bank, or political contributions.
Next week we will wrap up our discussion of Itemized Deductions with a detailed analysis of Miscellaneous Deductions. This is the area in which most actors deduct their professional expenses.
Campaigning for Cash
If you paid interest on a student loan in 2001, you may be able to deduct up to $2,500 from your gross income. The amount has been raised from $2,000 last year. This deduction is subject to limitations of your income. Also if you are claimed as a dependent on someone else's return, you may not take this deduction. The loan must have been taken out to pay for "qualified higher educational expenses" such as tuition, fees, room and board, books, equipment, and other necessary expenses such as transportation. This deduction is claimed on line 24 of Form 1040, or line 17 of Form1040A. Use the worksheet in the form's instructions to see if you qualify for this deduction. (This is not an Itemized Deduction; it comes under the heading of an Adjustment to Income.)
Many people are confused about the Presidential Election Campaign Fund check-off on the tax return. This fund was set up to help pay for presidential election campaigns. It does not go to any particular party or candidate. You may have $3 of your tax liability go to this fund by checking the "Yes" box on Form 1040 or 1040A. If you are filing a joint return, your spouse may also elect to have $3 go to the fund. If you check "Yes," it will not change the tax you pay or the refund you will receive. BSW