2001 Tax Help Archives  
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Itemized Deductions/Standard Deductions

This is archived information that pertains only to the 2001 Tax Year. If you
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Autos, Computers, Electronic Devices (Listed Property)  |   Education & Work-Related Expenses
Gifts & Charitable Contributions  |   Interest, Investment, Money Transactions (Alimony, Bad Debts, Applicable Federal Interest Rate, Gambling, Legal Fees, Loans, etc.)  |   Medical, Nursing Home, Special Care Expenses  |   Real Estate (Taxes, Mortgage Interest, Points, Other Property Expenses)  |   Other Deduction Questions

Autos, Computers, Electronic Devices (Listed Property)

My university required each incoming freshman to come to school with their own computer. Is there any way to deduct the cost of the computer from my tax liability?

The cost of a personal computer is generally a personal expense that is not deductible. However, if the school bills everyone, as a condition of attendance or enrollment for proprietory computer devices and/or softwares available no where else, then this may be a quality expense towards either the Lifetime Learning Credit or Hope Credit. For more information, refer to Publication 970, Tax Benefits for Higher Education.

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Education & Work-Related Expenses

What educational expenses are deductible?

You may be able to deduct work-related educational expenses as an itemized deduction on Schedule A of Form 1040, line 20. To be deductible, your expenses must be for education that:

  1. Maintains or improves skills required in your present job; or
  2. Serves a business purpose and is required by your employer, or by law or regulations, to keep your present salary, status, or job.

Certain restrictions also apply. For more information refer to Publication 508, Tax Benefits for Work-Related Education, and Tax Topic 513, Educational Expenses.

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What are types of educational expenses?

Deductible educational expenses include amounts spent for tuition, books, supplies, laboratory fees, and similar items. They also include the cost of correspondence courses, as well as formal training and research you do as part of an educational program. Transportation and travel expenses to attend qualified educational activities may also be deductible. For more information, refer to Publication 508, Tax Benefits for Work-Related Education and Tax Topic 513, Educational Expenses.

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Can I deduct the cost of classes I need for work?

In some cases, you may be able to deduct the cost of classes you need for work. This deduction, however, would be subject to the 2 percent of AGI floor, along with most other miscellaneous deductions you list on your Schedule A.

To be deductible, your expenses must be for education that:

(1) Maintains or improves skills required in your present job, or

(2) Serves a business purpose and is required by your employer, or by law to keep your present salary, status, or job.

However, these same expenses are not deductible if:

(1) The education is required to meet the minimum educational requirements of your job, or

(2) The education is part of a program that will lead to qualifying you in a new trade or business.

Educational expenses, related to your present work, that are incurred during periods of temporary absence from your job may also be deductible provided you return to the same job or same type of work. Generally, absence from work for one year or less is considered temporary.

For more information, refer to Publication 508, Tax Benefits for Work-Related Education, and Tax Topic 513, Education Expenses.

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Am I eligible to claim both my job education expenses (minus 2% of AGI) and the Lifetime Learning Credit on my taxes?

If you are eligible to deduct educational expenses and are also eligible for the lifetime learning credit, then it is possible to claim both, as long as you do NOT use the same educational expenses to claim both benefits. Your expenses must be divided between the two. This is sometimes desireable because a qualifying expense for one benefit may not be a qualifying expense for the other tax benefit. For more information, refer to Publication 508, Tax Benefits for Work-Related Education, Form 8863, Education Credit (Hope and Lifetime Learning Credit); and Tax Topic 513, Educational Expenses.

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I am employed as a Registered Nurse and am currently taking classes to be an Advanced Practitioner of Nursing (which is a master's Degree in Nursing). My classes are not required by my employer but they do increase my knowledge to do my job well. I will probably continue working for the same employer when I graduate. Can I claim the cost of tuition, books, travel to the university, etc., as an unreimbursed business expense?

You may be able to claim this deduction as long as the position of Advanced Practitioner of Nursing does not constitute a change of trade or business. If the education merely maintains or improves the skills required in your employment and you merely have a change of duties, then, your expenses would likely be deductible as job education expenses, subject to certain limitations. However, you should consider the relative merits of taking a tax deduction versus taking a tax credit consider the relative merits of taking a tax deduction or taking a tax credit (Lifetime Learning Credit) for the same expense. For more information on the Education Credits, including the Lifetime Learning Credit, refer to Publication 970, Tax Benefits for Higher Education. For information on deducting Education Expense, refer to Publication 508, Tax Benefits for Work-Related Higher Education, Tax Topic 513, Educational Expenses, and Instructions for Form 2106, Employee Business Expenses

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I took an accounting course in order to keep my salary on my current job. My employer did not reimburse me for the expenses. Can I take a deduction on my tax return for the cost of the course?

If you itemize deductions you may be able to deduct work-related educational expenses as a job expenses which, when combined with your other miscellaneous deductions, are subject to the 2% of adjusted gross income limitation on Form 1040, Schedule A. To be deductible, your expenses must be for education that:

  1. Maintains or improves skills required in your present job, or
  2. Serves a business purpose and is required by your employer, or by law, to keep your present salary, status, or job.

Your expenses are not deductible if the education is required to meet the minimum educational requirements of your job or is part of a program that will lead to qualifying you in a new trade or business. For more information on deductible educational expenses, refer to Tax Topic 513, or Publication 508, Educational expenses, and Instructions for Form 2106, Employee Business Expenses.

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My employer is including my graduate school tuition reimbursements on my W-2. Where do I claim these education expenses on my Form 1040?

If your graduate school tuition is deductible and the reimbursements are includedm in your income as wages, then you may take the expense as a miscellaneous itemized edduction on Form 1040, Schedule A, Itemized Deductions, line 20. You may also need to attach Form 2106, Employee Business Expenses. For more information, refer to Publication 508, Tax Benefits for Work-Related Education; Tax Topic 513, Educational Expenses; and Form 2106, Employee Business Expense.

