Tax Preparation. Business Accounting. and Financial Services
How to Itemize Deductions
We recently wrote this letter to a client who purchased a house and wanted to know what to deduct:
Congratulations on your home purchase. Your home mortgage interest is tax-deductible so you are now going to be able to itemize deductions instead of claiming the standard deduction on your tax return. You must attach Schedule A to your tax return. Here are the categories of itemized deductions:
This category includes prescription medications but not over-the-counter medicine or supplements, even if recommended by a physician. Also included are premiums for healthcare, vision, dental, and long-term care insurance, as long as they are paid by you and not out of pre-tax dollars from your paycheck. Of course you include any direct payments to doctors, dentists, chiropractors, physical therapists, hospitals, labs, and clinics as well as your insurance co-payments. Only deduct what you actually paid last year for you, your spouse, and your dependents, even if you were billed for more. There are many other categories of expenses that are deductible, including a portion of home improvements made for medical reasons. Let me refer you to IRS Publication 502 for a complete list. Unfortunately, most taxpayers do not qualify for a medical deduction because expenses must exceed 7-1/2% of income before
they trigger a deduction.
The interest on purchase-money mortgages of up to $1 Million on your principal and one second residence is deductible. In addition, you may deduct the interest on up to $100,000 of home equity financing. Points paid to purchase a principal residence are usually deductible in the year of purchase, but points on a re-finance must be deducted ratably over the life of the loan. Any remaining points on a previous re-finance are written off when you re-finance a second time. You also may deduct investment interest (like on a margin account) to the extent of your investment income.
This is the catch-all category of itemized deductions. Included are unreimbursed business and investment expenses, education in your profession, and your tax-preparation fees. The instructions for Schedule A at www.irs.gov describe these deductions in detail. Only expenses in excess of 2% of income generate a deduction. Business expenses for self-employed individuals are claimed elsewhere, but since you are an employee and you work in internet multimedia, you should be able to reasonably deduct your home computer expenses, internet access, purchases of software, CDs, and DVDs, and attendance at concerts and movies. You may also qualify for office-in-home deductions if you maintain the office for the convenience of your employer.Source: renfinancialgroup.com