Can I Deduct That? Answers to your pressing tax questions
Tax time for individuals brings up questions about what can and can't be deducted. Here are general answers to some common and not-so-common questions about deductions for individuals. Remember, everybody's situation is different, so consult with your tax advisor regarding any deduction.
I lost money in the stock market in 2011. Will that reduce my tax liability?
It depends. You can deduct a loss in the value of the stock only when you sell the stock. If your net capital loss exceeds your capital gains, you can deduct up to $3,000. However, losses that exceed $3,000 for the year can be carried over to offset capital gains in future years.
In a related matter, the IRS now requires brokers to report both sales proceeds and costs for acquiring stocks. Reporting on exchange-traded funds, American depositary receipts (ADRs) and real estate investment trusts (REIT) is also required for 2011. The IRS will use this information to balance against the investor's reported capital gain or loss income. Beginning in 2012, brokers will also be required to report information on mutual funds and dividend reinvestment plans.
What type of interest is deductible?
Mortgage interest and points on your primary and secondary residences are deductible. To qualify as a residence, a property must have sleeping, cooking and bathroom facilities, so some motor homes and boats can qualify. As a general rule, deductible mortgage interest is limited to $1 million of mortgage debt and up to $100,000 of home equity debt. Here's a tip: Interest on home equity loans or lines of credit is deductible no matter how the funds are used, while interest on personal loans or credit cards is not. You may want to consider a home equity loan for a car or other major personal expenses.
Up to $2,500 of interest paid on student loans may be used as an adjustment to income even if you don't itemize. There are, however, some restrictions, so be sure to consult your tax advisor.
You can also deduct investment interest, which is interest on money borrowed to buy investments such as stocks, taxable bonds and mutual funds. The deduction for investment interest cannot exceed your net investment income, which is your total investment income less investment expenses other than interest. If your investment interest expense exceeds your investment income for the year, you can carry over the excess and deduct it the following year.
What types of deductions are allowed when searching for a new job?
You can deduct job search expenses as long as you're looking for a position within your present profession – even if you are not successful in your job search. Expenses can include employment agency fees, travel and transportation expenses and money spent preparing and mailing resumes. You don't need to be unemployed to have your expenses qualify as a deduction, but only the amount of expense that exceeds two percent of your income is allowed.
Job search expenses are not deductible if you're looking for your first job, are looking outside your current profession, or if there was a substantial break between ending your last job and beginning your search for a new one.
What types of medical and dental expenses are deductible?
Your and your dependents' medical expenses not covered by insurance are deductible; however, they must exceed 7.5 percent of AGI (starting in 2013, that will increase to 10 percent of AGI). Consider planning for non-urgent medical procedures and other controllable expenses over the course of a single year to take advantage of the deductions. The list of deductible medical expenses is long and can be found at IRS.gov.
Common deductions include health insurance premiums, expenses for dental care and medical supplies and medicines when prescribed by a doctor. Long-term care insurance premiums are also deductible, within limits. Seniors are allowed to deduct Medicare Parts B and D. Please note: Medical expenses are not deductible if they are reimbursable through insurance or paid through a pre-tax Health Savings Account or Flexible Spending Account.
Are non-federal taxes deductible on my federal return?
Yes, many are and they include paid state and local income taxes, real estate taxes, personal property taxes and foreign taxes. Examples of deductible personal property taxes include automobile license and registration fees because these fees are based on the value of the car. Non-deductible taxes include paid federal income, estate and gift taxes.
Cash and goods donated to qualified charities are deductible. You can also deduct 14 cents per mile if you volunteer for a charity and use your car. The IRS does require proof, so keep track of miles.
There are also substantial tax benefits for donating "appreciated" property such as stocks, bonds, mutual funds or real estate to qualified charities. If you've held the asset for more than one year, you can deduct the fair market value, not just what you paid for it. You also avoid paying capital gains taxes on the appreciation of the asset, adding to the benefit of the deduction. Unlike cash contributions, which are limited to 50 percent of AGI, donations of appreciated property are limited to 30 percent of your AGI. There are more conditions that must be met to take advantage of this deduction, so be sure to consult with your tax advisor. Charitable donations made in a single year that exceed the AGI limitations can be carried forward for up to five years.
Amy Blanke is vice president and trust tax officer with Northwestern Bank and a Certified Public Accountant. She has more than 20 years of experience specializing in individual tax and trust preparation; (231) 421-9016, firstname.lastname@example.org.
The U.S. federal tax advice, if any, contained in the above article may not be used or referred to in the promoting, marketing or recommending of any entity, investment plan or arrangement, nor is such advice intended or written to be used, and may not be used by a taxpayer for the purposes of avoiding federal tax penalties