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Is the exclusion from income of up to $5,250 of employer-provided educational assistance under a qualified program still available?

Yes, but for 2001, it applies only to benefits you receive for undergraduate courses. The exclusion does not currently apply to graduate-level courses. However, with the year 2002, employer-provided educational assistance will include graduate level courses. For more information, refer to Publication 508, Educational expenses.

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How do I claim an educational expense on my return?

Employees, generally, must complete Form 2106, Employee Business Expense; or Form 2106-EZ, Unreimbursed Employee Business Expense, when reimbursements or related travel expense are involved. Educational expenses are deducted as miscellaneous deductions, on line 20, Form 1040, Schedule A , Itemized Deductions. Alternatives to educational deductions should also be considered, such as the Lifetime Learning and Hope Credits, as discussed in Publication 970, Tax Benefits for Higher Education.

Self-employed individuals include educational expenses as deductions on Form 1040, Schedule C, Profit or Loss From Business; Form 1040EZ, Net Profit from Business; or Form 1040, Schedule F , Profit or Loss from Farming. For more information, refer to the forms, instructions, and publications listed above plus Tax Topic 513, Educational Expenses, and Tax Topic 605, Education Credits.

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Where can I get more information on educational expenses?

For more information on educational expenses, refer to Publication 508, Tax Benefits for Work-Related Education, and Publication 970, Tax Benefits for Higher Education, Tax Topic 513, Educational Expenses; Tax Topic 605, Education Credits.

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I have a child attending a private Catholic grade school. Is any or all of the tuition I pay deductible or a tax credit?

Other than a medical deduction for tuition in the case of a special school for physical or mental disability, tuition for primary or secondary education is neither deductible as an educational expense nor as a charitable contribution, and there are no tax credits for the tuition. You cannot take a charitable deduction for tuition, or for amounts you pay instead of tuition, even if you pay them for children to attend parochial schools or qualifying nonprofit day-care centers. Refer to Publication 526, Charitable Contributions. You also cannot deduct any fixed amount you may be required to pay in addition to the tuition fee to enroll in a private school, even if it is designated as a "donation."

Starting in 2002, you will be able to use primary school tuition as a qualified expense in taking a qualified distribution from a Coverdell Education Savings Account (formerly, Education IRA). Refer to Publication 970, Tax Benefits for Higher Education for more information or Coverdell Education Savings Accounts Education IRA's.

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I will be homeschooling my child next year and would like to know if school related expenses, such as curriculum, school supplies, field trip activities, etc., are deductible?

There is no deduction for your child's home schooling expenses. These are nondeductible personal, living, or family expenses. For more information, refer to Publication 529, Miscellaneous Deductions.

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If your child is diagnosed as ADD and cannot function in a public school setting and must be sent to a private school, can the cost of the private school be deducted from your taxes?

The expense would not be deductible as an education or a child care expense. The facts and circumstances will determine if the cost of the private school qualifies as a medical expense.

Under limited circumstances, you may be able to treat as medical expenses all or part of tuition or fees you pay to a special school for a child who has severe learning disabilities caused by mental or physical impairments, including nervous system disorders. Refer to Publication 502, Medical and Dental Expenses. Your doctor must recommend that the child attend the school, and the main reason for using the school must be its resources for relieving the disability.

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Is there a deduction for the costs of a child's music or swimming lessons? The child attends public school and these lessons are not related to any school program.

The costs of a child's music or swimming lessons are not deductible. These are nondeductible personal, living, or family expenses. For more information, refer to Publication 529, Miscellaneous Deductions.

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Can I file Form 1040EZ if I have interest to deduct from student loans?

No, you cannot claim the student loan interest deduction on file Form 1040EZ. To claim a student loan interest deduction, U.S. citizens and residental aliens must file either Form 1040 or Form 1040A. For more information on which form to file, refer to Publication 17, Your Federal Income Tax for Individuals.

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Can I take a deduction for the interest I paid on my student loan?

Starting in 1998, taxpayers who had taken out qualitying loans to pay certain costs of attending an eligible educational institution for themselves, their spouse, or their dependent were allowed to take a deduction from gross income for the interest they paid on these student loans. Currently, deduction of Student Loan Interest is limited to the first 60 months of required interest payments, and, there are income limitation. There are also income limits. For information, refer to Publication 970, Tax Benefits for Higher Education and Tax Topic 456, Student Loan Interest Deduction.

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What are the limits for deducting interest paid on a student loan?

For 2001, the maximum deductible interest on a qualified student loan is $2,500 per return. If you are a taxpayer whose return status is "Married Filing Jointly", then you are allowed to deduct the full $2,500, only if the Modified Adjusted Gross Income (MAGI) on your return is less than$ 60,000. If the MAGI is between $60,000 and $75,000, then you are able to take a deduction which is based on your income levels. The directions to the 1040 show you how to compute the deduction. If the MAGI is over $75,000, then you are not able to take any deduction.

For those who are not "Married Filing Jointly", the full $2,500 deduction is allowed for MAGI levels below $40,000. For MAGI between $40,000 and $55,000, the deduction is based on your income levels, and computation instructions are provided in the 1040. If the MAGI is over $55,000, there is no deduction. There is no deduction if you file "Married Filing Separately," if you are claimed as a dependent, if the loan is from a related party or a qualified employer plan. For more information, refer to Publication 970, Tax Benefits for Higher Education; Tax Topic 505, Interest Expense; and Tax Topic 513, Educational Expenses.

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Does consolidating my student loans impact how is the 60-month period for student loan interest calculated?

