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
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.
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.
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.
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
Now add lines 10 through 13. There is no limit
here either. This total amount of interest paid goes on line 14.
The IRS allows you to deduct your donations
to approved philanthropic groups. This next section is where you
detail your gifts.
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
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.
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
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
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
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
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.
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
-- Updated: Feb. 9, 2004