Nondeductible Expenses

Examples of nondeductible expenses are listed next. The list is followed by discussions of additional nondeductible expenses.

List of Nondeductible Expenses

• Broker's commissions that you paid in connection with your IRA or other investment property.
• Burial or funeral expenses, including the cost of a cemetery lot.
• Capital expenses.
• Fees and licenses, such as car licenses, marriage licenses, and dog tags.
• Hobby losses - but see Hobby Expenses, earlier.
• Home repairs, insurance, and rent.
• Illegal bribes and kickbacks - see Bribes and kickbacks in chapter 13 of Publication 535.
• Losses from the sale of your home, furniture, personal car, etc.
• Personal disability insurance premiums.
• Personal, living, or family expenses.
• The value of wages never received or lost vacation time.

Adoption Expenses

You cannot deduct the expenses of adopting a child, but you may be able to take a credit for those expenses. See chapter 38.

Campaign Expenses

You cannot deduct campaign expenses of a candidate for any office, even if the candidate is running for reelection to the office. These include qualification and registration fees for primary elections.

Legal fees.   You cannot deduct legal fees paid to defend charges that arise from participation in a political campaign.

Check-Writing Fees on Personal Account

If you have a personal checking account, you cannot deduct fees charged by the bank for the privilege of writing checks, even if the account pays interest.

Club Dues

Generally, you cannot deduct the cost of membership in any club organized for business, pleasure, recreation, or other social purpose. This includes business, social, athletic, luncheon, sporting, airline, hotel, golf, and country clubs. For exceptions, see Dues to Chambers of Commerce and Professional Societies under Unreimbursed Employee Expenses, earlier.

Commuting Expenses

You cannot deduct commuting expenses (the cost of transportation between your home and your main or regular place of work). If you haul tools, instruments, or other items, in your car to and from work, you can deduct only the additional cost of hauling the items such as the rent on a trailer to carry the items.

Fines or Penalties

You cannot deduct fines or penalties you pay to a governmental unit for violating a law. This includes an amount paid in settlement of your actual or potential liability for a fine or penalty (civil or criminal). Fines or penalties include parking tickets, tax penalties, and penalties deducted from teachers' paychecks after an illegal strike.

Health Spa Expenses

You cannot deduct health spa expenses, even if there is a job requirement to stay in excellent physical condition, such as might be required of a law enforcement officer.

Home Security System

You cannot deduct the cost of a home security system as a miscellaneous deduction. However, you may be able to claim a deduction for a home security system as a business expense if you have a home office. See Home Office under Unreimbursed Employee Expenses, earlier, and Security System under Deducting Expenses in Publication 587.

Homeowners' Insurance Premiums

You cannot deduct premiums that you pay or that are placed in escrow for insurance on your home, such as fire and liability or mortgage insurance.

Investment-Related Seminars

You cannot deduct any expenses for attending a convention, seminar, or similar meeting for investment purposes.

Life Insurance Premiums

You cannot deduct premiums you pay on your life insurance. You may be able to deduct, as alimony, premiums you pay on life insurance policies assigned to your former spouse. See chapter 20 for information on alimony.

Lobbying Expenses

You generally cannot deduct amounts paid or incurred for lobbying expenses. These include expenses to:

1. Influence legislation,
2. Participate or intervene in any political campaign for, or against, any candidate for public office,
3. Attempt to influence the general public, or segments of the public, about elections, legislative matters, or referendums, or
4. Communicate directly with covered executive branch officials in any attempt to influence the official actions or positions of those officials.

Lobbying expenses also include any amounts paid or incurred for research, preparation, planning, or coordination of any of these activities.

Dues used for lobbying.   If a tax-exempt organization notifies you that part of the dues or other amounts you pay to the organization are used to pay nondeductible lobbying expenses, you cannot deduct that part. See Lobbying Expenses in Publication 529 for information on exceptions.

Lost or Mislaid Cash or Property

You cannot deduct a loss based on the mere disappearance of money or property. However, an accidental loss or disappearance of property can qualify as a casualty if it results from an identifiable event that is sudden, unexpected, or unusual. See chapter 27.

Example.   A car door is accidentally slammed on your hand, breaking the setting of your diamond ring. The diamond falls from the ring and is never found. The loss of the diamond is a casualty.

Lunches With Coworkers

You cannot deduct the expenses of lunches with co-workers, except while traveling away from home on business. See chapter 28 for information on deductible expenses while traveling away from home.

Meals While Working Late

You cannot deduct the cost of meals while working late. However, you may be able to claim a deduction if the cost of meals is a deductible entertainment expense, or if you are traveling away from home. See chapter 28 for information on deductible entertainment expenses and expenses while traveling away from home.

Personal Legal Expenses

You cannot deduct personal legal expenses such as those for the following.

1. Custody of children.
2. Breach of promise (to marry) suit.
3. Civil or criminal charges resulting from a personal relationship.
4. Damages for personal injury.
5. Preparation of a title (or defense or perfection of a title).
6. Preparation of a will.
7. Property claims or property settlement in a divorce.