For 2001, consolidating an education loan does not extend the 60-month period, since the 60-month period is based upon the original loan. However, the date that the 60-month period is considered to have begun may change, depending on the most recent beginning date of the loans involved in the consolidation. Starting in 2002, the 60-month period will no longer apply. For more information, refer to Publication 970, Tax Benefits for Higher Education; Tax Topic 505, Interest Expense; and Tax Topic 513, Educational Expense,

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Is the $2,500 maximum deduction (credit) for student loan interest per PERSON, or per RETURN? I am married filing jointly, and have paid over $3,000 between my husband and I of qualified interest payments. Are we allowed to deduct $5,000 ($2,500/person) or only $2,500 total on our return?

The deduction is limited to $2,500 per return for tax year 2001 and beyond. If you file "Married Filing Separately," there is no deduction. Starting in 2002, thededuction limits will be raised, but the maximum amount of deduction on a "per return" basis will remain the same. For more information, refer to Publication 970, Tax Benefits for Higher Education; Tax Topic 505, Interest Expense.

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If I file married filing separately can I claim the new student loan interest deduction?

No, you cannot claim the deduction in any tax year in which your filing status is "Married Filing a Separate return." For more information, refer to Publication 970, Tax Benefits for Higher Education, Tax Topic 505, Interest Expense; and Tax Topic 513, Educational Expenses.

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I am a parent repaying a loan for my daughter's college education. The loan is a parent's loan taken out in my name. Is the interest deductible on my tax return?

If your daughter was your dependent when you received the loan, the interest paid on the loan is generally deductible. All other requirements must be met. For more information, refer to Publication 970, Tax Benefits for Higher Education; Tax Topic 505, Interest Expense; and Tax Topic 513, Educational Expense.

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My mother borrowed money for my college education. Now that I'm out of school, I make the monthly payments, but the loan is under her name. Can I take the student loan deduction since I'm actually making the payments?

You will not be able to take a deduction for the Student Loan Interest that you pay because you are not the one obligated to pay on the loan. However, your mother may take the deduction, provided all other requirements for the deduction are met. The payment made by you is treated as a gift to her, and then a payment by her. For more information, refer to Publication 970, Tax Benefits for Higher Education; Tax Topic 505, Interest Expense; and Tax Topic 513, Educational Expenses.

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Last year, my parents took out a student loan for me in their name and I also took out a student loan. My parents received Form 1098-E for their loan and I also received Form 1098-E for my loan. Can we both claim the interest from the loans on our tax returns? Last year, I was not their dependent.

One of the qualifications for claiming the student loan interest is that the expenses must have been for you, your spouse, or a person who was your dependent when you took out the loan. Since you were not your parents' dependent when they took out the student loan, the interest they pay on the loan does not qualify for deduction. However, the student loan interest payments you made on the student loan you took out on your behalf are eligible for deductible, provided all the regular requirements are met. For more information, refer to Publication 970, Tax Benefits for Higher Education; Tax Topic 505, Interest Expense; and Tax Topic 513, Educational Expense.

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I am an employee. What form do I use to claim business expenses for local transportation?

Generally, you must use Form 2106, Employee Business Expenses, or Form 2106-EZ, Unreimbursed Employee Business Expenses, to claim a deduction for employee business expenses. Your deductible expense is then taken to line 20 of Form 1040, Schedule A as a miscellaneous Itemized Deduction, subject to the 2% of adjusted gross income floor. Special rules may apply, depending on the reimbursement arrangement, you have with your employer. For additional information, refer to Publication 463, Travel, Entertainment, Gift, and Car Expenses, Tax Topic 514, Employee Business Expense, and Publication 529, Miscellaneous Deductions.

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I moved to a different state to accept a new job. Will I be able to deduct all of my moving expenses?

When moving expenses coincide closely with a job transfer or the start of a new job, then some of those expenses may qualify for deduction as an adjustment to income on Form 1040, U.S. Individual Income Tax Return. You must moved far enough, and, generally, closer to your new job than you were before you moved. You must have started and kept full-time work for a specific period after the move. Not all moving expenses are deductible. Deductible expenses are, generally, limited to one-way transportation of your household members, and household goods, which includes lodging, meals, and packing & storage along the most direct route to your new residence. You cannot deduct a reimbursed expense, unless the reimbursement has been counted in your wages. For more information, refer to Publication 521, Moving Expenses; Tax Topic 455, Moving Expenses; and the Instructions to Form 3903, Moving Expenses. For more information, refer to Tax Topic 455, Moving Expenses, or Publication 521, Moving Expenses.

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Gifts & Charitable Contributions

I donated a used car to a qualified charity. I itemize my deduction, and I would like to take a charitable contribution for the donation. Do I need to attach any special forms to my return? What records do I need to keep?

If you claim a deductin on your return of over $500 for all contributed property, you must attach a Form 8283, Noncash Charitable Contributions, to your return. If you claim a total deduction of $5,000 or less for all contributed property, you need only complete Section A of Form 8283. If you claim a deduction of more than $5,000 for an item or group of similar items, you need to complete Section B of Form 8283, which requires a qualified appraisal by a qualified appraiser.

You will need to obtain and keep evidence of your car donation and be able to substantiate the fair market value of the car. If you are claiming a deduction of $250 or more for the car donation, you will also need a written acknowledgement from the charity that includes a descriptin of the car and a statement of whether the charity provided any goods or services in return for the car and, if so, a description and estimate of the fair market val;ue of the goods or services.

For more information on these requirements, refer to Publication 526, Charitable Contributions, Publication 561, Determinining the Value of Donated Property, Form 8283, Noncah Charitable Contributions, and its instructions, and Tax Topic 506, Contributions.

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Interest, Investment, Money Transactions (Alimony, Bad Debts, Applicable Federal Interest Rate, Gambling, Legal Fees, Loans, etc.)

Is the interest amount that we paid to the IRS deductible?

Interest paid to the IRS on Federal Taxes and penaltie are not deductible. It is considered to be personal interest and is nondeductible. Refer to Items You Cannot Deduct in Chapter 25 of Publication 17, Your Federal Income Tax for Individuals, for more information, and Tax Topic 505, Interest Expense.

