3 Often Forgotten or Overlooked Tax Deductions
Each year tax deductions can save the vast majority of American taxpayers thousands of dollars in taxable income. While the IRS is only interested in claiming what the agency feels it is owed according to the tax code, there is an important caveat-determining tax exceptions and deductions is the taxpayer’s responsibility. This is received wisdom among certified public accounts, IRS enrolled agents and other tax professionals hired to help taxpayers with their federal tax returns. Because tax prepares such as the enrolled agent are often former IRS workers, and are required to enroll in tax continuing education courses as a condition of their ongoing EA certification, they are some of best tax professionals to tap for help with claiming often overlooked and legal deductions for taxes.
Below is a detailed look at three such deductions:
Student Loan Interest
Taxpayers are able to deduct up to $2,500 in interest paid on qualified student loans (used for post-secondary education, such as college or vocational school) for themselves, their legal partners or dependents. This deduction, which doesn’t need to be itemized, should be taken as an “adjustment to income” on Page 1 of Form 1040. Student loan interest paid is reported on Form 1098-E. Typically, the Social Security number and name of the person with the “primary obligation” will appear on this form.
But there are a few caveats to this deduction. To claim this deduction, taxpayer must have entered into a “primary obligation” to repay the loan, and must make the payments. In scenarios where it is the student who is legally obliged to pay the loan, but the parents make the actual payment, neither the parents nor the student can claim this deduction.
Moreover, if dependents are listed on their parents’ tax returns as dependents, they are unable to deduct student loan interest, even if the primary onus to pay the loan belongs to them and they make the payments.
Interest on loans from a related party or from a qualified employer plan, such as a 401(k), are not deductible.
Amount of Deduction
The amount that is able to be deducted is phased out as the taxpayer’s Adjusted Gross Income (AGI) goes from $60,000 to $75,000 if single, or from $120,000 to $150,000 if married and filing jointly. A married taxpayer filing separately cannot claim the deduction.
Taxpayers making alimony payments to an ex-spouse you may be able to claim an “above-the-line” deduction on the 1040.
The taxpayer in question must enter the Social Security number of the “ex,” who, in response, must claim the alimony received as taxable income.
To be deductible, alimony payments must be in cash (or check) and included as condition in the divorce decree. The taxpayer must not live with the “ex,” and payments must end upon the death of the “ex.”
Alimony deductions are not limited to just support payments. They include payments made to all third parties on behalf of your former spouse that stated in the divorce settlement, such as medical expenses, housing costs, taxes, tuition and life insurance premiums.
Taxpayers who pay all of the mortgage payments (principal and interest) on a home owned jointly with an “ex” are able to deduct half the payments as alimony. Likewise, if all the real estate taxes and/or insurance on a home held as “tenants in common” is paid by the taxpayer, half can be claimed as alimony.
It is important to note that rules outline above also apply to separate maintenance payments made under a separation agreement.
Child support payments are not deductible.
When preparing to file their federal tax return, taxpayers should be reminded not to forget their contributions to charitable organizations. Such donations could represent a sizeable tax deduction
Charitable donations should be itemized on IRS Form 1040, Schedule A.
Starting in 2007, taxpayers wishing to deduct any charitable donation of money must have a bank record or a written communication from the charitable organization listing the name of the organization and both the date and amount of the contribution.
While these tax deductions could potentially save taxpayers thousands, they aren’t as straightforward as they may appear. There are complex rules and certain exceptions that apply, and, if not followed, could land the taxpayers in trouble with the IRS. This is understood by tax professionals like enrolled agents who are familiar with these details as part of their EA continuing education.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.