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Schedule A: box-by-box

The easiest way to reduce your tax bill is to reduce your taxable income. You don't have to take a pay cut to do this. You can use tax deductions.

The Internal Revenue Service allows each taxpayer a standard deduction amount based on filing status. Some individuals, however, find that they get a better tax break if they itemize their deductions. This means keeping track of your expenses, meeting some income thresholds and deductibility limits and filing Schedule A.

You must file the long 1040 tax return to use Schedule A. This combination means that filing your taxes will take a while. But it also could mean more money in your pocket, instead of Uncle Sam's, when you're through.

Schedule A generally allows you to subtract from your income the amounts you spent on medical care, other taxes, some interest payments, charitable gifts, casualty losses and even several miscellaneous expenses. Let's see what you can itemize.

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Be sure to enter your name, and your spouse's if you're filing jointly, at the top of the form. As for the Social Security number sought by the IRS, enter the one of the main taxpayer.

Now, to the numbers. Schedule A is divided into sections for the various deductions you're allowed. First, medical and dental expenses.

Medical and dental
This is a popular section of the Schedule A. Most of us spend a lot at the doctor's office or corner drugstore, and we look forward to letting the government help out at tax time with these costs. Unfortunately, Uncle Sam has limited just how helpful he will be.

You can deduct medical and dental expenses that exceed 7.5 percent of your adjusted gross income. With an AGI of $40,000 your medical deduction threshold is $3,000. That means of your $5,000 total medical expenses, you can deduct only $2,000, the amount that exceeds 7.5 percent of your income.

Don't be discouraged. There are some medical costs that are often overlooked, such as mileage to the hospital, the costs of special medical equipment or even a portion of long-term care premiums you pay. And don't forget to count the medical care of your spouse and dependents. Add all these up and enter the amount on line 1.

On line 2, enter your AGI from line 35 of your 1040. The 7.5 percent test is taken on line 3, where you figure your deductibility threshold. Then you subtract line 3 from your total medical costs on line 1 and enter the amount on line 4. This is what you can deduct. If you don't meet the test, enter zero here.

Taxes
At federal tax time, some other taxes do come in handy. You can deduct many of them in this next section of Schedule A.

If you live in a state that collects state or local income taxes, the amount you paid goes on line 5. That includes any that were withheld from your paycheck (and shown on your W-2), as well as tax payments made directly to your local tax collector. Mandatory contributions you made to the California, New Jersey or New York Non-occupational Disability Benefit Fund, Rhode Island Temporary Disability Benefit Fund or Washington State Supplemental Workmen's Compensation Fund also can be counted on line 5.

Property owners can deduct real estate taxes they paid. Enter the amount on line 6. These taxes are what you get each year, usually from a county tax assessor. If they are paid by your mortgage company with escrowed funds, remember that you can only deduct the actual amount of taxes paid in the tax year, not the full amount of escrow payments you sent in to your lender.

Some states, counties and cities levy personal property taxes. The most common of this type of collection is on autos. This is not your license plate tag fee. It is a tax based on the value of your vehicle. Car taxes, as well as other personal property tax bills, can be deducted on line 7.

Line 8 gives you the chance to deduct what the IRS calls "any deductible tax" not listed earlier. A common entry here is a deduction for foreign taxes paid in connection with investments funds. When you make an entry here, be sure to write out on the dotted line precisely what other tax you are deducting.

Add the amounts from 5 through 8. There is no limit or minimum to meet for this section. Enter the full amount of nonfederal taxes you paid on line 9.

Interest
The next section, interest you paid, is for the almost exclusive benefit of homeowners. While interest paid on personal loans won't help you at tax time, interest on home loans -- both your primary residence and a second home -- is deductible.

On line 10, enter home mortgage interest you paid. Generally, this amount is reported to you on a Form 1098 you get from your lender by the end each January. If you bought your home last year and paid points for the loan, those points (each point is 1 percent of your loan amount) will be listed on the 1098, too, and should be included on line 10.

If you paid mortgage interest not reported on your 1098, put it on line 11. This might be the case if you sent in an extra house payment late in the year and your lender didn't properly credit the additional money. And if you paid interest to the person from whom you bought the home, it also goes on line 11, along with the seller's name, address and tax ID number.

Any points not listed on your 1098 might be found on your settlement statement. Also, if you took out a home improvement loan secured by your house and used part of that loan money to improve your residence, you may be able to deduct some of the points. These non-1098 point amounts go on line 12.

Interest paid on money borrowed to buy investment property, such as stocks and bonds, can be deducted on line 13. You may have to complete Form 4952, Investment Interest Expense Deduction, to claim this interest.

Now add lines 10 through 13. There is no limit here either. This total amount of interest paid goes on line 14.

Charitable gifts
The IRS allows you to deduct your donations to approved philanthropic groups. This next section is where you detail your gifts.

Gifts to charity

On line 15, enter all the monetary gifts (cash or check) that you made to qualified charities. This includes contributions to religious groups (churches, synagogues, mosques); nonprofit organizations (Salvation Army, Red Cross, Goodwill Industries, United Way); veterans' associations; not-for-profit schools; and public park and recreational facilities. If a gift was $250 or more, you must have a receipt from the recipient.

Gifts of property are reported on line 16. Here you count the value of the used clothing, household goods or vehicles that you donated. Keep itemized lists of what you've donated and its fair market value -- the price at which the property would change hands between a willing buyer and a willing seller -- for your own records. Do not include these lists with your return.

However, if the amount of any single noncash contribution is greater than $500, you also must complete and attach Form 8283, Noncash Charitable Contributions. And if your deduction is more than $5,000, the IRS may require you to get appraisals of the donated property.