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Can you tell me where on the Internet I can find the AFR, Applicable Federal Rate, for the months in 2001?

The Applicable Federal Rates for each month can, generally, be found in the first weekly Internal Revenue Bulletin (IRB) published for the month in which you are interested. Internal Revenue Bulletins are located on the IRS web-site, called the "Digital Daily," under Tax Information for You . The Digital Daily may be accessed at www.irs.gov.

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A family member has offered me a low interest loan for purchasing a home. Where can I find information on rates for private loans?

The rules for private or "Below Market" loans may be found in Publication 550, Investment Income and Expenses. To calculate the lowest acceptable rate of interest under federal tax law, you must use the Applicable Federal Rates (AFR) that apply based on the terms and period of your loan. The applicable federal rates are published monthly in the Internal Revenue Bulletin. The Internal Revenue Bulletins may be found on the IRS' Web-Site, the Digital Daily, under Tax Information for You. You may access the web-site at www.irs.gov.

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I made a personal loan of $3,500 to a friend. She declared bankruptcy after only paying me back $500.00. Does the IRS allow any provision for my loss?

In a true debtor-creditor relationship, someone owes you money that you cannot collect, then you have a bad debt. There are two kinds of bad debts - business and nonbusiness.

Bad debts are deductible only if the amount owed to you represents a loan of your cash or has been previously included in your income. A business bad debt, generally, is one that comes from operating your trade or business. All other bad debts are nonbusiness.

All other bad debts are nonbusiness. Nonbusiness bad debts must be totally worthless to be deductible. You cannot deduct a partially worthless nonbusiness bad debt. You must establish that you have taken reasonable steps to collect the debt and that the debt is worthless. You may take the deduction only in the year the debt becomes totally worthless. A debt becomes totally worthless when there is no longer any chance the amount owed will be paid. You do not have to wait until the debt comes due. A nonbusiness bad debt is generally, taken as a short-term capital loss on Form Form 1040, Schedule D, Capital Gains and Losses.

For more information on bad debts, refer to Publication 550, Investment Income and Expenses, and Publication 535, Business Expenses.

Form 1040, Schedule D, Capital Gains and Losses.

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Are the legal fees incurrred (paid) for collection of Social Security Benefits deductible?

Personal legal fees are not, generally, deductible. However you may deduct legal fees for the production or collection of taxable income. The portion of the legal fees that is deductible would be proportional to the amount of Social Security Benefit collected that is taxable. Such deduction would be taken on line 22 of Form 1040, Schedule A, Itemized Deductions, subject to the 2% of Adjusted Gross Income Limitation. For more information, refer to Publication 529, Miscellaneous Deductions, and Publication 915, Social Security and Equivalent Railroad Retirement Benefits.

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I went through a divorce last year and paid a lot of legal fees. Are these deductible on my tax return?

Personal legal fees, such as for a divorce, are not , generally deductible. However, legal fees for the production or collection of taxable income may be deductible. Alimony is taxable, so legal fees to collect taxable alimony may be deductible. Also, any legal fees for tax advice related to the divorce may be deductible. These deductions are taken on line 22 of Form 1040, Schedule A, itemized Deductions. For additional information, refer to Tax Topic 508, Miscellaneous Expenses, and Publication 529, Miscellaneous Deductions.

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Can I deduct alimony paid to my former spouse?

If you are divorced or separated, you may be able to deduct the alimony or separate maintenance payments that you are required to make to your spouse or former spouse, or on behalf of that spouse. For additional information, refer to Tax Topic 452, Alimony Paid (this topic covers alimony under decrees or agreements after 1984), or Publication 504, Divorced or Separated Individuals.

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Where are fees and commissions for investments deducted?

If they are deductible, investment expenses other than investment interest are taken as miscellaneous deductions on Form 1040, Schedule A, Itemized Deductions. These deductions must be reduced by 2% of your adjusted gross income.

Commissions and fees for the acquisition or sale of an asset are added to the basis of that asset and are not deductible. For example, acquisition fees, sales commissions, and load charges paid in connection with the purchase or selling of mutual fund shares are not deductible. They can usually be added to the basis of the shares.

Fees for managing investments, such as custodial fees and management fees are deductible. Fees you pay a broker to collect taxable bond interest or stock dividends are deductible. Fees that pass through to you from non-publicly offered mutual funds, partnerships, or trusts are deductible. All of these fees are subject to the 2% limit. For more information, refer to Publication 529, Miscellaneous Deductions; Publication 550, Investment Income and Expenses; Publication 564, Mutual Fund Distributions.

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Is a real estate investment considered investment property? Is the interest deductible as investment interest if you cannot deduct it as mortgage interest?

If you borrow money and use it to buy property you hold for investment, the interest you pay is investment interest. You can deduct investment interest subject to certain limits. However, you cannot deduct interest you incurred to produce tax-exempt income. Investment interest does not include any qualified home mortgage interest or any interest taken into account in computing income or loss from a passive activity, such as owning and operating rental real estate. For more information, refer to Publication 564, Investment Income and Expenses; Tax Topic 505, Interest Expense; and Publication 925, Passive Activity and At-Risk Rules.

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We took a margin loan from our investment money market account. Can the interest we paid be deducted?

If you are a cash method taxpayer, you can deduct interest on margin accounts to buy taxable securities as investment interest in the year you paid it. You are considered to have paid interest on these accounts only when you actually pay the broker or when payment becomes available to the broker through your account. Payment may become available to the broker through your account when the broker collects dividends or interest for your account, or sells securities held for you or received from you. You cannot deduct any interest on money borrowed for personal reasons. Investment Interest Deductions are limited to the extent of Investment Income. Such deductions are taken on Form 4952, Investment Interest Deduction. The deduction amount is then reported as an itemized deduction on line 13 of Form 1040, Schedule A, Itemized Deductions. For more information refer to Publication 550, Investment Income and Expenses.