You cannot deduct these expenses even if a result of the legal proceeding is the loss of income-producing property.

Political Contributions

You cannot deduct contributions made to a political candidate, a campaign committee, or a newsletter fund. Advertisements in convention bulletins and admissions to dinners or programs that benefit a political party or political candidate are not deductible.

Professional Accreditation Fees

You cannot deduct professional accreditation fees such as the following.

1. Accounting certificate fees paid for the initial right to practice accounting.
2. Bar exam fees and incidental expenses in securing admission to the bar.
3. Medical and dental license fees paid to get initial licensing.

Professional Reputation

You cannot deduct expenses of radio and TV appearances to increase your personal prestige or establish your professional reputation.

Relief Fund Contributions

You cannot deduct contributions paid to a private plan that pays benefits to any covered employee who cannot work because of any injury or illness not related to the job.

Residential Telephone Service

You cannot deduct any charge (including taxes) for basic local telephone service for the first telephone line to your residence, even if it is used in a trade or business.

Stockholders' Meetings

You cannot deduct transportation and other expenses you pay to attend stockholders' meetings of companies in which you own stock but have no other interest. You cannot deduct these expenses even if you are attending the meeting to get information that would be useful in making further investments.

Tax-Exempt Income Expenses

You cannot deduct expenses to produce tax-exempt income. You cannot deduct interest on a debt incurred or continued to buy or carry
tax-exempt securities.

If you have expenses to produce both taxable and tax-exempt income, but you cannot identify the expenses that produce each type of income, you must divide the expenses based on the amount of each type of income to determine the amount that you can deduct.

Example.   During the year, you received taxable interest of $4,800 and tax-exempt interest of $1,200. In earning this income, you had total expenses of $500 during the year. You cannot identify the amount of each expense item that is for each income item. Therefore, 80% ($4,800/$6,000) of the expense is for the taxable interest and 20% ($1,200/$6,000) is for the tax-exempt interest. You can deduct, subject to the 2% limit, expenses of $400 (80% of $500).

Travel Expenses for Another Individual

You generally cannot deduct travel expenses you pay or incur for a spouse, dependent, or other individual who accompanies you (or your employee) on business travel. See chapter 28 for more information on deductible travel expenses.

Voluntary Unemployment Benefit Fund Contributions

You cannot deduct voluntary unemployment benefit fund contributions you make to a union fund or a private fund. However, you can deduct contributions as taxes if state law requires you to make them to a state unemployment fund that covers you for the loss of wages from unemployment caused by business conditions.

Wristwatches

You cannot deduct the cost of a wristwatch, even if there is a job requirement that you know the correct time to properly perform your duties.

Figuring Your Taxes and Credits

The eight chapters in this part explain how to figure your tax and how to figure the tax of certain children who have more than $1,500 of investment income. They also discuss tax credits that, unlike deductions are subtracted directly from your tax and reduce your tax, dollar for dollar. Chapter 37 discusses the earned income credit and how you may be able to get part of the credit paid to you in advance throughout the year.

How To Figure Your Tax

Introduction

After you have figured your income and deductions as explained in Parts One through Five your next step is to figure your tax. This chapter discusses:

• The general steps you take to figure your tax,
• An additional tax you may have to pay called the alternative minimum tax, and
• The conditions you must meet if you want the IRS to figure your tax.

Figuring Your Tax

Your income tax is based on your taxable income. After you figure your income tax, subtract your tax credits and add any other taxes you may owe. The result is your total tax. Compare your total tax with your total payments to determine whether you are entitled to a refund or owe additional tax.

This section provides a general outline of how to figure your tax. You can find step-by-step directions in the instructions for Forms 1040EZ, 1040A, and 1040. If you are unsure of which tax form you should file, see Which Form Should I Use? in chapter 1.

Tax.   Most taxpayers use either the Tax Table or the Tax Rate Schedules to figure their income tax. However, there are special methods if your income includes any of the following items.

• Capital gains (see chapter 17).
• Lump-sum distributions (see chapter 11).
• Farm income (see Schedule J (Form 1040), Farm Income Averaging).
• Investment income over $1,500 for children under age 14 (see chapter 32).

Credits.   After you figure your income tax, determine your tax credits. This chapter does not explain whether you are eligible for these credits. You can find that information in chapters 33 through 38 and your form instructions. See the following table for credits you may be able to subtract from your income tax.

CREDITS
For information on:	See chapter:
Adoption	38
Child and dependent care	33
Child tax credit	35
Education	36
Elderly or disabled	34
Foreign tax	38
Health insurance credit	38
Mortgage interest	38
Prior year minimum tax	38
Electric vehicle	38
Retirement savings contributions	38

Some credits (such as the earned income credit) are not listed above because they are treated as payments. See Payments, later.

There are other credits that are not discussed in this publication. These include the following items.

