MONEY AND FINANCE

Non-deductible Deductions

Non-deductible Deductions

Many taxpayers confuse spousal and child support with alimony. Of the three, only alimony is deductible. It is considered income to the recipient and an expense to the payer. All of us wish we could deduct spousal and child support expenses. We’d probably never owe a dime in taxes if that was the case.

Another expense people tend to attempt to deduct is unreimbursed work expenses. Only
self-employed taxpayers can deduct every dollar of work-related expenses. W-2 employees are limited to deducting only unreimbursed expenses in excess of 2% of their adjusted gross incomes. This deduction is further limited to only those who are able to itemize their deductions.

Everyone has heard of IRAs and Roth IRAs. However only the traditional IRA and not the Roth IRA can be deducted. The reason, the income distributed from them is tax-free. If you have a traditional IRA, your retirement distributions are taxable as ordinary income.

529 Plan contributions confuse a lot of people. They are deductible only on state income tax filings and that is usually up to a certain limit. The federal government does not permit a deduction for 529 Plans.

Political contributions are not allowed. You may like the candidate and even be glad he or she won but you cannot deduct the money you donated to their campaign. On the other hand, cash or property donations you make to any qualified 501(c)(3) organization are deductible.

If you own a home, chances are excellent you have homeowners’ insurance to protect you in case a disaster strikes. However, the deduction for this item is only for those who either use part of their home for business or for those who own rental properties.

Life insurance premiums may be deducted by employers who provide group life insurance for their employees. But, they have to fall within certain limits. For individuals,
Only the coverage available inside Section 125 Cafeteria Plans and a small amount that can be purchased inside a qualified plan can be deducted

Dependent deductions are legitimate. However, not all dependents are deductions. Take separated and divorced couples. The IRS has a fairly clear, albeit complex set of rules that determine who gets to claim which kids. In some cases, one parent will get to claim the dependency exemption, while the other is eligible for the Child Tax Credit or Dependent Care Credit.

Giving is still alive and well in the United States. In fact, some people make substantial contributions of tangible property to charities. This is laudable but, depending on the size of the contribution, you may not be able to deduct the entire amount in the year of the donation. It can be deducted eventually but you have to follow the IRS rules and the dollar limits for this type of contribution are lower than for cash.

The IRS says cash contributions of up to 50% of adjusted gross income (AGI) are deductible, but property donations have a limit of 20% or 30% of AGI.

You may not have even heard of an item called passive losses. No worry, the IRS has and has written rules regarding passive losses. These are tax losses generated from certain types of investments or activities. They can only be written off against passive income. The IRS defines passive income as income for which the recipient had no material role in generating. Passive losses cannot be deducted against active income, such as earnings or investment income.

Capital losses can be used to offset any amount of capital gains. However, they can only be deducted against $3,000 of other income each year. For example, you lost $50,000 in the stock market last year but didn’t have an gains to declare it against, your deduction will limited to the $3,000 cap.

There is even more bad news. If you don’t have any gains in the ensuing 17 years, you’ll be limited to deducting only $3,0000 per year. But, if you reap a large gain in those 17 years, you can write off as much of the remaining loss as there is against whatever amount of gain you have earned.

Of course, there is a caveat to all of the above advice. First, we do not give tax advice. We leave that to the professionals and strongly suggest you consult a tax professional with any and all questions. Second, you can visit the IRS website at http://www.irs.gov/ and let them tell you what expenses can, and can not, be deducted. Third, the above is meant only to give you an idea of the errors some people are making with their tax returns. Fourth, good luck as you struggle with your tax return.


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