Tax Deductions: Family / Home Related Deductions

Family Related Deductions

Child and Dependant Care Credit. Child and dependant care can be a very expensive proposition. However, there are certain cases where you may be able to claim a deduction on such family-related expenses if you are in the process of looking for a job. As long as that is the case, you may be able to reduce your tax by claiming the Child and Dependent Care Credit on your federal income tax return on any expenses related to payments made to someone to care for a child under age 13 or a qualifying spouse or dependent.

Please note that in order to qualify, your spouse, children over the age of 13, and other dependents must be physically or mentally incapable of self-care.

This credit normally will equal a percentage of the amount of work-related child and dependent care expenses you paid to a care provider. Depending on your level of income, the credit can be up to 35 percent of your qualifying expenses.

If you exclude or deduct dependent care benefits provided by a dependent care benefit plan, the total amount you exclude or deduct must be less than the dollar limit for qualifying expenses (generally, $3,000 if one qualifying person was cared for, or $6,000 if two or more qualifying persons were cared for).

If two or more qualifying persons were cared for, the amount you exclude or deduct will always be less than the dollar limit, since the total amount you can exclude or deduct is limited to $5,000.

These types of credit must follow certain conditions in order to qualify as a deduction:

1. You must show income from wages, salaries, tips or other taxable employee compensation, or net earnings from self-employment.
2. You may not claim payments made to someone you can claim as a dependent on your return or to your child (under age 19), even if they are not your dependents.
3. Your filing status must be single, married filing jointly, head of household, or qualifying widow(er) with a dependent child.
4. Any payments for care must have been provided for one or more qualifying persons.
5. The qualifying person you care for must have lived with you for more than half of the current tax year.

There are some limitations on the amount of credit you can claim, and if you received dependent care benefits from your employer, other rules may apply.

For more information on the Child and Dependent Care Credit, see Publication 503, Child and Dependent Care Expenses, on the IRS Web site.

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Depreciation on Home Computer

You can deduct depreciation on your home computer if you use it to produce income (for example, to manage your investments that produce taxable income). You generally must depreciate the computer using the straight line method over the Alternative Depreciation System (ADS) recovery period. But if you work as an employee and also use the computer in that work, see Depreciation on Computers or Cell Phones under Unreimbursed Employee Expenses, earlier. For more information on depreciation, see Publication 946

Excess Deductions of an Estate

If an estate's total deductions in its last tax year are more than its gross income for that year, the beneficiaries succeeding to the estate's property can deduct the excess. Do not include deductions for the estate's personal exemption and charitable contributions when figuring the estate's total deductions. The beneficiaries can claim the deduction only for the tax year in which, or with which, the estate terminates, whether the year of termination is a normal year or a short tax year. For more information, see Termination of Estate in Publication 559 Survivors, Executors, and Administrators.

Fees To Collect Interest and Dividends

You can deduct fees you pay to a broker, bank, trustee, or similar agent to collect your taxable bond interest or dividends on shares of stock. But you cannot deduct a fee you pay to a broker to buy investment property, such as stocks or bonds. You must add the fee to the cost of the property.

You cannot deduct the fee you pay to a broker to sell securities. You can use the fee only to figure gain or loss from the sale. See the instructions for columns (d) and (e) of Schedule D (Form 1040) for information on how to report the fee.

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Hobby Expenses

You can generally deduct hobby expenses, but only up to the amount of hobby income. A hobby is not a business because it is not carried on to make a profit. See Not-for-Profit Activities in chapter 1 of Publication 535

Indirect Deductions of Pass-Through Entities

Pass-through entities include partnerships, S corporations, and mutual funds that are not publicly offered. Deductions of pass-through entities are passed through to the partners or shareholders. The partners or shareholders can deduct their share of passed-through deductions for investment expenses as miscellaneous itemized deductions subject to the 2% limit.

Example.

You are a member of an investment club that is formed solely to invest in securities. The club is treated as a partnership. The partnership's income is solely from taxable dividends, interest, and gains from sales of securities. In this case, you can deduct your share of the partnership's operating expenses as miscellaneous itemized deductions subject to the 2% limit. However, if the investment club partnership has investments that also produce nontaxable income, you cannot deduct your share of the partnership's expenses that produce the nontaxable income.

