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 certain taxes. 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 tax, are not deductible. You also cannot deduct fees paid to a homeowner's 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 deductible to you is the interest you pay on the mortgage for your home. That's right: Interest paid to a financial institution for a mortgage of your home is fully deductible. 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, these may be deductible, too.
Also, be aware that if you own shares in a co-op, the portion of the maintenance that is 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 of the formula to use to determine the exact deductibility of your maintenance. Simply multiply these amounts by the number of shares you own and you should come up with the right amount for this deduction.
Remember now, we are talking about interest that you pay, not interest that is paid to you (such as from a savings bank account). Interest that you pay is generally deductible as described above. Interest that is paid to you is generally taxable to you. Also, be aware that, for tax year 2000, any interest you pay on credit cards or personal loans (other than the student loans we mentioned earlier) or revolving charges is not deductible. (This deduction was phased out quite a few years ago.) Let's repeat: None of this consumer interest is deductible.
Continuing with Itemized Deductions, the next category is Charitable Contributions. Donations you make to churches, synagogues, Salvation Army, the Red Cross, CARE, Goodwill, United Way, Boy Scouts, and Girl Scouts are all 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 IRS Publication 78.
Also, please remember, the rules for documentation of these deductions changed a few years ago. The changes basically affect those people who contribute $250 or more to a charity. In the past, a cancelled check would have sufficed as adequate documentation for such a donation. Now, in addition to the cancelled check, one is required to provide, if asked, a written acknowledgment of the contribution from the qualified organization.
If you donate items other than cash (clothing for instance), you must have a detailed receipt from the organization. Usually the organization will not assign a value to the article you donate. You must assign what you believe to be the fair market value of the article donated and note it on the receipt. If you donate more than $500 in articles other than cash, a special IRS form must accompany your return stating chapter and verse about the specifics of your contribution. Without this form, the return could be sent back to you.
We've just given you a partial list of organizations, contributions to which 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.
One more thing—very often we are asked if someone can deduct the value of his or her service to a charity or not-for -profit organization. Unfortunately, the answer is no. So, if you donate your service and /or time to an organization and would normally get paid, let's say, $1,000, you would not be able to use that $1,000 as a charitable deduction. The contribution has to be a tangible commodity such as a written check, an authentic receipt for cash from the organization, or an itemized statement of the in-kind goods that you donated.
Next week we will wrap up our discussion of Itemized Deductions with a detailed analysis of Miscellaneous Deductions. Most actors deduct their professional expenses in this area.
Change of Name
If you changed your name because of marriage, divorce, or professional reasons, make sure that you immediately notify the Social Security Administration so that the name on your tax return is the same as the one the SSA has on its records. This may prevent delays in issuing your refund and help safeguard future Social Security benefits. The name change is made by simply filing Form SS-5, which can be obtained at any SSA office.
Paid Off The Books
Have you ever heard the expression "I was paid off the books" or "I was paid under the table"? During tax preparation season, these phrases are freely bandied about by clients. It seems a day doesn't pass without an actor sitting before us saying something to the effect of, "Well, I earned $550 from one guy, but since it's less than $600, I don't have to report it, do I." This is usually said as a declaration, not a question.
Well, the law is very specific regarding this one. Every person is required to report to the government every single dollar of earned income, regardless of the method of payment (i.e. W-2, 1099, or plain cash) and regardless of where it was earned (in the U.S. or abroad). Whether you receive a form from the person who hired you is irrelevant.
People confuse this with the rule that states an employer is required to send you a 1099 if the amount you earned from him was above $600. Remember folks—there is no free ride. "Under the table" and "off the books" have no meaning, especially to the IRS. Every dime of earned income is to be reported to the government.
Child Tax Credit
We are pleased to report that the Child Tax Credit that was initiated two years ago is available again to those of you with dependent children. It works like this: You may be able to claim a credit worth $500 for each child under age 17 at the end of 2000 whom you claimed as a dependent. The child may be your child, stepchild, grandchild, or great-grandchild. The credit is $500 times the number of children you claim. This credit will reduce your tax liability dollar for dollar. If, however, you are liable for Alternative Minimum Tax (AMT), your credit could be limited. To determine if this is the case, you should prepare a special IRS worksheet that will help you calculate the reduced credit. Also, be aware that if your modified adjusted gross income rises above certain threshold amounts, the Child Tax Credit will be phased out or even eliminated.
Here are some more hints that might prove helpful while preparing your tax returns. It is easier to complete your return if you round off all money amounts. This means you drop amounts under 50 cents. You increase amounts that are 50 cents or more to the next dollar. This method is perfectly acceptable to the IRS. Just remember to be consistent and round off all figures.
Never send in records, receipts, or cancelled checks with your tax return. Keep your records available so that you can produce them if the amounts you claimed on your return are ever questioned. You should generally keep records that support items of income or deductions on a return for three years (five years to be absolutely sure) from the date the return was filed.