You also can deduct your travel costs to do charitable work, as well as out-of-pocket expenses related to a charitable endeavor, such as stamps for a group's mailing. These amounts would be included on line 16.

But if your philanthropic efforts and gifts are motivated primarily by potential tax deductions, be aware that the IRS does set some limits here. Annual cash contributions can't exceed 50 percent of your adjusted gross income. Annual gifts of property -- such as stocks, bonds and artwork -- can't exceed 30 percent of your AGI.

If you give more than those limits, you can carry over the amount that you're unable to deduct. You have five years to deduct it on future tax returns. If you have a carryover from last tax year, enter the allowable amount (again, within the percentage guidelines) on line 17.

Add lines 15 through 17. This amount represents your deductible gifts to charity and goes on line 18.

Casualty and theft losses
There is never anything good when you're the victim of a casualty or theft. The IRS understands that, and allows you to recover some of your losses on your taxes.

Casualty and theft losses

Most taxpayers think they can deduct casualty losses only if they suffer catastrophic damages. It's true that victims here get special tax options. But you don't have to live through a fire, flood, hurricane, tornado or earthquake to file a casualty deduction. Losses from theft and vandalism are eligible losses, as are any damages from an automobile accident as long as it wasn't the result of driver negligence.

You don't, however, get to deduct the full amout of your unexpected loss. You'll have to complete Form 4684 to determine how much you can enter on line 19.

Job and miscellaneous expenses
The next portion of Schedule A lets you take into account money you spent in connection with your job, as well as a variety of miscellaneous expenses.

This catchall section, however, has a threshold you must meet before these expenses can be deducted. The total here must exceed 2 percent of your AGI. For our taxpayer making $40,000 that would mean these costs must go over $800 before they can be deducted.

On line 20, enter the total of all your job-related expenses for which you weren't reimbursed. Since you've got a percentage target you must meet, be thorough here. Some of the items you can count are professional memberships and journal subscriptions, uniforms you buy and the cost of keeping them clean, as well as expenses of looking for another job in the same field. You also might have to file and attach Form 2106, Employee Business Expenses, especially if you claim any travel, transportation, meal or entertainment expenses.

Even the IRS realizes how complicated tax filing can be, so it allows you to count what you paid a tax preparer or adviser as a miscellaneous deduction. You can also deduct the cost of tax-preparation software programs and any fee you paid for electronic filing. These amounts go on line 21.

Line 22 is for other expenses, such as charges you incur in managing your investments. This includes custodial and trust administration fees, accounting charges, safe deposit box rentals if you keep investment-related material in it, subscriptions to financial publications and any fees reported in box 5 of a Form 1099-DIV. List the type and amount of each expense on the dotted lines next to line 22. If you need more space, attach a separate sheet with the details.

Add your work-related and miscellaneous expenses shown on lines 20 through 22 and enter the total on line 23.

Now you must calculate if you have enough to deduct. On line 24 enter your AGI from line 35 of your 1040 form. Multiply that income by 2 percent (.02) and enter the result on line 25. This is the threshold your expenses must exceed.

Subtract this line 25 percentage from line 23's expenses total and enter the difference on line 26. This is your allowable deduction amount.

If your threshold amount is larger than your total expenses here, you don't get to deduct any of them. Enter zero on line 26.

Other miscellaneous deductions
The expenses you detailed on the lines above were limited by your income. But the IRS removes that restriction on expenses in seven specific areas. One of the most common deductions listed here by individual taxpayers is gambling losses.

Other deductions

Enter your gambling losses on line 27. Remember, however, that while your gambling losses aren't restricted by a percentage of your income, they are limited by your good luck. You can only deduct those losses up to how much you won. That is, if you won $1,000 and had losses of $1,700 you can only deduct $1,000. And don't forget to include your winnings on line 21 of your 1040.

Other miscellaneous deductions allowed on line 27 are casualty and theft losses from income-producing property, federal estate tax on some inherited income, amortizable bond premium on some bonds, deduction for repayment of amounts under a claim of right, certain unrecovered investment in a pension and impairment-related work expenses of a disabled person. For more details, see IRS Publication 529, Miscellaneous Deductions.

List the type and amount of each expense on the dotted lines next to line 27. Again, if you need more space, attach a separate statement.

Total itemized deductions
Now you get to see just how much your Schedule A entries can help you cut your taxes.

Add the amounts on lines 4 (medical), 9 (taxes), 14 (interest), 18 (charity), 19 (casualty and theft), 26 (job and most miscellaneous) and 27 (other miscellaneous) and enter the total on line 28.

But write the amount in pencil. The IRS takes one last shot at limiting your total deduction amount based on your income. That means you might have to make some changes to your itemized total depending on how you answer the boxes under line 28.

If your AGI is less than $139,500 and you file as single, married filing jointly, qualifying widow or widower or head of household, your amount is safe. (The income limit is $69,750 for married filing separately taxpayers.) Check the "No" box, write your total deduction amount in pen on line 28 and also enter it on line 38 of your 1040.

But if you check the "Yes" box, you'll have to use the worksheet on page A-6 of the instructions for Schedule A.

There, you're done. It took a while, but now you can check the numbers. If the itemized deduction amount is more than your standard deduction, your tax bill should be lower.

Michele Erbrick assisted with this report.

-- Updated: Feb. 9, 2004

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See Also
1040 box-by-box
1040A box-by-box
1040EZ box-by-box
Schedule 1 box-by-box
Schedule B box-by-box
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