- The only way to claim tax deductions other than the standard deduction is through itemizing deductions on Schedule A, which the taxpayer files along with Form 1040. A taxpayer must make the determination as to whether itemizing deductions produces the least tax liability based on his own assessment of allowable deductions vs. the standard deduction allowed by the IRS for his filing status.
- While the IRS allows many taxes as deductions, federal taxes are not eligible. Even though requirements for deducting taxes seem to indicate any tax qualifies as a deduction from the wage earner's gross income, federal taxes paid during the year work as a credit toward the wage earner's final tax liability instead of as a deduction form his gross income.
- Taxpayers may not deduct penalties paid on federal, state or local taxes, according to the IRS. The law is specific explaining there are no deductions for fines or penalties paid to a governmental unit for a law violation, including amounts paid for a fine or penalty, whether civil or criminal. Besides tax penalties, other fines or penalties off the allowed-deduction list include parking tickets and penalties deducted from teachers' paychecks after an illegal strike.
- The IRS says that a tax must be imposed on the taxpayer and must have been paid during the current tax year to deduct it. Five types of taxes are considered deductible for personal returns, including state, local and foreign income taxes, personal property taxes, state and local sales taxes, real estate taxes and qualified motor vehicle taxes. Estimated and prior year's income taxes paid to state or local governments also qualify for deduction if the taxpayer itemizes deductions. Many qualifiers accompany these deductible taxes, making it necessary for the taxpayer to fully comprehend the rules before submitting a finished return.
- Stay up-to-date with tax law changes. Congress enacts a myriad laws each year that have an impact on the IRS tax code. One of the most recent, The American Recovery and Reinvestment Act of 2009, has the potential of impacting the majority of the tax-filing public. Most of the ARRA's benefits target individuals, with credits for energy improvements for the home, education benefits for families struggling with ways to pay for higher education for their children and homebuyer credits for certain new home owners, to name a few. To take advantage of these credits, a taxpayer should investigate the ARRA and consider invoking some if the act's provisions if doing so results in a lower tax liability. Contact a tax professional if there is any doubt about the ARRA or any aspect of Form 1040, Form 1040A or 1040EZ.
previous post