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If I don't itemize my deductions can I still deduct my investment expenses such as margin interest?

Investment expenses for individuals must be taken as itemized deductions. Investment expenses (other than interest expenses) are deducted on Form 1040, Schedule A, Itemized Deductions, as miscellaneous deductions subject to the 2% of your Adjusted Gross Income (AGI) limit. Investment Interest Deductions are deducted on Form 4952, Investment Interest Deduction, and reported on Form 1040, Schedule A Itemized. Deductions, but are not subject to the 2% of your Adjusted Gross Income (AGI) limit. For more information, refer to Publication 550, Investment Income and Expenses; Publication 529, Miscellaneous Deductions; and Tax Topic 508, Miscellanous Expenses.

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How do I deduct and substantiate my gambling losses?

You can deduct gambling losses only if you itemize deductions. Claim your gambling losses as a miscellaneous deduction on Form 1040, Schedule A, Itemized Deductions. However, the amount of losses you deduct cannot total more than the amount of gambling income you have reported on your return. It is important to keep an accurate diary or similar record of your gambling winnings and losses. To deduct your losses, you must be able to provide receipts, tickets, statements or other records that show the amount of both your winnings and losses.

The Service provides the following guidelines for proving gambling winnings and losses:

1. An accurate diary or similar record regularly maintained by the taxpayer, supplemented by verifiable documentation usually is acceptable evidence for substantiation of wagering winnings, and losses. In general, the diary should contain at least the following information

  • date and type of specific wager or wagering activity;
  • name of gambling establishment;
  • address or location of gambling establishment; and
  • name(s) of other person(s) present with you at gambling establishment.
  • amount(s) won or lost.

2. Verifiable documentation includes, but is not limited to, wagering tickets, canceled checks, credit records, bank withdrawals, and statements of actual winnings or payment slips provided by the gambling establishment. When possible, the diary and available documentation the placement and settlement of a wager should be supported by such documentation as hotel bills, airline tickets, gasoline credit cards, or affidavits or testimony from responsible gambling officials regarding the wagering activity.

For more information refer to Publication 529, Miscellaneous Deductions; Publication 525, Taxable and Nontaxable Income.

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Medical, Nursing Home, Special Care Expenses

My father is in a nursing home and I pay for the entire cost. Can I deduct this on my tax return?

You may deduct qualified medical expenses you pay for yourself, your spouse, and your dependents, including a person you claim as a dependent under a Multiple Support Agreement. You can also deduct medical expenses you paid for someone who would have qualified as your dependent except that the person did not meet the gross income or joint return test.

Nursing home expenses are allowable as medical expenses in certain instances. If you, your spouse, or your dependent is in a nursing home, and the primary reason for being there is for medical care, the entire cost, including meals and lodging, is a medical expense. If the individual is in the home mainly for personal reasons, then only the cost of the actual medical care is a medical expense, and the cost of the meals and lodging is not deductible.

You deduct medical expenses on Form 1040, Schedule A, Itemized Deductions. The total of all allowable medical expenses must be reduced by 7.5% of your Adjusted Gross Income. For more information, refer to Publication 502, Medical and dental expenses.

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Are there any deductions that can be taken for helping my elderly mother? She lives on social security and I paid almost $7,600 in her expenses and bills. She collects approximately $9,600 from social security a year. These expenses are not often medical or such but rather living expenses.

There are no special deductions for providing money to assist your aging parent. However, you may want to review the tests in Publication 501, Exemptions, Standard Deduction, and Filing Information; to see whether you would be eligible to claim, your mother as a dependent.

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Can social security tax and Medicare tax be deducted on Schedule A, as medical insurance or anywhere else?

Social Security Taxes and Medicare Taxes imposed on employees are not deductible as medical insurance or pursuant to any other provision. Medicare A expense is not generally deductible. However If you itemize your deductions on Form 1040, Schedule A, Itemized Deductions, you may be able to deduct the monthly premiums paid from your social security check as medical expense.

If you have voluntarily enrolled in Medicare A because you were not otherwise covered, you can deduct your Medicare A premiums. If you are enrolled in Medicare B supplemental medical insurance, the premiums you pay can be deducted as a medical expense. All allowable medical expenses must be reduced by 7.5% of adjusted gross income. For more information, refer Publication 502, Medical Expenses; and Tax Topic 502, Medical and Dental Expenses

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Real Estate (Taxes, Mortgage Interest, Points, Other Property Expenses)

I just bought a home. What can I deduct from the settlement statement?

If you bought your home, you probably paid settlement or closing costs in addition to the contract price. These costs are divided between you and the seller according to the sales contract, local custom, or understanding of the parties. If you built your home, you probably paid these costs when you bought the land or settled on your mortgage.

The only settlement or closing costs you can deduct are home mortgage interest, points that represent interest and certain real estate taxes. You, generally, deduct them in the year you buy your home if you itemize your deductions. You can add certain other settlement or closing costs to the basis of your home. There are some settlement or closing costs that you cannot deduct or add to the basis.

Real estate taxes are usually divided so that you and the seller each pay taxes for the part of the property tax year that each owned the home.

You can include in your basis the settlement fees and closing costs that are for buying your home. You cannot include in your basis the fees and costs that are for getting a mortgage loan. A fee is for buying the home if you would have had to pay it even if you paid cash for the home.

For more information refer to Publication 530, Tax Information for First Time-Homeowners, and Publication 936, Home Mortgage Interest Deduction.

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I have a mortgage for my primary residence and a second mortgage for land that I intend to build a home on. Can the interest be deducted for the second mortgage?

Unless you have begun construction of a home on the bare land that you can occupy within 24 months, the land would be considered an investment. Interest does not qualify as deductible mortgage interest. "However, it would constitute investment interest which may offset your investment income if you itemize your deductions." For more informtion, refer to Publication 550, Investment Income and Expenses, and Publication 936, Home Mortgage Interest Deduction.

