Itemized Deductions – What is Deductible?

DISCLOSURE & ACKNOWLEDGMENT REGARDING SCHEDULE A

This disclosure is provided for you in order to clarify some of the deductions that may be taken on the IRS Form 1040 Schedule A. In the event of an audit, you will be required to provide support for all deductions listed.

General Schedule A Overview

The Schedule A is for listing itemized deductions (used anytime you have more deductions than the applicable standard deduction).

Year 2013 Standard Deductions

Single – $6,100 Married – $12,200 Head of Household – $8,950

Record-Keeping and Transactions

In order to assist with record-keeping and IRS compliance, we recommend you have and maintain backup documentation for all Schedule A deductions. In the event of an IRS audit, this helps to minimize disallowed deductions.

Sales Tax

Make sure to provide us with any receipts for large purchases in which you paid sales tax. This would include purchases of household appliances, vehicles, boats, etc.

Home Mortgage

You may deduct home mortgage interest as long as you meet the following requirements:

  • You are legally liable to pay the loan
  • Your home is collateral for the loan
  • Only for your main home (home you live in most of the time) or a second home

Interest you pay on a home other than your main or secondary home may still be deductible if the loan was used for business or investment, but we will need documentation to assist you in making that determination.

There are limits on the deductibility of home mortgage interest as follows:

  • Fully-deductible on loan amounts up to $1 million
  • Partially or non-deductible on loan amounts above $1 million
  • Partially or non-deductible on loans not used for home purchase, construction, or renovations (Example: cash-out to buy a car or motorcycle)

Since there may be limits on the deductibility of home mortgage interest, we will require that all mortgage information submitted (1098’s or organizer info) be properly documented showing:

  1. which property(s) each loan is related to
  2. the total dollar amount of each loan
  3. whether said loan is a purchase loan or refinance
  4. if a refinance loan, how proceeds were used

Cash Gifts to Charity

You can deduct donations or gifts to qualified organizations that are religious, charitable, educational, or non-profit. To be deductible, the law requires that you have a receipt, letter, or other written communication from the charity showing the name of the charity, date and amount of the contribution for all cash contributions, and that you have a receipt or a bank record (cancelled check) for all contributions made by check or other monetary means.

For all individual donations of $250 or more (cash or property), the law requires a receipt (written acknowledgement) from the charity stating the date and amount of the contribution as well as a statement as to whether you received anything in return for your contribution. If you received goods or services in return for the contribution, the receipt should include a description and an estimate of the value of the goods or services received in return.

If you do not have the backup listed above and you are audited, your deduction will most likely be disallowed by the IRS.

Non-Cash Gifts to Charity

The IRS has issued new guidance on non-cash donations and as a result, current rules are as follows:

  • Clothing and household goods must be in good, useable condition (we recommend a detailed list and photos as a way of documenting the condition )
  • Donations of vehicles, boats, or airplanes over $500 must receive a 1098-C from the charity
  • Contributions of property over $500 must list the date of contribution, a description of the items, the name and address of charitable organization, the condition and market value of the items, and must have a receipt from the charitable organization.
  • Contributions of property over $5,000 must be supported by a formal appraisal by a certified appraiser and a letter from the charitable organization.
  • You can deduct 14 cents per mile for charitable mileage. In order to obtain this deduction, you must maintain a mileage log.

Summary

Due to recent changes and increases in tax return preparer penalties as well as increased IRS audit activity, it is crucial for all involved that documentation is maintained for all deductions on your Schedule A. While we can’t eliminate taxes, by having adequate documentation, we can ensure that the tax compliance process is as painless as possible.

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