Publicly offered mutual funds. Publicly offered mutual funds do not pass deductions for investment expenses through to shareholders. A mutual fund is "publicly offered" if it is:

1. Continuously offered pursuant to a public offering,
2. Regularly traded on an established securities market, or
3. Held by or for at least 500 persons at all times during the tax year.

A publicly offered mutual fund will send you a Form 1099-DIV, Dividends and Distributions, or a substitute form, showing the net amount of dividend income (gross dividends minus investment expenses). This net figure is the amount you report on your return as income. You cannot deduct investment expenses.

Information returns. You should receive information returns from pass-through entities.

Partnerships and S corporations. These entities issue Schedule K-1, which lists the items and amounts you must report, and identifies the tax return schedules and lines to use.

Nonpublicly offered mutual funds. These funds will send you a Form 1099-DIV, or a substitute form, showing your share of gross income and investment expenses. You can claim the expenses only as a miscellaneous itemized deduction subject to the 2% limit.

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Investment Fees and Expenses

You can deduct investment fees, custodial fees, trust administration fees, and other expenses you paid for managing your investments that produce taxable income.

Legal Expenses

You can usually deduct legal expenses that you incur in attempting to produce or collect taxable income or that you pay in connection with the determination, collection, or refund of any tax.

You can also deduct legal expenses that are:

1. Related to either doing or keeping your job, such as those you paid to defend yourself against criminal charges arising out of your trade or business,
2. For tax advice related to a divorce if the bill specifies how much is for tax advice and it is determined in a reasonable way, or
3. To collect taxable alimony.

You can deduct expenses of resolving tax issues relating to profit or loss from business (Schedule C or C-EZ), rentals or royalties (Schedule E), or farm income and expenses (Schedule F) on the appropriate schedule. You deduct expenses of resolving nonbusiness tax issues on Schedule A (Form 1040 or Form 1040NR). See Tax Preparation Fees, earlier.

Unlawful discrimination claims. You may be able to deduct, as an adjustment to income on Form 1040, line 36, or Form 1040NR, line 34, rather than as a miscellaneous itemized deduction, attorney fees and court costs for actions settled or decided after October 22, 2004, involving a claim of unlawful discrimination, a claim against the U. S. Government, or a claim made under section 1862(b)(3)(A) of the Social Security Act. However, the amount you can deduct on Form 1040, line 36, or Form 1040NR, line 34, is limited to the amount you included in gross income for that claim. The rest of your attorney fees and court costs for this type of claim are deductible as a miscellaneous itemized deduction subject to the 2% limit. See Publication 525 for more information.

Loss on Deposits

If you can reasonably estimate the amount of your loss on money you have on deposit in a financial institution that becomes insolvent or bankrupt, you can generally choose to deduct it in the current year even though its exact amount has not been finally determined. Once you make this choice, you cannot change it without IRS approval.

If none of the deposit is federally insured, you can deduct the loss in either of the following ways.

1. As a miscellaneous itemized deduction subject to the 2% limit. Write the name of the financial institution and "Insolvent Financial Institution" beside the amount on Schedule A (Form 1040), line 22, or Schedule A (Form 1040NR), line 11. This deduction is limited to $20,000 ($10,000 if you are married filing separately) for each financial institution, reduced by any expected state insurance proceeds.
2. As a casualty loss. See Publication 547 for details.

If any part of the deposit is federally insured, you can deduct the loss only as a casualty loss.

Exception. You cannot make this choice if you are a 1%-or-more-owner or an officer of the financial institution, or are related to such owner or officer. For a definition of "related," see Deposit in Insolvent or Bankrupt Financial Institution in chapter 4 of Publication 550.

Actual loss different from estimated loss. If you make this choice and your actual loss is less than your estimated loss, you must include the excess in income. See Recoveries in Publication 525. If your actual loss is more than your estimated loss, treat the excess loss as explained under Choice not made, next.

Choice not made. If you do not make this choice (or if you have an excess actual loss after choosing to deduct your estimated loss), treat your loss (or excess loss) as a nonbusiness bad debt (deductible as a short-term capital loss) in the year its amount is finally determined. See Nonbusiness Bad Debts in chapter 4 of Publication 550.