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I paid my mother's mortgage and real estate taxes last year. The house is in her name. Can I deduct the mortgage interest and property tax on my tax return?

Generally, you can deduct only taxes that are imposed on you. You cannot deduct the property taxes unless you are the legal owner of the property, nor the mortgage interest unless you are legally liable for the loan. Your mother cannot deduct the mortgage interest either because she did not make the payments. For more information, refer to Publication 936, Home Mortgage Interest Deduction; Publication 17, Your Federal Income Tax for Individuals; and Tax Topic 505, Interest Expenses, Tax Topic 503, Deductible Taxes.

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My daughter and I own a house together. Her name is on the mortgage, but both our names are on the deed. Can we each claim half the yearly interest and property tax on our income tax returns?

In order for both of you to claim one-half of the interest deduction, both of you must be legally liable for the loan. Since only your daughter is legally liable for the loan, only she can deduct the interest. Since both of you are legal owners of the property, both of you may deduct one-half of the real estate taxes paid during the year. For more information, refer to Publication 936, Home Mortgage Interest Deduction; Publication 17, Your Federal Income Tax for Individuals; Publication 530, Tax Information for FirstTime Homeowners; and Tax Topic 505, Interest Expense; Tax Topic 503, Deductible Taxes.

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Is interest on a home equity line of credit deductible as a second mortgage?

If you itemize deductions, you may generally deduct Home Equity Debt Interest, if you are legally liable to pay the interest, you do pay the interest in the tax year, you secure the debt with your home, and you do not exceed your Home Equity Debt Limit. For more information, refer to Publication 936, Home Mortgage Interest; and Tax Topic 505, Interest Expense.

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I refinanced my home last year and paid points. Are they all deductible this year?

Points paid to refinance your home are not, generally deductible in their entirety in the year paid. They are "amortized" or deducted over the life of the loan. For more information, refer to Publication 936, Home Mortgage Interest Deduction, and Tax Topic 504, Home Mortgage Points.

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Is the interest paid on the loan for a lot (with no home on it) deductible as mortgage interest?

Generally the interest on a lot is not deductible as mortgage interest.

If you are planning to build a house, you can start deducting mortgage interest once construction begins. The following is from Publication 936, Home Mortgage Interest Deduction:

You can treat a home under construction as a qualified home for a period of up to 24 months, but only if it becomes your qualified home at the time it is ready for occupancy. The 24-month period can start any time on or after the day construction begins. For more information, refer to Publication 936, Home Mortgage Interest Deduction, and Tax Topic 505, Interest Expense.

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We purchased land to build a home on. Is the interest on the mortgage secured by the land deductible?

Interest on the mortgage secured by bare land ls not, generally, deductible as mortgage interest. In order for interest to be deductible as home mortgage interest. The loan must be secured by a qualified residence. A qualified residence is your principle residence or one other residence selected by you that you use as a residence.

Once you start construction of your home, you may treat the home under construction as a qualified residence for a period of up to 24 months, but only if the home becomes a qualified residence at the time it is ready for occupancy. For more information, refer to Publication 936, Home Mortgage Interest Deduction; and Tax Topic 505, Interest Expense.

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Is interest paid on a construction loan for a new home considered deductible mortgage interest?

You can treat a home under construction as a home qualifying for the home interest deduction for a period of up to 24 months, but only if it becomes your qualified home at the time it is ready for occupancy. For more information, refer to Publication 936, Home Mortgage Interest Deduction; and Tax Topic 505, Interest Expense.

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I got a loan to buy some land. Later I got another loan for the construction of the house. After the house was built I got a third loan which paid off the first two loans. Is the interest on any of these loans deductible?

All three loans may qualify as having some form of deductible interest. Generally, the interest paid on a financed lot is not deductible as mortgage interest. There might be a deduction for Investment Interest until construction of the home begins. Once construction begins, you can, generally, start deducting mortgage interest for up to 24 months. Once the home has been completed and occupied by you, and the two existing loans have been refinanced, you may deduct the interest from the new mortgage. For more information, refer to Publication 936, Home Mortgage Interest Deduction; Tax Topic 505, Interest Expense; and Publication 550, Investment Income and Expenses.

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I pay interest on money borrowed to purchase land. I built a home on that land, but have no mortgage. Is the interest I pay for the land deductible? Where is it deductible on the return?

Until you started construction, the interest on the lot was not deductible as mortgage interest. Once you started construction on the property, it became deductible as home mortgage interest provided that the loan was secured by the house or the property, and all other conditions for deductibility of Home Mortgage Interest were met. For more information, refer to Publication 936, Home Mortgage Interest Deduction and Tax Topic 505, Interest Expense.

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I took out a home equity loan to pay off personal debts. Is this interest deductible? Where do I enter this amount on my tax return?

If you took out a loan for reasons other than to buy, build, or substantially improve your home, such as to payoff personal debts, then the debt may qualify as home equity debt for interest deduction. Such a deduction would appear, generally on line 10, Form 1040, Schedule A, Itemized Deductions. You may not deduct interest on any amount of Home Equity Debt that exceeds your Home Equity Debt Limit. For more information, refer to Publication 936, Home Mortgage Interest Deduction, and Tax Topic 505, Interest Expense.

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If I borrow money from my 401(k) to purchase a home, is the interest I pay back to my 401(k) deductible as mortgage interest on my 1040?

The interest you pay on money you borrow from 401(K) plan to buy a home is not, generally, deductible as mortgage interest, because the loan is not secured by the home. In case of default, the recourse would be to treat the unpaid amounts as a taxable 401 (K) distribution. The home would not be used as a recourse to satisfy the debt. Generally, your mortgage is only a secured debt when you put up your home as collateral to protect the interests of the lender. For more information, refer to Publication 936, Home Mortgage Interest Deduction, and , Interest Expense.The mortgage must be a secured debt on a qualified home. Generally, your mortgage is a secured debt if you put your home up as collateral to protect the interests of the lender. The term "qualified home" means your main home or second home. For details, refer to Publication 936, Home Mortgage Interest Deduction and Tax Topic 505, Interest Expense.