• General business credit, which is made up of several separate business-related credits. These generally are reported on Form 3800, General Business Credit, and are discussed in chapter 4 of Publication 334, Tax Guide for Small Business.
• Empowerment zone and renewal community employment credit, which is for certain employers who are engaged in a business in an empowerment zone, a renewal community, or the DC zone. See Publication 954, Tax Incentives for Empowerment Zones and Other Distressed Communities, and the instructions for Form 8844, Empowerment Zone and Renewal Community Employment Credit.
• District of Columbia first-time homebuyer credit, which is for certain persons who buy a main home in the District. See the instructions for Form 8859, District of Columbia First-Time Homebuyer Credit.
• Credit for fuel from a nonconventional source, which is for the person who sold the fuel. See the instructions for line 53 of Form 1040 and section 29 of the Internal Revenue Code.

Other taxes.   After you subtract your tax credits, determine whether there are any other taxes you must pay. This chapter does not explain these other taxes. You can find that information in other chapters of this publication and your form instructions. See the following table for other taxes you may need to add to your income tax.

OTHER TAXES
For information on:	See chapter:
Additional taxes on qualified retirement plans and IRAs	11, 18
Advance earned income credit payments	37
Household employment taxes	33
Social security and Medicare tax on unreported tips	7
Uncollected social security and Medicare tax on tips	7

Another tax you may have to pay, the alternative minimum tax, is discussed later in this chapter.

There are other taxes that are not discussed in this publication. These include the following items.

1. Self-employment tax. You must figure this tax if either of the following applies to you (or your spouse if you file a joint return).
   1. Your net earnings from self-employment from other than church employee income were $400 or more. The term net earnings from self-employment may include certain nonemployee compensation and other amounts reported to you on Form 1099-MISC, Miscellaneous Income. If you received a Form 1099-MISC, see the Instructions to Recipients on the back. Also see the instructions for Schedule SE (Form 1040), Self-Employment Tax, and Publication 533, Self-Employment Tax.
   2. You had church employee income of $108.28 or more.
2. Recapture taxes. You may have to pay these taxes if you previously claimed an education credit, an investment credit, a low-income housing credit, a mortgage interest credit, a new markets credit, a qualified electric vehicle credit, or an Indian employment credit. For more information about recapture of an education credit, see chapter 36. For more information about other recapture taxes, see the instructions for line 61 of Form 1040.
3. Section 72(m)(5) excess benefits tax. If you are (or were) a 5% owner of a business and you received a distribution that exceeds the benefits provided for you under the qualified pension or annuity plan formula, you may have to pay this additional tax. See Tax on Excess Benefits in chapter 4 of Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans).
4. Uncollected social security and Medicare tax on group-term life insurance. If your former employer provides you with more than $50,000 of group-term life insurance coverage, you must pay the employee part of social security and Medicare taxes on those premiums. The amount should be shown in box 12 of your Form W-2 with codes M and N.
5. Tax on golden parachute payments. This tax applies if you received an excess parachute payment (EPP) due to a change in a corporation's ownership or control. See the instructions for line 61 of Form 1040.
6. Tax on accumulation distribution of trusts. This applies if you are the beneficiary of a trust that accumulated its income instead of distributing it currently. See the instructions for Form 4970, Tax on Accumulation Distribution of Trusts.
7. Additional tax on MSAs. If amounts contributed to, or distributed from, your medical savings account do not meet the rules for these accounts, you may have to pay additional taxes. See Publication 969, Medical Savings Accounts (MSAs), Form 8853, Archer MSAs and Long-Term Care Insurance Contracts, and Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts.
8. Additional tax on Coverdell ESAs. This applies if amounts contributed to, or distributed from, your Coverdell ESA do not meet the rules for these accounts. See Publication 970, Tax Benefits for Education, Form 5329, and Form 8606, Nondeductible IRAs.
9. Additional tax on qualified tuition programs. This applies to amounts distributed from qualified tuition programs that do not meet the rules for these accounts. See Publication 970 and Form 5329.

Payments.   After you determine your total tax, figure the total payments you have already made for the year. Include credits that are treated as payments. This chapter does not explain these payments and credits. You can find that information in other chapters of this publication and your form instructions. See the following table for amounts you can include in your total payments.

PAYMENTS
For information on:	See chapter:
Child tax credit (additional)	35
Earned income credit	37
Estimated tax paid	5
Excess social security and RRTA tax withheld	38
Federal income tax withheld	5
Regulated investment company credit	38
Tax paid with extension	1

Another credit that is treated as a payment is the credit for federal excise tax paid on fuels. This credit is for persons who have a nontaxable use of certain fuels, such as diesel fuel and kerosene. It is claimed on line 68 of Form 1040. See Publication 378, Fuel Tax Credits and Refunds, and Form 4136, Credit for Federal Tax Paid on Fuels.

Refund or balance due.   To determine whether you are entitled to a refund or owe additional tax, compare your total payments with your total tax. If you are entitled to a refund, see your form instructions for information on having it directly deposited into your financial account instead of receiving a paper check.

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