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Loss on IRA

If you have a loss on your traditional IRA (or Roth IRA) investment, you can deduct the loss as a miscellaneous itemized deduction subject to the 2% limit, but only when all the amounts in all your traditional IRA (or Roth IRA) accounts have been distributed to you and the total distributions are less than your unrecovered basis. For more information, see Publication 590, Individual Retirement Arrangements (IRAs).

Repayments of Income

If you had to repay an amount that you included in income in an earlier year, you may be able to deduct the amount you repaid. If the amount you had to repay was ordinary income of $3,000 or less, the deduction is subject to the 2% limit. If it was more than $3,000, see Repayments Under Claim of Right under Deductions Not Subject to the 2% Limit, later.

Repayments of Social Security Benefits

If the total of the amounts in box 5 (net benefits for 2006) of all your Forms SSA-1099, Social Security Benefit Statement, and Forms RRB-1099, Payments By the Railroad Retirement Board, is a negative figure (a figure in parentheses), you may be able to take a miscellaneous itemized deduction subject to the 2% limit. The amount you can deduct is the part of the negative figure that represents an amount you included in gross income in an earlier year.

The amount in box 5 of Form SSA-1099 or RRB-1099 is the net amount of your benefits for the year. It will be a negative figure if the amount of benefits you repaid in 2006 (box 4) is more than the gross amount of benefits paid to you in 2006 (box 3).

If the deduction is more than $3,000, you will have to use a special computation to figure your tax. See Publication 915, Social Security and Equivalent Railroad Retirement Benefits, for additional information.

Safe Deposit Box Rent

You can deduct safe deposit box rent if you use the box to store taxable income-producing stocks, bonds, or investment-related papers and documents. You cannot deduct the rent if you use the box only for jewelry, other personal items, or tax-exempt securities.

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Service Charges on Dividend Reinvestment Plans

You can deduct service charges you pay as a subscriber in a dividend reinvestment plan. These service charges include payments for:

1. Holding shares acquired through a plan,
2. Collecting and reinvesting cash dividends, and
3. Keeping individual records and providing detailed statements of accounts.

Trustee's Administrative Fees for IRA

Trustee's administrative fees that are billed separately and paid by you in connection with your IRA are deductible (if they are ordinary and necessary) as a miscellaneous itemized deduction subject to the 2% limit.

Deductions Not Subject to the 2% Limit

Listed below is a list of items that may be claimed as miscellaneous itemized deductions. These items are not subject to the 2% limit, and must be reported on Schedule A (Form 1040), line 27, or Schedule A (Form 1040NR), line 16.

List of Deductions

• Amortizable premium on taxable bonds.
• Casualty and theft losses from income-producing property.
• Federal estate tax on income received as a result of a death.
• Gambling losses (may not exceed the amount of gambling winnings).
• Impairment-related work expenses (for people with disabilities).
• Loss from other activities from Schedule K-1 (Form 1065-B), box 2.
• Repayments of more than $3,000 under a claim of right.
• Unrecovered investment in an annuity.

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Amortizable Premium on Taxable Bonds

A bond premium is the value you paid for the bond in excess of its stated principal amount. You can elect to amortize the premium on taxable bonds generally as an offset to interest income on the bond rather than a separate deduction item.

Pre-1998 election to amortize bond premium. The above listed rule does not apply to bonds acquired before 1988, if you first elected to amortize bond premium before 1998.

Bonds acquired after October 22, 1986, and before 1988. The amortization of the premium on these bonds is investment interest expense subject to the investment interest limit, unless you chose to treat it as an offset to interest income on the bond.

Bonds acquired before October 23, 1986. Amortization of the premium on bonds purchased prior to this date is considered a miscellaneous itemized deduction not subject to the 2% limit.