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May I deduct my home improvements and repairs to my home?

Home improvements add to the value of your home, prolong its useful life, or adapt it to new uses. Home improvements costs are not deductible. However, you add the cost of improvements to the basis of your property.

Examples of improvements include putting a recreation room in your unfinished basement, adding another bathroom, or bedroom, putting up a fence, putting in new plumbing or wiring, putting on a new roof, or paving your driveway.

For a list of some other examples of improvements, refer to Publication 523, Selling Your Home.

Repairs maintain your home in good condition. They are not currently deductible nor do they add to your home's value or prolong its life. You do not add their cost to the basis of your property.

Some examples of repairs include repainting your house inside or outside, fixing your gutters or floors, repairing leaks or plastering and replacing broken window panes.

Exception: The entire job is considered an improvement, however, if items that would otherwise be considered repairs are done as part of an extensive remodeling or restoration of your home. For more information, refer to Publication 523; Selling Your Home; and Publication 551, Basis of Assets.

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Our home was seriously damaged by flooding last year. Are there special provisions for claiming a loss since our home is located in a declared disaster area?

Casualty losses are generally deductible only in the year the casualty occurred. However, if you have a deductible loss from a disaster in an area that is officially designated by the President of the United States as eligible for federal disaster assistance, you can choose to deduct that loss on your return for the year immediately preceding the loss year. In other words, you may treat the loss as having occurred in either the current year or the previous year, whichever provides the best tax results for you. If you have already filed your return for the preceding year the loss may be claimed by filing an amended return, Form 1040X, Amended U.S. Individual Incomed Tax Return. For more information on disaster area losses (including flood losses), refer to Tax Topic 515 , Disaster Area Losses (Including Flood Losses), or Publication 547, Casualties, Disasters and Thefts (Business and Non-Business). Publication 584, Non-Business Disaster, Casualty, and Theft Loss Workbook, can be used to help you catalog your property.

References:

  • Publication 547, Casualties, Disasters and Thefts (Business and Non-Business)
  • Publication 584, Non-Business Disaster, Casualty, and Theft Loss Workbook
  • Form 1040X, Amended U.S. Individual Income Tax Return
  • Tax Topic 515, Disaster Area Losses (Including Flood Losses)

Our garage caught fire this last July. Can we claim a loss on our income tax return?

If you lose property through casualty or theft, you may be entitled to a tax deduction. A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual in nature. Some examples of casualties include car accidents, fires, and vandalism. If your property is covered by insurance, you cannot deduct a loss unless you file a timely insurance claim for reimbursement. To claim a casualty or theft loss, you must complete Form 4684, Casualties and Thefts, and attach it to your return. Claim the amount from the form on line 19 of Form 1040, Schedule A, Itemized Deduction. If your loss took place in a declared disaster area, please refer to Tax Topic 515, Disaster Area Losses (Including Flood Losses). For more information, refer to Form 4684,Casualties and Thefts, or Tax Topic 507, Casualty Losses, or Publication 547, Casualties, Disasters, and Thefts (Business and Non-business). If many items are involved, also refer to Publication 584, Non-business Disaster, Casualty, and Theft Workbook.

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Is personal credit card interest tax deductible?

No Publication 17, Your Federal Income Tax for Individuals; and Tax Topic 505, Interest Expense.

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Is the mortgage interest and property tax on a second residence deductible?

"The mortgage interest on a second home, which you use as as residence for substantial time periods during the taxable year, is generally deductible if the interest satisfies the same requirements for deductibility as interest on a primary residence." Real estate taxes paid on your primary and second residence are generally, deductible. Deductible real estate taxes include any state, local, or foreign taxes on real property levied for the general public welfare. Deductible real estate taxes generally do not include taxes charged for local benefits and improvements that increase the value of the property. For more information, refer to Publication 17, Your Federal Income Tax for Individuals; Tax Topic 503, Deductible Taxes; and Publication 530, Tax Information for First-Time Home Buyers.

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I bought a 5th wheel (trail rig) for vacationing. Can I deduct the interest on the loan for this 5th wheel? Where would it be listed?

If the loan is secured by travel trailer, you can claim interest on this loan as acquisition indebtedness only if the trailer meets the requirements of a qualified home and is considered your second home. A qualified home includes a house, condominium, cooperative, mobile home, boat or similar property that has sleeping, cooking and toilet facilities. You can only have one principal residence and only one qualified second home. "Regardless of whether the trailer or any part of the fifth wheel trailer rig qualifies as a home, interest on home equity indebtedness secured by a qualified home and used to acquire such rig, may also be deductible interest." The interest is deducted on Form 1040, Schedule A, Itemized Deductions, as mortgage interest, generally, on line 11.

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What are the rules for mortgage interest on a manufactured Home? Can I deduct the interest on the mortgage for the manufactured home if it is on a rented lot? Can I deduct the interest for the manufactured home and for the lot if I buy a lot for the home?

For you to take a home mortgage interest deduction, your debt must be secured by a qualified home. This means your main home or your second home. A home includes a house, condominium, cooperative, mobile home, boat, or similar property that has sleeping, cooking, and toilet facilities.

If you buy a lot and place a manufactured home on it, the interest paid for the lot is qualifying home mortgage interest, provided the mortgage is secured by the house." On a rented lot, deductibility of mortgage interest applies only to the structure.

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I refinanced my home and paid closing costs. Are the loan origination fee, appraisal fee, document prep fee, closing fee, and title insurance or any of the other expenses deductible? Are any of the fees I paid to the bank for the loan deductible?

Closing cost may be divided into three categories.

(1) Deductible fees are limited to interest and real estate taxes. Points that represent interest are, generally, deductible, though they are "amortized" or deducted over the life of the loan in the case of a refinance.

