Oh The Tax Blues ... Again

Ok, so we've talked about your income, now let's get to the Itemized Deductions.

Medical and Dental Expenses - Most tax payers do not have enough medical expenses to take the medical deduction so I hate to see you put a lot of work into it for no reason.  Only the medical expenses in excess of 7.5% are deductible. For those of you that percentages are not your strong suit, that means if you have income of $100,000, only the medical expenses in excess of $7,500 or if $75,000 of income only the amount over $5,625 qualify.  Now health insurance premiums count, but usually if you receive your health insurance through work they have already reduced your taxable income on your W-2 as part of a section 125 or health savings plan.  Almost any medical, dental or eye care expenses qualify including mileage (19 cents per mile the first half of the year and 23.5 cents the second half).  Sorry, those frugal Congressmen continue to not allow a tax deduction for face lifts, liposuction, teeth whitening, and breast augmentations.

Taxes You Paid - Real estate taxes, state income taxes, and excise taxes paid to the town on vehicles, boats, etc. qualify.  If you pay real estate taxes to your mortgage company, the real estate tax totals will be part of your 1098, but if not, you will need to provide the amounts to your tax preparer.  Your state withholding will be on your W-2.  The amount paid to the town for registration can be found in your checkbook or on your registrations.  Sales tax on a new motor vehicle may also be deductible.

Interest You Paid - Unless you are using private financing, your home mortgage interest, points, equity line interest should all be on the 1098 received from your mortgage company.  If you purchased a house during the year, it's a good idea to provide the first two pages of your closing statement often called the HUD statement to your preparer to see if there are points on the purchase that can be used as a deduction.

Gifts to Charity - Charitable Gifts are reported in two categories.  One is by gifts by cash or check and the other is by anything other than by cash or check or as I like to call it "stuff".  Any donation of stuff worth more than $250 must include the name and address of the organization, date and location of the contribution and a description of the "stuff".  If it's over $500, the date acquired and purchase price must be included.  A couple of years ago the IRS started requiring Appraisals on all car donations with a value of more than $500.  This slowed the donation of vehicles to a trickle, in fact I haven't seen one car donation in the last couple of years.  Mileage for charity is 14 cents per mile.

Casualty and Theft Losses - I'm not even going to get into this one.  In my 20 years of tax preparation, try as I might, I've never seen anyone that qualified for this deduction.  If you think you may qualify, please talk to your tax preparer before you put any work into getting information together for it.

Job Expenses and Certain Miscellaneous Deductions - This is another area where most people don't qualify for the deduction.  Only expenses over 2% of your income qualify so for you that are challenged by percentages it's anything over $2,000 on a $100,000 income that qualifies or anything over $1,500 on $75,000 of income that qualifies. The two big items here are unreimbursed employee expenses or work-related education costs and gambling expenses.  The gambling expenses have a couple of unusual characteristics.  First of all, they are not subject to the 2% floor and second, gambling losses in excess of gambling expenses are nondeductible.

Hope this helps guide you, and eases the pain of gathering your tax information.  This should cover most items unless you own a business or rental property, which puts you in a whole different tax gathering stratosphere.  But, please feel free to post your questions regarding those.

In any case, a little of your favorite music while gathering all the information makes it much more enjoyable.  My pick, of course, is blues!

Oh The Tax Blues

Stuck Inside of New England with Those Tax Blues Again*

Oh, the tax man draws circles

Up and down the block

I'd ask him what the matter was

But I know that he don't talk

And the ladies treat me kindly

And furnish me with red tape

But deep inside my heart

I know I can't escape

Oh, Mama, can this really be the end?

To be stuck inside of New England with the Tax Blues Again

Isn't putting together your tax return one of those things that you hate to do and put off and dread it worse than cleaning the garage? I bet you spend more time worrying about putting the information together than you do actually sitting down and putting together the information. I'm going to try and make it as simple as I can for you.

By the end of January your employer, mortgage company, investment institutions, and colleges are required to mail out the W-2s, 1098s, 1099s, Social Security Benefits, Unemployment Compensation, State Tax Refunds, & K-1s for you to prepare your tax return.  Please be aware that the IRS also gets a copy and later in the year matches them up to your tax return so it's important to have all the information so you don't get a not-so-friendly notice guaranteed to ruin your day.  As the first step, I suggest that you take a big envelope and stuff all this tax information inside when it is received so none of this information gets misplaced.  When you complete this step, you are more than half way done!

The W-2s, 1098s, and 1099s for the most part don't require additional information for tax preparation. One exception is the 1099 brokerage information upon selling securities.  When you sell stocks, bonds, etc. we have to determine the profit or loss on the sale and whether it's long or short term.  Sometimes it's on the brokerage year-end statement included with the 1099.  Often we have to have to contact your stockbroker or sometimes we have to go to your old records and occasionally we have to make the best guess.  If the purchase information is not included with the 1099, the easiest thing to do is to contact your broker and let them know your accountant will be calling them.  Let me add a word of caution. Capital gains are a little tricky and the biggest source of IRS notices. You may not want to attempt these yourself.

Usually on your 401k, 403A, Simple IRA, and SEP retirement plans we have all the information we need from your W-2s and 1099s but if you contribute to an individual IRA we will need those amounts. As a side note you have until April 15th to make an IRA contribution and the dollar limit is $5,000 if you are under 50 and $6,000 if 50 or over.

Get all those items together and you've just completed your income side of things.  I'll talk more about deductions in my next post.  This should keep you busy for a couple of days....

* Apologies to Bob Dylan