Deduction for excess premium.On certain bonds (such as bonds that pay a variable rate of interest or that provide for an interest-free period), the amount of bond premium that belongs to a specific period may exceed the amount of stated interest distributable during that period. If this occurs, the excess can be claimed as a miscellaneous itemized deduction that is not subject to the 2% limit. However, the amount deductible is limited to the amount by which your total interest inclusions on the bond in prior periods exceed the total amount you treated as a bond premium deduction on the bond in prior periods.
If any of the excess bond premiums cannot be deducted because of the limit, this amount can be carried forward to the next period and treated as bond premium related to that specific period.

Pre-1998 choice to amortize bond premium. If you made the choice to amortize the premium on taxable bonds before 1998, you can deduct the bond premium amortization that is more than your interest income only for bonds acquired during 1998 and later years.

More information. For more information on bond premium, see Bond Premium Amortization in chapter 3 of Publication 550.

Casualty and Theft Losses of Income-Producing Property

Casualty or theft loss can be claimed as a miscellaneous itemized deduction not subject to the 2% limit if the damaged or stolen property was income-producing property (property held for investment, such as stocks, notes, bonds, gold, silver, vacant lots, and works of art). You must report the loss in Section B of Form 4684 (on efile.com). You may also have to include the loss on Form 4797 (on efile.com the form will be selected) if you are otherwise required to file that form. To calculate your deduction, add all losses from this type of property included on Form 4684, lines 35 and 41b, or Form 4797, line 18a. For more information on casualty and theft losses, see Publication 547.

Federal Estate Tax on Income in Respect of a Decedent

If you are a beneficiary as a result of a death and any gross income is included in your filing, you can deduct the federal estate tax attributable to such income. Income in respect of the decedent is gross income that the decedent would have received had death not occurred and that was not properly includible in the decedent's final income tax return. See Publication 559 for information about figuring the amount of this deduction.

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Gambling Losses Up to the Amount of Gambling Winnings

All income for a particular year resulting from gambling winnings must be reported on Form 1040 (efile.com will select this for you), line 21. Any losses can be deducted on Schedule A (Form 1040), line 27. You may not deduct gambling losses that exceed your winnings. Generally, non-resident aliens cannot deduct gambling losses on Schedule A (Form 1040NR).

Please note that you cannot reduce your gambling winnings by your gambling losses and report the difference. Records should show any winnings listed separately from your losses. Therefore, you must report the full amount of your winnings as income and claim your losses (up to the amount of winnings) as an itemized deduction.

Diary of winnings and losses.In order to properly file any gambling income and losses, you must keep an accurate diary or similar record of all losses and winnings.
Your diary or booklet must contain at a minimum the following information:

1. The date and type of your specific wager or wagering activity.
2. The name and address or location of the gambling establishment.
3. The names of other persons present with you at the gambling establishment.
4. The amount(s) you won or lost.

Proof of winnings and losses.In addition to a diary or specific list of winnings/losses, you should also keep other documentation. You can generally prove your winnings and losses through Form W-2G, Certain Gambling Winnings, Form 5754, Statement by Person(s) Receiving Gambling Winnings, wagering tickets, canceled checks, substitute checks, credit records, bank withdrawals, and statements of actual winnings or payment slips provided to you by the gambling establishment.
For specific wagering transactions, you can use the following items to support record-keeping for your winnings and losses. Such recordkeeping suggestions are intended as general guidelines to help you establish gambling income and losses. These are not all-inclusive, and any tax liability depends on your particular facts and circumstances.

Keno. Copies of any purchased keno tickets validated by the gambling establishment, copies of your casino credit records, and copies of your casino check-cashing records.

Slot machines. The number of the slot machine that was played and all winnings by date and time.

Table games (twenty-one (blackjack), craps, poker, baccarat, roulette, wheel of fortune, etc.). The number of the table at which you were playing. Any casino credit card data indicating whether the credit was issued in the pit or at the cashier's cage.

Bingo. A record of the number of games played, cost of tickets purchased, and amounts collected on winning tickets. Supplemental records include any receipts from the casino, parlor, etc.

Racing (horse, harness, dog, etc.). A record of the races, amounts of wagers, amounts collected on winning tickets, and amounts lost on losing tickets. Supplemental records include unredeemed tickets and payment records from the racetrack.

Lotteries. A record of ticket purchases, dates, winnings, and losses. Supplemental records include unredeemed tickets, payment slips, and winnings statements..

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