(2) Other fees may only have effect on the basis of the home. These are fees that are not associated with the acquisition of a loan. An example would be transfer tax that would be charged regardless of whether a loan was involved.

(3) The third category of fees would be those that are related to the acquisition of a loan. These fees are not deductible and are not basis adjustments. A credit report fee is a good example. As a result, the closing costs involved in a refinance are not, generally, deductible. The exception would be interest, real estate taxes, and the amortized portion of any points.

For more information, refer to Publication 936, Home Mortgage Interest Deduction; Tax Topic 504, Home Mortgage Points; and Publication 551, Basis of Assets.

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I refinanced my home mortgage and had to pay $2,000.00 worth of points to get the mortgage. Can I claim these points as a deduction on my tax return?

Points, that represent interest, may be deductible as home mortgage interest. Generally, the points have to be amortized over the life of the loan. Points charged for specific services, such as preparation costs for a mortgage note, appraisal fees or notary fees are not interest and cannot be deducted. It is possible to deduct a larger percentage of the points in the first year when a portion of the refinance is used to improve the home and sufficient cash is added to the transaction to be equal to or greater that the amount of the points. Certain other restrictions apply. For more information, refer to Publication 936, Home Mortgage Interest Deduction; and Tax Topic 504, Home Mortgage Points.

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If the IRS says I must deduct points over the life of my mortgage, and I have a 30 year mortgage, does this mean that I divide the points paid by 30 and enter that amount on Schedule A?

You need to divide the points by the number of payments over the term of the loan and deduct points for a year according to the number of payments made in the year. If the loan ends prematurely, due to payoff or refinance, for example, then the remaining points are deducted in that year. Points not included in Form 1098 (usually not included on a refinance) should be entered on Line 12 of Form 1040, Schedule A, Itemized Deductions. For more information, refer to Publication 936, Home Mortgage Interest Deduction; and Tax Topic 504, Home Mortgage Points.

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I refinanced my house once and paid $1,230 in points. On Schedule A, line 12 (points not reported on Form 1098) I have listed $41 each year. I refinanced my home again and paid off the entire previous loan including the points. Am I entitled to include the $984 (remaining points paid off) on Schedule A this year?

If you spread your deduction for points over the life of the mortgage, you can deduct any remaining balance in the year the mortgage ends. A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event.

Under the conditions you describe in your question, you would be able to deduct $984, in the year the mortgage ended. You would report the deduction on Form 1040, Schedule A, Itemized Deductions. For more information, refer to Publication 936, Home Mortgage Interest Deduction; and Tax Topic 504, Home Mortgage Points.

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I took out a second mortgage and received a form with my mortgage interest on it but it has no points. Under the points section it states to check with your original lender. Can I still claim those points? If so, how do I get a form stating them?

Deductibility of points depends on meeting the underlying requirements specific in Publication 936, Home Mortgage Interest Deduction, not on whether the points appear on Form 1098. In the case of a refinance, the points almost never appear in the year's Form 1098. The deductibile portion is shown on Form 1040, ScheduleD A, Itemized Deductions, using line 12, instead of line 10 because the points do not appear on the Form 1098. In the case of a second mortgage or Home Equity Loan that exists in addition to the first mortgage on the home then the points usually do appear on the Form 1098. If they don't appear, confer with your lender for a corrected Form 1098. If they do not correct it, you may still claim the deductible portion using line 11, as described above. For more information, refer to Publication 936, Home Mortgage Interest Deduction; and Tax Topic 504, Home Mortgage Points.

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Other Deduction Questions

What is itemizing and is it beneficial to me?

Itemization is the process of listing specific deductible personal expenses you paid during the year including but not limited to medical and dental care, state and local income taxes, real estate taxes, home mortgage interest, and gifts to charity. Such a list would appear on Form 1040, Schedule A, Itemized Deductions.

When you complete your list, you total the amount spent and compare the total with your standard deduction. The larger of the two deductions, standard or itemized, will be the deduction to choose, since it will lower the amount of federal income tax you will owe. For additional information refer to Tax Topic 501, Should I Itemize?

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My spouse and I are filing separate returns. How can we split our itemized deductions?

If you and your spouse file separate returns and one of you itemizes deductions, the other spouse will have a standard deduction of zero. Therefore, the other spouse should also itemize deductions.

You may be able to claim itemized deductions on a separate return for certain expenses that you paid separately or jointly with your spouse. Deductible expenses that are paid out of separate funds, such as medical expenses, are deductible by the spouse who pays them. If these expenses are paid from community funds, the deduction may depend on whether or not you live in a community property state. In a community property state, the deduction is, generallly, divided equally between you and your spouse. For more information refer to Publication 504, Divorced or Separated Individuals; and Publication 555, Community Property.

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I am in a disaster area and heard the IRS could help me. What can the IRS do?

If you have been impacted by a Presidentially declared disaster, the IRS may help you by allowing additional time for your filing of returns and making payments, and waiving penalties, in some circumstances, if the disaster has caused you to file or pay late. The IRS may also, provide copies or transcripts of previously filed returns, free of charge. You may be eligible to file for a casualty loss deduction on the prior year's tax return, or by amended return (Form 1040X) you have already filed. On the IRS site, the Digital Daily, there is a disaster services page, Help During Disasters and Emergencies. The page provides more detail on services available, as well as, a link to the WEB site of the Federal Emergency Management Agency (FEMA), with whom the IRS will coordinate. Separate packages are provided for individuals and for business. The around The Nation section of the IRS Web site may be checked for additional information available through local IRS authorities. For more information, refer to Publication 547, Non-Business Casualties and Theft; and the IRS Digital Daily at www.irs.gov.

We have also assembled a set of forms and publications you can download for further assistance. There is a set for individuals and a set for businesses.

Also check Around the Nation for any additional information your local IRS office may have provided.

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